CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress 

Washington, DC 20515 

February 22, 2012 

Honorable Lindsey O. Graham 

United States Senate 

Washington, DC 20510 

Dear Senator: 

As you requested, CBO has analyzed whether the limitation on employer incentives 

to TRICARE-eligible beneficiaries (section 707 of the John Warner National 

Defense Authorization Act for Fiscal Year 2007, Public Law 109-364) has resulted 

in budgetary savings for the Department of Defense. Our analysis is detailed in the 

enclosure. 

I hope this information is helpful. The CBO staff contact for this analysis is Matt 

Schmit. 

Sincerely, 

Douglas W. Elmendorf 

Enclosure 

cc: Honorable Carl Levin 

 Chairman 

 Committee on Armed Services 

 Honorable John McCain 

 Ranking Member 

 Honorable Howard P. “Buck” McKeon 

 Chairman 

 House Committee on Armed Services 

 Honorable Adam Smith 

 Ranking Member
Congressional Budget Office 

February 22, 2012 

The Budgetary Effect of Regulations Limiting the Ability of Employers to 

Offer Incentives to Employees to Use TRICARE 

Section 707 of the John Warner National Defense Authorization Act for Fiscal Year 2007 

(Public Law 109-364, 10 USC 1097c) restricts the ability of employers to offer subsidies 

and other incentives to their TRICARE-eligible employees to use TRICARE in place of 

employer-sponsored health care plans.1

 Based on the available information, CBO 

estimates that there is a high probability that the enactment of section 707 has resulted in 

budgetary savings for the Department of Defense (DoD) and that the expected value of 

those savings is about $55 million per year (in 2010 dollars).2

 However, because of 

certain effects on federal revenues, the expected value of the net savings to the federal 

government as a whole is less: about $30 million per year. 

The savings owing to the enactment of section 707 depend to a large extent on whether 

beneficiaries who previously took advantage of the employer incentives continued to use 

TRICARE even after the implementation of that section (which often results in added 

costs to the government as some beneficiaries move from TRICARE Standard to 

TRICARE Prime) or switched to a non-DoD health care option provided by their 

employers (which results in savings for the government). If the growth in out-of-pocket 

expenses arising under employer-sponsored health care plans continues to outpace those 

under TRICARE by significant margins, more retirees are likely to leave employersponsored care and enroll in TRICARE, which will probably reduce the savings 

attributable to section 707. However, the path of out-of-pocket expenses under TRICARE 

will depend to a large extent on future decisions about the administration of that program. 

Background 

Retirees of the Uniformed Services often have several options available to them to cover 

at least some of their health care costs. As military retirees, they and their family 

members are eligible to use the TRICARE health benefit. They can also utilize the 

Veterans Health Administration and in some cases Medicare and Medicaid. In addition, 

because military personnel are eligible to retire after they have accumulated 20 years of 

service, many retirees are young enough to work in the private sector after their military 

 

1

 The military’s health care program, TRICARE, comprises nine health plans that cover uniformed servicemembers, 

retirees, and their dependents in the United States and abroad. Two of the most commonly used plans are TRICARE 

Prime—a managed care option, and TRICARE Standard—a fee-for-service option. For beneficiaries not eligible for 

Medicare, the TRICARE programs are funded through annual appropriations to the defense health program. 

2

 All figures in this analysis are expressed in nominal 2010 dollars, which is the most recent year for which complete 

TRICARE cost data are available. Annual savings for years before or after 2010 will vary because of trends in per 

capita health spending. 
2 

service has concluded and thereby gain access to employer-sponsored health care 

benefits. A 2007 survey indicates that over 75 percent of military retirees under the age of 

65 had access to a civilian health care plan through an employer or other professional 

association.3

 Nonetheless, TRICARE remains a popular option among working-age 

military retirees, with a participation rate of about 75 percent.4

Because of increasing health care costs, employers have been actively seeking ways to 

lower their expenses for employee health care benefits. One approach that some 

employers have taken is to provide incentives to military retirees to discontinue their 

enrollment with the employer’s group health plan and instead utilize their TRICARE 

health benefit. Before section 707 was implemented, this practice occasionally took the 

form of direct cash payments to employees. More often, employers offered subsidized 

TRICARE supplements. Such supplements are widely used by military retirees (they are 

usually offered through nonprofit servicemember organizations) and act as wrap-around 

coverage for the TRICARE Standard fee-for-service plan. The supplement usually pays 

the beneficiaries’ out-of-pocket costs, such as coinsurance, or charges from health care 

providers that exceed the amount TRICARE will cover. This arrangement is attractive to 

both employers and employees; premiums for the supplements cost employers a fraction 

of premiums for the regular group health plans, while employees are able to utilize the 

flexibility of the TRICARE fee-for-service option with little or no out-of-pocket costs.5

 

CBO estimates that somewhere between 45,000 and 70,000 working-age military retirees 

accepted incentives prior to implementation of section 707 to use their TRICARE benefit 

(as much as 5 percent of the total population of working-age military retirees), with the 

vast majority of those incentives being in the form of employer-subsidized TRICARE 

supplements. 

The final rule implementing section 707 was issued on April 9, 2010. It prohibits 

employers from providing incentives specifically targeted to TRICARE beneficiaries. 

However, it does not prohibit all incentives to discontinue enrollment with an employer’s 

plan, as long as the same incentive is offered to all employees whether or not they are 

eligible for TRICARE. For instance, the rule permits employers to offer cash payments to 

 

3

 Louis T. Mariano and others, Civilian Health Insurance Options of Military Retirees: Findings from a Pilot Survey

(report submitted by the RAND Corporation to the Office of the Secretary of Defense, 2007). 

4

 Department of Defense, TRICARE Management Activity, Evaluation of the TRICARE Program: Fiscal Year 2011 

report to Congress, (February 2011), p. 77. 

5

 TRICARE Prime—the managed care option—has the lowest out-of-pocket costs of the TRICARE plans available 

to working-age retirees. As such, it is the most popular plan among TRICARE beneficiaries. However, because 

some beneficiaries do not like the restrictions that come with a managed care plan and because Prime is not 

available in some parts of the country, some TRICARE-eligible beneficiaries prefer to use TRICARE Standard—the 

fee-for-service option. TRICARE Standard offers beneficiaries more options with regard to health providers, but it 

has higher out-of-pocket costs. 
3 

all employees (whether they are TRICARE-eligible or not) to purchase their own health 

care or health insurance. Separately, the rule prohibits employers from subsidizing 

TRICARE supplements for its employees, but it does allow employers to offer TRICARE 

supplements through their group health plans as long as the employees pay the full cost 

of the premiums. Some employees prefer to purchase supplements through their 

employers because it allows them to do so through pre-tax payroll deduction.6

 

For those people who have chosen to stop using TRICARE and instead enroll in an 

employer-provided group health plan, their health care expenses have shifted from DoD 

to the private sector. As discussed later in this report, we estimate that the government 

loses some tax revenue when beneficiaries elect to use non-government health care plans 

through their employers. However, that loss in revenue is not enough to fully offset the 

savings to the government from the discontinued use of TRICARE by those beneficiaries. 

Thus, the government saves money because of the change in these people’s behavior. 

At the same time, some people have chosen to continue using TRICARE even without 

the employer-subsidized supplements or other incentives. When beneficiaries use a 

TRICARE supplement, it is almost always used with TRICARE Standard (the fee-forservice option of the TRICARE benefit). However, with employers no longer subsidizing 

the supplements for TRICARE Standard, it is likely that many working-age military 

retirees have stopped using Standard and have instead enrolled in TRICARE Prime (the 

managed care option of the TRICARE benefit) because it has very low out-of-pocket 

costs. However, the average cost to the federal government for TRICARE Prime is at 

least 15 percent higher than it is for TRICARE Standard. Therefore, the change in 

behavior by these people probably raises the government’s costs. 

CBO’s Analysis of the Budgetary Impact of Section 707 

Because little data are available about the population affected by section 707, estimating 

its budgetary effects is difficult. CBO does not know how many TRICARE beneficiaries 

were offered incentives or subsidies by their employers to use TRICARE prior to the 

enactment of section 707. Furthermore, it is not clear which health care plans those 

people have chosen to use since the incentives and subsidies were restricted. 

Even estimating the differences in cost between TRICARE Prime and Standard is 

difficult. Apart from the different cost-sharing arrangements of those two options, the 

difference in cost to DoD is affected by different average household sizes and the relative 

health status of the populations choosing each option. Also, studies have shown that those 

with higher out-of-pocket costs generally use fewer health care services than those with 

little or no out-of-pocket costs. This might lead one to conclude that those who use 

 

6

 For specifics about the final rule, see Department of Defense, “TRICARE; Relationship Between the TRICARE 

Program and Employer-Sponsored Group Health Coverage,” Federal Register, vol. 75, no. 68 (April 9, 2010), pp. 

18051-18055. This has been codified at 32 C.F.R. 199.8(d)(6). 
4 

TRICARE Standard will use fewer health services than those who use TRICARE Prime. 

However, it is not clear whether beneficiaries who use Standard with a supplement, and 

therefore have smaller out-of-pocket costs, experience those same, lower usage rates. In 

any event, operating TRICARE Standard will almost always be less expensive for DoD 

because there is additional cost sharing borne by either the beneficiaries or a 

supplemental provider. 

CBO created a model of the decisions of military retirees to simulate a wide range of 

possible outcomes. CBO used the available information to create ranges of the most 

likely values for each of the key estimating assumptions. The agency then used 

simulation software to generate alternative values for each of those assumptions and to 

estimate whether section 707 created costs or savings for the federal government given 

those assumptions. Among the key estimating assumptions are the following: 

 The population of beneficiaries who received employer-subsidized TRICARE 

supplements or other incentives prior to the enactment of section 707 was 

somewhere between 45,000 and 70,000. That range is based on information from 

the insurance industry on the number of employees who received TRICARE 

supplements through their employers and on surveys of military retirees. 

 Between 10 percent and 37 percent of that population chose to stop using 

TRICARE after section 707 was implemented and now use private-sector health 

care options provided through their employers or other non-government sources. 

That range is based on information from state governments who previously 

offered TRICARE supplements (covering about 7,500 employees), as well as 

surveys of military retirees. 

 Between 28 percent and 48 percent of that population continued to use TRICARE 

Standard after section 707 was implemented, either without a supplement or with a 

supplement that retirees purchased on their own. That range is based on 

information from the insurance industry and the current proportion of TRICARE 

beneficiaries who choose to rely on Standard. 

 CBO assumes that the retirees in that population who chose not to use a privatesector health care option or to continue to use TRICARE Standard have instead 

switched to enroll in TRICARE Prime. Based on the distributions discussed 

above, this means that anywhere from 15 percent to 62 percent of those who used 

employer-sponsored TRICARE Standard supplements prior to the enactment of 

section 707 are now enrolled in TRICARE Prime. 
5 

 CBO estimates that the average cost to DoD for a family enrolled in TRICARE 

Prime is between $11,800 and $13,800 (in 2010 dollars), based on information 

from DoD. The average cost for those retirees who enroll themselves but not their 

families is less. 

 CBO estimates that the average cost to DoD of persons who use TRICARE 

Standard are about 70 percent to 85 percent of the cost of equivalent persons who 

use TRICARE Prime, based on information from DoD. 

CBO used the above inputs to create 1,000 different simulations. CBO used those 

simulations for two types of analysis: one excluding effects on federal revenues and 

another including those effects. In the analysis excluding revenue effects, about 

90 percent of the outcomes from those simulations indicate that section 707 has resulted 

in savings for DoD, and about 10 percent imply that section 707 has increased DoD’s 

costs. The range of possible outcomes is admittedly large. Based on the information 

available, CBO estimates that almost all of the possible outcomes for DoD lie between 

savings of $140 million per year and costs of $20 million per year, with an expected 

outcome of about $55 million in savings per year (in 2010 dollars).7

The net savings to the federal government from section 707 have been smaller than the 

savings to DoD because of the effects of that section on federal revenues. As discussed 

above, section 707 has led some people who previously relied on the TRICARE health 

benefit to shift to employer-sponsored group health plans. Because total compensation 

costs are determined by market forces, wages and other forms of compensation are 

assumed to decline by roughly the amounts of any increases in employers’ health 

insurance costs. Employer and employee expenditures on health insurance premiums are 

generally nontaxable, so a shift in compensation from wages and salaries to additional 

health benefits results in lower revenue for the federal government. Based on information 

from the staff of the Joint Committee on Taxation, we estimate that the loss of revenue 

from enactment of section 707 has been between $5 million and $45 million per year, 

with an expected loss of revenue of about $25 million per year. 

With revenue effects included, about 85 percent of CBO’s simulations show that section 

707 has resulted in savings for the federal government. When combined with the estimate 

of expected savings to the Department of Defense, CBO estimates that implementing 

section 707 has saved the federal government, on net, about $30 million per year (in 2010 

dollars; see table below). 

 

 

7

 This range includes 95 percent of the simulated outcomes (it does not include the highest 2.5 percent or the lowest 

2.5 percent of outcomes). Thus, nearly all possible outcomes fall within the estimated range of -$140 million to 

+$20 million per year, and given that range, most of the possible outcomes indicate net savings. 
6 

Simulated Effects on the Federal Budget of Section 707 of the John Warner 

National Defense Authorization Act for Fiscal Year 2007 

 Simulated Range of 

Annual 

Savings (-) or Costs (+) 

Percentage of Outcomes 

That Result in Annual 

Savings 

Expected Annual 

Savings (-) 

Without Revenue Effects -$140 million to 

+$20 million 90 percent -$55 million 

 

Including Revenue Effects -$95 million to 

+$25 million 85 percent -$30 million 

Sources: Congressional Budget Office and staff of the Joint Committee on Taxation. 

Note: Figures are in 2010 dollars. 

CBO’s estimates are very sensitive to changes in some of the assumptions discussed 

above. As one might expect, the results are especially sensitive to the percentage of 

beneficiaries who chose to use their employer-sponsored health insurance after 

TRICARE incentives were restricted, because it is this decision that results in savings for 

the federal government. If the percentage of those who have chosen to use their employer 

health care benefits instead of TRICARE is on the low end of the distribution discussed 

above (15 percent or less), then section 707 has probably resulted in higher costs for DoD 

and for the government as a whole. 

Over time, the TRICARE plans have become increasingly attractive to retirees, as the 

out-of-pocket costs of most private-sector health insurance have increased significantly 

relative to those of TRICARE. That trend has resulted in a steadily increasing share of 

military retirees choosing to participate in TRICARE, and should that pattern continue, 

the likelihood that section 707 creates additional costs for DoD will increase over time. 

For instance, if premiums for employer-sponsored health insurance plans continue to 

outpace the growth in out-of-pocket costs for TRICARE, then those retirees who 

switched to employer health care plans after section 707 was implemented might 

eventually switch back to TRICARE, and most of them would probably choose 

TRICARE Prime, which is more expensive for DoD under current law and existing 

policies. However, future out-of-pocket costs in the TRICARE program will depend to a 

large extent on future decisions about the administration of the program. The migration to 

TRICARE could decrease if out-of-pocket costs for TRICARE were raised or if retirees 

perceived a lack of availability of TRICARE network providers.