Medicare Subvention Demonstration

The Balanced Budget Act of 1997 authorized the Department of Defense (DOD) to conduct the Medicare subvention demonstration for a three-year period. Under this demonstration, DOD formed Medicare managed care organizations--collectively called TRICARE Senior Prime--at six sites that provided the full range of Medicare-covered services as well as additional DOD-covered services, notably prescription drugs. The Medicare program was to pay DOD for Medicare-covered care of the enrolled military retirees if DOD continued to spend on all aged military retirees at least as much as it had historically. Under the subvention demonstration, Senior Prime enrollees' care in 1999 cost DOD far more than the Medicare capitation rate that was established for the demonstration. This mainly resulted from enrollees' heavy use of medical services, but DOD coverage of prescription drugs--not included in the Medicare benefit package--also contributed to its high costs. Without the demonstration, Medicare spending in 1999 for retirees who enrolled in Senior Prime would have been, on average, about 55 percent of the Senior capitation rate. The Balanced Budget Act's payment rules resulted in no Medicare payment to DOD in 1999. This was because they were designed to prevent the government from paying twice for the same care--once through DOD appropriations and again through Medicare. The rules also required that the payment be adjusted to account for Senior Prime enrollees' health status.