DOD has the unique dual mission of maintaining adequate medical readiness capability while providing peacetime health care. During the early 1990s, in a time of military downsizing, medical cost escalation, and budgetary constraints, DOD restructured its system into TRICARE to improve beneficiaries’ access to health care while maintaining quality and controlling costs. TRICARE gives beneficiaries a choice among a health maintenance organization (TRICARE Prime), a preferred provider network (TRICARE Extra), and a fee-for-service benefit (TRICARE Standard). TRICARE Prime, the option in which care is most actively managed, is the only option requiring beneficiaries to enroll. Under TRICARE, DOD supplements care provided in its MTFs with civilian providers. To do so, DOD contracts with civilian health care companies to administer its TRICARE program on a regional basis. The primary responsibilities of these TRICARE contractors include: developing civilian provider networks (includes credentialing providers and negotiating reimbursement discounts), ensuring adequate access to health care, enrolling beneficiaries, referring and authorizing beneficiaries for health care, processing health care claims, conducting utilization management and quality management programs, and educating providers and beneficiaries. The TRICARE Management Activity (TMA), under the ASD/HA, is responsible for procuring and administering the TRICARE contracts. Since 1994, TMA has sequentially awarded 7 contracts covering 11 geographic TRICARE regions. These contracts were competitively bid and awarded as fixed-price, at-risk contracts. Nonetheless, DOD designed them to include adjustments for health care cost increases beyond the contractors’ control, while other costs, such as administrative, remain fixed. All of the contracts were awarded for a base period and 5 option years. (See table 1.) Four of the contracts have used all of the option years and three of these have been extended for an additional 2 years. The negotiation for the fourth contract’s extension is expected to be completed in June 2001. TMA anticipates that all of its contracts will be extended; however, the TRICARE contracts will eventually need to be resolicited and awarded because they are only authorized to be extended a maximum of 4 option years. In August 1999, the Deputy Secretary of Defense formed DMOC to provide greater oversight in the operation of the TRICARE program. Its membership consists of the Under Secretary of Defense (Personnel and Readiness), the four service Vice Chiefs, the military department Under Secretaries, the Under Secretary of Defense (Comptroller), the Director for Logistics from the Joint Staff, the Surgeons General, and the Assistant Secretary of Defense (Health Affairs). As part of its responsibilities, DMOC undertook a review of TMA’s contract approach for the TRICARE contracts. DOD’s current contracting approach for TRICARE poses several administrative challenges, and has contributed to significant funding shortfalls. To be considered for a contract award, offerors were required, in effect, to submit voluminous, expensive-to-produce proposals, which has limited competition. Offerors have stated that complicating the preparation of proposals was the need to address DOD’s overly prescriptive requirements, restricting its ability to use best practices to achieve the same results with greater cost efficiency. Furthermore, TRICARE contracts were awarded while DOD was realigning and reducing its MTF capability during a time of budgetary concerns. The resulting shift to greater reliance on civilian providers as well as frequent changes to the program resulted in numerous adjustments to the TRICARE contracts, both planned and unplanned. The effect and cost of these numerous adjustments created an unstable program and contributed to annual budget shortfalls. Under DOD’s contract approach, the TRICARE contracts were competitively bid. Because the required proposals were large, complex, lengthy, and preparation involved significant sums of money, offerors incurred substantial expense to participate. In preparing the proposal, offerors were required to address 13 different tasks, including enrollment and beneficiary services, fiscal management and controls, program integrity, and automated data processing. The proposals were also to address seven cost factors including utilization management, provider reimbursement discounts, and coordination of third party liability. To illustrate the size and complexity of the resulting proposals, one complete proposal consisted of 33,000 pages. In 1995, we reported that several offerors stated that it cost them between $1 million and $3 million just to develop their proposals. More recently, one contractor official told us that it cost the company he worked for about $5 million to bid. As a result of the large contract size and complexity, competition has been limited to large companies with significant resources. Further, because of the large cost to develop a proposal, losing contractors stated they had everything to gain by protesting the award even at substantial cost to them and DOD. All seven contract awards have been protested; three were sustained. The requests for proposal (RFP) DOD used to solicit TRICARE contracts have been very prescriptive. DOD officials stated that highly detailed proposals were needed to ensure a uniform nationwide program under which beneficiaries and providers would be subject to the same requirements and processes regardless of region. For example, utilization management is used to ensure that patients receive all necessary care in the most cost-effective manner. DOD’s proposal required the offerors to perform utilization management functions, such as pre-authorization, concurrent and retrospective reviews, and waiver considerations, for all types of health care in all settings. These activities were to be performed using a uniform set of criteria determined by DOD. However, offerors have often cited utilization management as the area in which more relaxed DOD requirements would enable them to implement effective techniques with greater savings. Offerors said that this could be achieved with an RFP that emphasized health care outcomes desired rather than mandate the processes to achieve them. They believe it would allow them more innovation and flexibility in devising approaches to economically achieve such outcomes without adversely affecting the quality of care delivered. Such an approach deserves DOD’s careful consideration, but would also require provisions such as appropriate, evidence-based reviews performed by qualified health care professionals to ensure that all desired outcomes are achieved. In addition, prescriptive requirements for utilization management review have contributed to claims processing inefficiencies. As we reported in June 2000, DOD’s contractual requirements for prepayment review of claims are manifested as thousands of edits in the adjudication logic of the claims processing system. These edits result in claims being “kicked out” of the system for manual review, which extends processing time and increases administrative costs. However, not all of these edits are needed, especially since contractors are at risk for some health care dollars. For example, claims for electrocardiograms—14,000 for one contractor alone—were being manually reviewed, but in every case at the time of our evaluation, the claims were paid after review. As we reported, over half of TRICARE’s claims were manually reviewed, a rate significantly higher than the industry average of 25 percent. In its claims improvement initiative, DOD has been partnering with its contractors to review the need for these edits. Further complicating the design of the TRICARE contracts is the fact that DOD designed them to have periodic adjustments to the contract price, which are called bid price adjustments (BPA). These adjustments are based on shifts in workload between the MTFs and civilian providers as well as other operating conditions of the contract, such as changes in the number of beneficiaries caused by the frequent geographic rotation of active-duty members and their dependents. To calculate these adjustments, DOD uses a formula that incorporates factors including cost, population shifts, inflation, and utilization. However, these determinations have been a source of contention with contractors. For example, contractors have been concerned with DOD’s use of inaccurate and incomplete data, such as that used to determine the MTF workload. In addition, contractors were concerned about some of the factors used in the BPA formula. As a result, in recent negotiations, DOD agreed to modify its inflation index and other adjustment factors. Outside of the regularly scheduled BPA process, TRICARE contractors have also initiated additional adjustments in the contract price called requests for equitable adjustment, which are used to redress unforeseen changes in contract conditions, such as higher than anticipated claim submissions, that subsequently increased their administrative expenses. In addition, DOD has made a total of over 1,000 unscheduled modifications to these contracts via contract change orders—an average of 156 per contract as of June 30, 2000. Change orders may result from new laws or regulations, or from DOD initiatives. They range in scope from administrative changes, such as changes to home health care billing procedures, to significant benefit expansions, such as the elimination of copayments for active duty dependents that will significantly add to program costs. Until recently, DOD directed its contractors to implement change orders prior to negotiation of the final terms of the modification, including payment. As we recently reported, DOD’s management of the change order process resulted in a large backlog of outstanding change orders, which was mostly eliminated under a recent short-term effort by DOD and the contractors to settle all outstanding contract adjustments.Negotiated settlements for this initiative totaled about $900 million for current and prior fiscal years. DOD hopes to avoid future problems with change order backlogs by using a new process to negotiate and settle changes prior to implementation. However, it is premature to evaluate the effectiveness of this process because TMA has not yet issued any change orders under it. Change orders and other contract adjustments have contributed to program instability and have led, in part, to DOD’s having to request additional funding from Congress to address health program budget shortfalls. These requests have called into question DOD’s financial management practices for estimating and budgeting costs. In fiscal year 2000, Congress provided a supplemental appropriation of $1.3 billion— nearly half of which was designated for contract adjustments.