Military Health Care
Cost Data Indicate That TRICARE Reserve Select Premiums Exceeded the Costs of Providing Program Benefits Gao ID: GAO-08-104 December 21, 2007(DOD) TRICARE Reserve Select (TRS) program allows most reservists to purchase coverage under TRICARE, the military health insurance program, when not on active duty. DOD intends to set premiums at a level equal to the expected costs of providing TRS benefits. The National Defense Authorization Act for 2007 required GAO to review TRS costs. As discussed with the committees of jurisdiction, GAO compared (1) the TRS premiums established by DOD to the reported costs of providing benefits under TRS in 2006 and (2) DOD's projected costs for TRS before implementation to DOD's reported costs for the program in 2005 and 2006. To do this work, GAO examined DOD analyses and interviewed DOD officials and external experts.
In 2006, the premium for both individual and family coverage under TRS--which DOD based on Blue Cross and Blue Shield (BCBS) premiums--exceeded the reported average cost per plan of providing TRICARE benefits through the program. TRS currently serves less than 1percent of the overall TRICARE population, and unlike most other TRICARE beneficiaries, TRS enrollees pay a premium to receive health care coverage. At the time of GAO's analysis, TRS consisted of three tiers, established by law, with reservists in each tier paying different portions of the total premium, based on the tier for which they qualified. Over 90 percent of reservists who purchased TRS coverage enrolled in tier 1. The premium for individual coverage under tier 1 was 72 percent higher than the average cost per plan of providing benefits through the program. Similarly, the premium for family coverage under tier 1 was 45 percent higher than the average cost per plan of providing benefits. DOD based TRS premiums on BCBS premiums because, at the time DOD was developing TRS, actual data on the costs of TRS did not exist; however, these data are now available. Had DOD been successful in establishing premiums that were equal to the cost of providing benefits in 2006, the portion of the premium paid by enrollees in tier 1--which is set by law to cover 28 percent of the full premium--would have been lower that year. Reasons that TRS premiums did not align with benefit costs included differences between the TRS and BCBS populations and differences in the way the two programs are designed, which DOD did not consider in its methodology. According to experts, the most successful methods for aligning premiums with actual program costs involve using program cost data when setting premiums. The regulation governing TRS premium adjustments allows DOD to use either BCBS premiums or other means as the basis for TRS premiums. However, DOD officials told GAO that they plan to continue, at least for the near future, to base TRS premiums on BCBS premiums because of limitations associated with using currently available data to predict future TRS costs. However, these limitations should decrease over time as DOD gains more experience with the program and enrollment increases. Nonetheless, due to the uncertainty associated with predicting future health care costs, premiums are unlikely to exactly match program costs, even when they are based on cost data from prior years. Other insurance programs have methods to address differences between premiums and program costs, which are not provided to DOD in the law governing TRS. DOD overestimated the total cost of providing benefits through TRS. While the department projected that its total costs would amount to about $70 million in fiscal year 2005 and about $442 million in fiscal year 2006, DOD's reported costs in those years were about $5 million and about $40 million, respectively. DOD's cost projections were too high largely because it overestimated the number of reservists who would purchase TRS and the associated cost per plan of providing TRS benefits. DOD officials told GAO that they chose not to use TRS cost and enrollment data when projecting future year program costs and enrollment levels because of uncertainty about whether they would provide an accurate indication of future experience.
RecommendationsOur 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: Team: Phone:GAO-08-104, Military Health Care: Cost Data Indicate That TRICARE Reserve Select Premiums Exceeded the Costs of Providing Program Benefits
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entitled 'Military Health Care: Cost Data Indicate That Tricare Reserve
Select Premiums Exceeded the Costs of Providing Program Benefits' which
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
December 2007:
Military Health Care:
Cost Data Indicate That Tricare Reserve Select Premiums Exceeded the
Costs of Providing Program Benefits:
GAO-08-104:
GAO Highlights:
Highlights of GAO-08-104, a report to congressional committees.
Why GAO Did This Study:
The Department of Defense‘s (DOD) Tricare Reserve Select (TRS) program
allows most reservists to purchase coverage under Tricare, the military
health insurance program, when not on active duty. DOD intends to set
premiums at a level equal to the expected costs of providing TRS
benefits. The National Defense Authorization Act for 2007 required GAO
to review TRS costs. As discussed with the committees of jurisdiction,
GAO compared (1) the TRS premiums established by DOD to the reported
costs of providing benefits under TRS in 2006 and (2) DOD‘s projected
costs for TRS before implementation to DOD‘s reported costs for the
program in 2005 and 2006. To do this work, GAO examined DOD analyses
and interviewed DOD officials and external experts.
What GAO Found:
In 2006, the premium for both individual and family coverage under
TRS”which DOD based on BCBS premiums”exceeded the reported average cost
per plan of providing Tricare benefits through the program. TRS
currently serves less than 1 percent of the overall Tricare population,
and unlike most other Tricare beneficiaries, TRS enrollees pay a
premium to receive health care coverage. At the time of GAO‘s analysis,
TRS consisted of three tiers, established by law, with reservists in
each tier paying different portions of the total premium, based on the
tier for which they qualified. Over 90 percent of reservists who
purchased TRS coverage enrolled in tier 1. The premium for individual
coverage under tier 1 was 72 percent higher than the average cost per
plan of providing benefits through the program. Similarly, the premium
for family coverage under tier 1 was 45 percent higher than the average
cost per plan of providing benefits. DOD based TRS premiums on BCBS
premiums because, at the time DOD was developing TRS, actual data on
the costs of TRS did not exist; however, these data are now available.
Had DOD been successful in establishing premiums that were equal to the
cost of providing benefits in 2006, the portion of the premium paid by
enrollees in tier 1”which is set by law to cover 28 percent of the full
premium”would have been lower that year. Reasons that TRS premiums did
not align with benefit costs included differences between the TRS and
BCBS populations and differences in the way the two programs are
designed, which DOD did not consider in its methodology. According to
experts, the most successful methods for aligning premiums with actual
program costs involve using program cost data when setting premiums.
The regulation governing TRS premium adjustments allows DOD to use
either BCBS premiums or other means as the basis for TRS premiums.
However, DOD officials told GAO that they plan to continue, at least
for the near future, to base TRS premiums on BCBS premiums because of
limitations associated with using currently available data to predict
future TRS costs. However, these limitations should decrease over time
as DOD gains more experience with the program and enrollment increases.
Nonetheless, due to the uncertainty associated with predicting future
health care costs, premiums are unlikely to exactly match program
costs, even when they are based on cost data from prior years. Other
insurance programs have methods to address differences between premiums
and program costs, which are not provided to DOD in the law governing
TRS.
DOD overestimated the total cost of providing benefits through TRS.
While the department projected that its total costs would amount to
about $70 million in fiscal year 2005 and about $442 million in fiscal
year 2006, DOD‘s reported costs in those years were about $5 million
and about $40 million, respectively. DOD‘s cost projections were too
high largely because it overestimated the number of reservists who
would purchase TRS and the associated cost per plan of providing TRS
benefits. DOD officials told GAO that they chose not to use TRS cost
and enrollment data when projecting future year program costs and
enrollment levels because of uncertainty about whether they would
provide an accurate indication of future experience.
What GAO Recommends:
GAO recommends that DOD stop basing TRS premiums only on Blue Cross and
Blue Shield (BCBS) premium adjustments and use the reported costs of
providing benefits through the TRS program when adjusting TRS premiums
in future years as limitations associated with the reported cost data
decrease. GAO also recommends that DOD explore options for addressing
instances in which premiums have been either significantly higher or
lower than program costs in prior years, including seeking legislative
authority as necessary. In its comments, DOD concurred with these
recommendations and with GAO‘s conclusions.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-104]. For more information, contact
Laurie Ekstrand at (202) 512-7114 or ekstrandl@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Basing TRS Premiums on BCBS Premiums Resulted in TRS Premiums That
Exceeded the Costs of Providing Program Benefits in 2006:
TRS's Projected Costs Significantly Exceeded Reported Costs for Fiscal
Years 2005 and 2006 Largely Because Enrollment Levels Were Lower Than
DOD Expected:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Comparison of TRS Premium Growth with DOD's Estimated Rate
of Medical Care Price Inflation:
Appendix II: Scope and Methodology:
Appendix III: Comments from the Department of Defense:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Selected TRS Qualification Criteria and Premiums for Members
of the Selected Reserves:
Table 2: Comparison of Cost-Sharing Provisions under TRS and Blue Cross
and Blue Shield Standard:
Table 3: Comparison of the Projected Number of TRS Plans to the
Reported Number of TRS Plans, June 2007:
Figures:
Figure 1: Comparison of DOD's Reported Average Cost per Plan with TRS
Premiums, 2006:
Figure 2: Number of TRS Plans in Each Tier, January 2006-June 2007:
Abbreviations:
BCBS: Blue Cross and Blue Shield:
CPI-W: Consumer Price Index for Urban Wage Earners and Clerical
Workers:
DOD: Department of Defense:
FEHBP: Federal Employees Health Benefits Program:
MTF: military treatment facility:
NDAA: National Defense Authorization Act:
TRS: Tricare Reserve Select:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
December 21, 2007:
Congressional Committees:
Since the September 11, 2001, terrorist attacks, the Department of
Defense (DOD) has increasingly relied on reservists to support military
operations, such as the conflicts in Iraq and Afghanistan.[Footnote 1]
In recognition of this, Congress has increased the health care benefits
available to reservists and their dependents, which generally include
family members such as spouses and dependent children. Specifically,
the National Defense Authorization Acts (NDAA) for Fiscal Years 2005,
2006, and 2007 expanded the number of reservists and their dependents
who qualify for Tricare, the military health insurance program, and
increased the period during which they qualify.[Footnote 2] The NDAA
for Fiscal Year 2005 established the program that DOD has named Tricare
Reserve Select (TRS), which currently allows most members of the
Selected Reserves[Footnote 3] to purchase Tricare coverage for periods
after the Tricare coverage associated with active duty expires. After
purchasing coverage, enrollees can obtain health care through Tricare-
authorized providers or hospitals or through DOD-operated military
treatment facilities (MTF) if appointments are available. TRS currently
serves a small portion of the Tricare population--as of June 2007, only
about 34,000 of the 9.1 million Tricare beneficiaries were enrolled in
TRS.
Unlike most Tricare beneficiaries who obtain health care benefits
without paying premiums, reservists who qualify for TRS must pay a
monthly premium to receive benefits through the program. By statute,
DOD is required to set premiums for TRS at a level that it determines
to be reasonable using an appropriate actuarial basis.[Footnote 4] DOD
officials told us that the department interpreted this to mean that TRS
premiums should be set equal to the expected average costs of providing
the benefit per plan.[Footnote 5] TRS enrollees are responsible for
paying a portion of the total premium set by DOD. In this report the
term premium refers to the total premium--that is, the portion paid by
enrollees, currently 28 percent, plus the portion covered by DOD,
currently 72 percent.[Footnote 6] DOD based the premiums for TRS on the
Federal Employees Health Benefits Program's (FEHBP) Blue Cross and Blue
Shield (BCBS) Standard premiums, which the department adjusted to
account for differences in age, gender, and family size between the
BCBS population and the population of reservists and their family
members who qualify for TRS. To keep pace with rising health care
costs, DOD originally designed TRS so that the premiums are adjusted
each year based on annual adjustments in BCBS Standard premiums. DOD
planned to continue using this method to adjust premiums in the near
future.
The NDAA for Fiscal Year 2007 required that we review DOD's costs of
implementing the TRS program.[Footnote 7] Specifically, as discussed
with the committees of jurisdiction, we compared (1) the annual TRS
premiums established by DOD to the reported costs of providing benefits
under TRS in 2006 and (2) DOD's projected costs for the TRS program
before implementation to DOD's reported costs for the program in 2005
and 2006. The NDAA for Fiscal Year 2007 also required that we describe
how increases in TRS premiums compare with DOD's annual rate of medical
care price inflation. This information is included in appendix I.
To compare the annual TRS premiums established by DOD to the reported
costs of providing benefits under TRS in 2006, we reviewed DOD's
reported TRS enrollment data and data on the cost of providing TRS
benefits through Tricare-authorized civilian providers or hospitals,
data on the administrative costs associated with providing TRS
benefits, and data on the costs of providing TRS benefits through MTFs.
Using DOD's data, we calculated the average cost per TRS plan[Footnote
8] of providing individual and family coverage as the sum of the
reported costs divided by the average number of TRS plans. We also
reviewed legislation relevant to the TRS program and literature on
setting health insurance premiums and interviewed experts from the
fields of health economics and finance and DOD officials in the Tricare
Management Activity and the Office of the Assistant Secretary for
Health Affairs, which are responsible for managing the Tricare program.
We limited our analysis to calendar year 2006 because some 2007 data
are still incomplete and because 2005 average cost data in some months
are based on a very small number of enrollees. During the time period
covered by our analysis, TRS included three tiers of eligibility with
enrollees in each tier paying different portions of the premium based
on the tier for which they qualified. We limited our analysis to tier 1
because it included over 90 percent of TRS plans and because tier 1
enrollee premium levels have applied to the entire TRS program since
October 2007. In addition, we were unable to report the average cost
per plan for tiers 2 and 3 separately, due to the low number of
enrollees in these tiers.
To compare DOD's projected costs for the TRS program before
implementation with DOD's reported costs for the program in 2005 and
2006, we reviewed the analyses prepared by DOD before TRS's
implementation that projected (1) the number of individual and family
plans in each tier of the TRS program and (2) the costs per plan of
providing the TRS benefit. These projections were the two major factors
used by DOD to estimate TRS costs. We compared these data with reported
TRS enrollment and cost data from 2005 through 2007. In reporting the
results of our comparison we use cost data through 2006 only, because
some cost data for 2007 were incomplete due to the delay between when a
claim is incurred and when it is paid. We also reviewed DOD internal
documents and interviewed DOD officials.
While we have raised concerns about the quality of DOD cost data in
previous reports,[Footnote 9] we determined that the data used for this
analysis were sufficiently reliable for our purposes based on
interviews with DOD officials and an examination of the data for
obvious errors and omissions. However, we did not independently verify
these data.
For a complete discussion of our scope and methodology, see appendix
II. We conducted our work from May 2007 through October 2007 in
accordance with generally accepted government auditing standards.
Results in Brief:
In 2006, the premium for both individual and family coverage under TRS-
-which DOD based on BCBS premiums--exceeded the reported average cost
per plan of providing Tricare benefits through the program. The premium
for individual coverage under tier 1 was 72 percent higher than the
average cost per plan of providing benefits through the program.
Similarly, the premium for family coverage under tier 1 was 45 percent
higher than the average cost per plan of providing benefits. DOD based
TRS premiums on BCBS premiums because, at the time DOD was developing
TRS, actual data on the costs of delivering Tricare benefits for the
TRS population did not exist; however, these data are now available for
2005 and 2006. Had DOD been successful in establishing premiums that
were equal to the cost of providing benefits in 2006, the portion of
the premium paid by enrollees in tier 1--which is set by statute to
cover 28 percent of the full premium--would have been lower that year-
-$566 instead of $972 for single coverage and $2,099 instead of $3,036
for family coverage. Reasons that basing TRS premiums on BCBS premiums
did not successfully align TRS premiums with benefit costs included
certain differences between the TRS and BCBS populations and certain
differences between the two programs that DOD did not consider in its
methodology. According to experts, the most successful methods for
aligning premiums with the actual costs of providing benefits involve
using program cost data when setting premiums. The regulation governing
TRS premium adjustments allows DOD to use either BCBS premiums or other
means as the basis for TRS premiums. However, DOD officials told us
that they plan to continue, at least for the near future, to base TRS
premium adjustments on BCBS premiums because of limitations associated
with using currently available data to predict future TRS costs. DOD
officials told us that the limitations associated with currently
available data are due to the newness of the TRS program, recent
changes to TRS, and the low number of enrollees. However, any
limitations associated with TRS cost data should decrease over time as
DOD gains more experience with the program and enrollment increases,
thus enabling DOD to better project future health care costs.
Nonetheless, due to the uncertainty associated with predicting future
health care costs, premiums are unlikely to exactly match program
costs, even when they are based on cost data from prior years. Other
insurance programs have methods to address discrepancies between
premiums and program costs, which are not provided to DOD in the law
governing TRS.
DOD significantly overestimated the total cost of providing benefits
through TRS. While the department projected that its total costs would
amount to about $70 million in fiscal year 2005 and about $442 million
in fiscal year 2006, DOD's reported costs in those years were about $5
million and about $40 million, respectively. DOD's cost projections
were too high largely because it overestimated the number of reservists
who would purchase TRS as well as the associated cost per plan of
providing benefits through the program. DOD officials told us that they
considered TRS cost and enrollment data when developing future year
projections of program costs and enrollment levels, but they chose not
to use these data as part of their projections because of uncertainty
about whether they would provide an accurate indication of likely
future experience.
With the goal of eventually eliminating reliance on BCBS premiums and
to better align premiums with the costs of providing TRS health care
benefits, we recommend that the Secretary of Defense direct the
Assistant Secretary for Health Affairs to stop basing TRS premium
adjustments only on BCBS premium adjustments and use the reported costs
of providing benefits through the TRS program when adjusting TRS
premiums in future years as limitations associated with the reported
cost data decrease.
We also recommend that DOD explore options for addressing instances in
which premiums have been either significantly higher or lower than
program costs in prior years, including seeking legislative authority
as necessary.
In its written comments on a draft of this report, DOD concurred with
our conclusions and recommendations. See appendix III for DOD's
comments.
Background:
Beginning on April 27, 2005, DOD made Tricare coverage available for
purchase through TRS for certain reservists when they were not on
active duty or eligible for pre-or postactivation Tricare coverage.
[Footnote 10] Enrollees in TRS can obtain care from MTFs or from
Tricare-authorized civilian providers or hospitals. TRS enrollees can
obtain prescription drugs through Tricare's pharmacy system, which
includes MTF pharmacies, network retail pharmacies, nonnetwork retail
pharmacies, and the Tricare Mail Order Pharmacy. Since 2005, Congress
has made this benefit available to a growing number of members of the
Selected Reserves.
Changes in TRS Coverage:
The NDAA for Fiscal Year 2005 authorized the TRS program.[Footnote 11]
As originally authorized, TRS made Tricare coverage available to
certain members of the Selected Reserves--that is, reservists mobilized
since September 11, 2001, who had continuous qualifying service on
active duty for 90 days or more in support of a contingency operation.
To qualify for TRS, reservists had to enter into an agreement with
their respective reserve components to continue to serve in the
Selected Reserves in exchange for TRS coverage. For each 90-day period
of qualifying service in a contingency operation, reservists could
purchase 1 year of TRS coverage.[Footnote 12] Electing to enroll in
this TRS program was a onetime opportunity, and as originally
authorized, the program required reservists to sign the new service
agreement and register for TRS before leaving active duty service.
Reservists who qualified could also obtain coverage for their
dependents by paying the appropriate premium.
The NDAA for Fiscal Year 2006 expanded the number of reservists and
dependents who qualify to participate in the TRS program.[Footnote 13]
Under the expanded program, which became effective on October 1, 2006,
almost all reservists and dependents--regardless of the reservists'
prior active duty service--had the option of purchasing Tricare
coverage. Similar to the TRS program as it was originally authorized,
members of the Selected Reserves and their dependents choosing to
enroll in the expanded TRS program had to pay a monthly premium to
receive Tricare coverage. The portion of the premium paid by reservists
in the Selected Reserves and their dependents for TRS coverage varied
based on certain qualifying conditions that had to be met, such as
whether the reservist also had access to an employer-sponsored health
plan. The NDAA for Fiscal Year 2006 established three levels--which DOD
calls tiers--of qualification for TRS, with enrollees paying different
portions of the premium based on the tier for which they qualified.
Those who would have qualified under the original TRS program, because
they had qualifying service in support of a contingency operation, paid
the lowest premium. In another change to the program, those reservists
with qualifying service in support of a contingency operation now had
up to 90 days after leaving active duty to sign the new service
agreement required to qualify for this lowest premium tier.
The NDAA for Fiscal Year 2007 significantly restructured the TRS
program by eliminating the three-tiered premium structure.[Footnote 14]
The act also changed TRS qualification criteria for members of the
Selected Reserves, generally allowing these reservists to purchase
Tricare coverage for themselves and their dependents at the lowest
premium--formerly paid by enrollees in tier 1--regardless of whether
they have served on active duty in support of a contingency operation.
In addition, the act removed the requirement that reservists sign
service agreements to be qualified for TRS. Instead, the act
established that reservists in the Selected Reserves qualify for TRS
for the duration of their service in the Selected Reserves. DOD
implemented these changes on October 1, 2007. See table 1 for an
overview of TRS qualification criteria and the monthly portion of the
TRS premiums paid by reservists.
Table 1: Selected TRS Qualification Criteria and Premiums for Members
of the Selected Reserves:
Qualification Criteria: TRS as authorized by the NDAA for Fiscal Year
2005 (Effective April 2005 through September 2006); Reservist must have
qualifying active duty service in support of a contingency operation on
or after September 11, 2001, for at least 90 days; reservist must agree
to serve in the Selected Reserves for the entire period of TRS
coverage. If reservist was released from active duty after April 26,
2005, reservist must execute this service agreement before release from
active duty. If reservist was released from active duty on or before
April 26, 2005, reservist must execute this service agreement no later
than October 28, 2005.
Percentage of TRS premium paid by enrollees: 28;
Monthly portion of the TRS premium paid by reservist, Individual
coverage: $75.00 (April 2005 through December 2005); $81.00 (January
2006 through September 2006);
Monthly portion of the TRS premium paid by reservist, Family Coverage:
$233.00 (April 2005 through December 2005); $253.00 (January 2006
through September 2006);
Duration of coverage: One year of coverage for each continuous 90 days
of qualifying service.
Qualification Criteria: TRS as authorized by the NDAA for Fiscal Year
2006 (Effective October 2006 through September 2007); Tier 1: Reservist
must have qualifying active duty service in support of a contingency
operation on or after September 11, 2001, for at least 90 days and must
agree to serve in the Selected Reserves for the entire period of TRS
coverage. Reservist must execute this service agreement within 90 days
after release from active duty;
Percentage of TRS premium paid by enrollees: 28;
Monthly portion of the TRS premium paid by reservist, Individual
coverage: $81.00;
Monthly portion of the TRS premium paid by reservist, Family coverage:
$253.00;
Duration of coverage: One year of coverage for each continuous 90 days
of qualifying service.
Qualification criteria: TRS as authorized by the NDAA for Fiscal Year
2005 (Effective April 2005 through September 2006): Tier 2: Reservist
does not qualify for tier 1; must not be eligible for employer-
sponsored health insurance, or must be eligible for unemployment
compensation or must be self-employed; must execute a service agreement
to serve in the Selected Reserves for the entire period of TRS
coverage. Reservist must qualify during open season or submit
documentation establishing a qualifying life event;
Percentage of TRS premium paid by enrollees: 50;
Monthly portion of the TRS premium paid by reservist, Individual
coverage: $145.29; Monthly portion of the TRS premium paid by
reservist, Family coverage: $451.42;
Duration of coverage: Up to 1 year of coverage with an annual option to
renew.
Qualification criteria: TRS as authorized by the NDAA for Fiscal Year
2005 (Effective April 2005 through September 2006): Tier 3: Reservist
does not qualify for tier 1 or 2; may be eligible for employer-
sponsored insurance, but must execute a service agreement to serve in
the Selected Reserves for the entire period of TRS coverage. Reservist
must qualify during open season or submit documentation establishing a
qualifying life event;
Percentage of TRS premium paid by enrollees: 85;
Monthly portion of the TRS premium paid by reservist, Individual
coverage: $247.00;
Monthly portion of the TRS premium paid by reservist, Family coverage:
$767.41;
Duration of coverage: Up to 1 year of coverage with an annual option to
renew.
Qualification criteria: TRS as authorized by the NDAA for Fiscal Year
2007 (Effective as of October 2007); Reservist must be a member of the
Selected Reserves. Reservists who are eligible for coverage under FEHBP
do not qualify to purchase TRS;
Percentage of TRS premium paid by enrollees: 28;
Monthly portion of the TRS premium paid by reservist, Individual
coverage: $81.00;
Monthly portion of the TRS premium paid by reservist, Family coverage:
$253.00;
Duration of coverage: Coverage is available as long as the reservist is
a member of the Selected Reserves.
Source: GAO.
Note: The Selected Reserves contains those units and individuals
considered essential to wartime missions. As of 2005, 88 percent of
reservists were considered part of the Selected Reserves.
[End of table]
Enrollment in TRS:
Currently, reservists who qualify for TRS may purchase TRS individual
or family coverage at any time. Once enrolled in TRS, reservists and
their dependents are able to obtain health care through MTFs, if
appointments are available, or through Tricare-authorized civilian
providers or hospitals. Enrollees who choose to use civilian providers
are subject to an annual deductible, co-payments, and coinsurance. When
these enrollees use providers outside Tricare's civilian network, they
pay higher cost shares and are considered to be using Tricare Standard,
the Tricare option that is similar to a fee-for-service plan. When they
use providers who are part of the Tricare network, they pay discounted
cost shares and are considered to be using Tricare Extra, the Tricare
option that is similar to a preferred provider plan.[Footnote 15]
DOD's Methods for Developing TRS Premiums:
DOD is required by law to set premiums for TRS at a level that it
determines to be reasonable using an appropriate actuarial
basis.[Footnote 16] DOD officials told us that the department
interpreted this to mean that TRS premiums should be set equal to the
expected average costs per plan of providing the benefit. Beginning in
2005, DOD based TRS premiums on the premiums for the BCBS Standard plan
offered through FEHBP because, at the time DOD was developing TRS,
actual data on the costs of delivering TRS benefits for the TRS
population did not exist. To set the premiums, DOD compared
characteristics of the beneficiary populations in each group and
subsequently adjusted the BCBS premiums for differences in age, gender,
and family size between the TRS and BCBS populations. The population
that qualifies for TRS is younger, has a higher percentage of males,
and has a larger number of dependents per sponsor than the BCBS
population. Taken together, DOD concluded that these factors caused
expected health care costs for the TRS population to be lower than
expected health care costs for the BCBS population. To account for
these differences, DOD set the TRS premium for individual coverage 32
percent lower than the corresponding BCBS premium and set the TRS
premium for family coverage 8 percent lower than the corresponding BCBS
premium.[Footnote 17] According to DOD officials, the department based
TRS premiums on BCBS premiums, rather than another health insurance
plan's premiums, because BCBS offers coverage that is similar to the
coverage offered under Tricare Standard. (For a comparison of cost-
sharing provisions under TRS and BCBS Standard, see table 2.) In
addition, like TRS, BCBS charges a separate premium for individual
coverage and for family coverage, and each of these premiums is uniform
nationally and updated annually. Furthermore, according to DOD
officials, basing TRS premiums on BCBS premiums allowed the department
to account for the effect of adverse selection on the department's
costs, because adverse selection is already accounted for in BCBS
premiums.[Footnote 18]
Table 2: Comparison of Cost-Sharing Provisions under TRS and Blue Cross
and Blue Shield Standard:
Catastrophic limit per family[A];
Tricare Reserve Select: In-network: $1,000;
Tricare Reserve Select: Out-of-network: $1,000;
Blue Cross and Blue Shield Standard: In-network: $4,000;
Blue Cross and Blue Shield Standard: Out-of-network: $6,000.
Calendar year deductible per individual/family;
Tricare Reserve Select: In-network: $150/$300 or $50/$100 (E4 and
below);
Tricare Reserve Select: Out-of-network: $150/$300 or $50/$100 (E4 and
below);
Blue Cross and Blue Shield Standard: In-network: $250;
Blue Cross and Blue Shield Standard: Out-of-network: $250.
Hospital inpatient deductible or co-payment;
Tricare Reserve Select: In-network: Greater of $14.80 per day or $25
per admission;
Tricare Reserve Select: Out-of-network: Greater of $14.80 per day or
$25 per admission;
Blue Cross and Blue Shield Standard: In-network: $100 per admission;
Blue Cross and Blue Shield Standard: Out-of-network: $300 per
admission.
Primary doctor office visits;
Tricare Reserve Select: In-network: 15 percent[B];
Tricare Reserve Select: Out-of-network: 20 percent[B];
Blue Cross and Blue Shield Standard: In-network: $15;
Blue Cross and Blue Shield Standard: Out-of-network: 25 percent.
Specialist office visits;
Tricare Reserve Select: In-network: 15 percent[B];
Tricare Reserve Select: Out-of-network: 20 percent[B];
Blue Cross and Blue Shield Standard: In-network: $15;
Blue Cross and Blue Shield Standard: Out-of-network: 25 percent.
Retail pharmacy co-payment for generic drugs;
Tricare Reserve Select: In-network: $3;
Tricare Reserve Select: Out-of-network: Greater of $9 or 20 percent of
total cost;
Blue Cross and Blue Shield Standard: In-network: 25 percent;
Blue Cross and Blue Shield Standard: Out-of-network: 45 percent or
higher.
Mail-order pharmacy co-payment for generic drugs;
Tricare Reserve Select: In-network: $3;
Tricare Reserve Select: Out-of-network: N/A;
Blue Cross and Blue Shield Standard: In-network: $10;
Blue Cross and Blue Shield Standard: Out-of-network: N/A.
Retail pharmacy co-payment for brand-name drugs;
Tricare Reserve Select: In-network: $9;
Tricare Reserve Select: Out-of-network: Greater of $9 or 20 percent of
total cost;
Blue Cross and Blue Shield Standard: In-network: 25 percent;
Blue Cross and Blue Shield Standard: Out-of-network: 45 percent or
higher.
Mail-order pharmacy co-payment for brand-name drugs;
Tricare Reserve Select: In-network: $9;
Tricare Reserve Select: Out-of-network: N/A;
Blue Cross and Blue Shield Standard: In-network: $35;
Blue Cross and Blue Shield Standard: Out-of-network: N/A.
Sources: DOD and the Office of Personnel Management.
[A] The catastrophic cap is the maximum out-of-pocket expense for which
Tricare enrollees are responsible in a given fiscal year. The
catastrophic cap applies only to services covered by Tricare.
[B] The in-network coinsurance rate is 15 percent of the negotiated
rate, which is the rate network providers and participating nonnetwork
providers have agreed to accept for covered services. The out-of-
network coinsurance rate is 20 percent of the Tricare allowable charge,
which is the maximum amount Tricare will pay for services.
[End of table]
In order to compensate for rising health care costs, DOD originally
designed TRS premiums so that they would be adjusted each year based on
annual adjustments in the total BCBS Standard premiums. DOD planned to
continue using this method to adjust premiums in the immediate future
but allowed for the possibility that it might change the methodology at
some point in the future. Thus, if BCBS premiums increased by 8.5
percent from 2005 to 2006, TRS premiums would be increased by the same
percentage. New premiums are effective at the start of each calendar
year. TRS premiums were increased by 8.5 percent for 2006 and scheduled
to be increased by 1 percent for 2007, but a provision in the NDAA for
Fiscal Year 2007 prevented this increase from being implemented for
2007.[Footnote 19]
According to DOD officials, another reason DOD decided to use BCBS as
the basis for annual TRS premium adjustments was because BCBS premiums
are updated annually, and the new premiums are made public each
October. DOD officials told us they did not want to use DOD data to
adjust premiums because they believe that doing so would be less
transparent; that is, they wanted to avoid any appearance that the data
might have been manipulated to DOD's own financial advantage.
Basing TRS Premiums on BCBS Premiums Resulted in TRS Premiums That
Exceeded the Costs of Providing Program Benefits in 2006:
In 2006, the premiums for both individual and family coverage under TRS
exceeded the reported costs of providing Tricare benefits through the
program. The total premium for individual coverage under tier 1 was 72
percent higher than the average cost per plan of providing benefits
through the program. Similarly, the total premium for family coverage
under tier 1 was 45 percent higher than the average cost per plan of
providing benefits. There are several reasons that basing TRS premiums
on BCBS premiums did not successfully align TRS premiums with benefit
costs. These include certain differences between the TRS and BCBS
populations and certain differences between the two programs that DOD
did not take into account. Experts indicated that data on the costs of
delivering TRS benefits would provide DOD with an improved basis for
adjusting premiums in future years.
In 2006, the Premium for Both Individual and Family Coverage under TRS
Exceeded the Reported Costs per Plan of Providing Benefits through the
Program:
In 2006, the premium for both individual and family coverage under TRS
exceeded the reported costs per plan of providing Tricare benefits
through the program. For tier 1, the annual premium for individual
plans of $3,471--including the share paid by enrollees and the share
covered by DOD--was 72 percent higher than the average cost of
providing benefits through TRS of $2,020 per plan. Similarly, the
annual premium for family plans of $10,843 was 45 percent higher than
the average cost of providing benefits through TRS of $7,496 per plan.
(See fig. 1.)
Figure 1: Comparison of DOD's Reported Average Cost per Plan with TRS
Premiums, 2006:
[See PDF for image]
This figure is a vertical bar graph depicting a comparison of DOD's
reported average cost per plan with TRS premiums, 2006. The vertical
axis of the graph represents amount in dollars from 0 to 12,000. The
horizontal axis of the graph represents the type of plan. The following
data is depicted:
Type of plan: Individual coverage;
TRS premium: approximately $2000;
DOD's reported average cost per plan: approximately $3500 (72%);
Type of plan: family coverage;
TRS premium: approximately $7500;
DOD's reported average cost per plan: approximately $10,500 (45%);
Source: GAO analysis of DOD data.
Note: The average cost per plan refers to tier 1 plans only.
[End of figure]
The average costs per TRS plan do not include certain administrative
costs that DOD was not able to allocate specifically to TRS, such as
advertising costs and program education. However, DOD officials told us
that including these costs would not be sufficient to close the gap
between TRS premiums and the average costs per plan. DOD also incurred
start-up costs associated with establishing the TRS program, which are
not included in the average costs per TRS plan because DOD did not
intend for them to be covered by TRS premiums.
The discrepancy between TRS premiums and reported TRS costs has
implications for DOD's cost sharing with TRS enrollees. By statute, the
portion of the TRS premium paid by enrollees in tier 1--and all
enrollees as of October 1, 2007--is to cover 28 percent of the full
premium. In 2006, TRS enrollees in tier 1 paid $972 for individual
coverage and $3,036 for family coverage. This covered 48 percent of the
average cost per individual plan and 41 percent of the average cost per
family plan. Had DOD been successful in establishing TRS premiums that
were equal to the average reported cost per TRS plan in 2006,
enrollees' share of the premium would have been $566 for single
coverage and $2,099 for family coverage in that year.[Footnote 20]
Basing TRS Premiums on BCBS Premiums Is Unlikely to Successfully Align
TRS Premiums with Benefit Costs:
Basing TRS premiums on BCBS premiums is unlikely to align TRS premiums
with benefit costs because of several differences between the TRS and
BCBS populations and programs that DOD did not take into account. DOD
based TRS premiums on BCBS premiums because at the time DOD was
developing TRS, actual data on the costs of delivering TRS benefits to
the TRS population did not exist. However, experts we interviewed
suggested that because of demographic differences between the TRS and
BCBS populations, BCBS-based premiums are unlikely to reflect TRS
costs. In setting TRS premiums, DOD adjusted BCBS premiums to account
for differences in age, gender, and family size between the TRS and
BCBS populations. However, DOD did not take other demographic
differences into account that could have potentially affected its
likely success--such as enrollees' geographic distribution and health
status--because accounting for these differences is very difficult. The
geographic distribution of a population is an important factor in
predicting health care costs and corresponding health insurance
premiums, in large part because physician payment rates vary across
geographic locations.[Footnote 21] Furthermore, according to experts we
interviewed, the most important predictors of health care costs are
measures related to enrollees' health status, which were not fully
available to DOD when it first established TRS premiums.
Another factor that may have contributed to the disparity between TRS
premiums and the program's costs is the dissimilarity in the structures
of the TRS and BCBS programs. While TRS premiums are designed to cover
enrollees' health care costs and certain administrative costs, BCBS
premiums are designed to cover these costs and also may include
contributions to or withdrawals from plan reserves[Footnote 22] and
profits. As a result, changes in BCBS premiums are generally not equal
to changes in BCBS program costs.
TRS Cost Data Would Provide DOD with an Improved Basis for Adjusting
Premiums in Future Years:
Experts indicated that data on the costs of delivering TRS benefits
will provide DOD with an improved basis for adjusting premiums in
future years.[Footnote 23] They informed us that there are several
methods of setting health insurance premiums. The methods that are most
successful in aligning premiums with the actual costs of providing
benefits involve using program cost data when setting premiums.
Although TRS cost data did not exist when the program was implemented,
leading DOD to base TRS premiums on BCBS premiums, TRS cost data from
2005 and 2006 are now available. In DOD's description of its
methodology for establishing and adjusting TRS premiums in the Federal
Register on March 16, 2005, DOD allowed for the possibility of using
other means to adjust premiums in the future.[Footnote 24] It stated
that it could base future changes in TRS premiums on actual cost data.
However, DOD officials told us that the department has not used these
data to adjust TRS premiums due to the limitations associated with
using prior year costs to predict future costs. According to DOD
officials, prior year claims data may not be indicative of future year
claims costs due to the newness of the TRS program, recent changes to
TRS, and the low number of enrollees. However, TRS cost data reflect
actual experience with the program and any limitations associated with
TRS cost data should decrease over time as DOD gains more experience
with the program and more reservists enroll in it.
Nonetheless, due to the uncertainty associated with predicting future
health care costs, premiums are unlikely to exactly match program
costs, even when they are based on cost data from prior years. To help
adjust for discrepancies between premiums and program costs, some
health insurance programs have established reserve accounts, which may
be used to defray future premium increases or cover unexpected
shortfalls from higher-than-anticipated costs. For example, as noted
earlier, the Office of Personnel Management administers a reserve
account for each FEHBP plan, including BCBS. These reserve accounts are
funded by a surcharge of up to 3 percent of a plan's premium. Once
funds in the reserve accounts exceed certain minimum balances, they can
be used to offset future year premium increases. Similarly, some health
insurance programs make adjustments to premiums for subsequent years
that account for any significant discrepancy between prior year
premiums and program costs. The law governing TRS contains no provision
for the establishment of a reserve account or for methods of increasing
or decreasing premiums, after they are set, to address differences
between premiums and costs in prior years.
TRS's Projected Costs Significantly Exceeded Reported Costs for Fiscal
Years 2005 and 2006 Largely Because Enrollment Levels Were Lower Than
DOD Expected:
DOD's estimated costs of providing TRS benefits were about 11 times
higher than its reported costs. DOD's cost projections were too high
largely because it overestimated the number of reservists who would
enroll in TRS as well as the associated cost per plan of providing
benefits through the program. DOD officials told us that they
considered TRS cost and enrollment data when developing future year
projections of program costs and enrollment levels, but they chose not
to use these data as part of their projections because they are
uncertain that prior year enrollment and cost data are indicative of
future year costs and enrollment levels.
DOD's Projected Costs Were Significantly Higher Than Its Reported Costs
for TRS in Fiscal Years 2005 and 2006:
DOD significantly overestimated the costs of providing benefits through
TRS. Prior to TRS's implementation, DOD estimated that total costs of
providing benefits through the program would amount to about $70
million in fiscal year 2005 and about $442 million in fiscal year 2006.
In contrast, reported costs in those years only amounted to about $5
million and about $40 million, respectively.[Footnote 25] DOD estimated
the program's likely costs by multiplying the number of TRS plans that
it projected would be purchased by DOD's estimated cost per plan for
individual and family plans. DOD estimated that its cost per plan would
be equal to the total TRS premium minus the portion of the premium paid
by enrollees.[Footnote 26]
DOD's Projected Costs Were Higher Than Reported Costs for TRS Because
It Overestimated the Number of TRS Enrollees and the Cost per Enrollee:
The number of reservists who purchased TRS coverage has been
significantly lower than DOD projected, and as a result TRS program
costs have also been lower than expected. DOD projected that about
114,000 reservists would purchase individual or family plans by 2007;
however, as of June 2007 only about 11,500--or about 10 percent--of
that number had purchased TRS plans. Over 90 percent of TRS enrollment
had been for coverage under tier 1, which offered the lowest enrollee
premium contributions of the three tiers in existence at the time
covered by our analysis. Very few reservists signed up for coverage
under tier 3, which had the highest enrollee premium contributions of
the three tiers. (See table 3.)
Table 3: Comparison of the Projected Number of TRS Plans to the
Reported Number of TRS Plans, June 2007:
Tier 1;
Projected number of plans (fiscal year 2007), Individual coverage:
18,216;
Projected number of plans (fiscal year 2007), Family coverage: 78,591;
Reported number of plans (June 2007), Individual coverage: 3,107;
Reported number of plans (June 2007), Family coverage: 7,412.
Tier 2;
Projected number of plans (fiscal year 2007), Individual coverage:
3,096;
Projected number of plans (fiscal year 2007), Family coverage: 6,285;
Reported number of plans (June 2007), Individual coverage: 363;
Reported number of plans (June 2007), Family coverage: 610.
Tier 3;
Projected number of plans (fiscal year 2007), Individual coverage:
2,639;
Projected number of plans (fiscal year 2007), Family coverage: 5,359;
Reported number of plans (June 2007), Individual coverage: 17;
Reported number of plans (June 2007), Family coverage: 25.
All tiers;
Projected number of plans (fiscal year 2007), Individual coverage:
23,951;
Projected number of plans (fiscal year 2007), Family coverage: 90,235;
Reported number of plans (June 2007), Individual coverage: 3,487;
Reported number of plans (June 2007), Family coverage: 8,047.
Source: DOD.
[End of table]
DOD estimated the number of reservists who would purchase TRS coverage
by dividing the population of reservists who qualify for each of the
three tiers into several categories for which it estimated distinct
participation rates, based on the premiums these reservists would
likely pay for non-DOD health insurance. DOD projected lower enrollment
for groups that had access to less expensive health insurance options,
such as those who are offered insurance through their employers. DOD
officials believe that enrollment in TRS will increase the longer the
program is in place. However, while enrollment in TRS increased
moderately through October 2006, it has remained relatively stable from
October 2006 through June 2007. (See fig. 2.)
Figure 2: Number of TRS Plans in Each Tier, January 2006-June 2007:
[See PDF for image]
This figure is a multiple vertical stacked bar graph dpicting the
number of TRS plans in each tier, January 2006-June 2007. The vertical
axis of the graph represnets number of plans from 0 to 12,000. The
horizontal axis of the graph represents months from January, 2006 to
June, 2007. Each bar is a composite of Tier 1, 2, and 3 plans. The
graph also indictes that there is a relatively stable number of plans
from October 2006 to June 2007.
Source: GAO analysis of DOD data.
[End of figure]
In addition to the estimated number of plans purchased, the other major
factor that affected DOD's projection of overall TRS program costs was
its estimate of the cost of providing benefits for each TRS plan. As
previously stated, DOD based its estimated cost per plan on the total
TRS premium minus the portion of the premium paid by enrollees. Because
the premiums have been higher than DOD's reported costs, DOD's cost
projections have also been too high.
DOD's Projection of Future TRS Enrollment Levels Is Likely Too High:
DOD developed a new model to project enrollment levels and program
costs under TRS's single-tiered premium structure that went into effect
on October 1, 2007; however, DOD's projection of future TRS enrollment
levels is likely too high. DOD projected that the total number of TRS
plans for individual and family coverage would be approximately 64,000
in fiscal year 2008 at a cost to the department of about $381 million
for that year.[Footnote 27] However, actual TRS enrollment data to date
suggest that total TRS enrollment--and therefore program costs--are
unlikely to be as high as DOD projected. As of June 2007, there were
about 11,500 TRS plans--well below DOD's projection of about 114,000.
Enrollment will almost certainly increase to some extent because
reservists who previously only qualified for tier 2 or tier 3 of the
program--which required enrollees to pay a larger portion of the
premium--have qualified for the significantly lower tier 1 enrollee
premiums since October 1, 2007. However, the degree to which it will
increase is not clear. DOD officials told us that they considered TRS
cost and enrollment data when developing future year projections of
program costs and enrollment levels, but they chose not to use these
data as part of their projections because of uncertainty about whether
they would provide an accurate indication of likely future experience.
DOD's past enrollment projections, made without the benefit of prior
year enrollment data, were significantly higher than actual enrollment
levels.
Conclusions:
Although DOD intended that TRS premiums would be equal to the expected
costs per plan of providing the benefit, DOD set premiums for the
program based on BCBS premiums that proved to be significantly higher
than the program's average reported costs per plan in 2006. Reservists'
portion of TRS premiums would have been lower in 2006 if DOD had
aligned premiums with the cost of providing TRS benefits. DOD officials
told us that the department planned to continue basing TRS premium
adjustments on BCBS premium adjustments in the immediate future, but
the regulation governing TRS premium adjustments allows for the
possibility that the department might change its methodology at some
point in the future. However, because TRS premiums were higher than the
average costs per plan in 2006, continuing to adjust TRS premiums based
on BCBS premium adjustments could widen the gap between TRS premiums
and the average costs per plan.
The discrepancy between TRS premiums and the reported program costs per
plan results from the approach DOD used in setting TRS premiums. Basing
TRS premiums on BCBS premiums is problematic because of several
dissimilarities between the two programs. Most important, the average
cost data now available suggest that TRS enrollees have incurred
significantly lower health care costs than BCBS enrollees, even after
adjusting for certain demographic characteristics. In addition, BCBS
premiums may be based on more than program costs, whereas TRS premiums
are intended to cover only costs. Basing TRS premiums on BCBS premiums
may have been reasonable at the time that TRS was first implemented in
2005 due to the lack of available data on the cost of providing
benefits through TRS. However, cost data that reflect actual experience
under the program are now becoming available, and limitations
associated with them should decrease over time as DOD gains more
experience with the program and more reservists enroll in it. These
data will provide DOD with an improved basis for setting premiums in
future years, and allow the department to eventually eliminate its
reliance on BCBS premiums. Nonetheless, due to the uncertainty
associated with predicting future health care costs, premiums are
unlikely to exactly match program costs, even when they are based on
cost data from prior years. Other insurance programs have methods to
address discrepancies between premiums and program costs, which are not
provided to DOD in the law governing TRS.
DOD has also had difficulty accurately estimating the likely cost of
providing TRS benefits in large part because it overestimated the
number of reservists who would likely purchase TRS coverage. Over time,
the availability of actual cost and enrollment data should help DOD
improve its projections for future years.
Recommendations for Executive Action:
With the goal of eventually eliminating reliance on BCBS premiums and
to better align premiums with the costs of providing TRS health care
benefits, we recommend that the Secretary of Defense direct the
Assistant Secretary for Health Affairs to stop basing TRS premium
adjustments only on BCBS premium adjustments and use the reported costs
of providing benefits through the TRS program when adjusting TRS
premiums in future years as limitations associated with the reported
cost data decrease.
We also recommend that DOD explore options for addressing instances in
which premiums have been either significantly higher or lower than
program costs in prior years, including seeking legislative authority
as necessary.
Agency Comments:
We received written comments on a draft of this report from DOD. DOD
stated that it concurs with our conclusions and recommendations and
that it is committed to improving the accuracy of TRS premium
projections. It further stated that our recommendations are consistent
with DOD's strategy to evolve the process, procedures, and analytical
framework used to adjust TRS premiums as the quality and quantity of
reported cost data improve. DOD's written comments are reprinted in
appendix III.
We are sending copies of this report to the Secretary of Defense and
other interested parties. We will also make copies available to others
on request. In addition, the report will be available at no charge on
GAO's Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-7114 or ekstrandl@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix IV.
Signed by:
Laurie Ekstrand:
Director, Health Care:
[End of section]
List of Committees:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Ted Stevens:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Ike Skelton:
Chairman:
The Honorable Duncan L. Hunter:
Ranking Member:
Committee on Armed Services:
House of Representatives:
The Honorable John P. Murtha:
Chairman:
The Honorable C. W. Bill Young:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendix I: Comparison of TRS Premium Growth with DOD's Estimated Rate
of Medical Care Price Inflation:
The John Warner National Defense Authorization Act (NDAA) for Fiscal
Year 2007 required that we describe how increases in Tricare Reserve
Select (TRS) premiums compare with the Department of Defense's (DOD)
annual rate of medical care price inflation.[Footnote 28] As discussed
with the committees of jurisdiction, this appendix compares DOD's
January 2006 TRS premium increase and DOD's proposed January 2007 TRS
premium increase with DOD's estimated annual rate of medical care price
inflation in fiscal years 2005 and 2006 as well as the medical
component of the Consumer Price Index for Urban Wage Earners and
Clerical Workers (CPI-W).
Premiums for TRS were first established when the program was
implemented in April 2005. To keep pace with rising health care costs,
DOD originally designed TRS premiums so that they are adjusted each
year based on annual adjustments in the Federal Employees Health
Benefits Program's Blue Cross and Blue Shield (BCBS) Standard plan
premiums. DOD planned to continue using this method to adjust premiums
in the immediate future, although program regulations allow some
flexibility in setting the premiums. Accordingly, in line with BCBS,
TRS premiums increased by 8.5 percent in January 2006. Based on
increases in BCBS, TRS premiums would have increased by 1 percent in
January 2007. However, the NDAA for Fiscal Year 2007 froze 2007
premiums through September 30, 2007, at the rates for calendar year
2006.
DOD calculated its average annual rate of medical care inflation to be
about 4.9 percent in fiscal year 2005 and about 4.7 percent in fiscal
year 2006. DOD did not develop these estimates of inflation based on
its own spending. Instead, DOD based the estimates on inflation rates
provided annually by the Office of Management and Budget for the
various components of the Tricare operating budget, such as military
personnel, private sector health care, and pharmacy. In contrast, the
medical component of the CPI-W increased at lower rates than DOD's rate
of medical care price inflation. The medical care component of the CPI-
W increased by about 4.1 percent in 2005 and about 4.2 percent in 2006.
The medical care component of the CPI-W is based on medical expenses,
but it is problematic to compare to DOD's estimated rate of medical
care inflation because it is based only on out-of-pocket medical
expenditures paid by consumers, including health insurance premiums,
and excludes the medical expenditures paid by public and private
insurance programs.
Comparing premium growth trends with DOD's annual rate of medical care
price inflation and the medical care component of the CPI-W is
problematic because of differences in each measurement. Unlike medical
care price inflation, premium growth may reflect factors such as
changes in the comprehensiveness of the policy, changes in the ratio of
premiums collected to benefits paid, changes in costs because of
increased utilization of health care services, contributions to or
withdrawals from plan reserves, and profits.
[End of section]
Appendix II: Scope and Methodology:
To compare the annual TRS premiums established by DOD to the reported
average costs per plan of providing benefits under TRS in 2006, we
reviewed DOD's reported TRS enrollment data and data on the cost of
providing TRS benefits through Tricare-authorized civilian providers or
hospitals, data on the administrative costs associated with providing
TRS benefits, and data on the costs of providing TRS benefits through
military treatment facilities (MTF). Using DOD's data, we calculated
the average cost per TRS plan[Footnote 29] of providing individual and
family coverage as the sum of the reported costs divided by the average
number of TRS plans. We also reviewed legislation relevant to the TRS
program and literature on setting health insurance premiums and
interviewed several experts from the fields of health economics and
finance and DOD officials in the Tricare Management Activity and the
Office of the Assistant Secretary for Health Affairs. We limited our
analysis to calendar year 2006 because some 2007 data are still
incomplete and because 2005 average cost data in some months are based
on a very small number of enrollees. At the time covered by our
analysis, TRS included three tiers of eligibility with enrollees paying
different portions of the premium based on the tier for which they
qualified.[Footnote 30] We limited our analysis to tier 1 because it
included over 90 percent of TRS plans and because tier 1 enrollee
premium levels have applied to the entire TRS program since October
2007. We are unable to report the average cost per plan for tiers 2 and
3 separately, due to the low number of enrollees in these tiers.
To compare DOD's projected costs for the TRS program before
implementation to DOD's reported costs for the program in 2005 and
2006, we reviewed the analyses prepared by DOD before TRS's
implementation that projected (1) the number of individual and family
plans in each tier of the TRS program and (2) the costs per plan of
providing the TRS benefit. These projections were the two major factors
used by DOD to estimate TRS costs. We compared these data with reported
TRS enrollment and cost data from April 2005 through June 2007. In
reporting the results of our comparison we use cost data through 2006
only, because some cost data for 2007 were incomplete. We also reviewed
DOD internal documents and interviewed DOD officials.
Calculation of Average Costs per TRS Plan:
To determine the average cost of providing benefits under TRS for 2006-
-for individual and family plans--we reviewed TRS enrollment data and
TRS purchased care cost data, administrative cost data, and data on the
costs of providing TRS benefits through MTFs, each of which were
provided to us by DOD.
DOD officials provided TRS enrollment data to us in the form of
multiple reports from the Defense Enrollment Eligibility Reporting
System for each month from May 2005 through June 2007. Each report
lists the number of TRS plans and enrollees in individual and family
plans broken down by tier. Using these reports, we calculated the
average number of TRS plans and enrollees in each month.
For each month, from May 2005 through June 2007, we calculated the
total costs of providing benefits under TRS by adding the cost
components reported by DOD, which consist of purchased care costs, MTF
costs, and administrative costs. Administrative costs were further
divided among costs associated with claims processing and separate
administrative fees levied by certain Tricare managed care support
contractors for each enrollee in each month.
For each month, we calculated the average cost per TRS plan for
individual and family coverage by dividing the total costs of providing
benefits under TRS by the average number of TRS plans. We determined
the average cost of providing benefits under TRS in 2006--for single
and family plans--by summing the monthly averages and weighting them by
enrollment in each month.
Data Reliability Tests:
To ensure that the DOD data were sufficiently reliable for our
analyses, we conducted detailed data reliability assessments of the
data sets that we used. We restricted these assessments, however, to
the specific variables that were pertinent to our analyses.
We reviewed DOD data that we determined to be relevant to our findings
to assess their quality and methodological soundness. Our review
consisted of (1) examining documents that describe the respective data,
(2) manually and electronically checking the data for obvious errors
and missing values, (3) interviewing DOD officials to inquire about
concerns we uncovered, and (4) interviewing DOD officials about
internal controls in place to ensure that data are complete and
accurate.
Our review revealed minor inconsistencies in DOD's data that we
reported to DOD officials. Overall, however, we found that all of the
data sets used in this report were sufficiently reliable for use in our
analyses. However, we did not independently verify DOD's figures.
We conducted our work from May 2007 through October 2007 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix III: Comments from the Department of Defense:
The Assistant Secretary Of Defense:
Health Affairs:
1200 Defense Pentagon:
Washington, DC 20301-1200:
December 14, 2007:
Ms. Laurie E. Ekstrand:
Director, Health Care:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Ekstrand:
This is the Department of Defense (DOD) response to the U.S. Government
Accountability Office (GAO) draft report; `Military Health Care: Cost
Data Indicates that Tricare Reserve Select Premiums Exceed the Costs of
Providing Program Benefits,' dated October 26, 2007, (GAO Code
290632/GAO-08-104).
Thank you for the opportunity to review and comment on the draft
report. Overall, the Department concurs on the subject draft report.
Our response to the recommendations is enclosed.
GAO's overall finding was that the Department did not accurately
estimate the costs of the Tricare Reserve Select (TRS) program and
proposed two recommendations.
As a first recommendation, GAO suggested that DOD stop basing TRS
premiums only on Blue Cross Blue Shield premium adjustments and use the
reported costs of providing benefits through TRS program when adjusting
TRS premiums in future years, as limitations associated with the
reported cost data decrease. GAO's second recommendation directed DOD
to explore options for addressing instances in which premiums have been
either significantly higher or lower than program costs in prior years,
including seeking legislative authority as necessary.
From the outset of TRS program, the Department's strategy was to evolve
the process, procedures, and analytical framework used to determine TRS
premiums as the quality and quantity of actual reported data improved.
Congressionally directed changes to the program, via three consecutive
National Defense Authorization Acts (fiscal years 2005-2007), has
slowed the data maturation process. Nonetheless, the Department remains
committed to improving the accuracy of TRS premium projections. Both of
GAO's recommendations are consistent with and reaffirm the Department's
basic strategy.
My points of contact regarding on this audit are Mr. Sean Coyle who can
be reached at (303) 676”3629 (Functional), and Mr. Gunther Zimmerman
(Audit Liaison) who can be reached at (703) 681”4360.
Sincerely,
Signed by:
S. Ward Casscells, MD
Enclosures: As stated:
U.S. Government Accountability Office Draft Report-Dated October 26,
2007 (GAO CODE 290632/GAO-08-104):
'Military Health Care: Cost Data Indicates that Tricare Reserve Select
Premiums Exceed the Costs of Providing Program Benefits'
Department Of Defense (DOD) Comments To The U.S. Government
Accountability Office Recommendations:
Recommendation 1: DOD stop basing Tricare Reserve Select (TRS) premium
adjustments only on Blue Cross Blue Shield premium adjustments and use
the reported costs of providing benefits through TRS program when
adjusting TRS premiums in future years as limitations associated with
the reported cost decrease.
DOD Response: Concur.
Recommendation 2: DOD explore options for addressing instances in which
premiums have been either significantly higher or lower than program
costs in prior years, including seeking legislative authority as
necessary.
DOD Response: Concur.
[End of section]
Appendix IV GAO Contact and Staff Acknowledgments:
GAO Contact:
Laurie Ekstrand, (202) 512-7114 or ekstrandl@gao.gov:
Acknowledgments:
In addition to the contact named above, Thomas Conahan, Assistant
Director; Krister Friday; Adrienne Griffin; William Simerl; and Michael
Zose made key contributions to this report.
[End of section]
Footnotes:
[1] In this report the term reservist includes all members of the seven
reserve components: the Army National Guard and the Air National Guard
as well as the Army Reserve, the Naval Reserve, the Marine Corps
Reserve, the Air Force Reserve, and the Coast Guard Reserve.
[2] Prior to these expansions, a reservist and his or her dependents
were eligible for Tricare only while the reservist was serving on
active duty for more than 30 days.
[3] The Selected Reserves contains those units and individuals
considered essential to wartime missions. In 2005, 88 percent of
reservists were considered part of the Selected Reserves.
[4] See 10 U.S.C. § 1076d(d)(2).
[5] In this report the term plan refers to a TRS policy purchased for
individual or family coverage.
[6] By law, under a three-tiered premium structure in effect during
fiscal year 2007, qualification criteria for TRS were set for each of
three separate tiers: Members of the Selected Reserves who served in a
contingency operation for 90 continuous days or more since September
11, 2001, qualified to purchase TRS coverage under tier 1 and paid 28
percent of the total premium. Members of the Selected Reserves who did
not have such service but were either unemployed, self-employed, or not
eligible for employer-sponsored insurance qualified to purchase TRS
coverage under tier 2 and paid 50 percent of the total premium. Members
of the Selected Reserves who did not qualify for tier 1 or tier 2 were
qualified to purchase TRS coverage under tier 3, and paid 85 percent of
the total premium. Due to a change in law, since October 1, 2007, all
enrollees have paid 28 percent of the total premium.
[7] See Pub. L. No. 109-364, § 713(b), 120 Stat. 2083, 2289-90 (2006).
[8] In our analysis we calculated a separate average cost per TRS plan
for individual and family coverage--not the average cost per TRS
enrollee.
[9] GAO, Global War on Terrorism: DOD Needs to Improve the Reliability
of Cost Data and Provide Additional Guidance to Control Costs, GAO-05-
882 (Washington, D.C.: Sept. 21, 2005), and Medicare Subvention
Demonstration: DOD Data Limitations May Require Adjustments and Raise
Broader Concern, GAO/HEHS-99-39, (Washington, D.C.: May 28, 1999).
[10] Tricare coverage is generally available to reservists and their
dependents at no charge for up to 90 days prior to the beginning of
active duty service and 180 days after. The Transitional Assistance
Management Program offers 180 days of individual or family Tricare
coverage to reserve component members separated from active duty after
being called up or ordered in support of a contingency operation for
more than 30 days.
[11] See Pub. L. No. 108-375, § 701, 118 Stat. 1811, 1980-82 (2004).
[12] Reservists who were ordered to active duty for a period of more
than 30 days, but served less than 90 continuous days due to an injury,
illness, or disease incurred or aggravated while deployed, were
eligible for 1 year of Tricare coverage under TRS as originally
authorized.
[13] See Pub. L. No. 109-163, §§ 701-702, 119 Stat. 3136, 3339-42.
[14] See Pub. L. No. 109-364, § 706, 120 Stat. 2083, 2282 (2006)
(codified at 10 U.S.C. § 1076d).
[15] Tricare has three options, referred to as Standard (similar to fee-
for-service option), Extra (similar to a preferred provider option),
and Prime (similar to a health maintenance organization option).
Tricare Prime is not available under TRS.
[16] See 10 U.S.C. § 1076d(d)(2).
[17] The TRS premiums for family coverage and individual coverage were
both affected by TRS's younger population. The TRS premium for family
coverage was affected by the TRS population's larger number of
dependents per sponsor, making its adjustment from the BCBS premium
smaller. The TRS premium for individual coverage is affected by the TRS
population's larger percentage of males, who generally incur lower
health care costs than females, making its adjustment larger.
[18] Adverse selection occurs when people who know they have a risk of
incurring health care expenses buy insurance coverage, while those who
have relatively less risk of incurring health care expenses decide the
insurance is too expensive and therefore do not buy it. In these cases,
the resulting insured population is likely to incur greater-than-
average health care costs. Therefore, any premiums set to account for
an insured population with average health care costs may not be
sufficient to cover the claims that eventually arise.
[19] See Pub. L. No. 109-364, § 704, 120 Stat. 2083, 2280 (2006). This
provision prevented any increase in premiums through September 30,
2007. The NDAA for Fiscal Year 2008, as passed by the House and Senate
and reported on in Conference Report 110-477, contains a provision that
would extend this prohibition through September 20, 2008. As of
December 17, 2007, the President had not signed this bill into law.
[20] The average costs per TRS plan reported above apply only to tier 1
plans and are weighted by the number of plans in each month in calendar
year 2006. However, including tiers 2 and 3 in our calculation of the
average costs per plan does not substantially change the results,
because tier 1 comprised over 90 percent of all TRS plans.
[21] GAO, Federal Employees Health Benefits Program: Differences in
Health Care Prices across Metropolitan Areas Linked to Competition and
Other Factors, GAO-06-281T (Washington, D.C.: Dec. 2, 2005).
[22] Under 5 U.S.C. § 8909, the Office of Personnel Management
administers a reserve account for each FEHBP plan, including BCBS.
Funds in the reserves may be used to defray future premium increases,
enhance plan benefits, reduce premiums, or cover unexpected shortfalls
from higher-than-anticipated claims.
[23] We obtained information from experts in the fields of economics
and finance.
[24] See 70 Fed. Reg. 12798, 12800-01 (Mar. 16, 2005).
[25] The TRS program does not receive a separate appropriation but is
funded through the lump sum appropriation for the Defense Health
Program, as well as the premiums paid by reservists. Both the lump sum
appropriation and the premiums are credited to the Defense Health
Program account. Since amounts in this account are generally available
for all medical and dental care for DOD beneficiaries, not just for TRS
benefits, funds not spent on TRS are available for other components of
the Defense Health Program. See 10 U.S.C. §§ 1076d(d)(5), 1100.
[26] Both DOD's projected and reported costs also included
approximately $25 million that DOD obligated over fiscal years 2005 and
2006 for start-up costs to be paid to the managed care support
contractors and subcontractors that oversee Tricare's civilian provider
network and process Tricare claims, and for changes to DOD's data
systems. DOD officials told us that this $25 million had been obligated
over fiscal years 2005 and 2006, but that it had not been paid out in
full. As of September 18, 2007, DOD officials told us that they and the
contractors had not yet determined the exact amounts to be paid.
[27] DOD's new model projects enrollment and costs through 2013 under
TRS's single-tiered structure. Approximately 107,000 reservists are
expected to enroll in TRS by fiscal year 2010, with enrollment levels
remaining relatively constant through fiscal year 2013. Program costs
are projected to increase each year and amount to approximately $874
million in fiscal year 2013.
[28] See Pub. L. No. 109-364, § 713(b)(2)(B), 120 Stat. 2083, 2289
(2006).
[29] In our analysis, we calculated a separate average cost per TRS
plan for individual and family coverage--not the average cost per TRS
enrollee.
[30] By law, under a three-tiered premium structure in effect during
fiscal year 2007, qualification criteria for TRS were set for each of
three separate tiers: Members of the Selected Reserves who served in a
contingency operation for 90 or more continuous days since September
11, 2001, qualified to purchase TRS coverage under tier 1 and paid 28
percent of the total premium. Members of the Selected Reserves who did
not have such service but were either unemployed, self-employed, or not
eligible for employer-sponsored insurance qualified to purchase TRS
coverage under tier 2 and paid 50 percent of the total premium. Members
of the Selected Reserves who did not qualify for tier 1 or tier 2 were
qualified to purchase TRS coverage under tier 3 and paid 85 percent of
the total premium. Due to a change in law, since October 1, 2007, all
enrollees have paid 28 percent of the total premium.
[End of section]
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