GAO-04-322R MTF Third-Party Collections 

United States General Accounting Office 

Washington, DC 20548 

February 20, 2004 

The Honorable Dennis J. Kucinich 

Ranking Minority Member 

Subcommittee on National Security, Emerging Threats 

 and International Relations 

Committee on Government Reform 

House of Representatives 

The Honorable Janice D. Schakowsky 

House of Representatives 

Subject: Military Treatment Facilities: Improvements Needed to Increase DOD Third-Party 

 Collections 

Like the private health care industry, the cost of providing health care services to the 

Department of Defense’s (DOD) active duty personnel, their dependents, retirees, and 

survivors and their dependents has increased dramatically over the past decade. In fiscal 

year 2003, DOD reported that more than 8.7 million Military Health System beneficiaries 

were eligible to receive health care at a cost of about $27.2 billion per year—up from a 

reported 8.2 million eligible beneficiaries at a cost of $15.6 billion in fiscal year 1997. To 

the extent that DOD beneficiaries have private health insurance coverage, DOD is authorized 

to bill insurance companies under the Third Party Collections Program.1

 As such, DOD has 

the opportunity to defray the rising cost of providing health care to an increasing number of 

eligible beneficiaries. 

In October 2002, we reported to you that the three military treatment facilities (MTFs) we 

visited did not always bill and collect from private insurers for care that was reimbursable to 

the government.2 At all three facilities, we identified control weaknesses that resulted in 

instances where these MTFs had not identified all patients with third-party insurance and 

sometimes did not bill those insurers even when they were aware such coverage existed. 

Consequently, opportunities to collect millions of dollars of reimbursements from insurers 

for medical services provided were forgone. 

 

1

The statutory underpinning for the program is 10 U.S.C. §1095. 

2

U.S. General Accounting Office, Military Treatment Facilities: Internal Control Activities Need 

Improvement, GAO-03-168 (Washington, D.C.: Oct. 25, 2002). The three facilities we visited were 

Eisenhower Army Medical Center, Augusta, Georgia; Naval Medical Center-Portsmouth, Portsmouth, 

Virginia; and Wilford Hall Air Force Medical Center, San Antonio, Texas. 
2 GAO-04-322R MTF Third-Party Collections 

Concerned that there were additional MTFs that also did not effectively bill and collect for 

reimbursable services, you requested that we expand our audit to provide some perspective 

on the amount of such services that were not billed and collected across all of DOD’s MTFs. 

However, after determining that it was not feasible to develop a DOD-wide estimate of 

missed collection opportunities, as agreed to with your offices and explained in more detail 

later, we are providing a perspective on the amount of services not billed and collected across 

all of DOD’s MTFs based on work performed by DOD’s service auditors at 35 of the largest 

MTFs reporting collections. This report also provides information on (1) specific control 

weaknesses and other issues that impair DOD’s ability to increase collections, (2) the 

department’s ongoing efforts to improve the third-party billings and collection function, and 

(3) our assessment of DOD’s use of performance metrics to manage third-party collections at 

its MTFs. 

We performed our work from April 2003 through December 2003 in accordance with 

generally accepted government auditing standards. Details on our objectives, scope and 

methodology are included in enclosure 1. 

Results in Brief 

Based on our previous audit work and our analysis of reports issued by the military service 

auditors, conservatively, tens of millions of dollars are not being collected each year because 

key information required to effectively bill and collect from third-party insurers is often not 

properly collected, recorded, or used by the MTFs. DOD’s failure to effectively bill and 

collect from third-party insurers, in effect, reduces the amount third-party private sector 

insurance companies must pay out in benefits and unnecessarily adds to DOD’s increasing 

health care budget—financed by taxpayers. While DOD has limited control over the 

burgeoning cost of providing health care benefits to DOD retirees and their dependents and 

active duty dependents, DOD has an opportunity to offset the impact of its rising health care 

costs by collecting amounts due from its Third Party Collections Program. 

For fiscal years 2000 through 2002, DOD’s Third Party Collections Program generated on 

average about $122 million annually. However, the Army, Navy, and Air Force service 

auditors at 35 of the largest 132 MTFs found that collections from reimbursable health care 

costs could be increased by approximately $44 million a year at these 35 facilities alone. 

These findings along with our past and current work suggest that the billing and collections 

problems we reported on previously are pervasive throughout DOD. However, because 

DOD does not maintain a reliable central database containing patient insurance information, 

which would facilitate sampling and thus the development of a statistically based projection 

across the entire universe of care provided by MTFs, neither the service auditors nor we 

could feasibly provide a comprehensive estimate of the total third-party collections shortfall 

across all MTFs. Further, DOD’s current transition to a new billing methodology made it 

impractical for us to perform even limited sampling and testing at this time. 

Weaknesses throughout DOD’s third-party billing and collection process, such as incomplete 

medical documentation and coding of care provided, insufficient monitoring of accounts 

receivable, and ineffective follow-up to collect accounts receivable, have all contributed to 
GAO-04-322R MTF Third-Party Collections 3

collection shortfalls. The single biggest obstacle to increasing collections, however, is 

inadequate identification of patients with third-party insurance. DOD does not have effective 

systems or processes for obtaining and updating insurance information for patients that have 

other health insurance coverage. This weakness dramatically reduces the possibility of 

collecting from third-party insurers and recouping the cost of providing reimbursable care. 

According to DOD officials, they have several process and system improvement initiatives 

planned or underway that are intended to address the weaknesses identified. Central to 

DOD’s effort to improve the Third Party Collections Program overall and conform to 

industry best practices, DOD recently initiated a new itemized billing methodology for 

outpatient care. However, the new billing system resulted in significant start-up issues that, 

according to DOD officials, seriously affected third-party outpatient billings and collections 

in the short term. Consequently, total collections, including inpatient, outpatient, and 

ancillary reimbursements, in fiscal year 2003 were only about $92 million—down from 

previous years by about $30 million or 25 percent. DOD officials said that this is a 

temporary decline due to implementation issues with outpatient itemized billing and the 

impact of the Iraq mobilization on MTF operations. Officials expect collections to increase 

and exceed earlier levels as problems are resolved and new system enhancements are 

implemented. However, according to DOD officials, many of the system enhancements will 

not be fully operational until fiscal year 2005 and beyond. 

Although DOD monitors certain performance information related to MTF workload and 

third-party collections, little is done with this information in terms of managing DOD’s Third 

Party Collections Program. Presently, the department lacks key information needed to 

establish performance goals for billings and collections functions to assess individual MTFs. 

This letter includes recommendations to the Secretary of Defense to implement a corrective 

action plan to address start-up problems with DOD’s outpatient itemized billing methodology 

and establish an effective performance management system that establishes realistic 

collection goals by MTF. 

In its written comments, reprinted in enclosure II, DOD concurred with our recommendations 

and acknowledged that additional funds could have been recovered. DOD also included in 

its comments a comprehensive discussion of its current and future initiatives aimed at 

improving its Third Party Collections Program. However, DOD (1) took exception with our 

position that additional collections could be used to offset the rising cost of health care and 

(2) questioned our reliance on the work of other auditors to provide some perspective on how 

much more could be collected annually from third-party insurers. First, we recognize that 

there is a statutory prohibition against DOD using third-party collections to reduce an 

individual MTF’s operating budget, and, as noted in this letter, that DOD may use the 

collections to support the operations of the MTF instead of depositing the collections in the 

General Fund of the Treasury. However, our point, taking a broader view, is that every 

dollar recovered from third-party insurers is one more dollar for the Congress to consider in 

funding the government’s operations. We reaffirm our position that DOD has the 

opportunity, as well as a fiduciary responsibility to taxpayers, to maximize its collection 

efforts under this program. 
4 GAO-04-322R MTF Third-Party Collections 

Second, the information in our letter on the potential amount of lost collections is adequately 

supported. As detailed in this letter, DOD’s incomplete or flawed data prevented us from 

providing a more comprehensive estimate of third-party collections shortfalls across all 

MTFs. Consistent with generally accepted government auditing standards, we relied on prior 

work performed by military service auditors at 35 MTFs, as well as our own more recent 

assessments, to provide an estimate of lost collections. 

Background 

The military health system has three missions: (1) maintaining the health of active-duty 

service personnel, (2) medically supporting military operations, and (3) providing care to the 

dependents of active-duty personnel, retirees and their families, and survivors and their 

dependents. The military health care system has changed significantly during the past 

decade. Along with substantial active duty force and infrastructure reductions, medical 

personnel strength has decreased by 15 percent, and one-third of all military hospitals have 

been closed. Further, the 1980s doubling of military health costs and increasing beneficiary 

concerns about care access in military hospitals led DOD to establish its nationwide managed 

care program, called TRICARE. In recent years, the defense authorization act for fiscal year 

20013

 greatly expanded the health care benefits available through DOD for Medicare-eligible 

military retirees. In the past, these retirees were not eligible for the TRICARE health care 

program and were able to get care from MTFs only when space was available. 

TRICARE covers inpatient services, outpatient services such as physician visits and lab tests, 

and skilled nursing facility and other postacute care. It also covers prescription drugs, which 

are available at MTFs, through DOD’s TRICARE Mail Order Pharmacy, and at civilian 

pharmacies. TRICARE delivers care through (1) Army, Navy, and Air Force operated 

medical centers, (2) community hospitals, (3) major clinics, known as MTFs, that serve 

military installations, and (4) a network of civilian providers managed by DOD’s managed 

care support contractors. Eligible beneficiaries can access care at the MTFs for free or at 

minimal cost. However, if a beneficiary has other health insurance coverage, then the care 

provided by the MTF may be reimbursable by private health insurers. The government is 

authorized to collect the reimbursable amounts from insurance companies under the Third 

Party Collections Program authorized by 10 U.S.C. §1095.4

 Instead of depositing the 

collections in the Treasury, DOD may use the collections to support the operations of the 

MTF. 

DOD’s Third Party Collections Program is led by the TRICARE Management Activity 

(TMA) in coordination with the Army Medical Command (MEDCOM), the Navy’s Bureau 

of Medicine and Surgery (BUMED), and the Air Force Medical Service. TMA sets policy 

and provides program oversight and issue resolution, and develops reimbursement rates. 

Service managers at each of the service medical commands develop and execute servicespecific guidelines and provide oversight within their service for third-party collection 

 

3

Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001, Pub. L. No. 106-398, § 712, 114 

Stat. 1654, 1654A-176 (2000).

4

The program was established pursuant to Public Law Number 99-272, 100 Stat. 82, 100 (1986). 
GAO-04-322R MTF Third-Party Collections 5

operations. However, individual MTFs are responsible for executing policy, training 

personnel, developing marketing plans, operating within compliance guidelines, 

implementing best practice solutions, and establishing internal controls. Consequently, 

individual MTFs have great flexibility to determine how they will implement DOD policy 

and manage their Third Party Collections Program. 

Tens of Millions of Dollars Are Not Collected Each Year 

Based on work performed by Army, Navy, and Air Force service auditors at 35 of the 132 

largest MTFs, collections from reimbursable health care costs could be increased 

substantially. Their audit work, some of which is recent and fairly comprehensive and some 

of which is more limited in scope and not completed recently, could be used to suggest that 

approximately $44 million a year more could be colleted at these 35 facilities. While some 

MTFs are performing better than others, service auditors found collection shortfalls at all the 

MTFs visited. Because DOD does not maintain a reliable central database containing 

patient insurance information, which could facilitate sampling, neither the service auditors 

nor we could feasibly provide a comprehensive estimate of third-party collection shortfalls 

across all MTFs. In addition, DOD’s current transition to a new itemized billing 

methodology, which significantly disrupted collections in fiscal year 2003, made it 

impractical for us to perform even limit sampling and testing at this time because these 

estimates would not be reflective of future years collections. Therefore, even though there 

are differences in the service auditors’ sampling periods, scope of work, and sampling 

approaches that preclude us from comparing the relative performance among Army, Navy, 

and Air Force MTFs, these estimates provide the most comprehensive and current 

information with respect to DOD’s third-party collection shortfall. 

• In March 2003, based on work performed at five of the Army’s largest MTFs, the 

Army Audit Agency reported that these five facilities could have collected an 

additional $24.5 million more annually—doubling current collections at those sites.5

 

Of all the service auditors, the Army auditors provided the most recent and 

comprehensive assessment of collections—providing audit coverage for all workloads 

or types of care provided including inpatient, outpatient, ancillary services, pharmacy, 

and ambulatory visits. 

• Focusing only on reimbursable pharmaceutical collections, the Air Force Audit 

Agency reported6

 that for the 13 Air Force MTFs audited, these facilities could have 

collected an additional $15.7 million annually. 

• Based on work performed in 1996 at 17 Navy facilities and focusing strictly on 

outpatient workload, the Naval Audit Service reported7

 that these MTFs could have 

collected an additional $3.4 million annually. 

 

5

U.S. Army Audit Agency, Third party Collection Program, U.S. Army Medical Command, Audit Report A2003-0185-IMH (Mar. 10, 2003). 

6

Air Force Audit Agency, Third Party Collection Program—Pharmaceuticals, Audit Report 01051015 (Aug. 8, 

2001). 

7

Naval Audit Service, Recovery of Outpatient Health Care Costs From Third Party Payers, Audit Report 010-

97 (Dec. 17, 1996). 
6 GAO-04-322R MTF Third-Party Collections 

Although the service auditors looked at different workloads and used varying audit 

approaches, the conclusions were similar. All determined that millions of dollars in 

reimbursable care were not being collected. The auditors identified similar reasons for 

collections shortfalls: (1) medical personnel often failed to identify patients with other health 

insurance, (2) bills were not always prepared even when the information was available, and 

(3) staff did not aggressively follow up on open claims with private insurance companies. 

Generally, these findings are consistent with our previous audit findings for the three MTFs 

we visited.8

 Across all the services, auditors have concluded that significant increases in 

collections are possible at every MTF examined, and this condition likely exists in varying 

degrees throughout DOD’s MTFs. 

Process Weaknesses Limit Collections 

Weaknesses in DOD’s third-party billing and collection processes and systems impair 

DOD’s ability to collect tens of millions of dollars each year from third-party insurers. As 

shown by our prior work and confirmed by earlier or more current service auditor reports, 

weaknesses throughout the process, such as inadequate identification of patients with thirdparty insurance, incomplete medical documentation and coding of care provided, insufficient 

monitoring of accounts receivable, and ineffective follow-up to collect accounts receivable, 

have all contributed to collection shortfalls. According to DOD officials, they presently have 

several initiatives planned and underway that are intended to address many of the weaknesses 

identified. In particular, DOD is in the process of implementing automated systems 

improvements, including a new DOD-wide itemized billing methodology, intended to 

improve its billing processes and increase collections. 

DOD’s billing and collections process cuts across five functional areas, as shown in figure 1. 

In each functional area or phase of the process, DOD must obtain and document key 

information in order to properly bill third-party insurers and maximize collections. Each 

phase of the process is therefore highly dependent on the completeness and accuracy of 

information collected in prior phases. However, because MTFs do not always properly 

collect, record, or utilize key information during each phase of the process, the pool of 

potential third-party collections is diminished with each control breakdown during the 

process. 

Figure 1: Breakdowns Reduce DOD’s Third-Party Collections 

 

8

GAO-03-168. 
GAO-04-322R MTF Third-Party Collections 7

Starting with patient intake, our previous work as well as the service MTF audits have shown 

that DOD does not have effective systems and processes for obtaining and updating 

insurance information for patients who have other health insurance coverage or for verifying 

the accuracy of the information with the insurer. This weakness dramatically reduces the 

possibility of collecting from third-party insurers and recouping the cost of providing 

reimbursable care. For example, based on work performed by Army service auditors at five 

MTFs, they found that while MTF records identified 4.5 percent of the outpatients as having 

third-party insurance, in fact about 9.8 percent of the outpatients had insurance, more than 

doubling the number of patients with insurance and projected to include an additional 96,000 

patients. If the MTFs had accurate insurance information for these patients, Army auditors 

estimated that they could have collected an additional $8.7 million. At three MTFs where 

we tested internal controls, we found these MTFs also were not identifying all patients with 

third-party insurance coverage and frequently did not bill insurers even when they knew the 

patients had insurance coverage, thereby losing opportunities to collect millions of dollars in 

reimbursable care. According to DOD officials, they are currently exploring the possibility 

of outsourcing this function with the hope of establishing a comprehensive, independently 

validated database of beneficiaries with third-party health insurance. 

During the medical documentation and coding phases, MTF physicians and other health care 

providers must adequately document the health care provided to the patient and medical 

records professionals must assign complete and accurate diagnoses and procedure codes to 

ensure that third-party insurers are billed appropriately. However, MTF physicians and other 

health care providers often do not adequately document their diagnosis or the specific 

procedures performed. For example, one independent study9

 conducted at 50 MTFs found 

that approximately 17 percent of the records reviewed did not contain documentation for the 

specified date of the outpatient visit and about 34 percent to 47 percent of the time, reviewers 

could not find documentation in the medical record for the diagnosis or procedure performed. 

In addition, care is sometimes coded inaccurately, as shown in one DOD coding validation 

study; approximately 14 percent of the diagnosis and procedure codes reviewed were in 

error.10

 

The completeness and accuracy of insurance and medical coding information are extremely 

important since it is the sole basis used to identify reimbursable care and create and send bills 

to third-party insurers. However, because care is sometimes not coded or improperly coded, 

it is either not identified as billable care, overbilled, underbilled, or rejected from the billing 

system. In addition, as we reported previously,11 even when this information was available, 

the staff often did not send a bill for a variety of reasons including lack of staff resources and 

clerical oversights. Finally, accounts receivable personnel are responsible for processing 

payments from insurers and following up with insurers on outstanding or denied bills. 

However, many MTFs do not actively monitor and manage accounts receivable to ensure 

prompt resolution of disputed claims and pursue collection of delinquent accounts. 

 

9

The Iowa Foundation for Medical Care Information Systems, Outpatient Database Coding Validation Audits, 

2002. 

10Defense Supply Service-Washington, Region 1 Coding Validation Study, Overall Report: TRICARE 

Management Activity Health Program Analysis and Evaluation, Contract Number GS-35F-4694G, Order 

Number DASW01-01-F-1053. 

11GAO-03-168.
8 GAO-04-322R MTF Third-Party Collections 

According to some DOD officials, heavy workloads, limited staff resources, and the lack of 

legal support make it cost prohibitive for the MTFs to resolve and pursue low dollar value 

claims. Thus far, however, DOD has not performed any type of cost-benefit analysis to 

determine what claims it should or should not pursue. 

To address collection issues, the Army has initiated a process to consolidate and document 

denied or disputed claims, grouping them by insurer and the reason for denial, in an effort to 

cost effectively resolve these claims. Specifically at 15 MTFs, after collections efforts have 

been unsuccessful, the Army is using a contractor to attempt collection, track accounts 

receivable by insurance company, and document the government’s case for reimbursement 

with the intent of putting the Army in a better position to resolve disputed claims and demand 

payment or initiate legal action. 

Itemized Billing Methodology Results in 

Decreased Collections for Fiscal Year 2003 

DOD’s implementation of a new outpatient itemized billing methodology intended to 

improve its billing processes and increase collections has led to a significant decrease in 

collections during fiscal year 2003. For fiscal years 2000 through 2002, DOD’s Third Party 

Collections Program has generated an average of about $122 million in revenues a year. 

However, in fiscal year 2003 total collections decreased by about $30 million to only $92 

million. According to DOD officials, the decline is temporary and is attributable largely to 

start-up problems associated with the new itemized billing methodology and to a lesser 

degree, the Iraqi mobilization. 

In October 2002, in an effort to improve the Third Party Collections Program, conform to 

industry best practices, and comply with standards for the protection of electronic private 

health information set by the Secretary of Health and Human Services,12 DOD transitioned to 

an itemized billing methodology for outpatient care. Previously, DOD billed outpatient care 

using a standard, all-inclusive rate based on the average cost of a clinical visit. This entailed 

annual DOD calculations of the cost of providing care by the type of outpatient visit, 

including physician care, and ancillary costs such as pharmacy, laboratory, and other 

services, typically associated with the clinical visit type. For example, as shown in figure 2, 

under the all-inclusive rate, an insurer might have been billed $150 for a visit to an MTF’s 

family practice clinic, or $200 for a patient visit to an MTF’s cardiology clinic. 

 

12The Health Insurance Portability and Accountability Act of 1996 required the Secretary to adopt standards for 

financial and administrative transactions to enable private health information to be exchanged electronically. 

Public Law No. 104-191, §262 (a), 110 Stat. 2024, 42 U.S.C. §1320d-2. 
GAO-04-322R MTF Third-Party Collections 9

Figure 2: Comparison of Bills Under All-inclusive Rate and Itemized Billing 

However, under itemized billing, because DOD bills third-party insurers based on the 

specific services and procedures provided, including any medications prescribed or 

laboratory or other ancillary care provided for a particular clinical visit, several bills may 

have to be prepared. 

 A TMA study comparing MTF billings under the all-inclusive rate and itemized billing 

methods concluded that, on average, the amount of billings to insurers would be 

approximately the same under either billing method. However TMA projected that under 

itemized billing, MTFs’ third-party collections should increase, as automation improvements 

would help to more completely identify all reimbursable care for billing. In addition, 

itemized billing, especially when electronic billing and other system improvements are 

implemented, would result in MTF claims being in a format more widely accepted by the 

insurers. 

In implementing the new outpatient billing system, DOD officials acknowledged that 

collections had declined in the first 2 quarters of fiscal year 2003, but they expected that 

collections would catch up by the end of the fiscal year. Instead, as shown in figure 3, we 

found that collections did not recover by the end of fiscal year 2003. 
10 GAO-04-322R MTF Third-Party Collections 

Figure 3: MTF Inpatient and Outpatient Collections for Fiscal Year 2000 through 2003 

The major reason for the collections drop off was recoveries for outpatient care. As seen in 

figure 3, reimbursements for outpatient care, billed under the new itemized billing system, 

decreased by more than 30 percent from peak collections in fiscal years 2001 and 2002 and 

inpatient care collections declined by more than 20 percent—from a high of about $58 

million in fiscal year 2001—to just over $44 million in fiscal year 2003. According to DOD 

officials, incorrect or incomplete medical coding and other system start-up problems have 

resulted in an unusually high number of bills being rejected by the automated outpatient 

billing systems. Consequently, in fiscal year 2003, many of the MTFs did not send numerous 

bills to insurers for payment, and collections have fallen dramatically. 

As discussed previously, MTF physicians and other health care providers must adequately 

document the nature of health care provided to the patient, and medical records professionals 

must assign complete and accurate diagnoses and procedure codes to ensure that third-party 

insurers are billed appropriately. Under the new itemized billing methodology, the system 

requires more specificity and consistency among the diagnosis and procedure codes and 

provider-related information in order to pass systems edit checks and automatically generate 

a bill. This is a significant cultural change that requires physician and other health care 

providers to document more precisely the care they provide. However, according to DOD 

officials, in some cases the cultural shift toward more complete documentation of medical 

care has not taken hold yet. As a result, administrative personnel are currently researching 

and manually correcting coding errors and other rejected transactions on a bill-by-bill basis, 

which is extremely labor intensive and has resulted in significant billing backlogs. 

In the long term, TMA expects MTF collections to increase as automation enhancements, 

other systems improvements, and reengineered MTF business practices are implemented, 
GAO-04-322R MTF Third-Party Collections 11

resulting in the improved identification of all reimbursable care for billing. For example, 

according to DOD officials, they plan to add enhancements to the itemized billing system 

that will identify incomplete or inaccurate information as the health care provider enters 

patient data into the system. Planned automated systems edit features would alert clinical 

staff when they enter inconsistent or incongruent information into the system. This will 

allow clinical staff, familiar with the care provided, to detect and correct missing or incorrect 

information at the point of entry. However, this and many other system enhancements will 

not be fully operational until fiscal year 2005 and beyond. 

Performance Metrics Not Available 

While DOD’s Third Party Collections Program is led by TMA and managed by Army, Navy, 

and Air Force medical commands, neither TMA nor the services have an effective 

performance management system in place for establishing performance goals, identifying 

collection shortfalls, and managing the overall performance of DOD’s Third Party 

Collections Program. TMA and the services monitor certain performance information related 

to MTF workload and collections. However, this information alone does not provide the 

context needed to establish individual MTF baselines or goals against which performance 

may be assessed. Key information needed to establish credible performance expectations 

includes both quantitative and qualitative information related to the patient population 

covered by other health insurance and the type and amount of care provided by each MTF to 

this population. Without this information, DOD is unable to determine whether a particular 

MTF is maximizing collections. 

The amount of money collected from third-party insurers varies widely from MTF to MTF 

depending on the extent to which the patient population served has third-party health 

insurance and the type and level of care provided by the MTF. For example, a large military 

hospital providing specialty care in a metropolitan area and serving a large retiree population 

with third-party health insurance is much more likely to provide reimbursable care which in 

turn should generate higher collections, than a military clinic in a remote location offering 

basic medical care to a patient population consisting mainly of active duty personnel and 

their dependents. However, TMA and the services do not currently have visibility over 

information such as the number and percentage of patients with third-party heath insurance 

and therefore cannot use this and other profile information to set collections performance 

expectations. According to DOD officials, they plan to field a new centralized database in 

2004 that will provide visibility over demographic information including the beneficiary’s 

age, gender, physical location, and whether the beneficiary has third-party health insurance. 

Collections can also vary dramatically over time at a single MTF for reasons that are not 

readily apparent to TMA or the services. Our analysis of collections data for fiscal years 

2000 through 2002 showed that collections for individual MTFs fluctuated widely from year 

to year for a significant number of MTFs—fluctuating upward by as much as 784 percent 

and downward by as much as 85 percent. Reasons provided by MTF officials for increases 

include identifying and billing a previously unbilled workload, hiring a new business 

manager, or increased support from clinical staff or the MTF commander. Reasons for 

declines are not as clear, but include systems problems, inadequate or inexperienced staff, or 
12 GAO-04-322R MTF Third-Party Collections 

the loss of key personnel. Although quarterly collections activity is monitored by TMA or 

the services, little can be done with this information in terms of managing DOD’s Third Party 

Collections Program. Given the absence of credible performance expectations for each 

MTF, it is not possible to determine whether a particular MTF is maximizing its collections. 

Conclusion 

Managed effectively, DOD’s Third Party Collections Program could collect tens of millions 

of dollars more each year to offset the cost of providing health care to DOD retirees and their 

dependents and active duty dependents. Because DOD is authorized to use revenue collected 

from third-party insurers to supplement its defense health care appropriation and improve 

MTF operations, DOD has an opportunity to reduce the budgetary impact of the rising cost of 

providing health care services to DOD beneficiaries. Start-up problems with DOD’s new 

outpatient itemized billing methodology further jeopardize DOD’s ability to realize its thirdparty collections potential in the near term and possibly into the future as it expands its 

itemized billing methodology to the inpatient workload. Lessons learned from DOD’s 

current effort should provide valuable insights as it expands the use of itemized billing. 

However, addressing the current problems with itemized billing and maximizing third-party 

collections will require sustained leadership and greater visibility over individual MTF 

performance.

Recommendations for Executive Action 

We recommend that the Secretary of Defense direct the Assistant Secretary of Defense for 

Health Affairs to (1) implement a corrective action plan that includes time frames for 

addressing the start-up problems with outpatient itemized billing that have resulted in 

collections decreases in fiscal year 2003, and (2) establish an effective performance 

management system that establishes realistic performance baselines or collections goals for 

each MTF and enables MTFs to identify collections shortfalls and improve their operations.

Agency Comments and Our Evaluation

In its written comments, reprinted in enclosure II, DOD concurred with our findings and 

recommendations and acknowledged that additional funds could have been recovered. 

However, DOD (1) took exception with our position that additional collections could be used 

to offset the rising cost of health care and (2) questioned our reliance on the work of other 

auditors to provide some perspective on how much more could be collected annually from 

third-party insurers. In addition, DOD included in its comments a comprehensive discussion 

of its current and future initiatives aimed at improving its Third Party Collections Program. 

First, with regard to the disposition of the third-party collections, we recognize that there is a 

statutory prohibition against DOD using third-party collections to reduce an individual 

MTF’s operating budget. Our letter clearly states that DOD is authorized to use the 

collections to support the operations of the MTF and that these funds are a revenue source 

that can be used to enhance the services provided by the MTFs. Our point, taking a broader 

view, is that every dollar recovered from third-party insurers is one more dollar for the 

Congress to consider in funding the government’s operations. We reaffirm our position that 
GAO-04-322R MTF Third-Party Collections 13

DOD has the opportunity, as well as a fiduciary responsibility to taxpayers, to maximize its 

collection efforts under this program. 

Second, DOD expressed a concern that our evidence for the department’s missed collections 

opportunities was based solely upon previous services audit reviews and that we did not 

provide an actual analysis to support the statement. We disagree with DOD’s comment and 

provide our perspective based on the following three points. 

• In accordance with generally accepted government auditing standards (GAGAS),13 in 

planning an audit, auditors should determine whether other auditors have previously 

done, or are doing, audits of the program or the entity that operates it. If other 

auditors have recently performed work in the area, as was the case on this audit, the 

availability of other auditors’ work may influence the selection of methodology, since 

the auditors may be able to rely on that work to limit the extent of their own testing. 

Also in accordance with GAGAS and as discussed the methodology section of this 

report, we performed procedures regarding the specific work to be relied on that 

provided a sufficient basis for that reliance. Specifically, we obtained evidence 

concerning the other auditors’ qualifications and independence through prior 

experience, inquiry, and review of the other auditors’ external quality control review 

report. We also determined the sufficiency, relevance, and competence of other 

auditors’ evidence by reviewing their reports and audit programs.14 

• As detailed in our report, we analyzed the macro trend data on MTF inpatient and 

outpatient collections for fiscal years 2000 through 2003. These data showed that 

collections had fallen dramatically in fiscal year 2003 during its transition to a new 

outpatient billing system, providing additional support for our finding that DOD had 

missed collections opportunities. Further, our previous report15 on MTF internal 

control activities, as referenced in this letter, corroborated the work of the service 

auditors, as we reported that the three MTFs that we reviewed did not have effective 

controls over third-party billings and collections and therefore lost opportunities to 

collect millions of dollars of reimbursements for services. 

• As we discussed in this report, we selected our audit methodology and decided to use 

the work of the service auditors for two reasons: (1) DOD does not maintain a reliable 

central database containing patient insurance information, which would have made 

providing a comprehensive estimate of third-party collections shortfalls across all 

MTFs possible, and (2) DOD’s current transition to a new itemized billing 

methodology, which significantly disrupted collections in fiscal year 2003, made it 

impractical for us to perform even limited sampling and testing. As a result of these 

issues, neither DOD nor we can quantify the amount of possible collections under this 

program. While the total amount of collection shortfalls is also unknown, it is likely 

 

13U.S. General Accounting Office, Government Auditing Standards, 2003 Revision, GAO-03-673G 

(Washington, D.C.: June 2003). 

14Given the time elapsed, the audit program and quality control review report for the NAS work was 

unavailable. 

15 GAO-03-168. 
14 GAO-04-322R MTF Third-Party Collections 

much higher than the amounts reported by the service auditors, as they each 

performed limited reviews of selected MTFs and/or types of services. 

Thus, we maintain that our finding of at least tens of millions of dollars of forgone annual 

collections is adequately supported and that DOD needs to continue to work towards 

managing its Third Party Collections Program as efficiently and effectively as possible. 

Finally, DOD cited ongoing and planned efforts in the areas of patient health insurance 

information, medical documentation and coding, and the billing and collections function. 

DOD also cited a financial study being done this fiscal year to determine what metrics could 

be used to establish MTF-specific revenue goals. The department expects that as milestones 

are achieved over the next several years in the areas of business process reengineering and 

other business and automated system enhancements, collections will increase over the 

previous year’s benchmark. While we acknowledge DOD’s efforts in this area, many of 

DOD’s efforts will not be fully operational until fiscal year 2005 and beyond. As a result, we 

cannot assess the adequacy of DOD’s planned actions and believe that it is premature for 

DOD to assert the success of these efforts. 

- - - - - - - - - - - - - - - - - - - - - - 

Unless you publicly announce its contents earlier, we will not distribute this letter until 15 

days from its date. At that time, we will send copies to the Chairman of the Subcommittee on 

National Security, Emerging Threats and International Relations, and the Chairman and 

Ranking Minority Member, Subcommittee on Government Efficiency and Financial 

Management, House Committee on Government Reform, as well as other congressional 

committees. We are also sending copies to the Secretary of Defense; the Assistant Secretary 

of Defense for Health Affairs; and the Surgeons General of the military services. Copies will 

be made available to others upon request. In addition, the letter will also be available at no 

charge on GAO’s home page at http://www.gao.gov. 

 

Please contact me at (202) 512-9095 or by e-mail at kutzg@gao.gov or Diane Handley, 

Assistant Director, at (404) 679-1986 or by e-mail at handleyd@gao.gov if you or your staffs 

have any questions concerning this letter. Major contributors to this letter were Mario 

Artesiano, Carl Barden, Francis Dymond, James Haynes, Julie Matta, Terry Richardson, 

Vanessa Taylor, and Lisa Warde. 

Gregory D. Kutz 

Director, Financial Management and Assurance 

Enclosures 
GAO-04-322R MTF Third-Party Collections 15

Enclosure I 

Scope and Methodology 

We relied on existing work of Army Audit Agency (AAA), Air Force Audit Agency 

(AFAA), and Naval Audit Service (NAS) to provide a perspective on the extent and amounts 

of reimbursable care that is not being collected by MTFs. We did not verify or retest the 

amounts reported by the service auditors; however, we did obtain, review, and discuss with 

the auditors the audit methodologies used by each of the services. We also obtained and 

reviewed audit programs and quality control reports for the AAA and AFAA. Given the 

elapsed time for the NAS work, their audit program and quality control report were not 

available. We interviewed staff at TRICARE Management Activity in Falls Church, 

Virginia; Army Medical Command (MEDCOM) in San Antonio, Texas; the Navy’s Bureau 

of Medicine and Surgery (BUMED) in Washington, D.C.; the Air Force Medical Service 

(AFMS) in Washington, DC; and the National Naval Medical Center in Bethesda, Maryland. 

As agreed with our requesters to provide a perspective on the amount of such services that 

were not billed and collected across all of DOD’s MTFs, we reviewed audit reports of service 

auditors. While scope, timing, and methodology differences in AAA, AFAA, and NAS 

estimates limit using these estimates to arrive at a DOD-wide estimate, the estimates do 

provide a perspective of collections shortfalls at various MTFs across DOD. We also 

analyzed individual MTF collections from fiscal year 2001 through 2003 to assess the extent 

and reasons for collections variances. 

To identify the status of specific control weaknesses that resulted in lost collections from 

third-party insurers, we reviewed the internal control weaknesses identified by service 

auditors, those we had identified in our earlier work, and DOD studies to identify the areas 

most likely to affect collections. 

To assess the performance information used by TMA and the services to manage DOD’s 

Third Party Collections Program we obtained and reviewed information currently reported to 

TMA and the services by the MTFs and inquired about the availability of other information 

not contained in the information reported and inquired how these data were used to oversee 

MTF billing and collections efforts. The Department of Defense provided written comments 

on a draft to this letter. These comments are presented and evaluated in the “Agency 

Comments and Our Evaluation” section of this letter and reprinted in enclosure II. Although 

DOD’s comments also included four enclosures, their substance was generally included in 

the comment letter and addressed as appropriate in our agency comment response. 

Accordingly, we did not reprint all enclosures. We performed our work from April 2003 

through December 2003 in accordance with U.S. generally accepted government auditing 

standards. 
16 GAO-04-322R MTF Third-Party Collections 

Enclosure II 

 

Comments from the Department of Defense 
GAO-04-322R MTF Third-Party Collections 17
18 GAO-04-322R MTF Third-Party Collections 
GAO-04-322R MTF Third-Party Collections 19
20 GAO-04-322R MTF Third-Party Collections 
GAO-04-322R MTF Third-Party Collections 21
22 GAO-04-322R MTF Third-Party Collections 
GAO-04-322R MTF Third-Party Collections 23

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