United States Government Accountability Office

GAO Report to Congressional Committees

MILITARY HEALTH 

CARE 

TRICARE 

Cost-Sharing 

Proposals Would Help 

Offset Increasing 

Health Care Spending, 

but Projected Savings 

Are Likely 

Overestimated 

May 2007 

 

GAO-07-647 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

May 2007

MILITARY HEALTH CARE 

TRICARE Cost-Sharing Proposals Would 

Help Offset Increasing Health Care 

Spending, but Projected Savings Are 

Likely Overestimated 

Highlights of GAO-07-647, a report to 

congressional committees 

In light of the fact that Department 

of Defense (DOD) health care 

spending more than doubled from 

2000 to 2005 and continues to

escalate, DOD proposed increasing 

the share of health care costs paid

by TRICARE beneficiaries, under a 

proposal known as Sustain the 

Benefit. DOD estimated that if the 

proposal had been implemented in

fiscal year 2007, savings would 

amount to over $11 billion through 

fiscal year 2011. As required by the 

National Defense Authorization Act 

for 2007, GAO evaluated (1) the

likelihood that DOD would achieve 

its estimated savings from the 

proposed enrollment fee and 

deductible increases for retirees

and dependents under age 65,

(2) the likelihood that DOD would 

achieve its estimated savings from

the proposed pharmacy 

co-payment increases for all

beneficiaries except active duty 

personnel, and (3) the factors 

identified by DOD as contributing 

to increased TRICARE spending 

from 2000 to 2005. To conduct its 

work, GAO examined DOD

analyses and interviewed DOD

officials. GAO also analyzed data

on many aspects of health care

costs in general and interviewed 

health economists.

What GAO Recommends

GAO recommends that DOD collect 

and compile certain data from 

TRICARE beneficiaries to help 

manage its health care spending. In 

its comments, DOD concurred with

this recommendation and with 

GAO’s conclusions. 

Although DOD would likely achieve significant savings if its proposal is 

implemented, it is unlikely to achieve the $9.8 billion savings that it expects

to receive over 5 years as a result of increased TRICARE enrollment fees and 

deductibles for retirees and dependents under age 65. DOD’s savings 

estimate depends largely on the assumption that the increased fees and 

deductibles will result in approximately 500,000 retirees and dependents 

under age 65 either leaving or choosing not to enroll in TRICARE—

collectively referred to as avoided users—and on the assumption that each 

avoided user will save DOD the equivalent of the cost of providing health 

care to the average TRICARE beneficiary. However, DOD’s projected 

number of avoided users is likely too high. Many beneficiaries in this group, 

particularly older and sicker individuals, are unlikely to have lower-priced 

health insurance options available to them and would therefore be likely to 

continue to use TRICARE. In addition, DOD’s estimated savings per avoided 

user is likely too high because the estimate does not account for older and 

sicker individuals, who are less likely to leave or not enroll in TRICARE, and

who incur greater-than-average medical expenses. Even without any avoided 

users, GAO estimates that DOD’s proposed fee and deductible increases 

would achieve at least $2.3 billion in savings over 5 years. Neither GAO nor 

DOD can make a more accurate savings estimate, in part because DOD does 

not collect and compile certain data, such as the cost of other health 

insurance options. These data, along with information on beneficiaries’ 

access to other health insurance options, could help DOD estimate 

beneficiary reaction to changes in TRICARE’s cost-sharing structure, such as 

the number of beneficiaries who would become avoided users. 

DOD is unlikely to achieve the $1.5 billion it expects to save by increasing 

retail pharmacy co-payments for all beneficiaries except active duty 

personnel. DOD based its estimated savings on a study that measured 

savings from increased pharmacy co-payments in non-DOD employersponsored insurance programs. This study was not analogous to DOD’s 

situation, which resulted in DOD overestimating the reduction in the number 

of prescriptions obtained from retail pharmacies, and thereby overestimating 

its savings. Therefore, more beneficiaries may continue to use retail 

pharmacies and pay higher co-payments, generating more revenue for DOD. 

However, revenues from these beneficiaries would not offset the higher cost 

of providing these beneficiaries’ prescriptions in retail pharmacies. 

DOD attributed its increase in health care spending, from $17.4 billion in 

2000 to $35.4 billion in 2005, to a number of factors. The factors DOD 

identified as the largest contributors were medical care inflation and benefit 

enhancements required by law, including TRICARE for Life, which 

supplements Medicare coverage for TRICARE beneficiaries, generally after 

age 65. DOD also identified other factors, including an increased number of 

beneficiaries who have chosen to use TRICARE and health care costs for 

mobilized reservists and their families due to the Global War on Terrorism. 

www.gao.gov/cgi-bin/getrpt?GAO-07-647.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Laurie Ekstrand 

at (202) 512-7101 or ekstrandl@gao.gov. 
Contents 

Letter 1

Results in Brief 6 

Background 8

DOD Is Unlikely to Achieve $9.8 Billion in Savings as a Result of 

Increased Enrollment Fees and Deductibles, though Significant 

Savings Can Be Expected 17 

Savings from Increased Pharmacy Co-payments Are Likely 

Overestimated, although Some Savings Can Be Expected 24 

Medical Care Inflation, Benefit Enhancements, and Other Factors 

Drove the Increase in DOD Health Care Spending from 2000 to 

2005 27

Conclusions 32

Recommendation for Executive Action 33 

Agency Comments and Our Evaluation 33 

Appendix I DOD’s Calculation of the Portion of TRICARE 

Costs Being Paid by Retirees and Dependents 

under Age 65 36 

Appendix II Comparison of DOD Medical Care Inflation with

Insurance Premium Growth and Broader Inflation

Indicators 38 

Appendix III Scope and Methodology 41 

Appendix IV Comments from the Department of Defense 44 

Appendix V GAO Contact and Staff Acknowledgments 46 

 

 

Page i GAO-07-647 Proposed TRICARE Cost-Share Increases
Tables 

Table 1: TRICARE Prime Proposed Enrollment Fees for Military 

Retirees and Dependents under Age 65 10 

Table 2: TRICARE Standard and Extra Proposed Enrollment Fee 

and Deductible Increases for Military Retirees and Their 

Dependents under Age 65 11 

Table 3: Proposed TRICARE Pharmacy Co-payments for All 

Beneficiaries Except Active Duty 12 

Figures 

Figure 1: DOD’s Projected Number of Retirees and Dependents 

under Age 65 Who Would Use TRICARE under the Sustain 

the Benefit Proposal and under Current Policy, 2004-2011 14 

Figure 2: Percentage of Military Retirees under Age 65 Reporting 

Not Having Access to Civilian Group Health Insurance by 

Age and Health Status, 2006 19 

Figure 3: Comparison of Proposed TRICARE Enrollment Fees with 

Kaiser/HRET-Reported Employee Shares of EmployerSponsored Insurance Premiums, Family Coverage, 2000-

2008 20

Figure 4: Factors Identified by DOD as Contributing to the Increase 

in Its Health Care Spending, 2000-2005 27 

Figure 5: TRICARE Users by Beneficiary Group, 2001-2005 30 

Figure 6: DOD Health Care Costs by Beneficiary Group, 2001-2005 32 

Figure 7: Comparison of DOD’s Estimated Rate of Medical Care 

Inflation, Health Insurance Premium Growth Trends, and 

Broader Indicators of Inflation 39 

Page ii GAO-07-647 Proposed TRICARE Cost-Share Increases
Abbreviations 

AHRQ Agency for Healthcare Research and Quality 

BLS Bureau of Labor Statistics 

CalPERS California Public Employees’ Retirement System 

CBO Congressional Budget Office 

COLA cost of living adjustment 

CPI Consumer Price Index 

CPI-W Consumer Price Index for Urban Wage Earners and 

 Clerical Workers 

DOD Department of Defense 

FEHBP Federal Employees Health Benefits Program 

GWOT Global War on Terrorism

Kaiser/HRET Kaiser Family Foundation and Health Research 

 and Educational Trust 

MEPS Medical Expenditure Panel Survey 

MTF military treatment facility 

NDAA National Defense Authorization Act 

OMB Office of Management and Budget 

OPM Office of Personnel Management 

RAND RAND Corporation 

TMOP TRICARE Mail Order Pharmacy 

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Page iii GAO-07-647 Proposed TRICARE Cost-Share Increases
United States Government Accountability Office

Washington, DC 20548 

May 31, 2007

Congressional Committees 

From 2000 to 2005, the Department of Defense’s (DOD) spending for 

health care,1

 which primarily funds TRICARE—its program that provides 

health care to 9.2 million active duty personnel2

 and other beneficiaries, 

including dependents of active duty personnel, military retirees, and 

dependents of retirees—more than doubled, from $17.4 billion to 

$35.4 billion.3 DOD projects that its health care spending will continue to 

rise in coming years and will consume 12 percent of its total budget by 

2015,

4

 up from 7.5 percent in 2005. In prior work, we have identified longterm increases in the cost of health care, including TRICARE, as one of the 

major challenges facing the nation in the 21st century.5

 We have also 

previously identified concerns with the sustainability of military benefits, 

including health care, and recommended that Congress consider 

restructuring military compensation.6

From 2000 to 2005, the Department of Defense’s (DOD) spending for 

health care,1

 which primarily funds TRICARE—its program that provides 

health care to 9.2 million active duty personnel2

 and other beneficiaries, 

including dependents of active duty personnel, military retirees, and 

dependents of retirees—more than doubled, from $17.4 billion to 

$35.4 billion.3 DOD projects that its health care spending will continue to 

rise in coming years and will consume 12 percent of its total budget by 

2015,

4

 up from 7.5 percent in 2005. In prior work, we have identified longterm increases in the cost of health care, including TRICARE, as one of the 

major challenges facing the nation in the 21st century.5

 We have also 

previously identified concerns with the sustainability of military benefits, 

including health care, and recommended that Congress consider 

restructuring military compensation.6

 1

While TRICARE is DOD’s health care program, its total health care spending includes 

additional items, such as research and development. All of the DOD spending figures and 

calculations included in this report relate to fiscal years, rather than calendar years. 

Figures that appear in this report are generally rounded. 

2

Reserve personnel who are on active duty orders for a period of more than 30 consecutive 

days become eligible for TRICARE with the same benefits as active duty personnel. The 

duration of eligibility may range from up to 90 days before active duty begins to 180 days 

after active duty ends. The dependents of these reservists also become eligible for several 

TRICARE options. In this report, we include these mobilized reservists with other active 

duty personnel and include their dependents with other dependents of active duty

personnel. 

3

TRICARE includes a health maintenance organization option called TRICARE Prime, a

preferred-provider organization option called TRICARE Extra, and a fee-for-service option 

called TRICARE Standard. A separate benefit, TRICARE for Life, supplements Medicare 

coverage for eligible beneficiaries. 

4

DOD estimates that its health care spending will amount to about $64 billion in 2015. 

5

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005). 

6

GAO, Military Personnel: DOD Needs to Improve the Transparency and Reassess the 

Reasonableness, Appropriateness, Affordability, and Sustainability of Its Military

Compensation System, GAO-05-798 (Washington, D.C.: July 19, 2005). 

Page 1 GAO-07-647 Proposed TRICARE Cost-Share Increases
According to DOD, the increase in its health care spending can be 

attributed to several factors, including growth in the number of TRICARE 

beneficiaries; the addition of new benefits such as the TRICARE for Life 

program, which supplements Medicare coverage for TRICARE 

beneficiaries over age 65;

7

 and increasing costs for prescription drugs. For 

example, TRICARE spending on prescription drugs increased from 

$1.6 billion in 2000 to $5.4 billion in 2005. DOD health care officials have 

stated that ensuring that TRICARE remains intact, affordable, and 

effective is their top priority, and this includes finding ways to manage the

growth in DOD’s health care spending.8

While DOD’s health care spending has increased significantly, out-ofpocket expenses paid by many beneficiaries—including enrollment fees, 

deductibles, coinsurance rates,9

 and co-payments—have remained 

relatively unchanged since TRICARE’s inception in 1995. For example, a 

retired beneficiary who is not yet eligible for TRICARE for Life currently 

pays an annual enrollment fee of $460 for family coverage in TRICARE 

Prime, DOD’s managed care option—the same fee that was charged in 

1995.

10 As a result, the proportion of TRICARE costs paid by beneficiaries 

has steadily declined since the program was implemented. According to 

calculations by DOD officials, retirees and dependents under age 65 paid

for approximately 27 percent of their overall health care costs in 1996 and 

about 12 percent of these costs in 2005.11

 7

TRICARE for Life also supplements Medicare coverage for TRICARE beneficiaries under 

age 65 who qualify for Medicare on the basis of disability or end-stage renal disease and 

enroll in Medicare Part B. 

8

Department of Defense, The Military Health System (Prepared statement for testimony

before the Subcommittee on Personnel, Committee on Armed Services, U.S. Senate, April 

2005). 

9

Coinsurance is a form of cost sharing between insurer and beneficiary in which the

beneficiary pays a percentage of the cost of certain aspects of care. In some of the 

TRICARE benefit options, for retirees and dependents under age 65, the coinsurance rate 

for outpatient visits is 20 or 25 percent.

10The current retirement system requires servicemembers to generally serve 20 years

before becoming eligible for nondisability retirement pay and benefits. Retired reserve 

component personnel are eligible for TRICARE when they reach age 60. 

11In this report, we use the phrase retirees and dependents under 65 to refer to military 

retirees under age 65 and their dependents and survivors under age 65. Survivors include

widows, widowers, and certain unmarried children. After age 65, beneficiaries are generally 

eligible for Medicare with supplementary coverage through TRICARE for Life. 

Page 2 GAO-07-647 Proposed TRICARE Cost-Share Increases
To help address the growth in its health care spending, DOD proposed—as 

part of the President’s budget proposal for fiscal year 2007—increasing the 

share of health care costs paid by TRICARE beneficiaries, under a 

proposal DOD calls Sustain the Benefit. For one group of TRICARE 

beneficiaries—retirees and dependents under age 6512—DOD proposed 

implementing higher enrollment fees for TRICARE Prime and establishing 

enrollment fees for beneficiaries who choose not to use TRICARE Prime

and instead use either TRICARE’s fee-for-service or preferred-provider 

options, called TRICARE Standard and TRICARE Extra, respectively. 

Under the proposal, retirees and dependents under age 65 who use 

Standard and Extra would also incur higher annual deductibles. DOD 

proposed phasing in the enrollment fee and deductible increases in fiscal 

years 2007 and 2008 and then adjusting enrollment fees and deductibles in 

future years based on the rate of premium increases in the Federal 

Employees Health Benefits Program (FEHBP), the largest employersponsored health insurance program in the country.13 Furthermore, DOD 

has proposed increasing retail pharmacy co-payments in fiscal year 2007 

for all TRICARE beneficiaries except active duty personnel—that is, 

retirees and dependents under age 65, retirees and dependents in 

TRICARE for Life, and dependents of active duty personnel. The increased 

co-payments are intended to encourage the use of the TRICARE Mail 

Order Pharmacy (TMOP) or military treatment facility (MTF) pharmacies 

and to discourage the use of more costly retail pharmacies. While DOD 

originally proposed implementing Sustain the Benefit beginning in fiscal 

year 2007, provisions in the John Warner National Defense Authorization 

Act for Fiscal Year 2007 (NDAA for 2007)14 prevent DOD from

implementing the proposal before October 1, 2007.15 The proposal’s 

implementation after that date remains uncertain; DOD officials are 

awaiting the recommendations of the Task Force on the Future of Military 

Health Care, a group established by DOD and required by the NDAA for 

 12The proposed increases in enrollment fees and deductibles do not apply to beneficiaries

in TRICARE for Life, including TRICARE for Life beneficiaries who may be under age 65 

but who are eligible for Medicare on the basis of disability or end-stage renal disease. 

13The Office of Personnel Management (OPM) administers FEHBP by contracting with 

multiple health insurance carriers to offer health plans for federal employees enrolled in 

the program. OPM negotiates benefits and premium rates with each carrier. 

14See Pub. L. No. 109-364, §§ 704, 708, 120 Stat. 2083, 2280, and 2284 (2006). 

15The proposal remained as part of the President’s budget proposal for fiscal year 2008. 

Page 3 GAO-07-647 Proposed TRICARE Cost-Share Increases
2007 to make interim recommendations on TRICARE’s cost-sharing 

structure by May 31, 2007.

16

DOD estimated that if the proposal had been implemented beginning in 

fiscal year 2007 as planned, savings from these changes—in the form of 

reduced costs and increased revenues17—would amount to over $11 billion 

through fiscal year 2011, including $9.8 billion from the effects of 

enrollment fee and deductible increases and $1.5 billion from pharmacy 

co-payment increases. DOD estimated that these savings would largely be 

the result of current users leaving TRICARE or potential users choosing 

not to enroll in TRICARE—and choosing other health care options—

because of the higher enrollment fees and deductibles. Collectively, DOD 

refers to these individuals as avoided users. 

Advocacy groups for military beneficiaries have raised concerns over the 

analyses that led DOD to propose increasing beneficiaries’ out-of-pocket 

costs. The advocacy groups have questioned DOD’s accounting of the 

factors that have driven increases in DOD’s health care spending as well as 

the amount of projected savings from the Sustain the Benefit proposal. 

The NDAA for 2007 required that we review DOD’s proposal.18 Specifically, 

as discussed with the committees of jurisdiction, we examined (1) the 

likelihood that DOD would achieve its estimated savings associated with 

the proposed enrollment fee and deductible increases for retirees and 

dependents under age 65, (2) the likelihood that DOD would achieve its 

estimated savings associated with the proposed pharmacy co-payment 

increases for all beneficiaries except active duty personnel, and (3) the 

factors identified by DOD as contributing to the increase in its health care 

spending from 2000 to 2005. The act also required us to review DOD’s 

calculations of the proportion of TRICARE’s health care costs paid by 

retirees and dependents under 65. This information is included in 

appendix I. Furthermore, the act required that we describe how DOD’s 

annual rate of medical care inflation—that is, the rate at which prices rise 

and purchasing power falls for a fixed set of medical goods and services—

compares with increases in health insurance premium growth trends and

broader indicators of inflation from 2001 through 2005. We provide this 

 16See Pub. L. No. 109-364, § 711, 120 Stat. 2083, 2284-87 (2006). 

17DOD refers to offsetting collections from enrollment fees, deductibles, and co-payments 

as revenue. We have adopted this term for the purposes of this report. 

18See Pub. L. No. 109-364, § 713(a), 120 Stat. 2083, 2288-89 (2006). 

Page 4 GAO-07-647 Proposed TRICARE Cost-Share Increases
information in appendix II. We did not examine other challenges that 

might be faced by DOD in managing TRICARE spending, but instead 

limited our scope to those areas prescribed by the NDAA for 2007. 

To examine the likelihood that DOD would achieve its estimated savings 

associated with the proposed enrollment fee and deductible increases for 

retirees and dependents under age 65 and the proposed pharmacy 

co-payment increases for all beneficiaries except active duty personnel, 

we reviewed the analyses prepared by DOD and a DOD contractor that 

projected cost savings from these increases. We also interviewed DOD 

officials, reviewed relevant economic literature, and consulted with 

several health economists about DOD’s assumptions and methodology for 

making the savings estimates. As part of our review of DOD’s savings 

estimates, we used survey data from the RAND Corporation (RAND) on 

military retirees’ options for obtaining health insurance, survey data from 

the Kaiser Family Foundation and Health Research and Educational Trust 

(Kaiser/HRET) on employer-sponsored health insurance premiums, and 

survey data from the Agency for Healthcare Research and Quality on the 

health care costs for the U.S. population. We also reviewed a draft report 

prepared by RAND on the health insurance options of military retirees and 

Kaiser/HRET reports on employer health benefits. 

To examine the factors identified by DOD as contributing to the increase 

in DOD health care spending, we reviewed the factors DOD identified as 

contributing to the increase in its health care spending from 2000 to 2005, 

including TRICARE’s rate of medical care inflation.19 We determined that 

the spending data provided by DOD were sufficiently reliable for our 

purposes, but we did not independently verify DOD’s figures. In most 

cases, DOD provided estimates instead of actual spending data, a practice 

on which we have previously reported. We made recommendations to 

DOD in a previous report to improve the reliability and reporting of its 

costs.20 DOD officials told us that in many cases the department does not 

have the information systems necessary to precisely determine actual 

 19Medical care inflation represents cost increases for delivering a fixed set of medical goods

and services. Medical care inflation is distinguished from other cost increases in health 

care that can result from changing medical goods and services, such as expanding health

benefits or an increase in the number of beneficiaries. 

20GAO, Global War on Terrorism: DOD Needs to Improve the Reliability of Cost Data and 

Provide Additional Guidance to Control Costs, GAO-05-882 (Washington, D.C.: Sept. 21,

2005), and Global War on Terrorism: Observations on Funding, Costs, and Future 

Commitments, GAO-06-885T (Washington, D.C.: July 18, 2006). 

Page 5 GAO-07-647 Proposed TRICARE Cost-Share Increases
spending for specific activities. We also interviewed DOD officials and 

reviewed relevant literature on medical care inflation. To assess the 

reliability of the data used by DOD to project savings for Sustain the 

Benefit and identify the factors influencing increased DOD health care 

spending, we interviewed DOD officials and tested the data for errors. We 

determined that the data were sufficiently reliable for our purposes. As 

required by the NDAA for 2007, we cooperated with the Congressional 

Budget Office (CBO) to conduct our work. We periodically discussed our 

progress with and obtained advice from CBO officials, particularly 

concerning our review of DOD’s savings estimates. 

We conducted our work from July 2006 through May 2007 in accordance 

with generally accepted government auditing standards. See appendix III 

for more information about our scope and methodology. 

If Sustain the Benefit is implemented, DOD is unlikely to achieve the 

$9.8 billion savings that it expects over 5 years as a result of higher 

TRICARE enrollment fees and deductibles aimed at retirees and 

dependents under age 65, but it is still likely to achieve significant savings. 

DOD’s savings estimate depends largely on the assumption that the 

increased fees and deductibles will result in approximately 500,000 

retirees and dependents under age 65 either leaving or choosing not to 

enroll in TRICARE—collectively referred to as avoided users—and on the 

assumption that each avoided user will save DOD the equivalent of the 

cost of providing health care to the average TRICARE beneficiary. 

However, DOD’s projected number of avoided users is likely too high. 

Many beneficiaries in this group, particularly older and sicker individuals, 

are unlikely to have lower-priced health insurance options available to 

them and would therefore be likely to continue to use TRICARE. In 

addition, DOD’s estimated savings per avoided user is also likely too high 

because the estimate does not account for the fact that the older and 

sicker individuals who are less likely to leave or not enroll in TRICARE 

also incur greater-than-average medical expenses. CBO officials reviewed

DOD’s savings estimates and our analysis and agreed that DOD’s estimates 

were likely too high. Nevertheless, even with no avoided users, we 

estimate that DOD’s proposed fee and deductible increases would likely 

achieve a minimum of $2.3 billion in savings over 5 years, in the form of 

revenue collected from higher enrollment fees and deductibles. DOD’s 

savings will likely be higher than this minimum because Sustain the 

Benefit should result in some avoided users. However, neither we nor 

DOD are able to make a more accurate estimate of these savings, in part 

because DOD does not collect and compile certain data, such as the cost 

Results in Brief 

Page 6 GAO-07-647 Proposed TRICARE Cost-Share Increases
of other health insurance options available to beneficiaries. These data,

along with information on beneficiaries’ access to other health insurance 

options, could help DOD estimate how TRICARE beneficiaries would 

react to changes in TRICARE’s cost-sharing structure, such as the number 

of beneficiaries who would become avoided users because of increased 

fees and deductibles. 

DOD would also be unlikely to achieve the $1.5 billion it expects to save 

by increasing retail pharmacy co-payments for all beneficiaries except 

active duty personnel. According to DOD officials, DOD based its 

estimated savings on a study that measured savings from increased 

pharmacy co-payments in non-DOD employer-sponsored insurance 

programs.21 DOD used the decrease in costs reported by the study to 

estimate the likely decrease in the number of TRICARE retail prescriptions 

resulting from the proposed changes. However, doing so resulted in an 

overestimate of the likely reduction in the number of prescriptions that 

would be obtained from retail pharmacies because of the increased 

co-payments—and therefore an overestimate of savings—because some 

savings in the study resulted from beneficiaries switching from brandname to generic drugs. Because DOD already generally requires the use of

generic drugs when available, it cannot expect to receive significant 

additional savings from a shift to generic drugs. If fewer beneficiaries than 

DOD projected choose to reduce retail pharmacy use, then more 

beneficiaries would pay the higher co-payments, generating more revenue 

for DOD. However, increased revenues from these beneficiaries would not 

be large enough to offset the higher cost to DOD of providing these 

beneficiaries’ prescriptions in retail pharmacies. 

DOD attributed the increase in its health care spending, from $17.4 billion 

in 2000 to $35.4 billion in 2005, to a number of factors. The factors DOD 

identified as the largest contributors were medical care inflation and 

benefit enhancements required by law, including TRICARE for Life. DOD 

also identified other factors, including an increase in the number of 

TRICARE beneficiaries who have chosen to use TRICARE and increased 

health care costs because of the Global War on Terrorism (GWOT), such

as DOD’s costs of providing health care for mobilized National Guard and 

Reserve personnel and their families. 

 21G.F. Joyce and others, “Employer Drug Benefit Plans and Spending on Prescription 

Drugs,” JAMA, vol. 288, no. 14 (2005): 1733-1739. 

Page 7 GAO-07-647 Proposed TRICARE Cost-Share Increases
To help DOD manage its health care spending, we are recommending that 

DOD routinely collect and compile certain information that could help 

DOD identify the reasons why beneficiaries may or may not choose to use 

TRICARE, including information on beneficiaries’ access to and costs of 

other health insurance. 

In its written comments on a draft of this report, DOD concurred with our 

conclusions and recommendation. See appendix IV for DOD’s comments. 

DOD also provided technical comments, which we incorporated as 

appropriate.

DOD’s TRICARE program, which was established in 1995,22 offers health 

care benefits to active duty personnel and other beneficiaries, including 

dependents of active duty personnel, military retirees, and dependents of 

retirees. Beneficiaries receive care at MTFs or from civilian providers. 

TRICARE beneficiaries can obtain prescription drugs through TRICARE’s 

pharmacy system, which includes MTF pharmacies, network retail 

pharmacies, nonnetwork retail pharmacies, or TMOP. 

Background 

Dependents of active duty personnel and retirees and dependents under 

age 65 can choose to enroll in TRICARE Prime (managed care option), or

if they choose not to enroll, they can obtain care through TRICARE 

Standard (fee-for-service option) or TRICARE Extra (preferred-provider 

option). Active duty personnel are generally required to enroll in TRICARE 

Prime.23 Enrollees in TRICARE Prime, except for active duty beneficiaries 

and their family members, pay an annual enrollment fee, which is the same 

regardless of a retired beneficiary’s rank. Beneficiaries who do not enroll

in TRICARE Prime can receive care subject to an annual deductible and

other cost shares. When these unenrolled beneficiaries use providers 

outside the TRICARE network, they pay higher cost shares and are 

considered to be using TRICARE Standard. When they use providers who 

are part of the TRICARE network, they pay discounted cost shares and are 

considered to be using TRICARE Extra. Before 2001, DOD provided health

care for beneficiaries eligible for the Medicare program—typically those 

 22Prior to 1995, DOD provided health benefits under a different system, the Civilian Health 

and Medical Program of the Uniformed Services. 

23DOD officials told us that some active duty beneficiaries are not required to enroll in 

TRICARE Prime. However, DOD still considers these beneficiaries to be covered by

TRICARE Prime. 

Page 8 GAO-07-647 Proposed TRICARE Cost-Share Increases
over age 65—at MTFs on a space-available basis. The National Defense 

Authorization Act for Fiscal Year 2001 established TRICARE for Life to 

provide supplementary health care coverage for TRICARE beneficiaries 

enrolled in the Medicare program.24 All TRICARE beneficiaries except 

active duty personnel pay co-payments for prescription drugs obtained 

through retail pharmacies or TMOP. MTF pharmacies do not charge copayments. 

DOD’s Proposed Sustain 

the Benefit Initiative 

As part of the President’s fiscal year 2007 budget proposal, DOD proposed 

increasing certain TRICARE fees through its Sustain the Benefit initiative. 

Under the proposal, for retirees and dependents under age 65, DOD would 

increase enrollment fees for TRICARE Prime and establish enrollment fees 

and higher annual deductibles for TRICARE Standard and TRICARE 

Extra.25 DOD proposed different fee and deductible levels for retired 

officers and their dependents, retired senior enlisted personnel (E-7 and 

above) and their dependents, and retired junior enlisted personnel (E-1 to

E-6) and their dependents. DOD has proposed phasing in enrollment fee 

and deductible increases in fiscal year 2007 and fiscal year 2008 that are 

generally lower than the total percentage increase in premiums over the 

past 10 years for FEHBP; these premiums are negotiated by the Office of 

Personnel Management. DOD proposed adjusting enrollment fee and 

deductible increases based on the annual rate of premium increases in 

FEHBP beginning in fiscal year 2009.

Provisions in the NDAA for 2007 prevent DOD from implementing its 

proposal before October 1, 2007. The act also requires DOD to establish 

the Task Force on the Future of Military Health Care and requires the task 

force to make interim recommendations by May 31, 2007, on the 

beneficiary and government cost-sharing structure needed to sustain 

 24See Pub. L. No. 106-398, §§ 712-713, 114 Stat. 1654, 1654A-176 to 1654A-184 (2000). 

TRICARE for Life covers beneficiaries who are eligible for Medicare Part A, which helps 

cover inpatient care in hospitals, and who are enrolled in Medicare Part B, which helps

cover medical services such as doctors’ services and outpatient care. It acts as a secondary

payer to Medicare and pays for many services that Medicare only partially covers or does 

not cover. While TRICARE beneficiaries do not have to pay for their TRICARE for Life 

coverage, they pay premiums to be enrolled in Medicare Part B. Some TRICARE 

beneficiaries under age 65 are eligible for Medicare on the basis of disability or end-stage 

renal disease, and therefore are also eligible for TRICARE for Life. 

25Outpatient deductibles for TRICARE Standard and Extra are currently capped by law at 

$150 annually for single beneficiaries and $300 annually for families. See 10 U.S.C. § 

1086(b). 

Page 9 GAO-07-647 Proposed TRICARE Cost-Share Increases
TRICARE’s health benefits over the long term. The Sustain the Benefit 

proposal was also included as part of the President’s fiscal year 2008 

budget proposal, but DOD officials expect to await the recommendations 

of the task force before deciding on the future of the proposal. Table 1 lists 

DOD’s proposed enrollment fees for TRICARE Prime. 

Table 1: TRICARE Prime Proposed Enrollment Fees for Military Retirees and 

Dependents under Age 65

Annual enrollment fees 

FY 95-FY 06 FY 07 FY 08

FY 09 and 

future years 

Retired junior Self $230 $275 $325

enlisteda

Family 460 550 650

Self 230 350 475

Fees for all 

adjusted based

on FEHBP 

Retired senior 

enlistedb

Family 460 700 950

Retired officer Self 230 500 700

Family 460 1,000 1,400

Source: DOD. 

a

Retired junior enlisted is defined as military grades E-1 to E-6. 

b

Retired senior enlisted is defined as military grades E-7 and above. 

Table 2 lists DOD’s proposed enrollment fees and deductibles for 

TRICARE Standard and Extra. 

Page 10 GAO-07-647 Proposed TRICARE Cost-Share Increases
Table 2: TRICARE Standard and Extra Proposed Enrollment Fee and Deductible Increases for Military Retirees and Their 

Dependents under Age 65

Annual enrollment fee Annual outpatient deductible

FY 95-FY 06 FY 07 FY 08

FY 09 and 

future years FY 95-FY 06 FY 07 FY 08

FY 09 and 

future years 

Retired junior Self $0 $75 $140 $150 $175 $185

enlisted Family 0 150 280 300 350 370

Self 0 100 200 150 175 185

Fees for all 

adjusted 

based on 

Retired FEHBP 

senior 

enlisted Family 0 200 400

Fees for all 

adjusted 

based on 

FEHBP 

300 350 370

Retired Self 0 150 280 150 225 280

officer Family 0 300 560 300 450 560

Source: DOD. 

In addition, for all beneficiaries except active duty personnel—that is, for 

retirees and dependents under age 65, retirees and dependents in 

TRICARE for Life, and dependents of active duty personnel, the proposal 

includes increasing retail pharmacy co-payments and eliminating copayments for generic drugs in TMOP (see table 3).26 The proposal would 

not change other TRICARE provisions that affect beneficiaries’ costs, such 

as cost shares for inpatient and outpatient care or the annual limit on 

beneficiaries’ costs, known as the catastrophic cap.27

 26Retirees and dependents in TRICARE for Life are eligible to obtain prescription drugs

through TRICARE, including from retail pharmacies, TMOP, and MTF pharmacies. 

According to DOD, for nearly all TRICARE for Life beneficiaries, under most

circumstances, there is no added value in purchasing Medicare prescription drug coverage, 

referred to as Medicare Part D. 

27Specifically, the catastrophic cap is the maximum out-of-pocket expense for which 

TRICARE beneficiaries are responsible in a given fiscal year. As of March 2007, the

catastrophic cap for active duty families was $1,000 and the catastrophic cap for all other 

TRICARE-eligible families was $3,000. The catastrophic cap applies only to services 

covered by TRICARE. 

Page 11 GAO-07-647 Proposed TRICARE Cost-Share Increases
Table 3: Proposed TRICARE Pharmacy Co-payments for All Beneficiaries Except Active Duty 

Current co-payments Proposed co-payments

Delivery option Supply Generic Brand Nonformulary Generic Brand Nonformulary

Military treatment 

facility 

Up to 

90 days 

None None Not applicable None None Not applicable

TRICARE Mail 

Order Pharmacy 

Up to 

90 days 

$3 $9 $22 $0 $9 $22

Retail network 

pharmacy 

Up to 

30 days 

$3 $9 $22 $5 $15 $22

Retail nonnetwork 

pharmacy, 

TRICARE Standard 

and Extra 

Up to 

30 days 

Greater of $9 or 

20 percent of total cost 

Greater of $22 

or 20 percent of

total cost 

Greater of $15 or 

20 percent of total cost 

Greater of $22 

or 20 percent of

total cost 

Retail nonnetwork 

pharmacy, 

TRICARE Prime 

Up to 

30 days 

50 percent 50 percent 50 percent 50 percent 

Source: DOD. 

Note: Retirees and dependents in TRICARE for Life are eligible to obtain prescription drugs through 

TRICARE, including from retail pharmacies, TMOP, and MTF pharmacies. 

Rationale for Sustain the 

Benefit 

DOD designed the Sustain the Benefit proposal to slow the increases in its 

health care spending, which more than doubled from $17.4 billion in 2000 

to $35.4 billion in 2005. A portion of this increase was caused by 

prescription drug spending, which increased from $1.6 billion in 2000 to 

$5.4 billion in 2005. While TRICARE spending has increased, many fees 

paid by beneficiaries, such as enrollment fees, deductibles, and 

co-payments, have remained virtually unchanged since the program’s 

inception. In particular, TRICARE Prime enrollment fees have remained at 

$230 for single beneficiaries and $460 for families since 1995, and 

TRICARE Standard and Extra have never had an enrollment fee.28 In 

addition, enhancements to the TRICARE benefit required by law, such as 

the reduction of the TRICARE Standard and Extra catastrophic cap for 

retirees and dependents under age 65, have further limited beneficiaries’ 

out-of-pocket costs, thereby increasing DOD’s share of TRICARE costs.29

 28Active duty beneficiaries and their family members do not pay enrollment fees. 

29The Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 lowered the 

maximum allowable catastrophic cap for retirees and dependents under age 65 in

TRICARE Standard and Extra from $7,500 to $3,000. See Pub. L. No. 106-398, § 759, 114

Stat. 1654, 1654A-200 (2000), codified at 10 U.S.C. § 1086(b)(4). 

Page 12 GAO-07-647 Proposed TRICARE Cost-Share Increases
DOD’s increased health care costs, combined with the largely unchanged 

average out-of-pocket costs for TRICARE beneficiaries, have led to a 

decreasing portion of TRICARE costs being paid by beneficiaries. To 

explain the need for Sustain the Benefit, DOD officials said that military 

retirees and dependents under age 65—the group that would be affected 

by enrollment fee and deductible increases—paid approximately 

27 percent of their health care costs covered by TRICARE in 1996 and 

about 12 percent of these costs in 2005. For more information on DOD’s 

calculation of these figures, see appendix II. 

From 1996 to 2005, average out-of-pocket expenses paid by TRICARE 

beneficiaries remained relatively unchanged, while average out-of-pocket 

expenses for enrollees in FEHBP and other employer-sponsored health 

insurance increased, largely in the form of higher premiums. For example, 

an enrollee’s share of the average FEHBP premium, when weighted by the

proportion of enrollees with single and family coverage, nearly doubled in

9 years, from about $1,148 in 1996 to about $2,260 in 2005. In contrast, the 

TRICARE Prime enrollment fees, when weighted by the number of 

enrollees with single and family coverage, amounted to $437 in 1996 and 

remained at $437 in 2005. 

According to DOD, increasing enrollment fees and deductibles would 

reduce the price gap between civilian health insurance premiums and 

TRICARE enrollment fees, thereby reducing the incentive for retirees and 

dependents under age 65 to choose TRICARE over other health insurance 

options. DOD officials estimate that by 2011, the proposed increases in 

enrollment fees and deductibles would generate over 500,000 avoided 

users. (See fig. 1.) 

Page 13 GAO-07-647 Proposed TRICARE Cost-Share Increases
Figure 1: DOD’s Projected Number of Retirees and Dependents under Age 65 Who 

Would Use TRICARE under the Sustain the Benefit Proposal and under Current 

Policy, 2004-2011 

Avoided users

Year

Users (in thousands)

Source: GAO analysis of DOD data. 

0

600

1,200

1,800

2,400

3,000

DOD's estimate of retirees and dependents under age 65 in TRICARE under 

Sustain the Benefit

DOD's estimate of retirees and dependents under age 65 in TRICARE under 

current enrollment fees and deductibles

2004 2005 2006 2007 2008 2009 2010 2011

DOD officials told us that they want to increase enrollment fees and 

deductibles for retirees and dependents under age 65 because these 

beneficiaries are more likely than other beneficiaries to have other health

insurance options and therefore are more likely to leave or choose not to

enroll in TRICARE. DOD officials said that they did not consider 

implementing enrollment fees and deductibles for active duty personnel or 

increasing deductibles for their dependents to avoid affecting military 

readiness. DOD officials also did not consider establishing enrollment fees 

for retirees and dependents in TRICARE for Life because they believe that 

the fact that the TRICARE for Life benefit was recently established 

suggests that Congress would not be likely to approve enrollment fees for 

those beneficiaries. In addition, DOD officials told us that they proposed 

FEHBP as the basis for the proposed increase amounts because its 

premiums are driven by the private insurance market and are calculated 

Page 14 GAO-07-647 Proposed TRICARE Cost-Share Increases
outside of DOD by the Office of Personnel Management.30 DOD officials 

did not want to use DOD data to set rate increases because they wanted to

avoid any appearance that the data might be manipulated to DOD’s 

financial advantage. 

To discourage TRICARE users from obtaining prescriptions at high-cost 

retail pharmacies, DOD officials chose to increase co-payments for 

prescriptions dispensed at retail pharmacies for all beneficiary groups 

except active duty personnel. We previously reported that in 2004, DOD 

spent over 50 percent—about $2.4 billion—of its pharmacy costs on 

prescriptions dispensed through retail pharmacies, even though these 

prescriptions account for less than 30 percent of its total number of 

prescriptions.31 DOD’s reported cost per prescription varies among retail 

pharmacies, TMOP, and MTF pharmacies for a number of reasons, 

including differences in the price of drugs dispensed in each system, copayments, and the administrative costs of dispensing the drugs. For 

example, DOD receives discounted drug prices for drugs it purchases and 

then dispenses through MTFs or TMOP, but does not receive these 

discounts when beneficiaries obtain drugs through retail pharmacies. 

Therefore, DOD’s costs for purchases at retail pharmacies are generally 

higher than at MTFs or through TMOP. 

DOD’s Projected Savings 

from Sustain the Benefit 

DOD projected that implementing the Sustain the Benefit proposal would 

lead to a total savings of more than $11 billion over a 5-year period, from 

2007 through 2011. DOD projected that the effects of the proposed 

increases in enrollment fees and deductibles for retirees and dependents 

under age 65 would account for approximately $9.8 billion of these 

savings, while the effects of proposed increases in pharmacy co-payments 

 30For more information on how FEHBP costs are calculated, see GAO, Federal Employees 

Health Benefits Program: Premium Growth Has Recently Slowed, and Varies Among 

Participating Plans, GAO-07-141 (Washington, D.C.: Dec. 22, 2006).

31See GAO, Mail Order Pharmacies: DOD’s Use of VA’s Mail Pharmacy Could Produce 

Savings and Other Benefits, GAO-05-555 (Washington, D.C.: June 22, 2005).

Page 15 GAO-07-647 Proposed TRICARE Cost-Share Increases
for dependents of active duty personnel and retirees and dependents 

under age 65 would account for about $1.5 billion of the savings.32

Specifically, DOD estimated that $7.6 billion of the $9.8 billion in savings 

from the proposed increases in enrollment fees and deductibles would 

result from avoided users—current beneficiaries choosing to leave 

TRICARE or potential beneficiaries choosing not to enroll. DOD also 

expected that some beneficiaries who choose to use TRICARE Standard 

or Extra would be influenced by the proposal’s higher deductibles to use 

fewer health care services, leading to about $361 million of the $9.8 billion 

of expected savings. Finally, DOD expected that $1.9 billion of the 

$9.8 billion in savings would come from the higher enrollment fees and 

deductibles collected from beneficiaries who continue to use TRICARE.33

DOD also projected that the $1.5 billion in savings from increased 

pharmacy co-payments would result from three factors: (1) reductions in

the overall number of prescriptions for TRICARE beneficiaries filled at 

retail pharmacies, (2) a shift of prescriptions from higher-cost retail 

pharmacies to lower-cost MTF pharmacies or TMOP, and (3) increased 

revenues from higher co-payments. DOD officials expected that the first 

two factors would account for about $982 million in savings. DOD officials 

expected that the third factor would produce savings of $486 million, in 

the form of co-payments collected from beneficiaries who choose to use 

retail pharmacies. 

 32DOD also expects that there will be savings of $1.5 billion over 5 years because of 

pharmacy co-payment increases for retirees and dependents over 65 in TRICARE for Life. 

However, DOD officials told us that they did not include this amount in DOD’s estimate of 

savings because TRICARE for Life costs are paid through the Department of Defense 

Medicare Eligible Retiree Health Care Fund. See 10 U.S.C. §§ 1111 et seq.

33Numbers do not total precisely because of rounding. 

Page 16 GAO-07-647 Proposed TRICARE Cost-Share Increases
DOD is unlikely to achieve the $9.8 billion it expects to save as a result of 

higher TRICARE enrollment fees and deductibles because it overestimated 

the number of avoided users the increases would likely generate. The

number of avoided users is likely to be lower than DOD estimated because 

for many military retirees and dependents under age 65, TRICARE may be 

the only option or may still be the lowest-cost option for health insurance. 

DOD also overestimated the amount of savings that could be attributed to 

each avoided user. If no current TRICARE users leave TRICARE and no 

potential users choose not to enroll as a result of the proposed cost-share 

increases, collection of the higher enrollment fees and deductibles from a 

greater number of users would likely amount to a minimum of $2.3 billion 

in savings through 2011. DOD’s savings would be higher than $2.3 billion 

to the extent that DOD generates avoided users. However, because DOD 

does not collect and compile certain information from its beneficiaries—

such as data on the cost of other health insurance options available to 

TRICARE beneficiaries that could help DOD estimate beneficiaries’ 

reaction to changes in TRICARE’s cost-sharing structure—neither we nor 

DOD are able to make a more accurate estimate. 

DOD is unlikely to achieve the $9.8 billion it expects to save over 5 years 

from the effects of higher TRICARE enrollment fees and deductibles 

aimed at retirees and dependents under age 65, largely because the 

department likely overestimated the number of avoided users that the 

change would generate. DOD projected that the proposed increase in fees 

and deductibles would generate approximately 500,000 avoided users in 

5 years. The department based this projection on a RAND review of 

studies that examined how individuals enrolled in employer-sponsored 

health insurance have responded to premium increases.34 The studies 

RAND reviewed showed that most individuals who left health insurance 

plans when faced with increases in their health insurance premiums 

switched to lower-priced health insurance plans. DOD officials recognized 

that TRICARE beneficiaries often would lack lower-priced health 

insurance alternatives and therefore relied on one of the studies in the 

RAND review that showed the lowest level of beneficiary responsiveness 

to premium increases. However, even in this study, the individuals who 

left their health insurance plans in response to premium increases had 

lower-priced health insurance options to choose from, an option that many 

DOD Is Unlikely to 

Achieve $9.8 Billion in 

Savings as a Result of 

Increased Enrollment 

Fees and Deductibles, 

though Significant 

Savings Can Be 

Expected 

DOD Overestimated the 

Number of Avoided Users 

That Would Likely Result 

from Higher Fees and 

Deductibles 

 34J.S. Ringel and C. Eibner, Health Care Demand Elasticities and Their Implications for

Military Health Cost Containment (RAND Corporation: 2004). 

Page 17 GAO-07-647 Proposed TRICARE Cost-Share Increases
TRICARE beneficiaries would be unlikely to have. Therefore, DOD’s 

projected number of avoided users is probably too high. CBO officials 

reviewed DOD’s savings estimates, including its estimates of the number 

of avoided users, and agreed that these estimates were likely too high. 

In its savings estimates, DOD did not develop separate measures of 

responsiveness to enrollment fee and deductible increases for various 

groups within the population of retirees and dependents under age 65, 

such as those who are older or less healthy than average, but instead 

applied an average measurement of price sensitivity to the population as a 

whole. However, for some retirees and dependents under age 65, 

TRICARE is the only option for group health insurance through an 

employer, a spouse’s employer, or a professional association. For these 

TRICARE beneficiaries, the proposed increases in enrollment fees and 

deductibles are unlikely to make them leave TRICARE and become 

avoided users. According to a draft report compiled in 2006 by RAND, 

around 21 percent of retired enlisted and 27 percent of retired officers 

reported that they do not have access to group health insurance.35 Because 

these individuals do not have access to group health insurance, they are 

unlikely to have access to health insurance plans that are less expensive 

than TRICARE.36 The lack of group health insurance options is even more 

pronounced for retirees who reported being older or less healthy than 

average, making these beneficiaries even less likely than others to become 

avoided users. According to the RAND survey, 51 percent of retired 

enlisted personnel ages 60-64 and 44 percent of retired officers in that age 

group reported not having access to group health insurance, compared 

with 11 percent of retired enlisted personnel ages 45-49 and 15 percent of 

retired officers in that age group. Similarly, 47 percent of military retirees

under age 65 in poor health reported not having access to group health 

insurance through any of these sources, compared with 26 percent of 

those in excellent health. (See fig. 2.)

 35Louis T. Mariano and others, Civilian Health Insurance Options of Military Retirees: 

Findings from a Pilot Survey, Draft (RAND Corporation: August 2006). 

36These individuals may have access to health insurance plans on the individual market, but

premiums for these plans are, for the most part, more expensive than the premiums they 

would pay for group health insurance.

Page 18 GAO-07-647 Proposed TRICARE Cost-Share Increases
Figure 2: Percentage of Military Retirees under Age 65 Reporting Not Having 

Access to Civilian Group Health Insurance by Age and Health Status, 2006 

Source: GAO analysis of RAND data.

0

10

20

30

40

50

Poor

Fair

Good

Very good

Excellent

Health status

Percentage of retired servicemembers under age 65 

who do not have access to group health insurance

26

19

23

42

47

0

10

20

30

40

50

60

Retired officers

Retired enlisted personnel

45-49 60-64

Percentage of retired servicemembers under age 65 

who do not have access to group health insurance

Age

11

15

51

44

In addition, for many retirees and dependents under age 65 with access to 

group health insurance, TRICARE may be the lowest-cost option for health 

insurance, even when DOD’s proposed fee increases are taken into 

account. According to the 2006 Kaiser/HRET Employer Health Benefits

Annual Survey, the average employer-sponsored insurance premium paid 

by enrollees in 2006 was $2,973 for family coverage and $627 for single 

coverage. Under DOD’s Sustain the Benefit proposal, enrollment fees for 

TRICARE, including Prime, Standard, and Extra, in 2008 would largely 

remain below this average and range from $280 to $1,400 for family 

coverage and $140 to $700 for single coverage, depending on the primary 

beneficiary’s rank (retired junior enlisted personnel, retired senior enlisted 

personnel, or retired officer) and choice of TRICARE benefit option 

(Prime or Standard and Extra). For example, if the average employersponsored insurance premium paid by enrollees remains unchanged from 

2006 to 2008, only about 22 percent of employer-sponsored insurance 

premiums for family coverage would be lower than or equal to the 

Page 19 GAO-07-647 Proposed TRICARE Cost-Share Increases
proposed enrollment fees to be paid by retired officers enrolled in 

TRICARE Prime in that year (see fig. 3).37

Figure 3: Comparison of Proposed TRICARE Enrollment Fees with Kaiser/HRETReported Employee Shares of Employer-Sponsored Insurance Premiums, Family 

Coverage, 2000-2008 

0

20

40

60

80

100

Standard and Extra- retired officers

Standard and Extra- retired senior enlisted personnel

Standard and Extra- retired junior enlisted personnel

Prime- retired officers

Prime- retired senior enlisted personnel

Prime- retired junior enlisted personnel

2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Percentile of Kaiser/HRET premium for family coverage

Source: GAO analysis of Kaiser/HRET data.

Kaiser/HRET median premium (50%)

Another factor limiting the number of avoided users that DOD is likely to 

achieve is the fact that DOD’s proposed enrollment fee and deductible 

increases will not affect retirees and their dependents under 65 who have 

annual out-of-pocket health care costs greater than $3,000. All enrollment 

fees and deductibles paid by TRICARE beneficiaries count toward 

 37If employer-sponsored insurance premiums increase from 2006 to 2008, then these 

percentages would be even lower. 

Page 20 GAO-07-647 Proposed TRICARE Cost-Share Increases
TRICARE’s catastrophic cap of $3,000 per family.38 If DOD increases 

TRICARE enrollment fees and deductibles, more TRICARE beneficiaries 

will reach the cap. For those who reach the cap, there will be no additional 

out-of-pocket costs for TRICARE, even if fees and deductibles continue to

rise. Therefore, the proposed fee and deductible increases may be limited 

in their ability to generate avoided users, especially among high-cost users 

who anticipate exceeding the cap.39

DOD Likely Overestimated 

the Savings Associated 

with Each Avoided User 

In addition to overestimating the number of avoided users, DOD also 

overestimated the savings that it would be likely to achieve from each 

avoided user. In projecting $7.6 billion in savings over 5 years from 

avoided users, DOD calculated that each year, the average avoided user 

would result in savings equivalent to DOD’s annual cost of providing 

health care to the average TRICARE retiree or dependent under age 65.40

However, this calculation is likely too high, for two reasons. First, as 

previously discussed, beneficiaries who are older and sicker than average 

are less likely than others to become avoided users. Therefore, avoided 

users would likely have lower-than-average health care costs, reducing 

DOD’s savings. As previously noted, beneficiaries who anticipate meeting 

the catastrophic cap for their out-of-pocket expenses—and this group 

includes beneficiaries who tend to be older and sicker than average—have 

little incentive to become avoided users in response to increased 

enrollment fees and deductibles. Similarly, studies on individuals’ choices 

of health insurance have concluded that older and sicker individuals are 

 38Specifically, the catastrophic cap is the maximum out-of-pocket expense for which 

TRICARE beneficiaries are responsible in a given fiscal year. As of March 2007, the

catastrophic cap for active duty families was $1,000 and the catastrophic cap for all other 

TRICARE-eligible families was $3,000. The catastrophic cap applies only to services 

covered by TRICARE. 

39DOD estimated that approximately 20 percent of families in Standard and Extra would 

exceed the cap from 2007 to 2011. These beneficiaries are generally responsible for the

highest health care costs among Standard and Extra beneficiaries.

40For example, for 2007, DOD determined that the projected annual cost of providing health

care for the average retiree and dependent under 65 was $3,924 for TRICARE Prime users 

and $3,173 for TRICARE Standard and Extra users. 

Page 21 GAO-07-647 Proposed TRICARE Cost-Share Increases
less likely than those of average health to leave a health insurance plan in 

response to premium increases.41

Second, older and sicker beneficiaries are more likely to incur greater 

medical expenses than the average TRICARE user. In developing the 

Sustain the Benefit proposal, DOD did not conduct an analysis of the 

distribution of health care costs by age or health status of TRICARE 

beneficiaries. However, data on the health care costs by age and health

status are available for the general population from the Medical 

Expenditure Panel Survey (MEPS), a set of surveys of families and 

individuals, their medical providers, and employers across the United 

States conducted by the Agency for Healthcare Research and Quality. 

According to the most recent MEPS data, the reported average health care 

costs for individuals ages 60-64 in 2004 were more than twice as high as 

the reported costs for individuals ages 45-49. Moreover, in 2004 the 

reported health care costs for individuals who indicated that they were in 

poor health were more than 10 times as high as those for individuals who 

indicated that they were in excellent health. 

In its technical comments, DOD stated that many beneficiaries are unable 

to anticipate being sicker than average. While this is true, the lack of a

limited enrollment period for TRICARE Standard and Extra would allow 

these beneficiaries to enroll in TRICARE whenever they choose to do so.

Therefore, DOD’s projected savings per avoided user may be 

overestimated because healthy individuals who are eligible for TRICARE

may initially choose not to enroll in the program—avoiding associated 

enrollment fees—until confronted with a costly medical condition, at 

which point they could choose to enroll in TRICARE Standard and Extra. 

DOD officials told us that they are considering limiting the enrollment 

period for TRICARE Standard and Extra to an annual or semiannual openenrollment period; however, as of March 2007 no final decision had been 

made. 

 41See, for example, B.A. Strombom, T.C. Buchmueller, and P.J. Feldstein, “Switching Costs,

Price Sensitivity, and Health Plan Choice,” Journal of Health Economics, vol. 21, no. 1 

(2002): 89-116 and A.B. Royalty and N. Solomon, “Health Plan Choice: Price Elasticities in a 

Managed Competition Setting,” The Journal of Human Resources, vol. 34, no. 1 (1999): 

1-41. 

Page 22 GAO-07-647 Proposed TRICARE Cost-Share Increases
DOD expects to collect $1.9 billion in revenues from retirees and 

dependents under 65 who remain in TRICARE and who would pay higher 

enrollment fees and deductibles under Sustain the Benefit. The estimate of 

$1.9 billion depends on DOD achieving its projected number of 500,000 

avoided users from Sustain the Benefit. However, if DOD does not 

generate as many avoided users as projected, the increase in revenue

would be higher than $1.9 billion, because DOD would collect higher 

enrollment fees and deductibles from a greater number of beneficiaries. 

We estimated that if the higher enrollment fees and deductibles do not 

result in any avoided users, the increase in collected revenue would likely

amount to $2.3 billion over 5 years. 

This $2.3 billion figure also represents the minimum total savings that are

likely to result from the proposed enrollment fee and deductible increases, 

if these changes do not generate any avoided users. However, Sustain the 

Benefit would be likely to generate some avoided users, and any savings 

associated with each avoided user would increase total savings in excess 

of $2.3 billion. With each avoided user, total savings would increase 

because the average savings generated from each avoided user would be 

higher than the associated reduction in revenue from the user no longer 

paying enrollment fees and deductibles. 

While we estimate that DOD would achieve $2.3 billion or more from the 

proposed fee and deductible increases, we cannot make a more accurate

estimate of these savings, in part because DOD does not collect and 

compile certain data from TRICARE beneficiaries—data that DOD could 

have used to make the projections for Sustain the Benefit more accurate.42

In particular, DOD officials told us that the department does not collect

and compile data from TRICARE beneficiaries on the cost of premiums in 

non-TRICARE health insurance programs available to them. In addition, 

for Sustain the Benefit, DOD did not collect information on why 

beneficiaries choose to use or not to use TRICARE. This information could 

be used to help better predict how beneficiaries might react to changes in

TRICARE’s cost-sharing structure, such as the number of avoided users 

that might result from TRICARE enrollment fee increases. RAND recently 

surveyed military retirees under age 65 and collected some of this 

Revenues from Higher 

Enrollment Fees and 

Deductibles Would Likely 

Be between $1.9 Billion 

and $2.3 Billion, 

Depending on the Number 

of Avoided Users 

A Lack of Data on 

TRICARE Beneficiaries 

Prevents a More Accurate 

Estimate of Likely Savings 

from Proposed Fee and 

Deductible Increases 

 42DOD routinely collects data about its beneficiaries, such as their satisfaction with 

TRICARE, through surveys. DOD is required by law to conduct an annual survey to collect

certain information from beneficiaries and may also collect additional information on other 

matters through those surveys, as appropriate. See 10 U.S.C. § 1071, note.

Page 23 GAO-07-647 Proposed TRICARE Cost-Share Increases
information for its draft report. However, this information was compiled 

after DOD developed its Sustain the Benefit proposal, and it does not 

include some important information. RAND researchers stated that data

on premiums for other health insurance plans available to TRICARE 

beneficiaries, relative to their available financial resources, and reasons 

why beneficiaries choose to enroll in TRICARE Prime would be necessary 

to fully model the effects of increases in TRICARE cost shares. They 

recommended a follow-up survey of military retirees under age 65, aimed

at collecting this information. 

DOD is unlikely to achieve the $1.5 billion it expects to receive by 

increasing retail pharmacy co-payments for all beneficiaries except active 

duty personnel.43 DOD projected that implementing the proposed higher 

co-payments would both reduce demand for prescription drugs purchased 

in retail pharmacies and encourage TRICARE beneficiaries to use MTF 

pharmacies and TMOP instead of relatively more expensive retail 

pharmacies, resulting in $982 million in savings. DOD’s estimate of 

$982 million in savings is likely too high because fewer beneficiaries than 

DOD projects are likely to reduce their use of retail pharmacies. If more 

beneficiaries continue to use retail pharmacies and pay higher copayments, DOD will receive more than the estimated $486 million in 

increased revenue that the department expects. However, the increased 

revenue collected from these co-payments would not be large enough to 

offset the cost of providing these beneficiaries’ prescriptions through 

higher-cost retail pharmacies. 

Savings from 

Increased Pharmacy 

Co-payments Are 

Likely Overestimated, 

although Some 

Savings Can Be 

Expected 

 43DOD also expects that there will be savings of $1.5 billion over 5 years because of 

pharmacy co-payment increases for retirees and dependents over 65 in TRICARE for Life. 

However, DOD officials told us that they did not include this amount in DOD’s estimate of 

savings because TRICARE for Life costs are paid through the Department of Defense 

Medicare Eligible Retiree Health Care Fund. See 10 U.S.C. §§ 1111 et seq.

Page 24 GAO-07-647 Proposed TRICARE Cost-Share Increases
DOD projected that $982 million in savings from the proposed increases in 

retail pharmacy co-payments would result from beneficiaries’ reactions to 

the increased co-payments. Specifically, DOD projected that some 

beneficiaries would reduce their demand for prescription drugs purchased 

in retail pharmacies and increase their use of MTF pharmacies and TMOP 

instead of relatively more expensive retail pharmacies. However, DOD’s 

estimate of $982 million is likely too high because DOD based the estimate 

on results from a study44 of non-DOD employer-sponsored health 

insurance plans that was not analogous to DOD’s situation. The study 

included savings from individuals who shifted from brand-name to less 

expensive generic drugs, but DOD already generally requires beneficiaries 

to use generic drugs when available. Specifically, the study measured how 

increases in the co-payments for brand-name and generic prescription 

drugs affected prescription drug spending in employer-sponsored health

insurance plans. However, the cost-sharing structures and options for 

obtaining prescriptions in the plans included in the study were different 

from those in TRICARE. DOD relied on this study because no studies were 

available that directly applied to its situation. The study reported a 

percentage decrease in prescription drug spending because of increased

co-payments. However, DOD applied this percentage as a decrease in the 

number of retail prescriptions. Doing so is incorrect—and overestimates 

the reduction in demand for prescription drugs obtained at retail 

pharmacies—because a portion of the percentage decrease in prescription 

drug costs reported in the study resulted from individuals shifting from 

brand-name to less expensive generic drugs. DOD cannot expect 

significant additional savings from beneficiaries shifting from brand-name 

to generic prescriptions because TRICARE already generally requires 

beneficiaries to use generic drugs when available.45 Therefore, DOD’s 

projected savings are likely to be lower than the savings projected in the 

study. In its technical comments, DOD stated that the study did not find 

savings from increased pharmacy co-payments to be caused by an 

increased use of generic drugs and that savings were similar among plans 

that required beneficiaries to use generic drugs when available and plans 

that did not. Although the study is somewhat ambiguous on this point, a 

discussion with the study’s main author indicated that DOD’s use of the 

study’s results likely overestimated the savings from increased retail 

pharmacy co-payments. 

DOD’s Estimate of Savings 

Resulting from 

Beneficiaries’ Response to 

Increased Retail Pharmacy 

Co-payments Is Likely Too 

High 

 44Joyce and others. 

45A clinical justification for the use of a brand-name drug may be made under procedures

prescribed by DOD. See 32 C.F.R. § 199.21(j). 

Page 25 GAO-07-647 Proposed TRICARE Cost-Share Increases
DOD’s projection of $982 million in savings depends on a reduction in the 

number of prescriptions obtained at retail pharmacies over 5 years. DOD 

projected that about two-thirds of these prescriptions would instead be 

obtained from MTF pharmacies or TMOP, and projected that about onethird would not be obtained through TRICARE. However, neither we nor 

DOD have data to accurately project the number of beneficiaries who 

would be likely to obtain prescriptions at MTFs or TMOP instead of retail

pharmacies. It is likely that some beneficiaries would increase their use of

MTF pharmacies and TMOP because these options would continue to be

less expensive than retail pharmacies. However, the exact number and 

associated savings cannot be estimated accurately because of the lack of 

data. 

Although DOD May Collect 

More Revenue Than 

Projected from Higher 

Co-payments, the Increase 

Would Not Be Sufficient to 

Offset the High Cost of 

Retail Pharmacies

If fewer beneficiaries than DOD projected choose to reduce retail 

pharmacy use, then more beneficiaries would pay the higher co-payments, 

generating more revenue than the $486 million over 5 years that DOD 

estimated.46 DOD calculated this estimate by determining the additional 

amount of co-payments that would be paid by beneficiaries who continue 

to obtain prescriptions at retail pharmacies. If more beneficiaries than 

DOD projected continue using retail pharmacies, then revenues would be 

higher because more beneficiaries would pay higher retail pharmacy copayments. However, the increased revenue collected from these copayments would not be large enough to offset the higher cost of providing 

these beneficiaries’ prescriptions through retail pharmacies. For example, 

DOD would collect an additional $6 for each brand-name prescription drug 

and $2 for each generic drug that beneficiaries would obtain from retail 

pharmacies if Sustain the Benefit were enacted. However, based on DOD 

data, we estimated that it would save an average of $29 for each 

prescription that is no longer dispensed at a retail pharmacy. Some of 

these prescriptions would instead be dispensed through TMOP or MTFs.47

 46DOD’s estimate of savings from increased retail pharmacy co-payments also depends on 

the number of avoided users generated by increased enrollment fees and deductibles for 

retirees and dependents under 65. If there are some avoided users, the population of 

beneficiaries who would be affected by increased retail pharmacy co-payments would be 

decreased, which would result in a reduction in savings from higher retail pharmacy 

co-payments. However, the reduction in savings from higher retail pharmacy co-payments

would not be high enough to offset the savings from avoided users.

47In calculating its data on average costs, DOD assumed that it would receive federal 

pricing discounts at retail pharmacies, although it currently does not receive these 

discounts.

Page 26 GAO-07-647 Proposed TRICARE Cost-Share Increases
DOD estimated that from 2000 to 2005, its health care spending increased

by $18.0 billion, from $17.4 billion to $35.4 billion, and that this increase 

was driven by several factors: medical care inflation; benefit 

enhancements required by law, including TRICARE for Life; increasing 

numbers of beneficiaries who choose to use TRICARE; and GWOT (see 

fig. 4). According to DOD, increases in its overall health care spending are 

reflected in spending for each of its beneficiary groups—active duty 

personnel, their dependents, retirees and dependents under age 65, and 

retirees and dependents in TRICARE for Life. 

Figure 4: Factors Identified by DOD as Contributing to the Increase in Its Health

Care Spending, 2000-2005 

Medical Care 

Inflation, Benefit 

Enhancements, and 

Other Factors Drove 

the Increase in DOD 

Health Care Spending 

from 2000 to 2005 

Source: GAO analysis of DOD data.

$8.7 billionb TRICARE for Life

$4.4 billion Medical care inflation

$1.6 billiona Not attributed to 

specific causes

$1.3 billion

Increase in number of retirees and

dependents under age 65

$1.1 billion

Global War on Terrorism

$941 million

Other benefit enhancements

required by law

0.9

1.1

1.3

1.6

4.4

8.7

a

DOD officials believe that the “not attributed to specific causes” category is driven by additional 

medical care inflation beyond DOD’s estimated amount of $4.4 billion, increasing use of health care 

services, technological advancements in treatment, and decreasing portions of costs paid by 

beneficiaries. 

b

The $8.7 billion increase in spending for TRICARE for Life is based on contributions DOD has made 

to the DOD Medicare Eligible Retiree Health Care Fund. 

DOD estimated that medical care inflation accounted for $4.4 billion of the 

$18.0 billion increase in its health care spending from 2000 to 2005. 

According to DOD, medical care inflation—increases in cost over time for 

delivering a fixed set of medical goods and services—averaged 4.6 percent 

per year. According to DOD officials, the department did not develop this 

estimate of medical care inflation based on its own spending. Instead, 

Page 27 GAO-07-647 Proposed TRICARE Cost-Share Increases
DOD based this estimate on information provided annually by the Office of

Management and Budget (OMB) on inflation rates for the various 

components of the TRICARE operating budget, such as military personnel 

assigned to MTFs, private sector health care, and pharmaceuticals.48

However, an additional portion of DOD’s spending increase may also be 

caused by medical care inflation. DOD officials identified $1.6 billion in 

spending increases—classified as residual—that DOD could not attribute 

directly to specific causes. DOD officials stated that a portion of the 

residual could also be the result of medical care inflation. If the residual 

category is included with DOD’s estimate of medical care inflation, then 

medical care inflation could account for up to $6.0 billion of the increase 

in DOD health care spending from 2000 to 2005. This could add up to 

1.5 percent to DOD’s average annual rate of medical care inflation, making

the total as much as 6.1 percent per year. However, DOD officials told us 

that they believe a large portion of the residual is caused by factors other 

than medical care inflation, such as an increasing use of health care 

services by beneficiaries, technological advancements in treatment, and 

decreasing portions of health care costs paid by TRICARE beneficiaries.49

Our prior work on TRICARE has noted that a factor similar to DOD’s 

residual—technology and intensity—is widely recognized as one that 

reflects growth in health care costs and often accounts for an additional 

1 or 2 percent beyond medical care inflation in the private and public 

sectors.50 As health care providers adopt new and expensive medical 

technologies and offer more intensive patient treatment, health care costs

can increase at rates above the rate of medical care inflation. (See app. II 

for information on how DOD’s estimated rate of medical care inflation 

compares to health insurance premium growth trends and broader 

indicators of inflation.) 

DOD attributed a total of $9.6 billion of the increase in its health care 

spending to benefit enhancements required by law—$8.7 billion for 

 48As part of the annual budget process, OMB provides agencies with inflation rates for the 

various components of their budgets. The TRICARE operating budget is mostly supported

by appropriations for Operation and Maintenance. 

49According to DOD officials, the residual also includes any spending not accounted for in

the other categories, such as the spending for the global settlement to pay managed care 

support contract claims. 

50See GAO, Defense Health Program: Future Costs Are Likely to Be Greater Than

Estimated, GAO/NSIAD-97-83BR (Washington, D.C.: Feb. 21, 1997).

Page 28 GAO-07-647 Proposed TRICARE Cost-Share Increases
TRICARE for Life and $941 million to other enhancements to the 

TRICARE benefit required by law. DOD’s estimate of $8.7 billion in 

increased spending on TRICARE for Life, which was implemented in 2001, 

is based on contributions DOD has made to the DOD Medicare Eligible 

Retiree Health Care Fund, an accrual fund that pays costs for TRICARE 

for Life.51 Since TRICARE for Life’s initial implementation and 2005, the 

increase in DOD’s spending represented by payments to the accrual fund

was $8.7 billion.52 In addition to its spending on TRICARE for Life, DOD 

estimated that its spending increased by $941 million from 2000 to 2005 

because of other enhancements to TRICARE required by law, such as the 

reduction of the TRICARE Standard and Extra catastrophic cap from 

$7,500 to $3,000 for retirees and dependents under age 65 and the 

elimination of TRICARE Prime co-payments for active duty dependents. 

According to DOD, the $941 million is based on cost estimates of benefit

enhancements before they were implemented. DOD did not determine 

actual spending on these benefit enhancements. CBO cost estimates done 

at about the same time project lower costs for some benefit 

enhancements. CBO officials also questioned the appropriateness of using 

cost estimates completed prior to implementation to estimate actual 

program costs because they are often based on incomplete information 

about a program. DOD officials have estimated spending on some of these 

enhancements after their implementation, but DOD officials told us that 

the department does not have the information systems necessary to 

precisely determine the spending because of the enhancements. 

DOD estimated that an increase in the number of retirees and dependents

under age 65 accounted for $1.3 billion of the $18.0 billion increase in DOD 

health care spending from 2000 to 2005. DOD’s ability to control its health

care spending for this population depends to a large degree on the extent 

to which beneficiaries who currently do not use TRICARE later enter the 

program for care, generating more spending. Our analysis of DOD data 

 51Before the TRICARE for Life program was implemented, DOD provided care to these 

beneficiaries on a space-available basis in MTFs. DOD makes annual contributions to the

accrual fund for the cost of medical benefits to be provided in retirement to certain active 

duty servicemembers and reservists. The U.S. Treasury also makes contributions to the 

fund to cover its unfunded liability, including liability for beneficiaries who are already

retired. 

52DOD contributed about $10.22 billion to the accrual fund in 2005, but DOD officials 

estimated that DOD would have spent approximately $1.56 billion on increased MTF care if 

the TRICARE for Life benefit had not been implemented. Therefore, increased spending

attributed to TRICARE for Life benefit amounts to $8.66 billion as of 2005. 

Page 29 GAO-07-647 Proposed TRICARE Cost-Share Increases
indicates that the number of retirees and dependents under age 65 

increased 6.0 percent a year, on average, from 2001 to 2005. (See fig. 5.) 

Figure 5: TRICARE Users by Beneficiary Group, 2001-2005 

Fiscal year

Users by beneficiary group (in thousands)

Source: GAO analysis of DOD data.

1,000

1,500

2,000

2,500

Retirees and dependents under age 65

Dependents of active duty personnel

Active duty personnel

2001 2002 2003 2004 2005

6.0%

DOD attributed $1.1 billion of the increase in its health care spending from 

2000 to 2005 to health care costs associated with GWOT. According to 

DOD officials, the largest components of costs related to GWOT over this 

period were health care for mobilized National Guard and Reserve 

personnel and their families, pre- and postdeployment medical care for 

servicemembers, and filling vacated positions of deployed medical 

personnel. DOD was able to provide only limited documentation and 

description of how these estimates were calculated. We reported in 

September 2005 about numerous problems with DOD’s processes for 

recording and reporting costs for GWOT. Factors affecting the reliability 

of DOD’s reported costs included long-standing deficiencies in DOD 

financial management systems and business processes, the use of 

estimates instead of actual costs, and the lack of supporting 

documentation. We made several recommendations to DOD to improve 

the reliability and reporting of costs. These included using actual data 

Page 30 GAO-07-647 Proposed TRICARE Cost-Share Increases
whenever possible and, when not possible, taking steps to allow the 

development of actual data.53

The overall increase of $18.0 billion in DOD health care spending from 

2000 to 2005 is spread across each of DOD’s beneficiary groups—active 

duty personnel, dependents of active duty personnel, retirees and 

dependents under age 65, and retirees and dependents in TRICARE for 

Life—each of which showed increases in overall spending and spending 

per beneficiary. Our analysis of DOD data on overall health care spending

from 2001 to 2005 by beneficiary group indicated that total spending has 

increased by an average of 10.8 percent per year for active duty personnel,

11.7 percent for dependents of active duty personnel, and 13.6 percent for 

retirees and dependents under age 65. (See fig. 6.) A separate analysis 

indicated that total spending for retirees and dependents in TRICARE for 

Life increased at 16.2 percent per year, on average, from 2003 to 2006. 

During this time, DOD’s spending per TRICARE beneficiary also increased. 

According to our analysis of DOD data, from 2001 to 2005, health care 

spending per beneficiary increased by an average of 7.3 percent per year 

for active duty personnel, 8.6 percent for dependents of active duty 

personnel, and 7.2 percent for retirees and dependents under age 65. 

 53GAO-05-882 and GAO-06-885T. 

Page 31 GAO-07-647 Proposed TRICARE Cost-Share Increases
Figure 6: DOD Health Care Costs by Beneficiary Group, 2001-2005 

11.1%

10.5%

9.3%

Fiscal year

Total government costs by beneficiary group (in millions)

Source: GAO analysis of DOD data.

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Retirees and dependents in TRICARE for Life

Retirees and dependents under age 65

Dependents of active duty personnel

Active duty personnel

2001 2002 2003 2004 2005 2006

a

a

The costs for retirees and dependents in TRICARE for Life increased by 16.2 percent, on average, 

per year from 2003 through 2006.

DOD health care spending more than doubled from 2000 to 2005. In an 

effort to control this rapidly increasing health care spending, DOD has 

proposed increases to certain fees and co-payments that have remained

unaltered for over 10 years. DOD’s proposal would begin to narrow the 

price difference between TRICARE and civilian health insurance, which is

consistent with DOD’s priority of ensuring that TRICARE remains intact, 

affordable, and effective.

Conclusions 

While the proposal would likely result in significant savings for DOD, DOD 

is unlikely to achieve the amount of savings it projected. In particular, 

DOD overestimated the amounts it would likely save from the increases in 

fees, deductibles, and retail pharmacy co-payments, in large part because 

of the difficulties in determining how beneficiaries will react to the 

increases. Determining how beneficiaries will react to changes in the 

TRICARE benefit—such as the number who would be likely to leave or 

Page 32 GAO-07-647 Proposed TRICARE Cost-Share Increases
choose not to enroll in TRICARE because of increased enrollment fees and 

deductibles—can be important for understanding the effects of 

implementing benefit changes. Although DOD routinely collects and 

compiles some information from its TRICARE beneficiaries, it does not 

collect and compile information on beneficiaries’ access to and cost of 

other health insurance, or other information on reasons why beneficiaries 

may or may not choose to use TRICARE. This information would allow 

DOD to more accurately predict beneficiaries’ likely responses to changes

in TRICARE and could help DOD manage its health care spending. 

To help DOD manage its health care spending, we recommend that the 

Secretary of Defense direct the Assistant Secretary of Defense for Health 

Affairs to collect and compile information that could help DOD identify 

the reasons why beneficiaries may or may not choose to use TRICARE. 

Such data could include beneficiaries’ access to and cost of other health 

insurance. 

We received written comments on a draft of this report from DOD. DOD 

stated that it concurs with our conclusions and recommendation. DOD 

expressed concern that the report leaves the impression that savings from 

DOD’s proposed cost share increases may be as low at $2.3 billion. As 

stated in the draft report, we estimate that even with no avoided users, the 

enrollment fee and deductible portion of DOD’s proposed cost share 

increases would likely achieve a minimum of $2.3 billion in savings over 

5 years. We state that DOD’s savings will likely be higher than this 

minimum because the proposal should result in some avoided users. 

However, neither we nor DOD are able to make a more accurate estimate 

of these savings. DOD’s concern highlights the importance of our 

recommendation. Because the available information did not allow us or 

DOD to make a more accurate estimate of savings, we recommend that 

DOD collect and compile information that could help identify the reasons 

why beneficiaries may or may not choose to use TRICARE, such as 

beneficiaries’ access to and cost of other health insurance. DOD’s written 

comments are reprinted in appendix IV. DOD also provided technical 

comments, which we incorporated as appropriate. 

Recommendation for 

Executive Action 

Agency Comments 

and Our Evaluation 

Page 33 GAO-07-647 Proposed TRICARE Cost-Share Increases
We are sending copies of this report to the Secretary of Defense and other

interested parties. We will also make copies available to others on request. 

In addition, the report will be available at no charge on GAO’s Web site at 

http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me 

at (202) 512-7101 or ekstrandl@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix V. 

Laurie Ekstrand 

Director, Health Care 

Page 34 GAO-07-647 Proposed TRICARE Cost-Share Increases
List of Committees 

The Honorable Carl Levin 

Chairman 

The Honorable John McCain 

Ranking Member 

Committee on Armed Services 

United States Senate 

The Honorable Daniel Inouye 

Chairman 

The Honorable Ted Stevens 

Ranking Member 

Subcommittee on Defense 

Committee on Appropriations 

United States Senate 

The Honorable Ike Skelton 

Chairman 

The Honorable Duncan Hunter 

Ranking Member 

Committee on Armed Services 

House of Representatives 

The Honorable John P. Murtha 

Chairman 

The Honorable C. W. Bill Young 

Ranking Member 

Subcommittee on Defense 

Committee on Appropriations 

House of Representatives 

Page 35 GAO-07-647 Proposed TRICARE Cost-Share Increases
Appendix I: DOD’s Calculation of the Portion 

of TRICARE Costs Being Paid by Retirees and Appendix I: DOD’ Dependes Calculation of the Portion nts under Age 65 

of TRICARE Costs Being Paid by Retirees 

and Dependents under Age 65 

To demonstrate the need for its Sustain the Benefit proposal, Department 

of Defense (DOD) officials calculated the proportion of health care costs 

paid by retirees and dependents under age 65 in 1996 and 2005. We were 

mandated to review these calculations. 

DOD’s calculations show that retirees and dependents under age 65 paid 

for approximately 27 percent of their overall health care costs in 1996, 

while they paid for around 12 percent in 2005. DOD based this calculation

on the average out-of-pocket health care costs paid by a family of three 

and estimates of DOD’s costs to provide health care to an average family 

of that size. DOD’s calculations assume that the hypothetical family of 

three received all of its health care through civilian providers rather than 

military treatment facilities (MTF).1

 Had DOD included care received at 

MTFs in its calculation, the share of the cost paid by beneficiaries would 

have been even lower, because unlike civilian providers, MTFs do not 

charge co-payments or coinsurance.

Our review of DOD’s calculation showed that DOD used different methods 

to calculate beneficiaries’ out-of-pocket costs in 1996 than it used for 2005. 

DOD officials told us that they used the best available data for each year. 

Certain information, such as individual claims data used to estimate the 

average costs paid per beneficiary in 2005, was not available for 1996.

Instead, for TRICARE Standard and Extra users DOD estimated average 

costs paid by beneficiaries in 1996 by allocating TRICARE’s total health 

care costs paid to civilian providers for that year among the total number 

of Standard and Extra users and estimating the average family of three’s 

out-of-pocket costs, including deductibles and coinsurance based on these 

data and the assumption that all care was received from civilian providers. 

To ensure consistency, we asked DOD officials to recalculate the 

proportion of health care costs paid by retirees and their dependents 

under age 65 who were Standard and Extra users in 2005 using the same 

methods that they used for the 1996 calculation. We then reviewed the 

results of this calculation. These results were very similar to DOD’s 

original calculation, but were different in two ways. First, the new 

 1

For the calculation, DOD officials assumed that TRICARE Prime users received all of their 

care from participating TRICARE network providers and that TRICARE Standard and 

Extra users received all of their care from nonnetwork providers in 1996 and 50 percent of

their care from network providers and 50 percent from nonnetwork providers in 2005. 

Page 36 GAO-07-647 Proposed TRICARE Cost-Share Increases
Appendix I: DOD’s Calculation of the Portion 

of TRICARE Costs Being Paid by Retirees and 

Dependents under Age 65 

calculation produced a 2005 estimated proportion of health care costs paid

by beneficiaries that was slightly smaller than the proportion estimated 

using DOD’s original calculation. Second, the new calculation showed that 

the proportion decreased by a slightly larger amount over the same period. 

Page 37 GAO-07-647 Proposed TRICARE Cost-Share Increases
Appendix II: Comparison of DOD Medical 

Care Inflation with Insurance Premium Appendix II: Comparison of DOD Medical Growth and Broader Inflation Indicators 

Care Inflation with Insurance Premium 

Growth and Broader Inflation Indicators 

The John Warner National Defense Authorization Act for Fiscal Year 2007 

required that we describe how DOD’s annual rate of medical care inflation 

compares with increases in health insurance premium growth trends and

broader indicators of inflation from 2001 through 2005.

1

 To respond to this 

requirement, this appendix compares DOD’s estimated annual rate of 

medical care inflation with premium growth trends among non-TRICARE 

health insurance, including the Federal Employees Health Benefits 

Program (FEHBP) and other programs, and indicators of inflation in 

broader sectors of the economy from 2001 through 2005. The methods 

used by DOD to estimate its annual rate of medical care inflation are not

strictly comparable to the methods used to calculate more widely used 

price indexes, such as the Consumer Price Index (CPI). Price indexes such 

as CPI and its components, including the medical care component, are 

constructed from detailed data on the prices of a fixed set of goods and 

services of constant quantity and quality bought on average by urban 

consumers over time. DOD did not develop its estimate of inflation based 

on its own spending. Instead, DOD based the estimate on inflation rates 

provided annually by the Office of Management and Budget for the various 

components of the TRICARE operating budget, such as military personnel, 

private sector health care, and pharmacy. To facilitate the comparison, we 

gathered premium data, including FEHBP premium trend data from the 

Office of Personnel Management; premium data from the California Public

Employees’ Retirement System (CalPERS)—the second largest public 

purchaser of employee health benefits; and premium levels from surveys 

of employer-sponsored health plans from the Kaiser Family Foundation 

and Health Research and Educational Trust (Kaiser/HRET). We also 

gathered information on broader indicators of inflation from the Bureau of

Labor Statistics (BLS) on the Consumer Price Index for Urban Wage 

Earners and Clerical Workers (CPI-W), which is the basis for the annual

cost of living adjustment (COLA) to cash pensions paid to military 

retirees,2

 and the medical care component of CPI-W. 

Generally, the annual rate of medical care inflation estimated by DOD 

from 2001 to 2005 is lower than premium growth trends among FEHBP 

and other purchasers but higher than increases in broader indicators of 

 1

See Pub. L. No. 109-364, § 713(a)(2)(D), 120 Stat. 2083, 2289 (2006). 

2

For military personnel who first entered military service before August 1, 1986, each 

December a COLA equal to the percentage increase in CPI-W between the third quarters of 

successive years is applied to military retired pay for the annuities paid beginning each 

January 1. 

Page 38 GAO-07-647 Proposed TRICARE Cost-Share Increases
Appendix II: Comparison of DOD Medical 

Care Inflation with Insurance Premium

Growth and Broader Inflation Indicators 

inflation. (See fig. 7.) However, these measurements are by definition very 

different from each other, so comparing them to each other can be 

problematic. 

Figure 7: Comparison of DOD’s Estimated Rate of Medical Care Inflation, Health Insurance Premium Growth Trends, and

Broader Indicators of Inflation 

Source: GAO analysis of data from DOD, Kaiser/HRET, CalPERS, and BLS.

0

5

10

15

20

25

DOD's estimated rate of medical inflation

Medical care component of CPI

COLA

Kaiser/HRET 

CalPERS

FEHBP

2001 2002 2003 2004 2005

0

10

20

30

40

50

60

70

80

2001 2002 2003 2004 2005

Year

Percentage Percentage

Year

Annual Cumulative

Notes: Cumulative growth reflects increases over the level of each measurement in 2000. 

Page 39 GAO-07-647 Proposed TRICARE Cost-Share Increases
Appendix II: Comparison of DOD Medical 

Care Inflation with Insurance Premium

Growth and Broader Inflation Indicators 

DOD calculated its average annual rate of medical care inflation to be 

about 4.6 percent per year from 2001 through 2005.3

 Premium growth 

trends in FEHBP, the Kaiser/HRET survey of employer-sponsored health

plans, and CalPERS ranged from 10.4 to 14.4 percent, on average, per year

from 2001 to 2005. The average premium growth rate for the 10 largest 

FEHBP plans by enrollment—accounting for about three-quarters of total 

FEHBP enrollment—was 10.4 percent per year during this period. The 

average premium growth rate for surveyed employers was 11.6 percent per 

year and 14.4 percent per year for CalPERS. 

Comparing DOD’s annual rate of medical care inflation to premium growth 

trends and broader indicators of inflation is difficult because of 

differences in each measurement. Unlike medical care inflation, premium 

growth trends may reflect factors such as changes in the 

comprehensiveness of the policy, changes in the ratio of premiums 

collected to benefits paid, or changes in costs because of increased 

utilization of health care services. Therefore, it can be problematic to 

compare premium growth trends to DOD’s estimated rate of medical care 

inflation. Broader indicators of inflation increased substantially slower 

than premium growth trends. In contrast, broader indicators of inflation, 

particularly the medical care component of CPI-W and the COLA, 

increased at lower rates than DOD’s estimated rate of medical care 

inflation. The medical care component of CPI-W increased almost 

2 percentage points per year faster than the COLA—4.4 percent per year 

compared to 2.5 percent per year, on average. The medical care 

component of CPI-W is based on medical care expenses, but it is difficult 

to compare with DOD’s estimated rate of medical care inflation because it

is based only on out-of-pocket medical expenditures paid by consumers, 

including health insurance premiums, and excludes the medical 

expenditures paid by public and private insurance programs. The COLA is 

also not directly comparable to DOD’s estimated rate of medical care 

inflation because it is based on price increases of a broad range of goods 

and services, and is not based solely on medical expenses. 

 3

DOD’s rates of medical care inflation from 2001 through 2005 are based on inflation rates 

provided annually by the Office of Management and Budget for the various components of

the TRICARE operating budget, such as military personnel assigned to MTFs, private 

sector health care, and pharmacy. As we note in this report, an additional portion of DOD’s

spending increase may also be caused by medical care inflation, making DOD’s average

annual rate of medical care inflation likely to be from 4.6 to 6.1 percent.

Page 40 GAO-07-647 Proposed TRICARE Cost-Share Increases
Appendix III: Scope and Methodology

Page 41 GAO-07-647 

Appendix III: Scope and Methodology 

To examine the DOD’s estimated savings associated with enrollment fee 

and deductible increases for retirees and dependents under age 65 and 

pharmacy co-payment increases for all beneficiaries except active duty 

personnel, we reviewed the analyses prepared by DOD and its contractor 

that projected cost savings from these increases. We also interviewed 

DOD officials in the Office of the Assistant Secretary of Defense for Health 

Affairs, the Office of Program Analysis and Evaluation, and the Office of 

the Under Secretary of Defense (Comptroller). Furthermore, we reviewed 

literature from the field of health economics and interviewed six health 

economists to discuss economic principles relevant to our work, including 

price sensitivity for health insurance and prescription drugs and adverse 

and biased selection. We also reviewed survey data from (1) the Kaiser 

Family Foundation and Health Research and Educational Trust 

(Kaiser/HRET) on employer-sponsored insurance premiums, (2) the RAND 

Corporation (RAND) on the health insurance options of military retirees, 

and (3) the Agency for Healthcare Research and Quality (AHRQ) on health 

care costs for the U.S. population. We also reviewed a draft report 

prepared by RAND on the health insurance options of military retirees and 

Kaiser/HRET reports on employer health benefits. In addition, to identify 

concerns with DOD’s Sustain the Benefit proposal and associated savings 

estimates, we interviewed representatives from the Reserve Officers 

Association, the National Association of Uniformed Services, the National 

Military Families Association, and The Military Coalition. 

To examine the factors identified by DOD as contributing to the increase 

in TRICARE spending, we reviewed the factors that DOD identified as 

contributing to the increase in TRICARE spending from 2000 to 2005 and 

interviewed officials from the Office of the Assistant Secretary of Defense 

for Health Affairs. We determined that the spending data provided by DOD 

were sufficiently reliable for our purposes, but we did not independently

verify DOD’s figures. We also reviewed academic literature on medical 

care inflation. 

Evaluation of Cost Savings 

Estimates 

As part of our evaluation of DOD’s estimate of beneficiary response to 

increases in TRICARE enrollment fees and deductibles and the cost 

savings attributable to these individuals, we reviewed data from several 

sources to conduct the following frequency analyses and cross 

tabulations.

We calculated the average cost of civilian health insurance premiums and 

how it compares to TRICARE enrollment fees by evaluating data on the 

cost of employer-sponsored insurance premiums reported in the 

 Proposed TRICARE Cost-Share Increases
Appendix III: Scope and Methodology

Kaiser/HRET annual employer health benefits survey. Using these data for 

2000 through 2006, we determined the percentage of enrollees whose 

share of the employer-sponsored health insurance premium was lower 

than or equal to the TRICARE Prime and Standard and Extra enrollment 

fees for both single and family coverage. 

We assessed characteristics of the military retiree population, including 

access to health insurance other than TRICARE, self-reported health 

status, age, and employment status, by reviewing data reported in RAND’s 

draft report titled Civilian Health Insurance Options of Military 

Retirees. We also examined cross tabulations showing access to health 

insurance other than TRICARE by age and self-reported health status to 

determine whether older and less healthy individuals are less likely to 

have other health insurance options.

We examined health care spending for various groups within the U.S. 

population by reviewing data from the Medical Expenditure Panel Survey 

(MEPS), which is conducted by AHRQ. Using the results from the 2004 

MEPS, we examined cross tabulations of health care expenditures by age

and health status. 

Our analysis was limited because neither we nor DOD were able to control 

for several important factors affecting beneficiaries’ response to 

enrollment fee and deductible increases and the associated savings. For 

example, no data on TRICARE beneficiaries’ sensitivity to cost-share 

increases is available because DOD has not attempted to increase fees 

since TRICARE’s inception. Furthermore, although the RAND draft report 

includes information on access to civilian insurance plans among military 

retirees and their dependents under age 65, there are no data specific to 

this population on the cost of civilian health insurance plans available to 

them. 

Data Reliability Tests To ensure that the DOD data were sufficiently reliable for our analyses, we

conducted detailed data reliability assessments of the data sets that we 

used. We restricted these assessments, however, to the specific variables 

that were pertinent to our analyses. 

We reviewed DOD analyses that we determined to be relevant to our 

findings to assess their quality and methodological soundness. Our review 

consisted of (1) examining documents that describe the respective

analyses, (2) manually and electronically checking the data for obvious 

errors and missing values, (3) interviewing DOD officials to inquire about

Page 42 GAO-07-647 Proposed TRICARE Cost-Share Increases
Appendix III: Scope and Methodology

concerns we uncovered, (4) interviewing DOD officials about internal 

controls in place to ensure that data are complete and accurate, and 

(5) assessing the reasonableness of assumptions DOD made. To assess 

DOD assumptions, we reviewed relevant health economics literature and 

interviewed six health economists. 

Our review revealed inconsistencies and minor errors in DOD’s analyses 

that we reported to DOD officials. Overall, however, we found that all of 

the data sets used in this report were sufficiently reliable for use in our 

analyses. 

We conducted our work from July 2006 through May 2007 in accordance 

with generally accepted government auditing standards. 

Page 43 GAO-07-647 Proposed TRICARE Cost-Share Increases
Appendix IV: Comments from the Department Appendix IV of Defense : Comments from the 

Department of Defense 

Page 44 GAO-07-647 Proposed TRICARE Cost-Share Increases
Appendix IV: Comments from the Department 

of Defense 

Page 45 GAO-07-647 Proposed TRICARE Cost-Share Increases
Appendix V: 

St

GAO Contact and 

aff Acknowledgments

Page 46 GAO-07-647 

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact Laurie Ekstrand (202) 512-7101 or ekstrandl@gao.gov

In addition to the contact named above, Bonnie Anderson, 

Assistant Director; Thomas Conahan, Assistant Director; Timothy Carr; 

Timothy Cunningham; Krister Friday; Adrienne Griffin; William Simerl; 

Eric Wedum; and Michael Zose made key contributions to this report. 

Proposed TRICARE Cost-Share Increases

Acknowledgments 

(290559) 
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