CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE Approaches to Changing Military Health Care OCTOBER 2017 Notes Unless otherwise indicated, all years referred to in this report are federal fiscal years (which run from October 1 to September 30 and are designated by the calendar year in which they end), and all dollar amounts are expressed in 2017 dollars. Amounts are adjusted to remove the effects of general inflation using the price index for per capita gross domestic product, with values of that index projected by the Congressional Budget Office. Numbers in the text and tables may not add up to totals because of rounding. Data underlying Summary Figure 1 and additional details about CBO’s cost-estimating methodology are posted along with this report on CBO’s website. On the cover— Major Chad Hampton (left), an orthopedic surgeon with the 30th Medical Brigade of the U.S. Army Europe, assists in repairing a broken femur in the operating room at the 37th Military Hospital in Accra, Ghana, during a medical readiness training exercise. Photograph by Captain Charles An, U.S. Army Africa. www.cbo.gov/publication/53137 Contents Summary 1 How Does DoD Provide Health Care? 1 What Broad Approaches Might Improve How Health Care Is Supplied or Funded? 1 What Would Be the Effects of Two Specific Options? 3 1 Overview of the Military Health System Goals of the Military Health System The Military Health System and TRICARE 7 7 8 TRICARE’s Health Plans 9 Direct and Purchased Care 10 The Costs of Military Health Care 11 BOX 1-1. RECENT CHANGES TO THE TRICARE PROGRAM 12 Areas of Concern for Policymakers 12 2 Broad Approaches to Changing the Military Health System Approach 1: Focus the Direct Care System on Operational Readiness Approach 2: Pay Fixed Amounts per Person to TRICARE Contractors 17 17 20 Approach 3: Change the Way That Military Departments Pay for Health Care 21 3 Specific Options for Changing the Military Health System Option 1: Increase Cost Sharing for Most Beneficiaries Who Use TRICARE Option 2: Replace the TRICARE Health Plans With a Choice of 25 26 Commercial Insurance Plans for Most Beneficiaries 28 BOX 3-1. THE EFFECTS OF IMPLEMENTING ACCRUAL FUNDING FOR WORKING-AGE RETIREES UNDER OPTION 2 32 Appendix: Cost Sharing in TRICARE Under Current Law 37 List of Tables and Figures 41 About This Document 43 Summary T he Department of Defense (DoD) provides ■ All members of the four military branches, including health care through its Military Health System members of the National Guard and reserves, (MHS), an organization that oversees the as well as members of the Coast Guard and the delivery of health care at home and abroad commissioned corps of the Public Health Service through a program known as TRICARE. The two pri- and of the National Oceanic and Atmospheric mary purposes of that system are to ensure that service Administration (1.9 million); members are healthy enough to deploy (sometimes called medical readiness) and that military clinicians and other ■ Families of current uniformed service members providers are adequately trained to care for personnel (2.0 million); and during both peacetime and wartime (sometimes called operational readiness.) A third function of the MHS is ■ Military retirees and their families (5.4 million). to provide health benefits as an additional form of compensation for military personnel and eligible retirees. In general, care received at military treatment facilities DoD spends about $50 billion annually on the MHS. (MTFs) is free for participants. For care by contract providers, participants face deductibles and other Policymakers and analysts have raised concerns about cost-sharing requirements that vary, depending on the DoD’s rising health care costs, the quality of care type of plan they select, but those amounts are usually provided at its facilities, and how well the department’s less than required by civilian health plans. In most cases, medical establishment prepares for wartime missions. TRICARE beneficiaries pay just a small fee or premium, Efforts to change the system are complicated, however, if any, for that coverage. partly because the resources used to accomplish the various goals are often intermingled or unclear. For What Broad Approaches Might Improve How this report, the Congressional Budget Office examined Health Care Is Supplied or Funded? several broad, illustrative approaches that might address CBO examined three broad approaches and two specific policymakers’ concerns. In addition, the agency esti- options that would change the way DoD provides or mated the costs of two options that have been proposed funds health care (see Summary Table 1). The approaches specifically to make changes to TRICARE. would fundamentally change how health care is supplied but would not focus on what beneficiaries pay for care or How Does DoD Provide Health Care? the effects of those costs on the demand for health care. The MHS provides direct care through its own system Each of the approaches has the potential to directly or of clinics and hospitals—both in combat settings and at indirectly reduce costs, improve the quality of care, or military installations that can be visited by TRICARE improve operational readiness (or at least more clearly beneficiaries. It also purchases care from civilian provid- identify the costs of ensuring readiness). But because ers by means of regional contracts. Within the United the costs or savings of those approaches would depend States, direct care accounts for about 40 percent of care on many programmatic details, CBO did not estimate provided through the MHS, and purchased care for the savings that might result from implementing them. remaining 60 percent. Approach 1: Focus the Direct Care System on The following groups of people are eligible to participate Operational Readiness in TRICARE (with the respective populations at the Under this approach, the system would focus on pro- beginning of 2016 shown in parentheses): viding care to service members and on training military clinicians and other providers. Most care provided to 2 Approaches to Changing Military Health Care October 2017 Summary Table 1 . Alternatives That Might Address Concerns About the Military Health System Approaches to Ensuring Readiness and Options Whose Costs Lowering Costs CBO Estimated Option 2: Approach 2: Approach 3: Option 1: Replace TRICARE Approach 1: Pay Fixed Change the Way Increase Cost With a Choice Focus the Direct Amounts That Military Sharing for Most of Commercial Care System per Person Departments Pay Beneficiaries Insurance on Operational to TRICARE for Health Care Who Use Plans for Most Readiness Contractors in MTFs TRICARE Beneficiaries Concerns About Operational Readiness MTF providers use different skills than X those needed for deployment Volume of care at some U.S.-based MTFs X X is too low to ensure medical proficiency Concerns About DoD’s Rising Health Care Costs Medical force is larger than that needed for X X combat Costs of ensuring operational readiness are X X X not apparent No mechanism exists for ensuring an X X X X X efficient direct care system Beneficiaries’ use of TRICARE is increasing X X X Source: Congressional Budget Office. X signifies that the relevant approach or option might address a particular concern. “Operational readiness” indicates that military clinicians and other providers are adequately trained to care for personnel during both peacetime and wartime. DoD = Department of Defense; MTFs = military treatment facilities. families and retirees would be outsourced to the private Approach 3: Change the Way That Military sector, substantially reducing the size of the direct care Departments Pay for Health Care in MTFs system. The effect on federal spending would depend on In general, each military department (Army, Navy, and whether DoD was able to eliminate excess capacity (facil- Air Force) currently manages its own MTFs and controls ities, equipment, and clinical personnel no longer needed its own medical operations in the wartime theater. This to treat families and retirees) and whether private-sector approach could take one of two possible forms. One care proved to be more or less costly than direct care. would involve paying fixed amounts per beneficiary to MTFs for health care services. Another would use an Approach 2: Pay Fixed Amounts per Person to internal pricing mechanism—known as a working capital TRICARE Contractors fund—for military departments to purchase care in MTFs This approach would give contractors more latitude to for their beneficiaries. The goal of each change would be restructure provider networks, reimburse providers, and to better distinguish the costs of providing health care determine patients’ cost sharing. Such a transformation from the costs of ancillary activities related to ensuring could save DoD money, but MTFs would need to be medical and operational readiness. (Ancillary activities restructured or closed and patients would probably need include functions conducted at medical command head- to pay a larger share of their costs to generate significant quarters, the education and training of medical personnel, savings. and veterinary services, including the care of working animals.) Decisionmakers within DoD and the Congress could better allocate resources if those costs were known. Summary Approaches to Changing Military Health Care 3 What Would Be the Effects of Two Specific by 2031. If lawmakers reduced discretionary funding Options? accordingly, the net effect of the options on the deficit CBO analyzed two options that have been proposed would be an annual decrease of roughly $2.5 billion to make changes to the MHS (see Summary Table 1). under Option 1 or an annual increase of $700 million Earlier work by CBO found that people using mili- under Option 2 (evaluated at the midpoint of the likely tary health services pay a lower share of their health range of outcomes, in 2017 dollars).1 (See Summary care costs than most civilians with employment-based Figure 1.) The first option would, on net, decrease costs coverage. Those lower costs encourage people to switch to DoD and other agencies by $2.9 billion per year (in to TRICARE and to use health care services more than 2017 dollars) but would cause a small ($0.4 billion) comparable civilians. In CBO’s judgment—which is net increase in the deficit from reduced tax revenues informed by the agency’s earlier work—policy changes and greater mandatory spending (mostly the former).2 that would increase beneficiaries’ cost sharing have the By contrast, the second option could result in a small greatest potential to generate significant savings for DoD ($0.2 billion) annual decrease in discretionary costs and and the federal government as a whole. Both options a slightly larger increase in the deficit ($0.9 billion) from were assumed to go into effect in January 2020. reduced revenues (and a small change in mandatory spending.) Option 1: Increase Cost Sharing for Most Beneficiaries Who Use TRICARE The estimated effects of Option 2 on discretionary costs This option would keep the current structure of are highly uncertain, however, largely because incorpo- TRICARE and the Military Health System intact but rating military treatment facilities and providers into would increase the out-of-pocket costs paid both by commercial insurance networks would bring significant active-duty TRICARE users who wish to buy coverage changes to beneficiaries and DoD and thus could be for their families and by users who have retired from the very difficult to implement. In particular, if operations at military but are not yet eligible for Medicare (sometimes military treatment facilities could not be fully funded by called working-age retirees, they are generally between reimbursements for providing care, any excess capacity the ages of 40 and 65). Under the option, savings would would need to be reduced or subsidized by DoD through accrue directly to the government because beneficiaries appropriations. The greatest uncertainty associated with would use fewer health care services. Savings would also the estimates for Option 2 involves the extent to which be generated when beneficiaries switched to a cheaper DoD would reduce any excess capacity in the Military TRICARE plan or to other sources of health insurance. Health System as a result of the lower demand for health Consequently, the option would primarily affect the care at those facilities. demand for, rather than the supply of, health care. Evaluating the two options on a per-family basis provides Option 2: Replace TRICARE With a Choice of additional insights (see Summary Table 2). In 2031, the Commercial Insurance Plans for Most Beneficiaries first year in which the full budgetary effects of both of This option, which is based on reforms proposed by the the options would occur, implementing Option 1 or Military Compensation and Retirement Modernization Option 2 would result in lower annual costs to the Commission, would offer commercial insurance and government—by about $2,000 or $600, respectively, incorporate MTFs into those networks. It would sub- per retiree family. But under Option 2, that family’s stantially restructure the TRICARE benefit and its out-of-pocket costs would more than triple, from about delivery system, including adding new cash allowances $1,900 per year to about $7,500 per year. for families of active-duty personnel and raising out- of-pocket costs for working-age retirees. The option would change the supply side of the market as well as the 1. For the discretionary effects of the options, changes in outlays demand side. would approximately equal the changes in budget authority. Effects of the Options 2. Discretionary spending is controlled by annual appropriation acts that specify the amounts that are to be provided for a broad CBO assessed the effects of these options in the “steady array of government activities. Mandatory spending is governed state”—that is, when the policy changes would be fully by statutory criteria and is not normally controlled by the annual implemented, which CBO projects would happen appropriation process. 4 Approaches to Changing Military Health Care October 2017 Summary Figure 1 . Likely Ranges of Possible Savings or Costs in 2031 Under the Two Options Examined by CBO Billions of 2017 Dollars Change in the Federal Budget -4 0 4 Discretionary -3.6 -2.3 Effects Midpoint -2.9 Option 1 Net Effects of Increased Mandatory 0.2 0.6 Spending and Lost Revenues Midpoint 0.4 Midpoint Discretionary -0.2 Effects -3.9 3.5 The range of possible outcomes is wider for Option 2 because of Option 2 uncertainty about how much excess capacity would be reduced at military Net Effects of Increased Mandatory 0.5 1.3 treatment facilities. Spending and Lost Revenues Midpoint 0.9 Source: Congressional Budget Office. Option 1 would increase cost sharing in TRICARE for the families of active-duty personnel and for working-age retirees. Option 2 would replace TRICARE with a choice of private insurance plans from which the families of active-duty personnel and working-age retirees could choose. Estimated annual effects are shown in the “steady state”—that is, when the benefit changes would be fully implemented and any capacity reductions would have been made, which CBO projects would happen by 2031. For discretionary effects, outlays would approximately equal budget authority. The likely ranges reflect the middle two-thirds of the range of possible outcomes. Savings or costs could be even larger or smaller than those displayed here. For an average active-duty family, the cost to the gov- TRICARE prices would no longer be constrained by ernment would decrease slightly under Option 1 but Medicare rates and because subsidies would be required increase substantially under Option 2, CBO estimates. if DoD maintained excess capacity in its military treat- That increase would occur in part because of the allow- ment facilities. ances paid to those families, but primarily because Summary Approaches to Changing Military Health Care 5 Summary Table 2 . Estimated Cost of Health Care for an Average Family Using TRICARE in 2031 2017 Dollars Working-Age Retirees and Their Familiesa Families of Active-Duty Personnelb Current Current Total Cost Program Option 1 Option 2 Program Option 1 Option 2 To the Government 24,100 22,100 23,500 24,300 24,200 27,100 c To a Family 1,900 3,300 7,500 300 300 0 Source: Congressional Budget Office. A family is defined as a household that relies on TRICARE for 100 percent of its health care. Estimated annual costs are shown in the “steady state”—that is, when the benefit changes would be fully implemented and any capacity reductions would have been made, which CBO projects would happen by 2031. The potential subsidies that the Department of Defense would have to provide under these options to retain capacity at military treatment facilities are uncertain, and so the potential cost to the government is also uncertain. CBO estimates that the likely range of such costs could be $21,900 to $22,400 per retiree family under Option 1; $21,000 to $26,000 per retiree family under Option 2; and $22,700 to $31,400 per active-duty family under Option 2. a. The average retiree family consists of three people, including the retiree sponsor who is not yet eligible for Medicare. b. The average active-duty family consists of three people, not including the sponsor. c. Under Option 2, an active-duty family would receive an allowance covering average out-of-pocket costs of $7,900. CHAPTER 1 Overview of the Military Health System T he Department of Defense (DoD) pursues overseas and again when they come home. The facilities its two primary goals for the Military Health care for those who fall ill or who are wounded or other- System (MHS)—ensuring that active-duty wise injured in the line of duty, although the military personnel are healthy enough to serve and that departments themselves provide care in combat settings. military clinicians are adequately trained—by provid- ing care directly through its own system of clinics and Second, the system aims to guarantee that its personnel by training its own medical personnel. It also pursues and facilities are ready to provide the high-quality care a third objective—providing care for military families that military personnel will require in combat and during and retirees through the TRICARE program. Just over peacetime—often called operational readiness. Achieving half (52 percent in 2016) of all care is purchased from that goal involves choices about “capacity”—specifi- the private sector and offered to beneficiaries through cally, the number of military medical personnel deemed TRICARE’s health plans; the remainder of care is necessary to treat patients, the mix of specialties in which obtained directly at treatment facilities operated by providers should be proficient, the size of facilities, and DoD. the amount of equipment required to care for deployed forces. In 2016, DoD spent $51 billion to provide medical care, dental care, and prescription drug coverage to more than DoD pursues its readiness goals by operating its own 8 million service members, retirees, and their eligible system of clinics and hospitals and by training its own family members. Between 2000 and 2012, the costs of uniformed doctors, nurses, corpsmen, dentists, adminis- providing that care increased rapidly. Such expenditures trators, and other specialists. In doing so, it is responsible have continued to grow since 2013, although at a more for certifying that its facilities are run efficiently and that modest rate that is in line with civilian health care costs. its providers are adequately trained. Within DoD, the Much of the cost increases are attributable to new and Assistant Secretary of Defense (Health Affairs) exercises expanded health care benefits and to financial incentives authority, direction, and control over medical resources. to use those benefits. At the same time, each military department (Army, Navy, and Air Force), under its surgeon general, manages Policymakers have recently focused on two areas of con- its MTFs and controls medical operations in the wartime cern: the extent to which DoD achieves its primary goals theater. for readiness and ways to control the rising costs of both direct and purchased care. One perceived advantage of this system is that each military department trains its providers to have the Goals of the Military Health System skills that meet the medical needs of their uniformed The primary purpose of the MHS is to ensure readiness, personnel in combat, and each must ensure that those which DoD defines as having two elements.1 First, the providers perform their tasks with enough frequency to system aims to ensure that all active-duty personnel (as ensure competence. One drawback, however, has been well as activated members of the National Guard and significant duplication across DoD for some health and reserves) are medically ready to serve—often called med- administrative services (such as information technology, ical readiness. For example, all personnel are screened at medical education and training, research, and resource military treatment facilities (MTFs) before they deploy management). As a means of reducing that duplication, DoD established the Defense Health Agency (DHA) in 1. See Department of Defense, Health Service Support, Joint 2013 to administer the MHS and to combine shared ser- Publication 4-02 (July 2012), www.dtic.mil/doctrine/new_pubs/ vices. The Congress gave DHA additional administrative jp4_02.pdf (1.6 MB). 8 Approaches to Changing Military Health Care October 2017 responsibilities for the military treatment facilities in the The Military Health System and TRICARE National Defense Authorization Act for Fiscal Year 2017 In addition to overseeing the delivery of health care in (NDAA; Public Law 114-328). Beginning on October 1, combat settings and other theaters of operation, the 2018, DHA will be responsible for the administration MHS provides health care benefits through a program of MTF budgets, health care management, military called TRICARE. Under TRICARE, beneficiaries can construction, and other central functions. The military receive care at MTFs and through a network of provid- departments, however, will retain their own medical ers in the private sector. In 2015, about 8 million of the commands and continue to be responsible for ensuring 9.3 million people eligible to receive health care through medical and operational readiness and providing health TRICARE used the system.4 Managing, supporting, and care at the MTFs. providing health care services that year required about 84,000 military personnel and 65,000 federal civilian The primary means by which military medical personnel personnel working in 55 hospitals and 373 medical develop and maintain their skills during peacetime is by clinics. The TRICARE network supplemented the care providing care at MTFs to service members, their fam- delivered in the MTFs with about 550,000 private pro- ilies, retirees, and their families. The latter three groups viders and 3,800 hospitals. account for about 80 percent of the care provided; conse- quently, the mix of cases that military providers encoun- The 9.3 million people eligible for TRICARE fall into ter during peacetime does not match the types typically three broad categories: seen in combat. For example, a large percentage of the cases at MTFs involve childbirth and the care of new- ■ All members of the military, including members of borns. In addition, DoD has found that care provided the National Guard and reserves (1.9 million). Those at MTFs is usually more expensive than that offered by serving on active duty must use TRICARE. civilian providers who treat military beneficiaries; but the higher costs may be justified because MTFs are required ■ Family members of those who are currently serving to ensure readiness.2 In essence, therefore, DoD is paying (2.0 million at the end of 2015). Family members a premium—the size of which is difficult to calculate— are not required to use the system, but more than in the name of military readiness by operating its own 80 percent do. facilities with its own personnel and providing care to so many patients other than those currently serving in the ■ Military retirees and their families (5.4 million at the military. end of 2015). Retirees and their families are also not required to use the system, but more than three- A third function of the MHS is to provide health bene- quarters do. (To qualify for military retirement, an fits as an additional form of compensation for military individual must serve 20 years or more, although employees and eligible retirees. After cash pay, subsidized disability retirement is sometimes granted sooner.) health insurance is the largest element of the military compensation package.3 Most large employers offer Most people who join the military do not remain for an health insurance to their employees, but few operate entire career and therefore are not eligible for TRICARE their own medical systems, and most require their when they leave. When they complete their service, they employees to pay a greater share of costs than DoD does. become veterans. Many veterans are eligible for care The proportion of employers who offer health insurance through the Veterans Health Administration (VHA), the to their retirees has been shrinking as well. medical program of the Department of Veterans Affairs 4. TRICARE, which is funded and managed by DoD, is available 2. See Department of Defense, Report on Military Health System to members of all seven branches of the uniformed services: Modernization: Response to Section 713 of the Carl Levin and the Army, Navy, Marine Corps, Air Force, Coast Guard, Public Howard P. “Buck” McKeon National Defense Authorization Act Health Service, and the National Oceanic and Atmospheric for Fiscal Year 2015 (P.L. 113-291) (February 8, 2016), pp. iii–v, Administration. The first four (military) branches represent https://go.usa.gov/xncKp (PDF, 11 MB). about 97 percent of the total uniformed corps. See Department 3. See Congressional Budget Office, Costs of Military Pay and of Defense, Evaluation of the TRICARE Program: Access, Cost, Benefits in the Defense Budget (November 2012), www.cbo.gov/ and Quality, Fiscal Year 2016 Report to Congress (February 2016), publication/43574. pp. 12 and 18, https://go.usa.gov/x9hDN. CHAPTER 1: OVERVIEW OF THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 9 (VA). As a distinct system from the MHS, VHA provides as copayments and deductibles) for the medical care directly in its own hospitals and clinics, but in cer- care they receive. Their family members must enroll tain circumstances veterans may access outside providers annually—also at no cost—if they wish to participate at VHA’s expense.5 This report does not address VHA in the plan. Retired military members who are not care. yet eligible for Medicare and their families may also enroll, but they are charged an annual enrollment fee TRICARE’s Health Plans (similar to a premium) and may also incur some out- Most TRICARE plans are for beneficiaries who are not of-pocket expenses. eligible for Medicare. That includes active-duty person- nel, their families, and retirees and their family members ■■ TRICARE Extra mirrors a civilian preferred provider who are under age 65 (and not otherwise eligible for organization (PPO). Compared with TRICARE Medicare). Military personnel who serve on active duty Prime, Extra allows participants more freedom to for 20 years or more, or who become medically disabled select providers, but users have higher out-of-pocket while serving, are eligible to retire from the military. costs. Civilian providers who are designated as Because most members join the military between the preferred accept a reduced payment from TRICARE ages of 18 and 25, few retirees are old enough to qualify in return for the business that the local military for Medicare immediately upon retirement. Those who treatment facility refers to them, and the providers are eligible for Medicare can participate in the TRICARE agree to file all claims for participants. for Life (TFL) plan. ■■ TRICARE Standard allows beneficiaries even greater TRICARE Plans for Beneficiaries Not Eligible for freedom to select providers than do Prime and Extra, Medicare but out-of-pocket costs are higher. Beneficiaries Although some smaller TRICARE plans are available must pay any difference between a provider’s billed to select subgroups, most military users receive their charges and the rate of reimbursement allowed health care through one of three major plans: TRICARE under the plan, although the maximum amount Prime, TRICARE Extra, or TRICARE Standard. (See that the provider can bill is capped. By law, the the appendix for the current costs to beneficiaries of the reimbursement rate is tied to Medicare’s allowable three TRICARE plans.) charges. (Such plans are known as indemnity insurance or fee-for-service plans.) ■■ TRICARE Prime is a managed care option similar to that provided by a health maintenance organization Beneficiaries who have not enrolled in Prime can receive (HMO). Of the nearly 8 million people who used care under Extra, Standard, or both. When beneficiaries the TRICARE benefit in 2015, nearly two-thirds choose an in-network provider for medical care, they (4.8 million) were enrolled in Prime.6 Like civilian are automatically covered under Extra; if they choose an HMOs, the plan’s features include a primary care out-of-network provider for a different medical service manager (either a military or civilian health care (even within the same year), they are automatically provider) who oversees care and provides referrals covered under the Standard plan. As of 2017, neither of to visit specialists. Active-duty service members those plans requires beneficiaries to enroll, although both are required to use Prime. They pay no annual have an annual deductible for outpatient care. Users of enrollment fee or premium for the coverage, nor Extra or Standard can access MTFs for free, but unlike do they incur other out-of-pocket expenses (such Prime enrollees, they get appointments only when space is available. The Congressional Budget Office esti- 5. The Veterans Access, Choice, and Accountability Act of 2014 mates that there were over 1 million users of Extra and (P.L. 113-146) temporarily authorized VA to spend up to Standard in 2015, although some of those users relied on $10 billion for purchased care from outside health providers to civilian health insurance or other payers in addition to ensure that veterans meeting certain criteria do not experience long waits for VHA appointments or long drives to VHA TRICARE. facilities. Lawmakers recently authorized changes to the TRICARE 6. See Department of Defense, Evaluation of the TRICARE Program: Access, Cost, and Quality, Fiscal Year 2016 Report to Congress program that would increase the share of costs paid (February 2016), p. 13, http://go.usa.gov/x9hDN. by many beneficiaries. Beginning on January 1, 2018, 10 Approaches to Changing Military Health Care October 2017 Standard and Extra will be combined into a single DoD finances the TRICARE for Life program differently preferred provider option called Select. Beneficiaries from other TRICARE plans. For the latter, it pays the who enroll in Select will pay less when they choose in- costs directly from its operation and maintenance and network providers than they will for out-of-network pro- military personnel accounts. But for TFL, it uses accrual viders. Most of the new provisions would affect military funding: DoD pays what actuaries estimate to be the members entering the service on or after January 1, 2018 amount necessary to fund future health care benefits (see Box 1-1). for members currently serving in the military (referred to as accrual payments). Those accrual payments are TRICARE for Life made to the Medicare-Eligible Retiree Health Care Designed to supplement Medicare coverage, TFL Fund (MERHCF), an account established to pay for the requires beneficiaries to enroll in Parts A (hospital insur- health care of Medicare-eligible retirees. When retirees ance) and B (medical insurance) of Medicare; Part B seek care from TRICARE, MTFs or private providers are requires payment of annual premiums based on income, reimbursed for the cost of that care by the MERHCF. but TFL charges no annual premium or enrollment fee.7 The military services have no discretion in determining For inpatient and outpatient services that are covered by accrual rates, which are set by an actuarial board; they both Medicare and TRICARE, TFL pays the difference budget an amount equal to the accrual rates (one rate between Medicare’s allowable costs and the Medicare for active-duty personnel and another for reservists) payment rate (which is typically about 80 percent of the multiplied by the average number of active-duty person- allowable cost); in other words, TFL covers Medicare’s nel and reservists currently in the force. In 2016, DoD cost-sharing requirements. Thus, with the exception of made accrual payments to the MERHCF totaling about pharmacy copayments, TFL largely eliminates out-of- $7 billion. That same year, outlays from the MERHCF pocket costs for retirees and their families.8 to reimburse private providers and MTFs for care deliv- ered to Medicare-eligible retirees totaled $10 billion. DoD reports that 2.1 million people were covered by Those two sums differ because the former is an estimate TFL in 2015. The TFL benefit appears to cover a greater of future costs for current service members, whereas the share of costs than private Medicare supplemental plans: latter measures current costs for people who have already DoD estimates that out-of-pocket costs for eligible bene- retired from the military. ficiaries were 54 percent less than those incurred by their civilian counterparts who have Medicare and supplemen- Direct and Purchased Care tal insurance coverage.9 The MHS offers direct care using military providers at hospitals, clinics, and other facilities that are overseen by the military departments and DHA. About 40 percent of 7. Between 1966, the year Medicare began to provide benefits, military health care (measured by workload) is provided and 2002, the year TFL went into effect, military retirees could by that system. The costs include staff salaries, expen- use TRICARE (or its predecessor program) only until they ditures on medical supplies, and costs for the operation became eligible for Medicare; 86 percent of them purchased and maintenance of MTFs. supplemental insurance to cover the costs that Medicare would not. See Department of Defense, Evaluation of the TRICARE Program: Access, Cost, and Quality, Fiscal Year 2016 Report to The overall capacity of the direct care system is more Congress (February 2016), p. 105, https://go.usa.gov/x9hDe. than sufficient to provide care to the fewer than 2 mil- lion active-duty personnel. To keep its facilities busy and 8. Neither Medicare Part B nor TFL covers pharmacy copayments, so retirees must pay those out of pocket. However, like all to provide training and experience to its military medical TRICARE beneficiaries, military retirees can obtain up to a personnel, DoD has for decades offered care to fami- 90-day supply of prescription drugs from military pharmacies lies of active-duty personnel and military retirees when for free. They also can go to in-network civilian pharmacies and space is available. However, the capacity of the direct pay $10 for a 30-day supply of a generic drug and $24 for a care system as a whole is not sufficient for the roughly brand-name drug (although some brand-name drugs may cost more). Home delivery is available as well. See www.tricare.mil/ 8 million people who want to receive their health care CoveredServices/Pharmacy/Costs. from TRICARE. Some MTFs have excess capacity, but they may not be conveniently located for retiree popu- 9. See Department of Defense, Evaluation of the TRICARE Program: Access, Cost, and Quality, Fiscal Year 2016 Report to Congress lations; and some MTFs may not provide the services (February 2016), pp. 13 and 106, https://go.usa.gov/x9hDe. needed. The ability to treat family members and retirees CHAPTER 1: OVERVIEW OF THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 11 is stretched further when military providers who staff the function of rising per capita costs rather than changes in MTFs in peacetime deploy to support combat opera- the number of TRICARE users. tions. Therefore, DoD contracts with regional networks of civilian providers of health care to deliver the remain- In 2014, CBO analyzed the causes of increases in DoD’s ing 60 percent of care to DoD beneficiaries. health care spending between 2000 and 2012 to identify approaches to constrain future spending.11 CBO found Health care provided through the direct care system that most of the growth could be explained by two (including pharmaceuticals dispensed by military factors:■ pharmacies) is generally free to users, whereas care from civilian providers—purchased care—may include very ■ New TRICARE benefits. A decade of legislative modest copayments or coinsurance, depending on the changes had added new groups of beneficiaries and category of beneficiary and the type of health plan the expanded access for existing beneficiaries.■ beneficiary chooses. Unlike most commercial plans, TRICARE allows beneficiaries to access care without ■ Financial incentives to use TRICARE. Because enrolling. TRICARE’s contracts with providers resemble beneficiaries’ cost-sharing burden had been declining, those used by many commercial insurance companies in TRICARE had become increasingly attractive when that they are fee-for-service arrangements—that is, pro- compared with other options for health care coverage. viders are reimbursed for care as they deliver it. However, In addition, those relatively low costs had encouraged DoD has not instituted other contracting arrangements, existing beneficiaries to use more health care services. including capitated payments (generally, a fixed amount per enrollee per year) or value-based contracts (alter- By contrast, the medical costs of military operations in native payment methods that contain explicit cost- Iraq and Afghanistan over the past decade had a compar- efficiency and quality performance measures). Several atively small effect on DoD’s spending. researchers have asserted that such models can be more efficient (and less costly) than fee-for-service contracts.10 Military retirees and their families generally pay much However, the savings from switching to those models less for health care than comparable civilian families might be smaller for TRICARE than for commercial do.12 DoD has estimated that, in 2015, the family of a plans because payments to network providers under retiree enrolled in a civilian HMO would pay nearly six TRICARE are based by statute on Medicare rates, which times as much as a similar family with coverage under are lower than the rates paid by most civilian health TRICARE Prime. A family who used a civilian PPO plans. would pay more than five times the amount a similar military family would pay for coverage under TRICARE The Costs of Military Health Care Extra or Standard.13 DoD expects to spend about $50 billion for the MHS in 2017, and the Administration has requested an As a result of those differences in costs, a rapidly growing appropriation of $51 billion for 2018. In later years, the share of military retirees and their families are relying on health system’s costs will increase if its growth reflects TRICARE rather than participating in health insurance anticipated national trends in health care costs—mostly a provided by civilian employers or purchasing insurance on their own. In 2002, about 47 percent of military 10. See Bruce E. Landon and others, “The Relationship Between retirees signed up for private health insurance, but by Physician Compensation Strategies and the Intensity of Care 2015 that figure had dropped to 18 percent, indicating Delivered to Medicare Beneficiaries,” Health Services Research, vol. 46, no. 6 (December 2011), pp. 1863–1882, http://doi. org/10.1111/j.1475-6773.2011.01294.x; Lee N. Newcomer, “Changing Physician Incentives for Cancer Care to Reward Better Patient Outcomes Instead of Use of More Costly Drugs,” 11. See Congressional Budget Office, Approaches to Reducing Federal Health Affairs, vol. 31, no. 4 (April 2012), pp. 780–785, http:// Spending on Military Health Care (January 2014), www.cbo.gov/ doi.org/10.1377/hlthaff.2012.0002; and Roger G. Kathol, publication/44993. Frank deGruy, and Bruce L. Rollman, “Value-Based Financially 12. Ibid., pp. 13–15. Sustainable Behavioral Health Components in Patient-Centered Medical Homes,” Annals of Family Medicine, vol. 12, no. 2 13. See Department of Defense, Evaluation of the TRICARE Program: (March 2014), pp. 172–175, http://doi.org/10.1370/afm.1619. Access, Cost, and Quality, Fiscal Year 2016 Report to Congress (February 2016), pp. 101 and 103, https://go.usa.gov/x9hDN. 12 Approaches to Changing Military Health Care October 2017 Box 1-1. Recent Changes to the TRICARE Program In December 2016, lawmakers authorized changes to the who enter afterward (see the table). Beneficiaries who use TRICARE program that will take effect over the next several TRICARE Select will have a new schedule of copayments years.1 Specifically, beginning on January 1, 2018, TRICARE instead of the coinsurance currently required by Extra and Extra and Standard will be merged into a single plan known Standard (which those who enter service before January 1, as TRICARE Select. The new program will include both the 2018, will continue to pay). In addition, future retirees (those in-network benefits that are currently part of the Extra plan who enter service on or after January 1, 2018, and complete a and out-of-network (fee-for-service) benefits available through career or who retire for medical reasons) will pay triple the fee Standard. All beneficiaries will need to enroll in TRICARE paid by their predecessors to enroll in Select. The enrollment Select to receive coverage. Enrollment will be free until fees for both groups, however, will increase annually by the January 1, 2020. Beginning in 2020, current working-age rate of the cost-of-living adjustment for military retired pay. retirees who wish to use Select must pay an enrollment fee of Other adjustments tied to the cost of living will apply only to $150 for individual coverage or $300 for family coverage.2 the costs paid by those who enter military service on or after Changes to other out-of-pocket costs will take effect for those January 1, 2018. The annual deductible and catastrophic cap who enter service after January 1, 2018. Those changes will for members who enter service in 2018, for example, will create two distinct fee schedules: one for those who entered increase each year, whereas the deductible and cap for those military service before January 1, 2018, and another for those who entered service before that year will be fixed. 1. The National Defense Authorization Act for Fiscal Year 2017 (Public Law 114-328) was passed by the Congress on December 8, 2016, and signed into law by President Obama on December 23, 2016. 2. The new fees can be instituted only 90 days after a report is submitted to the Congress by the Comptroller General of the United States. The report must evaluate TRICARE coverage and access and be completed by February 1, 2020. Continued greater reliance on TRICARE.14 In addition, low Improving the Operational Readiness of Medical out-of-pocket costs, the increasing expense of employ- Providers and the Quality of Care in MTFs ment-based insurance plans, and other factors have led The MHS regularly exceeds the goals it sets for ensur- to higher usage rates for inpatient and outpatient care ing that soldiers, sailors, airmen, and Marines are ready among enrollees in TRICARE Prime than DoD has to deploy—that is, the first element of medical readi- reported for comparable civilians enrolled in HMOs.15 ness. The second element—preparing military medical personnel to provide high-quality care during combat Areas of Concern for Policymakers missions and at home—has been more problematic for Policymakers have raised concerns about the depart- the following reasons: ment’s preparation for wartime missions, the quality of care provided at its facilities, and its rising health care ■ Mismatches in medical specialties. DoD has had costs. Efforts to change the system are complicated, how- difficulty ensuring that its clinical personnel are ever, partly because the resources used to accomplish the adequately prepared to provide the types of care various goals are often intermingled or unclear. the department expects will be most in demand on combat missions because those clinicians receive 14. Ibid., p. 100. most of their training at MTFs, and most of the patients at MTFs are families or retirees. 15. Ibid., pp. 85–90. CHAPTER 1: OVERVIEW OF THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 13 Box 1-1.Continued Recent Changes to the TRICARE Program Costs Incurred by Different Types of Beneficiaries as a Result of Changes Enacted in the National Defense Authorization Act for Fiscal Year 2017 Active-Duty Personnel Who Entered Service Active-Duty Personnel Who Working-Age Retirees Who Working-Age Retirees Who Before 2018 and Their Enter Service in 2018 or Entered Service Before 2018 Enter Service in 2018 or Families Later and Their Families and Their Families Later and Their Families Enrollment Fees HMO (Prime) None None $282.60 or $565.20 in 2017 for $350 or $700 for individual individual and family coverage, and family coverage, respectively. Increases each respectively. Increases year with COLA. each year with COLA. PPO (Select) None None Currently, none. Beginning $450 or $900 for individual in 2020, $150 or $300 for and family coverage, individual and family coverage, respectively. Increases respectively; disability retirees each year with COLA. and certain survivors will be exempt. Increases each year with COLA. Deductibles HMO (Prime) None None None None PPO (Select) Range from $50 to Range from $50 to $300, $150 or $300 for individual and Range from $150 to $600, $300, depending on depending on pay grade and family coverage, respectively. depending on whether pay grade and whether whether individual or family No annual increase. individual or family coverage individual or family coverage. Increases each and in-network or out-of- coverage. No annual year with COLA. network use. Increases each increase. year with COLA. Coinsurance and Copayments HMO (Prime) None None Copayments are the same as Higher copayments that in- under current law. DoD could crease each year with COLA. raise copayments annually. PPO (Select) Coinsurance of New copayments (in net- No copayments. Coinsurance New copayments 15 percent work). Copayments increase 20 percent (in network); 25 per- (in network). Copayments (in network); each year with COLA. cent (out of network). increase each year with 20 percent Coinsurance COLA. Coinsurance 25 per- (out of network). 20 percent (out of network). cent (out of network). No copayments. Catastrophic Cap HMO (Prime) $1,000. No annual $1,000. Increases each year $3,000. No annual increase. $3,500. Increases each year increase. with COLA. with COLA. PPO (Select) $1,000. No annual $1,000. Increases each year $3,500 starting in 2020. $3,500. Increases each year increase. with COLA. No annual increase. with COLA. Source: Congressional Budget Office, using information from the National Defense Authorization Act for Fiscal Year 2017 (Public Law 114-328). Beginning on January 1, 2018, TRICARE Extra and Standard will be combined under a common name, TRICARE Select. Unless another year is specified, the costs shown will be in effect in 2018. Most families of active-duty personnel are enrolled in Prime, which resembles an HMO. Cost sharing for them under the new plan will be similar to that for the current plan. Enrollment fees and other costs (copayments and deductibles) will increase annually by the rate of the COLA for military retired pay. COLA = cost-of-living adjustment for retiree pensions (equal to the annual increase in the consumer price index); DoD = Department of Defense; HMO = health maintenance organization; PPO = preferred provider organization. 14 Approaches to Changing Military Health Care October 2017 ■ Mismatches in clinicians’ proficiency. A related issue is ready if they do not perform enough procedures to whether military providers are able to deliver high- ensure that their skills meet civilian benchmarks. quality care. In MTFs, patients often receive types of care that are delivered infrequently, and low volumes Between August 2014 and May 2015, DoD released are often associated with low quality: The general two internal studies of the direct care system and the medicine practiced in most MTFs means there is readiness of its medical providers. The first review, which little clinical specialization, which can adversely spanned the period from October 2010 to May 2014, affect the outcomes of complex medical procedures focused on efficiency at MTFs.18 DoD’s researchers and surgeries required in combat settings. found that overall access, quality, and safety were good, but that performance varied widely among different clin- One recent study by the Institute for Defense Analyses ics and hospitals. Surgical complications were statistically documented a shift in recent conflicts toward smaller more frequent than expected in almost half (8 of 17) of medical facilities with more specialized trauma capa- the MTFs that voluntarily reported data on morbidity bilities in operational theaters, but the study noted (the incidence of disease) and mortality to the American that those specialties were in short supply in the mili- College of Surgeons in 2013, and there were persistent tary medical corps today. Instead, the military medical problems in three MTFs, although three others were departments retain specialists whose skills are better performing at the top tier nationally.19 matched to peacetime beneficiary care—particularly those involving childbirth, infant care, and conditions The second study examined whether access to medical associated with aging.16 care met defined standards, whether the quality met spe- cific benchmarks, and whether effective processes were A recent report by CNA, a nonprofit research and in place to ensure safe medical care.20 One overarching analysis organization, examined whether the volume finding was that no methodology existed to determine of typical surgeries performed at MTFs was sufficient the amount and types of procedures performed within to ensure high-quality outcomes.17 CNA’s researchers MTFs that were considered necessary to support medical examined health care studies of the civilian sector and readiness. Without knowing that workload, determining found that surgeons who perform a higher volume of the optimal number of MTFs, or their capacity, was not procedures have lower complication rates, lower repeat possible. Both studies recommended reorganizing the operation rates, and lower mortality rates than surgeons responsibilities and governance of the MHS to support who perform a lower volume of procedures. The CNA better collaboration and alignment among DHA and the report identified standards set in the civilian sector for military medical departments. the number of procedures per hospital that must be performed each year to substantially lower the likelihood Controlling Costs of adverse events. The study evaluated MTFs by applying The high and rising costs of the MHS constitute the the relationships between quality and volume that have second area of concern for policymakers. That issue been established in the literature for civilian hospitals. has two interrelated components—the cost of ensuring According to that study, most patients in civilian settings operational readiness and the cost of providing care to receive care in high-volume settings, but most patients TRICARE’s 8 million users. in DoD’s direct care system receive care in low-volume settings. Few doctors in the MHS met the volume targets that the literature indicated were associated with high-quality care and better outcomes. The researchers 18. See Department of Defense, Military Health System Review: Final asked whether one can consider providers to be medically Report to the Secretary of Defense (August 2014), https://go.usa. gov/x9hN8. 16. See John E. Whitley and others, Medical Total Force Management, 19. Ibid., pp. 110–118. In 2013, 56 MTFs had inpatient facilities. IDA Paper P-5047 (Institute for Defense Analyses, May 2014), The MHS does not require MTFs to report data on surgical http://tinyurl.com/y8gku45s (PDF, 3.67 MB). quality to the American College of Surgeons. 17. See Holly Brevig and others, The Quality-Volume Relationship: 20. See Department of Defense, Military Health System Comparing Civilian and MHS Practice (CNA Corporation, Modernization Study Team Report (May 2015), https://go.usa.gov/ January 2015), www.dtic.mil/docs/citations/ADA615315. xncKp. CHAPTER 1: OVERVIEW OF THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 15 Identifying the Cost of Ensuring Operational If TRICARE contractors proved to be less expensive, Readiness. DoD allocates funding to different com- however, DoD could potentially reduce the size of the ponents and subcomponents of the MHS in ways that direct care system without compromising readiness, out- make it difficult to track the cost of ensuring operational source more care to the contractors, and thereby reduce readiness. Military physicians receive their salaries from spending. their branch of service through the military personnel appropriation, for example. Individual hospitals receive However, the relative costs are unclear. A recent study an overall budget for their supplies, materials, and equip- compared certain procedures performed at MTFs with ment. The base where the hospital operates is funded those performed by TRICARE network providers and from another component. Therefore, it is difficult to found that procedures were on average about 35 percent distinguish between the costs of providing health care less expensive when performed by network providers, and the costs of activities needed to ensure readiness. who are paid at Medicare rates.22 In another study, DoD acknowledged that the average cost of care provided to Better understanding of those costs could help decision- DoD beneficiaries in the direct care system is usually makers develop more efficient ways of meeting DoD’s higher than the cost of purchased care. But the study’s readiness goals. As an example, researchers have noted authors argued that MTF buildings and equipment that the total size of the medical force generally exceeds represent “sunk costs” (that is, costs that have already the requirements for operational readiness that the been incurred and cannot be recovered), and the costs of services have identified.21 Furthermore, those require- operational uniformed personnel are fixed (because the ments significantly exceed the number of medical units number of military personnel is determined by readi- and personnel that have historically deployed to overseas ness needs).23 That study therefore finds that the direct operations. Military medical personnel deploy less than care system should be filled to capacity, with excess care nonmedical personnel: Their deployment rates average beyond that capacity sent to civilian providers. one-fifth to one-third those of personnel with combat arms specialties. If the military medical establishment is Although costs can appear fixed in any given month or too large for wartime missions and providers see too few year, most economists would agree that costs vary over patients to maintain their proficiency, DoD may be pay- longer periods and that better information about relative ing more than necessary for readiness. More transparency prices could improve decisionmaking about the alloca- of the costs of providing that readiness could help DoD tion of resources. Different funding mechanisms could operate the MHS more efficiently. provide that information. For example, the mechanism for funding TRICARE for Life—accrual funding—is Controlling the Cost of Providing Care. Separating meant to help policymakers consider the future costs of the costs of providing care to the MHS’s 8 million users the current force. Such information for other portions of from the costs of ensuring readiness is difficult because the MHS could help them determine the efficient size of they overlap. Hence, the true cost of providing the the direct care system relative to the contracted networks, health care benefit is uncertain, and determining how even when readiness is a concern. to lower those costs is challenging. An important factor contributing to that uncertainty—one that has persisted for decades—is whether care provided in the direct care system is more or less expensive than that offered by civilian providers. The answer would help shape future policy. If MTFs can provide health care less expensively than TRICARE contractors, policies that encouraged greater use of those facilities would not only improve the skills of military providers, thereby improving opera- 22. Philip M. Lurie, Comparing the Costs of Military Treatment Facilities With Private Sector Care, IDA Paper NS P-5262 tional readiness, but also reduce the overall cost of care. (Institute for Defense Analyses, February 2016), http://tinyurl. com/zpunu5k (PDF, 504 KB). 21. See John E. Whitley and others, Medical Total Force Management, 23. Department of Defense, Military Health System Modernization IDA Paper P-5047 (Institute for Defense Analyses, May 2014), Study Team Report (May 29, 2015), p. 1, https://go.usa.gov/ http://tinyurl.com/y8gku45s (PDF, 3.67 MB) xncKp. CHAPTER 2 Broad Approaches to Changing the Military Health System I n 2014, the Congressional Budget Office explored the approaches CBO considered in this analysis might three approaches to reducing the Department of not reduce health care spending on their own, they Defense’s health care spending: better manage- would improve the visibility of costs, which would allow ment of chronic diseases, more effective adminis- decisionmakers to make more informed choices about tration of the Military Health System, and increased allocating defense resources for health care. cost sharing for retirees who use TRICARE.1 The first two could be considered changes on the supply side of For this report, CBO examined three broad approaches health care, while the third could be viewed as affecting to making fundamental changes on the supply side: the demand side. In CBO’s assessment, only the last of those approaches had the potential to generate signifi- ■■ Focusing the direct care system on operational cant savings for DoD. The first two approaches would readiness, make changes to the way in which health care is supplied and might generate savings, but they would not address ■■ Paying fixed amounts per person to private insurers the primary drivers of health care costs for DoD. Since for TRICARE, and that report was published, however, policymakers have expressed interest in more fundamental changes to the ■■ Changing how DoD finances health care. system, particularly on the supply side. For example, in the National Defense Authorization Act for Fiscal Year Each approach has the potential to address all or some of 2017, the Congress directed the Defense Health Agency policymakers’ aims—to improve readiness, increase the to take over the management of all of the military treat- quality of care, or reduce spending for military health ment facilities currently operated by the Army, Navy, care—but each has drawbacks as well. CBO examined and Air Force. Because of the continuing interest in how ways that the alternatives could be implemented and military health care is provided, this CBO analysis has a identified whether they would address one or more of broader scope than the previous one. the concerns policymakers and analysts have expressed about military health care. Such analysis is complicated, however. Researchers have found that the effects of various supply-side changes have Approach 1: Focus the Direct Care System on been mixed or more difficult to measure, in part because Operational Readiness less evidence is available about their likely effects. For For several reasons, policymakers might choose to reduce instance, estimating the effect of approaches that would the size of the direct care system to focus it more on the make DoD’s direct care system more efficient requires types of care needed by the active-duty force, while shift- measuring some baseline level of efficiency. It can also ing more peacetime care to the private sector: be difficult to judge what form that greater efficiency might take: Would military or civilian providers see ■■ The medical conditions encountered most often at more patients, would military facilities close, would MTFs are similar to those seen in civilian facilities there be fewer providers, or would healthier people rather than those encountered by active-duty need less costly forms of care? Answering each of those members, particularly in combat zones. Although questions can be challenging, which adds greater uncer- deployed service members need routine care, the tainty to any estimates. However, even though some of peacetime MTF workload may not be ideal for preparing military clinicians for deployment duties, 1. See Congressional Budget Office, Approaches to Reducing Federal and many military physicians serving in a combat Spending on Military Health Care (January 2014), www.cbo.gov/ publication/44993. 18 Approaches to Changing Military Health Care October 2017 theater often have no formal training in emergency would be paid from the services’ military personnel medicine or trauma resuscitation.2 appropriations, as they are now.) Currently, a little less than half (44 percent) of the military medical corps is ■■ The geographic distribution of patients is uneven, made up of reservists, who usually have full-time clini- resulting in long waits at some MTFs and insufficient cal jobs in the civilian sector and can be activated when patient load at other MTFs. needed. Greater reliance on them would reduce DoD’s expenditures in general (because reservists cost as much ■■ The number of retirees is projected to decline in the as active-duty personnel only when they are activated). coming decades, and contracted care can be reduced However, pulling more doctors and nurses from the more easily to match decreases in the beneficiary civilian sector could also impose some costs on civilians, population. adversely affecting their care. If more reservists were used, the services would probably still choose to retain Focusing on operational readiness in the direct care sys- some active-duty physicians and nurses to ensure rapid tem would require that the clinicians who provide care mobilization and deployment as needed. during deployments undertake more of their training in civilian trauma centers. Routine medical care would The main rationale for shifting training to civilian hos- be provided by the private sector much more often pitals is that much of the knowledge gained by military than it is now. For the military services, the number of clinicians at MTFs—where they primarily treat families uniformed medical personnel would shrink, potentially and retirees—is not applicable to medicine delivered allowing the services to increase end strength in other during deployment. For example, childbirth and new- areas. (End strength is the number of active-duty service born care are the highest volume inpatient services pro- members on the last day of the fiscal year.) Training vided at MTFs.3 Those health care needs are not the ones fewer medical staff at MTFs would constitute a consid- clinicians typically address when they deploy to combat erable change, however, and some families of military zones, a misalignment that is well documented.4 personnel would probably prefer not to receive routine care from the private sector. The military could place greater emphasis on training its clinicians—including physicians, nurses, and other Such changes could be implemented in a number of professionals who provide medical care—to treat acute ways. Although it is not possible to envision precisely injuries by placing them in civilian trauma centers.5 how changing one part of the current system would affect other aspects of military health care, CBO 3. See Department of Defense, Evaluation of the TRICARE Program: examined in detail three issues that would need to be Access, Cost, and Quality, Fiscal Year 2016 Report to Congress addressed to focus the direct care system on operational (February 2016), p. 89, https://go.usa.gov/x9hDN. readiness: the provision of combat care, the extent of care 4. See the testimony of John E. Whitley, Senior Fellow at the provided at MTFs, and the staffing of MTFs. Institute for Defense Analyses, before the Subcommittee on Personnel of the Senate Committee on Armed Services, Who Would Provide Combat Care and How Would TRICARE Reform (February 23, 2016), www.armed-services. They Be Trained? senate.gov/hearings/16-02-23-defense-health-care-reform. Under this approach, medical care provided during 5. See Christine Eibner, Maintaining Military Medical Skills During military operations overseas could be delivered either Peacetime: Outlining and Assessing a New Approach (RAND by active-duty military clinicians or by reservists, but in Corporation, 2008), www.rand.org/pubs/monographs/MG638. either case, most of their training would be conducted in html. In that report, the RAND Corporation explored how DoD might maintain the operational readiness of military personnel civilian hospitals. (Salaries for those military physicians by stationing some of them in civilian hospitals. It also presented steps that DoD could take to institute a pilot study on the 2. See Robert L. Mabry, “Challenges to Improving Combat practice. A separate study recommended an integrated network Casualty Survivability on the Battlefield,” Joint Force Quarterly, of military and civilian trauma centers for improving such care. no. 76 (First Quarter 2015), pp. 78–84, http://dtic.mil/doctrine/ See National Academies of Sciences, Engineering, and Medicine, jfq/jfq-76.pdf (3.44 MB); and Melony E. Sorbero and others, A National Trauma Care System: Integrating Military and Civilian Improving the Deployment of Army Health Care Professionals: An Trauma Systems to Achieve Zero Preventable Deaths After Injury Evaluation of PROFIS (RAND Corporation, 2013), www.rand. (National Academies Press, June 2016), http://tinyurl.com/ org/pubs/technical_reports/TR1227.html. n4r298m. CHAPTER 2: BROAD APPROACHES TO CHANGING THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 19 Although combat injuries from blasts, fire, and mil- positions at MTFs in the United States that provide a itary-grade small arms are more complex than most rotation base for military personnel who are returning injuries seen in emergency rooms (those that result from deployments overseas or that provide opportunities from falls, car accidents, and gunshots, for instance), for promotion. Also, because large reductions in active- the expertise needed for those conditions is more in line duty medical positions would result in heavy reliance on with that required on the battlefield.6 Outside of com- reservists, the military could end up short of its clinical bat operations, the only way most military clinicians are manpower requirements, particularly for specialists. exposed to emergency medicine is through simulation training and by briefly working in civilian hospitals. Who Would Provide Care at MTFs? Emergency rooms and trauma centers in urban areas Under this approach, civilians would provide at least often have large numbers of patients, which strengthens some health care in MTFs unless the direct care system health care providers’ skills. Because clinicians working became much smaller. Most peacetime medical care in emergency rooms also treat many routine medical could be furnished by federal civilians, or by contractors, conditions, they retain those skills as well. who would work in MTFs. The medical communities in the three military departments have classified between If military clinicians learned and maintained their skills 43 percent and 82 percent of their ambulatory care mainly by working in civilian hospitals, MTFs could be occupations as commercial in nature, which means those restructured or closed, depending on their workload. functions may be carried out by either federal civilians The services could, however, decide to continue train- or contractors. Those commercial occupations include ing some military clinicians in a few military hospitals surgeons and other physicians, nurses and dentists, as that specialize in mental health and in rehabilitation of well as administrators, pharmacists, and technicians. particular deployment-related injuries (such as burns Patients might notice little change or even improvement and amputations) and that offer residencies for medical if civilians provided more care because civilians tend to students and new physicians (that is, graduate medical remain in their jobs longer than military personnel, who education). must periodically change jobs and locations. What Care Would Be Provided at MTFs? What Would Be the Budgetary Consequences of Focusing the direct care system on operational readiness Such Changes? could emphasize the training of people who provide Depending on how the contracts were negotiated, mov- combat care while leaving the types of care provided and ing health care delivery from MTFs to private providers the populations served at MTFs unchanged (although could result in substantial savings or additional costs. the volume of services would be reduced); or it could DoD reports that, even within the current Prime plan, make fundamental changes in the MTFs. Many ben- the average annual cost to the government of patients eficiaries feel strongly about having access to MTFs, who use civilian providers is much less for inpatient and and leaving the types of care provided at such facilities outpatient care than for patients who use MTFs for most unchanged (but at a lower volume) could preserve some of their care.7 Civilian insurers could implement differ- of that access, but not as much as under the current ent models—such as value-based contracts—that are not system. feasible in the current structure but have the potential to reduce costs. One reason that civilian providers are Alternatively, under this approach, all care for less costly, however, is that their reimbursement rates non-active-duty patients could be moved out of the under TRICARE are tied to Medicare rates. If contracted MTFs and directed to private providers, shrinking the providers were paid rates that were comparable to those size of the direct care system substantially. Going further, paid by private insurers, which are much higher than small clinics on military bases could provide routine care Medicare’s rates, on average, switching care to civilian for active-duty members, but major procedures could be providers could be more costly, not less. Because DoD performed in outside facilities. One possible disadvan- has not put forth any plans for moving most care out of tage of such changes would be the loss of some medical 7. See Department of Defense, Evaluation of the TRICARE Program: 6. An exception is Brooke Army Medical Center in San Antonio, Access, Cost, and Quality, Fiscal Year 2016 Report to Congress Texas, which is a Level I Trauma Center. (February 2016), pp. 88 and 93, https://go.usa.gov/x9hDN. 20 Approaches to Changing Military Health Care October 2017 the MTFs, CBO could not evaluate whether other con- oversee management tasks such as enrollment of patients, tract mechanisms could reduce costs sufficiently to offset claims processing, specialty care referrals, customer ser- higher non-Medicare rates. vice, and recordkeeping. Regarding the budgetary effects of using more civilians at Under most TRICARE contracts, doctors and hospitals MTFs, CBO estimates that replacing one military mem- are paid on a fee-for-service basis, which largely puts ber with one civilian could save about $24,000 per year, the burden of implementing cost-control measures on on average, assuming that the relative costs of military DoD. Although many large employers use the same and civilian medical personnel did not change. Not all of approach—contracting with an insurer to manage those savings would accrue to DoD, however, as many provider networks and process claims and paying those of the costs of military personnel are associated with claims as they are incurred—many health insurers out- their veterans’ benefits. If fewer civilians were required to side of TRICARE have instituted or are currently exper- replace a given number of military personnel, as has been imenting with various reforms to counteract rising costs found in other areas of DoD, then additional savings and possible overutilization of services associated with would be realized within the department. For example, fee-for-service plans.10 Some employers pay insurers a if three military personnel could be replaced with only fixed fee per enrollee for coverage. Under those arrange- two civilians, CBO estimates, the annual savings could ments, the insurer bears the financial risk that costs will approach $36,000 per position replaced.8 To attain exceed expectations and therefore has stronger incentives budgetary savings, however, DoD would need to reduce to control those costs. Taking those considerations into military end strength. account, CBO examined how TRICARE could adopt an approach using fixed payments per person for health care Approach 2: Pay Fixed Amounts per services. Person to TRICARE Contractors TRICARE uses private-sector doctors, hospitals, and How Do TRICARE Contracts Currently Work? contractors to supplement care that is not provided at TRICARE contracts must adhere to certain standards, MTFs. Administration of that private-sector health care and the regional contractors have discretion about how within the United States is currently split into three to meet performance objectives. However, the contrac- geographic regions—North, South, and West—with one tors have no authority to control costs, and the prices contractor each.9 Those contractors develop and main- they pay to private providers are governed by statute. tain the private network of health care providers and Federal law mandates that TRICARE adopt Medicare’s reimbursement rules when practicable.11 8. The general methodology used in this estimate is based on earlier work by CBO. See Congressional Budget Office, Replacing TRICARE uses a prospective payment system for Military Personnel in Support Positions With Civilian Employees inpatient stays and for hospital outpatient services, (December 2015), www.cbo.gov/publication/51012. The range of potential savings in this estimate represents either one civilian similar to that used by Medicare. Under that system, replacing one service member or two civilians replacing three the payment amount for the hospital is predetermined service members. The estimate that three military personnel could for the type of medical encounter or the type of proce- be replaced with two civilians is based on the observed military- dure performed, even though the amount of care that civilian substitution ratio across both medical and nonmedical each patient receives may vary significantly.12 For other occupations. Military personnel require more training and perform more ancillary duties than civilian personnel. The 10. For an overview of recent reforms in civilian health plans military system also requires more people in a given occupation and alternative approaches, see Susan D. Hosek and others, to provide jobs for those returning from deployments and to Introducing Value-Based Purchasing Into TRICARE Reform ensure opportunities for promotion. Much of the federal savings (RAND Corporation, 2016), www.rand.org/pubs/perspectives/ would arise because civilian employees are ineligible for VA PE195.html. benefits. Also, civilian employees receive a much larger share of their income in a taxable form than do active-duty personnel, 11. 10 U.S.C. §1079(h) (2012 & Supp.). Major exceptions are which increases tax revenues paid by civilian employees relative to obstetrics and pediatrics, which generally do not apply to the military personnel. population using Medicare. 9. Beginning January 1, 2018, the three regions will be merged into 12. Sometimes the payment is adjusted for extremely long stays. two (East and West), each having one Managed Care Support Payments are also adjusted for complications that may arise or for Contractor. other conditions the patient may have (known as comorbidities). CHAPTER 2: BROAD APPROACHES TO CHANGING THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 21 types of outpatient care, such as routine office visits, about how to construct its provider networks and struc- TRICARE uses a fee-for-service payment system. Unlike ture the benefits. That feature would allow contractors prospective payment, fee-for-service is a model where to move away from fee-for-service payment structures services are unbundled and paid for separately. With that and implement alternative structures sometimes seen in type of payment system, health care providers may pre- the civilian market. MTFs, which receive appropriated scribe more treatments and procedures than are necessary funds, have their own patients and would not be part of because payment is dependent on the volume and com- the contract network; rather, beneficiaries’ use of MTFs plexity of care rather than quality of care or the medical would be part of the calculation when setting contrac- outcome. (Some of those incentives to overtreat are also tors’ capitated rates. Details would be determined by present under prospective payment systems.) the contractors, but additional contract features could include changes in how medical providers are reimbursed How Do Fixed Payments per Person Work in the and in patients’ cost sharing. Private Sector? One arrangement used in the private sector to counteract An advantage of that approach might be more predict- incentives to overtreat is capitation. Capitation can take able costs for DoD once the payment formulas were con- many forms, but in essence the provider—either the structed. Because contractors in a capitated system would insurance firm or, less commonly, the clinical practice— have a profit incentive to minimize costs, the resulting is paid a fixed amount for each enrollee to provide savings would initially accrue to them. However, compe- certain types of care for a specified period (typically tition among bidders would tend to convey at least some one year); that amount may be adjusted for risk on the of those savings to DoD over time. Alternatively, con- basis of the characteristics of each enrollee. Under full tracts could be constructed so that savings were shared capitation, providers are paid a flat fee for their assigned between contractors and DoD from the outset, but that patient population, regardless of how little or how much deviation from capitated payments would also weaken care those patients use. With other variations of capita- the incentive for TRICARE contractors to generate sav- tion, only certain types or categories of services are paid ings in the first place. To the extent that firms bear some for on a capitated basis, depending on which services are of the risk for cost variation that is now borne by DoD, excluded (also known as carved out). however, the added costs of doing so would be reflected in their bids. How Would Capitated Payments for TRICARE Work? Like private-sector plans, TRICARE could also move Although the cost per beneficiary would be more appar- toward some form of capitated payment system that ent, it is not clear that this approach would reduce fed- holds the regional contractors responsible for both the eral spending. The bidding process might not be compet- cost and quality of care. Currently, contractors pass itive because a single regional incumbent that already has claims from private health care providers through to an established network of providers in place could have a the Defense Health Agency, and bills are paid from a large advantage over other potential bidders. In addition, dedicated account.13 Alternatively, DHA could estab- most of the capitated contracts seen in the private sector lish a system in which TRICARE contractors are paid involve substantially higher cost sharing for beneficia- on a capitated basis to cover the provision of services ries. If DoD wanted to keep the current out-of-pocket to enrollees in their regions. The capitated amount per costs about the same for its enrollees, then measurable patient would be adjusted for risk. savings might not accrue. One additional concern involves the incentives to provide health care: Although One way in which DHA could institute capitated pay- fee-for-service contracts encourage overtreatment, some ments would be to select contractors through a competi- researchers have argued that capitated contracts encour- tive bidding process based largely on the capitation pay- age undertreatment. ments that those contractors would be willing to accept. Each contractor would have to meet quality and access Approach 3: Change the Way That Military standards set by DoD but would have broad latitude Departments Pay for Health Care Altering internal budgeting practices to change the way 13. All medical claims are processed by two subcontractors, PGBA, the Army, Air Force, and Navy pay for health care would LLC, and Wisconsin Physicians Service Insurance Corporation. create pressure within DoD to change the way care is 22 Approaches to Changing Military Health Care October 2017 supplied in the Military Health System (and the direct the readiness of military physicians, nurses, and other care system in particular)—with the aim of making the health care providers.15 system more efficient or more effective (or both). CBO examined two variants of this approach. One would With capitated payments, DHA would provide funds provide fixed payments to the MTFs for the health care only for medical care of enrolled populations. (That they provide beneficiaries. The other would have the approach would use capitation funding for direct care departments purchase health care on a fee-for-service basis provided at the MTFs; the previous section examined through an accounting mechanism known as a working an approach that would use capitation funding only for capital fund (WCF), which would make the cost of that care provided by contractors outside of the MTFs.) Once care more apparent to the services and provide the MHS DHA developed a per-beneficiary formula, each MTF with some additional flexibility in the way it provides care. would receive funding based on that formula and the number of beneficiaries. How Might DHA Use a Capitated Budget to Operate Military Treatment Facilities? Payments for reimbursing private providers when Just as TRICARE’s regional contractors could receive patients are referred by MTF clinicians to outside capitated payments (that is, a fixed amount per enrollee providers for care or for the few patients with signifi- per year) for the care of patients, such a system could cantly higher costs than average could be defrayed by be implemented for military treatment facilities. That DHA using a management reserve fund solely for those approach has been tried by DoD before, most recently in purposes: Because government budgeting generally does 2005. However, the department encountered a number of not allow funds to be used beyond one fiscal year, unless difficulties when conducting those experiments, includ- specifically designated otherwise in an appropriation ing the following: forecasting the number of patients act, some health care funds would have to be designated seeking care in a system that did not require beneficiaries as multiyear funding.16 To the extent that health care to enroll; calculating reimbursement rates that accu- funding under capitation was insufficient to maintain rately reflected the costs of treating patients; adjusting the MTFs, DHA, along with the military departments, for risk (particularly for high-cost patients); and enforc- would have to use a different funding source to cover the ing spending caps. When DHA begins to operate the difference or reduce costs. MTFs as a single health care system, as directed by the 2017 NDAA, capitated payments for the MTFs may be Transitioning to a system in which DHA funded only more feasible than they were in the past, especially given medical care, as opposed to also funding ancillary recent improvements in DoD’s method of collecting data activities as happens now, would take some time. One at the patient level. Nevertheless, implementing such an transitional mechanism would be for DoD to initially approach could still prove difficult. distribute to the Army, Navy, and Air Force amounts equal to the difference between each department’s cur- Currently, DHA provides each military service with rent total funding and the amount that the MTFs could funding designated for providing health care. The ser- claim as reimbursement for providing health care under vices then distribute funds to their respective surgeons capitation. That amount would then decline over time. general, who in turn allocate funds to the MTFs.14 Some The military departments could choose to pass all of that of that funding is used to provide medical care to benefi- transitional funding through to the MTFs; DHA and ciaries, and the rest is used for other activities, including the military departments could demand greater efficiency graduate medical education, training, and readiness. The from the MTFs by passing through smaller amounts funding for all those purposes is intermingled, which and reallocating the difference to other purposes; or they would make its disentanglement challenging. The details could close some MTFs if they identified higher priority of the new structure are being developed by DoD, but uses for those funds. the most recent plan grants DHA budgetary responsibili- ties for the MTFs, while service components will oversee 15. See Department of Defense, Plan to Implement Section 1073c of Title 10, United States Code, Second Interim Report (June 2017) www.health.mil/Reference-Center/Reports?query=Reform. 16. Most funding in the operation and maintenance appropriation is 14. DHA currently operates and funds two MTFs: Walter Reed for one year: It must be obligated within the fiscal year for which National Medical Center and Fort Belvoir Community Hospital, it was appropriated. Multiyear funding can be obligated over both in the Washington, D.C., area. more than one year. CHAPTER 2: BROAD APPROACHES TO CHANGING THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 23 Using capitation funding would help DoD identify With this model, funds would be appropriated by the the costs of providing health care to beneficiaries in the Congress to defense customers (in this case, the military MTFs, which could promote more efficient or more services). Those customers would place orders with DHA effective resource allocation, or both. Employing this for health care provision and obligate appropriations to approach would present significant challenges, however. pay for those services. DHA would provide health care to Foremost, closing or realigning facilities that are not beneficiaries (either at MTFs or through civilian provid- sustainable in the new capitated environment would ers), incurring costs for labor, materials, and contracts, probably be viewed as a reduction in benefits both by and adding a surcharge to cover administrative expenses military families and by those retirees located near MTFs and other overhead costs. because those people would lose access to free care. In addition, DHA would need a policy for providing addi- DHA’s prices would be set to reflect the expected average tional funding to individual MTFs that were exposed to costs for health care services. Prices would need to be set large financial risk because some patients were extremely at least a year in advance so that the military departments expensive to treat. Also, although DoD now has the could factor them into their annual budget requests. data necessary to develop a suitable method for deter- DHA, in conjunction with its customers, would project mining per-patient expenses, past efforts to implement how much and what types of health care would be capitated payments were unsuccessful. Even if those needed, and the costs they would incur. Costs would be obstacles could be overcome, the new system would be allocated across DHA’s health care services. The price of complex, and implementing it would probably take years each health care service or product would be set as the and result in additional administrative costs that might total expected costs for providing the service divided by partially offset potential savings or other benefits, such as the quantity that DHA expected to provide. (Because the cost transparency, that capitation would bring. provision of health care often involves substantial fixed costs, at least in the short run, allocating costs across How Could Military Health Care Be Funded services to set prices appropriately could be particularly Through a Working Capital Fund? challenging.) Over the years, several large organizations within the Department of Defense have adopted a system in which One advantage of pricing health care in that way is that DoD “customers” (meaning, generally, the deployable the cost of providing that care would become more elements of the armed forces) purchase services from a visible. Participating in an agency financed through a DoD supplier, using a set of internal prices. The goal is WCF could provide greater managerial flexibility as for customers that require services or commodities to well. For example, WCF agencies can meet increased be aware of their cost so that they use them more effi- demand without requesting additional appropriations ciently. Military paychecks, for instance, are processed (although they would draw more appropriated funds by the Defense Finance and Accounting Service (DFAS) from their customers) and can continue to operate for the military departments, which pay DFAS for that during a temporary government shutdown. They also service. Similarly, the U.S. Transportation Command can take on more work for other federal agencies, which (TRANSCOM) provides global transportation of pas- the MHS generally does not do.17 One disadvantage of sengers and cargo by air, land, and sea to the military this approach is that WCF organizations must develop departments and other customers, in peacetime and in cost-accounting tools to attribute costs to specific out- wartime, and charges for those services according to a set puts, and the current tools used by the MHS might not fee schedule. For instance, the Army can send troops and be sufficient, although it might be able to adopt similar equipment overseas using TRANSCOM but must pay for tools that exist in the private sector or that are used by that service and thus take its costs into account. Agencies other defense agencies. Pursuing this approach might funded in that way can take on work outside of DoD as also require realigning the responsibilities between DHA well. U.S.-based nongovernmental organizations can ship and the military surgeons general. humanitarian supplies using TRANSCOM, for example. Under this approach, DHA would join those and a few other defense agencies that receive their funding through 17. Some patients of the Veterans Health Administration currently a WCF, instead of through direct appropriations. receive selected medical procedures at MTFs. CHAPTER 3 Specific Options for Changing the Military Health System C BO has estimated the budgetary effects Under Option 2, military treatment facilities would of two options that have been proposed operate like any other preferred provider in a commer- to change the Military Health System. cial network. Thus, they would be reimbursed for care Option 1—increase cost sharing for most provided under the contracts set with the commercial beneficiaries who use TRICARE—is based on changes insurer. For example, the military hospital located in authorized by the Congress in 2016 and is intended to San Diego would become an in-network provider and affect primarily the demand for military health care. The be reimbursed for care in the same way as the civilian expectation is that higher enrollment fees, copayments, hospital nearby. Consequently, the size and scope of that and other costs would cause beneficiaries to reduce the military hospital would be determined by beneficiaries’ amount of health care services they use or switch to other demand for its services. If those beneficiaries preferred to coverage.1 In its examination of the first option, CBO go to a civilian hospital, the military hospital would not found that appreciable reductions in federal spending receive enough funding to retain its current capacity. would be possible within the current structure of the MHS. Because the supply-side initiatives would bring unprec- edented changes to the way MTFs are funded and oper- Option 2—replace TRICARE with a choice of commer- ated, and because the nature of the new civilian-based cial insurance plans for most beneficiaries—is intended market is unknown, a high degree of uncertainty is to affect both demand and supply. It is largely based associated with the estimate of Option 2’s budgetary on a proposal made by the Military Compensation and effects. (Details of CBO’s estimate and model can be Retirement Modernization Commission (MCRMC).2 found in the supplemental material that is posted with The proposal would affect the demand for medical care this report on the agency’s website, www.cbo.gov/ because most beneficiaries would see their share of costs publication/53137.) increase. It would affect the supply of medical care because, the commissioners believed, commercial insur- Option 1 could be implemented relatively quickly, but ers could bring innovations seen in the civilian insurance the full effects of Option 2 could take several years. market to the MHS. Such changes could increase the To allow for a more straightforward comparison of the value of health care—that is, they could increase the budgetary effects of the two options, CBO estimated the quality of health care while reducing costs.3 impact on federal costs in three particular years: 2021 (the first full fiscal year in which both options would be 1. See Willard Manning and others, “Health Insurance and the implemented), 2026 (5 years later), and 2031 (10 years Demand for Medical Care: Evidence From a Randomized later). Estimates are provided in constant 2017 dollars.4 Experiment,” American Economic Review, vol. 77, no. 3 (1987) www.jstor.org/stable/1804094; and Katherine Swartz, Cost- Sharing: Effects on Spending and Outcomes, Research Synthesis Option 1 would make no changes to the way health care Report 20 (Robert Wood Johnson Foundation, December 2010), is supplied, so it would not measurably improve medical http://tinyurl.com/oyle4s8 (PDF, 369 KB). readiness or the quality of health care provided. It would, 2. See Alphonso Maldon Jr. and others, Final Report of the Military however, reduce federal spending on military health care. Compensation and Retirement Modernization Commission Under Option 2, beneficiaries would have more plans (January 2015), pp. 79–119, www.dtic.mil/docs/citations/ from which to choose, with different provider networks ADA625626. and different cost-sharing requirements. Beneficiaries 3. For a discussion of value-based initiatives, see Susan D. Hosek and others, Introducing Value-Based Purchasing Into TRICARE 4. Although general price inflation is removed from the estimates, Reform (RAND Corporation, 2016), www.rand.org/pubs/ they incorporate projected cost growth in health care that exceeds perspectives/PE195.html. the general rate of inflation. 26 Approaches to Changing Military Health Care October 2017 might view those expanded choices as improvements beneficiaries who seek care from in-network providers over the TRICARE program. Also, the need to compete would pay lower out-of-pocket costs than those seeing with private facilities for patients could increase the out-of-network providers. The two TRICARE plans quality of care provided at MTFs. CBO did not measure would be offered to the family members of active-duty those effects, but the potential for improvement could be personnel and to military retirees who are not yet eligible relevant for policymakers. for Medicare and their families. Active-duty members would continue to have their health care provided by Option 1: Increase Cost Sharing for Most the MHS for free, and Medicare-eligible retirees could Beneficiaries Who Use TRICARE continue to use TRICARE for Life. This option would modify the changes to the TRICARE program that were authorized in the National Defense How the Option Would Work Authorization Act for Fiscal Year 2017 (see Box 1-1 on Under this option, beginning in January 2020, active- page 12). It would retain a managed care option (Prime) duty personnel could enroll their family members in and a preferred-provider health plan (Select), but it either TRICARE Prime (as they can now) or in Select at would eliminate the two distinct schedules of enrollment no cost. Those who enrolled in Select would be sub- fees, copayments, and deductibles—thus requiring that ject to an annual deductible, as well as copayments or people who entered service before January 1, 2018, and coinsurance for each visit, depending on whether they those who enter service after that date to incur the same saw in-network or out-of-network providers. CBO cost-sharing payments. Under the option, enrollment expects that this part of the option would result in fees for working-age retirees would be substantially very small changes in either government spending or higher than those specified in the 2017 NDAA. In utilization of health care by the families of active-duty addition, enrollment fees, copayments, and other out- personnel. of-pocket costs would be indexed to the future growth in nationwide per capita spending for health care, rather Working-age military retirees who wished to enroll in than the cost-of-living index specified in the NDAA.5 Prime could do so by paying a $650 annual fee for indi- vidual coverage or $1,300 for family coverage. The fees The Prime and Select plans would both allow users to would be approximately equivalent to those instituted manage their own care and to see either in-network when TRICARE began providing benefits in 1995— or out-of-network providers. As is currently the case, $230 for individual coverage or $460 per family—after adjusting for growth in nationwide per capita health care spending.6 (The enrollment fees would be approximately 5. CBO recently published a cost estimate for S. 1519, the National double those authorized in the 2017 NDAA, but all Defense Authorization Act for Fiscal Year 2018. Section 707 of that bill would apply the higher out-of-pocket costs enacted in other out-of-pocket costs would be the same as those the National Defense Authorization Act for Fiscal Year 2017 stipulated by that legislation.) (P.L. 114-328) to almost all working-age retirees, even those who began their service before 2018. See Congressional Budget Office, Retirees (or surviving spouses) who wanted coverage cost estimate for S. 1519, the National Defense Authorization from TRICARE’s preferred provider plan (Select)— Act for Fiscal Year 2018 (August 3, 2017), www.cbo.gov/ publication/52991. The savings from Option 1 would be greater which would include both in-network and out-of- than the savings from S. 1519 because Option 1 would impose network coverage—could enroll and pay an annual higher enrollment fees, and out-of-pocket costs would increase fee of $450 for individual coverage or $900 for family each year with the rate of growth of medical inflation. CBO also coverage. For visits to civilian providers, beneficiaries has previously estimated the effects of increasing out-of-pocket would pay copayments that matched the new amounts costs for working-age retirees in its biennial volume on options for reducing the deficit. For instance, see Congressional Budget Office, “Health Option 15: Modify TRICARE Enrollment Fees 6. As a point of comparison, the least expensive health maintenance and Cost Sharing for Working-Age Military Retirees,” Options for organization available to federal civilians in the Mid-Atlantic Reducing the Deficit: 2017–2026 (December 2016), pp. 263–264, region (where most federal civilians reside) costs the employee www.cbo.gov/publication/52142. The estimates for Option 1 $1,450 per year for individual coverage and $3,400 per year are similar to the estimates in that volume. Differences are for family coverage. See Kaiser Permanente, 2017 Kaiser attributable to the effects of recently enacted legislation, updated Foundation Health Plan of the Mid-Atlantic States, Inc., RI 73-047 economic inputs, and differences in the out-of-pocket costs (October 2016), p. 102, http://tinyurl.com/y7atqukl (PDF, postulated for the estimates. 463 KB). CHAPTER 3: SPECIFIC OPTIONS FOR CHANGING THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 27 authorized by the Congress in the 2017 NDAA, while enrollment fees for working-age retirees would be higher treatment at MTFs would continue to be free. Retirees than those specified in the 2017 NDAA and because also would have an annual deductible of $150 per this option would index out-of-pocket costs to medical individual or a family deductible of $300 for in-network inflation (rather than to the cost-of-living adjustment for care, and deductibles of $300 per individual and retiree pensions, which is equal to the annual increase in $600 per family for out-of-network care. the consumer price index), the option would produce estimated savings larger than those expected under the Effects of the Option NDAA for all future years. CBO finds that increasing the share of health care costs paid by most TRICARE beneficiaries, beginning Discretionary spending outside of DoD would increase in January 2020, could reduce federal discretionary slightly under the option. Some eligible retirees would spending by about $2.9 billion in 2031. There is some switch to other discretionary federal programs—such as uncertainty associated with the estimate because of the the Federal Employees Health Benefits (FEHB) pro- possibility that the Department of Defense would retain gram (if the person or his or her spouse was employed capacity in the MTFs that exceeded the amount required as a civilian by the federal government) or the Veterans for the care of beneficiaries. There would also be a small Health Administration—increasing the costs of those reduction ($0.4 billion) in revenues collected annually programs. Some of those increases would be offset by by the federal government, as some beneficiaries would reductions in spending on health care for current mem- switch from TRICARE to health care plans offered by bers of the uniformed services outside of DoD (specif- their civilian employers. Thus, the net effect of Option 1 ically, the Coast Guard, and commissioned officers in would be to reduce the deficit by $2.5 billion in 2031, if the Public Health Service and the National Oceanic and the Congress reduced discretionary spending accordingly. Atmospheric Administration). On net, about $0.3 bil- lion in additional spending would be needed for those Effects on Discretionary Costs. The increased out-of- programs in 2031, CBO projects, so the overall reduc- pocket expenses for beneficiaries would reduce DoD’s tion in discretionary costs would be $2.9 billion in that discretionary costs for the TRICARE program, both year. directly, as enrollees used fewer services, and indirectly, as Prime members switched to Select or to civilian care Effects on Mandatory Spending and Revenues. Some provided by their current employers or some other low-income people would switch to Medicaid, thereby source.7 As the amount of care provided by some MTFs increasing mandatory spending. However, those increases decreased, the direct care system would have excess in mandatory spending would be roughly offset by capacity if DoD did not adjust its size. However, DoD reduced mandatory spending on the TRICARE-related might be unable to eliminate some of that capacity health care costs of retired members of the non-DoD because of training needs or for other reasons. Paying to uniformed services—the net effect being that the change maintain some or all of that excess capacity would limit in mandatory spending would be close to zero in 2031.8 the savings associated with higher fees and copayments. The changes in TRICARE fees also would cause some According to CBO’s estimates, if TRICARE fees, current users to shift to health care plans sponsored by copayments, and deductibles were modified as specified their employers in the private sector. Because premiums in Option 1, and if DoD could only decrease excess paid by employers for employment-based health insur- capacity by about half, discretionary costs for DoD’s ance are not subject to federal income tax, the change TRICARE program would be reduced, on net, by would lead to a shift in overall compensation from tax- $1.6 billion in 2021 (in 2017 dollars). Savings in 2031, able wages to nontaxable fringe benefits. CBO and the when the benefit changes were fully implemented and staff of the Joint Committee on Taxation estimate that any capacity reductions had been made, would equal about $3.2 billion (see Table 3-1). Because the initial 8. Health care costs for retired uniformed members of the Coast Guard, the Public Health Service, and the National Oceanic and Atmospheric Administration are paid from mandatory 7. In this chapter, CBO uses the word “costs” to describe the spending accounts. By contrast, DoD pays for the health care of changes in discretionary funding that would need to be its retirees who are not yet eligible for Medicare out of its annual appropriated by the Congress. discretionary appropriation. 28 Approaches to Changing Military Health Care October 2017 Table 3-1 . Estimated Budgetary Effects of Option 1: Increasing Cost Sharing for Most Beneficiaries Under TRICARE Billions of 2017 Dollars 2021 2026 2031 Changes in Discretionary Budget Authority a Department of Defense -1.6 -2.3 -3.2 VHA, FEHB program, and other uniformed services 0.1 0.2 0.3 Net Impact on Discretionary Budget Authority -1.5 -2.1 -2.9 Other Budgetary Effects Change in mandatory outlaysb * * * c Change in revenues -0.3 -0.3 -0.4 Sources: Congressional Budget Office; staff of the Joint Committee on Taxation. This option would increase the annual enrollment fee for retirees who use TRICARE Prime to $650 for individuals and $1,300 for families. It also would create an enrollment fee for TRICARE Select of $450 for individuals and $900 for families and would have separate deductibles for in-network and out-of-network care. In addition, it would increase copayments. All fees and deductibles would increase each year at the rate of per capita medical inflation. This estimate is based on the assumption that the change would become effective in calendar year 2020. FEHB = Federal Employees Health Benefits; VHA = Veterans Health Administration; * = between -$50 million and $50 million. a. For the discretionary effects of the option, changes in outlays would approximately equal the changes in budget authority. b. Mandatory spending would increase because some retirees would rely more heavily on certain mandatory federal programs, such as Medicaid (if they have low incomes) or the FEHB program (if they have retired from the federal civil service). However, mandatory spending would decline for retirees associated with the Coast Guard, the Commissioned Officer Corps of the National Oceanic and Atmospheric Administration, and the uniformed corps of the Public Health Service. The combined effect is shown on the table. c. Negative numbers represent a loss of revenues. About 28 percent of the estimated revenues for each year (about $0.1 billion in 2031) would come from Social Security payroll taxes and so would be classified as off-budget. Revenues would decrease because many working-age retirees would increase their use of employment-based health plans, which would reduce taxable income. this shift would result in a reduction of about $0.4 bil- private insurers would specify what the new cost- lion in federal revenues in 2031 (in 2017 dollars).9 sharing requirements would be); and Option 2: Replace the TRICARE Health Plans ■■ Require most MTFs to become in-network providers With a Choice of Commercial Insurance in commercial health plans and be reimbursed for Plans for Most Beneficiaries care. Beginning in January 2020, this option, based on the one proposed by the Military Compensation and How the Option Would Work Retirement Modernization Commission, would: Under this option, active-duty personnel would still receive care at MTFs, and Medicare-eligible beneficia- ■■ Eliminate the TRICARE health plans and contracts ries could continue to use TFL. (Thus, MTFs would and establish a system of private insurance plans from continue to receive appropriated funds for the care of which families of active-duty personnel and working- active-duty personnel and reimbursement from the age retirees could choose; Medicare-Eligible Retiree Health Care Fund for the care of Medicare-eligible retirees.) Service members who ■■ Provide an allowance to the families of active-duty wished to purchase health insurance for their families personnel to cover their median health insurance would pay 28 percent of the premium for the plan they plan premiums and average out-of-pocket costs (the chose. Those service members would receive a tax-free allowance to offset average costs for family premiums 9. Of the estimated $445 million reduction in revenues that would and other out-of-pocket expenses. Service members result in 2031, about $125 million would come from Social could keep any part of the allowance that was unspent at Security payroll taxes and would be classified as off-budget. CHAPTER 3:  SPECIFIC OPTIONS FOR CHANGING THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 29 the end of the year.10 Working-age retirees who wished to result from those higher out-of-pocket expenses, discre- purchase health insurance for themselves or their families tionary costs for DoD would increase by about $2.7 bil- would pay 20 percent of their chosen plan’s premium lion in 2021, CBO estimates (see Table 3-2). Costs but would receive no allowances to offset those higher for DoD would increase in part because of the higher expenses. reimbursement rates paid to providers, but also because of the new allowances and the likelihood that DoD Family members of active-duty personnel and work- would retain excess capacity in its direct care system—all ing-age retirees and their families would be subject to of which would more than offset the potential savings the copayments or coinsurance costs established by their for DoD from reduced demand. By 2031, if the excess chosen plan and would have to pay for care obtained capacity in the system was reduced by about half, DoD from MTFs rather than receiving that care for free. For could see a small reduction in costs (of about $0.4 bil- this estimate, CBO assumed that TRICARE reimburse- lion per year, in 2017 dollars). The estimated budgetary ment rates to civilian providers would no longer be tied effects are very sensitive to that judgment about the to Medicare rates, as they are currently, so that reim- reduction in excess capacity. bursement costs would be higher under the option than under current law.11 Discretionary costs for the Veterans Health Administration, FEHB program, and the other uni- Effects of the Option formed services would increase by an additional $0.2 bil- CBO finds that changing the TRICARE program in the lion in that year, largely because of military retirees’ leav- way the MCRMC proposes would have small budgetary ing TRICARE and relying more on the care provided by effects once it was phased in, but the estimates are highly VHA. Thus, under Option 2, discretionary costs for the uncertain. Two factors—the provision of allowances to federal government as a whole would decrease by about families of active-duty members and the possibility that $0.2 billion in 2031 (in 2017 dollars), CBO estimates. DoD would retain capacity in the MTFs that exceeded the amount required for beneficiaries—would offset the Comparison With the MCRMC’s Estimate. The budgetary savings that would result if retiree families MCRMC estimated that implementing its proposal paid higher premiums and copayments. could reduce DoD’s spending for health care by about $3.2 billion per year (which represents about 6 per- Effects on Discretionary Costs. In CBO’s estimation, cent of MHS’s annual spending).12 According to the the effects on the demand for health care would be larger Commissioners’ findings, about two-thirds of the savings under this option than those seen in Option 1 because ($2.2 billion annually) would come from higher cost beneficiaries’ cost-sharing requirements in the new sharing paid by beneficiaries. In the Commissioners’ system would be greater, on average, than those under estimation, private-sector health plans would offer better Option 1. Despite the reductions in demand that would management of beneficiaries’ health care usage and outcomes and would be able to reduce the program’s 10. Families that faced catastrophic illness would be able to apply for overhead and management expenses—thus account- relief under a program that DoD would establish specifically for ing for the remainder of the savings. They based their that purpose. conclusions on the expectation that the MTFs—as in- 11. Recent reports show that commercial insurance payments to network providers in a commercial system—could pro- physicians are about 25 percent higher than similar payments vide sufficient care to cover their operating costs, perhaps from Medicare and that payments to hospitals are, on average, by charging patients lower out-of-pocket costs than other about 75 percent higher under commercial insurance plans. See providers. They also assumed that MTFs could treat Medicare Payment Advisory Commission, Report to the Congress: other populations, including veterans or local civilians. Medicare Payment Policy (March 2016), pp. 82 and 94, https:// go.usa.gov/xncBB (PDF, 5.6 MB). Also see Thomas M. Selden But if MTFs could not attract enough business to cover and others, “DATAWATCH: The Growing Difference Between Public and Private Payment Rates for Inpatient Hospital Care,” 12. For an analysis of the estimated savings, see Sarah K. Burns, Health Affairs, vol. 34, no. 12 (December 2015), pp. 2147–2150, Philip M. Lurie, and Stanley A. Horowitz, Analyses of the http://doi.org/10.1377/hlthaff.2015.0706; and Jared Lane Military Healthcare Benefit Design and Delivery: Study in Support Maeda and Lyle Nelson, An Analysis of Private-Sector Prices for of the Military Compensation and Retirement Modernization Hospital Admissions, Working Paper 2017-02 (Congressional Commission, IDA Paper P-5213 (Institute for Defense Analyses, Budget Office, April 2017), www.cbo.gov/publication/52567. January 2015), www.dtic.mil/docs/citations/ADA617159. 30 Approaches to Changing Military Health Care October 2017 Table 3-2 . Estimated Budgetary Effects of Option 2: Replacing TRICARE With a Choice of Commercial Insurance Plans for Most Beneficiaries Billions of 2017 Dollars 2021 2026 2031 a Changes in Discretionary Budget Authority Department of Defense 2.7 1.3 -0.4 VHA, FEHB program, and other uniformed services 0.2 0.2 0.2 Net Impact on Discretionary Budget Authority 3.0 1.5 -0.2 Other Budgetary Effects Change in mandatory outlaysb * * * Change in revenuesc -0.6 -0.8 -0.9 Sources: Congressional Budget Office; staff of the Joint Committee on Taxation. This option would replace TRICARE with a choice of private insurance plans from which family members of active-duty personnel and working-age retirees could choose. Average deductibles and copayments would increase, but families of active-duty service members would receive an allowance to offset those costs. MTFs could become preferred providers in the private networks and be reimbursed for care. Reductions in excess capacity of the MTFs would be phased in over 10 years. This estimate is based on the assumption that the change would become effective for all beneficiaries beginning in calendar year 2020. FEHB = Federal Employees Health Benefits; MTFs = military treatment facilities; VHA = Veterans Health Administration; * = between -$50 million and $50 million. a. For the discretionary effects of the option, changes in outlays would approximately equal the changes in budget authority. b. Mandatory spending would increase because some retirees would rely more heavily on certain mandatory federal programs, such as Medicaid (if they have low incomes) or the FEHB program (if they have retired from the federal civil service). However, mandatory spending would decline for retirees associated with the Coast Guard, the Commissioned Officer Corps of the National Oceanic and Atmospheric Administration, and the uniformed corps of the Public Health Service. The combined effect is shown on the table. c. Negative numbers represent a loss of revenues. About 28 percent of the estimated revenues for each year (about $0.2 billion in 2031) would come from Social Security payroll taxes and so would be classified as off-budget. Revenues would decrease because many retirees would increase their use of employment-based health plans, which would reduce taxable income. their costs, their excess capacity could be eliminated by network, much like any other private provider, and could DoD, in their estimation. Because some of the new plans adjust its capacity to reflect the demand for its services. could offer greater choice to consumers than is currently By contrast, CBO considered the likelihood that the offered by TRICARE, the Commissioners argued, the direct care system would have excess capacity that DoD overall quality of health care would increase as well. would retain through subsidies. CBO’s estimate differs from the MCRMC’s plan in two The MCRMC proposal also would change how a por- significant ways. First, the MCRMC proposed phasing tion of military health care is funded: It would fund the in the higher premiums over 15 years to help retirees benefit for younger retirees in the same way the TFL adjust to the new plan. However, to examine the full program is financed, so that health care for all retirees effect of the proposal, CBO based its estimate on the (not just those who are eligible for Medicare) would assumption that the new premiums and other cost-shar- be funded through accrual charges. Under an accrual ing requirements would take effect in 2020. Second, and budget, DoD pays for the future benefits of people who of greater importance in assessing the long-term effects, are currently providing military service. By contrast, with the MCRMC assumed that the direct care system—that a cash system, the current year’s defense budget reflects is, the MTFs—could be part of the commercial plan the cost of pensions or health care benefits provided now CHAPTER 3:  SPECIFIC OPTIONS FOR CHANGING THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 31 to retirees who ceased contributing to national security would be reduced by about half and that DoD would years earlier. The accounting effects of switching to an choose to retain that capacity through subsidies. Small accrual fund, however, would make it hard to observe variations in those factors could cause large changes in the budgetary effects of altering the TRICARE benefit. the estimates. Evaluated at the midpoint of the ranges, For this portion of the analysis, CBO therefore estimated discretionary costs would decrease by about $200 million the effects of changes in benefits under a cash-accounting per year, CBO estimates, but costs could fall in a likely system—that is, when DoD pays for the health benefits range from about $3.7 billion in annual savings to about of retirees as they are incurred—and explored the effects $3.2 billion in annual costs. of accrual funding separately (see Box 3-1). Although accrual funding would affect DoD’s budget, it would not An additional source of uncertainty about the effects of affect the federal budget deficit or surplus. this option relates to the integration of MTFs into the provider networks of commercial health plans, a process Uncertainty About Discretionary Costs. Under this that could be quite difficult. The MTFs would have to option, the effects on DoD’s costs are substantially more shift from their current financing through DoD’s budget uncertain than in Option 1 because the program would to arrangements in which they received much of their be significantly different from the current TRICARE funding from those health plans. And they would still program. In particular, CBO had to consider two related need to provide and budget for their care of active-duty variables when estimating the effects of Option 2: personnel. The commercial health plans would have to determine their premium bids despite substantial ■■ The extent to which beneficiaries would leave MTFs uncertainty about the pricing and use of care at MTFs. in favor of private providers, and Because those facilities are generally located close to military families and represent their usual source of ■■ The ability of DoD to reduce the excess capacity in care, health plans that did not include MTFs in their MTFs if the direct care system was not able to fully networks might have trouble attracting enrollees. Private cover its costs by providing health care. hospitals might view military facilities as competitors and raise concerns with insurers about including military For the purposes of this estimate, CBO took the mid- hospitals in civilian networks. Much would depend on point of the distributions for both key variables. In local conditions, but the operational challenges of imple- CBO’s view, it is likely that some patients would switch menting such a shift would be substantial and it could from MTFs to private-sector care because they would take much longer than anticipated by the MCRMC or face cost sharing for services from MTFs. In addition, by CBO. some MTFs might not be part of the providers’ net- works. Those changes would leave excess capacity in the Effects on Mandatory Spending and Revenues. Like direct care system. If DoD maintained all of the excess Option 1, this option also would affect mandatory capacity—for readiness or other reasons—subsidies to spending and tax revenues. Mandatory spending would the affected MTFs might be required, and discretionary decrease slightly, CBO estimates, by about $15 million costs would increase. If DoD could reduce all of the annually (in 2017 dollars), primarily because of reduced excess capacity, then the direct care system would be fully spending for retirees who served in the Coast Guard and funded for the health care it provided, and no discretion- for uniformed members of the Public Health Corps. ary spending would be required to subsidize it.13 CBO estimated that the workload in the direct care system The changes in TRICARE fees also would cause some working-age retirees to shift to health care plans spon- sored by their current employers in the private sector. 13. Under Option 2, MTFs potentially would receive funding from several sources. They would receive appropriated funds related Because employment-based health insurance premiums to the care of active-duty personnel, plus any funding related to are not subject to federal income tax, the change would excess capacity. They would receive funding from the MERHCF lead to a shift in overall compensation from taxable for those retirees who are eligible for TFL. And they would wages to nontaxable benefits. CBO and the staff of the receive funding from private health plans for care provided as Joint Committee on Taxation estimate this shift would part of the network. It could be more difficult to identify the cost of operating an MTF under the option than it is under the current system. 32 Approaches to Changing Military Health Care October 2017 Box 3-1. The Effects of Implementing Accrual Funding for Working-Age Retirees Under Option 2 The Department of Defense (DoD) currently uses a cash-ac- government as a whole (hence, they are not described in the counting system to record payments for the health care table.) benefits of working-age retirees—that is, costs are recorded To add the health care costs of younger retired beneficiaries as they are incurred. Consequently, decisionmakers may be to the existing fund for older retirees, however, DoD and the more likely to determine the size and composition of the force other uniformed services (the Coast Guard, the Public Health with little regard for the implications of the costs of retirees’ Service, and the National Oceanic and Atmospheric Adminis- future health care coverage. By contrast, under an accrual tration) would pay an additional accrual charge into the fund system, the cost of those future benefits would be reflected each year for the future health care benefits that are earned in DoD’s current budget through accrual charges, potentially in that year. Those payments would be determined by DoD’s giving the department and policymakers a better picture of Board of Actuaries so that the contributions, together with the full costs of military personnel. The accrual payments the interest, would fund the expected future medical benefits. from DoD represent an intragovernmental transfer and do not Using the most recent economic assumptions approved by the affect the federal budget as a whole. Both military retirement board, CBO estimates that those new accrual payments would pay and the TRICARE for Life (TFL) program are funded from amount to about $13 billion per year in steady state accrual accounts. (in 2031, expressed in 2017 dollars). The Congressional Budget Office examined a proposal made Under current law, DoD’s accrual payments for the TFL by the Military Compensation and Retirement Modernization program are uniform regardless of the branch of service or Commission that would expand the accrual fund currently rank, so CBO’s estimates of the effects of Option 2—replace used to pay for the health care of Medicare-eligible enrollees TRICARE with a choice of commercial insurance plans for most in TFL in several steps to include the health care costs of beneficiaries—are similarly uniform.2 According to information working-age retirees (and their families). Under that proposal, obtained from DoD’s Office of the Actuary, in 2016, the most discretionary spending by DoD for the care that is currently recent year for which published data are available, that office provided to retirees and their family members would be used an inflation rate of 2.75 percent, a nominal discount rate eliminated, except for the accrual charge. That reduction, net of 5.5 percent, and an expected nominal rate of growth for of the added cost of new allowances for active-duty families medical expenditures of 5.5 percent.3 and reservists, would total about $16.8 billion annually in the steady state (as represented in 2031), CBO estimates (see the The overall reduction in discretionary costs across the federal table).1 budget in 2031 would equal about $3.2 billion. DoD would receive payments from the fund for the care it provides to DoD would not be responsible for funding the cost of benefits those beneficiaries. Payments from the accrual fund would attributable to military service before 2020. The Treasury be considered mandatory spending and would equal about would make payments into the fund to cover that liability for $16 billion per year (in 2017 dollars), CBO estimates. past service. Because that transaction would be a manda- tory outlay with a corresponding mandatory receipt, there would be no budgetary implications for DoD or the federal 2. The only distinction in the payments is between those for full-time service members and those for part-time reservists. Because part-time reservists are less likely to reach retirement, the accrual charges for 1. Estimated annual costs are shown in the “steady state”—that is, when them are lower than the charges for full-time personnel. Even reservists the benefit changes would be fully implemented and any capacity who do retire cannot draw health benefits until they start receiving an reductions would have been made, which CBO projects would happen annuity (at roughly age 60). by 2031. 3. See Department of Defense, Office of the Actuary, Valuation of the Medicare-Eligible Retiree Health Care Fund (December 2016), pp. D-2–D-3, https://go.usa.gov/xX3JV (PDF, 2.27 MB). Continued CHAPTER 3: SPECIFIC OPTIONS FOR CHANGING THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 33 Box 3-1.Continued The Effects of Implementing Accrual Funding for Working-Age Retirees Under Option 2 Estimated Budgetary Effects of Replacing TRICARE With Private Insurance and Using Accrual Funding Billions of 2017 Dollars 2021 2026 2031 a Changes in Discretionary Budget Authority Department of Defense Defense Health Program -10.8 -13.5 -16.8 New accrual payments 9.6 11.4 13.4 VHA, FEHB program, and other uniformed services 0.2 0.2 0.2 Net Impact on Discretionary Budget Authority -1.0 -1.8 -3.2 Other Budgetary Effects Change in mandatory outlaysb 13.5 14.7 16.2 Change in revenuesc -0.6 -0.8 -0.9 Receipt of accrual payments (nonscorable)d -9.6 -11.4 -13.4 Sources: Congressional Budget Office; staff of the Joint Committee on Taxation. This option would replace TRICARE with a choice of private insurance plans from which family members of active-duty personnel and working- age retirees could choose. DoD would pay the estimated future costs of the current force for retiree health care into an accrual fund. Average deductibles and copayments would increase, but families of active-duty service members would receive an allowance to offset those costs. MTFs would become preferred providers in the private networks and be reimbursed for care. Reductions in excess capacity at MTFs would be phased in over 10 years. This estimate reflects the assumption that the change would become effective for all beneficiaries beginning in calendar year 2020. FEHB = Federal Employees Health Benefits; MTFs = military treatment facilities; VHA = Veterans Health Administration. a. For the discretionary effects of the option, changes in outlays would approximately equal the changes in budget authority. b. Under accrual accounting, the health care costs of working-age retirees would be paid from a mandatory account, so the change in mandatory outlays in this table is larger than the comparable change in Table 3-2. To crosswalk the estimates in this table with those in Table 3-2, one would eliminate the payment and receipt of the accrual payments and add together the lines for “Defense Health Program” and “Change in Mandatory Outlays,” which would approximately equal the line for “Department of Defense” in Table 3-2. Any differences are due to rounding. Although accrual accounting would affect DoD’s budget and mandatory spending, it would not affect the budget deficit or surplus. c. Negative numbers represent reductions in budget authority or a loss of revenues. About 28 percent of the estimated revenues for each year would come from Social Security payroll taxes and so would be classified as off-budget. Revenues would decrease because many retirees would increase their use of employment-based health care plans, which would reduce taxable compensation. d. New accrual payments would be offset one-for-one by the receipt of those payments into the accrual fund. However, for budget-enforcement purposes, the receipt of those payments could not be used to offset mandatory outlays. 34 Approaches to Changing Military Health Care October 2017 Table 3-3 . Detailed Estimates of the Cost of Health Care for an Average Family Using TRICARE in 2031 2017 Dollars Working-Age Retirees and Their Familiesa Families of Active-Duty Personnelb Current Current Program Option 1 Option 2 Program Option 1 Option 2 Health Care Costs for a Family Paid by the government 24,100 21,900 21,000 24,300 24,200 14,800 Paid by a family 1,900 _______ 3,300 _______ 7,500 _______ 300 _______ 300 _______ 7,900 _______ Total cost per family 26,000 25,300 28,500 24,600 24,500 22,700 Costs to the Government Health care costs for a family 24,100 21,900 21,000 24,300 24,200 14,800 Allowance paid to a family n.a. n.a. n.a. n.a. n.a. 7,900 Additional subsidy to retain capacity at MTFsc n.a. _______ 200 _______ 2,500 _______ n.a. _______ 0 _______ 4,400 _______ Total cost per family 24,100 22,100 23,500 24,300 24,200 27,100 Costs to a Family Health care costs paid out of pocket 1,900 3,300 7,500 300 300 7,900 Allowance received from the government n.a. _______ n.a. _______ n.a. _______ n.a. _______ n.a. _______ -7,900 _______ Total cost per family 1,900 3,300 7,500 300 300 0 Source: Congressional Budget Office. A family is defined as a household that relies on TRICARE for 100 percent of its health care. Estimated annual costs are shown in the “steady state”—that is, when the benefit changes would be fully implemented and any capacity reductions would have been made, which CBO projects would happen by 2031. MTFs = military treatment facilities; n.a. = not applicable. a. The average retiree family consists of three people, including the retiree sponsor who is not yet eligible for Medicare. b. The average active-duty family consists of three people, not including the sponsor. c. The potential subsidies required to retain capacity at MTFs under the options are uncertain. CBO estimates that the likely range of possible outcomes varies from zero to $400 per retiree family in Option 1, from zero to $4,900 per retiree family under Option 2, and from zero to $8,700 per active- duty family under Option 2. result in a reduction of about $900 million in federal family’s out-of-pocket costs are expected to amount to revenues in 2031.14 about $2,000.15 Both options would reduce the govern- ment’s costs for the average retiree family, CBO esti- Comparing the Estimated Average Costs per mates, largely by increasing beneficiaries’ premiums, fees, Family of Each of the Two Options or other out-of-pocket costs. Each of the options would have different implications for the government and for families of both active-duty Under Option 1, retiree families would see their costs service members and military retirees (see Table 3-3). rise by about $1,400 annually. Under Option 2, retiree families could see their out-of-pocket costs rise by about Costs for Retiree Families. In 2031, under current law, $5,600 per year, growing to about four times their share the average retiree family is expected to cost the federal under the current program. (Cost-sharing requirements government about $24,000 (in 2017 dollars), and that would not be specified under Option 2, so estimating 14. Of the estimated $0.9 billion reduction in revenues that would 15. The per-family calculations are composites and have been result in 2031, about $0.2 billion would come from Social weighted by the proportion of families using the different Security payroll taxes and would be classified as off-budget. TRICARE plans. CHAPTER 3: SPECIFIC OPTIONS FOR CHANGING THE MILITARY HEALTH SYSTEM Approaches to Changing Military Health Care 35 what enrollees would pay in premiums and what cost because increased out-of-pocket expenses would reduce sharing they would incur is difficult. CBO judged that their use of health care.17 the new cost-sharing and provider reimbursement rates would be comparable to those seen in the civilian sector, Effects of Excess Capacity on the Government’s Costs. particularly in the FEHB program, because the new sys- The net effects of Option 2 (and to a lesser extent tem would resemble that program in some respects.)16 Option 1) for both retiree and active-duty families would depend on the extent to which DoD retained all Costs for Active-Duty Families. For the average active- of the current capacity in the direct care system. Under duty family, the total cost to the government would be Option 2, the annual cost to the government per active- similar under current law and under Option 1, equal- duty family to maintain about half the excess capacity ing a little more than $24,000 annually in either case. at MTFs would be $4,350, with a likely range of zero to However, the government’s cost per family would rise $8,700 per family per year. The comparable amount for a under Option 2, to more than $27,000, because DoD retiree’s family would be about $2,460 per year, ranging would be paying for the health care of those families between zero and $4,920 per year. Because active-duty as well as the costs required to retain excess capacity at families tend to use the direct care system more inten- MTFs. Nevertheless, the quantity of care used by active- sively than retiree families, the financial effect on MTFs duty families and retirees would decline, CBO projects, would be larger if more of those families switched to civilian network providers under the options. 16. Utilization is currently higher among TRICARE Prime enrollees 17. Because active-duty families would no longer have health care as than users of civilian plans. See Department of Defense, an in-kind benefit but would instead receive allowances to offset Evaluation of the TRICARE Program: Access, Cost, and Quality, the higher average premiums under Option 2, CBO estimates Fiscal Year 2016 Report to Congress (February 2016), pp. 85 and that their use of health care would probably decrease by about 90, https://go.usa.gov/x9hDN. 18 percent. Appendix: Cost Sharing in TRICARE Under Current Law T he deductibles, copayments, and other fees out-of-pocket costs (see Table A-1). Family members that TRICARE users face depend on several can use Extra or Standard (a preferred provider factors: whether the beneficiary is serving on network, known as a PPO in the civilian sector), both active duty, is a family member or surviving of which allow more choice of providers but require a spouse of an active-duty service member, or is retired deductible and some cost sharing. from the military. Other considerations are the type of TRICARE plan the beneficiary qualifies for and uses— ■■ Retirees and their families who are not yet eligible for Prime, Extra, or Standard—and whether the individual Medicare (sometimes called working-age retirees) pay receives care in a military treatment facility or from a nothing if they rely on military treatment facilities civilian provider. for their care. If they choose to use civilian providers within the Prime network, they face lower costs than This appendix provides an overview of the various fees those who rely on the Extra network or pay Standard that certain TRICARE users pay. The accompanying out-of-network charges (see Table A-2). They pay a tables provide a more detailed breakdown of those costs. larger share of costs than family members of people on active duty. ■■ Active-duty members and their families who use Prime (a managed care option similar to a health maintenance organization, or HMO) pay no 38 Approaches to Changing Military Health Care October 2017 Table A-1 . Costs Incurred by Active-Duty Service Members and Their Families Under TRICARE in 2017 Prime (HMO)a Extra (PPO, in network)b Standard (PPO, out of network) Annual Enrollment Fee 0 0 0 Annual Deductible for Civilian $50 single/$100 family for E-4 and below; $50 single/$100 family for E-4 and below; 0 Careb $150/$300 for E-5 and above $150/$300 for E-5 and above Outpatient Visit 0 15% of negotiated charge 20% of allowed charges for covered service Emergency Services 0 15% of negotiated charge 20% of allowed charges for covered service Mental Health Visit 0 15% of negotiated charge 20% of allowed charges for covered service Inpatient Hospitalization 0 $18 per day ($25 minimum charge) $18 per day ($25 minimum charge) c Catastrophic Cap $1,000 $1,000 $1,000 Source: Department of Defense, Office of Health Affairs. E-4 and E-5 denote military pay grades. HMO = health maintenance organization; PPO = preferred provider organization. a. Beneficiaries participating in Prime receive priority treatment when they make appointments at military treatment facilities. Those participants can see specialty providers without a referral under a “point-of-service” (POS) alternative. The POS alternative has a deductible that ranges from $300 (for individual coverage) to $600 (for family coverage) and 50 percent cost sharing. b. Cost sharing begins after the outpatient deductible is met. c. The catastrophic cap is the annual maximum a family would have to pay for TRICARE-covered services. Some costs do not count toward that cap. APPENDIX Approaches to Changing Military Health Care 39 Table A-2 . Costs Incurred by Working-Age Retirees and Their Families Under TRICARE in 2017 Prime (HMO)a Extra (PPO, in network)b Standard (PPO, out of network) $282.60 single/ Annual Enrollment Fee 0 0 $565.20 family Annual Deductible for Civilian Careb 0 $150 single/$300 family $150 single/$300 family Outpatient Visit $12 20% of negotiated charge 25% of allowed charges Emergency Services $30 20% of negotiated charge 25% of allowed charges Mental Health Visit $12 20% of negotiated charge 25% of allowed charges In Network: $250/day or 25% for hospital $848 per day or 25% of institutional $11/day Inpatient Hospitalization services (whichever is less) plus 20% for services (whichever is less) plus 25% for ($25 minimum) separately billed professional charges separately billed professional charges Catastrophic Capc $3,000 $3,000 $3,000 Source: Department of Defense, Office of Health Affairs. HMO = health maintenance organization; PPO = preferred provider organization. a. Beneficiaries participating in Prime receive priority treatment when they make appointments at military treatment facilities. Those participants can see specialty providers without a referral under a “point-of-service” (POS) alternative. The POS alternative has a deductible that ranges from $300 (for individuall coverage) and $600 (for family coverage) and 50 percent cost sharing. b. Cost sharing begins after the outpatient deductible is met. c. The catastrophic cap is the annual maximum a family will have to pay for TRICARE-covered services. Some costs do not count toward this cap. List of Tables and Figures Tables S-1. Alternatives That Might Address Concerns About the Military Health System 2 S-2. Estimated Cost of Health Care for an Average Family Using TRICARE in 2031 5 3-1.Estimated Budgetary Effects of Option 1: Increasing Cost Sharing for Most Beneficiaries Under TRICARE 28 3-2.Estimated Budgetary Effects of Option 2: Replacing TRICARE With a Choice of Commercial Insurance Plans for Most Beneficiaries 30 3-3.Detailed Estimates of the Cost of Health Care for an Average Family Using TRICARE in 2031 34 A-1.Costs Incurred by Active-Duty Service Members and Their Families Under TRICARE in 2017 38 A-2.Costs Incurred by Working-Age Retirees and Their Families Under TRICARE in 2017 39 Figure S-1. Likely Ranges of Possible Savings or Costs in 2031 Under the Two Options Examined by CBO 4 About This Document This Congressional Budget Office report was prepared at the request of the Chairman of the House Budget Committee in the 114th Congress. In keeping with CBO’s mandate to provide objective, impartial analysis, the report makes no recommendations. The report was prepared by Carla Tighe Murray and Elizabeth Bass, with guidance from Matthew Goldberg (formerly of CBO) and David Mosher. Matthew Schmit prepared the cost estimates. Phil Ellis (formerly of CBO), Allison Percy, Matthew Schmit, and David Weaver provided useful comments, as did Sarah Burns of the Institute for Defense Analyses, Susan Hosek of the RAND Corporation, and Laura Junor of the National Defense University. (The assistance of external reviewers implies no responsibility for the final product, which rests solely with CBO.) Jeffrey Kling, John Skeen, and Robert Sunshine reviewed the report, Loretta Lettner edited it, and Jorge Salazar prepared it for publication. An electronic version and supplemental material are available on CBO’s website (www.cbo.gov/publication/53137). Keith Hall Director October 2017