Report to the Chairman and Ranking

Minority Member, Subcommittee on

Military Personnel, Committee on

Armed Services, House of

Representatives

United States General Accounting Office

GAO

April 2001 DEFENSE HEALTH

CARE

Continued

Management Focus

Key to Settling

TRICARE Change

Orders Quickly

GAO-01-513
Page i GAO-01-513 TRICARE Change Order Management

Letter 1

Appendix I Scope and Methodology 22

Appendix II Prior Initiatives to Address Change Order Problems

and Their Outcomes 24

Appendix III GAO Contact and Staff Acknowledgments 27

Tables

Table 1: MCS Contractors, Regions, and Date of Initial Award 4

Table 2: TRICARE Change Orders by MCS Contractor, Region, and

Settlement Status on May 1, 1997, and on June 30, 2000 9

Table 3: TRICARE Change Orders Issued by MCS Contractor and

Region as of May 1, 1997, and June 30, 2000 12

Figures

Figure 1: Percentage of Change Orders by TRICARE Manual, May

1, 1997, and June 30, 2000 6

Figure 2: Change Orders Issued by Month, May 1997 - June 2000 13

Contents
Page ii GAO-01-513 TRICARE Change Order Management

Abbreviations

ADP automated data processing

BPA Bid Price Adjustment

CNA Center for Naval Analysis

COTS Change Order Tracking System

DHP Defense Health Program

DLA Defense Logistics Agency

DOD Department of Defense

IGCE independent government cost estimate

IPT Integrated Program Team

IS information systems

MCS managed care support

REA Request for Equitable Adjustment

TMA TRICARE Management Activity
Page 1 GAO-01-513 TRICARE Change Order Management

April 30, 2001

The Honorable John M. McHugh

Chairman

The Honorable Martin T. Meehan

Ranking Minority Member

Subcommittee on Military Personnel

Committee on Armed Services

House of Representatives

Under TRICARE, the Department of Defense’s (DOD) managed care

program, military-operated hospitals and clinics are supplemented by

contracted civilian services. To date, DOD has awarded seven managed

care support (MCS) contracts to administer health care in 11 geographic

regions. Since the inception of TRICARE, DOD has made numerous

modifications to these contracts via contract change orders. These

changes were made for a variety of reasons, such as the addition of new

benefits or changes in administrative processes. In recent years, DOD’s

management of the change order process has resulted in a large backlog of

outstanding change orders. The cost associated with this backlog as well

as its growth has been an ongoing source of congressional concern. Until

recently, DOD directed its MCS contractors to implement change orders

prior to negotiation and payment. Therefore, DOD’s backlog of unsettled

changes orders generally consists of change orders for which the MCS

contractors have not received payment. Because DOD’s estimates for

change order costs have typically been lower than MCS contractors’

proposed costs, the unsettled change orders could represent a significant

future liability for the Defense Health Program (DHP) if they are settled at

higher amounts than DOD estimated.

In July 1997, we reported that DOD was taking steps to improve its change

order process, and we recommended that DOD continue providing the

high-level management attention it had recently begun to use to implement

change order process improvements.1

 However, the backlog continued to

grow. On July 1, 2000, DOD began a short-term initiative to negotiate and

pay for all of its outstanding change orders. In addition, DOD has begun to

use a new process for issuing and settling change orders.

 1

Defense Health Care: Actions Under Way to Address Many TRICARE Contract Change

Order Problems (GAO/HEHS-97-141, July 14, 1997).

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-513 TRICARE Change Order Management

Your Subcommittee raised questions about whether the change order

process had, in fact, improved and about DOD’s ability to effectively

manage the MCS contracts. Specifically, you asked us to update the 1997

report and provide information on (1) the status of the change order

backlog and whether DOD reduced it, (2) factors that contributed to the

growth of the backlog, and (3) DOD’s new change order process.

To address these objectives, we analyzed data from DOD’s Change Order

Tracking System and interviewed officials of DOD’s TRICARE

Management Activity (TMA), which solicits, awards, and oversees the MCS

contracts. We also met with the MCS contractors to obtain their views on

problems with change orders and potential process modifications. We did

our work from July 2000 through March 2001 in accordance with generally

accepted government auditing standards. (For a further description of our

scope and methodology, see app. I.)

As of June 30, 2000, TMA’s backlog of unsettled change orders had more

than doubled—from 223 to 562—since our July 1997 report. Despite TMA’s

concurrence with our earlier recommendation to continue providing highlevel management attention to needed process improvements, TMA

management did not remain consistently focused on the change order

process. Furthermore, the initiatives it implemented had limited

effectiveness in reducing the backlog. On July 1, 2000, TMA initiated a

short-term, ambitious effort to eliminate the backlog by making the

settlement of change orders a management priority both internally and

with the MCS contractors. By February 2001, TMA had eliminated most of

the backlog, which resulted in settlements of about $900 million for

current and prior fiscal years. This short-term effort, while successful, was

prompted by the need to prepare for sweeping program changes, including

expanded benefits for retired military beneficiaries who are Medicareeligible, legislated by the Floyd D. Spence National Defense Authorization

Act for Fiscal Year 2001 (P.L. 106-398). Because the total cost of these

settlements had not been included in the current-year defense budget,

these costs contributed to about $500 million of the overall DHP funding

shortfall for fiscal year 2001, which TMA estimates at $1.4 billion.

TMA had issued 1,091 change orders to its TRICARE contracts as of June

30, 2000—more than triple the amount we reported in July 1997. However,

because the pace of settlements lagged far behind the number of change

orders issued, TMA’s backlog continued to grow. Because the change

order process involves a number of sequential tasks, recurring delays with

steps in this sequence (such as cost proposal submissions by MCS

Results in Brief
Page 3 GAO-01-513 TRICARE Change Order Management

contractors and reviews by TMA), slowed the overall process and

ultimately, payments to the MCS contractors. By June 30, 2000, TMA had

met its goal to settle change orders within 180 days of issuance less than

20 percent of the time. TMA’s staffing problems further impeded its ability

to settle change orders in a timely manner. For instance, TMA had a major

reorganization and staff reduction under the 1997 Defense Reform

Initiative. In addition, TMA had problems with the high turnover of its

Contract Management staff, who are responsible for issuing and settling

change orders. The resulting knowledge gaps and reduced resources left

TMA unable to make significant progress in settling change orders to

eliminate the backlog.

Recently, TMA began using a new change order process requiring potential

changes to be reviewed, approved, and prioritized by senior-level TMA and

military services officials. Furthermore, change order costs are to be

negotiated and settled before changes are implemented. TMA officials told

us that the new approval and prioritization process for new changes will

help control the number of change orders issued by ensuring that all the

changes issued are necessary and that the most important changes are

implemented first, based on the availability of funds. In addition,

negotiating and settling change orders before implementation will help

TMA ensure that sufficient funding is available to pay for the changes,

which will help it avoid future funding shortfalls. However, it is premature

to evaluate the effectiveness of this process because TMA has not yet

issued any change orders under it. Given TMA’s past experience with

change order initiatives, it is imperative that TMA closely monitor its new

process.

We are recommending that the Secretary of Defense ensure that the new

change order process receives the consistent high-level management

attention necessary to succeed and, as part of this effort, monitor the new

process and take corrective actions if problems, such as a growing

backlog, develop. We requested comments from DOD, but none were

provided.

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

active duty service personnel and to provide health care for them during

military operations. DOD also offers health care to 6.7 million nonactive

duty beneficiaries, including dependents of active duty personnel, military

retirees, and dependents of retirees. Under TRICARE, DOD provides

health care to its eligible beneficiaries through military-operated hospitals

and clinics worldwide and supplements this care with civilian providers.

Background
Page 4 GAO-01-513 TRICARE Change Order Management

DOD contracts with MCS contractors to administer its TRICARE program

on a regional basis. The MCS contractors’ responsibilities include claims

processing, customer service, and developing and maintaining an adequate

network of civilian providers.

Since 1994, DOD has awarded seven MCS contracts covering the 11

TRICARE regions. These contracts were awarded for a base period and 5

option years.2 (See table 1.) Four of the MCS contracts have used all of the

option years and three of these have been extended for an additional 2

years. A fourth contract’s extension is under way. TMA anticipates that all

of its MCS contracts will eventually be extended.

Table 1: MCS Contractors, Regions, and Date of Initial Award

MCS Contractor Region name and number

Date of initial

award

Health Net Federal ServicesaNorthwest/11 September

1994

Health Net Federal Services Southwest/6 April 1995

Health Net Federal Services Golden Gate, Southern California, and

Pacific/9, 10, and 12

August 1995

Humana Military Healthcare

Services

Southeast and Gulf South/3 and 4 November

1995

TriWest Healthcare Alliance Central/(formerly 7 and 8) June 1996

Anthem AlliancebMid-Atlantic and Heartland/2 and 5 September

1997

Sierra Military Healthcare

Services

Northeast/1 September

1997

a

Health Net Federal Services, formerly Foundation Health Federal Services, changed its name in

February 2001.

b

In April 2001, DOD announced that Humana Military Healthcare Services acquired Anthem Alliance

and will assume responsibility for the Mid-Atlantic and Heartland Regions.

Source: TMA.

TMA, within DOD’s Office of the Assistant Secretary of Defense (Health

Affairs), is responsible for administering the MCS contracts. TMA’s

contracting officers have the ultimate responsibility for contract

administration, including the issuance of change orders. Contracting

 2

The base period, which varies by contract, consists of a transition period, ranging from 6-9

months, and the early months of health care delivery.
Page 5 GAO-01-513 TRICARE Change Order Management

officers are assigned to each MCS contract and are supported by other

TMA staff as well as by the Lead Agents.3

Change orders may result from new laws or regulations, or from DOD

initiatives. The most recent data available, which were in our 1997 report,

showed that one-third of all TRICARE change orders resulted from new

laws or regulations, while the remaining two-thirds were self-initiated.

TMA officials told us that they were unable to provide updated statistics

for our current review because the data are maintained by several

different departments and would require significant effort to compile.

Most changes are incorporated into the MCS contracts by issuing the

change order as an amendment to the applicable TRICARE program

manual: the Policy Manual, the Automated Data Processing (ADP) Manual,

or the Operations Manual. Policy changes include the authorization of new

benefits or changes in the administration or payment of current benefits.

ADP changes involve modifications to how data are created, maintained,

or reported, as well as changes to systems requirements. Operations

changes include those involving the administration of the TRICARE

program, such as revisions to home health care billing procedures.

Changes can also be classified as “multiple,” meaning they involve

modifying two or more of the manuals. Changes classified as “other” fall

outside these categories. Examples of such changes are the authorization

of travel costs incurred by the MCS contractors for government training

and orders directing MCS contractors to report information about ongoing

provider fraud investigations. Similar to our 1997 report, we found that as

of June 30, 2000, the Operations Manual was modified most frequently,

followed by the Policy Manual, as shown in figure 1.

 3

An administrative organization called a Lead Agent is designated for each of the TRICARE

regions to coordinate health care provided by all military treatment facilities in the region.

Lead Agents can issue change orders that are small in scope. However, we included in our

review only those change orders issued by TMA.
Page 6 GAO-01-513 TRICARE Change Order Management

Figure 1: Percentage of Change Orders by TRICARE Manual, May 1, 1997, and

June 30, 2000

Note: The percentage for each year total more than 100 percent because some change orders

modified more than one manual. In May 1997, 30 percent of change orders affected multiple

manuals, and in June 2000, 35 percent of change orders affected more than one manual.

Source: TMA’s Change Order Tracking System.

Most change orders affect all of the MCS contracts. For example, if TMA

issues a change to the TRICARE program, such as a new benefit, all of the

MCS contracts must be changed. Each change order, even for the same

change, has to be negotiated separately with each MCS contractor because

the cost of the change can vary by geographic region and the number of

beneficiaries a contract covers.

The Federal Acquisition Regulation, the Defense Federal Acquisition

Regulation Supplement, and other internal DOD guidance set forth the

requirements governing the administration of change orders. The

Percentage

0

10

20

30

40

50

60

Policy Manual ADP Manual Operations

Manual

Other r

May 1, 1997

June 30, 2000
Page 7 GAO-01-513 TRICARE Change Order Management

requirements include time frames within which contractors should submit

cost proposals to the government as well as guidance as to the time frames

within which change orders should be settled.

All change orders have been issued by TMA as unilateral changes, which

means that they were implemented before their costs were negotiated and

settled. The process of issuing and settling change orders involved many

steps. When a change was identified for the TRICARE program, TMA

defined its requirements, solicited comments about the change from the

MCS contractors, and obtained an independent government cost estimate

(IGCE), which was used to obligate, or set aside, funds for the change

order. Then, the change orders were issued to the MCS contractors for

implementation. MCS contractors were asked to submit a cost proposal

within 60 days. When it received the proposal, TMA performed technical

reviews and cost analyses of the information and then negotiated with the

MCS contractor to determine the final price. Change order settlements can

result in payments to the MCS contractors, savings to TMA, or no cost to

either party. TMA’s goal for settling change orders is 180 days from

issuance.

TMA is also responsible for formulating the DHP budget request, which

encompasses costs for MCS contracts, including change orders. TMA

prepares both a current-year budget and a budget for the Future Years

Defense Plan, which represents the estimated appropriation needs for the

budget years for which funds are being requested and at least 4 years after.

TMA also maintains the accounting system used to obligate and disburse

funds for change orders.

In our July 1997 report we cited a series of actions TMA had under way to

address change order problems and reduce the backlog, such as hiring a

management consulting firm to recommend improvements. In that report,

we recommended that TMA continue providing high-level management

attention to implement needed improvements to the process. However,

TMA’s actions failed to make a measurable improvement to the process,

and by June 30, 2000, the number of unsettled change orders had peaked

at 562—more than double what it had been at the time of our previous

report. Realizing that they had to “clear the books” in order to prepare for

sweeping program changes that would result from the Floyd D. Spence

National Defense Authorization Act for Fiscal Year 2001 (P.L. 106-398),

TMA officials began an ambitious effort on July 1, 2000, to eliminate the

backlog by the end of the calendar year. As of February 2001, TMA’s

change order backlog totaled 121—a reduction of 78 percent in 7 months.

Change Order

Backlog Recently

Reduced
Page 8 GAO-01-513 TRICARE Change Order Management

To reach this goal within the short time frame, TMA modified its normal

change order process, negotiating with its MCS contractors about $900

million in global settlements for the current and prior fiscal years that

included change orders as well as other contract adjustments. Because the

total cost of these settlements had not been included in the current-year

defense budget, these costs contributed to about $500 million of the

overall DHP funding shortfall for fiscal year 2001, which TMA estimates at

$1.4 billion.

According to our 1997 report, the initiatives TMA was implementing to

address change order problems included engaging a consulting firm to

prepare IGCEs for individual change orders, establishing a new

requirement that all proposed change orders be reviewed and approved by

Health Affairs before issuance, and hiring a management consulting firm

to review and recommend improvements to the process. In that report, we

stated that while it was too soon to determine the effectiveness of these

efforts, they could bring needed discipline to the system by helping to

ensure the need for, cost of, and timely settlement of change orders.

However, for a variety of reasons that included a major staff

reorganization and reduction, TMA management did not remain

consistently focused on change order improvements, and these initiatives

either were not fully implemented or had limited success. Furthermore,

TMA did not always have data available to measure the impact of these

specific initiatives on the change order process. (See app. II for a list of the

initiatives and their outcomes.) These initiatives notwithstanding, between

July 1997 and June 30, 2000, the backlog more than doubled to 562 (see

table 2) although the percent of unsettled change orders decreased from

62 percent to 52 percent.

Past Initiatives Had

Limited Effectiveness
Page 9 GAO-01-513 TRICARE Change Order Management

Table 2: TRICARE Change Orders by MCS Contractor, Region, and Settlement

Status on May 1, 1997, and on June 30, 2000

Status of all change orders on

May 1, 1997a

Status of all change orders

on June 30, 2000

MCS

Contractor/region Settled Unsettled Total Settled Unsettled Total

Health Net Federal

Services/11 56 56 112 138 76 214

Health Net Federal

Services/6 30 46 76 104 78 182

Health Net Federal

Services/9, 10, and

12 29 47 76 104 80 184

Humana/3 and 4 19 52 71 85 82 167

TriWest/Central

(formerly 7 and 8) 0 22 22 56 72 128

Anthem/2 and 5b

29 72 107

Sierra Military

Healthcare

Services/1b

13 96 109

Total 134 223 357 529 562 1,091

a

Data from GAO/HEHS-97-141, July 14, 1997.

b

These contracts had not been awarded on May 1, 1997.

Source: TMA’s Change Order Tracking System.

On July 1, 2000, TMA initiated an ambitious, short-term effort, referred to

as Mobilization, to settle its 562 open change orders as well as other

contract adjustments by the end of the calendar year.4

 TMA officials stated

that clearing the backlog was necessary in order to prepare for changes

mandated in the Floyd D. Spence National Defense Authorization Act for

Fiscal Year 2001 (P.L. 106-398) that would result in significant program

changes, including expanded health care and pharmacy benefits for

military retirees who are age 65 and older. In addition, TMA officials

recognized that they needed to reimburse MCS contractors for

implementing past change orders that had not been negotiated and paid.

To help achieve this goal, TMA increased the technical support for its

 4

TMA’s initiative also included the settlement of all outstanding Requests for Equitable

Adjustment (REA), claims, and Bid Price Adjustments (BPA). REAs are submitted by MCS

contractors to redress unforeseen changes in contract conditions that subsequently

increased their expenses. Claims usually result from the inability of TMA and the MCS

contractor to agree on an REA. BPAs are regularly scheduled reviews of the operating

conditions of the contract, with subsequent adjustments to the contract price, which may

either increase or decrease the contract price.

Change Order Backlog

Mostly Eliminated Under

Recent Settlement Effort
Page 10 GAO-01-513 TRICARE Change Order Management

Contract Management staff by using 14 staff on contract from the Center

for Naval Analysis (CNA), who were originally slated to analyze and

evaluate the proposals submitted in response to TMA’s solicitations for the

next round of TRICARE contracts, which had been postponed. These

additional staff were used primarily to help with change order proposal

reviews by providing technical and pricing expertise. TMA also hired an

information systems consulting firm to help review proposals and

increased the numbers of other contracted staff who support Contract

Management.

TMA worked with its MCS contractors to make this initiative a priority by

setting deadlines for the cost proposal submissions, which are needed to

negotiate and settle the change orders. TMA officials soon realized,

however, that reviewing and negotiating individual change orders would

be too time-consuming to meet its 6-month goal. To expedite negotiations,

TMA sent a team of contract staff to each MCS contractor to negotiate

global settlements, which included all change orders that had not yet been

settled under this effort, as well as REAs, claims, and other outstanding

contract adjustments. As of February 8, 2001, TMA had completed

payments to four of its five MCS contractors and had made partial

payments to the fifth MCS contractor.5

 Through this effort, TMA settled all

but 71 change orders. According to TMA, some change orders were not

settled under this effort because it lacked information or disagreed with

the MCS contractors about settlement terms. The 71 change orders,

combined with the 50 change orders issued after July 1, 2000, resulted in a

backlog of 121 by February 2001.

As of February 2001, TMA estimated a DHP funding shortfall of about $1.4

billion for fiscal year 2001. This shortfall amount includes about $500

million of the negotiated settlement amounts from TMA’s Mobilization

initiative as well as other DHP requirements, such as the direct care

system of military treatment facilities and the National Mail Order

Pharmacy.6

 TMA officials indicated that this shortfall would have to be

 5

As of April 16, 2001, TMA had completed payments to the fifth MCS contractor for all but 5

of the change orders that were negotiated during this effort.

6

TMA’s funding shortfall estimate of $1.4 billion includes costs associated with the MCS

contract settlements as well as other MCS contract costs; other private sector care

benefits, such as the National Mail Order Pharmacy; the direct care system; and statutory

requirements, including start-up costs for some of the new benefits for beneficiaries, who

are age 65 and older.

Amounts Budgeted for

Change Orders Insufficient

to Cover Negotiated

Settlement Costs
Page 11 GAO-01-513 TRICARE Change Order Management

satisfied through either an emergency supplemental budget request for

fiscal year 2001 or a reprogramming of DOD funds. Negotiated settlements

from the Mobilization initiative totaled about $900 million for current and

prior fiscal years.7

 However, it is not possible to identify the amounts

related specifically to change orders for each of the MCS contracts

because the change orders and other contract adjustments were jointly

settled. Furthermore, the total cost of this effort is difficult to determine

because the settlements also affected future-year costs.8

 TMA officials

stated that future-year cost estimates will be included in the President’s

Budget for Fiscal Year 2002.

In 1997 we reported that TMA was not budgeting separately for change

orders, and we cautioned that settling TRICARE’s backlog of change

orders could be very costly. We noted that the MCS contractors’ estimates

to settle only a portion of the open change orders at the time totaled $423

million, yet TMA estimated that settling all open change orders would cost

$38 million. At the time of our 1997 report, TMA officials told us that they

were developing a methodology to include change order costs in their

budget. That methodology, developed in 1998 and first employed in fiscal

year 1999, was to use 3 percent of TMA’s annual adjusted MCS contract

costs as an estimated budget for change orders. Using this methodology,

the amount in the fiscal year 2001 budget for change orders is

approximately $90 million. However, since TMA has negotiated settlement

amounts for most of its change order backlog and has a clearer picture of

change order costs, TMA officials plan to review the adequacy of the 3

percent budget estimate.

The high volume of change orders issued and the consistently slow pace of

settlements allowed the backlog to grow. Although TMA’s goal is to settle

change orders within 180 days after issuance, it had met this goal less than

20 percent of the time as of June 30, 2000. In July 1997 we reported an

average settlement time of 340 days and an average age per unsettled

change order of 273 days. By June 30, 2000, both averages had increased:

settlement time had risen to 499 days and the age of unsettled change

 7

This amount does not include settlements for some claims, which are still being

negotiated. Also, these settlements affected BPA amounts for current and prior fiscal years.

These additional amounts have yet to be finalized.

8

Future-year costs increased, in part, because the settlements included changes to health

care costs and factors used in BPAs.

Many Factors

Contributed to the

Change Order

Backlog
Page 12 GAO-01-513 TRICARE Change Order Management

orders reached 547 days—11⁄2 years. Settlement delays occurred because

of the slow submissions of cost proposals by the MCS contractors, the

subsequent slow reviews of the proposals by TMA, and TMA’s periodic

problems with obtaining funds for payment. TMA contract staffing

shortages and high turnover further impeded the process.

As of May 1, 1997, TMA had issued 357 change orders to its TRICARE

contracts, with an average of 71 per contract; as of June 30, 2000, change

orders totaled 1,091 and averaged 156 per contract. Since our 1997 report,

TMA awarded two additional MCS contracts, whose change orders

resulted in a 25 percent increase to the overall number issued. Table 3

compares the number of change orders issued for each TRICARE contract

and region for these time periods.

Table 3: TRICARE Change Orders Issued by MCS Contractor and Region as of

May 1, 1997, and June 30, 2000

MCS Contractor/region

All changes issued

as of May 1, 1997a

All changes issued

as of June 30, 2000

Health Net Federal Services/11 112 214

Health Net Federal Services/6 76 182

Health Net Federal Services/9, 10, and

12 76 184

Humana/3 and 4 71 167

TriWest/Central (formerly 7 and 8) 22 128

Anthem/2 and 5b

107

Sierra Military Healthcare Services/1b

109

Total 357 1,091

a

Data from GAO/HEHS-97-141, July 14, 1997.

b

These contracts had not been awarded on May 1, 1997.

Source: TMA’s Change Order Tracking System.

Figure 2 shows that the rate of issuance for change orders since May 1,

1997, has varied substantially by month. The number of change orders

issued each month from May 1, 1997, through June 30, 2000, varied from a

low of 3 during July 1998 to a high of 80 during September 1998. An

average of 19 change orders were issued each month during this time

period.

TMA Continued to Issue

Hundreds of Change

Orders
Page 13 GAO-01-513 TRICARE Change Order Management

Figure 2: Change Orders Issued by Month, May 1997 - June 2000

Source: TMA’s Change Order Tracking System.

The change order process has consisted of sequential steps, such as the

submission of cost proposals by the MCS contractors, the subsequent

proposal reviews by TMA, and ultimately, payment by TMA, if needed, for

settlement. Delays in completing these steps slowed settlements.

Furthermore, long-standing contract staffing problems, including both

limited numbers and high turnover, diminished the contract staff’s overall

knowledge base and impeded its ability to handle the heavy workload.

To begin the change order negotiation and settlement process, TMA must

receive an adequate cost proposal from the MCS contractor. TMA asks

MCS contractors to submit a cost proposal within 60 days from receipt of

the change order, but TMA does not often receive them within this time

frame. As of June 30, 2000, TMA had not received proposals for 381 of the

562 unsettled change orders (68 percent)—90 percent of which were older

than 60 days. In addition, we found that it took an average of about 9

months from change order issuance to proposal submission. One of the

most common reasons MCS contractors cited for slow proposal

submission was that they believe TMA does not always provide sufficient

specifications for them to appropriately price out the costs of the changes.

We cited this same problem in our 1997 report. As a result, MCS

contractors said that during the implementation of the change they must

spend time clarifying the details and scope of the change. One MCS

Process Impediments and

Staffing Problems Allowed

the Backlog to Grow

Slow Proposal Submissions

90

0

10

20

30

40

50

60

70

80

Change Orders Issued

 May

 June

 July

 Aug.

 Sept.

 Oct.

 Nov.

 Dec.

 Jan.

 Feb.

 Mar.

 Apr.

 May

 June

 July

 Aug.

 Sept.

 Oct.

 Nov.

 Dec.

 Jan.

 Feb.

 Mar.

 Apr.

 May

 June

 July

 Aug.

 Sept.

 Oct.

 Nov.

 Dec.

 Jan.

 Feb.

 Mar.

 Apr.

 May

 June

1997 1998 1999 2000
Page 14 GAO-01-513 TRICARE Change Order Management

contractor told us that TMA’s insufficient specifications leaves many items

open to contractor interpretation, and therefore the MCS contractor’s

efforts and corresponding costs sometimes vary significantly from TMA’s

expectations.

Another reason some contractors gave us for slow proposal submissions is

the time it takes to collect relevant data for determining the total cost of

the change. This process involves obtaining information from various

internal departments, which can include systems and actuarial personnel,

as well as from subcontractors, such as those used in processing health

care claims. Also, two of the MCS contractors stated that if the benefit is

new and unique, they prefer to gather actual costs because it is hard to

predict the extent to which beneficiaries will use the benefit. Another

factor that delays proposal preparation is TMA’s issuance of additional

changes to previous unsettled change orders.9

 This complicates proposal

preparation because it is difficult to determine where to assign costs—to

the original or to the subsequent change.

In order to meet TMA’s goal to settle change orders in 180 days, it has 120

days after proposals are submitted to review, negotiate, and settle them.

However, as of June 30, 2000, the average time between proposal

submission and settlement was 295 days. A number of factors contributed

to this delay. One was that when a proposal is received, the TMA

contracting officer may need to obtain multiple cost evaluations, including

health care, information systems (IS), operations, and possibly a Defense

Contract Audit Agency audit.10 These evaluations usually are not

performed by TMA’s Contract Management staff but by consultants or

other TMA staff. The logistics of obtaining timely evaluations from these

different sources can be time-consuming, and negotiations cannot proceed

until the appropriate evaluations are complete.11

An audit or review that results in the revision of a proposal also adds to

the settlement time. Furthermore, as time passes, data in the proposal may

 9

TMA does not maintain data showing the frequency with which this occurs. TMA officials

estimated that about half of their large dollar change orders, those over $500,000, fall into

this category (about 5 percent of all change orders).

10TMA asks the Defense Contract Audit Agency to audit all proposals over $500,000 and

others upon the request of the TMA contracting officer.

11TMA has not maintained data on the difficulties or time spent in obtaining proposal

reviews.

Slow Proposal Reviews
Page 15 GAO-01-513 TRICARE Change Order Management

need to be updated. There is no standard length of time for which a

proposal is considered current, and either TMA or the MCS contractor

may initiate these updates. MCS contractors also may choose to revise

their proposals if additional information becomes available that affects the

cost of the change order.

If TMA determines that a proposal is inadequate, the MCS contractor must

make the necessary changes and resubmit it for review. According to

TMA, an adequate proposal must meet the requirements of the Federal

Acquisition Regulation. TMA told us that some of the more common

reasons a proposal must be revised are that it does not provide sufficient

detail on costs and that it does not include adequate supporting

documentation. TMA officials said they rarely issue formal notices of

inadequacy and prefer to resolve problems informally in a collaborative

approach. As a result, even though TMA officials told us that proposals are

frequently inadequate, they have not maintained statistics to demonstrate

this.

TMA officials acknowledged that contract staff exercise a fair amount of

judgment in determining the adequacy of a proposal. For example, one

contracting officer may find a proposal adequate, while another, who

prefers more detailed cost data, may not. This can be a problem for MCS

contractors if the TMA contract official they work with changes. One MCS

contractor expressed frustration when proposals it submitted were

initially considered adequate, then inadequate, and then adequate again, as

their TMA contracting officer changed. Another MCS contractor told us it

generally experienced an influx of inadequate proposals when new and

inexperienced TMA staff were assigned to its contract. Once these staff

became familiar with the MCS contractor’s proposal format, fewer

proposals were returned as inadequate.

All of the MCS contractors told us that once they and TMA agreed upon a

payment amount, there was sometimes a lengthy delay before they

received the official settlement paperwork allowing them to bill TMA. As a

result, the change order backlog can include change orders that have been

negotiated but not paid. Although TMA does not maintain statistics

showing the length of time between negotiation and payment, MCS

contractors told us that in some instances they waited many months after

negotiation to receive the final settlement paperwork. For example, one

MCS contractor waited 9 months for settlement paperwork, and another

said it waited 6 months.

Insufficient Funding Delays

Payment
Page 16 GAO-01-513 TRICARE Change Order Management

TMA officials acknowledged that one of the primary reasons for delays has

been insufficient funding. After negotiation, TMA officials prepare

settlement paperwork and coordinate with Resource Management staff,

who perform budgeting and accounting functions, to determine whether

adequate funding is available. If it is not, TMA must wait until additional

funding is obtained before sending paperwork to the MCS contractor.

Delays also can occur if there is a problem with any of the numerous steps

that must be completed in sequence after negotiation before the MCS

contractor can be paid. Once TMA determines it has adequate funding, it

sends the settlement paperwork to the MCS contractor for signature. The

MCS contractor signs and returns the paperwork to TMA, where it is

signed and returned to the MCS contractor, who may then bill TMA. TMA

officials told us that they are required to pay the bill within 30 days of

receipt.

In 1997, TMA officials stated that the backlog was caused in part by a

shortage of staff as well as TMA’s decision to allocate existing resources to

the higher priority work of awarding the TRICARE contracts. Until

recently, TMA officials continued to cite staff shortages as a problem

contributing to the growth of the change order backlog. These officials

stated that the continuation of this shortage was partially due to the

Defense Reform Initiative that began in late 1997 and resulted in both a

reorganization and an overall staff reduction of about 20 percent. TMA

also had difficulty obtaining staff with certain areas of expertise needed to

review MCS contractors’ proposals. For example, TMA did not have

adequately trained staff who were dedicated to perform information

systems technical evaluations of proposals for approximately 11⁄2 years

from January 1999 to June 2000.12 Without these evaluations, proposals

with IS data could not be satisfactorily negotiated and settled. To avoid

future staffing difficulties, TMA officials told us that they intend to retain

some of the contracted staff who assisted them with Mobilization. In

addition, TMA is currently conducting an internal assessment of current

and future workload requirements to better align its resources, which

could affect staffing levels. Therefore, TMA officials told us that they are

not sure how many contracted staff will be used in the future.

Another problem was the turnover among TMA’s contract staff—with staff

both leaving and shifting among contracts. TMA officials stated that staff

 12An IS technical evaluation would be used to determine whether the costs incurred by the

MCS contractor in making systems changes were appropriate.

Staffing Problems
Page 17 GAO-01-513 TRICARE Change Order Management

turnover is primarily due to staff shortages, which results in more work

being distributed among fewer staff, leading to burnout. TMA officials

stated that their experienced contract staff are highly marketable and can

readily obtain other jobs for higher pay. Turnover of contract staff has

been a long-standing problem for TMA. A 1998 Defense Logistics Agency

(DLA) procurement management review of contracting activities at TMA

reported that since January 1995, the turnover of contracting staff was

high—about 33 percent over 3 years—and morale was low. The DLA

report stated that these problems were due, in part, to staff burnout

resulting from the change to managed care contracts, the sometimes

hectic work pace, and the lack of program managers to make decisions

and focus priorities. TMA concurred with the findings in that report.

The DLA report also said that contract staff need a minimum of 18 months

of TRICARE experience to properly learn about MCS contracts. Therefore,

high turnover of contract staff compromises the overall knowledge level

about contracts as well as the specific business operations of the MCS

contractors, which can delay change order settlements. For example, a

few of the MCS contractors said that by the time they reached final

negotiations, the TMA contract staff they initially worked with were no

longer there, and they had to spend time educating the new staff about

past actions on the change order.

In May 1999, TMA began revising the change order process with the goals

of reducing the backlog and facilitating the effective management of future

change orders. The resulting streamlined Change Management Process is

intended to address the fundamental problems with change orders, such

as controlling the number issued by ensuring that the changes are

necessary and by making certain that money is available to fund them. The

new process includes the creation of the Change Management Board, an

executive-level body charged with reviewing, approving, and prioritizing

new changes. Although the Change Management Board began meeting in

January 2000, it is premature to evaluate the effectiveness of the new

process because no change orders have yet been issued under it.

Under the revised process, TMA’s Program Executive Officer assigns each

potential change order to a Program Manager, who is responsible for all

activities associated with it.13 The Program Manager’s initial task is to

 13The Chief Operating Officer for TMA serves as the Program Executive Officer.

Effectiveness of New

Change Management

Process Unknown
Page 18 GAO-01-513 TRICARE Change Order Management

determine whether the potential change is “operational” or “significant.”

Operational changes are those that cost less than $500,000 per MCS

contract and include administrative modifications, such as annual updates

of provider reimbursement rates, ADP system updates, and routine

modifications such as the clarification of current requirements.

Operational changes are not reviewed by the Change Management Board

for approval and proceed directly to negotiation and implementation.

Significant changes include benefits that represent a major program shift

or changes with a financial impact over $500,000. For such changes, the

Program Manager establishes an Integrated Program Team (IPT)

consisting of a cross-section of personnel including senior TMA, military

services, and Lead Agent officials and others as needed. The IPT is

responsible for determining specifically how a new change will be

implemented and for estimating the cost of implementation to the MCS

contracts, if applicable. Although the amount of time needed to determine

these details may vary, TMA officials estimate that the IPT’s portion of the

process could take 6 to 12 months. Within this time period, the IPTs have

specific milestones to meet, such as receiving approval of an

implementation plan from the Change Management Board.

The Change Management Board is composed of senior officials of both

TMA and the Armed Services.14 The Board reviews proposed changes and

determines which ones will become change orders. Approved changes are

prioritized for negotiation and implementation on the basis of their

importance and the availability of funds. Some approved changes will be

delayed if funding is not available and thus may be included in the next

year’s budget. For example, the Board may approve 20 change orders with

total estimated costs of $34 million. However, if only $20 million is

available to fund these changes, only changes with the highest priority will

be implemented immediately.

TMA’s new Change Management Process allows for change orders to be

issued either unilaterally, as they were previously, or bilaterally, which

means that the changes are negotiated before implementation. TMA’s goal

is to issue all of its contract changes bilaterally. As with the previous

 14Members of the Change Management Board include the Program Executive Officer, who

serves as the Chairperson; the Deputy Surgeons General; the Deputy Director of Medical

Readiness, Joint Chiefs of Staff; the Director of Resource Management; the Director of

Acquisition Management and Support; and the Director of Information Management,

Technology and Reengineering.
Page 19 GAO-01-513 TRICARE Change Order Management

process, contract changes issued bilaterally must have an adequate

proposal with the requisite reviews before negotiations begin. Because the

entire bilateral process may take over a year, any delays with proposal

submissions and reviews would delay not only settlement but also

implementation. To avoid such delays, in the new Change Management

Process, TMA and MCS contractor officials will work together to develop

the proposal, eliminating the more time-consuming consecutive steps of

proposal submission and review.15 When possible, TMA plans to have

negotiation teams that can be deployed to the MCS contractors’ locations

to jointly develop proposals and negotiate costs, with the goal of leaving

with signed bilateral agreements.

Changes now going through the new process include one for the National

Enrollment Database, which is to be issued bilaterally; TMA expects it to

be issued in spring 2001. Twenty-three other changes are pending approval

by the Board and will not be considered until funding is available. These

include the expansion of the mammography benefit and elimination of the

preauthorization requirement for beneficiaries with other health

insurance. In addition, the Floyd D. Spence National Defense

Authorization Act for Fiscal Year 2001 (P.L. 106-398) contained mandates

that resulted in 22 changes not yet in the process, including the elimination

of copayments for family members under TRICARE Prime as well as the

extension of TRICARE Prime Remote for family members.16 Other

mandates in this act include the recently added benefits for military

retirees who are Medicare-eligible—TRICARE Senior Pharmacy and

TRICARE for Life, both of which will be issued bilaterally. These 46

changes, when applied to all seven contracts, could create a total of 322

change orders.17

According to TMA officials, potential advantages of the new process

include better control over the volume of change orders issued by

prioritizing approved changes for issuance. In addition, TMA should be

able to better manage its financial resources by issuing changes bilaterally

 15TMA calls this streamlined step Alpha Contracting.

16TRICARE Prime is DOD’s managed care program. TRICARE Prime Remote provides

active duty members with a specialized version of TRICARE Prime when they are assigned

to duty stations in areas not served by the military health care system.

17TMA officials indicated that because some of the mandated changes are outside the scope

of the current MCS contracts, they may use a different contracting mechanism to change

the contracts, such as sole-source requests for proposal.
Page 20 GAO-01-513 TRICARE Change Order Management

because it will know the costs of changes before implementation and can

ensure that funds will be available to pay for them. Potential benefits to

contractors include better-defined specifications and assurance of timely

payments.

Although the bilateral process appears to be a step in the right direction, it

may not work for some changes because sufficient lead-time may not be

available. For example, congressionally mandated changes may have

implementation dates that this process cannot meet because the amount

of lead-time will not be sufficient. According to TMA, the unilateral change

order process can still be used under such time constraints.

As of June 30, 2000, the number of change orders issued had almost

tripled, while the number of unsettled change orders had more than

doubled since our last report. Although we recommended in that report

that DOD devote high-level attention to managing improvements to the

change order process, this was not consistently done. As a result, until

recently, none of TMA’s numerous initiatives effected much improvement

to the process or reduced the backlog. The current small backlog is the

result of a recent concerted effort, not better management over time.

TMA’s new Change Management Process appears to address many of

TMA’s problems with change orders by controlling the volume of issuance,

using a more collaborative negotiation process, and settling costs before

implementation. However, past initiatives that appeared promising

ultimately delivered little in terms of preventing or reducing the backlog.

The high volume of change orders soon to enter the new Change

Management Process makes it imperative that TMA management closely

monitor the process to prevent future backlogs.

We recommend that the Secretary of Defense direct the Assistant

Secretary of Defense (Health Affairs) to monitor the new Change

Management Process on a continuous basis and take immediate corrective

action if problems, such as a growing backlog, are identified.

We requested comments from DOD, but none were provided.

Conclusions

Recommendation for

Executive Action

Agency Comments

and Our Response
Page 21 GAO-01-513 TRICARE Change Order Management

We are sending copies of this report to the Honorable Donald H. Rumsfeld,

Secretary of Defense, and relevant congressional committees. Please

contact me on (202) 512-7101 if you or your staff have any questions

concerning this report. Another GAO contact and staff acknowledgments

are listed in appendix III.

Stephen P. Backhus

Director, Health Care—Veterans’ and

 Military Health Care Issues
Appendix I: Scope and Methodology

Page 22 GAO-01-513 TRICARE Change Order Management

Our objectives were to update the 1997 report and provide information on

(1) the status of the change order backlog and whether DOD reduced it,

(2) factors that contributed to the growth of the backlog, and (3) DOD’s

new change order process.

To provide information on the status of the change order backlog and

whether DOD reduced it, we analyzed a copy of TMA’s Change Order

Tracking System (COTS) dated January 8, 2001. This file contains data

about all change orders that have been issued by TMA to the five MCS

contractors. With this database, we identified change orders that had been

issued and settled on August 1, 1996, May 1, 1999, and June 30, 2000. We

also used this database to identify the number of change orders issued

since May 1, 1997, the number that had an independent government cost

estimate (IGCE), and the average number of days between change order

issuance and proposal submission. We compared these data with the

corresponding data from our 1997 report to assess the difference.

We also interviewed and obtained documentation from TMA about its

prior initiatives to address change order problems, its Mobilization effort,

the funding shortfall, and the number of unsettled change orders as of

February 2001. We also assessed how TMA estimates, budgets, and

accounts for change orders by obtaining studies and supporting

documentation used to estimate costs, tracing estimated costs to the

budget, and reviewing accounting data from fiscal year 1997 through fiscal

year 2000. In addition, we interviewed and obtained documentation from

each of the five MCS contractors about prior initiatives to address change

order problems, and the Mobilization effort. We also interviewed and

obtained supporting documentation from the TMA consultant who

prepares budget estimates and IGCEs.

To provide information on factors that contributed to the previous growth

of the backlog, we used the January 8, 2001, COTS database to calculate

the

• average amount of time needed to finalize all change orders settled by

June 30, 2000;

• average age of unsettled change orders as of June 30, 2000;

• number of change orders issued each month between May 1, 1997, and

June 30, 2000;

• number of proposals that had been submitted as of June 30, 2000;

• average amount of time from change order issuance to proposal

submission;

Appendix I: Scope and Methodology
Appendix I: Scope and Methodology

Page 23 GAO-01-513 TRICARE Change Order Management

• average number of days between proposal submission and change order

settlement as of June 30, 2000; and

• number of change orders issued since May 1997 that had an IGCE.

We compared these data with the corresponding data from our 1997 report

to assess the difference.

We also interviewed and obtained documentation from TMA about the

number of change orders issued, the pace of settlements, the process TMA

uses to settle change orders, factors affecting the pace of proposal review,

and reasons why payments to MCS contractors are delayed. In addition,

we interviewed the five MCS contractors about how they process change

orders, factors affecting the timeliness of proposal submission, and

delayed payments from TMA. We met with officials of the Defense

Contract Audit Agency and Defense Contract Management Agency to

determine their roles in the change order process.

We were not able to determine whether change orders resulted from new

laws or regulations or whether they were self-initiated because TMA does

not regularly maintain these data. TMA officials stated that they were

unable to provide this information in time for this report because the data

are filed in several different departments and would require significant

effort to compile.

To provide information on DOD’s new change order process, we

interviewed officials from TMA and obtained documentation that

described this new process. We also discussed the new process with each

of the MCS contractors to obtain their views. We did our work from July

2000 through March 2001 in accordance with generally accepted

government auditing standards.
Appendix II: Prior Initiatives to Address

Change Order Problems and Their Outcomes

Page 24 GAO-01-513 TRICARE Change Order Management

At the time we issued our 1997 report, TMA had begun numerous efforts to

improve the change order process and expedite settlements.1

 These

initiatives and their outcomes include the following:

• TMA assembled a team of contract specialists in August 1996 to expedite

the settlement of change orders for all MCS contracts. TMA told us that

the team was focused on reducing the change order backlog to a

manageable and consistent level—a goal of 100 to 150 open change

orders—by early 1999. However, by May 1999, when the team was

disbanded, the backlog had grown from 197 to 408 change orders. TMA

officials explained that this approach did not work for several reasons,

including staff shortages.

• In November 1996, TMA engaged a consulting firm to prepare independent

government cost estimates (IGCE) for new change orders instead of

making “guesstimates” or basing cost estimates on contractors’ informal

estimates. While this was a needed improvement, it was not expected to

have an impact on the timeliness of the process since the IGCE is obtained

before the change order is issued. Since our 1997 report, approximately 90

percent of the change orders issued had an IGCE. IGCEs are an important

financial management tool because they serve as the basis for determining

the amount of funds to be obligated for the change orders. Inaccurate

estimates could result in either the underobligation of funds, which would

result in the need for additional funding, or overobligation, which would

unnecessarily obligate funds that could be used for another DHP program

activity. According to TMA’s consultant who prepared the estimates,

differences between IGCEs and proposal amounts occur for many reasons.

For example, the MCS contractors may use different actuarial assumptions

than TMA’s consultant. Differences can also result from the time delay

between the preparation of the IGCE, which is developed shortly before

the change order is issued, and the contractor’s proposal, which may be

developed many months later and include actual costs. As of June 30,

2000, we found that it took an average of about 9 months from issuance to

proposal submission. TMA’s analysis found that IGCEs were generally

lower than both the MCS contractors’ proposed costs and settlement

amounts.

• In March 1997, TMA established a new requirement that all proposed

change orders be reviewed and approved by Health Affairs before

issuance. The review was to evaluate each order’s effects on the health

 1

Defense Health Care: Actions Under Way to Address Many TRICARE Contract Change

Order Problems (GAO/HEHS-97-141, July 14, 1997).

Appendix II: Prior Initiatives to Address

Change Order Problems and Their Outcomes
Appendix II: Prior Initiatives to Address

Change Order Problems and Their Outcomes

Page 25 GAO-01-513 TRICARE Change Order Management

care system, its costs, and the availability of funds. In short, the Deputy

Assistant Secretary, Health Services Financing, was to evaluate the need

for each change order and decide whether to implement it. However,

under the reorganization prompted by the Defense Reform Initiative, this

responsibility was transferred to the Director of Military Health Systems

Operations, who created a Change Management Board consisting of senior

Service and TMA officials. Although TMA officials said that the Board

reviewed and approved change orders before issuance, they could not

provide us data to assess the impact of these reviews on the numbers of

change orders issued.

• In March 1997, TMA hired a management consulting firm to review and

recommend improvements to TMA’s change order process, specifically,

ways to help reduce the current backlog and to prevent future backlogs.

However, after reviewing a draft of the firm’s report, TMA officials

discontinued the study because they were already aware of the

consultant’s principal finding—that the change order problems were

caused by high volume and a lack of discipline within the process.

Nevertheless, some of TMA’s subsequent initiatives mirrored the report’s

recommendations, such as the use of predetermined milestones and the

establishment of a centralized review board to evaluate changes before

they are issued.

• TMA notified contractors to begin submitting overdue (beyond the 60-day

post-issuance requirement) proposals for low-cost or no-cost change

orders. Contractors were told that proposals not received within 30 days

could be unilaterally settled by TMA, meaning that TMA would pay the

price it deemed appropriate. TMA officials told us that they periodically

prompted MCS contractors to submit cost proposals for particular change

orders and that the MCS contractors responded, obviating the need for

TMA to settle any change orders unilaterally. However, these officials did

not have data to illustrate the outcome of this and similar initiatives.

• When we issued our July 1997 report, TMA was developing provisional

payment procedures, which were implemented in January 1998. These

procedures allow MCS contractors to bill TMA on a monthly basis for

costs incurred to implement changes, which is contingent upon the receipt

of an adequate cost proposal. TMA makes provisional payments at the

lesser of 100 percent of incurred contractor costs or up to 75 percent of

the amount TMA has obligated for the change. If incurred costs are greater

than obligated amounts, TMA requests a Defense Contract Audit Agency

audit to validate the additional costs. TMA will then pay up to 75 percent

of the validated costs. Despite TMA’s effort to pay contractors in a more

timely manner, MCS contractors told us that the provisional payment

process is cumbersome and slow, especially when their incurred costs are

greater than TMA’s funded amounts. TMA officials said that the biggest
Appendix II: Prior Initiatives to Address

Change Order Problems and Their Outcomes

Page 26 GAO-01-513 TRICARE Change Order Management

obstacle to MCS contractors’ receipt of provisional payments is the

submission of an adequate proposal.
Appendix III: GAO Contact and Staff

Acknowledgments

Page 27 GAO-01-513 TRICARE Change Order Management

Michael T. Blair, Jr., (404) 679-1944

Bonnie Anderson, Mario Artesiano, Rathi Bose, Cynthia Forbes, Linda

Garrison, Elizabeth T. Morrison, and Dayna K. Shah made key

contributions to this report.

Appendix III: GAO Contact and Staff

Acknowledgments

GAO Contact

Staff

Acknowledgments

(101644)

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