For Release on Delivery

Expected at 10:00 a.m.

Thursday, June 22, 2000

GAO/T-HEHS-00-138

DEFENSE HEALTH CARE

Opportunities to Reduce

TRICARE Claims

Processing and Other

Costs

Statement of Stephen P. Backhus, Director

Veterans’ Affairs and Military Health Care Issues

Health and Human Services Division

Testimony

Before the Task Force on Defense and International

Relations, Committee on the Budget, House of

Representatives

United States General Accounting Office

GAO
Page 1 GAO/T-HEHS-00-138

Mr. Chairman and Members of the Task Force:

I am pleased to be here today to discuss opportunities to reduce claims

processing and other costs of TRICARE—the Department of Defense’s

(DOD) managed health care program. Today more than 8.2 million activeduty personnel, retirees, and their dependents are eligible to receive care

under this $16 billion-per-year health care system. As the costs of

delivering health care continue to increase and as beneficiaries demand

improved and expanded services, significant pressures have been placed

on the system, and DOD continues to search for ways to address them.

Since TRICARE’s inception, we have reported on the challenges DOD

faces in delivering health care. DOD considers health care to be one of its

major quality-of-life issues important to maintaining a quality force. As a

result, DOD has continually striven to deliver this health care benefit and

to respond to suggestions made for improving its health care system.

Currently, DOD is facing increasing pressures to improve customer

service. Improvements in areas such as claims processing not only have

the potential to make the health care system more user-friendly and

efficient, but also to reduce costs.

At your request, my testimony today will focus primarily on the cost of

processing TRICARE claims. Additionally, I will briefly discuss two other

opportunities that potentially can reduce costs and improve service to

beneficiaries, namely increased anti-fraud efforts and more joint

procurement of pharmaceuticals and medical supplies with the

Department of Veterans Affairs (VA). You also asked that I discuss our

ongoing study of the process beneficiaries use to make medical

appointments. The information I am presenting is based on a substantial

body of work we have undertaken over the past several years on TRICARE

operations.

In summary, processing TRICARE claims costs several times as much as

processing Medicare claims–$7.50 compared to $1.78 per claim on average.

However, much of the cost difference appears to be attributable to

differences in program design and processing requirements. For example,

TRICARE offers three different benefit packages, with reimbursement

rates that are established for each provider, and a complex system of

authorizations and referrals. The program also experiences frequent

changes to coverage and operating policies that make it difficult to

administer. Nonetheless, we and others believe that opportunities exist to

reduce some of the approximately $225 million spent annually to process

claims. In response to the House version of the fiscal year 2001 Defense

Authorization bill, and through several of its own initiatives that mirror

Defense Health Care: Opportunities to

Reduce TRICARE Claims Processing and

Other Costs
Defense Health Care: Opportunities to

Reduce TRICARE Claims Processing and

Other Costs

Page 2 GAO/T-HEHS-00-138

private-sector practices, DOD has adopted and is planning several actions

to reduce claims processing costs, including increasing electronic claims

submission and web-based services to reduce the costs of claims review

and to deal with the large number of inquiries received by providers and

beneficiaries.

Beyond claims processing, we believe there are other opportunities to

reduce TRICARE costs and improve services. For example, although DOD

has efforts under way to combat health care fraud and abuse, these efforts

have only been marginally effective. Additional opportunities exist to save

potentially hundreds of millions of dollars that could be used to purchase

care for military beneficiaries. Also, we believe that additional cooperation

with the VA to procure pharmaceuticals and medical supplies could yield

substantial savings. Lastly, different systems are in place throughout the

military health system for making medical appointments, and beneficiaries

sometimes are unsure as to how to make such appointments, leading to

frustration with TRICARE. We are currently reviewing this process and

anticipate making recommendations for improving it at the conclusion of

our study.

DOD’s primary medical mission is to maintain the health of active-duty

service personnel and to provide health care during military operations.

DOD also offers health care to non-active-duty beneficiaries, including

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

retirees, if space and resources are available. The Army, Navy, and Air

Force provide most of the system’s care through their own medical

centers, hospitals, and clinics, totaling about 580 treatment facilities

worldwide. Civilian providers supply the remaining care. TRICARE is a

triple-option benefit program designed to give beneficiaries a choice

among a health maintenance organization (TRICARE Prime), a preferred

provider organization (TRICARE Extra), and a fee-for-service benefit

(TRICARE Standard).

TRICARE is organized geographically into 11 health care regions

administered by five managed-care support contractors. Among the

contractors’ many responsibilities are claims processing, for which all

have subcontracted with one of two companies. DOD requires contractors

to meet specific timeliness and accuracy standards when processing

claims. The tasks required to process claims include claims receipt, data

entry, claims adjudication, and claims payment or denial. During 1999,

contractors processed about 30 million health claims submitted by

institutions, health care providers, and beneficiaries.

Background
Defense Health Care: Opportunities to

Reduce TRICARE Claims Processing and

Other Costs

Page 3 GAO/T-HEHS-00-138

To help safeguard against health care fraud and abuse in its system, DOD

established a Program Integrity unit in 1982 to coordinate its antifraud

activities. This unit is responsible for developing policies and procedures

regarding the prevention and detection of TRICARE fraud and abuse.

DOD’s Office of Inspector General and the Department of Justice work

together with this unit (and sometimes also with the Department of Health

and Human Services) to investigate and prosecute alleged health care

fraud and abuse. DOD’s contracts with its five managed-care support

contractors also require them to perform antifraud and abuse activities to

help ensure that TRICARE dollars are used to pay only claims that are

appropriate.

Claims processing activities have generated a great deal of dissatisfaction

among providers and beneficiaries, as well as among various

congressional committees, and DOD recognizes that problems exist.

Complaints and frustrations stem from perceived inaccurate and late

payments; complex program rules, processes, and reporting requirements;

and high costs. All agree that the claims adjudication system needs to be

simplified and made more user-friendly, and that it could benefit from

increased use of technology. A number of administrative and legislative

actions are under way, which, if properly implemented, should reduce

TRICARE claims processing costs.

In August 1999, at the request of the House Subcommittee on Military

Personnel, Committee on Armed Services, we reported on the complexity

of the TRICARE program and benefit structure.1 This complexity

manifests itself in many aspects of claims processing such as high rates of

manual review, low electronic submission rates, and high customer inquiry

rates. These factors, in addition to the relatively small program size when

compared with Medicare, increase TRICARE claims processing costs

because fixed costs are spread over a smaller number of claims. Currently,

TRICARE claims cost an average of $7.50 per claim to process—double

the industry average and more than four times the $1.78 Medicare claims

processing cost.

Contractors told us that of the many programs they administer, including

Medicare and private plans, TRICARE is the most complicated,

contributing to claims processing difficulties and high costs. For example,

1Defense Health Care: Claims Processing Improvements are Under Way but Further Enhancements are

Needed (GAO/HEHS-99-128, Aug. 23, 1999).

Program Complexity

Impedes Claims

Processing Efficiency;

Improvements Under

Way

Program Complexity and

Size Contribute to High

Claims-Processing Costs
Defense Health Care: Opportunities to

Reduce TRICARE Claims Processing and

Other Costs

Page 4 GAO/T-HEHS-00-138

each of TRICARE’s three options has a different array of benefits,

copayments, and deductibles. Claims require different adjudication

procedures, depending on which option is involved, and contractual

requirements for prepayment review further complicate the process.

Complexities such as these are manifested as thousands of edits in the

adjudication logic of the claims processing system. These edits result in

claims being “kicked out” of the system for manual review, which extends

processing time and increases administrative costs. Over half of

TRICARE’s claims are manually reviewed, a rate significantly higher than

the industry average of 25 percent.

Program complexities also contribute to numerous beneficiary and

provider inquiries, which add considerably to the cost of processing a

claim. TRICARE claim inquiry rates average about one for every 4.5

claims—four times higher than Medicare inquiries. Documentation shows

that beneficiaries frequently inquire about their benefits and cost shares

because they do not understand the program. Providers inquire most often

about payment issues primarily because the same services might be

reimbursed at different amounts depending on which TRICARE option the

beneficiary is using. TRICARE has thousands of unique fee schedules and

contracts that change frequently. In contrast, Medicare reimbursement is

more consistent because it has national standard physician and hospital

payment methodologies. In addition, Medicare inquiries are handled

almost entirely by automated systems.

TRICARE’s per-claim processing costs are higher than Medicare’s also

because TRICARE’s fixed costs are spread over a smaller claims base.

Medicare costs are spread over about 900 million claims per year, whereas

TRICARE processes only about 30 million claims per year.

Under TRICARE less than 20 percent of hospital and professional claims

are submitted electronically, compared to the Medicare average of about

85 percent. Electronic claim submissions are faster, involve less chance of

data input error, and are less expensive to process than paper claims.

Paper-based claims require significant front-end handling in the mailroom,

document preparation, imaging, data entry, and storage. However, because

TRICARE is usually a small percentage of providers’ income—often less

than 5 percent—providers have no incentive to incur the expense of

adapting their computer systems to permit electronic TRICARE claim

submission. Furthermore, because 98 percent of claims are paid within

timeliness standards, the incentive to submit electronic claims is further

reduced.
Defense Health Care: Opportunities to

Reduce TRICARE Claims Processing and

Other Costs

Page 5 GAO/T-HEHS-00-138

Nevertheless, we believe that some opportunities exist to reduce the

administrative costs associated with processing a TRICARE claim. One of

the claims processing subcontractors reported that $4.46 of each claim

processed—totaling about $125 million per year—is paid for services

provided or processes required by the program above the costs of

determining payment outcomes. For example, responding to TRICARE

inquiries reportedly costs $1 per claim more than responding to Medicare

inquiries. Other costs that we consider to be targets of opportunity include

mailroom handling, document preparation, imaging, paper storage, data

entry, and certain reporting requirements. A number of initiatives are

currently under way or planned that may reduce these costs as described

below.

Several legislatively directed and DOD-initiated efforts are under way to

simplify the claims adjudication process, improve provider and beneficiary

education, and increase electronic claims submission. If properly

implemented, these actions should reduce TRICARE claims processing

costs.

For example, the House version of the fiscal year 2001 Defense

Authorization bill would direct that the Secretary of Defense take action to

require high-volume TRICARE providers to submit claims electronically,

and increase the use of automated voice response systems for provider

inquiries on claims status. Also, the bill would direct that certain

administrative reporting requirements be reduced.

With the assistance of a consultant, DOD has developed and is

implementing a plan that calls for eliminating unnecessary or duplicative

processes that interfere with optimal performance, emphasizing the use of

commercial best practices and Medicare standards. For example, the plan

calls for adopting Medicare’s standards for processing timeliness and the

elimination of DOD required edits that should help decrease the number of

manually reviewed claims. According to one of the claims processing

subcontractors, some of these edits are unnecessary while others should

be modified or retained. For example, claims for electrocardiograms must

be manually reviewed, but in every case so far, the claims have been paid

after review. Last year, for one TRICARE contract, almost 14,000 claims

for this procedure were submitted. While DOD has issued formal contract

modifications for all the changes it wants to make, contractors have not

yet had time to implement all of them.

Additionally, DOD is pursuing the possible use of Medicare’s provider

identification numbers to encourage and facilitate electronic claims

Initiatives Under Way to

Improve Claims Processing

Efficiencies
Defense Health Care: Opportunities to

Reduce TRICARE Claims Processing and

Other Costs

Page 6 GAO/T-HEHS-00-138

submission. Also, DOD now permits contractors to delay the payment of

paper claims (as an incentive for providers to submit electronically) so

long as the contractors continue to meet standards. This initiative mirrors

Medicare’s process for increasing the number of claims submitted

electronically. Further, to reduce the number of manual reviews, DOD is

encouraging contractors to limit prepayment review of certain types of

claims if appropriate.

DOD and the contractors are also looking at ways to use new technology

on the World Wide Web to reduce administrative costs and increase

provider and beneficiary satisfaction. Currently, TRICARE claims

processing subcontractors have developed comprehensive Web sites

containing information on policy and benefits, electronic claims

submissions, and claim status.2 In addition, DOD and contractor officials

are considering future use of the Internet as a means to submit claims for

processing. This method, which is similar to that used for electronic

claims, might provide a more expedient, less expensive means of handling

claims. However, before this Web-based technology can be utilized, the

government must define security requirements to ensure privacy.

Nonetheless, because TRICARE makes up such a small percentage of most

providers’ business, neither Web-based nor electronic claims submissions

are likely to significantly increase in volume without specific incentives or

mandates. However, mandates may increase providers’ reluctance to

participate in the program. In the future these problems may be mitigated

as a result of industry-wide requirements to adopt uniform standards for

electronic health care transactions, including claims.3 Uniform standards

for electronic claim submissions will enable providers to submit claims for

any health insurance plan in the same filing format.

2One subcontractor’s Web site (www.mytricare.com) allows beneficiaries to access claim status while

the other subcontractor’s site (www.wpsic.com) gives providers access. Both sites are designed to

ensure the privacy of beneficiary information.

3The Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191) requires the

industrywide adoption of uniform standards for electronic transactions, including claims filing.
Defense Health Care: Opportunities to

Reduce TRICARE Claims Processing and

Other Costs

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While DOD does not know the precise extent of fraud and abuse in its

health care system, it estimates potential annual losses to its TRICARE

program to be in the hundreds of millions of dollars. In addition to the

financial loss, health care fraud and abuse also affects the quality of care

provided and may cause serious harm to patients’ health. Despite its

responsibility to prevent and detect health care fraud and abuse, DOD has

not been effective in doing so, recovering less than 3 percent of its

estimated losses to fraud and abuse between 1996 and 1998. DOD has the

opportunity to improve its antifraud efforts by developing clear and

measurable goals and ensuring that contractors comply with the antifraud

requirements in their contracts.

DOD estimates that losses due to fraud and abuse could account for

10 to 20 percent of military health care expenditures. These ranges are

consistent with estimates of other public and private-sector organizations,

such as the Health Care Financing Administration, the U.S. Chamber of

Commerce, the Health Insurance Association of America, and the National

Health Care Anti-Fraud Association. Given TRICARE’s expenditure of

about $2.9 billion for contracted civilian-provided care in fiscal year 1999,

DOD could be losing between $290 million and $580 million annually to

fraud and abuse. DOD officials acknowledged that they could be more

effective in combating fraud and abuse if their TRICARE contractors were

more proactive in identifying and referring potential fraud cases. They also

agreed that they should expedite the implementation of revised antifraud

policies and requirements that place greater demands on contractors to

identify and prevent fraud and abuse. However, although DOD provided

contractors with antifraud software, not all contractors are using the

software. Further, DOD required contractors to develop and submit

antifraud plans, but most contractors’ initial antifraud plans were

deficient. Current statistics do not indicate any significant improvements

in DOD’s antifraud efforts. Out of over 40 million claims processed from

January 1999 through April 2000, only 17 fraud referral cases from the

contractors have been accepted by DOD for investigation.4

4 These 17 cases all involved high dollars or had the potential to cause patient harm. In addition,

contractors submitted numerous small dollar cases that DOD has returned, believing they should be

handled as overpayments rather than as fraud.

DOD Could Save

Hundreds of Millions

of Dollars With a

More Effective

Antifraud Program
Defense Health Care: Opportunities to

Reduce TRICARE Claims Processing and

Other Costs

Page 8 GAO/T-HEHS-00-138

We recently testified that DOD and VA would benefit through additional

cooperative efforts to procure pharmaceuticals and through the use of

VA’s Consolidated Mail Outpatient Pharmacy (CMOP) for DOD’s

prescription refill workload.5 As the largest direct federal drug purchasers,

the Departments already enjoy varying, though significant, discounts on

their drug purchases. The expectation is that, as the two agencies buy

more of a particular drug, their leverage—particularly under competitively

bid contracts—would permit them to obtain even greater discounts from

drug manufacturers and to save funds for both Departments. Currently,

the two agencies have awarded 18 joint and 51 separate national contracts

representing 19 percent of their combined drug expenditures of $2.4

billion in fiscal year 1999. We believe that VA and DOD could potentially

save $150 to $300 million more each year by jointly purchasing other

medications they both use.

Further, additional savings could be achieved by utilizing VA’s mail-out

pharmacy program to handle DOD’s annual refill workload of about 23

million prescriptions. For example, VA has the capability for mail order

refills through its CMOP and documentation shows that CMOP refills cost

about one-half of DOD’s current costs of refilling prescriptions at military

pharmacies. CMOPs potentially could reduce military pharmacy refill

dispensing costs by about $45 million annually.

Since the inception of TRICARE, beneficiaries have complained about the

difficulties they encounter in making appointments for health care. For

years beneficiaries seeking to make appointments in military treatment

facilities accessed care by calling the desired clinic directly. Over the past

several years however, DOD has been moving towards a centralized

appointment system. In some military medical facilities an appointment

center has been created and beneficiaries call that center to schedule

various types of appointments. In four TRICARE regions though,

TRICARE contractors have established regional appointment centers

which beneficiaries call to schedule appointments with physicians in

military medical facilities. The contractors perform this function as part of

their administrative tasks under their contracts with DOD. We are

currently reviewing the appointment making process in TRICARE.

We are finding that the lack of uniform appointment names and

requirements for scheduling appointments has resulted in confusion for

5DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could Save Millions of

Dollars (GAO/T-HEHS-00-121, May 25, 2000).

Additional Joint

Procurement of

Pharmaceuticals With

VA Would Yield

Substantial Savings

Improving the Medical

Appointment Process

Would Likely Increase

Beneficiary

Satisfaction
Defense Health Care: Opportunities to

Reduce TRICARE Claims Processing and

Other Costs

Page 9 GAO/T-HEHS-00-138

both appointment clerks and beneficiaries, with beneficiaries sometimes

being transferred from the appointment center to the military clinic, or

told to call the clinic themselves.

Thus, what is meant to be a simplified, more user-friendly appointment

process appears to be a complex and confusing process, where

beneficiaries are unsure as to whether to call the contractor or the military

medical facility to schedule appointments. We expect to be making

recommendations at the conclusion of our work.

Mr. Chairman, this concludes my prepared statement. I will be happy to

answer questions you or other Task Force members may have.

For more information regarding this testimony, please call Stephen P.

Backhus at (202) 512-7101. Key contributors include Michael T. Blair, Jr.,

Lois L. Shoemaker, and Bonnie W. Anderson.

(101645)

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