TRICARE Administrative Prices in the Northwest Region May Be Too High

GAO reviewed the Department of Defense's (DOD) TRICARE program, focusing on whether TRICARE managers in the Northwest Region had taken advantage of DOD's contractual authority to adjust administrative prices to correspond with a large health care price decrease.

GAO noted that: (1) the largest contract change to date in the Northwest Region, modification P00008, effective February 1, 1995, reduced the health care price by a total of $169 million, 33 percent, over the five option periods; (2) the reduction was calculated to reflect lower baseline population and military treatment facility utilization estimates; (3) despite a 33-percent reduction in health care prices, TRICARE contracting officers did not propose a second action to reduce administrative support prices; (4) TRICARE managed care services (MCS) contracts do not require that health care price reductions automatically trigger a corresponding reduction in the administrative support prices, nor do contracts require the reasons administrative prices are not reduced; (5) while administrative price adjustments are not part of the bid price adjustment process, administrative support price adjustments are not precluded under the federal acquisition regulation (FAR) changes provisions; (6) because modification P00008 was issued under the authority of FAR section 52.243-1, it is a change order that allows TRICARE Support Office (TSO) contracting officers to adjust administrative support prices; (7) while health care costs are not directly linked to administrative support costs in existing TRICARE MCS contracts, there is a clear relationship between the two; (8) the Defense Contract Audit Agency and Lead Agent officials told GAO that a 33-percent reduction in health care price should have been accompanied by a reduction, perhaps proportionally smaller, in the administrative support price or, at minimum, TSO contracting officers should have conducted further analysis to determine the extent to which an administrative support price reduction was warranted; (9) had TRICARE contracting officials applied the contractor's administrative support rates to the reduced health care prices in modification P00008, administrative support prices might be as much as $25 million less over the 5 years of the contract; (10) this projection, moreover, is at the upper range of potential savings because administrative support costs would likely not decrease in the same proportion as health care costs; and (11) nevertheless, renegotiating administrative support prices would not only give DOD valuable information on the true cost of administrative services in the Northwest Region, but also would ensure DOD pays fair and reasonable prices for these services.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Stephen P. Backhus Team: Government Accountability Office: Education, Workforce, and Income Security Phone: (202) 512-7111