Military Health Care: Cost Data Indicate That TRICARE Reserve Select Premiums Exceeded the Costs of Providing Program Benefits
Published: 2007-12-21T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: (DOD) TRICARE Reserve Select (TRS) program allows most reservists to purchase coverage under TRICARE, the military health insurance program, when not on active duty. DOD intends to set premiums at a level equal to the expected costs of providing TRS benefits. The National Defense Authorization Act for 2007 required GAO to review TRS costs. As discussed with the committees of jurisdiction, GAO compared (1) the TRS premiums established by DOD to the reported costs of providing benefits under TRS in 2006 and (2) DOD's projected costs for TRS before implementation to DOD's reported costs for the program in 2005 and 2006. To do this work, GAO examined DOD analyses and interviewed DOD officials and external experts.
section_title: What GAO Found
paragraphs: In 2006, the premium for both individual and family coverage under TRS--which DOD based on Blue Cross and Blue Shield (BCBS) premiums--exceeded the reported average cost per plan of providing TRICARE benefits through the program. TRS currently serves less than 1percent of the overall TRICARE population, and unlike most other TRICARE beneficiaries, TRS enrollees pay a premium to receive health care coverage. At the time of GAO's analysis, TRS consisted of three tiers, established by law, with reservists in each tier paying different portions of the total premium, based on the tier for which they qualified. Over 90 percent of reservists who purchased TRS coverage enrolled in tier 1. The premium for individual coverage under tier 1 was 72 percent higher than the average cost per plan of providing benefits through the program. Similarly, the premium for family coverage under tier 1 was 45 percent higher than the average cost per plan of providing benefits. DOD based TRS premiums on BCBS premiums because, at the time DOD was developing TRS, actual data on the costs of TRS did not exist; however, these data are now available. Had DOD been successful in establishing premiums that were equal to the cost of providing benefits in 2006, the portion of the premium paid by enrollees in tier 1--which is set by law to cover 28 percent of the full premium--would have been lower that year. Reasons that TRS premiums did not align with benefit costs included differences between the TRS and BCBS populations and differences in the way the two programs are designed, which DOD did not consider in its methodology. According to experts, the most successful methods for aligning premiums with actual program costs involve using program cost data when setting premiums. The regulation governing TRS premium adjustments allows DOD to use either BCBS premiums or other means as the basis for TRS premiums. However, DOD officials told GAO that they plan to continue, at least for the near future, to base TRS premiums on BCBS premiums because of limitations associated with using currently available data to predict future TRS costs. However, these limitations should decrease over time as DOD gains more experience with the program and enrollment increases. Nonetheless, due to the uncertainty associated with predicting future health care costs, premiums are unlikely to exactly match program costs, even when they are based on cost data from prior years. Other insurance programs have methods to address differences between premiums and program costs, which are not provided to DOD in the law governing TRS. DOD overestimated the total cost of providing benefits through TRS. While the department projected that its total costs would amount to about $70 million in fiscal year 2005 and about $442 million in fiscal year 2006, DOD's reported costs in those years were about $5 million and about $40 million, respectively. DOD's cost projections were too high largely because it overestimated the number of reservists who would purchase TRS and the associated cost per plan of providing TRS benefits. DOD officials told GAO that they chose not to use TRS cost and enrollment data when projecting future year program costs and enrollment levels because of uncertainty about whether they would provide an accurate indication of future experience.

section_title: Letter
paragraphs: Since the September 11, 2001, terrorist attacks, the Department of Defense  (DOD) has increasingly relied on reservists to support military operations,  such as the conflicts in Iraq and Afghanistan. In recognition of this,  Congress has increased the health care benefits available to reservists and  their dependents, which generally include family members such as  spouses and dependent children. Specifically, the National Defense  Authorization Acts (NDAA) for Fiscal Years 2005, 2006, and 2007 expanded  the number of reservists and their dependents who qualify for TRICARE,  the military health insurance program, and increased the period during  which they qualify. The NDAA for Fiscal Year 2005 established the  program that DOD has named TRICARE Reserve Select (TRS), which  currently allows most members of the Selected Reserves to purchase  TRICARE coverage for periods after the TRICARE coverage associated  with active duty expires. After purchasing coverage, enrollees can obtain  health care through TRICARE-authorized providers or hospitals or  through DOD-operated military treatment facilities (MTF) if appointments  are available. TRS currently serves a small portion of the TRICARE  population—as of June 2007, only about 34,000 of the 9.1 million TRICARE  beneficiaries were enrolled in TRS.
Unlike most TRICARE beneficiaries who obtain health care benefits  without paying premiums, reservists who qualify for TRS must pay a  monthly premium to receive benefits through the program. By statute,  DOD is required to set premiums for TRS at a level that it determines to be  reasonable using an appropriate actuarial basis. DOD officials told us that  the department interpreted this to mean that TRS premiums should be set  equal to the expected average costs of providing the benefit per plan. TRS  enrollees are responsible for paying a portion of the total premium set by  DOD. In this report the term premium refers to the total premium—that is,  the portion paid by enrollees, currently 28 percent, plus the portion  covered by DOD, currently 72 percent. DOD based the premiums for TRS  on the Federal Employees Health Benefits Program’s (FEHBP) Blue Cross  and Blue Shield (BCBS) Standard premiums, which the department  adjusted to account for differences in age, gender, and family size between  the BCBS population and the population of reservists and their family  members who qualify for TRS. To keep pace with rising health care costs,  DOD originally designed TRS so that the premiums are adjusted each year  based on annual adjustments in BCBS Standard premiums. DOD planned  to continue using this method to adjust premiums in the near future.
The NDAA for Fiscal Year 2007 required that we review DOD’s costs of  implementing the TRS program. Specifically, as discussed with the  committees of jurisdiction, we compared (1) the annual TRS premiums  established by DOD to the reported costs of providing benefits under TRS  in 2006 and (2) DOD’s projected costs for the TRS program before  implementation to DOD’s reported costs for the program in 2005 and 2006.  The NDAA for Fiscal Year 2007 also required that we describe how  increases in TRS premiums compare with DOD’s annual rate of medical  care price inflation. This information is included in appendix I.
To compare the annual TRS premiums established by DOD to the reported  costs of providing benefits under TRS in 2006, we reviewed DOD’s  reported TRS enrollment data and data on the cost of providing TRS  benefits through TRICARE-authorized civilian providers or hospitals, data  on the administrative costs associated with providing TRS benefits, and  data on the costs of providing TRS benefits through MTFs. Using DOD’s  data, we calculated the average cost per TRS plan of providing individual  and family coverage as the sum of the reported costs divided by the  average number of TRS plans. We also reviewed legislation relevant to the  TRS program and literature on setting health insurance premiums and  interviewed experts from the fields of health economics and finance and  DOD officials in the TRICARE Management Activity and the Office of the  Assistant Secretary for Health Affairs, which are responsible for managing  the TRICARE program. We limited our analysis to calendar year 2006  because some 2007 data are still incomplete and because 2005 average  cost data in some months are based on a very small number of enrollees.  During the time period covered by our analysis, TRS included three tiers of  eligibility with enrollees in each tier paying different portions of the  premium based on the tier for which they qualified. We limited our  analysis to tier 1 because it included over 90 percent of TRS plans and  because tier 1 enrollee premium levels have applied to the entire TRS  program since October 2007. In addition, we were unable to report the  average cost per plan for tiers 2 and 3 separately, due to the low number of  enrollees in these tiers.
To compare DOD’s projected costs for the TRS program before  implementation with DOD’s reported costs for the program in 2005 and  2006, we reviewed the analyses prepared by DOD before TRS’s  implementation that projected (1) the number of individual and family  plans in each tier of the TRS program and (2) the costs per plan of  providing the TRS benefit. These projections were the two major factors  used by DOD to estimate TRS costs. We compared these data with  reported TRS enrollment and cost data from 2005 through 2007. In  reporting the results of our comparison we use cost data through 2006  only, because some cost data for 2007 were incomplete due to the delay  between when a claim is incurred and when it is paid. We also reviewed  DOD internal documents and interviewed DOD officials.
While we have raised concerns about the quality of DOD cost data in  previous reports, we determined that the data used for this analysis were  sufficiently reliable for our purposes based on interviews with DOD  officials and an examination of the data for obvious errors and omissions.  However, we did not independently verify these data.
For a complete discussion of our scope and methodology, see appendix II.  We conducted our work from May 2007 through October 2007 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Beginning on April 27, 2005, DOD made TRICARE coverage available for  purchase through TRS for certain reservists when they were not on active  duty or eligible for pre- or postactivation TRICARE coverage. Enrollees in  TRS can obtain care from MTFs or from TRICARE-authorized civilian  providers or hospitals. TRS enrollees can obtain prescription drugs  through TRICARE’s pharmacy system, which includes MTF pharmacies,  network retail pharmacies, nonnetwork retail pharmacies, and the  TRICARE Mail Order Pharmacy. Since 2005, Congress has made this  benefit available to a growing number of members of the Selected  Reserves.
subsections: section_title: Changes in TRS Coverage
paragraphs: The NDAA for Fiscal Year 2005 authorized the TRS program. As originally  authorized, TRS made TRICARE coverage available to certain members of  the Selected Reserves—that is, reservists mobilized since September 11,  2001, who had continuous qualifying service on active duty for 90 days or  more in support of a contingency operation. To qualify for TRS, reservists  had to enter into an agreement with their respective reserve components  to continue to serve in the Selected Reserves in exchange for TRS  coverage. For each 90-day period of qualifying service in a contingency  operation, reservists could purchase 1 year of TRS coverage. Electing to  enroll in this TRS program was a onetime opportunity, and as originally  authorized, the program required reservists to sign the new service  agreement and register for TRS before leaving active duty service.  Reservists who qualified could also obtain coverage for their dependents  by paying the appropriate premium.
The NDAA for Fiscal Year 2006 expanded the number of reservists and  dependents who qualify to participate in the TRS program. Under the  expanded program, which became effective on October 1, 2006, almost all  reservists and dependents—regardless of the reservists’ prior active duty  service—had the option of purchasing TRICARE coverage. Similar to the  TRS program as it was originally authorized, members of the Selected  Reserves and their dependents choosing to enroll in the expanded TRS  program had to pay a monthly premium to receive TRICARE coverage.  The portion of the premium paid by reservists in the Selected Reserves  and their dependents for TRS coverage varied based on certain qualifying  conditions that had to be met, such as whether the reservist also had  access to an employer-sponsored health plan. The NDAA for Fiscal Year  2006 established three levels—which DOD calls tiers—of qualification for  TRS, with enrollees paying different portions of the premium based on the  tier for which they qualified. Those who would have qualified under the  original TRS program, because they had qualifying service in support of a  contingency operation, paid the lowest premium. In another change to the  program, those reservists with qualifying service in support of a  contingency operation now had up to 90 days after leaving active duty to  sign the new service agreement required to qualify for this lowest premium  tier.
The NDAA for Fiscal Year 2007 significantly restructured the TRS program  by eliminating the three-tiered premium structure. The act also changed  TRS qualification criteria for members of the Selected Reserves, generally  allowing these reservists to purchase TRICARE coverage for themselves  and their dependents at the lowest premium—formerly paid by enrollees  in tier 1—regardless of whether they have served on active duty in support  of a contingency operation. In addition, the act removed the requirement  that reservists sign service agreements to be qualified for TRS. Instead, the  act established that reservists in the Selected Reserves qualify for TRS for  the duration of their service in the Selected Reserves. DOD implemented  these changes on October 1, 2007. See table 1 for an overview of TRS  qualification criteria and the monthly portion of the TRS premiums paid by  reservists.
section_title: Enrollment in TRS
paragraphs: Currently, reservists who qualify for TRS may purchase TRS individual or  family coverage at any time. Once enrolled in TRS, reservists and their  dependents are able to obtain health care through MTFs, if appointments  are available, or through TRICARE-authorized civilian providers or  hospitals. Enrollees who choose to use civilian providers are subject to an  annual deductible, co-payments, and coinsurance. When these enrollees  use providers outside TRICARE’s civilian network, they pay higher cost  shares and are considered to be using TRICARE Standard, the TRICARE  option that is similar to a fee-for-service plan. When they use providers  who are part of the TRICARE network, they pay discounted cost shares  and are considered to be using TRICARE Extra, the TRICARE option that  is similar to a preferred provider plan.
section_title: DOD’s Methods for Developing TRS Premiums
paragraphs: DOD is required by law to set premiums for TRS at a level that it  determines to be reasonable using an appropriate actuarial basis. DOD  officials told us that the department interpreted this to mean that TRS  premiums should be set equal to the expected average costs per plan of  providing the benefit. Beginning in 2005, DOD based TRS premiums on the  premiums for the BCBS Standard plan offered through FEHBP because, at  the time DOD was developing TRS, actual data on the costs of delivering  TRS benefits for the TRS population did not exist. To set the premiums,  DOD compared characteristics of the beneficiary populations in each  group and subsequently adjusted the BCBS premiums for differences in  age, gender, and family size between the TRS and BCBS populations. The  population that qualifies for TRS is younger, has a higher percentage of  males, and has a larger number of dependents per sponsor than the BCBS  population. Taken together, DOD concluded that these factors caused  expected health care costs for the TRS population to be lower than  expected health care costs for the BCBS population. To account for these  differences, DOD set the TRS premium for individual coverage 32 percent  lower than the corresponding BCBS premium and set the TRS premium  for family coverage 8 percent lower than the corresponding BCBS  premium. According to DOD officials, the department based TRS  premiums on BCBS premiums, rather than another health insurance plan’s  premiums, because BCBS offers coverage that is similar to the coverage  offered under TRICARE Standard. (For a comparison of cost-sharing  provisions under TRS and BCBS Standard, see table 2.) In addition, like  TRS, BCBS charges a separate premium for individual coverage and for  family coverage, and each of these premiums is uniform nationally and  updated annually. Furthermore, according to DOD officials, basing TRS  premiums on BCBS premiums allowed the department to account for the  effect of adverse selection on the department’s costs, because adverse  selection is already accounted for in BCBS premiums.
In order to compensate for rising health care costs, DOD originally  designed TRS premiums so that they would be adjusted each year based  on annual adjustments in the total BCBS Standard premiums. DOD  planned to continue using this method to adjust premiums in the  immediate future but allowed for the possibility that it might change the  methodology at some point in the future. Thus, if BCBS premiums  increased by 8.5 percent from 2005 to 2006, TRS premiums would be  increased by the same percentage. New premiums are effective at the start  of each calendar year. TRS premiums were increased by 8.5 percent for  2006 and scheduled to be increased by 1 percent for 2007, but a provision  in the NDAA for Fiscal Year 2007 prevented this increase from being  implemented for 2007.
According to DOD officials, another reason DOD decided to use BCBS as  the basis for annual TRS premium adjustments was because BCBS  premiums are updated annually, and the new premiums are made public  each October. DOD officials told us they did not want to use DOD data to  adjust premiums because they believe that doing so would be less  transparent; that is, they wanted to avoid any appearance that the data  might have been manipulated to DOD’s own financial advantage.
section_title: Basing TRS Premiums on BCBS Premiums Resulted in TRS Premiums That Exceeded the Costs of Providing Program Benefits in 2006
paragraphs: In 2006, the premiums for both individual and family coverage under TRS  exceeded the reported costs of providing TRICARE benefits through the  program. The total premium for individual coverage under tier 1 was   72 percent higher than the average cost per plan of providing benefits  through the program. Similarly, the total premium for family coverage  under tier 1 was 45 percent higher than the average cost per plan of  providing benefits. There are several reasons that basing TRS premiums  on BCBS premiums did not successfully align TRS premiums with benefit  costs. These include certain differences between the TRS and BCBS  populations and certain differences between the two programs that DOD  did not take into account. Experts indicated that data on the costs of  delivering TRS benefits would provide DOD with an improved basis for  adjusting premiums in future years.
subsections: section_title: In 2006, the Premium for Both Individual and Family Coverage under TRS Exceeded the Reported Costs per Plan of Providing Benefits through the Program
paragraphs: In 2006, the premium for both individual and family coverage under TRS  exceeded the reported costs per plan of providing TRICARE benefits  through the program. For tier 1, the annual premium for individual plans  of $3,471—including the share paid by enrollees and the share covered by  DOD—was 72 percent higher than the average cost of providing benefits  through TRS of $2,020 per plan. Similarly, the annual premium for family  plans of $10,843 was 45 percent higher than the average cost of providing  benefits through TRS of $7,496 per plan. (See fig. 1.)
The average costs per TRS plan do not include certain administrative costs  that DOD was not able to allocate specifically to TRS, such as advertising  costs and program education. However, DOD officials told us that  including these costs would not be sufficient to close the gap between TRS  premiums and the average costs per plan. DOD also incurred start-up costs  associated with establishing the TRS program, which are not included in  the average costs per TRS plan because DOD did not intend for them to be  covered by TRS premiums.
The discrepancy between TRS premiums and reported TRS costs has  implications for DOD’s cost sharing with TRS enrollees. By statute, the  portion of the TRS premium paid by enrollees in tier 1—and all enrollees  as of October 1, 2007—is to cover 28 percent of the full premium. In 2006,  TRS enrollees in tier 1 paid $972 for individual coverage and $3,036 for  family coverage. This covered 48 percent of the average cost per individual  plan and 41 percent of the average cost per family plan. Had DOD been  successful in establishing TRS premiums that were equal to the average  reported cost per TRS plan in 2006, enrollees’ share of the premium would  have been $566 for single coverage and $2,099 for family coverage in that  year.
section_title: Basing TRS Premiums on BCBS Premiums Is Unlikely to Successfully Align TRS Premiums with Benefit Costs
paragraphs: Basing TRS premiums on BCBS premiums is unlikely to align TRS  premiums with benefit costs because of several differences between the  TRS and BCBS populations and programs that DOD did not take into  account. DOD based TRS premiums on BCBS premiums because at the  time DOD was developing TRS, actual data on the costs of delivering TRS  benefits to the TRS population did not exist. However, experts we  interviewed suggested that because of demographic differences between  the TRS and BCBS populations, BCBS-based premiums are unlikely to  reflect TRS costs. In setting TRS premiums, DOD adjusted BCBS  premiums to account for differences in age, gender, and family size  between the TRS and BCBS populations. However, DOD did not take other  demographic differences into account that could have potentially affected  its likely success—such as enrollees’ geographic distribution and health  status—because accounting for these differences is very difficult. The  geographic distribution of a population is an important factor in predicting  health care costs and corresponding health insurance premiums, in large  part because physician payment rates vary across geographic locations.  Furthermore, according to experts we interviewed, the most important  predictors of health care costs are measures related to enrollees’ health  status, which were not fully available to DOD when it first established TRS  premiums.
Another factor that may have contributed to the disparity between TRS  premiums and the program’s costs is the dissimilarity in the structures of  the TRS and BCBS programs. While TRS premiums are designed to cover  enrollees’ health care costs and certain administrative costs, BCBS  premiums are designed to cover these costs and also may include  contributions to or withdrawals from plan reserves and profits. As a  result, changes in BCBS premiums are generally not equal to changes in  BCBS program costs.
section_title: TRS Cost Data Would Provide DOD with an Improved Basis for Adjusting Premiums in Future Years
paragraphs: Experts indicated that data on the costs of delivering TRS benefits will  provide DOD with an improved basis for adjusting premiums in future  years. They informed us that there are several methods of setting health  insurance premiums. The methods that are most successful in aligning  premiums with the actual costs of providing benefits involve using  program cost data when setting premiums. Although TRS cost data did not  exist when the program was implemented, leading DOD to base TRS  premiums on BCBS premiums, TRS cost data from 2005 and 2006 are now  available. In DOD’s description of its methodology for establishing and  adjusting TRS premiums in the Federal Register on March 16, 2005, DOD  allowed for the possibility of using other means to adjust premiums in the  future. It stated that it could base future changes in TRS premiums on  actual cost data. However, DOD officials told us that the department has  not used these data to adjust TRS premiums due to the limitations  associated with using prior year costs to predict future costs. According to  DOD officials, prior year claims data may not be indicative of future year  claims costs due to the newness of the TRS program, recent changes to  TRS, and the low number of enrollees. However, TRS cost data reflect  actual experience with the program and any limitations associated with  TRS cost data should decrease over time as DOD gains more experience  with the program and more reservists enroll in it.
Nonetheless, due to the uncertainty associated with predicting future  health care costs, premiums are unlikely to exactly match program costs,  even when they are based on cost data from prior years. To help adjust for  discrepancies between premiums and program costs, some health  insurance programs have established reserve accounts, which may be used  to defray future premium increases or cover unexpected shortfalls from  higher-than-anticipated costs. For example, as noted earlier, the Office of  Personnel Management administers a reserve account for each FEHBP  plan, including BCBS. These reserve accounts are funded by a surcharge  of up to 3 percent of a plan’s premium. Once funds in the reserve accounts  exceed certain minimum balances, they can be used to offset future year  premium increases. Similarly, some health insurance programs make  adjustments to premiums for subsequent years that account for any  significant discrepancy between prior year premiums and program costs.  The law governing TRS contains no provision for the establishment of a  reserve account or for methods of increasing or decreasing premiums,  after they are set, to address differences between premiums and costs in  prior years.
section_title: TRS’s Projected Costs Significantly Exceeded Reported Costs for Fiscal Years 2005 and 2006 Largely Because Enrollment Levels Were Lower Than DOD Expected
paragraphs: DOD’s estimated costs of providing TRS benefits were about 11 times  higher than its reported costs. DOD’s cost projections were too high  largely because it overestimated the number of reservists who would  enroll in TRS as well as the associated cost per plan of providing benefits  through the program. DOD officials told us that they considered TRS cost  and enrollment data when developing future year projections of program  costs and enrollment levels, but they chose not to use these data as part of  their projections because they are uncertain that prior year enrollment and  cost data are indicative of future year costs and enrollment levels.
subsections: section_title: DOD’s Projected Costs Were Significantly Higher Than Its Reported Costs for TRS in Fiscal Years 2005 and 2006
paragraphs: DOD significantly overestimated the costs of providing benefits through  TRS. Prior to TRS’s implementation, DOD estimated that total costs of  providing benefits through the program would amount to about   $70 million in fiscal year 2005 and about $442 million in fiscal year 2006. In  contrast, reported costs in those years only amounted to about $5 million  and about $40 million, respectively. DOD estimated the program’s likely  costs by multiplying the number of TRS plans that it projected would be  purchased by DOD’s estimated cost per plan for individual and family  plans. DOD estimated that its cost per plan would be equal to the total TRS  premium minus the portion of the premium paid by enrollees.
section_title: DOD’s Projected Costs Were Higher Than Reported Costs for TRS Because It Overestimated the Number of TRS Enrollees and the Cost per Enrollee
paragraphs: The number of reservists who purchased TRS coverage has been  significantly lower than DOD projected, and as a result TRS program costs  have also been lower than expected. DOD projected that about 114,000  reservists would purchase individual or family plans by 2007; however, as  of June 2007 only about 11,500—or about 10 percent—of that number had  purchased TRS plans. Over 90 percent of TRS enrollment had been for  coverage under tier 1, which offered the lowest enrollee premium  contributions of the three tiers in existence at the time covered by our  analysis. Very few reservists signed up for coverage under tier 3, which  had the highest enrollee premium contributions of the three tiers. (See  table 3.)
DOD estimated the number of reservists who would purchase TRS  coverage by dividing the population of reservists who qualify for each of  the three tiers into several categories for which it estimated distinct  participation rates, based on the premiums these reservists would likely  pay for non-DOD health insurance. DOD projected lower enrollment for  groups that had access to less expensive health insurance options, such as  those who are offered insurance through their employers. DOD officials  believe that enrollment in TRS will increase the longer the program is in  place. However, while enrollment in TRS increased moderately through  October 2006, it has remained relatively stable from October 2006 through  June 2007. (See fig. 2.)
In addition to the estimated number of plans purchased, the other major  factor that affected DOD’s projection of overall TRS program costs was its  estimate of the cost of providing benefits for each TRS plan. As previously  stated, DOD based its estimated cost per plan on the total TRS premium  minus the portion of the premium paid by enrollees. Because the  premiums have been higher than DOD’s reported costs, DOD’s cost  projections have also been too high.
section_title: DOD’s Projection of Future TRS Enrollment Levels Is Likely Too High
paragraphs: DOD developed a new model to project enrollment levels and program  costs under TRS’s single-tiered premium structure that went into effect on  October 1, 2007; however, DOD’s projection of future TRS enrollment  levels is likely too high. DOD projected that the total number of TRS plans  for individual and family coverage would be approximately 64,000 in fiscal  year 2008 at a cost to the department of about $381 million for that year.  However, actual TRS enrollment data to date suggest that total TRS  enrollment—and therefore program costs—are unlikely to be as high as  DOD projected. As of June 2007, there were about 11,500 TRS plans—well  below DOD’s projection of about 114,000. Enrollment will almost certainly  increase to some extent because reservists who previously only qualified  for tier 2 or tier 3 of the program—which required enrollees to pay a larger  portion of the premium—have qualified for the significantly lower tier 1  enrollee premiums since October 1, 2007. However, the degree to which it  will increase is not clear. DOD officials told us that they considered TRS  cost and enrollment data when developing future year projections of  program costs and enrollment levels, but they chose not to use these data  as part of their projections because of uncertainty about whether they  would provide an accurate indication of likely future experience. DOD’s  past enrollment projections, made without the benefit of prior year  enrollment data, were significantly higher than actual enrollment levels.
section_title: Conclusions
paragraphs: Although DOD intended that TRS premiums would be equal to the  expected costs per plan of providing the benefit, DOD set premiums for  the program based on BCBS premiums that proved to be significantly  higher than the program’s average reported costs per plan in 2006.  Reservists’ portion of TRS premiums would have been lower in 2006 if  DOD had aligned premiums with the cost of providing TRS benefits. DOD  officials told us that the department planned to continue basing TRS  premium adjustments on BCBS premium adjustments in the immediate  future, but the regulation governing TRS premium adjustments allows for  the possibility that the department might change its methodology at some  point in the future. However, because TRS premiums were higher than the  average costs per plan in 2006, continuing to adjust TRS premiums based  on BCBS premium adjustments could widen the gap between TRS  premiums and the average costs per plan.
The discrepancy between TRS premiums and the reported program costs  per plan results from the approach DOD used in setting TRS premiums.  Basing TRS premiums on BCBS premiums is problematic because of  several dissimilarities between the two programs. Most important, the  average cost data now available suggest that TRS enrollees have incurred  significantly lower health care costs than BCBS enrollees, even after  adjusting for certain demographic characteristics. In addition, BCBS  premiums may be based on more than program costs, whereas TRS  premiums are intended to cover only costs. Basing TRS premiums on  BCBS premiums may have been reasonable at the time that TRS was first  implemented in 2005 due to the lack of available data on the cost of  providing benefits through TRS. However, cost data that reflect actual  experience under the program are now becoming available, and  limitations associated with them should decrease over time as DOD gains  more experience with the program and more reservists enroll in it. These  data will provide DOD with an improved basis for setting premiums in  future years, and allow the department to eventually eliminate its reliance  on BCBS premiums. Nonetheless, due to the uncertainty associated with  predicting future health care costs, premiums are unlikely to exactly  match program costs, even when they are based on cost data from prior  years. Other insurance programs have methods to address discrepancies  between premiums and program costs, which are not provided to DOD in  the law governing TRS.
DOD has also had difficulty accurately estimating the likely cost of  providing TRS benefits in large part because it overestimated the number  of reservists who would likely purchase TRS coverage. Over time, the  availability of actual cost and enrollment data should help DOD improve  its projections for future years.
section_title: Recommendations for Executive Action
paragraphs: With the goal of eventually eliminating reliance on BCBS premiums and to  better align premiums with the costs of providing TRS health care benefits,  we recommend that the Secretary of Defense direct the Assistant  Secretary for Health Affairs to stop basing TRS premium adjustments only  on BCBS premium adjustments and use the reported costs of providing  benefits through the TRS program when adjusting TRS premiums in future  years as limitations associated with the reported cost data decrease.
We also recommend that DOD explore options for addressing instances in  which premiums have been either significantly higher or lower than  program costs in prior years, including seeking legislative authority as  necessary.
section_title: Agency Comments
paragraphs: We received written comments on a draft of this report from DOD. DOD  stated that it concurs with our conclusions and recommendations and that  it is committed to improving the accuracy of TRS premium projections. It  further stated that our recommendations are consistent with DOD’s  strategy to evolve the process, procedures, and analytical framework used  to adjust TRS premiums as the quality and quantity of reported cost data  improve. DOD’s written comments are reprinted in appendix III.
We are sending copies of this report to the Secretary of Defense and other  interested parties. We will also make copies available to others on request.  In addition, the report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-7114 or ekstrandl@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix IV.
section_title: Appendix I: Comparison of TRS Premium Growth with DOD’s Estimated Rate of Medical Care Price Inflation
paragraphs: The John Warner National Defense Authorization Act (NDAA) for Fiscal  Year 2007 required that we describe how increases in TRICARE Reserve  Select (TRS) premiums compare with the Department of Defense’s (DOD)  annual rate of medical care price inflation. As discussed with the  committees of jurisdiction, this appendix compares DOD’s January 2006  TRS premium increase and DOD’s proposed January 2007 TRS premium  increase with DOD’s estimated annual rate of medical care price inflation  in fiscal years 2005 and 2006 as well as the medical component of the  Consumer Price Index for Urban Wage Earners and Clerical Workers   (CPI-W).
Premiums for TRS were first established when the program was  implemented in April 2005. To keep pace with rising health care costs,  DOD originally designed TRS premiums so that they are adjusted each  year based on annual adjustments in the Federal Employees Health  Benefits Program’s Blue Cross and Blue Shield (BCBS) Standard plan  premiums. DOD planned to continue using this method to adjust  premiums in the immediate future, although program regulations allow  some flexibility in setting the premiums. Accordingly, in line with BCBS,  TRS premiums increased by 8.5 percent in January 2006. Based on  increases in BCBS, TRS premiums would have increased by 1 percent in  January 2007. However, the NDAA for Fiscal Year 2007 froze 2007  premiums through September 30, 2007, at the rates for calendar year 2006.
DOD calculated its average annual rate of medical care inflation to be  about 4.9 percent in fiscal year 2005 and about 4.7 percent in fiscal year  2006. DOD did not develop these estimates of inflation based on its own  spending. Instead, DOD based the estimates on inflation rates provided  annually by the Office of Management and Budget for the various  components of the TRICARE operating budget, such as military personnel,  private sector health care, and pharmacy. In contrast, the medical  component of the CPI-W increased at lower rates than DOD’s rate of  medical care price inflation. The medical care component of the CPI-W  increased by about 4.1 percent in 2005 and about 4.2 percent in 2006. The  medical care component of the CPI-W is based on medical expenses, but it  is problematic to compare to DOD’s estimated rate of medical care  inflation because it is based only on out-of-pocket medical expenditures  paid by consumers, including health insurance premiums, and excludes  the medical expenditures paid by public and private insurance programs.
Comparing premium growth trends with DOD’s annual rate of medical  care price inflation and the medical care component of the CPI-W is  problematic because of differences in each measurement. Unlike medical  care price inflation, premium growth may reflect factors such as changes  in the comprehensiveness of the policy, changes in the ratio of premiums  collected to benefits paid, changes in costs because of increased  utilization of health care services, contributions to or withdrawals from  plan reserves, and profits.
section_title: Appendix II: Scope and Methodology
paragraphs: To compare the annual TRS premiums established by DOD to the reported  average costs per plan of providing benefits under TRS in 2006, we  reviewed DOD’s reported TRS enrollment data and data on the cost of  providing TRS benefits through TRICARE-authorized civilian providers or  hospitals, data on the administrative costs associated with providing TRS  benefits, and data on the costs of providing TRS benefits through military  treatment facilities (MTF). Using DOD’s data, we calculated the average  cost per TRS plan of providing individual and family coverage as the sum  of the reported costs divided by the average number of TRS plans. We also  reviewed legislation relevant to the TRS program and literature on setting  health insurance premiums and interviewed several experts from the fields  of health economics and finance and DOD officials in the TRICARE  Management Activity and the Office of the Assistant Secretary for Health  Affairs. We limited our analysis to calendar year 2006 because some 2007  data are still incomplete and because 2005 average cost data in some  months are based on a very small number of enrollees. At the time covered  by our analysis, TRS included three tiers of eligibility with enrollees paying  different portions of the premium based on the tier for which they  qualified. We limited our analysis to tier 1 because it included over   90 percent of TRS plans and because tier 1 enrollee premium levels have  applied to the entire TRS program since October 2007. We are unable to  report the average cost per plan for tiers 2 and 3 separately, due to the low  number of enrollees in these tiers.
To compare DOD’s projected costs for the TRS program before  implementation to DOD’s reported costs for the program in 2005 and 2006,  we reviewed the analyses prepared by DOD before TRS’s implementation  that projected (1) the number of individual and family plans in each tier of  the TRS program and (2) the costs per plan of providing the TRS benefit.
These projections were the two major factors used by DOD to estimate  TRS costs. We compared these data with reported TRS enrollment and  cost data from April 2005 through June 2007. In reporting the results of our  comparison we use cost data through 2006 only, because some cost data  for 2007 were incomplete. We also reviewed DOD internal documents and  interviewed DOD officials.
subsections: section_title: Calculation of Average Costs per TRS Plan
paragraphs: To determine the average cost of providing benefits under TRS for 2006— for individual and family plans—we reviewed TRS enrollment data and  TRS purchased care cost data, administrative cost data, and data on the  costs of providing TRS benefits through MTFs, each of which were  provided to us by DOD.
DOD officials provided TRS enrollment data to us in the form of multiple  reports from the Defense Enrollment Eligibility Reporting System for each  month from May 2005 through June 2007. Each report lists the number of  TRS plans and enrollees in individual and family plans broken down by  tier. Using these reports, we calculated the average number of TRS plans  and enrollees in each month.
For each month, from May 2005 through June 2007, we calculated the total  costs of providing benefits under TRS by adding the cost components  reported by DOD, which consist of purchased care costs, MTF costs, and  administrative costs. Administrative costs were further divided among  costs associated with claims processing and separate administrative fees  levied by certain TRICARE managed care support contractors for each  enrollee in each month.
For each month, we calculated the average cost per TRS plan for  individual and family coverage by dividing the total costs of providing  benefits under TRS by the average number of TRS plans. We determined  the average cost of providing benefits under TRS in 2006—for single and  family plans—by summing the monthly averages and weighting them by  enrollment in each month.
section_title: Data Reliability Tests
paragraphs: To ensure that the DOD data were sufficiently reliable for our analyses, we  conducted detailed data reliability assessments of the data sets that we  used. We restricted these assessments, however, to the specific variables  that were pertinent to our analyses.
We reviewed DOD data that we determined to be relevant to our findings  to assess their quality and methodological soundness. Our review  consisted of (1) examining documents that describe the respective data,  (2) manually and electronically checking the data for obvious errors and  missing values, (3) interviewing DOD officials to inquire about concerns  we uncovered, and (4) interviewing DOD officials about internal controls  in place to ensure that data are complete and accurate.
Our review revealed minor inconsistencies in DOD’s data that we reported  to DOD officials. Overall, however, we found that all of the data sets used  in this report were sufficiently reliable for use in our analyses. However,  we did not independently verify DOD’s figures.
We conducted our work from May 2007 through October 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix III: Comments from the Department of Defense
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Thomas Conahan, Assistant  Director; Krister Friday; Adrienne Griffin; William Simerl; and Michael  Zose made key contributions to this report.