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------------------------------ Indexing Terms ------------------------------

 REPORTNUM:  HEHS-95-104
     TITLE:  Defense Health Care: Issues and Challenges Confronting 
             Military Medicine
      DATE:  03/22/95
   SUBJECT:  Health care planning
             Health care programs
             Health care cost control
             Military personnel
             Dependents
             Reductions in force
             Health services administration
             Employee medical benefits
             Cost effectiveness analysis
IDENTIFIER:  Military Health Services System
             CHAMPUS
             Civilian Health and Medical Program of the Uniformed 
             Services
             DOD TRICARE Program
             Federal Employees Health Benefits Program
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Cover
================================================================ COVER

Report to Congressional Requesters

March 1995

DEFENSE HEALTH CARE - ISSUES AND
CHALLENGES CONFRONTING MILITARY
MEDICINE

GAO/HEHS-95-104

Defense Health Care Issues

Abbreviations
=============================================================== ABBREV

  AIDS - acquired immune deficiency syndrome
  CBO - Congressional Budget Office
  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services
  CHCS - Composite Health Care System
  CRI - CHAMPUS Reform Initiative
  DEERS - Defense Enrollment Eligibility Reporting System
  DOD - Department of Defense
  GME - graduate medical education
  HMO - health maintenance organization
  MHSS - Military Health Services System
  RFP - request for proposal
  USTF - Uniformed Services Treatment Facility

Letter
=============================================================== LETTER

B-260741

March 22, 1995

The Honorable Dan Coats
Chairman
The Honorable Robert C.  Byrd
Ranking Minority Member
Subcommittee on Personnel
Committee on Armed Services
United States Senate

The Honorable Robert K.  Dornan
Chairman
The Honorable Owen B.  Pickett
Ranking Minority Member
Subcommittee on Military Personnel
Committee on National Security
House of Representatives

The nation's health care system continues to change substantially as
governments, employers, and consumers try to address significant
increases in medical care costs and issues of access to high-quality
medical care.  As a large component of this system, the Department of
Defense's (DOD) military health care system is also confronting
significant challenge and change.  This system performs many
difficult and interrelated missions, including providing medical
services and support to active-duty members of the armed forces both
in peacetime and in war and health care to the families of
active-duty personnel, military retirees, their dependents, and
survivors.  Post-cold war contingency planning scenarios, efforts to
reduce the overall size of the nation's military forces, federal
budget reduction initiatives, and base closures and realignments have
heightened scrutiny of the size and makeup of DOD's health care
system, how it operates, who it serves, and whether its missions can
be satisfactorily carried out in a more cost-effective way. 

In preparation for your Subcommittee's authorization and oversight
responsibilities for military health care, you asked us to describe
the Military Health Services System (MHSS), past problems faced by
DOD as it operated the system and its efforts to overcome those
problems, and the management challenges now confronting DOD. 

This report is based on our past and ongoing work along with studies
done by others.  The work for these reports and studies was conducted
at DOD and Service headquarters in Washington, D.C., military
installations overseas, and many hospitals and offices nationwide. 
We conducted the work for this review in accordance with generally
accepted government auditing standards.\1

--------------------
\1 An annotated bibliography of the reports we have published about
the MHSS, its problems, and DOD's responses to management and
operational challenges appears in appendix IV. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The MHSS is one of the nation's largest health care systems, offering
health benefits to about 8.3 million people and costing over $15
billion annually.  Its primary mission is to maintain the health of
1.7 million active-duty service personnel\2 and to be prepared to
deliver health care during times of war.  Also, as an employer, DOD
offers health care services to 6.6 million nonactive-duty
beneficiaries.  These services are provided through a system of
medical centers, smaller hospitals, and clinics worldwide, and
through a DOD-administered insurance-like program called the Civilian
Health and Medical Program of the Uniformed Services (CHAMPUS).  In
fiscal year 1995, DOD expects to spend about $11.6 billion providing
care directly to its beneficiaries and about $3.6 billion for
CHAMPUS. 

We and others have reported on concerns about DOD's ability to meet
its wartime mission, most recently following the Persian Gulf War. 
These reports described problems such as inadequate training, missing
equipment, and large numbers of nondeployable personnel as serious
threats to the Department's ability to provide adequate medical
support to deployed forces.  The changing world environment--which
generates different demands for care with a smaller force--poses
continuing challenges to medical readiness.  DOD is currently
examining the impact of these new challenges to determine the optimal
size and structure of the medical force. 

DOD, in the past decade, has experienced many of the same challenges
confronting the nation's health care system--increasing costs, uneven
access to health care services, and disparate benefit and
cost-sharing packages for similarly situated categories of
beneficiaries.  In response to these challenges, DOD initiated, with
congressional authority, a series of demonstration programs around
the country designed to explore various means by which it could more
cost effectively manage the care it provides and funds.  The
experiences of these demonstration programs provided many valuable
lessons and has enabled DOD to become one of the nation's leaders in
the managed care arena. 

These experiences also led the Department, in 1993, to begin a
nationwide managed care program, called TRICARE, to improve
beneficiary access to high-quality care while containing the growth
of the system's costs.  This program, which, because of its
complexity, is being implemented over a 3-year period, calls for
coordinating and managing beneficiary care on a regional basis using
all available military hospitals and clinics supplemented by
contracted civilian services.  As DOD implements its TRICARE program,
several operational challenges are emerging that must be addressed if
the program is to achieve its goals.  These range from deciding the
appropriate authorities of regional health administrators to
constructing networks adequate to serve all beneficiaries in each
region. 

As the Congress and the Department plan for the future, decisions
about the appropriate size of the military health care system will be
of paramount importance.  DOD's ability to use TRICARE to adequately
augment a downsized medical care system and its ability to
successfully address the operational challenges to TRICARE are key to
the program's future utility as the principal means by which DOD will
provide care to its beneficiaries.  If TRICARE falls short of its
stated objectives, other options, such as including military
beneficiaries under the Federal Employees Health Benefits Program,
may serve as an alternative to TRICARE. 

--------------------
\2 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. 

   THE MHSS SERVES MULTIPLE
   MISSIONS AND MUST MEET A WIDE
   VARIETY OF HEALTH CARE NEEDS
------------------------------------------------------------ Letter :2

The MHSS provides health care in peacetime and wartime settings,
reflecting DOD's responsibility both as an employer and as a provider
of national security in military contingencies and other emergencies
of national concern.  These responsibilities require a unique medical
care system that can successfully deliver high-quality care, ranging
from preventive health maintenance to rapid and sophisticated
treatment of casualties in wartime and emergency situations.  These
wide-ranging requirements have led to the creation of a complex
organization and costly infrastructure that was designed primarily to
meet the needs of a large military force expecting to face a
prolonged and casualty-intensive European war. 

The system consists of 127 military hospitals and medical centers and
500 clinics worldwide and employs about 183,000 military personnel
and civilians with an additional 91,000 medical personnel in the
National Guard and Selected Reserves.  Figure 1 shows the locations
of military hospitals and medical centers in the United States. 

   Figure 1:  Military Hospitals
   and Medical Centers in the
   United States

   (See figure in printed
   edition.)

About 19,500 physicians serve in the military of which 13,000 are
active-duty members.  Most of the active-duty physicians received
their medical education through DOD-paid scholarships to civilian
medical schools or through DOD's own 4-year medical school.  In
addition, many physicians receive specialty training through DOD's
extensive graduate medical education program, which offers 77 medical
specialties and subspecialties.  DOD also conducts an extensive
medical research program in environmental and social disease and
critical injury care. 

Active-duty members and their dependents make up one-half of the
eligible beneficiary population, as shown in figure 2.  The remaining
50 percent are retirees and their dependents and survivors.  Because
many of those eligible for care either have difficulty accessing the
system or have other options, such as private insurance from another
employer or eligibility for other federal programs, only
three-quarters of them regularly use the MHSS. 

   Figure 2:  1995 MHSS Population
   by Beneficiary Category

   (See figure in printed
   edition.)

A more complete description of the MHSS, its wartime and peacetime
operations, beneficiary population, and costs appear in appendix I. 

   PAST AND CURRENT PROBLEMS
   FACING MILITARY HEALTH CARE
------------------------------------------------------------ Letter :3

By most accounts, the DOD medical system has provided adequate care
for both its missions, but doing so has been difficult at times. 

      READINESS ISSUES
---------------------------------------------------------- Letter :3.1

Had the Services incurred the predicted number of casualties during
the Gulf War, their combat medical care units may not have been able
to provide adequate care.  To illustrate, combat medical units were
assigned wartime missions they were not prepared to fulfill.  They
were neither staffed nor equipped to care for the number of
casualties, provide noncombat medical care, support the evacuation of
casualties, or treat large numbers of chemically contaminated
casualties. 

These problems were attributable to several factors.  First,
mobilization plans were out of date and untested.  Second, large
numbers of medical personnel were undeployable because of poor
physical condition or insufficient training.  Third, medical
equipment, supplies, and evacuation assets were insufficient.  While
the Services have efforts under way to address these deficiencies,
the changing world environment will continue to challenge medical
readiness. 

Additionally, a recent DOD study mandated by the National Defense
Authorization Act for fiscal years 1992 and 1993 and known as the
"733 study" questions the size of the current military health care
system, suggesting that DOD has as many as twice the number of
physicians it needs to meet wartime requirements.  Although the
Services have not disagreed with the 733 study results, their
individual estimates produced higher numbers of physicians needed
during peacetime to ensure wartime readiness.  We are currently
evaluating the reasonableness of the 733 study and the Services'
response to it. 

      PEACETIME CARE ISSUES
---------------------------------------------------------- Letter :3.2

Several significant problems have consistently plagued DOD in its
efforts to provide peacetime care--some dating back to the 1970s. 
Many of the challenges parallel those that the nation is facing,
while others are unique to the military.  In the 1980s, for example,
MHSS costs rose more than the nation's, 225 percent to 166 percent,
respectively.  During this period, the medical portion of the Defense
budget doubled, from 3 percent of the total to 6 percent, a trend
that concerns many military leaders.  Figure 3 shows the cumulative
percent change in the total defense budget versus the MHSS budget
since 1989.  Based on the number of those beneficiaries estimated by
DOD to rely on the MHSS for their health care, per capita costs,
adjusted for inflation, have changed only slightly since 1989, as
shown in figure 4. 

   Figure 3:  DOD Total and MHSS
   Budgets, Fiscal Years 1990-1995
   (Nominal Dollars)

   (See figure in printed
   edition.)

   Figure 4:  DOD Cost Per MHSS
   User, Fiscal Years 1989-1995
   (Constant 1995 Dollars)

   (See figure in printed
   edition.)

Beneficiaries have long complained about difficulties accessing care
in military facilities and an inequitable health benefits package. 
Military hospitals vary significantly in size and medical
sophistication and therefore the availability of health care services
also varies from facility to facility.  DOD tests of health care
alternatives have contributed to health benefits and cost-sharing
requirements varying around the country, causing inequity and
confusion among beneficiaries. 

Other management problems that have hampered improvement efforts
include long-standing inter-Service rivalries and overlapping
responsibilities, inadequate information systems, and fraud and abuse
in the CHAMPUS program.  Appendix II describes these matters in more
detail. 

   TRICARE STILL FACES CHALLENGES
------------------------------------------------------------ Letter :4

For several years, with congressional authorization, DOD has been
testing alternative approaches to delivering health care that
incorporate managed health care techniques.  As a result of these
tests, DOD designed TRICARE, a managed care program offering
beneficiaries alternatives to the current CHAMPUS program, such as a
health maintenance organization (HMO) option that will lower cost
sharing when beneficiaries agree to limitations on their choice of
physicians.  Beneficiaries will be assigned a primary care physician
to manage their care.  TRICARE is intended to control costs, improve
beneficiary access to care, and provide high-quality care. 

To implement and administer TRICARE, DOD has reorganized the military
delivery system into 12 new, joint-Service regions, each headed by a
military health care administrator, or lead agent, who is responsible
for monitoring and coordinating all care in the region.  TRICARE
incorporates cost control features found in civilian sector managed
care programs, such as capitation budgeting and utilization
management.  These features provide managers and caregivers
incentives to limit the use of health care resources to appropriate
amounts.  Except for active-duty members, enrollment in the TRICARE
HMO is optional.  Care in military hospitals will be supplemented by
civilian providers under contract to DOD on a regional basis.  Over a
5-year period, DOD estimates these contracts will cost about $17
billion. 

DOD's goal is to have TRICARE implemented nationwide by May 1997. 
One regional contract with a civilian health care company has been
awarded, and implementation began in that region in March 1995. 
Several other procurements are under way and in various stages of
completion. 

As the midpoint of transition to TRICARE approaches, DOD faces a
number of challenges and concerns: 

Several studies have suggested that more cost-effective ways than
TRICARE exist to provide or arrange for health care services to
beneficiaries, such as the Federal Employees Health Benefits Program. 

Military medical officials have expressed concern that the regional
structure established in TRICARE does not provide sufficient regional
authority and control over resources to effectively manage the
delivery of care. 

DOD has encountered many problems in obtaining civilian health care
services because of a cumbersome and contentious procurement process. 

Beneficiary groups are concerned that DOD will impose limits on
enrollment in the HMO option, reducing access to care in military
facilities for retirees and their dependents. 

TRICARE will not fully eliminate differences and inequities in
cost-sharing requirements for beneficiaries because outpatient care
received in military facilities will remain free, but similar care
obtained from civilian providers will require copayments. 

Appendix III describes TRICARE and its challenges in more detail. 

   CONCLUSIONS
------------------------------------------------------------ Letter :5

One of the most crucial tasks facing the Congress and DOD as they
plan for the future of the MHSS is to agree on the size and structure
of the medical force needed to meet wartime requirements.  This
decision will drive the combination of military physician
specialties, the number of hospitals and clinics, and the training
and experience that medical personnel need to achieve the appropriate
level of readiness.  Subsequent decisions must also be made on the
cost-effectiveness of maintaining a military medical capacity larger
than that needed for readiness purposes to help meet the health care
demands of nonactive-duty beneficiaries. 

DOD is addressing difficult and costly health care problems with many
implications for all those affected by the military health care
system.  It needs time to decide the most equitable arrangement for
those affected, while containing military health care cost growth. 
TRICARE is in the early stages, and predictions about the ultimate
success of its meeting its objectives are premature.  Nevertheless,
the already identified operational challenges to TRICARE must be
addressed quickly to achieve the hoped for results. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We did not obtain agency comments, but we did discuss the information
in the report with agency officials.  The officials generally agreed
with the data presented, and we incorporated their comments as
appropriate. 

---------------------------------------------------------- Letter :6.1

We are sending copies of this report to the Secretary of Defense and
will make copies available to others upon request.  Please contact me
on (202) 512-7101 if you or your staff have any questions concerning
this report.  Contributors to this report are listed in appendix V. 

David P.  Baine
Director, Federal Health Care
 Delivery Issues

THE CHALLENGES AND COMPLEXITIES OF
THE MILITARY HEALTH SERVICES
SYSTEM
=========================================================== Appendix I

The Military Health Services System (MHSS) is a large and complex
organization with multiple responsibilities.  Throughout the year,
DOD provides health care for millions of active-duty troops and other
beneficiaries through a worldwide system of hospitals and a major
insurance-like program; it operates a 4-year medical university and
an extensive graduate medical education program; it trains physicians
and other health professionals to provide combat health care; it
conducts medical research on a wide range of social and environmental
diseases; and it oversees the operations of several hundred medical
personnel on operational assignments around the world.  Through these
activities, DOD responds to its two missions:  wartime readiness,
that is, maintaining the health of service members and treating
wartime casualties; and peacetime care, providing for the health care
needs of the families of active-duty members, retirees and their
families, and survivors.  These missions are carried out with an
annual budget of more than $15 billion, representing about 6 percent
of the total defense budget. 

Wartime medical readiness is the primary mission of the MHSS;
however, caring for families and retirees makes up the bulk of
services it provides.  These nonactive-duty beneficiaries comprise
almost 80 percent of the 8.3 million people eligible for military
health care.  The number of eligible beneficiaries will decline only
slightly through the year 2000, even as active-duty forces are
reduced because the number of retiree families will increase. 
Active-duty members must receive nearly all of their health care in
military facilities, but other beneficiaries have choices.  Some use
other federal programs, such as Medicare, Department of Veterans
Affairs hospitals, or civilian providers funded by DOD; others obtain
care through insurance provided by their employer.  Because of these
choices, and other factors such as difficulties accessing military
facilities, about 25 percent of nonactive-duty beneficiaries do not
rely on the MHSS; that is, they receive medical care from other
sources. 

   DUAL MISSION OF THE MHSS
--------------------------------------------------------- Appendix I:1

      DOD HAS WARTIME AND
      PEACETIME MEDICAL
      RESPONSIBILITIES
------------------------------------------------------- Appendix I:1.1

The MHSS is considered to have a dual mission:  it must provide
medical services and support to the armed forces, in peacetime and in
war, and also care for the families of active-duty personnel,
military retirees and their dependents, and survivors. 

The readiness mission is the primary mission.  According to a draft
of DOD's Medical Readiness Strategic Plan, the military medical
organization exists to support combat forces in war and, in
peacetime, to maintain and sustain the well-being of the fighting
forces in preparation for war.  Military medical personnel care for
wounded and ill personnel in combat areas or evacuate and treat them
at military medical facilities outside the combat areas.  The MHSS
also contributes to maintaining the forces' readiness by providing
medical care to active-duty armed forces personnel not involved in
combat operations, including routine preventive care as well as
treating injuries and illness.\3 In recent years the U.S.  military
role, and the mission of the medical departments, has expanded to
include peacekeeping and humanitarian missions, such as deployments
to Somalia and Haiti and care to the victims of Hurricane Andrew, the
Los Angeles earthquake, and the California floods. 

In addition, since 1956 DOD has been authorized to treat nonmilitary
people in the MHSS.  Legislative actions in 1956 and 1966\4 gave
dependents of active-duty military personnel, retirees and their
dependents, and survivors of military personnel access to care in
military medical facilities on a space-available basis.  When care is
not available in the military facilities, nonactive-duty
beneficiaries can also get care from private-sector health care
providers through the Civilian Health and Medical Program of the
Uniformed Services (CHAMPUS). 

--------------------
\3 Members of the Reserves and National Guard, and their families,
are also covered by the MHSS while on active duty. 

\4 Dependents' Medical Care Act (P.L.  84-569), in 1956 and the
Military Medical Benefits Amendments of 1966 (P.L.  89-614). 

   DOD OVERSEES THE MHSS, BUT EACH
   SERVICE HAS ITS OWN MEDICAL
   DEPARTMENT
--------------------------------------------------------- Appendix I:2

The Assistant Secretary of Defense (Health Affairs) is responsible
for planning, policy development, and oversight of the MHSS.  These
responsibilities include developing guidance on DOD health plans and
programs; ensuring that medical programs and systems meet operational
readiness requirements; establishing requirements and standards for
DOD medical and acquisition programs; programming and budgeting all
MHSS resources and funds, except for personnel and construction
funds; and administering CHAMPUS.\5

Each Service has its own medical department headed by a surgeon
general.  Each of the Services' medical departments prepares a
medical program budget for the Assistant Secretary, develops
Service-specific programs within the guidance and parameters
established by Health Affairs, and operates the Services' medical
facilities.  Each Service also recruits and funds its own medical
personnel to administer the medical programs and provide medical
services to beneficiaries. 

--------------------
\5 DOD medical program funds are provided through a single Defense
Health Program appropriations account.  This account provides funds
for operation and maintenance, procurement, research and development,
and CHAMPUS, but excludes funds for active and reserve medical
personnel (funded through the Services) or for military construction
(funded through a separate account).  The Assistant Secretary of
Defense (Health Affairs) directs the distribution of the funds to the
Services, which allocate the funds to their facilities. 

   MANY PEOPLE ARE INVOLVED IN
   PROVIDING CARE
--------------------------------------------------------- Appendix I:3

For fiscal year 1995, DOD medical personnel total 274,000, including
about 135,000 active-duty members and 48,000 civilians.  In addition,
about 91,000 personnel in the Selected Reserves and National Guard
are assigned to medical missions.  Table I.1 shows the breakdown of
active-duty and civilian personnel levels by each Service. 

                          Table I.1
           
             Medical Personnel Levels by Service
                Affiliation, Fiscal Year 1995

                                      Forc
                                         e       Total
--------------  ----  --------------  ----  ================
Active-duty     51,0      42,205      41,6      134,895
                  24                    66
Civilian        28,4      12,155      7,62      \48,214
                  36                     3
============================================================
Total           79,4      54,360      49,2      183,109
                  60                    89
------------------------------------------------------------
DOD medical personnel include physicians, dentists, nurses,
administrators, medical technicians, veterinarians, and corpsmen. 
The Services recruit and train all of these personnel, preparing them
to serve in both peacetime and wartime environments.  Since fiscal
year 1991, the number of medical personnel has decreased by about 8
percent and is expected to decrease an additional 8 percent by the
year 2000. 

There are about 13,000 active-duty physicians.  They receive their
initial medical training from either a DOD or civilian medical
school.  In 1972, DOD established the Uniformed Services University
of the Health Sciences, a 4-year, tuition-free medical school created
in response to congressional concern about DOD's ability to attract
and retain physicians.\6 The university has graduated about 2,000
medical students since its inception who comprise about 12 percent of
active-duty physicians.  The legislation that established the
university also authorized DOD's Health Professions Scholarship
Program, under which DOD pays tuition, fees, and a stipend for
program participants enrolled in civilian medical schools.  About
1,000 scholarship recipients enter military service each year.  Those
on active duty comprise about 60 percent of current military
physicians.  The remaining 28 percent of active-duty physicians are
volunteers who enter the military as licensed physicians. 

Military physicians also receive additional training and experience
through an extensive graduate medical education (GME) program and
major medical research efforts conducted by DOD.  In 1994 DOD
operated about 300 GME programs with an enrollment of about 3,300
physicians.  The medical specialties offered include primary care
programs, such as internal medicine, family practice, pediatrics,
emergency medicine, and obstetrics and gynecology; and those related
to the wartime mission, such as surgery, orthopedics, anesthesiology,
radiology, and psychiatry.  Primary care specialties comprise about
42 percent of all physicians in training, and wartime-essential
specialties account for another 40 percent.  Military physicians also
contribute to major research efforts conducted by DOD and the
Services in such areas as Acquired Immune Deficiency Syndrome (AIDS),
breast cancer, and blood research programs. 

--------------------
\6 The university was created as part of the Uniformed Services
Health Professions Revitalization Act of 1972 (P.L.  92-426). 

   DELIVERY OF MEDICAL CARE TO
   ACTIVE-DUTY TROOPS IN WARTIME
--------------------------------------------------------- Appendix I:4

Providing medical care to members of the armed forces during wartime
involves a complicated structure of medical forces, differing modes
of transportation and operations, and complex evacuation policies. 
When conflicts arise, the Services are responsible for responding to
the medical requirements of the combat theater Commanders-in-Chief. 
To fulfill these requirements, the Services must train, supply, and
equip a medical system that can mobilize and deploy in any theater. 
Currently, the Services must be ready to medically support two major
regional contingencies simultaneously. 

In combat, the primary goal of the medical departments is to enable
personnel to return to duty as soon as possible and to safeguard
those who cannot be returned to duty.  The theater of combat
operations has four levels, or echelons, of medical support, which
become progressively more sophisticated with distance from the
battlefield.  Wartime medical support begins with echelon one, which
consists of basic first aid and emergency care in the forward areas. 
The second echelon involves care at an Aid Station where the casualty
is examined and evaluated to determine priority for continued
movement to the rear.  The third echelon involves treating the
casualty in a medical installation staffed and equipped for
resuscitation, surgery, and postoperative treatment.  The fourth
echelon, far from the combat area, involves treating the casualty in
a hospital staffed and equipped for definitive care. 

An evacuation policy specifies the number of days that patients may
be held within the theater for treatment and rehabilitation; those
who cannot be returned to duty status within the period prescribed
are evacuated.  The evacuation policy impacts greatly on the wartime
medical resources required; a long evacuation policy will require
more facilities and medical personnel in the combat theater, and a
short policy will require more evacuation beds and personnel in
hospitals in the United States. 

The wartime medical support structures vary among the Services
depending on the missions of their combat forces.  Each Service
structures and sizes its medical organization to support its own
forces.  The Army, for example, must plan to meet a variety of
wartime environments, from a sophisticated battlefield with an
infrastructure of communications and facilities, to a relatively
unsophisticated battlefield in which it may have to create an
infrastructure or choose to fight without one.  The Army's primary
mission is preparing for sustained ground combat with a rapidly
moving enemy.  Forward deployed forces, such as U.S.  forces in
Korea, may have to fight with only a few hours notice.  This requires
the Army Medical Department to provide mobile, flexible support
across long distances in a variety of environments. 

The medical forces of the Navy provide wartime support to both the
Navy and Marine Corps.  The Navy is generally called upon to conduct
prompt and sustained combat operations at sea, while the Marines
conduct both amphibious and land operations.  These missions are
global, and contingencies may occur under climatic extremes and
austere conditions.  The Navy's dual mission requires that its
medical forces be prepared to provide flexible and rapidly responsive
forces to support both the Naval Fleet and the Marine Corps.  The
Navy is unique in that its daily operational missions require a large
percentage of its active-duty force, including medical personnel, to
be deployed throughout the year. 

The Air Force must perform prompt and sustained offensive and
defensive air operations, both independently and in support of the
other Services.  Historically, the Air Force has not required
extensive medical resources to conduct its wartime mission because
its bases were relatively safe from any opposing forces, far to the
rear of the combat area.  Consequently, it anticipated, and received,
very few casualties.  However, in certain scenarios the enemy's
offensive capability has increased, making Air Force bases in wartime
theaters more vulnerable.  This could result in more Air Force
casualties than projected in the past.  Air Force medical forces must
be prepared to provide air transportable hospitals for operations
bases and most of the air evacuation in wartime. 

   DIRECT CARE SYSTEM AND CHAMPUS
   SERVE BENEFICIARIES IN
   PEACETIME
--------------------------------------------------------- Appendix I:5

Peacetime health care is delivered to military beneficiaries and
active-duty members through a system of DOD-operated hospitals and
clinics staffed by civilian and military medical personnel, known as
the direct care system.  DOD also operates CHAMPUS, an insurance-like
program that pays for a portion of the care military families and
retirees receive from private-sector health care providers.  Military
facilities provide about three-fourths of all care and CHAMPUS about
one-fourth.  Table I.2 shows the distribution of care provided in
fiscal year 1994. 

                         Table I.2
          
           Source of Care Provided by the MHSS in
              Fiscal Year 1994, by Beneficiary
                          Category

                                   Inpatient    Outpatient
                                  admissions        visits
------------------------------  ------------  ------------
In military facilities
----------------------------------------------------------
Active-duty members                  191,323    16,810,464
Nonactive-duty beneficiaries         498,761    27,103,382

Through CHAMPUS
----------------------------------------------------------
Active-duty members                        0             0
Nonactive-duty beneficiaries         230,976    11,285,928
==========================================================
Total MHSS                           921,060    55,199,774
----------------------------------------------------------
The direct care system includes 14 medical centers, 86 hospitals, and
over 400 clinics operated by the three Services nationwide.  The
capacity and level of care vary among the types of facilities, as
described below and shown in figure I.1. 

   Figure I.1:  MHSS Hospitals in
   the United States by Size

   (See figure in printed
   edition.)

Medical centers are large, tertiary care facilities, ranging in size
from about 200 to 1,000 beds, offering both inpatient and outpatient
care. 

Community hospitals, typically with fewer than 200 beds, also offer
inpatient and outpatient care but usually handle less complex cases
than the medical centers. 

Clinics are generally small facilities offering a limited range of
primary care services usually only on an outpatient basis. 

Although fewer in number, the medical centers provide a larger
portion of direct care.  In 1992, about 57 percent of the inpatient
workload and about one-third of the outpatient workload in the direct
care system were handled in medical centers.  Community hospitals
handled about 43 percent of the direct care inpatient workload and
about 60 percent of the outpatient workload.  The remaining
outpatient care was delivered in military clinics. 

In some areas, the direct care system also includes former Public
Health Service medical facilities and contractor-operated clinics. 
Ten former Public Health Service hospitals and clinics, now called
Uniformed Services Treatment Facilities, provide care to more than
100,000 nonactive-duty beneficiaries.  The Military Construction
Authorization Act, 1982 (P.L.  97-99), included these facilities in
DOD's health care system. 

In 1985 DOD further expanded its direct care system to include
off-base primary care clinics operated by civilian contractors. 
These clinics, called PRIMUS and NAVCARE, were established to expand
access to primary care and to relieve the overcrowding of the
military medical facilities.  All beneficiaries eligible to receive
care in military facilities can be treated at PRIMUS and NAVCARE
clinics, including active-duty members.  Twenty-one PRIMUS and
NAVCARE clinics operate nationwide. 

DOD requires minimal cost sharing from most beneficiaries for
inpatient care provided in the direct care system but no cost sharing
for outpatient care.  Active-duty personnel receive nearly all of
their medical care through the direct care system and pay $4.75 for
each day of inpatient care.  Retired officers pay the same amount as
the active-duty members, but retired enlisted members receive
inpatient care at no cost.  The families of retirees and active-duty
personnel, as well as survivors, are subject to slightly higher cost
sharing, paying $9.50 per day for inpatient care. 

Most nonactive-duty beneficiaries can also receive care outside the
direct care system through private-sector health care providers.  In
those cases, DOD pays a portion of the cost of care through CHAMPUS. 
CHAMPUS is automatically available to families of active-duty
personnel, retirees and their dependents, and survivors under the age
of 65.  At age 65, beneficiaries are no longer eligible for CHAMPUS
because they become eligible for Medicare.  CHAMPUS is comparable to
private-sector indemnity (fee-for-service) health benefits plans,
requiring beneficiaries to pay for care up to an annual deductible
amount, and then pay a portion of the remaining costs; however,
beneficiaries are not required to pay premiums for CHAMPUS.  The
amount of the deductible and copayment varies by the type and source
of care and by different beneficiary groups, ranging from $50 to $300
for the deductible and 20 to 25 percent for copayments.  The
beneficiary cost-sharing requirements of CHAMPUS and the direct care
system are shown in table I.3. 

                                    Table I.3
                     
                      Cost-Sharing Requirements for Military
                              Facilities and CHAMPUS

Military                                      Military
facility          CHAMPUS                     facility      CHAMPUS
----------------  --------------------------  ------------  --------------------
Active-duty

$4.75 per day     Not eligible                $0            Not eligible

Active-duty dependents
--------------------------------------------------------------------------------
$9.50 per day     $25 for each admission or   $0            E-4 and below:
                  $9.50 per day (in fiscal                  Annual deductible of
                  year 1995), whichever is                  $50 per dependent or
                  greater                                   $100 per family and
                                                            then 20% of
                                                            allowable charges
                                                            Above E-4: Annual
                                                            deductible of $150
                                                            per dependent or
                                                            $300 per family and
                                                            then 20% of
                                                            allowable charges

Other
beneficiaries

$0 for enlisted   25% of billed hospital      $0            Annual deductible of
retirees $4.75    charges or $323 per day                   $150 per person or
per day for       (in fiscal year 1995),                    $300 per family and
retired           whichever is less, and 25%                then 25% of
officers          of other providers'                       allowable charges
$9.50 per day     allowable charges
for others
--------------------------------------------------------------------------------
Note:  Beneficiaries annual copayment liability is capped at $1,000
for active-duty families and at $7,500 for all other CHAMPUS-eligible
families. 

To help ensure fuller utilization of the direct care system, CHAMPUS
will not pay for private-sector inpatient hospital care and some
high-cost outpatient care provided to beneficiaries living within a
40-mile radius of a military medical facility unless those
beneficiaries receive prior approval from the facility.  This
approval, called a statement of nonavailability, indicates that the
military facility could not provide treatment within established time
frames or did not have resources available.  Beneficiaries living
outside the 40-mile radius are not required to get prior approval for
private-sector care. 

During the late 1980s and early 1990s, DOD tested alternative health
care delivery mechanisms using managed care techniques as a means to
control costs and improve access.  In 1993, DOD established a
joint-Service, systemwide managed care program called TRICARE, which
more closely integrates the direct care system and CHAMPUS and adopts
several private-sector practices.  Appendix III describes TRICARE in
detail. 

   BENEFICIARY PROFILE
--------------------------------------------------------- Appendix I:6

Of the 8.3 million people eligible for care from the MHSS worldwide
in fiscal year 1995, active-duty personnel comprise a small
percentage.  Currently, the 1.7 million active-duty members\7

represent 21 percent of the eligible population.  Figure 1.2 shows
the percentage breakout of the MHSS eligible population.  Active-duty
members receive almost all of their care in military facilities and
are not eligible for CHAMPUS.  They have first priority for care in
military facilities.  Those active-duty members have 2.5 million
dependents, representing almost 30 percent of the total eligible
population.  Active-duty dependents are eligible both for CHAMPUS and
care in military facilities on a space-available basis. 

   Figure I.2:  1995 MHSS
   Population by Beneficiary
   Category

   (See figure in printed
   edition.)

Retirees and their dependents and survivors of deceased members make
up almost 50 percent of all MHSS beneficiaries.  Three million of
these are under 65 and therefore eligible for care provided in
military facilities as well as through CHAMPUS.  However, they are
entitled to care in military facilities only on a resource-available
basis.  Nonactive-duty beneficiaries who are over 65 are eligible for
care only in military facilities because at age 65 they lose their
CHAMPUS eligibility and become eligible for Medicare.  This group
numbers almost 1.2 million and is expected to grow by 22 percent to
just over 1.4 million by the year 2000.  At the same time, the rest
of the beneficiary population will shrink by almost 6 percent. 
Figure I.3 illustrates the percentage change in beneficiary
population since 1989 through 2000. 

   Figure I.3:  MHSS
   Beneficiaries, Fiscal Years
   1990-2000

   (See figure in printed
   edition.)

Note:  Data for fiscal years 1995 through 2000 are projections. 

DOD estimates that about 6.4 million beneficiaries currently use the
MHSS.  Almost all active-duty members and their families use the
system at some time during the year, and about two-thirds of retirees
and their dependents under 65 regularly use either the direct care
system or CHAMPUS.  In contrast, only about a third of the
beneficiaries over age 65 regularly use military facilities. 

Many beneficiaries have alternatives to the MHSS.  For example, DOD
estimates that about one-fourth of beneficiaries (about 2 million
people) have private insurance.  If beneficiaries with insurance seek
care in military facilities or submit claims under CHAMPUS, this
insurance must pay the military facilities, or, in the case of
CHAMPUS, the insurance must pay first, with CHAMPUS paying any
remaining amounts.  VA estimates that 1.7 million military retirees
are eligible for care in VA hospitals.  In addition, 1.2 million
retirees and dependents over age 65 are eligible for Medicare, and
the most recent DOD survey found that over 50 percent have private
insurance.  Some beneficiaries are eligible for multiple programs. 

--------------------
\7 Includes members of the Coast Guard and the Commissioned Corps of
the National Oceanic and Atmospheric Administration and of the Public
Health Service who are eligible for care in the MHSS. 

   MILITARY HEALTH SYSTEM COSTS
   HAVE STABILIZED SINCE 1991
--------------------------------------------------------- Appendix I:7

For fiscal year 1995, DOD's budget for the MHSS is just over $15.2
billion, consisting of about $6.0 billion in operations and
maintenance funds for the direct care system, $3.6 billion for
CHAMPUS, $5.0 billion for military personnel, $330 million for
procurement of medical equipment and supplies, and $319 million for
construction.\8 The defense health budget has leveled off in recent
years, with growth of about 1 percent per year since 1991.  Per
capita health costs have also remained stable.  Medical spending has
however, consumed a greater proportion of the total defense budget. 
In 1990, the medical budget represented about 4 percent of the total
defense budget, increasing to about 6 percent in 1995.  DOD has
requested $15.5 billion for fiscal year 1996. 

--------------------
\8 In 1994, the Institute for Defense Analyses estimated that about
16 percent of MHSS costs (roughly $2.5 billion) supported the
system's mission of maintaining the readiness of the armed forces. 

MHSS HAS FACED MANY DIFFICULT
ISSUES
========================================================== Appendix II

For years DOD has encountered many difficult issues and problems as
it has carried out its dual mission and responsibilities.  We and
others have identified several issues related to the deployment of
medical personnel to the Persian Gulf, ranging from the
nondeployability of large numbers of medical personnel to
inadequacies in the medical evacuation procedures for casualties. 
Had the Services incurred the predicted number of casualties during
the Gulf War, their combat medical units may not have been able to
provide adequate care.  DOD has acknowledged these problems and
reports that it is taking steps to address them, including developing
a new medical readiness strategic plan. 

As it carried out its peacetime care role in the 1980s, the cost of
operating the MHSS increased significantly.  Part of this cost growth
was due to the overall nationwide escalation of medical care costs
and part was due to military beneficiaries' greater use of medical
care services than their civilian counterparts.  In the late 1980s,
DOD began a series of demonstration programs around the country to
contain the growth in its medical care costs and gain greater control
of beneficiaries' utilization of their health care benefits.  DOD
also hoped to improve beneficiary access to care and enhance
beneficiary satisfaction with the care they received.  The
demonstration programs, each of which was authorized by the Congress,
were designed to test the use of managed care principles such as
establishing primary care managers and case management services,
developing networks of private-sector providers, and experimenting
with different organizational and financing arrangements for
beneficiaries' care.  The programs highlighted difficult conceptual
and operational issues confronting the Department as it moved to
convert its health system into a large managed care system.  These
issues, which ranged from how to establish the appropriate health
benefit package to how to deal with long-standing inter-Service
rivalries, are discussed in this appendix. 

   GULF WAR REVEALED WARTIME
   READINESS ISSUES
-------------------------------------------------------- Appendix II:1

The ability of DOD to meet its wartime medical mission was questioned
by us and the DOD Inspector General in studies conducted after the
Gulf War.  Both studies examined the ability of DOD to provide
adequate, timely medical support during contingencies and found
problems with the planning and execution of these efforts. 

We found that medical units in the Gulf War may have had difficulty
providing care to the predicted number of casualties because of
understaffed units and inadequate supplies and equipment.  Also,
medical units were not staffed and equipped to provide noncombat
medical care, support the evacuation of casualties from the battle
line to outside the theater of conflict, or receive large numbers of
chemically contaminated casualties.  We found other medical force
problems, including (1) large numbers of nondeployable personnel due
to unacceptable physical condition, lack of required skills, and
mismatches in medical specialties; (2) a widespread lack of training
for the wartime mission; and (3) inadequate or missing equipment and
supplies. 

The DOD Inspector General found similar problems.  Mobilization plans
were out of date, largely untested, and invalidated.  Inaccurate
requirements, misassignments, and insufficient training hampered
availability of medical personnel.  Insufficient and incompatible
communication equipment and problems with the management of war
reserves hindered the effectiveness of the medical forces. 
Shortfalls in transportation assets and the lack of automation of the
DOD blood program hampered medical logistics support. 

DOD is working to correct the deficiencies and is developing a
strategic plan to address the shortcomings.  All three Services have
major reengineering efforts under way to respond to contingency
requirements that involve training, leader development, organization,
doctrine, and material and equipment changes. 

With the dissolution of the Soviet Union and the emergence of
regional threats, however, DOD's wartime requirements for the MHSS
may have drastically changed.  A recent DOD study, mandated by the
Defense Authorization Act for Fiscal Years 1992 and 1993 and known as
the "733 study," estimates that DOD has as many as twice the number
of physicians it needs to meet wartime requirements.  Although the
Services have not disagreed with the 733 study results, their
individual estimates produced higher numbers of physicians needed
during peacetime to ensure wartime readiness.  Theater commanders use
different planning factors that result in higher estimates of
casualties and rely more on the MHSS to treat patients requiring
long-term care than the 733 study does.  Differences also exist in
estimates of how many physicians are needed during peacetime to
ensure wartime readiness, including the number of physicians needed
for GME, rotation of overseas medical personnel, and staffing
overseas military hospitals. 

   DEMONSTRATION PROGRAMS
   HIGHLIGHTED PEACETIME ISSUES
-------------------------------------------------------- Appendix II:2

Many of the peacetime challenges facing DOD were identified or
highlighted through its managed care demonstration programs during
the late 1980s and early 1990s.  Others have persisted much longer. 
These challenges are difficult to overcome and reflect both
operational and policy issues.  Some are problems that mirror the
challenges facing health care nationwide, but others are unique to
the military.  The problems include

significant increases in health care costs and utilization,

inter-Service rivalries and competing responsibilities that have
hindered improvement efforts,

varying health care benefits and cost-sharing requirements causing
beneficiary confusion and inequitable treatment,

uneven access to care in military hospitals resulting in beneficiary
dissatisfaction,

inadequate information systems that have long hampered attempts to
analyze the MHSS and develop strategies to overcome problems and
monitor progress,

fraud and abuse in the CHAMPUS program, and

variations in the quality of care. 

   HEALTH CARE COSTS GREW
   SIGNIFICANTLY BETWEEN 1980 AND
   1990
-------------------------------------------------------- Appendix II:3

Throughout the 1980s, MHSS costs have significantly escalated,
including large CHAMPUS cost overruns.  The DOD health care budget
grew by almost 225 percent between 1980 and 1990; the greatest
portion of growth occurred in the CHAMPUS program, which grew by
about 350 percent during the period.  In comparison, national health
expenditures increased by about 166 percent from 1980 to 1990. 
Furthermore, because DOD could not accurately predict its rapidly
increasing spending requirements, major shortfalls in CHAMPUS funds
totaled well over $3 billion in the late 1980s and early 1990s. 

The chief drivers of the cost growth were increased health care
prices nationwide, a growing military beneficiary population that
made greater use of health care services than its civilian
counterparts, and a system of resource allocation for military
hospitals that encouraged managers to increase hospital workload. 

Lewin/ICF reported in 1989 that a major cause of cost growth in the
MHSS was increases in the price of CHAMPUS services.\9 For example,
the average CHAMPUS cost per inpatient admission rose from $2,388 in
fiscal year 1981 to $5,395 in fiscal year 1990.  The average cost of
a CHAMPUS outpatient visit also doubled during this period.  These
price increases, Lewin concluded, were due to high medical inflation,
new technologies, and cost shifting to the CHAMPUS program by doctors
and hospitals facing reimbursement limits from other payers. 

An increasing population of eligible beneficiaries and an increased
percentage of eligible beneficiaries who actually used the MHSS drove
the growth in the total volume of CHAMPUS-provided services.  The
number of CHAMPUS users grew by 162 percent from 1981 to 1990.  While
CHAMPUS hospital admissions remained almost constant, the increase in
CHAMPUS users caused an increase in CHAMPUS outpatient visits, which
grew over 200 percent in this period. 

DOD health care services are highly utilized.  A recent DOD study of
the military health care system found that DOD beneficiaries use
health care services as much as 50 percent more than civilians in
fee-for-service health care plans.  Experts attribute this to the
availability of virtually free care in the military facilities. 

In addition to high utilization, DOD's resource allocation methods
have provided incentives for military health care providers to
deliver more care.  DOD has traditionally allocated resources to
hospital commanders on the basis of historical workload:  The more
admissions, bed-days, and outpatient visits the hospital produced,
the more resources it would receive the following year.  This method
provided incentives to hospitalize patients for long periods of time,
even more than medically necessary.  Military providers often
hospitalized patients who in a civilian setting would have received
outpatient treatment.  For example, in the past, military physicians
have hospitalized patients for tooth extractions.  In addition,
hospital commanders had no incentive to control CHAMPUS usage because
this budget was not under their control, nor were they held
accountable for its use.  Therefore, complicated or costly procedures
could be referred to civilian care without affecting military
hospital costs. 

--------------------
\9 The Appraisal of Managed Care Practices in CHAMPUS, Lewin/ICF
(Vienna, Va.:1989). 

   INTER-SERVICE RIVALRIES AND
   COMPETING RESPONSIBILITIES HAVE
   HINDERED IMPROVEMENT EFFORTS
-------------------------------------------------------- Appendix II:4

DOD has had difficulty coordinating efforts to improve its system
because of traditional rivalries among the Services and their diverse
organizational structures and responsibilities.  We and many others
have reported on difficulties arising from the conflicts between
these roles and responsibilities, and some studies have suggested
unifying the medical departments to resolve inefficiencies. 

The lines of authority and accountability between hospital
commanders, the Services, the Service Surgeons General, and the
Assistant Secretary of Defense (Health Affairs) are complicated and
sometimes conflict.  Funding of the MHSS, for example, is controlled
by two different entities.  The Assistant Secretary controls funding
for operations, while the Military Departments control funding for
the personnel who operate the system. 

These conflicting responsibilities and authorities have led to
divergent approaches to improving the MHSS.  The Army, for example,
established a servicewide managed care effort that gave
responsibility for managing care to individual hospital commanders
and held them accountable for the funds spent on the care in their
area.  The Air Force experimented with a similar servicewide
approach, but the Navy did not establish its own servicewide effort. 
As a result, the Services now have varying degrees of expertise in
implementing managed care efforts. 

Past studies have suggested changes in the way military medicine is
organized, including consolidating the Services' medical departments
into a single defense health agency.\10 However, the Services have
always resisted these efforts.  In a 1991 report on the status of
DOD's improvement efforts,\11 we noted that the Services had resisted
major organizational changes in favor of maintaining their own health
care systems, primarily on the grounds that each has unique medical
activities and requirements.  However, others have pointed out that
the Navy handles sea, land, and air functions, indicating that one
system can perform all functions.  Furthermore, in wartime, the U.S. 
military fights and provides medical care under the authority of
unified and specified commands, not as individual Services.  In some
hospitals, the Services have been experimenting with joint-Service
staffing for greater efficiency or to fill needs created by
deployments. 

--------------------
\10 See The Feasibility of Uniting the Medical Services of the
Various Branches of the Armed Forces Into a Single Corps,
Congressional Research Service (Washington, D.C.:  Aug.  1993). 

\11 Defense Health Care:  Implementing Coordinated Care--A Status
Report (GAO/HRD-92-10, Oct.  3, 1992). 

   HEALTH CARE SERVICES AND COST
   SHARING ARE NOT UNIFORM
-------------------------------------------------------- Appendix II:5

Beneficiaries' access to services and their cost-sharing
responsibilities have traditionally differed depending on where they
lived.  Because health care services vary by size and location of
facility, so does beneficiaries' ability to get free care from the
direct care system versus paying for a portion of the costs through
CHAMPUS.  DOD's managed care initiatives contributed to these
differences, producing a variety of different benefits and cost
sharing.  When active-duty members and their families move from one
base to another, they often have to relearn how their health care
benefits and cost-sharing responsibilities have changed.  These
variations in health care offerings have caused confusion and
inequities among beneficiaries. 

   BENEFICIARIES ARE DISSATISFIED
   WITH ACCESS TO MILITARY
   FACILITIES
-------------------------------------------------------- Appendix II:6

Military beneficiaries have frequently complained about their access
to military facilities.  Historically, the demand for care in the
direct care system has exceeded the capacity of military medical
facilities, resulting in long delays for appointments and excessive
waiting times for outpatient care.\12 This is one reason that
beneficiaries turn to CHAMPUS for medical care, even though it costs
more than care in military facilities. 

In a recent DOD survey,\13 beneficiaries voiced their concerns about
access.  Beneficiaries who used civilian facilities reported having
better access to care than those who used military facilities. 
Specifically, beneficiaries using civilian facilities for their most
recent outpatient visit had less trouble scheduling appointments,
shorter intervals between making the appointment and the actual
visit, and less time spent in the waiting room.  For example, 13
percent of military facility users waited more than 1 hour in the
waiting room, versus only 6 percent of civilian facility users.  In
fact, one of the most frequently cited reasons for not seeking care
in military facilities, according to the DOD survey, was, "it was too
hard to get an appointment."

--------------------
\12 The term "capacity" refers to staffed hospital beds or the
ability of DOD medical facilities to meet demand with not only beds
but also physicians and support staff. 

\13 The Economics of Sizing the Military Medical Establishment,
Department of Defense, Office of Program Analysis and Evaluation
(Washington, D.C.:  Apr.  1994). 

   INFORMATION SYSTEMS ARE
   INADEQUATE
-------------------------------------------------------- Appendix II:7

Lack of adequate, timely, local information on health care provided
to beneficiaries has impeded improvements to the cost-effectiveness
of the MHSS, as we and others have reported.  Military hospital
commanders have commented that inadequate information systems hamper
their effectiveness in performing their job and implementing change. 
The demands of managing health care require, at a minimum, accurate
information about individual physician practice patterns and charges,
beneficiary enrollment, patient outcomes, budgeting and resource
allocation, and patient and physician scheduling. 

Several times we have reported problems with DOD's development and
deployment of its Composite Health Care System (CHCS).\14 Military
health care facilities are supported by CHCS, a state-of-the-art
integrated, automated medical information system used in facilities
worldwide.  CHCS currently supports patient appointment scheduling,
pharmacy, laboratory, radiology, patient administration, outpatient
order entry by physicians, inpatient/outpatient medical test result
reports, and managed care.  In July 1994, we reported that DOD was
not managing CHCS performance as effectively or economically as was
warranted for a state-of-the-art system.  For example, the
performance management tools DOD was using did not collect all the
data needed to detect response-time problems, diagnose causes, or
determine significance.  Instead DOD relied largely on user
complaints to identify performance concerns with response times. 
Also, we reported on problems that physicians were experiencing when
entering orders in CHCS for treating hospitalized patients. 
Physicians viewed the order entry process as unacceptable because of
the many steps involved. 

Analyses conducted as part of DOD's recent study of the MHSS cited
many other problems with current MHSS information systems.\15 One of
these analyses found that military systems generate higher estimates
of use than those reported in beneficiary surveys.  For example,
military facility visit rates estimated from military information
systems were 200 percent higher for active-duty personnel than rates
reported in surveys of those personnel.  While some inaccuracy in
self-reported visit data may occur, this discrepancy casts doubt on
the validity of DOD health systems data.  In addition, they found
that military information systems could not be relied upon to produce
geographically specific analyses. 

--------------------
\14 Medical ADP Systems:  Defense's Tools and Methodology for
Managing CHCS Performance Needs Strengthening (GAO/AIMD-94-61, July
15, 1994); Medical ADP Systems:  Changes in Composite Health Care
System's Deployment Strategy Are Unwise (GAO/IMTEC-91-47, Sept.  30,
1991); Medical ADP Systems:  Composite Health Care System Is Not
Ready to be Deployed (GAO/IMTEC-92-54, May 20, 1992). 

\15 Cost Analysis of the Military Medical Care System, Institute for
Defense Analyses (Alexandria, Va.:  Sept.  1994).  The Demand for
Military Health Care:  Supporting Research for a Comprehensive Study
of the Military Health Care System, RAND Corporation (Santa Monica,
Cal.:  Jan.  1994). 

   CHAMPUS HAS BEEN VULNERABLE TO
   FRAUD AND ABUSE
-------------------------------------------------------- Appendix II:8

The CHAMPUS program has been vulnerable to fraud and abuse, as
reported by us and DOD audit agencies as far back as the 1970s. 
CHAMPUS psychiatric benefits, in particular, have been targets of
fraud and abuse. 

Concerns over CHAMPUS fraud and abuse led to DOD's developing the
Defense Enrollment Eligibility Reporting System (DEERS).  Before
DEERS implementation, it was estimated that DOD lost $40 million
annually under CHAMPUS for services to ineligible people.  DOD
created DEERS to track the eligibility of military beneficiaries and
the Office of Program Integrity (which was established in the
organization administering CHAMPUS) to investigate fraud and abuse. 
Despite these improvements, DOD has continued to detect fraud and
abuse cases. 

We have reported several times on CHAMPUS's vulnerability to fraud
and abuse by psychiatric providers.  Among such problems under
CHAMPUS have been unnecessary hospital admissions, excessive lengths
of stay, poor quality of care, and unauthorized or duplicate
payments.  In recent years, federal investigative agencies have
significantly increased resources devoted to reviewing health care
fraud and abuse, and investigations of psychiatric providers have
increased.  One of these investigations yielded a 1994 repayment to
the federal government by a psychiatric hospital chain of $324.8
million, $54 million of which is earmarked for DOD.  DOD too has made
significant improvements in its oversight of psychiatric providers. 

   QUALITY OF CARE IS GENERALLY
   GOOD, BUT VARIES
-------------------------------------------------------- Appendix II:9

Those studying DOD have noted variations in the quality of care
around the country.  The most recent DOD survey of beneficiaries
shows overall high levels of satisfaction with the quality of care in
military facilities, but beneficiaries give higher ratings to
civilian care. 

Past studies have reported weaknesses in DOD's quality assurance
programs.  The DOD Inspector General in 1985\16 and we in 1987 and
1989\17 cited a lack of centralized databases and oversight as well
as weaknesses in the implementation of quality assurance programs. 
As described in the previous section, concerns about the quality of
psychiatric care provided to DOD beneficiaries under the CHAMPUS
program are the most recent examples of such problems. 

DOD has addressed these concerns and is improving its quality of
care.  DOD operates two databases to track claims and adverse actions
against DOD physicians,\18 the Defense Practitioner Data Bank and the
DOD Risk Management Database, and also participates in the National
Practitioner Data Bank, administered by the Department of Health and
Human Services.  These systems allow DOD to identify health care
providers who receive a disproportionate share of adverse actions. 
As a supplement to internal hospital-based quality assurance
programs, DOD's Civilian External Peer Review Program contracts with
a private-sector organization to monitor the effectiveness of
internal quality assurance efforts, assist with the development of
clinical health care guidelines, and identify areas for quality
improvement.  DOD also requires all its hospitals to be accredited by
the Joint Commission on Accreditation of Healthcare Organizations and
reports that military hospitals regularly score well above the
national average in accreditation reviews.  In addition, DOD has
programs to monitor the quality of civilian care provided through the
CHAMPUS program, such as the National Quality Monitoring Contract,
which reviews claims and medical records of both medical and
psychiatric CHAMPUS providers. 

Appendix III describes DOD's plans for dealing with the problems
outlined in this appendix. 

--------------------
\16 Defense-wide Audit of Medical Quality Assurance, DOD Office of
the Inspector General (Washington, D.C.:  June 1985). 

\17 DOD Health Care:  Better Use of Malpractice Data Could Help
Improve Quality of Care (GAO/HRD-87-30, June 4, 1987) and DOD Health
Care:  Occurrence Screen Program Undergoing Changes, but Weaknesses
Still Exist (GAO/HRD-89-36, Jan.  5, 1989). 

\18 Adverse actions refer to actions taken that reduce, restrict,
suspend, revoke, or deny a provider's clinical privileges or
membership in a health care entity. 

TRICARE--THE MHSS' MANAGED CARE
PROGRAM
========================================================= Appendix III

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. 

TRICARE is significantly changing the military health care system. 
It offers beneficiaries alternatives to the current CHAMPUS program,
providing alternatives such as 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 the military
delivery system into 12 new, joint-Service regions.  A new
administrative organization, the lead agent, has also been created in
each region to monitor and coordinate the delivery of health care. 
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
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 sector managed
care programs. 

DOD expects to have TRICARE implemented nationwide by May 1997.  One
regional contract with a civilian health care company had been
awarded, and TRICARE implementation in that region began in March
1995.  Several other regional procurements are in process. 

As DOD approaches the midpoint of its transition to TRICARE, several
issues and concerns about the design and implementation of TRICARE
have been raised: 

Military medical officials have expressed concern that lead agents
lack sufficient authority and control to effectively manage health
care delivery in the regions because the individual Services still
retain control over their medical funds, facilities, and personnel. 

DOD has had many problems so far in procuring civilian health care
services through the managed care support contracts. 

Beneficiaries are concerned that they may not have access to the same
benefit options as others in their region or across the country due
to limitations on the number and type of military and civilian
providers. 

Military officials are also concerned that delivering and installing
a critical managed care information system may be delayed as have
other information systems, which could seriously impact TRICARE's
successful and timely implementation. 

Additionally, beneficiary groups and others have suggested that more
cost-effective alternatives to TRICARE exist. 

   TRICARE OFFERS THREE OPTIONS
   FOR HEALTH CARE
------------------------------------------------------- Appendix III:1

TRICARE features a triple-option benefit, offering beneficiaries
eligible for CHAMPUS two new options for health care in addition to
the CHAMPUS program.\19 The options vary in the choices beneficiaries
have in selecting their physicians and the amount beneficiaries are
required to contribute toward the cost of their care received 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, but requires the
highest beneficiary cost share.  For example, beneficiaries using
Standard must meet an annual deductible for outpatient care ranging
from $100 for families of active-duty personnel at or below the E-4
level to $300 per family above the E-4 level, retirees, their
dependents, and survivors.  Active-duty dependents are expected to
pay 20 percent of the cost of outpatient care and $25 per inpatient
admission or $9.50 per day, whichever is greater.  Retirees, their
dependents, and survivors contribute more toward their care, paying
25 percent of outpatient costs and the lesser of $323 per day of
inpatient care or 25 percent of the hospital charges, as well as 25
percent of related professional medical services. 

The second option, TRICARE Extra, is a preferred provider option,
through which beneficiaries receive a 5-percent discount on the
Standard option cost of care when they choose a medical provider from
the contractors' network.  The outpatient deductibles are the same as
the Standard option, but active-duty dependents pay a 15-percent
copayment, with other beneficiaries paying a 20-percent copayment. 
Active-duty dependents pay the same amount for inpatient care as
under the Standard option, but retirees and others have a reduced
cost share under Extra, paying the lesser of $250 per day or 25
percent of the hospital charges, as well as 20 percent of related
professional medical services.  Beneficiaries are not required to
enroll in the Extra option or exclusively use network providers, but
may use network providers on a case-by-case basis. 

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
copayment features provide financial incentives for beneficiaries to
select this option, the most highly managed of the three options. 
For example, Prime enrollees are not required to meet an annual
deductible, but retirees, their dependents, and survivors enrolled in
the option must pay an annual enrollment fee of $230 for an
individual and $460 for a family.  Cost-sharing requirements for care
provided by civilian providers range from $6 a visit for active-duty
dependents of lower rank military personnel to $12 a visit for
dependents of higher rank personnel, retirees, their dependents, and
survivors.  Cost-sharing requirements for inpatient care are
significantly lower than for the other options.  Regardless of their
beneficiary category, all enrollees pay the greater of $25 per
admission or $11 per day. 

--------------------
\19 The Federal Register of February 8, 1995, contains DOD's proposed
rule describing TRICARE and establishing requirements and procedures
for implementing the program. 

   LIMITATIONS AND PRIORITIES FOR
   TRICARE OPTIONS
------------------------------------------------------- Appendix III:2

Establishing an HMO option, such as Prime, depends on the
availability of sufficient medical resources to adequately address
the health care needs of all enrollees.  At a minimum, DOD expects
that integrated networks of military and civilian providers for the
Prime and Extra options can be established within the 40-mile area
surrounding military hospitals and medical centers.  Establishing
networks in areas farther from the hospitals and medical centers may
also be feasible if the area has a sizeable beneficiary population
and a sufficient number of civilian medical providers.  In some areas
of the country, however, establishing a provider network to support
Prime or Extra will not be feasible, and beneficiaries will only have
the TRICARE Standard option. 

Even in areas where provider networks for Prime can be established,
if sufficient military and civilian medical resources are not
available to provide care to all anticipated enrollees, DOD will
limit the number of beneficiaries that enroll in the Prime option. 
For those situations, DOD has established a priority system for
enrollment.  Because active-duty members must receive nearly all of
their care in military facilities, they will have first enrollment
priority and will be automatically enrolled in the Prime option. 
Dependents of active-duty personnel have the next priority, followed
by retired military personnel, their dependents, and survivors under
age 65.  Retirees, their dependents, and survivors age 65 and over
cannot enroll in Prime. 

Beneficiaries not selecting the Prime option continue to be eligible
to receive care in military facilities on a space- available basis
(as discussed in app.  I).\20 However, the introduction of the Prime
option designed to maximize the use of military facilities by those
enrolled in the option has resulted in a differentiation in some
beneficiary categories.  DOD has established a sublevel of priority
in the active-duty dependent beneficiary group, with active-duty
dependents enrolled in Prime given priority for military care over
nonenrollees.  However, active-duty dependents not enrolled in Prime
still have priority to receive care in military facilities over
retirees, their dependents, and survivors, even if those retirees and
others are enrolled in Prime.  No differentiation based on enrollment
status has been made in the beneficiary category of retirees, their
dependents, and survivors. 

--------------------
\20 Retirees, their dependents, and survivors age 65 and over are not
eligible to enroll in Prime but remain eligible to receive care in
military medical facilities. 

   NEW REGIONAL STRUCTURE
   DEVELOPED FOR TRICARE
------------------------------------------------------- Appendix III:3

To implement TRICARE, 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 well as the number of eligible
beneficiaries in each region's boundaries.  In each region, a
military medical center commander has been designated as the region's
lead agent, or health administrator, supported by a joint-Service
staff drawn from the region's military medical facilities and DOD
medical program offices.  Table III.1 presents information on the 12
TRICARE regions, including the designated lead agents, the states
included in the regional boundaries, the estimated number of eligible
beneficiaries, and the number of military hospitals and medical
centers in each region. 

                                   Table III.1
                     
                      Information on the 12 TRICARE Regions

                                                                 Hospitals and
                                States in        Beneficiary        medical
Region          Lead agent      region            population       centers\a\
--------------  --------------  --------------  --------------  ----------------
1               National        Connecticut,      1,093,918            12
                Capital         Delaware,
                (Bethesda,      District of
                Walter Reed,    Columbia,
                Malcolm Grow    Maine,
                Medical         Maryland,
                Centers)        Massachusetts,
                                New Hampshire,
                                New Jersey,
                                New York,
                                Pennsylvania,
                                Rhode Island,
                                Vermont,
                                Northern
                                Virginia

2               Portsmouth      North              872,011             8
                Naval Hospital  Carolina,
                                Southern
                                Virginia

3               Eisenhower      Georgia, South    1,063,770            12
                Army            Carolina,
                Medical Center  parts of
                                Florida

4               Keesler Air     Alabama,           595,024             10
                Force           Tennessee,
                Medical Center  parts of
                                Florida and
                                Louisiana

5               Wright-         Illinois,          653,328             5
                Patterson Air   Indiana,
                Force Medical   Kentucky,
                Center          Michigan,
                                Ohio, West
                                Virginia,
                                Wisconsin

6               Wilford Hall    Arkansas,          949,778             14
                Air Force       Oklahoma,
                Medical Center  parts of
                                Louisiana and
                                Texas

7               William         Arizona,           323,058             8
                Beaumont Army   Nevada, New
                Medical Center  Mexico, parts
                                of Texas

8               Fitzsimons      Colorado,          732,821             14
                Army Medical    Iowa, Kansas,
                Center\b        Minnesota,
                                Missouri,
                                Montana,
                                Nebraska,
                                North Dakota,
                                South Dakota,
                                Utah, Wyoming,
                                parts of Idaho

9               San Diego       Southern           710,461             7
                Naval Hospital  California

10              David Grant     Northern           382,590             5
                Air Force       California
                Medical Center

11              Madigan Army    Oregon,            350,439             4
                Medical Center  Washington,
                                parts of Idaho

12              Tripler Army    Hawaii             151,750             1
                Medical Center

================================================================================
Total                                             7,878,948           100
--------------------------------------------------------------------------------
\a Does not include hospitals and medical centers scheduled for
closure in 1995. 

\b On DOD's list of military facilities recommended for closure. 

Lead agents have broad responsibilities for planning, coordinating,
and monitoring the care delivered throughout the region by medical
facilities from all three Services as well as by contract providers. 
An initial responsibility of the lead agent is developing an
integrated plan for delivering health care to beneficiaries in the
region.  Following general topics prescribed by the Assistant
Secretary of Defense (Health Affairs), the plan describes how the
lead agent and the military medical facilities will address and
implement managed care in the region.  For example, plans must
discuss the extent to which military facilities can provide primary
care physicians, how the enrollment process will be established, and
the capacity of the military facilities to implement programs to
control and monitor utilization of direct care system resources. 
Lead agents develop the plan in collaboration with the commanders and
staff of the other medical facilities in the region.  Although the
lead agents do not command or control the facilities in their region,
they oversee the operations of the three Services' staff through
developing and implementing the regional health plan. 

   TRICARE'S MANAGED CARE SUPPORT
   CONTRACTS
------------------------------------------------------- Appendix III:4

In addition to providing new options for health care and a new
regional structure, TRICARE expands DOD's prior experiences in using
contracted civilian physicians in demonstration programs to the
entire MHSS.  Under TRICARE, seven managed care support contracts
will be awarded for the 12 TRICARE regions.\21 Each support contract
will be awarded to a single private-sector health care company to
supplement the care available in the military medical facilities in
the region and to provide administrative support to the lead agent
and medical facility commanders and staff.  The contracts are for a
5-year period (1 year plus 4 option years), and DOD estimates that
they have a combined value of about $17 billion.  After the 5-year
period, contracts will be resolicited.  DOD plans to award all seven
contracts by September 30, 1996, with the TRICARE program fully
implemented in all regions by May 1997.  As of February 1995, one
contract had been awarded, with the request for proposals (RFP)
issued for another three contracts.  The status of each region's
support contract and the expected TRICARE implementation date appear
in table III.2. 

                         Table III.2
           
             TRICARE Support Contract Status and
            Expected TRICARE Implementation Dates

                                        TRICARE
Region              Contract status     implementation date
------------------  ------------------  --------------------
11                  Awarded to          March 1995
                    Foundation Health
                    Corporation
                    September 1994

9, 10, and 12       Evaluating          October 1995
                    proposals

6                   Evaluating          November 1995
                    proposals

3 and 4             Evaluating          May 1996
                    proposals

7 and 8             RFP pending         November 1996

1                   RFP pending         May 1997

2 and 5             RFP pending         May 1997
------------------------------------------------------------
The TRICARE managed care support contracts are procured centrally by
the Office of CHAMPUS, within the Office of the Assistant Secretary
of Defense (Health Affairs), not by the lead agents of each region. 
To ensure uniformity across the regions, the Office of CHAMPUS has
developed a standard RFP for all contracts, describing the program
requirements the contractor must meet.  For example, the RFP includes
a detailed description of the TRICARE program requirements and
services to be provided by the contractor, including the following: 

implementing and operating a comprehensive health care delivery
system for all CHAMPUS beneficiaries, including TRICARE Prime and
Extra;

implementing and operating TRICARE service centers that provide
enrollment, physician assignment and referral, and appointment
functions;

providing medical personnel and resources to the military facilities
if needed to lower overall program costs;

conducting comprehensive utilization and quality management programs;

conducting programs to educate providers and beneficiaries on the
features of the TRICARE program;

developing procedures to maintain services in the event of the
mobilization of military medical personnel from the region; and

performing fiscal intermediary services for care provided outside the
military facilities, including claims processing and data reporting. 

The lead agents include in the RFP any unique or region-specific
requirements that they identify beyond those included in the standard
RFP. 

The contracts are bid on a competitive basis and considered
fixed-price, at-risk contracts.  However, only the administrative
portion of the contract has a fixed price, while the health care
price is subject to adjustments on the basis of risk-sharing
provisions in which the contractor and the government share
contractor losses and gains beyond a certain level.  Price
adjustments can be based on factors such as inflation, beneficiary
population, and military treatment facility usage.  The risk-sharing
and bid price adjustment features are intended to protect both the
contractor and the government from the large risks associated with
these complex contracts. 

--------------------
\21 Some of the contracts will cover more than one region.  Single
contracts will cover Region 1; Regions 2 and 5; Regions 3 and 4;
Region 6; Region 11; Regions 7 and 8; and Regions 9, 10, and 12. 

   CAPITATED METHOD TO ALLOCATE
   FUNDS
------------------------------------------------------- Appendix III:5

TRICARE, like other managed care programs, uses a capitation method
to allocate health care funds.  Capitation is a strategy for
containing the cost of health care by allocating resources based on a
fixed amount per beneficiary in the population.  In the past, DOD
medical facilities were funded on the basis of historical workload,
which rewarded high resource utilization with increased budgets. 
However, as part of its transition to TRICARE, in 1994 DOD adopted a
modified capitation method, with the Assistant Secretary of Defense
(Health Affairs) allocating some resources to the Services' medical
departments on a per capita basis. 

DOD's model is a modified capitation approach because funds for some
functions are not provided on a per capita basis.  Funding for
medical support functions not related to the size of the military
force, such as the air evacuation system and overseas medical
activities, are not capitated.  Medical functions that are unique to
the military and related to military readiness and the size of the
military force are capitated on the basis of the active-duty
population.  Funding for operating and maintaining the direct care
system and CHAMPUS will be capitated, using a fixed-dollar amount for
each beneficiary DOD estimates is using the MHSS system.  The
Services' medical departments pass the direct care funds on to the
individual medical facilities using their own Service-unique
capitation methodologies, making each medical facility commander
responsible for providing health services to a defined population for
a fixed-dollar amount per beneficiary.  This approach is intended to
remove incentives to prolong hospital stays, inappropriately increase
the number of services provided, or otherwise provide more costly
care than is medically appropriate.  CHAMPUS funds are not provided
to the medical facilities but are pooled together at the Service
level to fund the TRICARE managed care support contracts in each
region. 

   UTILIZATION MANAGEMENT UNDER
   TRICARE
------------------------------------------------------- Appendix III:6

Following the lead of private-sector managed care programs, TRICARE
includes a plan to implement a comprehensive utilization management
program for the MHSS.  Utilization management programs are designed
to ensure appropriate use of medical resources, to support quality
care, and to ensure that beneficiaries receive appropriate and
coordinated health care services.  The primary components of
utilization management include precertification, concurrent and
retrospective review, case management, and discharge planning. 
Through utilization management, health care administrators evaluate
the use of medical resources on an ongoing basis.  DOD, lead agent,
and military medical facility officials view utilization management
as a key to containing costs and ensuring health care quality and
access. 

Each lead agent will develop a written utilization management plan
for care provided throughout the region, whether in the direct care
system or through the managed care support contract.  The lead
agent's plan must be consistent with the DOD utilization management
policy, issued in November 1994.\22 The managed care support
contractor is required to develop and implement utilization
management programs consistent with the DOD policy for care provided
outside of the military facilities. 

In developing their utilization management plans, lead agents review
the capabilities and capacity for each military medical facility in
their region to perform the required utilization management functions
for the direct care system.  Lead agents may choose to contract for
utilization management services for the direct care system, or the
military medical facility may retain those functions.  According to
DOD, regardless of who performs these functions, the activities will
be carried out following uniform DOD utilization management policy
guidance. 

--------------------
\22 This guidance, issued on November 23, 1994, is the first DOD-wide
utilization management policy.  The policy, developed jointly by the
Services and Health Affairs, provides uniform criteria and standards
for utilization management programs in the direct care systems as
well as for care provided by the support contractor. 

   IMPLEMENTING TRICARE WILL BE
   CHALLENGING
------------------------------------------------------- Appendix III:7

We and others have reported in the past that managed care offers DOD
the chance to gain more control over costs, improve beneficiary
access, and maintain high-quality care.  However, implementing and
institutionalizing TRICARE entails many difficult operational
decisions for DOD.  Some of the more significant issues facing DOD
are summarized below. 

      LEAD AGENT AUTHORITY AND
      CONTROL
----------------------------------------------------- Appendix III:7.1

The reorganization of medical facilities into joint-Service regions
and establishment of the new lead agent structure represents a
significant change to the administrative structure of the military
health system.  DOD policy for TRICARE states that the success of the
program relies to a great extent on inter-Service cooperation and the
administrative skills of the lead agents.  Officials from lead agent
offices and military hospitals have expressed general satisfaction
with the cooperative and collaborative attitude of the facilities in
their region.  However, the officials are concerned about the degree
of control or authority the lead agents and medical facilities will
have and the extent to which they can effectively manage the delivery
of care in the region.  They also believe that clearer lines of
responsibility and accountability for organizational performance are
necessary. 

Issues related to lead agent control and authority are inherently
complex because TRICARE calls for the lead agent to coordinate all
care provided in the region (including care provided by the
contractor).  However, the Services retain command and control over
their military facilities and personnel, with each facility
accountable to its parent Service.  Therefore, the lead agent does
not control the funds that flow from the Services to their respective
facilities or the CHAMPUS funds, which are controlled by DOD and the
contractor. 

The lead agents must also overcome the effects of inter-Service
rivalries that have historically hampered efforts to establish
efficient health care delivery systems.  The lead agent must foster
teamwork that crosses traditional Service boundaries.  For example,
the Air Force lead agent in one region will oversee and manage the
delivery of health care by 19 Army, Navy, and Air Force military
hospitals and clinics and the civilian contractor.  Although
communication among the Services appears to have improved, the lead
agents' challenge will be to convince other Services' hospital
officials and headquarters commands to participate in initiatives to
improve health care delivery in the entire region. 

Some DOD and Service officials have questioned whether lead agents
will have the authority necessary to improve health care delivery. 
Some of those officials, particularly those more experienced in
managed care demonstrations, believe that lead agents and medical
facilities need more control over the use of CHAMPUS money, what is
to be contracted out, and contractor activities and functions.  On
the other hand, some prospective contractors have expressed concern
that DOD is seeking control over issues that the contractor should
decide. 

      HEALTH CARE CONTRACTING
      PROCESS IS CUMBERSOME AND
      CONTENTIOUS
----------------------------------------------------- Appendix III:7.2

Contracting for private-sector health care services, a key feature of
TRICARE, is proving to be cumbersome, complex, and costly, resulting
in protests, schedule delays, and an overall lengthy procurement
process.  For example, the one awarded contract took almost 2 years. 
Prospective contractors have expressed much frustration with the
process, stating that the level of detail in the RFPs and the number
of changes to the requests contribute to contract delays and increase
their costs of preparing responsive proposals.  Offerors estimate it
costs between $1 and $2 million just to prepare a proposal.  Because
of the size and complexity of the contracts, competition may be
limited to only the largest health care companies, according to
prospective offerers.  DOD officials acknowledge the complaints but
consider the benefits of implementing a uniform program nationwide to
be a worthwhile trade-off.  Further, DOD officials consider the
problem of changes to the RFPs to be a diminishing one as they
continue to gain experience with this type of contract. 

Several protests have been filed during the managed care support
contracting process.  One of the protests was upheld by GAO,
resulting in the contract's rebidding and DOD's changing several of
its procurement procedures to address the protested issues.  The
other protests, filed after the changes were made, were denied.  DOD
officials hope the changes will prevent future protests from being
upheld.  We are examining DOD's procurement process to determine
whether additional changes are needed and expect to report on these
matters at a later date. 

      CAPITATION AND ENROLLMENT
      FEATURES IN TRICARE
----------------------------------------------------- Appendix III:7.3

Two features of private-sector managed care programs are the use of a
capitated method to allocate resources and the requirement that
beneficiaries enroll and pay premiums in a specific health care plan. 
These features work together, with enrollment and associated premiums
providing a definition of the population that will use the plan and
capitation providing a mechanism to budget health care funds on the
basis of the number enrolled rather than the type of medical care to
be provided.  These features create strong incentives for
beneficiaries to exclusively use plans in which they are enrolled and
have paid premiums and for health care providers to more efficiently
serve beneficiaries.  Concerns have been raised, however, that the
capitation method and enrollment requirements under TRICARE may not
yield the same benefits as those private-sector plans because of
design differences. 

The capitation method adopted by DOD could perpetuate existing
inefficiencies in the system because the per capita rates are based
on past levels of military spending, according to the Congressional
Budget Office (CBO).  CBO reported that projecting future resource
requirements on the basis of historical spending patterns could lock
past inefficiencies into the system, especially given
higher-than-average use of medical care by military beneficiaries. 
Furthermore, the capitated amounts are not based on the actual number
that used the system but on an estimate determined from surveys of
military beneficiaries.  DOD acknowledges that it does not know the
number of actual users because it does not require beneficiaries to
select and enroll in a single health care plan but expects that it
will be able to address any disparities as TRICARE matures. 

Under TRICARE, beneficiaries are not required to select between
civilian care and military care, nor must they select a single plan
within the three options offered by DOD.  Without a universal
enrollment system that would lock beneficiaries into a single plan,
beneficiaries may move freely between DOD sources of care and private
insurers or other programs or health care providers such as Medicare,
the Federal Employees Health Benefits Program, and the VA.  Even
beneficiaries enrolled in the PRIME option are not locked into a
single choice; they may use other health care providers, although at
a considerably higher cost share. 

The lack of a universal enrollment system to identify the population
that uses the MHSS also makes it more difficult for lead agents and
support contractors to create provider networks and plan the medical
services necessary to best meet the health care needs of the
population using the MHSS.  According to CBO and other managed care
experts, the absence of universal enrollment makes it unlikely that
TRICARE will achieve its maximum efficiency. 

According to DOD, universal enrollment in the civilian sector does
not inherently restrict a beneficiary to a particular source of care
if other insurance programs and providers are available to the
beneficiary.  The principle mechanism that restricts the use of
multiple programs in the civilian sector is charging beneficiaries a
sufficient premium for care, and DOD has included a premium for some
beneficiaries in TRICARE Prime in the form of an enrollment fee. 
However, at this early stage of TRICARE implementation, whether the
capitation and enrollment features of TRICARE will address the
concerns of CBO and others is uncertain. 

      PROGRAM AVAILABILITY AND
      COST-SHARING REQUIREMENTS
----------------------------------------------------- Appendix III:7.4

We and others have reported on the need for uniform benefits and cost
sharing for each category of beneficiary, regardless of residence or
location of health care provider.  Additionally, the fiscal year 1994
authorization and appropriations acts for the Department of Defense
required DOD to develop, to the extent practical, health benefit
options including a uniform health benefit modeled after
private-sector HMOs.\23 DOD has made significant progress on this
issue.  TRICARE offers beneficiaries three health benefit options,
and, in December 1994, DOD announced a fee structure for
beneficiaries that enroll in Prime, regardless of residence. 

Despite this progress, however, true uniformity in benefits and cost
sharing has yet to be achieved, and some inequities still remain. 
For example, all beneficiaries will not have access to the three
health benefits options because medical resources do not exist in
some areas to support establishing provider networks for the Prime
and Extra option.  As a result, those beneficiaries will not have
access to the benefits and cost savings that the Prime and Extra
options offer.  Secondly, in some places where TRICARE Prime is
established, DOD expects that availability will be limited and not
all eligible beneficiaries will be permitted to enroll, creating
another inequity.  Finally, beneficiaries who do enroll in Prime may
not receive all their care within military facilities but can be
assigned a civilian primary care physician and referred to civilian
specialists.  This creates another inequity for Prime enrollees
because those using civilian providers must bear a greater cost share
than those assigned or referred to military physicians. 

--------------------
\23 The National Defense Authorization Act for Fiscal Year 1994 (P.L. 
103-160) and Department of Defense Appropriations Act, 1994, (P.L. 
103-139). 

      AVAILABILITY OF CRITICAL
      MANAGEMENT INFORMATION
      SYSTEMS
----------------------------------------------------- Appendix III:7.5

The long-standing concerns about DOD health care management
information systems continue and are even more critical with the
implementation of TRICARE.  In particular, the Managed Care Program
module of DOD's Composite Health Care System (CHCS) is designed to
support the administration and delivery of health care in each
region.  The module tracks the enrollment of beneficiaries in the
Prime option, patient appointment bookings, and patient referrals--
all functions needed at the onset of TRICARE implementation.  DOD has
a schedule for installing the module into CHCS within the military
medical facilities nationwide, but lead agents and medical facility
officials are concerned that it will not be available when needed,
given the long development history and pattern of delivery schedule
delays of the CHCS. 

      IS TRICARE THE MOST
      COST-EFFECTIVE OPTION? 
----------------------------------------------------- Appendix III:7.6

The 733 study conclusion (described in app.  II) that DOD may be able
to reduce its medical force by as much as one-half has significant
implications for peacetime medical care.  To the extent that the
current peacetime capacity exceeds that which is required for war,
economic factors will become a principal determinant of the size and
structure of the peacetime medical force and of the best means for
delivering care to military beneficiaries. 

DOD has certified to the Congress that its managed care approach is
the most efficient method of providing health care.  We have reported
that the analyses conducted in support of DOD's certification were
done in a reasonable way and fairly represented the likely impact of
DOD's managed care approach on costs, quality, and access.  Other
studies, however, suggest that more cost-effective alternatives to
TRICARE exist that will better meet the future health care needs of
all beneficiaries, while maintaining a required readiness posture. 
CBO reported that DOD's certification analyses likely understated
costs and that it was possible that net costs could increase
substantially.  The 733 study concluded that an attractive MHSS
benefit, such as that offered in TRICARE, attracts more people than
the system can cost effectively accommodate.  They determined that to
implement such a benefit, which would increase demand for military
care, DOD would need to seek reimbursement from other employers and
the Health Care Financing Administration for care provided to
employed or Medicare eligible beneficiaries.  Otherwise, DOD would
have to bear the additional costs of this demand effect.  A study by
RAND of the CHAMPUS Reform Initiative, one of DOD's early managed
care experiments that had many similarities to TRICARE found that the
increased demand resulting from the program's very generous benefit
resulted in costs to the government greater than would have been
incurred without the program. 

Beneficiary groups have proposed a broader health benefits program
that would permit beneficiaries to also choose from among the options
offered in the Federal Employees Health Benefits Program.  They
believe this would not only improve access to care but would be more
cost-effective than DOD's current plans.  A DOD-contracted study,
conducted in 1993, concluded that such a proposal might cost DOD less
compared with current MHSS costs.  Both CBO and the Commission on the
Roles and Missions of the Armed Forces have been studying the cost
and feasibility of this option, and their reports are expected in the
near future. 

GAO REPORTS AND TESTIMONIES ON
MILITARY HEALTH CARE
========================================================== Appendix IV

   MANAGED CARE PLANNING AND
   IMPLEMENTATION
-------------------------------------------------------- Appendix IV:1

Defense Health Care:  Challenges Facing DOD in Implementing
Nationwide Managed Care (Testimony, GAO/T-HEHS-94-145, Apr.  19,
1994).  DOD has made progress in implementing TRICARE, but some
questions remain about its potential cost-effectiveness.  In
addition, implementation issues need to be addressed, such as the
unclear role and authority of lead agents, DOD's ability to evaluate
contractor proposals sufficiently, and problems resulting from rigid
time frames for implementation of TRICARE. 

Defense Health Care:  Expansion of CHAMPUS Reform Initiative Into
DOD's Region 6 (Report, GAO/HEHS-94-100, Feb.  9, 1994).  The
analyses conducted in support of DOD's certification for expanding
the modified CHAMPUS Reform Initiative (CRI) program to DOD's region
6 were done in a reasonable way and fairly represent the likely
impact of the program on cost, quality, and access. 

Defense Health Care:  Expansion of the CHAMPUS Reform Initiative Into
Washington and Oregon (Report, GAO/HRD-93-149, Sept.  20, 1993). 
DOD's comparison of the modified CRI program and standard CHAMPUS was
done in a reasonable way.  However, the certification based on this
comparison did not address other health care delivery methods. 

Defense Health Care:  Lessons Learned From DOD's Managed Health Care
Initiatives (Testimony, GAO/T-HRD-93-21, May 10, 1993).  The lessons
learned from DOD's managed care initiatives can provide useful
information as DOD proceeds in implementing managed care throughout
its health care system.  These lessons emphasize the need for uniform
health care benefits, improvements in accountability, budgeting and
resource allocation, and information systems, as well as the
establishment of safeguards to ensure high-quality and accessible
care that protects the beneficiaries and the government. 

Defense Health Care:  Obstacles in Implementing Coordinated Care
(Testimony, GAO/T-HRD-92-24, Apr.  7, 1992).  DOD faces significant
challenges as it tries to restructure its health care system, such as
budget constraints, building a consensus for the changes needed, and
lack of reliable data upon which to base decisions.  In addition, DOD
needs to address significant implementation issues in both program
features, such as beneficiary cost sharing, and administrative
functions, such as information systems. 

Defense Health Care:  Implementing Coordinated Care--A Status Report
(Report, GAO/HRD-92-10, Oct.  3, 1991).  Although DOD has made
significant advances in moving to a managed health care system, some
questions remain:  DOD does not know how it will measure military
hospital commanders' performance; adequate budgeting and resource
allocation systems may not be developed quickly enough; limited
start-up resources have been allocated; and benefits and cost-sharing
requirements vary. 

The Military Health Services System:  Prospects for the Future
(Testimony, GAO/T-HRD-91-11, Mar.  14, 1991).  DOD has tested managed
care models in its demonstration programs and has found that
features, such as local accountability, strong utilization management
and quality assurance programs, and good information and claims
processing systems, are necessary in a managed care environment. 

   MENTAL HEALTH
-------------------------------------------------------- Appendix IV:2

Psychiatric Fraud and Abuse:  Increased Scrutiny of Hospital Stays Is
Needed for Federal Health Programs (Report, GAO/HRD-93-92, Sept.  17,
1993).  Some control weaknesses exist and other controls have not
been fully implemented, which renders federal programs, such as
Medicare, Medicaid, and CHAMPUS, vulnerable to fraudulent and abusive
psychiatric hospital practices. 

Defense Health Care:  Additional Improvements Needed in CHAMPUS's
Mental Health Program (Report, GAO/HRD-93-34, May 6, 1993).  Mental
health cost control efforts are working; however, several problems
remain:  reviews of medical records show high rates of potentially
inappropriate hospital admissions, inspections of residential
treatment centers continue to reveal problems, and CHAMPUS payment
rates to psychiatric facilities are higher than other government
program rates. 

DOD Mental Health Review Efforts (Letter, GAO/HRD-93-19R, Mar.  31,
1993).  DOD has made a commitment to act against providers who
deliver unnecessary or inappropriate care.  The provision of mental
health services to DOD beneficiaries is scrutinized more thoroughly
than other federally financed insurance programs. 

Defense Health Care:  CHAMPUS Mental Health Demonstration Project in
Virginia (Report, GAO/HRD-93-53, Dec.  30, 1992).  The demonstration
project has saved money under two measures of cost savings.  However,
improvements are needed in DOD oversight. 

Defense Health Care:  Efforts to Manage Mental Health Care Benefits
to CHAMPUS Beneficiaries (Testimony, GAO/T-HRD-92-27, Apr.  28,
1992).  Although DOD's management of mental health care has improved
since the 1980s, GAO has substantial concerns about the quality and
appropriateness of mental health care provided to DOD beneficiaries
and believes that DOD needs to act more aggressively in dealing with
problem providers. 

DOD's Management of Beneficiaries' Mental Health Care (Testimony,
GAO/T-HRD-91-18, Apr.  24, 1991).  Legislative changes and DOD's
management initiatives enhance the prospects for gaining control over
mental health care costs.  However, DOD needs to improve its quality
assurance program for mental health services. 

   INFORMATION TECHNOLOGY
-------------------------------------------------------- Appendix IV:3

Medical ADP Systems:  Composite Health Care System Is Not Ready to be
Deployed (Report, GAO/IMTEC-92-54, May 20, 1992).  Two critical
system-development and operational issues remain unresolved--multiple
patient records and archiving patient records.  The limited progress
made by DOD on an efficient method of entering physicians' inpatient
orders could have a significant impact on the Composite Health Care
System (CHCS) deployment. 

Composite Health Care System:  Outpatient Capability Is Nearly Ready
for Worldwide Deployment (Report, GAO/IMTEC-93-11, Dec.  15, 1992). 
The deployment plan lacks specificity and the cost/benefit analysis
is still unclear and unsubstantiated. 

Medical ADP Systems:  Changes in Composite Health Care System's
Deployment Strategy Are Unwise (Report, GAO/IMTEC-91-47, Sept.  30,
1991).  DOD planned a March 1992 decision to deploy a version of CHCS
that did not include the capability to archive and retrieve patient
records and an efficient method for entry of physicians' orders. 

   OPERATION DESERT STORM
-------------------------------------------------------- Appendix IV:4

Operation Desert Storm:  Problems With Air Force Medical Readiness
(Report, GAO/NSIAD-94-58, Dec.  30, 1993).  The medical and
evacuation units provided by the Air Force would have had difficulty
handling the predicted number of casualties, and the system for
regulating patient movement to available medical facilities was
inadequate.  However, initiatives to implement lessons learned may
improve the Air Force's response to future contingencies. 

Operation Desert Storm:  Improvements Required in the Navy's Wartime
Medical Care Program (Report, GAO/NSIAD-93-189, July 28, 1993).  Navy
medical units were assigned wartime missions they were not prepared
to fulfill.  Deployment and assignment of medical personnel were not
efficiently managed, personnel arrived in theater without adequate
training, and lack of inventory controls hampered the flow of
equipment and supplies. 

Operation Desert Storm:  Full Army Medical Capability Not Achieved
(Report, GAO/NSIAD-92-175, Aug.  18, 1992).  Testimony on same topic
(GAO/T-NSIAD-92-8, Feb.  5, 1992).  The Army's ability to provide
adequate care had the predicted number of casualties occurred would
have been questionable because of problems with nondeployable medical
personnel, incomplete personnel information systems, medical
personnel not trained for wartime missions, and hospitals that were
never fully equipped or supplied. 

   OTHER
-------------------------------------------------------- Appendix IV:5

Decision Regarding Protest Filed by QualMed, Inc.  (Redacted Version,
B-257184.2, Jan.  7, 1995).  The offeror protested the award on the
grounds that the technical and business proposals were improperly
evaluated.  GAO found that the processes involved in evaluating
health care costs were reasonable and in accordance with the request
for proposal (RFP).  In addition, no evidence existed to show that
DOD acted with the intent of hurting the protester.  The protest was
denied in part and dismissed in part. 

VA/DOD Health Care:  More Guidance Needed to Implement CHAMPUS-Funded
Sharing Agreements (Report, GAO/HEHS-95-15, Oct.  28, 1994). 
Potential sharing opportunities have been missed because neither DOD
nor VA has conducted a systemwide search to identify opportunities
for sharing agreements. 

Defense Health Care:  Uniformed Services Treatment Facility Health
Care Program (Report, GAO/HEHS-94-174, June 2, 1994).  USTF health
care services equal TRICARE Prime and surpass other components of the
military health care system.  Beneficiary cost sharing in USTFs is
less than in other DOD health programs except the direct care system. 
The cost and other implications of terminating the USTF agreements
before they expire vary among the parties affected. 

Decision Regarding Protests Filed by Foundation Health Federal
Services, Inc.  and QualMed, Inc.  (Redacted Version, B-254397.4 et
al., Dec.  20, 1993).  This decision sustained the protests on the
basis that DOD failed to evaluate offerors' proposals in accordance
with the RFP evaluation criteria. 

Defense Health Care:  Health Promotion in DOD and the Challenges
Ahead (Report, GAO/HRD-91-75, June 4, 1991).  The health promotion
programs reviewed appeared comparable to those of private-sector
firms; however, the comprehensiveness of these programs varies.  How
cost beneficial health promotion efforts are unknown. 

Defense Health Care:  Potential for Savings by Treating CHAMPUS
Patients in Military Hospitals (Report, GAO/HRD-90-131, Sept.  7,
1990).  DOD can potentially save money by adding staff and equipment
at military hospitals to treat more patients, rather than paying for
their care under CHAMPUS. 

Defense Health Care:  Military Physicians' Views on Military Medicine
(Report, GAO/HRD-90-1, Mar.  22, 1990).  Physicians reported
dissatisfaction with many aspects of military medicine, and
physicians' intentions to leave the service over the next several
years parallel DOD's historical attrition rates.  Active-duty
physicians' intentions to leave are influenced by the time spent on
nonphysician tasks, the gap between military and civilian
compensation, and the lack of opportunity to practice in their
primary specialties. 

Defense Health Care:  Effects of AIDS in the Military (Report,
GAO/HRD-90-39, Feb.  26, 1990).  Thus far, AIDS has had a minimal
impact on overall DOD operations.  However, AIDS has had a
significant impact on military hospitals primarily because of the
strain placed on resources during mass testing.  It is unclear how
DOD plans to provide the resources needed to deal with the expected
increase in demand for AIDS-related health care services. 

GAO CONTACTS AND STAFF
ACKNOWLEDGMENTS
=========================================================== Appendix V

GAO CONTACTS

Stephen Backhus, Assistant Director, (202) 512-7111
Catherine Shields, Senior Evaluator, (202) 512-7168

ACKNOWLEDGMENTS

In addition to those named above, the following individuals made
important contributions to this report.  Paul Francis and Dade Grimes
provided the information on DOD's wartime health care mission and
performance.  Helen Lew, Tonia Johnson, and John Riley provided the
input on management information systems.  Don Hahn and Cheryl Brand
provided the data on the contracting process.  Elkins Cox, Sylvia
Diaz, Allan Richardson, and Nancy Toolan provided information on
DOD's peacetime health care and TRICARE. 

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