United States General Accounting Office

GAO Report to the Chairman and Ranking

Minority Member, Subcommittee on

Defense, Committee on Appropriations,

U.S. Senate

May 1996 DEFENSE HEALTH

CARE

Medicare Costs and

Other Issues May

Affect Uniformed

Services Treatment

Facilities’ Future

G O A

years

1921 - 1996

GAO/HEHS-96-124

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-265686 

May 17, 1996

The Honorable Ted Stevens

Chairman

The Honorable Daniel K. Inouye

Ranking Minority Member

Subcommittee on Defense

Committee on Appropriations

United States Senate

Since fiscal year 1994, the Congress has appropriated nearly $1 billion for

the Uniformed Services Treatment Facilities (USTF) to deliver health care

to what now totals about 124,000 beneficiaries. In 1982, the Congress

enacted legislation that designates 10 former Public Health Service

hospitals now under civilian ownership as USTFs and makes them part of

the Department of Defense’s (DOD) health care system.1

 This arrangement

with DOD has guaranteed the USTFs, in addition to their private health care

business, a stable revenue source by enabling them to provide care to

uniformed services beneficiaries.2

 The arrangement also has improved

eligible USTF members’ access to low-cost, comprehensive health care. The

USTFs’ deemed status will expire in September 1997 unless the Congress

intervenes.3

In recent years, the Congress has grown concerned about the increased

cost to treat USTF members, in part because some members retain dual

eligibility and unrestricted access to such other government health care

services as Medicare, CHAMPUS,

4

 and DOD hospitals. As a result, in 1991, the

Congress directed DOD to institute a managed care plan to reform the USTF

program. The USTF managed care program has been in effect since

October 1993. Even with this change, questions have arisen about the USTF

1

The Military Construction Authorization Act of 1982, section 911 (42 U.S.C. 248c), deemed these

facilities to be facilities of the uniformed services.

2

The uniformed services include the Army, Navy, Marine Corps, Air Force, Coast Guard, and the

Commissioned Corps of the Public Health Service and of the National Oceanic and Atmospheric

Administration. USTFs provide care to active duty dependents and retirees of these uniformed

services as well as to retired lighthouse keepers and retirees and dependents of the National Ocean

Service.

3

The National Defense Authorization Act of Fiscal Year 1996, P.L. 104-106, section 721. The Congress

has periodically enacted delays in the termination of the deemed status since the program’s inception

in 1982.

4

CHAMPUS (Civilian Health and Medical Program of the Uniformed Services) is a fee-for-service

health insurance program that pays for a substantial part of the health care that civilian hospitals,

physicians, and others provide to non-active duty DOD beneficiaries.

Page 1 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

program’s future as DOD moves to implement its new nationwide managed

care program, known as TRICARE.

DOD began to implement TRICARE in 1993 to improve beneficiary access

to high-quality health care while containing costs. TRICARE calls for

coordinating and managing beneficiary care on a regional basis using all

available military hospitals and clinics, supplemented by contracted

civilian services. DOD expects to have TRICARE fully implemented by

September 1997.

At your request, we looked at issues regarding the USTFs’ integration into

TRICARE, namely

• whether unnecessary costs result from USTF members’ use of other

federally funded health care sources and

• what other issues need to be considered during congressional

deliberations on reauthorizing the USTF program.

To do our work, we examined the legislative history of the USTFs and the

Medicare and USTF laws. We reviewed DOD policies and regulations

affecting the USTFs, and our prior studies on USTF operations as well as

those conducted by the DOD Inspector General, DOD consultants, the

Congressional Budget Office, and the Institute for Defense Analyses. We

obtained and analyzed data from DOD; the USTFs; and the Health Care

Financing Administration (HCFA), which administers Medicare, regarding

USTF members’ Medicare, military treatment facility, and CHAMPUS usage.

Fiscal year 1994 was the only year, at the time of our work, for which

sufficient data were available on the extent of USTF members’ Medicare

usage. We interviewed DOD, HCFA, and USTF officials regarding USTF program

operations and the USTFs’ future under TRICARE; unnecessary Medicare

payments; and USTF members’ use of military treatment facilities and

CHAMPUS. We did our work from August 1995 through April 1996 in

accordance with generally accepted government auditing standards. A

more detailed discussion of our scope and methodology is in appendix I.

Results in Brief In fiscal year 1994, over $9.5 million in unnecessary costs to the

government resulted from USTF members’ use of Medicare.5

 If the same

Medicare usage occurs from the time the USTF managed care program

began in fiscal year 1994 until current USTF agreements with DOD end in

5

Medicare covers some medical services, such as end-stage renal disease treatment, that the USTFs do

not. Payments for such services are not included in the unnecessary Medicare payment total.

Page 2 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

September 1997, such unnecessary costs could approach $38 million.

Some of these payments were made to USTF hospitals themselves and

hospitals under contract with the USTFs—hospitals required to bill the

USTFs for such care. Although DOD requires Medicare-eligible USTF members

to agree on the enrollment form that they will not use Medicare, these

beneficiaries are statutorily eligible for care under both programs. DOD

does not have explicit statutory authority to disenroll USTF members for

using Medicare or to prevent Medicare from paying any claims submitted

for such care. Furthermore, under the current agreement between DOD and

the USTFs, the unnecessary Medicare payments cannot be fully recovered.

Although DOD has attempted to work with HCFA and the USTFs to address

this continuing problem, they have been only partly successful. In

contrast, DOD has been able to curb USTF members’ use of military

treatment facilities and CHAMPUS because DOD has the authority and

controls in place to minimize such occurrences.

Other cost and equity issues will also likely affect forthcoming

deliberations on the USTF program’s reauthorization. One such issue is how

to cost-effectively serve USTF members’ health needs given DOD’s TRICARE

implementation and its mandate that the new system’s costs be no greater

than DOD’s current costs under CHAMPUS and in military treatment facilities.6

Recent reports have indicated that the USTFs may be more costly to the

government. In 1996, for example, the Institute for Defense Analyses

estimated that the USTF managed care program cost DOD $193 million more

per year than what costs would be if the members had to rely for their care

on the current military health services system (MHSS).

Another issue is how the USTFs should fit into TRICARE, under which DOD

awards a single contract for an area’s health care delivered outside

military hospitals. Currently, the USTFs have a unique, noncompetitive

contractual and operational relationship with DOD. At issue is whether the

USTFs should retain that special relationship and, if so, what the cost and

equity implications might be for TRICARE.

Background Currently, 8.3 million people are eligible for medical care from the MHSS:

7

1.7 million active duty members and 6.6 million non-active duty

beneficiaries. As part of the MHSS, USTFs are permitted to enroll any of

these beneficiaries, except for active duty members themselves, who

6

The National Defense Authorization Act for Fiscal Year 1996, P.L. 104-106, section 714.

7

Includes members of the Coast Guard and the Commissioned Corps of the Public Health Service and

of the National Oceanic and Atmospheric Administration, who are also eligible for military health care.

Page 3 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

generally must receive their care at military hospitals or clinics. At the

beginning of fiscal year 1996, the USTFs had 124,012 members and an

appropriated funding level of $339 million.8

 Table 1 lists the locations,

enrollment, and appropriations for each of the USTFs.

Table 1: USTF Enrollment and

Appropriation, FY 1996

USTF Location

FY 1996

enrollment

FY 1996

appropriation

Bayley Seton Hospital Staten Island, N.Y. 15,772 $53,236,085

Brighton Marine Public

Health Care Center

Boston, Mass.

11,892 40,010,161

Johns Hopkins Medical

Services Corporation

Baltimore, Md.

23,881 57,020,329

Lutheran Medical Center Cleveland, Ohio 6,570 13,915,480

Martin’s Point Health Care

Center

Portland, Me.

18,795 41,340,896

Pacific Medical Center

and Clinics

Seattle, Wash.

20,048 58,802,354

Sisters of Charity

Hospitalsa

Texas

27,054 75,022,395

Total 124,012 $339,347,700

aSisters of Charity Hospitals operates three USTF facilities in Texas (St. John’s Hospital, Nassau

Bay; St. Joseph’s Hospital, Houston; and St. Mary’s Hospital, Port Arthur). Sisters of Charity

recently sold its fourth USTF facility, St. Mary’s Hospital, Galveston, to the University of Texas

Medical Branch, and it is no longer a USTF.

The USTFs provide health care under individual participation agreements,

which DOD negotiates with each facility on behalf of itself and the

Departments of Health and Human Services and Transportation. DOD’s USTF

program provides only a part of each facility’s total business because the

facilities also provide services for private insurance, Medicare, and other

patients. Beneficiaries who enroll in the USTF program agree on the

application form not to use other DOD health care sources or the Medicare

program.

In fiscal year 1994, at the Congress’ direction, DOD implemented a USTF

managed care program to control rising care costs. This program, which is

similar to a health maintenance organization (HMO), is characterized by

(1) the formation of provider networks to deliver a full spectrum of

inpatient and outpatient care, (2) enrollment of beneficiaries, and (3) a

8

In addition to DOD’s covered beneficiaries, this appropriation includes amounts for the Department of

Transportation’s Coast Guard beneficiaries and the Department of Health and Human Services’

Commissioned Corps beneficiaries of the Public Health Service and the National Oceanic and

Atmospheric Administration.

Page 4 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

capitated reimbursement system under which each USTF is paid a monthly

sum for each enrolled member in return for the USTF’s provision of all

needed care for the member. Appendix II provides more detailed funding

and enrollment information.

The capitation payments made to the USTFs are to cover all the medical

care a member would need. Thus, if another government program (such as

Medicare or CHAMPUS) is billed for any care a USTF member receives and the

bill is paid, the government is paying unnecessarily for that care because it

has already paid the USTF in advance for all USTF members’ care. Similarly,

if a USTF member receives care at a military hospital, the government

incurs costs unnecessarily for care it has already paid for.

The USTFs offer their members the full CHAMPUS benefit package plus some

additional preventive services not already covered by CHAMPUS. But unlike

CHAMPUS, USTF members do not lose their participation rights when they

reach age 65 and become Medicare-eligible. At the beginning of fiscal year

1996, 22 percent (about 27,000) of the USTF members were

Medicare-eligible. Figure 1 shows the breakdown, by facility, of USTF

Medicare-eligible members compared with all members.

Page 5 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

Figure 1: Medicare-Eligible USTF

Members Compared With Total

Members, FY 1996

Number of Enrollees

0

5000

10000

15000

20000

25000

Bayley Seton

Brighton Marine

Johns Hopkins

Lutheran Medical

Martin’s Point

Pacific Medical

Sisters of Charity

USTFs

Medicare-Eligible

Total Enrollment

The MHSS is moving from a system of direct care in military facilities and

CHAMPUS to TRICARE, DOD’s nationwide managed care program. TRICARE

implementation is aimed at improving access to high-quality care while

containing cost growth. DOD’s goal is to have TRICARE implemented

nationwide by September 1997. TRICARE involves managing beneficiary

care using all available military hospitals and clinics, supplemented by

contracted civilian services. TRICARE features three benefit options,

offering CHAMPUS-eligible beneficiaries two new additional health care

choices: (1) TRICARE Standard, the current fee-for-service CHAMPUS

program; (2) TRICARE Extra, a preferred provider option; and

(3) TRICARE Prime, an HMO-like alternative that provides comprehensive

medical care to beneficiaries through an integrated network of military

and contracted civilian providers. The USTF managed care program is

Page 6 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

similar to TRICARE Prime. Appendix III contains details about TRICARE’s

three options.

The fiscal year 1996 National Defense Authorization Act contained a

number of provisions relevant to DOD’s future relationship with the USTFs.

First, it made the participation agreements between the USTFs and DOD

subject to the Federal Acquisition Regulation (FAR),9 from which the USTFs

had been previously exempt. Now DOD must seek full and open

competition from all qualified managed care providers for the services

previously procured on a sole source basis from the USTFs.10 Second, the

act directed DOD to submit a plan to the Congress addressing the USTFs’

integration into TRICARE. Third, the act requires the USTFs to adopt

TRICARE’s enrollment fees and copayments after October 1, 1996, or the

implementation of TRICARE in the USTF service area, whichever is later. In

that regard, the act directed us to assess and report to the Congress the

effects of adopting such fees and copayments on USTF operations, provided

that the USTFs submitted actuarial estimates in support of their contention

that the extension of such fees and copayments will have an adverse

impact on the operation of the USTFs and the enrollment of participants.11

Unnecessary Costs

Result From USTF

Members’ Use of

Medicare

For fiscal year 1994, HCFA paid over $9.5 million for USTF members’ use of

Medicare services. If the same Medicare usage continues, such

unnecessary costs could approach $38 million when the current USTF

agreements with DOD end in September 1997. Unnecessary costs result

when USTF members, for whose care DOD has prepaid the USTFs a monthly

capitation payment, use Medicare. One reason for this is that federal

statute does not bar USTF members from using both types of care. In other

cases, members may use USTF providers who inappropriately bill Medicare.

Recognizing this, HCFA has agreed to share its Medicare reimbursement

data with DOD so that some cost recovery can be effected from the USTFs.

But under the current DOD and USTF agreements, DOD cannot fully recover

the unnecessary Medicare costs and to date has not recovered any of these

costs. In contrast, DOD can prevent unnecessary payments from USTF

members’ use of military treatment facilities and CHAMPUS.

9

Federal Acquisition Regulation, 48 C.F.R. Part 1.

10The National Defense Authorization Act for Fiscal Year 1996 applies the requirements regarding

competition to any new participation agreement between DOD and the USTFs upon the expiration of

the current participation agreements (P.L. 104-106, section 724).

11See Defense Health Care: Effects of Mandated Cost Sharing on Uniformed Services Treatment

Facilities Likely to Be Minor (GAO/HEHS-96-141, May 13, 1996).

Page 7 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

Millions of Dollars

Needlessly Paid for USTF

Members’ Medicare Use

The unnecessary Medicare payments totaling over $9.5 million made for

USTF members’ health care in fiscal year 1994 are shown in figure 2. The

payments are aggregated by the USTF in which members were enrolled.

Figure 2: Unnecessary Medicare

Payments Made for USTF Members, by

Facility Membership, FY 1994

Dollars in Thousands

0

500

1000

1500

2000

Bayley Seton

Brighton Marine

Johns Hopkins

Lutheran Medical

Martin’s Point

Pacific Medical

Sisters of Charity

USTF

Notes: Sisters of Charity includes four hospitals.

This figure does not include $1.2 million in physician services for USTF members whose place of

enrollment could not be verified.

These Medicare payments cover such medical services as care received in

both inpatient and outpatient settings as well as physician services and

skilled nursing facilities. Because Medicare covers some medical services

that the USTFs do not, such as end-stage renal disease treatment and

chiropractic care, we did not include such services in our analysis. For a

more detailed description of our analysis, see appendix I. Figure 3 shows

unnecessary Medicare payments for fiscal year 1994 by type of medical

service.

Page 8 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

Figure 3: Unnecessary Medicare

Payments, by Service Category,

FY 1994

30% • Physician/Supplier

59%•

Inpatient

•

8%

Hospital Outpatient

•

4%

Skilled Nursing Facility

Note: Numbers add to more than 100 percent because of rounding.

As shown in figure 3, 67 percent, or $6.3 million, of the unnecessary

Medicare payments were for inpatient and outpatient care. USTF members

receive such care at USTF hospitals or at hospitals under contract to the

USTFs. Although the hospitals under contract to the USTFs have agreed to

bill the USTFs for medical services to USTF members, no control exists to

prevent them, or the USTFs themselves, from billing Medicare if the

member is also Medicare-eligible. In these cases, non-USTF hospitals have

no knowledge that Medicare-eligible patients are USTF members unless the

members specifically tell them. Our analysis showed that 78 percent of the

payments were in this category. Conversely, 22 percent ($1.4 million) of

the unnecessary Medicare payments for USTF members’ inpatient and

outpatient care were made to USTF hospitals, as shown in figure 4. At

present, DOD is not aware of such inappropriate billings by USTF hospitals

and their affiliates. Thus, we believe DOD needs to review the USTF entities’

Page 9 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

billing practices to ensure that Medicare is not continuing to pay for such

services.

Figure 4: Percentage of Unnecessary

Medicare Payments to USTF and

Non-USTF Hospitals, FY 1994

22% • USTF Hospitals

78%•

Non-USTF Hospitals

Note: “USTF hospitals” includes hospitals under contract to USTFs.

Unless effective preventive controls are put in place, the unnecessary

payments are likely to increase in magnitude. For fiscal years 1994, 1995,

and 1996, the total number of USTF members aged 65 and over grew from

19,814 to 27,496—a 39-percent increase. Also, capitation payments for the

USTF Medicare-eligible members continue to account for an increasing

percentage of total capitation payments ranging from almost 40 percent in

fiscal year 1994 to 50 percent in fiscal year 1996. Figure 5 shows the

capitation payments paid to USTFs for fiscal years 1994, 1995, and 1996 for

Medicare-eligible members compared with all members.

Page 10 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

Figure 5: USTF Annual Capitation

Payments for Medicare-Eligible and All

Members, FY 1994-96

Dollars in Thousands

0

50000

100000

150000

200000

250000

300000

1994 1995 1996

Fiscal Year

Payments for Medicare-Eligible Members

Total Payments for All Members

Note: Payment amounts for Medicare-eligible members are estimates based on capitation rates

for Medicare-eligible members.

DOD and HCFA Lack

Explicit Statutory

Authority to Resolve

Problem

Lacking explicit legislative authority, DOD and HCFA are limited in the

actions they can take to prevent USTF members from using Medicare. DOD

requires, for example, that USTF members sign a statement upon

enrollment that they will refrain from using Medicare while a USTF member

or be subject to disenrollment. But, since the USTF program’s future is

uncertain, DOD encourages Medicare-eligible members, on the USTF

enrollment form, to continue paying their Medicare part B premiums to

prevent penalties in the future.12 Also, USTF officials told us that they

advise their Medicare-eligible members not to use Medicare, but cannot

control their actions.

12Medicare part B is a voluntary program financed by enrollee premiums and federal general revenues

and covers physician and a variety of other health care services, such as laboratory and outpatient

hospital services. If the recipient allows coverage to lapse or does not begin participation in part B

immediately upon becoming Medicare-eligible, a penalty is assessed equal to 10 percent per year for

each year the part B coverage is not taken.

Page 11 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

DOD has requested that HCFA insert an automated screen into the USTF

members’ Medicare records to identify and block payments for Medicare

use. However, HCFA believes it lacks the statutory authority to deny

Medicare-eligible USTF members the right to use Medicare. Accordingly,

HCFA cannot institute this simple, yet effective automated control that it

now uses to prevent unnecessary Medicare fee-for-service payments for

beneficiaries enrolled in Medicare-risk HMOs—a civilian equivalent of the

USTFs. For these HMOs, HCFA inserts a screen into the members’ Medicare

records that alerts HCFA not to pay any Medicare claim that may be

submitted because HCFA has prepaid the HMO. In such cases, the patient is

responsible for paying for any unauthorized medical care obtained outside

the HMO.

If a legislative change was made to permit HCFA to automatically screen13

the records of Medicare-eligible USTF members, then members choosing to

receive care from a Medicare provider outside the USTF network would

bear the payment burden (except for emergency and authorized

out-of-area care). Then, if a USTF provider inappropriately billed Medicare

for a member’s care, Medicare would send the bill to the USTF. Currently,

without a screen, HCFA pays for care that DOD has already prepaid the USTFs

to provide.

An alternative legislative course is also available. Currently, DOD does not

have explicit statutory authority to disenroll a USTF member for using

Medicare. If legislation was enacted requiring USTF members aged 65 and

over to elect either to use Medicare or a USTF for all health care for a

specified period of time, and if DOD was authorized to disenroll members

who use Medicare in that period, DOD could promptly act to disenroll

individuals found to have acted contrary to their USTF election. In such

cases, the members would not be liable for the unnecessary Medicare

costs but would lose their USTF eligibility while retaining their entitlements

to Medicare and space-available care at military treatment facilities.

Without such legislative authority, HCFA officials have made clear that any

Medicare usage data they supply to DOD should not be used for an adverse

purpose, such as member disenrollment.

After lengthy negotiations, DOD and HCFA have agreed to share data in an

attempt to document the extent of Medicare usage. Using these data, DOD

plans to recoup a portion of the unnecessary Medicare payments from the

USTFs by reducing their future capitation payments. But the recoupment

13HCFA estimated that the one-time cost of changing its systems to screen USTF members would be

$190,715. In discussing our draft report, HCFA officials told us that this estimate may need to be

amended to include system maintenance costs, but they gave no new estimate.

Page 12 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

will be based on a complex formula (see app. IV) negotiated between DOD

and the USTFs that limits the risk to the USTFs. The costs incurred by

Medicare will still be higher than the costs recouped by DOD. Also, because

the formula reduces future USTF capitation payments based on Medicare

claims from an earlier period, no provision exists for DOD to recoup

unnecessary Medicare costs that may occur in fiscal year 1997, when the

USTF participation agreements expire. Since the USTF managed care

program began in October 1993, none of these unnecessary costs have

been recovered from the USTFs.

DOD Has Curbed USTF

Members’ Use of Military

Treatment Facilities and

CHAMPUS

In contrast with Medicare, automated controls are in place to prevent

military treatment facilities from providing care to USTF members. When a

patient enters a military treatment facility for care, the admissions

personnel check the patient’s military identification number against data

in the automated Defense Enrollment Eligibility Reporting System (DEERS).

DEERS indicates whether the individual is enrolled in a USTF and thus

ineligible for treatment at a military treatment facility. Thus, as long as the

DEERS information is kept accurate and current, and the system is routinely

checked, a military facility should know not to treat a USTF member. Our

limited data match of 100 members’ names at two locations found only one

instance of military hospital use by a USTF member.

Concerning CHAMPUS, controls appear adequate to prevent unnecessary

payments for health care services to USTF members. For every claim

submitted, the CHAMPUS system automatically queries DEERS about

eligibility. Thus, any medical claim submitted to CHAMPUS by a USTF

member is rejected. Although we did not independently assess the CHAMPUS

claims processing system, contractor audits of the system revealed few

errors regarding eligibility.14

Other Cost and Equity

Issues Likely to Affect

the USTFs’ Future

In addition to the unnecessary Medicare costs, other issues need to be

addressed as the Congress deliberates the USTF program’s reauthorization.

One issue is how to most cost-effectively serve the health care needs of

the current USTF members, given DOD’s nationwide implementation of

TRICARE and its mandate that it be no more costly than DOD’s current

costs under CHAMPUS and the military treatment facilities. Several

congressional and DOD studies have shown that the USTF program may not

be as cost-effective as CHAMPUS and other health care sources. And

14CHAMPUS contractors audit claims for payment errors every quarter. Included in the payment error

category is eligibility determination.

Page 13 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

questions of cost and equity have arisen with respect to the USTFs’

prospective role as TRICARE providers.

Studies Document USTFs’

Comparative Costliness

In a 1988 study,15 we reported that USTFs were no more costly than

comparable fee-for-service CHAMPUS providers. We recommended in

subsequent testimony that in light of changes then being made to the USTF

reimbursement method, the question should be periodically reevaluated.16

Since then, the USTFs have changed to managed care, and CHAMPUS benefits

have been scaled back in an effort to contain costs. Several subsequent

studies have found that the USTFs now may be more costly than CHAMPUS

and other health care sources.

A 1994 study by Lewin-VHI for DOD compared the cost-effectiveness of the

USTF program with CHAMPUS and the military treatment facilities.17 The

study found that if the USTF program ended and its members had to rely for

their care on CHAMPUS or military hospitals, DOD’s costs could be reduced

by an estimated $93 million to $146 million per year. Lewin-VHI also

estimated that, for those aged 65 and over, USTF program costs were 10

times higher than what DOD’s costs would be in the MHSS.

18 This is because

the USTF managed care program provides to those aged 65 and over

benefits that are not available in CHAMPUS and on a space-available-only

basis in military treatment facilities. Moreover, the study concluded that to

be budget neutral, the program should increase beneficiary cost sharing

and impose enrollment fees for members under age 65, and ensure that all

members receive all their care through the USTF.

Also in 1994, a congressionally mandated study by the Congressional

Budget Office (CBO) addressed the USTFs’ comparative cost-effectiveness

with the MHSS and also with civilian HMOs.19 Similar to Lewin-VHI’s findings,

the study estimated that, for those beneficiaries aged 65 and over, USTF

15Defense Health Care: Cost of Care at Selected Uniformed Services Treatment Facilities

(GAO/HRD-88-67, Mar. 22, 1988).

16Costs of Care at Selected Uniformed Services Treatment Facilities (GAO/T-HRD-88-22, Sept. 28,

1988).

17Review of the USTF Managed Care Plan, submitted to the Assistant Secretary of Defense (Health

Affairs) (Fairfax, Va.: Lewin-VHI, Apr. 26, 1994).

18Although, as estimated, DOD’s costs would be reduced if the population aged 65 and over did not use

USTFs, the total cost to the government might not change, because many of these individuals would

switch to Medicare.

19CBO Memorandum: Evaluating the Uniformed Services Treatment Facilities (Washington, D.C.: CBO,

June 1994).

Page 14 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

program costs were eight times greater, or $95 million more per year, than

what DOD’s costs would be in the MHSS. CBO also estimated that the eight

USTFs not located near military hospitals had costs 16 to 18 percent higher

for caring for retirees and other beneficiaries under age 65 than what DOD’s

costs would be in the MHSS. This is because beneficiaries use CHAMPUS in

areas not located near military treatment facilities, and CHAMPUS requires

beneficiary cost sharing, which reduces the government’s overall costs.

CBO’s work also suggested that USTF capitation rates were higher than the

premiums of civilian HMOs.

Regarding the beneficiary cost-sharing findings of these studies, the fiscal

year 1996 National Defense Authorization Act requires USTFs to adopt the

uniform benefit cost shares and enrollment fees applicable to TRICARE

after October 1, 1996, or the implementation of TRICARE in the USTF

service area, whichever is later. The resulting higher beneficiary cost

sharing may help lower DOD’s overall costs for the USTF program.

A 1996 congressionally mandated study by the Institute for Defense

Analyses also considered the cost-effectiveness issue.20 The study

estimated that the USTF program cost DOD over $193 million more per year

than what costs would be if the members had to rely on the MHSS for their

care. Considering overall government costs, the Institute estimated that

the USTFs cost about $110 million more per year than what costs would be

in the MHSS combined with Medicare coverage. Similar to the studies by

Lewin-VHI and CBO, the study also estimated that, for those aged 65 and

over, USTF program costs were eight times greater, or $115.5 million more

per year, than what DOD’s costs would be in the MHSS. Moreover, for those

USTF members under age 65 who are active duty dependents, the study

estimated that USTF program costs were 30 percent higher than what DOD’s

costs would be in the MHSS. The Institute also noted that high numbers of

USTF members have private insurance coverage and may be receiving care

outside the USTF, despite DOD’s capitation payment to the USTF on their

behalf to cover all of their care. The study results are currently under

consideration by DOD and the affected parties.

USTFs’ Inclusion in

TRICARE Remains

Undecided

DOD’s policy has been that USTFs eventually would be made part of

TRICARE on an equal footing with other contract providers.21 With this

policy, DOD’s aim was to provide a level playing field for TRICARE’s

20Summary of IDA’s Evaluation of the Uniformed Services Family Health Plan (Washington, D.C.:

Institute for Defense Analyses, Jan. 1996).

2160 Fed. Reg. 52090.

Page 15 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

managed care programs and ensure beneficiary equity. The 1996 National

Defense Authorization Act requires DOD to report to the Congress on how

the USTFs could become TRICARE entities. In response, DOD formed a

working group with USTF representatives and has drafted guiding

principles for the transition.

Essentially, the guiding principles call for the USTFs to be distinct MHSS

components; managed by TRICARE’s regional lead agents; allowed to

retain their currently enrolled members, including Medicare-eligible

members and those who became Medicare-eligible while still USTF

enrollees; and paid a per member capitation payment by DOD based on

local health care market costs. In addition, the USTFs and DOD Health

Affairs officials negotiated legislative language for the proposed fiscal year

1997 Defense Authorization Act that is now under consideration by the

authorizing congressional committees. The legislation would essentially

implement the guiding principles and specifically provide relief from FAR’s

competitive requirements as they pertain to the participation agreements

so as to maintain DOD’s current sole source contractual relationship with

USTFs.

DOD Proposes That USTFs

Retain Noncompetitive Status

Under Tricare

DOD proposes that under TRICARE the USTFs should largely retain their

current, noncompetitive status. Under this arrangement, the USTFs would

be uniquely authorized to enroll Medicare-eligible beneficiaries aged 65

and over who would otherwise essentially lose their access to military

health care under TRICARE.

Under TRICARE, civilian health care companies compete for each of the

seven regional managed care support contracts under which they manage,

within each designated area, all DOD beneficiaries’ health care that is

provided outside of the military treatment facilities. Each designated area

has one managed care support contractor that, in turn, develops a network

of providers within that area for the actual health care delivery. Under the

proposed DOD plan, the USTFs would remain outside of this network of

providers. Not only would the USTFs be allowed to keep their current

enrollment of beneficiaries aged 65 and over, but they would be allowed to

negotiate their capitation rates noncompetitively with DOD directly,

whereas, under the TRICARE managed care support contracts, providers

must compete.

USTF Enrollment of

Medicare-Eligibles Creates

Inequities

Along with the government’s comparatively higher health care costs for

USTF Medicare-eligible members, the USTF program allows a small number

of beneficiaries to enjoy a benefit not now available to the majority of

Page 16 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

military retirees. For example, USTFs enroll about 27,000 Medicare-eligible

beneficiaries who receive DOD-funded care largely free to them. But DOD’s

other 1.2 million retirees aged 65 and over now rely—and will do so under

TRICARE—on space-available access to military treatment facilities.

Alternately, they may rely on Medicare, which does not cover such

necessities as pharmaceuticals. TRICARE’s goal of bringing as much

CHAMPUS care as possible into military treatment facilities, thus reducing

their resource availability, may further exacerbate the equity issue by

squeezing out still more retirees who do not have access to such facilities.

The USTFs alternatively have proposed that they act as Medicare providers

to treat individuals aged 65 and over and be reimbursed by HCFA, and that

DOD’s reduced capitation payment for these individuals should cover such

added benefits as preventive, pharmaceutical, and optical services. Among

other problems, however, such an arrangement (referred to as Option II),22

would not remove the inequity issue in guaranteeing full health care

coverage for only a fraction of DOD’s older retiree community.

Conclusions In recent years, the Congress has increasingly been concerned about the

cost of the USTF program, partly because some members retain dual

eligibility for other federal health care sources. Additionally, questions

have arisen about the role that the USTFs should play as TRICARE

providers. DOD is implementing its nationwide TRICARE program in the

current environment of budget reductions and related attempts to control

health care costs. Therefore, whether the USTFs are as cost-effective as

alternative sources of care has become an issue.

In instances where DOD has clear authority to minimize USTF members’ use

of other potential health care sources, DOD has instituted controls that

prevent unnecessary payments for these services. However, DOD does not

have explicit legal authority to prevent unnecessary payments for health

care to Medicare-eligible USTF members because of their dual eligibility.

Accordingly, USTFs have relied on providers and members to not use

Medicare, but this reliance has not proven effective as a control. As a

result, unnecessary Medicare payments have been and continue to be

22Option II is a USTF proposal that would designate the USTFs as Medicare-risk HMOs and permit

them to seek reimbursement from Medicare for Medicare-covered services provided to beneficiaries

enrolled in the USTF health care program. In addition, this option would provide, for DOD

beneficiaries, additional benefits such as pharmaceutical, optical, and preventive care services, which

would supplement a beneficiary’s Medicare benefits and require copayments identical to those

required in TRICARE Prime. The 1996 National Defense Authorization Act directed DOD to address

the feasibility of implementing Option II in its report to the Congress on its plan for integrating the

USTFs into TRICARE.

Page 17 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

made for services to USTF members. Unless action is taken, the magnitude

of the problem will grow as the age of the USTF population advances.

Although DOD has developed a method for recovering some of the

capitation payments it has made to USTFs, this method allows for

recovering only a portion of the money unnecessarily spent by the

government. As yet, no money has been recovered.

In our view, DOD needs to reconsider its current plans to seek to retain its

noncompetitive contractual relationship with the USTFs. In effect, with its

current relationship, the USTFs have a business advantage relative to other,

competitive TRICARE providers. Also, allowing the USTFs to continue to

provide comprehensive health care for some Medicare-eligible members

would be inequitable relative to the care the majority of such beneficiaries

can obtain under TRICARE. This inequity would increase as the

space-available care in military treatment facilities for TRICARE’s

beneficiaries aged 65 and over is further reduced. Rather, DOD needs to

weigh the merits of having the USTFs compete on an equal footing with

other TRICARE health care providers for care delivered outside the

military facilities. At issue is what is the best, most cost-effective way to

provide high-quality health care to uniformed services beneficiaries.

Matters for

Congressional

Consideration

To prevent unnecessary costs to the government from USTF members’

Medicare use, the Congress should consider

• deeming USTFs Medicare-risk HMOs under the Social Security Act’s section

1876(a)(3) for the limited purpose of allowing HCFA to identify and block

payments for the costs of services incurred by dually eligible members or

• requiring Medicare-eligible members to elect whether to receive care from

a USTF or under Medicare for a specified time period and authorizing the

Secretary of Defense to disenroll USTF members who act contrary to their

election not to use Medicare.

Also, the Congress should consider specifying in the authorizing

legislation whether USTFs should continue as sole source contractors

under TRICARE, and whether USTF members should be treated differently

from all other DOD beneficiaries who receive medical services under DOD’s

managed care support contracts and direct care system.

Page 18 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

Recommendations to

the Secretary of

Defense

We recommend that the Secretary of Defense direct the Assistant

Secretary of Defense, Health Affairs,

• pending action on the matters for congressional consideration in this

report, to include, in all future USTF agreements, a method for directly and

fully offsetting all unnecessary Medicare payments from the USTFs;

• to review USTF network providers who have inappropriately billed

Medicare for USTF members’ care and, as appropriate, require providers to

reimburse Medicare for unnecessary payments and bill the USTFs for such

costs; and

• to reconsider continuing the USTFs’ sole source contractual relationship

with DOD under TRICARE, including whether USTF members should be

treated the same way all other DOD beneficiaries are treated under DOD’s

managed care support contracts and direct care system.

DOD and USTF

Comments and Our

Evaluation

We obtained comments on a draft of this report from DOD, USTF, and HCFA

officials.

DOD officials stated that they agree with our recommendation to include, in

all future USTF agreements, a method for directly and fully offsetting all

unnecessary Medicare payments from the USTFs. They also fully agreed

with our recommendation concerning inappropriate Medicare billings by

USTF network providers and stated that the data match between DOD and

HCFA will enable them to identify noncompliant USTF providers.

DOD officials emphasized that competition is important in the purchase of

health care services and that providers’ rates should be competitive and

services’ costs should be no greater than the costs of the TRICARE

program. But, in responding to our recommendation, DOD officials declined

to comment on the appropriateness of retaining a sole source contractual

relationship with the USTFs under TRICARE.

We believe that DOD has the authority to reconsider its plan to maintain

such relationships with the USTFs. Because DOD did not indicate its

willingness to do so and in light of the legislation now pending in the

Congress, we have also added to the report a matter for consideration of

the Congress that in deliberating the USTFs’ reauthorization it consider the

fairness of the USTFs’ continuing as sole source DOD contractors under

TRICARE, including whether USTF members should be treated the same

way all other DOD beneficiaries are treated under DOD’s managed care

support contracts and direct care system.

Page 19 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

Furthermore, DOD officials acknowledged the inequity that exists because

some Medicare-eligibles receive full medical care at USTFs, whereas the

majority of such DOD beneficiaries must access care through military

treatment facilities on a space-available basis. They said that they are

pursuing an approach whereby Medicare would help pay for such

beneficiaries’ care in military treatment facilities to try to address this

inequity.

DOD also suggested some technical changes to the report, which we

incorporated as appropriate.

USTF officials expressed concern that the report implies that the USTFs are

responsible for the unnecessary Medicare payments problem. They stated

that they did not create the problem, have limited means to stop its

occurrence, and have not been given the tools to control it. In addition,

these officials stated that the USTFs are the only organizations that have

acted to limit the government’s exposure to unnecessary Medicare

payments, but that the report is silent on this.

We disagree that the report assigns fault to the USTFs and state in the

report that the problem results from the dual eligibility of USTF members

who are aged 65 and over. While we agree that the USTFs have

implemented some measures to help address the problem, such as

developing guidelines in 1994 for handling affiliated providers that violate

their agreement not to bill Medicare for USTF members’ care, we did not

discuss these measures because our analysis showed they do not prevent

the problem from occurring.

Furthermore, USTF officials disagreed that they should be responsible for

full reimbursement of their members’ unnecessary Medicare payments.

Because DOD’s capitated USTF payments cover all the health care of

members who actually use Medicare, we continue to believe that DOD

should fully recover the unnecessary Medicare costs from the USTFs so the

government does not pay twice for such care.

USTF officials disagreed with the findings of the Lewin, CBO, and Institute

for Defense Analyses studies cited in our report, stating that these studies

consider the USTFs’ cost-effectiveness relative to CHAMPUS and DOD’s direct

care system costs, not the federal government’s total costs. But under

TRICARE, DOD has been required by congressional mandate to ensure that

its costs under TRICARE not exceed what costs would have been under

CHAMPUS and the direct care system. Thus, studies of the USTFs’ costliness

Page 20 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

relative to DOD’s other system costs are directly relevant to whether and

how the USTFs should be made a part of TRICARE. Also, our report points

out that if the USTF population aged 65 and over were to leave the USTFs

and switch to Medicare, the federal government’s total costs for such

beneficiaries might not change—except that the current overlapping

Medicare and DOD costs for some such members would be eliminated.

Regarding USTF care for Medicare-eligible DOD beneficiaries, USTF officials

stated that inequities exist throughout the MHSS, and our report did not

discuss these other inequities. We agree that other inequities may exist in

the MHSS, but this report specifically addressed the USTF program.

USTF officials stated that we distorted the competition issue and that when

TRICARE is fully established, the USTFs will compete equally for DOD

beneficiaries on the basis of their network design, care, quality, reputation,

access, and value-added services. We disagree, and continue to believe

that if the USTFs retain their noncompetitive contractual relationship with

DOD under TRICARE, they will have a decided business advantage over

other, competitive TRICARE providers.

In discussions with us, HCFA officials stated that identifying and blocking

payments in the Medicare system for USTF members aged 65 and older is a

reasonable solution to the unnecessary payment problem, but

implementation details will have to be worked out. We agree.

HCFA officials also stated that our report alternatively suggests that the

Congress consider enacting legislation requiring USTF members aged 65

and older to elect either USTF care or Medicare, and authorizing DOD to

disenroll members who inappropriately use Medicare. The officials stated,

however, that in negotiations with DOD regarding HCFA’s providing DOD data

on USTF members’ Medicare use, DOD agreed that no member would be

disenrolled on the basis of the released Medicare data. Nevertheless, we

believe that the enactment of legislation expressly granting DOD authority

to disenroll such USTF members would remove any current statutory

impediments to DOD’s using the HCFA-provided data for that purpose.

The HCFA officials stated that the report’s estimated cost for adjusting their

Medicare system to screen USTF members may need to be amended to

include the costs of maintaining the process once in place. Although they

provided no amended cost estimate, we have acknowledged this

possibility in the report.

Page 21 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
B-265686 

We are sending copies of this report to the Secretaries of Defense, Health

and Human Services, Transportation, and Commerce; and the USTFs. We

will make copies available to others upon request.

If you have any questions about this report, please call me on

(202) 512-7111. Other GAO contacts and staff acknowledgments are listed in

appendix V.

Stephen P. Backhus

Associate Director, Health Care Delivery

 and Quality Issues

Page 22 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Page 23 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Contents

Letter 1

Appendix I 

Scope and

Methodology

26

Appendix II 

USTF Program

Information

28

Appendix III 

Background on

TRICARE

30

Appendix IV 

Medicare Recoupment

Formula

33

Appendix V 

Contacts and Staff

Acknowledgments

37

Tables Table 1: USTF Enrollment and Appropriation, FY 1996 4

Table II.1: Capitation Payments Made to USTFs, FY 1994-96 28

Table II.2: USTF Managed Care Program Enrollment by USTF

Facility, FY 1994-96

28

Table II.3: Fiscal Year 1996 USTF Enrollment and Percentage of

Medicare-Eligible Members

28

Table II.4: Allocation of USTF Managed Care Program

Appropriations

29

Table II.5: USTF Operators 29

Table IV.1: USTF Share of Unnecessary Payments 36

Figures Figure 1: Medicare-Eligible USTF Members Compared With Total

Members, FY 1996

6

Page 24 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Contents

Figure 2: Unnecessary Medicare Payments Made for USTF

Members, by Facility Membership, FY 1994

8

Figure 3: Unnecessary Medicare Payments, by Service Category,

FY 1994

9

Figure 4: Percentage of Unnecessary Medicare Payments to USTF

and Non-USTF Hospitals, FY 1994

10

Figure 5: USTF Annual Capitation Payments for

Medicare-Eligible and All Members, FY 1994-96

11

Figure III.1: Map of USTFs and TRICARE Regions 32

Abbreviations

CBO Congressional Budget Office

CHAMPUS Civilian Health and Medical Program of the Uniformed

Services

DEERS Defense Enrollment Eligibility Reporting System

DOD Department of Defense

FAR Federal Acquisition Regulation

HCFA Health Care Financing Administration

HMO health maintenance organization

MHSS Military Health Services System

USTF Uniformed Services Treatment Facility

Page 25 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix I 

Scope and Methodology

In conducting our review, we examined USTF program documents obtained

from DOD and the USTFs. We examined the legislative history of the USTFs

and the Medicare and USTF statutes, and reviewed DOD policies and

regulations affecting the USTFs. We interviewed USTF officials from three

USTFs, the USTF Conference Group, officials from the Health Care Financing

Administration (HCFA) responsible for the Medicare program, and DOD

officials from Walter Reed Army Medical Center and Bethesda Naval

Hospital.

We analyzed fiscal year 1994 Medicare part A and part B data relating to

inpatient, outpatient, skilled nursing facility, and physician/supplier claims

for USTF enrollees. We did not analyze data for home health aides and

hospice claims because these services were not covered by the USTF

program in fiscal year 1994. We also did not analyze data regarding durable

medical equipment because the number of claims and dollar amount were

small.

We matched fiscal year 1994 Medicare claims data to the USTF enrollment

file to verify that the claims were for USTF enrollees. We eliminated claims

from our analysis if the date of service was before the individual enrolled

in the USTF program. We also eliminated claims for end-stage renal disease

because Medicare is the primary payer for these claims. In addition, we

eliminated chiropractic claims from the physician/supplier category since

chiropractic care is not a covered benefit in the USTF program.

We could not verify that all the claims for outpatient and

physician/supplier services occurred after the date of USTF program

enrollment because they did not contain the name of the beneficiary. For

physician/supplier services, we took the ratio of the Medicare payment

amount incurred after USTF enrollment to the Medicare payment amount

after matching the HCFA data to the USTF enrollment file and applied this

ratio to the total Medicare payment amount for all fiscal year 1994 claims.

In addition, we obtained data from the USTFs listing USTF contracted

hospitals and compared these data with the Medicare claims data to

determine whether Medicare payments were made to USTF-contracted

hospitals or other hospitals.

To get information on services USTF members received at military

treatment facilities, we obtained a list of USTF members from DOD, which

DOD personnel had entered into the military hospital’s Composite Health

Page 26 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix I 

Scope and Methodology

Care System at Walter Reed Army Medical Center and Bethesda Naval

Hospital.

To obtain information on the CHAMPUS program, we reviewed contractor

monitoring reports from the contractors responsible for monitoring the

CHAMPUS fiscal intermediaries. We also reviewed pertinent sections of the

CHAMPUS operations and automated data processing manuals.

We conducted work at the Office of the Assistant Secretary of Defense

(Health Affairs), Washington, D.C.; Walter Reed Army Medical Center,

Washington, D.C.; Bethesda Naval Hospital, Bethesda, Maryland; the Johns

Hopkins USTF in Baltimore; the corporate headquarters of the Sisters of

Charity, Houston; at two Sisters of Charity USTFs: St. Joseph’s, Houston,

and St. John’s, Nassau Bay; and at the Pacific Medical Center USTF in

Seattle. In addition, we interviewed officials from the USTF Conference

Group in Baltimore, and from the Office of CHAMPUS in Aurora, Colorado.

Page 27 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix II 

USTF Program Information

Table II.1: Capitation Payments Made

to USTFs, FY 1994-96 USTF FY 1994 FY 1995 FY 1996a Total

Bayley Seton $29,042,942 $44,119,093 $11,871,802 $85,033,837

Brighton Marine 35,971,304 38,426,245 9,769,871 84,167,420

Johns Hopkins 44,184,621 51,487,006 13,699,693 109,371,320

Lutheran Medical 10,037,476 12,985,443 3,361,360 26,384,279

Martin’s Point 37,095,034 38,793,141 10,003,219 85,891,394

Pacific Medical 49,539,661 57,604,882 14,515,423 121,659,966

Sisters of Charity 70,014,513 71,893,084 18,615,385 160,522,982

All

facilities $275,885,551 $315,308,894 $81,836,753 $673,031,198

Note: Capitation payments include those for all the uniformed services, including the Army, Navy,

Marines Corps, Air Force, Coast Guard, and the Commissioned Corps of the Public Health Service

and the National Oceanic and Atmospheric Administration.

aFiscal year 1996 data are for the first quarter only.

Table II.2: USTF Managed Care

Program Enrollment by USTF Facility,

FY 1994-96

USTF FY 1994 FY 1995 FY 1996

Bayley Seton 8,574 13,858 15,772

Brighton Marine 10,290 11,411 11,892

Johns Hopkins 16,832 21,847 23,881

Lutheran Medical 3,878 6,001 6,570

Martin’s Point 14,334 18,047 18,795

Pacific Medical 16,064 20,439 20,048

Sisters of Charity 24,720 26,903 27,054

All facilities 94,692 118,506 124,012

Table II.3: Fiscal Year 1996 USTF

Enrollment and Percentage of

Medicare-Eligible Members USTF

FY 1996

enrollment

Percentage who are

Medicare-eligible

Bayley Seton 15,772 24

Brighton Marine 11,892 29

Johns Hopkins 23,881 17

Lutheran Medical 6,570 12

Martin’s Point 18,795 14

Pacific Medical 20,048 32

Sisters of Charity 27,054 23

All facilities 124,012 22

Page 28 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix II 

USTF Program Information

Table II.4: Allocation of USTF Managed

Care Program Appropriations USTF FY 1994 FY 1995 FY 1996

Bayley Seton $29,695,800 $45,600,000 $53,236,085

Brighton Marine 36,776,800 38,700,000 40,010,161

Johns Hopkins 45,290,300 52,000,000 57,020,329

Lutheran Medical 15,641,000 14,400,000 13,915,480

Martin’s Point 42,300,500 39,200,000 41,340,896

Pacific Medical 49,539,600 59,000,000 58,802,354

Sisters of Charity 75,756,000 72,100,000 75,022,395

All facilities $295,000,000 $321,000,000 $339,347,700

Notes: This table lists the budget ceiling DOD has established for each USTF program based on the

total USTF appropriation.

Appropriations include those for the Army, Navy, Marine Corps, Air Force, Coast Guard, and the

Commissioned Corps of the Public Health Service and the National Oceanic and Atmospheric

Administration.

Table II.5: USTF Operators

USTF Operator

Bayley Seton Sisters of Charity Health Care System

Brighton Marine Allston-Brighton Aid & Health Group, Inc.

Johns Hopkins Johns Hopkins Health Systems

Lutheran Medical Fairview Health System

Martin’s Point Penobscot Bay Medical Association

Pacific Medical Pacific Hospital Preservation Development

Authority

Sisters of Charity Sisters of Charity of the Incarnate Word

Note: The operators are the owners of the USTF facilities.

Page 29 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix III 

Background on TRICARE

Following years of demonstration programs that tested alternative health

care delivery mechanisms, DOD designed TRICARE, a managed health care

program. The program is intended to ensure a high-quality, consistent

health care benefit, preserve choice of health care providers for

beneficiaries, improve access to care, and contain health care costs. DOD

began implementing TRICARE in 1993 and expects to complete

implementation by September 1997.

TRICARE is significantly changing the military health care system. It offers

beneficiaries alternatives to the current CHAMPUS program, such as the

option of using a health maintenance organization (HMO) that will lower

cost sharing when beneficiaries agree to limitations on their choice of

physicians. To implement and administer the TRICARE program, DOD has

reorganized its medical facilities into new health care regions and

established a new administrative structure to oversee the delivery of

health care within the regions. Military medical facilities are organized on

a geographic basis into 12 health care regions, encompassing medical

facilities from all three of the services. The number and service affiliation

of the facilities vary among regions, as do the number of eligible

beneficiaries within in each region’s boundaries. A military medical center

commander has been designated in each region as the lead agent, or health

administrator, supported by a joint-service staff drawn from the region’s

military medical facilities and DOD medical program offices.

One significant feature that has been maintained from the demonstration

programs is the use of contracted civilian health care providers to

supplement the level and type of care provided by the Military Health

Services System (MHSS) on a regional basis. DOD estimates that these

contracts will cost about $17 billion over the 5-year contract period.

TRICARE also incorporates several cost-control features of civilian

managed care programs.

TRICARE features a triple-option benefit, offering beneficiaries eligible for

CHAMPUS two new options for health care in addition to the CHAMPUS

program. The options vary in the choices beneficiaries have in selecting

their physicians and the amount beneficiaries are required to contribute

toward the cost of the care they receive from civilian providers. The first

option, TRICARE Standard, is the current fee-for-service CHAMPUS program.

This option provides beneficiaries with the greatest freedom in selecting

civilian physicians and requires the highest beneficiary cost share. The

second option, TRICARE Extra, is a preferred provider option, through

which beneficiaries receive a 5-percent discount on the Standard option

Page 30 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix III 

Background on TRICARE

cost of care when they choose a medical provider from the contractor’s

network. The third option, TRICARE Prime, represents the greatest

change in MHSS health care delivery. TRICARE Prime is an HMO-like

alternative that provides comprehensive medical care to beneficiaries

through an integrated network of military and contracted civilian

providers. Beneficiaries selecting this option must enroll annually in the

program, agreeing to go through an assigned military or civilian primary

care physician for all care. Low enrollment fees and copaymant features

provide financial incentives for beneficiaries to select this option, the most

highly managed of the three options.

See figure III.1, which shows the locations of the USTFs and the TRICARE

regions.

Page 31 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix III 

Background on TRICARE

Figure III.1: Map of USTFs and TRICARE Regions

11

9,

10, &

12

6

7, 8

1

3, 4

2, 5

Martin's Point

Portland

Brighton Marine

Boston

Bayley Seton

Staten Island

Johns Hopkins

Baltimore

Lutheran Medical

Cleveland

Pacific Medical

Seattle

St. Mary’s

Port Arthur

St. Joseph’s

Houston

St. John’s

Nassau Bay

Sisters of

Charity

Hospitals

Page 32 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix IV 

Medicare Recoupment Formula

This appendix describes the formula negotiated between DOD and the USTFs

to recover unnecessary Medicare payments made on behalf of USTF

members. Under this recoupment formula, DOD would not recover the full

amount of unnecessary Medicare payments. Rather, after the USTFs

confirm the members’ eligibility and verify the Medicare claims data, the

formula converts the data to units—that is, the number of inpatient days

and outpatient visits. The units are adjusted to reflect the difference

between a beneficiary’s experience under Medicare and in managed care.

After removing outlier data such as catastrophic care cases, the formula

assigns the remaining units a dollar value—$600 per inpatient day and $60

per outpatient visit. This total, rather than the total amount of unnecessary

Medicare costs, is the dollar value base unnecessary payments subject to

reimbursement. This base is then divided by the USTFs’ capitation

payments for their Medicare-eligible members, and the resulting

percentage determines the dollar value base for which the USTFs are

responsible. The USTFs are responsible for 100 percent of the derived base

value up to 1 percent of the same year’s capitation payments; 75 percent of

the value between 1 and 4 percent; 50 percent of the value between 4 and

7 percent; and 25 percent of the value between 7 and 10 percent. The

USTFs’ liability is limited to 10 percent of the capitation payments.

Following is the detailed formula that would be used to determine the

amount the USTFs would reimburse DOD for their members’ use of

Medicare.

1. Define the cost to the government.

The cost is the government cost associated with utilization of covered

health care services by Medicare beneficiaries enrolled in the USTF

managed care plan. The cost does not include the following:

• deductibles and copayments paid by the member;

• amounts not allowed by Medicare, such as charges in excess of the

Medicare allowance;

• collection from third parties for deductibles and copayments as allowed;

and

• payments to hospitals other than actual diagnosis related group payments,

such as capital pass-through payments and indirect or direct medical

education.

On the basis of the information DOD/USTFs provide, HCFA furnishes the USTFs

with the names of Medicare beneficiaries with paid claims, the amount of

Page 33 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix IV 

Medicare Recoupment Formula

each claim, date of service, and Social Security number so the claims can

be verified and eligibility confirmed.

2. Determine out-of-plan utilization based on units of service for inpatient

days and outpatient physician visits during the first enrollment period.

On the basis of the information provided by HCFA, the USTFs calculate the

number of inpatient days for each USTF member with Medicare coverage

and the number of outpatient physician visits. (Outpatient visits include

only those involving a physician. Lab tests, for example, are not counted

unless they are part of the physician visit.) The USTFs furnish this

information to DOD for review and comment.

3. Estimate utilization based on HMO experience.

The USTFs manage the care of their Medicare-eligible members. The

utilization experience of USTF members should be substantially less than

the utilization for nonenrolled Medicare beneficiaries. Thus, a USTF is

responsible only for utilization that is consistent with managed care

service. In 1989 the national average for hospital days per 1,000 members

aged 65 and over was 2,930. For individuals enrolled in HMOs who were 65

and older, the utilization was 1,545 days, or 53 percent of the national

experience. HMO members 65 and older had 7 outpatient physician visits

per member per year, approximately 10 percent higher than the national

average of 6.4 visits.

Therefore, the number of utilization units, calculated in step 2 under

Medicare, is adjusted to reflect the difference between the beneficiary

experience under Medicare and in an HMO. The number of inpatient units is

multiplied by .53 to reflect this HMO experience. The number of outpatient

physician visit units is multiplied by 1.1 to reflect this HMO experience. The

sum of these two calculations is the number of units of unnecessary

payments eligible for reimbursement.

4. Determine outliers and remove them from the total number of units of

service eligible for reimbursement.

To protect the USTF from bearing the cost for outlier claims for

non-managed-care services, the outlier claims are removed from the units

eligible for reimbursement. The average inpatient utilization for an HMO

member aged 65 and older is 1.545 hospital days per year. This number is

multiplied by 3 to get 4.635 units per member per year as the outlier

Page 34 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix IV 

Medicare Recoupment Formula

threshold. Units above this threshold for each member are removed from

the total number of inpatient units used to calculate the USTF

reimbursement for unnecessary payments.

5. Determine the value of each unit of service and calculate the value of

unnecessary payments.

Consistent with the individual reinsurance reimbursement, the number of

inpatient units of service allowed by this methodology is multiplied by

$600 and adjusted by the Medicare wage index. The number of outpatient

physician units is multiplied by $60, and the sum of the two calculations is

the dollar amount of unnecessary payments subject to reimbursement.

6. Allocation of unnecessary payments between DOD and the USTFs.

The USTF is responsible for only a portion of any unnecessary payments.

The allocation is subject to a maximum dollar amount based on the

capitation payments the USTF received during the enrollment period. The

USTF is responsible for 100 percent of the value of the unnecessary

payment amount up to 1 percent of its capitation payments for

Medicare-eligible members. If the unnecessary payments amount is greater

than 1 percent of the capitation payments but less than 4 percent, the USTF

is responsible for 75 percent of this amount. If the amount is 4 percent but

less than 7 percent, the USTF is responsible for 50 percent of this amount. If

the amount is 7 percent of the capitation payments but less than

10 percent, the USTF will be responsible for 25 percent of this amount. The

USTF is not responsible for the value of any unnecessary payments beyond

10 percent of the capitation payments for its Medicare-eligible members.

The following example illustrates this allocation band methodology:

(1) USTF has 2,000 Medicare-eligible members.

(2) The average Medicare capitation payment is $6,000 per member per

year.

(3) The total of annual capitation payments for Medicare-eligible members

is $12,000,000.

(4) Unnecessary payments are calculated to be $1.0 million on the basis of

this methodology.

Page 35 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix IV 

Medicare Recoupment Formula

(5) The share of unnecessary payments allocated to the USTF is $40,000, or

25 percent, as shown in table IV.1.

Table IV.1: USTF Share of

Unnecessary Payments Unnecessary payments

as a percentage

of capitation payment

Percentage of

unnecessary payment

USTF is responsible for

USTF share of

unnecessary

payment

0 - 1% 100% $120,000

1% - 4% 75% $270,000

4% - 7% 50% $180,000

7% - 10% 25% $40,000

Any unnecessary costs in excess of the amount determined by this

methodology are not the responsibility of the USTF.

7. Recoupment of USTF portion of unnecessary payment reimbursement.

At the beginning of the second enrollment period after the calculation of

unnecessary payments is made, DOD adjusts the payments made to the USTF

to reflect this amount. At the beginning of the second enrollment period,

the number of Medicare-eligible members is determined by age and

gender. The projected annual capitation payments are calculated by

multiplying the age/gender capitation rates by the number of

Medicare-eligible individuals. The recoupment amount, determined

through the above methodology, is divided by the projected annual

capitation payments to the USTF. The capitation payment for each

Medicare-eligible individual is reduced by this percentage. For example, if

the USTF enrolled 2,000 Medicare-eligibles with an average capitation

payment of $6,000, the projected annual payment for these members will

be $12 million. If the payment amount due, based on the above

methodology, is $610,000, the monthly capitation payment for each

individual is reduced by 5.083 percent for the 12 months in the contract

year. The value of the unnecessary payment amount is determined for

each contract year. The amount of potential reduction in the capitation

payments will vary depending on the actual amount of unnecessary

payments, calculated by this methodology, in each enrollment period.

Page 36 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Appendix V 

Contacts and Staff Acknowledgments

GAO Contacts Daniel M. Brier, Assistant Director, (202) 512-6803

Cheryl Brand, Senior Evaluator, (303) 572-7383

Staff

Acknowledgments

In addition to those named above, the following individuals made

important contributions to this report: Carolyn Kirby and Sigrid McGinty,

Senior Evaluators; Jean Chase, Evaluator; Robert DeRoy, Assistant

Director; Stefanie Weldon, Senior Attorney; and Pamela Tumler,

Communications Analyst.

(101479) Page 37 GAO/HEHS-96-124 USTF Medicare Costs and Other Issues
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100