Defense Health Care:

Additional Analysis of Costs and Benefits of Potential Governance Structures Is Needed

GAO-12-911: Published: Sep 26, 2012. Publicly Released: Sep 26, 2012.

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Brenda S. Farrell
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What GAO Found

The Department of Defense's (DOD) assessment of potential governance options for its Military Health System (MHS) did not provide complete information on the options' total cost impact and their strengths and weaknesses. As part of DOD's assessment, it identified 13 potential governance options for the MHS and included a limited analysis of the options' estimated costs savings and their strengths and weaknesses. All of the options would create a shared services concept to consolidate common services, such as medical logistics, acquisition, and facility planning, under the control of a single entity. DOD selected an option that would create a defense health agency to, among other things, assume the responsibility for creating and managing shared services, and leave the longstanding military chain of command intact with the services in control of the military hospitals. The National Defense Authorization Act (Act) for Fiscal Year 2012 required DOD to submit a report to congressional committees that would, among other things, estimate the cost savings and analyze the strengths and weaknesses of each option. Using key principles derived from federal guidance, including cost estimating and economic analysis documents, GAO determined that DOD could have provided more information on cost implications and strengths and weaknesses in its report to Congress. Specifically, DOD did not (1) estimate implementation costs and comprehensive cost savings; (2) include a business case to support consolidating common services; or (3) include supporting quantitative data in its analysis of the options' strengths and weaknesses.

  • DOD's cost analysis for its potential MHS governance options was limited In that it did not include implementation costs and only estimated personnel costs savings based on some potentially flawed assumptions, such as not using representative salaries to estimate personnel savings.
  • DOD did not develop a business case analysis and an implementation strategy for its proposed shared services concept. A business case analysis would, among other things, define the services to be consolidated, cost to implement and efficiencies to be achieved and could support DOD's assertion that implementing shared services could achieve efficiencies. DOD approved a shared services concept two other times since 2006, but it has yet to develop a business case analysis that would provide a data-driven rationale for implementing the concept.
  • DOD used a qualitative process with input from internal experts to assess the strengths and weaknesses of the potential governance structures. However, it did not balance this support with quantitative data as its criteria for assessing the strengths and weaknesses specified. DOD officials stated that they did not provide comprehensive cost estimates or quantitative analysis of the options because an internal 90-day deadline to report back to the Deputy Secretary of Defense did not allow enough time. However, the act requiring DOD to report to Congress was enacted subsequent to DOD's own internal assessment and did not establish a specific deadline. As a result, DOD could have taken time to conduct a more comprehensive analysis before submitting its report.

Why GAO Did This Study

Over the past decade, the cost of the MHS has grown substantially and is projected to reach nearly $95 billion by 2030 according to the Congressional Budget Office. As health care costs consume an increasingly large portion of the defense budget, current DOD leadership and Congress have recognized the need to better control these costs. Section 716 of the National Defense Authorization Act for Fiscal Year 2012 required DOD to submit a report analyzing potential MHS governance options under consideration, and also required GAO to submit an analysis of these options. In response to this mandate, GAO determined the extent to which DOD's assessment provides complete information on cost implications and the strengths and weaknesses of potential MHS governance options. To conduct this review, GAO analyzed DOD's governance report along with supporting documents, and interviewed Task Force members.

What GAO Recommends

GAO recommends that DOD develop (1) a comprehensive cost analysis for its potential MHS governance options, (2) a business case analysis and strategy for implementing its shared services concept, and (3) more complete analyses of the options' strengths and weaknesses. DOD concurred with developing a business case analysis for its shared services concept. DOD did not concur with the other 2 recommendations, stating that further analysis would not alter its conclusions. GAO disagrees and believes that more comprehensive analysis will help to distinguish the differences among the costs and benefits of the options.

For more information, contact Brenda S. Farrell at (202) 512-3604 or farrellb@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: DOD opposes our recommendation to perform a more detailed and comprehensive cost analysis of the various potential MHS governance structures studied by the Task Force. The Department stated that it did not believe that doing so would be prudent because it had definitively decided on which governance structure to pursue, and that by re-directing their efforts to further analyze various other potential governance structures would delay the Department from implementing reforms in the short term. DOD's response stated that its decision to pursue the Defense Health Agency was arrived at after extensive discussion among the senior most leaders of the Department, including the Deputy Secretary of Defense, the Chairman of the Joint Chiefs of Staff, and the Military Department Secretaries and Service Chiefs. As such, they all believe that further cost analysis as we recommended would not help to materially distinguish among the various potential MHS governance options under consideration. Therefore, DOD officials have begun its implementation of the Defense Health Agency and have taken no action regarding this recommendation, and it does not appear that they ever will go back and further re-evaluate other governance structures to any degree.

    Recommendation: To provide decision makers with more complete information on the total cost impact of the various governance structures to help determine the best way forward, the Secretary of Defense should direct the Assistant Secretary of Defense (Health Affairs) to develop a comprehensive cost analysis for the MHS governance structures including estimates of implementation costs and cost savings in additional areas such as health care operations and infrastructure changes as well as an improved estimate of personnel savings.

    Agency Affected: Department of Defense

  2. Status: Open

    Comments: According to the NDAA FY 13, Congress directed DOD to submit implementation plans that detailed the timelines, the purpose, the scope of responsibilities, the cost to implement, and the anticipated savings with respect to the shared services that it was going to implement during both FY 13 and FY 14. To support these details, DOD is in the process of developing business case analyses for each of the 10 shared services that it has identified for implementation. As of August 1, 2013, DOD has completed 4 of the 10 business case analyses. Until we have all 10 business case analyses, we should keep this recommendation open. These should be available by the end of the calendar year 2013.

    Recommendation: To provide decision makers with more complete information on the total cost impact of the various governance structures to help determine the best way forward, the Secretary of Defense should direct the Assistant Secretary of Defense (Health Affairs) to develop a business case analysis and strategy for the implementation of its shared services concept.

    Agency Affected: Department of Defense

  3. Status: Closed - Not Implemented

    Comments: DOD officials have not done anything related to this recommendation and according to their official response to our report, the Department does not intend to continue to study options for potential transformation efforts. The Department is highly unlikely to address this issue since a decision has been made to move forward with the Defense Health Agency. Therefore, the department does not consider it of any value to go back and re-evaluate aspects of other governance options that were under consideration at the time of their review because it has stated that the additional evaluation recommended by GAO would be time-consuming, inherently speculative and imprecise, would not materially enhance its ability to select among potential governance options, and would not alter its conclusion about which governance reforms it should pursue.

    Recommendation: To provide decision makers with more complete information on the total cost impact of the various governance structures to help determine the best way forward, the Secretary of Defense should direct the Assistant Secretary of Defense (Health Affairs) to improve its evaluation of the potential governance structures' strengths and weaknesses by including quantitative data when available, and a specific assessment of the degree to which the options meet the criteria Trained and Ready Medical Force and Quality Beneficiary Care.

    Agency Affected: Department of Defense

 

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