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

June 1997 MILITARY RETIREES’

HEALTH CARE

Costs and Other

Implications of Options

to Enhance Older

Retirees’ Benefits

GAO/HEHS-97-134

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-276905 

June 20, 1997

The Honorable Steve Buyer

Chairman

The Honorable Gene Taylor

Ranking Minority Member

Subcommittee on Military Personnel

Committee on National Security

House of Representatives

Today, 4.3 million military retirees,1

 their dependents, and survivors are

eligible for care under the Department of Defense’s (DOD) health care

system. But this system has changed significantly in the last decade. As a

result of these changes, which include the establishment of a nationwide

managed care program called TRICARE and the closing or downsizing of

many medical facilities, many military retirees, especially those aged 65

and older, fear they will lose the access they now have to care in military

medical facilities.

In recent testimony before your Subcommittee,2

 we reported that military

facilities and resources available to care for older retirees will decrease

and eventually disappear in many locations as enrollment in TRICARE

increases, leaving many retirees without DOD-sponsored health care.

Because of your concern about this issue, we agreed with your office to

describe various proposals that have been made to enhance older retirees’

DOD health care benefits, as well as to provide cost estimates, where

possible, for implementing the options, based on specific variables and

assumptions. The options, each of which would require legislative action

to implement, include (1) enrolling Medicare-eligible3

 retirees in TRICARE

Prime, TRICARE’s health maintenance organization (HMO), and paying for

their care with Medicare funds (referred to as “Medicare subvention”);

(2) using DOD funds to pay retirees’ Medicare part B premiums and to

furnish Medigap policies; (3) providing the Civilian Health and Medical

Program of the Uniformed Services (CHAMPUS)4

 as a Medicare supplement;

1

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

survivors. Further, the term “older retirees” refers to retirees who are aged 65 or older.

2

Defense Health Care: Limits to Older Retirees’ Access to Care and Proposals for Change

(GAO/T-HEHS-97-84, Feb. 27, 1997).

3

Medicare is a national health insurance program for people 65 years of age and older, certain younger

disabled people, and people with kidney failure.

4

CHAMPUS is an insurance-like program administered by DOD that pays for a portion of the care

military families and retirees under age 65 receive from private sector health care providers.

Page 1 GAO/HEHS-97-134 Military Retirees’ Health Care
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(4) extending the Federal Employees Health Benefits Program (FEHBP) to

retirees as a Medicare supplement and using DOD funds to pay part of the

premium; and (5) expanding DOD’s current mail-order prescription

program to Medicare-eligibles who do not live near military medical

facilities. This report also discusses the uncertainties about and limitations

of these options, including their potential effects on cost and

administrative requirements as well as considerations surrounding the

military medical system’s size and mission.

To do our work, we examined legislative proposals and available studies

relating to each option; analyzed DOD data; and interviewed DOD health

experts and officials from DOD, the Office of Personnel Management (OPM),

the Congressional Budget Office (CBO), the Congressional Research

Service (CRS), and military beneficiary associations. A more detailed

discussion of our scope and methodology and cost estimates for the

options examined appear in appendix I.5

Results in Brief Our analyses of the various proposals to improve DOD-sponsored health

care benefits for older retirees and their dependents indicate that the

proposals vary in their potential costs; coverage; and other effects on DOD,

eligible beneficiaries, and Medicare (see table 1). For example, Medicare

subvention, under which DOD would receive payment from Medicare for

treating Medicare-eligible retirees in TRICARE Prime, seeks to ensure that

neither DOD nor the Health Care Financing Administration (HCFA)6

 would

incur added costs by enrolling retirees. However, DOD lacks the cost and

care use data needed to estimate its current spending level for

Medicare-eligible retirees—the level that would be DOD’s spending limit

under this proposal and that, once reached, would trigger HCFA’s payments

to begin. Moreover, it is uncertain whether HCFA’s subvention payment

rates, which would be lower than those it pays to Medicare HMOs, would

equal DOD’s actual care costs. Finally, relatively few retirees (about

75,000) could be accommodated by subvention at military medical

facilities because of facility capacity and financial constraints.

5

We did not attempt to estimate the cost of implementing the Medicare subvention option, for the

reasons given in app. I.

6

HCFA is the agency in the Department of Health and Human Services responsible for administering

the Medicare program.

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Table 1: Comparison of Proposed Military Retiree Health Care Options

Option Benefit description Estimated annual cost to DOD Estimated cost to beneficiary

Medicare subvention Using Medicare funds, this option

guarantees inpatient and

outpatient care and prescriptions

at military medical facilities or

through the TRICARE network.

We estimated subvention at

military facilities would

accommodate about 75,000

participants.

The goal is to be budget neutral,

but uncertainties remain

regarding (1) DOD’s actual costs

for providing full care for all

enrollees and the resulting

difficulty in setting DOD’s

baseline spending level and (2)

whether HCFA’s payment levels

would be appropriately set to

ensure cost-neutrality.

Medicare part B is required,

costing $526/year for each

covered beneficiary. The

beneficiary pays TRICARE Prime

copayments when care is

received outside DOD facilities:

$12 per outpatient visit; $11 per

day, minimum $25 per inpatient

admission; and $9 per

prescription.

Medicare part B and

Medigap policy

DOD pays for Medicare part B

premium and a Medigap policy to

supplement Medicare for

inpatient and outpatient care and

prescription drugs. Offered to all

Medicare-eligible retirees.

$2.2 billion per year ($629 million

for part B premiums and $1.6

billion for Medigap policies);

$1,833 per participant ($526 for

part B premium and $1,307 for

Medigap policy).

Participant pays no copayments

for Medicare-covered inpatient

and outpatient care but does pay

a 50-percent prescription

copayment, with annual dollar

limits.

CHAMPUS as a Medicare

supplement

DOD extends CHAMPUS to

supplement Medicare for

inpatient and outpatient care and

prescription drugs. Offered to all

Medicare-eligible retirees.

$1.8 billion per year; $1,520 per

participant.

Medicare part B is required,

costing $526/year for each

covered beneficiary. CHAMPUS

covers most out-of-pocket costs;

under the standard CHAMPUS

program, there is a 25-percent

copayment for prescriptions.

FEHBP as a Medicare

supplement

DOD pays part of the premium for

the participants’ choice of FEHBP

plans, which typically cover

Medicare deductibles and

coinsurance, prescription drugs,

and some dental care. Offered to

all Medicare-eligible retirees, but

we assumed 83-percent

participation.

$1.6 billion per year; $1,571 per

participant.

The participant pays about 29

percent of the plan

premium—single annuitant

average is about $680—just as a

federal employee does.

Copayments and deductibles

vary but are close to $0 if the

participant also has optional

Medicare part B.

Mail-order pharmacy plan DOD provides mail-order plan for

prescription drugs, primarily for

recurring medications, to all

Medicare-eligible beneficiaries

not living near a military

pharmacy and not having

mail-order service under a base

closure plan (about 408,000

retirees).

$229 million per year; $561 per

participant.

$8 per 90-day prescription.

The three proposals to have DOD fund Medicare supplemental coverage

would cover all older retirees, and estimated additional DOD costs would

range from $1.6 billion to $2.2 billion per year, in 1996 dollars, after they

were fully implemented. Costs would be likely to rise over time as health

care costs rose and greater numbers of Medicare-eligible retirees became

Page 3 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

eligible for the programs. Specifically, the proposal to have DOD fund

retirees’ Medicare part B premiums and a private Medigap policy,

including prescription coverage, would cost an estimated $2.2 billion per

year. A second alternative—extending CHAMPUS coverage to older retirees

as a Medicare supplement—could cost as much as $1.8 billion per year.

The third option—offering older military retirees a Medicare supplement

through enrollment in FEHBP—is attractive for its broad coverage and

cost-sharing provisions, but it could cost as much as $1.6 billion per year.

Moreover, all three of these options could inadvertently create a disparity

in retirees’ health care benefits by, in effect, providing older retirees with

more comprehensive benefits than younger retirees. Further, while these

options would provide retirees with enhanced benefits, none would

increase retirees’ access to care in military medical facilities.

Finally, the mail-order pharmacy option would address a significant gap in

older retirees’ health coverage—Medicare’s lack of outpatient prescription

drug coverage. This proposal is unlike the others, which involve many

uncertainties or high potential costs. Under this proposal, for an estimated

cost of $229 million per year, DOD could extend the current mail-order

pharmacy program in base closure areas to Medicare-eligible retirees who

live far from military facility pharmacies. This option would reduce

prescription expenses for retirees living far from military pharmacies who

have limited or no prescription coverage. And, because the approach

could be implemented fairly easily as an extension of the current program,

it would offer some relief to beneficiaries without major system changes.

Background Today’s DOD health care system provides coverage for about 8.2 million

people, of whom over half are retirees and their dependents and survivors.

(App. II includes more detailed information on military retirees, including

population size and growth projections, demographics, use of DOD health

care, and extent of other insurance coverage.) 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. Retirees receive this care, referred to as “space-available” care,

at little or no cost. The statute, however, does not entitle retirees to care in

military facilities.

When DOD was given the authority to provide care to military retirees,

retirees made up only 8 percent of the population eligible for military

health care. At that time, the military health care system was sized for a

large active-duty force, with enough capacity that retirees were almost

Page 4 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

assured health care in military facilities on a space-available basis. Since

then, however, downsizing of the military medical system, coupled with

increases in the size of the retiree population, have contributed to a

reduction in the availability of care for retirees in DOD facilities.

The introduction of TRICARE has also affected the amount of

space-available care in medical facilities. The legislation authorizing

TRICARE gives beneficiaries who enroll in its HMO benefit program called

TRICARE Prime priority for care in military medical facilities. However,

because retirees aged 65 and older are ineligible for TRICARE Prime, they

can obtain care in military facilities only if space and resources remain

after care is provided to enrolled beneficiaries. As TRICARE enrollment

increases, the amount of space-available care will decline.

When space and resources are not available in DOD facilities, retirees not

enrolled in TRICARE Prime must seek care from other providers. DOD pays

most of the cost of the care of those under age 65 who receive care from

private health care providers through CHAMPUS. CHAMPUS was established in

part so that military members, once retired, could have health care

coverage until eligible at age 65 for Medicare. Retirees lose their CHAMPUS

coverage at age 65, and, when space and resources are not available within

DOD facilities, these older retirees must depend on non-DOD sources, such

as Medicare, Department of Veterans’ Affairs facilities, and other

government-sponsored or private health insurance, for their health care.

As we reported in our February 1997 testimony, using a blend of military

facilities and other sources has created a patchwork system that

Medicare-eligible retirees must learn to navigate to receive care.

Space-available care is episodic and lacks the regularity and continuity

that are often important to older retirees, who have more frequent and

chronic medical problems than younger ones. And, although retirees may

also access care through Medicare and private supplemental health

insurance, many retirees experience coverage gaps and high out-of-pocket

costs. Even older military retirees with more generous coverage through

private or other government employer-sponsored insurance that acts as a

Medicare supplement could experience relatively high costs depending on

the extent to which their former employers share the costs. To address

these availability, cost, and coverage issues, DOD and members of the

Congress have developed several proposals with various health care

program options for Medicare-eligible retirees.

Page 5 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

Despite Cost-Neutral

Intent, Medicare

Subvention Poses

Financial Risk to the

Government

Under Medicare subvention, DOD’s HMO option—TRICARE Prime—would

be opened to Medicare-eligible retirees and would operate essentially as a

Medicare HMO—that is, as HMOs that are currently operated by private

companies under contract with HCFA and available to many of DOD’s older

retirees. DOD’s subvention plan attempts to ensure cost-neutrality for both

DOD and HCFA in two ways. First, it would require DOD to maintain its

current spending, or “level of effort,” on Medicare-eligible retirees treated

in military medical facilities. Second, the plan would require that HCFA’s

payment rate be set lower than the per-person rate HCFA currently pays to

private Medicare HMOs. If DOD’s level of effort was accurately determined

and the Medicare payment rate was appropriately set, neither DOD or HCFA

would experience increased costs. However, DOD’s lack of information

with which to accurately determine its current level of effort raises

questions about whether the program would actually be cost neutral.

Furthermore, DOD’s capacity and financing constraints could significantly

limit the number of older retirees who would benefit from this program.

Accurately Determining

DOD’s Level-of-Effort

Baseline Would Be

Difficult

DOD’s role in attaining cost-neutrality under the subvention plan would be

to maintain its historic level of spending, or “level of effort,” for care it

provided to Medicare-eligible retirees. According to the proposal, once the

level of effort in dollar terms was determined, it would be divided into two

portions: one that would continue to fund space-available care for older

retirees and one devoted to fund care for beneficiaries who enrolled in

TRICARE Prime through subvention.7

 The dollars allocated for TRICARE

enrollees’ care would then be divided by HCFA’s per-person payment,

yielding the number of subvention enrollees that DOD remained responsible

for funding. Once DOD’s subvention enrollees reached that number, DOD

would receive monthly per-enrollee payments from HCFA for each enrollee

over the target. At the end of each year, a level-of-effort spending

reconciliation would be conducted. If DOD had not spent all of its

level-of-effort dollars, even if it had enrolled more than the target number

of beneficiaries, it would have to reimburse HCFA for payments it made up

to DOD’s level-of-effort threshold.

After its review of Medicare subvention legislation, CBO reported that the

program’s potential cost-neutrality critically hinges on how accurately DOD

would be able to establish its level-of-effort baseline spending on

7

Under proposed legislation for a test of the subvention program, the proportions for space-available

care and enrolled care would be 70 percent/30 percent in the first year of subvention,

60 percent/40 percent in the second year, and 50 percent/50 percent in the third year.

Page 6 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

Medicare-eligibles.8 The risk of establishing an inaccurate level-of-effort

baseline would be great because of the limitations of DOD’s cost and

utilization data. DOD’s current systems capture information on the types

and costs of medical services provided by individual facilities but cannot

attribute those facility costs to specific patients or groups of patients. If

the current spending was overestimated, the level-of-effort baseline would

be set too high, putting DOD at risk of guaranteeing care to enrolled retirees

without having adequate funding to provide it. If DOD underestimated its

current spending, the level-of-effort baseline would be set too low, and

HCFA would pay for services that DOD now pays for. This would exacerbate

the problems of the Medicare Hospital Insurance trust fund, which is

expected to be depleted in 2001.

Even if the baseline was accurately set, DOD’s historic level of spending

might not reflect the actual costs of guaranteeing comprehensive health

care coverage to retirees enrolled under subvention. That is, the level of

effort reflects the past spending on space-available care for

Medicare-eligible beneficiaries. If the costs to provide the full range of

Medicare-covered services to the targeted number of enrollees were

greater than the spending level established by the baseline, DOD would

have to find funds to provide enrollees’ care, possibly by taking funds from

other DOD health programs, by reducing space-available care for

nonenrollees, or by asking for supplemental appropriations.

Medicare Payment Level Is

Critical to Proposal’s

Cost-Neutrality

HCFA’s role in attaining cost-neutrality under this proposal would be to

provide per-person payments for additional enrollees. These payments,

which would be intended to reimburse DOD for the cost of the care

provided to Medicare-eligible enrollees above the level of effort, are

critical to the cost-neutrality of this proposal. HCFA currently pays

Medicare HMOs a flat fee for each enrolled beneficiary that is equal to

95 percent of Medicare’s estimated average cost of treating a similar

beneficiary in the fee-for-service sector. Under this proposal, DOD has

agreed to accept a payment rate from HCFA that would be at least

2 percentage points lower than the rate HCFA pays to private Medicare

HMOs.9 After the first year, HCFA’s payment rate would be further reduced

by excluding allocations for graduate medical education, indigent care,

and capital costs—costs that DOD does not incur or for which it is

separately funded. DOD has estimated that, because of these adjustments,

8

CBO, memorandum for the record, Feb. 21, 1996, and cost estimate on H.R. 3142, Sept. 17, 1996.

9

Current proposals for Medicare subvention contain payment rates ranging from 90.25 percent to

93 percent.

Page 7 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

the resulting payment rate could be 7 to 13 percent less than the rates HCFA

pays private Medicare HMOs.

It is uncertain whether the proposed payment rates would be appropriate

to ensure that neither DOD nor HCFA incurred costs greater than it would

otherwise have incurred to care for this population. For example, DOD

could incur additional costs if the payment rate was lower than the actual

cost of providing the full range of care that Medicare subvention promises

to the newly enrolled beneficiaries, both at military facilities and through

civilian providers. DOD believes that it can provide care to older retirees in

military medical facilities at a lower cost than Medicare HMOs can. This

contention is based on the “733 study,” which compared the cost of

providing care to DOD beneficiaries in military medical facilities with the

cost of providing care in the civilian sector.10 The study compared military

medical facilities only with the CHAMPUS fee-for-service program, however,

and not with Medicare fee-for-service or HMO providers. Moreover, the

study developed average costs of care as they pertain to the overall

military community, not to older retirees as a separate population.

Therefore, the cost advantage attributed to military medical facilities by

the 733 study may not accurately reflect DOD’s costs in comparison with

private sector HMOs or be generalizable to older retirees treated in DOD

facilities.11

Even if DOD did not incur additional costs in delivering medical facility

care, it could incur additional costs if the cost of using civilian providers

was higher than the payment rate. Although DOD’s intention under

Medicare subvention is to enroll older retirees and provide most of their

care in military medical facilities, not all facilities have the resources to

provide the full range of enrollees’ care. To meet its obligation, therefore,

DOD would supplement facility care with care purchased from private

providers. To ensure that it did not incur additional costs, DOD would need

to purchase this care at rates commensurate with the rates HCFA would pay

DOD. It is uncertain whether DOD could find providers who would accept

these lower rates. If DOD could not find providers who would accept the

lower rates, it would either incur additional costs by buying those services

guaranteed under subvention at the higher rates or be unable to offer

subvention at some facilities.

10Office of Program Analysis and Evaluation, “The Economics of Sizing the Military Medical

Establishment,” Executive Report of the Comprehensive Study of the Military Medical Care System

(Washington, D.C.: DOD, Apr. 1994).

11DOD officials told us that they are in the process of developing patient-level accounting systems that

may provide better information on the cost of providing care to specific groups of patients, such as

older retirees.

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B-276905 

On the other hand, because many enrollees in a Medicare subvention

program would presumably be diverted from civilian fee-for-service

Medicare providers, HCFA could incur additional costs if its payments to

DOD were higher than what HCFA would have paid under standard

fee-for-service Medicare. In April 1997, we reported that HCFA’s method for

establishing HMO payment rates overstates the average cost of all Medicare

beneficiaries and leads to excess payments because it does not fully

correct for HMOs enrolling a less costly—more favorable—selection of

beneficiaries.12 Thus, it would remain to be seen whether the proposed

payment rates for DOD would result in excess payments.

Comparatively Few

Retirees Would Benefit

From Subvention

Under DOD’s current proposal, subvention would only be offered to

Medicare-eligible beneficiaries who live near military medical facilities.13

Moreover, for the reasons described above, subvention would be less

financially feasible for facilities that had to purchase significant amounts

of care from private providers. DOD officials told us that each medical

facility would have to carry out a financial analysis before starting a

subvention program to determine the amount and cost of care it would

have to purchase. They told us that, from a financial perspective, many

smaller facilities would not be able to afford to offer enrollment under

subvention. It appears, then, that a smaller number of retirees than is now

being served—approximately 300,000—would be likely to benefit from

subvention. In its plan for a test of the subvention program at seven

facilities, the number of enrollees that DOD estimated it could

accommodate equated to about 20 percent of the Medicare-eligible

beneficiaries in those areas, and DOD expected that a similar proportion

could be accommodated under a nationwide implementation. On the basis

of the numbers of retirees living near military facilities with sufficient

capacity to operate a subvention program, we estimated that about 75,000

older retirees could participate nationwide if the subvention program was

offered at all but DOD’s smallest hospitals.14

12Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in Excess Payments

(GAO/HEHS-97-16, Apr. 25, 1997).

13According to DOD officials, over the longer term DOD would seek to offer subvention outside of

military medical facilities using civilian providers, if the program proved feasible once tested.

14We defined “smallest hospitals” as those with fewer than 50 beds. According to DOD population data

for 1996, 381,788 Medicare-eligible retirees lived within the DOD-designated 40-mile catchment area of

a military hospital with 50 beds or more. DOD defines “catchment area” as the area within a 40-mile

radius surrounding a military medical facility. In addition, we removed from consideration any

facilities that were currently in operation but scheduled to close because of base closure actions.

Page 9 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

Uncertainties about DOD’s ability to establish a reliable level-of-effort

baseline and otherwise estimate its costs under subvention point up the

need for DOD to test this concept before nationwide implementation. DOD

agrees and has already begun exploring within its system the possible

financial and capacity limitations to subvention and planning for the

administrative and reimbursement mechanisms needed to test the concept

in limited areas.

Supplemental

Insurance Would Fill

Medicare Gaps but Be

Expensive

Another option to improve older retirees’ DOD-sponsored health benefits is

for DOD to offer increased insurance coverage beyond that provided

through the Medicare program, given the likelihood that many older

retirees will be unable to access care from military facilities. As suggested

in three proposals, if DOD funded the cost of supplemental insurance

provided by private insurers, CHAMPUS, or FEHBP, many of the gaps in

Medicare coverage could be filled, and some retirees could experience

lower out-of-pocket costs. However, DOD’s costs to provide this additional

coverage could be substantial, from $1.6 billion to $2.2 billion per year,

depending on the type of supplemental insurance plan offered. Moreover,

the costs of these programs would probably rise with health care costs and

as greater numbers of retirees reached age 65 and became eligible for the

benefits. Providing this type of supplemental coverage would require some

changes in the current administrative systems, but the administrative costs

should be relatively minor for the CHAMPUS and FEHBP options, with

somewhat higher administrative costs associated with the private

supplemental insurance option.

Paying for Medicare Part B

Premiums and Private

Medigap Policies

Upon reaching age 65, retirees’ eligibility for CHAMPUS ends, and Medicare

becomes the primary insurer. Under Medicare part A, which is paid for

through employer/employee payroll taxes, retirees receive coverage for

inpatient hospital, skilled nursing facility, home health, and hospice care.

Most retirees also purchase Medicare part B (which costs $525.60 per

person in 1997) to receive coverage for services including physician visits,

outpatient care, laboratory tests, and medical equipment needed in the

home. However, requirements for copayments and deductibles and

limitations in the Medicare benefit, such as no coverage for outpatient

prescriptions and no cap on out-of-pocket costs, have led many retirees to

purchase additional insurance policies—“Medigap” policies—specifically

to fill the gaps in coverage. According to a 1995 survey of military

beneficiaries, about 31 percent of those aged 65 and older reported having

this supplemental insurance.

Page 10 GAO/HEHS-97-134 Military Retirees’ Health Care
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The cost of these supplemental policies can be significant to the retiree.

The annual premiums of plans that include coverage for prescription drugs

can range from $750 to almost $3,000, with the more expensive plans

generally providing the greatest coverage and filling in more of the gaps in

Medicare coverage. We calculated the 1996 average annual premium for a

Medigap policy that included coverage for outpatient prescriptions to be

approximately $1,307.15

Assuming financial responsibility for part B premiums as well as paying

for Medigap policies for all Medicare-eligible retirees would cost DOD an

estimated $2.2 billion, or about $1,833 per participant. This cost estimate is

based on coverage under a Medigap policy that includes a prescription

benefit.

The cost for this option could be even higher if DOD also paid the premium

penalty assessed for late enrollment in Medicare part B. Retirees who do

not enroll in Medicare part B during their initial enrollment period16 are

subject to a 10-percent surcharge on their monthly premiums for each year

between the one in which they turned age 65 and the one in which they

enrolled. Paying these additional surcharges could be a significant cost to

DOD. In a report on a 1995 study related to base closure activities,17 DOD

estimated that the 11,000 Medicare-eligible beneficiaries living near

military medical facilities who did not enroll in Medicare part B during

their initial enrollment period would be subject to $10 million in

surcharges over a 5-year period. According to a recent DOD survey of

beneficiaries, about 10 percent of retirees aged 65 and older, or

approximately 120,000, did not have Medicare part B.

To offer Medigap policies, DOD would need to establish some new

administrative structures. Because Medigap policies’ premiums and

insurers vary across the states, DOD would need to establish a mechanism

for coordinating and managing the program, such as OPM has for

administering FEHBP. The cost to create this mechanism is unknown but

could be considerable. An alternative would be to solicit bids on and

15We based our calculation on the premiums of plans offered through Blue Cross/Blue Shield and

Prudential in most states, as presented in a study by the Families USA Foundation, a health care

advocacy group, and weighted those premiums to reflect differences in plan costs by age relative to

the age distribution of DOD retirees.

16The initial enrollment period is generally a 7-month period that begins 3 months before the retiree

turns age 65.

17Office of the Assistant Secretary for Health Affairs, DOD, “Possible Financial Relief From Medicare

Part B Late Enrollment Surcharges for Medicare-eligible Military Retirees Who Have Been Adversely

Affected by a BRAC,” Report to Congress (Washington, D.C.: DOD, 1996).

Page 11 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

award a national contract for a Medigap policy, although this would not be

without cost.

Extending CHAMPUS as a

Medicare Supplemental

Policy

Another option to increase insurance coverage of military retirees is to

extend their coverage under the CHAMPUS program beyond age 64. Under

this extension, the CHAMPUS benefit would serve as a supplemental policy

to Medicare, covering most out-of-pocket costs as well as medical services

included in CHAMPUS but not covered by Medicare, such as prescriptions.

The extension of CHAMPUS would provide retirees continued coverage

under a plan familiar to many of them. Additionally, even though current

legislative proposals would require retirees to enroll in Medicare part B,

retirees could experience lower out-of-pocket costs.

Providing CHAMPUS as a supplemental policy to all Medicare-eligible

beneficiaries could cost DOD as much as $1.8 billion, or about $1,520 per

participant. This estimate is based on the assumption that CHAMPUS would

pay the costs remaining after Medicare paid its allowable amount for

covered services and that CHAMPUS would pay for the services not covered

by Medicare. As a result, retirees would generally have no out-of-pocket

costs for Medicare-covered services. For example, if the cost of a medical

procedure was $100 and the maximum amount allowed by Medicare and

CHAMPUS was $100, Medicare would first pay its customary 80 percent of

the allowable ($80) and CHAMPUS would pay the difference, up to its

customary 75 percent of the allowable. In this example, the retiree would

have no out-of-pocket costs. For those services covered by CHAMPUS but

not by Medicare, such as prescription drugs, retirees would pay the

customary CHAMPUS copayment of 25 percent.

Because CHAMPUS is an established program within DOD, the existing

administrative structure could be used after modifications were made to

various information and claims processing systems. According to DOD,

these modifications would not significantly increase the costs of the

program but could take between 6 and 12 months to implement.

Offering Enrollment in

FEHBP to Older Retirees

Another option is to offer military retirees enrollment in FEHBP, the

nationwide health care plan administered by OPM that is available to

federal civil servants during employment and, as a supplement to

Medicare, after retirement. Through FEHBP, military retirees could choose

from at least a dozen plan options including fee-for-service plans such as

Blue Cross/Blue Shield and the Government Employees Hospital

Page 12 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

Association, regional HMOs, and point-of-service plans.18 As with active and

retired federal employees, military retirees who enrolled would be

required to pay a premium. The amount of the premium would vary

depending on which plan was chosen and the government and beneficiary

share in the cost of the selected plan. In 1996, for example, the government

paid, on average, 71 percent of the premium for non-Postal Service federal

employees and retirees, and beneficiaries were responsible for the

remaining 29 percent.

Offering Medicare-eligible retirees the opportunity to participate in FEHBP

could provide additional coverage for services not covered under

Medicare. For example, many of the plans provide coverage for

prescriptions and have catastrophic limits on out-of-pocket costs, and

some offer dental benefits, none of which is covered by Medicare.

Additionally, even with the same cost-sharing provision as federal

employees have, under FEHBP, retirees could pay a lower premium for

increased coverage than they would under private Medigap policies,

depending on the plan chosen. For example, in 1997 an enrollee’s share of

premiums for the five largest plans in FEHBP with comprehensive coverage,

including prescription and dental coverage, ranges from about $370 to

$1,750, compared with Medigap plans, which have premiums ranging from

$750 to almost $3,000 but offer no dental benefits and have limits on

prescription coverage.

Providing this additional coverage to Medicare-eligible retirees, however,

could cost DOD as much as $1.6 billion, or about $1,571 per beneficiary.

This estimate is based on our assumption that 83 percent of DOD’s

Medicare-eligible population would enroll in FEHBP.

19 Because the

remaining 17 percent would have insurance paid in full or in part by their

former employers, and most employer-sponsored plans require lower

out-of-pocket costs than FEHBP, we assumed that very few of these retirees

would opt for FEHBP coverage.

Premium amounts, and thus the government and beneficiary costs, are

determined by such characteristics of the covered beneficiary population

as gender mix, health status, and health care utilization. According to OPM,

however, this information has not been developed for the military retiree

population. Therefore, the legislative proposals for this option require that

18Point-of-service plans are HMOs that permit enrollees to use non-HMO providers if they pay higher

copayments.

19This is based on our analysis of the 1994-95 Health Care Survey of DOD Beneficiaries, which

indicates that 17 percent of military retirees have private health insurance for which the premiums are

paid either in full or in part by their former employer.

Page 13 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

the premiums for DOD retirees be determined separately from the

premiums for the retired federal employee population covered through

FEHBP. As a result, the cost for this option could be affected by the extent

to which certain characteristics of the military retiree population are

similar to or different from those of retired federal employees. If military

retirees and other FEHBP participants, on average, used the same types and

amounts of health care, then their premiums would be similar.20

Offering Medicare-eligible retirees enrollment in FEHBP would impose new

administrative responsibilities and related costs on DOD and OPM, such as

managing enrollments, withholding premiums from annuities, and

preparing and distributing plan materials. Although the administrative

costs associated with this option have not been determined, they should

not be substantial, according to DOD and OPM.

Another consideration related to the supplemental coverage approach

used in all these proposals is whether DOD would be creating a disparity

between the benefits offered to its Medicare-eligible retirees and those

offered to its other beneficiaries. For example, organizations representing

military beneficiaries have reported that many retirees under the age of 65

would prefer FEHBP coverage to CHAMPUS because under FEHBP, for

example, they would not have to pay for additional supplemental

insurance, as some do under CHAMPUS. To the extent that DOD funds

supplemental coverage for older retirees, younger retirees could view this

as an inequity in benefits.

Mail-Order Pharmacy

Benefit Would Fill a

Major Coverage Gap

The Medicare program does not provide coverage for outpatient

prescriptions, a major expense for older people, who tend to use more

prescription drugs as they age. Military retirees can get prescriptions filled

at military treatment facility pharmacies for free, but these facilities are

not readily accessible to all older retirees. Retirees who live near facilities

that have been closed through base closure actions can get prescription

drug refills through the base closure mail-order benefit program. Further

expanding this mail-order benefit to those who do not live near military

facilities and do not currently have a mail-order benefit would fill an

important health coverage gap. It would cost about $229 million per year

and would not require major changes in the DOD medical program.

20A study by the Rand Corporation (Susan D. Hosek and others, The Demand for Health Care:

Supporting Research for a Comprehensive Study of the Military Health-Care System (Santa Monica,

CA: RAND Corporation, 1994)) provides evidence that military families tend to use more health care

than comparable civilian families. However, it is not clear whether this pattern holds for older retirees,

let alone whether it would persist under the conditions of the proposed FEHBP option.

Page 14 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

Current Mail-Order

Program Could Be

Expanded at Relatively

Modest Cost

DOD currently operates a mail-order prescription program in base closure

areas for all beneficiaries affected by the closing of military medical

facilities. Older retirees who live in these areas or who can demonstrate

prior use of a now-closed military pharmacy are eligible to use this

mail-order benefit. By expanding this mail-order program, this benefit

could be provided to older retirees outside base closure areas who live too

far from a military pharmacy to easily use that source for recurring

prescriptions.

Expanding the current program would result in additional cost to DOD. We

calculated the added annual cost of expanding the current mail-order

benefit to older retirees who live outside the catchment area of a military

facility, and who do not already have the benefit through the base closure

medical program, at about $229 million, or about $561 per participant. The

mail-order pharmacy proposal would allow these retirees to receive a

90-day supply of a drug for an $8 copayment. We assumed that all the

beneficiaries eligible for the program would participate because there

would be no premium and a small copayment. However, it is possible that

fewer would actually participate. According to DOD officials, only about

half of those eligible for the existing mail-order program in base closure

areas have used it. Many choose not to participate either because they

prefer to travel to a military facility to receive their prescriptions for free

or because they are using other health insurance that they currently hold

for their prescriptions. To the extent that beneficiaries chose to continue

using other health care coverage, the added costs to DOD for this program

would be less. And, if beneficiaries chose to no longer travel to military

facilities to refill their prescriptions, the added cost of implementing this

proposal would be somewhat offset by savings at those military facilities’

pharmacies. We were not able to estimate this effect because DOD

currently does not collect data on the amount or cost of prescriptions

supplied to older retirees through its military pharmacies.

A Formulary and a Drug

Utilization System Could

Help DOD Manage

Mail-Order Program Costs

A common method used by private sector payers to control prescription

drug costs is a formulary—a list of prescription drugs that are preferred by

a health plan sponsor for reasons of medical value and price.21 The

mail-order pharmacy programs now operating in base closure sites allow

beneficiaries to obtain the broad selection of pharmaceuticals available

under CHAMPUS. The one exception is that pharmacies that contract with

21For more information on formularies and their use in managing pharmacy costs, see Pharmacy

Benefit Managers: Early Results on Ventures With Drug Manufacturers (GAO/HEHS-96-45, Nov. 9,

1995) and Pharmacy Benefit Managers: FEHBP Plans Satisfied With Savings and Services, but Retail

Pharmacies Have Concerns (GAO/HEHS-97-47, Feb. 21, 1997).

Page 15 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

DOD to carry out these programs are required to dispense the generic

equivalent of a brand-name drug unless a doctor specifically requires that

the brand-name item be dispensed as written for clinical reasons. The use

of a formulary appropriate for older retirees would be one way for DOD to

contain the costs of a mail-order program.

Carefully tracking the number of older retirees using pharmacy

benefits—collecting data on where they receive their prescriptions, what

types of medications they use, and what those prescriptions cost DOD—is

another way to manage the cost of a pharmacy program. DOD could use

this information to develop a cost-effective formulary and to adjust

copayments to control costs. Although DOD currently has no drug

utilization information system in place, we believe DOD could use a

participant enrollment mechanism and point-of-service software to better

track the use of a mail-order pharmacy benefit.

Medical System Size,

Structure, and Mission

Considerations

As we testified in February 1997, the military health system’s current size

and structure relative to its primary wartime mission are now being

evaluated. Further downsizing and restructuring of the system in line with

reduced wartime requirements are being predicted. It is important to

factor the potential for such changes into the choices DOD makes about

providing care for its aging population through major new benefit

programs. Before deciding on proposals that either retain care for older

beneficiaries in military facilities or provide for them entirely through

civilian sources, the training needs of DOD physicians may have to be

evaluated. Upholding the “medical readiness” tenet that military medical

facilities have a mix of patients of all ages to keep physicians prepared for

wartime may be difficult if more care for older beneficiaries is provided

through civilian sources. Moreover, it is important to consider the broad

issue of whether the physician mix of the military medical system is

adequately equipped or trained for geriatric care, and whether it should be

realigned to be so in light of its primary wartime mission.

Conclusions Over the last decade, DOD health care system changes have included the

introduction of managed care programs that altered access-to-care

priorities, numerous facility closures, and significant downsizing of

military medical staff. Older retirees, who cannot participate in TRICARE

Prime, have grown concerned about their current, and even more so, their

future ability to access space-available care in military facilities. The

proposals made thus far to improve older retirees’ health benefits and

Page 16 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

access to DOD-sponsored health care to varying degrees increase either the

number of retirees receiving such care or the amount of care that many

now receive. The proposals’ anticipated costs would vary markedly, from

the Medicare subvention option, which is designed to be budget neutral, to

the relatively moderately priced mail-order pharmacy option, to the

high-price-tag options of using Medigap, CHAMPUS, or FEHBP as Medicare

supplements. Each of the options would have differing effects on the

military health system. All would introduce the need for such structural

changes as new enrollment and reimbursement mechanisms, and some

raise questions about the “military readiness” consequences of caring for

all older retirees outside military facilities. Furthermore, the Medicare

subvention option has generated concern about the system’s ability to

provide comprehensive geriatric care at its facilities. Given these

considerations and the likelihood that the military medical system will

undergo further downsizing, the mail-order pharmacy option appears

comparatively attractive for the near term. The lack of a prescription

benefit under Medicare is a major void in older retirees’ coverage that

could be filled at a comparatively modest cost and without major system

change.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, DOD generally agreed with our

representation of the issues. It did, however, have several concerns. First,

DOD suggested that our mail-order pharmacy cost estimate be updated and

provided us with more current prescription expenditure and usage data

for the current base closure area program. As appropriate, we used these

more recent data to recalculate our estimate.

Relatedly, DOD stated that our apparent assumption that catchment area

retirees now have 100 percent of their prescription drug needs met by

military facilities was incorrect. Also, DOD questioned the feasibility—from

an operational and customer service standpoint—of offering the

mail-order program only to retirees living outside catchment areas and

thus denying it to those within such areas. We were asked to evaluate the

pharmacy option only as it pertained to retirees outside catchment areas

and not to all retirees regardless of their proximity to military facilities. In

doing so, our evaluation did not assume that those within catchment areas

now have all of their prescription drug needs met, nor did it assume that

those who would receive the mail-order pharmacy benefit would have

100 percent of their prescription drug needs met. We do believe, however,

that such a program would help fill a major Medicare coverage gap for

those most needing such coverage. We are currently planning a review of

Page 17 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

all of DOD’s pharmacy operations that will include such issues as current

benefit uniformity. Regarding the operational difficulties of establishing

geographic eligibility for the mail-order program, we note that the existing

base closure area program defines eligibility primarily by service area.

Thus, we believe any such eligibility-related difficulties could be overcome

for a limited expansion of this program to beneficiaries outside catchment

areas.

DOD also commented that our report failed to mention that, under the

Medicare subvention proposal, DOD’s ultimate goal would be to offer

enrollment in TRICARE Prime to Medicare-eligible beneficiaries wherever

TRICARE Prime was offered. We agree, and have amended the text

accordingly. DOD went on to say that such an expansion could be made by

using the TRICARE contractors or existing Medicare HMOs. Regarding such

an expansion, however, even if subvention was tested at military facilities

and proved cost neutral, it would remain to be seen whether DOD could

administer subvention using civilian providers and achieve the same

cost-neutral result—that is, provide services costing less than or the same

as services from other Medicare providers. We continue to question

whether any government cost advantage would result from DOD’s making

such arrangements with civilian providers. Further, extending subvention

this way could involve a rather complex financing arrangement whereby

HCFA might provide payments to DOD for its use in paying civilian

contractors or HMOs. These organizations might, in turn, reimburse DOD for

any care DOD provided in its own facilities. And each year, DOD would

attempt to reconcile these funding transfers with HCFA to ensure

cost-neutrality. Moreover, DOD’s use of civilian providers for this purpose

could duplicate, and thus compete with, the existing Medicare HMO

program administered by HCFA.

Finally, DOD stated that the option providing CHAMPUS as a Medicare

supplement might enable beneficiaries to obtain prescription drugs with a

lower copayment than the standard CHAMPUS copayment of

25 percent—the percentage we used to estimate costs—from retail

pharmacies and mail-order programs operating under TRICARE. DOD said

that, if beneficiaries were able to take advantage of these programs, their

costs would be lower, but the cost to DOD would increase. While we agree

that beneficiaries might avail themselves of TRICARE pharmacy programs

under this option, we disagree that DOD’s costs would necessarily increase.

TRICARE programs are aimed at reducing DOD and beneficiary costs

through negotiated discounts such that providing prescription benefits

through these programs might not be more costly than under standard

Page 18 GAO/HEHS-97-134 Military Retirees’ Health Care
B-276905 

CHAMPUS. For these reasons, and because DOD does not have data available

on how many prescriptions retirees would obtain at various copayment

amounts or what DOD’s cost would be, we continue to believe that using

the standard CHAMPUS copayment is a reasonable approach to estimating

this option.

DOD also made several technical comments, which we incorporated as

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

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) 512-7111 or Dan Brier, Assistant Director, on

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

report. Other contributors to this report include Catherine O’Hara,

Evaluator-in-Charge; Timothy Carr; Sandra Davis; James Espinoza; Elsie

Picyk; Mary Reich; Dayna Shah; and Nancy Toolan.

Stephen P. Backhus

Director, Veterans’ Affairs and

 Military Health Care Issues

Page 19 GAO/HEHS-97-134 Military Retirees’ Health Care
Contents

Letter 1

Appendix I 

Scope and

Methodology

22

Appendix II 

Profile of the Military

Retiree Population

27

Retiree Population, More Than Half of DOD Beneficiaries, Is

Expected to Grow

27

Most Older Retirees Do Not Live Near Large Military Medical

Facilities

30

Few Older Retirees Use the Military Medical System; Many Use

Only Pharmacy Services

32

Almost Half of Military Retirees Have Private Health Insurance 34

Appendix III 

Comments From the

Department of

Defense

37

Table Table 1: Comparison of Proposed Military Retiree Health Care

Options

3

Figures Figure II.1: Population Eligible for Military Health Care by

Beneficiary Category, 1996

27

Figure II.2: Active Duty and Retiree Population Trends, 1994-2004 28

Figure II.3: Age Distribution of Retiree Population, 1996 29

Figure II.4: Projected Change in Retiree Population Through 2004 30

Figure II.5: Proximity of Retirees to Military Medical Facilities by

Retirees’ Age, 1996

31

Figure II.6: Percentage of Older Retirees Living Near a Military

Medical Facility, by Facility Size, 1996

32

Figure II.7: Retirees’ Use of Military Health System by Retiree

Age, 1996

33

Figure II.8: Type of Service Older Retirees Received at Military

Medical Facilities by Retirees’ Proximity to Facility, 1996

34

Figure II.9: Retiree Private and Supplemental Insurance Coverage

by Age, 1994-95

35

Page 20 GAO/HEHS-97-134 Military Retirees’ Health Care
Contents

Figure II.10: Retirees With Private Insurance by Age and by Who

Paid the Premium, 1994-95

36

Abbreviations

CBO Congressional Budget Office

CHAMPUS Civilian Health and Medical Program of the Uniformed

Services

CRS Congressional Research Service

DOD Department of Defense

FEHBP Federal Employees Health Benefits Program

HCFA Health Care Financing Administration

HMO health maintenance organization

OPM Office of Personnel Management

Page 21 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix I 

Scope and Methodology

In conducting our review, we examined, where available, the legislative

history of each proposal under consideration. We interviewed Department

of Defense (DOD) headquarters officials, military medical facility managers,

and health care providers nationwide to gain perspective on the effects of

system changes on retirees and to obtain cost data relevant to the different

proposals. We analyzed DOD population and health care use data for the

period between 1994 and 2004 and the results of the 1994-95 Health Care

Survey of DOD Beneficiaries to obtain demographic characteristics and

information about sources of care and insurance coverage relating to

eligible retiree populations. We did not verify DOD’s data for accuracy or

consistency.

We also interviewed Department of Veterans Affairs officials regarding the

Department’s pharmacy program, and reviewed DOD contractor reports

and studies of the military health system and interviewed their authors.

These contractors included the Rand Corporation, the Institute for

Defense Analyses, the Logistics Management Institute, and the Center for

Naval Analysis. We also interviewed representatives of military retiree

associations and advocacy groups to obtain their perceptions of problems

Medicare-eligible retirees face and solutions to improve their health care

benefits. In addition, we interviewed Health Care Financing

Administration (HCFA) officials and reviewed agreements between HCFA

and DOD regarding the Medicare subvention proposal. We also interviewed

Congressional Budget Office (CBO) officials about CBO’s efforts to estimate

the budgetary effects of Medicare subvention and Office of Personnel

Management (OPM) officials about the cost and structural implications of

the Federal Employees Health Benefits Plan (FEHBP) option. In addition,

we reviewed our reports on the military health care system and those of

DOD, the Congressional Research Service (CRS), and CBO. We conducted our

work from June 1996 through May 1997 in accordance with generally

accepted government auditing standards.

Methodology for

Estimating Costs of

Proposals

The information and assumptions we used to estimate the cost of the

various options were derived from studies and evaluations conducted by

DOD, CBO, CRS, and private consultants as well as from DOD data systems.

We made certain general assumptions, in addition to assumptions that are

specific to the analysis of each of the options. First, we assumed that these

options would be implemented in an environment in which very little or no

space-available medical care could be provided to older retirees in military

medical facilities, because virtually all available care would be devoted to

TRICARE Prime enrollees. Thus, the cost of each option was evaluated

Page 22 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix I 

Scope and Methodology

relative to a baseline scenario in which older retirees relied almost

exclusively on civilian Medicare-funded care.

Also, we recognized that, to the extent that each of these options would

lower beneficiaries’ cost of health care, beneficiaries could use more

health care, a phenomenon known as induced demand. However, we did

not incorporate induced demand effects in our estimates because we

lacked specific data on the behavior of DOD’s Medicare-eligible population,

its total health care use, and its current insurance coverage and cost.

Further, we recognized that a change in the benefit options offered to

older retirees might result in an increased use of Medicare-funded health

care services by beneficiaries who previously were reliant on DOD for care.

However, because of the lack of appropriate data, we have not estimated

the potential increases in costs to the Medicare program. Neither did we

assess the impact that these proposed changes might have on the future

solvency of the Medicare Hospital Insurance trust fund.

Finally, we did not attempt to produce an estimate of the cost of

implementing a Medicare subvention program because we determined that

sufficient data are not available on certain crucial variables (for example,

the cost of treating older retirees inside DOD facilities). Further, a

substantial portion of the effect of implementing a subvention option

would consist of the effect on the Medicare Hospital Insurance trust fund.

But uncertainties related to DOD’s ability to reliably set its level-of-effort

baseline and price out its per-enrollee care, as well as other problems

discussed in this text, seriously limit the reliability of estimates of

subvention’s potential effects on the Medicare Hospital Insurance trust

fund.

Estimating the Population To determine the population eligible for each option, we used DOD’s

Resource Analysis and Planning System, Version 10.0.1 (Feb. 1997). We

limited the population for each proposal to the 1,196,346 Medicare-eligible

retirees, their dependents, and survivors (referred to hereafter as

“retirees”) living in the continental United States. We excluded those living

overseas (about 12,000) because their health care options differ

significantly from those of retirees in the United States. For example,

Medicare is not available overseas, and few military facilities are available.

Page 23 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix I 

Scope and Methodology

Cost for DOD to Pay the

Medicare Part B Premium

and Purchase Medigap

Policies for Older Retirees

Medigap policies are offered by private insurers under 10 standard plans,

referred to as plans A through J, which provide progressively greater

coverage at increasingly higher premiums. Only plans H, I, and J offer

coverage for outpatient prescription drugs. We assumed that DOD would

purchase the lowest cost plan providing prescription coverage: plan H. For

our estimate, we used the 1996 average annual premium of $1,307 for plan

H policies offered by Blue Cross/Blue Shield and Prudential. We obtained

this figure from the Families USA Foundation, a national nonprofit

consumer health care organization.

Further, to purchase a Medigap policy, beneficiaries are required to enroll

in Medicare part B. The 1997 annual premium for Medicare part B is

$525.60. We assumed that DOD would offer this benefit to the entire

population of Medicare-eligible retirees. Although many retirees already

have both Medicare part B and Medigap coverage, because DOD would pay

the premiums for both the Medigap policy and the Medicare part B

premium, unlike most employers, we assumed that all 1,196,346

beneficiaries would participate.22

Medicare Part B and Medigap

Plan H Cost Estimate

Calculation

$525.60 (annual Medicare part B premium) x 1,196,346 (Medicare-eligible

beneficiaries) = $628,799,458.

$1,307 (average annual Medigap plan H premium) x 1,196,346

(Medicare-eligible beneficiaries) = $1,563,624,222.

$628,799,458 (for Medicare part B) + $1,563,624,222 (for Medigap plan H) =

$2,192,423,680 (total estimated cost).

Cost for CHAMPUS as a

Medicare Supplement

Under the proposal that would make the Civilian Health and Medical

Program of the Uniformed Services (CHAMPUS) a Medicare supplement, DOD

would pay beneficiaries’ out-of-pocket costs for copayments and

deductibles for services covered by Medicare parts A and B and a portion

of the cost of outpatient prescription drugs, which are not covered by

Medicare. HCFA estimates that aged Medicare-eligible beneficiaries’

out-of-pocket costs for Medicare-covered services will be $877.44 in 1997.

Annual prescription costs for Medicare-eligible beneficiaries in 1997 are

estimated to be $819, according to HCFA. Under this proposal, beneficiaries

would pay the standard CHAMPUS copayment of 25 percent for prescription

drugs, with DOD paying the remaining 75 percent, or $614.25. Finally,

22Because some retirees would not have previously elected Medicare part B coverage, they would face

penalties for late enrollment. If DOD paid the cost of these penalties, there would be an additional cost

in the initial years of the program.

Page 24 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix I 

Scope and Methodology

because physicians can charge more than the maximum amount Medicare

allows—up to 115 percent—CHAMPUS, as supplementary coverage to

Medicare, would pay these additional costs up to its allowed amount. DOD

estimates that these additional physician charges would amount to about

$34 million.

We assumed DOD would offer this benefit to the entire population of

Medicare-eligible retirees. Because there are no premiums for CHAMPUS

coverage and DOD would pay most of the out-of-pocket costs for retirees,

we assumed that all 1,196,346 Medicare-eligible beneficiaries would

participate.

CHAMPUS as a Medicare

Supplement Cost Estimate

Calculation

$877.44 (average Medicare beneficiary out-of-pocket cost per year) x

1,196,346 (Medicare-eligible beneficiaries) = $1,049,721,834 (for medical

costs).

$819.00 (annual retail prescription cost for each Medicare-eligible

beneficiary) - 25 percent (beneficiary copayment) = $614.25 (DOD annual

prescription cost for each Medicare-eligible beneficiary).

$614.25 (DOD annual prescription cost for each Medicare-eligible

beneficiary) x 1,196,346 (Medicare-eligible beneficiaries) = $734,855,531

(total annual cost of prescription coverage).

$1,049,721,834 (medical costs) + $734,855,531 (prescription coverage) +

$34,000,000 (additional physician charges) = $1,818,577,365 (total

estimated cost).

Cost to Enroll Older

Retirees in FEHBP

For our estimate, we assumed DOD would pay an annual premium of $1,571

per person. This represents the government’s portion of the fiscal year

1996 self-only premium for federal government retirees enrolled in FEHBP,

of whom about 75 percent are aged 65 or older. We obtained this figure

from OPM. This premium cost could be higher or lower for DOD, depending

upon demographic and medical use characteristics as well as beneficiary

plan choices. In the absence of a specific plan and beneficiary data, OPM

could not provide us with an estimate of the actual premiums, so we

assumed that the costs would be the same as for the federal retiree

population.

We assumed that DOD would offer this benefit to the entire population of

Medicare-eligible retirees. According to a DOD survey, 17 percent of

Page 25 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix I 

Scope and Methodology

Medicare-eligible retirees have insurance coverage fully or partially paid

by their post-military employers. Because FEHBP requires beneficiaries to

pay a higher portion of the premium than most private employers do, it is

likely that the 17 percent would not enroll in FEHBP. Therefore, we

assumed that 992,967, or 83 percent of the 1,196,346 Medicare-eligible

retirees, would participate.

FEHBP Cost Estimate

Calculation

$1,571 (average annual premium cost to DOD) x 992,967 (83 percent of

Medicare-eligible beneficiaries) = $1,559,951,157.

Cost for the Mail-Order

Pharmacy Benefit

For our estimate, we used DOD’s cost per prescription, dispensing fee,

copayment, and prescription usage rates under the current base closure

mail-order pharmacy benefit program. We assumed that the benefit would

be provided to all Medicare-eligible beneficiaries aged 65 and older who

live outside a DOD military treatment facility catchment area (568,885 of

the total 1,196,346). But, 160,531 of these are already eligible for the

benefit under the current base closure mail-order program. Therefore, we

assumed that a maximum of 408,354 older retirees would participate in the

program.

Mail-Order Pharmacy Benefit

Cost Estimate Calculation

$35.00 (average cost per 90-day supply prescription) + $7.00 (dispensing

fee) - $8.00 (copayment) = $34 (average cost per 90-day supply

prescription).

$34.00 (average cost per 90-day supply prescription) x 16.5 (average

number of 90-day supply prescriptions per person annually) = $561.00

(average annual prescription cost for each Medicare-eligible beneficiary).

$561.00 (average annual prescription cost for each Medicare-eligible

beneficiary) x 408,354 (Medicare-eligible beneficiaries) = $229,086,594

(total estimated cost).

Page 26 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix II 

Profile of the Military Retiree Population

Retiree Population,

More Than Half of

DOD Beneficiaries, Is

Expected to Grow

In 1996, military retirees23 made up over 50 percent of the population

eligible for DOD health care (see fig. II.1). Since 1994, the number of

retirees and their families has increased 5 percent, and the number of

active duty members and their families has decreased about 12 percent;

this trend is projected to continue (see fig. II.2). Most of the 1996 retiree

population was younger than age 65 (see fig. II.3). However, the number of

retirees aged 65 and older is expected to increase dramatically, while the

number of those under age 65 remains essentially the same (see fig. II.4).

Figure II.1: Population Eligible for

Military Health Care by Beneficiary

Category, 1996

20%

28%

15%

37%

Retirees Aged 65 and Older

Retirees Under Age 65

Active Duty Dependents

Active Duty Members

Source: Our analysis of DOD’s Resource Analysis and Planning System data.

23We continue to use the term “retirees” to refer to retirees and their dependents and survivors.

Page 27 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix II 

Profile of the Military Retiree Population

Figure II.2: Active Duty and Retiree Population Trends, 1994-2004

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

3,600,000

3,800,000

4,000,000

4,200,000

4,400,000

4,600,000

Year

Number

Active Duty Members and Families

Retirees, Their Families, and Survivors

Source: Our analysis of DOD’s Resource Analysis and Planning System data.

Page 28 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix II 

Profile of the Military Retiree Population

Figure II.3: Age Distribution of Retiree Population, 1996

30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100 +

0

100,000

200,000

300,000

400,000

500,000

600,000

Age Group

Number

Source: Our analysis of DOD’s Defense Medical Information System data.

Page 29 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix II 

Profile of the Military Retiree Population

Figure II.4: Projected Change in Retiree Population Through 2004

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

-10

0

10

20

30

40

50

Year

Cumulative Percentage of Change

Retirees Under Age 65

Retirees Aged 65 and Over

Source: Our analysis of DOD’s Resource Analysis and Planning System data.

Most Older Retirees

Do Not Live Near

Large Military Medical

Facilities

In 1996, about 60 percent of retirees under age 65 lived within the 40-mile

catchment area24 of a military medical facility, as compared with slightly

more than half (52 percent) of the retirees aged 65 and older (see fig. II.5).

Of the older retirees, about 14 percent lived near a large facility (200 beds

or more) that offered a wide variety of specialty care services. About

10 percent lived near facilities with 100 to 199 beds, about 8 percent lived

near facilities with 50 to 99 beds, and about 21 percent lived near small

medical facilities of less than 50 beds that had little inpatient capacity.

(See fig. II.6.)

24A catchment area is defined as the area within a 40-mile radius surrounding a military medical

facility.

Page 30 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix II 

Profile of the Military Retiree Population

Figure II.5: Proximity of Retirees to

Military Medical Facilities by Retirees’

Age, 1996

60%

40%

Less Than 65 Years Old

52%

48%

65 Years Old or Older

In Catchment Area

Outside Catchment Area

Note: Retirees living outside the continental United States are not included.

Source: Our analysis of DOD’s Resource Analysis and Planning System data.

Page 31 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix II 

Profile of the Military Retiree Population

Figure II.6: Percentage of Older

Retirees Living Near a Military Medical

Facility, by Facility Size, 1996

 200+ Bed Facility

100-199 Bed Facility

50-99 Bed Facility

< 50 Bed Facility

No Facility

14%

10%

8%

21%

48%

Source: Our analysis of DOD’s Resource Analysis and Planning System and the Joint Cross

Service Working Group on Military Medical Facilities of the Base Realignment and Closure

Commission data.

Few Older Retirees

Use the Military

Medical System; Many

Use Only Pharmacy

Services

In 1996, about two thirds of retirees under age 65 used the military health

system, including military medical facilities and the CHAMPUS program. In

comparison, only about a quarter of the retirees aged 65 and older used

military medical facilities for their care (CHAMPUS eligibility ends at age 65).

(See fig. II.7.) For retirees aged 65 and older who did use the military

medical system, a significant percentage used pharmacy services only,

regardless of their proximity to a military medical facility (see fig. II.8).

Page 32 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix II 

Profile of the Military Retiree Population

Figure II.7: Retirees’ Use of Military

Health System by Retiree Age, 1996

64%

36%

Less Than 65 Years Old

27%

73%

65 Years Old or Older

Use System

Do Not Use System

Source: DOD’s Resource Analysis and Planning System data.

Page 33 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix II 

Profile of the Military Retiree Population

Figure II.8: Type of Service Older

Retirees Received at Military Medical

Facilities by Retirees’ Proximity to

Facility, 1996

54%

46%

In Catchment Area

43%

57%

Outside Catchment Area

Medical Care

Pharmacy Only

Source: Our analysis of DOD’s Semi-Annual User Survey data.

Almost Half of

Military Retirees Have

Private Health

Insurance

According to a 1994-95 survey of DOD beneficiaries, over 40 percent of

military retirees, regardless of age, had private health insurance coverage.

About a third of retirees aged 65 and older also reported having additional

insurance coverage to supplement their Medicare benefits. A smaller

proportion of retirees under age 65, about 14 percent, also had insurance

to supplement their CHAMPUS coverage. (See fig. II.9.) For those retirees

who had private health insurance, many had part or all of that coverage

paid for by their current or former employer; however, many more older

retirees paid the entire cost of that coverage themselves (see fig. II.10).

Page 34 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix II 

Profile of the Military Retiree Population

Figure II.9: Retiree Private and

Supplemental Insurance Coverage by

Age, 1994-95

Private Supplemental

0

10

20

30

40

50

42

14

44

31

Percentage With Coverage

Less Than 65 Years Old

65 Years Old and Older

Source: Our analysis of DOD’s 1994-95 Survey of DOD Beneficiaries data.

Page 35 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix II 

Profile of the Military Retiree Population

Figure II.10: Retirees With Private

Insurance by Age and by Who Paid the

Premium, 1994-95

14%

18%

63%

2% 3%

Less Than 65 Years Old

47%

11%

28%

9%

6%

65 Years Old or Older

Beneficiary Paid

Employer Paid

Shared Cost

Other

Did Not Indicate

Source: Our analysis of DOD’s 1994-95 Survey of DOD Beneficiaries data.

Page 36 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix III 

Comments From the Department of Defense

Page 37 GAO/HEHS-97-134 Military Retirees’ Health Care
Appendix III 

Comments From the Department of Defense

(101491) Page 38 GAO/HEHS-97-134 Military Retirees’ Health Care
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