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Benefits of Potential Governance Structures Is Needed' which was 
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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

September 2012: 

Defense Health Care: 

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

GAO-12-911: 

GAO Highlights: 

Highlights of GAO-12-911, a report to congressional committees. 

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 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 long-standing 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. 

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. 

View [hyperlink, http://www.gao.gov/products/GAO-12-911]. For more 
information, contact Brenda S. Farrell at (202) 512-3604 or 
farrellb@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

DOD's Preferred Option Generally Retains Command Structures and 
Includes a Shared Service Concept: 

DOD's Cost Analysis of Its Potential MHS Governance Options Was 
Limited: 

DOD Limited Its Assessment of the Options' Strengths and Weaknesses to 
a Qualitative Process: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Detailed Description of the Potential Governance 
Structures and DOD's Assessment of Their Strengths and Weaknesses: 

Defense Health Agency Governance Structures: 

Unified Medical Command Governance Structures: 

Single Service Governance Structures: 

Hybrid Governance Structures: 

Appendix III: Comments from the Department of Defense: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related Products: 

Table: 

Table 1: Possible Implementation Cost and Cost Savings Categories for 
DOD's Preferred Defense Health Agency Governance Structure: 

Figures: 

Figure 1: Distribution of Beneficiaries as of May 2012: 

Figure 2: Governance Structure of the MHS as of August 2012: 

Figure 3: Timeline of Military Health System Governance Studies: 

Figure 4: Summary of Differences in Governance Elements for the 
Potential Defense Health Agency, Unified Medical Command, and the 
Single Service Governance Structures: 

Figure 5: Summary of Differences in Governance Elements for the 
Potential Hybrid Governance Structures: 

Figure 6: Criteria Used to Assess MHS Governance Options: 

Figure 7: Frequency that the Criteria Were Listed as a Strength or 
Weakness for Potential Governance Structures: 

Abbreviations: 

BRAC: Base Realignment and Closure: 

DOD: Department of Defense: 

MHS: Military Health System: 

JTF CapMed: Joint Task Force National Capital Region Medical: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

September 26, 2012: 

Congressional Committees: 

Over the past decade, the cost of the Department of Defense's (DOD) 
Military Health System (MHS) has grown substantially. DOD's fiscal 
year 2013 budget request for health care is almost $50 billion, 
[Footnote 1] and is projected to reach about $95 billion by 2030. 
[Footnote 2] Historical growth rates in the MHS have been 
significantly higher than the corresponding rates in the national 
economy. For example, from 2006 to 2011, DOD experienced annual growth 
rates of 6.2 percent for purchased care and contracts and 5.2 percent 
for direct care and administration, compared with a national rate of 
3.3 percent.[Footnote 3] As health care consumes an increasingly 
larger portion of the defense budget, DOD leadership recognizes the 
need to reduce duplication, overhead, and operate the most efficient 
health system possible. Under the current structure, the 
responsibilities and authorities for the management of the MHS and the 
medical services it provides to over 9.7 million beneficiaries are 
distributed among several organizations. Several past DOD studies have 
suggested that realigning the MHS governance structure could help 
control the increase in health care costs. 

Congressional leaders also have raised questions regarding rising 
military health costs and the MHS governance structure. For example, 
the House Armed Services Committee's Print accompanying the Ike 
Skelton National Defense Authorization Act for Fiscal Year 2011 
[Footnote 4] noted that DOD had not yet developed a comprehensive plan 
to enhance quality, efficiencies, and savings in the MHS, and it 
encouraged the Secretary of Defense to evaluate the potential 
operational, organizational, and financial benefits of a unified 
medical command. For the past 6 decades, DOD and Congress have 
undertaken many studies to attempt to determine the governance 
structure of the MHS, with many of these studies recommending major 
organizational realignments. However, for several years, GAO has 
highlighted a range of long-standing issues surrounding the MHS and 
its efforts to reorganize its governance structure. In 2005, we 
identified DOD's health care system as an example of a key challenge 
facing the U.S. government in the 21st century and an area in which 
DOD could improve delivery of services by combining, realigning, or 
otherwise changing selected support functions to achieve economies of 
scale.[Footnote 5] Additionally, in our March 2011 report on 
opportunities to reduce potential duplication in government programs, 
we noted that realigning DOD's military medical command structures and 
consolidating common functions could increase efficiencies and 
significantly reduce costs.[Footnote 6] 

In June 2011, the Deputy Secretary of Defense established a Task Force 
to review various options for changes to the overall governance 
structure of the MHS and of its multi-service medical markets and to 
provide a report back within 90 days.[Footnote 7] The Task Force 
submitted a report to the Deputy Secretary of Defense in September of 
2011. Further, the National Defense Authorization Act for Fiscal Year 
2012 required DOD to submit a report to the congressional defense 
committees to include a description of the alternative MHS governance 
structures developed and considered by the Task Force; the goals to be 
achieved by restructuring or reorganization and the principles upon 
which the goals are based; a description of how each option would 
affect readiness, quality of care, and beneficiary satisfaction; an 
explanation of the costs of each potential option considered; an 
analysis of the strengths and weaknesses of each option; and an 
estimate of the cost savings, if any, to be achieved by each option 
compared to the MHS in place on December 31, 2011. No deadline for 
DOD's report was included in the statutory language. Additionally, we 
were required to submit a subsequent report to the congressional 
defense committees within 180 days from the date DOD issued its report 
(March 2, 2012) reviewing, among other things, the cost implications 
and strengths and weaknesses of DOD's potential governance structures. 
[Footnote 8] In response to this mandate, we determined the extent to 
which (1) DOD's preferred governance option, and the other options 
presented in its report, change the current structure of the MHS; (2) 
DOD developed a cost analysis of its potential MHS governance options; 
and (3) DOD's assessment of the strengths and weaknesses of its 
potential governance options is well supported and data-driven. 

To determine how DOD's preferred governance option and the other 
options presented in its report would change the current structure of 
the MHS, we obtained and reviewed the current MHS governance structure 
including identifying key changes that have occurred since 1991 by 
reviewing relevant legislative materials and DOD directives, as well 
as interviewing knowledgeable DOD officials. We then compared the 
current governance structure with each of the potential options by 
using the terms of reference from the Task Force report. To determine 
the extent to which DOD has developed a cost analysis of its potential 
MHS governance options, we reviewed DOD's analysis using key 
principles we derived from cost estimating and budgeting 
guidance.[Footnote 9] To apply those principles, we reviewed DOD's 
report, interviewed Task Force members concerning their analysis, and 
identified broad cost categories that should be considered in the 
course of implementing DOD's governance transformation. We were unable 
to rely on DOD's cost savings estimates because the estimates and 
their supporting data were insufficient in the key data elements 
needed to completely and accurately develop them as discussed in the 
findings section of this report. Finally, to determine the extent to 
which DOD's assessment of the strengths and weaknesses of its 
potential governance options is well-supported and data driven, we 
obtained and reviewed the Task Force's supporting documents including 
meeting minutes, briefing slides, and the voting template for the 
criteria and process used to formulate the strengths and weaknesses of 
the options. We also interviewed Task Force officials regarding their 
involvement in the process and how they formulated their assessments. 
For each of our objectives, we limited our review to the potential 
overall governance structures that the Task Force presented in its 
report. We did not specifically review the proposed changes to DOD's 
multi-service medical markets or to the governance structure in place 
within the National Capital Region as presented in the Task Force 
report because we determined these proposed changes were outside the 
scope of our mandate. We conducted this performance audit from March 
2012 through September 2012 in accordance with generally accepted 
government auditing standards. Those standards require that we plan 
and perform the audit to obtain sufficient, appropriate evidence to 
provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. For details on our scope and methodology, see appendix I. 

Background: 

The MHS is a complex organization that provides health services to its 
beneficiaries across a range of care venues, from the battlefield to 
traditional hospitals and clinics at stationary locations. The current 
management of this large health system is spread over several 
organizations in order to meet its two-fold mission of ensuring 
servicemember readiness and delivering beneficiary care. Over the 
years many studies have been conducted to assess potential changes to 
the governance structure of the MHS. 

Current Governance Structure of DOD's Military Health System: 

DOD operates its own large, complex health system that employs almost 
140,000 military, civilian, and contract personnel who work in medical 
facilities throughout the world to provide health care to 
approximately 9.7 million beneficiaries.[Footnote 10] Operationally, 
the MHS has two missions: supporting wartime and other deployments, 
known as the readiness mission, and providing peacetime care, known as 
the benefits mission. The readiness mission provides medical services 
and support to the armed forces during military operations, including 
deploying medical personnel and equipment throughout the world, and 
ensures the medical readiness of troops prior to deployment. The 
benefits mission provides medical services and support to members of 
the armed forces, retirees, and their dependents. Beneficiaries fall 
into several different categories: (1) active duty servicemembers and 
their dependents, (2) eligible National Guard and Reserve 
servicemembers and their dependents, and (3) retirees and their 
dependents or survivors. As of May 2012, active duty servicemembers 
and their dependents represented 36.7 percent of the beneficiary 
population, eligible National Guard and Reserve servicemembers and 
their dependents represented 9.5 percent, and retirees and their 
dependents or survivors made up the remaining 53.8 percent. See figure 
1. 

Figure 1: Distribution of Beneficiaries as of May 2012: 

[Refer to PDF for image: pie-chart] 

Retirees and their dependents or survivors: 53.8%; 
Eligible National Guard and Reserve servicemembers and their 
dependents: 36.7% 
Active duty servicemembers and their dependents: 9.5%. 

Source: GAO analysis of DOD data. 

[End of figure] 

Reporting to the Under Secretary of Defense (Personnel and Readiness), 
the Assistant Secretary of Defense (Health Affairs) is the principal 
advisor for all DOD health policies, programs, and force health 
protection activities. The Assistant Secretary of Defense (Health 
Affairs) issues policies, procedures, and standards that govern 
management of DOD medical programs and has the authority to issue DOD 
instructions, publications, and directive-type memorandums that 
implement policy approved by the Secretary of Defense or the Under 
Secretary of Defense (Personnel and Readiness). As the Director of the 
TRICARE Management Activity, the Assistant Secretary of Defense 
(Health Affairs) is also responsible for awarding, administering, and 
overseeing approximately $24.4 billion in fiscal year 2012 funding for 
DOD's purchased care network of private sector civilian primary and 
specialty care providers. Additionally, the Assistant Secretary of 
Defense (Health Affairs) integrates the military departments' budget 
submissions into a unified medical budget that provides resources for 
MHS operations; however, the military services have direct command and 
control of the military hospitals and their medical personnel. See 
figure 2 for the current organizational structure of the MHS. 

Figure 2: Governance Structure of the MHS as of August 2012: 

[Refer to PDF for image: organizational chart] 

Top level:                           
Secretary of Defense; 
Deputy Secretary of Defense. 

Second level, reporting to Secretary of Defense: 

Secretary of the Navy: 
* Chief of Naval Operations: 
* Navy Surgeon General[A]; 
* Navy Bureau of Medicine and Surgery; 
* Military Treatment Facilities. 

Secretary of the Army: 
* Chief of Staff of the Army; 
* Army Surgeon General[A]; 
* Army Medical Command; 
* Military Treatment Facilities. 

Secretary of the Air Force: 
* Chief of Staff of the Air Force; 
* Air Force Surgeon General[A]; 
* Air Force Major Command; 
* Military Treatment Facilities. 

Under Secretary of Defense for Personnel and Readiness: 
* Assistant Secretary of Defense for Health Affairs; 
* TRICARE Management Activity 

Third level, reporting to Secretary of Defense: 

Joint Task Force National Capital Region Medical (JTF CAPMED): 
* Walter Reed National Military Medical Center                        
* Fort Belvoir. 

[A] Policy and budget oversight provided by Under Secretary of Defense 
for Personnel and Readiness and the Assistant Secretary of Defense for 
Health Affairs. 

Source: DOD. 

[End of figure] 

The care of the eligible beneficiary population is also spread across 
the Army, the Navy, and the Air Force, which deliver care at 56 
inpatient facilities and hundreds of clinics. Both the Army and the 
Navy have medical commands headed by surgeons general. The Army's 
portion of the fiscal year 2012 Unified Medical Budget's funding is 
approximately $11.8 billion, and it manages 24 of the 56 inpatient 
facilities. Additionally, the Navy's portion of the fiscal year 2012 
Unified Medical Budget funding was approximately $6.4 billion. It 
manages 19 of the 56 inpatient facilities and provides medical support 
to the Marine Corps. Additionally, the Air Force's portion of the 
fiscal year 2012 Unified Medical Budget's funding is approximately 
$6.6 billion, and it manages 13 of the 56 inpatient clinics. The Air 
Force Surgeon General serves as medical advisor to the Air Force Chief 
of Staff and as functional manager of the Air Force Medical Service. 
Air Force hospitals and their personnel do not report to the Air Force 
Surgeon General, but directly to local line commanders. Each military 
department also recruits, trains, and funds its own medical personnel 
to administer the medical programs and provide medical services to 
beneficiaries. 

Specifically for the management of Military Treatment Facilities 
within the National Capital Region and the execution of related Base 
Realignment and Closure (BRAC) actions in that area, an additional 
medical organizational structure and reporting chain was established 
in 2007.[Footnote 11] This structure is known as the Joint Task Force 
National Capital Region Medical, and its Commander reports to the 
Secretary of Defense through the Deputy Secretary of Defense. The two 
inpatient medical facilities in the area, Walter Reed National 
Military Medical Center and Fort Belvoir Community Hospital, were 
directed by the Deputy Secretary of Defense in January 2009 to become 
joint commands.[Footnote 12] 

Studies of Governance Structures for DOD's Military Health System: 

As early as March 1949, the following recommendation was presented to 
the Secretary of Defense: 

"The Joint Chiefs of Staff recommend unanimously that the Secretary of 
Defense immediately institute studies and measures intended to 
produce, for the support of the three fighting services, a completely 
unified and amalgamated (single) Medical Service."[Footnote 13] 

As noted in DOD's 2011 Task Force report, a long series of studies 
have addressed the issue of DOD's health care organization. Performed 
by both internal and external boards, commissions, task forces, and 
other entities, a number of these studies have recommended dramatic 
changes in the organizational structure of military medicine. See 
figure 3 for a timeline of MHS governance studies. 

Figure 3: Timeline of Military Health System Governance Studies: 

[Refer to PDF for image: timeline] 

1948: 
Hawley Board.  

1949: 
First Hoover Commission; 
Cooper Committee. 

1955: 
Second Hoover Commission. 

1958: 
Consultant to President. 

1970: 
Presidential Blue Ribbon Panel. 

1975: 
Military Health-Care Study. 

1979: 
Defense Resource Management Committee.  

1982: 
Grace Commission. 

1983: 
Systems Research and Applications Corporation Report to Congress.  

1990: 
ASD/HA Report to Congress.  

1991: 
OSD/HA Joint Working Group; 
OSD Office of Administration and Management.  

2001: 
Reorganizing the Military Health System. 

2005: 
Establishment of the Joint/Unified Medical Command Working Group.  

2006: 
Cost Implications of a Unified Medical Command; 
Defense Business Board.  

2011: 
Review of Military Health Care and Impacts on Health of the Force; 
Task Force on Military Health System Governance. 

Source: GAO analysis of DOD information. 

[End of figure] 

Although many of these studies favored a unified system or a stronger 
central authority to improve coordination among the services, major 
organizational change has historically been resisted by the military 
services in favor of the retention of their respective independent 
health care systems. In 1995, we reported that interservice rivalries 
and conflicting responsibilities, hindered improvement 
efforts,[Footnote 14] and noted that the services' resistance to 
changing the way military medicine is organized is based primarily on 
the grounds that each service has unique medical activities and 
requirements. 

Overview of DOD's 2011 Task Force and Its Potential Governance Options: 

In June 2011, with the pending completion of the consolidation of 
medical facilities and functions in the National Capital Region 
undertaken by DOD in response to 2005 BRAC Commission recommendations, 
the Deputy Secretary of Defense recognized that a final decision 
concerning the governance of military health care in the capital 
region needed to be made. This need for a decision provided an 
opportunity to address the desired end-state governance structure of 
the entire MHS. Furthermore, in light of the considerable, long-term 
fiscal challenges the nation faces, and the 2010 comprehensive review 
established by the then-Secretary of Defense to inform future 
decisions about spending on national security, the Deputy Secretary of 
Defense wrote that it was important to ensure that MHS was organized 
in a way that curtails expenses and achieves savings to the greatest 
extent possible in meeting its mission. 

As a result, in June of 2011, the Deputy Secretary of Defense 
established an internal task force to conduct a review of the current 
governance structure of the MHS. The Task Force was directed to 
evaluate options for the long-term governance of the MHS as a whole 
and for the governance of multi-service medical markets, to include 
the National Capital Region and to provide a report within 90 days 
detailing the relative strengths and weaknesses of each option 
evaluated as well as recommendations. The Deputy Secretary of Defense 
designated the co-chairs of the Task Force as the Deputy Assistant 
Secretary of Defense (Force Health Protection and Readiness) and the 
Joint Staff Surgeon. The Task Force also contained representatives 
from the military services,[Footnote 15] the Joint Chiefs of Staff, 
the DOD Comptroller, the Cost Assessment and Program Evaluation 
Office, and the Under Secretary of Defense (Personnel and Readiness). 
In addition to this membership, the co-chairs included representatives 
from the Office of the Deputy Secretary of Defense, the DOD Office of 
General Counsel, Legislative Affairs, and Administration and 
Management as advisors to the Task Force. 

Potential Governance Structures--DOD's report, submitted to the Deputy 
Secretary of Defense in September of 2011 and later to Congress in 
response to section 716 of the National Defense Authorization Act for 
Fiscal Year 2012, presented 13 potential governance structures for the 
overall MHS, with other options for governance of multi-service 
medical markets and the National Capital Region. The potential options 
were variations of the following three governance structures:[Footnote 
16] 

* The defense health agency governance structures would create a 
combat support agency led by a 3-star flag officer (Lieutenant General 
or Vice Admiral) who would report to the Assistant Secretary of 
Defense (Health Affairs). This agency would be focused on 
consolidating and delivering a set of shared health care support 
services. DOD presented variations of a defense health agency which 
would (1) leave management of the Military Treatment Facilities with 
the military services, (2) place the management of the Military 
Treatment Facilities under the control of the defense health agency, 
or (3) create hybrid structures by pairing the agency with other 
options such as a unified medical command. 

* The unified medical command governance structures would create a 
unified functional combatant command led by a 4-star flag officer 
(General or Admiral) who would report to the Secretary of Defense. The 
command would exercise direction and control over the entire MHS but 
would do so either through (1) service components, (2) geographic 
regions, (3) a subordinate health care command, or (4) various hybrid 
governance structures pairing the unified medical command with other 
options such as a designated single service structure. 

* Finally, the single service governance structures would place 
overall control of the MHS under one designated military department 
Secretary, who would report to the Secretary of Defense. However, each 
of the services would continue to organize, train, and equip their 
respective forces. The Military Treatment Facilities report to the 
designated military department Secretary through a variety of local 
and regional commands combinations. 

See appendix II for a more detailed description of DOD's potential 
governance options. 

Task Force Voting Process--Through the course of 20 formal meetings, 
the Task Force members evaluated 13 potential overall governance 
structures by first establishing criteria for evaluation and 
developing a system to weight the criteria to reflect their relative 
importance. After formulating criteria, the Task Force discussed each 
potential governance structure in detail. Following discussion, the 
individual Task Force members voted on the governance structures by 
scoring them according to the criteria. The member score was then 
adjusted by the weights established by the Task Force, and the 
governance structures were ranked according to the final, weighted 
score. The Task Force held five voting rounds on the governance 
options throughout the 90 days allotted to the review process (rather 
than holding a single vote at the end of the review). Using this 
method, the Task Force evaluated the potential structures in "head-to-
head" voting rounds, until the governance option that the Task Force 
believed was the highest ranking was determined. 

Task Force Results--The Task Force provided the Deputy Secretary of 
Defense with a report and a recommendation as to which course of 
action to follow for changing the governance structure of the overall 
MHS, the multi-service medical markets, and specifically, the National 
Capital Region. For the overall MHS, the Task Force's recommendation 
was to pursue the formation of a defense health agency which would 
consolidate common shared services[Footnote 17] in support of the 
three military departments and to leave the medical components of the 
military departments as they are currently. The rationale for this 
action, according to the Task Force report, would allow DOD to create 
shared services, common business and clinical practices under one 
leader without large-scale changes to the MHS at this time. According 
to the Task Force report, pursuing this preferred option would not 
preclude subsequent decisions by the Department to implement more 
sweeping changes in the future and was considered an appropriate 
incremental next step to improving MHS governance and providing a 
structure to rein in healthcare costs. 

DOD's Preferred Option Generally Retains Command Structures and 
Includes a Shared Service Concept: 

DOD's preferred option would create a defense health agency that would 
assume the responsibility for shared services in the MHS with military 
hospitals remaining under the control of the services while other 
potential options represent larger scale changes. In addition, DOD's 
preferred option would include implementing a shared services concept, 
which was common to all of its governance options; however, DOD did 
not develop a business case analysis that would provide a data-driven 
rationale for implementing the concept. 

DOD's Preferred Option Creates a New Agency but Maintains Established 
Military Chains of Command: 

DOD's preferred option creates a defense health agency that would 
report to the Assistant Secretary of Defense (Health Affairs) and 
would consolidate and deliver shared services in the MHS while 
services would maintain control of their military hospitals. DOD 
presented a wide range of governance structures in its report, such as 
creating another unified functional combatant command or establishing 
a single service in charge of all medical operations. However, DOD's 
preferred option does not require complex changes in long-established 
military chains of command like some other structures would. As 
discussed earlier, currently the Army, the Navy, and the Air Force 
manage their own personnel, hospitals, and medical operations. The 
Assistant Secretary of Defense (Health Affairs) exercises authority, 
direction, and control over the policies and resources of the MHS, but 
does not have command and control over the military hospitals or over 
the respective military departments' medical personnel. Over the 
years, DOD has shifted certain responsibilities and authorities among 
various MHS officials, as seen in the establishment of the Assistant 
Secretary of Defense (Health Affairs) authority over the Defense 
Health Program in 1991 and the TRICARE Management Activity in 1998, 
both of which remain part of the current MHS. In 1991, the Defense 
Health Program was established as the result of a study of governance 
options for the MHS to address concerns about recurring funding crises 
and concerns over the inconsistent distribution of health care 
services and benefits among the different military departments. In 
1992, Department of Defense Directive 5136.1 assigned responsibility 
for the program to the Assistant Secretary of Defense (Health 
Affairs). Later, the TRICARE Management Activity was created to reduce 
duplication within management of the MHS and transfer the direct 
management of several functions away from the Assistant Secretary of 
Defense (Health Affairs) to allow that position to concentrate on 
major policy and Defense Health Program related issues and 
initiatives. Together, all of these entities and their 
responsibilities have evolved into the current MHS governance 
structure. 

The Task Force reviewed multiple versions of three basic governance 
structures--defense health agency, unified medical command, and single 
service. The options' primary differences from the current structure 
of the MHS occur mainly in three particular areas of roles and 
responsibilities--overall control, budgetary authority, and control of 
personnel. DOD's preferred governance option is a defense health 
agency with military hospitals remaining under the control of the 
military services. The unified medical command options would assign 
the services' medical assets to a functional combatant command. 
Lastly, the single service options would assign these assets to a 
single military service. Figure 4 summarizes variations of these three 
structures and the current structure as it has evolved over the years, 
while figure 5 presents a number of hybrid models also considered by 
the Task Force, such as an option which includes a unified medical 
command sharing responsibilities with a defense health agency. 

Figure 4: Summary of Differences in Governance Elements for the 
Potential Defense Health Agency, Unified Medical Command, and the 
Single Service Governance Structures: 

[Refer to PDF for image: table] 

Current model: 

Option: Current Military Health System Governance Structure 
Overall control: Determines dispute resolution and lines of 
accountability: Assistant Secretary of Defense (Health Affairs); 
Budgetary authority Determines the organizational entity with 
budgetary authority for the Defense Health Program: Assistant 
Secretary of Defense (Health Affairs); 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Military departments; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: Military departments.
     
Defense Health Agency models: 

Option: Preferred option: Defense Health Agency with Military 
Treatment Facilities Under the Services; 
Overall control: Determines dispute resolution and lines of 
accountability: Assistant Secretary Defense (Health Affairs); 
Budgetary authority Determines the organizational entity with 
budgetary authority for the Defense Health Program: Assistant 
Secretary Defense (Health Affairs); 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Military departments; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: Military departments. 
 
Option: Defense Health Agency — Geographic Model; 
Overall control: Determines dispute resolution and lines of 
accountability: Defense Health Agency, the Director of the Defense 
Health Agency reports to the Assistant Secretary of Defense (Health 
Affairs); 
Budgetary authority Determines the organizational entity with 
budgetary authority for the Defense Health Program: Defense Health 
Agency; 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Defense Health Agency; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: 
* Defense Health Agency (peacetime medical mission);
* Military Departments (deployed forces and administrative control). 
    
Option: Defense Health Agency Hybrid with Medical Treatment Facilities 
placed under the Agency; 
Overall control: Determines dispute resolution and lines of 
accountability: Defense Health Agency, but Assistant Secretary of 
Budgetary authority Determines the organizational entity with 
budgetary authority for the Defense Health Program: Defense (Health 
Affairs) would have an oversight and policy role. Military Departments 
would be responsible for the size and capabilities of the active duty 
medical forces; 
Defense Health Agency, with oversight from Assistant Secretary of 
Defense (Health Affairs); 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Military departments; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: Defense Health Agency. 

Option: Defense Health Agency Hybrid with Regional Military Treatment 
Facilities; 
Overall control: Determines dispute resolution and lines of 
accountability: Assistant Secretary of Defense (Health Affairs), 
Combatant Command, or Designated Service Secretary; 
Budgetary authority Determines the organizational entity with 
budgetary authority for the Defense Health Program: Assistant 
Secretary of Defense (Health Affairs), Combatant Command, or 
Designated Service Secretary; 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Military departments through regional enhanced 
Multi-Service Market offices; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: No information provided in Task Force report. 
    
Unified Medical Command models: 

Option: Unified Medical Command — Geographic Model; 
Overall control: Determines dispute resolution and lines of 
accountability: Unified Medical Command; 
Budgetary authority Determines the organizational entity with 
budgetary authority for the Defense Health Program: Unified Medical 
Command; 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Unified Medical Command; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: Unified Medical Command. 

Option: Unified Medical Command with Service Components; 
Overall control: Determines dispute resolution and lines of 
accountability: Unified Medical Command; 
Budgetary authority Determines the organizational entity with 
budgetary authority for the Defense Health Program: Unified Medical 
Command; 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Unified Medical Command; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: Unified Medical Command. 

Option: Unified Medical Command — HR 1540; 
Overall control: Determines dispute resolution and lines of 
accountability: Unified Medical Command; 
* Unified Medical Command; 
* Military departments (planning, programming, budget, and execution 
over the wartime forces); 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Unified Medical Command;  
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: 
* Unified Medical Command (force provider authorities);
* Military departments (wartime forces).
    
Single service models: 

Option: Single Service — Geographic Model;
Overall control: Determines dispute resolution and lines of 
accountability: Military department; 
Budgetary authority Determines the organizational entity with 
budgetary authority for the Defense Health Program: Military department 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Military department; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: Military department. 

Option: Single Service with Service Components; 
Overall control: Determines dispute resolution and lines of 
accountability: Military department; 
Budgetary authority Determines the organizational entity with 
budgetary authority for the Defense Health Program: Military department 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Military department; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: Military department. 

Source: GAO analysis of DOD information. 

[End of figure] 

Figure 5: Summary of Differences in Governance Elements for the 
Potential Hybrid Governance Structures: 

[Refer to PDF for image: table] 

Hybrid models: 

Option: Unified Medical Command and Defense Health Agency — Geographic
Model; 
Overall control: Determines dispute resolution and lines of 
accountability: 
* Unified Medical Command (wartime forces); 
* Defense Health Agency (peacetime medical personnel); 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Defense Health Agency; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: 
* Unified Medical Command (wartime forces in the Military
Treatment Facilities); 
* Military departments (administration control). 

Option: Unified Medical Command with Service Components and Defense 
Health Agency; 
Overall control: Determines dispute resolution and lines of 
accountability: 
* Unified Medical Command (operational control over all forces and the 
Military Treatment Facilities and serve as a force provider); 
* Defense Health Agency (operational control over assigned personnel); 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Unified Medical Command; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: 
* Defense Health Agency (shared and consolidated services); 
* Unified Medical Command (operational control of forces and Military 
Treatment Facilities); 
* Military departments (administration control). 

Option: Single Service with a Unified Medical Command; 
Overall control: Determines dispute resolution and lines of 
accountability: 
* Military department (peacetime beneficiary health care system for 
the MHS); 
* Unified Medical Command (deployable mission and leverage single 
service run Military Treatment Facilities for clinical currency); 
Control of personnel: Management and supervisory chains of Military 
Treatment Facilities: Military department; 
Control of personnel: Control over Military HealthSystem (MHS) mission 
personnel: 
* Military department (tactical control); 
* Unified Medical Command (wartime and medical facility forces). 

Source: GAO analysis of DOD information. 

[End of figure] 

* Overall control - determines policy making authority, dispute 
resolution, and lines of accountability. Under the current MHS 
structure, the Assistant Secretary of Defense (Health Affairs) 
exercises authority, direction, and control of policy and resources, 
but DOD noted that in practice, this structure fails to take advantage 
of consensus opportunities to more rapidly implement common business 
processes. DOD's preferred option of a defense health agency with 
military hospitals remaining under the control of the services would 
establish a military-led combat support agency organized under the 
Assistant Secretary of Defense (Health Affairs) that would have 
authority, direction, and control of shared services, health plan 
management, other strategic areas, while another version of this 
option would assign the proposed defense health agency control of 
military hospitals. The unified medical command options would place 
authority, direction, and control of the MHS with a functional 
combatant commander, along with direct responsibility for execution of 
health care services. This option would mark a departure from the 
current separation of these responsibilities among the three military 
services. The single-service options would assign responsibility for 
the MHS as a whole to a designated military service Secretary who 
would also command all military hospitals--a departure from the 
current arrangement of split responsibility between the Assistant 
Secretary of Defense (Health Affairs) and the military departments. 
Under all options, the Assistant Secretary of Defense (Health Affairs) 
would retain a policy-making role. 

* Budgetary authority - determines the organizational entity or 
entities with responsibility over the Defense Health Program 
appropriation. In 2007, the Defense Health Board stated in its report, 
Task Force on the Future of Military Health Care,[Footnote 18] that 
the MHS does not function as a fully integrated health care system and 
this lack of integration diffuses accountability for fiscal management 
and results in misalignment of incentives. The current governance 
structure vests overall budgetary authority with the Assistant 
Secretary of Defense (Health Affairs), who allocates funds to the 
services to execute their respective budgets. The Assistant Secretary 
of Defense (Health Affairs) does not have command and control over the 
military hospitals or over the respective military departments' 
medical personnel. DOD's preferred option of a defense health agency 
with military hospitals remaining under the control of the services 
would not alter this aspect of the current governance structure. An 
alternative potential option of a defense health agency with the 
military hospitals under the agency's control would assume direct 
control of the Defense Health Program appropriation. Like the latter 
option, the unified medical command options would consolidate 
budgetary authority with a single official, a functional combatant 
commander, along with direct responsibility for the execution of 
health care, and would mark a departure from the current separation of 
these responsibilities. Similarly, the single-service options would 
streamline budgetary authority by vesting all such authority with a 
designated military service Secretary. 

* Personnel control - determines which entity has management and 
supervisory responsibility over the personnel working within the MHS. 
Historically, military services have exercised command and control 
over their own medical personnel, and Task Force members told us that 
control over the medical personnel was a sensitive issue in their 
discussions. DOD's preferred option of a defense health agency with 
military hospitals remaining under the control of the services would 
allow the services to maintain control over their own personnel. An 
alternative potential option of a defense health agency with the 
military hospitals under the agency's control would allow the agency 
to take control of personnel not assigned to deployable units. The 
unified medical command options vary on the level of authorities 
retained over personnel, as some options assign control of all forces 
to the unified medical command, and others assign control of only some 
personnel to the unified medical command. The single service options 
provide some level of control of all personnel to the designated 
single military service in charge of the MHS, with variations of this 
option related to the assignment of the deployable medical personnel 
assigned to their respective military services. 

DOD's potential governance options would have different effects on 
multi-service medical market governance, which is the management of 
medical care in a geographic area where more than one service operates 
Military Treatment Facilities through a common business plan and 
coordination of resources. For example, a single service option would 
make such coordination unnecessary, while it still might be required 
under a unified medical command. In its report, DOD cites the main 
weakness of the current governance of multi-service markets as the 
failure to fully leverage the medical capabilities across service 
boundaries in a given market to achieve efficiencies. According to DOD 
officials, DOD's preferred option of a defense health agency would 
allow the department to implement an enhanced management structure for 
the multi-service medical markets that would drive such efficiencies 
while avoiding complex changes to long-established military chains of 
command. According to DOD's report, the authorities of the multi-
service market managers would be expanded to include responsibility 
for developing a 5-year business plan, budgetary authority for the 
entire medical market, and the authority to direct personnel to work 
in other locations within the market on a short-term basis, among 
other authorities. However, DOD's current effort is not its first 
attempt at improving multi-service medical market governance. As its 
report notes, DOD has experimented with different approaches to multi-
service medical markets over the past 25 years, including the 2003 
establishment of Senior Market Managers responsible for coordinating 
the development of a single business plan for all Military Treatment 
Facilities in each such market. In 2006, the Deputy Secretary of 
Defense approved the implementation of an alternative to wholesale 
changes in the structure of the MHS, which included seven targeted 
governance initiatives. Among other things, the initiatives included 
the establishment of governance structures for two multi-service 
medical markets, San Antonio and the National Capital Region, as well 
as the creation of governance structures that consolidate command and 
control of military treatment facilities in other multi-service 
medical markets.[Footnote 19] As we reported in 2012, DOD established 
these structures in San Antonio and the National Capital Region, but 
had made no changes to the governance structures of other multi-
service markets.[Footnote 20] Several senior DOD officials noted that 
while they recognize there are efficiencies to be gained in multi-
service markets, they expressed reservations concerning the details of 
DOD's plans for reforming such markets. One senior DOD official 
highlighted challenges that may arise in their operation, such as the 
control of medical personnel to support deployments and other missions 
and coordination of market business plans with the services' 
priorities. 

DOD Did Not Present a Business Case Analysis for Its Shared Services 
Concept: 

DOD did not present a business case analysis for proceeding with its 
shared services concept[Footnote 21] common to all of the proposed 
governance structures, including an estimate of costs to merge shared 
services functions, operational savings to be accrued, or the likely 
timeframe in which this service consolidation would achieve savings. 
As we have previously reported, a business-case analysis can provide a 
data-driven rationale for why an agency is undertaking a consolidation 
initiative, such as a shared services concept since consolidation is 
beneficial in some situations and not in others, and so a case-by-case 
analysis is necessary.[Footnote 22] DOD has twice proposed this shared 
services concept in the past, which would consolidate areas such as 
information technology, contracting, and public health under one 
entity. DOD first proposed implementation of a shared services concept 
in 2006 as part of a series of seven different incremental governance 
initiatives adopted as an alternative to wholesale changes in the 
structure of the MHS. Specifically, implementation of the initiative 
would have created a Joint Military Health Service Directorate under a 
joint senior flag officer reporting to the Assistant Secretary of 
Defense (Health Affairs), a structure not unlike DOD's preferred 
option of a Defense Health Agency for its current review of MHS 
governance. At the time, we recommended that DOD needed to demonstrate 
a sound business case, including an analysis of benefits, costs, and 
risks, for proceeding with its seven initiatives, and DOD concurred 
with our recommendation.[Footnote 23] Further, we later reported that 
DOD had not developed such estimates, and the Assistant Secretary of 
Defense (Health Affairs) had not provided guidance on how and when to 
complete these initiatives.[Footnote 24] In 2012, we also reported 
that in the prior calendar year, DOD approved a plan to reorganize the 
TRICARE Management Activity and establish a shared services division 
with a new Military Health System Support Activity as part of the 
former Secretary of Defense's effort to increase efficiencies and 
reduce costs with the department.[Footnote 25] As a result of this 
effort, DOD reduced the fiscal year 2012 Defense Health Program budget 
request anticipating the establishment of the Military Health System 
Support Activity, but the initiative was put on hold pending the 
results of the Task Force report. 

In addition to a data-driven analysis, our body of work on 
organizational mergers, acquisitions, and other transformations has 
shown that agencies should apply essential change management practices 
such as active, engaged leadership of top leaders and a dedicated 
implementation team to ensure the continued attention needed for a 
transformation to be sustained and successful, among others.[Footnote 
26] We reported in 2012 that in the implementation of its 2006 
governance initiatives, including efforts to establish a shared 
services directorate, DOD did not establish an effective and ongoing 
communication strategy, did not establish a dedicated implementation 
team, and top leadership did not provide the sustained direction 
needed to maintain progress.[Footnote 27] Moreover, we also have 
previously reported on the challenges that other federal agencies have 
faced in attempting to specifically implement shared services. For 
example, in December 2005, the Department of Homeland Security (DHS) 
halted its eMerge2 program, which was expected to integrate financial 
management systems across the entire department and address financial 
management weaknesses, after DHS had spent about $52 million, 
according to officials.[Footnote 28] We noted our concern that moving 
forward, DHS did not have a fully developed financial management 
strategy and plan for the integration of its financial management 
systems and shared services, such as information technology hosting, 
business process services, and application management services. 

DOD's report does not estimate the costs to implement a shared 
services concept or an implementation timeline. Also, while DOD 
estimated a projected savings of 330 full-time personnel equivalents 
for implementing this concept, it did not estimate potential savings 
from consolidating common services. According to DOD officials, DOD's 
preferred option of a defense health agency is a significant change 
for the MHS because it would allow the department to implement shared 
services in order to drive the adoption of common business and 
clinical practices and achieve efficiencies while not requiring 
complex changes to long-established military chains of command. 
However, under the current governance structure, the Assistant 
Secretary of Defense (Health Affairs) has the broad authority that 
could allow for the implementation of shared support services across 
the MHS. As noted above, DOD has developed proposals to exercise such 
authority in the past, but such proposals have never been implemented. 
Further, DOD has not developed a business case analysis for its shared 
services concept since it was first proposed in 2006. Until DOD 
develops a more detailed business case analysis, it lacks a data-
driven rationale and a strategy for proceeding with the implementation 
of this concept. 

DOD's Cost Analysis of Its Potential MHS Governance Options Was 
Limited: 

DOD took certain steps to develop a cost analysis for its potential 
MHS governance options, but we found it to be limited because it (1) 
did not include an estimate of implementation costs, (2) reflected 
only personnel cost savings, and (3) was based on some potentially 
flawed assumptions. DOD initiated a review of potential governance 
structures to assess possible changes that it anticipated could result 
in improved effectiveness and cost savings within the MHS. To aid its 
assessment, DOD included many internal stakeholders from across the 
department in the Task Force to solicit varying opinions and 
perspectives in the deliberations. As part of this process, the Task 
Force used a number of methods to develop estimates of the required 
number of full-time equivalent positions for the headquarters of each 
potential governance structure. To develop its cost savings estimates, 
the Task Force then translated these estimates of the number of 
required personnel into costs by multiplying the number of full-time 
equivalent positions by an average salary for civilian employees. The 
Task Force did not attempt to estimate savings other than in the area 
of headquarters personnel. Based on key principles we derived from 
cost estimating and budgeting guidance,[Footnote 29] we identified two 
elements needed to ensure a reasonable basis for cost savings 
estimates: (1) inclusion of all significant costs and key assumptions 
and (2) use of reliable data. However, several aspects of DOD's cost 
analysis fell short of these principles for the following reasons. 

* DOD did not estimate implementation costs. The Task Force's report 
does not include an estimate of implementation costs for any of its 13 
governance options. We have previously reported that, in some 
instances, up-front investments are needed to yield longer-term 
savings.[Footnote 30] The results of the implementation of the 2005 
BRAC recommendations provide useful insight concerning the effect of 
implementation costs on the net impact of major transformations. For 
example, the estimate of the 20-year net present value[Footnote 31] 
for the relocation of medical command headquarters changed from a 
projected net savings of $316.3 million to a net cost of $105.9 
million. According to officials, projected increases are the result of 
the decision to lease a building, as opposed to the original plan to 
renovate an existing building or build a new facility.[Footnote 32] 
Over the course of BRAC implementation, DOD's one-time implementation 
costs increased 53 percent, from the $21 billion originally estimated 
by the BRAC Commission to about $32.2 billion,[Footnote 33] while the 
20-year net present value of savings decreased 72 percent, from $35.6 
billion originally estimated by the BRAC Commission to $9.9 
billion.[Footnote 34] The Cost of Base Realignment and Closure Model 
provides a number of implementation cost categories that may be 
relevant to health care reorganization, including personnel severance, 
moving costs, and military construction. Military construction costs 
are particularly important, as our analysis of the implementation of 
the 2005 BRAC recommendations found that such expenses were largely 
responsible for the overall increase in implementation costs. Task 
Force officials told us that they did not attempt to develop 
implementation cost estimates for the various options, and that they 
intend to develop an implementation cost estimate only for DOD's 
preferred option as part of the implementation process. Similarly, in 
the course of the 2006 review of possible changes to MHS governance, 
DOD approved seven initiatives to improve medical governance without 
conducting a comprehensive cost-benefit analysis. GAO recommended that 
DOD needed to demonstrate a sound business case, including an analysis 
of benefits, costs, and risks, for proceeding with its preferred 
medical governance concept, and DOD concurred. However, in 2011, we 
reported that DOD had not developed such estimates.[Footnote 35] 

* DOD restricted its estimates to personnel savings. DOD's cost 
analysis of potential savings for its governance options was limited 
to changes in headquarters personnel levels and excluded other 
possible areas of savings. By limiting its analysis of savings for all 
of the governance options to changes in headquarters personnel levels, 
DOD's savings estimates do not consider the impact of headquarters 
reorganization on the larger health system. In its 2006 report on MHS 
governance,[Footnote 36] CNA's Center for Naval Analyses presented 
additional areas of potential savings which the 2011 Task Force report 
did not explore. Although CNA's estimates are 6 years old and do not 
reflect such changes in the MHS as the consolidation of health care in 
the National Capital Region, the study provides several categories for 
potential savings beyond headquarters personnel. For example, health 
care operations savings could be accrued through administrative 
consolidation between large medical facilities which perform 
responsibilities on behalf of smaller clinics in the same geographic 
area. CNA reported that by bridging current service administrative 
boundaries which require the smaller clinics to report to larger 
facilities of the same service, potential savings could be accrued by 
designating a single facility in a geographic area to perform 
technical, legal, and administrative functions on behalf of all nearby 
clinics, regardless of service affiliation. In addition, governance 
reorganization may provide an opportunity to reduce infrastructure 
costs, and as the CNA report notes, the timeline for realizing cost 
savings could influence the amount of possible short-and long-term 
savings. The difference in the areas of cost savings considered and 
methodological approaches could explain the varying results of CNA and 
DOD's analyses. For example, DOD estimated a net cost increase for a 
unified medical command option, while CNA estimated a net cost savings 
for the same option in its 2006 study. As noted earlier, although 
DOD's preferred option assumes that DOD would achieve some personnel 
efficiencies due to greater use of shared services, DOD did not 
estimate the operational savings it expects, such as savings from 
consolidated contracts. 

* DOD used several potentially flawed assumptions in estimating 
headquarters personnel savings. DOD used several potentially flawed 
assumptions in estimating its headquarters personnel savings, and 
therefore it cannot be assured that DOD's methods to estimate such 
savings produced reliable results. First, DOD estimated the size of a 
unified medical command by using Joint Task Force National Capital 
Region Medical (JTF CapMed) headquarters as an example of a unified 
medical command on a small scale. DOD estimated that given this 
command performs 10 percent of MHS operations with 150 personnel, a 
unified medical command would require a minimum of 1,500 personnel. 
However, DOD did not present evidence that 150 personnel is the most 
efficient number of staff for JTF CapMed, and the assumption 
concerning the relationship between the number of staff at JTF CapMed 
and a unified medical command is questionable because economies of 
scale could create efficiencies, therefore requiring fewer personnel. 
Moreover, the report assumes such economies of scale in its estimate 
of personnel savings from shared services functions. Second, DOD used 
the services' execution of the Defense Health Program's Operations and 
Maintenance budget to determine the most efficient staffing 
requirements for service support and regional commands. While these 
commands currently execute only their respective services' portion of 
the budget, DOD estimated the number of full-time equivalents each of 
these commands would require if charged with executing the entire 
budget. However, in its report, DOD undermines the credibility of this 
method by citing numerous weaknesses, and characterized this approach 
as "not a credible predictor of staffing requirements." Third, DOD 
determined the cost of the potential options' personnel requirements 
by multiplying an average of TRICARE Management Activity civilian 
compensation by the number of staffing requirements. However, this 
figure excluded military personnel, whose compensation is markedly 
different from that of civilian personnel. 

Task Force officials stated that the internal 90-day deadline required 
by the Deputy Secretary of Defense for the Task Force to complete its 
report did not allow for a detailed analysis of implementation costs 
or a more thorough review of possible cost savings, and that this time 
period also limited the practicality of more detailed analysis. 
However, the National Defense Authorization Act for Fiscal Year 2012, 
which required a report on MHS governance options to be submitted to 
the congressional defense committees, was passed approximately 3 
months after the Task Force completed its review and contained no 
specific deadline for DOD to submit its report. DOD chose to submit 
the report developed by the Task Force in response to the Deputy 
Secretary of Defense's direction, along with an additional cost 
analysis in response to the statutory requirement. However, DOD could 
have conducted additional analysis before submitting its report to the 
congressional defense committees. 

Given the concerns outlined above, DOD has not comprehensively 
assessed the net costs of the various governance options. As we 
reported in 2007, such information is critical to making data-informed 
decisions about the structure of the MHS, especially in light of the 
nation's current fiscal challenges.[Footnote 37] Past transformation 
experiences, such as the BRAC process, and prior reports on MHS 
governance, such as the 2006 CNA study, could provide a starting point 
for DOD in the consideration of possible implementation costs, cost 
savings areas, and methods of estimating such cost data. DOD has 
selected its preferred structure, a Defense Health Agency with the 
Military Treatment Facilities remaining under the services, without 
the benefit of an inclusive cost analysis which explores these areas. 
Table 1 provides possible implementation cost and cost savings 
categories from BRAC and the 2006 CNA study and available estimates 
for DOD's preferred defense health agency governance option as 
provided in their report. 

Table 1: Possible Implementation Cost and Cost Savings Categories for 
DOD's Preferred Defense Health Agency Governance Structure: 

Implementation Costs: 

Category: Personnel severance; 
Cost/Savings (dollars, millions per year): Not estimated. 

Category: Moving; 
Cost/Savings (dollars, millions per year): Not estimated. 

Category: Military construction; 
Cost/Savings (dollars, millions per year): Not estimated. 

Category: Information technology; 
Cost/Savings (dollars, millions per year): Not estimated. 

Category: Total Implementation Costs; 
Cost/Savings (dollars, millions per year): Not estimated. 

Cost Savings: 

Category: Shared Services; 
Cost/Savings (dollars, millions per year): Not estimated[A]. 

Category: Health care operations; 
Cost/Savings (dollars, millions per year): Not estimated. 

Category: Reduced Infrastructure; 
Cost/Savings (dollars, millions per year): Not estimated. 

Category: Personnel; 
Cost/Savings (dollars, millions per year): $46.5[B]. 

Category: Total Cost Savings; 
Cost/Savings (dollars, millions per year): Not estimated. 

Category: Net Cost/Savings; 
Cost/Savings (dollars, millions per year): Not estimated. 

Source: GAO analysis and DOD MHS governance cost estimates. 

[A] These savings should include the net of any implementation costs 
and anticipated savings associated with the creation of the shared 
services part of the Defense Health Agency. 

[B] We determined that this cost savings estimate is not reliable 
because DOD did not use estimating methods which produced reliable 
results. 

[End of table] 

Prior attempts to proceed with MHS reorganization without the benefit 
of reliable estimates of implementation costs and cost savings 
demonstrate the effects of such an approach. In 2007, DOD did not 
conduct a comprehensive cost-benefit analysis, including an analysis 
of benefits, costs, and risks, for proceeding with its preferred 
medical governance concept at that time, which consisted of seven 
different incremental governance initiatives.[Footnote 38] At the 
time, DOD concurred with our recommendation that they develop such an 
analysis, but we reported in 2011 that it had not done so.[Footnote 
39] Additionally, in 2012, we reported that DOD had documented 
estimated financial savings for only one of those seven governance 
initiatives while at least one other one had an estimated cost 
increase.[Footnote 40] In the absence of an inclusive and reliable 
cost analysis, DOD's current effort may produce similar results. 

DOD Limited Its Assessment of the Options' Strengths and Weaknesses to 
a Qualitative Process: 

DOD used a qualitative process to support its assessment of the 
strengths and weaknesses of the 13 potential governance options 
presented in its report, but did not balance this support with 
quantitative data. We recognize the use of quantitative data is a key 
component of study quality, and DOD's criteria calls for assessing the 
options based on quantitative data. Also, DOD did not mention in its 
report some of the criteria it identified as most important for 
assessing the governance options because they asserted that no option 
that adversely affected these two criteria would be recommended. 

DOD's Assessment Gathered Significant Qualitative Information from 
Internal Stakeholders, but Did Not Provide Support for the 
Quantitative Elements Included in Its Criteria: 

DOD used a deliberative and qualitative approach to assess the 
strengths and weaknesses of the 13 potential governance structures 
presented in its report that included developing and applying criteria 
to each of the 13 governance options it developed.[Footnote 41] In 
establishing the MHS review, the Deputy Secretary of Defense 
prescribed that the review should assess potential governance options 
based on their fulfillment of the following criteria: 

* Provision of high-quality, integrated medical care for 
servicemembers and eligible beneficiaries; 

* Maintenance of a trained and ready deployable medical force to 
support combatant commanders; 

* Achievement of significant cost-savings through, for example, 
elimination of redundancies, increased interoperability, and other 
means of promoting cost-efficient delivery of care. The Deputy 
Secretary of Defense noted that the Task Force members could consider 
additional criteria in their review. As such, the Task Force members 
collectively decided to split the criteria provided by the Deputy 
Secretary of Defense into separate criteria and add two new criteria, 
for a total of seven criteria used to assess the MHS governance 
options (see Figure 6). The Task Force members also collectively 
defined each of the criteria and added a weight to each based on their 
expert opinion of the relative importance of the criteria. 

Figure 6: Criteria Used to Assess MHS Governance Options: 

[Refer to PDF for image: illustration] 

Sustain a medically ready Active Duty (AD)/Reserve Component (RC) 
through high quality integrated health care: 25%; 

Maintain a trained and ready deployable medical force: 23%; 

Provide high quality, integrated health care to non-AD/RC 
beneficiaries: 21%; 

Achieve significant cost savings through reduction in duplication and 
variation: 17%; 

Provide dispute resolution process and clear decision authority with 
clear accountability: 6%; 

Ease of implementation: 5%; 

Enhance interoperability: 3%. 

Source: DOD Task Force Report. 

[End of figure] 

The definitions of the seven criteria used by DOD--while mostly 
qualitative--included elements for certain criteria that called for 
quantitative data. For example, 

* DOD defined the Ease of Implementation criterion as "The alternative 
should be implementable taking into account Title 10 equities, 
[Footnote 42] short-term costs and long-term savings, and decisions 
required inside and outside of the DOD." 

* DOD defined the Achieve Significant Cost Savings through Reduction 
in Duplication and Variation criterion as "The alternative should 
result in a reduction of the system operating costs." 

As we have previously reported, the quality of assessments can be 
strengthened by using a mixed approach that includes both qualitative 
and quantitative information to remove concerns about bias in one data 
source.[Footnote 43] DOD's review obtained a great deal of qualitative 
information from stakeholders and internal experts and used this 
information to support its assessment of the strengths and weaknesses 
of the governance options, but it did not balance this assessment with 
quantitative data. Specifically DOD's assessments of the strengths and 
weaknesses did not provide data to support the quantitative elements 
specified in its own criteria as indicated in the following two 
examples. 

* DOD did not attempt to estimate the range of either short-or long-
term costs or savings data associated with the governance structures 
in the 14 instances where Ease of Implementation was listed either as 
a strength or a weakness. Instead, the DOD report cited qualitative 
information such as "this action would represent a significant 
departure in governance for all existing organizations" or "this will 
entail a large scale reorganization to include re-mapping of service 
medical personnel to operational platforms and there is no known 
precedent or example where this approach has been tested in other 
military medical organizations worldwide" as support for the 
assessment of this criterion. As one leading industry official told 
us, statements about how hard it would be to change and that the 
change would be too disruptive to actually implement is not sufficient 
evidence for avoiding necessary change. 

* DOD did not provide cost data as support for the 11 instances where 
Achieve Significant Cost Savings through Reduction in Duplication and 
Variation was listed as a strength or a weakness. During the Task 
Force meetings, members expressed concern that no business case was 
presented for the governance options, and that the support presented 
for the assessment of strengths and weaknesses were "descriptive 
statements." According to the meeting minutes, it was understood by 
the Task Force that "deeper analytical work will be required following 
the submission of the report." 

Furthermore, DOD's report listed the Medical Readiness criterion as a 
weakness for five options but did not provide supporting examples or 
quantitative data for this assessment. DOD defined Medical Readiness 
as "The alternative should maintain or enhance the ability to provide 
medically ready warfighters." As support for the assessments where 
this criterion was listed as a weakness, DOD stated that coordination 
between Service Chiefs and Military Department Secretaries would be 
required under governance options where medical personnel were still 
"owned" by their service components. For governance options that 
included a split between unified medical command and military-led 
defense health agency, DOD stated that these structures would 
effectively split the readiness sustainment between the higher command 
and the services, thereby making the development and sustainment of 
the medical readiness forces more complex. However, DOD did not 
specifically identify the types of complexities or provide supporting 
examples in which such organizational issues have resulted in a 
negative impact on medical readiness. In July 2010, we reported that 
the services' collaborative planning efforts regarding requirements 
determination for medical personnel working in fixed military 
treatment facilities have been limited, and recommended that DOD 
develop and implement cross-service medical manpower standards for 
common medical capabilities.[Footnote 44] DOD did not address how the 
potential governance structures they presented would affect such 
issues. Similarly, DOD did not discuss or provide support for how the 
governance structures would impact the other MHS priorities--
population health, experience of care, and per capita cost--even 
though quantitative data that measure the performance of these 
priorities for the current governance structure are available. 
[Footnote 45] 

In addition, DOD's assessment of the strengths and weaknesses was 
often unclear. Specifically, 10 of the 13 assessments of governance 
options listed at least one criterion as support for both a strength 
and a weakness, without coming to a conclusion as to whether the 
criterion was a strength or a weakness on balance. For example, in its 
assessment of its preferred governance option (Defense Health Agency 
with Service Medical Treatment Facilities), DOD listed the Enhance 
Interoperability criterion as both a strength and a weakness for the 
option without coming to a final conclusion as to the net effect of 
this assessment. Task Force members we met with told us that for 
options where the same criterion was listed as both a strength and a 
weakness, each Task Force member would make their own judgment as to 
which was a more important characteristic and vote accordingly - 
taking into account the perspective of their organization or service 
and the weighting of the criteria. This approach to assessing the 
strengths and weaknesses of the options illustrates the subjective 
nature of DOD's analysis, and highlights an area where additional 
support, specifically quantitative data, would have improved the 
clarity and robustness of DOD's conclusions about the strengths and 
weaknesses of the governance options. 

DOD's Assessment Did Not Provide Supporting Information for Two of the 
Criteria It Identified as Most Important: 

DOD weighted its criteria according to relative importance but DOD's 
assessment of strengths and weaknesses did not mention two of the 
three criteria weighted as most important. As noted earlier, DOD 
assigned various weights to the seven criteria used to assess the 
governance options as shown in figure 6. The DOD report stated that 
the weighting system was developed to reflect the relative importance 
of the criteria. However, two of the top three criteria with the 
greatest assigned weight--Trained and Ready Medical Force and Quality 
Beneficiary Care--were not mentioned in DOD's assessment of the 
strengths and weaknesses. See figure 7. 

Figure 7: Frequency that the Criteria Were Listed as a Strength or 
Weakness for Potential Governance Structures: 

[Refer to PDF for image: horizontal bar graph] 

Criteria: The option should maintain a trained and ready deployable 
medical force; 
Criteria were not listed as strengths or weaknesses. 

Criteria: The option should provide high quality, integrated health 
care to non-Active Duty/Reserve Component beneficiaries; 
Criteria were not listed as strengths or weaknesses. 

Criteria: The option should sustain a medically ready Active 
Duty/Reserve Component through high quality integrated health care; 
Times listed as a weakness for an option: 5. 

Criteria: The option should achieve significant cost savings through 
reduction in duplication and variation. 
Times listed as a strength for an option: 6; 
Times listed as a weakness for an option: 5. 

Criteria: The option should provide dispute resolution process       
and clear decision authority with clear accountability. 
Times listed as a strength for an option: 11; 
Times listed as a weakness for an option: 11. 

Criteria: The option is easily implementable. 
Times listed as a strength for an option: 7; 
Times listed as a weakness for an option: 7. 

Criteria: The option should enhance interoperability.       
Times listed as a strength for an option: 5. 
Times listed as a weakness for an option: 5. 

Source: GAO analysis of DOD data.       

[End of figure] 

DOD officials told us that these two criteria were not discussed in 
the report because the Task Force members agreed that each governance 
option presented in the report would meet both of these criteria. 
However, DOD did not provide an explanation or justification as to how 
each governance option would satisfy the two criteria in question. The 
officials added that there was a general understanding among the Task 
Force members that no option that adversely affected these two 
criteria would be recommended. However, five of DOD's options 
presented medical readiness of the active duty force, a related and 
similarly important concept, as a weakness. Because DOD's report does 
not discuss the criteria they identified as the most important for 
their assessment of the strengths and weaknesses--including providing 
support for why each option equally satisfied the Trained and Ready 
Medical Force and Quality Beneficiary Care criteria--DOD and Congress 
lack assurance that these criteria were sufficiently considered in 
DOD's assessment. As a result, decision makers may not have well-
supported, data-driven information about the strengths and weaknesses 
of the potential MHS governance options. 

Conclusions: 

Transforming the governance structure of the MHS represents a 
potential opportunity to implement more efficient ways of doing 
business while maintaining a ready and trained medical force as well 
as continuing to meet the needs of military personnel, retirees, and 
their dependents. Reliable and comprehensive information, including 
implementation and other associated costs, is needed to provide a data-
driven rationale for why DOD may be undertaking consolidation 
initiatives, and a clearly presented business-case or cost-benefit 
analysis can justify the benefits of such action. DOD has repeatedly 
studied options to transform its governance structure, but has relied 
on implementing "interim steps" or incremental changes toward an 
unknown final governance structure, often without the benefit of a 
clear understanding of the costs and benefits of its actions. DOD 
risks repeating this pattern without full knowledge of the costs, 
strengths, and weaknesses of each of the options. As DOD moves forward 
with its plans to transform its governance structure, it is imperative 
that officials benefit from full and complete information to be 
assured that they choose the best alternative and that their efforts 
yield necessary improvements and achieve maximum efficiencies. 

Recommendations for Executive Action: 

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, we recommend that the Secretary of Defense 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, 

* Develop a business case analysis and strategy for the implementation 
of its shared services concept, 

* 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 Comments and Our Evaluation: 

In written comments provided in response to our draft report, DOD 
concurred with one of our recommendations and did not concur with the 
remaining two recommendations. DOD's written comments are reprinted in 
appendix III of this report. 

In concurring with our recommendation that DOD develop a business case 
analysis and a strategy for the implementation of its shared services 
concept, DOD agreed, but on the premise that it can and should occur 
in the context of its ongoing implementation planning effort for the 
creation of a defense health agency. DOD reiterated that all of the 
potential governance options under consideration include a shared 
services concept and noted that as part of its implementation 
planning, it will ascertain which shared services, functions, and 
activities will be consolidated. Additionally, DOD stated it will 
produce a detailed implementation timeline for the transfer of each 
such service to the defense health agency. We agree this effort to 
identify which services will be consolidated and to develop a timeline 
for the migration of these services is important. DOD states that 
shared services and common business practices will realize savings, 
but we are concerned that DOD is moving forward in implementing its 
shared services concept without knowledge of implementation costs or 
an estimated return on its investment. Further, with respect to DOD's 
governance decisions on the multi-service markets and the National 
Capital Region, DOD states that our recommendations for additional 
analysis did not apply to these reforms. We did not include these 
specific areas in our recommendation because the potential governance 
options for the multi-service markets and the National Capital Region 
were outside the scope of our mandated review. As a result, we did not 
address the extent to which DOD's reform plans for the multi-service 
markets and the National Capital Region may or may not require 
additional analysis. However, several senior DOD officials noted 
during the course of our review that while they recognize efficiencies 
could be gained in multi-service markets, they expressed reservations 
concerning the details of DOD's plans for reforming such markets. 

In its non-concurrence with our recommendation that DOD develop a 
comprehensive cost analysis for the MHS governance structures, 
including (1) estimates of implementation costs, (2) cost savings in 
additional areas such as health care operations and infrastructure 
changes, and (3) and an improved estimate of personnel savings, DOD 
noted that it recognizes that a more detailed and comprehensive cost 
analysis of governance options could be undertaken. However, DOD 
states that further cost analysis will not help to materially 
distinguish among the options. We disagree with DOD and believe that 
more comprehensive cost analysis will help to distinguish the 
differences among the costs and benefits of the options. First, DOD 
did not estimate implementation costs for any of its 13 governance 
options. As we reported, significant implementation costs are a key 
element of a comprehensive cost analysis, as illustrated in the case 
of the Base Realignment and Closure (BRAC) process, in which DOD's one-
time implementation costs increased 53 percent over the BRAC 
Commission's original estimate. Second, we continue to believe that 
further analysis of cost savings areas beyond personnel cost savings, 
such as health care operations or reduced infrastructure, could help 
DOD to materially distinguish among the governance options. Third, 
DOD's estimate of personnel cost savings used several potentially 
flawed assumptions, and as a result, we determined DOD's estimate to 
be unreliable. In its decision to move forward with implementation of 
the defense health agency, DOD not only lacks any estimate of 
implementation costs and cost savings in areas such as healthcare 
operations and reduced infrastructure, but also reliable estimates of 
personnel cost savings. DOD also stated in its non-concurrence that 
its decision to affect incremental change through the implementation 
of a defense health agency enjoys the consensus of the most senior 
military leaders. However, the decision for this option is based on 
incomplete and potentially flawed data. Absent such information, we 
continue to believe that DOD lacks a sound basis upon which to make 
its decision about the future of MHS governance. 

In its non-concurrence with our recommendation that DOD include 
quantitative data as available in its assessment of the strengths and 
weaknesses of the potential overall governance structures and conduct 
a specific assessment of the degree to which the options meet the 
criteria for Trained and Ready Medical Force and Quality Beneficiary 
Care, DOD stated that the work of the MHS governance task force 
provided DOD senior leaders with sufficient information to make 
decisions among near-term medical governance reform options based on a 
variety of criteria, many of which are inherently qualitative in 
nature and would not significantly benefit from the sort of 
quantitative data we recommended that DOD include. However, DOD's own 
criteria for the assessment of the potential governance structures 
called for the inclusion of quantitative information, as we reported. 
Further, DOD's response to our draft report did not specifically 
address the portion of our recommendation that a specific assessment 
of the degree to which the potential governance options meet the 
criteria Trained and Ready Medical Force and Quality Beneficiary Care--
two of the three most important criteria according to DOD task force 
members. Without inclusion of these criteria coupled with the lack of 
quantitative data, it remains unclear how DOD senior leaders have 
sufficient information to make decisions regarding near-and long-term 
medical governance reform options. Therefore, we believe our 
recommendation that DOD improve its evaluation of the potential 
governance structures' strengths and weaknesses by including 
quantitative data in its assessment and to determine the impact on a 
trained and ready medical force and the quality of beneficiary care 
remains valid. 

In its comments, DOD noted that it is committed to the MHS governance 
changes agreed to by the Department leadership in 2012 that are 
presented in its report in response to Section 716 of the National 
Defense Authorization Act for Fiscal Year 2012. As we noted, Section 
716 required DOD to submit a report to the congressional defense 
committees to include, among other things, a description of the 
alternative MHS governance options developed and considered by the 
Task Force; an analysis of the strengths and weaknesses of each 
option; and an estimate of the cost savings, if any, to be achieved by 
each option. DOD stated that to undertake the additional evaluation we 
recommended would not only be time-consuming but also inherently 
speculative and imprecise, and that additional analysis would not 
alter its conclusion about which governance reforms to pursue in the 
near term. We are not suggesting that DOD not reap the benefits of 
certain desirable, near-term reforms, such as the development of a 
business-case analysis for its shared services followed by its 
implementation, and we recognize that implementing these near-term 
reforms can provide some insight into the potential benefits of 
further transformation efforts. As we noted in our report, under the 
current governance structure, the Assistant Secretary of Defense 
(Health Affairs) has the broad authority that could allow for the 
implementation of shared support services across MHS, and DOD has had 
an opportunity to develop a supporting business case analysis since 
this concept was first proposed in 2006. However, given the complex 
and costly nature of MHS, we continue to believe that changes to its 
overall governance should be well thought out and analyzed to ensure 
that there are significant, measurable benefits before being 
implemented. In addition, the need to improve the evaluation of 
potential governance options by considering critical information such 
as the cost of DOD's reforms, their possible cost savings, and a 
thorough discussion of the options' strengths and weaknesses would 
benefit DOD's decision-making process. DOD has repeatedly studied 
options to transform its governance structure, but has relied on 
implementing "interim steps" or incremental changes toward an unknown 
final governance structure, often without the benefit of a clear 
understanding of the costs and benefits of its actions. Prior attempts 
to proceed with MHS reorganization without the benefit of such 
information demonstrate the effects of such an approach. In 2007, DOD 
did not conduct a comprehensive cost-benefit analysis, including an 
analysis of benefits, costs, and risks, for proceeding with its 
preferred medical governance concept at that time, which consisted of 
seven different incremental governance initiatives. At the time, DOD 
concurred with our recommendation that they develop such an analysis, 
but we reported in 2011 that it had not done so. We reiterate that DOD 
risks repeating this pattern if it does not develop full knowledge of 
the costs, strengths, and weaknesses of each of the options under 
consideration. 

DOD noted that it is currently planning for the implementation of its 
governance reforms, and that it expects the defense health agency to 
reach an initial operating capability by 2013, with full operating 
capability within 2 years. We will continue to monitor DOD's efforts 
to reform MHS governance. 

We are sending copies of this report to interested congressional 
committees, the Secretary of Defense, the Deputy Secretary of Defense, 
the Under Secretary of Defense for Personnel and Readiness, the 
Assistant Secretary of Defense (Health Affairs), the Surgeon General 
of the Air Force, the Surgeon General of the Army, and the Surgeon 
General of the Navy. In addition, the report is available at no charge 
on the GAO website at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions regarding this report, please 
contact me at (202) 512-3604 or farrellb@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in appendix IV. 

Signed by: 

Brenda S. Farrell: 
Director: 
Defense Capabilities and Management: 

List of Committees: 

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

The Honorable Daniel K. Inouye: 
Chairman: 
The Honorable Thad Cochran: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Howard P. "Buck" McKeon: 
Chairman: 
The Honorable Adam Smith: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable C.W. Bill Young: 
Chairman: 
The Honorable Norman D. Dicks: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

[End of section] 

Appendix I: Scope and Methodology: 

To determine how the Department of Defense's (DOD) preferred 
governance option, and the other options presented in its report, 
changes the current structure of the MHS, we first obtained 
documentation describing key changes in the Military Health System 
(MHS) governance structure since 1991 by reviewing relevant DOD 
directives, legislation, and interviewing knowledgeable DOD officials. 
Using this as the basis for what constitutes the current MHS 
governance system, we then reviewed DOD's description of each of the 
proposed changes to the current governance options in the Task Force 
report. Upon review of all of the historical as well as proposed 
changes to the MHS governance structure, we identified three common 
governance elements among them all: the overall control of policy-
making authority, budgetary authority, and control of medical 
personnel. As a guide for developing our comparison of the changes, we 
used these elements to describe the differences among the various 
governance options and key changes that have shaped the current 
structure. We defined these three governance elements to encompass the 
following activities: 

* Overall Control of Policy-Making Authority: Who controls the overall 
MHS? Who heads its various entities? Who reports to the Secretary of 
Defense? What is the command and control structure? Who establishes 
MHS policy for the Office of the Secretary of Defense, the Services, 
and joint entities? What are the roles of senior leaders? 

* Budgetary Authority: Who controls the Defense Health Program 
appropriation? 

* Control of Personnel: Who manages and supervises the Military 
Treatment Facilities and multi-service medical markets? Who controls 
the MHS mission and administrative support personnel among the Office 
of the Secretary of Defense, the Military Departments, and/or joint 
entities? 

To review DOD's shared services concept, we reviewed the information 
presented in DOD's report and interviewed DOD officials concerning 
their analysis of this concept. We compared this information to our 
prior work on business case analyses in the context of management 
consolidations,[Footnote 46] and leveraged our prior work on efforts 
by DOD and other federal agencies to establish shared services to 
provide context for DOD's current efforts.[Footnote 47] 

To determine the extent to which DOD has developed a cost analysis of 
its potential MHS governance options, we reviewed DOD's cost 
assessments for its governance options using key principles we derived 
from cost estimating and budgeting guidance. Specifically, we reviewed 
numerous federal guidance documents related to cost estimating, 
accounting standards, economic analysis, and budgeting and identified 
key principles that we believe can be applied to the evaluation of 
cost savings estimates. The guidance documents we reviewed include GAO 
Cost Estimating and Assessment Guide, GAO-09-3SP; Office of Management 
and Budget Circular No. A-11, Preparation, Submission and Execution of 
the Budget (Aug. 2011, superseded by an August 2012 issuance); Federal 
Accounting Standards Advisory Board, Statement of Federal Financial 
Accounting Standards 4 (June 2011); Department of Defense Instruction 
7041.3, Economic Analysis for Decisionmaking (Nov. 7, 1995); and 
Department of Defense Financial Management Regulation 7000.14-R, 
Volume 4, Chapter 22, Cost Finding (May 2010). Although each of these 
documents may not apply to these circumstances as a legal matter, we 
believe that they collectively contain broad themes that can be 
applied to evaluating cost analyses. To apply these key principles, we 
interviewed Task Force members concerning the extent to which they 
attempted to estimate implementation costs and reviewed the cost 
savings presented in DOD's report. We identified broad cost categories 
that should be considered in the course of implementing DOD's 
governance transformation by leveraging prior GAO work on the 
implementation costs of major transformations and consolidations, such 
as the Base Realignment and Closure (BRAC) process, and CNA's report, 
Cost Implications of a Unified Medical Command.[Footnote 48] In 
reviewing DOD's cost savings estimate, we interviewed officials 
concerning their estimating methods and reviewed supporting 
documentation, noting where we identified shortcomings in the Task 
Force's approach. We were unable to rely on DOD's cost savings 
estimates because the estimates and their supporting data were 
insufficient in the key data elements needed to completely and 
accurately develop them as discussed in the findings section of this 
report. 

To determine the extent to which DOD's assessment of the strengths and 
weaknesses of its potential governance options is well-supported and 
data-driven, we obtained and analyzed Task Force documents including 
meeting minutes, briefing slides, and voting templates. We then used 
this analysis to determine the criteria and process used to formulate 
the strengths and weaknesses of the options. We then assembled a list 
of the 78 strengths and weaknesses cited in the task force report and 
used a semi-structured interview process to collect information from 
Task Force officials regarding the process and inputs used to 
formulate each assessment. We then conducted a content analysis of the 
information provided by the officials to identify and categorize the 
inputs that the officials cited as contributing to the assessments of 
strengths and weaknesses. The categorization of the information was 
conducted by one analyst and confirmed by a second analyst to ensure 
the analysis was adequately supported by the evidence. In addition, we 
interviewed officials from one multi-service market and a health 
administration expert to obtain their opinions on the process used by 
DOD to formulate the strengths and weaknesses. 

For each of our objectives, we limited our review to the potential 
overall governance structures that the Task Force presented in its 
report. We did not specifically review the proposed changes to DOD's 
multi-service medical markets or to the governance structure in place 
within the National Capital Region as presented in the Task Force 
report because we determined that these proposed changes were outside 
the scope of our mandate. We conducted this performance audit from 
March 2012 through September 2012 in accordance with generally 
accepted government auditing standards. Those standards require that 
we plan and perform the audit to obtain sufficient, appropriate 
evidence to provide a reasonable basis for our findings and 
conclusions based on our audit objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Appendix II: Detailed Description of the Potential Governance 
Structures and DOD's Assessment of Their Strengths and Weaknesses: 

DOD's task force report provided the following detailed description, 
cost savings estimates,[Footnote 49] and strengths and weaknesses of 
the governance structures[Footnote 50] it identified as potential 
options for its Military Health System (MHS). As we noted earlier in 
our report, we found DOD's cost savings estimates to be unreliable 
because the estimates and their supporting data were insufficient in 
the key data elements needed to completely and accurately develop 
them. As a result, using DOD's data as presented below may lead to an 
incorrect or unintentional result. 

Defense Health Agency Governance Structures: 

Defense Health Agency with Military Treatment Facilities under the 
Services: 

DOD's preferred option would create a new defense health agency that 
would assume the responsibilities of the TRICARE Management Activity 
and additional possible areas of savings known as shared services. The 
new agency would be a combat support agency headed by a 3-star general 
or flag officer who would report to the Assistant Secretary of Defense 
(Health Affairs), but with oversight from the Chairman of the Joint 
Chiefs of Staff. The services would maintain their surgeons general, 
service support commands, and intermediate headquarters. 

DOD's Estimate of Projected Net Savings: $46.5 million per year. 

DOD's Assessment of Strengths: 
* Lines of Authority: The services control the hospital and deployed 
health care; eliminates the Assistant Secretary of Defense role as the 
Director of the TRICARE Management Activity; 
* Enhance Interoperability: The defense health agency would be focused 
on the shared and consolidated services; 
* Ease of Implementation: This would require minimal change to the 
current service organizational structure; 
DOD's Assessment of Weaknesses: 
* Enhance Interoperability: Eliminates the Joint Hospitals in the 
National Capital Region as well as San Antonio; 
* Ease of Implementation: This option would require the Joint Task 
Force National Capital Region Medical to transition to a different 
structure. The services' cultures could limit the implementation of 
common services and processes. 

Defense Health Agency with Military Treatment Facilities Placed under 
the Agency: 

Similar to the previous option, this structure would create a defense 
health agency combat support agency led by a 3-star general or flag 
officer, but would place Military Treatment Facilities under the 
authority, direction, and control of the agency. Military personnel 
not assigned to a deployable unit would be under the direction of the 
defense health agency, but the services would continue to own their 
personnel, and all civilian personnel would be under the direction of 
the agency. 

DOD's Estimate of Projected Net Savings: $87.4 million per year. 

DOD's Assessment of Strengths: 
* Dispute Resolution/Lines of Authority/Accountability: Management of 
all medical treatment facilities under one authority (Director, 
Defense Health Agency); the Defense Health Agency Director would 
report directly to the Assistant Secretary of Defense (Health Affairs); 
* Achieve Significant Cost Savings Through Reduction in Duplication 
and Variation: The defense health agency would be focused on the most 
common theme emphasized by the Task Force - an organizational model 
that would accelerate implementation of shared services models that 
identify and proliferate best practices and consider entirely new 
approaches to delivering shared activities. Further, placement of 
medical treatment facilities under the defense health agency would 
allow for even more rapid implementation of unified clinical and 
business systems, which could create significant savings; 
* Other: Would align management of purchased care (TRICARE) and direct 
care (Medical Treatment Facilities) under one entity, creating 
potential for greater coordination and cost-effective distribution of 
resources between the two sources of care; 
DOD's Assessment of Weaknesses: 
* Dispute Resolution/Lines of Authority/Accountability: This model may 
elevate management disputes to the highest levels of the DOD, as local 
line command disputes with the defense health agency command structure 
may need to be adjudicated at the level of the Secretary of the 
Military Department/Assistant Secretary of Defense (Health Affairs) 
level; 
* Medical Readiness: Concerns were expressed that an organization this 
large with this many authorities could jeopardize services priorities. 
A comprehensive defense health agency could reduce command and 
leadership development opportunities; 
* Ease of Implementation: Moving all medical treatment facilities to 
the defense health agency would be a major reorganization; 
* Other: Could mix the defense health agency mission between support 
of MHS-wide functions and direct operation of hospitals and clinics. 
The Military Department's representatives on the Task Force believed 
that operation of the direct care system is a Military Department 
responsibility. 

Weaknesses of a DHA with MTFs under the Agency: 

Defense Health Agency - Geographic Model: 

This option would create a Defense Health Agency to exercise 
authority, direction, and control over the Military Treatment 
Facilities. However, service intermediate headquarters would be 
replaced by a single defense health agency-run organization. 

DOD's Estimate of Projected Net Savings: $21.4 million per year. 

DOD's Assessment of Strengths: 
* Lines of Authority: This organizational construct would have clear 
lines of authority and there would be central control of the Military 
Treatment Facilities; 
* Enhance Interoperability: This option would allow for single 
processes for key functions; 
DOD's Assessment of Weaknesses: 
* Dispute Resolution: Key issues would be elevated quickly to the 
highest levels; 
* Ease of Implementation: This option would be more of a 
"civilianized" model which may be difficult to implement in the 
current military structure. It may also reduce command leadership 
opportunities and professional growth. 

Unified Medical Command Governance Structures: 

Unified Medical Command with Service Components: 

A unified medical command with service components option would create 
a tenth combatant command led by a 4-star general or flag officer, 
with forces supplied by service components. Service intermediate 
headquarters would manage the Military Treatment Facilities, but 
personnel not assigned to deployable units would be assigned to the 
unified medical command. A Joint Health Support Command would manage 
the TRICARE health plan and shared services. 

DOD's Estimate of Projected Net Cost: $203.6 million per year. 

DOD's Assessment of Strengths: 
* Dispute Resolution/Lines of Authority/Accountability: Clear lines of 
authority would be established; 
* Achieve Significant Cost Savings Through Reduction in Duplication 
and Variation: There would be central control of common business and 
clinical processes, and implementation would be achieved more readily 
with command and control throughout the medical structure to ensure 
compliance; 
* Ease of Implementation: Joint Task Force National Capital Region 
Medical, if retained in its current form, could be addressed as a 
region directly reporting to the Commander, U.S. Medical Command; 
DOD's Assessment of Weaknesses: 
* Dispute Resolution/Lines of Authority/Accountability: The current 
structure of civilian authority over components of the MHS (the 
Assistant Secretary of Defense (Health Affairs)) and Military 
Department Secretaries) would not be maintained; the first civilian 
official in the authority chain would be the Secretary of Defense; 
* Achieve Significant Cost Savings Through Reduction in Duplication 
and Variation: In any unified medical command structure that maintains 
service Components (the common model for all unified commands) the 
overall management headquarters overhead would increase above "As Is" 
and all other organizational models; 
* Ease of Implementation: This action would represent a significant 
departure in governance for all existing organizations (Assistant 
Secretary of Defense (Health Affairs), TRICARE Management Activity, 
Military Department Secretaries, Military Service Chiefs, Service 
Medical Departments). For the Air Force, this includes creating a 
medical component command for operation of Air Force medical treatment 
facilities; the Navy would need to redesign how garrison billets are 
mapped to operational requirements. 

Unified Medical Command, Geographic Model: 

This structure would create a tenth combatant command for medical 
care. However, the unified medical command commander would exercise 
control over personnel and the Military Treatment Facilities. Service 
intermediate headquarters would be replaced by a single organization. 

DOD's Estimate of Projected Net Cost: $152.3 million per year. 

DOD's Assessment of Strengths: 
* Dispute Resolutions and Lines of Authority: This organizational 
structure would have clear lines of authority and there would be 
central control of the Military Treatment Facilities. The shared 
services (i.e. education and training, research and development, 
health information technology, logistics) would be centrally managed. 
The TRICARE Regional Offices would be aligned with the Military 
Treatment Facilities in the same chain of command; 
* Enhance Interoperability: This option would focus the development of 
common business processes; 
* Ease of Implementation: The Joint Table of Distributions would 
eliminate any multi-service market issues because the unified medical 
command would control the multi-service markets; 
* Achieve Significant Cost Savings Through Reduction in Duplication 
and Variation: Reduction in overhead personnel would be relative to 
the current MHS structure. Services would focus on deployable forces 
with the unified medical command as the platform for medical 
professional force development and benefit delivery; 
DOD's Assessment of Weaknesses: 
* Lines of Authority: This would be a major change for the Service 
Surgeons General; * Enhance Interoperability: Some required service 
assets would not be under service control--sourcing would be from the 
unified medical command; 
* Ease of Implementation: This would be a massive change for the way 
the DOD does business. Hospital based and wartime medical forces would 
be split. An alternative is to embed deployable wartime forces in a 
Joint Table of Distribution in the unified medical command; 
* Achieve Significant Cost Savings through Reduction in Duplication 
and Variation: The Command may be focused on effectiveness over costs. 

Unified Medical Command, HR 1540[Footnote 51] 

This option would create a tenth combatant command for medical care 
with forces supplied by service components. Subordinate service 
commands would manage the Military Treatment Facilities, but within 
the framework of a Healthcare Command led by a 3-star general or flag 
officer to manage the service components. 

DOD's Estimate of Projected Net Cost: $238.8 million per year. 

DOD's Assessment of Strengths: 
* Dispute Resolution/Lines of Authority/Accountability: Clear lines of 
authority would be established as well as central management of shared 
services (i.e. education and training, research and development, 
health information technology, logistics). Military Treatment 
Facilities would be centrally controlled; 
* Enhance Interoperability: Allows for Joint Task Force National 
Capital Region Medical to be easily inserted into this structure as a 
regional or sub-regional command. Common business processes would be 
implemented across the Military Treatment Facilities; 
* Ease of Implementation: The service component execution would 
minimize organizational change; 
DOD's Assessment of Weaknesses: 
* Achieve Significant Cost Savings Through Reduction in Duplication 
and Variation: The Command would likely be focused more on 
effectiveness over costs; 
* Dispute Resolution/Lines of Authority/Accountability: Some required 
service assets would not be under service control. There would be 
civilian oversight for budget located at the Secretary of Defense 
level which would bypass the Office of the Secretary of Defense 
Principal Staff Assistant; 
* Enhance Interoperability: Hospital based and unit based medical 
forces would be split; 
* Ease of Implementation: This would require all three services to 
significantly change, with the biggest impact on the Air Force; 
* Dual-hatted surgeons general could face perception issues from home 
service and the unified medical command. 

Single Service Governance Structures: 

Single Service with Service Components: 

A single military service Secretary would be assigned all headquarters 
management functions, such as management of the TRICARE health plan 
and shared services. The designated service also would control a 
Defense Healthcare System agency that would include the service 
component commands, which in turn would command the Military Treatment 
Facilities. 

DOD's Estimate of Projected Net Savings: $94.4 million per year. 

DOD's Assessment of Strengths: 
* Dispute Resolution/Lines of Authority/Accountability: Clear lines of 
authority would be established as well as central control of the 
Military Treatment Facilities and multi-service markets. Service 
readiness assets would be under service control; 
* Achieve Significant Cost Savings Through Reduction in Duplication 
and Variation: There would be single processes for key functions; 
DOD's Assessment of Weaknesses: 
* Dispute Resolution/Lines of Authority/Accountability: This option 
would create a need for coordination of issues between the service 
Secretaries; 
* Enhance Interoperability: This would split the warrior and 
beneficiary care systems. 

Single Service, Geographic Model: 

Under this structure, a single military service Secretary would be 
assigned all headquarters management functions, such as management of 
the TRICARE health plan and shared services. In addition, the 
designated service would command all of the Military Treatment 
Facilities, while all services would remain responsible for providing 
personnel. 

DOD's Estimate of Projected Net Savings: $94.4 million per year: 

DOD's Assessment of Strengths: 
* Dispute Resolution/Lines of Authority/Accountability: Clear lines of 
authority and chain of command from Secretary through the Military 
Treatment Facilities commander would be established; 
* Achieve Significant Cost Savings Through Reduction in Duplication 
and Variation: With shared services, there would be one set of 
business and clinical processes and implementation would be achieved 
more readily with command and control in a single service. It also 
could eliminate the issues that arise with multi-service markets. This 
option would create the most significant savings in headquarters 
overhead of any organizational option; 
DOD's Assessment of Weaknesses: 
* Medical Readiness: With medical personnel still "owned" by their 
service components, a requirement for coordination between Service 
Chiefs and Military Department Secretaries on readiness and personnel 
issues would remain; 
* Ease of Implementation: There is no known precedent or example where 
this approach has been tested in other military medical organizations 
worldwide. The Navy/US Marine Corps medical support model does not 
have the mission for all of the DOD; however, it is representative of 
how a single service model could work. Additionally, this option would 
entail a large scale reorganization to include re-mapping of service 
medical personnel to operational platforms; 
* Dispute Resolution/Lines of Authority/Accountability: Issues would 
be adjudicated at a higher level (Military Department Secretary). 

Hybrid Governance Structures: 

Unified Medical Command with Service Components and Defense Health 
Agency: 

This option would create a tenth combatant command led by a 4-star 
general or flag officer, with forces supplied by service components, 
and service commands charged with management of the Military Treatment 
Facilities. However, shared services would be split, with the unified 
medical command in charge of readiness-focused areas and a defense 
health agency charged with beneficiary health care and clinical 
quality. 

DOD's Estimate of Projected Net Cost: $225.3 million per year. 

DOD's Assessment of Strengths: 
* Dispute Resolution/Lines of Authority/Accountability: This option 
would align command and control forces under a military chain of 
command. It would also align the Assistant Secretary of Defense 
(Health Affairs) role to policy and oversight with execution delegated 
to the unified medical command commander and the defense health agency 
director; 
* Ease of Implementation: This option would maintain service 
structures as component commands in the unified medical command. It 
would also support the Joint Task Force National Capital Region 
Medical structure; 
DOD's Assessment of Weaknesses: 
* Medical Readiness: Service readiness functions would be located in 
the unified medical command; 
* Dispute Resolution/Lines of Authority/Accountability: The unified 
medical command commander would report directly to the Secretary of 
Defense. It could be difficult to adjudicate disagreements between the 
unified medical command and the defense health agency at the Deputy 
Secretary of Defense level; 
* Achieve Significant Cost Savings: The execution of the shared 
services and common processes would require unified medical command 
and defense health agency agreement. 

Unified Medical Command and Defense Health Agency, Geographic Model: 

Similar to the above, this option would pair a tenth combatant command 
with a defense health agency with shared services divided between the 
two organizations. However, the defense health agency through Regional 
Directors, not service components, would manage the Military Treatment 
Facilities. 

DOD's Estimate of Projected Net Cost: $238.8 million per year. 

DOD's Assessment of Strengths: 
* Dispute Resolution/Lines of Authority/Accountability: This option 
would align command and control forces under a military chain of 
command. It would also align the role of the Assistant Secretary of 
Defense (Health Affairs) to policy and oversight with execution 
delegated to the unified medical command commander and defense health 
agency director; 
* Achieve Significant Cost Savings: The execution of the shared 
services and common processes would require unified medical command 
combatant command agreement; 
DOD's Assessment of Weaknesses: 
* Medical Readiness: Service readiness functions would be located in 
the unified medical command; 
* Dispute Resolution/Lines of Authority/Accountability: The unified 
medical command commander would report directly to the Secretary of 
Defense. It could be difficult to adjudicate disagreements between the 
unified medical command and defense health agency at the Deputy 
Secretary of Defense level. 

Single Service with a Unified Medical Command: 

Similar to the above two options, this option would pair a tenth 
combatant command with another organization, a Defense Healthcare 
System in charge of all of the Military Treatment Facilities managed 
by one military service. Shared services also would be divided between 
the two organizations. 

DOD's Estimate of Projected Net Cost: $238.8 million per year. 

DOD's Assessment of Strengths: 
* Dispute Resolution/Lines of Authority/Accountability: This option 
would establish clear lines of authority for administrative, 
operational, and tactical control of forces with each being vested in 
a different structure. It would also create central control of the 
Military Treatment Facilities; 
* Ease of Implementation: In this option, the multi-service markets 
are addressed and joint facilities would be maintained; 
* Enhance Interoperability: This option would allow for single 
processes for key functions; 
DOD's Assessment of Weaknesses: 
* Medical Readiness: This would split the warrior care and the 
beneficiary care systems; 
* Dispute Resolution/Lines of Authority/Accountability: This option 
would create different responsible agents for administrative, 
operational, and tactical control of forces. 

Defense Health Agency Hybrid with Regional Military Treatment 
Facilities: 

The defense health agency would be led by a 3-star general or flag 
officer who would report directly to either a Service Secretary, the 
Assistant Secretary of Defense (Health Affairs) or a combatant 
commander. The agency would control the TRICARE health plan. 
Additionally, a Medical Operations Support Command would be created to 
control the education and training, research and development, and 
public health. Finally, the individual military departments would 
continue to manage the Military Treatment Facilities, albeit through 
Service designated regional enhanced multi-service market offices 
instead of their current medical commands. 

DOD's Estimate of Projected Cost/Saving: None presented. 

DOD's Assessment of Strengths: 
* None provided; 
DOD's Assessment of Weaknesses: 
* None provided. 

[End of section] 

Appendix III: Comments from the Department of Defense: 

The Assistant Secretary of Defense: 
Health Affairs: 
1200 Defense Pentagon: 
Washington, DC 20301-1200: 
 
September 14, 2012: 
 
Ms. Brenda S. Farrell: 
Director, Defense Capabilities and Management: 
U.S. Government Accountability Office: 
441 G. Street, N.W. 
Washington, DC 20548: 

Dear Ms. Farrell: 

Thank you for the opportunity to comment on the draft Government 
Accountability Office (GAO) report, GA0-12-911. Military Health System 
(MHS) governance reform is a priority issue for the Department of 
Defense (DoD) and we very much appreciate GAO's thoughtful assessment. 

The Department's specific comments on the three recommendations 
contained in the draft GAO report are provided in the attached. Our 
points of contact are Dr. Michael Dinneen (Functional) at 703-681-8063 
and Mr. Gunther Zimmerman (Audit Liaison) at 703-681-4360. 

Sincerely, 

Signed by: 

Jonathan Woodson, M.D. 

Attachment: As stated. 

GAO Draft Report Dated August 23, 2012: 
GAO-12-911 (GAO Code 351719): 

"Defense Health Care: Additional Analysis Of Costs And Benefits Of 
Potential Governance Structures Is Needed" 

Department Of Defense Comments To The GAO Recommendations: 

The Department of Defense is committed to the military health system 
(MHS) governance changes agreed to by Department leadership in 2012 
and explained in enclosure 1 of the Department's report in response to 
Section 716 of the National Defense Authorization Act. These near-term 
reforms will realize savings through common business processes and 
shared services, and will provide valuable information to improve 
management of our shared medical markets. These reforms will also 
provide information, based on actual experience and outcomes that will
be used to inform future MRS governance decisions. The Department is 
currently undertaking detailed implementation planning for its 
intended medical governance reforms, and is on track to achieve an 
initial operating capability of the new Defense Health Agency by 2013, 
with full operating capability within two years. 

The Department extensively reviewed the work of its internal task 
force and prior studies of governance options and arrived at an 
informed consensus among the Department's civilian and uniformed 
leadership both regarding this approach and that improved efficiency 
in the military health system is an urgent priority. While the 
Department does not concur with proposals that would delay 
implementation of these near-term reforms, it is undertaking detailed 
cost analyses as part of the implementation planning process. 
Furthermore, the implementation of these near term reforms will result 
in additional information and insight, based on actual experience and 
outcomes that can inform future consideration by the Department and 
the Congress of potential more significant transformations to MIN 
governance. 

Recommendation 1: The GAO recommends that the Secretary of Defense 
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. 

DoD Response: DoD recognizes that a more detailed and comprehensive 
cost analysis of military health system (MHS) governance structures 
could be undertaken; however, the Department does not believe that 
doing so would materially enhance its ability to select among 
potential governance options, or that it would alter its conclusion 
about which governance reforms it should pursue in the near term. 
Furthermore, to the extent that the GAO recommendation might suggest 
that DoD should defer the implementation of its intended near-term 
reform to MHS governance until further cost analysis is completed, the 
Department does not agree, because doing so would unduly delay the 
Department from realizing the benefits of these needed reforms. 

As described in Enclosure 1 of the report provided to the 
congressional defense committees as directed by section 716 of the 
National Defense Authorization Act for 2012, DoD intends to transition 
the TRICARE Management Activity (TMA) to a "Defense Health Agency" 
that will, among other things, assume responsibility for shared 
services, functions, and activities in the MHS. This decision was 
informed by the work of the Department's internal task force on MHS 
governance and 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, this 
option has the consensus of the senior leaders representing the 
various components of the Department involved in the medical mission 
and achieves important objectives sought in medical governance 
reform — one of which is the potential to achieve cost savings. 
Further cost analysis as recommended by the GAO will not help to 
materially distinguish among the MHS governance options developed by 
the Task Force, all of which are predicated on the concept of 
consolidating shared services and functions that are currently 
performed separately by each of the Military Departments. 

DoD does intend to undertake additional cost analysis of its intended 
medical governance change, to include cost savings in the areas 
specified in the GAO's recommendation, in the context of the 
implementation planning effort directed by the Deputy Secretary of 
Defense (as described in Enclosure 1 of DoD's section 716 report). 
This effort is already well underway, and is targeted to achieve 
interim operating capability for the Defense Health Agency by 2013 and 
full operating capability within two years. To undertake the cost 
analysis recommended by the GAO for each of the medical governance 
options developed by the Task Force would be a time- and labor-
intensive process that, if required to be undertaken prior to 
proceeding with any MIIS governance reforms, would significantly delay 
the implementation of these needed and beneficial reforms. As the GAO 
report notes, MHS governance reform has been studied numerous times 
before, and has yet to result in the implementation of a significant 
redesign to the system. In the context of the past and the projected 
future of the MIIS, DoD sees this incremental MHS governance reform — 
around which there is consensus within the Department and which is on 
track for execution in the near term — as beneficial, and preferable 
to deferring any reform for another study. 

Recommendation 2: The GAO recommends that the Secretary of Defense 
direct the Assistant Secretary of Defense (Health Affairs) to develop 
a business case analysis and strategy for the implementation of its 
shared services concept. 

DoD Response: DoD agrees that a business case analysis and strategy 
for the implementation of its shared services concept should be 
undertaken; this will be done in the context of the ongoing 
implementation planning effort. As described above, DoD's intended 
governance change (and, indeed, all of the changes considered by the 
task force) is predicated on the concept of consolidating shared 
services and functions. In the context of implementation planning, the 
Department will ascertain, based on this business case analysis, 
precisely which shared services, functions, and activities will be 
consolidated among the Military Departments and transferred to the 
Defense Health Agency. This process will also produce detailed 
implementation timelines for the transfer of each such service to the 
Defense Health Agency. As such, the Department agrees with the 
recommendation, but on the premise that it can and should occur in the 
context of the ongoing implementation planning effort. 

Additionally, DoD agrees with GAO that the recommendations for 
additional analysis do not involve the reforms to the Multi-Service 
Markets (MSMs) or the National Capital Region (NCR), which the GAO 
considered outside the scope of its review mandate. Thus, DoD will 
continue to pursue its reform plans for the MSMs and the NCR (as 
described in Enclosure 1 of DoD's section 716 report), which are part 
of the current implementation planning effort. 

Recommendation 3: The GAO recommends that the Secretary of Defense 
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. 

DoD Response: For similar reasons expressed in the response to 
recommendation 1, DoD does not support an indefinite deferral of the
Department's intended near-term MHS governance reform for a new study 
to develop potential quantitative data to inform a reconsideration of 
options already considered at length by DoD senior leaders. The work 
of the MHS governance task force provided DoD senior leaders with 
sufficient information to make decisions among near-term medical 
governance reform options based on a variety of criteria, many of 
which are inherently qualitative in nature and would not significantly 
benefit from the sort of quantitative data recommended by the GAO.
To this end, the Department also does not agree with the proposed 
title of the draft GAO report, to the extent that it suggests that 
additional analysis of costs and benefits is needed before useful, 
albeit incremental, reforms are put into place in the near term. 

Even as it works to implement these near-term reforms, DoD does intend 
to continue to study options for potential further, more significant 
transformations to MHS governance in the future. Importantly, as 
described in Enclosure 1 of DoD's section 716 report, the Department's 
intended near-term MHS governance reforms — including the 
consolidation of shared services into one entity, the enhancement of 
authorities of managers in multi-Service medical markets, and the 
improvements to the singular authority model currently in place in the 
NCR (and unique in the MHS) — will provide the Department with actual 
experience to evaluate the efficacy of these different governance 
models. In doing so, the Department will not only reap the benefits of 
these desirable near-term reforms, but will also obtain greater 
insight, based on actual results and outcomes that can inform the 
evaluation of potential more significant transformations in the future.
To undertake the additional evaluation recommended by the GAO at this 
time, prior to the implementation to any near-term changes to shared 
services, multiservice market management, and the National Capital 
Region, would not only be time-consuming but also inherently 
speculative and imprecise. 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Brenda S. Farrell, (202) 512-3604 or farrellb@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Lori Atkinson, Assistant 
Director; Edward Anderson, Jr., Rebecca Beale, Grace Coleman, Foster 
Kerrison, Charles Perdue, Carol Petersen, Terry Richardson, Adam 
Smith, and Karen Nicole Willems made key contributions to this report. 

[End of section] 

Related Products: 

GAO, Defense Health Care: Applying Key Management Practices Should 
Help Achieve Efficiencies within the Military Health System, 
[hyperlink, http://www.gao.gov/products/GAO-12-224] (Washington, D.C.: 
April 12, 2012). 

GAO, 2012 Annual Report: Opportunities to Reduce Duplication, Overlap 
and Fragmentation, Achieve Savings, and Enhance Revenue, [hyperlink, 
http://www.gao.gov/products/GAO-12-342SP] (Washington, D.C.: Feb. 28, 
2012). 

GAO, Follow-up on 2011, Status of Actions Taken to Reduce Duplication, 
Overlap, and Fragmentation, Save Tax Dollars, and Enhance Revenue, 
[hyperlink, http://www.gao.gov/products/GAO-12-453SP] (Washington, 
D.C.: Feb. 28, 2012). 

GAO, Opportunities to Reduce Potential Duplication in Government 
Programs, Save Tax Dollars, and Enhance Revenue, [hyperlink, 
http://www.gao.gov/products/GAO-11-318SP] (Washington, D.C.: Mar. 1, 
2011). 

GAO, Defense Health Care: DOD Needs to Address the Expected Benefits, 
Costs, and Risks for Its Newly Approved Medical Command Structure, 
[hyperlink, http://www.gao.gov/products/GAO-08-122] (Washington, D.C.: 
Oct. 12, 2007). 

[End of section] 

Footnotes: 

[1] DOD's fiscal year 2013 budget request of $48.7 billion for its 
Unified Medical Budget includes $32.5 billion for the Defense Health 
Program, $8.5 billion for military medical personnel, $1.0 billion for 
military construction, and $6.7 billion set aside for the Medicare-
Eligible Retiree Health Care Fund. The total excludes overseas 
contingency operations funds and certain transfers. 

[2] Congressional Budget Office, Long-term Implications of the 2013 
Future Years Defense Program, Pub. No. 4458, July 2012. 

[3] The national rate refers to the comparable composite category of 
hospital care and physician and clinical services. 

[4] The Ike Skelton National Defense Authorization Act for Fiscal Year 
2011 Pub. L. No. 111-383 (2010) was not accompanied by a conference 
report. In lieu of a formal conference report and joint explanatory 
statement, House Committee on Armed Services Print No. 5 (December 
2010) was reported to show congressional intent and maintain 
legislative history. 

[5] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, [hyperlink, http://www.gao.gov/products/GAO-05-325SP] 
(Washington, D.C.: Feb. 2005). 

[6] GAO, Opportunities to Reduce Potential Duplication in Government 
Programs, Save Tax Dollars, and Enhance Revenue, [hyperlink, 
http://www.gao.gov/products/GAO-11-318SP] (Washington, D.C.: Mar. 1, 
2011). 

[7] Deputy Secretary of Defense Memorandum, Review of Governance Model 
Options for the Military Health System (Jun. 14, 2011). Multi-service 
medical markets are areas in which more than one DOD component 
provides military health care services. 

[8] National Defense Authorization Act for Fiscal Year 2012, Pub. L. 
No. 112-81, § 716 (2011). The act also prohibits the Secretary of 
Defense from restructuring or reorganizing the MHS until 120 days 
after we submit our report. 

[9] We reviewed numerous federal guidance documents related to cost 
estimating, accounting standards, economic analysis, and budgeting and 
identified key principles that we believe can be applied to the 
evaluation of cost savings estimates. The guidance documents we 
reviewed include: GAO Cost Estimating and Assessment Guide, 
[hyperlink, http://www.gao.gov/products/GAO-09-3SP] (Washington, D.C.: 
Mar. 2, 2009); Office of Management and Budget Circular No. A-11, 
Preparation, Submission and Execution of the Budget (Aug. 2011, 
superseded by an August 2012 issuance); Federal Accounting Standards 
Advisory Board, Statement of Federal Financial Accounting Standards 4 
(June 2011); Department of Defense Instruction 7041.3, Economic 
Analysis for Decisionmaking (Nov. 7, 1995); and Department of Defense 
Financial Management Regulation 7000.14-R, Volume 4, Chapter 22, Cost 
Finding (May 2010). Although each of these documents may not apply to 
these circumstances as a legal matter, we believe that they 
collectively contain broad themes that can be applied to evaluating 
cost analyses. 

[10] In addition to approximately 9.7 million beneficiaries, DOD also 
provides care and, in some cases, rehabilitation for veterans as part 
of its coordination with the Department of Veterans Affairs on health 
care services. 

[11] The 2005 BRAC Commission recommended that certain patient care 
activities at Walter Reed Army Medical Center in Washington, D.C., be 
relocated to the National Naval Medical Center in Bethesda, Maryland, 
and to a new community hospital at Fort Belvoir, Virginia. 

[12] According to DOD, as of August 2012, these hospitals were 
operating on an interim manning document. 

[13] Department of Defense, Review of the Department of Defense 
Organization for Health Care, March 1991. 

[14] GAO, Defense Health Care: Issues and Challenges Confronting 
Military Medicine, [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-95-104] (Washington, D.C.: Mar. 
22, 1995). 

[15] The Task Force subsequently added a representative from the 
Marine Corps to the Department of the Navy delegation. 

[16] These three structures are in addition to the current MHS 
structure, which the Task Force included in the 13 options presented 
in the report. 

[17] According to DOD a shared services concept is a combination of 
common services performed across the medical community, such as 
medical logistics, facility planning, medical education and training, 
health information technology, and medical research and development. 

[18] Defense Health Board, Task Force on the Future of Military Health 
Care (December 2007). 

[19] Action Memorandum for the Deputy Secretary of Defense, 
Joint/Unified Medical Command (J/UMC) Way Ahead (Nov. 27, 2006). 

[20] GAO, [hyperlink, http://www.gao.gov/products/GAO-12-224], 
Applying Key Management Practices Should Help Achieve Efficiencies 
within the Military Health System, [hyperlink, 
http://www.gao.gov/products/GAO-12-542] (Washington, D.C.: Apr 12, 
2012). 

[21] According to DOD a shared services concept is a combination of 
like common services across the medical community, such as medical 
logistics, facility planning and construction, health information 
technology, and medical research and development. 

[22] GAO, Streamlining Government: Questions to Consider When 
Evaluating Proposals to Consolidate Physical Infrastructure and 
Management, [hyperlink, http://www.gao.gov/products/GAO-12-542] 
(Washington, D.C.: May 23, 2012). 

[23] GAO, Defense Health Care: DOD Needs to Address the Expected 
Benefits, Costs, and Risks for Its Newly Approved Medical Command 
Structure, [hyperlink, http://www.gao.gov/products/GAO-08-122] 
(Washington, D.C.: Oct. 12, 2007). 

[24] [hyperlink, http://www.gao.gov/products/GAO-11-318SP]. 
[hyperlink, http://www.gao.gov/products/GAO-12-224]. 

[25] [hyperlink, http://www.gao.gov/products/GAO-12-224]. 

[26] GAO, Highlights of a GAO Forum: Mergers and Transformation: 
Lessons Learned for a Department of Homeland Security and Other 
Federal Agencies, [hyperlink, 
http://www.gao.gov/products/GAO-03-293SP] (Washington, D.C.: Nov. 14, 
2002). 

[27] [hyperlink, http://www.gao.gov/products/GAO-12-224]. 

[28] GAO, Homeland Security: Departmentwide Integrated Financial 
Management Systems Remain a Challenge, [hyperlink, 
http://www.gao.gov/products/GAO-07-536] (Washington, D.C.: June 21, 
2007). 

[29] We reviewed numerous federal guidance documents related to cost 
estimating, accounting standards, economic analysis, and budgeting and 
identified key principles that we believe can be applied to the 
evaluation of cost savings estimates. The guidance documents we 
reviewed include: GAO Cost Estimating and Assessment Guide, 
[hyperlink, http://www.gao.gov/products/GAO-09-3SP]; Office of 
Management and Budget Circular No. A-11, Preparation, Submission and 
Execution of the Budget (Aug. 2011, superseded by an August 2012 
issuance); Federal Accounting Standards Advisory Board, Statement of 
Federal Financial Accounting Standards 4 (June 2011); Department of 
Defense Instruction 7041.3, Economic Analysis for Decisionmaking (Nov. 
7, 1995); and Department of Defense Financial Management Regulation 
7000.14-R, Volume 4, Chapter 22, Cost Finding (May 2010). Although 
each of these documents may not apply to these circumstances as a 
legal matter, we believe that they collectively contain broad themes 
that can be applied to evaluating cost analyses. 

[30] [hyperlink, http://www.gao.gov/products/GAO-12-542]. 

[31] Net present value is a financial calculation that accounts for 
the time value of money by determining the present value of future 
savings minus up-front investment costs over a specific period of 
time. Determining net present value is important because it 
illustrates both the up-front investment costs and long-term savings 
in a single amount. In the context of BRAC implementation, net present 
value is calculated for a 20-year period from 2006 through 2025. 

[32] GAO, Military Base Realignments and Closures: Updated Costs and 
Savings Estimates from BRAC 2005, [hyperlink, 
http://www.gao.gov/products/GAO-12-709R] (Washington, D.C.: Jun. 29, 
2012). 

[33] Calculation and amounts in 2005 constant dollars. 

[34] [hyperlink, http://www.gao.gov/products/GAO-12-709R]. 

[35] [hyperlink, http://www.gao.gov/products/GAO-11-318SP]. 

[36] CNA Center for Naval Analyses, Cost Implications of a Unified 
Medical Command, 2006. 

[37] [hyperlink, http://www.gao.gov/products/GAO-08-122]. 

[38] [hyperlink, http://www.gao.gov/products/GAO-08-122]. 

[39] [hyperlink, http://www.gao.gov/products/GAO-11-318SP]. 

[40] [hyperlink, http://www.gao.gov/products/GAO-12-224]. 

[41] Qualitative methods include collecting data through interviews, 
focus groups, document or literature reviews, and observation, and 
analyzing data by discerning, examining, comparing, and contrasting 
meaningful patterns or themes in qualitative data. Quantitative 
methods typically involve collecting quantifiable data or other 
information, and may include the use of probability sampling using 
various forms of statistical analysis to generalize results. 
Evaluations using mixed methods employ a combination of qualitative 
and quantitative data collection and analysis techniques. 

[42] DOD's Task Force report did not define Title 10 equities. Title 
10 of the United States Code contains the organic law governing the 
Armed Forces of the United States and providing for the organization 
of the Department of Defense, including the military departments and 
the Reserve Components. 

[43] GAO, Designing Evaluations: 2012 Revision, [hyperlink, 
http://www.gao.gov/products/GAO-12-208G] (Washington, D.C.: Jan. 12, 
2012). 

[44] GAO, Military Personnel: Enhanced Collaboration and Process 
Improvements Needed for Determining Military Treatment Facility 
Medical Personnel Requirements, [hyperlink, 
http://www.gao.gov/products/GAO-10-696] (Washington, D.C.: July 29, 
2010). 

[45] Department of Defense, 2012 MHS Stakeholder's Report. 

[46] [hyperlink, http://www.gao.gov/products/GAO-12-542]. 

[47] [hyperlink, http://www.gao.gov/products/GAO-07-536] and 
[hyperlink, http://www.gao.gov/products/GAO-12-224]. 

[48] [hyperlink, http://www.gao.gov/products/GAO-12-542]. 

[49] We determined DOD's cost savings estimates to be unreliable. 

[50] These structures are in addition to the current MHS structure, 
which the Task Force included in the 13 options presented in the 
report. 

[51] H.R. 1540, which became the National Defense Authorization Act 
for Fiscal Year 2012, Pub. L. No. 112-81 (2011), when initially passed 
by the House, contained a provision (sec. 711) that would have 
required the establishment of a unified medical command. That 
provision was not ultimately enacted, and was replaced by section 716 
during conference. 

[End of section] 

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