Defense Health Care: Effects of Mandated Cost Sharing on Uniformed Services Treatment Facilities Likely to Be Minor
Released: 1996-05-13T00:00:00

Letter

Background

DOD offers medical services to 8.3 million eligible people through the MHSS—1.7 million active duty members and another 6.6 million non-active duty members, such as dependents of active duty personnel and military retirees and their dependents. The bulk of the health care is provided at more than 600 military hospitals and clinics worldwide; through CHAMPUS; and, to a comparatively minor extent, at USTFs.

The USTF managed care program involves the formation of provider networks to deliver a full spectrum of inpatient and outpatient care and preventive services; beneficiary enrollment; and a monthly capitated reimbursement system. DOD’s capitation payment rates cover all the medical care a member would need in a year. Subject to annual appropriations, USTFs are permitted to enroll any person eligible for MHSS benefits except for active duty members, who receive their care at military hospitals and clinics. But unlike those under CHAMPUS, USTF members do not lose their participation rights when they reach age 65 and become eligible for Medicare. At the beginning of fiscal year 1996, the USTFs had 124,012 members, including about 27,000 Medicare-eligibles, and an appropriated funding level of $339 million (see table 1).

By September 1997, DOD plans to complete its implementation of TRICARE—a nationwide managed care program. TRICARE is aimed at improving access to high-quality care while containing costs. TRICARE involves coordinating and managing beneficiary care on a regional basis using all available military hospitals and clinics supplemented by competitively contracted civilian services. TRICARE offers beneficiaries three plans: (1) TRICARE Standard, a fee-for-service arrangement to replace the present CHAMPUS program; (2) TRICARE Extra, a preferred provider plan; and (3) TRICARE Prime, an HMO that provides comprehensive medical care to beneficiaries through an integrated network of military and contracted civilian providers. (App. I compares the cost-sharing provisions of the three TRICARE plans.)

As required by P.L. 104-106, DOD is to develop a plan to integrate the USTFs into TRICARE. We will soon report on several issues regarding the USTFs’ integration into TRICARE, including whether the USTFs should retain their special, noncompetitive relationship with DOD. The managed care support contractors under TRICARE compete on a cost-effectiveness basis rather than through a noncompetitive negotiation of rates as is done with the USTFs.

Potential Adverse Selection Effects Will Likely Be Minor and Offset by Capitation Adjustments

Our analysis of the potential effects on the USTFs of adopting the TRICARE cost shares showed that less than 10 percent of the members will disenroll, causing less than a 2-percent increase in operating costs. But DOD’s reimbursement approach takes into account and otherwise adjusts the USTFs’ capitation payments for higher costs that may result from changes in the population’s age and gender. It also allows for negotiated adjustments in reimbursement rates for the effects of benefit and cost-sharing revisions, which may result in adverse selection.

In contrast, the USTFs estimated that the new cost shares will cause about a 40-percent USTF disenrollment rate and cost increases of about 11 percent. However, the USTFs’ estimates are overstated because of weaknesses in their survey and health claims data, and the absence of out-of-pocket cost differences among the key plans that are significant enough to cause disenrollment of more than 10 percent.

Survey and Claims Data Weaknesses Reduce Reliability of USTFs’ Estimates

The USTFs’ estimates of the effects of the new cost shares were based largely on the results of a telephone survey of USTF households and an analysis of health claims data. In February 1996, the USTFs conducted a survey of 2,100 member households (300 from each USTF) to determine whether, with the new cost shares, members would disenroll and choose TRICARE Standard. Retirees under age 65 and their households were surveyed because only this group—not the Medicare-eligible or active duty dependent members—will be subject to the new enrollment fee. Also, USTF health claims data for the surveyed households covering the 12 months ending September 30, 1995, were analyzed to determine the costs for members who said they would remain and those who would disenroll.

Our review of the USTFs’ survey approach and data analysis raised several concerns about the reliability of their estimates. First, the survey questions focused solely on the households’ out-of-pocket cost increases and did not probe respondents’ views about the quality of or access to care at the USTF versus other options available to them. (See app. III for the questionnaires used in the USTF survey.) Since households may base their health plan decisions on factors other than out-of-pocket costs, such as access and quality, questions on these other factors would have added needed perspective to the survey responses. Second, the wording of several questions could have misled respondents and produced incorrect responses. For example, one question asked: “If you have to choose between CHAMPUS [or TRICARE Standard, TRICARE Extra, or TRICARE Prime at the Pacific Medical USTF] and the USTF with higher copays and enrollment fees for your household in the future, which would you select?” The question’s phrasing could have led respondents to believe that with the new cost shares the USTFs will have higher copayments than the other choices. This is not the case.

Furthermore, survey choices were categorized as “would stay,” “would leave and choose TRICARE Standard,” “neither, or would choose different plan,” and “don’t know.” To reduce the number of “don’t know” responses, interviewers were instructed to probe respondents and try to force them to make a decision. One probe was “We’re not asking you to make a firm commitment right now, but we are interested in knowing which one you would be most likely to choose on the basis of the information I just read to you.” Because interviewers tried to force respondents to change “don’t know” answers, the responses in these cases may not reliably predict the respondent’s answer. Finally, the average length of time individuals took to respond to the survey was about 4 minutes. This short period probably did not allow most individuals to weigh and respond thoughtfully about the medical plan they would choose.

When analyzing cost differences among respondents, the USTF actuaries combined the “don’t know” responses with the group who responded they would disenroll. This caused an overstatement of the number of respondents the USTFs estimated will leave. Also, in analyzing potential cost differences, the USTF actuaries did not verify the claims data the USTFs reported. In addition, four of the USTFs provided incomplete data for the surveyed households. They provided less than 12 months of claims data and/or omitted such services as outpatient prescription drugs and care provided under subcontract with non-USTF providers. For Bayley Seton and Johns Hopkins, 172 and 106, respectively, of the 300 surveyed households for each facility were dropped because no claims data were available for these households. Furthermore, the USTF report stated that the USTFs had to perform some adjustments to produce theoretical billed charges. In effect, a percentage of the claims costs the USTFs provided is incomplete, or estimated; thus, such data cannot be validated and are of questionable use for estimating the potential cost effects of adverse selection.

USTFs Overestimated Disenrollment Resulting From Adverse Selection

According to actuarial research, any time a health plan increases a member’s out-of-pocket costs relative to competing plan choices, some adverse selection can occur. But for the USTFs to experience the 40-percent disenrollment rate they estimated, the cost differences would have to be significantly higher than what would exist between the USTFs’ new cost shares and TRICARE Standard. As table 2 shows, the USTF households that face the greatest out-of-pocket increase—$460—relative to TRICARE Standard are those incurring no medical expenditures. Most USTF households, or those incurring some medical expenditures, will have even lower relative cost differences. According to actuarial experience, such relative cost difference levels will not result in major enrollment shifts. Moreover, a Congressional Research Service study of the 1987 FEHBP open season found that out-of-pocket cost differences among plans had to be at least $1,000—$2,000 in 1996 dollars—to result in more than a 10-percent plan disenrollment rate. But as table 2 shows, no USTF household will reach an out-of-pocket cost difference that high when compared with TRICARE Standard.

The disenrollment rate that will likely result from the USTFs’ adopting the new cost shares will be less than 10 percent. But to be actuarially conservative, we allowed for a 20-percent outcome and reestimated the USTFs’ disenrollment and cost increases. Table 3 shows the comparative results of these adjustments.

As shown, the 20-percent disenrollment estimate reduces the USTFs’ estimated 11-percent cost increase to 4 percent. Reductions in the USTFs’ estimated cost increases are greater for the USTFs that may experience the most adverse selection, such as Pacific Medical. (App. IV provides a breakdown on the effects for each USTF.)

Also, although active duty and Medicare-eligible family members are not subject to the new enrollment fee, the USTFs estimated that some of these family members will also disenroll. The USTFs estimated up to 5-percent cost increases for each group as a result of adverse selection. We found, however, that there would be negligible or no adverse selection of such members and thus no cost increase would occur with the new cost shares. Family members of active duty personnel would incur the same out-of-pocket costs at the USTFs as elsewhere in the TRICARE system and thus would not have a relative cost difference incentive to disenroll.Medicare-eligible family members would incur the same costs but have better benefits and better access to care at the USTFs than in TRICARE. We believe, moreover, that individuals from these two categories would replace those retirees under age 65 and their dependents who disenroll because of adverse selection.

Estimating the USTFs’ Next-Year Costs With Last Year’s Claims Distorts Results

In estimating an 11-percent cost increase resulting from the new cost shares, the USTFs assumed that each affected member would have the same claims costs in the year after adverse selection occurred as they had in the year before. Also, they concluded that members with the most costly claims would be most likely to stay with the USTF, and new enrollees would have the same claims costs as those respondents who said they would stay. According to actuarial research, however, individuals that incur a large claim in one year will not necessarily do so the following year. This is because large claims may be for one-time high-cost events. A recent study of year-to-year health care expenditures for a large manufacturing firm showed that most large claims incurred in a given year are from individuals incurring much lower claims the prior year. Conversely, most of the future large claims will come from individuals with low claims in the current year. According to the USTFs’ estimates of adverse selection, members with the least costly claims will be most likely to disenroll.

Also, in any given year, a small number of enrollees will have large claims. If enrollees could predict such claims—and some can—when faced with choosing between competing plans, they would join the plan most cost-beneficial to them (the USTFs, in this case). According to actuarial research, however, many such claims cannot be predicted, so many of the USTF members with high claims in the year after adverse selection would have had no reason to have selected the USTF plan before adverse selection occurred.

To illustrate the sensitivity of the USTF analysis to the inclusion of all high-cost claims, we recomputed the USTFs’ cost estimates by removing the two largest claimants from each facility. The largest claimants’ costs ranged from about $49,000 to $337,000. The comparative results are shown in table 4.

As shown, removing such high claims costs from the USTFs’ estimating base reduces their 11-percent cost increase estimate to 4 percent.Coincidentally, this is the same effect produced by reducing their estimated disenrollment rate from 40 percent to our conservatively applied 20 percent rate. Because less than 1 percent of the surveyed households had high claims that accounted for almost 20 percent of the total claims costs, including or removing such claimants from the estimating base significantly affects the estimating outcome. Moreover, on the basis of the actuarial assumption that individuals who have large cost claims in one year are likely to have lower claims the following year, the USTFs’ 11-percent cost increase estimate appears to be unnecessarily high.

Finally, actuarial studies focusing on adverse selection and ways to predict the effects of beneficiary choice have concluded that future-year costs resulting from adverse selection cannot be accurately predicted by any set of known characteristics and circumstances from past years. According to actuarial research, the most reliable way to gauge the effects of adverse selection is to examine actual experience under the benefit change in question.

Capitation Adjustments Will Likely Offset USTF Cost Increases

Our adjustments to the USTFs’ estimated 11-percent cost increase covering the adverse selection for retirees and their dependents under 65 years old resulted in a reduced estimate of 4 percent. Using the 4-percent cost increase, we estimated that the weighted average cost effect of adverse selection for the USTFs in 1996 would be less than 2 percent of their 1996 reimbursement level, or about $5.5 million dollars.

This estimated increase, however, will likely have no lasting negative financial impact on USTFs because DOD’s current reimbursement approach automatically adjusts USTF payments to account for changes in members’ age and gender. For example, our analysis of the survey data available for Johns Hopkins beneficiaries who had a claims history shows that the facility may gain financially from adverse selction. The Johns Hopkins data indicate that respondents who said they would stay there are, on average, 1.7 years older than all respondents. Because USTF capitation rates generally increase as the members age, some of the older remaining members would cause substantial payment increases as they move to higher capitation bands. For example, DOD pays the Johns Hopkins USTF $885 more per year for a 55-year-old male than a 54-year-old male. For females, the difference between 55- and 54-year-olds is $483 per year (see DOD’s capitation bands by age and gender category in app. V). Thus, if its remaining members’ average age increases by 1.7 years, we estimate that capitation payments would automatically rise by 4.9 percent. The higher revenue would exceed the USTFs’ 4-percent estimate of Johns Hopkins’ cost increase resulting from adverse selection. = 2.38). As a result, the capitation increase resulting from a 1.7-year age increase would be 4.9 percent (1.7 years x 2.9 percent per year).

USTF, and the process for periodically adjusting them is set forth in their participation agreements with DOD.

TRICARE Cost Shares Are Appropriate for the USTFs

The TRICARE cost shares are appropriate for the risks to be borne by the USTFs. The cost shares would create some problems for a managed care plan unable to adjust its capitation. But any initial USTF loss would be covered through automatic capitation adjustments based on members’ age and gender, and later losses could be offset by future negotiated capitation adjustments. As a result, the TRICARE cost shares will not create a financial burden on the USTFs.

Furthermore, the TRICARE cost sharing is similar to HMO plans in the FEHBP. However, the new $230 to $460 USTF enrollment fees are lower than the employee shares of the typical private sector HMO and signficantly less than those in the FEHBP (see table 5).

Cost Sharing Could Make USTF and DOD Populations More Alike

The USTFs believe that adoption of the new cost shares will result in their enrolling an older, perhaps less healthy beneficiary population than is enrolled under TRICARE. This in their opinion will increase USTF costs. The USTF and DOD beneficiary populations are already dissimilar. The USTFs serve proportionately more retirees and their dependents. At issue, therefore, is to what degree this dissimilarity is likely to change as a result of the USTFs’ new cost shares. In 1994, the USTF population consisted of a larger proportion of retirees and dependents under age 65 than the DOD populations in the USTF regions. This disparity grew during the 1996 USTF enrollment period, as shown in table 6.

Thus, the USTF population, already dissimilar to the DOD population, is becoming more so. But with the new USTF cost shares, the USTF population will actually move closer to the general DOD population as the healthy retirees under age 65 seek less costly medical coverage. Further, those who disenroll will likely be replaced by new enrollees who are dependents of active duty personnel or Medicare-eligible retirees and their families over age 64. But no matter how dissimilar the populations are, DOD’s reimbursement approach will account for USTF population changes and offset any resulting negative financial effect.

Conclusions

The establishment of uniform benefits and cost sharing for DOD beneficiaries is a key component of the TRICARE program and something that we and others have long advocated. Such uniformity would, in our view, eliminate inequities and confusion that now exist among beneficiaries of military health plans. While adopting the TRICARE cost shares may cause some minor adverse selection for the USTFs, our analysis indicates that there will be no lasting negative financial effect on USTF operations. Further, the new cost shares, which are similar to HMOs, are appropriate for the risks to be borne by the USTFs and will likely make the USTF population more similar to DOD’s general beneficiary population. More importantly, should there be a financial impact, DOD’s current USTF capitation methodology takes into account and allows for adjusted reimbursement levels for such higher costs that result from changes in the enrollee cost shares and population characteristics.

Comments From DOD and the USTFs and Our Evaluation

We received comments on a draft of the report from DOD’s Principal Deputy Assistant Secretary for Health Affairs and other DOD officials, and on the USTFs’ behalf from officials of the Seattle and Texas facilities.

DOD officials stated that they agreed with the report’s analysis and findings. They pointed out, however, that the draft report’s language discussing DOD’s reimbursement approach should clearly set forth that the capitation rates make automatic age and gender adjustments and also allow for negotiated rate adjustments to cover the possible adverse selection effects of benefit/cost-sharing revisions. We clarified the report’s language on this matter and incorporated the officials’ other suggested technical report changes as appropriate.

USTF officials also took issue with the report’s discussion of factors for which the capitation rates automatically adjust. They stated that there is no provision in their participation agreements with DOD that allows for negotiated capitation rate adjustments for possible adverse selection due to cost-sharing changes. The officials stated that, while the agreements allow for negotiated rate changes due to benefit revisions, the USTFs do not consider the new cost shares to be benefit changes—although they stated they have not consulted DOD on the matter. We believe that because the new cost shares represent a change in the health care package offered to USTF beneficiaries and materially affect the actuarial value or cost of the package, the new cost shares constitute a benefit change. Also, as pointed out, DOD considers the effects of such changes to be subject to negotiated capitation rate adjustments.

USTF officials stated that, contrary to our assertion that the USTFs’ survey should have included questions on quality and access along with the questions on higher cost shares, such additional questions were not relevant. They stated that their annual member surveys repeatedly show high member satisfaction with the USTFs, tending to affirm their historic 2-percent disenrollment rate. Adding questions on quality and access would have, in our view, added perspective for more fully understanding why survey respondents gave the answers they did. Moreover, the high levels of member satisfaction referred to by the USTF officials tend to raise further questions as to whether members would disenroll at the USTFs’ estimated 40 percent rate.

The USTF officials stated that our removing the two highest claimants per USTF from their database and reestimating the potential cost increase is incorrect. They stated that there will be high claims in each year—or new enrollees with high claims—so that removing the two highest claimants would not reflect the USTFs’ actual costs. Also, the officials stated that while it is true that a member with high claims in one year will not necessarily have such claims the next year because the member may have died, the costs should be included in the estimating base to have a true picture of the total costs.

We disagree. The USTFs’ cost-effect estimates assume that all claims, including the high claims, for all members whether they said they would stay or leave will be the same in the year after the choice as before the choice. According to actuarial research, however, many of the high claims in one year will not be for the same individuals as in the prior year, which, for example, as the USTFs point out, would occur if the member died.

To illustrate the major impact that a few respondents with high claims costs had on the USTFs’ estimated cost increases, we removed the two largest claimants in each USTF. We agree that the USTFs will have some high claims each year. But the level of cost increase the USTFs estimated as a result of adverse selection will depend on the same members (with the highest claims in the year before the choice) staying and having the same high claims in the year after the choice. The USTFs’ assumption is actuarially questionable and greatly overstates the adverse selection effect. Even if we had included the two highest claimants per USTF in our illustration, but distributed them randomly among those who stay and those who leave, the net adverse selection effect would have only been approximately 4 percent.

USTF officials also said we were incorrect in basing the estimated cost increase due to adverse selection on their total reimbursement. They said it should be based only on reimbursement for the segment of the USTF members most affected by adverse selection—the retirees and their dependents under age 65.

We disagree. One purpose of our evaluation was to determine if the new cost shares would be inappropriate for fully at-risk managed care facilities. To do so, it is necessary to consider the financial impact of adverse selection on the facilities’ total income—in this case, DOD’s total capitation payments for all USTF members. Also, since the active duty dependents and retirees and their dependents aged 65 and over will not pay any enrollment fee, the impact of adverse selection on these two groups would be negligible. Thus, in our view it is appropriate to compare the potential adverse selection cost increase for the retirees and dependents under age 65 ($5.5 million) to the total income of the USTF facilities ($323.5 million) in determining the 1.7-percent increase in financial risk to the facilities.

Finally, the USTF officials stated that their members cannot be compared to FEHBP or private plan enrollees; that their members are used to and believe they are entitled to free care such that the enrollment fees would be strongly resisted; and that our use of a 20-percent disenrollment rate is not substantiated nor valid.

We disagree. Fewer than 10 percent of the USTFs’ members would disenroll, but to be actuarially conservative, we used a 20-percent rate to estimate the cost shares’ effects. We based our approach on actuarial research and experience with a wide range of private and public health plans. As the report states, there is very little disenrollment as a result of relative increases in out-of-pocket differences of $460 or less per family. While plans do vary widely in structure and demographics, the relative effect of changes in out-of-pocket costs on choice is similar, and one set of plans can safely be used to predict the results in another set. Also, neither the USTF officials nor their report cited any evidence or studies that showed that disenrollment had been higher than 10 percent for similar out-of-pocket changes in any other plan.

We will send copies of this report to the Secretaries of Defense, Health and Human Services, Transportation, and Commerce; and the USTFs. We will make copies available to others upon request.

If you have any questions about this report, please call me on (202) 512-7111. Other major contributors are listed in appendix VI.

Cost-Sharing Provisions in TRICARE and USTF Plans

Retirees and retiree family members$230(S), $460(F) $11/day, $25 min. $11/day, $25 min. $11/day, $25 min. $20/day, $25 min. $20/day, $25 min.

Catastrophic limits (single or family)

Retirees and retiree family members$150(S), $150(S), $150(S), $300(F) $300(F) $50(S), $100(F) $150(S), $300(F) $300(F) $10.50/day, $25 min. $250/day or 25% $10.50/day, $25 min. $10.50/day, $25 min.

The greater of $25/admission or $20/day 15%, no deductible 20%, no deductible (S) = single; (F) = family.

Table I.2: Comparison of USTFs’ Current and New Cost-Sharing Provisions

Active duty family members, ranks E5 and above $230(S), $230(S), $460(F) $460(F) $11/day, $25 min. $11/day, $25 min. $11/day, $25 min. $11/day, $25 min. $20/day, $25 min. $20/day, $25 min.

USTF Funding and Enrollment, FY 1994-96

Questionnaires Used to Survey Member Reactions to Proposed Cost Shares

Adjustments to USTF Estimated Cost Increases Due to Adverse Selection

This appendix contains estimates of the cost impact on each USTF resulting from adverse selection (1) with and without the two largest claimants of each facility in the computation and (2) using disenrollment rates of 20 percent and 40 percent.

The cost impact with and without the two largest claimants is derived by subtracting the cost for total respondents’ monthly claims from the monthly claims cost of the respondents who stay and dividing this increase by the total respondents’ monthly claims costs. For example, as shown in table IV.1, the cost for total respondents’ monthly claims (including all claimants) is $257. The monthly claims cost of the respondents who stay is $279. Subtracting $257 from $279 yields a cost increase of $22, which is about 8 percent of $257.

The cost impact of using different disenrollment rates is derived by subtracting the total respondents’ monthly claims costs from those of the respondents who stay and dividing this increase by the total respondents’ costs. For example, as shown in table IV.2, the cost for the total respondents’ monthly claims is $257. For a 20-percent disenrollment rate, the monthly claims cost of the respondents who stay is $265. Subtracting $257 from $265 yields a cost increase of $8, which is about 3 percent of $257.

USTF Capitation Rates, FY 1996

Major Contributors to This Report

Daniel M. Brier, Assistant Director, (202) 512-6803 Carolyn R. Kirby, Senior Evaluator, (202) 512-9843 Jean N. Chase, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.

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