DOD’s primary medical mission is to maintain the health of its 1.6 million active duty service personnel and to provide health care for them during military operations. DOD also offers health care to 6.7 million nonactive duty beneficiaries, including dependents of active duty personnel, military retirees, and dependents of retirees. Under TRICARE, DOD provides health care to its eligible beneficiaries through military-operated hospitals and clinics worldwide and supplements this care with civilian providers. DOD contracts with MCS contractors to administer its TRICARE program on a regional basis. The MCS contractors’ responsibilities include claims processing, customer service, and developing and maintaining an adequate network of civilian providers. Since 1994, DOD has awarded seven MCS contracts covering the 11 TRICARE regions. These contracts were awarded for a base period and 5 option years. (See table 1.) Four of the MCS contracts have used all of the option years and three of these have been extended for an additional 2 years. A fourth contract’s extension is under way. TMA anticipates that all of its MCS contracts will eventually be extended. TMA, within DOD’s Office of the Assistant Secretary of Defense (Health Affairs), is responsible for administering the MCS contracts. TMA’s contracting officers have the ultimate responsibility for contract administration, including the issuance of change orders. Contracting officers are assigned to each MCS contract and are supported by other TMA staff as well as by the Lead Agents. Change orders may result from new laws or regulations, or from DOD initiatives. The most recent data available, which were in our 1997 report, showed that one-third of all TRICARE change orders resulted from new laws or regulations, while the remaining two-thirds were self-initiated. TMA officials told us that they were unable to provide updated statistics for our current review because the data are maintained by several different departments and would require significant effort to compile. Most changes are incorporated into the MCS contracts by issuing the change order as an amendment to the applicable TRICARE program manual: the Policy Manual, the Automated Data Processing (ADP) Manual, or the Operations Manual. Policy changes include the authorization of new benefits or changes in the administration or payment of current benefits. ADP changes involve modifications to how data are created, maintained, or reported, as well as changes to systems requirements. Operations changes include those involving the administration of the TRICARE program, such as revisions to home health care billing procedures. Changes can also be classified as “multiple,” meaning they involve modifying two or more of the manuals. Changes classified as “other” fall outside these categories. Examples of such changes are the authorization of travel costs incurred by the MCS contractors for government training and orders directing MCS contractors to report information about ongoing provider fraud investigations. Similar to our 1997 report, we found that as of June 30, 2000, the Operations Manual was modified most frequently, followed by the Policy Manual, as shown in figure 1. Most change orders affect all of the MCS contracts. For example, if TMA issues a change to the TRICARE program, such as a new benefit, all of the MCS contracts must be changed. Each change order, even for the same change, has to be negotiated separately with each MCS contractor because the cost of the change can vary by geographic region and the number of beneficiaries a contract covers. The Federal Acquisition Regulation, the Defense Federal Acquisition Regulation Supplement, and other internal DOD guidance set forth the requirements governing the administration of change orders. The requirements include time frames within which contractors should submit cost proposals to the government as well as guidance as to the time frames within which change orders should be settled. All change orders have been issued by TMA as unilateral changes, which means that they were implemented before their costs were negotiated and settled. The process of issuing and settling change orders involved many steps. When a change was identified for the TRICARE program, TMA defined its requirements, solicited comments about the change from the MCS contractors, and obtained an independent government cost estimate (IGCE), which was used to obligate, or set aside, funds for the change order. Then, the change orders were issued to the MCS contractors for implementation. MCS contractors were asked to submit a cost proposal within 60 days. When it received the proposal, TMA performed technical reviews and cost analyses of the information and then negotiated with the MCS contractor to determine the final price. Change order settlements can result in payments to the MCS contractors, savings to TMA, or no cost to either party. TMA’s goal for settling change orders is 180 days from issuance. TMA is also responsible for formulating the DHP budget request, which encompasses costs for MCS contracts, including change orders. TMA prepares both a current-year budget and a budget for the Future Years Defense Plan, which represents the estimated appropriation needs for the budget years for which funds are being requested and at least 4 years after. TMA also maintains the accounting system used to obligate and disburse funds for change orders. In our July 1997 report we cited a series of actions TMA had under way to address change order problems and reduce the backlog, such as hiring a management consulting firm to recommend improvements. In that report, we recommended that TMA continue providing high-level management attention to implement needed improvements to the process. However, TMA’s actions failed to make a measurable improvement to the process, and by June 30, 2000, the number of unsettled change orders had peaked at 562—more than double what it had been at the time of our previous report. Realizing that they had to “clear the books” in order to prepare for sweeping program changes that would result from the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 (P.L. 106-398), TMA officials began an ambitious effort on July 1, 2000, to eliminate the backlog by the end of the calendar year. As of February 2001, TMA’s change order backlog totaled 121—a reduction of 78 percent in 7 months. To reach this goal within the short time frame, TMA modified its normal change order process, negotiating with its MCS contractors about $900 million in global settlements for the current and prior fiscal years that included change orders as well as other contract adjustments. Because the total cost of these settlements had not been included in the current-year defense budget, these costs contributed to about $500 million of the overall DHP funding shortfall for fiscal year 2001, which TMA estimates at $1.4 billion. According to our 1997 report, the initiatives TMA was implementing to address change order problems included engaging a consulting firm to prepare IGCEs for individual change orders, establishing a new requirement that all proposed change orders be reviewed and approved by Health Affairs before issuance, and hiring a management consulting firm to review and recommend improvements to the process. In that report, we stated that while it was too soon to determine the effectiveness of these efforts, they could bring needed discipline to the system by helping to ensure the need for, cost of, and timely settlement of change orders. However, for a variety of reasons that included a major staff reorganization and reduction, TMA management did not remain consistently focused on change order improvements, and these initiatives either were not fully implemented or had limited success. Furthermore, TMA did not always have data available to measure the impact of these specific initiatives on the change order process. (See app. II for a list of the initiatives and their outcomes.) These initiatives notwithstanding, between July 1997 and June 30, 2000, the backlog more than doubled to 562 (see table 2) although the percent of unsettled change orders decreased from 62 percent to 52 percent. On July 1, 2000, TMA initiated an ambitious, short-term effort, referred to as Mobilization, to settle its 562 open change orders as well as other contract adjustments by the end of the calendar year. TMA officials stated that clearing the backlog was necessary in order to prepare for changes mandated in the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 (P.L. 106-398) that would result in significant program changes, including expanded health care and pharmacy benefits for military retirees who are age 65 and older. In addition, TMA officials recognized that they needed to reimburse MCS contractors for implementing past change orders that had not been negotiated and paid. To help achieve this goal, TMA increased the technical support for its Contract Management staff by using 14 staff on contract from the Center for Naval Analysis (CNA), who were originally slated to analyze and evaluate the proposals submitted in response to TMA’s solicitations for the next round of TRICARE contracts, which had been postponed. These additional staff were used primarily to help with change order proposal reviews by providing technical and pricing expertise. TMA also hired an information systems consulting firm to help review proposals and increased the numbers of other contracted staff who support Contract Management. TMA worked with its MCS contractors to make this initiative a priority by setting deadlines for the cost proposal submissions, which are needed to negotiate and settle the change orders. TMA officials soon realized, however, that reviewing and negotiating individual change orders would be too time-consuming to meet its 6-month goal. To expedite negotiations, TMA sent a team of contract staff to each MCS contractor to negotiate global settlements, which included all change orders that had not yet been settled under this effort, as well as REAs, claims, and other outstanding contract adjustments. As of February 8, 2001, TMA had completed payments to four of its five MCS contractors and had made partial payments to the fifth MCS contractor. Through this effort, TMA settled all but 71 change orders.