CBO

A

S T U D Y

Growth in Medical Spending

by the Department of Defense

September 2003

The Congress of the United States # Congressional Budget Office 
Notes

Unless otherwise indicated, all years referred to in this study are fiscal years.

Numbers in the text and tables may not add up to totals because of rounding.

All dollar amounts are expressed in 2002 dollars (having been converted, when necessary, using

the gross domestic product price deflator).

The photographs on the cover of this report appear courtesy of the Department of Defense. 

They were taken by Journalist 2nd Class Sybil McCarrol, U.S. Navy (top right); Tom 

Watanabe, for the U.S. Navy (bottom right); Senior Master Sgt. Dennis W. Goff, Air 

National Guard (bottom left); Photographer’s Mate 2nd Class Steven Harbour, U.S. Navy 

(top left); and Cpl. Paula M. Fitzgerald, U.S. Marine Corps (center).
Preface

From fiscal year 1988 to 2003, the Department of Defense’s (DoD’s) spending on medical care almost doubled in real terms. That growth occurred despite large reductions in the

size of the active-duty military force and a substantial reduction in the size of the military’s

own hospital system. This Congressional Budget Office (CBO) study—prepared at the request of the Chairman of the Senate Budget Committee—examines the reasons for those

increases and considers directions for the future. Already, DoD’s total spending on health care

is more than half as large as its cash compensation. Looking forward, CBO’s analysis examines

how overall growth of health care costs in the economy could affect DoD’s health care costs

through 2020, as well how changes in benefits could do so. In keeping with CBO’s mandate

to provide objective, impartial analysis, this study makes no recommendations.

Allison Percy of CBO’s National Security Division wrote the study under the general supervision of Deborah Clay-Mendez and J. Michael Gilmore. Sam Papenfuss of CBO’s Budget

Analysis Division prepared the cost estimates in Chapter 3 and wrote Appendix C under the

general supervision of Jo Ann Vines and Peter H. Fontaine. Julie H. Topoleski of CBO’s

Health and Human Resources Division provided assistance with the projection methodology

in Chapter 2. Carla Tighe Murray of the National Security Division helped review the manuscript for factual accuracy. Arlene Holen, Julie Lee, Robert P. Murphy, Carla Tighe Murray,

Sam Papenfuss, Rachel Schmidt, Jo Ann Vines, and G. Thomas Woodward provided

thoughtful comments on a draft of the study, as did external reviewer Paul F. Dickens. 

John Skeen edited the study, and Christine Bogusz proofread it. Cindy Cleveland produced

drafts of the manuscript, and Christian Spoor prepared the study for publication. Lenny

Skutnik printed the initial copies, and Annette Kalicki prepared the electronic versions for

CBO’s Web site (www.cbo.gov).

Douglas Holtz-Eakin

Director

September 2003

1

2

3

CONTENTS

Summary ix

Historical Growth in the Department of Defense’s 

Medical Spending 1

Growth in per Capita Health Care Spending for the

U.S. Population 2

One-Time Occurrences Contributing to Growth 

in DoD’s Medical Spending 3

Other Factors Affecting the Pattern of Growth in 

DoD’s Medical Spending 5

Comparisons with Other Employers’ Spending on Health Care 8

Projections of DoD’s Future Medical Spending Under 

Current Policies 13

Midrange Estimates 13

Low Estimates 15

High Estimates 15

The Effects of Legislative and Policy Changes on DoD’s

Projected Health Care Spending 17

Future Health Care Spending Under Policies That

Could Slow Growth 17

Policies That Could Accelerate the Growth of Health

Care Spending 20

Appendix A

Background on the Department of Defense’s 

Medical Coverage 25

Appendix B

Adjusting for the Changing Mix of the Department 

of Defense’s Beneficiaries 29

Appendix C

Comparison of the Midrange Projections and

CBO’s Baseline for the Department of Defense’s

 Medical Care 31
vi GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Tables

1. Estimated Contributions to Growth in the Department of Defense’s 

Medical Spending per Full-Time-Equivalent Beneficiary 9

2. The Department of Defense’s Future Medical Spending Under

Three Scenarios 15

B-1. Total Annual Medical Expenditures per Capita in a Civilian

Population, by Age and Sex 30

C-1. Comparison of This Study’s Midrange Estimates and Those in

CBO’s Baseline 33

Figures

S-1. Factors Contributing to the Growth in the Department of Defense’s 

Medical Spending per Active-Duty Service Member, 1988 to 2003 x

S-2. Medical Spending per Dollar of Cash Compensation for Service

Members and for Federal and Private-Sector Employees, 1988 to 2020 xi

1. The Department of Defense’s Historical Medical Spending and 

the Size of the Active-Duty Force 2

2. The Department of Defense’s Historical Medical Spending per 

Active-Duty Service Member and Relative to Cash Compensation,

1988 to 2003 3

3. Factors Contributing to the Growth in the Department of Defense’s 

Medical Spending per Active-Duty Service Member, 1988 to 2003 4

4. Actual and Projected Growth in the Department of Defense’s 

Medical Spending per Active-Duty Service Member, 1988 to 2003 7

5. Medical Spending per Dollar of Cash Compensation for Service 

Members and for Federal and Private-Sector Employees, 1988 to 2020 10

6. Timeline of Events for the Department of Defense’s Medical 

Coverage 11

7. The Department of Defense’s Future Medical Spending per 

Active-Duty Service Member Under Three Scenarios, 2000 to 2020 16
CONTENTS vii

A-1. Out-of-Pocket Costs for Military Families Using the TRICARE 

Program and for Their Civilian Counterparts, 2002 26

B-1. Relative Medical Costs for a Civilian Population, by Age and Sex 29

B-2. Percentage of Care Provided by the TRICARE Program 31

B-3. The Department of Defense’s Health Care Beneficiaries and 

Full-Time-Equivalent Beneficiaries, 1988 to 2003 32

Boxes

1. Accrual Budgeting for Retirees’ Health Benefits 6

2. Choosing a Range for Future Growth Projections 14

3. Estimating the Savings from Introducing a Cafeteria Plan 20

Summary

The Department of Defense (DoD) faces a growing

burden in providing peacetime health care for military

personnel, retirees, and their dependents and survivors—

who all together number over 8 million. Adjusted for the

overall rate of inflation in the U.S. economy, the department’s annual spending on medical care almost doubled

from 1988 to 2003, rising from $14.6 billion to $27.2

billion. Furthermore, because DoD cut the size of the

active-duty force by 38 percent over that same period,

medical spending per active-duty service member nearly

tripled, rising from $6,600 to $19,600.1

 Medical

spending rose from one-quarter to more than one-half

of the level of cash compensation (defined as basic pay,

the housing allowance, and the subsistence allowance),

and it is likely to continue to increase.

DoD views many of its medical costs as unavoidable. The

department argues that it must operate its own in-house

system of health care providers and military medical

treatment facilities to ensure that U.S. forces will have

reliable, high-quality medical care in time of war. Moreover, DoD believes that in peacetime, it needs that inhouse system, together with care purchased from the

private sector, to provide the health care benefits necessary to attract and retain high-quality active-duty and

reserve forces.

CBO’s analysis addresses some of the questions raised by

the trends in spending growth. What factors explain the

historical growth in DoD’s medical costs? If policies do

not change, what levels of spending might be seen in the

future? What are the implications of current trends in

military medical costs for the total costs of military personnel? How might various policy changes work either

to suppress or accelerate growth in DoD’s medical

spending? 

Factors Underlying Past Growth

Over half (56 percent) of the total growth in spending per

active-duty service member from 1988 to 2003 can be

attributed to national changes in health care costs generally—owing to greater use of technology, changes in the

utilization of health care services, and higher medical

prices (see Summary Figure 1). That growth reflects a

trend that could continue. Another 41 percent of the

observed growth can be attributed to events that are

unlikely to recur. One was a shift in the mix of DoD’s

beneficiary population: the number of active-duty service

members and their dependents fell substantially during

the military drawdown after the Cold War while the

number of retirees and their dependents grew—pushing

up spending per active-duty service member. Another

unique event was the introduction of accrual budgeting

for the medical benefits of military retirees and their dependents who were eligible for Medicare. That accounting change (aimed at better capturing the full cost of

labor) did not affect benefits but did raise DoD’s budgets.

The remaining 3 percent of growth in spending derived

from other changes within DoD’s medical system. Although small, that figure derives from the net effect of

several more substantial offsetting factors, including

reduced access to care at military medical treatment

facilities in the 1990s, improved efficiency with the in- 1. These figures are calculated as medical spending on all beneficiaries

divided by the number of active-duty service members.
x GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Summary Figure 1.

Factors Contributing to the Growth in the Department of Defense’s 

Medical Spending per Active-Duty Service Member, 1988 to 2003

(2002 dollars)

Source: Congressional Budget Office.

Note: The Department of Defense’s medical spending increased from $6,600 per active-duty service member in 1988 to $19,600 in 2003, or by a total of $13,000.

a. Owing to the greater use of technology, changes in the utilization of health care services, and higher medical prices.

b. Consisting of a decrease in the number of active-duty military personnel and their dependents and an increase in the number of retirees and their dependents and

survivors.

troduction of the TRICARE program, and new medical

benefits provided since 2000. The most significant of

those new benefits was the TRICARE For Life plan for

Medicare-eligible retirees introduced in fiscal year 2002.

CBO estimates that that program added $3.0 billion to

military health care spending in 2003. 

Projections of Future Growth

Under Current Policies

Because DoD is subject to many of the same factors that

drive growth in per capita health care spending in the

United States as a whole, CBO began its projections of

the department’s future medical spending by incorporating

just those general influences—extending the department’s

current policies, including the current size of the military.

If DoD’s medical spending (adjusted for projected shifts

in the number and mix of beneficiaries) increases at the

same rate as per capita medical spending (similarly

adjusted) in the United States as a whole, it could grow

from $27 billion today to between $40 billion and $52

billion by 2020 (in 2002 dollars). That range translates

to between $29,000 and $38,000 a year for each activeduty service member. 

Medical spending is already substantially higher per dollar

of cash compensation for members of the military than

it is for federal civilian employees or private-sector workers. Although that fact is due in part to the early age at

which military service members retire, it also reflects the

Introduction of

Accrual Budgeting

18%

Changes in Beneficiary

Populationb

23%

National Increases in

Health Care Costsa

56%

Net Effect of Changes in

Benefits and

Improved Efficiency

3% ($400)

$7,300

$3,000

$2,300
SUMMARY xi

high rate at which DoD’s beneficiaries utilize health care

services. Unlike beneficiaries of health care plans offered

by private employers, most of DoD’s face few, if any,

premiums, deductibles, or copayments. 

If current policies remain unchanged, DoD’s spending

on health care per dollar of cash compensation could grow

from 55 cents to between 64 cents and 84 cents by 2020

(see Summary Figure 2). To the extent that military members might prefer a compensation package that placed

more emphasis on cash relative to medical benefits, that

mix of compensation could reduce the quality of the force

that DoD could attract and retain for a given compensation budget and increase the cost of military personnel

relative to contractors and civilians.

Policy Changes and Future Spending

Although the same factors underlying national trends are

likely to put pressure on DoD to increase its medical

spending, that spending may not continue to rise in line

with that in the United States as a whole. DoD’s medical

spending grew more slowly than national trends from

1988 to 2000 and much more quickly from 2000 to 2003.

The markedly different rates of growth seen during those

two periods illustrate the impact that changes in policies

and benefits can have. 

This analysis examines four policy changes and their

potential effect on DoD’s future medical spending. Two

of the policies, drawn from trends in private-sector health

care and a change in the military retirement system that

introduced an element of choice, would slow the rate of

growth by offering beneficiaries the opportunity to choose

less-generous health coverage and receive some of the

savings in cash. 

The first would allow retiring service members to choose

a cash bonus instead of TRICARE For Life coverage after

age 65. The present discounted cost of TRICARE For Life

at retirement for an individual who retires this year is

$172,000, a figure that rises to $319,000 for someone who

will retire in 2020. Even if service members received a

bonus of only half of the present discounted value, many

might prefer to take the cash in place of the benefit. The

second policy change would create a “cafeteria plan” that

would provide family members of active-duty personnel

Summary Figure 2.

Medical Spending per Dollar of Cash

Compensation for Service Members

and for Federal and Private-Sector

Employees, 1988 to 2020

(Dollars)

Source: Congressional Budget Office using information from the Department

of Defense (for military service members), the Office of Personnel

Management (for federal civilian employees’ salaries and Federal

Employees Health Benefits program premiums), and the Bureau of

Labor Statistics (for comparable data on private-sector employees).

Note: Error bars represent high and low estimates (detailed in Chapter 2).

a. Based on 1991 data because earlier data are not available.

with a cash allowance that they could use to pay for any

current TRICARE plan, a new low-option TRICARE

plan, or coverage by a civilian employer. By 2020, those

policy changes together would reduce DoD’s annual

medical spending by 3 percent, or $1.5 billion, CBO

estimates. At the same time, they would increase the

options available to service members and their families.

However, such options that offer choice cannot by themselves halt the shift in the compensation package away

1988 2000 2002 2010 2020

0.00

0.20

0.40

0.60

0.80

1.00

Military Service Members

Federal Civilian Employees

Private-Sector Employees

Actual Projected

 a
xii GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

from cash and toward health care. Even if both of the

options were adopted, DoD’s spending on health care per

dollar of cash compensation could still rise from 55 cents

today to 70 cents by 2020. Maintaining the current ratio

could require far-reaching changes, such as the introduction of premiums (which could reduce DoD’s costs

by encouraging families with access to plans offered by

private employers to choose those plans) and imposing

more copayments (which would bring down utilization

rates). In the private sector, employers have relied on

changes in health care benefits and on premiums, deductibles, and copayments to hold medical spending below

nine cents per dollar of salaries and wages (as shown in

Summary Figure 2).

The third and fourth policies examined in this study

would increase the rate of growth in DoD’s health budget

by implementing new benefits that have been proposed

(by lawmakers in current legislation and by advocacy

groups) for reservists and for retirees under age 65. If DoD

offered reservists full-time access to the TRICARE program, as considered in the third option, and expanded

benefits for retirees under age 65, as described in the

fourth option, DoD’s medical spending could increase

by 15 percent, or $7 billion per year, by 2020. However,

the size of the increase would depend crucially on the

design of the benefits. If DoD simply helped the families

of reservists pay the costs of maintaining their civilian

coverage during mobilizations, spending would increase

by only $9 million per year by 2020 under peacetime

conditions.
1

Historical Growth in the Department

of Defense’s Medical Spending

The Department of Defense (DoD) substantially

increased its total medical spending from 1988 to 2003.

Adjusted for the overall rate of inflation in the U.S. economy, DoD’s spending on medical care almost doubled

over that 15-year period, rising from $14.6 billion to

$27.2 billion (see Figure 1).1

 Because the size of the activeduty force shrank, spending per active-duty service member rose even more rapidly, at a real annual growth rate

of 7.5 percent, increasing from $6,600 to $19,600 (see

Figure 2). Basic pay and other cash compensation spending

did not keep pace, so DoD’s medical spending rose from

26 cents for every dollar spent on cash compensation for

military personnel in 1988 to 55 cents on the dollar in

2003.2

DoD is responsible for providing medical care and coverage for over 8 million beneficiaries. It does so through

the TRICARE program, which combines hundreds of

military medical treatment facilities with several regional

networks of civilian health care providers. Although the

primary purpose of the system is to ensure a healthy activeduty force capable of performing critical national security

missions, TRICARE provides coverage for a wide variety

of eligible beneficiaries: not only active-duty service members, but also military retirees and mobilized reservists,

along with their families and survivors. The program offers

several different health plans, including TRICARE Prime

(organized as a health maintenance organization), TRICARE Extra (set up as a preferred provider organization),

and TRICARE Standard (a fee-for-service plan). Also,

military retirees and their family members who are eligible

for Medicare can access a new TRICARE For Life benefit

that complements Medicare’s coverage. (See Appendix A

for additional details about DoD’s medical coverage.)

While treatment for combat injuries and medical evacuation constitute a part of DoD’s medical program, peacetime care accounts for the overwhelming majority of

DoD’s medical spending. In 2003, spending on programs

that are specific to military needs and have no counterparts

in private-sector civilian health plans made up only 3 per1. The Congressional Budget Office used DoD’s 2003 Future Years

Defense Program, as normalized by the Institute for Defense

Analyses, as the data source for the department’s medical spending

from 1988 to 2003. “Medical spending” is defined as all expenses

(including military personnel expenses) attributed to Defense

Mission Category Code 323, “Medical,” plus accrual payments

for the health care benefits of Medicare-eligible retirees. Dollar

amounts may differ somewhat from the Defense Health Program’s

budget documents. Spending for fiscal year 2003 was estimated

in the data set and may not match actual outlays for the year.

2. This analysis focuses on cash compensation rather than total

compensation. The compensation package provided to service

members includes a wide variety of in-kind benefits whose value

can depend on the service member’s marginal tax rate and other

factors. Another common metric for military pay is “regular military

compensation,” or RMC, which includes cash compensation and

the value of housing and subsistence allowances plus the tax

advantage arising from the fact that the allowances are not subject

to income or payroll taxes. The Congressional Budget Office

estimates that medical benefits grew from 20 cents per dollar of

RMC to 43 cents per dollar of RMC between 1988 and 2003.

CHAPTER
2 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Figure 1.

The Department of Defense’s Historical Medical Spending and the Size of the

Active-Duty Force

Source: Congressional Budget Office based on information from the Department of Defense’s 2003 Future Years Defense Program (for medical spending); Department

of Defense Budget for Fiscal Years 2004/2005: Military Personnel Programs (for the 2003 accrual payment included in medical spending); and the Defense

Enrollment Eligibility Reporting System and Managed Care Forecasting and Analysis System (for the size of the active-duty force).

a. Excluding mobilized and full-time members of the Reserves and National Guard.

cent ($900 million) of the department’s total medical

spending.3

 However, many of the resources used to

provide peacetime care also contribute to wartime

readiness.

Some critics view the growth in DoD’s medical spending

as an indication that the department needs to manage its

health care dollars more efficiently, increasing the amount

of health care provided per dollar. But this analysis finds

that however efficient or inefficient DoD may be in using

its health care resources, the observed growth in spending

(adjusted for changes in the department’s accounting

methods and changes in the size and mix of DoD’s population of beneficiaries) has been consistent with the growth

in per capita health care spending in the U.S. population

as a whole over the past 15 years. However, the rate of

growth over shorter periods of time has been closely tied

to policy changes affecting benefits.

Growth in per Capita Health Care

Spending for the U.S. Population

In the United States as a whole, per capita health care

expenditures (adjusted for changes in the population in

terms of age and sex) increased by 76 percent in real terms

from 1988 to 2003.4

 That growth reflects technological

improvements, new medical treatment standards, different

patterns of utilization, and increases in the prices of medi3. That amount reflects most of the spending on the Consolidated

Health Support Budget Activity Group, which provides for health

exams for recruits, military public/occupational health, veterinary

services, the aeromedical evacuation system, the Armed Forces

Institute of Pathology, and health services unique to the military.

4. That increase reflects real growth after allowing for the general rate

of price inflation in the economy.

Fiscal Year

1988 1991 1994 1997 2000 2003

0

5

10

15

20

25

30

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Billions of 2002 Dollars Millions of People

DoD's Medical Spending

(Left axis) Active-Duty Force

(Right axis)

a
CHAPTER ONE HISTORICAL GROWTH IN THE DEPARTMENT OF DEFENSE’S MEDICAL SPENDING 3

Figure 2.

The Department of Defense’s Historical Medical Spending per Active-Duty

Service Member and Relative to Cash Compensation, 1988 to 2003

Source: Congressional Budget Office using information from the Department of Defense’s 2003 Future Years Defense Program (for medical spending); Department

of Defense Budget for Fiscal Years 2004/2005: Military Personnel Programs (for the 2003 accrual payment included in medical spending); the Defense

Enrollment Eligibility Reporting System and Managed Care Forecasting and Analysis System (for the size of the active-duty force); and DoD’s 1996 Military

Compensation Background Papers and recent budget documents (for cash compensation).

a. For the purposes of this figure, mobilized and full-time reservists have not been counted as part of the active-duty force.

b. Cash compensation includes basic pay, the basic allowance for housing, and the basic allowance for subsistence.

cal goods and services that exceeded the overall rate of

price inflation in the economy. 

DoD is subject to many of the same pressures that contribute to rising medical costs in the economy. Technologies and standards of care in DoD facilities are similar

to those in civilian health facilities. Moreover, DoD spends

approximately $5 billion annually on Managed Care

Support contracts with private insurers who oversee the

civilian providers in the TRICARE system, and much of

the remainder of its budget pays for supplies and pharmaceuticals purchased from the same firms used by private

health care providers. Increases in the cost of medical

personnel in the civilian economy may also affect what

DoD must pay to attract and retain qualified personnel

in the military. In the absence of changes in benefits, those

connections with the private sector could tend to push

DoD’s spending up at the same rate as the cost of care in

U.S. society as a whole. 

If those factors raised the cost of DoD’s care by the same

percentage as the cost of care in the country as a whole

(with adjustments included for changes in the populations

of beneficiaries), they could account for $7,300, or 53 percent, of the observed growth in the department’s medical

spending per active-duty service member between 1988

and 2003 (see Figure 3).

One-Time Occurrences Contributing

to Growth in DoD’s Medical Spending

Two specific occurrences account for roughly 40 percent

of the $13,000 growth in DoD’s health care spending per

active-duty service member between 1988 and 2003. First,

1988 1991 1994 1997 2000 2003

0

5,000

10,000

15,000

20,000

25,000

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

2002 Dollars

Fiscal Year

Spending per Active-Duty

Service Member

(Left axis)

a

Ratio of Medical Spending

to Cash Compensation

(Right axis)

b
4 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Figure 3.

Factors Contributing to the Growth in the Department of Defense’s Medical

Spending per Active-Duty Service Member, 1988 to 2003

(2002 dollars)

Source: Congressional Budget Office.

Note: The Department of Defense’s medical spending increased from $6,600 per active-duty service member in 1988 to $19,600 in 2003, or by a total of $13,000.

a. Owing to the greater use of technology, changes in the utilization of health care services, and higher medical prices.

b. Consisting of a decrease in the number of active-duty military personnel and their dependents and an increase in the number of retirees and their dependents

and survivors.

the number of military retirees and dependents eligible

for health benefits increased sharply relative to the number

of active-duty personnel because of the decision to dramatically decrease the size of the active-duty force at the end

of the Cold War. Second, the introduction of accrual

budgeting in fiscal year 2003 caused a jump in DoD’s

spending that reflects a change in the way the department’s

obligations are tracked but not a change in the benefits

that it owes to beneficiaries.

Growth in Numbers of Military Retirees and

Dependents Relative to Active-Duty Personnel

In 1988, the population eligible for DoD’s medical benefits included 3.1 non-active-duty individuals for each

active-duty service member.5

 By 2003, however, there were

4.7 eligible non-active-duty individuals for each activeduty service member. That increase reflects both the

decline in the size of the active-duty force at the end of

the Cold War (known as the “drawdown”) and the growth

in the size of the population of military retirees as the first

cohorts to enter the military under the All-Volunteer Force

became eligible for military retirement. 

5. Full-time and mobilized reservists and their families are not included in this calculation. If they were included, the number of

non-active-duty beneficiaries per service member would be 3.0 in

1988 and 4.3 in 2003.

Introduction of

Accrual Budgeting

18%

Changes in Beneficiary

Populationb

23%

National Increases in

Health Care Costsa

56%

Net Effect of Changes in

Benefits and

Improved Efficiency

3% ($400)

$7,300

$3,000

$2,300
CHAPTER ONE HISTORICAL GROWTH IN THE DEPARTMENT OF DEFENSE’S MEDICAL SPENDING 5

Active-duty service members can retire after 20 years of

service and receive both a pension and lifetime access to

DoD’s medical system for themselves and their dependents. Most of those who retire are between 38 and 45

years of age. About 30 percent to 40 percent of officers

and only 10 percent to 20 percent of enlisted personnel

ever become eligible for military retirement.6

 Because both

the pension and health care coverage are provided

immediately upon retirement and the retirement age is

quite young, the cost of those benefits is high compared

with the compensation received during active-duty service.

During the drawdown, the number of active-duty personnel decreased from over 2.2 million to under 1.4 million. At the same time, the number of military retirees in

the beneficiary population rose from 1.6 million to nearly

2 million. Since the end of the drawdown, the ratio of

beneficiaries to active-duty personnel has stabilized, however, and is not expected to contribute to future growth

in spending per active-duty service member.

Overall, changes in the number and mix of beneficiaries

(in terms of age, sex, and military status) accounted for

$3,000, or nearly one-quarter of the growth in the department’s medical spending per active-duty service member

between 1988 and 2003 (see Figure 3). That estimate takes

into consideration how health care use varies by age and

sex, as well as differences in the extent to which active-duty

and retired individuals of different ages rely on DoD’s

health care. Older individuals, on average, consume

substantially more health care resources than younger

individuals do. Counterbalancing that, however, is the

fact that military retirees, on average, rely less on DoD

for their care and more on civilian employers and

Medicare.

The Introduction of Accrual Budgeting

A second factor that increased DoD’s medical spending

over this period was the introduction of accrual funding

for the benefits of military retirees eligible for Medicare.

Under accrual budgeting, DoD pays for the cost of medical benefits provided in retirement as those benefits are

earned by active-duty service members, rather than as the

benefits are paid to those who are already retired.7

 (See Box

1 for additional details.) 

Because health care costs are expected to grow faster than

overall inflation, the cost of the benefits that accrue to

those on active duty in 2003 is expected to be about $3.2

billion greater than the cost of benefits provided to retirees. As a result, shifting to the new accounting system

has resulted in a one-time increase in DoD’s spending,

although total federal outlays for medical care and the

actual level of resources used to provide care for Medicareeligible beneficiaries have not been affected by the accounting change. Because of the shift, DoD’s spending per

active-duty service member rose by $2,300 in 2003 over

what it otherwise would have been, explaining 18 percent

of the growth seen between 1988 and 2003 (see Figure 3).8

Other Factors Affecting the Pattern

of Growth in DoD’s Medical Spending

Both legislation and DoD’s policies also played a role in

increasing the department’s medical spending. The

Congressional Budget Office’s (CBO’s) analysis attributes

only 3 percent of the total growth in spending per activeduty service member to changes in benefits and efficiency.

That small percentage, however, represents the net effect

of several important offsetting factors. Within it are

decreases in spending that resulted from restructuring the

military health system during the 1990s by closing or

6. Beth J. Asch, Richard Johnson, and John T. Warner, Reforming

the Military Retirement System (Santa Monica, Calif.: RAND,

1998).

7. See Congressional Budget Office, Accrual Budgeting for Military

Retirees’ Health Care (March 2002).

8. DoD paid $7.5 billion into the Medicare-Eligible Retiree Health

Care Fund in 2003. However, the department received outlays

of $4.3 billion from the fund. Of that, $1.3 billion went to military

medical treatment facilities to pay for care received there by

Medicare-eligible retirees and their dependents. Those costs were

previously covered under the Defense Health Program’s budget.

The remaining $3.0 billion purchased care under the TRICARE

For Life and TRICARE Senior Pharmacy programs (the latter of

which provides Medicare-eligible military retirees and dependents

with an expanded pharmacy benefit). 
6 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Box 1.

Accrual Budgeting for Retirees’ Health Benefits

In an accrual budget, the costs of deferred compensation

such as pensions and retirees’ health care are recognized

during the years in which the employees are working,

not when the benefits are actually paid. Accrual budgeting has become increasingly important in the federal

budget because it provides better information about the

full cost of labor and gives decisionmakers better incentives to use labor cost-effectively.1

In 2002, the Department of Defense (DoD) introduced

the TRICARE For Life program, a new benefit for

Medicare-eligible military retirees that pays most of the

copayments and deductibles not covered by Medicare.

In the first year of that program, benefits were paid out

of the annual budget of the Defense Health Program.

Beginning in 2003, however, payments for benefits are

being made from the Medicare-Eligible Retiree Health

1. Congressional Budget Office, Accrual Budgeting for Military

Retirees’ Health Care (March 2002).

Care Fund. The health care that those beneficiaries

receive at military medical treatment facilities is also

paid for by that fund.

Each year, DoD pays into the fund an amount that is

calculated on the basis of the current number of activeduty and reserve personnel. An independent board of

actuaries sets the amount of those payments (known

as “normal cost payments”) so that, when invested in

Treasury securities, they will fully fund the future benefits earned by the people currently in uniform. The

costs of medical benefits for current retirees and any

benefits for personnel now in uniform that are attributable to military service before 2003 become an unfunded liability of the fund. The Treasury, rather than

DoD, is responsible for making annual payments into

the fund to amortize that liability of over $400 billion;

in 2003, the amortization payment was $14 billion. The

Treasury also covers financial losses or gains to the fund

resulting from unanticipated changes in benefits and

interest rates.

downsizing many facilities, savings associated with the

introduction of managed care in the form of TRICARE

Prime, and the cost of the TRICARE Senior Pharmacy

and TRICARE For Life benefits introduced in 2001 and

2002, respectively.9

DoD’s spending grew less rapidly than might have been

predicted on the basis of national health expenditures from

1988 through 2000 but much more rapidly after that (see

Figure 4). The differences between growth in DoD’s

medical spending and that in civilian health care spending

can be seen most easily if the department’s spending is

expressed not relative to the number of active-duty personnel but relative to the number of eligible DoD beneficiaries, adjusted for changes over time in the mix of the

population by age, sex, and military status. To make that

adjustment, CBO used information on how health care

usage varies by age and sex and how beneficiaries’ reliance

on DoD’s system varies by military status to convert the

actual population of beneficiaries into a number of fulltime-equivalent beneficiaries, with the cost of supporting

an 18-to-44-year-old active-duty male used as the base.

(See Appendix B for a more detailed discussion of CBO’s

analysis.)

Growth in Spending Between 1988 and 2000 

Between 1988 and 2000, DoD’s health care spending per

full-time-equivalent beneficiary grew at an annual rate of

2.3 percent, or from $1,300 to $1,700. That is well below

the 3.4 percent annualized growth rate in per capita health

care spending seen for the United States as a whole

(adjusted for the age and sex mix of the U.S. population)

during that same period. 

9. That cost reflects a $3 billion increase in spending that would have

been required had DoD funded the new TRICARE For Life

benefits (including TRICARE Senior Pharmacy) without shifting

to an accrual budget. It is in addition to the $3.2 billion increase

in DoD’s budget that is due to the decision to fund the health

benefits of Medicare-eligible retirees on an accrual basis starting

in fiscal year 2003.
CHAPTER ONE HISTORICAL GROWTH IN THE DEPARTMENT OF DEFENSE’S MEDICAL SPENDING 7

Figure 4.

Actual and Projected Growth in the Department of Defense’s Medical Spending

per Active-Duty Service Member, 1988 to 2003

(2002 dollars)

Source: Congressional Budget Office.

Note: Calculations for this figure include DoD’s medical spending on all types of beneficiaries divided by the number of active-duty service members. For the purposes

of this figure, mobilized and full-time reservists have not been counted as part of the active-duty force.

One explanation for the lower rate of growth in DoD’s

spending is that the department may have increased the

efficiency of its health care system relative to that in the

United States as a whole during that period. During the

1990s, DoD gradually made the managed health care

program TRICARE Prime available to the families of

active-duty personnel as well as retirees and their dependents not eligible for Medicare. Even if DoD may simply

have been catching up with managed care innovations that

had already been introduced in the private sector, the

introduction of TRICARE Prime could have helped

constrain DoD’s spending increases during this period.

Another reason that DoD’s spending may have grown

more slowly is that contract disputes and a backlog of

unresolved change orders delayed some payments to the

department’s regional Managed Care Support contractors.

Those disputes about contracts that went into effect

between 1995 and 1998 were settled in 2001 for a total

of $2.1 billion. The delay pushed those costs into the

future, leading to an understatement of DoD’s actual cost

growth between 1988 and 2000.

In addition, the end of the Cold War brought many base

closures and hospital consolidations that decreased the

number of DoD’s in-house medical treatment facilities.

From 1990 to 2001, the number of beds at such facilities

dropped by 74 percent, bed-days by 76 percent, and

outpatient visits by 36 percent.10 On the one hand, the

changes made DoD’s system of in-house treatment facilities more cost-effective, allowing the department to avoid

the cost of maintaining facilities that it no longer required

for its wartime mission. On the other hand, they

amounted to a de facto decline in the level of benefits

10. According to data obtained from DoD’s Office of the Assistant

Secretary of Defense for Health Affairs, May 2, 2002. 

Fiscal Year

1988 1991 1994 1997 2000 2003

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Contribution of Changes in the Size and Mix of the Beneficiary Population

Contribution of National Increases in Health Care Costs

Contribution of One-Time Shift to Accrual Budgeting

Projected Growth

Growth in Actual Spending
8 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

provided to Medicare-eligible retirees, many of whom had

difficulty obtaining care at military medical treatment

facilities on a space-available basis. The increasing difficulty that retirees and their dependents experienced in

obtaining access to military medical treatment facilities

is reflected, in part, in a decline in the degree to which

they relied on DoD for health care during that period.

(See Figure B-2 in Appendix B for more details.) 

Growth in Spending from 2000 to 2003 

In contrast to the period from 1988 to 2000, the period

since then has seen DoD’s spending per full-timeequivalent beneficiary grow much more rapidly than what

might have been expected given the rate of growth in real

per capita health care spending in the United States as a

whole. For DoD, spending per full-time-equivalent

beneficiary rose from $1,700 in 2000 to $2,300 in 2003—

reflecting an annual growth rate of 11.3 percent. For the

United States as a whole, that rate (adjusted for shifts in

the mix of the population by age and sex) was 5.6 percent.11

More than a fifth of that more rapid growth is explained

by DoD’s efforts to eliminate the backlog of payments

owed to contractors, mentioned earlier. Nearly a third of

the growth in DoD’s medical spending, however, might

be attributed to policy changes that increased the level of

benefits available to beneficiaries (see Table 1). In the

future, trends in DoD’s medical spending may also depend

heavily on what, if any, changes in benefits take place. 

Comparisons with Other Employers’

Spending on Health Care

Although the growth in DoD’s medical spending overall

from 1988 to 2003 is consistent with broader trends in

health care costs, DoD’s experience is not the same as

other employers’. 

Trends in Health Care Benefits of Private Employers

As per capita health care costs rose in the United States,

many private employers sought to restrain spending on

health benefits for their employees by shifting costs to

them—whether by dropping health insurance coverage,

requiring higher contributions from employees toward

premiums, shifting to preferred provider plans and away

from more costly fee-for-service plans, or offering plans

with higher deductibles and copayments. 

The percentage of employers offering coverage to current

and retired employees has declined in recent years. Between calendar year 1988 and calendar year 1997, for

example, the percentage of medium-sized and large firms

offering medical benefits to current employees fell from

90 percent to 76 percent.12 According to the Employee

Benefit Research Institute, the percentage of companies

reporting that they provide medical benefits to retirees

declined from 20 percent in calendar year 1997 to 11 percent today and is expected to continue to fall.13 In addition, among those firms that continue to offer coverage

to current employees, more are requiring employees to

contribute toward the premium for single coverage. In

1988, 56 percent of firms offering health insurance coverage paid the entire premium for employees choosing

single coverage. By 1997, that figure had fallen to 31

percent.14 Moreover, employees choosing family coverage

have faced additional costs as well. The average premium

contribution required by employers for family coverage

increased in real terms by 28 percent between calendar

years 1996 and 2002.15

The costs faced by most employees for deductibles and

copayments also rose. On average, private-sector employ11. For the purpose of comparing DoD’s health care costs with national

trends in health care costs, this discussion excludes the effect of

DoD’s switch to accrual budgeting. If the cost of the change to

accrual budgeting had been included, the annual rate of growth

in DoD’s medical spending per full-time-equivalent beneficiary

would have been 16.1 percent, increasing from $1,700 in 2000

to $2,600 in 2003.

12. Bureau of Labor Statistics, National Compensation Survey—

Benefits, available at www.bls.gov/ncs/ebs/home.htm.

13. Paul Fronstin and Dallas Salisbury, Retiree Health Benefits: Savings

Needed to Fund Health Care in Retirement. Employee Benefit

Research Institute Issue Brief (February 2003). 

14. Bureau of Labor Statistics, National Compensation Survey—

Benefits.

15. The Kaiser Family Foundation and Health Research and Education

Trust Employer Health Benefits 2002 Survey (Menlo Park, Calif:

Kaiser Family Foundation, 2002).
CHAPTER ONE HISTORICAL GROWTH IN THE DEPARTMENT OF DEFENSE’S MEDICAL SPENDING 9

Table 1.

Estimated Contributions to Growth in the Department of Defense’s

Medical Spending per Full-Time-Equivalent Beneficiary

(In 2002 dollars)

1988-2000 2000-2003

Total,

1988-2003

Increases in National Health Expenditures per Capita 637 337 974

Shift to Accrual Budgeting n.a. 311 311

New Benefits

TRICARE for Life n.a. 290 290

TRICARE Prime Remotea n.a. 5 5

Elimination of copaymentsb n.a. 4 4

Subtotal n.a. 299 299

Delayed Payments to TRICARE Contractorsc -206 206 0

Reduction in Access to Military Medical Treatment

Facilities, Increased Efficiency, and All Other Factorsd -37 -211 -248

Total Change in DoD’s Medical Spending 394 942 1,336

Source: Congressional Budget Office. 

Note: n.a. = not applicable.

a. For families living in remote areas not adequately served by TRICARE Prime.

b. For family members of active-duty personnel enrolled in the TRICARE Prime plan.

c. Reflects the settlement of contract disputes between the Department of Defense and its regional Managed Care Support contractors for services provided under

the TRICARE program since the contracts started in 1995. Those contract disputes were settled for a total of $2.1 billion in 2001.

d. The amounts shown are the residuals after all known factors contributing to cost increases and cost decreases have been accounted for.

ees in preferred provider plans have faced a 37 percent real

increase in their deductibles since 1996. The copayments

charged by health maintenance organizations for a visit

to a physician increased by 12 percent in real terms.16

In part as a result of those changes in employees’ premiums, copayments, and deductibles, the ratio of firms’

spending on medical benefits to spending on salaries and

wages has grown little in the past 10 to 15 years (see Figure

5), fluctuating from 8.3 percent in calendar year 1991 (the

first year for which data from the Bureau of Labor Statistics are available), to 7.5 percent in 2000, to 8.4 percent

at the end of 2002.17

The extent to which changes in the number of hours

worked by employees and in the number, age, and sex of

covered beneficiaries contributed to the increase in spending in the private sector is not known, making comparisons with DoD’s spending difficult. Nonetheless, as

described above, DoD’s spending on health care per

active-duty service member increased by $13,000 between

1988 and 2003, at an annualized growth rate of 7.5

percent. Even if the effects of the introduction of accrual

16. The Kaiser Family Foundation Employer Health Benefits 2002 Survey.

Although private-sector employees in fee-for-service plans (similar

to TRICARE Standard) experienced flat or decreasing deductibles,

only 5 percent of private-sector employees were in such plans.

17. Bureau of Labor Statistics, National Compensation Survey—

Compensation Cost Trends, available at www.bls.gov/ncs/ect/

home.htm.
10 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Figure 5.

Medical Spending per Dollar of Cash

Compensation for Service Members

and for Federal and Private-Sector

Employees, 1988 to 2020

(Dollars)

Source: Congressional Budget Office using information from the Department

of Defense (for military service members); Office of Personnel

Management (for federal civilian employees’ salaries and Federal

Employees Health Benefits program premiums); and the Bureau of

Labor Statistics (for comparable data on private-sector employees).

Note: Error bars represent high and low estimates (detailed in Chapter 2).

a. Based on 1991 data because earlier data are not available.

budgeting and changes in the beneficiary population were

excluded, medical spending would still have grown by

$7,700 per active-duty service member over that period,

at an annual rate of 5.3 percent. That increase alone would

have caused medical costs to rise from 26 cents for every

dollar of cash compensation in 1988 to 40 cents in 2003.

Trends in Military Health Care Benefits

Although DoD has adopted some of the same practices

as private employers—for example, in its introduction of

TRICARE Prime, a managed care program—the trend

in DoD has generally been toward greater coverage and

lower copayments and deductibles. (Figure 6 provides a

timeline of changes in DoD medical coverage.) Families

of active-duty personnel using TRICARE Prime pay no

premiums or deductibles for services received from military medical treatment facilities or from TRICARE network providers, and the 2001 National Defense Authorization Act eliminated nearly all copayments for those

users.18 Although retirees not eligible for Medicare must

pay a small annual enrollment fee to participate in

TRICARE Prime, inflation has reduced the real cost of

the fees—$230 for an individual and $460 for a family—

by 12 percent since 1995. Inflation since 1995 has also

taken 12 percent off the real cost of the deductibles paid

by the active-duty families using TRICARE Extra or

Standard, DoD’s preferred provider organization and feefor-service plans, respectively. Other increases in benefits

and coverage include the introduction of TRICARE For

Life and TRICARE Prime Remote, a plan designed to

reduce the out-of-pocket costs faced by families living in

remote areas not adequately served by TRICARE Prime.

Government Spending on Health Care 

for Federal Civilian Employees

The rise in military health care costs relative to cash

compensation during the 1990s, although not typical for

private-sector employees, is closer to trends in federal

health care spending for civilian employees. Inflationadjusted spending by the federal government on health

care benefits per civilian employee rose at an annual rate

18. Those charges were eliminated in order to improve customer

satisfaction with TRICARE Prime and to make the benefit equal

for people who see civilian providers and those who see military

providers. Copayments and deductibles still apply for care provided

outside the network. See “TRICARE Eliminates Prime Co-pays

for Family Members,” Military Health System News Release No.

01-05, February 6, 2001, available at www.tricare.osd.mil/

newsreleases/News2001_005.htm.

1988 2000 2002 2010 2020

0.00

0.20

0.40

0.60

0.80

1.00

Military Service Members

Federal Civilian Employees

Private-Sector Employees

Actual Projected

 a
CHAPTER ONE HISTORICAL GROWTH IN THE DEPARTMENT OF DEFENSE’S MEDICAL SPENDING 11

Figure 6.

Timeline of Events for the Department of Defense’s Medical Coverage

Source: Congressional Budget Office.

of 6.1 percent between calendar years 1988 and 2003

(unadjusted for shifts in the age and sex of the population

of civilian employees). That rate outpaced increases in

wages per civilian employee, so government spending on

health benefits as a percentage of salaries rose from 8.7

percent in 1988 to 16.0 percent in 2002 (see Figure 5).19

Despite that increase, spending on medical benefits per

dollar of cash compensation has been much higher for the

military than for either civilian federal employees or

private-sector workers. That difference is partly due to the

earlier retirement age for the military population: members

of the military who serve 20 years will qualify for lifetime

medical benefits for themselves and their dependents, and

most retiring service members are in their 40s, as compared to most retirees in government or the private sector,

who are generally at least 55 years old and often over 60

at retirement. 

19. CBO’s analysis is based on data provided by the Office of Personnel

Management. 

2

Projections of DoD’s Future Medical Spending

Under Current Policies

The Congressional Budget Office projected future

spending assuming no change in the Department of

Defense’s policies and using low, midrange, and high

estimates of health care cost growth. CBO’s midrange

estimates assume that DoD’s costs per beneficiary grow

at the real annual rate projected for per capita health

spending in the United States as a whole (after adjustments

for changes in the distribution of the population in terms

of age and sex) and that DoD spends enough to keep the

level of benefits the same.1

 CBO also projected both low

and high estimates using growth rates that were 30 percent

lower and higher, respectively, than the midrange

assumptions. CBO chose that range because it falls within

the range of error of previous government projections of

health care cost growth (see Box 2).

Under the midrange assumptions, DoD’s projected

medical spending (including accrual payments) rises from

$27 billion in 2003 to almost $46 billion in 2020—

reflecting a real increase of 68 percent. If costs grow at

rates that are 30 percent lower each year than those used

in the midrange estimates, total spending could reach only

$40 billion by 2020—an increase of 46 percent. If,

however, costs grow at rates that are 30 percent higher

than those in the midrange estimates, total spending could

reach $52 billion by 2020—an increase of 93 percent.

Thus, under the high-range estimates, medical spending

could approach the level of spending on cash compensation by 2020.2

Midrange Estimates

For its midrange estimates, CBO assumed that the accrual

funds would grow at the same rate as that projected by

DoD’s actuaries—6.25 percent in nominal terms, or

approximately 4.1 percent real growth in accrual payments

1. In deriving its estimates, CBO used projections of national health

expenditures through 2010 made by the Office of the Actuary,

Centers for Medicare and Medicaid Services, Department of Health

and Human Services (see cms.hhs.gov/statistics/nhe/projections2002/highlights.asp). For the years after 2010, CBO assumed that

per capita growth in those expenditures would begin to decrease

toward an ultimate rate of growth 1 percentage point above the

growth in per capita gross domestic product. 

2. Using 2003 spending levels as the base, CBO estimated growth

in DoD’s medical spending per beneficiary and multiplied that

estimate by the projected beneficiary population each year. CBO

projected the growth of DoD’s accrual payments into the MedicareEligible Retiree Health Care Fund at the rate of growth anticipated

by DoD’s Board of Actuaries. For population projections through

2009, CBO used figures from DoD’s Managed Care Forecasting

and Analysis System (MCFAS) database. For the years after 2009,

CBO assumed that the size of the active-duty force and the number

of reservists would remain fixed, as would the number of

dependents of those personnel. CBO projected the population of

retirees, dependents of retirees, survivors, and others through 2020

by extending the relevant average growth rates of 2007 through

2009 in MCFAS. In projecting the growth of cash compensation,

CBO used DoD’s budget projections through 2007 and assumed

that thereafter cash compensation would grow by 1.1 percent

annually in real terms, reflecting CBO’s projection for the employment cost index.

CHAPTER
14 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Box 2.

Choosing a Range for Future Growth Projections

The Congressional Budget Office’s (CBO’s) midrange

projections hinge on the assumption that the Department of Defense’s health costs will rise at about the

same rate as that projected for civilian medical spending.

However, that growth for civilian medical spending is

uncertain. For that reason, CBO prepared low and high

estimates using growth rates both above and below the

rates assumed in the midrange estimates. In the case of

spending on beneficiaries under 65, CBO’s approach

includes growth rates that are 30 percent below and 30

percent above the midrange rates. For the accrual

charges funding benefits for Medicare-eligible beneficiaries, the low-growth estimate is 2.9 percent, and the

high-growth estimate is 5.3 percent—30 percent above

and below the midrange growth rate of 4.1 percent.

In order to assess whether that range was reasonable,

CBO examined 10-year projections made by the Department of Health and Human Services in the late

1980s and early 1990s. CBO found that those projections were anywhere from 45 percent below actual

growth to 65 percent above (see the table below). In this

analysis, because CBO is projecting spending over a

longer period (the 17 years from 2003 to 2020), plus

or minus 30 percent seemed a reasonable range.

Projections of National Health Expenditures and Actual Growth

Authors

Projection Period

Examined

Annual Real Growth Rate Percentage Difference

Projected Actual in Rates

Freeland and Schendler 1979-1990 4.1 5.4 -24.4

Arnett and Others 1984-1990 3.1 5.7 -45.3

Sonnefeld and Others 1990-2000 4.4 3.3 31.0

Burner, Waldo, and McKusick 1990-2000 5.5 3.3 65.4

Burner and Waldo 1990-2000 4.0 3.3 19.5

Sources: Mark S. Freeland and Carol Ellen Schendler, “National Health Expenditures: Short-Term Outlook and Long-Term Projections,” Health Care Financing

Review, vol. 2, no. 3 (Winter 1981), pp. 97-126.; Ross H. Arnett III and others, “Projections of Health Care Spending to 1990,” Health Care Financing

Review, vol. 7, no. 3 (Spring 1986), pp. 1-36; Sally T. Sonnefeld and others, “Projections of National Health Expenditures Through the Year 2000,”

Health Care Financing Review, vol. 13, no. 1 (Fall 1991), pp. 1-27; Sally T. Burner, Daniel R. Waldo, and David R. McKusick, “National Health

Expenditures Projections Through 2030,” Health Care Financing Review, vol. 14, no. 1 (Fall 1992), pp. 1-29; and Sally T. Burner and Daniel R.

Waldo, “National Health Expenditure Projections, 1994-2005,” Health Care Financing Review, vol. 16, no. 4 (Summer 1995), pp. 221-242 (that

article, published in the middle of the time period shown, used historical data for 1990 through 1994).

to the Medicare-Eligible Retiree Health Care Fund.3 CBO

projected spending for active-duty personnel and their

dependents as well as for retirees and their family members

under 65 years of age on a per capita basis, assuming that

costs for that population would grow at the same rate as

civilian medical costs—varying from 4.2 percent per capita

real growth in 2004 to 2.3 percent in 2020 (see Table 2).

Under those assumptions, DoD’s projected medical

spending (including accrual charges) would increase from

$27 billion in 2003 to about $46 billion in 2020. If

value of future spending that will take place 20 to 40 years or more

into the future. CBO assumed that growth in spending on medical

care for the Medicare-eligible population that far in the future would

equal the ultimate growth rate—in the case of the midrange

estimates, the same 4.1 percent real growth rate used by DoD’s

actuaries. CBO calculated DoD’s total accrual payments on the

basis of the size of the active-duty population.

3. According to Milliman USA, the actuarial firm that performs the

accrual analysis for DoD, the rate of 6.25 percent in nominal terms

was estimated on the basis of Medicare spending projections in

the Medicare trustees’ 2001 report (for TRICARE For Life benefits

that supplement Medicare) and the Milliman Health Cost Index

(for other benefits, including prescription drugs). See Milliman

USA, Analysis of the U.S. Military’s Projected Retiree Medical Liabilities as of September 30, 2000, February 2002, p. II-6. CBO used

a constant growth rate for accrual charges, reflecting the present
CHAPTER TWO PROJECTIONS OF DOD’S FUTURE MEDICAL SPENDING UNDER CURRENT POLICIES 15

Table 2.

The Department of Defense’s Future Medical Spending

Under Three Scenarios

Midrange Low High

Projections of DoD’s Medical Spending in 2020

Total (In billions of 2002 dollars) 46 40 52

Per Active-Duty Service Member (In 2002 dollars) 32,800 28,500 37,700

Per dollar of cash compensation 0.73 0.64 0.84

Assumptions

Growth in Spending for All Beneficiaries Under 65 (Percent)

2004 4.2 3.0 5.5

2010 3.0 2.1 3.9

2015 2.4 1.7 3.1

2020 2.3 1.6 3.0

Annual Growth in Accrual Charges (Percent) 4.1 2.9 5.3

Source: Congressional Budget Office. 

DoD’s cash compensation were to grow at the same rate

as civilian salaries and wages, the department would be

spending about 73 cents on medical benefits for every

dollar in cash compensation by 2020. Spending per activeduty service member would increase to $32,800 by 2020

(see Figure 7).4

Low Estimates

In the past, long-term projections of medical cost growth

have often varied substantially from actual growth. CBO’s

low estimates, assuming 30 percent slower real growth

than the rates used in the midrange estimates, aim to

account for the possibility that national health care costs

might grow more slowly than anticipated or that DoD’s

medical spending might grow somewhat more slowly than

national trends. For example, new contracting mechanisms might moderate the growth in purchased care, or

military medical treatment facilities might be more successful than their civilian counterparts in holding down

costs. Furthermore, DoD’s actuaries could have overestimated future growth in the cost of health care for older

retirees. 

CBO assumed that DoD’s accrual payments would grow

by 2.9 percent per year in real terms, while the rate of

growth for all of DoD’s other medical spending would

vary from 3.0 percent in 2004 to 1.6 percent in 2020.

Under the low-range assumptions, DoD’s total medical

spending would grow to $40 billion by 2020, or about

$6 billion less than projected under the midrange assumptions. Medical spending would reach only 64 cents

for every dollar spent on cash compensation rather than

the 73 cents expected in the midrange estimates. These

low-range estimates imply spending per active-duty service

member of $28,500 by 2020. 

High Estimates

In contrast, several factors might contribute to higherthan-expected growth in medical spending after 2003.

Civilian medical costs could grow more rapidly than currently projected, or spending on TRICARE could boost

DoD’s medical spending beyond expectations. 

The midrange growth estimates assume a rapid return to

relatively modest growth rates after the full implementation of TRICARE For Life and the accrual budgeting

system. However, the TRICARE For Life plan is a gener- 4. Those projections differ from CBO’s March 2003 baseline projections of DoD’s medical spending; see Appendix C for details.
16 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Figure 7.

The Department of Defense’s

Future Medical Spending per 

Active-Duty Service Member Under

Three Scenarios, 2000 to 2020

(2002 dollars)

Source: Congressional Budget Office.

Notes: Spending includes accrual charges. Calculations for this figure include

the Department of Defense’s medical spending on all types of beneficiaries divided by the number of active-duty service members.

ous “wraparound” benefit that leaves very few costs for

beneficiaries to pay out of pocket. Empirical research on

the design of health insurance plans has shown that people

who face few out-of-pocket costs tend to use more medical

care than those who pay even modest copayments for their

care; as a result, some retirees can be expected to increase

their health care utilization substantially under TRICARE

For Life.5

 Similarly, family members of active-duty

personnel, who now face no out-of-pocket costs under

TRICARE Prime or TRICARE Prime Remote, may use

more services than expected. 

The high-range projection assumes spending growth at

a 30 percent higher rate than that assumed in the

midrange estimates. Under the high-range assumptions,

spending would increase at a real rate of 5.5 percent per

capita in 2004 and fall to 3.0 percent in 2020, while

accrual charges would grow at 5.3 percent per year in real

terms. Under this scenario, total spending on defense

health care would grow to $52 billion by 2020, or about

$7 billion more than the midrange estimates predict.

Medical spending would reach 84 cents for every dollar

spent on cash compensation, compared with 73 cents

under the midrange estimates. Spending per active-duty

service member would rise to $37,700.

5. See W. Manning and others, “Health Insurance and the Demand

for Medical Care: Evidence from a Randomized Experiment,”

American Economic Review, vol. 77, no. 3 (1987), pp. 251-277,

and R. Brook and others, “Does Free Care Improve Adults’ Health?

Results from a Randomized Controlled Trial,” New England Journal

of Medicine, vol. 309, no. 23 (1983), pp. 1426-1434.

2000 2004 2008 2012 2016 2020

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Fiscal Year

Midrange

Low

High
3

The Effects of Legislative and Policy Changes

on DoD’s Projected Health Care Spending

The midrange, low, and high projections presented

in the previous chapter assume that the Department of

Defense’s policies remain fixed and that no legislated

changes in benefits or coverage take place. Certainly,

though, changes in policies or laws could cause health care

costs—and the ratio of health care costs to cash compensation—to diverge widely from those projections. 

Future Health Care Spending Under

Policies That Could Slow Growth

Continued increases in health care costs relative to cash

compensation might at some point lead service members,

DoD, and the Congress to reassess the cost-effectiveness

of the department’s current compensation system. The

total military compensation package—which includes

immediate cash, deferred retirement pay, and immediate

and deferred health care benefits, as well as other in-kind

benefits—must be sufficient to attract and retain highly

qualified personnel. The constant ratio of health care benefits to cash compensation in the private sector, however,

suggests that the most cost-effective compensation package

—the one that for a given cost is most attractive to employees—is one in which cash dominates. Private-sector

health care plans typically entail copayments, deductibles,

and managed care not because employees like those

features, but because employers have found that a compensation package that includes more cash wages combined with moderately priced health insurance options

provides the best package for recruiting and retaining

workers.

This paper examines two policy changes—drawn from

trends in private-sector health care and a change in DoD’s

retirement system—that would allow DoD to slow the

growth in health care spending and raise cash compensation. In the first, military retirees are allowed to choose

between coverage under TRICARE For Life and cash; in

the second, the families of active-duty service members

are allowed to choose either TRICARE’s current options

or a less generous plan and cash. Both of those possible

policy changes involve choice; all military families that

preferred to remain under the current system could do

so. Nonetheless, the Congressional Budget Office finds

that those policies could save DoD $1.5 billion annually

(in 2002 dollars) by 2020. 

The two policies were selected to illustrate the potential

offered by arrangements that seek to balance health care

benefits and cash compensation. The two policies alone,

however, would not be sufficient to forestall continued

increases in medical spending relative to cash compensation. Even if both were adopted, DoD’s health care

spending would rise from 55 cents for every dollar of cash

compensation today to 70 cents by 2020. Maintaining

the current ratio would require more far-reaching changes,

such as coupling increases in cash compensation with the

introduction of premiums (which would reduce DoD’s

costs by encouraging families with access to plans offered

CHAPTER
18 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

by private employers to choose those plans more

frequently), deductibles, and copayments. 

Option: A Retirement Bonus in Lieu of Health Care

Over Age 65

The present value of TRICARE For Life coverage is

$172,000 for a service member retiring in 2004.1

 That

figure includes both the value of the service member’s own

coverage as well as the value of coverage for his or her dependents (but it does not include the value of the benefits

the retiree and his or her dependents will receive before

reaching age 65). Because health care costs are expected

to grow faster than inflation, by 2020 the value of TRICARE For Life for a new retiree will reach $319,000 (in

2002 dollars). Yet many military retirees could seek retiree

health coverage from a future civilian employer or a

spouse’s employer, and others might prefer to purchase

a less generous private Medicare supplement (known as

a “medigap” plan) or to save money and self-insure rather

than receive so much of the value of their retirement

benefits in the form of health insurance. Those possibilities

suggest that retirees could be given an option at retirement: retain TRICARE For Life coverage for themselves

and their dependents or receive a cash bonus.2

 As an

example, DoD could offer the retirees and their families

a cash bonus equal to one-half of the present value of those

benefits to spend as they wish. The after-tax bonus that

could be offered to service members retiring today would

be $86,000 (one-half of $172,000).3

 The value of the

bonus offered to retirees could rise over time as health care

costs grew. By 2020, this level of cash bonus at retirement

would be approximately $159,000. 

If even a few retirees chose this option, the federal government would see a cost savings in the long run.4

 For

example, if only 10 percent of retiring service members

chose this option, the present value of future savings to

the federal government could equal $117 million in 2004,

and that number would rise each year as long as medical

cost growth outstripped overall inflation.5 The present

value of savings to the government could exceed $217

million in 2020. However, substantial expenditures would

occur in the short run as retiring service members took

the bonuses, while the savings would occur much later,

after retirees and their dependents reached 65 years of age.

Thus, in the short run, at least, this proposal would

increase federal outlays. 

However, DoD itself could see a savings within a few years

because of the accounting method used to pay for TRICARE For Life benefits. If, as assumed above, 10 percent

of retiring service members received a bonus of one-half

the present value of their TRICARE For Life benefits in

return for waiving coverage under the program, and if the

same share of newly retiring service members took the

bonus each year, DoD’s actuaries would be able to take

the future savings into account when calculating the

annual accrual payments to be made into the retiree health

care fund. The annual budgetary savings to DoD would

1. Personal communication from DoD’s Office of the Actuary,

February 6, 2003. That figure includes the payment of Medicare’s

copayments and deductibles, the TRICARE Senior Pharmacy

benefit, and the cost of care provided at military medical treatment

facilities. Retirees waiving TRICARE For Life would also be

waiving access to care at DoD hospitals. CBO’s calculation used

a nominal discount rate of 6.25 percent.

2. This bonus option is similar to the career status bonus offered to

eligible military service members at their 15th year of service. Those

accepting the bonus receive a $30,000 up-front cash bonus in

return for accepting the REDUX retirement system, which

generally pays lower pension benefits during retirement than the

alternative retirement system based on service members’ “high

three” years of compensation. 

3. The government could offer a tax-free bonus of $86,000 or offer

a higher taxable bonus that would have the same after-tax value.

If the bonus was taxable, retirees could be given the option of

receiving the bonus in installments over a five-year period in order

to reduce the tax liability.

4. That conclusion presumes that adverse selection would not be

severe—that is, that retirees choosing the cash bonus option would

not be so far below the average risk that they would have cost the

government less than the cash bonus if they had remained under

the current system. The extent of adverse selection would probably

be low because military retirement generally occurs decades before

TRICARE For Life coverage starts, making it difficult for service

members to predict their future need for health care, and because

TRICARE For Life is structured in a manner that discourages the

purchase or use of other health insurance by imposing additional

paperwork on people with such insurance; as a result, relatively

few eligible individuals would be likely to forgo TRICARE For

Life in the absence of this option providing a cash bonus.

5. CBO assumed that about 20 percent of the savings would be offset

by increases in spending by the Federal Employees Health Benefits

program and the Department of Veterans Affairs. 
CHAPTER THREE THE EFFECTS OF LEGISLATIVE AND POLICY CHANGES ON DOD’S PROJECTED HEALTH CARE SPENDING 19

be around 10 percent of the total accrual charge, or $795

million in 2004. After taking into account outlays of $117

million on bonuses, DoD would have a net savings of

$649 million in 2004, rising to $1.2 billion in 2020 even

if the share of retirees choosing the bonus stayed fixed at

10 percent.

Because retiring service members would retain the option

of remaining in the current system, this policy change

would increase their choices about the structure of their

compensation.

Option: A “Cafeteria Plan” for the Health Benefits 

of Family Members of Active-Duty Personnel

Studies of health insurance in the civilian sector indicate

that copayments, deductibles, and more stringent managed

care restrictions can significantly decrease health care

spending by reducing unnecessary use of the system without adversely affecting the overall health of each beneficiary.6

 Unlike most private health plans, however, TRICARE charges few copayments or deductibles to constrain

the demand for care. Three-quarters of the family members of active-duty personnel are enrolled in TRICARE

Prime and face no copayments or deductibles for health

care received from network providers, regardless of

whether those providers are military or civilian. Although

TRICARE Prime provides some cost control using managed care methods, utilization rates in the program remain

40 percent to 50 percent higher than those in civilian

plans.7

 Given a choice, some family members of activeduty personnel may prefer a compensation plan that offers

them more cash and a somewhat less generous health care

benefit. 

This option would give family members that choice by

establishing a “cafeteria plan” for their health coverage.

In the private sector, employers have turned increasingly

to various types of flexible benefit plans to allow workers

to adjust the mix of benefits that they receive to most suit

their needs and preferences.8

 Under the cafeteria plan

considered here, DoD would provide each family with

a cash allowance for its health coverage. The allowance

could be used in one of three ways. First, family members

could purchase TRICARE coverage, which would include

any of the current options (TRICARE Standard, TRICARE Extra, and TRICARE Prime).9

 Second, they could

use some of the money to purchase a new “low-option”

TRICARE plan and keep the remaining funds. That

version of TRICARE would be similar to TRICARE

Prime in that it would have many managed care features.

However, it would also incorporate a substantial deductible as well as copayments for health care services, whether

obtained at military medical treatment facilities or from

civilian providers. Third, military family members could

show proof of employer-provided insurance and apply

the allowance toward their share of the premiums, copayments, and deductibles for that insurance. Active-duty

service members themselves would still be automatically

enrolled in TRICARE Prime; only the dependents of

active-duty service members would have the new choices.

Those choosing the low-option TRICARE plan would

be protected against catastrophic costs by a “stop-loss” of

no more than $3,000 in out-of-pocket costs per year.10

By CBO’s estimates, such a plan would reduce DoD’s

outlays by 25 percent per beneficiary (not including the

cost of the cash allowance). If DoD offered those families

opting out of traditional TRICARE coverage a cash

allowance of $1,000 for coverage of a spouse or $2,000

for family coverage and if beneficiaries could choose the

new low-option TRICARE plan by paying only half of

that cash allowance as a premium, DoD’s net savings

would be $18 million in 2004, rising to $185 million in

2006 (as the program phased in and more families participated) and perhaps $245 million annually by 2020. (See

6. See, for example, W. Manning and others, “Health Insurance and

the Demand for Medical Care”; and R. Brook and others, “Does

Free Care Improve Adults’ Health?” 

7. Department of Defense, Evaluation of the TRICARE Program: Fiscal

Year 2003 Report to Congress (April 2003).

8. According to data from the Employee Benefit Research Institute,

from 1991 to 1997, there was a 30 percent increase in the percentage of full-time employees participating in cafeteria plans and

other flexible benefit plans at medium-sized to large private firms.

9. The amount of the cash allowance would equal the price charged

for any of the three traditional TRICARE plans, so that families

choosing one of those plans would be no worse off than under

current policy.

10. For additional discussion of the pros and cons of this policy change,

see Congressional Budget Office, Budget Options (March 2003).
20 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Box 3.

Estimating the Savings from

Introducing a Cafeteria Plan

The Congressional Budget Office’s (CBO’s) estimate

of the impact of introducing a cafeteria plan for the

family members of active-duty personnel incorporates

several key factors:

# The cost of the cash allowances of $1,000 for

coverage of a spouse and $2,000 for coverage of

a family (rising with inflation each year). 

# A decrease in demand for health care by those

choosing the new low-option plan, as copayments

and deductibles improved the efficiency of health

care utilization. CBO assumes that the plan

would be structured to reduce the Department

of Defense’s (DoD’s) spending on enrollees by

25 percent. CBO estimates that 13 percent of

family members would choose coverage under

the low-option plan if it cost half the value of the

cash allowance. 

# Savings to DoD from the fact that more family

members would be likely to take advantage of

employer-sponsored health insurance, which

most currently forgo. CBO estimates that 4 percent of family members would take the cash

allowance and switch from TRICARE to an

employer plan.

# A cost increase due to a small number of eligible

family members who are not currently using

TRICARE (known as “ghosts”) and who thus

cost nothing to the system at the moment but

who would apply for the cash allowance. CBO

estimates that 2 percent of family members

would fall into this category.

Box 3 for a discussion of the factors incorporated in CBO’s

estimates.)

Policy changes like this one and the preceding one would

not stop aggregate cost growth. Taken together, the two

policy changes would save DoD $1.5 billion by 2020. But

to maintain the current ratio of spending on health

benefits without increasing cash compensation more than

anticipated, DoD would need to cut medical spending

by over $11 billion by that year. That reduction would

require more radical changes to benefits, such as the introduction of premiums and increases in deductibles and

copayments. An alternative approach would be to lengthen

military careers, thus extending the number of years of

service required to be eligible for lifetime health care

coverage. 

Policies That Could Accelerate 

the Growth of Health Care Spending

Yet even if DoD and the Congress try to control future

growth in health care spending, they will face pressure to

adopt policies that could result in increases. This study

examines two areas in which such pressures are already

being felt. One relates to the nature of the health care

benefits provided to reservists. The other addresses the

difference between the benefits available to retirees who

are eligible for Medicare and those who are not. 

How DoD and the Congress respond to pressures for

additional benefits could have a significant impact on the

department’s future health care spending. Furthermore,

CBO’s examination of potential benefits for reservists

shows how alternative health care programs that might

address readiness could have dramatically different cost

implications. And the examination of benefits for retirees

under age 65 illustrates how the introduction of new,

relatively inexpensive, benefits in the current system could

lead to pressure for still additional, and more costly,

benefits.

Option: Extended Benefits for Reservists 

In recent years, the U.S. military has come to rely increasingly on the Reserves and the National Guard as key

components of the force structure. CBO examined two

approaches that have been proposed by lawmakers to

increase medical benefits for reservists.11 While the first

11. The term “reservists” is used throughout this report to refer to

members of the Selected Reserve, including the U.S. Army Reserve,

U.S. Air Force Reserve, U.S. Marine Corps Reserve, U.S. Naval

Reserve, Army National Guard, and Air National Guard.
CHAPTER THREE THE EFFECTS OF LEGISLATIVE AND POLICY CHANGES ON DOD’S PROJECTED HEALTH CARE SPENDING 21

option is targeted at helping reservists and their families

maintain their civilian coverage while the reservists are

deployed, the other, more expensive, option provides reservists with full-time access to TRICARE coverage even

when they are not mobilized. 

In the past decade, call-ups of reservists have become more

frequent. Since September 11, 2001, the average tour for

reservists has lengthened to 300 days, up from 140 days

in 1990 and 1991.12 As reservists play a larger role, concerns have grown about the burden being placed on them,

their families, and their employers.13 Lengthy or frequent

call-ups can disrupt reservists’ civilian employment and

create challenges for ensuring continuous health coverage

for their families. 

Whenever a reservist is called to active duty for 30 days

or more, his or her family becomes eligible for TRICARE

coverage. Alternatively, the family can choose to retain

the reservist’s civilian employer-sponsored health coverage

for up to 18 months. However, after the reservist’s first

30 days on active duty, the employer may require the

reservist to pay the full premium (both the employee’s and

the employer’s shares) as well as a 2 percent administrative

charge.14 If the reservist chooses to drop civilian coverage

while on active duty, the employer must later reinstate

the reservist and his or her family without a waiting period

and without excluding coverage for any preexisting health

conditions that may have emerged for anyone in the

family.15

While some mobilized reservists choose to stay on their

employer’s health plan, some switch to TRICARE in order

to save on premiums.16 The transition from an employer’s

plan to TRICARE and then back to the employer’s plan

at the end of the deployment can be disruptive for families, particularly when a family member has a chronic or

serious illness and the changes in coverage would require

switching doctors.

Several alternatives have been suggested to improve the

health coverage available to reservists and their families.

Two primary goals for any policy change are:

# Continuity of coverage for families when reservists

are deployed, and

# Ensuring that reservists have coverage regardless of

deployment status.

Two proposals focusing respectively on those goals have

been considered by the Senate and were incorporated in

the Senate version of the National Defense Authorization

Act for Fiscal Year 2004 (S. 1050). 

Helping Reservists Retain Civilian Coverage for Their

Families. Rather than providing a reservist’s family with

full-time coverage under TRICARE or switching the

family out of its civilian plan each time the reservist was

deployed, the first option would have DoD pay any outof-pocket costs associated with continuing the civilian

coverage during the deployment. The amount reimbursed

would be capped at the cost of TRICARE coverage (which

would remain an option for families choosing to switch)

and could pay the reservist’s share of premiums as well

12. Personal communication from the Office of the Assistant Secretary

of Defense for Reserve Affairs, August 4, 2003.

13. DoD has implemented a demonstration project for reservists

activated for more than 30 days in support of operations that result

from the terrorist attacks of September 11, 2001. For those eligible,

the department has increased the maximum allowable charge for

civilian care and is waiving deductibles in the TRICARE Standard

and Extra plans and requirements that enrollees obtain statements

attesting to the unavailability of services at military medical treatment facilities before seeking nonemergency care from a civilian

provider. Those measures are intended to ease the transition and

reduce the out-of-pocket costs for a family switching from a civilian

health plan to TRICARE while the reservist is deployed. A second

demonstration project provides transitional health coverage after

deactivation for between 60 and 120 days, depending on the

reservist’s number of years of military service. 

14. Department of Defense, “Healthcare Benefits for Reserve Component Members on Active Duty More than 30 Days and Their

Families,” available at www.tricare.osd.mil/RNGOLBrochure/

Reservereprint.pdf.

15. The military and/or Department of Veterans Affairs is responsible

for providing treatment for medical conditions attributed to military service. See www.tricare.osd.mil/reserve.

16. General Accounting Office, Defense Health Care: Most Reservists

Have Civilian Coverage But More Assistance Is Needed When

TRICARE Is Used, GAO-02-829 (September 2002).
22 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

as any copayments and deductibles. While some employers

cover their share of premiums for mobilized reservists

beyond the 30 days currently required, most reservists

normally have to pay the full premiums to continue coverage for their families under their employer’s plan. On

average, employer-sponsored family health coverage costs

nearly $8,500 per year, including both the employer’s and

the employee’s shares of the premiums.17

The cost of providing this benefit to the families of

mobilized reservists would be about $71 million in 2004,

CBO estimates. That estimate takes into account the unusually high number of reservists currently mobilized.

Spending on this benefit would fall to $6 million by 2009

under the assumption that fewer reservists would be

mobilized in the future. Spending would then slowly rise

to $9 million in 2020 as health care costs increased

somewhat more quickly than inflation.

Providing Full-Time TRICARE Coverage for All Reservists.

The second option would incorporate all of the features

of the one just discussed but would also offer TRICARE

coverage to reservists and their families regardless of the

reservists’ deployment status.18 The primary purpose

would be to ensure comprehensive, continuous health

coverage for them. For that reason, the premiums charged

would be held low—for enlisted reservists, only $330

annually for individual coverage or $560 for family coverage, and for officers, $380 for individual coverage or

$610 for family coverage.19 Those premiums are somewhat

higher than those paid by military retirees under age 65

for TRICARE Prime but lower than the average amounts

that civilian employees contribute for their coverage

(currently $456 for a single person or $2,088 for a

family).20 Some reservists who live far from a military

medical treatment facility would find it difficult to use

any TRICARE option except Standard, which might

expose them to substantial out-of-pocket costs if a family

member became seriously ill.21

According to CBO’s estimates, this proposal would cost

approximately $454 million in 2004 and would then

phase in over three more years to cost $1.8 billion in 2007.

Eventually, as health care costs rose faster than inflation,

the proposal would cost $3.1 billion in 2020. The cost

of this proposal is considerably higher than the first

because all reservists, not just those mobilized, would be

eligible to receive the benefit. CBO assumed that 40 percent of reservists with private insurance would drop that

insurance in favor of TRICARE coverage, given the low

annual premiums. 

However, this proposal fails to take advantage of the health

insurance options currently available to most reservists

through their civilian employers or their spouses’ employers. If reservists who were not deployed were offered

comprehensive TRICARE coverage at very low premiums,

many would drop their civilian coverage, essentially resulting in a transfer of costs from the civilian employers to

DoD. A recent report by the General Accounting Office

indicated that nearly 80 percent of reservists had health

care coverage when not on active duty.22 Thus, this proposal arguably carries a relatively high cost compared to

the modest increase in the number of reservists and their

families who would gain health insurance. 

17. The Kaiser Family Foundation and Health Research and Education

Trust Employer Health Benefits 2002 Survey (Menlo Park, Calif.:

Kaiser Family Foundation, 2002).

18. This benefit would be offered only to members of the Selected

Reserve who take part in regular training exercises as part of a

Reserve or National Guard unit. CBO assumed that other groups

of reservists who are much less likely to be mobilized, including

the Individual Ready Reserve, Inactive National Guard, Standby

Reserve, and Retired Reserve, would not be offered this benefit.

19. Those premiums are based on the Graham-Daschle amendment

added to S. 1050, the Senate version of the National Defense Authorization Act for Fiscal Year 2004, on May 19, 2003. 

20. The Kaiser Family Foundation Employer Health Benefits 2002 Survey.

21. This proposal assumes that deployed reservists would also be offered

the reimbursement described above in the proposal for retaining

civilian coverage. The availability of that benefit would affect the

number of reservists likely to choose TRICARE coverage. A

reservist who expected frequent call-ups might decide that his or

her family was better off staying in a civilian plan and receiving

reimbursement during times when the reservist was deployed. 

22. General Accounting Office, Defense Health Care: Most Reservists

Have Civilian Coverage.
CHAPTER THREE THE EFFECTS OF LEGISLATIVE AND POLICY CHANGES ON DOD’S PROJECTED HEALTH CARE SPENDING 23

Option: Expanded Benefits for Retirees 

Under 65 Years of Age 

With the introduction of TRICARE For Life, military

retirees and their dependents over 65 years of age now

enjoy low-cost health care from either military or civilian

providers.23 When space is available, visits to military

medical treatment facilities remain free, and TRICARE

For Life now pays most of the copayments and deductibles

for services covered by Medicare and delivered by civilian

providers. Pharmaceuticals are subject to copayments as

low as $3 per prescription, and free medicines are available

from military medical treatment facilities. Participants

must pay the Medicare Part B premium, which is currently

$58.70 per month. 

That more generous benefit for beneficiaries over age 65

has led some retirees and dependents under 65 to seek

similar coverage. The premiums, copayments, and

deductibles paid by military retirees and their dependents

under age 65, while comparable to charges paid by

civilians, can amount to far more than the nearly free care

now available to retirees and dependents over 65. While

TRICARE For Life pays beneficiaries’ expenses not

covered by Medicare, TRICARE Standard normally does

not cover the copayments and deductibles left unpaid by

private health insurance policies held by retirees under age

65. Rather, TRICARE pays the lesser of the following:

# An amount of up to 15 percent more than TRICARE

Standard’s allowable charge minus the amount that

the other health insurance paid or

# The amount that TRICARE Standard would have

paid if the beneficiary did not have any other health

insurance.

In some cases, then, TRICARE Standard currently pays

nothing for services covered by retirees’ civilian health

plans when the amount the other insurance company pays

is more than 115 percent of TRICARE’s allowable charge.

That policy could be changed to make TRICARE Standard complement retirees’ civilian employer-provided

health insurance in the same way that TRICARE For Life

complements Medicare coverage.24 While that change in

benefits is not under consideration by the Congress, it has

been proposed by advocates for military retirees. CBO

chose to analyze this option because it is one of many such

proposed changes that would increase the level of coverage

provided by the TRICARE program for some beneficiaries.25

Under this option, no matter how much the providers

billed, TRICARE Standard would pay any remaining

balance up to the amount it would have paid if there were

no other insurance—usually 75 percent to 80 percent of

TRICARE’s allowable charge. In many circumstances,

that amount would be enough to cover the entire cost left

over after the retiree’s other insurance has paid. As with

TRICARE For Life, beneficiaries would be left with

almost no out-of-pocket costs.

By CBO’s estimates, altering the coverage rules for TRICARE Standard so that it “topped off” other health

insurance would cost $1.8 billion in 2004 and $3.5 billion

by 2020. That estimate assumes that use of the health care

system by retirees and their dependents with civilian insurance would increase by 25 percent because they would

23. Until October 2001 (that is, the beginning of fiscal year 2002),

military retirees and their dependents lost their eligibility to receive

services from civilian providers under TRICARE when they became

eligible for Medicare. While they could still obtain free care from

military medical treatment facilities, access to such care was on a

space-available basis. When a number of base hospitals and clinics

were closed or downsized in the 1990s, such care became increasingly scarce. In fiscal year 2002, the TRICARE For Life program

was instituted to provide a wraparound benefit for military retirees

and their dependents who were eligible for Medicare. 

24. While TRICARE Prime and Extra are available to military retirees

and dependents under age 65, they can reduce out-of-pocket costs

only for those who live near military medical treatment facilities

and in areas with extensive networks of TRICARE providers.

25. See, for example, Statement of Robert Washington, Sr., Fleet

Reserve Association, Cochairman, the Military Coalition Health

Care Committee, and Sue Schwartz, Military Officers Association

of America, Cochairman, the Military Coalition Health Care Committee, before the Subcommittee on Total Force of the House

Committee on Armed Services, March 27, 2003.
24 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

face few out-of-pocket costs.26 Under this option, about

a quarter of the total cost of care for this population would

be borne by TRICARE and the remaining three-quarters

by the civilian health plans, CBO estimates. 

However, improving TRICARE Standard for retirees who

have civilian coverage could lead to still further pressures

to expand benefits for other retirees. The policy change

described here would not help retirees who did not have

civilian coverage and who relied on TRICARE Standard

as their sole source of insurance. Those retirees might seek

additional expansions of coverage, which could increase

DoD’s spending even more. 

As this chapter has demonstrated, decisions about benefits

will play a key role in the future growth of DoD’s medical

spending. While some proposals currently being considered could substantially increase spending per active-duty

service member and result in a compensation package that

is even more heavily weighted toward medical benefits,

other options could provide new choices for service

members and their families while moderating future

growth.

26. CBO’s assumption here is consistent with the methodology used

to determine the cost of the “low-option” TRICARE plan. For

that option, the introduction of copayments and deductibles was

assumed to reduce total spending by 25 percent.
A

Background on the Department

of Defense’s Medical Coverage

The collection of the Department of Defense’s

(DoD’s) health plans is known as TRICARE. Beneficiaries

covered to one degree or another by the program include:

# Active-duty service members,

# Dependents of active-duty service members,1

# Military retirees,2

# Dependents of military retirees,

# Full-time reservists,3

# Dependents of full-time reservists, and

# Survivors of military retirees or those who died on

active duty.4

The TRICARE program combines military medical treatment facilities with regional networks of civilian providers

that work together to provide care to eligible beneficiaries.

The military medical treatment facilities include 75 hospitals and over 460 clinics in the continental United States

and overseas. Those facilities provide care for eligible beneficiaries at no charge and also serve as a training ground

for military medical personnel. Because the military health

system’s capacity is not large enough to serve the health

care needs of all eligible beneficiaries, DoD has ensured

that active-duty service members receive top priority for

care at the facilities, while other beneficiaries can receive

care there on a “space-available” basis. Many beneficiaries

also seek care from civilian providers paid for through the

TRICARE program.

Individuals have access to different levels and types of

benefits depending on which type of beneficiary they are.

Active-duty service members must go to military medical

treatment facilities for their care. Family members of

active-duty personnel as well as military retirees and

dependents who are not eligible for Medicare can choose

from one of three main options:

1. Dependents include spouses, including ones who have divorced

but not remarried, and unmarried children (up to age 21).

2. Retirees have generally served 20 or more years in uniform or have

been medically retired owing to an illness or injury incurred while

serving in a branch of the armed forces. The normal military

retirement age is around 38 to 45 years. Currently, more than half

of the population of military retirees is under the age of 65.

3. While most reservists are in uniform only part time, a minority

serve full time to ensure the continuing operation of Reserve and

National Guard units. Reservists can also be called to active duty

for 30 days or more. Full-time reservists and reservists mobilized

for more than 30 days, along with their families, are entitled to

medical care under rules that are similar to those for regular activeduty service members.

4. Survivors include widows and widowers who have not remarried

and unmarried children (up to age 21) of deceased active-duty or

retired service members.

APPENDIX
26 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Figure A-1.

Out-of-Pocket Costs for Military Families Using the TRICARE Program and for

Their Civilian Counterparts, 2002

(2002 dollars)

Source: Department of Defense, Evaluation of the TRICARE Program, Fiscal Year 2003 Report to Congress (April 2003).

Note: For military families, the designations refer to the status of the service member and the TRICARE program in which they are enrolled; for example, Active Duty/Prime

refers to families of active-duty service members that are enrolled in TRICARE Prime.

# TRICARE Prime is similar to a civilian health maintenance organization (HMO). Beneficiaries are assigned to a primary care manager, who coordinates

all aspects of their medical care. 

# TRICARE Standard is a fee-for-service plan that

allows beneficiaries to seek care from any civilian

provider and be reimbursed for a portion of the costs

after paying copayments and meeting deductibles.

For some services, beneficiaries are required to seek

care first from a military medical treatment facility

when possible.

# TRICARE Extra is similar to a civilian preferred

provider organization. Beneficiaries pay lower copayments than they would under TRICARE Standard

if they seek care from a provider in the TRICARE

network.

Retirees and dependents over 65 years of age or otherwise

eligible for Medicare are not eligible for those TRICARE

Active

Duty/

Prime

Active

Duty/

Standard

or Extra

Retirees

Under 65/

Prime

Retirees

Under 65/

Standard

or Extra

0

500

1,000

1,500

2,000

2,500

3,000

3,500

TRICARE Prime Enrollment fees

TRICARE Deductibles and Copayments

TRICARE Supplemental Insurance Premiums Deductibles and Copayments

Insurance Premiums

Civilian

Counterparts

Civilian

Counterparts

Civilian

Counterparts

Civilian

Counterparts

Military Civilian
APPENDIX A BACKGROUND ON THE DEPARTMENT OF DEFENSE’S MEDICAL COVERAGE 27

plans. Instead, they are eligible for care at military hospitals and clinics as space allows and for TRICARE For

Life, a wrap-around benefit for those with Medicare.5

Under TRICARE For Life, Medicare usually pays first,

while TRICARE covers most or all of the rest of the bill.

Prescription medications for this population are provided

free at military medical treatment facilities or for a modest

copayment through the TRICARE Senior Pharmacy

benefit.6

Several smaller plans provide additional options for

individuals living in certain areas. For example, TRICARE

Prime Remote is a plan for active-duty service members

and their families who live and work more than 50 miles

or approximately one hour’s drive from a military medical

treatment facility. 

DoD’s recent evaluation of the TRICARE program found

that over 76 percent of the family members of active-duty

personnel were enrolled in TRICARE Prime in 2002.7

The remainder were using some mix of TRICARE Standard, TRICARE Extra, and civilian health insurance plans.

By comparison, fewer than 33 percent of military retirees

and their family members under age 65 were enrolled in

TRICARE Prime in that year. Most other retirees and

their dependents under 65 had some type of civilian health

insurance, although some were relying on TRICARE

Standard or Extra.

The evaluation also found that (after adjusting for the

different demographic characteristics) TRICARE Prime

enrollees had utilization rates that were 40 percent to 50

percent higher than those for civilian HMO members.

The difference in utilization can be traced in part to the

very different out-of-pocket costs faced by TRICARE

beneficiaries as compared to their civilian counterparts

(see Figure A-1). TRICARE beneficiaries, whether they

use TRICARE Prime, Standard, or Extra, faced dramatically lower total costs for their coverage. Much of the

difference reflects insurance premiums. Only military

retirees who enroll in TRICARE Prime face any sort of

enrollment fee, although many who use Standard or Extra

also purchase a supplemental insurance policy to help

cover the copayments and deductibles. The TRICARE

Prime enrollment fee is small compared with the employees’ share of civilian insurance premiums faced in the

private sector. Besides the insurance premiums, other outof-pocket costs such as copayments and deductibles are

dramatically lower for military beneficiaries than they are

for their civilian counterparts. Such costs can help temper

demand for medical care and thus hold down total costs.

5. The TRICARE For Life benefit was introduced in October 2001

(the beginning of fiscal year 2002), adding coverage for services

received from civilian providers by complementing the Medicare

program. Previously, military retirees and their dependents who

were eligible for Medicare were entitled to receive medical services

and pharmaceuticals at military medical treatment facilities when

space was available but had no coverage for care received from

civilian providers.

6. TRICARE Senior Pharmacy was introduced on April 1, 2001.

Medicare does not cover most outpatient pharmaceuticals. 

7. Department of Defense, Evaluation of the TRICARE Program: Fiscal

Year 2003 Report to Congress (April 2003).

B

Adjusting for the Changing Mix of the

Department of Defense’s Beneficiaries

The Congressional Budget Office (CBO) used the

Medical Expenditure Panel Survey, conducted by the

Agency for Healthcare Research and Quality, to identify

a civilian population of beneficiaries that was comparable

to the Department of Defense’s (DoD’s) and examined

the relative medical expenditures of that civilian population.1

 CBO broke the population down by sex and by

age group (up to 17 years of age, 18 to 44, 45 to 64, and

65 or older). Average total medical expenditures varied

among those groups from around $1,000 for females up

to age 17 to over $5,800 for males age 65 or older (see

Table B-1). Using males who were 18 to 44 years old as

the base group, CBO converted average expenditures into

relative weights ranging from 0.87 to 4.95.2

 For example,

the figure for males age 65 or older indicates that that

group spent, on average, 4.95 times as much as males

between 18 and 44 years old did (see Figure B-1).

CBO then divided the population of DoD beneficiaries

up into those same groups and multiplied the total numFigure B-1.

Relative Medical Costs for a Civilian

Population, by Age and Sex

(Ratio)

Source: Congressional Budget Office using data from the Agency for Healthcare Research and Quality’s 1996 Medical Expenditure Panel Survey.

Note: CBO used a comparable civilian population that included only those

with private insurance and/or Medicare because the uninsured and

people with only Medicaid probably use the health care system

substantially differently from the ways that the Department of Defense’s

beneficiaries do. The base group consisted of males who were 18 to

44 years old to correspond to the bulk of the Department of Defense’s

beneficiaries on active duty. CBO excluded from its sample very high

cost outliers—or people with annual expenditures over $250,000—

because of their disproportionate effect on average costs.

1. The data are from the Agency for Healthcare Research and Quality’s 1996 Medical Expenditure Panel Survey, within the consolidated data file for the full year, which was updated in March 2001.

The information is available at www.meps.ahrq.gov/Puf/

DataResultsData.asp?ID=20. CBO used a comparable civilian population that included only people with private insurance and/or

Medicare because the uninsured and people with only Medicaid

probably use the health care system substantially differently from

the ways that DoD’s beneficiaries do.

2. CBO chose males ages 18 to 44 because they make up the largest

group within the active-duty force, although the results would not

differ in substance if any other group was chosen as the base group.

0 to 17

Years

18 to 44

Years

45 to 64

Years

65 or

Older

0

1

2

3

4

5

6

Males

Females

Base Group

Age Group

APPENDIX
30 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Table B-1.

Total Annual Medical Expenditures per Capita in a Civilian

Population, by Age and Sex

Expenditures

in 2002 Dollars

Relative

Expenditures

Age Group Males Females Males Females

0 to 17 Years 1,114 1,028 0.95 0.87

18 to 44 Years 1,177 2,009 1.00 1.71

45 to 64 Years 2,865 3,071 2.43 2.61

65 or Older 5,823 5,306 4.95 4.51

Source: Congressional Budget Office using data from the Agency for Healthcare Research and Quality’s 1996 Medical Expenditure Panel Survey. 

Notes: To provide a comparable civilian population, CBO included only people with private insurance and/or Medicare because the uninsured and people with only

Medicaid probably use the health care system substantially differently from the ways that the Department of Defense’s beneficiaries do.

The base group consisted of males who were 18 to 44 years old to correspond to the bulk of the Department of Defense’s beneficiaries on active duty.

CBO excluded from its sample very high cost outliers—or people with annual expenditures over $250,000—because of their disproportionate effect on average

costs.

ber in each group by the appropriate weight. Because older

beneficiaries impose a heavier burden on any health care

system, converting each beneficiary into an imaginary

number of “weighted beneficiary units” makes tracking

the total demand placed on the system easier. For example,

if 450 beneficiaries convert into 875 weighted beneficiary

units, the demand on the system would equal that by a

beneficiary population consisting of 875 males between

18 and 44 years of age and no one else.

CBO then adjusted those weighted beneficiary units for

the beneficiaries’ different rates of reliance on DoD’s

health care system (including both military medical

treatment facilities and civilian providers) by multiplying

the number of weighted beneficiary units in each category

by the following full-time-equivalent weights:

# Active-duty personnel: 1.00

# Family members of active-duty personnel: 0.95

# Retirees, family members, and survivors under age

65: 0.64

# Retirees, family members, and survivors over age 65:

0.30

Those figures represent the approximate average rates of

reliance for each group, as revealed by surveys by DoD

taken from 1994 to 1998. In reality, utilization by some

groups, particularly retirees over age 65, fell during the

time when the surveys were taken. Older retirees sought

32 percent of their care from military medical treatment

facilities in 1994 but less than 25 percent by 1998, probably because the closure and downsizing of military medical treatment facilities made it more difficult to obtain

care on a space-available basis (see Figure B-2). 

While it might be possible to vary the adjustment factors

to reflect changes in the rates of reliance over time, doing

so would mask the impact of those changes in reliance on

DoD’s system and attribute them to the changing mix

of beneficiaries rather than to the reduced use of the

system by some groups. Such reduced use could reflect

growing access to or preference for alternative sources of

care (such as employer-provided health insurance or Medicare), or it could reflect the “squeezing out” of some beneficiaries as space-available care became more difficult to

obtain. 

After weighting the beneficiary population by sex/age

group and by rates of reliance, the end result is a number

of “full-time-equivalent beneficiary units”—essentially,
APPENDIX B ADJUSTING FOR THE CHANGING MIX OF THE DEPARTMENT OF DEFENSE’S BENEFICIARIES 31

Figure B-2.

Percentage of Care Provided by

the TRICARE Program

(Percent)

Source: Department of Defense, Office of the Assistant Secretary for Health

Affairs.

the number of full-time active-duty males ages 18 to 44

that it would take to impose the same approximate

demand on the system as the actual mix does. While the

number of beneficiaries decreased from 9.5 million to 8.5

million from 1988 to 2003 (an 11 percent decrease), the

number of full-time-equivalent beneficiary units dropped

from 11.4 million to 10.4 million (a 9 percent decrease).

(See Figure B-3.) 

Dividing DoD’s total medical expenditures by the number

of full-time-equivalent beneficiary units, CBO finds that

real spending per unit rose from $1,300 in 1988 to $2,600

in 2003, or by about 5 percent annually.

1994 1996 1998

0

10

20

30

40

50

60

70

80

90

100

Family Members of Active-Duty Personnel

Retirees Under 65 and Family Members Under 65

Retirees Over 65 and Family Members Over 65

95.9 94.5 94.7

64.7

31.9

65.0

30.4

61.8

24.7
32 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

Figure B-3.

The Department of Defense’s Health Care Beneficiaries and 

Full-Time-Equivalent Beneficiaries, 1988 to 2003

(Millions)

Source: Congressional Budget Office based on data from the Defense Enrollment Eligibility Reporting System and the Managed Care Forecasting and Analysis System.

1988 1991 1994 1997 2000 2003

0

2

4

6

8

10

12

Active-Duty Service Members

Reservists

Family Members of Active-Duty Personnel

Family Members of Reservists

Retirees

Retirees' Family Members, Survivors, and Other Beneficiaries

Full-Time-Equivalent Beneficiaries
C

Comparison of the Midrange

Projections and CBO’s Baseline for the 

Department of Defense’s Medical Care

The midrange estimates of future medical spending

by the Department of Defense (DoD) presented in this

study are somewhat different from the Congressional

Budget Office’s (CBO’s) estimates of such spending in

its March 2003 baseline. Starting from essentially the same

level of budget authority in 2003, the midrange estimates

in this paper show spending increasing more quickly than

it does in CBO’s baseline. Table C-1 compares the two

projections in nominal dollars. By the last year of CBO’s

baseline, or 2013, the baseline estimate is less than $40

billion, while the midrange estimate is nearly $47

billion—a difference of about 18 percent.

The two projections differ because CBO’s baseline assumes

lower inflation rates over the period. In the case of the

midrange estimates, medical care furnished through the

Table C-1.

Comparison of This Study’s Midrange Estimates and Those in CBO’s Baseline

(Budget authority in millions of current dollars, by fiscal year)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Midrange Estimates in This Study

Medical Spending 19,867 20,534 21,819 23,117 24,431 25,675 27,016 28,415 29,821 31,249 32,729

Accrual Charges 7,567 8,166 8,498 9,174 9,750 10,359 11,007 11,729 12,491 13,297 14,147

Estimates in CBO’s March Baseline

Medical Spending 20,217 20,722 21,231 21,795 22,377 22,992 23,627 24,291 24,979 25,681 26,390

Accrual Charges 7,279 7,734 8,217 8,731 9,277 9,856 10,472 11,127 11,822 12,561 13,346

Differences Between Midrange and Baseline Estimates

Medical Spending -350 -188 588 1,322 2,054 2,683 3,389 4,124 4,842 5,568 6,339

Accrual Chargesa 288 432 281 443 473 503 535 602 669 736 801

Source: Congressional Budget Office.

a. The difference in the estimates of the accrual charges over time are attributable solely to the different initial values in 2003; both the midrange estimates and

CBO’s baseline assume the same rate of growth over the 2003-2013 period. The initial values for the accrual charges in 2003 differ because the midrange estimates

are based on data available in February 2003, whereas the March baseline is derived from information available in December 2002.

APPENDIX
34 GROWTH IN MEDICAL SPENDING BY THE DEPARTMENT OF DEFENSE

operation and maintenance (O&M) accounts and salaries

for military doctors and nurses paid from the military

personnel accounts are estimated to grow at an average

annual rate of about 5.1 percent in nominal terms. The

midrange estimates provided in this study represent a

projection of what spending would be if it increased at

the same rates as those expected for national health expenditures. Those growth rates more closely reflect what

spending would need to be in order to keep benefits the

same in the face of rising health care costs.

In contrast, CBO’s baseline projection for DoD’s medical

care is constructed using methods specified under the

Balanced Budget and Emergency Deficit Control Act,

which requires the use of specific (and in this case, lower)

inflators. In particular, CBO projects spending for medical

care furnished through the O&M accounts and pay for

military doctors and nurses by increasing the current year

appropriations for those items by a rate of inflation that

reflects both the gross domestic product deflator and the

employment cost index. That overall rate of inflation,

averaging about 2.5 percent per year in nominal terms,

is much lower than the estimated average increase in health

care expenditures over the 2004-2013 period. 

Unlike the estimates for medical spending in general, both

the midrange estimates and CBO’s baseline project the

accrual payments for defense health care to increase at an

annual nominal rate of 6.25 percent. The accrual charges

are paid out of the military personnel accounts, which are

adjusted to reflect the higher inflation rate. Table C-1

summarizes the comparison of the accrual and nonaccrual

portions of DoD’s medical spending.