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

July 1997 DEFENSE HEALTH

CARE

Actions Under Way to

Address Many

TRICARE Contract

Change Order

Problems

GAO/HEHS-97-141

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-276226 

July 14, 1997

The Honorable Steve Buyer

Chairman

The Honorable Gene Taylor

Ranking Minority Member

Subcommittee on Military Personnel

Committee on National Security

House of Representatives

To help contain health care costs, in late 1993 the Department of Defense

(DOD) initiated TRICARE, its nationwide managed health care program for

military beneficiaries. Under TRICARE, health care for about 8 million

eligible beneficiaries is coordinated and managed on a regional basis using

all available military hospitals and clinics, supplemented by contracted

civilian services. By mid-1998, DOD expects to have implemented seven

TRICARE managed care support contracts at an estimated total cost of

$17 billion. The dynamic nature of health care, the fact that contracts are

awarded for 5-year periods, the uniqueness of the contracts, and other

factors have resulted in the contracts’ being continually modified. Change

orders are a mechanism used by DOD to require its contractors to accept a

DOD modification of the original contract.

Because of the large volume of change orders and their potential costs,

you requested that we review DOD’s process for managing change orders to

determine (1) the number of, nature of, and reasons for the orders;

(2) whether DOD is adequately managing the change order process; and

(3) if appropriate, how DOD can improve the process.

To do this work, we interviewed DOD Health Affairs and TRICARE Support

Office (TSO) officials as well as TRICARE contractors. We reviewed

individual change orders and related DOD policies and regulations that

apply to the orders and examined pertinent contract files for the five DOD

TRICARE contracts that have been awarded. We also obtained and

analyzed statistical data from DOD monthly change order status reports and

discussed with officials the number of change orders, how long DOD has

taken to settle—or complete negotiations with the contractors on—the

orders, and reasons for the changes.

During our review, DOD instituted many actions to address problems we

identified with the change order process. We discussed these efforts with

DOD officials. Accordingly, to prepare a more timely report on the issues

Page 1 GAO/HEHS-97-141 TRICARE Contract Change Orders
B-276226 

being addressed, we reduced the scope of our work, including our review

of the appropriateness of individual orders. Also, as agreed with your

office, we did not attempt to independently estimate the orders’ costs or

their possible effects on TRICARE’s need to be budget neutral.1

 We

conducted our review between October 1996 and May 1997 in accordance

with generally accepted government auditing standards.

Results in Brief Since the 1994 award of the first TRICARE contract, 357 change orders,

which cumulatively have increased tasks and overall costs, have been

made to the five TRICARE contracts now in place.2 DOD has settled 134 of

the orders at a cost of about $336,000. DOD estimated costs for the 223

orders that are yet to be settled at $38 million. But DOD’s initial cost

estimates differ markedly from contractors’ estimates. For example,

contractor-submitted cost proposals for 85 of the 223 orders amounted to

$423 million.

The change orders, which averaged 43 per contract in 1996, have entailed

policy, automated data processing (ADP), and operational changes to the

contracts. About one-third have resulted from legislative or regulatory

requirements; for example, legislation establishing a hospice benefit.3

 The

remainder were DOD-initiated changes, such as changing contractor

reporting requirements.

Although there have been numerous change orders, DOD has not

adequately managed the process. For example, rather than separately

budgeting for the costs of individual change orders, DOD has used funds

budgeted for other Defense Health Program (DHP) activities to pay for

them—an approach that could potentially create a need for supplemental

funding. In addition, DOD’s initial cost estimates for new orders, the basis

for obligating funds for the orders, have not been sound. As a result, DOD

has not developed a reliable estimate of the total federal liability for the

contract changes.

1

In referring to the TRICARE program and its health maintenance organization (HMO) type option, sec.

731 of the National Defense Authorization Act for FY 1994 (as amended) states that the HMO option

must be administered so that the costs incurred under TRICARE are no greater than the costs that

would otherwise have been incurred to provide health care to covered beneficiaries.

2

In addition to the 357 change orders that require cost estimates and negotiated prices, DOD has issued

over 70 change orders that typically involve minor changes related to administrative information

contained in the contractual documents and that do not materially affect the requirements of the

contracts or contract prices.

3

The National Defense Authorization Act for fiscal years 1992 and 1993, P.L. 102-190, authorized a

hospice benefit for beneficiaries.

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Also, DOD has neither systematically reviewed the need for each order nor

considered its likely costs and other effects. Moreover, DOD has not

evaluated alternatives to amending the contracts that could achieve the

same end. Thus, DOD has no assurance that only needed orders are issued

and that their costs are minimized.

Finally, although DOD’s goal is to settle orders within 180 days of issuance,4

the average TRICARE order settlement time has been 340 days. As of

May 1, 1997, the average age of the 223 orders yet to be settled was 273

days. Failure to settle orders on time can reduce the contractors’ cost

control incentives and limit DOD’s ability to negotiate prices after the

contractor has incurred actual costs.

During our review, DOD attempted to address the problems we were

identifying. For example, regarding budgeting for the orders, DOD is now

developing a method to estimate anticipated change order costs for

inclusion in future DOD budgets. To prepare new order cost estimates, DOD

has engaged a consultant to independently estimate the cost of

implementing each order before its issuance. Also, DOD now requires that,

once a potential order’s cost has been estimated, the Deputy Assistant

Secretary of Defense for Health Services Financing review its

appropriateness before approval. Finally, DOD has formed a task force and

engaged an outside contractor to settle the orders in a more timely way

and suggest ways to streamline the overall process.

We believe that DOD is taking needed steps to improve the change order

process, and we urge DOD’s continued efforts to bring the process under

control. But the longer term efficacy of these efforts remains to be seen. In

view of the leadership changes under way in DOD offices that manage the

change order process, DOD’s continued high-level management attention to

implementing needed process improvements is essential.

Background TRICARE is DOD’s managed health care program operated in partnership

with civilian contractors. The goals of TRICARE are to ensure high-quality,

consistent health care benefits; preserve beneficiaries’ choice of health

care providers; improve access to care; and contain health care costs.

Under TRICARE, seven managed care support contracts covering DOD’s 12

health care regions will have been awarded to civilian contractors by

mid-1998. Contracts are awarded for 5 years (1 year plus 4 option years),

4

Sec. 43.204(b)(1) of the Federal Acquisition Regulation states that “contracting officers shall negotiate

equitable adjustments resulting from change orders in the shortest practicable time.”

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B-276226 

and DOD estimates that these contracts together will cost about $17 billion.

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

Affairs), has the responsibility for administering the TRICARE contracts.

Each contract is administered by a contracting officer. An administrative

organization, called a lead agent, is designated for each of the 12 regions to

coordinate the health care provided by all military treatment facilities in

the region.

Since September 1994, DOD has awarded five TRICARE contracts totaling

over $11 billion: three contracts were awarded to Foundation Health

Federal Services, one contract was awarded to Humana Military

Healthcare Services, and one contract was awarded to TriWest Healthcare

Alliance (see table 1).

Table 1: TRICARE Contracts, 1997

Dollars in Billions

Region/area of coverage

Date of contract

award Contractor Amount of award

11/Northwest September 1994 Foundation Health

Federal Services $0.66

6/Southwest April 1995 Foundation Health

Federal Services 1.81

9, 10, and 12/ California

and Hawaii

August 1995 Foundation Health

Federal Services 2.59

3 and 4/Southeast and

Gulf South

November 1995 Humana Military

Healthcare

Services 3.65

7 and 8/Desert States and

North Central

June 1996 TriWest Healthcare

Alliance 2.32

Total $11.03

Two additional TRICARE contracts are scheduled for implementation by

mid-1998.

Because the nature of health care is dynamic, the contracts are awarded

for 5-year periods, and the contracts are unique, contracts are continually

being modified. Change orders, which are issued by contracting officers at

TSO,

5

 are a mechanism DOD uses to require its contractors to accept a DOD

modification of the original contract. Typically, change orders are the

result of policy, ADP, operations, and other changes to the TRICARE

program. Some orders occur because of new laws or regulations. Most

change orders affect all of the TRICARE contracts.

5

Lead agents can issue change orders that are small in scope and pertain to lead agent requirements in

the contracts. However, we included in our review only those change orders issued by TSO.

Page 4 GAO/HEHS-97-141 TRICARE Contract Change Orders
B-276226 

The Federal Acquisition Regulation (FAR), the Defense Federal Acquisition

Regulation Supplement (DFAR), and other internal DOD guidance set forth

the requirements governing the administration of change orders. The

requirements include time frames within which government cost estimates

must be obtained, orders must be settled, and interim payments to

contractors must be made.

The change order process involves many steps. First, DOD Health Affairs

directs TSO to initiate an order, which involves drafting language; obtaining

comments from contractors; and, when costs are involved, developing the

government cost estimate. On the basis of this estimate, funds are

obligated. At this point, the TSO contracting officers provide the change

order to their contractors. The contractors must respond with a cost

proposal within 60 days. After receiving the contractors’ cost proposal,

DOD conducts a technical review and cost analysis and then negotiates

with the contractors to determine the final price of the order.

In many cases, Health Affairs directs TSO to implement a single change to

the TRICARE program but that change necessitates a separate change

order for each contract. When this occurs, each of the orders has to be

negotiated separately because the change’s costs can vary by contract.

In October 1996, at the start of our review, TSO had 722 change orders that

needed to be negotiated with contractors. Of these, 226 were for TRICARE

contracts, and 496 were for other contracts that TSO administers, such as

fiscal intermediary and dental contracts.

Changes in the leadership of DHP are now under way. The Assistant

Secretary of Defense (Health Affairs) retired in March 1997, and, as of

June 1, 1997, a permanent replacement had not been nominated. In

January 1997, a new director reported to TSO and was charged with, among

other matters, streamlining the change order process.

Hundreds of Change

Orders Issued to

Modify TRICARE

Contracts

As of October 1996, a total of 248 change orders that could affect the cost

of the TRICARE contracts had been issued. By May 1997, this number had

increased to 357. Table 2 shows the number of orders issued for each

TRICARE contract and region.

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Table 2: TRICARE Change Orders by

Contractor, Region, and Status, May 1,

1997

Contractor/region To be settled Settled Total

Foundation/11 56 56 112

Foundation/6 46 30 76

Foundation/9, 10, and 12 47 29 76

Humana/3 and 4 52 19 71

TriWest/7 and 8 22 0 22

Total 223 134 357

For the 134 settled orders, most of which cost DOD little or nothing, the

total negotiated price was about $336,000. DOD’s estimated costs for the

223 to-be-settled orders is $38 million. But this estimate differs markedly

from the contractors’ estimates. At the time of our review, contractors had

submitted cost proposals for only 85 of the 223 open orders, and their

estimates amounted to $423 million.

TRICARE contract change orders averaged 43 per contract in 1996. Figure

1 shows the variety of kinds of change orders for TRICARE contracts.

Page 6 GAO/HEHS-97-141 TRICARE Contract Change Orders
B-276226 

Figure 1: Types of TRICARE Change

Orders, May 1997

• 6%

ADP

10%•

Operational

14%•

Policy

35%•

Multiple (Various Mixes of ADP,

Operational, and Policy)

•35%

Other

Source: GAO analysis of data provided by TSO.

Policy changes include the authorization of new benefits or changes in the

administration or payment of current benefits. Examples of such orders

include revising the definition of medically necessary ambulance services

and issuing new guidance on heart and lung transplants.

ADP orders involve creating, maintaining, or reporting data and changes to

systems requirements. Such orders have included changes to the Defense

Enrollment Eligibility Reporting System and changes to implement the

Health Care Service Records.

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B-276226 

Change orders classified by TSO as operational in nature include changes

to the administration of the TRICARE program. Such orders have included

changes to regional participation in clinical trials for a cancer

demonstration project and revisions to home health care billing

procedures.

Some orders incorporate policy and ADP changes, for example, or ADP and

operational changes. An example is an order expanding the definition of

foreign medical claims to include claims for services provided on a ship

outside U.S. territorial waters.

In addition to these types of orders, DOD has issued others applicable to

one or more contracts. Examples include authorizing travel costs incurred

by contractors for government training and orders directing contractors to

report information about ongoing provider fraud investigations. Table 3

shows the number of each type of change order that has not yet been

settled.

Table 3: Types of Change Orders Not

Yet Settled, May 1, 1997 Type Number

Policy 31

ADP 14

Operations 22

Multiple 77

Other 79

Total 223

TSO data indicate that about one-third of all TRICARE change orders were

required by law or regulation. Examples are implementation of a hospice

benefit and revision of the active duty dependent inpatient cost-sharing

provisions for mental health services. Two-thirds were DOD-initiated

change orders, such as changing contractor reporting requirements,

establishing a new TRICARE logo, and requiring contractors to distribute

dental program brochures.

DOD Not Managing

Process Effectively

DOD has not managed change orders in an effective manner. Among the

problems are, first, that DOD has not separately budgeted for the estimated

costs of orders, so its budget does not reflect TRICARE’s total cost.

Second, DOD has not methodically estimated costs of new orders;

therefore, its estimates have not reliably reflected the actual federal

liability for the orders. Also, DOD has issued orders without a formal review

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B-276226 

of their impact on TRICARE, their costs, and the availability of funds.

Consequently, DOD cannot be assured that each change order is necessary,

is issued at the most reasonable cost, and can be funded. Finally, DOD has

not settled orders within its own time frame of 180 days. Of the 134 orders

settled as of May 1, 1997, the average finalization time was 340 days. Such

delays in settling costs may reduce the contractor’s incentive to control

costs and place DOD at a disadvantage when negotiating change orders

because contractors have already incurred actual costs.

DOD Not Budgeting for

Orders

DOD does not include in its budget the estimated costs for new change

orders or the out-year costs of settled orders. Only the award price of

TRICARE contracts is reflected in DOD’s budget justification documents.

Thus, DHP’s budget does not reflect the TRICARE program’s total cost.

Although the 134 change orders settled so far have increased TRICARE’s

price by about $336,000, the change orders still outstanding are potentially

far more costly: Contractors’ estimates for about 38 percent of the open

orders amount to $423 million.

Since orders are not separately budgeted for, when new orders have been

obligated or settled, they have been funded from monies budgeted for

other DHP programs.6

 While significant funding problems have not yet

surfaced, the potential for them has increased considerably now that DOD

is actively seeking to reduce its order backlog and is settling many more

orders far sooner than it had been. And, a number of costly orders

simultaneously going to settlement could potentially create the need for

supplemental funding. Similarly, the failure to reliably estimate the costs

of new orders and adequately fund them can delay their implementation

and protract their settlement times.

According to a DOD official, change orders have not been budgeted for

because DOD has lacked a reliable basis for projecting the cost of change

orders. DOD has also lacked experience predicting the volume, frequency,

and types of changes that would be made to the TRICARE contracts once

under way.

New Order Cost Estimates

Have Been Unreliable

DOD has not had a reliable approach for estimating the costs of new orders

because, according to DOD officials, it has lacked the in-house expertise.

TSO personnel, who initiate the change order paperwork and make the

6

Ninety-seven percent of the FY 1997 DHP appropriation of $10.2 billion is operations and maintenance

funds. The TRICARE program, including TRICARE contract change orders, is funded with operations

and maintenance monies.

Page 9 GAO/HEHS-97-141 TRICARE Contract Change Orders
B-276226 

initial estimates, told us they were unschooled in estimating such costs.

They told us they often guessed at what the government’s costs might be

or requested an informal estimate from the contractor and used a variation

of that figure for their estimate. As a result, DOD has had little confidence

in the reliability of individual order estimates and less in the potential

aggregate government costs of unsettled orders. Thus, DOD has lacked a

sound estimate of the actual federal liability for the contract changes it has

made.

DOD requirements state that when each change order is initiated, a

government cost estimate should be prepared. This estimate becomes the

basis for obligating funds for the order. A poor estimate can result in

either underobligating funds for the order, resulting in the need for more

funds upon the order’s settlement, or overobligating funds, resulting in

unnecessarily tying up funds needed for another DHP program activity.

These cost estimates also provide the basis for contractors to receive

provisional payments for work completed before the order has been

settled. Contractors may receive from 50 to 75 percent of the government

cost estimate upon submission of valid invoices. Poor cost estimates result

in overpaying or underpaying contractors for work completed on the order

before it is settled, at which time an adjustment is made on the basis of the

final negotiated amount.

Cost/Benefit Analyses Not

Performed

DOD has modified TRICARE contracts without first reviewing the potential

effects on the program of each order, its cost, whether less costly

alternatives were available, or the availability of funds. Thus, DOD has had

no assurance that each change order is needed, its costs have been

minimized, potentially more cost-effective alternatives to the order have

been considered, or funds are available. Under these conditions, Health

Affairs has initiated about two-thirds of the contract change orders. And,

once directed to go ahead with the order, TSO has then attempted to

estimate the order’s costs, obligate funds, and instruct the contractor to

submit a cost proposal and proceed with the new work tasks.

Knowing the likely costs and other information about the orders would

position Health Affairs to consider changing an order in some way to

lessen its prospective expense. In some cases, it would also allow Health

Affairs to wait until the region’s contract was re-bid and build the change

into the new request for proposal, thus subjecting the order to the

competitive bid process. In other cases, Health Affairs could simply not

proceed with the order. Moreover, knowing the funding availability for

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B-276226 

each new order would enable Health Affairs to consider delaying,

expediting, or otherwise timing change order issuance to correspond with

availability of funds. Finally, more complete information would position

DOD officials to weigh an order’s effects on the entire program.

Orders Not Settled in a

Timely Way

DOD’s goal is to settle orders within 180 days after issuance. But only 23 of

the 134 orders settled as of May 1, 1997, have met this timeframe. As a

result, at our review’s outset, DOD had a backlog of over 226 TRICARE

contract orders and 496 outstanding orders from other contracts. Delaying

the settlement of orders can reduce the contractor’s incentive to control

costs and places the government at a disadvantage when negotiating

orders because the contractor has performed the work at no risk and is

paid for actual costs incurred.

DOD’s average settlement time for the 134 settled orders was 340 days.

Change orders were settled in as few as 17 or as many as 1,055 days. As of

May 1, 1997, the average age of the 223 orders to be settled was 273 days.

Historically, TSO has not achieved its settlement time goal either. We

analyzed change orders to a Civilian Health and Medical Program of the

Uniformed Services (CHAMPUS) Reform Initiative contract under which

health care services were delivered between August 1988 and

January 1994.7

 We found that DOD’s average settlement time for 41 change

orders was 1,504 days—over 4 years.

Failure to promptly settle orders is problematic for both DOD and the

contractors. First, DOD funds are tied up for long periods, since final prices

remain unknown until orders are settled. In addition, contractors who

submit initial cost proposals later have to update their estimates to reflect

actual costs incurred. This takes contractor time and resources and can

potentially increase DOD costs because the contractors’ cost control

incentive has been reduced.

DOD officials told us that the order backlog was caused by staff shortages

and the generally ambitious schedule to award all the TRICARE contracts

before the end of fiscal year 1997. They said that TSO staff, normally

assigned to contract administration functions, including change order

management, were diverted by tasks associated with awarding the new

TRICARE contracts.

7

The CHAMPUS Reform Initiative contract was a forerunner of the TRICARE contracts.

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Other Related Problems Since many of the change orders must be implemented upon issuance,

contractors essentially have been funding the contract changes with little

or no DOD reimbursement until the orders are settled. Contractors are

entitled to receive provisional payments for actual work completed before

orders are settled. So far, only one contractor has done so. However, it

took DOD 8 months to pay four of the invoices submitted by this contractor

because the invoices were not properly tracked by TSO. Finally, by delaying

order settlement, some smaller health care companies lacking the capital

to fund orders for such protracted periods may be discouraged from

bidding on TRICARE contracts.

Relatedly, DOD requires contractors to submit cost proposals within 60

days of an order’s issuance, but DOD has not enforced this requirement.

Currently, contractor cost proposals have yet to be submitted on 186

orders that are older than 60 days. Without such proposals, settlement

negotiations cannot begin. A representative of one contractor told us it has

not submitted cost proposals in a timely way because (1) it has not

received needed clarification from DOD on the orders’ specifics and (2) it

did not anticipate the volume of DOD orders and lacked the staff to cost out

new contract changes.

DOD Is Acting to

Correct Identified

Problems

During our review, DOD initiated a host of actions to address the problems

we identified in the change order process. Specifically, Health Affairs is

developing a methodology to estimate and budget for the cost of new

orders; has engaged a consulting firm to prepare independent government

cost estimates for new change orders; and has implemented procedures to

review and evaluate proposed orders before going ahead with them. Also,

a team of contract specialists was formed at TSO to focus on and expedite

the settlement of open orders, and other efforts are under way to

streamline the process.

Fiscal Year 1999 Budget to

Include Cost Estimate for

Anticipated Orders

Health Affairs is now attempting to develop a methodology that will enable

it to budget for orders expected to be issued in future years. DOD officials

told us that its implementation goal is fall 1997. Thus, DOD plans to include

such order cost estimates in its fiscal year 1999 budget. Also, DOD will

include out-year costs for settled orders beginning with its fiscal year 1999

budget.

DOD officials told us that budgeting for the change orders will provide a

more structured funding process. It will also facilitate order issuance

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decisions with improved information on whether funds are available to

support the TRICARE contracts.

New Order Cost Estimates

to Be Improved

Instead of continuing to make “guesstimates” or basing its cost estimates

for new orders on contractors’ informal cost estimates, DOD has acted to

obtain independent government cost estimates for TRICARE change

orders. In November 1996, DOD engaged a consulting firm to prepare cost

impact statements for each order and to analyze contract cost effects for

use in developing independent government cost estimates. This

information should enable DOD to assess the costs and technical effects of

new changes, and it should be especially useful in negotiating orders with

the contractors. As of April 1997, the consultant had been assigned to

prepare 22 cost estimates on proposed change orders.

Health Affairs to Review

and Approve Orders

Before Issuance

In March 1997, DOD established a new requirement that all proposed orders

be reviewed and approved by Health Affairs before issuance. The review

will evaluate each order’s effects on the health care system, its costs, and

the availability of funds. In short, the Deputy Assistant Secretary, Health

Services Financing, will evaluate the need for the order and decide

whether to implement it.

Thus, program managers initiating orders are now required to provide

documentation (1) describing the proposed change in detail and including

draft contract modification language, (2) ensuring that an independent

government cost estimate has been performed, and (3) earmarking funding

sources to defray the order’s estimated cost. According to DOD, the new

procedures are aimed at bringing discipline to the process and ensuring

that appropriate funding is available for each TRICARE contract change.

Team Formed to Expedite

Order Settlement

A team of contract specialists has been assembled at TSO to expedite the

settlement of all open change orders. TSO officials told us that the team is

focused on reducing the order backlog to a manageable and consistent

level—the goal is 100 to 150 open orders—by 1999.

In August 1996, TSO formed a team to settle the mounting change order

backlog. In October 1996, the team had 7 members; by May 1997, it had 10

members. The team consists of five specialists hired under contract with

TSO, three TSO employees, and two specialists temporarily assigned from

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the Defense Contract Management Command.8 A TSO official told us it

plans to hire two additional team members to help reduce the change

order backlog. Before October 1996, only 22 TRICARE orders had been

settled. As figure 2 shows, the team has increased the number of TRICARE

orders settled since that time and has settled orders for other contracts

administered by TSO as well.

Figure 2: Number of Change Orders

Settled, October 1996-April 1997 Number of Change Orders Settled

0

10

20

30

40

50

60

70

80

90

100

October

November

December

January

February

March

April

Month

TRICARE Contract Change Orders

Other Contract Change Orders

Source: GAO Analysis of data provided by TSO.

Figure 3 shows the number of change orders that remained to be settled,

by month.

8

Defense Contract Management Command is located within the Defense Logistics Agency. Its mission

is to provide contract administration services in support of DOD and other designated federal

organizations. The Denver Defense Contract Management Command office does price and cost

analysis work for TSO.

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Figure 3: Number of Change Orders

That Remained to Be Settled, October

1, 1996-May 1, 1997

Number of Open Change Orders

0

100

200

300

400

500

600

700

800

October

November

December

January

February

March

April

May

Month

TRICARE Contract Change Orders

Other Contract Change Orders

Source: GAO analysis of data provided by TSO.

Other Corrective Actions

Taken

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

recommend improvements to TSO’s change order process. The firm’s study

is to develop ways to help further reduce the current backlog and prevent

future backlogs.

TSO also notified contractors to begin submitting overdue (beyond the 60

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

change orders. Contractors were told that proposals not received within

30 days could be unilaterally settled by DOD. A TSO official told us most

contractors have attempted to respond to this effort to reduce the backlog.

Additionally, TSO is revising its provisional payment procedures so that

contractors can be paid more quickly for actual costs incurred. Further,

TSO is attempting to develop a standard format for contractors’ use when

Page 15 GAO/HEHS-97-141 TRICARE Contract Change Orders
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submitting cost proposals in order to expedite TSO’s evaluation of

proposals and shorten order settlement times.

Conclusions The hundreds of change orders that have been made to the TRICARE

contracts are likely to have a significant effect on program costs and

operations. Yet DOD has not reliably estimated the costs of the orders,

separately budgeted for such costs, or systematically reviewed the need

for each order and whether more cost-effective alternatives existed.

Moreover, new TRICARE change orders and previously existing orders

have backlogged, and change order settlement times have greatly

exceeded requirements. The process, in short, has been managed

ineffectively.

DOD has now initiated actions to reduce the number of orders that have not

been settled and address the other problems we identified with the change

order process. When fully implemented, these actions should bring needed

discipline to the system: They should position DOD to better ensure the

need for, cost-effectiveness of, and timely settlement of contract change

orders. But the long-term efficacy of these efforts remains to be seen.

Recommendation We recommend that the Secretary of Defense direct the Assistant

Secretary of Defense (Health Affairs) to continue providing the high-level

management attention that DOD has begun to focus on implementing the

needed change order process improvements.

Agency Comments In commenting on a draft of this report, DOD officials concurred with our

recommendation that both the Acting and incoming Assistant Secretary of

Defense (Health Affairs) continue providing high-level management

attention to needed change order process improvements. DOD officials also

raised four points related to technical accuracy.

First, DOD officials took exception to our assertion that DOD’s corrective

actions were initiated during our review, pointing out that DOD acted to

improve the change order process well before our review began. While it is

true that in 1995 DOD assigned one TSO individual to negotiate all change

orders, as the report indicates, the change order settlement team was not

formed until August of 1996 or expanded to its needed strength until

October 1996. DOD’s other actions, such as its attempt to develop budgeting

methodologies for orders slated for issuance in future years and for settled

Page 16 GAO/HEHS-97-141 TRICARE Contract Change Orders
B-276226 

orders’ out-year costs in future years’ budgets; its new requirement that

Health Affairs review and approve all proposed orders before issuance; its

revision of provisional payment procedures; and its hiring of a consulting

firm to recommend improvements to the entire process each occurred

during our review. Rather than disputing when DOD took these actions, our

more important concerns—and we believe DOD’s, as well—are such issues

as the yet-unknown extent of federal liability for TRICARE contract

change orders and whether DOD’s actions to fix the broken process will

succeed.

DOD officials also believed our report did not adequately convey that DOD

now has an approach for reliably estimating new order costs. We disagree.

As we reported, not until November 1996, when DOD’s hired consultant

started preparing Independent Government Cost Estimates for new

orders, did DOD have a reliable approach for estimating new order costs

because it lacked the needed in-house expertise. We believe that this effort

appears to be working reasonably well and should help DOD make sound

cost estimates for each new order and, in time, for the total federal liability

for the numerous contract changes DOD has made.

Further, regarding our references to contractors’ estimated costs of

$423 million for only a fraction of the open orders, DOD officials said we

should have pointed out that contractors have an incentive to submit high

estimates to build a bargaining position for negotiating with the

government. We agree that contractors may behave this way in some

cases, but certainly not in all. We found, moreover, that for about

91 percent of the settled TRICARE orders, contractors’ initial cost

estimates were the same as or lower than DOD’s estimates. Also, for the

32 percent of settled orders for which contractors’ estimates were lower

than DOD’s estimates, all were settled at or below the contractors’

estimates. For example, for Foundation Health Federal Services’ region 11

contract, the contractor’s initial estimate for an order requiring shockwave

lithotripsy reimbursement was $9,067, while DOD’s cost proposal was

$125,000, yet the final settled price was $9,067. Similarly, the contractor’s

initial estimate for a change order implementing hospice benefits was

$30,971, while DOD’s estimate was $265,563, yet the final settled price was

$28,758. Thus, we did not make the change to our report that DOD

suggested.

Finally, DOD pointed out that the report’s reference to DFAR change order

settlement times was incorrect, and we corrected the citation.

Page 17 GAO/HEHS-97-141 TRICARE Contract Change Orders
B-276226 

DOD’s comments appear in the appendix in their entirety.

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

make copies available to others upon request. Please contact me on

(202) 512-7101 if you or your staff have any questions concerning this

report. Other major contributors to this report include Daniel M. Brier,

Assistant Director; Cheryl A. Brand, Evaluator-in-Charge; William

Temmler; Arthur Trapp; and Alan Wernz.

Stephen P. Backhus

Director, Veterans’ Affairs and

 Military Health Care Issues

Page 18 GAO/HEHS-97-141 TRICARE Contract Change Orders
Page 19 GAO/HEHS-97-141 TRICARE Contract Change Orders
Contents

Letter 1

Appendix I 

Comments From the

Department of

Defense

22

Tables Table 1: TRICARE Contracts, 1997 4

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

Status, May 1, 1997

6

Table 3: Types of Change Orders Not Yet Settled, May 1, 1997 8

Figures Figure 1: Types of TRICARE Change Orders, May 1997 7

Figure 2: Number of Change Orders Settled, October

1996-April 1997

14

Figure 3: Number of Change Orders That Remained to Be Settled,

October 1, 1996-May 1, 1997

15

Abbreviations

ADP automated data processing

CHAMPUS Civilian Health and Medical Program of the Uniformed

Services

DFAR Defense Federal Acquisiton Regulation Supplement

DHP Defense Health Program

DOD Department of Defense

FAR Federal Acquisition Regulation

HMO health maintenance organization

TSO TRICARE Support Office

Page 20 GAO/HEHS-97-141 TRICARE Contract Change Orders
Page 21 GAO/HEHS-97-141 TRICARE Contract Change Orders
Appendix I 

Comments From the Department of Defense

Now on pp. 2 and 6.

Page 22 GAO/HEHS-97-141 TRICARE Contract Change Orders
Appendix I 

Comments From the Department of Defense

(101498) Page 23 GAO/HEHS-97-141 TRICARE Contract Change Orders
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