The DOD Medicare subvention demonstration created a link between the DOD health care delivery system and Medicare, a health insurance program for the elderly and disabled, which is operated by the Health Care Financing Administration (HCFA) within the Department of Health and Human Services (HHS). DOD and HCFA implemented this demonstration during a period of change in both Medicare and military health care. Since its beginning in 1995, DOD’s health system, called TRICARE, has offered care to active duty members of the uniformed services, retired members under age 65, and their respective families and survivors—a population of about 6.6 million. An additional 1.5 million retirees (including dependents) aged 65 and older could receive limited health care. DOD delivers care through about 600 MTFs worldwide. TRICARE covers a broad range of outpatient and inpatient services, including home health, hospice, and skilled nursing facility care. Services not available at an MTF are purchased through a network of civilian specialists and hospitals. TRICARE includes a managed care option, TRICARE Prime, which offers care at the MTF augmented by the civilian network. TRICARE Prime enrollees, including all active duty members of the armed services, have priority for care at the MTFs. There is also a fee-for-service option called TRICARE Standard that offers a broader choice of civilian providers, and a preferred provider option called TRICARE Extra. These options offer generally similar benefits but differ considerably in the nature and amount of costs to beneficiaries. Pharmacy services are available at most MTFs for all TRICARE eligibles as well as for retirees on Medicare. MTF pharmacy services are free-of-charge but limited to the medications carried at each MTF. TRICARE is managed at multiple levels. The Office of the Assistant Secretary of Defense for Health Affairs sets TRICARE policy – which governs both MTF and civilian care – and establishes regulations in coordination with the Army, Navy, and Air Force. Responsibility for policy execution is delegated to the TRICARE Management Activity (TMA) but is shared with the military Surgeons General, who are responsible for implementing TRICARE policies within their respective services. TMA performs programwide support functions, such as managing TRICARE’s information technology and data systems, preparing the budget and managing the accounts. In addition, TMA selects, directs and pays managed care support contractors, who maintain the private provider network and perform many services assisting beneficiaries and supporting management. In each TRICARE region within the United States, MTF and contractor activities are coordinated by a lead agent, usually the commander of the region’s largest MTF. At the MTF level, MTF commanders report to the Surgeon General of their respective service, who allocates part of the service’s appropriated funds to each MTF. MTF officials have input into network size and composition but lack direct authority over these providers or the network, which the managed care support contractor manages. Medicare is a federally financed health insurance program for people aged 65 and over, some people with disabilities, and people with end-stage kidney disease. Eligible beneficiaries automatically are covered under Part A, which covers inpatient hospital, skilled nursing facility, and hospice care as well as home health care that follows a stay in a hospital or skilled nursing facility. They also can pay a monthly premium to join Part B, which covers physician and outpatient services as well as those home health services not covered under Part A. Traditional Medicare allows beneficiaries to choose any provider that accepts Medicare payment and requires beneficiaries to pay for part of their care as well as for any services not covered by Medicare. To help meet these costs, some beneficiaries purchase supplemental “Medigap” policies from private insurers. Beneficiaries can choose from up to 10 standard policies. The less expensive cover Medicare deductibles and coinsurance, while the more expensive policies offer broader coverage, including prescription drugs. The alternative to traditional Medicare, Medicare+Choice, offers beneficiaries the option of enrolling in managed care or other private health plans. All Medicare+Choice plans cover basic Medicare benefits, and many also cover additional benefits such as prescription drugs. Typically, these plans have limited cost sharing but restrict members’ choice of providers and may require an additional monthly premium. Under the Medicare subvention demonstration, DOD established and operated Medicare+Choice managed care plans, called TRICARE Senior Prime, at six sites. Senior Prime added benefits and network providers to those already in place for TRICARE Prime, where needed to meet Medicare managed care requirements. Enrollment in Senior Prime was open to military retirees enrolled in Medicare Part A and Part B who resided within the plan’s service area. Open enrollment for those already in Medicare was capped at a number that DOD selected—roughly 28,000 for the demonstration as a whole. In addition, retirees enrolled in TRICARE Prime could “age in” to Senior Prime upon reaching age 65, even if the cap had been reached. Beneficiaries enrolled in the program paid the Medicare Part B premium but no additional premium to DOD. Senior Prime enrollees received the same priority for care at the MTFs as younger retirees enrolled in TRICARE Prime. Care at the MTFs was free, but beneficiaries had to pay any applicable cost-sharing amounts for care in the civilian network (for example, $12 for an office visit). The demonstration authorized Medicare to pay DOD for Medicare-covered health care services provided to retirees at an MTF or through private providers under contract to DOD. HCFA calculated capitation rates for the demonstration areas, discounted from what Medicare would pay private managed care plans in the same area. However, to receive payment, DOD had to spend at least as much of its own funds in serving this dual-eligible population as it had in the recent past. The six demonstration sites are each in a different TRICARE region and include 10 MTFs that vary in size and types of services offered. (See table 1.) The five medical centers offer a wide range of inpatient services and specialty care as well as primary care. These centers also have graduate medical education (GME) training programs. The community hospitals are smaller, have more limited capabilities, and can accommodate fewer Senior Prime enrollees. At these smaller facilities, much of the specialty care is provided by the civilian network. At the Dover site, the MTF is a clinic that offers only outpatient services, thus requiring all inpatient and specialty care to be obtained at another MTF or purchased from the civilian network. For all the sites, Senior Prime’s share of total enrollment (TRICARE Prime plus Senior Prime) was relatively small—an average of about 9 percent of all enrollees toward the end of 2000. Before the demonstration, seniors at all demonstration sites received MTF care when space was available, but at some sites seniors had more regular or formalized access. At the medical centers, seniors had been a substantial part of the workload to support GME in specialty care. In particular, centers with GME programs in internal medicine had formed panels of retirees who regularly received primary care at the MTF. However, at most of the smaller sites, MTF care for seniors was more limited. Senior Prime began delivering services just as a period of major change started in both Medicare and DOD managed care. The BBA replaced Medicare’s previous managed care program with Medicare+Choice, which brought many administrative changes, including a new process for demonstrating compliance with Medicare managed care requirements. Medicare+Choice also established a more structured quality improvement program than had been in effect previously. Medicare+Choice officially began January 1, 1999, but the process of issuing regulations and guidance continued into 2000. During this same period, DOD initiated its Military Health System Optimization Plan, a wide-ranging effort to re-engineer many facets of military health care. Among the issues addressed in the plan are adjustments in primary care staffing, adoption of productivity benchmarks for primary care, and use of clinical best practices and other initiatives to improve health service delivery. More sweeping changes in retiree benefits and military health care are occurring in 2001 as a result of the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001. This legislation gave Medicare- eligible military retirees two major benefits: Pharmacy benefit—Beginning April 1, 2001, Medicare-eligible retirees from the uniformed services were given access to prescription drugs through TRICARE’s national mail order pharmacy and at retail pharmacies as well as through pharmacies at MTFs. TRICARE eligibility—Beginning October 1, 2001, retirees enrolled in Medicare Part B will also become eligible for TRICARE coverage— commonly termed TRICARE For Life. Under TRICARE For Life, military retirees who use traditional Medicare will be able to stay with their current private sector providers, while being relieved of most of their Medicare cost sharing. TRICARE will pay nearly all out-of-pocket costs for Medicare-covered services that these retirees previously had to pay. The law also authorizes continuation of Senior Prime—with Medicare paying DOD for seniors’ care, including care received in MTFs—for 1 additional year (through 2001), with the possibility of further extension and expansion. Any such continuation will require agreement between DOD and HHS as well as congressional approval. DOD is reviewing its options for providing military managed care to seniors under this legislation and is holding discussions with HCFA. The Senior Prime sites were successful in operating Medicare managed care plans. Sites expended substantial effort to meet Medicare+Choice requirements, and HCFA reviewers said that they generally did as well as other new health plans in meeting these requirements. The demonstration showed that there is a demand among retirees for DOD managed care with low out-of-pocket costs.