United States General Accounting Office

GAO Report to the Chairman and Ranking

Minority Member, Subcommittee on

Military Personnel, Committee on

National Security, House of

Representatives

August 1997 DEFENSE HEALTH

CARE

TRICARE Resource

Sharing Program

Failing to Achieve

Expected Savings

GAO/HEHS-97-130

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-276961 

August 22, 1997

The Honorable Stephen E. Buyer

Chairman

The Honorable Gene Taylor

Ranking Minority Member

Subcommittee on Military Personnel

Committee on National Security

House of Representatives

The Department of Defense’s (DOD) nationwide managed care program,

called TRICARE, is intended to improve the military community’s access

to health care while maintaining quality and controlling costs. TRICARE

represents a significant effort to reform DOD’s $15 billion per year health

system. DOD’s approach to this reform involves a unique partnership

between military and civilian health care entities that will include seven

multistate managed care support contracts together estimated to cost

about $17 billion over 5 years. In that partnership arrangement, resource

sharing is an important cost-saving feature. To share resources, the

contractor supplements the capacity of a military hospital or clinic by

providing civilian personnel, equipment, or supplies. DOD has estimated

that resource sharing could save about $700 million1

 over 5 years for the

contracts under way during our review.

Because of your Subcommittee’s continuing interest in DOD’s use of

support contracts to help deliver health care and, specifically, to control

costs, we reviewed the cost-saving feature of resource sharing. In

particular, we focused on (1) whether resource sharing savings are

meeting DOD’s projections and thus helping control TRICARE costs,

(2) what problems DOD might be encountering in pursuing resource

sharing, and (3) actions and alternatives pursued by DOD to overcome

those problems. Also, we considered the implications of resource sharing

within the broader context of TRICARE’s overall cost-effectiveness.

In doing our work, we held discussions and examined records at DOD

headquarters in Washington, D.C.; TRICARE regional offices; military

hospitals and clinics; and contractor offices. We focused on resource

sharing experiences under the first four contracts, involving seven

TRICARE regions that had been active long enough for us to draw

conclusions about the progress of resource sharing. We also examined

1

This does not include expected savings from the most recently awarded contract, which began

operating April 1, 1997, or from the remaining two contracts yet to be awarded.

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TRICARE policies and plans DOD has devised or is considering that will

affect resource sharing’s future. Finally, we reviewed data, which DOD

provided in response to our findings, suggesting that TRICARE savings

other than from resource sharing were occurring. Appendix I further

describes our work’s scope and methodology. Appendix III shows the

contract start dates and related TRICARE regions.

Results in Brief Thus far, DOD and the contractors have made agreements likely to save

about 5 percent of DOD’s overall resource sharing savings goal.2

 At that

rate, after 9 to 24 months of operations, about $36 million of the expected

$700 million in savings will be realized. New agreements are being

considered, but neither DOD nor the contractors are confident that pending

agreements will be reached or that further cost savings can be attained.

Because resulting TRICARE contract costs may be greater than

anticipated, both parties may experience related financial losses.

Problems impeding progress on resource sharing agreements and the

related savings have included lack of clear program policies and priorities,

uncertainty about cost effects on military hospitals, lack of financial

rewards for the hospitals entering into such agreements, and changes in

military hospital capacities after contractors developed bids. In response,

DOD has revised policies, improved training and analytical tools, and taken

other steps to promote resource sharing under the contracts, but to date,

these efforts have not been sufficient to bring needed results.

For the last two contracts, soon to be awarded, DOD is applying a revised

financing approach that includes resource sharing but at a reduced level.

The new approach allocates more funds to the military hospitals and less

to the contractors, enabling the hospitals to directly acquire and use

outside resources rather than use resource sharing with the contractor.

But how the military hospitals, other sources, and contractors would

interact under the new approach is still being defined and has not been

tested. Therefore, it is not possible to say whether it will work. Moreover,

resource sharing problems will not be automatically eliminated and may

be exacerbated when used in combination with revised financing.

For the future, DOD plans even broader changes intended to simplify

military hospital budgeting and support contract operations. DOD has

concluded that the current approach, including resource sharing, does not

2

Resource sharing also includes support contractor conversions of previous agreements DOD hospitals

had with civilian providers. But these agreements existed before TRICARE, such that savings

associated with them were not part of DOD’s new projected TRICARE resource sharing savings.

Page 2 GAO/HEHS-97-130 TRICARE Resource Sharing
B-276961 

provide adequate accountability and incentives for delivering

cost-effective care. While the military hospitals and contractors could still

use resource sharing, it no longer would be the basis for projecting major

savings and lowering bids at the contract’s outset. But, as DOD goes about

the budgeting and contracting changes, unless they are specifically

addressed, the kinds of policy, priority, and procedural problems that

plagued resource sharing may continue to impair any new initiatives’

cost-savings efforts. In addition, such TRICARE efforts may be made even

more challenging by leadership changes in health care management now

under way in DOD.

DOD officials acknowledged their resource sharing savings problems but

told us that lower than expected contract award prices have led to over

$2 billion in unexpected, offsetting savings. They said that the contract

amounts have underrun cost projections, made as early as 1993, of what

CHAMPUS3 costs would have been during the contract periods. While

TRICARE’s overall cost-effectiveness was beyond our review’s scope,

there are reasons to question the currency and analytical completeness of

DOD’s preliminary savings claims. Thus, we support DOD’s current plans4 to

undertake a detailed analysis, based on more up-to-date cost data and

estimates, of TRICARE’s overall cost-effectiveness.

Background DOD’s primary medical mission is to maintain the health of 1.6 million

active duty service personnel5

 and provide health care during military

operations. Also, as an employer, DOD offers health care to 6.6 million

other military-related beneficiaries, including dependents of active duty

personnel and military retirees and their dependents. Most care is

provided in about 115 hospitals and 470 clinics—referred to as military

treatment facilities, or MTFs—worldwide, operated by the Army, Navy, and

Air Force. DOD’s direct care system is supplemented by care paid for by

DOD but provided in civilian facilities. In fiscal year 1997, DOD expects to

spend about $12 billion providing care directly and about $3.5 billion for

care in civilian facilities.

3

The Civilian Health and Medical Program of the Uniformed Services, a DOD-administered

insurance-like program that has traditionally supplemented DOD’s direct care system.

4

Also, as required by the National Defense Authorization Act for Fiscal Year 1996, DOD has contracted

for an independent study to, among other things, review TRICARE’s cost-effectiveness. Under the

contract, the first results report is due by January 31, 1998.

5

Also includes members of the Coast Guard and the Commissioned Corps of the Public Health Service

and the National Oceanic and Atmospheric Administration, who are also eligible for military health

care.

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B-276961 

In response to increasing health care costs and uneven access to care, in

the late 1980s, DOD initiated, under congressional authority, a series of

demonstration programs to evaluate alternative health care delivery

approaches. On the basis of this experience, DOD designed TRICARE as its

managed health care program.

The TRICARE program uses regional managed care support contracts to

augment its MTFs’ capacities by having contractors perform some managed

care functions, including arranging civilian sector care. Altogether, seven

managed care support contracts will be awarded covering 11 TRICARE

regions (see app. II). To coordinate MTF and contractor services and

monitor care delivery, each region is headed by a joint-service

administrative organization called a “lead agent.”

Thus far, DOD has awarded five contracts to three health care companies

covering eight TRICARE regions. The contracts are competitively awarded

and fixed price, although the price is subject to specified adjustments for

changes in beneficiary population, MTF workload, and other factors beyond

the contractor’s control.

DOD officials believe that care provided to its patients at military facilities

is less expensive than such patients’ care at civilian facilities. Resource

sharing arrangements are designed to permit DOD and the contractor to

share contractor-provided personnel, equipment, supplies, and other items

in an effort to maximize savings. To identify resource sharing

opportunities, contractors analyze such data as historical health care

costs, workload, and care use, and visit military facilities. They then

project the expected savings from providing care in military facilities

rather than in potentially more expensive civilian settings. The contract is

designed so that the contractor’s expected savings over the contract’s life

from the resource sharing are deducted from the contractor’s final offer

when bidding on a contract. The contract price thus reflects such

anticipated savings through shared resources.

The contract also is subject to a risk-sharing arrangement under which the

government and the contractor share responsibility for health costs that

overrun the contract price. Contractors are at risk for their bid amount of

health care profit plus up to 1 percent of the bid health care price. Beyond

that, the contractor and the government share in losses until an amount

prepledged by the contractor, called “contractor equity,” is depleted. At

that time the government becomes fully responsible for any further losses.

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Thus, DOD’s initially realized savings in the form of a lower contract price

could be reduced or lost if actual health care expenses are higher than

anticipated. Accordingly, DOD encourages MTFs to help the contractor

achieve projected resource sharing volume and savings.

Resource sharing savings, along with expected savings from other sources,

such as negotiated provider discounts; better health care utilization

management; and better claims management, including collections from

other health insurance plans, contribute to government and contractors’

overall financial gains. The combined expected savings from resource

sharing and other sources are important as offsets to the increased costs

of managing care under TRICARE. Also, statutorily, TRICARE costs

cannot be greater than the health costs DOD otherwise would have incurred

under CHAMPUS and the direct care system in the program’s absence

(National Defense Authorization Acts for Fiscal Years 1994 and 1996, P.L.

103-160 and P.L. 104-106, 10 U.S.C. 1073 note).

We reported last year that lack of resource sharing progress was one area

that could impair efforts to contain related TRICARE costs and achieve

savings. We reported that resource sharing was a complex and difficult

process and that the process’ details were not well developed or

understood, including uncertainty about how resource sharing agreements

may affect contract price adjustments.6

Resource Sharing

Savings Falling Short

of Projections

DOD and the contractors are not attaining major new savings through

resource sharing agreements, and the potential for new agreements and

further savings appears limited. On the basis of progress to date and

discussions with DOD and contractor officials, achieving overall projected

resource sharing savings appears highly unlikely.

For the contracts under way, DOD projected saving about $700 million,

including $116 million through the current operating years. The

contractors’ projections were similar. But by March 1997, after 9- to

24-month contract operating periods, new resource sharing agreements

represented only about 5 percent of the savings needed to achieve DOD’s

projected savings. In addition to the new agreements, contractors have

also converted into resource sharing agreements previously existing

agreements that MTFs had with civilian providers before TRICARE became

operational. At one MTF, for example, on the day the support contract

6

Defense Health Care: Managed Care Plan Progressing, but Cost and Performance Issues Remain

(GAO/HEHS-96-128, June 14, 1996).

Page 5 GAO/HEHS-97-130 TRICARE Resource Sharing
B-276961 

became operational, seven existing agreements were converted to

resource sharing agreements. But savings associated with those converted

agreements do not represent new TRICARE savings and thus were not

part of DOD’s new projected savings.

Support contractors and DOD are aware of the lack of progress in resource

sharing. One contractor’s representative told us that achievements so far

are just previous agreement conversions and that a more aggressive

approach toward new agreements is needed. Another said lack of progress

in negotiating new agreements remains their greatest TRICARE contract

concern. DOD officials expressed mixed views ranging from optimism that

resource sharing momentum will build to the belief that the approach

simply will not work as envisioned.

At this time, the potential for further resource sharing savings appears

limited. In March 1997, the contractors had about 170 new resource

sharing possibilities in some stage of cost and workload data gathering or

analysis, or in some way being considered as potential agreements. For

example, one region had 39 resource sharing possibilities under

development, covering an array of services such as cardiology, radiology,

and internal medicine. Officials told us, however, that considerable

analysis was needed before potential savings could be reliably estimated

and that some of the proposals likely would not prove cost-effective.

Meanwhile, additional proposals are being added and existing ones

deleted as the proposal and evaluation processes continue. But, as

previously indicated, savings to date show that not enough is being done

to reach DOD’s projected resource sharing savings levels.

Problems

Encountered in

Establishing

Agreements

In addition to agreements already implemented or under consideration, by

March 1997, over 260 other resource sharing proposals had been either

rejected or otherwise not further pursued. Our analysis indicated that

various impediments exist to resource sharing, including lack of clear

policies, program complexity, lack of MTF incentives, and military

downsizing.

Issued in December 1994, DOD resource sharing guidance stated that MTFs

had an obligation to help contractors reach the bid amount of resource

sharing savings. But the guidance also instructed MTFs to look for other,

possibly more cost-effective ways to increase MTF resource use, such as by

reallocating existing resources, referring patients to other MTFs, or directly

contracting with civilian care providers other than the support contractor.

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When some MTFs pursued such alternatives, one contractor objected,

stating its belief that resource sharing was the first alternative for

increasing MTF use. In November 1996, DOD issued new guidance stating

that resource sharing was the first alternative and that MTF commanders

should make good faith efforts to work with contractors to execute such

agreements.

MTF and contractor officials cited the resource sharing approach’s

complexity as another factor limiting progress. The agreements require

considerable financial analysis to assess their cost-effectiveness potential

(see app. IV). Also, the agreements involve intricate issues of how much

credit contractors should receive for adding to the MTFs’ workload and

how that credited workload will affect the contract price. MTF officials told

us they did not understand all of the agreements’ financial implications,

largely because they did not control or understand all the data and

analyses used. They were concerned that workload shifts between MTFs

and contractors, and ensuing bid price adjustments, would enable

contractors to gain at MTFs’ workload and budgetary expense. At two MTFs,

for example, proposed gastroenterology assistance agreements, projected

to save over $400,000, were rejected because of unresolvable MTF concerns

about possible effects on the overall contract price.

Both contractor and MTF officials expressed concerns—and resulting

hesitance to enter into agreements—about the reliability of data used to

analyze agreements’ potential cost-effectiveness. According to contractors,

for example, several MTFs supplied inappropriate data, such as personnel

salaries and hospital maintenance, that hampered their analyses of the

proposals’ likely costs and other effects. At one of the MTFs, eight proposed

agreements were rejected because of data problems.

Tied to the complexity and data problems, a lack of incentive to enter into

agreements because MTFs do not share in resulting savings was also cited

by MTF officials. DOD and the Services have not established a savings return

policy for MTFs that have resource sharing agreements. Instead, after

consideration, the Services decided that any such savings are to be

retained at the Service level for reallocation as needed within the system.

Still another MTF resource sharing disincentive is that the agreements can

actually increase facility costs. For example, an agreement to provide an

anesthesiologist, so the MTF can do more surgeries, will in turn result in

related radiology, laboratory, and pharmacy costs. Unless contractors

compensate MTFs for such costs, MTFs’ overall costs may increase. While

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the contracts provide for such contractor compensatory payments, a

July 1996 DOD policy clarification was issued to help facilitate such

payments. A remaining challenge has been MTF and contractor negotiations

on what costs to apply to individual agreements.

Both DOD and the contractors cited military downsizing, including at the

MTFs, as another limiting factor. Resource sharing opportunities identified

during the contract bidding process may no longer exist as military forces

are reduced or relocated and as MTFs are closed, downsized, or converted

to clinics. For example, one MTF rejected five proposals because it had

subsequently reduced its operating rooms from eight to four, thus

obviating the need for agreements.

Resource sharing problems have prompted one contractor to request a

contract price adjustment. In June 1996, near the start date of health care

delivery, the contractor reported that while the other care delivery

preparations had progressed well, the lack of resource sharing progress

was a major problem. Projecting millions of dollars in financial losses, the

contractor requested a price renegotiation. In a letter to DOD, the

contractor complained about changing DOD rules on how the approach was

to work, inadequate data, improper MTF incentives, insufficient MTF

training in developing agreements, and postaward MTF workload and

capacity changes that reduced resource sharing opportunities. DOD

generally agreed that problems existed, committed to work collaboratively

to resolve them, and scheduled meetings with the contractor to pursue the

issues in more detail. DOD said, however, that a price renegotiation was

premature at the time. As of May 1997, the contractor was still pursuing a

price adjustment.

DOD’s Actions to

Address Resource

Sharing Problems

DOD has acted to increase resource sharing under current contracts. For

the latest two contracts, soon to be awarded, DOD will be applying an

alternative approach, referred to as “revised financing,” that relies less on

resource sharing for savings but adds other challenges. For the future, DOD

is planning far broader changes in MTF budgeting and support contracting,

which are expected to further reduce reliance on resource sharing.

Attempts to Improve

Resource Sharing Under

Current Contracts

DOD has worked to facilitate resource sharing through policy issuances and

provision of analytical tools. Since issuing resource sharing guidance in

December 1994, DOD headquarters officials visited the regions to provide

briefings, used a focus group to help make resource sharing easier to use,

Page 8 GAO/HEHS-97-130 TRICARE Resource Sharing
B-276961 

developed standardized training, and attempted to promote better DOD and

contractor cooperation. Also, the contractors have continued to work with

the MTFs to identify and pursue resource sharing opportunities.

In November 1996, DOD issued clarifying policy stating that resource

sharing is to be the first alternative for recapturing private sector

workload into the MTF. Lead agents and MTFs are to ensure that any other

MTF actions to add or retain workload do not prevent the TRICARE

support contractor from entering into cost-effective agreements and

reaching their resource sharing bid amounts.

In July 1996, DOD clarified its policy regarding cash payments by support

contractors to MTFs for marginal costs stemming from agreements. In a

related move, DOD recently made available $25 million to the Services to

help pay such marginal costs, or for the MTFs to otherwise invest in

agreements, and asked the Services to submit potential projects for the

funds’ use. In April 1997, DOD told us that some funds had been approved

for only two or three requests.

To help reduce resource sharing complexities, DOD provided a financial

analysis worksheet for determining whether an agreement might be

cost-effective and whether the amount of recaptured workload credited to

the contractor is appropriate (see app. IV). DOD later revised the worksheet

to, among other things, account for different agreement types. DOD also

provided an analytical model further showing the MTFs’ resource sharing’s

potential financial effects. The model was introduced to the MTFs in

July 1996.

DOD created a resource sharing focus group after a lead agent reported in

January 1996 that resource sharing was complicated and presented MTFs

with disincentives. The group worked for about 6 months and

recommended improvements in such areas as training, the financial

analysis worksheet, and the data used to make agreements.

In early 1996, DOD began developing a TRICARE Financial Management

Education Program curriculum that included resource sharing and the bid

price adjustment process. Program testing was completed in December

and presentations have begun.

In November 1996, DOD initiated a new “partnering” effort with the

contractors. DOD saw a need to help MTFs and contractors work through

data problems, contract ambiguities, resource constraints, and other

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TRICARE difficulties. The partnering approach calls for a more

cooperative, trusting, teamwork relationship between MTFs and support

contractors, including ways to avoid disputes and to informally resolve,

rather than possibly litigate, those that occur. Early actions included DOD

meetings with contractors at headquarters and regional levels, contractor

participation in a national TRICARE conference, and consideration of

assigning representatives of lead agents and the contractors to work

together at each other’s locations.

The bottom-line measure of DOD’s and the contractors’ efforts is in the

progress made entering new resource sharing agreements. But progress

remains slow, and the prospects for additional agreements are

questionable. These outcomes, along with one contractor’s request for

financial relief and DOD’s recognized need to improve teamwork, indicate a

need for more concerted efforts under the current contracts to reach the

agreements that are pending while seeking acceptable alternatives to

resource sharing.

Revisions Under the Latest

Contracts Reduce Reliance

on Resource Sharing but

Add Complications

DOD’s revised financing approach, conceived before the first support

contract began operating but applied only in the latest two, is intended to

strengthen MTF health care management. Under this approach, MTFs’ direct

funding and financial responsibilities will be increased. The funding

increase will be determined by the amount of previous CHAMPUS

expenditures for MTF-based TRICARE Prime7 enrollees, which DOD expects

will include most MTF service areas’ beneficiaries. Thus, rather than

sharing responsibility for Prime enrollees with the support contractor, the

MTFs will have full funding and full responsibility for their Prime enrollees

and will pay the contractor for care required from the contractor’s

network. One result of this approach will be to reduce reliance on

resource sharing to lower support contract costs; but it also adds new

challenges and does not eliminate, and may even exacerbate, resource

sharing problems.

Giving the MTFs direct financial control for TRICARE Prime enrollees is

aimed at providing them with clearer incentives to efficiently manage care

use and to behave more like private sector HMOs. DOD saw the need for this

while still arranging the earlier contracts and later viewed it as a way to

relieve emerging resource sharing problems. But, under revised financing’s

7

TRICARE is designed to give beneficiaries a choice among TRICARE Prime, which is similar to a

health maintenance organization (HMO); TRICARE Extra, which is similar to a preferred provider

organization; and TRICARE Standard, which is the current fee-for-service-type benefit. Beneficiaries

who select TRICARE Prime must enroll to receive care under this option.

Page 10 GAO/HEHS-97-130 TRICARE Resource Sharing
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current approach, DOD will continue sharing care costs with the contractor

for beneficiaries not enrolled with the MTFs. Also, the MTFs will continue

working with the new contractor toward signing resource sharing

agreements. Thus, to the extent contractor reliance on resource sharing

continues, the difficulties already experienced are also likely to continue.

DOD believes revised financing gives MTFs added cost-saving incentives to

engage in resource sharing by reducing the need for referral of their

enrollees to the TRICARE support contractor. However, revised financing

may add further complexity to resource sharing’s use. Because the new

approach’s potential effects on resource sharing are not now known,

TRICARE contract offerors must make their own assumptions and

projections about such effects. Much will depend, for example, on how

MTFs’ funding levels may change and the consequent alterations in their

beneficiary service priorities. And the added extent of funding going to

MTFs rather than to contractors will in turn depend on the MTFs’ capacities

and ability to enroll beneficiaries and serve as their primary care

manager—all of which have yet to be determined.

Revised financing’s effects on resource sharing are uncertain and were at

issue during the two affected contracts’ bidding processes. One bidder, a

current TRICARE contractor, wrote to DOD to clarify what portion of the

funds the MTFs and contractor respectively would control and how revised

financing would affect resource sharing. In earlier discussions, the bidder

told DOD the company could be creative and assume resource sharing

opportunities would still exist or assume none would exist. DOD replied

that the new approach’s effects on resource sharing were uncertain but

that the successful bidder should work creatively with the MTFs to achieve

resource sharing. DOD also amended the request for a bid proposal to

provide more description and examples of how revised financing and

resource sharing might be integrated. But, as with resource sharing under

the current contracts, the new approach’s actual effects will not be known

until it is implemented.

While DOD officials in regions with contracts generally favored revised

financing, they expressed concerns about poor accounting systems and

lack of data on patient care costs and outcomes that MTFs will need to

become effective, cost-competitive providers. Some had concerns about

the general lack of MTF health care management experience and control

over their staffing. MTF officials in regions about to apply revised financing

have stated that they recognize their increased need for accountability,

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adequate staffing to support their enrollees, and better information

systems to support resource sharing decisions.

While theoretically possible, revised financing’s potential has yet to be

demonstrated. Also, while revised financing reduces reliance on resource

sharing, it does not eliminate or necessarily alleviate resource sharing

problems and may exacerbate such problems under the new contracts.

More Contracting and

Related Budgeting

Changes Planned, With

Broader Implications

For the future, DOD plans other changes to simplify TRICARE contracting

and MTF budgeting. The changes would incorporate revised financing and

further reduce reliance on resource sharing but also would have far

broader implications for current and future contracts. Adding to such

TRICARE initiatives’ challenges are changes in DOD’s top leadership in

Health Affairs.

DOD is now considering alternative structures for future contracts, on the

basis of our recommendations8

 and those from lead agents, contractors,

and others in the health care industry. The alternatives include smaller,

shorter, and less prescriptive contracts, allowing contractors to rely more

on their own “off-the-shelf” commercial practices. DOD has held several

forums to discuss ideas and the alternative approaches’ potential

advantages and disadvantages. The issues involved include effects on

beneficiary choice of providers, assurance of contractor qualifications,

quality of care, DOD and contractors’ risk sharing, administrative

complexity, adequacy of bid competition, and DOD costs. No final decisions

have been made yet.

The new contract structures likely will include an approach similar to

revised financing. Basically, each MTF would be funded to cover all its

enrollees in TRICARE Prime, and the contractor would be funded for all

other beneficiaries. Thus, each MTF and contractor would be responsible

for its share of the beneficiary population’s care costs, and would

reimburse each other when one provides services to the other’s

beneficiaries. For example, the contractor would reimburse an MTF for

caring for a nonenrollee, and one MTF would reimburse another upon

referring its own enrollee for care there. One aim of the funding approach

would be to eliminate reliance on resource sharing as a major source for

TRICARE savings.

8

Defense Health Care: Despite TRICARE Procurement Improvements, Problems Remain

(GAO/HEHS-95-142, Aug. 3, 1995).

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In April 1997, DOD accelerated the planned change in MTF budgeting and

contract financing and announced it would be effective at the start of

fiscal year 1998. This means that not only will the changes apply to future

contracts but also current contracts will have to be amended. DOD expects

that changing the current contracts may have cost implications of

unknown extent at this time for both the government and the contractors.

Commenting on a February 1997 DOD policy draft, one contractor said that

any change that would avoid reliance on resource sharing, bid price

adjustments, and resulting MTF disincentives would be positive. The

contractor added, however, that DOD needs to involve the contractors in

weighing the new budgeting and financing approach’s assumptions and

risks to ensure it will work; otherwise contract prices may increase to

cover the unknown risks. Another contractor said that many of the details

had yet to be worked out and that two remaining questions are how

funding will be split between MTFs and contractors and how resource

sharing will be affected.

Such budgeting and contracting changes reach far beyond an expectation

that they will reduce the need for resource sharing. This notwithstanding,

DOD lacks a simple, stable, long-term approach to TRICARE budgeting and

contracting that provides clear managed care incentives and

accountability and avoids the complexities and disincentives of resource

sharing. As the contractors indicated, whether the contemplated system

changes succeed will depend upon how these details are worked out and

how well DOD and the contractors manage the system and support each

other.

In addition, both the Assistant Secretary of Defense (Health Affairs) and

the Principal Deputy Assistant Secretary, who have actively and forcefully

led TRICARE since its beginning, have left their positions. The former

Principal Deputy has taken the Assistant Secretary position in an acting

capacity. The Principal Deputy position has been filled, but to date no

successor to the Assistant Secretary has been nominated. These top DOD

leadership changes may add to the challenge of successfully reducing

reliance on resource sharing and adopting broader budgeting and

contracting changes.

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DOD Views Resource

Sharing as One of

Several Cost-Saving

Features

DOD officials acknowledged that resource sharing has not achieved the

expected savings, but told us that lower than expected contract award

amounts have led to more than $2 billion in other savings. They explained

that the contract award amounts consistently have underrun DOD’s

projections, required before each contract is awarded, of what CHAMPUS

costs would be over the contracts’ lives. As an example, one region’s

estimated CHAMPUS costs without the contract would have been about

$2.1 billion, compared with the contract award amount of $1.8 billion; so,

according to DOD, the savings would be $0.3 billion. These officials also

said that overall health care data show downward MTF cost trends, further

supporting managed care’s cost-saving effects—despite resource sharing’s

limited showing. For example, they provided a graph showing that both

direct care and CHAMPUS total costs declined steadily—by 10 percent

overall—from fiscal years 1991 through 1996.

While assessing TRICARE’s overall cost-effectiveness was beyond our

review’s scope, there are reasons at this time to question the currency and

analytical completeness of DOD’s savings claims. First, DOD’s preaward

estimates of CHAMPUS costs, a key component of its savings claim, may now

be outdated. The first estimate—for the Northwest Region contract—was

based on cost data prior to August 1993. Over the 4 years since then,

changes in such areas as benefits and allowed payments to providers

would affect the results of that estimate. Second, in a separate review,9

 we

found that as of May 1997, the existing five contracts had been modified as

many as 350 times, with the resulting potential for substantial contract

cost increases attributable to TRICARE. These potential cost increases,

just like the potential losses from lack of resource sharing, also would

offset DOD’s projected savings.

Furthermore, we recently questioned10 DOD’s cumulative 5- to 7-percent

utilization management11 savings estimate in its near $15 billion to

$18 billion health care budget totals for fiscal years 1998 to 2003. We

reported that DOD lacked a formal methodology for developing the

estimates, and we concluded overall that future health care costs likely

would be greater. Lastly, DOD’s available health care cost data do not

indicate whether apparent downward shifts might be due to managed care

9

We plan to report shortly on DOD’s overall management of TRICARE contract change orders.

10Defense Health Care: Future Costs Are Likely to Be Greater Than Estimated (GAO/NSIAD-97-83BR,

Feb. 21, 1997).

11Utilization management employs such techniques as preadmission hospital certification, concurrent

and retrospective reviews, and case management to determine the appropriateness, timeliness, and

medical necessity of an individual’s care.

Page 14 GAO/HEHS-97-130 TRICARE Resource Sharing
B-276961 

effectiveness or to such other factors as reductions in allowed provider

payments that would have occurred in TRICARE’s absence. Thus, we

support DOD’s plans to undertake a more current and complete cost

analysis of MTF direct and contractor-provided care, based on recent

program data, to bottom-line TRICARE’s current and future-year

cost-effectiveness.

Conclusions At their present results levels, for the existing contracts, DOD and the

support contractor will achieve only about 5 percent of the expected

$700 million in new savings, potentially causing shared financial losses and

higher TRICARE costs. Progress in achieving new agreements is slow, and

neither DOD nor the contractors know what resource sharing potential

remains under these contracts. While DOD now seems to be moving toward

a view that the approach will not work as designed, the contractors and

DOD are still pursuing about 170 resource sharing possibilities in an effort

to discover additional savings with which to reduce their costs.

Many problems have contributed to resource sharing’s lack of success.

DOD’s policies, processes, and tools for use at the local level as well as the

degree of DOD and contractor collaboration have not yet been sufficient to

effectively resolve the approach’s obstacles.

While revised financing is feasible though unproven, its potential effects

on resource sharing and on other expected savings under the latest two

contracts remain to be seen. Under the new approach, resource sharing

may be reduced, but its problems will remain and may become more

complex as new MTF and contractor management responsibilities are

introduced.

DOD’s more broadly proposed MTF budgeting and support contracting

changes would greatly affect future and current contracts, including

further reducing resource sharing. Clearly, a simple, accountable,

incentive-based approach is lacking, yet the potential effectiveness of

DOD’s considered changes will largely depend on how well they are

designed and implemented. As such changes further reduce resource

sharing as a potential savings mechanism and as DOD looks to alternative

savings sources, lessons learned from resource sharing will need to be

carefully heeded and skillfully incorporated. Carrying such lessons

forward may be particularly challenging as DOD changes the top leadership

in Health Affairs.

Page 15 GAO/HEHS-97-130 TRICARE Resource Sharing
B-276961 

DOD officials acknowledged that resource sharing has not, and likely will

not, produce the projected savings, but contended that TRICARE’s

managed care approach has produced offsetting savings in other ways. We

question, however, the currency and analytical completeness of these

claims and thus believe it is important that DOD proceed with its plans to

reestimate TRICARE costs versus projected costs without TRICARE.

Recommendations We recommend that the Secretary of Defense direct the Assistant

Secretary of Defense (Health Affairs) to

• determine whether any further resource sharing savings remain under the

current contracts and, as appropriate, consummate promising agreements

while seeking other mutually acceptable alternatives to resource sharing;

• determine, to the extent the new contracts with revised financing use

resource sharing, whether any such agreements are available and, as

appropriate, enter promising agreements while seeking effective

alternatives to resource sharing; and

• incorporate, while planning for and implementing the next wave of MTF

financing and contract management initiatives, such resource sharing

lessons learned as the need for coherent, timely policies; clearly

understood procedures; mutually beneficial incentives; and effective

collaboration.

Agency Comments

and Our Evaluation

DOD agreed with our recommendations and said, without elaborating, it

had already implemented each of them. Nevertheless, while agreeing with

the recommendations, DOD disagreed with the way we presented certain

issues.

DOD said, for example, that the report does not note the tremendous

resource sharing success during the “CHAMPUS Reform Initiative” (CRI) in

California and Hawaii (which preceded TRICARE) and does not note the

continued success in region 9 (Southern California). Thus, DOD said the

reader is led to assume that problems occurred in other regions because

resource sharing was implemented on a broad scale without the requisite

examination. We did not evaluate CRI resource sharing because our focus

was whether resource sharing under TRICARE was producing new savings

to help offset added TRICARE costs. Also, as the report notes, DOD’s

reference to continued success in region 9 is basically a conversion of CRI

resource sharing agreements, which do not reflect new savings under

TRICARE.

Page 16 GAO/HEHS-97-130 TRICARE Resource Sharing
B-276961 

Furthermore, DOD said the resource sharing program as currently

structured was based on the best available information at the time and that

the report should note that the TRICARE support contractors came to the

same conclusion as DOD regarding resource sharing’s potential

cost-effectiveness, even with their years of experience with managed care.

But our report does not question whether DOD’s structure for TRICARE

resource sharing was based on the best information available at the time.

Instead, the report discusses the complex issues that arose during the

implementation of resource sharing. Also, the report notes that the

contractors as well initially concluded that resource sharing would be

cost-effective.

Also, DOD said the report treats resource sharing in isolation, as opposed to

one component of a comprehensive system that has proven to be

cost-effective. While we focused on resource sharing because it was

expected to be a major cost-saving mechanism, we also noted that it was

one of several ways in which DOD expected to achieve savings to offset

TRICARE’s costs. DOD went on to state that efficiencies not achieved

through resource sharing were otherwise achieved by increased MTF

capability and efficiency brought about by TRICARE. As the report points

out, during our review DOD presented information showing downward MTF

cost trends, but these data do not show whether the trends were due to

TRICARE managed care efforts or whether the costs would have declined

anyway in TRICARE’s absence.

DOD said managed care support (MCS) contracts have resulted in savings of

$2.3 billion when compared with projected costs without the contracts. It

said that we acknowledged this savings estimate but that our placement of

it in the report diluted its significance. While a detailed review of overall

TRICARE savings was beyond the scope of our review, as our report

states, we question that savings estimate’s currency and analytical

completeness, and we support DOD’s plans to undertake more current and

complete analysis of TRICARE’s cost-effectiveness. We have revised the

report to discuss DOD’s overall savings estimate in a separate section.

DOD took issue with the report statement that, while revised financing

reduces reliance on resource sharing, it does not eliminate or necessarily

alleviate resource sharing problems and may exacerbate such problems

under the new contracts. DOD said revised financing, in conjunction with

its planned change to enrollment-based capitated budgeting for MTFs,

increases incentives for MTFs to engage in resource sharing by expanding

MTF funding while reducing support contractor costs. We agree that

Page 17 GAO/HEHS-97-130 TRICARE Resource Sharing
B-276961 

revised financing, in conjunction with enrollment-based capitation, has the

potential to create more incentive for the MTFs to engage in resource

sharing and may similarly provide incentive to the support contractors.

Still, those approaches add their own complexities and do not

automatically eliminate the difficulties experienced with resource sharing.

As we said in the report, the approaches are still being defined and are yet

to be tested. Nonetheless, we revised the relevant text to better recognize

DOD’s views on revised financing’s potential.

DOD’s comments in their entirety are included as appendix V.

We also obtained comments from the three current TRICARE support

contractors. All expressed general agreement with the report’s overall

content and completeness of subject coverage.

In its comments, one contractor also offered a minor technical comment

about lack of clarity in a statement defining limits on resource sharing

agreement profits, which is part of the procedural description in appendix

IV. The contractor pointed out, however, that there is no misunderstanding

between it and DOD as to what is intended. We made no change because

the appendix was presented to illustrate DOD’s guidance as it was offered.

A second contractor expressed concern about its limited progress in

resource sharing and about the problems and lack of success in resource

sharing elsewhere, as conveyed in our report, and expressed hope that the

report would help bring about favorable resolution of the problems.

While stating that the report otherwise accurately portrays the resource

sharing situation, the third contractor disagreed with the report’s

statement that the prospects for additional resource sharing agreements

are questionable. The contractor informed us that it had recently made a

presentation to DOD on resource sharing shortfalls, but it also asserted

that, with the right incentives and education at the MTF commander level,

resource sharing is still an extremely viable program with current savings

opportunities. On the basis of our analysis of the problems and overall

limited resource sharing progress, the prospects for reaching new

agreements seem to us to be limited. Still, the report urges DOD to identify

and pursue promising resource sharing opportunities while also seeking

other mutually acceptable alternatives to resource sharing.

Page 18 GAO/HEHS-97-130 TRICARE Resource Sharing
B-276961 

We are sending copies of this report to the Secretary of Defense and

interested congressional committees, and will make copies available to

others upon request.

Please contact me at (202) 512-7111 or Dan Brier, Assistant Director, at

(202) 512-6803 if you or your staff have any questions concerning this

report. Other major contributors are Elkins Cox, Evaluator-in-Charge;

Allan Richardson; Beverly Brooks-Hall; and Sylvia Jones.

Stephen P. Backhus

Director, Veterans’ Affairs and

 Military Health Care Issues

Page 19 GAO/HEHS-97-130 TRICARE Resource Sharing
Contents

Letter 1

Appendix I 

Scope and

Methodology

22

Appendix II 

Regions Served by the

Seven Managed Care

Support Contracts

24

Appendix III 

TRICARE Support

Contracts and Start

Dates

25

Appendix IV 

Guidance on

Developing Resource

Sharing Agreements

26

Appendix V 

Comments From the

Department of

Defense

37

Figure Figure IV.1: Resource Sharing Development Flowchart 31

Page 20 GAO/HEHS-97-130 TRICARE Resource Sharing
Contents

Abbreviations

ADD active duty dependent

CHAMPUS Civilian Health and Medical Program of the Uniformed

Services

CPT current procedural terminology

CRI CHAMPUS Reform Initiative

DCP data collection period

DOD Department of Defense

DRG diagnosis-related group

HCF Health Care Finder

HMO health maintenance organization

MCS managed care support

MEPRS Medical Expense and Performance Reporting System

MHSS Military Health Services System

MTF military treatment facility

NADD nonactive duty dependent

NAS Non-Availability Statement

RSA resource sharing agreement

Page 21 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix I 

Scope and Methodology

To assess the Department of Defense’s (DOD) experiences with resource

sharing, we visited 5 (of the 7) regions where TRICARE support

contractors had begun delivering health care and 11 military treatment

facilities (MTF) within those regions. We also met with the two civilian

TRICARE contractors that were providing health care support to the MTFs.

A third contractor began providing health care on April 1, 1997, in two

other regions (since combined into one region), but because of the

newness of the operations, we met with this contractor briefly but did not

include it in our detailed assessment of resource sharing progress and

problems. Two other contracts, covering the remaining three regions,

were still pending at the time of our review.

We reviewed DOD and contractor projections of resource sharing costs and

savings, TRICARE policies and guidance, and various efforts by DOD to

promote the overall resource sharing effort. This included discussions

with officials of the Office of the Assistant Secretary of Defense for Health

Affairs, DOD’s TRICARE cost consultant, and contractor officials. At the

contractors’ offices, we reviewed individual resource sharing project files

to analyze the progress being made and determine the specific reasons

why some potential agreements were not being implemented. The project

files consisted of both agreements existing before TRICARE, referred to as

“partnerships,” and new resource sharing agreements. Many of the

partnership agreements were converted to resource sharing agreements as

TRICARE became operational. To assess progress in achieving new

savings under TRICARE, we identified the expected savings from the new

agreements and compared the result to DOD’s overall projected TRICARE

savings.

We discussed information, training, and other needs with DOD officials at

DOD’s Washington, D.C., headquarters and at regional and MTF levels,

focusing on the factors that affected progress in resource sharing.

Especially at the MTF level, we discussed officials’ understanding of, and

amount of confidence in, the financial aspects of resource sharing

agreements, including effects on the MTF workload and bid price

adjustment. Through discussions with DOD and contractor officials and

examination of records, we reviewed their experiences with planning and

establishing resource sharing agreements, including the problems they

encountered. We also discussed with DOD and contractor officials

alternatives DOD has undertaken for the current contracts as well as

policies and plans DOD has devised or is considering that will affect the

future of resource sharing.

Page 22 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix I 

Scope and Methodology

At the completion of our work, we briefly reviewed DOD-provided data

suggesting that TRICARE savings other than from resource sharing were

occurring that more than offset the resource sharing savings shortfalls we

had found. Determining TRICARE’s overall cost-effectiveness was beyond

the scope of our review. Nonetheless, upon reviewing the data, we asked

follow-up questions of DOD, obtained status information on DOD’s planned

and under way internal and contracted studies aimed in whole or in part at

determining TRICARE’s cost-effectiveness, and reviewed pertinent

information from our other work in process and our issued reports.

We conducted our review between June 1996 and May 1997 in accordance

with generally accepted government auditing standards.

Page 23 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix II 

Regions Served by the Seven Managed Care

Support Contracts

Page 24 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix III 

TRICARE Support Contracts and Start Dates

Region Lead agent Contract status

Health care

delivery

start date

Northwest Madigan Awarded to Foundation

Health Federal Services,

Inc., September 1994, for

$475 million

March 1995

Southwest Wilford Hall Awarded to Foundation

Health Federal Services,

Inc., April 1995, for $1.8

billion

November

1995

Southern California,

Golden Gate, and

Hawaii-Pacific

San Diego,

David Grant,

Tripler

Awarded to Foundation

Health Federal Services,

Inc., September 1995, for

$2.5 billion

April 1996

Southeast and 

Gulf South

Eisenhower,

Keesler

Awarded to Humana

Military Healthcare

Services, November 1995,

for $3.8 billion

July 1996

Central Evans Awarded to Triwest

Healthcare Alliance, Inc.,

July 1996, for $2.3 billion

April 1997

Northeast National Capital Award expected by

September 1997

May 1998

Mid-Atlantic and

Heartland

Portsmouth,

Wright-Patterson

Award expected by

September 1997

May 1998

Page 25 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV 

Guidance on Developing Resource Sharing

Agreements

To further explain the resource sharing agreement development process,

the following information was condensed from selected guidance offered

by lead agents. The guidance includes preparation of proposals, a chart

showing the flow of agreement development (fig. IV.1), and application of

a financial analysis worksheet.

Guidance on

Preparation of

Proposals

The Resource Sharing Program is a mechanism for providing contracted

civilian health care personnel, equipment, and/or supplies to enhance the

capabilities of MTFs to provide necessary inpatient and outpatient care to

beneficiaries of the Civilian Health and Medical Program of the Uniformed

Services (CHAMPUS).

Resource sharing is a cooperative activity between the contractor, the lead

agent, and the MTF commander. A variety of information sources and

databases may be examined in looking for and evaluating resource sharing

opportunities that may subsequently be developed into resource sharing

proposals and agreements.

Analysis of CHAMPUS

Utilization and Cost Data

Analysis of CHAMPUS utilization and cost data may identify diagnoses,

procedures, or specialty health care, which account for significant

numbers of patient encounters or high costs. A variety of reports may be

useful in this regard.

CHAMPUS Cost and Utilization Reports. These reports are generated by the

Office of the Civilian Health and Medical Program of the Uniformed

Services from health care service record data to show CHAMPUS costs and

utilization, by type of health care service, for each catchment area. Those

services showing high costs and/or utilization may be excellent candidates

for resource sharing considerations.

Non-Availability Statement (NAS) Reports. NASs authorize beneficiaries to

seek certain care in civilian facilities when the MTF cannot provide the

care. These reports show the numbers and types of NASs generated by each

MTF. Those health care services showing large numbers of NASs being

issued over time may be excellent candidates for resource sharing

consideration.

Health Care Finder (HCF) Referral Reports. These reports show the

numbers and types of referrals of CHAMPUS-eligible beneficiaries to both

MTF and civilian health care providers. High numbers of referrals to civilian

Page 26 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV 

Guidance on Developing Resource Sharing

Agreements

providers for specific health care services may indicate resource sharing

opportunities.

CHAMPUS Ad Hoc Claims Reports. CHAMPUS historical data may be obtained

from claims data files. These data can be tailored to provide greater detail

for the types of services being provided under CHAMPUS. Information from

CHAMPUS Cost and Utilization Reports, NAS Reports, and HCF Referral

Reports may indicate those health care specialties that warrant more

detailed examination to identify potential resource sharing opportunities.

MTF Capability Reports. These reports are developed by HCFs and indicate

MTF capabilities. They are used by the HCFs to guide referrals into and out

of MTFs. They may also provide insight into potential resource sharing

opportunities.

Composite Health Care System Professional Activity Study Reports. These

reports may be used to identify gaps in MTF services or high referral

patterns from the MTF to outside health care providers. These gaps and

referral patterns may indicate additional opportunities for resource

sharing.

Network Provider Directory. This directory provides the numbers and

types of health care providers by location. Gaps and shortages in the

civilian provider network may be identified that may indicate resource

sharing opportunities.

Analysis of MTF

Capabilities

MTF capabilities, staffing, workload, and backlog—both current and

projected—should be identified and evaluated to determine potential

opportunities for resource sharing. MTF capabilities may be assessed using

the following reports:

MTF Capability Reports. (See prior description of reports.)

MTF Staffing Reports. These reports are developed by MTFs and show the

numbers and types of personnel assigned to, and employed by, the MTF.

Careful review of staffing reports over time may indicate staffing trends,

which may provide insight into both current and future resource sharing

opportunities. A baseline report of regionwide staffing, by MTF, was

compiled from computer tapes provided by the government to the

contractor for fiscal year 1993.

Page 27 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV 

Guidance on Developing Resource Sharing

Agreements

MTF Operations Study. This report shows the historical number of health

care services provided by MTFs for both inpatient and outpatient services.

This report is derived from data compiled on a computer tape provided to

the contractor by the government for fiscal year 1993. This information

can be used to identify both current and future opportunities for resource

sharing.

Potential Resource Sharing Opportunities List. This list, developed during

site visits at each MTF, provides resource sharing opportunities that had

been identified by the MTF, after examining the demand for services and

identifying shortfalls in meeting those demands.

The Written Resource

Sharing Proposal

Once a resource sharing opportunity has been identified, the MTF

completes a written request for consideration of the potential resource

sharing agreement (RSA).

The proposal is to show the project title, requesting MTF, point of contact,

and desired start date. The expected accomplishment is to be described.

For example, “This project is intended to expand Family Practice services

within the hospital. This MTF currently averages 200 ambulatory care visits

a month, and the implementation of this project should increase the

monthly visits by an additional 200 visits. This should decrease the number

of NASs issued and the concomitant CHAMPUS visits and costs.”

The proposal is to include the estimated resources required, including

personnel, equipment, and supplies, along with the following:

Direct Workload. Provide the number of outpatient visits and/or inpatient

admissions, by type of CHAMPUS beneficiary (active duty dependent [ADD],

or nonactive duty dependent [NADD]) that the project is expected to

provide per year. Note that the NADD category includes retirees, family

members of retirees, survivors of deceased service members, and others.

If possible, provide a detailed breakdown of workload numbers by current

procedural terminology (CPT) or diagnosis-related group (DRG). If possible,

provide the estimated cost to the MTF for each CPT and DRG code.

Ancillary Workload. Provide the anticipated additional ancillary workload

that the project will develop for the MTF, by type of CHAMPUS beneficiary

(ADD or NADD), per year. If possible, provide a detailed breakdown of

ancillary workload numbers by CPT or DRG. If possible, also provide the

estimated cost to the MTF for each CPT and DRG code.

Page 28 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV 

Guidance on Developing Resource Sharing

Agreements

MTF Cost/Expense Data. Provide specific Medical Expense and

Performance Reporting System (MEPRS) cost elements for the clinical

function of the project. If possible, provide a detailed breakdown of MEPRS

cost elements by CPT or DRG.

CHAMPUS Workload Data. Provide CHAMPUS workload, within the catchment

area, currently being accomplished for the clinical function of the project.

If possible, provide a detailed breakdown of CHAMPUS workload and cost

data by CPT or DRG.

Signature and Date. Provide signature of the MTF commander, or his agent,

and the date the document was signed.

Example of a Resource

Sharing Proposal

Project Title. Internal Medicine Augmentation and Support.

Purpose. The MTF had three internists assigned in fiscal year 1994, two in

fiscal year 1995, and will decrease to one by June 1996. MTF workload has

shown a concomitant decrease in the average number of outpatient visits,

admissions, and occupied bed days. The number of NASs and visits to

civilian providers under CHAMPUS has risen to absorb the demand for

internal medicine services in the face of decreasing supply within the MTF.

This proposed RSA, if approved, would expand the internal medicine

services within the MTF and should increase the number of monthly

outpatient visits by approximately 900 per month and the number of

inpatient admissions by 37 per month. These increases should avoid a shift

of approximately 425 outpatient visits per month to CHAMPUS with the loss

of a military provider. They should also add an additional 475 outpatient

visits per month to the MTF workload. Recognizing that approximately

44 percent of our CHAMPUS beneficiaries are ADDs and that 56 percent are

NADDs, and using the appropriate volume trade-off factors, it should also

reduce the number of visits that had previously been paid for through

CHAMPUS by approximately 212 visits per month.

Resources Required. To implement the proposed RSA, additional providers

and support personnel will be required. Also, a financial offset for

increased costs in ancillary services and supply costs will be necessary.

Facility space and equipment are adequate to support the additional

workload.

Page 29 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV 

Guidance on Developing Resource Sharing

Agreements

Personnel. Internist (board certified or eligible), Nurse (Licensed

Vocational Nurse), with attached example of position description.

Equipment. None.

Supplies. No direct supplies, but, based on fiscal year 1995 MEPRS data,

reimbursement for the costs of ancillary services and supplies for

outpatient visits above that achieved during the data collection period,

fiscal year 1995 (10,188 outpatient visits per year). Estimated at up to 5,700

visits. (For outpatient visits, example shows costs per procedure and per

visit for pharmacy, laboratory, radiology, medical supplies, and other

supplies.)

Also, reimbursement for the cost of ancillary services and supplies for

inpatient admissions above that achieved during the data collection

period, fiscal year 1995 (404 admissions per year). Estimated at up to 226

admissions. (Example shows ancillary service and supply costs—based

upon fiscal year 1995 MEPRS data—per procedure and per admission for

same categories as for outpatient admissions.)

MTF Workload Data. (Example shows internal medicine direct workload,

based on fiscal year 1995 MEPRS data, in terms of outpatient visits and

inpatient admissions. It shows also the internal medicine ancillary

workload, based on fiscal year 1995 MEPRS data, in terms of pharmacy

prescriptions, laboratory procedures, and radiology films per year for

outpatient visits and inpatient admissions.)

MTF Cost/Expense Data. (Example refers to attachments for MEPRS data for

outpatient and inpatient care, based on fiscal year 1995 MEPRS data.)

CHAMPUS Workload Data. (Example refers to attachment for CHAMPUS

claims data for this catchment area based on claims data from September

1994 through August 1995.)

Page 30 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV 

Guidance on Developing Resource Sharing

Agreements

Figure IV.1: Resource Sharing Development Flowchart

Source: TRICARE Desert States Financial Guide (Jan. 1997).

Using the Financial

Analysis Worksheet

Purpose of Worksheet The standardized Internal Resource Sharing Financial Analysis Worksheet

is structured to take into account three different types of proposed

agreements: (1) the recapture of new workload, (2) the conversion of a

partnership agreement, and (3) the replacement of a lost provider.

Page 31 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV 

Guidance on Developing Resource Sharing

Agreements

For all of these different situations, the resource sharing worksheet is

designed to help the MTF answer two questions: (1) Is the proposed

agreement projected to be cost-effective and (2) is the proposed

contractor workload credit appropriate?

An agreement is deemed cost-effective from the Military Health Services

System (MHSS) perspective if the MHSS cost for the agreement (the sum of

the MTF’s marginal expenditures and the contractor’s expenditures for the

proposed RSA) is less than the government’s share of projected CHAMPUS

savings.

Assuming the cost-effectiveness test is satisfied, there are two additional

criteria for evaluating whether the contractor’s workload credit is

appropriate. First, the contractor credit shall not exceed the full credit

(that is, 100 percent credit) that would be counted under the Guidelines

for Resource Sharing Workload Reporting. Second, a prospective profit

rate limit applies to RSAs for which the savings exceed those assumed in

the contractor’s best and final offer. For these agreements, the

contractor’s projected profit rate on resource sharing expenditures (as

calculated by the worksheet) should not exceed the contractor’s overall

proposed health care profit rate (on a prospective basis). For example, if a

contractor proposed a 5-percent profit rate for health care costs, then the

projected contractor profit on resource sharing expenditures exceeding

the up-front bid price assumptions should also not exceed 5 percent.

A prospective profit limit also applies to an RSA that converts an inpatient

partnership agreement that existed in the data collection period (DCP) and

for which CHAMPUS admissions were not counted in the DCP data. (In this

case, workload credit should be negotiated as necessary to produce a

projected contractor net gain approximately equal to zero, since otherwise

the contractor would receive an upward price adjustment for additional

NASs simply for maintaining the same workload done in the DCP under the

partnership agreement.)

If both of the previous questions cannot be answered “yes” for the

proposed RSA, then the MTF should either renegotiate some of the terms of

the proposed agreement (for example, the contractor’s workload credit)

or consider other alternatives to the proposed agreement (for example, the

task order resource support option).

In addition to answering both previous questions for resource sharing in

isolation, the resource sharing worksheet is designed to project the cost

Page 32 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV 

Guidance on Developing Resource Sharing

Agreements

impact of implementing the agreement under task order resource support

rather than resource sharing, including a summary comparison of

cost-effectiveness under the two options. Similarly, the worksheet shows

the relative financial impact on the managed care support (MCS) contractor

of resource sharing versus resource support. (Details on resource support

analysis are excluded from this condensed version of the guidance.)

Accrual of Savings Under the MCS contracts, resource sharing savings can accrue to the

government in three ways, each of which is addressed in the worksheet.

First, for those resource sharing savings investments assumed as part of

the contractor’s best and final offer proposal, the contractor’s bid price

includes a cost-per-eligible trend factor for resource sharing savings (that

is, claims avoidance). Net of the contractor’s expected expenditures on

resource sharing, this creates a lower up-front bid price (claims

avoidance - resource sharing expenditures = net savings). These net

savings are calculated in section I of the worksheet on an average basis

(that is, using the contractor’s best and final offer assumption about the

average savings to cost ratio for resource sharing).

Second, if partial contractor workload credit is negotiated, the government

will realize savings in the bid price adjustment for MTF utilization (the “O”

factor). This can result in a more favorable bid price adjustment for the

government. These savings are calculated in section II of the worksheet.

Third, the government will also realize 0, 80, 90, or 100 percent of any

residual savings in the risk-sharing corridor, depending on which tier of

the risk-sharing corridor applies to the bid price adjustment for the option

period. (The contract’s risk-sharing provisions are specified in detail in

section G-5 and in appendix C in the Bid Price Adjustment Procedures

Manual.) This will result in the government sharing any risk-sharing

savings realized by the contractor. These savings are calculated in section

IV of the worksheet.

Required Completion of

the Financial Analysis

Worksheet

MTF commanders or their designated representatives are required to

complete the standardized Resource Sharing Financial Analysis Worksheet

in negotiating each proposed RSA, in addition to any other analyses

prepared by the contractor or the MTF (as specified in section G-5g(2) of

the contract).

Page 33 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV 

Guidance on Developing Resource Sharing

Agreements

In completing the resource sharing worksheet, users should not be lulled

into a false sense of security by focusing on numerical results rather than

on underlying assumptions. The accuracy of assumptions such as the

number of admissions and/or visits to be recaptured, the MTF’s marginal

costs in recapturing these units, and the costs avoided in CHAMPUS are

crucial to the accuracy of the spreadsheet’s projections. If estimates are

too optimistic, even though the spreadsheet may project net gains for the

government, in reality the government may experience net losses. Of

course, overly pessimistic estimates can lead the government to miss out

on cost-effective opportunities.

The MTF Inputs Page To use the Financial Analysis Worksheet, the MTF must enter the boxed

values on the “MTF Inputs” page. These include (1) the type of RSA,

(2) whether the agreement converts an inpatient partnership agreement

that previously existed, (3) the option period (year) covered by the

proposed agreement, (4) the number of outpatient visits or inpatient

admissions enabled by the agreement, (5) the expected government

risk-sharing responsibility percentage, (6) the estimated volume trade-off

factor used to estimate CHAMPUS avoidance savings, (7) the estimated

average government cost per unit for admissions and/or outpatient visits

avoided in CHAMPUS for care covered by the agreement, (8) the expected

contractor expenditure under the agreement, (9) the projected MTF

marginal expenditures, (10) the contractor resource sharing workload

credit assumed in the analysis, (11) the sum of the projected resource

sharing expenditures for those agreements approved for the lead agent

region as a whole, and (12) the expected MTF payment for the contractor’s

costs and the MTF’s marginal costs if the resource is acquired under task

order resource support rather than resource sharing.

As part of the negotiation of the RSA, the MTF commander and the

contractor must agree on each estimate or assumption entered on the “MTF

Inputs” page before the worksheet is finalized.

The remaining sections of the Financial Analysis Worksheet do not require

the MTF to enter any data or assumptions. Depending on the results shown

on the “summary” page for resource sharing, however, it may be

appropriate to revise some of the MTF inputs (for example, the contractor

workload credit) on an iterative basis.

Resource Sharing

Summary Page

The “Summary—Resource Sharing” page lists the key results for the

proposed agreement under resource sharing. This summary shows

Page 34 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix IV 

Guidance on Developing Resource Sharing

Agreements

(1) whether the proposed contractor workload credit is appropriate,

(2) whether government gains exceed government expenditures, (3) the

projected contractor net gain under the RSA, (4) the projected government

net gain, and (5) whether the proposed agreement reduces the contractor’s

actual costs even if the contractor’s net gain is negative due to the average

savings assumed up front in the contractor’s best and final offer. (Because

the contractor reduced its best and final offer bid price based on an

assumption about average savings for each RSA, some actual agreements

are expected to produce savings that are smaller than this assumed

average, but are still positive. This perspective is particularly relevant for

conversion of partnership agreements, since the contractor is not likely to

achieve new savings simply for continuing previous partnership

agreements under the same terms as RSAs. The net contractor gain after

taking account of average up-front savings from the best and final offer is

likely to be negative, yet converting a cost-effective partnership agreement

allows the contractor to avoid an increase in CHAMPUS claims costs that

would otherwise result.)

If the “Summary—Resource Sharing” page shows that the contractor

workload credit is not appropriate and/or government gains do not exceed

government expenditures, then one option for the MTF is to adjust the

proposed contractor workload credit on an iterative basis until the

proposed agreement satisfies both requirements. It may also be

appropriate for the MTF to renegotiate other terms of the proposed

agreement (for example, the level of resources to be provided by the

contractor). If it is not possible to determine a workload credit percentage

that results in a “yes” response to both questions, given all of the other

input assumptions agreed upon by the MTF commander and the contractor,

then the proposed RSA should not be approved (unless the lead agent

determines that the proposed agreement still warrants approval due to

compelling circumstances).

Resource Sharing Page The resource sharing worksheet page has five sections. Section I estimates

the net resource sharing savings under this agreement that would already

be reflected in the contractor’s proposed bid price, based on the

average-savings-to-cost ratio used to develop the resource sharing savings

trend factor in the contractor’s best and final offer.

Section II estimates the effect of the RSA, including the contractor’s

workload credit, on the MTF utilization adjustment in the bid price

adjustment formula (that is, the “O” factor adjustment).

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Appendix IV 

Guidance on Developing Resource Sharing

Agreements

Section III estimates the actual savings (that is, cost avoidance) in CHAMPUS

health care costs as a result of the RSA.

Section IV estimates the residual gain in CHAMPUS (that is, the difference

between the adjusted bid price for health care costs and the actual health

care costs) under the proposed RSA. The section also estimates the

government and contractor portions of these gains, since the gains would

be subject to risk sharing between the government and contractors.

Section V provides the two necessary results of this analysis (for an

assessment of resource sharing in isolation). First, is the contractor credit

for resource sharing workload assumed in the analysis appropriate?

Second, does the analysis indicate that the proposed RSA would be

cost-effective for the government from the MHSS perspective?

Page 36 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix V 

Comments From the Department of Defense

Page 37 GAO/HEHS-97-130 TRICARE Resource Sharing
Appendix V 

Comments From the Department of Defense

Now on p. 12.

(101493) Page 38 GAO/HEHS-97-130 TRICARE Resource Sharing
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