Military Retiree Health Benefits: Enrollment Low in Federal Employee Health Plans under DOD Demonstration
Released: 2003-06-06T00:00:00

Letter

Background

Medicare is generally the primary source of health insurance for people age 65 and over. However, traditional Medicare leaves beneficiaries liable for considerable out-of-pocket costs, and most beneficiaries have supplemental coverage. Military retirees can also obtain some care from MTFs and, since October 1, 2001, DOD has provided comprehensive supplemental coverage to its retirees age 65 and over. Civilian federal retirees and dependents age 65 and over can obtain supplemental coverage from FEHBP. The demonstration tested extending this coverage to military retirees age 65 and over, and their dependents.

Medicare

Medicare, a federally financed health insurance program for persons age 65 and older, some people with disabilities, and people with end-stage kidney disease, is typically the primary source of health insurance for persons age 65 and over. Eligible Medicare beneficiaries are automatically covered by part A, which includes inpatient hospital and hospice care, most skilled nursing facility (SNF) care, and some home health care. They can also pay a monthly premium ($54 in 2002) to join part B, which covers physician and outpatient services as well as those home health services not covered under part A. Outpatient prescription drugs are generally not covered. Under traditional fee-for-service Medicare, beneficiaries choose their own providers and Medicare reimburses those providers on a fee-for- service basis. Beneficiaries who receive care through traditional Medicare are responsible for paying a share of the costs for most services.

The alternative to traditional Medicare, Medicare+Choice, offers beneficiaries the option of enrolling in private managed care plans and other private health plans. In 1999, before the demonstration started, about 16 percent of all Medicare beneficiaries were enrolled in a Medicare+Choice plan; by 2002, the final year of the demonstration, enrollment had fallen to 12 percent. Medicare+Choice plans cover all basic Medicare benefits, and many also offer additional benefits such as prescription drugs, although most plans place a limit on the amount of drug costs they cover. These plans typically do not pay if their members use providers who are not in their plans, and plan members may have to obtain approval from their primary care doctors before they see specialists. Members of Medicare+Choice plans generally pay less out of pocket than they would under traditional Medicare.

Medicare Supplemental Coverage

Medicare’s traditional fee-for-service benefit package and cost-sharing requirements leave beneficiaries liable for significant out-of-pocket costs, and most beneficiaries in traditional fee-for-service Medicare have supplemental coverage. This coverage typically pays part of Medicare’s deductibles, coinsurance, and copayments, and may also provide benefits that Medicare does not cover—notably, outpatient prescription drugs. Major sources of supplemental coverage include employer-sponsored insurance, the standard Medigap policies sold by private insurers to individuals, and Medicaid.

Employer-sponsored insurance. About one-third of Medicare’s beneficiaries have employer-sponsored supplemental coverage. These plans, which typically have cost-sharing requirements, pay for some costs not covered by Medicare, including part of the cost of prescription drugs.

Medigap. About one-quarter of Medicare’s beneficiaries have Medigap, the only supplemental coverage option available to all beneficiaries when they initially enroll in Medicare. Prior to 1992, insurers were free to establish the benefits for Medigap policies. The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) required that beginning in 1992, Medigap policies be standardized, and OBRA authorized 10 different benefit packages, known as plans A through J, that insurers could offer. The most popular Medigap policy is plan F, which covers Medicare coinsurance and deductibles, but not prescription drugs. It had an average annual premium per person of about $1,200 in 1999, although in some cases plan F cost twice that amount. Among the least popular Medigap policies are those offering prescription drug coverage. These policies are the most expensive of the 10 standard policies—they averaged about $1,600 in 1999, and some cost over $5,000. Beneficiaries with these policies pay most of the cost of drugs because the Medigap drug benefit has a deductible and high cost sharing and does not reimburse policyholders for drug expenses above a set limit.

Health Care for Military Retirees

DOD provides health care to active-duty military personnel and retirees, and to eligible dependents and survivors through its TRICARE program. Prior to 2001, retirees lost most of their military health coverage when they turned age 65, although they could still use MTFs when space was available, and they could obtain prescription drugs without charge from MTF pharmacies. In the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 (NDAA 2001), Congress established two new benefits to supplement military retirees’ Medicare coverage: Pharmacy benefit. Effective April 1, 2001, military retirees age 65 and over were given access to prescription drugs through TRICARE’s National Mail Order Pharmacy (NMOP) and civilian pharmacies. Retirees make lower copayments for prescription drugs purchased through NMOP than at civilian pharmacies. Retirees continue to have access to free prescription drugs at MTF pharmacies.

TFL. Effective October 1, 2001, military retirees age 65 and over who were enrolled in Medicare part B became eligible for TFL. As a result, DOD is now a secondary payer for these retirees’ Medicare-covered services, paying all of their required cost sharing. TFL also offers certain benefits not covered by Medicare, including catastrophic coverage. Retirees can continue to use MTFs without charge on a “space available” basis.

In fiscal year 1999, before TFL was established, DOD’s annual appropriations for health care were about $16 billion, of which over $1 billion funded the care of military retirees age 65 and over. In fiscal year 2002, DOD’s annual health care appropriations totaled about $24 billion, of which over $5 billion funded the care of retirees age 65 and over who used TFL, the pharmacy benefit, and MTF care.

In addition to their DOD coverage, military retirees—but generally not their dependents—can use Department of Veterans Affairs (VA) facilities. There are 163 VA medical centers throughout the country that provide inpatient and outpatient care as well as over 850 outpatient clinics. VA care is free to veterans with certain service-connected disabilities or low incomes; other veterans are eligible for care but have lower priority than those with service-connected disabilities or low incomes and are required to make copayments.

FEHBP, the health insurance program administered by OPM for federal civilian employees and retirees, covered about 8.3 million people in 2002. Civilian employees become eligible for FEHBP when hired by the federal government. Employees and retirees can purchase health insurance from a variety of private plans, including both managed care and fee-for-service plans, that offer a broad range of benefits, including prescription drugs. Insurers offer both self-only plans and family plans, which also cover the policyholders’ dependents. Some plans also offer two levels of benefits: a standard option and a high option, which has more benefits, less cost sharing, or both. For retirees age 65 and over, FEHBP supplements Medicare, paying beneficiaries’ Medicare deductibles and coinsurance in addition to paying some costs not covered by Medicare, such as part of the cost of prescription drugs.

Over two-thirds of FEHBP policyholders are in national plans; the remainder are in local plans. National plans include plans that are available to all civilian employees and retirees as well as plans that are available only to particular groups, for example, foreign service employees. In the FEHBP, the largest national plan is Blue Cross Blue Shield, accounting for about 45 percent of those insured by an FEHBP plan. Other national plans account for about 24 percent of insured individuals. The national plans are all preferred provider organizations (PPO) in which enrollees use doctors, hospitals, and other providers that belong to the plan’s network, but are allowed to use providers outside of the network for an additional cost. Local plans, which operate in selected geographic areas and are mostly managed care, cover the remaining 32 percent of people insured by the FEHBP.

Civilian employees who enroll in FEHBP can change plans during an annual enrollment period. During this period, which runs from mid- November to mid-December, beneficiaries eligible for FEHBP can select new plans for the forthcoming calendar year. To assist these beneficiaries in selecting plans, OPM provides general information on FEHBP through brochures and its Web site. Also, as part of this information campaign, plans’ representatives may visit government agencies to participate in health fairs, where they provide detailed information about their specific health plans to government employees.

The premiums charged by these plans, which are negotiated annually between OPM and the plans, depend on the benefits offered by the plan, the type of plan—fee-for-service or managed care—and the plan’s out-of- pocket costs for the enrollee. Plans may propose changes to benefits as well as changes in out-of-pocket payments by enrollees. OPM and the plans negotiate these changes and take them into account when negotiating premiums. Fee-for-service plans must base their rates on the claims experience of their FEHBP enrollees, while adjusting for changes in benefits and out-of-pocket payments, and must provide OPM with data to justify their proposed rates. Managed care plans must give FEHBP the best rate that they offer to groups of similar size in the private sector under similar conditions, with adjustments to account for differences in the demographic characteristics of FEHBP enrollees and the benefits provided. The government pays a maximum of 72 percent of the weighted average premium of all plans and no more than 75 percent of any plan’s premium. Unlike most other plans, including employer-sponsored insurance and Medigap, FEHBP plans charge the same premium to all enrollees, regardless of age. As a result, persons over age 65, for whom the FEHBP plan supplements Medicare, pay the same rate as those under age 65, for whom the FEHBP plan is the primary insurer.

The FEHBP Demonstration

The FEHBP demonstration allowed eligible beneficiaries in the demonstration sites to enroll in an FEHBP plan. The demonstration ran for 3 years, from January 1, 2000, through December 31, 2002. The law that established the demonstration capped enrollment at 66,000 beneficiaries and specified that DOD and OPM should jointly select from 6 to 10 sites. Initially, the agencies selected 8 sites that had about 69,000 eligible beneficiaries according to DOD’s calculation for 2000. (See table 1.) Four sites had MTFs, and 1 site—Dover—also participated in the subvention demonstration. Two other sites, which had about 57,000 eligible beneficiaries, were added in 2001. Demonstration enrollees received the same benefits as civilian FEHBP enrollees, but could no longer use MTFs or MTF pharmacies.

Military retirees age 65 and over and their dependents age 65 and over were permitted to enroll in either self-only or family FEHBP plans. Dependents who were under age 65 could be covered only if the eligible retiree chose a family plan. Several other groups were permitted to enroll including: unremarried former spouses of a member or former member of the armed forces entitled to military retiree health care, dependents of a deceased member or former member of the armed forces entitled to military retiree health care, and dependents of a member of the armed services who died while on active duty for more than 30 days.

About 13 percent of those eligible for the demonstration were under age 65.

DOD, with assistance from OPM, was responsible for providing eligible beneficiaries information on the demonstration. A description of this information campaign is in appendix IV.

The demonstration guaranteed enrollees who dropped their Medigap policies the right to resume their coverage under 4 of the 10 standard Medigap policies—plans A, B, C, and F—at the end of the demonstration. However, demonstration enrollees who held any other standard Medigap policies, or Medigap policies obtained before the standard plans were established, were not given the right to regain the policies. Enrollees who dropped their employer-sponsored retiree health coverage had no guarantee that they could regain it.

Each plan was required by OPM to offer the same package of benefits to demonstration enrollees that it offered in the civilian FEHBP, and plans operating in the demonstration sites were generally required to participate in the demonstration. Fee-for-service plans that limit enrollment to specific groups, such as foreign service employees, did not participate. In addition, health maintenance organizations (HMO) and point-of-service (POS) plans were not required to participate if their civilian FEHBP enrollment was less than 300 or their service area overlapped only a small part of the demonstration site. Thirty-one local plans participated in the demonstration in 2000; for another 14 local plans participation was optional, and none of these participated.

The law established a separate risk pool for the demonstration, so any losses from the demonstration were not covered at the expense of persons insured under the civilian FEHBP. As a result, plans had to establish separate reserves for the demonstration and were allowed to charge different premiums in the demonstration than they charged in the civilian program.

Enrollment Was Low, Largely Due to Beneficiaries’ Satisfaction with Existing Coverage

Enrollment in the demonstration was low, although enrollment in Puerto Rico was substantially higher than on the U.S. mainland. Among eligible beneficiaries who knew about the demonstration yet chose not to enroll, most were satisfied with their existing health care coverage and preferred it to the demonstration’s benefits. Lack of knowledge about the demonstration accounted for only a small part of the low enrollment. Although most eligible retirees did not enroll in a demonstration plan, several factors encouraged enrollment. Some retirees took the view that the demonstration plans’ benefits, notably prescription drug coverage, were better than available alternatives. Other retirees mentioned lack of satisfactory alternative coverage. In particular, retirees who were not covered by an existing Medicare+Choice or employer-sponsored health plan were much more likely to enroll. The higher enrollment in Puerto Rico reflected a higher proportion of retirees there who considered the demonstration’s benefits—ranging from drug coverage to choice of doctors—better than what they had. The higher enrollment in Puerto Rico also reflected in part Puerto Rico’s greater share of retirees without existing coverage, such as an employer-sponsored plan.

Enrollment Rate Low on U.S. Mainland, Far Greater in Puerto Rico

While some military retiree organizations as well as a large FEHBP plan predicted at the start of the demonstration that enrollment would reach 25 percent or more of eligible beneficiaries, demonstration-wide enrollment was 3.6 percent in 2000 and 5.5 percent in 2001. In 2002, following the introduction of the senior pharmacy benefit and TFL the previous year, demonstration-wide enrollment fell to 3.2 percent. (See fig. 1.) The demonstration’s enrollment peaked at 7,521 beneficiaries, and by 2002 had declined to 4,367 of the 137,230 eligible beneficiaries.

These low demonstration-wide enrollment rates masked a sizeable difference in enrollment between the mainland sites and Puerto Rico. In 2000, enrollment in Puerto Rico was 13.2 percent of eligible beneficiaries—about five times the rate on the mainland. By 2001, Puerto Rico’s enrollment had climbed to 28.6 percent. Unlike 2002 enrollment on the mainland, which declined, enrollment in Puerto Rico that year rose slightly, to 30 percent. (See fig. 2.) Among the mainland sites, there were also sizeable differences in enrollment, ranging from 1.3 percent in Dover, Delaware, in 2001, to 8.8 percent in Humboldt County, California, that year. Enrollment at all mainland sites declined in 2002.

Nonenrollees Emphasized Better Benefits and Lower Costs of Existing Coverage

Retirees who knew about the demonstration and did not enroll cited many reasons for their decision, notably that their existing coverage’s benefits— in particular its prescription drug benefit—and costs were more attractive than those of the demonstration. In addition, nonenrollees expressed several concerns, including uncertainty about whether they could regain their Medicare supplemental coverage after the demonstration ended.

Benefits of existing coverage. Almost two-thirds of nonenrollees who knew about the demonstration reported that they were satisfied with their existing employer-sponsored or other health coverage. For the majority of nonenrollees with private employer-sponsored coverage, the demonstration’s benefits were no better than those offered by their current plan.

Costs of existing coverage. Nearly 30 percent of nonenrollees who knew about the demonstration stated that its plans were too costly. This was likely a significant concern for retirees interested in a managed care plan, such as a Medicare+Choice plan, whose premiums were generally lower than demonstration plans.

Prescription drugs and availability of doctors. In explaining their decision not to enroll, many eligible beneficiaries who knew about the demonstration focused on limitations of specific features of the benefits package that they said were less attractive than similar features of their existing coverage. More than one-quarter of nonenrollees cited not being able to continue getting prescriptions filled without charge at MTF pharmacies if they enrolled. More than one-quarter also said their decision at least partly reflected not being able to keep their current doctors if they enrolled. These nonenrollees may have been considering joining one of the demonstration’s managed care plans, which generally limit the number of doctors included in their provider networks. Otherwise, they would have been able to keep their doctors, because PPOs, while encouraging the use of network doctors, permit individuals to select their own doctors at an additional cost.

Uncertainty. About one-fourth of nonenrollees said they were uncertain about the viability of the demonstration and wanted to wait to see how it worked out. In addition, more than 20 percent of nonenrollees were concerned that the demonstration was temporary and would end in 3 years. Furthermore, some nonenrollees who looked beyond the demonstration period expressed uncertainty about what their coverage would be after the demonstration ended: Roughly one-quarter expressed concern that joining a demonstration plan meant risking the future loss of other coverage—either Medigap or employer-sponsored insurance. Finally, about one-quarter of nonenrollees were uncertain about how the demonstration would mesh with Medicare.

Lack of Knowledge about Demonstration Accounted for Only Small Part of Low Enrollment

Lack of knowledge—although common among eligible retirees—was only a small factor in explaining low enrollment. If everyone eligible for the demonstration had known about it, enrollment might have doubled, but would still have been low. DOD undertook an extensive information campaign, intended to inform all eligible beneficiaries about the demonstration, but nearly 54 percent of those eligible for the demonstration did not know about it at the time of our survey (May through August 2000). Of those who knew about the demonstration, only 7.4 percent enrolled. Those who did not know about the demonstration were different in several respects from those who did: They were more likely to be single, female, African American, older than age 75, to have annual income of $40,000 or less, to live an hour or more from an MTF, not covered by employer-sponsored health insurance, not officers, not to belong to military retiree organizations and to live in the demonstration areas of Camp Pendleton, California, Dallas, Texas, and Fort Knox, Kentucky.

Accounting for the different characteristics of those retirees who knew about the demonstration and those who did not, we found that roughly 7 percent of those who did not know about the demonstration would have enrolled in 2000 if they had known about it. As a result, we estimate that demonstration-wide enrollment would have been about 7 percent if all eligible retirees knew about the demonstration. (See app. II.)

Comparison of enrollment in Puerto Rico and the mainland sites also suggests that, among the factors that led to low enrollment, knowledge about the demonstration was not decisive. In 2000, fewer people in Puerto Rico reported knowing about the demonstration than on the mainland (35 percent versus 47 percent). Nonetheless, enrollment in Puerto Rico was much higher.

Factors Spurring Enrollment Included Favorable Assessment of FEHBP and Lack of Existing Coverage

In making the decision to enroll, retirees were attracted to an FEHBP plan if it had better benefits—particularly prescription drug coverage—or lower costs than their current coverage or other available coverage. Among those who knew about the demonstration, retirees who enrolled were typically positive about one or both of the following: Better FEHBP benefits. Two-thirds of enrollees cited their demonstration plan’s benefits package as a reason to enroll, with just over half saying the benefits package was better than other coverage available to them. Nearly two-thirds of enrollees mentioned the better coverage of prescription drugs offered by their demonstration plan. Furthermore, the inclusiveness of FEHBP plans’ networks of providers mattered to a majority of enrollees: More than three-fifths mentioned as a reason for enrolling that they could keep their current doctors under the demonstration.

Lower demonstration plan costs. Among enrollees, about 62 percent said that their demonstration FEHBP plan was less costly than other coverage they could buy.

Beneficiaries’ favorable assessments of FEHBP—and their enrollment in the demonstration—were related to whether they lacked alternative coverage to traditional Medicare and, if they had such coverage, to the type of coverage. In 2000, among those who lacked employer-sponsored coverage or a Medicare+Choice plan, or lived more than an hour’s travel time from an MTF, about 15 percent enrolled. By contrast, among those who had such coverage, or had MTF access, 4 percent enrolled.

In particular, enrollment in an FEHBP plan was more likely for retirees who lacked either Medicare+Choice or employer-sponsored coverage.

Lack of Medicare+Choice. Controlling for other factors affecting enrollment, those who did not use Medicare+Choice were much more likely to enroll in a demonstration plan than those who did. (See fig. 3.) Several reasons may account for this. First, in contrast to fee-for-service Medicare, Medicare+Choice plans are often less costly out-of-pocket, typically requiring no deductibles and lower cost sharing for physician visits and other outpatient services. Second, unlike fee-for-service Medicare, many Medicare+Choice plans offered a prescription drug benefit. Third, while Medicare+Choice plan benefits were similar to those offered by demonstration FEHBP plans, Medicare+Choice premiums were typically less than those charged by the more popular demonstration plans, including Blue Cross Blue Shield, the most popular demonstration plan on the mainland.

Lack of employer-sponsored coverage. Retirees who did not have employer-sponsored health coverage were also more likely to join a demonstration plan. Of those who did not have employer-sponsored coverage, 8.6 percent enrolled in the demonstration, compared to 4.7 percent of those who had such coverage. Since benefits in employer- sponsored health plans often resemble FEHBP benefits, retirees with employer-sponsored coverage would have been less likely to find FEHBP plans attractive.

Retirees with another type of alternative coverage, Medigap, responded differently to the demonstration. Unlike the pattern with other types of insurance coverage, more of those with a Medigap plan enrolled (9.3 percent) than did those without Medigap (5.6 percent). Medigap plans generally offered fewer benefits than a demonstration FEHBP plan, but at the same or higher cost to the retiree. Seven of the 10 types of Medigap plans available to those eligible for the demonstration do not cover prescription drugs. As a result of these differences, retirees who were covered by Medigap policies would have had an incentive to enroll instead in a demonstration FEHBP plan, which offered drug coverage and other benefits at a lower premium cost than the most popular Medigap plan.

Like the lack of Medicare+Choice or employer-sponsored coverage, lack of nearby MTF care stimulated enrollment. While living more than an hour from an MTF was associated with higher demonstration enrollment, MTF care may have served some retirees as a satisfactory supplement to Medicare-covered care, making demonstration FEHBP plans less attractive to them. Of eligible retirees who knew of the demonstration and lived within 1 hour of an MTF, 3.7 percent enrolled, compared to 11.1 percent of those who lived more than 1 hour away.

Higher Enrollment in Puerto Rico Associated with Greater Lack of Satisfactory Alternative Coverage

Higher enrollment in Puerto Rico than on the mainland reflected in part the more widespread lack of satisfactory alternative health coverage in Puerto Rico compared to the mainland. In Puerto Rico, of those who knew of the demonstration, the share of eligible retirees with employer- sponsored health coverage (14 percent) was about half that on the mainland (27 percent). In addition, before September 2001, no Medicare+Choice plan was available in Puerto Rico. By contrast, in mainland sites where Medicare+Choice plans were available, their attractive cost sharing and other benefits discouraged retirees from enrolling in demonstration plans. Other factors associated with Puerto Rico’s high enrollment and cited by enrollees there included the demonstration plan’s better benefits package—especially prescription drug coverage—compared to many retirees’ alternatives, the demonstration plan’s broader choice of doctors, and the plan’s reputation for quality of care.

Premiums Varied Widely, Reflecting Plans’ Different Assessments of Demonstration Risk

The premiums charged by the demonstration plans varied widely, reflecting differences in how they dealt with the concern that the demonstration would attract a disproportionate number of sick, high-cost enrollees. To address these concerns, plans generally followed one of two strategies. Most plans charged higher premiums than those they charged to their civilian FEHBP enrollees—a strategy that could have provided a financial cushion and possibly discouraged enrollment. A small number of plans set premiums at or near their premiums for the civilian FEHBP with the aim of attracting a mix of enrollees who would not be disproportionately sick. Plans’ underlying concern that they would attract a sicker population was not borne out. In the first year of the demonstration, for example, on average health care for demonstration retirees was 50 percent less expensive per enrollee than the care for their civilian FEHBP counterparts.

Plans’ Premiums Varied Widely, and Plans with Lower Premiums Attracted the Most Enrollees

Demonstration plans charged widely varying premiums to enrollees, with the most popular plans offering some of the lowest premiums. In 2000, national plans’ monthly premiums for individual coverage ranged from $65 for Blue Cross Blue Shield to $208 for the Alliance Health Plans. Among local plans—most of which were managed care—monthly premiums for individual coverage ranged from $43 for NYLCare Health Plans of the Southwest to $280 for Aetna U.S. Healthcare. Not surprisingly, few enrollees selected the more expensive plans. The two most popular plans were Blue Cross Blue Shield and Triple-S; the latter offered a POS in Puerto Rico. Both plans had relatively low monthly premiums—the Triple-S premium charged to individuals was $54 in the demonstration’s first year. Average premiums for national plans were about $20 higher than for local plans, which were largely managed care plans. (See table 2.)

Some plans in the demonstration were well known in their market areas, while others—especially those open only to government employees— likely had much lower name recognition. Before the demonstration started, OPM officials told us that they expected beneficiaries to be unfamiliar with many of the plans included in the demonstration. These officials said that beneficiaries were likely to have only experience with or knowledge of Blue Cross Blue Shield and, possibly, some local HMOs. The success of Blue Cross Blue Shield relative to other national plans in attracting enrollees appears to support their view, as does Triple-S’s success in Puerto Rico, where it is one of the island’s largest insurers. In 2000, Blue Cross Blue Shield was the most popular plan in the demonstration, with 42 percent of demonstration-wide enrollment and 68 percent of enrollment on the mainland. Among national plans, the GEHA Benefit Plan (known as GEHA) was a distant second with 4 percent of enrollment. The other five national plans together captured less than 1 percent of all demonstration enrollment. Among local plans, Triple-S was most successful, capturing 96 percent of enrollment in Puerto Rico and 38 percent of enrollment demonstration-wide. The other local plans, taken together, accounted for about 14 percent of demonstration-wide enrollment.

Plans’ Premium Strategies Diverged despite Common Concerns about Attracting Sicker Enrollees

Several factors contributed to plans’ concern that they would attract sicker—and therefore more costly—enrollees in the demonstration. Plans did not have the information that they usually use to set premiums— claims history for fee-for-service plans and premiums charged to comparable private sector groups for managed care plans. Moreover, according to officials, some plans were reluctant to assume that demonstration enrollees would be similar to their counterparts in the civilian FEHBP. A representative from one of the large plans noted that the small size of the demonstration was also a concern. The number of people eligible for the demonstration (approaching 140,000, when the demonstration was expanded in 2001) was quite small compared to the number of people in the civilian program (8.5 million in 2001). If only a small number of people enrolled in a plan, one costly case could result in losses, because claims could exceed premiums.

In response to the concern that the demonstration might attract a disproportionate number of sick enrollees, plans developed two different strategies for setting premiums. Plans in one group, including Blue Cross Blue Shield and GEHA, kept their demonstration premiums at or near those they charged in the civilian FEHBP. Representatives of one plan explained that it could have priced high, but they believed that would have resulted in low enrollment and might have attracted a disproportionate number of sick—and therefore costly—enrollees. Instead, by keeping their premium at the same level as in the civilian program, these plan officials hoped to make their plan attractive to those who were in good health as well as to those who were not. Such a balanced mix of enrollees would increase the likelihood that a plan’s revenues would exceed its costs.

By contrast, some plans charged higher premiums in the demonstration— in some cases, 100 percent higher—than in the civilian FEHBP. Setting higher premiums might provide plans with a financial cushion to deal with potential high-cost enrollees. While higher premiums might have discouraged enrollment and reduced plans’ exposure to high-cost patients, this strategy carried the risk that those beneficiaries willing to pay very high premiums might be sick, high-cost patients.

More than four-fifths of plans chose the second strategy, charging higher premiums in the demonstration than in the civilian FEHBP. In 2000, only two plans—both local plans—charged enrollees less in the demonstration than in the civilian program for individual, standard option policies; these represented about 6 percent of all plans. By contrast, three plans—about 9 percent of all plans—set premiums at least twice as high as premiums in the civilian FEHBP. (See fig. 4.)

Military Retirees Who Enrolled in Demonstration Not as Sick as Other Retirees

The demonstration did not attract sicker, more costly enrollees—instead, military retirees who enrolled were less sick on average than eligible nonenrollees. We found that, as scored by a standard method to assess patients’ health, older retirees who enrolled in the demonstration were an estimated 13 percent less sick than eligible nonenrollees. At each site enrollees were, on average, less sick than nonenrollees. In the GAO-DOD- OPM survey, fewer enrollees on the U.S. mainland (33 percent) reported that they or their spouses were in fair or poor health compared to nonenrollees (40 percent). Retirees who enrolled in demonstration plans had scores that indicated they were, on average, 19 percent less sick than civilian FEHBP enrollees in these plans.

Plans’ divergent strategies for setting premiums resulted in similar mixes of enrollees. Blue Cross Blue Shield and GEHA, both of which did not increase premiums, attracted about the same proportion of individuals in poor health as plans on the mainland that raised premiums.

Demonstration Enrollees Less Expensive than Eligible Nonenrollees and Much Less Expensive than Their Civilian FEHBP Counterparts, Leading to Reduced Premiums for Most Plans in Final Year of Demonstration

During 2000, the first year of the demonstration, enrolled retirees’ health care was 28 percent less expensive—as measured by Medicare claims— than that of eligible nonenrolled retirees and one-third less expensive than that of their FEHBP counterparts. (See table 3.) The demonstration enrollees’ average age (71.8 years) was lower than eligible nonenrollees’ average age (73.1 years), which in turn was lower than the average age of civilian FEHBP retirees (75.2 years) in the demonstration areas. OPM has obtained from the three largest plans claims information that includes the cost of drugs and other services not covered by Medicare. These claims show a similar pattern: Demonstration enrollees were considerably less expensive than enrollees in the civilian FEHBP.

Although demonstration enrollees’ costs were lower than those of their FEHBP counterparts in the first year, demonstration premiums generally remained higher than premiums for the civilian FEHBP. In 2001, the second year of the demonstration, only a limited portion of the first year’s claims was available when OPM and the plans negotiated the premiums, so the lower demonstration costs had no effect on setting 2001 premiums. Demonstration premiums in 2001 increased more rapidly than the civilian premium charged by the same plans: a 30 percent average increase in the demonstration for individual policies compared to a 9 percent increase for civilians in the same plans. In 2002, the third year, when both the plans and OPM were able to examine a complete set of claims for the first year before setting premiums, the pattern was reversed: On average, the demonstration premiums for individual policies fell more than 2 percent while the civilian premiums rose by 13 percent. However, on average, 2002 premiums remained higher in the demonstration than in the civilian FEHBP. Blue Cross Blue Shield was an exception, charging a higher monthly premium for an individual policy to civilian enrollees ($89) in 2000 than to demonstration enrollees ($74).

Impact of Demonstration on DOD Was Limited Due to Small Size and Low Enrollment, but Impact on Enrollees Was Greater

Because the demonstration was open to only a small number of military retirees—and only a small fraction of those enrolled—the demonstration had little impact on DOD, nonenrollees, and MTFs. However, the impact on enrolled retirees was greater. If the FEHBP option were made permanent, the impact on DOD, nonenrollees, and MTFs would depend on the number of enrollees.

DOD Little Affected by Demonstration, Due Primarily to Its Size, but Enrollees More Affected

Because of its small size, the demonstration had little impact on DOD’s budget. About 140,000 of the more than 8 million people served by the DOD health system were eligible for the demonstration in its last 2 years. Enrollment at its highest was 7,521—about 5.5 percent of eligible beneficiaries. DOD’s expenditures on enrollees’ premiums that year totaled about $17 million—roughly 0.1 percent of its total health care budget. Under the demonstration, DOD was responsible for about 71 percent of each individual’s premium, whereas under TFL it is responsible for the entire cost of roughly similar Medicare supplemental coverage.

Probably because of its small size, the demonstration had no observable impact on either the ability of MTFs to assist in the training and readiness of military health care personnel or on nonenrollees’ access to MTF care. Officials at the four MTFs in demonstration sites told us that they had seen no impact from the demonstration on either MTFs or nonenrollees’ access to care.

Since enrollees were typically attracted to the demonstration by both its benefits and its relatively low costs, the impact on those who enrolled was necessarily substantial. In the first 2 years, the demonstration provided enrollees with better supplemental coverage, which was less costly or had better benefits, or both. In the third year of the demonstration, after TFL and the retirees’ pharmacy benefit were introduced and enrollment declined, the number of beneficiaries affected by the demonstration decreased. TFL entitled military retirees to low-cost, comprehensive coverage, making the more expensive FEHBP unattractive. The average enrollee premium for an individual policy in the demonstration’s third year was $109 per month. In comparison, to obtain similar coverage under the the combined TFL-pharmacy benefit, the only requirement was to pay the monthly Medicare part B premium of $54. Further, pharmacy out-of- pocket costs under TFL are less than those in the most popular FEHBP plan.

Impact of Permanent FEHBP Option Would Depend on Enrollment

The impact on DOD of a permanent FEHBP option for military retirees nationwide would depend on the number of retirees who enrolled. For example, if the same percentage of eligible retirees who enrolled in 2002— after TFL and the retirees’ pharmacy benefit were introduced—enrolled in FEHBP, enrollment would be roughly 20,000 of the more than 1.5 million military retirees. As retirees’ experience with TFL grows, their interest in an FEHBP alternative may decline further. As long as enrollment in a permanent FEHBP option remains small, the impact on DOD’s ability to provide care at MTFs and on MTF readiness would also likely be small.

Agency Comments

We provided DOD and OPM with the opportunity to comment on a draft of this report. In its written comments DOD stated that, overall, it concurred with our findings. However, DOD differed with our description of the demonstration’s impact on DOD’s budget as small. In contrast, DOD described these costs of the 3-year demonstration–$28 million for FEHBP premiums and $11 million for administration—as substantial. While we do not disagree with these dollar-cost figures and have included them in this report, we consider them to be small when compared to DOD’s health care budget, which ranged from about $18 billion in fiscal year 2000 to about $24 billion in fiscal year 2002. For example, as we report, DOD’s premium costs for the demonstration during 2001, when enrollment peaked, were about $17 million—less than 0.1 percent of DOD’s health care budget. Although DOD’s cost per enrollee in the demonstration was substantial, the number of enrollees was small, resulting in the demonstration’s total cost to DOD being small. DOD’s comments appear in appendix VI. DOD also provided technical comments, which we incorporated as appropriate. OPM declined to comment.

We are sending copies of this report to the Secretary of Defense and the Director of the Office of Personnel Management. We will make copies available to others upon request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staffs have questions about this report, please contact me at (202) 512-7101. Other GAO contacts and staff acknowledgments are listed in appendix VII.

Appendix I: GAO-DOD-OPM Survey of Military Retirees and Others Eligible for the DOD-FEHBP Demonstration

To determine why those eligible for the Federal Employees Health Benefits Program (FEHBP) demonstration enrolled or did not enroll in an FEHBP plan, we co-sponsored with the Department of Defense (DOD) and the Office of Personnel Management (OPM) a mail survey of eligible beneficiaries—military retirees and others eligible to participate in the demonstration. The survey was fielded during the first year of the demonstration, from May to August 2000, and was sent to a sample of eligible beneficiaries, both those who enrolled and those who did not enroll, at each of the eight demonstration sites operating at that time. The survey was designed to be statistically representative of eligible beneficiaries, enrollees, nonenrollees, and sites, and to facilitate valid comparisons between enrollees and nonenrollees.

Questionnaire Design

In constructing the questionnaire, we developed questions pertaining to individuals’ previous use of health care services, access to and satisfaction with care, health status, knowledge of the demonstration, reasons for enrolling or not enrolling in the demonstration, and other topics. Because eligible beneficiaries could choose FEHBP plans that also covered their family members, we included questions about spouses and dependent children. DOD and OPM officials and staff members from Westat, the DOD subcontractor with responsibility for administering the survey, provided input on the questionnaire’s content and format. After pretesting the questionnaire with a group of military retirees and their family members, the final questionnaire included the topic areas shown in table 4. We also produced a Spanish version of the questionnaire that was mailed to beneficiaries living in Puerto Rico.

Sample Design

Working with DOD, OPM, and Westat, we defined the survey population as all persons living in the initial eight demonstration sites who were eligible to enroll in the demonstration. The population included military retirees, their spouses and dependents, and other eligible beneficiaries, such as unremarried former spouses, designated by law. We drew the survey sample from a database provided by DOD that listed all persons eligible for the demonstration as of April 1999.

We stratified the sample by the eight demonstration sites and by enrollment status—enrollees and nonenrollees. Specifically, we used a stratified two-stage design in which households were selected within each of the 16 strata and one eligible person was selected from each household. For the enrollee sample, we selected all enrollees who were the sole enrollee in their households. In households with multiple enrollees, we randomly selected one enrollee to participate. For the nonenrollee sample, first we randomly selected a sample of households from all nonenrollee households and then randomly selected a single person from each those households. We used a modified equal allocation approach, increasing the size of the nonenrollee sample in steps, bringing it successively closer to the sample size that would be obtained through proportional allocation. This modified approach produced the best balance in statistical terms between the gain from the equal allocation approach and the gain from the proportional allocation approach. If both an enrollee and a nonenrollee were selected from the same household, the nonenrollee was dropped from the sample and a different nonenrollee was selected. We adjusted the nonenrollee sample size to take account of expected nonresponse. Our final sample included 1,676 out of 2,507 enrollees and 3,971 out of 66,335 nonenrollees.

Response Rates

Starting with an overall sample of 5,647 beneficiaries, we obtained usable questionnaires from 4,787 people—an overall response rate of 85 percent. (See table 5.) Response rates varied across sites, from 76 percent to 85 percent among nonenrollees, and from 92 percent to 98 percent among enrollees. (See table 6.) At each site, enrollees responded at higher rates than nonenrollees.

Each of the 16 strata was weighted separately to reflect its population. The enrollee strata were given smaller sampling weights, reflecting enrollees’ higher response rates and the fact that they were sampled at a higher rate than nonenrollees. The weights were also adjusted to reflect the variation in response rates across sites. Finally, the sampling weights were further adjusted to reflect differences in response rates between male and female participants in 8 strata.

Appendix II: Data, Methods, and Models Used in Analyzing Factors Affecting DOD-FEHBP Demonstration Enrollment

In this appendix, we describe the data, methods, and models used to (1) analyze the factors explaining how beneficiaries knew about the demonstration and why they enrolled in it, (2) assess the health of beneficiaries and civilian FEHBP enrollees, and (3) obtain the premiums of Medigap insurance in the demonstration areas.

Analysis of Factors Affecting Knowledge about the Demonstration and Enrollment

Our approach to analyzing eligible beneficiaries’ behavior involved two steps: first, analyzing the factors related to whether eligible beneficiaries knew about the demonstration, and second, analyzing the factors related to whether those who knew about the demonstration decided to enroll.

Knowledge about the demonstration. To account for differences in beneficiaries’ knowledge about the demonstration, we used individual- level variables as well as variables corresponding to individual sites. These individual-level categories were demographic and economic variables, such as age and income; health status; other sources of health coverage, such as having employer-sponsored health insurance; and military-related factors. The inclusion of site variables allowed the model to take account of differences across the different sites in beneficiaries’ knowledge about the demonstration.

We analyzed the extent to which these variables influenced beneficiaries’ knowledge about the demonstration using a logistic regression—a standard statistical method of analyzing an either/or (binary) variable. This method yields an estimate of each factor’s effect, controlling for the effects of all other factors in the regression. In our analysis, either a retiree knew about the demonstration or did not. The logistic regression predicts the probability that a beneficiary knew about the demonstration, given information about the person’s traits—for example, over age 75, had employer-sponsored health insurance, and so on. The coefficient on each variable measures its effect on beneficiaries’ knowledge. These coefficients pertain to the entire demonstration population, not just those beneficiaries in our survey sample. To make the estimates generalizable to the entire eligible population, we applied sample weights to all observations.

In view of the large difference in enrollment between the mainland sites and Puerto Rico, we tested whether the same set of coefficient estimates was appropriate for the mainland sites and the Puerto Rico site. Our results showed that the coefficient estimates for the mainland and for Puerto Rico were not significantly different (at the 5 percent level), so it was appropriate to estimate a single logistic regression model for all sites.

Table 7 shows for each variable its estimated effect on knowledge, as measured by the variable’s coefficient and odds ratio. The odds ratio expresses how much more likely—or less likely—it is that a person with a particular characteristic knows about the demonstration, compared to a person without that characteristic. The odds ratio is based on the coefficient, which indicates each explanatory variable’s estimated effect on the dependent variable, holding other variables constant. For the mainland sites, retirees were more likely to know about the demonstration if they were male, were married, were officers, were covered by employer- sponsored health insurance, lived less than an hour from a military treatment facility (MTF), or belonged to military retiree organizations. Retirees were less likely to know about the demonstration if they were African American; were older than age 75; or lived in Camp Pendleton, California, Dallas, Texas, or Fort Knox, Kentucky.

Decision to enroll in the demonstration. To account for a retiree’s decision to enroll or not to enroll, we considered four categories of individual-level variables similar to those in the “knowledge of the demonstration” regressions, and a site-level variable for Puerto Rico. We also introduced a set of health insurance factors pertaining to the area in which the retiree lived—the premium for a Medigap policy and the proportion of Medicare beneficiaries in a retiree’s county of residence enrolled in a Medicare+Choice plan.

In our logistic regression analysis of enrollment, we included only those people who knew about the demonstration. Despite the large enrollment differences between the mainland sites and Puerto Rico, our statistical tests determined that the mainland sites and the Puerto Rico site could be combined into a single logistic regression of enrollment. We included a variable for persons in the Puerto Rico site. (See table 8.)

We found that retirees were less likely to enroll in the demonstration if they were African American, enrolled in Medicare+Choice plans, had employer-sponsored health insurance, lived in areas with a high proportion of Medicare beneficiaries enrolled in a Medicare+Choice plan, lived in areas where Medigap was more expensive, or lived less than an hour from an MTF. Retirees who had higher incomes, were officers, were members of a military retiree organization, were enrolled in Medicare part B, lived in Puerto Rico, or were covered by a Medigap policy were more likely to enroll.

Calculating the Impact on Enrollment if Those Eligible Had Known about the Demonstration

We estimated what the demonstration’s enrollment rate would have been in 2000 if everyone eligible for the demonstration had known about it. For the 54 percent of retirees who did not know about the demonstration, we calculated their individual probabilities of enrollment, using their characteristics (such as age) and the coefficient estimates from the enrollment regression. Aggregating these individual estimated enrollment probabilities, we found that if all eligible retirees had known about the demonstration, enrollment in 2000 would have been 7.2 percent of eligible beneficiaries, compared with actual enrollment of 3.6 percent.

Estimating Health Status Based on PIP-DCG Scores

To measure the health status of retired enrollees and nonenrollees, as well as of civilian FEHBP enrollees, we calculated scores for individuals using the Principal Inpatient Diagnostic Cost Group (PIP-DCG) method. This method—used by the Centers for Medicare & Medicaid Services (CMS) in adjusting Medicare+Choice payment rates—yielded a proxy for the healthiness of military and civilian retirees as of 1999, the year before the demonstration. The method relates individuals’ diagnoses to their annual Medicare expenditures. For example, a PIP-DCG score of 1.20 indicates that the individual is 20 percent more costly than the average Medicare beneficiary. In our analysis, we used Medicare claims and other administrative data from 1999 to calculate PIP-DCG scores for eligible military retirees and their counterparts in the civilian FEHBP in the demonstration sites.

Using Medicare part A claims for 1999, we calculated PIP-DCG scores for Medicare beneficiaries who were eligible for the demonstration. We used a DOD database to identify enrollees as well as those who were eligible for the demonstration but did not enroll.

We also calculated PIP-DCG scores based on 1999 Medicare claims for each Medicare-eligible person enrolled in the civilian FEHBP. We obtained from OPM data on enrollees in the civilian FEHBP and on the plans in which they were enrolled. We restricted our analysis to those Medicare- eligible civilian FEHBP enrollees who lived in a demonstration site.

Results of PIP-DCG calculations. We compared the PIP-DCG scores of demonstration enrollees with those of eligible retirees who did not enroll. In every site, the average PIP-DCG score was significantly less for demonstration enrollees than for those who did not enroll. We also compared the PIP-DCG scores of those enrolled in the demonstration with those enrolled in the civilian FEHBP: For every site, these scores were significantly less for demonstration enrollees than for their counterparts in the civilian FEHBP. (See table 9.)

Medigap Premiums

We compiled data from Quotesmith Inc. to obtain a premium price for Medigap plan F in each of the counties in the eight demonstration sites. We collected the lowest premium quote for a Medigap plan F policy for each sex at 5-year intervals: ages 65, 70, 75, 80, 85, and over 89. A person age 65 to 69 was assigned the 65-year-old’s premium, a person age 70 to 74 was assigned the 70-year-old’s premium, and so on. Using these data, we assigned a Medigap plan F premium to each survey respondent age 65 and over, according to the person’s age, sex, and location.

Appendix III: Enrollment in the DOD-FEHBP Demonstration

Tables 10, 11, and 12 show enrollment rates by site and for the U.S. mainland sites as a whole for each year of the demonstration, 2000 through 2002.

Appendix IV: DOD’s Approach to Informing Beneficiaries about the DOD-FEHBP Demonstration

The program for informing and educating eligible beneficiaries about the demonstration was modeled on OPM’s approach to informing eligible civilian beneficiaries about FEHBP. Elements of OPM’s approach include making available a comparison of FEHBP plans and holding health fairs sponsored by individual federal agencies. DOD expanded upon the OPM approach–for example, by sending postcards to inform eligible beneficiaries about the demonstration because they, unlike civilian federal employees and retirees, were unlikely to have any prior knowledge of FEHBP. In addition, DOD established a bilingual toll-free number. During the first year’s enrollment period, DOD adjusted its information and education effort, for example, by changing the education format from health fairs to town meetings designed specifically for demonstration beneficiaries. In the second year of the demonstration, DOD continued with its revised approach. In the third year, after TRICARE For Life (TFL) began, DOD significantly reduced its information program but continued to mail information to all eligible beneficiaries. It limited town meetings to Puerto Rico, the only site where enrollment remained significant during the third year.

Mailings

DOD sent a series of mailings to all eligible beneficiaries. These included a postcard announcing the demonstration, mailed in August 1999, that alerted beneficiaries to the demonstration–the returned postcards allowed DOD to identify incorrect mailing addresses and to target follow-up mailings to beneficiaries with correct addresses; an OPM-produced booklet, The 2000 Guide to Federal Employees Health Benefits Plans Participating in the DOD/FEHBP Demonstration Project, received by all eligible retirees from November 3 through 5, 1999, that contained information on participating FEHBP plans, including coverage and consumer satisfaction; a trifold brochure describing the demonstration, which was mailed on September 1 and 4, 1999; and a list of Frequently Asked Questions (FAQ) explaining how Medicare and FEHBP work together.

At the time of our survey, after the first year’s information campaign, over half of eligible beneficiaries were unaware of the demonstration. Among those who knew about it, more recalled receiving the postcard than recalled receiving any of the later materials—although the FAQ was cited more often as being useful. (See table 13.)

Health Fairs and Town Meetings

Initially, the health fairs that DOD sponsored for military bases’ civilian employees were its main effort—other than the mailings—to provide information about the demonstration to eligible beneficiaries. At these health fairs, plans set up tables at which their representatives distributed brochures and answered questions. At one site, the military base refused to allow the demonstration representatives to participate in its health fair because of concern about an influx of large numbers of demonstration beneficiaries. At another site, the turnout exceeded the capacity of the plan representatives to deal with questions and DOD officials told us that they accommodated more people by giving another presentation at a different facility or at the same facility 1 month later.

A DOD official discovered, however, that it was difficult to convey information about the demonstration to large numbers of individuals at the health fairs. DOD officials determined that the health fairs were not working well, so by January 2000, DOD replaced them with 2-hour briefings, which officials called town meetings. In these meetings, a DOD representative explained the demonstration during the first hour and then answered questions from the audience. A DOD official told us that these town meetings were more effective than the health fairs.

For the first year of the demonstration, just under 6 percent of those eligible attended either a health fair or a town meeting. The number of eligible beneficiaries who reported attending these meetings varied considerably by site—from about 3 percent in New Orleans and Camp Pendleton to 4 percent in Fort Knox and 18 percent in Humboldt County. Roughly 11 percent of beneficiaries reported attending in Puerto Rico, the site with the highest enrollment.

DOD’s Call Center and Web Site

DOD also established a call center and a Web site to inform eligible beneficiaries about the demonstration. The call center, which was staffed by Spanish and English speakers, answered questions and sent out printed materials on request. In the GAO-DOD-OPM survey, about 18 percent of those who knew about the demonstration reported calling the center’s toll- free number. The proportion that called the toll-free number was much higher among subsequent enrollees (77 percent) than among nonenrollees who knew about the demonstration (13 percent). The Web site was another source of information about the demonstration.

Beneficiaries’ Sources of Information

Although less than half of eligible beneficiaries knew about the demonstration, most of those who did know said they obtained their information from DOD’s mailings. Other important sources of information included military retiree and military family organizations and FEHBP plans. (See table 14.)

Nearly all of enrollees (93 percent) and more than half of nonenrollees who said they considered enrolling in an FEHBP health plan (55 percent) reported that they had enough information about specific plans to make an informed decision about enrolling in one of them. More than three-fifths of these beneficiaries who enrolled or considered enrolling in an FEHBP plan said they used The 2000 Guide to FEHBP Plans Participating in the DOD/FEHBP Demonstration Project as a source of information. Other major sources of information were the plans’ brochures and DOD’s health fairs and town meetings. More than 18 percent of those who considered joining did not obtain information about any specific plan. (See table 15.)

Appendix V: Enrollees’ and Nonenrollees’ Reasons for Joining or Not Joining a DOD- FEHBP Demonstration Plan

Table 16 shows reasons cited by enrollees for enrolling in a DOD-FEHBP health plan in 2000, and table 17 shows reasons cited by nonenrollees for not enrolling.

Appendix VI: Comments from the Department of Defense

Appendix VII: GAO Contacts and Staff Acknowledgments

GAO Contacts

Acknowledgments

Major contributors to this work were Michael Kendix, Robin Burke, Jessica Farb, Martha Kelly, Dae Park, and Michael Rose.

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