Defense Health Care

To help contain health care costs, the Department of Defense (DOD) in 1993 initiated TRICARE, its nationwide managed health care program for military personnel. By mid-1998, DOD expects to have implemented seven TRICARE managed care support contracts at an estimated cost of $17 billion. Since the award of the first TRICARE contract in 1994, 357 change orders have been made to the five TRICARE contracts now in place. Cumulatively, these change orders have increased tasks and overall costs. DOD has settled 134 of the orders at a cost of about $336,000. DOD estimates costs for the 223 orders that are yet to be settled at $38 million. However, DOD's initial cost estimates differ markedly from contractor estimates. GAO found that although there have been many change orders, DOD has not adequately managed the process. For example, rather than separately budgeting for the costs of individual change orders, DOD has used funds budgeted for other Defense Health Program activities to pay for them--an approach that could potentially create a need for supplemental funding. In addition, DOD's initial cost estimates for new orders have not been sound. As a result, DOD has not developed a reliable estimate of the total federal liability for the contract changes.

GAO noted that: (1) since the 1994 award of the first TRICARE contract, 357 change orders, which cumulatively have increased tasks and overall costs, have been made to the five TRICARE contracts now in place; (2) DOD has settled 134 of the orders at a cost of about $336,000; (3) DOD estimated costs for the 223 orders that are yet to be settled at $38 million, but DOD's initial cost estimates differ markedly from the contractors' estimates; (4) the change orders, which averaged 43 per contract in 1996, have entailed policy, automated data processing, and operational changes to the contracts; (5) about one-third of the change orders have resulted from legislative or regulatory requirements and the remainder were DOD-initiated changes; (6) rather than separately budgeting for the costs of individual change orders, DOD has used funds budgeted for other Defense Health Program activities to pay for them--an approach that could potentially create a need for supplemental funding; (7) in addition, DOD's initial cost estimates for new orders, the basis for obligating funds for the orders, have not been sound, and as a result, DOD has not developed a reliable estimate of the total federal liability for the contract changes; (8) DOD has neither systematically reviewed the need for each order nor considered the likely costs and other effects; (9) DOD has not evaluated alternatives to amending the contracts that could achieve the same end, thus DOD has no assurance that only needed orders are issued and that their costs are minimized; (10) although DOD's goal is to settle orders within 180 days of issuance, the average TRICARE order settlement time has been 340 days; (11) as of May 1, 1997, the average age of the 223 orders yet to be settled is 273 days; (12) failure to settle orders on time can reduce the contractor's cost control incentives and limit DOD's ability to negotiate prices after the contractor has incurred actual costs; (13) to prepare new order cost estimates, DOD has engaged a consultant to independently estimate the cost of implementing each order before its issuance; (14) DOD now requires that, once a potential order's cost has been estimated, the Deputy Assistant Secretary of Defense for Health Services Financing review its appropriateness before approval; (15) DOD has formed a task force and engaged an outside contractor to streamline the overall change order process; and (16) in view of the leadership changes under way in DOD offices that manage the change order process, DOD's continued high-level management attention to implementing needed process improvements is essential.

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.

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