39 million beneficiaries and spends about $212 billion a year. Its benefits include hospital, physician, and other services such as home health and limited skilled nursing facility care. HCFA administers Medicare and regulates participating providers and health plans. Original, or traditional, Medicare reimburses private providers on a fee-for-service basis and allows Medicare beneficiaries to choose their own providers without restriction. A newer option within Medicare allows beneficiaries to choose among private, managed care health plans. Currently, 17 percent of beneficiaries use Medicare managed care. In original Medicare, beneficiaries must pay a share of the costs for various services. Most Medicare managed care plans have only modest beneficiary cost-sharing and many offer extra benefits, such as prescription drugs. DOD received an appropriation for military health care of almost $16 billion in fiscal year 1999. Of that, an estimated $1.2 billion is spent on the 1.3 million Medicare-eligible military retirees. Under its TRICARE program, DOD provides health benefits to active duty military, retirees, and their dependents, but most retirees 65 and over lose their eligibility for comprehensive, DOD-sponsored health coverage. DOD delivers most of the health care needed by active duty personnel and military retirees through its military hospitals and clinics. DOD gives priority for care to active duty personnel and their dependents, and to certain retirees under 65. Retirees who turn 65 and become eligible for Medicare can get military care if space is available (called space-available care)—that is, after other DOD beneficiaries are treated. Some military facilities have little or no space-available care. covers services of military physicians as well as civilian network providers by drawing on DOD’s appropriated funds and premiums and copayments charged to some enrollees. In TRICARE Prime, DOD generally organizes the delivery of care on managed care principles—for example, an emphasis on a primary care manager for each enrollee. DOD has gained considerable experience with managed care, but it relies heavily on contractors to conduct marketing, build a network of providers, and perform other critical functions. The BBA established a 3-year demonstration of Medicare subvention, to start on January 1, 1998, and end on December 31, 2000. Within the BBA’s guidelines, DOD and HCFA negotiated a Memorandum of Agreement (MOA). The MOA stated the ways in which HCFA would treat DOD like any other Medicare health plan and the ways in which HCFA would treat it differently. The MOA also spelled out the benefit package and the rules for Medicare’s payments to DOD. After DOD and HCFA signed the MOA, they selected six demonstration sites. They would be able to serve about 30,000 of the 125,000 people eligible for both Medicare and military health benefits in these areas. The subvention demonstration made DOD responsible for creating a DOD-run Medicare managed care organization for elderly retirees. This pilot health plan, which DOD named Senior Prime, is built on DOD’s existing managed care model. By enrolling in Senior Prime, Medicare-eligible military retirees obtain priority for services at military facilities—an advantage, compared to nonenrollees. Senior Prime’s benefit package is “Medicare-plus”—the full Medicare benefits package supplemented by some other benefits, notably prescription drugs. only retain a portion of these payments if that year’s costs for the six sites together exceed baseline LOE. VA provides a comprehensive array of health services to veterans with service-connected disabilities or low incomes. Since 1986, VA has also offered health care to higher-income veterans, who must however make copayments for services. Overall, VA serves over 13 percent of the total veteran population of 25 million, with the remaining veterans receiving their health care through private or employer health plans or other public programs. Many of the veterans whom VA serves also get part of their care from other sources, such as DOD, Medicaid, and private insurance. The administration has requested $17.3 billion for VA medical care in fiscal year 2000. To make up the differences between appropriated funds and projected costs, VA estimates that, by fiscal year 2002, it can derive almost 8 percent of the medical care budget from nonappropriated sources, including Medicare reimbursement. Since the early 1990s, VA has shifted its focus from inpatient to outpatient care. At the same time, it implemented managed care principles, emphasizing primary care. In 1995, VA accelerated this transformation by realigning its medical centers and outpatient clinics into 22 service delivery networks and empowering these networks to restructure the delivery of health services. In 1996, the Congress passed the Veterans’ Health Care Eligibility Reform Act that established, for the first time, a system to enroll or register veterans. Enrollment is in effect a registration system for veterans who want to receive care. The law establishes seven priority groups, with Priority Group 1 the highest and Priority Group 7 the lowest. Priority Group 7 includes veterans whose incomes and assets exceed a specified level and (a) do not have a service-connected disability or (b) do not qualify for VA payments for those disabilities. Priority Group 7 veterans must agree to make copayments for health services. broad package that covers inpatient and outpatient care; rehabilitative care and services; preventive services; respite and hospice care; and pharmaceuticals, durable medical equipment, and prosthetics. Enrolled veterans remain free to get some or all of their care from other private or public sources, including Medicare. VA, on the other hand, is committed to serving all enrolled veterans. The structure of any VA subvention demonstration would depend upon the principles and directions that the Congress incorporates in authorizing legislation. We have found certain common elements in all demonstration proposals we reviewed. A VA subvention demonstration would serve certain higher-income, Medicare-eligible veterans (effectively, Priority Group 7 veterans): for a limited time period, such as 3 years; in a limited number of locations; and in compliance with Medicare rules that HCFA applies to the private sector, although HCFA could waive rules that were inappropriate or irrelevant to VA. direct VA to maintain reserves against the risk that appropriated funds would be needed to pay for the care of veterans enrolled in the subvention demonstration. Some proposals authorize VA to establish both fee-for-service and managed care subvention sites, while at least one only authorizes managed care. In implementing the subvention demonstration, DOD and HCFA completed numerous and substantial tasks. DOD sites had to gain familiarity with HCFA regulations and processes, prepare HCFA applications, prepare for and host a HCFA site visit to assess compliance with managed care plan requirements, develop and implement an enrollment process, market the program to potential enrollees, establish a provider network (for care that cannot be provided at the military treatment facilities), assign Primary Care Managers to all enrollees, conduct orientation sessions for new enrollees, and begin service. The national HCFA and DOD offices developed a Memorandum of Agreement, spelling out program guidelines in broad terms. They also developed payment mechanisms, and translated the BBA requirement that DOD maintain its historical LOE in serving dual eligibles into a reimbursement formula. HCFA accelerated review procedures and assigned additional staff so that timelines could be met. But these accomplishments were not without difficulties, and several issues remain that are likely to impact the demonstration’s results. These include the extent to which payment rules can be made more understandable and workable, and the extent to which DOD can operate successfully and efficiently as a Medicare managed care organization. In view of the steep learning curve that DOD faced—it started without any Medicare experience—it is not surprising that the demonstration did not start on time. The BBA was enacted in August 1997 and authorized a demonstration beginning in January 1998. The first site started providing service in September 1998, and all sites were providing service by January 1999. Officials at all DOD sites emphasized to us that the process of establishing a Medicare managed care organization at their facility was far more complex than they had expected. They noted several issues that caused difficulty during this accelerated startup phase, including the following: Delayed notification to sites of their selection for the demonstration. Difficulties in learning and adapting to HCFA rules, procedures, and terms for managed care organizations. For example, DOD had to significantly rework grievance and appeals procedures to comply with HCFA requirements. Difficulties due to shifts in Medicare requirements. All sites started planning as HCFA was developing the new Medicare managed care regulations to replace the rules for the former risk contract managed care program. Consequently, the sites had to adapt to changed rules when they were published. Sites vary significantly in their capacity for caring for Medicare-eligible retirees, how close enrollment is to capacity, and what fraction of eligibles has enrolled. This variation suggests that potential demand for a subvention program is uncertain. Retirees’ enrollment decisions reflect several factors, some that DOD may be able to influence but others—such as the extent of managed care presence in an area—outside its control. In establishing their enrollment capacity—which effectively became an enrollment target—some sites were more conservative than others. Sites’ assessment of their resources focused on the availability of primary care managers—physicians and other clinicians who both provide primary care and serve as gatekeepers to specialist care. Additionally, the national TRICARE office developed a model to show how many enrollees a site would need to meet its LOE threshold and start receiving increased resources from subvention, and these results were made available to sites. Capacity varied from San Antonio, the largest site with four hospitals and a capacity of 12,700, to Dover, which provides only outpatient care in its military health facility and set its capacity at 1,500. Many DOD officials and other observers expected that sites would be deluged with applications and would rapidly reach capacity, but this did not happen. One site is currently at capacity, but only after several months. Other sites have enrolled between 44 percent and 91 percent of capacity as of the end of April 1999. 50 percent of dual eligibles are in private Medicare managed care plans—to two sites with higher percentages of enrollees (Keesler and Dover)—where no one is in managed care because no plans are available. The availability of military care varies. Several sites emphasized in their marketing that retirees who did not enroll could not count on receiving space-available care. This information might spur retirees who prefer military care to enroll in Senior Prime. At other sites, space-available care was less of an issue. At these sites, prospective enrollees who believe that they can continue to receive space-available care may not see an advantage in enrollment but rather a disadvantage—especially because enrolling in Senior Prime locks them out of other Medicare-paid care. Sites may differ in the amount of space-available care they have given in the past and in beneficiaries’ satisfaction with that care. These factors could also affect the decision to enroll. Some retirees expressed reluctance to enroll because the demonstration is due to end in December 2000. They also noted that they did not get information about how, after the demonstration ends, enrollees would transition back to space-available care, traditional fee-for-service Medicare, or a Medicare managed care organization. The subvention demonstration for military retirees aged 65 and over is a new endeavor that highlights challenges for DOD to operate as a Medicare managed care organization. The first is operational—putting in place procedures, organization, and staff to deliver a managed care product to these seniors. The second is economic and organizational—creating the business culture that reconciles delivering services to this illness-prone population with cost-consciousness. DOD’s reliance on contractors (like Foundation Health and Humana) has both enabled it to accomplish key managed care tasks and brought risks with it. DOD overcame obstacles in launching TRICARE Senior Prime as a managed care organization. Specifically, to establish and run a managed care plan requires infrastructure—the ability to market the plan, enroll members, and recruit, manage, and pay a provider network. In building Senior Prime organizations at the six sites, DOD has benefited from its TRICARE Prime experience, and from its contractors who help with or perform many of these tasks. Sites with well-established TRICARE Prime organizations that had worked with the same contractor for several years seemed to us to have a sizeable advantage in establishing Senior Prime. It is not yet known what effect DOD’s extensive use of contractors will have on DOD costs for Senior Prime. But an expanded, permanent subvention program would require establishing and monitoring contractors at many new sites. That would make contractor quality, relationships, and costs a pivotal and uncertain feature of a potential DOD subvention program. get more military primary care doctors or to set up a new program with large up-front costs, even if these actions would promote longer-term efficiency. DOD and HCFA have devised payment rules to meet the statutory requirement that Medicare should pay DOD only after its spending on retirees’ care reaches predemonstration levels—that is, after it has met its baseline, or LOE. These rules have added to the difficulty and the complexity of the demonstration. Furthermore, they have resulted in Medicare payments to DOD not being immediately distributed to the sites. As a result, DOD site managers tend to view DOD appropriations as the sole funding source for all Senior Prime care delivered at military health facilities; the managers are likely to consider Medicare subvention payments as irrelevant to their plans for dealing with capacity bottlenecks or other resource needs in TRICARE Senior Prime. The demonstration’s payment system requires extensive cost and workload data—data that are often problematic and difficult to retrieve and audit. It also involves a complicated sequence of triggers and adjustments for interim and final payments from Medicare to DOD. Interim payments are made to DOD for care delivered at each site that is above a monthly LOE threshold. A reconciliation after the end of the year to determine final Medicare payments can result in DOD returning a portion of those interim payments if the LOE for all sites for the entire year is not reached. DOD would also return Medicare payments if data showed that the demonstration population was in better health than that allowed for in the Medicare payment rates, or if payments exceed the statutory cap ($50 million in the first year, $60 million in the second, and $65 million in the third). managed care payment system, in which payments are made at the beginning of the month to cover care delivered during the month. Based on experience to date with the demonstration, any payment approach for subvention must be even-handed (that is, it should favor neither HCFA nor DOD); straightforward and readily understandable; and prospective (DOD and its sites should receive payment in advance of delivering care to enrollees). The demonstration’s payment mechanism, which relies on LOE, is functional in the short term—although the calculation of LOE has weaknesses. However, this payment mechanism may not be appropriate over the longer term for an extended or expanded subvention program. Moreover, a credible long-term payment system should start with a zero-based budgeting approach: first, determining the cost to DOD of providing TRICARE Senior Prime care to dual eligibles and then deciding how much care will be provided from DOD’s appropriations and how much from Medicare reimbursement. One of the key issues for VA under the proposed demonstration would be how to market subvention and persuade veterans in subvention sites to enroll in the demonstration. This issue is complicated by VA’s own enrollment process and the broad benefits package it offers to all priority groups. VA is committed, as a matter of policy, to serving all enrolled veterans in 1999 and has indicated a desire to do so next year. As a result, it has relatively few options if veterans in a subvention demonstration consume so many resources that they crowd out—or at least put pressure on VA’s capacity for serving—other veterans. Two models are possible for the demonstration—fee for service and managed care. Although fee for service is, in principle, easier to implement and operate, VA’s past difficulties with billing third-party payers raise concern. Proposals for a VA demonstration could be strengthened by taking account of DOD’s difficulties in establishing a subvention demonstration. In particular, DOD experience shows that implementation is difficult and that enough time should be allowed to undertake the numerous operational steps needed to get a demonstration started. Furthermore, payment rules need to be as simple as possible, and data systems are key to managing and evaluating a subvention demonstration. they can currently receive from VA. Priority Group 7 veterans—the only ones eligible for subvention—can now get all services in VA’s broad Uniform Benefits Package. Veterans who are eligible for Medicare can also get care from non-VA providers—either under fee-for-service or through a managed care plan. If it needed to make subvention benefits more attractive, VA could either reduce copayments or increase benefits. However, VA officials tell us that, due to resource constraints, VA may not serve Priority Group 7 veterans in the future. If this happens, these veterans could only get VA services through a subvention demonstration and hence would probably be more likely to enroll. (To make this exception possible, legislation would be required, as eligibility for VA enrollment is uniform nationally.) Some VA officials have suggested to us that, to give Priority Group 7 veterans a reason to enroll, it may be necessary to exclude them from VA services—except through the demonstration. The greatest risk in a VA subvention program is that subvention enrollees could consume so many services that VA patients in higher priority groups would be “crowded out.” However, VA, according to its policy, cannot deny care to an enrolled veteran (that is, one who is registered with VA), even if it does not have sufficient capacity. In the short term, waiting times for appointments would probably increase, or care could be limited to certain facilities, which might be inconvenient for some veterans. VA could also reduce its benefits package, although that would require a change in regulations. In the longer term, some veterans could be denied all VA care if VA excludes one or more priority groups. This would be particularly serious for veterans who lack other insurance. Current proposals for a VA subvention demonstration permit both managed care and fee-for-service sites. Of the two, fee for service appears to be easier to implement, because it only requires submitting claims for covered services to HCFA for payment. However, in the past, VA has had difficulty in collecting from insurance companies because its bills have not had enough detail (for example, diagnosis, service, procedure, and individually identified provider). While VA is moving toward a billing system that will more closely approximate private sector counterparts, its success remains to be seen. Managed care, by definition, places VA at financial risk, and it is also, as DOD’s experience demonstrates, difficult to implement. On the other hand, managed care is highly compatible with the direction in which VA is currently moving. Moreover, VA does not have the experience that DOD gained from TRICARE, and it does not have broad-based managed care contractors that appear to have greatly facilitated implementing and managing the DOD demonstration. If a VA subvention demonstration were to include both managed care and fee-for-service sites, a phased implementation, with one type of delivery system being successfully implemented before the other started, would allow both HCFA and VA to focus their resources. The requirements for Medicare fee for service and managed care differ considerably. As a result, implementing both types of sites simultaneously may place significant strains on both HCFA and VA staffs, particularly at the national level. We see three main lessons for VA in DOD’s experience in establishing its subvention demonstration. Officials at every DOD site told us that establishing a Medicare managed care organization was more difficult and required more effort than they had expected. Months into the implementation, they continue to encounter new issues. Even though the sites took 13 to 17 months after the legislation was passed to establish Senior Prime, hindsight suggest that the goals to get it running earlier were unrealistic. If a VA demonstration is authorized, it should have 12 to 18 months to implement its plans for the demonstration; both VA headquarters and the sites will need that much time. The complexity of the LOE definition and Medicare payment rules, as well as ambiguity about what sites could earn and whether earnings would be distributed to the sites, were issues for DOD. These factors caused many site managers and physicians to largely disregard the potential changes in available financial resources and focus their attention primarily on implementation and patient care issues. As a result, the demonstration may not produce the cost savings and efficiencies that are expected from managed care. VA and HCFA have tentatively agreed to rules that are consistent with the DOD rules and still contain many of the elements that have made it difficult for DOD to manage the demonstration. In particular, payments would be retrospective and an annual reconciliation process could lead to VA returning money to HCFA. DOD’s experience shows that data systems are a point of vulnerability for a successful and credible program. The extent to which data quality would pose an obstacle to a VA demonstration depends in part on how the payment rules are specified. Good data, consistent across sites, would also be needed to manage and evaluate the demonstration. Data quality problems would probably vary by site, with some sites having better data than others. The types of data systems needed would depend in part on the subvention model that is selected. For example, in a fee-for-service model, billing systems are critical. In addition, both DOD and VA will need to develop a strategy to inform and assist beneficiaries with their options in the postdemonstration period. Further, as Medicare enrollment in managed care plans is shifting to an annual open season, it would be desirable to coordinate enrollment in and termination of the demonstration with Medicare’s open season. Subvention holds significant potential for giving military retirees and veterans an additional option for health care coverage, for giving DOD and VA additional funds, and for saving Medicare money. However, at this point—with little systematic data yet available—these outcomes are uncertain. This uncertainty underlines the value of demonstrations of subvention, such as the one that the BBA established for DOD. If a VA demonstration were authorized, VA would clearly need sufficient time to plan and initiate it. VA could also increase its chance of successfully establishing the demonstration if it took advantage of DOD’s experience. 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Summary: Pursuant to a congressional request, GAO discussed the Department of Defense's (DOD) Medicare subvention demonstration program, focusing on: (1) the early phases of implementing the DOD demonstration; (2) issues raised by that experience for DOD subvention; and (3) lessons from the DOD demonstration for a possible Department of Veterans Affairs (VA) demonstration. GAO noted that: (1) subvention holds the potential to benefit military retirees and veterans, DOD and VA, and Medicare; (2) although it got off to a slow start, DOD has initiated its subvention demonstration and is now serving Medicare-eligible military retirees at six sites; (3) several key operational issues remain; (4) these include development of more understandable payment rules, viable for the longer term, and development of data to manage the demonstration and support its evaluation; (5) most important, the demonstration's final results, in terms of access to health care, quality of patient care, and costs to DOD, Medicare, and retirees, will not be known until the evaluation is completed, several months after the end of the demonstration in December 2000; (6) DOD's early experience with subvention does offer insights if proposals are acted on to permit Medicare subvention for VA; (7) in particular, it would need to consider, in collaboration with the Health Care Financing Administration, how to determine its baseline costs and payment rules, as well as the need for good data for implementation, management, and controlling costs; (8) moreover, VA would need to make its regular enrollment of veterans who wish to use VA health care services interface smoothly with subvention demonstration enrollment; (9) VA would also need to be concerned about potential crowding-out of other, higher-priority veterans by subvention enrollees; and (10) GAO's early work on DOD subvention suggests that VA would have a greater chance of success if it has sufficient time to plan and establish the demonstration, and if the value and feasibility of implementing fee-for-service and managed care subvention models simultaneously were reconsidered.