Coast Guard Retiree Health Care
Coast Guard Contributions to and Payments from the DOD Medicare-Eligible Retiree Health Care Fund (MERHCF) Gao ID: GAO-09-857R July 15, 2009This letter formally transmits information about the process used to determine the amount charged to the Coast Guard for Medicare-eligible retiree health care and amounts paid from the MERHCF for health care benefits provided to Coast Guard retirees for fiscal years 2006 through 2008.
GAO-09-857R, Coast Guard Retiree Health Care: Coast Guard Contributions to and Payments from the DOD Medicare-Eligible Retiree Health Care Fund (MERHCF)
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GAO-09-857R:
United States Government Accountability Office:
Washington, DC 20548:
July 15, 2009:
Congressional Committees:
Subject: Coast Guard Retiree Health Care: Coast Guard Contributions to
and Payments from the DOD Medicare-Eligible Retiree Health Care Fund
(MERHCF):
This letter formally transmits the enclosed briefing slides in response
to 154 Cong. Rec. H9801 (daily ed. Sept. 24, 2008) (Explanatory
Statement accompanying H.R. 2638, Consolidated Security, Disaster
Assistance, and Continuing Appropriations Act, 2009, Pub. L. No. 110-
329, 122 Stat. 3574 (Sept. 30, 2008)). The briefing slides provide
information about the process used to determine the amount charged to
the Coast Guard for Medicare-eligible retiree health care and amounts
paid from the MERHCF for health care benefits provided to Coast Guard
retirees for fiscal years 2006 through 2008.
We are sending copies of this report to the appropriate congressional
committees. We are also sending copies to the Secretary of Defense, the
Assistant Secretary of Defense for Health Affairs, the Secretary of
Homeland Security, and the Commandant of the Coast Guard. In addition,
the report will be available at no charge on GAO's Web site at
[hyperlink, http://www.gao.gov. Should you or your staff have any
questions concerning this report, please contact me at 202-512-9095 or
dalykl@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Key contributors to this report were Kimberly Brooks (Assistant
Director), Diane Morris, Donell Ries, and Melanie Swift.
Signed by:
Kay L. Daly:
Director:
Financial Management and Assurance:
Enclosure:
List of Congressional Committees:
The Honorable Robert C. Byrd:
Chairman:
The Honorable George V. Voinovich:
Ranking Member:
Subcommittee on Homeland Security:
Committee on Appropriations:
United States Senate:
The Honorable David E. Price:
Chairman:
The Honorable Harold Rogers:
Ranking Member:
Subcommittee on Homeland Security:
Committee on Appropriations:
House of Representatives:
[End of letter]
Enclosure:
Coast Guard Contributions to and Payments from the DOD Medicare-
Eligible Retiree Health Care Fund (MERHCF):
Briefing for Staff of the House and Senate Subcommittees on Homeland
Security, Committees on Appropriations:
June 30, 2009:
Overview:
* Background;
* Objectives;
* Scope and Methodology;
* Process for Determining Coast Guard‘s Annual Contribution Amount;
- Determining the Annual Contribution Rate;
- Determining the Annual Contribution Amount;
- Annual Amounts Contributed by Coast Guard and Other Uniformed
Services for Fiscal Years 2006-2009;
* Health Care Benefits Paid from MERHCF.
Background:
MERHCF was established by the Floyd D. Spence National Defense
Authorization Act for Fiscal Year 2001 in order to pay for health care
benefits received by Medicare-eligible retirees of the uniformed
services and their eligible dependents and survivors.
* Uniformed services refer to both Department of Defense (DOD)
uniformed services (Army, Navy, Air Force, Marines) and non-DOD
uniformed services (Coast Guard, Public Health Service (PHS), and
National Oceanic and Atmospheric Administration (NOAA)).
Health care benefits include:
* Purchased Care”care from civilian providers,
* Direct Care”care from DOD military treatment facilities, and;
* Uniformed Services Family Health Plan (HMO-like plan).
The DOD and non-DOD uniformed services make annual contributions into
the MERHCF for the cost of future health care benefits associated with
service rendered after October 1, 2002.[Footnote 1]
* Contribution amounts for all uniformed services are determined by the
DOD Office of the Actuary. Funding for the contribution amounts is
included in each uniformed service‘s appropriation.
Objectives:
We performed this work in response to a mandate related to the
Consolidated Security, Disaster Assistance, and Continuing
Appropriations Act, 2009, Pub. L. No. 110-329, 122 Stat. 3574 (Sept.
30, 2008).
Our objectives were the following:
1. Describe the process for determining Coast Guard‘s annual
contribution into the MERHCF and report the amounts contributed during
fiscal years 2006 through 2009.
2. Report the amounts paid from the MERHCF for health care benefits
provided to Coast Guard Medicare-eligible retirees for fiscal years
2006 through 2008, the last year for which data is available.
Scope and Methodology:
To address the objectives we:
* interviewed knowledgeable agency officials and others from:
- DOD Office of the Actuary,
- Defense Finance and Accounting Service,
- DOD‘s TRICARE Management Activity,
- Coast Guard, and;
* discussed with the auditors of the MERHCF financial statements their
work related to amounts paid from the MERHCF for health care benefits.
We reviewed relevant documents and data such as:
* MERHCF audited financial statements,
* Office of the Actuary‘s valuation reports, and,
* DOD‘s TRICARE Management Activity (TMA) payment schedules and
reports.
- We conducted a reasonableness test of TMA‘s health care payment data
by comparing TMA data to the MERHCF financial statements.
- We did not independently verify the amounts.
We conducted our work from March 2009 to June 2009 in accordance with
all sections of GAO‘s Quality Assurance Framework that are relevant to
our objectives. The framework requires that we plan and perform the
engagement to obtain sufficient and appropriate evidence to meet our
stated objectives and to discuss any limitations in our work. We
believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for our work.
Process for Determining the Coast Guard‘s Annual Contributions to
MERHCF:
DOD actuaries are required by law to use the aggregate entry-age normal
cost method to determine annual contribution amounts.[Footnote 2]
The contribution rate is derived by dividing the present value of
future benefits by the actuarial value of future work years. This
contribution rate is then multiplied by the average force strength for
the year to produce each service‘s contribution amount.
* Full-time and part-time rates are determined for active duty and
reserves, respectively.
Figure: Process for Determining the Coast Guard‘s Annual Contributions
to MERHCF:
[Refer to PDF for image: illustration]
Determine contribution rate:
Estimate the population;
Estimate the amount of future health care benefits for the population;
Use discount rate to calculate present value of future benefits;
equals:
Present value of future benefits;
divided by:
Actual value of future work years;
equals:
Annual contribution rate;
Determine contribution amount:
Annual contribution rate;
times:
Average force strength for year;
equals:
Annual contribution amount.
Source: GAO analysis of DOD information.
[End of figure]
Determining the Annual Contribution Rate:
Contribution Rate equals Present Value of Future Benefits divided by
Actuarial Value of Future Work Years:
Determining the present value of future benefits:
1. Estimate the population of future Medicare-eligible retirees and
their eligible dependents and survivors.
* The actuaries use an assumed number of new entrants into active duty
and the reserves, as required by the aggregate entry-age normal cost
method.[Footnote 3]
* The actuaries use a population-projection model that applies various
assumptions[Footnote 4] over a 100-year period to project the status of
the new entrants into the future through their careers into retirement
until they and all of their dependents and survivors are deceased.
2. Estimate future health care benefits for the retiree population.
* The actuaries use historical data on payments from the MERHCF for
health care benefits provided to all uniformed services.
* The payment data[Footnote 5] includes purchased care received at
civilian health care providers and direct care[Footnote 6] received at
military treatment facilities for inpatient stays, outpatient visits,
and prescription drugs. Also included are amounts paid to Uniformed
Services Family Health Plan facilities for Medicare-eligible retirees.
3. Calculate the present value of the future benefits using the
approved discount rate.
Determining actuarial value of future work years:
* When the status of the new entrants is being projected, the same
model also calculates the number of service members remaining on active
duty at year-end for each year during the 100-year period.
* The actuaries use an assumed value of $1 per work year for the first
year of the 100-year period. The $1 per work year rate increases in
subsequent years based on assumed increases in medical costs, mix, and
utilization. The stream of future work years valued this way is
discounted using the approved discount rate to get the actuarial value
of future work years.[Footnote 7]
Determining Annual Contribution Amount:
Contribution Rate × Average Force Strength = Contribution Amount:
The contribution rates determined by the actuaries for fiscal years
2006-2009 were:
* fiscal year 2006: full-time rate = $5,652; part-time rate = $3,324,
* fiscal year 2007: full-time rate = $6,048; part-time rate = $3,516,
* fiscal year 2008: full-time rate = $5,988; part-time rate = $3,441,
and,
* fiscal year 2009: full-time rate = $5,560; part-time rate = $3,222.
Average force strength data is submitted to the DOD Office of the
Actuary annually by each uniformed service.
Coast Guard‘s average force strength data used to calculate its
contribution amount for fiscal years 2006 through 2009 were:
* fiscal year 2006: active duty = 41,332; reserves = 8,100,
* fiscal year 2007: active duty = 41,373; reserves = 8,100,
* fiscal year 2008: active duty = 40,788; reserves = 8,100, and,
* fiscal year 2009: active duty = 41,587; reserves = 8,100.
Table: Amounts Contributed to MERHCF by the Coast Guard and Other
Uniformed Services for Fiscal Years 2006-2009:
Contribution amount (In thousands):
Service: DOD;
Fiscal year 2006: $10,775,392;
Fiscal year 2007: $11,230,630;
Fiscal year 2008: $11,185,399;
Fiscal year 2009: $10,350,593.
Service: Coast Guard;
Fiscal year 2006: $260,533;
Fiscal year 2007: $278,704;
Fiscal year 2008: $272,111;
Fiscal year 2009: $257,322.
Service: PHS;
Fiscal year 2006: $34,477;
Fiscal year 2007: $36,288;
Fiscal year 2008: $36,647;
Fiscal year 2009: $34,778.
Service: NOAA;
Fiscal year 2006: $1,645;
Fiscal year 2007: $1,820;
Fiscal year 2008: $1,802;
Fiscal year 2009: $1,674.
Service: Total;
Fiscal year 2006: $11,072,047;
Fiscal year 2007: $11,547,442;
Fiscal year 2008: $11,495,959;
Fiscal year 2009: $10,644,367.
Source: DOD Office of the Actuary.
[End of table]
Health Care Benefits Paid from MERHCF:
MERHCF payments for purchased care are based on bills submitted by
civilian providers and pharmacies.
* For medical care, claims are filed by the doctor or hospital and sent
to a Medicare contractor. The claim is forwarded to TRICARE Management
Activity for remaining amounts due after Medicare and any private
insurance have paid. MERHCF funds are also used to pay administrative
claims-processing fees.
* For prescriptions from retail pharmacies, claims are filed by the
pharmacy and sent to a claims-processing contractor who pays the
pharmacy with MERHCF funds. MERHCF funds are also used to pay
administrative claims-processing fees.
* For prescriptions from the mail-order pharmacy, TRICARE Management
Activity uses MERHCF funds to pay the contractor for administrative
processing fees and to pay the Defense Logistics Agency, which supplies
the drugs.
MERHCF payments for care obtained from Uniformed Services Family Health
Plan providers are made on a monthly basis based on contract-specific
capitation rates.[Footnote 8]
MERHCF payments for direct care are based on estimates.
* TRICARE Management Activity (TMA) uses historical workload data to
develop estimates of the level of effort at each military treatment
facility (MTF) that was devoted to Medicare-eligible members.
* TMA determines the direct care amounts for MTF operations and
maintenance that should be assigned to the inpatient stays, outpatient
visits, and prescription drugs for MERHCF beneficiaries and the
appropriate portion of amounts for military labor/personnel associated
with health care delivered to MERHCF beneficiaries.
* The MERHCF financial statement auditors have reported weaknesses in
the underlying processes used to derive direct care amounts for fiscal
years 2006 through 2008. The auditors reported that there is
insufficient evidence that adequate controls exist and have been
implemented to ensure the completeness, validity, recording, and cut-
off of the direct care amounts reported.
Table: Amounts Paid from MERHCF, Unaudited (dollars in millions):
Purchased care: Inpatient and outpatient claims;
Fiscal year 2006, Coast Guard: $30.8;
Fiscal year 2006, All services: $2,157.0;
Fiscal year 2007, Coast Guard: $34.1;
Fiscal year 2007, All services: $2,375,7;
Fiscal year 2008, Coast Guard: $37.6;
Fiscal year 2008, All services: $2,543,7.
Purchased care: Prescription drugs;
Fiscal year 2006, Coast Guard: $40.0;
Fiscal year 2006, All services: $2,706.8;
Fiscal year 2007, Coast Guard: $44.2;
Fiscal year 2007, All services: $2,940.5;
Fiscal year 2008, Coast Guard: $48.5;
Fiscal year 2008, All services: $3,078.4.
Purchased care: US Family Health Plan;
Fiscal year 2006, Coast Guard: $19.0;
Fiscal year 2006, All services: $475.0;
Fiscal year 2007, Coast Guard: $21.4;
Fiscal year 2007, All services: $527.1;
Fiscal year 2008, Coast Guard: $23.7;
Fiscal year 2008, All services: $568.0.
Total Purchased Care Payments:
Fiscal year 2006, Coast Guard: $89.8;
Fiscal year 2006, All services: $5,338.8;
Fiscal year 2007, Coast Guard: $99.7;
Fiscal year 2007, All services: $5,843,3;
Fiscal year 2008, Coast Guard: $109.8;
Fiscal year 2008, All services: $6,190.1.
Direct care: Inpatient and outpatient claims;
Fiscal year 2006, Coast Guard: $6.6;
Fiscal year 2006, All services: $962.6;
Fiscal year 2007, Coast Guard: $7.8;
Fiscal year 2007, All services: $944.7;
Fiscal year 2008, Coast Guard: $7.9;
Fiscal year 2008, All services: $989.5.
Direct care: Prescription drugs;
Fiscal year 2006, Coast Guard: $7.5;
Fiscal year 2006, All services: $771.5;
Fiscal year 2007, Coast Guard: $7.9;
Fiscal year 2007, All services: $814.3;
Fiscal year 2008, Coast Guard: $8.0;
Fiscal year 2008, All services: $810.2.
Total Direct Care Payments:
Fiscal year 2006, Coast Guard: $14.1;
Fiscal year 2006, All services: $1,734.1;
Fiscal year 2007, Coast Guard: $15.7;
Fiscal year 2007, All services: $1,759.0;
Fiscal year 2008, Coast Guard: $15.9;
Fiscal year 2008, All services: $1,799.7.
Total Payments from MERHCF:
Fiscal year 2006, Coast Guard: $103.9;
Fiscal year 2006, All services: $7,073.9;
Fiscal year 2007, Coast Guard: $115.4;
Fiscal year 2007, All services: $7,602.3;
Fiscal year 2008, Coast Guard: $125.7;
Fiscal year 2008, All services: $7,989.8.
Source: DOD TRICARE Management Activity.
[End of table]
[End of section]
GAO Contacts and Staff Acknowledgments:
GAO Contact:
Kay Daly, (202) 512-9095:
Acknowledgments:
In addition to the contact named above, staff members who made key
contributions to this report include Kimberly Brooks (Assistant
Director), Diane Morris, Donell Ries, and Melanie Swift.
[End of section]
Footnotes:
[1] The MERHCF also receives annual funding from the Department of the
Treasury to pay the liability related to the cost of the portion of
retiree health care benefits attributable to service rendered prior to
October 1, 2002, and to cover any actuarial gains and losses due to
changes in assumptions, benefits, and experience since October 1, 2002.
This amount comes from the General Fund.
[2] This is an actuarial cost method designed to fund a member‘s total
health care benefits over the course of his or her career. Entry age is
the earliest age at which a member begins to accrue health care
benefits. In most cases, this is assumed to be the date of hire or
entry.
[3] The assumed number of new entrants used by the actuaries is 100,000
for active duty and 20,912 for the reserves. The 100,000 is an
arbitrary number that, according to the DOD actuaries, is large enough
to produce reasonable results when projecting the status of the new
entrants throughout their career and into retirement. The actuaries
have used 100,000 since the establishment of the MERHCF. The assumed
number of new entrants into the reserves--20,912--is derived based on
the 100,000 active duty new entrants.
[4] Assumptions based on historical data about changes in DOD active
duty and retiree populations, both enlisted and officers, represent
probabilities of a new entrant leaving a category of military service
for a specific cause such as active duty and retiree deaths, temporary
or permanent disability retirements, nondisability retirements,
withdrawals, and transfers between enlisted and officer status.
[5] The actuaries use 3 years of payment data to determine expected
average family benefit payment amounts for a given year per retiree, by
retiree age and category. The retiree categories are (1) retired,
nondisabled, active duty, enlisted; (2) retired, nondisabled, active
duty, officer; (3) retired, disabled, active duty, enlisted; (4)
retired, disabled, active duty, officer; (5) retired, nondisabled,
reserve, enlisted; (6) retired, nondisabled, reserve, officer; (7)
survivor of active duty enlisted; (8) survivor of active duty officers;
(9) survivor of reserve enlisted; and (10) survivor of reserve officer.
[6] The MERHCF financial statement auditors have reported weaknesses in
the underlying process used to derive direct care costs; existing cost
accounting systems do not have the capacity to record or generate cost
data for each patient and the processes used to identify costs at the
patient level could not be verified.
[7] The actuaries assume a normal cost based on a contribution starting
at $1 per work year and increasing thereafter with medical trends. This
assumption is made to assign a monetary value to the work years so that
the value of future work years can be expressed in present value the
same as the future benefits. This enables the actuaries to calculate a
normal cost rate each year that covers a portion of the future health
benefits for each group of new entrants.
[8] Capitation is a payment method for health care services. The
physician, hospital or other health care provider is paid a contracted
rate for each member assigned, regardless of the number or nature of
services provided.
[End of section]
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