DOD Health Care:

Prohibition on Financial Incentives That May Influence Health Insurance Choices for Retirees and Their Dependents under Age 65

GAO-11-160R: Published: Feb 16, 2011. Publicly Released: Mar 18, 2011.

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From fiscal years 2001 through 2010, the Department of Defense's (DOD) spending for health care increased from about $19 billion to nearly $49 billion, representing approximately 6 percent of DOD's total spending in fiscal year 2001 and approximately 9 percent in fiscal year 2010. This health care spending primarily funds TRICARE--DOD's program that provides health care to active duty personnel and other beneficiaries, including retired servicemembers. According to DOD, the increase in its health care spending can be attributed to factors such as growth in the number of TRICARE beneficiaries. From fiscal years 2001 through 2010, the number of TRICARE beneficiaries increased by nearly 15 percent, from 8.3 million to 9.5 million beneficiaries. To help reduce DOD's health care costs, Congress passed section 707 of the John Warner National Defense Authorization Act for Fiscal Year 2007 (section 707), which went into effect January 1, 2008. Section 707 prohibits employers with 20 or more employees from offering financial or other incentives to their employees who are eligible for TRICARE to not enroll in the employer-sponsored health insurance plan or to terminate such coverage. Historically, some employers offered financial or other incentives, which resulted in shifting much of the cost of providing health care for these employees from the employer to DOD. TRICARE beneficiaries who might have been offered incentives are retirees and their dependents under age 65 who have access to employer-sponsored health insurance in addition to TRICARE. When these employees accepted the incentives and did not enroll in the employer-sponsored health insurance, TRICARE became the primary payer and paid a greater share of the health care costs. As a result of section 707's prohibition on such incentives, DOD projected, in April 2010, that there would be approximately $436 million in total TRICARE savings for fiscal years 2010 through 2015. Congress requested that we examine how DOD developed its savings estimate and evaluated the effect of the law. In this report, we describe (1) DOD's method for projecting TRICARE savings as a result of section 707 for fiscal years 2010 through 2015 and (2) DOD's efforts to determine the effects of section 707 on TRICARE participation and costs after the law went into effect.

To project TRICARE savings resulting from section 707, DOD, in April 2010, developed two baseline estimates. One baseline estimate was of the number of retirees and their dependents under age 65 that DOD expected would not participate in TRICARE in fiscal year 2009 in the absence of employer incentives. The other baseline estimate was of the average TRICARE cost per participating retiree and dependent under age 65 for fiscal year 2009. DOD then calculated adjustments to both of the baseline estimates to account for anticipated changes in fiscal years 2010 through 2015. Specifically, DOD projected that there would be no change in the number of retirees and their dependents under age 65 in fiscal year 2010, but a 2 percent annual decrease in fiscal years 2011 through 2015. Additionally, DOD projected that average TRICARE costs would increase by 8 percent in fiscal year 2010 and 7 percent in fiscal years 2011 through 2015 as a result of medical inflation. DOD applied these adjustments to its baseline estimates to project savings for fiscal years 2010 through 2015. DOD reported that it was not able to determine the effects of section 707 on TRICARE participation and costs after the law went into effect because of data limitations and multiple factors affecting the health insurance choices of retirees and their dependents under age 65. DOD reported that it was unable to link data on TRICARE enrollment to beneficiary survey data on why beneficiaries choose one health insurance plan over another. DOD also reported that many factors affect health insurance choices, such as the costs of participating in TRICARE (compared to the costs of participating in employer-sponsored health insurance), making it difficult to attribute any single factor to changes in TRICARE participation. In commenting on a draft of this report, DOD indicated that it concurred with our report.

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