United States General Accounting Office

GAO Testimony

Before the Subcommittee on Health, Committee on Ways

and Means, House of Representatives

For Release on Delivery

Expected at 10:30 a.m.

Thursday, July 1, 1999

MEDICARE SUBVENTION

Challenges and

Opportunities Facing a

Possible VA Demonstration

Statement of William J. Scanlon, Director,

Health Financing and Public Health Issues, and 

Stephen P. Backhus, Director,

Veterans’ Affairs and Military Health Care Issues,

Health, Education, and Human Services Division

GAO/T-HEHS/GGD-99-159

Medicare Subvention: Challenges and

Opportunities Facing a Possible VA

Demonstration

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today as you review proposals for a Medicare

subvention demonstration for the Department of Veterans Affairs (VA). The

stated goal of VA subvention is to provide an alternative for delivering

accessible and quality care to certain Medicare-eligible veterans, without

increasing the cost to Medicare or to VA.

Several VA subvention proposals resemble in many respects the current

Department of Defense (DOD) demonstration. Medicare-eligible military

retirees who enroll in the DOD subvention program are able to get

Medicare-covered services from DOD. Similar proposals would allow

certain Medicare-eligible veterans to use their Medicare benefits at VA

facilities. Subvention could allow VA, like DOD, to supplement its funds with

Medicare payments. In principle, by paying VA a discounted rate, the

Medicare program might save money, so long as it does not pay for

services that VA previously would have covered.

Although the DOD and the proposed VA demonstrations are relatively small,

full-scale subvention programs could significantly affect the Medicare trust

funds and the costs of VA and DOD. The 3-year DOD demonstration involves

about 30,000 enrolled retirees and limits Medicare payments to DOD to, at

most, $65 million a year. By contrast, a nationwide DOD subvention

program could potentially involve substantially more in Medicare

payments. In VA, the potential size of a nationwide program may be even

greater. There are about 9 million veterans aged 65 and older, and nearly

all of them are covered by Medicare.

Favorable outcomes for Medicare, VA, and DOD, as well as military retirees

and veterans1

 are not, however, guaranteed. For DOD subvention, the

Balanced Budget Act of 1997 (BBA) authorized a large-scale, 3-year

demonstration and directed GAO to evaluate the demonstration’s effects on

access to care, quality, and the cost to DOD and to Medicare. We have

recently reported on data quality and payment issues affecting the DOD

demonstration and the potential for Medicare overpayments.2 We will be

providing you with further interim reports on aspects of the

demonstration. Our final results will not, however, be available until

several months after the demonstration ends in December 2000.

1

Military retirees are those who have completed a military career and are entitled to retirement pay.

Veterans include all who served and who did not receive a dishonorable discharge.

2

Medicare Subvention Demonstration: DOD Data Limitations May Require Adjustment and Raise

Broader Concerns (GAO/HEHS-99-39, May 29, 1999).

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Our testimony today focuses on a possible VA subvention demonstration

and on issues that VA subvention raises. Specifically, we will compare the

1998 House Ways and Means Committee bill on VA subvention with the

Senate Finance Committee proposal and discuss the unique characteristics

of VA health care that bear on subvention. We will also discuss lessons

learned from the design and early implementation of the DOD

demonstration that may be relevant to the proposed VA demonstration.

In summary, the 1998 House Ways and Means bill and the current Senate

Finance proposal are similar in that both provide for time-limited

subvention demonstrations in which Medicare pays VA at a discounted rate

to care for veterans who are aged 65 and older and who are covered by

Medicare. However, there are also significant differences between the two

proposals. For example, the Ways and Means bill includes a permanent

program for veterans in rural areas who have low incomes or severe

service-connected disabilities, while the Finance proposal would establish

two demonstration models—fee-for-service and coordinated (managed)

care—for lower-priority veterans. Under any proposal, subvention holds

several challenges for VA. It would be challenged to attract to a subvention

coordinated care program veterans who currently enjoy a generous VA

benefits package. VA would also need to strengthen its billing systems to

operate a fee-for-service model and would need to ensure that veterans’

access to services—whether or not they are in the demonstration—is not

reduced. Learning from DOD’s experience to date, VA would need sufficient

time to implement a subvention demonstration—officials at every DOD site

told us that establishing the demonstration was more difficult than they

had expected. DOD’s experience also shows that VA payment methods must

be carefully designed and implemented both to protect the Medicare trust

funds and to promote cost consciousness and efficiencies at VA

demonstration sites. Finally, as DOD’s experience underscores, sound data

systems are essential for managing and evaluating a subvention

demonstration.

Background

Medicare Most military retirees aged 65 and over are eligible for Medicare—a

federally financed health insurance program for the elderly, some disabled

people, and people with end-stage kidney disease. Medicare covers about

39 million beneficiaries and spends about $212 billion a year. Benefits

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include hospital, physician, and other services, such as home health and

limited skilled nursing facility care. The Health Care Financing

Administration (HCFA) administers Medicare and regulates participating

providers and health plans.

Medicare was originally set up to reimburse private providers on a

fee-for-service basis and to allow Medicare beneficiaries to choose their

own providers without restriction. A newer option3

 allows Medicare

beneficiaries to choose among private, managed care health plans.

Currently, 17 percent of beneficiaries use Medicare managed care. In

fee-for-service Medicare, beneficiaries must pay a share of the costs for

various services. Most Medicare managed care plans have only modest

beneficiary cost-sharing, and many offer extra benefits, such as

prescription drugs.

VA Health Care VA has traditionally provided a comprehensive array of health services to

veterans with service-connected disabilities or low incomes. Since 1986, VA

has also offered health care to higher-income veterans without

service-connected disabilities. However, those veterans must make

copayments for services. Overall, VA currently registers in its health care

system over 15 percent of the total veteran population of 25 million, with

the remaining veterans receiving their health care through private or

employer health plans or other public programs. Many of the veterans who

VA serves also get part of their care from other sources, such as DOD,

Medicare, and private insurance. The Administration has requested

$17.3 billion for VA medical care in fiscal year 2000. To make up the

differences between appropriated funds and projected costs, VA estimates

that, by fiscal year 2002, it can derive almost 8 percent of the medical care

budget from other sources, such as reimbursements from health insurers

and, if subvention is enacted, from Medicare.

Since the early 1990s, VA has shifted its focus from inpatient to outpatient

care. At the same time, it implemented many of the principles of

coordinated—that is, managed—care, emphasizing primary care, although

many veterans use VA for only a portion of their care. In 1995, VA

accelerated this transformation by realigning its medical centers and

outpatient clinics into 22 service delivery networks and empowering these

networks to restructure the delivery of health services.

3

BBA expanded this option to include plans in addition to health maintenance organizations and

labeled it “Medicare+Choice.”

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In 1996, the Congress passed the Veterans’ Health Care Eligibility Reform

Act, which established, for the first time, a system to enroll veterans.

Enrollment is, in effect, a registration system for veterans who want to

receive care. Currently, registration is continuous—a veteran may choose

to register at any time and start receiving services—although VA has the

authority to limit the enrollment period if it chooses. The law established

seven priority groups, with priority group 1 the highest and priority group

7 the lowest. Priority group 1 includes those veterans with the most severe

service-connected disabilities; priority group 7 includes veterans whose

incomes and assets exceed a specified level and who do not qualify for VA

payments for a service-connected disability. Priority group 7 veterans must

agree to make copayments for health services.

Each year, VA determines, on the basis of available resources, which

priority groups will be eligible for VA care in the coming year. Currently, VA

serves all seven priority categories, but in the future, that will not

necessarily be true. Veterans in any of the priority groups are eligible for

the VA Uniform Benefits Package, a comprehensive array of services

ranging from hospital care to home health.

Veterans remain free to get some or all of their care from other private or

public sources, including Medicare. VA, on the other hand, is committed to

serving all veterans within the priority groups it has designated for that

year, although capacity varies by region.

DOD Health Care DOD received an appropriation for military health care of almost $16 billion

in fiscal year 1999. Of that, an estimated $1.2 billion is spent on the

1.3 million Medicare-eligible military retirees. Under its TRICARE program,

DOD provides health benefits to active duty military personnel and retirees,4

but most retirees lose their eligibility for comprehensive, DOD-sponsored

health coverage at age 65. DOD delivers most of the health care needed by

active duty personnel through its military hospitals and clinics. DOD gives

priority for care at military facilities to active duty personnel and to

dependents of active duty personnel and those retirees under 65 who are

enrolled in DOD’s managed care program. Retirees who turn 65 and become

eligible for Medicare can get military care if space is available (called

4

We use “retirees” to refer to military retirees, their dependents, and their survivors.

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space-available care) after higher-priority beneficiaries are treated.5 Some

military facilities have little or no space-available care.

Since the early 1990s, DOD health care has shifted toward managed care.

DOD established its own managed care plan, TRICARE Prime, which uses

military providers, supplemented by a network of civilian providers.

However, it is not available to retirees aged 65 and over.6 TRICARE Prime

covers services of military physicians as well as civilian network providers

by drawing on DOD’s appropriated funds and premiums and copayments

charged to some enrollees. In TRICARE Prime, DOD generally organizes the

delivery of care on managed care principles—for example, an emphasis on

a primary care manager for each enrollee. DOD has gained considerable

experience with managed care, but it relies heavily on contractors to

conduct marketing, build a network of providers, and perform other

critical functions.

DOD Subvention

Demonstration

BBA established a 3-year demonstration of Medicare subvention, to start on

January 1, 1998, and end on December 31, 2000. Within BBA’s guidelines,

DOD and HCFA negotiated a “memorandum of agreement.” The agreement

stated the ways in which HCFA would treat DOD like any other Medicare

health plan and the ways in which HCFA would treat it differently. The

agreement also spelled out the benefits package and the rules for

Medicare’s payments to DOD. After DOD and HCFA signed the agreement,

they selected six demonstration sites. DOD estimated that it would be able

to serve nearly 30,000 of the approximately 125,000 people eligible for both

Medicare and military health benefits in these areas.

The subvention demonstration made DOD responsible for creating a

DOD-run Medicare managed care organization for elderly retirees. This

pilot health plan, which DOD named Senior Prime, is built on DOD’s existing

managed care model. By enrolling in Senior Prime, Medicare-eligible

military retirees obtain priority for services at military facilities—an

advantage compared to nonenrollees. Senior Prime’s benefit package is

“Medicare plus”—the full Medicare benefits package supplemented by

some other benefits, notably prescription drugs.

5

A partial, unofficial exception to this rule occurs at teaching hospitals, where aged retirees with

serious, persisting conditions are treated on an ongoing basis, in large measure so that medical

residents can be given the clinical experience required.

6

Active duty members of the armed forces receive their health care through TRICARE Prime.

Dependents of active duty military can choose among three DOD-run health plans that include

TRICARE Prime. Retirees under 65 can pay a premium and “buy in” to TRICARE Prime.

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BBA provides the basic rules by which, under the demonstration, Medicare

pays DOD. First, Medicare is to pay DOD the Medicare managed care rate,

less several adjustments and a 5-percent discount for each enrollee.

Second, in order to receive Medicare payments, DOD must at least match

its baseline costs, or level of effort—that is, devote at least the same

resources as it did in the recent past to providing care to retirees aged 65

and older. The memorandum of agreement translates these guidelines into

a complex payment system. For example, it allows any demonstration site

to earn monthly interim payments if its Senior Prime enrollment exceeds a

threshold derived from the baseline level of effort. But at the end of the

year, DOD can only retain a portion of these payments if that year’s costs

for the six sites together exceed the baseline level of effort.7

Proposals for VA

Demonstration Differ

but Share Key

Features

Although several proposals for VA Medicare subvention have been

developed recently, our analysis focuses on two: a House Ways and Means

Committee bill (H.R. 3828) passed by the House in 1998 and a proposal

adopted by the Senate Finance Committee on June 24, 1999. While similar

in key respects, the two proposals also differ in several significant ways,

including whether VA subvention would include a fee-for-service model

and whether a permanent program—in addition to a demonstration

targeting certain veterans—would be established in rural areas for higherpriority veterans. The two proposals share certain features, including a

managed care model (which the Finance Committee calls “coordinated

care”) for at least part of the subvention proposal, a demonstration

targeting lowest priority veterans, and a cap on annual Medicare payments

to VA under the demonstration.

H.R. 3828 (105th Congress) The House bill is distinctive in authorizing both a permanent subvention

program and a demonstration project:

• The permanent subvention program would follow a managed care (or

coordinated care) model. It would target VA’s higher-priority veterans (for

example, people with severe service-related disabilities or low incomes) in

rural areas and could be continued indefinitely. It would begin with up to

three sites, but more sites could be added after 2003. VA would have to

maintain its level of effort—its historical resource commitment—to the

targeted group of veterans in the sites. Medicare payments would be

capped at $50 million the first year, $75 million the second year, and

$100 million in subsequent years. No cap would apply if the program were

7

These issues are discussed in greater detail in GAO/HEHS-99-39.

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expanded to more sites, subject to certification by the Department of

Health and Human Services’ (HHS) Inspector General (IG) that VA could

measure its costs in a reasonably reliable and accurate manner.

• By contrast, the demonstration would be limited to veterans in the lowest

priority level for VA care at no more than three sites and would deliver

services for not more than 3 years. One site would have to be an area

previously served by a military health facility shut down in the military

base closing process, known as the BRAC (Base Realignment and Closure)

process. Unlike the permanent program, no rural sites are required.

Medicare payments to VA under the demonstration would be capped at

$50 million annually. The bill would allow requiring veterans to pay

enrollment fees and copayments that could vary with income.

For both the demonstration and the permanent program, the House bill

emphasizes that, if practicable, VA should use its outpatient clinics.

However, VA could still contract with private providers and health plans to

supply services as needed.

The Senate Finance

Proposal

The scope of the Finance Committee proposal8 is in some respects

narrower—its demonstration is limited to the lowest priority veterans

(priority group 7: higher-income veterans who mostly lack a

service-connected disability). In other respects, it is broader—authorizing

a test of two subvention models. The proposal would require VA to

establish, first, a coordinated care model of subvention and, a year later, a

fee-for-service model. It would authorize a VA subvention demonstration

in, at most, eight sites but would require equal numbers of sites for the two

models. The proposal would allow up to a year for implementing each

model, which would operate for up to 3 years after enrollment started.

Medicare’s rules for paying VA would resemble those in the DOD subvention

demonstration: To guard against the same VA care being paid for by both

VA appropriated funds and Medicare, the proposal would require VA to

demonstrate maintenance of its effort on behalf of the demonstration

population. HCFA would pay VA for the care of veterans in the

demonstration only after VA exceeded its historical spending, or level of

effort, for higher-income veterans.

8

The text of this bill is not yet available. Our description is based on a summary, prepared by

Committee staff for the markup on June 24, 1999, of the proposal contained in the Chairman’s Mark.

The Committee adopted the proposal.

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Common Features of the

Two Proposed

Demonstrations

The House bill and Senate proposal share certain common elements. In

each, a VA subvention demonstration would include a managed care (or

coordinated care) model and serve certain higher-income9

 veterans

(effectively, priority group 7) who are Medicare beneficiaries

• for a limited time period—3 years,

• in a limited number of locations, and

• in compliance with Medicare rules that HCFA applies to the private sector

(although HCFA could waive rules that were inappropriate for VA).

Regarding Medicare payments to VA,

• HCFA would pay VA at 95 percent of the applicable Medicare rate paid to

private providers or health plans—less certain exclusions, such as

payments for disproportionate share hospitals and graduate medical

education;

• HCFA payments to VA would be limited to a predetermined annual amount,

such as $50 million; and

• VA must meet its previous level of effort in providing services to

Medicare-eligible veterans.

(For a more extensive comparison of the two proposals, see app. I.)

VA Demonstration

Would Face

Challenges

Concerning

Participation, Billing,

and Access

A proposed VA demonstration holds several challenges. First, veterans may

see no advantage in enrolling in a subvention managed care plan because

everyone eligible for the demonstration currently has both VA and

Medicare benefits. Second, VA’s past difficulties in billing insurance

companies suggest that VA may have difficulty billing Medicare for services

provided to veterans. Finally, if subvention enrollees prove to be heavy

users of VA services, they may crowd out or limit the access of other,

higher-priority veterans.

For VA, an important issue to consider is whether veterans would enroll in

a subvention managed care plan that would not give them significantly

more services than they currently receive from VA and that would restrict

their freedom to use other providers. Priority group 7 veterans–the only

ones eligible for a subvention demonstration–can now obtain all services

in VA’s Uniform Benefits Package (although not always in a timely

manner). Like Medicare, VA benefits cover a broad range, including

9

Higher-income veterans are those who exceed VA’s income thresholds for cash benefits. For example,

the current threshold for a single veteran without dependents is $22,351.

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inpatient and ambulatory medical and surgical care, certain plastic

surgery, and durable medical equipment. VA benefits are particularly

strong, compared to Medicare, in mental health care, comprehensive

rehabilitative care and services, preventive services, and respite care. The

VA benefit also—unlike Medicare—covers drugs. Copayments are

generally no greater than under Medicare fee-for-service. Additionally,

veterans who are eligible for Medicare can also get care from non-VA

providers—either under fee-for-service or through a managed care

plan—whereas, under subvention, members would be locked out of using

other Medicare plans and providers. If it needed to make subvention

benefits more attractive, VA could either reduce copayments or increase

benefits, but these actions would increase VA’s costs.

In the future, however, VA benefits, as well as the number of priority

groups served, may be reduced. Paradoxically, the less generous the VA

package for all veterans, the greater their incentive to participate in the

demonstration, because that would be the only way they could obtain the

full range of VA care. VA is authorized to reduce its Uniform Benefits

Package and stop serving lower-priority veterans, including priority group

7. VA officials tell us that, due to resource constraints, VA may not serve

priority group 7 veterans in the future and may reduce the benefits

covered under the benefits package. If this happens, priority group 7

veterans could only get VA services through a subvention demonstration

and, hence, would probably be more likely to join the VA Medicare

subvention demonstration.10 Furthermore, some VA officials have

suggested to us that, to give priority group 7 veterans a reason to enroll, it

may be necessary to exclude them from VA services—except through the

demonstration.

Current proposals for a VA subvention demonstration, such as the Senate

Finance Committee’s, permit both managed care and fee-for-service sites.

Of the two, fee-for-service appears to be easier to implement because it

only requires VA to submit claims for covered services to HCFA for payment.

It does not require the veteran to join a VA-operated managed care plan and

forego access to other providers. However, in the past, VA has had

difficulty in collecting from insurance companies because its bills have not

had enough detail (for example, diagnosis, service, procedure, and

individually identified provider).11 While VA is moving toward a system that

10Since many veterans obtain only part of their care from VA, this still might not be sufficient incentive.

11See VA Medical Care: Increasing Recoveries From Private Health Insurers Will Prove Difficult

(GAO/HEHS-98-4, Oct. 17, 1997).

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will more closely approximate private sector billing procedures, its

success remains to be seen.

The greatest concern in a VA subvention program—either coordinated care

or fee-for-service—is that subvention enrollees could consume so many

services that veterans in higher priority groups would be crowded out or

their access to care restricted. This concern is particularly great in the

case of VA, both because of its constrained resources and its current policy

of not denying care to any veterans. VA’s budget has been essentially flat

for the last 3 years, and the President’s budget proposes the same amount

for medical care in fiscal year 2000 as was appropriated to VA for fiscal

year 1999. However, VA has not only restructured and moved resources

from inpatient to outpatient care, it also increased the number of veterans

served and is considering several expensive new initiatives, such as a

hepatitis C program. One result has been pressure on resources and, in

some areas, increased waiting times for appointments. Furthermore,

according to its policy, VA does not deny care to any veteran, although

veterans may have to wait longer to obtain the care. In the short term, if

subvention absorbed more resources than a medical facility had available,

waiting times for appointments would probably increase or care could be

limited to certain facilities, which might be inconvenient for some

veterans. It is unclear how much of an impact increases in waiting times or

other types of decreased access would have on enrollees in the

demonstration. VA would probably try to ensure that access was

maintained for demonstration participants, since their continued

participation increases VA resources.

Proposed VA

Demonstration Can

Benefit From DOD

Experience

Taking account of DOD’s experience in establishing a subvention

demonstration could strengthen proposals for a VA demonstration. In

particular, DOD experience shows that implementation is difficult and that

enough time should be allowed to undertake the numerous steps needed

to get a demonstration started. Furthermore, an adequate payment method

is essential to protect the Medicare trust funds, and payment rules need to

be as simple and straightforward as possible. Finally, accurate and reliable

data systems are needed to manage demonstration costs and health care

effectively.

A detailed discussion of these issues is in appendix II. The following

summarizes the main lessons from DOD’s experience.

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• Time needed for implementation should be recognized. Officials at every

DOD site told us that establishing a Medicare managed care organization

was more difficult and required more effort than they had expected.

Months into the implementation, they continue to encounter new issues.

Even though the sites took 13 to 17 months after the legislation was

passed to establish Senior Prime, hindsight suggests that the goals to get it

running earlier were unrealistic. If a VA demonstration is authorized, it

should have 12 to 18 months to implement its plans for the demonstration;

both VA headquarters and sites would need that much time.12

• Payment methods need careful design and oversight. In any demonstration

of Medicare subvention, adequate payment methods are needed to protect

the Medicare trust funds. The DOD demonstration stipulated that Medicare

would not pay DOD unless DOD had provided its Medicare-eligible retirees

an amount of care exceeding its historical level of effort for these retirees.

Under a VA demonstration, a similar requirement would be desirable. An

accurate estimate of VA’s baseline costs would reduce the chance that

Medicare would overpay or underpay VA under a subvention

demonstration.13

DOD and HCFA also encountered difficulties due to (1) the complexity of the

Medicare payment rules for subvention, (2) the definition and

measurement of baseline costs, and (3) ambiguity about what sites could

earn and whether earnings would be distributed to the sites. As a result of

these factors, many DOD site managers and physicians have largely

disregarded the uncertain gain in financial resources from possible

Medicare payments and have focused primarily on implementation and

patient care issues. Consequently, the DOD demonstration may not produce

the full savings and efficiencies that are expected from managed care.

DOD’s experience can be used in designing a possible VA demonstration.

First, payment rules should give VA and its sites greater certainty about

their earnings. Second, if a VA demonstration had a level-of-effort

requirement, the baseline costs should be for a period as close as possible

to the start of the demonstration. This would minimize problems of

comparing current and baseline costs. It would also facilitate audits of the

12The Finance Committee proposal provides a year for start-up and initial implementation of the

demonstration. It also would stagger the start of the two models: the fee-for-service model would start

a year after the coordinated care model.

13The payment rules in the DOD demonstration are, at least in principle, adequate for the short term

but would be undesirable for a longer-term program. A different payment method, with more

understandable rules and viable for the longer term, would need to be developed if the DOD

demonstration were extended.

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data. Third, sites should be informed in advance what proportion (if any)

of their Medicare earnings would be retained centrally or regionally.14

• Accuracy of data systems relies on agency commitment. DOD’s experience

shows that data systems are a point of vulnerability for a successful and

credible program. Inadequate data quality can weaken the management of

a demonstration and raise questions about reports of its favorable results.

The extent to which data quality would pose an obstacle to a VA

demonstration depends in part on how the payment rules are specified.

Good data, consistent across sites, would also be needed to manage and

evaluate the demonstration. Data quality problems would probably vary by

site, with some sites having better data than others. The types of data

systems needed would depend in part on the subvention model that is

selected. For example, in a fee-for-service model, billing systems are

critical. In general, solving data quality problems requires commitment and

follow-through of agency management.

In addition, DOD experience suggests that veterans in a potential VA

subvention demonstration would benefit if VA were to develop a strategy to

inform and assist them with their options after the demonstration ends.

Furthermore, as Medicare enrollment in managed care plans is shifting to

an annual open season, coordinating enrollment in and termination of the

demonstration with Medicare’s open season would help demonstration

participants.

Concluding

Observations

Subvention holds significant potential for giving veterans an additional

option for health care coverage, for saving Medicare money, and for giving

VA additional funds. However, these favorable outcomes are not

guaranteed. We have identified several challenges, based on the particular

characteristics of VA as well as the experience of DOD subvention. If a VA

subvention demonstration were designed to take account of the issues we

have raised, its chance for success would be greater. In particular, for a

managed (or coordinated) care demonstration, veterans need to have

sufficient incentives–compared to the standard VA benefits–to enroll. For

a fee-for-service demonstration, VA needs adequate billing systems to

ensure that it receives the money it earns. And, as with any demonstration,

it will be important to protect both participants’ and other veterans’ access

to care. DOD’s experience with subvention to date shows the importance of

sound data systems that consistently and accurately capture financial and

workload data. It also underscores the importance of straightforward and

14VA calls the regional level a Veterans Integrated Service Network, or VISN.

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easy-to-understand payment rules and a clearly defined level of effort that

creates a level playing field for both VA and Medicare.

Mr. Chairman, this concludes our prepared statement. We will be happy to

answer any questions that you or other Members of the Subcommittee

may have.

GAO Contacts and

Acknowledgments

For future contacts regarding this testimony, please call William J. Scanlon

at (202) 512-7114 or Stephen P. Backhus at (202) 512-7101. Key

contributors to this testimony include Gail MacColl, Jonathan Ratner,

Dayna Shah, and Phyllis Thorburn.

Page 13 GAO/T-HEHS/GGD-99-159
Appendix I 

Comparison of 1998 Ways and Means Bill

and 1999 Senate Finance Proposal on VA

Subvention

H.R. 3828 (105th Congress)a Senate Finance proposal summaryb

What would be

authorized and who

would be targeted?

— A demonstration project under which Medicare

would reimburse VA for care provided to veterans

enrolled in Medicare parts A and B who have no

service-connected disability and who do not meet

VA’s low-income threshold.

— A program under which Medicare would

reimburse VA for care provided to veterans enrolled

in Medicare parts A and B who have

service-connected disabilities or who are

low-income and who live far from a VA medical

center.

A demonstration project under which Medicare

would reimburse VA for care provided to veterans

enrolled in Medicare parts A and B who have no

compensable service-connected disability and do

not meet VA’s low-income threshold.

How would health

care be delivered?

To the extent practicable, VA would use its

outpatient clinics to provide services under the

program. VA may enter into contracts and

arrangements with entities such as private

practitioners, providers, preferred provider

organizations, and health care plans to provide

health care under the program or demonstration

project.

— Fee-for-service model.

— Coordinated care model consistent with

Medicare+Choice requirements.

How many health care

delivery sites?

— Up to three demonstration project sites, at least

one of which must encompass the area served by a

military medical facility closed pursuant to BRAC.

— Initially, no more than three program sites, but

additional sites could be designated starting in

2003.

— Up to four fee-for-service sites, at least one of

which must be operated in a predominantly rural

area.

— Up to four coordinated care sites, at least one

of which must be operated in a predominantly

rural area.

An equal number of sites would represent each

model.

When would the

demonstration or

program begin and

end?

— Demonstration would begin Jan. 1, 1999, and

end Dec. 31, 2001.

— Program would begin Jan. 1, 2000, and may

continue indefinitely.

— Fee-for-service model would start Jan. 1, 2001,

and end the earlier of 3 years after first enrollment

or Dec. 31, 2004.

— Coordinated care model would begin Jan. 1,

2000, and end 3 years after enrollment begins or,

if earlier, Dec. 31, 2003.

Would the start of the

demonstration or

program be

contingent on VA

meeting certain

requirements?

Yes. HHS’ Office of Inspector General (OIG) must

certify that VA and HHS have established a

data-matching program to identify veterans eligible

for Medicare and entitled to VA benefits and have

performed such a comparison.

Yes. HHS’ OIG must certify VA has (1) cost

accounting systems for each demonstration site;

(2) reliable, accurate, and consistent data across

sites; (3) minimized the risk that VA appropriations

will be used for the demonstration; (4) the

capacity at each site to provide benefits to

sufficient numbers of targeted Medicare-eligible

veterans; and (5) sufficient safeguards at each

site to minimize reduction in quality or access to

care to veterans (participating and not

participating in the demonstration.)

How would an eligible

veteran participate?

Participation in the program or demonstration

project is voluntary. Enrollment is implied.

Eligible veterans must enroll in the demonstration.

Eligibility must be verified prior to receiving

services.

(continued)

Page 14 GAO/T-HEHS/GGD-99-159
Appendix I 

Comparison of 1998 Ways and Means Bill

and 1999 Senate Finance Proposal on VA

Subvention

H.R. 3828 (105th Congress)a Senate Finance proposal summaryb

How much would

Medicare pay to VA?

95 percent of amount paid to Medicare+Choice

organizations (excluding payments for medical

education and disproportionate share and

capital-related payments to hospitals for inpatient

services).

— Under fee-for-service, 95 percent of Medicare

rate.

— Under the coordinated care model, 95 percent

of amount payable to Medicare+Choice

organizations.

Payments for medical education and

disproportionate share excluded from

reimbursements; one-third of capital-related costs

included.

Would there be a cap

on Medicare

reimbursements?

Yes:

— For demonstration project, not more than $50

million annually for 1999 through 2001.

— For program, not more than $50 million for 2000;

$75 million for 2001; and $100 million for 2002 and

each succeeding year, but no cap if program

expands to additional sites, subject to HHS’ IG

certification.

Yes; $50 million for each year of the demonstration.

What would veterans

be required to pay?

For the demonstration project, veterans may be

required to pay enrollment fees and to make

copayments, which can vary based on income.

Fees and copayments must be consistent with

Medicare+Choice requirements, except as waived

by HHS.

(Not specified in the Senate Finance proposal

summary.)

Would VA be required

to maintain its

historical level of

health care services

to Medicare-eligible

veterans?

Requires that VA and HHS agreement describe how

maintenance of effort will be implemented in both

the demonstration and program. However, only

implementation of the program is conditioned on VA

reporting to the Congress and GAO on steps taken

to prevent reduction in type or amount of health

care services provided. An agreement entered into

by VA and HHS would determine a base year

against which VA must maintain overall the level of

effort for services.

Yes. VA expenditures at any site must exceed an

established baseline amount before Medicare

reimbursement will occur.

How would the

baseline level of effort

be calculated?

VA and HHS would jointly determine a base year.

VA would report to the Congress and GAO on its

methodology and basis for calculating level of effort.

(Not specified in the Senate Finance proposal

summary.)

Would Medicare

requirements apply?

Yes. Both the demonstration project and program

must meet all requirements of Medicare+Choice

plans. (HHS may waive any requirement if waiver

reflects VA’s status as a federal agency and is

necessary to carry out the program or

demonstration project.)

Yes. Coordinated care demonstration must

provide, at a minimum, Medicare benefits under

Medicare+Choice rules and regulations, unless

waived by HHS for specific reasons.

How would costs to

Medicare be

monitored?

GAO would report annually on cost increases to

Medicare under the demonstration or program. If

VA and HHS conclude that the demonstration or

program has increased Medicare spending, VA

must reimburse Medicare and adjust future

Medicare payments.

Annual reconciliation process to ensure no

increase in costs to Medicare. GAO must report

annually on the extent, if any, to which costs to the

Medicare program under the demonstration have

increased.

(Table notes on next page)

Page 15 GAO/T-HEHS/GGD-99-159
Appendix I 

Comparison of 1998 Ways and Means Bill

and 1999 Senate Finance Proposal on VA

Subvention

aThe provisions of H.R. 3828 were incorporated into H.R. 4567, which passed the House on

Oct. 10, 1998.

bThe text of this bill is not yet available. Our description is based on a summary of a proposal

titled Chairman’s Mark: The Medicare Subvention Demonstration for Veterans Act of 1999,

prepared by the staff of the Senate Committee on Finance, June 24, 1999. The Committee

adopted the proposal on that date.

Page 16 GAO/T-HEHS/GGD-99-159
Appendix II 

Experience Implementing DOD Subvention

Demonstration

In implementing the subvention demonstration, DOD and HCFA completed

numerous and substantial tasks. DOD sites had to gain familiarity with HCFA

regulations and processes, prepare HCFA applications, prepare for and host

a HCFA site visit to assess compliance with managed care plan

requirements, develop and implement an enrollment process, market the

program to potential enrollees, establish a provider network (for care that

cannot be provided at the military treatment facilities), assign primary

care managers to all enrollees, conduct orientation sessions for new

enrollees, and begin service. The national HCFA and DOD offices developed

a memorandum of agreement, spelling out program guidelines in broad

terms. They also developed payment mechanisms and translated the BBA

requirement that DOD maintain its historical level of effort in serving dual

eligibles into a reimbursement formula.

HCFA accelerated review procedures and assigned additional staff so that

timelines could be met. But these accomplishments were not without

difficulties, and several issues remain that are likely to impact the

demonstration’s results. These include the extent to which payment rules

can be made more understandable and workable and the extent to which

DOD can operate successfully and efficiently as a Medicare managed care

organization.

Implementation Delayed

by Several Factors

In view of the steep learning curve that DOD faced—it started without any

Medicare experience—it is not surprising that the demonstration did not

start on time. BBA was enacted in August 1997 and authorized a

demonstration beginning in January 1998. The first site started providing

service in September 1998, and all sites were providing service by

January 1999. Officials at all DOD sites emphasized to us that the process of

establishing a Medicare managed care organization at their facility was far

more complex than they had expected. They noted several issues that

caused difficulty during this accelerated startup phase, including the

following:

• Delayed notification to sites of their selection for the demonstration.

• Difficulties in learning and adapting to HCFA rules, procedures, and terms

for managed care organizations. For example, DOD had to significantly

rework grievance and appeals procedures to comply with HCFA

requirements.

• Difficulties due to shifts in Medicare requirements. All sites started

planning as HCFA was developing the new Medicare managed care

regulations to replace the rules for the former risk contract managed care

Page 17 GAO/T-HEHS/GGD-99-159
Appendix II 

Experience Implementing DOD Subvention

Demonstration

program. Consequently, the sites had to adapt to changed rules when they

were published.

Capacity and Enrollment Sites vary significantly in (1) their capacity for caring for Medicare-eligible

retirees, (2) how close enrollment is to capacity, and (3) what fraction of

eligibles has enrolled. This variation suggests that potential demand for a

subvention program is uncertain. Retirees’ enrollment decisions reflect

several factors—some, DOD may be able to influence; others, such as the

extent of managed care presence in an area, are outside its control.

In establishing their enrollment capacity–which effectively became an

enrollment target–some sites were more conservative than others. Sites’

assessment of their resources focused on the availability of primary care

managers—physicians and other clinicians who both provide primary care

and serve as gatekeepers to specialist care. Additionally, the national

TRICARE office developed a model to show how many enrollees a site would

need to meet its level-of-effort threshold and start receiving increased

resources from subvention, and these results were made available to sites.

Capacity varied from San Antonio, Texas, the largest site with four

hospitals and a capacity of 12,700, to Dover, Delaware, which provides

only outpatient care in its military health facility and set its capacity at

1,500.

Many DOD officials and other observers expected that sites would be

deluged with applications and would rapidly reach capacity, but this did

not happen. One site has reached capacity, but only after several months.

Other sites have enrolled between 46 percent and 92 percent of capacity as

of the end of June 1999.

As table II.1 shows, there is a fourfold difference in sites’ enrollment as a

percentage of eligibles in their catchment areas–from 8 percent (San

Diego, California) to 36 percent (Keesler, Mississippi). Several factors may

explain this variation:

• Enrollment in other Medicare managed care plans varies widely, from one

site with a low percentage of eligible enrollees (San Diego)—where nearly

50 percent of dual eligibles are in private Medicare managed care

plans—to two sites with higher percentages of enrollees (Keesler and

Dover)—where no one is in managed care because no plans are available.

• The availability of military care varies. Several sites emphasized in their

marketing that retirees who did not enroll could not count on receiving

Page 18 GAO/T-HEHS/GGD-99-159
Appendix II 

Experience Implementing DOD Subvention

Demonstration

space-available care. This information might spur retirees who prefer

military care to enroll in Senior Prime. At other sites, space-available care

was less of an issue. At these sites, prospective enrollees who believe that

they can continue to receive space-available care may not see an

advantage in enrollment but rather a disadvantage—especially because

enrolling in Senior Prime locks them out of other Medicare-paid care.

• Sites may differ in the amount of space-available care they have given in

the past and in beneficiaries’ satisfaction with that care. These factors

could also affect the decision to enroll.

• Some retirees expressed reluctance to enroll because the demonstration is

due to end in December 2000. They also noted that they did not get

information about how, after the demonstration ends, enrollees would

transition back to space-available care, traditional fee-for-service

Medicare, or a Medicare managed care organization.

Table II.1: TRICARE Senior Prime

Enrollment

Enrolleda Capacityb

Enrolled

as a

percentage

of capacity

Total

eligible

Enrolled

as a

percentage

of eligibility

Madigan Army Medical

Center, Wash. 3,313 3,300 100.4% 21,709 15.3%

San Antonio, Tex. 11,638 12,700 91.6 41,215 28.2

Naval Medical Center,

San Diego, Calif. 2,879 4,000 72.0 35,619 8.1

Keesler Medical Center,

Miss. 2,617 3,100 84.4 7,361 35.6

Colorado Springs, Colo. 2,823 3,200 88.2 13,689 20.6

Dover, Del. 685 1,500 45.7 3,905 17.5

Total demonstration 23,955 27,800 86.2% 123,498 19.4%

Note: Status as of June 21, 1999.

aIncludes only people who were 65 years old at the beginning of the demonstration.

bCapacity at the beginning of the demonstration. Does not include capacity for those who turned

65 after the demonstration started.

Managed Care Issues The subvention demonstration for military retirees aged 65 and over is a

new endeavor that highlights challenges for DOD to operate as a Medicare

managed care organization. The first is operational—putting in place

procedures, organization, and staff to deliver a managed care product to

these seniors. The second is economic and organizational—creating a

Page 19 GAO/T-HEHS/GGD-99-159
Appendix II 

Experience Implementing DOD Subvention

Demonstration

business culture that reconciles delivering services to this illness-prone

population with cost-consciousness.

DOD’s reliance on contractors (like Foundation Health and Humana) has

enabled it to accomplish key managed care tasks. DOD overcame obstacles

in launching TRICARE Senior Prime as a managed care organization.

Specifically, to establish and run a managed care plan requires

infrastructure—the ability to market the plan, enroll members, and recruit,

manage, and pay a provider network. In building Senior Prime

organizations at the six sites, DOD has benefited from its TRICARE Prime

experience and from its contractors who help with or perform many of

these tasks.15 Sites with well-established TRICARE Prime organizations that

had worked with the same contractor for several years seemed to us to

have a sizeable advantage in establishing Senior Prime. It is not yet known

what effect DOD’s extensive use of contractors will have on DOD costs for

Senior Prime. But an expanded, permanent subvention program would

require establishing and monitoring contractors at many new sites. That

would make contractor quality, relationships, and costs a pivotal and

uncertain feature of a potential DOD subvention program.

Payment Issues DOD and HCFA have devised payment rules to meet the statutory

requirement that Medicare should pay DOD only after its spending on

retirees’ care reaches predemonstration levels—that is, after it has met its

baseline, or level of effort. These rules have added to the difficulty and the

complexity of the demonstration. Furthermore, they have resulted in

Medicare payments to DOD not being immediately distributed to the sites.

As a result, DOD site managers tend to view DOD appropriations as the sole

funding source for all Senior Prime care delivered at military health

facilities; the managers are likely to consider Medicare subvention

payments as irrelevant to their plans for dealing with capacity bottlenecks

or other resource needs in TRICARE Senior Prime.

The demonstration’s payment system requires extensive cost and

workload data—data that are often problematic and difficult to retrieve

and audit. It also involves a complicated sequence of triggers and

adjustments for interim and final payments from Medicare to DOD.

Interim payments are made to DOD for care delivered at each site that is

above a monthly level-of-effort threshold. A reconciliation after the end of

15The DOD sites relied on the TRICARE contractors for handling enrollment, claims processing, and

network management. They have also, to varying degrees, assisted with the application, site visit,

quality assurance, and utilization review areas.

Page 20 GAO/T-HEHS/GGD-99-159
Appendix II 

Experience Implementing DOD Subvention

Demonstration

the year to determine final Medicare payments can result in DOD returning

a portion of those interim payments if the level of effort for all sites for the

entire year is not reached. DOD would also return Medicare payments if

data showed that the demonstration population was in better health than

that allowed for in the Medicare payment rates, or if payments exceed the

statutory cap ($50 million in the first year, $60 million in the second, and

$65 million in the third).16

Because of the potential for adjustments after the close of the year, the

payment rules create some uncertainty for DOD. DOD cannot be certain that

it will retain all—or even part—of the monthly interim payments at the end

of the year. DOD has been slow to distribute interim payments to the sites,

in part because some of the money may have to be returned to HCFA. This

creates great uncertainty for DOD sites and means that care under

subvention is currently paid for with DOD’s appropriated funds. The

demonstration’s payment method differs significantly from the Medicare

managed care payment system, in which payments are made at the

beginning of the month to cover care delivered during the month.

Based on experience to date with the demonstration, any payment

approach for subvention must be even-handed (that is, it should favor

neither HCFA nor DOD); straightforward and readily understandable; and

prospective (DOD and its sites should receive payment in advance of

delivering care to enrollees). The demonstration’s payment mechanism,

which relies on level of effort, is functional in the short term—although

the calculation of level of effort has weaknesses.17 However, this payment

mechanism may not be appropriate over the longer term for an extended

or expanded subvention program. Moreover, a credible long-term payment

system should start with a zero-based budgeting approach: first,

determining the cost to DOD of providing TRICARE Senior Prime care to dual

eligibles and, then, deciding how much care will be provided from DOD’s

appropriations and how much from Medicare reimbursement.

(101868)

16The enrollment targets for each site reflect the statutory caps. Rebates (from DOD to Medicare) as a

result of payments exceeding the cap are unlikely.

17These issues were discussed more fully in GAO/HEHS-99-39.

Page 21 GAO/T-HEHS/GGD-99-159
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