The DHP budget estimates submitted to the Congress consist of all the O&M and procurement resources needed to support DOD’s consolidated medical activities. According to DOD, the budget estimates are based on the continued refinement and application of a managed care strategy and methodology used to produce DOD’s health care services for eligible beneficiaries. Operating under the Assistant Secretary of Defense (Health Affairs), TMA is responsible for formulating the DHP budget request and for managing DOD’s CHAMPUS and MCS contracts. The Surgeons General of the Army, Navy, and Air Force are responsible for the budget execution of decentralized medical activities such as direct MTF patient care. The DHP O&M budget request consists of a single budget activity—administration and servicewide activities. Each year, DOD provides detailed DHP budget information to the Congress in “justification materials” that show amounts requested for each of the 7 subactivities that encompass 34 program elements (see table 1). While the Congress appropriates DHP O&M funds as a single lump sum, its budget decision is based on the DHP budget request presented at the subactivity and program element levels. Since 1994, the Congress has generally appropriated more for DHP O&M expenses than DOD requested (see fig. 1). Committee reports may specify relatively small amounts of funding for such items as breast cancer and ovarian cancer research, which DOD then obligates through the appropriate account in accordance with congressional direction. Other than the funds specifically earmarked by the Congress, DOD has the latitude to allocate its congressional appropriation as needed to meet estimated subactivity and program element requirements. Between 1994 and 1999, DOD allocated most appropriations to direct care (primarily MTF patient care) and to purchased care (primarily CHAMPUS and MCS contracts). Table 2 shows the allocation of DHP appropriations by subactivity (see tables I.1 and I.2 for detailed information on DHP budget requests, budget allocations, and actual or currently estimated obligations between fiscal years 1994 and 1999). The Congress appropriated $48.9 billion for DHP O&M expenses between fiscal years 1994 and 1998. During budget execution, DOD obligated about $4.8 billion differently—as either increases or decreases—from its budget allocations for the various subactivities (see table 3). Obligations differed particularly for the direct care and purchased care subactivities. However, the magnitude of the funding adjustments has diminished in recent years, dropping to about $283 million in fiscal year 1998 from a peak of almost $1.5 billion in fiscal year 1995. Because the Congress makes a lump-sum appropriation, under DOD regulations and informal arrangements with the Congress, these adjustments did not require congressional notification or approval. The largest funding adjustments occurred in the direct care and purchased care subactivities. Between 1994 and 1998, DOD allocated $21.2 billion from the final DHP appropriation for purchased care but obligated only $19.1 billion, allowing DOD to reallocate $2.0 billion into such areas as direct patient care, information management, and base operations. For example, between 1994 and 1995, DOD increased obligations for direct care at MTFs by $876.3 million above the allocation. Between 1994 and 1996, DOD obligated about $289.5 million more than it had allocated for the information management subactivity. Also, funding for the base operations subactivity—which includes such items as repairs and maintenance on MTF facilities—received an increase of $479.6 million over the budget allocation between 1994 and 1997. (Table I.4 details the funding increases and decreases for each subactivity and program element between fiscal years 1994 and 1998.) In each year between 1994 and 1998, DOD’s budget allocation for purchased care—which provided funds for CHAMPUS, the now-terminated CHAMPUS Reform Initiative contracts, and MCS contracts—exceeded obligations, as shown in figure 2. At the program element level, the largest adjustments within the purchased care subactivity occurred between 1994 and 1996, when DOD obligated $1.4 billion less than the budget allocation for the CHAMPUS program element (see table I.4 and fig. 3). In contrast, MCS contract budget allocations more closely matched obligations through 1996, when DOD implemented two of the then four awarded MCS contracts on time. In 1997 and 1998, however, when implementation of the last three contracts was delayed, MCS budget allocations exceeded obligations by $990 million. Because of the delays in starting up these contracts, most of the unobligated MCS contract funds were used to defray higher than anticipated CHAMPUS program obligations. According to DOD officials, between 1994 and 1998, DOD-wide budget pressures and major program changes—such as downsizing and the rollout of TRICARE managed care reforms—made it difficult to estimate and allocate resources between direct care and purchased care budgets. They emphasized that while they are directly responsible for appropriation amounts at the lump-sum level, they have flexibility to manage the health care delivery system. Therefore, in executing the DHP appropriation funds for patient care, such funds may flow from direct care to purchased care and vice versa. They believe this flexibility is critical to efficiently managing the military health care delivery system. DOD officials cited several interrelated reasons why DHP obligations differed from DOD’s budget allocations between fiscal years 1994 and 1998. These reasons also suggest why “shortfalls” in recent DHP budget requests have prompted congressional concerns about the process DOD uses to estimate and allocate the DHP budget. TMA, Health Affairs, and service budget officials made various internal budget policy choices that included a DHP budget strategy to fully fund purchased care activities within available funding levels. This strategy, coupled with general budget pressures, left less money with which to budget direct care and other DHP subactivity requirements (such as information management and base operations). To keep within the DOD-wide spending caps, the officials intentionally understated requirements for direct care and other subactivities in the DHP budget requests submitted to the Congress. This pattern of policy choices, which led budget officials to underestimate direct care budget requirements, is underscored by the congressional testimonies by the Assistant Secretary of Defense (Health Affairs) and the service Surgeons General—all of whom identified shortfalls in the past 3 years of DHP budget requests, 1997 through 1999. The shortfalls—that is, the difference between the Assistant Secretary’s and the Surgeons General’s views of their needs and the President’s budget submission—have raised congressional concerns over DHP budget requests and prompted both DOD and the Congress to offset the shortfalls in various ways (see table 4). In addition, TMA and service officials told us they have relied on DHP’s flexibility during budget execution to fund direct patient care with funds available and not needed for CHAMPUS and MCS contracts. TMA officials told us that forecasting health care costs for budgeting purposes is inherently challenging because the budget year starts about 18 months after DOD starts preparing DHP budget estimates and 8 months after the President submits the DHP budget request to the Congress. They commented that many conditions change, affecting their direct and purchased care estimates over these protracted periods. In our view, however, these comments do not explain the often large differences that have occurred between budget allocations—which are established after the congressional appropriation is actually received—and obligations, which follow almost immediately thereafter. DOD has the flexibility to allocate most of its congressional appropriations as needed among the various DHP subactivities. Despite this flexibility and even taking into account the minor impacts of other adjustments to DHP’s allocated budget amounts such as supplemental appropriations or reprogrammings, DHP obligations still varied significantly from the budget allocations reported to the Congress, calling into question DOD’s methods for estimating DHP budget requirements. TMA and Health Affairs budget officials told us that the DHP beneficiary population is largely undefined, leading to budget uncertainty. According to these officials, DOD has little control over where beneficiaries go to get their health care because MTFs and MCS contractors do not enroll most beneficiaries. TMA officials stated that, in formulating the DHP budget request, separate cost estimates for MTFs and MCS contracts are based on the best available information at the time. Although service officials told us they had developed higher direct care budget estimates—which TMA nonetheless chose to underfund in the final DHP budget requests—one official told us that the nonenrolled beneficiary population is a major impediment to submitting realistic DHP budget requests. Moreover, DOD’s capitation method (allocating MTF budgets on the basis of the number of estimated users of the military health system) has not kept pace with MTF cost increases for space-available care to nonenrolled beneficiaries for medical services and outpatient prescription drugs. Others have noted similar concerns about the lack of a clearly defined beneficiary population and the effect on DHP budgeting uncertainties. For example, in a 1995 report, the Congressional Budget Office (CBO) raised concerns that, even with TRICARE Prime’s lower cost-sharing features providing incentives, not enough beneficiaries would enroll, and DOD would continue to have difficulties planning and budgeting. For DOD to effectively predict costs and efficiently manage the system, CBO concluded that DOD would need a universal beneficiary enrollment system to clearly identify the population for whom health care is to be provided. CBO concluded that even under TRICARE, beneficiaries can move in and out of the system as they please, relying on it for all, some, or none of their care. DOD would have to continue its reliance on surveys to estimate how many beneficiaries use direct care and purchased care and to what extent DOD is their primary or secondary source of coverage.