The USFHP is a statutorily required component of the MHS that offers the TRICARE Prime option to eligible military beneficiaries through 6 designated providers in certain locations across the country. Over the years, the number of designated providers has dropped from 10 to 6. The 6 USFHP designated providers that currently administer the USFHP are: (1) Johns Hopkins Medical Services Co., (2) Brighton Marine Health Center, (3) Martin’s Point Health Care, (4) CHRISTUS Health, (5) Pacific Medical Centers, and (6) St. Vincents Catholic Medical Centers. (See appendix I for a comparison of USFHP designated providers in 1994 and 2014.) The reduction in designated providers has largely been due to provider consolidations. In one case, a designated provider opted to no longer participate in the program. According to DOD officials, USFHP enrollees for that designated provider were successfully transitioned to other health care programs for which they were eligible, including the TRICARE options administered by the TRICARE MCSC in that region. Some of the designated providers provide care exclusively to beneficiaries enrolled in the USFHP, while others also provide health care services to beneficiaries of other health plans and may have additional lines of business. (See appendix II for more information on the characteristics of each of the designated providers.) Each of the designated providers—and their respective service areas—are located within one of the three TRICARE regions in the United States. Figure 1 below illustrates the location of the USFHP designated providers relative to the locations of the three TRICARE regions. The six designated providers offer TRICARE Prime to eligible beneficiaries through civilian provider networks in their service areas. To receive care through the USFHP, eligible beneficiaries must enroll in the program. All beneficiaries eligible for DOD health care and who are under the age of 65, except active duty servicemembers, are eligible for USFHP enrollment.designated providers may elect to enroll in TRICARE Prime with the USFHP instead of enrolling with the MCSC. As of October 2013, approximately 134,000 beneficiaries were enrolled in the USFHP—about 3 percent of all TRICARE Prime enrollees. See figure 2 for the total number of USFHP enrollees as a percent of total TRICARE Prime enrollees, as also delineated by designated provider. The USFHP’s role within the current MHS is duplicative because it offers military beneficiaries the same TRICARE Prime benefit that is offered by the MCSCs across much of the same geographic service areas and through many of the same providers. Furthermore, the USFHP is not integrated with the rest of the MHS, and does not support DOD’s efforts to increase efficiency because it potentially diverts enrollees away from DOD’s direct care system. The USFHP’s role in offering TRICARE Prime within the context of the current MHS duplicates the role of the MCSCs in several important ways. For example, the USFHP designated providers and the MCSCs both offer the same TRICARE Prime benefit as required by law. DOD implements this uniform benefit requirement by incorporating the TRICARE Policy Manual, which includes requirements for administering the TRICARE Prime option, into its contracts with both the USFHP designated providers and the TRICARE MCSCs. As a result, beneficiaries enrolled in TRICARE Prime through either the designated providers or the MCSCs receive the same benefit and have the same cost sharing responsibilities. There is also significant overlap in the geographic service areas in which the USFHP designated providers and the MCSCs offer TRICARE Prime. As of October 1, 2013, four of the six USFHP designated providers had more than 80 percent of their service area zip codes overlapping with the See table 1 for the percent of USFHP zip MCSCs’ Prime Service Areas. codes included in areas where the MCSCs also offer TRICARE Prime. Enrollees in the USFHP must live in specific zip codes that are near one of the six designated providers. Prime benefits through the MCSC if the USFHP did not exist.designated providers with a lower degree of overlap—CHRISTUS Health and Martin’s Point Health Care—are located in areas that have fewer or no MTFs or Base Realignment and Closure sites. Therefore, while USFHP enrollees in these two specific areas would not have the same level of access to TRICARE Prime through the MCSCs, they could still use other TRICARE options that are available nationwide through the MCSCs such as TRICARE Standard, or other programs for which they may be eligible. The MCSCs currently serve over 4.5 million Prime enrollees—therefore, adding 134,000 USFHP enrollees would not appear to be a significant burden, according to MCSC officials. All three MCSCs told us that they would likely have the capacity and capability to provide TRICARE coverage to all of the current USFHP enrollees, including the TRICARE Prime option or other options, as appropriate, depending on the enrollees’ locations. Specifically, if the USFHP did not exist, two of the three MCSCs could each be responsible for fewer than 6,000 additional enrollees, and the third MCSC would potentially be responsible for approximately 79,000 enrollees, if all affected beneficiaries maintained their TRICARE coverage. However, some affected beneficiaries might choose to enroll in other health care programs for which they may be eligible. We limited our analysis to include only providers with a Doctor of Medicine or Doctor of Osteopathic Medicine degree. The inclusion of other types of providers, including nurse practitioners or physician’s assistants, could potentially affect the degree of overlap. encourage all of their providers to participate in both the USFHP and MCSC networks, while officials from another told us that they encourage their providers not to participate with the MCSC’s network. In general, providers are allowed to contract with any organization they choose; therefore, those currently serving only the USFHP might also choose to participate in the applicable MCSC’s network. The duplication and related overlap between the USFHP and the MCSCs’ TRICARE Prime option has been longstanding in part because the program’s role has not been reassessed since TRICARE was implemented in the 1990s. Many key features of the USFHP have remained in place since the enactment of the NDAA for Fiscal Year 1997, notwithstanding TRICARE’s growth during the intervening years. DOD officials told us that there is not a function that the USFHP designated providers serve that the MCSCs could not perform. However, because the USFHP is statutorily required, DOD does not have the authority to eliminate it and transition the USFHP enrollees into the regional TRICARE program managed by the MCSCs or into other programs for which they may be eligible. One of the goals of the MHS is to maximize use of the direct care system’s MTFs, a goal most recently articulated in DOD’s budget request for fiscal year 2015. TRICARE’s managed care support contracts are designed to support this goal by requiring the MCSCs to optimize the use of the direct care system as part of an integrated MHS. For example, MCSCs are to first assign Prime enrollees to a Primary Care Manager located at an MTF until its enrollment capacity has been reached, at which point, enrollees are assigned to a Primary Care Manager from the civilian provider network. MCSCs are also required to give their region’s MTFs the right of first refusal for all specialty care referrals for Prime enrollees to ensure that, if it has the capability and capacity to administer the care, the MTF has the opportunity to do so prior to referring them to the civilian network. In these ways, the MCSCs help promote the efficient use of DOD’s direct care system by helping the MTFs operate at full capacity. DOD is unable to promote the efficient use of DOD’s direct care system through the USFHP, which operates independently of the integrated MHS as a distinct statutory program. Unlike Prime beneficiaries enrolled with the MCSCs, USFHP enrollees are generally precluded from receiving care at MTFs due to the program’s fixed-price capitation payment structure that is intended to cover all enrollees’ health care costs. Given the extent of overlap with the MCSCs’ Prime Service Areas, which are generally around MTFs, thousands of USFHP enrollees are precluded from using the direct care system. To limit any additional future impact of the USFHP on MTFs, DOD has denied designated providers’ requests for service area expansions. For example, in 2012, a designated provider submitted a request to DOD to expand its existing service area to a location that also included several MTFs. However, DOD denied this request, citing duplication with the existing MCSC network and a potentially higher health care cost per beneficiary to provide care through the USFHP since its enrollees would not be able to use the local MTFs. As an exception, a USFHP enrollee may access an MTF for emergency services, and the designated provider is then contractually responsible for reimbursing the MTF for that care. In addition, USFHP designated providers may negotiate Memorandums of Agreement with the MTFs for the purpose of referring enrollees to them on the condition that the designated providers would be responsible to the MTFs for the associated health care costs of any referred beneficiaries. During the course of our review, however, we found that no Memorandums of Agreement had been established for this purpose, although one designated provider told us that it was in the process of negotiating one. Certain features of the USFHP give designated providers a competitive advantage over the MCSCs—one that likely results in increased costs instead of the lower costs that typically result from competition. For example, the USFHP designated providers offer certain discounts and services that go beyond TRICARE’s uniform benefits, such as dental and vision care discounts. (See appendix III for a description of these discounts and services.) DOD officials acknowledged that the MCSCs’ Prime enrollees do not receive these discounts and services because MCSCs are paid on a cost reimbursement basis only for allowable TRICARE Prime benefits. DOD officials acknowledged that these discounts and services may not be entirely consistent with TRICARE’s uniform benefit requirement, but they have not taken issue with this practice because the USFHP designated providers receive a fixed- capitation payment, and therefore, DOD is not billed separately for any discounts and services that the designated providers choose to offer. Although the USFHP designated providers do not bill DOD for these discounts and services, it is not known how the designated providers account for these discounts and services in developing their proposed capitation payments. The USFHP designated providers promote these discounts and services in their marketing materials, which may lead to beneficiaries choosing to enroll with the USFHP designated providers over the MCSCs in areas where both programs are offered. MTF officials expressed concern that the USFHP diverts beneficiaries away from the MCSCs and, correspondingly, from the direct care system. MTFs rely on beneficiaries as a source of education and training opportunities. MTF officials we spoke with expressed concerns that the USFHP program detracts from the volume and complexity of cases needed to maintain a robust graduate medical education and skills training program. For example, a military service medical official noted that medical facilities with Magnetic Resonance Imaging capabilities seek to maximize the use of this equipment and strive to offer their providers opportunities for related specialty care training while treating enrollees needing this type of service. However, if the MTF is located near a USFHP, this official noted that such training opportunities may be more limited because any USFHP enrollees who need these services would not obtain them from their local MTF. In addition, since the USFHP contracts are full-risk capitated arrangements, the designated providers are not limited to the TRICARE provider reimbursement rates, and thus have the flexibility to offer their providers higher rates or other incentives. In contrast, MCSCs’ network providers must accept TRICARE maximum allowable charges as payment in full, and these rates are generally based on Medicare rates. The increased flexibility in setting reimbursement rates may provide the USFHP designated providers a competitive advantage over the MCSCs in recruiting providers to their networks. The USFHP designated providers told us that they exceed the TRICARE provider reimbursement rates on occasion, depending on their market areas, although some generally use the TRICARE rates as guidelines. DOD officials told us of an example where the USFHP designated provider recruited a primary care provider group, which resulted in the group leaving the MCSC network, and these officials were concerned that reimbursement rates may have been a factor in this decision. Consequently, beneficiaries who want to obtain care from this provider group may choose to enroll with the USFHP instead of enrolling with the MCSC. By maintaining exclusive relationships with providers—especially those that are highly desired by beneficiaries—this designated provider has a competitive advantage over the MCSC, potentially drawing beneficiaries away from and limiting the use of the direct care system. The provision of additional discounts and services to USFHP enrollees or exclusive provider arrangements may contribute to the USFHP’s high satisfaction rates, which the designated providers point to as a measure of the program’s success. While high satisfaction rates may be viewed as an argument in favor of maintaining the USHFP as a separate program, doing so comes at the expense of an integrated MHS that optimizes the use of MTFs. Because the USFHP’s role of offering TRICARE Prime is duplicative of the role played by the MCSCs, DOD has incurred added costs by paying the designated providers to simultaneously administer the same benefit as the MCSCs. Consequently, due to its duplicative role, managing the USFHP is also an inefficient use of DOD’s resources. Because the USFHP is a statutorily required component of the MHS, DOD must pay the USFHP designated providers to administer the same benefit to the same population of eligible beneficiaries in many of the same locations as the MCSCs. Although DOD would incur health care costs for the USFHP enrollees regardless of with whom they are enrolled, DOD must also pay administrative costs and profits to two different groups of contractors for providing the same TRICARE Prime benefit. Currently, administrative costs and profit margins are part of the negotiated payments for the USFHP contracts. We obtained a breakdown of the average capitation payments DOD made to the designated providers for USFHP enrollees for fiscal year 2013, and we estimated that the administrative costs and profit margins were approximately $27 million of the total cost of the program for that year (2.4 percent of $1.1 billion). However, our estimate may not represent the total administrative costs and profit realized since DOD’s knowledge of the actual cost components underlying these negotiated payments is limited.requirement to share certified cost or pricing data, DOD has requested that they share uncertified cost or pricing data. However, according to DOD officials, the designated providers have been unwilling to do so when asked. Thus, DOD does not know how much of the approximately $1.1 billion it pays the USFHP designated providers annually goes toward their actual administrative costs and profit versus the cost of health care services for USFHP enrollees. Furthermore, it is also unknown how the actual administrative costs and profit of the designated providers compare to the MCSCs. Although the designated providers are exempt from any In 2010, DOD hired a consultant to review its methodology for setting capitation rates for the designated providers. Overall, the consultant found that DOD’s process for establishing capitation rates was actuarially sound and that the rates were generally being set in accordance with current legislation. Nonetheless, the consultant did report some concerns with the rates—and thus, the cost-effectiveness of the USFHP—since the rates may not reflect the designated providers’ actual costs of delivering health care. More specifically, the consultant stated that the health care costs used by the designated providers in negotiating the capitation payment rates do not accurately represent their true cost of providing benefits under the program and offered several recommendations to improve the cost-effectiveness of the capitation rate setting process. Additionally, we found that the program likely provides a significant source of income for the designated providers as more than half of them rely heavily on the USFHP for their business. Specifically, USFHP enrollees comprise 100 percent of the total beneficiaries enrolled in two of the six designated providers and more than 60 percent for two others. The costs associated with the USFHP designated provider contracts are not the only costs DOD incurs for this program. DOD also has a data support contract that provides information technology support services to the USFHP designated providers. DOD officials told us that this contract, which is expected to cost $21 million over 5 years, exclusively supports the USFHP designated providers and that there is no comparable contract in place for the MCSCs. Additionally, a portion of DOD’s TRICARE Help Desk contract supports the USFHP at a cost of about $272,000 per year, according to DOD officials. If the USFHP did not exist, DOD would potentially save millions of dollars from duplicative administrative costs and profits. In addition to the costs associated with the USFHP designated providers’ capitation payments and support contracts, DOD must expend resources managing various aspects of the USFHP. As we have previously reported, expending resources on unnecessarily duplicative programs is inherently inefficient and that in most of these situations, there are opportunities for greater efficiencies or effectiveness by eliminating For example, DOD officials told us that several unnecessary duplication.officials are responsible for the overall management of the USFHP, which includes modifying the contracts and educating designated providers’ staff about program requirements. Additionally, several DOD officials are responsible for conducting the acquisition process necessary to enter into contracts with the USFHP designated providers, which involves acquisition planning, the development of a request for proposals, and the evaluation of proposals. DOD officials said that the most recent process lasted approximately 9 months, and as a result, they extended the length of the USFHP contracts to 10 years in an effort to reduce the administrative burden associated with it. DOD is also required to annually negotiate capitation payment amounts with each of the six USFHP designated providers. DOD officials told us that the process for negotiating these payments lasts approximately 8 months and includes several steps, such as collecting data from different sources, developing proposed payments, and negotiating the final payment amount. There are several participants in these negotiations from both sides, including a contractor that provides DOD with actuarial assistance. These annual payment negotiations are not necessary for the managed care support contracts, which are structured differently. Eliminating the USFHP would allow DOD to potentially realize savings, as well as better focus its resources on managing other aspects of the TRICARE program. The USFHP’s role in providing care to eligible military beneficiaries became duplicative once the nationwide TRICARE program was implemented in the 1990s. Since the NDAA for Fiscal Year 1997 required the USFHP to offer TRICARE Prime, there has been no assessment of the continued relevancy of this program despite the apparent overlap and duplication with the MCSCs, which has likely resulted in added costs and inefficiencies for DOD. Compounding this problem is the fact that the USFHP operates at odds, often in competition, with the rest of the MHS, which limits DOD’s effort’s to maximize the use of its direct care system of military hospitals and clinics. Moreover, it is not known how much it costs to deliver health care under the program, or the extent of administrative costs and profits that accrue to designated providers, because the designated providers have not been required to, nor have they chosen to, share cost or pricing data with DOD. The existence of a duplicative program that provides the same benefit to the same group of beneficiaries within many of the same service areas runs counter to DOD’s current environment of budget constraints and the department’s need to control rising health care costs. Eliminating this statutorily required program would not only eliminate unnecessary costs and inefficiencies but would also free up departmental resources that could be better used to manage and oversee the TRICARE program. However, it will be important to transition the 134,000 USFHP enrollees to other health care programs prior to eliminating the program to ensure the continuity of their care. According to DOD and MCSC officials, the MCSCs already have the national coverage, capability, and capacity to absorb these enrollees, assuming they do not obtain coverage elsewhere. Given the extent to which the USFHP’s role in offering TRICARE Prime duplicates and overlaps with the MCSCs, there is no compelling reason to maintain the USFHP as part of the MHS and incur the added costs and inefficiencies associated with doing so. To eliminate unnecessary program duplication and to achieve increased efficiencies and potential savings within the integrated MHS, Congress should terminate the Secretary of Defense’s authority to contract with the USFHP designated providers in a manner consistent with a reasonable transition of affected USFHP enrollees into TRICARE’s regional managed care program or other health care programs, as appropriate. We provided a copy of this report to DOD for review and comment. DOD stated that since our recommendation to eliminate the USFHP is addressed to Congress, it defers to Congress to consider it. DOD also reiterated our statement that if the USFHP were to be eliminated, it will be important to make provisions to carefully transition USFHP enrollees to other health care programs. In its response, DOD confirmed that our factual determinations about the USFHP are correct. DOD also provided specific comments on many of the program characteristics we identified, agreeing that they result in unnecessary costs and other inefficiencies for the department. In particular, DOD stated that the USFHP sole source contracts are an exception to congressional and DOD policy favoring competition in contracting. DOD also noted that the unnecessary duplication between the USFHP and MCSCs creates costs for the department, as necessary care is already provided through the MCSCs and the direct care system and that DOD is required to expend considerable resources in its annual negotiations with the designated providers to set capitation payment rates. DOD also stated that the separate existence of the USFHP is an exception to the general DOD policy of favoring an integrated MHS to support readiness and cost-effectiveness. DOD further acknowledged that the USFHP designated providers are allowed to offer their providers higher reimbursements and other incentives that draw beneficiaries away from the more cost effective MCSCs, which DOD characterized as an exception to congressional and DOD policy favoring a uniform TRICARE benefit. DOD’s comments are reprinted in appendix IV. DOD did not provide any technical comments. We are sending copies of this report to appropriate congressional committees; the Secretary of Defense; the Assistant Secretary of Defense (Health Affairs); and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at draperd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. Appendix I: Past and Current US Family Health Plan (USFHP) Designated Providers 2014 Martin’s Point Health Care Brighton Marine Health Center St. Vincents Catholic Medical Centers Johns Hopkins Medical Services Co. Total Number of USFHP Enrollees 41,752 (of which 8,602 are 65+) Massachusetts, Rhode Island, and northern Connecticut 14,288 (of which 5,497 are 65+) Maine, New Hampshire, Vermont, upstate and western New York, and the northern tier of Pennsylvania 41,991 (of which 12,573 are 65+) Southeast Texas and southwest Louisiana 11,803 (of which 6,596 are 65+) Puget Sound area of Washington state 13,062 (of which 7,354 are 65+) New Jersey, New York City, southern New York, western Connecticut, and southeastern Pennsylvania 11,164 (of which 3,575 are 65+) Services Co. Discounted vision services can include a free annual eye exam, discounts on glasses and lenses at select providers, or LASIK vision correction. Designated providers offer a free annual hearing exam, plus discounts on hearing aids. Designated providers offer up to four round-trips (eight one-way) to approved covered medical services. Services offered at a discount under this category can include nutritional counseling or gym memberships. This designated provider offers enrollees a $500 discount on any procedure including anti-aging procedures, such as face lifts and rhinoplasty and a 15 percent discount on all injectables including Botox. Enrollees receive an unspecified discount for all in vitro fertilization and intrauterine insemination procedures. In addition to the contact named above, Bonnie Anderson, Assistant Director; Kaitlin Coffey; Christine Davis; Sylvia Jones; Drew Long; Samantha Poppe; James Rebbe; and William T. Woods made key contributions to this report.

Summary: DOD provides health care to about 9.6 million eligible beneficiaries through its TRICARE program. The department contracts with MCSCs to administer TRICARE's benefit options in three regions across the United States. Separately, DOD contracts with six USFHP designated providers to offer TRICARE Prime—the managed care option—to enrollees in certain locations across the country. Senate Report 112-173, which accompanied a version of the National Defense Authorization Act for Fiscal Year 2013, mandated that GAO review DOD's health care contracts, citing concerns with the growing costs of these contracts, including the USFHP. For this report, GAO examined (1) the role of the USFHP within the MHS, and (2) the extent to which the USFHP affects DOD's health care costs. GAO analyzed information about the USFHP and the MCSCs, reviewed available USFHP cost data, and interviewed officials from DOD, the designated providers, and the MCSCs. The role of the US Family Health Plan (USFHP) within the Department of Defense's (DOD) current military health system (MHS) is duplicative because it offers military beneficiaries the same TRICARE Prime benefit that is offered by the regional TRICARE managed care support contractors (MCSC). The USFHP is an association of six health care providers, referred to as designated providers, which took ownership and control of U.S. Public Health Service hospitals in 1982 when Congress enacted legislation that made these facilities part of DOD's health care system. During the implementation of TRICARE in the 1990s, Congress required the designated providers to offer the TRICARE Prime benefit to their enrollees. While the USFHP is a relatively small program—approximately 134,000 enrollees—there is significant overlap with the MCSCs in several key areas, including benefits, geographic service areas, and provider networks. For example, four of the six USFHP designated providers have more than 80 percent of their service area zip codes included in areas where the MCSCs offer TRICARE Prime. Furthermore, the USFHP remains a distinct statutory program that is not integrated with the rest of the MHS. This limits DOD's ability to increase efficiency by maximizing the use of its direct care system of military treatment facilities (MTF), which USFHP enrollees are generally precluded from using because the USFHP's payment structure is intended to cover all enrollees' health care costs. The role of the USFHP has not been reassessed since TRICARE was implemented in the 1990s. However, DOD officials told us that there is not a function that the USFHP designated providers serve that the MCSCs could not perform. Furthermore, officials from all three MCSCs—which together serve over 4.5 million Prime enrollees—said that they would likely have the capacity and capability to provide TRICARE coverage to all current USFHP enrollees, if needed. Because the USFHP's role of offering TRICARE Prime is duplicative of the role of the MCSCs, DOD has incurred added costs and inefficiencies. Although DOD would incur health care costs for the USFHP enrollees regardless of with whom they are enrolled, DOD pays administrative costs and profits to two different groups of contractors for providing the same TRICARE Prime benefit to the same population of eligible beneficiaries in many of the same areas. However, outside of the negotiated payment amounts, no one knows the designated providers' actual costs for administering the program since the USFHP contracts are characterized in statute as commercial item contracts. This means that the designated providers are exempt from sharing certified cost or pricing data with DOD, and they have been unwilling to share uncertified cost or pricing data when requested. As a result, DOD does not know how much of the approximately $1.1 billion it pays the USFHP designated providers annually actually goes toward their administrative costs and profit versus the cost of health care services. DOD also incurs other expenses for the USFHP through support contracts, including a $21 million data support contract, and through the management of various aspects of the program. Eliminating this statutorily required program would not only eliminate unnecessary costs and inefficiencies, but would also free up departmental resources that could be better used to manage other aspects of the TRICARE program. Congress should terminate DOD's authority to contract with the USFHP designated providers in a manner consistent with a reasonable transition of affected USFHP enrollees into TRICARE's regional managed care program or other health care programs as appropriate. DOD confirmed that GAO's factual determinations about the USFHP are correct and agreed that this program is duplicative and results in unnecessary costs and other inefficiencies. DOD reiterated the importance of carefully transitioning USFHP enrollees to other health plans if the USFHP were eliminated.