DOD offers medical services to 8.3 million eligible people through the MHSS—1.7 million active duty members and another 6.6 million non-active duty members, such as dependents of active duty personnel and military retirees and their dependents. The bulk of the health care is provided at more than 600 military hospitals and clinics worldwide; through CHAMPUS; and, to a comparatively minor extent, at USTFs. The USTF managed care program involves the formation of provider networks to deliver a full spectrum of inpatient and outpatient care and preventive services; beneficiary enrollment; and a monthly capitated reimbursement system. DOD’s capitation payment rates cover all the medical care a member would need in a year. Subject to annual appropriations, USTFs are permitted to enroll any person eligible for MHSS benefits except for active duty members, who receive their care at military hospitals and clinics. But unlike those under CHAMPUS, USTF members do not lose their participation rights when they reach age 65 and become eligible for Medicare. At the beginning of fiscal year 1996, the USTFs had 124,012 members, including about 27,000 Medicare-eligibles, and an appropriated funding level of $339 million (see table 1). By September 1997, DOD plans to complete its implementation of TRICARE—a nationwide managed care program. TRICARE is aimed at improving access to high-quality care while containing costs. TRICARE involves coordinating and managing beneficiary care on a regional basis using all available military hospitals and clinics supplemented by competitively contracted civilian services. TRICARE offers beneficiaries three plans: (1) TRICARE Standard, a fee-for-service arrangement to replace the present CHAMPUS program; (2) TRICARE Extra, a preferred provider plan; and (3) TRICARE Prime, an HMO that provides comprehensive medical care to beneficiaries through an integrated network of military and contracted civilian providers. (App. I compares the cost-sharing provisions of the three TRICARE plans.) As required by P.L. 104-106, DOD is to develop a plan to integrate the USTFs into TRICARE. We will soon report on several issues regarding the USTFs’ integration into TRICARE, including whether the USTFs should retain their special, noncompetitive relationship with DOD. The managed care support contractors under TRICARE compete on a cost-effectiveness basis rather than through a noncompetitive negotiation of rates as is done with the USTFs. Our analysis of the potential effects on the USTFs of adopting the TRICARE cost shares showed that less than 10 percent of the members will disenroll, causing less than a 2-percent increase in operating costs. But DOD’s reimbursement approach takes into account and otherwise adjusts the USTFs’ capitation payments for higher costs that may result from changes in the population’s age and gender. It also allows for negotiated adjustments in reimbursement rates for the effects of benefit and cost-sharing revisions, which may result in adverse selection. In contrast, the USTFs estimated that the new cost shares will cause about a 40-percent USTF disenrollment rate and cost increases of about 11 percent. However, the USTFs’ estimates are overstated because of weaknesses in their survey and health claims data, and the absence of out-of-pocket cost differences among the key plans that are significant enough to cause disenrollment of more than 10 percent. The USTFs’ estimates of the effects of the new cost shares were based largely on the results of a telephone survey of USTF households and an analysis of health claims data. In February 1996, the USTFs conducted a survey of 2,100 member households (300 from each USTF) to determine whether, with the new cost shares, members would disenroll and choose TRICARE Standard. Retirees under age 65 and their households were surveyed because only this group—not the Medicare-eligible or active duty dependent members—will be subject to the new enrollment fee. Also, USTF health claims data for the surveyed households covering the 12 months ending September 30, 1995, were analyzed to determine the costs for members who said they would remain and those who would disenroll. Our review of the USTFs’ survey approach and data analysis raised several concerns about the reliability of their estimates. First, the survey questions focused solely on the households’ out-of-pocket cost increases and did not probe respondents’ views about the quality of or access to care at the USTF versus other options available to them. (See app. III for the questionnaires used in the USTF survey.) Since households may base their health plan decisions on factors other than out-of-pocket costs, such as access and quality, questions on these other factors would have added needed perspective to the survey responses. Second, the wording of several questions could have misled respondents and produced incorrect responses. For example, one question asked: “If you have to choose between CHAMPUS [or TRICARE Standard, TRICARE Extra, or TRICARE Prime at the Pacific Medical USTF] and the USTF with higher copays and enrollment fees for your household in the future, which would you select?” The question’s phrasing could have led respondents to believe that with the new cost shares the USTFs will have higher copayments than the other choices. This is not the case. Furthermore, survey choices were categorized as “would stay,” “would leave and choose TRICARE Standard,” “neither, or would choose different plan,” and “don’t know.” To reduce the number of “don’t know” responses, interviewers were instructed to probe respondents and try to force them to make a decision. One probe was “We’re not asking you to make a firm commitment right now, but we are interested in knowing which one you would be most likely to choose on the basis of the information I just read to you.” Because interviewers tried to force respondents to change “don’t know” answers, the responses in these cases may not reliably predict the respondent’s answer. Finally, the average length of time individuals took to respond to the survey was about 4 minutes. This short period probably did not allow most individuals to weigh and respond thoughtfully about the medical plan they would choose. When analyzing cost differences among respondents, the USTF actuaries combined the “don’t know” responses with the group who responded they would disenroll. This caused an overstatement of the number of respondents the USTFs estimated will leave. Also, in analyzing potential cost differences, the USTF actuaries did not verify the claims data the USTFs reported. In addition, four of the USTFs provided incomplete data for the surveyed households. They provided less than 12 months of claims data and/or omitted such services as outpatient prescription drugs and care provided under subcontract with non-USTF providers. For Bayley Seton and Johns Hopkins, 172 and 106, respectively, of the 300 surveyed households for each facility were dropped because no claims data were available for these households. Furthermore, the USTF report stated that the USTFs had to perform some adjustments to produce theoretical billed charges. In effect, a percentage of the claims costs the USTFs provided is incomplete, or estimated; thus, such data cannot be validated and are of questionable use for estimating the potential cost effects of adverse selection. According to actuarial research, any time a health plan increases a member’s out-of-pocket costs relative to competing plan choices, some adverse selection can occur. But for the USTFs to experience the 40-percent disenrollment rate they estimated, the cost differences would have to be significantly higher than what would exist between the USTFs’ new cost shares and TRICARE Standard. As table 2 shows, the USTF households that face the greatest out-of-pocket increase—$460—relative to TRICARE Standard are those incurring no medical expenditures. Most USTF households, or those incurring some medical expenditures, will have even lower relative cost differences. According to actuarial experience, such relative cost difference levels will not result in major enrollment shifts. Moreover, a Congressional Research Service study of the 1987 FEHBP open season found that out-of-pocket cost differences among plans had to be at least $1,000—$2,000 in 1996 dollars—to result in more than a 10-percent plan disenrollment rate. But as table 2 shows, no USTF household will reach an out-of-pocket cost difference that high when compared with TRICARE Standard. The disenrollment rate that will likely result from the USTFs’ adopting the new cost shares will be less than 10 percent. But to be actuarially conservative, we allowed for a 20-percent outcome and reestimated the USTFs’ disenrollment and cost increases. Table 3 shows the comparative results of these adjustments. As shown, the 20-percent disenrollment estimate reduces the USTFs’ estimated 11-percent cost increase to 4 percent. Reductions in the USTFs’ estimated cost increases are greater for the USTFs that may experience the most adverse selection, such as Pacific Medical. (App. IV provides a breakdown on the effects for each USTF.) Also, although active duty and Medicare-eligible family members are not subject to the new enrollment fee, the USTFs estimated that some of these family members will also disenroll. The USTFs estimated up to 5-percent cost increases for each group as a result of adverse selection. We found, however, that there would be negligible or no adverse selection of such members and thus no cost increase would occur with the new cost shares.