GAO-02-1061R Health Care Fund Regulations (DOD)

United States General Accounting Office

Washington, DC 20548

August 30, 2002

The Honorable Carl Levin

Chairman

The Honorable John Warner

Ranking Minority Member

Committee on Armed Services

United States Senate

The Honorable Bob Stump

Chairman

The Honorable Ike Skelton

Ranking Minority Member

Committee on Armed Services

House of Representatives

The Honorable Donald H. Rumsfeld

The Secretary of Defense

Subject: Financial Management: Department Of Defense Regulations Establishing

Methods to Calculate Amounts To Be Transferred from Department of

Defense Medicare Eligible Retiree Health Care Fund

This report addresses a legislative mandate to report on regulations issued by

Department of Defense (DOD) to cover transfers from a new fund created by the

Congress to finance the cost of expanded health care programs’ benefits for

Medicare-eligible uniformed services1 retirees and their eligible dependents. These

health care programs include pharmacy benefits and coverage of the deductible

portion of Medicare benefits.

The Floyd D. Spence National Defense Authorization Act (NDAA) for Fiscal Year

2001 (as amended by NDAA for Fiscal Year 2002, and codified 10 U.S.C. Section 1111,

et. seq. (2002)) established in the U.S. Treasury the Department of Defense Medicare

Eligible Retiree Health Care Fund (the Fund). Beginning on October 1, 2002, the

Fund will finance DOD’s liabilities under the uniformed services retiree health care

programs for Medicare-eligible beneficiaries. The legislation requires (1) the

Secretary of Defense to establish by regulation the method(s) for calculating amounts

 1

 These regulations currently only apply to DOD, but provisions exist for making them applicable to

other uniformed services, such as U.S. Coast Guard, for their future participation in the Fund. For the

purpose of this letter, DOD’s uniformed services retirees will be referred to as military retirees.
Page 2 GAO-02-1061R Health Care Fund Regulations (DOD)

to be transferred periodically from the Fund to applicable appropriations that incur

the programs’ costs and (2) the Comptroller General to report to the Secretary of

Defense and to Congress on the adequacy and appropriateness of these regulations

within 30 days of receiving them from the Secretary.2

 Our objectives were to

determine (1) whether the Secretary of Defense issued regulations that satisfy

Congress’ criteria for making these transfers from the Fund and (2) whether DOD’s

regulations are adequate and appropriate, with respect to the method(s) they

prescribe for calculating the amounts of such transfers.

Results in Brief

As required by the law, regulations establishing the methods for calculating transfers

from the Fund to finance eligible health care costs were issued in July 2002, in

sufficient time to begin making transfers upon activation of the Fund on October 1,

2002. The regulations describe the procedures for transferring amounts from the

Fund to reimburse the applicable appropriations from which the costs of military

retiree health care programs provided at military treatment facilities (MTFs) and

other non-DOD providers are to be paid.

DOD regulations for establishing the methods for calculating transfers from the Fund

appear to be adequate and appropriate and provide a framework for the transfers to

be implemented upon activation of the Fund. Whether there will be any

implementation problems or the degree of these problems will be unknown until

DOD has some experience in the Fund’s operation.

Under these regulations there are to be daily transfers from the Fund to cover

amounts disbursed to non-DOD providers, such as civilian health care providers and

retail pharmacies, based on claims transactions. One challenge that DOD will face in

paying non-DOD providers is to mitigate the risk of improper payments.

The regulations also provide the methodology for calculating transfers to cover the

cost of MTF care to the intended beneficiaries. Because MTFs’ cost accounting

systems do not presently have the capacity to record or generate cost data on a per

patient basis, aggregated cost and patient clinical data are to be used for the

calculation. In this regard, based on our and the DOD Inspector General’s prior work,

the reliability of the underlying cost and patient clinical data could limit DOD’s ability

to reliably assign costs and bill DOD for services to DOD Medicare-eligible retirees

and their eligible dependents.

Scope and Methodology

To satisfy the mandate, we reviewed the DOD regulations issued in July 2002. We

also reviewed the documentation supporting the regulations and analyzed the

methods of calculating the amounts to be transferred from the Fund, and discussed

them with cognizant DOD officials. We obtained oral comments from DOD on a draft

of this letter and have incorporated its views as appropriate. We performed our work

 2

 We received the regulations on August 1, 2002.
Page 3 GAO-02-1061R Health Care Fund Regulations (DOD)

in July and August 2002, in accordance with generally accepted government auditing

standards.

Background

DOD provides care to military services retiree Medicare-eligible beneficiaries through

a combination of direct care at its MTFs and care purchased from non-DOD

providers, such as civilian providers. In addition to inpatient and outpatient

treatment, those beneficiaries also qualify for pharmacy benefits.

Starting October 1, 2002, all health care costs of DOD Medicare-eligible retirees and

their eligible dependents provided at MTFs will be covered by the Fund. Payments to

civilian providers for health care for these beneficiaries will be covered by the Fund

as a supplemental payer; Medicare will be the primary payer. The pharmacy benefit

cost, less any copay at retail pharmacies or National Mail Order Pharmacy (NMOP)

will be covered entirely by the Fund. To obtain health care benefits from civilian

providers, retail pharmacies and NMOP, the Medicare-eligible beneficiaries must3

 be

enrolled in Medicare Part B.4

 In addition, the Fund will be available to cover

administrative costs of the uniformed services retiree health care programs, such as

claims processing.

Contributions to the Fund will be from two sources. Based on an actuarial

calculation, the Department of the Treasury will contribute amounts from the

General Fund for the costs of health care benefits attributable to military service

rendered prior to October 1, 2002, and DOD from its appropriation will contribute for

health care benefit costs accruing after that date. Under this arrangement, Treasury

will fund the costs for all current retirees and their dependents, and that portion of

the future retiree health care benefits of current active military members and their

eligible dependents for military services prior to October 1, 2002. 5 DOD’s

appropriation will fund the costs of Medicare-eligible retiree health care associated

with all military service after October 1, 2002, for those currently in the military

services and future entrants and their eligible dependents.

Treasury’s contribution from the General Fund to the Fund is to be based on its

actuarial liability, amortized over a number of years yet to be determined. DOD is to

calculate its share of the contribution to the Fund based on the monthly end strength

of each service and actuarially calculated per-capita rates for both full-time and parttime personnel. It will transfer its contribution to the Fund monthly from its existing

Military Personnel appropriation accounts or from other applicable accounts. DOD

 3

 Medicare-eligible beneficiaries who were age 65 or older as of April 1, 2001, the start date for

pharmacy benefit for the new program, were “grandfathered” and are not subject to this requirement. 4

 Medicare is a combination of two programs, Part A (Hospital Insurance) and Part B (Supplementary

Medical Insurance). Part A coverage is usually provided automatically to Medicare-eligible

beneficiaries, whereas Part B coverage is optional and subject to monthly premium payments by

beneficiaries.

5

 Treasury will also contribute to the Fund to cover amounts reflecting any future changes in health

care benefits and actuarial assumptions, and any resulting actuarial gains and losses.
Page 4 GAO-02-1061R Health Care Fund Regulations (DOD)

estimated the present value of the total long-term liability of the Fund as of

September 30, 2002, to be $451 billion.6

Adequacy of Fund Regulations

DOD’s regulations satisfy the legislative criteria for transfers from the Fund and

appear to be adequate and appropriate and provide a framework for the transfers to

be implemented upon activation of the Fund. Until DOD has some experience in the

Fund’s operations, whether there will be any problems with fund transfers will be

unknown.

DOD’s July 2002 regulations governing Fund operations are comprised of a DOD

Directive and a DOD Instruction.7

 The Directive8 requires that health care for

Medicare-eligible beneficiaries be funded in accordance with the law establishing the

Fund, sets out policies, and assigns responsibilities for implementation. The

Instruction9

 implements the Directive and provides details on the operations and

management of the Fund, including the procedures for making contributions to and

transfers from the Fund.

The new regulations require transfers from the Fund to cover health care program

costs to be made using the health care and financial management systems and

processes currently in place at DOD. All transfers from the Fund must be made from

the new Treasury account to the existing Defense Health Program appropriations

from which DOD’s costs of non-DOD provider or MTF care are presently paid.

The regulations require the validation of civilian provider daily claims costs to ensure

that only costs attributable to Medicare-eligible beneficiaries have been paid. Also,

after fiscal year-end, the amounts transferred from the Fund for MTF care are to be

compared to actual costs and patient clinical data for that year.

Payments for Health Care Purchased from Non-DOD Providers

The DOD regulations specify that daily transfers will be made from the Fund to cover

civilian provider and retail pharmacy benefit costs based on daily claims transactions

attributable to Medicare-eligible beneficiaries. Funds are to be transferred monthly

to cover payments to National Mail Order Pharmacy providers. All claims processing

costs are to be transferred from the Fund on a biannual basis. For the Uniformed

Services Family Health Plan (USFHP),10 funds are to be transferred biannually to

 6

 This amount includes $388 billion for pre-October 1, 2002, service liability, which Treasury is

responsible for funding, and $63 billion for post October 1, 2002, service of current active military

members, which DOD is responsible for funding.

7

 This is consistent with DOD policy and practice, as set out in DOD Directive 5025.1, subject: DOD

Directives System, July 27, 2000.

8

 DOD Directive 6070.1, subject: DOD Medicare Eligible Retiree Health Care Fund, July 17, 2002.

9

 DOD Instruction 6070.2, subject: DOD Medicare Eligible Retiree Health Care Fund Operations, July

19, 2002.

10 DOD has contracts with network providers under the Uniformed Services Family Health Plan. The

provider is paid a fixed amount based on enrollment estimate and per-person monthly capitation and

assumes total financial risk for higher than expected costs.
Page 5 GAO-02-1061R Health Care Fund Regulations (DOD)

cover the contract-specific capitation rates for Medicare-eligible retirees and their

eligible dependents enrolled in USFHP.

One challenge that DOD will face in paying civilian providers is to mitigate the risk of

improper payments. DOD presently pays for the health care services for its military

members and their dependents provided by the civilian health care sector under

certain circumstances. Therefore, it has the payment structure in place for paying

civilian providers’ claims. Because the new program will likely substantially expand

the volume of health care services obtained from civilian providers, DOD needs to be

aware of known vulnerabilities so it can assess any increased risk of improper

payments. This risk could be substantial, as shown by U.S. Department of Health and

Human Services’ Inspector General study that reported about 6.3 percent of

Medicare-fee-for-service claims were paid improperly in fiscal year 2001.11

Overpayments to civilian providers under the Medicare program administered by

Health and Human Services have been on our high-risk list since 1990.12

Payments for Health Care Provided in Military Treatment Facilities

Transfer amounts for MTF care are to be calculated annually based on most recently

reported fiscal year costs and patient clinical data, and are to be distributed by DOD

and the military departments to MTFs using DOD’s current budget execution process.

The instruction does not specify how frequently transfers will be made from the Fund

to DOD or when distributions will be made to the MTFs.

A major challenge in paying for care provided at MTFs is that their existing cost

accounting systems do not have the capacity to record or generate cost data for each

patient.13 As a result, the calculation of transfer amounts for MTF care is not based

on patient level cost and is not age, sex, or individual patient specific for costs.

Instead, the regulations call for transfer amounts to be calculated annually based on

recently reported fiscal year aggregated cost for all MTF activities and aggregated

patient specific clinical data, extracted from individual patient records, for Medicareeligible patients treated in each facility. According to DOD officials, DOD plans to

develop itemized billing for individual patients.

In addition, the reliability of the underlying cost, patient clinical and demographic

data to identify Medicare-eligible patients to be used to calculate the estimated

amounts to be transferred from the Fund is questionable. We and the DOD Inspector

General have previously reported14 that underlying MTF costs, as well as patient

 11 Office of the Inspector General, Department of Health & Human Services, Improper Fiscal Year

2001 Medicare Fee-for-Service Payments, A-17-01-02002 (Washington, D.C.: Feb. 15, 2002). 12 U.S. General Accounting Office, High-Risk Series: An Update, GAO-01-263 (Washington, D.C.: Jan.

2001)

13 U.S. General Accounting Office, Medicare Subvention Demonstration: DOD Costs and Medicare

Spending, GAO-02-67 (Washington, D.C.: Oct. 2001). 14 U.S. General Accounting Office, U.S. Government Financial Statements: FY 2000 Reporting

Underscores the Need to Accelerate Federal Financial Management Reform, GAO-01-570T

(Washington, D.C.: Mar. 30, 2001). Office of the Inspector General, Department of Defense,

Beneficiary Data Supporting the DOD Military Retirement Health Benefits Liability Estimate, D2001-154 (Washington, D.C.: Jul. 5, 2001); Office of the Inspector General, Department of Defense,
Page 6 GAO-02-1061R Health Care Fund Regulations (DOD)

clinical and demographic data used for calculating payments to these facilities are

not reliable. For example, the cost data in MTFs’ cost accounting system was not

being reconciled to its source systems, the patient clinical data for outpatient visits

was not reliable, and demographic data had ineligible, unable to be verified, or

incorrect critical data. The net effect is that there are uncertainties about the

numbers and type of patient care provided, which under the contemplated billing

process could result in either under or over billing for the Medicare eligible client

base. DOD has established a management improvement plan and implemented

several recent initiatives designed to improve data quality. It is too soon to assess

whether these actions have resulted in the needed improvements.

- - - - -

We are sending copies of this report to the Chairmen and Ranking Minority Members

of the Senate and House Appropriation Committees. We will also make copies

available to others upon request. In addition, the letter will be available at no charge

on the GAO Web site at http://www.gao.gov.

If you have any questions, please contact me at (202) 512-8365 or solisw@gao.gov, or

Linda P. Garrison, Assistant Director, at (404) 679-1902 or garrisonl@gao.gov. Key

contributors to this letter were Shawn Ahmed, Francine Delvecchio, Francis

Dymond, and Kristi Peterson.

William M. Solis

Director

Defense Capabilities and Management

 Internal Control and Compliance with Laws and Regulations for the FY 1999 Financial Statements

for Other Defense Organizations-General Funds, D-2000-103 (Washington, D.C.: Mar. 16, 2000).