Defense Health Program: Reporting of Funding Adjustments Would Assist Congressional Oversight
Released: 1999-06-01T00:00:00

Letter

Background on the DHP O&M Budget

The DHP budget estimates submitted to the Congress consist of all the O&M and procurement resources needed to support DOD’s consolidated medical activities. According to DOD, the budget estimates are based on the continued refinement and application of a managed care strategy and methodology used to produce DOD’s health care services for eligible beneficiaries. Operating under the Assistant Secretary of Defense (Health Affairs), TMA is responsible for formulating the DHP budget request and for managing DOD’s CHAMPUS and MCS contracts. The Surgeons General of the Army, Navy, and Air Force are responsible for the budget execution of decentralized medical activities such as direct MTF patient care.

The DHP O&M budget request consists of a single budget activity—administration and servicewide activities. Each year, DOD provides detailed DHP budget information to the Congress in “justification materials” that show amounts requested for each of the 7 subactivities that encompass 34 program elements (see table 1).

While the Congress appropriates DHP O&M funds as a single lump sum, its budget decision is based on the DHP budget request presented at the subactivity and program element levels. Since 1994, the Congress has generally appropriated more for DHP O&M expenses than DOD requested (see fig. 1).

Committee reports may specify relatively small amounts of funding for such items as breast cancer and ovarian cancer research, which DOD then obligates through the appropriate account in accordance with congressional direction. Other than the funds specifically earmarked by the Congress, DOD has the latitude to allocate its congressional appropriation as needed to meet estimated subactivity and program element requirements. Between 1994 and 1999, DOD allocated most appropriations to direct care (primarily MTF patient care) and to purchased care (primarily CHAMPUS and MCS contracts). Table 2 shows the allocation of DHP appropriations by subactivity (see tables I.1 and I.2 for detailed information on DHP budget requests, budget allocations, and actual or currently estimated obligations between fiscal years 1994 and 1999).

Significant Differences Between Budget Allocations and Obligations

The Congress appropriated $48.9 billion for DHP O&M expenses between fiscal years 1994 and 1998. During budget execution, DOD obligated about $4.8 billion differently—as either increases or decreases—from its budget allocations for the various subactivities (see table 3). Obligations differed particularly for the direct care and purchased care subactivities. However, the magnitude of the funding adjustments has diminished in recent years, dropping to about $283 million in fiscal year 1998 from a peak of almost $1.5 billion in fiscal year 1995. Because the Congress makes a lump-sum appropriation, under DOD regulations and informal arrangements with the Congress, these adjustments did not require congressional notification or approval.

The largest funding adjustments occurred in the direct care and purchased care subactivities. Between 1994 and 1998, DOD allocated $21.2 billion from the final DHP appropriation for purchased care but obligated only $19.1 billion, allowing DOD to reallocate $2.0 billion into such areas as direct patient care, information management, and base operations. For example, between 1994 and 1995, DOD increased obligations for direct care at MTFs by $876.3 million above the allocation. Between 1994 and 1996, DOD obligated about $289.5 million more than it had allocated for the information management subactivity. Also, funding for the base operations subactivity—which includes such items as repairs and maintenance on MTF facilities—received an increase of $479.6 million over the budget allocation between 1994 and 1997. (Table I.4 details the funding increases and decreases for each subactivity and program element between fiscal years 1994 and 1998.)

In each year between 1994 and 1998, DOD’s budget allocation for purchased care—which provided funds for CHAMPUS, the now-terminated CHAMPUS Reform Initiative contracts, and MCS contracts—exceeded obligations, as shown in figure 2.

At the program element level, the largest adjustments within the purchased care subactivity occurred between 1994 and 1996, when DOD obligated $1.4 billion less than the budget allocation for the CHAMPUS program element (see table I.4 and fig. 3). In contrast, MCS contract budget allocations more closely matched obligations through 1996, when DOD implemented two of the then four awarded MCS contracts on time. In 1997 and 1998, however, when implementation of the last three contracts was delayed, MCS budget allocations exceeded obligations by $990 million. Because of the delays in starting up these contracts, most of the unobligated MCS contract funds were used to defray higher than anticipated CHAMPUS program obligations.

DHP Obligations Differed From Budget Allocations for Several Reasons

According to DOD officials, between 1994 and 1998, DOD-wide budget pressures and major program changes—such as downsizing and the rollout of TRICARE managed care reforms—made it difficult to estimate and allocate resources between direct care and purchased care budgets. They emphasized that while they are directly responsible for appropriation amounts at the lump-sum level, they have flexibility to manage the health care delivery system. Therefore, in executing the DHP appropriation funds for patient care, such funds may flow from direct care to purchased care and vice versa. They believe this flexibility is critical to efficiently managing the military health care delivery system.

DOD officials cited several interrelated reasons why DHP obligations differed from DOD’s budget allocations between fiscal years 1994 and 1998. These reasons also suggest why “shortfalls” in recent DHP budget requests have prompted congressional concerns about the process DOD uses to estimate and allocate the DHP budget.

Decision to Fully Fund Purchased Care Left Less for Other Subactivities

TMA, Health Affairs, and service budget officials made various internal budget policy choices that included a DHP budget strategy to fully fund purchased care activities within available funding levels. This strategy, coupled with general budget pressures, left less money with which to budget direct care and other DHP subactivity requirements (such as information management and base operations). To keep within the DOD-wide spending caps, the officials intentionally understated requirements for direct care and other subactivities in the DHP budget requests submitted to the Congress. This pattern of policy choices, which led budget officials to underestimate direct care budget requirements, is underscored by the congressional testimonies by the Assistant Secretary of Defense (Health Affairs) and the service Surgeons General—all of whom identified shortfalls in the past 3 years of DHP budget requests, 1997 through 1999. The shortfalls—that is, the difference between the Assistant Secretary’s and the Surgeons General’s views of their needs and the President’s budget submission—have raised congressional concerns over DHP budget requests and prompted both DOD and the Congress to offset the shortfalls in various ways (see table 4). In addition, TMA and service officials told us they have relied on DHP’s flexibility during budget execution to fund direct patient care with funds available and not needed for CHAMPUS and MCS contracts.

Timing of the Budget Process Presents Challenges

TMA officials told us that forecasting health care costs for budgeting purposes is inherently challenging because the budget year starts about 18 months after DOD starts preparing DHP budget estimates and 8 months after the President submits the DHP budget request to the Congress. They commented that many conditions change, affecting their direct and purchased care estimates over these protracted periods. In our view, however, these comments do not explain the often large differences that have occurred between budget allocations—which are established after the congressional appropriation is actually received—and obligations, which follow almost immediately thereafter. DOD has the flexibility to allocate most of its congressional appropriations as needed among the various DHP subactivities. Despite this flexibility and even taking into account the minor impacts of other adjustments to DHP’s allocated budget amounts such as supplemental appropriations or reprogrammings, DHP obligations still varied significantly from the budget allocations reported to the Congress, calling into question DOD’s methods for estimating DHP budget requirements.

Number of Nonenrolled Beneficiaries Causes Budget Uncertainty

TMA and Health Affairs budget officials told us that the DHP beneficiary population is largely undefined, leading to budget uncertainty. According to these officials, DOD has little control over where beneficiaries go to get their health care because MTFs and MCS contractors do not enroll most beneficiaries. TMA officials stated that, in formulating the DHP budget request, separate cost estimates for MTFs and MCS contracts are based on the best available information at the time. Although service officials told us they had developed higher direct care budget estimates—which TMA nonetheless chose to underfund in the final DHP budget requests—one official told us that the nonenrolled beneficiary population is a major impediment to submitting realistic DHP budget requests. Moreover, DOD’s capitation method (allocating MTF budgets on the basis of the number of estimated users of the military health system) has not kept pace with MTF cost increases for space-available care to nonenrolled beneficiaries for medical services and outpatient prescription drugs.

Others have noted similar concerns about the lack of a clearly defined beneficiary population and the effect on DHP budgeting uncertainties. For example, in a 1995 report, the Congressional Budget Office (CBO) raised concerns that, even with TRICARE Prime’s lower cost-sharing features providing incentives, not enough beneficiaries would enroll, and DOD would continue to have difficulties planning and budgeting. For DOD to effectively predict costs and efficiently manage the system, CBO concluded that DOD would need a universal beneficiary enrollment system to clearly identify the population for whom health care is to be provided. CBO concluded that even under TRICARE, beneficiaries can move in and out of the system as they please, relying on it for all, some, or none of their care. DOD would have to continue its reliance on surveys to estimate how many beneficiaries use direct care and purchased care and to what extent DOD is their primary or secondary source of coverage. In previous reports, we also raised concerns about the budgetary uncertainties caused by less-than-optimal enrollment. Moreover, at the end of fiscal year 1998, we estimate that less than half of the 8.2 million DOD-eligible beneficiaries were enrolled. Thus, DOD’s budgeting uncertainties stem, in large measure, from its lack of a universal enrollment requirement.

Base Closures Did Not Yield Expected Savings

Higher than expected MTF costs in fiscal years 1994 and 1995 were given as another reason that DHP obligations differed from budget allocations, according to TMA, Health Affairs, and service officials. The budget savings projected to result from base closures (and reflected in their requests) were not achieved. Therefore, although the number of MTFs decreased by 9.5 percent between 1994 and 1998, DOD wound up obligating $726 million more for direct care than the amount allocated (see fig. 4). One service official told us that despite MTF downsizing, the number of beneficiaries going to MTFs has not dropped, thus sustaining a high level of demand for MTF health care. But MTF inpatient and outpatient workload data reported to the Congress in DOD’s annual justification materials indicate that MTF inpatient and outpatient workload declined by a respective 54.5 percent and 26 percent between 1994 and 1998. However, DOD and TMA officials cautioned us that the MTF workload data are not accurate. Yet, a May 1998 DOD Inspector General audit report (on the extent to which managed care utilization management savings met Health Affairs’ expectations as reflected in its DHP budgets found a significant reduction in inpatient and outpatient workload at 15 large MTFs from fiscal year 1994 through 1996, but no corresponding decrease in operating costs. DOD’s Inspector General attributed the cause to MTFs generally increasing their military medical staffing and infrastructure costs (real property maintenance, minor construction, and housekeeping). And, according to the Inspector General, it is especially difficult to reduce operating costs when workload is reducing without decreasing military medical staffing.

Lower Purchased Care Obligations Were Not Anticipated

TMA, Health Affairs, and service officials also told us that several interrelated factors had made purchased care obligations significantly lower than the allocated amounts between 1994 and 1998. First, they did not fully account for savings from rate changes in the CHAMPUS maximum allowable charge (CMAC) for physician payments. DOD officials told us that during this period, CHAMPUS budget requests and allocations did not account for $408 million to $656 million in estimated 3-year CMAC savings between 1994 and 1996. For fiscal years 1997 to 1998, DOD has estimated that CMAC saved $1.5 billion in CHAMPUS and TRICARE contract costs. Given that DHP purchased care budget requests and allocations track more closely with obligations in 1997 and 1998, it appears TMA better accounted for CMAC savings. Second, DOD officials cited a factor related to their budget strategy of conservatively estimating purchased care costs. After an earlier history of CHAMPUS budget shortfalls, DOD changed its budget strategy from not fully funding CHAMPUS to ensuring CHAMPUS was fully funded. However, they noted that an actuarial model for projecting CHAMPUS costs, which was used to formulate the budget requests for fiscal years 1994 through 1996, greatly overestimated CHAMPUS requirements.

Concerns About Antideficiency Act Violations Drove Decisions

Finally, with the CHAMPUS phase-out and the switch to MCS contracts, TMA and Health Affairs officials cited the need to fully fund these contracts in their budget request. According to these officials, their MCS budgeting strategy was essentially driven by the concern that if there were not enough funds allocated for the MCS contracts, an Antideficiency Act violation could occur. We do not see, however, how requesting the amount of funds DOD anticipates the contracts will actually cost could trigger an Antideficiency Act violation. Budget requests, even where they fail to fully fund an activity, do not cause such violations.

One of the ways an Antideficiency Act violation could occur is if DOD continued to pay additional amounts under the contract and overobligated or overexpended the appropriation or fund account related to the contract. In such a case, the proper response would be to reprogram funds and/or seek additional appropriations in advance of any such potential deficiency. In other words, should funds allocated for the MCS contracts appear to be inadequate, DOD would find itself in essentially the same position as any agency that anticipates running short of funds. Only if DOD officials continued to make additional payments under the contract knowing that appropriations for them were not available would there be an Antideficiency Act violation.

Looking ahead, DOD officials pointed out that the amount of funds shifted between DHP subactivities had fallen in 1997 and 1998, and they anticipated that volatility within the purchased care subactivity would also decrease now that all seven MCS contracts have been implemented. Officials also stated that TMA has established new resource management controls. A quarterly workgroup process, for example, refines CHAMPUS and MCS contract requirements and identifies associated DHP-wide adjustments that can be used to formulate future budget estimates. They stated that these procedures represent significant improvements in their ability to precisely project direct care and purchased care requirements. They acknowledged, however, that the next round of MCS contracts will be awarded and administered differently than the first round and that their integrated care system, with its largely nonenrolled beneficiary population, is inherently difficult to budget for. Thus, funding changes during budget execution are nearly inevitable.

Notification or Budget Execution Data Would Enhance Oversight of DHP Funding Changes

The movement of DHP funds between subactivities does not require prior congressional notification or approval. While the Congress must be notified in many cases when DOD transfers or reprograms appropriated funds, these reporting rules do not apply to the movement of funds among DHP subactivities. As a result, sizeable funding changes have occurred without specific notification. Refinements to the reporting process would put the Congress in a better position to be aware of funding changes.

Reprogramming Actions Have Varying Degrees of Congressional Oversight

Under procedures agreed upon between congressional committees and DOD, funds can be obligated for purposes other than originally proposed through transfers and reprogrammings. Reprogramming shifts funds from one program to another within the same budget account, while a transfer shifts funds from one account to another. According to the Congressional Research Service, DOD uses the term “reprogramming” for both kinds of transactions. DOD budgetary regulations, reflecting instructions from the appropriations committees, distinguish among three types of reprogramming actions: 1. Actions requiring congressional notification and approval, including (a) all transfers between accounts, (b) any change to a program that is a matter of special interest to the Congress, and (c) increases to congressionally approved procurement quantities; 2. Actions requiring only notification of the Congress, including reprogramming that exceeds certain threshold amounts; and 3. Actions not requiring any congressional notification, including reprogramming below certain threshold amounts and actions that reclassify amounts and actions within an appropriation without changing the purpose for which the funds were appropriated.

For example, DOD is required to notify the Congress if it shifts funds from the DHP O&M to the DHP procurement component. But the notification requirements do not apply when funds move from one DHP subactivity to another (such as from purchased care to direct care) or between DHP program elements (such as from MCS contracts to CHAMPUS, both within the purchased care subactivity) because such movements are within the same budget activity (administration and servicewide activities). Thus, the movements do not represent a change in the purpose for which the funds were appropriated and fit under the third type of reprogramming procedures.

Congress Has Required DOD to Report Budget Execution Data

To help increase the visibility of DOD funding changes, the reports accompanying recent defense appropriations acts have directed DOD to provide congressional defense committees with quarterly budget execution data on certain other O&M accounts. For example, in fiscal year 1999, DOD is directed to provide data for each budget activity, activity group, and subactivity not later than 45 days past the close of each quarter. These reports are to include the budget request and actual obligations and the DOD distribution of unallocated congressional adjustments to the budget request, as well as various details on reprogramming actions. This type of timely information supports congressional oversight of DOD O&M budget execution and shows the extent to which DOD is obligating O&M funds for purposes other than the Congress had been made aware of.

Under current procedures, DHP obligations are reported at the subactivity and program element levels in the prior-year column when DOD submits its budget request justification material to the Congress. However, such information is not reported in a manner that allows easy comparison with the prior year’s budget allocations, and thus does not facilitate oversight of funding changes that took place during budget execution. Reprogramming notification regulations do not apply when funds shift from one DHP subactivity to another, and congressional committees have not directed DOD to report DHP O&M budget execution data in the same manner as other O&M accounts.

The information needed to support congressional notification or quarterly budget execution reports is now readily available because DOD officials have instituted their own internal reviews to better track DHP budget execution. For example, DOD now requires internal quarterly budget execution reports from the services to document the shift of funds between subactivities. Therefore, we discussed with DOD officials potential reporting changes that would facilitate congressional oversight of DHP funding adjustments during budget execution. DOD officials told us that subjecting the lump-sum DHP appropriation to the reprogramming procedures that require prior approval from the Congress would eliminate flexibility, making it very difficult to manage the finances of the integrated MTF and MCS contract health care system. However, in our view, subjecting the DHP appropriation to reprogramming procedures for notification, but not prior approval, to the Congress whenever funds above a certain threshold shift from one DHP subactivity to another would not diminish DOD’s flexibility. DOD officials agreed that congressional oversight would be enhanced by quarterly budget execution reports on DHP obligations by subactivity and program element. Depending on where the threshold was set and the extent to which special interest DHP subactivities were designated for reporting, notification could involve fewer reports than a quarterly reporting process for DHP subactivities and program elements. Thus, in our view, notification may well offer a less burdensome means of facilitating congressional oversight of DHP funding changes during budget execution.

Conclusions

DOD officials expect future DHP obligations to track more closely with budget requests and allocations, while acknowledging that some movement of funds is inevitable given the lack of a universally enrolled beneficiary population for direct and purchased care. Although DOD is not required to adhere to its own budget requests or reported budget allocations when it obligates funds, in our view, a repeated failure to do so without providing sufficient justification could cause the Congress to question the validity of DHP budget requests. The Congress, however, will not be made aware of improvements or continuing funding adjustments unless DOD begins to either notify or report to congressional committees on how it obligates DHP appropriations.

In our view, and DOD agrees, additional information on how obligations differ from budget requests and allocations would improve oversight by the Congress and DOD. Since TMA officials already require quarterly budget execution reports to improve their internal budget oversight and budget decisionmaking, DOD would not be burdened by notifying or reporting similar information to the Congress. Such notification or reporting could provide the Congress with a basis for scrutinizing DHP budget request justifications and determining whether additional program controls—such as a universal requirement that all beneficiaries enroll in direct care or purchased care components—are needed.

Matter for Congressional Consideration

The Congress may wish to consider requiring DOD, consistent with current notification standards and procedures, to notify the congressional defense committees of its intent to shift funds among subactivities (such as direct care, purchased care, and base operations). Such notification, while not requiring congressional approval of the funding shift itself, could be initiated whenever the amount of the funding shift exceeded a certain threshold to be determined by the Congress. The notification would specify where funds are being deducted and where they are being added, and the justification for such reallocation. Also, or alternatively, the Congress may wish to consider requiring DOD to provide congressional defense committees with quarterly budget execution data on DHP O&M accounts. These data could be provided in the same manner and under the same time frames as DOD currently provides data for non-DHP O&M accounts.

Agency Comments and Our Evaluation

In its comments on a draft of the report, DOD concurred with the report and its focus of making the DHP funding more visible to the Congress. DOD further agreed that providing additional budget execution data to the Congress, on a regular basis, would be a valuable step toward keeping congressional members informed about the military health care system’s financial status. Finally, DOD agreed to modify its current process for internally reporting DHP obligations to report DHP O&M budget execution data to the Congress in the same manner as the non-DHP O&M accounts.

However, DOD did not support requiring it to notify congressional defense committees of its intent to shift funds among DHP subactivities. DOD stated that such notification could potentially limit its ability to obligate DHP funds and affect beneficiaries’ timely access to health care. We disagree. As we point out, such notification would not require prior approval of the funding shift itself, but would be initiated whenever the funding shift exceeded a certain amount to be determined by the Congress. These and other details of the notification procedure could be worked out between congressional committees and DOD to further ensure that DOD’s ability to obligate funds for the timely delivery of health care services was not impaired. Further, as the report points out, notification could involve fewer reports than a quarterly reporting process for DHP subactivities. Thus, in our view, notification may well offer a less burdensome means of facilitating congressional oversight of DHP funding changes during budget execution.

DOD also suggested several technical changes to the draft, which we have incorporated where appropriate. DOD’s comments are presented in their entirety in appendix II.

As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies to Senator Wayne Allard, Senator Robert C. Byrd, Senator Max Cleland, Senator Daniel K. Inouye, Senator Carl Levin, Senator Ted Stevens, Senator John Warner, Representative Neil Abercrombie, Representative Steve Buyer, Representative John P. Murtha, Representative David Obey, Representative Ike Skelton, Representative Floyd Spence, and Representative C.W. Bill Young in their capacities as chairman or ranking minority member of Senate and House committees and subcommittees. We will also send copies at that time to the Honorable William S. Cohen, Secretary of Defense; the Honorable William J. Lynn, III, Under Secretary of Defense (Comptroller); the Honorable Sue Bailey, Assistant Secretary of Defense (Health Affairs); and the Honorable Jacob J. Lew, Director, Office of Management and Budget. Copies will be made available to others upon request.

If you or your staff have any questions concerning this report, please contact Stephen P. Backhus, Director, Veterans’ Affairs and Military Health Care Issues, on (202) 512-7101 or Daniel Brier, Assistant Director, on (202) 512-6803. Other contributors to this report include Carolyn Kirby (Evaluator-in-Charge), Jon Chasson, Craig Winslow, and Mary Reich.

Detailed Defense Health Program Budget Tables

Table I.1: Defense Health Program Budget Requests, Budget Allocations, and Actual Obligations, Fiscal Years 1994-96 $2,583,114 $2,592,596 $3,062,708 $2,706,329 $2,658,394 $2,988,546 $3,035,259 $3,026,670 $2,954,594 $2,923,325 $2,933,625 $3,453,467 $3,098,704 $3,056,769 $3,413,238 $3,454,685 $3,452,996 $3,412,121 $4,325,682 $4,378,006 $3,771,326 $4,478,287 $4,508,287 $3,781,168 $4,267,097 $4,267,097 $3,720,333 (continued) (continued) $9,080,538 $9,326,635 $9,344,210 $9,613,331 $9,591,331 $9,625,162 $9,865,525 $9,886,961 $9,867,636 The TRICARE Support Office program element incorporated only Office of CHAMPUS costs in these years.

Medical centers, hospitals, and clinics—CONUS Medical centers, hospitals and clinics—OCONUS Armed Forces Institute of Pathology 79,457 (continued)

Other Adjustments to DHP Total Obligational Authority

Following congressional approval of funds for Defense Health Program (DHP) operations and maintenance (O&M) expenses enacted through the annual appropriations act, various other actions by DOD or the Congress result in further adjustments. These adjustments can increase or decrease the total obligational authority available to DOD for DHP O&M expenses. Table I.3 details the other adjustments.

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