Defense Health Program

Future Costs Are Likely to Be Greater than Estimated Gao ID: NSIAD-97-83BR February 21, 1997

The Defense Department (DOD), which is counting on infrastructure savings to pay for new weapon systems, may have underestimated its health care budget by billions of dollars because of questionable assumptions about the future costs of medical treatment and possible savings from its new managed health care system. In addition to treating patients during wartime, DOD's medical system provides health care for active duty military personnel, their families, and retirees. GAO found that DOD did not factor in any cost growth due to advances in medical technology and the intensity of treatment. In addition, DOD claimed that its managed health care system would yield substantial savings by reducing unnecessary treatments and testing--even though DOD did not use a formal methodology or analysis to arrive at such savings.

GAO noted that: (1) future Defense Health Program costs are likely to be greater than DOD has estimated; (2) GAO's analysis showed that one key assumption DOD used to estimate future program costs appeared to be unrealistic and another was questionable; (3) first, DOD assumed that no cost growth would be attributable to advances in medical technology and the intensity of treatment, an important and valid health care cost growth factor; (4) second, DOD assumed that a certain level of savings would be achieved from its new emphasis on utilization management techniques to reduce unnecessary treatment and testing, although it did not use a formal methodology or analysis to derive the savings; (5) DOD's projection that health program budgets will not increase in constant dollars during fiscal years 1998 to 2003 also appears to be unrealistic, given that during fiscal years 1985 to 1996, the operation and maintenance funds in DOD's health program increased by 73 percent in real terms (operation and maintenance funds take about two-thirds of the Defense Health Program budget); (6) in developing its budget estimates, DOD applied a factor of zero for technology and intensity; (7) according to health care financing experts, DOD's Defense Health Program is subject to some level of cost growth because of the addition of new technology and increased intensity of treatment; (8) these experts agreed that a factor of between 1 and 2 percent would be appropriate to apply to DOD's program; (9) DOD assumed in its program objective memorandum (POM) estimate that it would save 5 percent from utilization management techniques, even though it did not have a formal methodology for estimating this level of savings; (10) although DOD's budget assumptions appear to be optimistic, the extent to which future costs might exceed the budget estimates is unknown; (11) GAO analyzed the effects of using different assumptions on the budget estimates for fiscal years 1998 to 2003; (12) if DOD had accounted for technology and intensity of treatment at a rate of 1.5 percent, for example, in constructing its initial estimates, the projections would have been $3.2 billion higher cumulatively; (13) if DOD is unable to achieve the level of estimated savings it anticipates from utilization management techniques, program costs would exceed the budget estimate by an additional amount; (14) GAO also compared the 1998 POM to revised budget estimates from the post-program and budget decision cycle; and (15) this comparison showed that health program costs for fiscal years 1998 to 2003 could be $8.4 billion greater than estimated.

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