United States General Accounting Office

GAO Briefing Report to the Chairman and

Ranking Minority Member,

Subcommittee on National Security,

Committee on Appropriations, House of

Representatives

February 1997 DEFENSE HEALTH

PROGRAM

Future Costs Are

Likely to Be Greater

Than Estimated

GAO/NSIAD-97-83BR

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-275854 

February 21, 1997

The Honorable C.W. Bill Young

Chairman

The Honorable John P. Murtha

Ranking Minority Member

Subcommittee on National Security

Committee on Appropriations

House of Representatives

We recently briefed your subcommittee staff on our analysis of budgetary

trends of the Defense Health Program. This report summarizes the content

of that briefing. Because the Department of Defense (DOD) wants to reduce

spending for infrastructure activities to pay for modern weapon systems,

we have been reviewing how DOD categorizes and budgets for

infrastructure functions. Last year we reported that DOD will realize no

significant net infrastructure savings in its budget estimates between fiscal

year 1996 and 2001.1 DOD defines infrastructure as activities that provide

support services to mission programs and primarily operate from fixed

locations. It assigns infrastructure activities among eight categories, one of

which is central medical. Central medical is the third largest infrastructure

category, and nearly all the funds within that category are used for the

Defense Health Program.

Background The $15-billion Defense Health Program accounts for about 6 percent of

DOD’s total budget. The Defense Health 1998 Program Objective

Memorandum (POM) shows that total obligational authority is projected to

increase by about $2.7 billion, or 18 percent, from $15.1 billion in 1997 to

$17.8 billion in 2003, in current dollars.2

 The POM reflects no program

growth when expressed in constant dollars. In addition to meeting

wartime patient care requirements, the program provides health care

benefits for active duty personnel and their dependents as well as for

retirees and their dependents. Beneficiaries may receive health care

through DOD’s new managed health care system called TRICARE. They

may use DOD facilities and/or one of three options under DOD contract: a

1

Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little Savings for Modernization

(GAO/NSIAD-96-131, Apr. 4, 1996) and Defense Infrastructure: Costs Projected to Increase Between

1997 and 2001 (GAO/NSIAD-96-174, May 31, 1996).

2

We based our analysis on the Fiscal Year 1998 POM, the most current data available at the time of our

review. During the course of our review, DOD revised the POM estimates as it developed the

President’s Budget and the 1998 Future Years Defense Program. We provide information on these

revised estimates in our report.

Page 1 GAO/NSIAD-97-83BR Defense Health Program
B-275854 

health maintenance organization, a preferred provider, and a

fee-for-service option, formerly known as the Civilian Health and Medical

Program of the Uniformed Services (CHAMPUS). Retirees and dependents

over age 65 are not eligible for TRICARE because they receive Medicare

benefits. However, they may receive health care in DOD medical facilities

on a space-available basis. DOD has managed care initiatives in place that it

hopes will result in efficiencies and savings.

Results in Brief Future Defense Health Program costs are likely to be greater than DOD has

estimated. Our analysis showed that one key assumption DOD used to

estimate future program costs appeared to be unrealistic and another was

questionable. First, DOD assumed that no cost growth would be

attributable to advances in medical technology and the intensity of

treatment, an important and valid health care cost growth factor.3

 Second,

DOD assumed that a certain level of savings would be achieved from its

new emphasis on utilization management techniques to reduce

unnecessary treatment and testing, although it did not use a formal

methodology or analysis to derive the savings. DOD’s projection that health

program budgets will not increase in constant dollars during fiscal years

1998-2003 also appears to be unrealistic, given that during fiscal years

1985-96, the operation and maintenance funds in DOD’s health program

increased by 73 percent in real terms (operation and maintenance funds

take about two-thirds of the Defense Health Program budget).

In developing its budget estimates, DOD applied a factor of zero for

technology and intensity. According to health care financing experts, DOD’s

Defense Health Program is subject to some level of cost growth because of

the addition of new technology and increased intensity of treatment. These

experts agreed that a factor of between 1 and 2 percent would be

appropriate to apply to DOD’s program. Also, DOD assumed in its POM

estimate that it would save 5 percent from utilization management

techniques, even though it did not have a formal methodology for

estimating this level of savings. For example, DOD could have derived

utilization management savings estimates from analogous private sector

health care programs with an adjustment for DOD-unique aspects. Instead,

DOD officials discussed and agreed on the target number from a range of

savings (2 to 14 percent) reported by private sector managed health care

organizations. Later, in a revised health program budget estimate, DOD

projected a 7-percent savings during fiscal years 1998-2003 from utilization

3

Technological advances such as CAT scans, magnetic resonance imaging, organ transplants, and new

drug treatments increase costs. Costs are often compounded when new procedures increase the

intensity of treatment.

Page 2 GAO/NSIAD-97-83BR Defense Health Program
B-275854 

management techniques and its prime vendor program that uses best

management practices to buy medical supplies and pharmaceuticals. The

revised projected savings, along with other measures, effectively reduced

health program budget projections below POM estimates.

Although DOD’s budget assumptions appear to be optimistic, the extent to

which future costs might exceed the budget estimates is unknown. We

analyzed the effects of using different assumptions on the budget

estimates for fiscal years 1998-2003. If DOD had accounted for technology

and intensity of treatment at a rate of 1.5 percent, for example, in

constructing its initial estimates, the projections would have been

$3.2 billion higher cumulatively. And if DOD is unable to achieve the level of

estimated savings it anticipates from utilization management techniques,

program costs would exceed the budget estimate by an additional amount.

For example, if DOD achieves a 3-percent savings from utilization

management over fiscal years 1998-2003 (instead of the 5-percent

assumption it used in initial estimates) and accounts for technology and

intensity of treatment at the 1.5 percent rate, program costs would be

$4.5 billion greater than estimated. We also compared the 1998 POM—with

the 1.5 percent technology factor and the reduced 3-percent savings from

utilization management—to revised budget estimates from the

post-program and budget decision cycle. This comparison showed that

health program costs for fiscal years 1998-2003 could be $8.4 billion

greater than estimated. However, the extent to which future costs exceed

the Defense Health Program budget estimates depends on the specific

assumptions applied.

Agency Comments We discussed our draft report with DOD officials, who partially concurred

with the findings. We incorporated their suggestions into this report as

appropriate. DOD commented that it is not appropriate to include an

additional cost growth factor for technology and intensity at this time

because the matter is still under study. However, our analysis of the

literature and discussions with experts show that technology and intensity

is widely recognized as a health care cost growth factor that is by

definition beyond medical inflation in the private and public sectors.

Health care financing experts and Defense Health Affairs officials agree

that cost growth from technology and intensity of treatment affects the

Defense Health Program. While DOD has not yet determined the specific

rate to apply to its program, experts told us a factor of about 1 or 2 percent

would be appropriate to apply to the capitation model. As a result, we

believe that while the study has not yet been completed, it is reasonable

Page 3 GAO/NSIAD-97-83BR Defense Health Program
B-275854 

for DOD to include a factor for cost growth from technology and intensity

in the budget estimates.

DOD also commented that the 73-percent real growth in operation and

maintenance spending in the health program between 1985 and 1996

reflects the consolidation in 1991 of the various medical programs in the

military services into the Defense Health Program and that earlier data on

costs were compiled from inconsistent historical data. While DOD correctly

points out that its health and medical program spending was spread

among the military services until the Defense Health Program was created,

our analysis of this cost growth was taken from various DOD Future Years

Defense Programs using defense mission categories that cut across

military service-specific programs.

DOD agreed that it had no formal methodology or analysis to support its

assumptions of 5 percent and 7 percent utilization management savings

through fiscal year 2003. DOD also commented that while the DOD

Comptroller supports the capitation model concept for budgeting

purposes, that office does not necessarily agree with the data or

assumptions currently being used to generate the estimate.

Scope and

Methodology

We extracted and analyzed estimated total obligational authority data for

the Defense Health Program from the 1998 POM. As DOD revised its

estimates to prepare the President’s budget and the 1998 Future Years

Defense Program, we obtained updated information and compared it to

the original POM. We also obtained information on the capitation model

concept that DOD Health Affairs uses to make program budget projections

and discussed the factors and assumptions used in the model with DOD

Health Affairs and DOD Program Analysis and Evaluation officials. At our

request, DOD Health Affairs applied the model using a technology and

intensity of treatment cost growth factor and a lower rate of utilization

management savings in order for us to estimate the health program

budgets under different assumptions. We also discussed the model with

knowledgeable experts outside DOD and reviewed reports on health care

costs available from federal agencies and private organizations. However,

we did not validate the accuracy or completeness of DOD’s capitation

model.

We performed our review between September 1996 and January 1997 in

accordance with generally accepted government auditing standards.

Page 4 GAO/NSIAD-97-83BR Defense Health Program
B-275854 

We are providing copies of this report to the Chairmen and Ranking

Minority Members of the House Committee on National Security, the

Senate Committee on Armed Services, and the Senate Committee on

Appropriations; the Secretaries of Defense, the Army, the Navy, and the

Air Force; and the Director, Office of Management and Budget. Copies will

also be made available to others upon request.

If you have any questions about this report, please contact me at

(202) 512-3504. The major contributors to this report were Davi M.

D’Agostino and Richard A. McGeary.

Richard Davis

Director, National Security

 Analysis

Page 5 GAO/NSIAD-97-83BR Defense Health Program
Contents

Letter 1

Briefing Section I 

Background

8

Defense Health Progam in the Defense Budget 8

Most Defense Health Spending is for Patient Care 10

Defense Health Care Benefits and TRICARE Program

Components

12

Briefing Section II 

Budget Trends

14

Projected Total Obligational Authority for Defense Health

Program

14

Distribution of Defense Health Program Funds by Major Cost

Categories

16

Trends in Defense Health Program TOA by Category 18

Trends in Patient Care by Source 20

Distribution of Defense Health Program Beneficiaries 22

Historical Defense Health TOA Trends 24

Historical and Projected Defense Health Share of DOD’s TOA 26

History of DOD’s Underestimated Defense Medical Program TOA 28

Briefing Section III 

Model and

Assumptions

30

DOD’s Methodology and Assumptions in Constructing the

Estimate

30

DOD’s Methodology and Assumptions in Constructing the

Estimate

32

DOD’s Methodology and Assumptions in Constructing the

Estimate

34

Defense Health POM Estimate, Adding 1.5 Percent for

Technology and Intensity

36

Defense Health POM With 3 Percent Utilization Savings and 1.5

Percent Technology Cost

38

1998 POM and 1998 Post-Program Budget Decision Cycle Data 40

Updated Budget Estimate and 1998 POM With 3 Percent

Utilization Management Savings and 1.5 Percent Technology Cost

42

Page 6 GAO/NSIAD-97-83BR Defense Health Program
Contents

Abbreviations

CHAMPUS Civilian Health and Medical Program of the Uniformed

Services

DOD Department of Defense

PA&E Program Analysis and Evaluation

POM Program Objective Memorandum

PBD program budget decision

TOA total obligational authority

Page 7 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section I 

Background

GAO Defense Health Program in the Defense 

Budget

Central medical is DOD's third largest 

infrastructure category.

Defense Health Program captures 98 percent 

of central medical infrastructure for fiscal year 

1997 and consumes about 6 percent of the 

DOD budget.

DOD Health Affairs, Program Analysis and 

Evaluation, and Defense Comptroller have key 

roles in Defense Health Program budget 

estimates.

Page 8 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section I 

Background

Central medical is the third largest of eight infrastructure categories, after

installation support and central training, and is expected to remain the

third largest for the foreseeable future. Most of the central medical

infrastructure category consists of the Defense Health Program. The

Department of Defense (DOD) projects that the program will represent

about 6 percent of DOD’s total budget through at least fiscal year 2003.

DOD Health Affairs develops the Defense Health Program budget consistent

with guidance and direction from the DOD Program Analysis and

Evaluation (PA&E) directorate and the DOD Comptroller.

Page 9 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section I 

Background

GAO Most Defense Health Spending Is for Patient 

Care

About 73 percent of Defense Health Program 

costs are for patient care.

Patient care is medical benefits for active duty and 

retired military and their dependents through 

military hospitals and clinics and DOD-contracted 

care. 

Some patient care is required for wartime 

readiness; the rest is for peacetime medical 

benefits.

The program is regarded as an entitlement 

program within the discretionary DOD budget.

Page 10 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section I 

Background

The majority of the Defense Health Program budget is dedicated to patient

care. In addition to providing patient care to meet wartime readiness

requirements, the program also serves the peacetime health care needs of

its beneficiaries. Active duty and retired military personnel under age 65

and dependents are eligible for care in DOD medical facilities under title 10,

U.S.C., or they may choose DOD-contracted care in the private sector.

Military retirees over age 65 are eligible for treatment in DOD medical

facilities on a space-available basis.

Although the DOD budget is discretionary, active duty and retired military

personnel and their dependents consider the Defense Health Program to

be an integral part of their employment and retirement benefits. For this

reason, the Defense Health Program is regarded somewhat like an

entitlement program.

Page 11 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section I 

Background

GAO Defense Health Care Benefits and 

TRICARE Program Components

Direct care is medical care provided by 

DOD personnel in DOD military medical 

facilities.

DOD's new TRICARE program includes

a health maintenance organization,

a preferred provider organization, and

CHAMPUS fee-for-service coverage.

Page 12 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section I 

Background

Direct care (patient care provided in DOD medical facilities) is very

inexpensive to the beneficiary. For example, outpatient care provided in

DOD medical facilities is free. Inpatient care for retired enlisted personnel

is also free. Retired officers pay $4.75 per day, and dependents pay $9.50

per day for inpatient care.

Beneficiaries may also choose one of the three options in DOD’s new

TRICARE system. TRICARE Prime is a health maintenance organization

type of plan. Retirees pay $230 per year ($460 for families), $12 per

outpatient visit, and the greater of $25 per hospital admission or 

$11 per day. Members can also enroll in Prime with a military treatment

facility and avoid the per visit charges. TRICARE Extra is a preferred

provider organization plan. It has a $300 deductible per family and a $150

deductible per person, along with a 15-percent co-payment for active duty

families and a 20-percent co-payment for retirees for outpatient care.

Inpatient care costs $250 per day or 25 percent of the charge. Lastly,

TRICARE Standard is the former Civilian Health and Medical Program of

the Uniformed Services (CHAMPUS). It has a maximum $300 deductible and

a 20-percent co-payment for active duty family members’ outpatient care,

and a 25-percent co-payment for retirees and their dependents. Inpatient

care costs $323 per day or 25 percent of the charge.

Page 13 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

GAO Projected Total Obligational Authority 

for Defense Health Program 

1997 1998 1999 2000 2001 2002 2003

14.5

15

15.5

16

16.5

17

17.5

18

18.5

Fiscal year

Current-year dollars in billions

Note: Total Obligational Authority (TOA).

Source: 1998 Program Objective Memorandum (POM).

Page 14 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

The 1998 POM shows that DOD projects the Defense Health Program to

increase by about $2.7 billion, or 18 percent, from fiscal year 1998 to fiscal

year 2003, in current-year dollars. When viewed in constant dollars, DOD

projects no program growth. However, between fiscal year 1985 and 1996,

the operation and maintenance funds in DOD’s health program increased by

73 percent in real terms. Operation and maintenance funds account for

about two-thirds of the Defense Health Program budget.

Page 15 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

GAO Distribution of Defense Health Program 

Funds by Major Cost Categories

72.8%

10.2%

7.5%

6.5%

1.3%

1.7%

FY 1998

73.3%

10.4%

7.2%

6.5%

1.3%

1.2%

FY 2003

Patient care Patient support Base operations Training Construction Procurement

Source: 1998 POM.

Page 16 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

The majority of the Defense Health Program budget is for total patient

care. In the fiscal year 1998 estimate, patient care accounts for

$11.2 billion of the $15.5 billion budget. This portion of the budget is

projected to remain at about 73 percent. Consequently, the driving force

behind the Defense Health Program budget is patient care, both medical

care for active duty personnel and their dependents and health care

benefits received by military retirees and their dependents.

Page 17 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

GAO Trends in Defense Health Program 

TOA by Category

1997 1998 1999 2000 2001 2002 2003

0

2

4

6

8

10

Fiscal year

Current-year dollars in billions

DOD direct care Contracted care Other costs Care support Non-DOD care

Source: 1998 POM.

Page 18 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

Direct patient care, which DOD provides in its medical facilities, is the

largest portion of the Defense Health Program budget. The estimated TOA

for direct care is projected to increase by about 16 percent, from

$6.9 billion in fiscal year 1997 to $7.9 billion in fiscal year 2003. Patient

care that is purchased or provided under contract is projected to increase

by 31 percent, from $3.5 billion to $4.6 billion. Other budget categories

within the Defense Health Program are also projected to increase, but to

less extent. For example, patient care support is projected to increase by

23 percent. Patient care support includes a number of functions such as

management headquarters, military public and occupational health,

veterinary services, examining activities, the aeromedical evacuation

system, and the Armed Forces Institute of Pathology.

Page 19 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

GAO Trends in Patient Care by Source 

1997 1998 1999 2000 2001 2002 2003

0

2

4

6

8

10

12

14

16

10.846 11.232 11.461 11.873

12.437 12.777 13.106

Fiscal year

Current-year dollars in billions

DOD direct care Managed care CHAMPUS Non-DOD

Source: 1998 POM.

Page 20 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

We further analyzed the patient care portion of the Defense Health

Program POM. DOD projects in the 1998 POM that TOA for all patient

care—both care in military treatment facilities and government-funded

care from civilian providers—will increase 21 percent, from $10.8 billion in

fiscal year 1997 to $13.1 billion in fiscal year 2003. Patient care consists of

care provided directly in DOD facilities, managed care provided through

contracts, the former CHAMPUS fee-for-service health care plan, and care

provided in non-DOD facilities such as emergency rooms or Uniformed

Services Treatment Facilities.1

DOD direct care is the largest portion of the patient care budget category

and is projected to continue as the dominant category through 

fiscal year 2003. However, managed care support spending is projected to

expand. Health care support contracts under the new TRICARE system

are projected to increase by 67 percent, from $2.4 billion to $4 billion,

while the CHAMPUS portion is projected to decrease, from $1 billion to

about $514 million.

1

Uniformed Services Treatment Facilities are former Public Health Service hospitals now under

civilian ownership and designated by the Congress in the Military Construction Authorization Act of

1982 (42 U.S.C. 248c) to be part of the Military Health Services System.

Page 21 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

GAO Distribution of Defense Health Program 

Beneficiaries

26.0%

35.0%

39.0%

FY 1997 users

25.0%

34.0%

41.0%

FY 2003 users

20.0%

28.0%

52.0%

FY 1997 eligibles

19.0%

27.0%

54.0%

FY 2003 eligibles

Active duty Active dependents Retirees/dependents

Source: 1998 POM.

Page 22 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

Among all users of the DOD health system, DOD projects a slight decrease in

the share of active duty personnel and their dependents and a slight

increase in the share of retirees and their dependents between fiscal year

1997 and 2003. Of user beneficiaries, 61 percent are projected to be active

duty personnel and their dependents in fiscal year 1997 compared to

59 percent in fiscal year 2003. However, retired beneficiaries and their

dependents who use the system are projected to increase as a percentage

of the user population, from 39 percent in fiscal year 1997 to 41 percent in

fiscal year 2003.

More people are eligible to obtain health care benefits under the Defense

Health Program than the number who actually use the benefits. For

example, some retirees and their dependents may be eligible for non-DOD

health care benefits through their current private sector employer. Among

the total of those eligible for DOD health care benefits, the percentage of

active duty personnel and their dependents is projected to decrease by

2 percent between fiscal year 1997 and 2003, from 48 percent to

46 percent, while the percentage of retirees and their dependents is

expected to increase by 2 percent, from 52 percent to 54 percent, over the

same period.2

2

DOD Health Affairs officials expect the number of military retirees over age 65 to increase through

2014. Although the elderly may tend to require more health care than some other segments of the

population—which could affect health care costs—military retirees receive care in DOD medical

facilities on a space-available basis. Medicare-eligible dependents and retirees are not eligible for

DOD-contracted care under the TRICARE system.

Page 23 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

GAO Historical Defense Health TOA Trends

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

0

5

10

15

20

Fiscal year

Current-year dollars in billions

Defense health TOA

Source: DOD Health Affairs historical data and 1998 POM.

Page 24 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

The TOA for the medical program has increased from about $2 billion in

fiscal year 1970 to $17 billion projected for fiscal year 2001.3

 (Both fiscal

years’ amounts are expressed in current dollars.) DOD Health Affairs

attributes the flattening of the curve since fiscal year 1990 to the reduced

force structure and initiatives to better manage patient care. For example,

DOD has reduced the average length of hospital stays in DOD medical

facilities.

3

Because an appropriate DOD deflator is unavailable, we present TOA in current dollars. It should be

noted that some of the increase since 1970 is due to general price level inflation.

Page 25 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

GAO Historical and Projected Defense 

Health Share of DOD's TOA

1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

0

1

2

3

4

5

6

7

Fiscal year

Percentage

Percentage of DOD's TOA

Source: DOD Health Affairs.

Page 26 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

The medical share of DOD’s TOA has increased from 1.7 percent 30 years

ago to 6.2 percent in recent years. Although the historical data show an

upward trend in the Defense Health portion of the total DOD budget, DOD

projects a flat 6.2-percent share of TOA from fiscal year 1996 to fiscal year

2001.

Page 27 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

GAO History of DOD's Underestimated 

Defense Medical Program TOA

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

0

200

400

600

800

Fiscal year

Current-year dollars in millions

Source: DOD Health Affairs.

Page 28 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section II 

Budget Trends

DOD has a history of underestimating its medical program budget authority.

DOD officials attributed this problem to the difficulty in estimating CHAMPUS

costs. For 8 of the 12 fiscal years since 1986, DOD’s health program has

received additional funds above those budgeted. The understated budgets

were addressed by either reprogramming funds or supplemental funding in

6 years. There were appropriation adjustments in 2 years. In 4 of the past 

6 years additional funding was not required.

Page 29 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

GAO DOD's Methodology and Assumptions 

in Constructing the Estimate

Health Affairs uses a capitation financing 

model to estimate patient care costs. 

DOD considers the capitation financing 

model to reasonably estimate Defense 

Health Program costs.

Page 30 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

To construct the Defense Health Program budget, DOD Health Affairs uses

a capitation financing model that estimates per capita health care costs on

the basis of the user population, adjusted for gender and age and other

factors such as inflation. The budget is constructed under the guidance

and direction of the Defense Comptroller and PA&E.

PA&E and the Defense Comptroller accept the model as a reasonable

approach for estimating patient care costs. An Institute for Defense

Analysis analyst who is familiar with the model agrees. Health Care

Financing Administration officials noted that DOD’s current approach is an

improvement over previous DOD budgeting methods, which were based on

historical workload.

Page 31 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

GAO DOD's Methodology and Assumptions 

in Constructing the Estimate

DOD assumed 5 percent savings from 

utilization management for the 1998 

Defense Health Program POM and raised 

this to 7 percent for revised estimates.

Utilization management savings are not 

derived from program performance data 

or formal methodology.

Congressional Budget Office and Health 

Care Financing Administration suggest 

anticipated savings may be optimistic.

Page 32 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

Managed health care allows for the application of utilization management

techniques, such as gatekeepers, to reduce unnecessary treatment and

testing. The introduction of such techniques within the Defense Health

Program may result in lower costs. DOD initially estimated cumulative

savings of 5 percent from utilization management in the Defense Health

Program POM, but during the course of our review it increased the

projection to 7 percent in revised budget projections.

PA&E and DOD Health Affairs did not have managed care program

performance data to permit a more reliable estimate and, in the absence of

such data, did not derive the utilization management savings assumption

from a formal methodology or analysis. For example, DOD might have

derived estimated utilization management savings from an analysis of

analogous programs in the private sector, or from a blend of specific

savings from specific types of health care programs that apply utilization

management techniques similar to those being employed in DOD’s program.

DOD could have then adjusted these estimates for DOD-unique conditions.

Instead, DOD officials who constructed the estimates explained that they

discussed and agreed on savings estimates from a range of 2 to 14 percent

experienced in the private sector without a formal methodology or

analysis as a basis.

In a July 1995 study, the Congressional Budget Office stated that

depending on the assumptions, the broad application of managed care

techniques—including utilization management—under DOD’s new

TRICARE system in fiscal year 1996 could generate a savings of no more

than 1 percent under optimistic assumptions and increased costs of up to

6 percent under pessimistic assumptions. Health Care Financing

Administration officials stated that although the introduction of utilization

management generally can be expected to generate one-time savings, they

could not offer an estimate as to the extent of savings that DOD might

achieve.

Page 33 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

GAO DOD's Methodology and Assumptions 

in Constructing the Estimate

DOD's model allows for a cost growth factor 

for technology and intensity of treatment, but 

the 1998 POM estimate assumes a factor of 

zero.

A contractor is studying the extent to which 

technology and intensity affect the Defense 

Health Program budget. 

Outside experts believe that a reasonable 

estimate for cost growth from technology and 

intensity of treatment is about 1 or 2 percent.

Page 34 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

As health care providers adopt new and expensive medical technologies

and offer more intensive patient treatment, medical cost growth occurs

above the rate of medical inflation. Under a DOD contract, the Institute for

Defense Analysis has been studying for over a year the extent to which

new technology and increased intensity of treatment affect the Defense

Health Program budget. DOD Health Affairs has allowed for a technology

and intensity of treatment factor within its cost-estimating model.

However, because the contractor had not yet issued its report, DOD Health

Affairs applied zero for this cost growth factor.

A PA&E official stated that it is appropriate to apply a zero factor for

technology because DOD has a number of small, low-technology facilities

and performs fewer complex and expensive procedures compared to some

private sector hospitals. Further, the official stated that medical inflation

rates already account for technology cost growth.

We reviewed information on specialized units, medical procedures, and

services available at some of DOD’s larger medical facilities and found, for

example, that neonatal intensive care, oncology, HIV-AIDS, and open heart

surgery were common. All officials with whom we spoke within DOD and

outside of DOD agreed that precisely measuring the technology cost growth

factor is very complex and difficult. Nevertheless, analysts from the Health

Care Financing Administration and the Institute for Defense Analysis

estimated that a cost growth factor of about 1 or 2 percent for technology

and intensity of treatment is a reasonable factor for DOD to apply in

estimating the Defense Health Program budget. It is widely recognized in

health care financing literature that technology and intensity cost growth

occurs beyond medical inflation.

Page 35 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

GAO Defense Health POM Estimate, Adding 

1.5 Percent for Technology and Intensity

1998 1999 2000 2001 2002 2003

15

16

17

18

19

20

Fiscal year

Current-year dollars in billions

FY 98 POM With 1.5%

technology cost

$15.9

$16.2

$16.8

$17.5

$18.2

$19.0

$17.9

$17.4

$17.0

$16.4

$15.8 $15.5

Source: 1998 POM.

Page 36 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

Because DOD does not account for the technology and intensity of

treatment cost growth factor in its budget estimate, its Defense Health

Program budget is likely to be understated. To illustrate the effect of

accounting for this factor, we asked DOD Health Affairs to apply the model

using a technology cost growth factor of 1.5 percent instead of zero.1

 The

addition of this technology factor to the model increased the POM estimate

by a cumulative $3.4 billion between fiscal year 1998 and 2003.

1

A 1.5 percent factor is the approximate midpoint of the range of estimates that health care financing

experts thought was reasonable. Although DOD has not yet determined the appropriate factor for the

Defense Health Program, we believe that adding 1.5 percent illustrates the potential effect of applying

a factor within this range.

Page 37 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

GAO Defense Health POM With 3 Percent Utilization 

Savings and 1.5 Percent Technology Cost

1998 1999 2000 2001 2002 2003

15

16

17

18

19

20

Fiscal year

Current-year dollars in billions

98 POM 3% utilization &

1.5% technology

$15.8

$16.3

$17.0

$17.8

$18.5

$19.3

$17.9

$17.4 $17.0

$16.4

$15.8

$15.5

Source: 1998 POM.

Page 38 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

The extent of savings expected from utilization management techniques is

speculative. DOD applied a 5-percent savings rate to the 1998 POM estimate.

This estimate was not based on a study or other methodology, but rather

was a percentage DOD selected because it fell within the 2- to 14-percent

range experienced by private sector managed health care providers. We

asked DOD Health Affairs to apply the model using both a 1.5-percent

technology cost growth factor and a reduced utilization management

savings rate of 3 percent. Although the savings rate, if any, is unknown at

this time, applying a 3-percent rate illustrates the effect of a lower rate of

savings than DOD has included in its estimates. Using these two adjusted

factors, the combined cumulative underbudgeting of the Defense Health

Program between fiscal year 1998 and 2003 would be $4.5 billion.

Page 39 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

GAO 1998 POM and 1998 Post-Program 

Budget Decision Cycle Data

1998 1999 2000 2001 2002 2003

15

15.5

16

16.5

17

17.5

18

18.5

Fiscal year

Current-year dollars in billions

POM Post-PBD cycle

$15.5

$15.8

$16.4

$17.0

$17.4

$17.9

$15.4 $15.3

$15.7

$16.3

$16.6

$16.9

Note: Program Budget Decision—PBD.

Source: 1998 POM and post-PBD cycle data.

Page 40 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

As the programming and budgeting process continued after the Defense

Health Program POM was issued, DOD reduced its estimate of TOA for fiscal

years 1998-2003. The 1998 POM estimate for fiscal year 2003 was

$17.9 billion, for example, whereas the post-program budget decision (PBD)

estimate was $16.9 billion. DOD increased its estimated savings from

utilization management from 5 percent to 7 percent, lowered the cost of

living assumption in the base year because 1996 inflation was lower than

expected, and reduced operation and maintenance funding among other

measures.

Page 41 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

GAO Updated Budget Estimate and 1998 POM With 

3 Percent Utilization Management Savings and 

1.5 Percent Technology Cost

1998 1999 2000 2001 2002 2003

15

16

17

18

19

20

Fiscal year

Current-year dollars in billions

1998

Post-PBD estimate

1998 POM: 3% utilization savings

and 1.5% technology factor

$15.8

$16.3

$17.0

$17.8

$18.5

$19.3

$15.4 $15.3

$15.7

$16.3

$16.6

$16.9

Source: 1998 post-PBD cycle data and 1998 POM.

Page 42 GAO/NSIAD-97-83BR Defense Health Program
Briefing Section III 

Model and Assumptions

To illustrate the effect of DOD’s lower estimate of Defense Health Program

TOA, we compared the post-PBD cycle estimate to the POM estimate that

incorporated a 1.5-percent technology factor and a lower utilization

management savings of 3 percent. TOA using the post-PBD cycle data was

$16.9 billion in 2003, for example, while the estimated program

requirement using the revised assumptions for technology and utilization

management savings was $19.3 billion. Using these assumptions, the

post-PBD estimates could be understated by a cumulative $8.4 billion from

fiscal year 1998 to fiscal year 2003.

(701102) Page 43 GAO/NSIAD-97-83BR Defense Health Program
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