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entitled 'Defense Health Care: Health Insurance Stipend Program 
Expected to Cost More Than TRICARE But Could Improve Continuity of Care 
for Dependents of Activated Reserve Component Members' which was 
released on October 19, 2005. 

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October 19, 2005: 

The Honorable John Warner: 
Chairman: 
The Honorable Carl Levin: 
Ranking Minority Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Duncan L. Hunter: 
Chairman: 
The Honorable Ike Skelton: 
Ranking Minority Member: 
Committee on Armed Services: 
House of Representatives: 

Subject: Defense Health Care: Health Insurance Stipend Program Expected 
to Cost More Than TRICARE But Could Improve Continuity of Care for 
Dependents of Activated Reserve Component Members: 

Since the September 11, 2001, terrorist attacks, the Department of 
Defense (DOD) has increased its reliance on its National Guard and 
reserve forces to support the Global War on Terrorism, and particularly 
Operation Iraqi Freedom. Congress has been interested in making 
improvements and enhancements to compensation and benefit programs for 
reserve component members.[Footnote 1] When reserve component members 
are activated for more than 30 days under federal authorities, they are 
covered under TRICARE, DOD's health care system.[Footnote 2] While 
reserve component members are automatically covered by TRICARE when 
activated, their spouses and other dependents have the option of using 
either TRICARE or their private health insurance. However, our prior 
work[Footnote 3] found that dependents of reserve component members who 
had dropped their private health insurance reported problems accessing 
the TRICARE system--such as difficulty finding a health care provider, 
establishing eligibility, understanding TRICARE benefits, and knowing 
where to go when questions and problems arise. In addition, maintaining 
continuity of care with the same health care providers, especially for 
dependents with chronic medical conditions, may be problematic after 
switching to TRICARE. To address these concerns, some legislative 
proposals would give reserve component members the option of accepting 
a stipend from DOD to help defray the cost of continuing their private 
health insurance for their spouses and dependents when they are 
activated for more than 30 days. 

The Ronald W. Reagan National Defense Authorization Act for Fiscal Year 
2005[Footnote 4] requires us to determine the cost and feasibility of 
providing a stipend to members of the Ready Reserve[Footnote 5] to 
offset the cost of continuing their current private health insurance 
coverage for their dependents while they are on active duty. 
Specifically, we (1) examined whether the implementation of a health 
care stipend program would be likely to increase or decrease the cost 
to DOD of providing health care to the spouses and dependents of 
reserve component members and (2) identified the potential implications 
of a stipend program on members and their families, DOD, and the 
members' employers. 

To determine the cost of a stipend program, we requested the 
Congressional Budget Office (CBO) to prepare an estimate of cost for a 
stipend program for varying rates of participation since it is not 
within our purview, but rather CBO's, to develop cost estimates 
associated with legislative proposals. CBO also prepared an estimate of 
cost to DOD for spouses and dependents of activated reserve component 
members using TRICARE instead of receiving the stipend. 

To identify the potential implications of a stipend program on 
recruitment, retention, and medical readiness,[Footnote 6] we discussed 
and obtained documentation from DOD's Office of the Assistant Secretary 
of Defense for Reserve Affairs and Office of the Assistant Secretary of 
Defense for Health Affairs and representatives of selected military 
service organizations--the Enlisted Association of the National Guard 
of the United States, the Reserve Officers Association of the United 
States, and the Military Officers Association of America. We also 
analyzed the November 2004 DOD survey of reserve component members to 
identify those factors reserve component members consider important for 
retention. We also discussed the potential implications of a stipend 
program with representatives of two organizations representing 
employers--the National Federation of Independent Businesses and the 
National Association of Manufacturers. For more detailed information on 
our scope and methodology, see enclosure I. We performed our work from 
February 2005 through September 2005 in accordance with generally 
accepted government auditing standards. 

Results In Brief: 

Offering a health care stipend to reserve component members could cost 
DOD from $365 million to $735 million over a 5-year period--fiscal 
years 2006 through 2010--exclusive of program administration costs, for 
a specific range of reserve component member participation rates. CBO 
officials cautioned that in the absence of specific legislative 
language that describes the design of a proposed stipend program in 
detail, CBO's estimates should be considered preliminary. Final CBO 
estimates would reflect actual legislative language and CBO's then 
current baseline assumptions. For example, in preparing this estimate 
of cost, CBO assumed that the amount of the stipend would equal the 
average worker contribution for family health plans. However, for 
deployments of more than 30 days, employees may be liable for the full 
health insurance premium, including the employer share, plus an 
additional 2 percent for administrative costs. This amount may be 
significantly higher than the amount of the stipend used by CBO in 
preparing the estimate of cost. In addition, DOD estimated that it 
would cost about $10 million for startup costs in the first year of 
implementation and $20 to $25 million annually to administer stipend 
payments to participating reserve component members. Since the Ronald 
W. Reagan National Defense Authorization Act for Fiscal Year 2005 did 
not identify the specific design features of a stipend program, it was 
difficult to identify a reliable anticipated participation rate for a 
stipend program. Using CBO's cost estimate of a 75 percent 
participation level by eligible servicemembers and including DOD's 
estimate of administrative costs, it could cost DOD $230 million (45.5 
percent) more to provide health care stipends to spouses and dependents 
of activated reserve component members over a 5-year period (fiscal 
years 2006 through 2010) than to provide TRICARE to these individuals. 

The most significant potential impact of a health care stipend program 
could be to improve continuity of care for spouses and dependents of 
reserve component members because the availability of a stipend would 
potentially allow more reserve component members to continue their 
private health insurance while they are activated. Continuation of 
their private health insurance would help family members avoid 
disruption in ongoing medical treatment caused by switching to TRICARE 
for their health care coverage, by enabling them to keep their current 
health care providers. Civilian employers of reserve component members 
may also benefit from the availability of a stipend since this amount 
will help to offset the burden on those employers who choose to pay the 
full contribution for their activated employees. However, DOD officials 
are unaware of any evidence to support that a stipend would have any 
impact on several other issues affecting the reserve components, 
including medical readiness, recruitment, or retention of reserve 
component members. 

Background: 

There are seven reserve components: the Army Reserve, Army National 
Guard, Air Force Reserve, Air National Guard, Naval Reserve, Marine 
Corps Reserve and the Coast Guard Reserve. Reserve forces can be 
divided into three major categories: the Ready Reserve, the Standby 
Reserve, and the Retired Reserve. The Ready Reserve had about 1.1 
million National Guard and reserve members as of July 2005, and as of 
September 2005, members of the Ready Reserve have been the only reserve 
component members subject to mobilization under the partial 
mobilization authority[Footnote 7] declared by the President on 
September 14, 2001.[Footnote 8] 

Under federal mobilization authorities, members of the reserve 
component may be activated to move the military from its peacetime 
posture to a heightened state of readiness to support national security 
objectives in times of war or other national emergencies. In recent 
years, DOD has dramatically increased its reliance on reserve component 
members for military operations, particularly those in Afghanistan and 
Iraq. Between September 2001 and May 2005, DOD mobilized more than 
436,000 reserve component members. The average number of days a reserve 
component member spent on active duty for three ongoing operations 
(Operations Noble Eagle, Enduring Freedom, and Iraqi Freedom) as of 
March 2004 totaled 342 days. 

The Ronald W. Reagan National Defense Authorization Act for Fiscal Year 
2005 included several provisions to enhance health care benefits for 
reserve component members and their dependents--which includes spouses, 
children, and others who qualify--to help with their transition from 
civilian status to active duty status. Generally, these provisions 
provided for the following: 

* Permanent authority for reserve component members and their 
dependents to be eligible for TRICARE benefits when they receive a 
delayed- effective-date order for activation up to 90 days before 
activation. 

* Permanent authority to provide transitional health care benefits to 
certain service members and their dependents for up to 180 days 
following separation from active duty. 

* Authorized waiver of certain deductibles required by certain TRICARE 
programs for dependents of certain reserve component members who are 
called or ordered to active duty for a period of more than 30 days. 

* Exemption for dependents of reserve component members who are ordered 
to active duty for a period of more than 30 days from paying a health 
care provider any amount above the TRICARE maximum allowable charge. 

Also, the Act gave those reserve component members called up on or 
after September 11, 2001 an opportunity to purchase TRICARE health care 
coverage for themselves and their family members after they 
demobilize.[Footnote 9] This program, known as TRICARE Reserve Select, 
requires the member to agree to continue serving for a period of one 
year or more in the Selected Reserve after their active duty service 
ends. 

A reserve component member is covered by TRICARE while activated. The 
member's dependents, who qualify, have the option of using TRICARE at 
no premium or continuing to use health insurance that may be provided 
by the member's employer, which may include a cost to the member. 
TRICARE eligible dependents can obtain health care through DOD's direct 
care system of military hospitals and clinics, commonly referred to as 
military treatment facilities, and through DOD's purchased care system 
of civilian providers. DOD uses managed care support contractors to 
develop networks of providers to complement care available in military 
treatment facilities. The Office of the Assistant Secretary of Defense 
for Health Affairs establishes TRICARE policy. DOD's TRICARE Management 
Activity, under the Assistant Secretary of Defense for Health Affairs, 
is responsible for procuring, administering, and overseeing the health 
care contracts for purchased care. 

Under the Uniformed Services Employment and Reemployment Rights Act of 
1994 (USERRA),[Footnote 10] activated reserve component members' 
employer-provided health benefits are protected. Specifically, for 
absences of 30 days or less, health benefits continue as if the 
employee had not been absent. For absences of 31 days or more, coverage 
stops unless (1) the employee elects to pay for the coverage, including 
the employer contributions,[Footnote 11] or (2) the employer 
voluntarily agrees to continue coverage.[Footnote 12] Under USERRA, 
employers must reinstate reserve component members' health coverage 
upon reemployment. 

In May 2003, about 87 percent of reserve component members with 
dependents reportedly had health insurance before they were mobilized. 
Of these members, only about 54 percent reportedly continued their 
health insurance during their activation.[Footnote 13] 

Estimated Costs For Providing a Health Care Stipend Higher Compared to 
TRICARE: 

Providing a health care stipend program to activated reserve component 
members to enable their dependents to maintain their private health 
insurance would likely cost more than TRICARE, according to CBO's 
estimates prepared for this study. In September 2005, CBO estimated 
that offering a health care stipend program to reserve component 
members would cost DOD from $365 million to $735 million over a 5-year 
period--fiscal years 2006 through 2010--exclusive of program 
administration costs, for a specific range of reserve component member 
participation rates. CBO officials cautioned that in the absence of 
specific legislative language that describes the design of a proposed 
stipend program in detail, CBO's estimates should be considered 
preliminary. Final CBO estimates would reflect actual legislative 
language and CBO's then current baseline assumptions. For example, in 
preparing this estimate of cost, CBO assumed that the amount of the 
stipend would equal the average worker contribution of family health 
care plans. Since the Ronald W. Reagan National Defense Authorization 
Act for Fiscal Year 2005 did not identify the specific design features 
of a stipend program for our review, it was difficult to identify a 
reliable anticipated participation rate for a stipend program. In 
addition, DOD estimated that it would cost about $10 million for 
startup costs in the first year of implementation and $20 to $25 
million annually to administer stipend payments to participating 
reserve component members. Adding the DOD administrative cost estimates 
to the CBO program cost estimates and comparing them to CBO estimates 
for TRICARE shows that a stipend program would cost DOD $230 million 
(45.5 percent) more than TRICARE over a 5-year period (fiscal years 
2006 through 2010). (See enclosure II for estimate of cost 
assumptions.) 

CBO Estimate of Cost for a Health Care Stipend Program: 

CBO developed an estimate of cost for a stipend program at varying 
rates of participation by reserve component members in the program. In 
consultation with CBO analysts, we agreed that CBO would prepare an 
estimate of cost for a stipend program equal to the employee's share of 
health insurance, excluding federal employees. Since the Ronald W. 
Reagan National Defense Authorization Act for Fiscal Year 2005 did not 
identify the specific design features of a stipend program for our 
review, it was difficult to identify a reliable anticipated 
participation rate for a stipend program. As proxies for varying rates 
of participation, we requested CBO to prepare an estimate of cost at 
three levels of participation: low range (45 percent of eligible 
population), medium range (75 percent of eligible population), and high 
range (90 percent of eligible population). We selected the low range of 
participation (45 percent) as a marker representing the percentage of 
activated reserve component members with spouses and dependents that 
had private health insurance before the members activated and chose to 
continue this insurance coverage while they were activated and after 
excluding those members expected to participate in the TRICARE Reserve 
Select program. Similarly, we selected the medium range (75 percent) as 
a marker representing those reserve component members with dependents 
that had private health insurance before they were activated and also 
after excluding those members expected to participate in the TRICARE 
Reserve Select program. We selected the high range (90 percent) rather 
than 100 percent since full participation in a program is rarely 
achieved. 

Using a range of specified participation rates in a stipend program, 
CBO estimated that DOD's cost for a stipend program, exclusive of 
administrative costs, ranged from $365 million to $735 million for 
fiscal years 2006 through 2010, as shown in table 1.[Footnote 14] 

Table 1: CBO Estimate of Cost for a Health Care Stipend Program At 
Varying Rates of Participation, Exclusive of Administrative Costs, 
Fiscal Years (FY) 2006 - 2010A: 

[See PDF for image] 

Sources: Estimate of cost from CBO; rates of participation provided by 
GAO. 

[A] CBO officials cautioned that in the absence of specific legislative 
language that describes the design of a proposed stipend program in 
detail, CBO's estimates should be considered preliminary. Final CBO 
estimates would reflect actual legislative language and CBO's then 
current baseline assumptions. 

[B] CBO's estimate assumed that costs would be less in 2006 as the 
first year of the program because it takes time for potential 
participants to become aware of and actually enroll in the program. For 
this reason, CBO estimated that participants would receive the stipend 
for only part of the year in the first year of the program. 

[End of table] 

Administrative Costs: 

DOD officials believe that the method of paying the stipend--directly 
to reserve component members, to employers, or to insurance companies-
-would affect DOD's administrative costs. Office of the Assistant 
Secretary of Defense for Reserve Affairs (OASD/RA) officials commented 
that there would be administrative costs to establish and administer 
the payment system, regardless of which method is mandated. However, 
OASD/RA officials believe that the administrative costs might be 
smaller if the payments were provided directly to the reserve component 
member. This would avoid the need to establish a new, unique process to 
handle payments/claims from hundreds or thousands of 
employers/insurance companies. 

If stipend payments are made directly to the reserve component member, 
OASD/RA officials commented that some members may use the payments for 
expenses other than health insurance unless appropriate internal 
control processes are incorporated. In addition, CBO advised us that 
the decision to pay stipends directly to the reserve component member 
could affect participation rates, and therefore, program costs. 

In order to calculate administrative costs for a stipend program, DOD 
officials commented that the requirements of the stipend program would 
need to be defined, including the eligibility rules, portion of the 
premium to be covered by stipend, and required documentation. 

DOD's TRICARE Management Activity estimated that administrative costs 
for a stipend being paid directly to the member would approximate $10 
million in startup costs and $20 to $25 million annually to administer 
the program. We were told that DOD had not estimated administrative 
costs for stipend payments being paid directly to employers or health 
insurance companies. 

Comparative Costs Under TRICARE: 

We compared the estimated cost to DOD of providing health care for 
dependents of activated reserve component members under a stipend 
program and under TRICARE. For this comparison, we used the medium 
range, or 75 percent participation rate, for a health care stipend 
program.[Footnote 15] Based on CBO's estimate of cost at the 75 percent 
participation level and DOD's estimate of administrative costs, a 
stipend program could cost DOD $735 million compared with estimated 
costs of $505 million to provide TRICARE to reserve component members' 
spouses and dependents. Thus, the net cost of providing a stipend to 
reserve component members is estimated to be $230 million (45.5 
percent) more expensive than TRICARE over the 5 year period (fiscal 
years 2006 through 2010), as shown in table 2. This net difference will 
vary depending on the participation rate. 

Table 2: Estimated Costs to DOD for Health Care Stipend Program 
Compared to TRICARE: 

[See PDF for image] 

Source: Estimate of cost for stipend program and under TRICARE from 
CBO; estimate of administrative costs from TRICARE Management Activity. 

[A] For this comparison of estimated costs, we used $25 million each 
year for administrative costs. 

[B] See enclosure II for CBO assumptions in the estimate of cost under 
TRICARE. 

[End of table] 

Stipend Program Could Improve Continuity of Health Care For Reserve 
Component Members' Families, But May Have Minimal Impact On Other 
Reserve Issues: 

Implementing a stipend program to help defray a family's cost of 
maintaining their private health insurance when a reserve component 
member is activated for duty may have positive implications in terms of 
continuity of care and decreased costs for civilian employers; however, 
DOD officials do not believe that other factors--such as recruitment, 
retention, and medical readiness--would likely be significantly 
affected. By providing a stipend for health coverage to reserve 
component members, fewer families may experience disruptions in medical 
treatment. In addition, civilian employers may decide to reduce their 
contribution for the reserve component members' private health 
insurance while the member is activated if a stipend is available. 
However, a stipend is not likely to cause more individuals to join or 
remain in the reserve components, or improve the medical readiness of 
activated reserve component members. 

Health Care Stipend Program Could Improve Continuity of Care and May 
Decrease Civilian Employer Costs: 

A DOD health care stipend program could improve the continuity of care 
for families of reserve component members and may decrease costs for 
civilian employers while the member is activated. Officials with the 
Office of the Assistant Secretary of Defense for Health Affairs 
commented that payment of a stipend might enable families to avoid 
disruption in ongoing medical treatment caused by families shifting to 
TRICARE when the reserve component member is ordered to active duty for 
a period of more than 30 days because, with a stipend, dependents would 
be able to keep their same health care providers. Officials pointed out 
that the Ronald W. Reagan National Defense Authorization Act for Fiscal 
Year 2005 provides authority for waiving TRICARE deductibles and 
enabling higher payments to physicians who do not accept TRICARE 
payment rates, which would also increase the likelihood that family 
members can continue receiving care from the same health care 
providers. According to an official in the Office of the Assistant 
Secretary of Defense for Reserve Affairs (OASD/RA), DOD is still in the 
process of rule-making for these provisions; however, in the interim, a 
demonstration project for reserve component family members with these 
provisions has been extended until October 2007. Officials with the 
Military Officers Association of America and the Enlisted Association 
of the National Guard of the United States told us that switching to 
TRICARE may cause disruption of health care because some reserve 
component members live in areas that are not close to military 
treatment facilities and where health care providers may not accept 
TRICARE patients. In July 2003, we also reported that DOD and its 
contractors have reported long-standing health care provider shortages 
in some geographic areas and that a lack of health care providers in 
certain geographic locations, low reimbursement rates, and 
administrative requirements contribute to potential civilian provider 
network inadequacy.[Footnote 16] 

OASD/RA officials commented that the implications of a health care 
stipend program for employers would depend on how such a program is 
designed. DOD's survey of reserve component members conducted in 
November 2004 found that employers for 42 percent of the respondents 
paid the entire premium for their private health insurance and another 
43 percent paid a portion of the insurance premium while the member was 
activated. Because increasing employee health care costs are a major 
concern for employers, we believe that the availability of a stipend 
may encourage employers to transfer all or a portion of their cost for 
continuing the employer-based health insurance to DOD. While there is 
no empirical evidence that describes employer reactions, OASD/RA 
officials believe that employers who paid some portion or all of the 
premium payments for reserve component members who continue their 
private health insurance while activated are unlikely to continue 
making such payments if the federal government covers the expense. If 
employers reduce their contribution for the premium because of the 
availability of a stipend, the employee's share could increase and, 
therefore, the potential cost of a stipend program may increase if the 
amount of the stipend is linked to the employee's share. 

Neither the National Association of Manufacturers nor the National 
Federation of Independent Businesses had surveyed their employer 
memberships about the proposed stipend program. Similarly, neither had 
taken any positions on legislative proposals to provide stipends to 
reserve component members. However, officials from both organizations 
commented that they believe the vast majority of their members would 
prefer that stipends be made to employees or insurance companies rather 
than to employers. They added that most employers do not like the idea 
of dealing with the federal government because of the various reporting 
and verification requirements that usually accompany such a program. 
Also, most of their member-employers are relatively small companies 
with small human resource staffs that would likely have additional 
responsibilities associated with a stipend program. 

Less Impact on Other Reserve Component Issues: 

DOD officials are unaware of any evidence to support that a stipend 
would have any impact on several other issues affecting the reserve 
components, including medical readiness, recruitment, or retention of 
reserve component members. Representatives of three military service 
organizations we contacted had mixed views about the effects of a 
stipend program on recruitment but two of the three organizations 
believed that it could positively affect retention in the reserve 
component. 

Recruitment: OASD/RA officials commented that DOD has no evidence that 
any form of medical benefits or the prospect of such benefits during 
future periods of active duty affect individuals' decisions to join the 
reserve component. Officials commented that it is very unlikely that 
the potential for future medical benefits is an important factor in the 
decision of non-prior service recruits to join the reserve component. 
However, officials commented that a stipend program may contribute 
positively to the decision of prior-service recruits to join the 
reserve component because their families would be able to remain in the 
same health care system and keep the same providers while the members 
are on active duty. Officials with the Reserve Officers Association of 
the United States commented that they do not believe a health care 
stipend program would draw more people to the reserve component. 
Similarly, officials with the Military Officers Association of America 
said that they are not sure of the extent to which a stipend program 
would impact recruitment. However, officials with the Enlisted 
Association of the National Guard of the United States commented that 
they believe a stipend program may positively impact the recruitment of 
older individuals with families but have less of an impact on younger 
members without families. 

Retention: Although DOD has not surveyed reserve component members to 
determine the effect a stipend might have on retention, OASD/RA 
officials believe that it is unlikely that a stipend program would 
appreciably affect overall reserve component member retention. 
Officials cited recent surveys of National Guard and reserve members 
that found health care, in general, was ninth in relative importance in 
their decision to continue to participate in the reserve component. 
Only four percent of the respondents placed health care as the most 
important factor affecting their decision, and fewer than 15 percent 
placed it in their top three considerations. Some factors that were 
more important than health care for members' decision making as to 
whether to continue to participate in the reserve component were pay 
and allowances, military retirement, and predictability, frequency, and 
duration of deployments. Officials with the Enlisted Association of the 
National Guard of the United States said that a stipend program could 
positively impact retention of reserve component members since it would 
improve the continuity of care for families. Officials with the Reserve 
Officers Association of the United States said that they believe a 
stipend program would have a positive impact on retention because the 
lack of control in choosing health care insurance coverage is one of 
many reasons cited by reserve component members who leave military 
service. Officials with the Military Officers Association of America 
were unsure of the extent to which a stipend would impact retention but 
said that health care disruption is one of many factors causing 
retention problems. 

Medical readiness: DOD officials commented that it is difficult to 
understand how a stipend program for dependents would improve the 
medical readiness of reserve component members. They added that the 
only possible impact of a stipend program on medical readiness is the 
peace of mind achieved through the knowledge that members' families 
would be able to continue their private health insurance. However, 
officials commented that they are not aware of any study that supports 
the assumption that the member, while deployed, may enjoy increased 
peace of mind knowing their family members have health care coverage 
through private health insurance rather than TRICARE. 

Concluding Observations: 

DOD officials believe that making stipend payments directly to the 
reserve component member would be more efficient than making such 
payments to the members' employers or health insurance plans. Further, 
CBO points out that making stipend payments directly to the member 
could increase the rate of participation in a stipend program and thus 
increase the cost of the program. We believe that making stipend 
payments available to the member creates some risk that the funds may 
not be used for the intended purpose. To mitigate the risk of abuse, 
appropriate internal controls are important in implementing a health 
care stipend program. 

Agency Comments And Our Evaluation: 

DOD provided written comments on a draft of this report, which are 
found in enclosure III. The Assistant Secretary of Defense for Reserve 
Affairs commented that the estimated cost of a stipend program could be 
substantially more than the CBO estimate of cost, depending on the 
specific requirements included in proposed legislation. Factors the 
Assistant Secretary said could significantly increase the cost of a 
stipend program included: 

* Continued deployment of reserve component members at fiscal year 2006 
levels rather than assuming a decreasing number of deployed members; 

* Payment of a stipend amount higher than the average worker 
contribution for health insurance for employed workers; and: 

* Payment of a stipend during the period before and after the member is 
activated. 

We agree that the cost of the stipend program could be significantly 
more than the CBO estimate. As noted in our report, the actual cost of 
a stipend program would depend on the number of reserve component 
members activated over the next five years and the specific design of a 
stipend program. CBO's estimate of cost is based on the assumptions 
provided in enclosure II. 

Changes were made to the report, where appropriate, to respond to 
technical comments. 

We are sending copies of this report to the Secretary of Defense and 
other interested parties. We will provide copies of this report to 
others upon request. In addition, the report is available at no charge 
on the GAO Web site at http://www.gao.gov. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-5559 or stewartd@gao.gov. Key contributors to 
this report are listed in enclosure IV. 

Sincerely yours, 

Signed by: 

Derek B. Stewart: 

Director, Defense Capabilities and Management: 

Enclosure I: Scope and Methodology: 

To meet our objectives, we interviewed responsible officials and 
reviewed pertinent documents, reports, and information, when available, 
related to the cost and effects of providing a stipend to activated 
reserve component members obtained from officials at the Office of the 
Assistant Secretary of Defense for Reserve Affairs; the Office of the 
Assistant Secretary of Defense for Health Affairs; the TRICARE 
Management Activity; the Defense Manpower Data Center (DMDC); 
representatives of selected military service organizations--the 
Enlisted Association of the National Guard of the United States, the 
Reserve Officers Association of the United States, and the Military 
Officers Association of America; representatives of two organizations 
representing employers--the National Federation of Independent 
Businesses and the National Association of Manufacturers; DOD's 
National Committee for Employer Support to the Guard and Reserve; and 
Humana Inc. 

To determine the cost to DOD for providing a stipend to activated 
reservists, we requested CBO to prepare an estimate of cost for fiscal 
year 2006 through fiscal year 2010 for varying rates of participation 
in a stipend program since developing cost estimates associated with 
legislative proposals is not within our purview, but rather CBO's. In 
consultation with CBO analysts, we agreed that CBO would prepare an 
estimate of cost for a stipend program for a stipend equal to the 
employee's share of health insurance, excluding federal employees, for 
the specified participation rates, utilizing those assumptions that CBO 
considered most appropriate and its expertise in preparing cost 
projections.[Footnote 17] 

Since the Ronald W. Reagan National Defense Authorization Act for 
Fiscal Year 2005 did not identify the specific design features of a 
stipend program, it was difficult to identify a reliable anticipated 
participation rate for a stipend program. To identify reasonable 
markers for participation rates in a stipend program, we analyzed 
recent data obtained from the May 2003 Status of Forces survey 
administered to members of the reserve component regarding the 
percentage that have health insurance other than TRICARE and the 
percentage that maintained this coverage when they were activated. 
Based on discussions with DOD officials, we chose the May 2003 Status 
of Forces survey instead of the more recent November 2004 survey for 
three reasons: (1) the series of questions related to other health 
insurance in the May 2003 survey seemed more straight-forward than in 
the November 2004 survey, which did not ask an overall question on the 
percentage of families with insurance prior to their most recent 
activation; (2) the May 2003 survey response percentages for other 
health insurance coverage were consistent with our prior analysis of 
this issue from 2000 survey data; and (3) quality control checks were 
possible on the May 2003 survey that were not possible on the November 
2004 survey. In addition, DMDC officials had not analyzed the November 
2004 survey data to the same degree that the May 2003 survey data had 
been analyzed. We found estimates from the May 2003 Status of Forces 
survey to be sufficiently reliable for the purposes of this report. 

As proxies for varying rates of participation, we requested CBO to 
prepare an estimate of cost at three levels of participation: low (45 
percent of eligible population), medium (75 percent of eligible 
population), and high (90 percent of eligible population). We selected 
the low level of participation (45 percent) as a marker representing 
the percentage of activated reserve component members with dependents 
that had continued their private health insurance while they were 
activated and after excluding those members (17 percent) expected by 
the TRICARE Management Activity to participate in the TRICARE Reserve 
Select program. Similarly, we selected the medium level (75 percent) as 
a marker representing those reserve component members with dependents 
that had private health insurance before they were activated and also 
after excluding those members expected by the TRICARE Management 
Activity to participate in the TRICARE Reserve Select program. We 
selected the high level (90 percent) as a marker, recognizing that full 
participation in a program is rarely achieved. 

At our request, CBO also prepared an estimate of cost to DOD for 
dependents of activated reserve component members using TRICARE instead 
of receiving the stipend. For the estimate of cost for TRICARE, CBO 
used the average TRICARE cost per dependent based on fiscal year 2003 
TRICARE costs for active duty dependents. We did not independently 
verify the data used by CBO in preparing its estimate of cost. 
Enclosure II shows the assumptions used by CBO in preparing its 
estimates of cost for a stipend program and comparative costs under 
TRICARE. 

We discussed administrative and management considerations for DOD in 
implementing a stipend program with DOD officials and obtained related 
documentation. We also obtained an estimate of the cost to administer a 
stipend program from the TRICARE Management Activity. We did not 
independently assess the reliability of DOD's estimate for 
administrative costs. 

To identify the potential implications of a stipend program on 
recruitment, retention, and medical readiness, we discussed and 
obtained documentation from DOD's Office of the Assistant Secretary of 
Defense for Reserve Affairs and Office of the Assistant Secretary of 
Defense for Health Affairs and representatives of selected military 
service organizations--the Enlisted Association of the National Guard 
of the United States, the Reserve Officers Association of the United 
States, and the Military Officers Association of America. We also 
analyzed the November 2004 DOD survey of reserve component members to 
identify those factors they consider important for retention. 

We discussed the potential implications of a stipend program on 
continuity of care for dependents with pre-existing health conditions 
with DOD officials and obtained related documentation. We also 
discussed the prevalence of special medical needs within the TRICARE 
dependent population with a Humana Inc. official since Humana Inc. has 
the contract for administering the TRICARE program for about 2.8 
million beneficiaries in the 10-state South region. 

We also discussed the potential implications of a stipend program for 
employers with representatives of two organizations representing 
employers--the National Federation of Independent Businesses and the 
National Association of Manufacturers--with officials representing 
DOD's National Committee for Employer Support to the Guard and Reserve, 
and with DOD officials. We also obtained related documentation, when 
available, from these organizations and officials. 

We performed our work from February 2005 through September 2005 in 
accordance with generally accepted government auditing standards. 

[End of section] 

Enclosure II: Assumptions Used In CBO Estimate of Cost For the Stipend 
Program and Comparative Costs Under TRICARE: 

In developing the estimate of cost for the stipend program at specified 
participation rates, CBO used the following assumptions: 

* Based on an analysis of the number and types of reserve component 
members currently activated, CBO estimates that 165,000 reserve 
component members will be activated in 2005. CBO assumes that force 
levels and overseas operations for 2006 will remain at levels expected 
for 2005 and decline gradually over several years. If the number of 
reserve component members called to active duty were to remain at 
current levels over the 2006 through 2010 period, the cost of this 
program would be significantly higher. Costs are based on the following 
numbers of reserve component members being activated for more than 30 
days: 

Table 3: Number of Reserve Component Members Activated For More Than 30 
Days, Fiscal Years 2006 Through 2010: 

[See PDF for image] 

Source: CBO. 

[End of table] 

* The stipend is available only to activated reserve component members 
with dependents. Sixty percent of the activated reservists would have 
dependents based on 2005 data from DOD's Reserve Component Common 
Personnel Data System. 

* No cost was included for the 11 percent of reserve component members 
with dependents who are assumed to be enrolled in the Federal Employee 
Health Benefits Program based on 2005 data from DOD's Reserve Component 
Common Personnel Data System and 2004 data from the Office of Personnel 
Management Central Personnel Data File. 

* Amount of the stipend is the average worker contribution of family 
health insurance premiums based on 2004 data from The Kaiser Family 
Foundation and Health Research and Education Trust. 

* Health insurance premiums would increase at an annual inflation rate 
of 7 percent. 

In calculating the estimated costs for the dependents of the activated 
reserve component members under TRICARE, CBO used the following 
assumptions: 

Only 30 percent of activated reserve component members with dependents 
move their dependents to TRICARE when activated. 

* The average number of dependents per activated member is 2.3 based on 
2005 data from DOD's Reserve Component Common Personnel Data System. 

* Average TRICARE cost per dependent is based on the fiscal year 2003 
TRICARE costs for active duty dependents. 

* TRICARE costs per dependent will increase annually by CBO's Consumer 
Price Index--Medical component forecast. 

Enclosure III: Comments From the Department Of Defense: 

ASSISTANT SECRETARY OF DEFENSE: 
RESERVE AFFAIRS: 
WASHINGTON, DC 20301-1500: 

OCT 13 2005: 

Mr. Derek B. Stewart: 
Director, Defense Capabilities and Management: 
U.S. Government Accountability Office: 
441 G Street, N.W.: 
Washington, DC 20548: 

Dear Mr. Stewart: 

This is the Department of Defense (DoD) response to the Draft GAO 
report "DEFENSE HEALTH CARE: Health Insurance Stipend Program Expected 
to Cost More Than TRICARE But Could Improve Continuity of Care for 
Dependents of Activated Reserve Component Members" dated October 3, 
2005 (GAO Code 350659/06-128R). Written recommendations and comments 
attached. 

Should you have any questions reference this response, please direct 
them to my point of contact, Colonel Kathleen Woody at 703-693-2296 or 
by email at Kathleen.woody@osd.mil. 

Sincerely, 

Signed by: 

T. F. Hall: 

Attachment: As stated: 

GAO DRAFT REPORT - DATED OCTOBER 3, 2005: 
GAO CODE 350659/GAO-06-128R: 

"DEFENSE HEALTH CARE: Health Insurance Stipend Program Expected to Cost 
More Than TRICARE But Could Improve Continuity of Care for Dependents 
of Activated Reserve Component Members" (GAO-06-128R): 

DEPARTMENT OF DEFENSE RESPONSE AND RECOMMENDATIONS TO DRAFT REPORT: 

1. Recommend GAO expand on the limitations of the methodology of the 
study and incorporate footnote 7 on page 3 into the main body of the 
text. 

Rationale: DoD is concerned that the estimated cost of this proposed 
program could be substantially more than CBO estimated depending on the 
requirements that may be included in any proposed legislation. While 
the CBO provided a range of estimates based on participation rates, 
changes in other assumptions could significantly affect the cost. 

a. The number of deployed reserve members is projected to decline by 
two thirds. Continued deployments at FY 2006 levels could easily triple 
these estimates. 

b. The amount of the stipend was estimated using the average worker 
contribution among employed workers. Unless there is a cap on the 
stipend, the possibility exists that employers would discontinue 
providing their portion of the premiums, knowing that the RC member 
would be compensated for the additional cost. Given that employees 
typically pay only one-fourth to one-third of their premiums, the 
estimate could easily be tripled or quadrupled. 

c. Since the period during which the stipend is to be paid is unknown, 
there is uncertainty as to whether this payment would be continued 
during the pre and post-deployment periods which could again 
significantly increase the estimated cost. 

d. The report does not reflect the cost of providing a dual benefit to 
those RC members who elect the stipend program (the member would 
continue to receive care through the military health care system while 
also receiving a stipend for civilian health insurance) which impacts 
the overall cost to the program. Recommend this be incorporated into 
the report. 

2. Change last sentence in the last paragraph under "Results in Brief' 
(Page 4) to read: "There is no evidence to support that a stipend would 
have any impact on medical readiness, recruitment or retention of RC 
members." 

Rationale: Sentence should be rephrased to reflect an objective rather 
than subjective statement. 

3. Delete last sentence in last paragraph, on Page 11 beginning with 
"In addition, civilian employers may benefit by paying less to cover 
reserve component member's private health insurance while the member is 
activated. 

Rationale: There is no requirement under the law for employers to pay 
anything for coverage of members when activated. Further, COBRA and 
USERRA both provide an additional 2% to be added to the full premium of 
coverage to defray any administrative costs suffered by the employer 
for providing the continuation of coverage. If employers choose to 
absorb the costs of continued coverage or continue to pay some or all 
of the premium payments, rather than passing it along to the former 
employee, it is their own independent decision. 

[End of section]

Enclosure IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: Derek B. Stewart (202) 512-5559 or stewartd@gao.gov: 

Acknowledgments: In addition to the individual named above, Brenda 
Farrell, Assistant Director; Steve Fox; Joseph Applebaum; Timothy Carr; 
Alissa Czyz; Jennifer Popovic; William Mathers; Elisha Matvay; Terry 
Richardson; Clifton Spruill; John Van Schaik; and Michael Zola made key 
contributions to this report. 

(350659): 

FOOTNOTES 

[1] DOD's reserve components include the collective forces of the Army 
National Guard and the Air National Guard, as well as the forces from 
the Army Reserve, the Naval Reserve, the Marine Corps Reserve, and the 
Air Force Reserve. The Coast Guard Reserve is a service in the 
Department of Homeland Security, except when operating as a service in 
the Navy during times of war or national emergency. 

[2] DOD provides health care through TRICARE, a regionally structured 
program that uses civilian contractors to maintain health care provider 
networks that complement health care provided at military treatment 
facilities. 

[3] GAO, Defense Health Care: Most Reservists Have Civilian Health 
Coverage but More Assistance is Needed When TRICARE Is Used, GAO-02-829 
(Washington, D.C.: Sept. 6, 2002). 

[4] Pub. L. No. 108-375,  702 (2004). 

[5] The Ready Reserve accounts for about 98 percent of nonretired 
reserve component members and consists of individuals who are subject 
to activation under the provisions of 10 U.S.C.  12301 and  12302. 

[6] For this report, we defined medical readiness as the medical 
fitness of servicemembers to perform their mission. 

[7] The partial mobilization authority limits involuntary mobilizations 
to not more than 1 million reserve component members at any one time, 
for not more than 24 consecutive months during a time of national 
emergency. 

[8] Executive Order 13223 of September 14, 2001. 

[9] Reserve component members may be eligible to purchase TRICARE 
"after the member completes service on active duty to which the member 
was called or ordered for a period of more than 30 days on or after 
September 11, 2001, under a provision of law referred to in section 
101(a)(13)(B), if the member (1) served continuously on active duty for 
90 or more days pursuant to such call or order; and (2) on or before 
the date of the release from such active-duty service, entered into an 
agreement with the Secretary concerned to serve continuously in the 
Selected Reserve for a period of one or more whole years following such 
date." See Pub. L. No. 108-375  701. 

[10] Codified at 38 U.S.C.  4301-4334, as amended. 

[11] For deployments of 31 days or more, USERRA permits the employer to 
assess an additional 2 percent administrative fee if the reserve 
component members elect to continue with private health insurance and 
pay the full premium, including the employer share. 

[12] When the employer elects to continue mobilized reserve component 
members' health insurance, the reserve component member may continue to 
be liable for the employee portion of the premium. However, some 
employers pay the full premium. 

[13] Based on responses to DOD's May 2003 Status of Forces Survey of 
reserve component members. DOD officials told us that the May 2003 
survey represented a more accurate portrayal of this information than 
the November 2004 survey. 

[14] We did not assess the implications of making a stipend payment 
taxable or non-taxable to the reserve component member. If the stipend 
is taxable to the member, any taxes would effectively reduce the net 
cost to the government and the amount available to the member for 
defraying the cost of his or her private health insurance. We did not 
determine whether taxing the stipend would significantly affect the 
extent to which members would participate in a stipend program. 

[15] DOD officials also expressed concern that a stipend payment may 
represent a dual benefit to the reserve component member if the stipend 
includes a portion for the member even though the member is already 
covered by TRICARE while activated. 

[16] GAO, Defense Health Care: Oversight of the TRICARE Civilian 
Provider Network Should Be Improved, GAO-03-928 (Washington, D.C.: July 
31, 2003). 

[17] CBO officials cautioned that in the absence of specific 
legislative language that describes the design of a proposed stipend 
program in detail, CBO's estimates should be considered preliminary. 
Final CBO estimates would reflect actual legislative language and CBO's 
then current baseline assumptions.