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, 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’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. 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.