United States General Accounting Office

GAO Testimony

Before the Subcommittee on Military Personnel,

Committee on National Security, House of Representatives

For Release on Delivery

Expected at 1:00 p.m.

Thursday, February 27, 1997

DEFENSE HEALTH CARE

Limits to Older Retirees’

Access to Care and

Proposals for Change

Statement of Stephen P. Backhus, Director

Veterans’ Affairs and Military Health Care Issues

Health, Education, and Human Services Division

GAO/T-HEHS-97-84

Defense Health Care: Limits to Older

Retirees’ Access to Care and Proposals for

Change

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to be here today to discuss health care

options for retired military members and their families. Health care

options for these individuals involve complex issues, and proposed

alternatives may have wide-ranging effects on Department of Defense

(DOD) beneficiaries and federal health programs.

Today’s DOD health care system provides coverage for about 8.3 million

members, of which over half are retirees and their dependents and

survivors.1

 Under the terms of the 1956 Dependents’ Medical Care Act, DOD

has authority to provide retirees of any age health care in its medical

facilities as long as space and resources are available. This is referred to as

space-available care. The statute does not entitle retirees to care in

military facilities.

When space and resources are available in military facilities, retirees may

receive care at little or no cost. When resources are not available, retirees

under age 65 may seek care from private health care providers and DOD

will pay most of the cost through the Civilian Health and Medical Program

of the Uniformed Services (CHAMPUS). CHAMPUS was established in part so

that military members, once retired, could have health care coverage until

eligible at age 65 for Medicare. At age 65, retirees’ only source of DODfunded care is military facility space-available care.

Major changes in DOD’s health care system, including the introducing of a

managed care program called TRICARE and the closing or downsizing of

many medical facilities, have caused older military retirees, those aged 65

and older, to fear that these changes will eventually end their access to

space-available care. As a result, alternatives have been proposed for

improving older retirees’ access to DOD-funded or directly provided care.

At the Subcommittee’s request, we have been reviewing retirees’ concerns

and the major proposals for addressing them. We have talked with

beneficiary associations, DOD headquarters officials, and military medical

facility managers and health care providers nationwide to gain perspective

on the effects of system changes on retirees. Our work is still under way.

As this Subcommittee and others begin to weigh the costs and other

trade-offs associated with how best to help military retirees, we welcome

the opportunity to share our preliminary observations on the proposed

1

For the remainder of this statement, the term “retirees” refers to retirees and their dependents and

survivors.

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Defense Health Care: Limits to Older

Retirees’ Access to Care and Proposals for

Change

alternatives and their likely effects on beneficiaries and the government.

Later this spring, we plan to issue a final report addressing these matters

in more detail.

Specifically, you asked that we discuss two areas:

• older retirees’ options for accessing health care and the related effects of

DOD’s recent health care system changes on their access to care and

• proposed alternatives for addressing retirees’ concerns and their potential

effects on beneficiary and government costs.

Results in Brief In summary, our work has shown that recent system downsizing has

reduced all care, including space-available care—the only care retirees

may access at military facilities. In the last 10 years, the number of military

medical personnel has declined by 15 percent and one-third of military

hospitals have been closed, reflecting the one-third reduction in activeduty forces. While further readiness-related downsizing decisions are

pending, some predict more system reductions. Meanwhile, TRICARE,

which does not allow older retirees to enroll in its Prime health care

option (its new health maintenance organization (HMO) option), is moving

to maximize Prime enrollment at all the facilities. As this takes place, older

retirees’ space-available care will further decline at most facilities and

eventually end at some. Space-available care at military health facilities,

moreover, is episodic and lacks the continuity so important to older

retirees who have more frequent, and often chronic, medical problems

than younger retirees. And, although retirees may also access care through

such government-sponsored programs as Medicare and private

supplementary health insurance, many retirees experience coverage gaps

and high out-of-pocket costs.

DOD and members of the Congress have proposed alternatives to address

the availability, cost, and coverage issues affecting retirees’ access to care.

These proposals have potentially large price tags or fall short in helping

those most affected by base closures and TRICARE’s implementation. For

example, Medicare subvention, which is based upon DOD’s receiving

Medicare reimbursement for treating retirees as Prime enrollees at

military medical facilities, would be greatly limited by the number of

beneficiaries able to participate and susceptible to further downsizing

actions.

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Defense Health Care: Limits to Older

Retirees’ Access to Care and Proposals for

Change

Allowing retirees to join the Federal Employees Health Benefits Program

(FEHBP), on the other hand, or using CHAMPUS as a second payer to

Medicare, would provide retirees with more dependable, consistent access

to care. Costs, however, would be considerable, in part because retirees

whose care is now funded by other sources would most likely join the new

program. To mitigate these costs, DOD would probably need to explore

measures such as alternative beneficiary cost sharing.

In addition, although not yet fully developed, DOD’s pharmacy proposal

would provide retirees a single benefit not covered by basic Medicare and

could fill the gap in coverage until system restructuring decisions are

made and the related consequences known. DOD has not yet decided,

however, on benefit eligibility, delivery, or funding details for this

proposal; thus, it is too early to judge the cost implications.

DOD System Changes

Have Reduced

Retirees’ Access to

Facility Care

In the early 1950s, the military health care system was sized for a large

active-duty force. Military retirees and their families made up only

8 percent of the eligible military health care population; health care in

military facilities was almost assured for them.

The military health system has changed significantly, however. Beginning

in the 1980s, active-duty forces have been downsized by more than onethird, with attendant reductions in medical staff and facilities. Since then,

the number of military doctors, nurses, and medical technicians has

declined by 15 percent; in the past 10 years, one-third of all military

hospitals have been closed. In addition, while the total population eligible

for care declined by about 10 percent, the number of retirees grew.

Between 1987 and 1997, the number of older retirees increased by about

75 percent, to 1.2 million; and they are projected to outnumber active-duty

personnel in the future. These changes have significantly reduced the

availability of care for retirees in DOD facilities.

Moreover, recent DOD studies suggest that the military health care system

is larger than needed to meet future wartime requirements. If this is true,

then medical staff and facilities could be further reduced, with possible

reductions in retirees’ space-available care at military facilities. DOD is now

evaluating its medical requirements but has made no final decisions.

TRICARE may further reduce older retirees’ access to care at military

medical facilities. Before TRICARE, all retirees, regardless of age, had the

same priority for care in military medical facilities. Under TRICARE, those

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Retirees’ Access to Care and Proposals for

Change

who get priority for access are those enrolled in TRICARE Prime. As a

result, older retirees, who are currently not eligible to enroll in TRICARE

Prime, receive the lowest priority for access and can only access spaceavailable care at the facilities.

As of January 1997, most facilities where TRICARE is in place reported

having space available for older retirees but that retirees could not be

assured of obtaining such care whenever they sought it. According to

medical facility officials, many retirees may not make advance

appointments for routine or follow-up care or even get urgent care and

must persistently call each day hoping for an appointment. As a result,

care is episodic and lacks the regularity and continuity that is important to

older retirees, who have more frequent and chronic medical problems than

younger ones. Looking ahead, as TRICARE Prime enrollment increases,

older retirees’ space-available care will further decline at many facilities

and eventually end at others. If this trend continues, affected retirees will

need to depend more on non-DOD sources for their health care in the

future.

Older military retirees may now also access other government-sponsored

and private health insurance. Virtually all receive Medicare part A

insurance, for example, which covers their inpatient hospital, skilled

nursing, and home health care needs. By paying an extra monthly

premium, they may also receive Medicare part B coverage for physicians

and other outpatient services. Recent DOD beneficiary surveys have

indicated that 90 percent of older retirees have Medicare part B coverage,

and about half have private insurance.2

 Furthermore, in recent years, 31

states have introduced Medicare HMOs, providing some retirees another

care option. Finally, military retirees—though not their dependents—are

eligible for certain types of care through Department of Veterans Affairs

programs.

Unlike other federal retirees and retirees of many private employers who

are provided insurance supplementing Medicare, however, older military

retirees can experience coverage gaps, high costs, and an otherwise

patchwork system that they must learn to navigate to receive their care.

Medicare, for example, does not cover outpatient prescription drugs nor

does it have a catastrophic limit on patients’ out-of-pocket costs. In

addition, because Medicare has deductibles and copayment requirements,

about a third of older military retirees have purchased supplemental

2

In the general elderly population, 95 percent have Medicare part B and 75 percent have private health

insurance.

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Defense Health Care: Limits to Older

Retirees’ Access to Care and Proposals for

Change

Medigap policies from private insurers. Such plans’ annual premiums

range from about $400 to more than $2,100, and the coverage under the 10

standard policies varies widely. Only the most expensive plans cover

outpatient prescriptions and none pay for dental or vision care. Although

older military retirees with private or other government employersponsored insurance may have more generous coverage than those

without such coverage, their costs could still be relatively high depending

upon the extent to which such employers share the costs.

Alternatives for

Improving Retirees’

Access Could Have

Significant Cost and

Other Implications

The conditions discussed have spurred several alternatives for addressing

the availability of, cost of, and coverage for health care that now, and

perhaps even more so in the future, confront older military retirees. We

have been examining five alternatives for addressing the health care

concerns of military retirees aged 65 and older: (1) Medicare subvention,

(2) FEHBP enrollment, (3) CHAMPUS as a second payer, (4) Medigap policies,

and (5) a mail order pharmacy benefit. All of these proposals would

require some congressional action.

Through Medicare subvention, Medicare-eligible retirees could enroll in

TRICARE Prime. DOD would receive reimbursement for Medicare-covered

services from the Health Care Financing Administration (HCFA) to the

extent that older retirees’ care exceeds levels that DOD currently provides.

For those who enroll, DOD would directly provide or arrange for their full

care. Enrollees would have improved access to care in DOD facilities. Thus,

enrolled retirees would enjoy the continuity of care many now lack and

reduced out-of-pocket costs. The government might also benefit to the

extent that DOD facility care is provided less expensively than care

provided under Medicare.

The number of older retirees likely to benefit from subvention appears

proportionately small, however, because available resource capacity in

military facilities continues to decline. DOD estimates that less than half of

the older retirees now using the military medical facilities in areas where

subvention will be tested would be able to enroll in TRICARE Prime.

Under a nationwide implementation, DOD expects to be able to enroll in its

facilities a similar proportion of the 300,000 older retirees now using its

facilities. Furthermore, subvention would not be available to the many

retirees who do not live near military facilities such as those affected by

base closures. And, to expand subvention beyond the limits of its facilities,

DOD would have to buy care from civilian providers, through its TRICARE

contractors or, as HCFA does, on a fee-for-service basis or through HMOs.

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Change

There is most likely no cost advantage to the government of DOD’s

contracting out for this care rather than HCFA’s contracting out for it.

In addition, Medicare subvention would add administrative complexity to

DOD’s system. DOD has just begun implementing cost-accounting and

information systems needed to track enrollees’ care, reconcile Medicare

reimbursements, and accurately calculate spending and service levels. In

that regard, DOD’s current plans to test the program without HCFA

reimbursement seem prudent for the Department to effectively develop

the needed support systems.

Other alternatives—such as providing retirees with FEHBP, CHAMPUS, or

Medigap policies—would, in effect, supplement retirees’ current Medicare

coverage. With FEHBP, older retirees could choose from a wide array of

health insurance plans, including HMOs, sharing the premium costs with the

government. Offering FEHBP, moreover, would provide military retirees the

same coverage provided to other federal retirees and help those affected

by facility closures, distance from facilities, or reduced facility capacity

and those with limited insurance coverage from other sources. The

proposal’s potential cost, however, appears to be significant. DOD and the

Congressional Budget Office have estimated that additional annual costs

could exceed $1 billion, assuming that military retirees’ cost sharing equals

that of other federal retirees. This option would also impose new

administrative responsibilities and related costs on DOD and the Office of

Personnel Management, such as managing enrollments, withholding

premiums from annuities, and preparing and distributing plan materials.

Like the FEHBP proposal, providing CHAMPUS coverage to retirees when they

reach age 65 would help those with limited access to military medical

facilities or limited insurance coverage. In addition, older retirees could

continue coverage under a plan with which they are familiar and pay no

premiums. For these retirees, the program would operate as a secondary

payer and cover most expenses that Medicare does not now pay, including

prescription drug costs. Beneficiaries and providers alike, however, have

expressed dissatisfaction with such aspects of the CHAMPUS program as the

copayment amounts beneficiaries must pay and the amounts providers are

reimbursed. Furthermore, the proposal’s annual cost is estimated at

approximately $2 billion.

Many of the benefits older retirees would enjoy under FEHBP and CHAMPUS

could also be realized if DOD paid for their Medicare part B premium,

Medigap plans, or both. The cost implications would also be similar,

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Retirees’ Access to Care and Proposals for

Change

roughly $630 million for Medicare part B and up to $2 billion for Medigap

plans annually.

One alternative that would perhaps fill a significant health care gap for

many older retirees is an expanded pharmacy benefit. DOD is considering a

mail order program modeled after its current program in base closure

areas. The proposed program also would reduce retirees’ prescription

expenses for those with limited or no prescription coverage and those who

live too far from a military facility pharmacy. The costs of such a program

would depend on the amount of retiree cost sharing required, whether

retirees can continue to use military pharmacies, whether retirees have

other prescription coverage, and the prices the government can obtain

from drug suppliers. DOD’s preliminary estimates of its additional cost

range from $142 million to $360 million. The lower number assumes that

only retirees living outside facility catchment areas (generally 40 miles)

would be eligible for the mail order benefit. The higher estimate assumes

all older retirees would be eligible.

Observations DOD’s responsibilities to a growing retiree population given the availability,

cost, and coverage issues discussed today present a problem for the

Department. On the one hand, like all responsible employers, DOD seeks to

provide the best health care it can for its former employees, particularly

during their later years when so many need it most. And DOD has

acknowledged an obligation to its retirees, who served their country—

many in harm’s way—during their most productive years. On the other

hand, however, the military’s readiness needs determine the size of its

health care system. While readiness decisions are now pending, some

predict further system downsizing, leading to even less space-available

care at military facilities.

Within this context, the Medicare subvention proposal for treating retirees

at military facilities appears particularly unlikely to help many retirees.

The FEHBP and CHAMPUS as a second payer proposals have potentially large

price tags. While DOD health care system restructuring decisions are being

made, however, the pharmacy proposal might fill an important benefit gap

for retirees with limited or no pharmacy coverage.

Mr. Chairman, this concludes my prepared statement. My colleagues and I

will be happy to respond to any questions you or other members of the

Subcommittee may have.

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Defense Health Care: Limits to Older

Retirees’ Access to Care and Proposals for

Change

Contributors For more information on this testimony, please call Daniel Brier, Assistant

Director, at (202) 512-6803. Other major contributors include Catherine

O’Hara, Nancy Toolan, Sandra Davis, James Espinoza, Elsie Picyk, and

Timothy Carr.

(101601) Page 8 GAO/T-HEHS-97-84
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