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United States Government Accountability Office: 
GAO: 

Report to the Committee on Armed Services, U.S. Senate: 

July 2014: 

Defense Health Care: 

US Family Health Plan is Duplicative and Should be Eliminated: 

GAO-14-684: 

GAO Highlights: 

Highlights of GAO-14-684, a report to the Committee on Armed Services, 
U.S. Senate. 

Why GAO Did This Study: 

DOD provides health care to about 9.6 million eligible beneficiaries 
through its TRICARE program. The department contracts with MCSCs to 
administer TRICARE’s benefit options in three regions across the 
United States. Separately, DOD contracts with six USFHP designated 
providers to offer TRICARE Prime—-the managed care option—-to 
enrollees in certain locations across the country. 

Senate Report 112-173, which accompanied a version of the National 
Defense Authorization Act for Fiscal Year 2013, mandated that GAO 
review DOD’s health care contracts, citing concerns with the growing 
costs of these contracts, including the USFHP. For this report, GAO 
examined (1) the role of the USFHP within the MHS, and (2) the extent 
to which the USFHP affects DOD’s health care costs. GAO analyzed 
information about the USFHP and the MCSCs, reviewed available USFHP 
cost data, and interviewed officials from DOD, the designated 
providers, and the MCSCs. 

What GAO Found: 

The role of the US Family Health Plan (USFHP) within the Department of 
Defense’s (DOD) current military health system (MHS) is duplicative 
because it offers military beneficiaries the same TRICARE Prime 
benefit that is offered by the regional TRICARE managed care support 
contractors (MCSC). The USFHP is an association of six health care 
providers, referred to as designated providers, which took ownership 
and control of U.S. Public Health Service hospitals in 1982 when 
Congress enacted legislation that made these facilities part of DOD’s 
health care system. During the implementation of TRICARE in the 1990s, 
Congress required the designated providers to offer the TRICARE Prime 
benefit to their enrollees. While the USFHP is a relatively small 
program—approximately 134,000 enrollees—there is significant overlap 
with the MCSCs in several key areas, including benefits, geographic 
service areas, and provider networks. For example, four of the six 
USFHP designated providers have more than 80 percent of their service 
area zip codes included in areas where the MCSCs offer TRICARE Prime. 
Furthermore, the USFHP remains a distinct statutory program that is 
not integrated with the rest of the MHS. This limits DOD’s ability to 
increase efficiency by maximizing the use of its direct care system of 
military treatment facilities (MTF), which USFHP enrollees are 
generally precluded from using because the USFHP’s payment structure 
is intended to cover all enrollees’ health care costs. The role of the 
USFHP has not been reassessed since TRICARE was implemented in the 
1990s. However, DOD officials told us that there is not a function 
that the USFHP designated providers serve that the MCSCs could not 
perform. Furthermore, officials from all three MCSCs—which together 
serve over 4.5 million Prime enrollees—said that they would likely 
have the capacity and capability to provide TRICARE coverage to all 
current USFHP enrollees, if needed. 

Because the USFHP’s role of offering TRICARE Prime is duplicative of 
the role of the MCSCs, DOD has incurred added costs and 
inefficiencies. Although DOD would incur health care costs for the 
USFHP enrollees regardless of with whom they are enrolled, DOD pays 
administrative costs and profits to two different groups of 
contractors for providing the same TRICARE Prime benefit to the same 
population of eligible beneficiaries in many of the same areas. 
However, outside of the negotiated payment amounts, no one knows the 
designated providers’ actual costs for administering the program since 
the USFHP contracts are characterized in statute as commercial item 
contracts. This means that the designated providers are exempt from 
sharing certified cost or pricing data with DOD, and they have been 
unwilling to share uncertified cost or pricing data when requested. As 
a result, DOD does not know how much of the approximately $1.1 billion 
it pays the USFHP designated providers annually actually goes toward 
their administrative costs and profit versus the cost of health care 
services. DOD also incurs other expenses for the USFHP through support 
contracts, including a $21 million data support contract, and through 
the management of various aspects of the program. Eliminating this 
statutorily required program would not only eliminate unnecessary 
costs and inefficiencies, but would also free up departmental 
resources that could be better used to manage other aspects of the 
TRICARE program. 

What GAO Recommends: 

Congress should terminate DOD’s authority to contract with the USFHP 
designated providers in a manner consistent with a reasonable 
transition of affected USFHP enrollees into TRICARE’s regional managed 
care program or other health care programs as appropriate. DOD 
confirmed that GAO’s factual determinations about the USFHP are 
correct and agreed that this program is duplicative and results in 
unnecessary costs and other inefficiencies. DOD reiterated the 
importance of carefully transitioning USFHP enrollees to other health 
plans if the USFHP were eliminated. 

View [hyperlink, http://www.gao.gov/products/GAO-14-684]. For more 
information, contact Debra A. Draper at (202) 512-7114 or 
draperd@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

The USFHP Duplicates the Role of the MCSCs in offering the TRICARE 
Prime Option and is not Integrated with the Rest of the MHS: 

The USFHP's Duplicative Role Results in Added Costs and Inefficiencies 
for DOD: 

Conclusions: 

Matter for Congressional Consideration: 

Agency Comments: 

Appendix I: Past and Current US Family Health Plan (USFHP) Designated 
Providers: 

Appendix II: US Family Health Plan (USFHP) Designated Provider 
Characteristics: 

Appendix III: Discounts and Services Offered by Designated Providers 
in Addition to the TRICARE Prime Benefit as of June 2014: 

Appendix IV: Comments from the Department of Defense: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Percent of US Family Health Plan (USFHP) Service Area Zip 
Codes That Overlap with the TRICARE Managed Care Support Contractors' 
(MCSC) Prime Service Area Zip Codes: 

Table 2: Percent of US Family Health Plan (USFHP) Providers Also 
Participating in Managed Care Support Contractors' (MCSC) Provider 
Networks: 

Figures: 

Figure 1: Location of Six US Family Health Plan (USFHP) Designated 
Providers within the Three TRICARE Regions: 

Figure 2: US Family Health Plan (USFHP) Enrollees as a Percent of 
Total TRICARE Prime Enrollees, and by Designated Provider as of 
October 2013: 

Abbreviations: 

DOD: Department of Defense: 

FAR: Federal Acquisition Regulation: 

MCSC: Managed Care Support Contractor: 

MHS: Military Health System: 

MTF: Military Treatment Facility: 

NDAA: National Defense Authorization Act: 

USFHP: US Family Health Plan: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

July 31, 2014: 

The Honorable Carl Levin: 
Chairman: 
The Honorable James Inhofe: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Department of Defense (DOD) offered health care coverage to about 
9.6 million eligible beneficiaries through TRICARE, its regionally 
structured health care program, at a cost of almost $50 billion in 
fiscal year 2013.[Footnote 1] TRICARE consists of a direct care system 
of military treatment facilities (MTF) and a purchased care system of 
civilian health care providers that is used to augment the direct care 
system when needed. For each TRICARE region in the United States, 
DOD's Defense Health Agency, which oversees the program, contracts 
with private sector companies--referred to as managed care support 
contractors (MCSC)--to administer TRICARE's benefit options, including 
TRICARE Prime, its managed care option.[Footnote 2] Specifically, the 
MCSCs are responsible for developing and maintaining civilian provider 
networks and providing other services, such as enrollment, specialty 
care referrals, medical case management, claims processing, and 
customer service. Separately, in certain locations, TRICARE Prime is 
also offered by the US Family Health Plan (USFHP), an association of 
six health care providers--referred to as designated providers--
located throughout the country. The USFHP is a statutorily required 
component of the Military Health System (MHS) that offers the TRICARE 
Prime option to about 134,000 active duty dependents and retirees and 
their dependents at a cost of over $1 billion in fiscal year 2013. 
[Footnote 3] The USFHP was initially incorporated into the MHS in 1982 
when Congress enacted legislation transferring ownership of certain 
U.S. Public Health Service hospitals to the designated providers. 
[Footnote 4] This arrangement guaranteed the designated providers a 
stable revenue source by enabling them to provide care to military 
beneficiaries in addition to their private health care business, while 
also improving beneficiaries' access to care in the areas served by 
the designated providers. During the implementation of the TRICARE 
program in the 1990s, Congress required the designated providers to 
offer the TRICARE Prime benefit to their enrollees in accordance with 
the National Defense Authorization Act (NDAA) for Fiscal Year 
1997.[Footnote 5] Today, the USFHP remains a health care option 
required by statute to be available to eligible beneficiaries in 
certain locations, despite TRICARE's national presence through the 
MCSCs. 

As health care consumes an increasingly large portion of the overall 
Defense budget--the Congressional Budget Office reported in 2011 that 
DOD's health care costs are projected to reach nearly $92 billion by 
2030--it is important for DOD to operate its health care system 
efficiently, while also ensuring high-quality care.[Footnote 6] DOD 
leadership has also recently acknowledged the need to reduce 
duplication and overhead, operate its health system as efficiently as 
possible, and realize savings in the MHS.[Footnote 7] However, as the 
TRICARE program has matured and the cost of health care has increased, 
the USFHP has largely remained unchanged since the NDAA for Fiscal 
Year 1997, and its role has not been reassessed within the current 
MHS. Senate Report 112-173, which accompanied the Senate Committee on 
Armed Services' version of the NDAA for Fiscal Year 2013, mandated 
that GAO conduct a comprehensive review of DOD's health care 
contracts, and identify opportunities for potential savings and 
efficiencies.[Footnote 8] In this report, we examine (1) the role of 
the USFHP within the MHS, and (2) the extent to which the USFHP 
affects DOD's health care costs. 

To examine the role of the USFHP within the MHS, we reviewed 
requirements relevant to the USFHP and the TRICARE program, including 
those established in federal laws and regulations, contracts, policy 
manuals, and benefit handbooks.[Footnote 9] We interviewed DOD 
officials, including officials from DOD's Defense Health Agency; 
officials at each of the TRICARE Regional Offices (North, South, and 
West); Army, Navy, and Air Force regional officials; and officials at 
MTFs located within USFHP service areas to discuss the role of the 
USFHP and its impact on the regional TRICARE program, including DOD's 
direct care system. We also reviewed DOD's reports on its TRICARE 
program. In addition, we interviewed officials from the six USFHP 
designated providers, the USFHP Alliance, and the three regional 
MCSCs, and obtained and analyzed information about their operations, 
including information about their TRICARE Prime benefits, enrollees, 
geographic service areas, and provider networks.[Footnote 10] We 
reviewed and applied GAO's framework for addressing fragmentation, 
overlap, and duplication to assess the extent to which the USFHP and 
TRICARE MCSCs engaged in the same activities or strategies to provide 
the same services to the same target recipients or individuals. 
[Footnote 11] We also interviewed officials from beneficiary interest 
groups to obtain their perspective about the USFHP. We did not assess 
the quality of the care or benefits offered by either the USFHP 
designated providers or the MCSCs. 

To examine the extent to which the USFHP affects DOD's health care 
costs, we obtained and reviewed USFHP cost information, including the 
costs of the designated provider contracts and other DOD contracts 
related to the administration of the program. To better understand the 
requirements related to the USFHP's costs, we reviewed relevant 
federal laws and regulations, including laws pertaining to the USFHP 
and the Federal Acquisition Regulation (FAR).[Footnote 12] We 
interviewed DOD officials and officials from DOD's actuarial 
contractor to obtain information about the costs of the USFHP and how 
these costs have changed over time. Additionally, we asked DOD's 
contractor to provide us with a breakdown of the average capitation 
payments paid to the designated providers for fiscal year 2013, which 
includes amounts that have been allocated to cover the costs of health 
care services for USFHP enrollees, as well as the administrative costs 
and profit margins for the designated providers.[Footnote 13] 
Additionally, we obtained information from DOD officials and its 
actuarial contractor about DOD's annual process for developing its 
capitation payment rates for the designated providers, the components 
of these payments, and challenges related to determining how much 
these payment rates reflect actual health care costs. We obtained 
information from DOD's contractor about the reliability of the data on 
the capitation payment rates, and we determined that these data were 
sufficiently reliable for the purposes of our report. Finally, we 
obtained information about the USFHP acquisition process and DOD's 
annual process for negotiating the designated provider capitation 
payments to identify resources related to these efforts. 

We conducted this performance audit from March 2013 to July 2014 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. 

Background: 

Overview of the USFHP: 

The USFHP is a statutorily required component of the MHS that offers 
the TRICARE Prime option to eligible military beneficiaries through 6 
designated providers in certain locations across the country.[Footnote 
14] Over the years, the number of designated providers has dropped 
from 10 to 6. The 6 USFHP designated providers that currently 
administer the USFHP are: (1) Johns Hopkins Medical Services Co., (2) 
Brighton Marine Health Center, (3) Martin's Point Health Care, (4) 
CHRISTUS Health, (5) Pacific Medical Centers, and (6) St. Vincents 
Catholic Medical Centers. (See appendix I for a comparison of USFHP 
designated providers in 1994 and 2014.) The reduction in designated 
providers has largely been due to provider consolidations.[Footnote 
15] In one case, a designated provider opted to no longer participate 
in the program.[Footnote 16] According to DOD officials, USFHP 
enrollees for that designated provider were successfully transitioned 
to other health care programs for which they were eligible, including 
the TRICARE options administered by the TRICARE MCSC in that region. 

Some of the designated providers provide care exclusively to 
beneficiaries enrolled in the USFHP, while others also provide health 
care services to beneficiaries of other health plans and may have 
additional lines of business. (See appendix II for more information on 
the characteristics of each of the designated providers.) Each of the 
designated providers--and their respective service areas--are located 
within one of the three TRICARE regions in the United States. Figure 1 
below illustrates the location of the USFHP designated providers 
relative to the locations of the three TRICARE regions. 

Figure 1: Location of Six US Family Health Plan (USFHP) Designated 
Providers within the Three TRICARE Regions: 

[Refer to PDF for image: illustrated U.S. map] 

USFHP Designated Providers: 

TRICARE North Region: 
Brighton Marine Health Center; 
Johns Hopkins Medical Services Co. 
Martin’s Point Health Care; 
St. Vincents Catholic Medical Centers; 

TRICARE South Region: 
CHRISTUS Health. 

TRICARE West Region: 
Pacific Medical Centers. 

Source: GAO analysis of data from the Department of Defense; Map 
Resources (map). GAO-14-684. 

Note: TRICARE is organized in three regions across the United States--
North, South, and West. Within these regions, the Department of 
Defense contracts with managed care support contractors to develop 
provider networks and to administer TRICARE's benefit options. Alaska 
and Hawaii are located in TRICARE's West region. 

[End of figure] 

The six designated providers offer TRICARE Prime to eligible 
beneficiaries through civilian provider networks in their service 
areas. To receive care through the USFHP, eligible beneficiaries must 
enroll in the program. All beneficiaries eligible for DOD health care 
and who are under the age of 65, except active duty servicemembers, 
are eligible for USFHP enrollment.[Footnote 17] Beneficiaries who live 
in a location served by one of the six designated providers may elect 
to enroll in TRICARE Prime with the USFHP instead of enrolling with 
the MCSC. As of October 2013, approximately 134,000 beneficiaries were 
enrolled in the USFHP--about 3 percent of all TRICARE Prime enrollees. 
See figure 2 for the total number of USFHP enrollees as a percent of 
total TRICARE Prime enrollees, as also delineated by designated 
provider. 

Figure 2: US Family Health Plan (USFHP) Enrollees as a Percent of 
Total TRICARE Prime Enrollees, and by Designated Provider as of 
October 2013: 

[Refer to PDF for image: pie-chart and subchart] 

Total Number of TRICARE Prime Enrollees[A]: 4,613,500: 
Enrolled with Managed Care Support Contractors: 97%; 
Enrolled with USFHP Designated Providers: 3%. 

Total Number of US Family Health Plan (USFHP) Enrollees: 133,770: 
Johns Hopkins Medical Services Co.: 31%; 
Martin's Point Health Care: 31%; 
Brighton Marine Health Center: 11%; 
Pacific Medical Centers: 10%; 
CHRISTUS Health: 9%; 
St. Vincents Catholic Medical Centers: 8%. 

Source: GAO analysis of Managed Care Support Contractor and USFHP 
Designated Provider data. GAO-14-684. 

[A] TRICARE Prime includes enrollees in Prime (military and civilian 
primary care managers), TRICARE Prime Remote, TRICARE Young Adult 
Prime, and US Family Health Plan; and excludes beneficiaries in 
TRICARE For Life, TRICARE Plus, TRICARE Young Adult Standard, and 
TRICARE Reserve Select. The total number of TRICARE Prime enrollees 
excludes Prime enrollees located outside of the United States. 

[End of figure] 

The NDAA for Fiscal Year 1997 mandated a number of key aspects of the 
USFHP. For example, the statute prohibits DOD from reducing the size 
of a designated provider's geographic service area below the size in 
effect as of September 30, 1996.[Footnote 18] However, DOD does have 
discretion to increase the size of a designated provider's service 
area. In addition, DOD is required to enter into sole-source contracts 
with the designated providers to administer the USFHP.[Footnote 19] 
The statute also requires these contracts to be treated as commercial 
item contracts under the FAR--a designation that prohibits DOD from 
requiring the designated providers to provide certified cost or 
pricing data during contract negotiations.[Footnote 20] Additionally, 
the statute mandates that annual payments to the designated providers 
are to be made on a full-risk capitation payment basis,[Footnote 21] 
which means that the designated providers are fully at-risk for the 
cost of beneficiaries' health care services. These payments cover the 
projected costs of all the medical care an enrollee needs for the year 
plus administrative costs and profit. DOD and each of the designated 
providers annually negotiate the amounts of their capitation payments, 
which represent projected costs based on estimates and adjustments for 
factors such as differences in health care costs by geographic area 
and enrollees' health status.[Footnote 22] The statute limits total 
capitation payments to the designated providers, which cannot exceed 
the cost that would have been incurred by the government if USFHP 
enrollees had received their care through Medicare or TRICARE, 
including its direct care system of MTFs or its purchased care system 
of civilian providers.[Footnote 23] The USFHP contracts are expected 
to cost approximately $6.4 billion over 5 years. 

Overview of TRICARE: 

In 1993, DOD reformed the MHS by implementing TRICARE, a nationwide 
managed health care program designed to improve access and ensure high-
quality health care while also addressing DOD's rising health care 
costs. TRICARE consists of a direct care system of MTFs and a 
purchased care system of civilian health care providers that are used 
to augment the direct care system when needed. TRICARE offers three 
basic benefits to eligible beneficiaries: TRICARE Prime (a managed 
care option), TRICARE Extra (a preferred provider option), and TRICARE 
Standard (a fee-for-service option). In addition, DOD administers 
other TRICARE benefits, such as TRICARE For Life, which is secondary 
coverage to Medicare for all beneficiaries who have both Medicare 
Parts A and B. 

DOD's Defense Health Agency uses MCSCs to administer TRICARE's benefit 
options in three regions across the United States--North, South, and 
West. Within these regions, MCSCs are required to develop provider 
networks and offer the TRICARE Prime option in geographic areas called 
Prime Service Areas.[Footnote 24] DOD requires MCSCs to establish 
Prime Service Areas around MTFs and Base Realignment and Closure sites 
to augment the capability and capacity of MTFs with a civilian 
provider network.[Footnote 25] Beneficiaries living in Prime Service 
Areas can choose between the TRICARE Prime, TRICARE Standard, and 
TRICARE Extra options.[Footnote 26] Beneficiaries who choose TRICARE 
Prime--the managed care option--must enroll. The MCSCs are responsible 
for assigning Prime enrollees to Primary Care Managers, who provide or 
arrange for all health care services required by their enrollees. 
Beneficiaries who live outside of Prime Service Areas can choose 
between the TRICARE Standard and TRICARE Extra options. 

Unlike the USFHP contracts, the TRICARE managed care support contracts 
are awarded on a competitive basis. Further, DOD reimburses the MCSCs 
for the cost of health care services provided to TRICARE 
beneficiaries. As a result, the MCSCs are not "at risk" for their 
beneficiaries' health care costs as are the designated providers under 
USFHP. As of fiscal year 2012, the TRICARE managed care support 
contracts comprised DOD's three largest purchased care contracts. The 
costs of these three contracts are expected to total approximately $56 
billion over their 5-year performance period. 

The USFHP Duplicates the Role of the MCSCs in offering the TRICARE 
Prime Option and is not Integrated with the Rest of the MHS: 

The USFHP's role within the current MHS is duplicative because it 
offers military beneficiaries the same TRICARE Prime benefit that is 
offered by the MCSCs across much of the same geographic service areas 
and through many of the same providers. Furthermore, the USFHP is not 
integrated with the rest of the MHS, and does not support DOD's 
efforts to increase efficiency because it potentially diverts 
enrollees away from DOD's direct care system. 

The USFHP's Role within the MHS is Duplicative: 

The USFHP's role in offering TRICARE Prime within the context of the 
current MHS duplicates the role of the MCSCs in several important 
ways.[Footnote 27] For example, the USFHP designated providers and the 
MCSCs both offer the same TRICARE Prime benefit as required by law. 
[Footnote 28] DOD implements this uniform benefit requirement by 
incorporating the TRICARE Policy Manual, which includes requirements 
for administering the TRICARE Prime option, into its contracts with 
both the USFHP designated providers and the TRICARE MCSCs.[Footnote 
29] As a result, beneficiaries enrolled in TRICARE Prime through 
either the designated providers or the MCSCs receive the same benefit 
and have the same cost sharing responsibilities. 

There is also significant overlap in the geographic service areas in 
which the USFHP designated providers and the MCSCs offer TRICARE 
Prime. As of October 1, 2013, four of the six USFHP designated 
providers had more than 80 percent of their service area zip codes 
overlapping with the MCSCs' Prime Service Areas.[Footnote 30] See 
table 1 for the percent of USFHP zip codes included in areas where the 
MCSCs also offer TRICARE Prime. 

Table 1: Percent of US Family Health Plan (USFHP) Service Area Zip 
Codes That Overlap with the TRICARE Managed Care Support Contractors' 
(MCSC) Prime Service Area Zip Codes: 

TRICARE Region: North; 
TRICARE MCSC: Health Net Federal Services; 

USFHP Designated Provider: Johns Hopkins Medical Services Co.; 
Percent of Zip Codes that Overlap[A]: 90%. 

USFHP Designated Provider: St. Vincents Catholic Medical Centers; 
Percent of Zip Codes that Overlap[A]: 84%. 

USFHP Designated Provider: Brighton Marine Health Center; 
Percent of Zip Codes that Overlap[A]: 82%. 

USFHP Designated Provider: Martin's Point Health Care; 
Percent of Zip Codes that Overlap[A]: 41%. 

TRICARE Region: South; 
TRICARE MCSC: Humana Military Healthcare Services; 
USFHP Designated Provider: CHRISTUS Health; 
Percent of Zip Codes that Overlap[A]: 57%. 

TRICARE Region: West; 
TRICARE MCSC: UnitedHealth; 
USFHP Designated Provider: Pacific Medical Centers; 
Percent of Zip Codes that Overlap[A]: 88%. 

Source: GAO analysis of Department of Defense data. GAO-14-684. 

Note: TRICARE is organized in three regions across the United States--
North, South, and West. Within these regions, the Department of 
Defense contracts with managed care support contractors to develop 
provider networks and to administer TRICARE's benefit options. 

[A] Based on zip code information as of October 2013. 

[End of table] 

The significant service area overlap means that USFHP enrollees 
predominantly live in areas where MCSCs also offer TRICARE Prime. In 
general, because all of the beneficiaries who are eligible for the 
USFHP are also eligible for TRICARE Prime offered by the MCSCs, USFHP 
enrollees in these areas would likely be able to maintain their 
TRICARE Prime benefits through the MCSC if the USFHP did not exist. 
[Footnote 31] The two designated providers with a lower degree of 
overlap--CHRISTUS Health and Martin's Point Health Care--are located 
in areas that have fewer or no MTFs or Base Realignment and Closure 
sites. Therefore, while USFHP enrollees in these two specific areas 
would not have the same level of access to TRICARE Prime through the 
MCSCs, they could still use other TRICARE options that are available 
nationwide through the MCSCs such as TRICARE Standard, or other 
programs for which they may be eligible. The MCSCs currently serve 
over 4.5 million Prime enrollees--therefore, adding 134,000 USFHP 
enrollees would not appear to be a significant burden, according to 
MCSC officials. All three MCSCs told us that they would likely have 
the capacity and capability to provide TRICARE coverage to all of the 
current USFHP enrollees, including the TRICARE Prime option or other 
options, as appropriate, depending on the enrollees' locations. 
Specifically, if the USFHP did not exist, two of the three MCSCs could 
each be responsible for fewer than 6,000 additional enrollees, and the 
third MCSC would potentially be responsible for approximately 79,000 
enrollees, if all affected beneficiaries maintained their TRICARE 
coverage. However, some affected beneficiaries might choose to enroll 
in other health care programs for which they may be eligible. 

We also identified significant overlap in the provider networks of the 
USFHP designated providers and the MCSCs.[Footnote 32] Specifically, 
our analyses showed that several of the designated providers had a 40 
to 50 percent overlap with the MCSC networks while the remaining 
designated providers had network overlap ranging from 20 to 37 
percent. (See table 2.) Consequently, depending on the location, USFHP 
enrollees may be able to use the same providers under the MCSCs' 
provider networks if the USFHP did not exist. The designated providers 
differ in their preferences as to whether their providers also 
participate in the MCSCs' networks. For example, officials from one 
designated provider told us that they strive to support the entire 
MHS, and therefore encourage all of their providers to participate in 
both the USFHP and MCSC networks, while officials from another told us 
that they encourage their providers not to participate with the MCSC's 
network.[Footnote 33] In general, providers are allowed to contract 
with any organization they choose; therefore, those currently serving 
only the USFHP might also choose to participate in the applicable 
MCSC's network. 

Table 2: Percent of US Family Health Plan (USFHP) Providers Also 
Participating in Managed Care Support Contractors' (MCSC) Provider 
Networks: 

TRICARE Region: North; 
MCSC: Health Net Federal Services; 

USFHP Designated Provider: Johns Hopkins Medical Services Co.; 
Percent of USFHP Providers in Both Networks[A]: 40%. 

USFHP Designated Provider: St. Vincents Catholic Medical Centers; 
Percent of USFHP Providers in Both Networks[A]: 47%. 

USFHP Designated Provider: Brighton Marine Health Center; 
Percent of USFHP Providers in Both Networks[A]: 20%. 

USFHP Designated Provider: Martin's Point Health Care; 
Percent of USFHP Providers in Both Networks[A]: 27%. 

TRICARE Region: South; 
MCSC: Humana Military Healthcare Services; 
USFHP Designated Provider: CHRISTUS Health; 
Percent of USFHP Providers in Both Networks[A]: 35%. 

TRICARE Region: West; 
MCSC: UnitedHealth; 
USFHP Designated Provider: Pacific Medical Centers; 
Percent of USFHP Providers in Both Networks[A]: 51%. 

Source: GAO analysis of Managed Care Support Contractor and USFHP 
designated provider data. GAO-14-684. 

Note: TRICARE is organized in three regions across the United States--
North, South, and West. Within these regions, the Department of 
Defense contracts with managed care support contractors to develop 
provider networks and to administer TRICARE's benefit options. 

[A] Based on provider network information as of October 1, 2013. 

[End of table] 

The duplication and related overlap between the USFHP and the MCSCs' 
TRICARE Prime option has been longstanding in part because the 
program's role has not been reassessed since TRICARE was implemented 
in the 1990s. Many key features of the USFHP have remained in place 
since the enactment of the NDAA for Fiscal Year 1997, notwithstanding 
TRICARE's growth during the intervening years. DOD officials told us 
that there is not a function that the USFHP designated providers serve 
that the MCSCs could not perform. However, because the USFHP is 
statutorily required, DOD does not have the authority to eliminate it 
and transition the USFHP enrollees into the regional TRICARE program 
managed by the MCSCs or into other programs for which they may be 
eligible. 

The USFHP Limits DOD's Ability to Maximize Use of Its Direct Care 
System Because it Operates Independently of the Integrated MHS: 

One of the goals of the MHS is to maximize use of the direct care 
system's MTFs, a goal most recently articulated in DOD's budget 
request for fiscal year 2015.[Footnote 34] TRICARE's managed care 
support contracts are designed to support this goal by requiring the 
MCSCs to optimize the use of the direct care system as part of an 
integrated MHS. For example, MCSCs are to first assign Prime enrollees 
to a Primary Care Manager located at an MTF until its enrollment 
capacity has been reached, at which point, enrollees are assigned to a 
Primary Care Manager from the civilian provider network.[Footnote 35] 
MCSCs are also required to give their region's MTFs the right of first 
refusal for all specialty care referrals for Prime enrollees to ensure 
that, if it has the capability and capacity to administer the care, 
the MTF has the opportunity to do so prior to referring them to the 
civilian network. In these ways, the MCSCs help promote the efficient 
use of DOD's direct care system by helping the MTFs operate at full 
capacity. 

DOD is unable to promote the efficient use of DOD's direct care system 
through the USFHP, which operates independently of the integrated MHS 
as a distinct statutory program. Unlike Prime beneficiaries enrolled 
with the MCSCs, USFHP enrollees are generally precluded from receiving 
care at MTFs due to the program's fixed-price capitation payment 
structure that is intended to cover all enrollees' health care costs. 
Given the extent of overlap with the MCSCs' Prime Service Areas, which 
are generally around MTFs, thousands of USFHP enrollees are precluded 
from using the direct care system. To limit any additional future 
impact of the USFHP on MTFs, DOD has denied designated providers' 
requests for service area expansions.[Footnote 36] For example, in 
2012, a designated provider submitted a request to DOD to expand its 
existing service area to a location that also included several MTFs. 
However, DOD denied this request, citing duplication with the existing 
MCSC network and a potentially higher health care cost per beneficiary 
to provide care through the USFHP since its enrollees would not be 
able to use the local MTFs. 

As an exception, a USFHP enrollee may access an MTF for emergency 
services, and the designated provider is then contractually 
responsible for reimbursing the MTF for that care. In addition, USFHP 
designated providers may negotiate Memorandums of Agreement with the 
MTFs for the purpose of referring enrollees to them on the condition 
that the designated providers would be responsible to the MTFs for the 
associated health care costs of any referred beneficiaries. During the 
course of our review, however, we found that no Memorandums of 
Agreement had been established for this purpose, although one 
designated provider told us that it was in the process of negotiating 
one. 

The USFHP Has a Competitive Advantage over the MCSCs, Potentially 
Diverting Enrollees Away from the Direct Care System: 

Certain features of the USFHP give designated providers a competitive 
advantage over the MCSCs--one that likely results in increased costs 
instead of the lower costs that typically result from competition. For 
example, the USFHP designated providers offer certain discounts and 
services that go beyond TRICARE's uniform benefits, such as dental and 
vision care discounts. (See appendix III for a description of these 
discounts and services.) DOD officials acknowledged that the MCSCs' 
Prime enrollees do not receive these discounts and services because 
MCSCs are paid on a cost reimbursement basis only for allowable 
TRICARE Prime benefits. DOD officials acknowledged that these 
discounts and services may not be entirely consistent with TRICARE's 
uniform benefit requirement, but they have not taken issue with this 
practice because the USFHP designated providers receive a fixed-
capitation payment, and therefore, DOD is not billed separately for 
any discounts and services that the designated providers choose to 
offer.[Footnote 37] Although the USFHP designated providers do not 
bill DOD for these discounts and services, it is not known how the 
designated providers account for these discounts and services in 
developing their proposed capitation payments. The USFHP designated 
providers promote these discounts and services in their marketing 
materials, which may lead to beneficiaries choosing to enroll with the 
USFHP designated providers over the MCSCs in areas where both programs 
are offered.[Footnote 38] 

MTF officials expressed concern that the USFHP diverts beneficiaries 
away from the MCSCs and, correspondingly, from the direct care system. 
MTFs rely on beneficiaries as a source of education and training 
opportunities. MTF officials we spoke with expressed concerns that the 
USFHP program detracts from the volume and complexity of cases needed 
to maintain a robust graduate medical education and skills training 
program. For example, a military service medical official noted that 
medical facilities with Magnetic Resonance Imaging capabilities seek 
to maximize the use of this equipment and strive to offer their 
providers opportunities for related specialty care training while 
treating enrollees needing this type of service. However, if the MTF 
is located near a USFHP, this official noted that such training 
opportunities may be more limited because any USFHP enrollees who need 
these services would not obtain them from their local MTF. 

In addition, since the USFHP contracts are full-risk capitated 
arrangements, the designated providers are not limited to the TRICARE 
provider reimbursement rates, and thus have the flexibility to offer 
their providers higher rates or other incentives. In contrast, MCSCs' 
network providers must accept TRICARE maximum allowable charges as 
payment in full, and these rates are generally based on Medicare 
rates.[Footnote 39] The increased flexibility in setting reimbursement 
rates may provide the USFHP designated providers a competitive 
advantage over the MCSCs in recruiting providers to their networks. 
The USFHP designated providers told us that they exceed the TRICARE 
provider reimbursement rates on occasion, depending on their market 
areas, although some generally use the TRICARE rates as guidelines. 
DOD officials told us of an example where the USFHP designated 
provider recruited a primary care provider group, which resulted in 
the group leaving the MCSC network, and these officials were concerned 
that reimbursement rates may have been a factor in this decision. 
Consequently, beneficiaries who want to obtain care from this provider 
group may choose to enroll with the USFHP instead of enrolling with 
the MCSC. By maintaining exclusive relationships with providers--
especially those that are highly desired by beneficiaries--this 
designated provider has a competitive advantage over the MCSC, 
potentially drawing beneficiaries away from and limiting the use of 
the direct care system. 

The provision of additional discounts and services to USFHP enrollees 
or exclusive provider arrangements may contribute to the USFHP's high 
satisfaction rates, which the designated providers point to as a 
measure of the program's success. While high satisfaction rates may be 
viewed as an argument in favor of maintaining the USHFP as a separate 
program, doing so comes at the expense of an integrated MHS that 
optimizes the use of MTFs. 

The USFHP's Duplicative Role Results in Added Costs and Inefficiencies 
for DOD: 

Because the USFHP's role of offering TRICARE Prime is duplicative of 
the role played by the MCSCs, DOD has incurred added costs by paying 
the designated providers to simultaneously administer the same benefit 
as the MCSCs. Consequently, due to its duplicative role, managing the 
USFHP is also an inefficient use of DOD's resources. 

DOD Incurs Added Costs by Paying the Designated Providers to 
Simultaneously Administer the Same Benefit as the MCSCs: 

Because the USFHP is a statutorily required component of the MHS, DOD 
must pay the USFHP designated providers to administer the same benefit 
to the same population of eligible beneficiaries in many of the same 
locations as the MCSCs. Although DOD would incur health care costs for 
the USFHP enrollees regardless of with whom they are enrolled, DOD 
must also pay administrative costs and profits to two different groups 
of contractors for providing the same TRICARE Prime benefit. 
Currently, administrative costs and profit margins are part of the 
negotiated payments for the USFHP contracts. We obtained a breakdown 
of the average capitation payments DOD made to the designated 
providers for USFHP enrollees for fiscal year 2013, and we estimated 
that the administrative costs and profit margins were approximately 
$27 million of the total cost of the program for that year (2.4 
percent of $1.1 billion).[Footnote 40] However, our estimate may not 
represent the total administrative costs and profit realized since 
DOD's knowledge of the actual cost components underlying these 
negotiated payments is limited.[Footnote 41] Although the designated 
providers are exempt from any requirement to share certified cost or 
pricing data, DOD has requested that they share uncertified cost or 
pricing data. However, according to DOD officials, the designated 
providers have been unwilling to do so when asked. Thus, DOD does not 
know how much of the approximately $1.1 billion it pays the USFHP 
designated providers annually goes toward their actual administrative 
costs and profit versus the cost of health care services for USFHP 
enrollees. Furthermore, it is also unknown how the actual 
administrative costs and profit of the designated providers compare to 
the MCSCs. 

In 2010, DOD hired a consultant to review its methodology for setting 
capitation rates for the designated providers. Overall, the consultant 
found that DOD's process for establishing capitation rates was 
actuarially sound and that the rates were generally being set in 
accordance with current legislation. Nonetheless, the consultant did 
report some concerns with the rates--and thus, the cost-effectiveness 
of the USFHP--since the rates may not reflect the designated 
providers' actual costs of delivering health care. More specifically, 
the consultant stated that the health care costs used by the 
designated providers in negotiating the capitation payment rates do 
not accurately represent their true cost of providing benefits under 
the program and offered several recommendations to improve the cost-
effectiveness of the capitation rate setting process. Additionally, we 
found that the program likely provides a significant source of income 
for the designated providers as more than half of them rely heavily on 
the USFHP for their business. Specifically, USFHP enrollees comprise 
100 percent of the total beneficiaries enrolled in two of the six 
designated providers and more than 60 percent for two others.[Footnote 
42] 

The costs associated with the USFHP designated provider contracts are 
not the only costs DOD incurs for this program. DOD also has a data 
support contract that provides information technology support services 
to the USFHP designated providers.[Footnote 43] DOD officials told us 
that this contract, which is expected to cost $21 million over 5 
years, exclusively supports the USFHP designated providers and that 
there is no comparable contract in place for the MCSCs. Additionally, 
a portion of DOD's TRICARE Help Desk contract supports the USFHP at a 
cost of about $272,000 per year, according to DOD officials.[Footnote 
44] If the USFHP did not exist, DOD would potentially save millions of 
dollars from duplicative administrative costs and profits.[Footnote 45] 

Managing the USFHP is an Inefficient Use of DOD's Resources: 

In addition to the costs associated with the USFHP designated 
providers' capitation payments and support contracts, DOD must expend 
resources managing various aspects of the USFHP. As we have previously 
reported, expending resources on unnecessarily duplicative programs is 
inherently inefficient and that in most of these situations, there are 
opportunities for greater efficiencies or effectiveness by eliminating 
unnecessary duplication.[Footnote 46] For example, DOD officials told 
us that several officials are responsible for the overall management 
of the USFHP, which includes modifying the contracts and educating 
designated providers' staff about program requirements.[Footnote 47] 
Additionally, several DOD officials are responsible for conducting the 
acquisition process necessary to enter into contracts with the USFHP 
designated providers, which involves acquisition planning, the 
development of a request for proposals, and the evaluation of 
proposals. DOD officials said that the most recent process lasted 
approximately 9 months, and as a result, they extended the length of 
the USFHP contracts to 10 years in an effort to reduce the 
administrative burden associated with it.[Footnote 48] 

DOD is also required to annually negotiate capitation payment amounts 
with each of the six USFHP designated providers.[Footnote 49] DOD 
officials told us that the process for negotiating these payments 
lasts approximately 8 months and includes several steps, such as 
collecting data from different sources, developing proposed payments, 
and negotiating the final payment amount. There are several 
participants in these negotiations from both sides, including a 
contractor that provides DOD with actuarial assistance.[Footnote 50] 
These annual payment negotiations are not necessary for the managed 
care support contracts, which are structured differently. Eliminating 
the USFHP would allow DOD to potentially realize savings, as well as 
better focus its resources on managing other aspects of the TRICARE 
program. 

Conclusions: 

The USFHP's role in providing care to eligible military beneficiaries 
became duplicative once the nationwide TRICARE program was implemented 
in the 1990s. Since the NDAA for Fiscal Year 1997 required the USFHP 
to offer TRICARE Prime, there has been no assessment of the continued 
relevancy of this program despite the apparent overlap and duplication 
with the MCSCs, which has likely resulted in added costs and 
inefficiencies for DOD. Compounding this problem is the fact that the 
USFHP operates at odds, often in competition, with the rest of the 
MHS, which limits DOD's effort's to maximize the use of its direct 
care system of military hospitals and clinics. Moreover, it is not 
known how much it costs to deliver health care under the program, or 
the extent of administrative costs and profits that accrue to 
designated providers, because the designated providers have not been 
required to, nor have they chosen to, share cost or pricing data with 
DOD. 

The existence of a duplicative program that provides the same benefit 
to the same group of beneficiaries within many of the same service 
areas runs counter to DOD's current environment of budget constraints 
and the department's need to control rising health care costs. 
Eliminating this statutorily required program would not only eliminate 
unnecessary costs and inefficiencies but would also free up 
departmental resources that could be better used to manage and oversee 
the TRICARE program. However, it will be important to transition the 
134,000 USFHP enrollees to other health care programs prior to 
eliminating the program to ensure the continuity of their care. 
According to DOD and MCSC officials, the MCSCs already have the 
national coverage, capability, and capacity to absorb these enrollees, 
assuming they do not obtain coverage elsewhere. Given the extent to 
which the USFHP's role in offering TRICARE Prime duplicates and 
overlaps with the MCSCs, there is no compelling reason to maintain the 
USFHP as part of the MHS and incur the added costs and inefficiencies 
associated with doing so. 

Matter for Congressional Consideration: 

To eliminate unnecessary program duplication and to achieve increased 
efficiencies and potential savings within the integrated MHS, Congress 
should terminate the Secretary of Defense's authority to contract with 
the USFHP designated providers in a manner consistent with a 
reasonable transition of affected USFHP enrollees into TRICARE's 
regional managed care program or other health care programs, as 
appropriate. 

Agency Comments: 

We provided a copy of this report to DOD for review and comment. DOD 
stated that since our recommendation to eliminate the USFHP is 
addressed to Congress, it defers to Congress to consider it. DOD also 
reiterated our statement that if the USFHP were to be eliminated, it 
will be important to make provisions to carefully transition USFHP 
enrollees to other health care programs. 

In its response, DOD confirmed that our factual determinations about 
the USFHP are correct. DOD also provided specific comments on many of 
the program characteristics we identified, agreeing that they result 
in unnecessary costs and other inefficiencies for the department. In 
particular, DOD stated that the USFHP sole source contracts are an 
exception to congressional and DOD policy favoring competition in 
contracting. DOD also noted that the unnecessary duplication between 
the USFHP and MCSCs creates costs for the department, as necessary 
care is already provided through the MCSCs and the direct care system 
and that DOD is required to expend considerable resources in its 
annual negotiations with the designated providers to set capitation 
payment rates. DOD also stated that the separate existence of the 
USFHP is an exception to the general DOD policy of favoring an 
integrated MHS to support readiness and cost-effectiveness. DOD 
further acknowledged that the USFHP designated providers are allowed 
to offer their providers higher reimbursements and other incentives 
that draw beneficiaries away from the more cost effective MCSCs, which 
DOD characterized as an exception to congressional and DOD policy 
favoring a uniform TRICARE benefit. 

DOD's comments are reprinted in appendix IV. DOD did not provide any 
technical comments. 

We are sending copies of this report to appropriate congressional 
committees; the Secretary of Defense; the Assistant Secretary of 
Defense (Health Affairs); and other interested parties. In addition, 
the report will be available at no charge on GAO's website at 
[hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-7114 or at draperd@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 V. 

Signed by: 

Debra A. Draper: 
Director, Health Care: 

[End of section] 

Appendix I: Past and Current US Family Health Plan (USFHP) Designated 
Providers: 

1. 
1994: Martin's Point Health Care; 
2014: Martin's Point Health Care. 

2. 
1994: Brighton Marine Health Center; 
2014: Brighton Marine Health Center. 

3. 
1994: Bayley Seton Hospital; 
2014: St. Vincents Catholic Medical Centers[A]. 

4. 
1994: Johns Hopkins Medical Services; 
2014: Johns Hopkins Medical Services Co. 

5. 
1994: Pacific Medical Center; 
2014: Pacific Medical Centers. 

6. 
1994: St. John Hospital; 
2014: CHRISTUS Health. 

7. 
1994: St. Joseph Hospital; 
2014: CHRISTUS Health. 

8. 
1994: St. Mary's Hospital; 
2014: No longer a USFHP designated provider[B]. 

9. 
1994: St. Mary Hospital; 
2014: CHRISTUS Health. 

10. 
1994: Lutheran Medical Center; 
2014: Terminated its contract with the Department of Defense[C]. 

Source: GAO analysis of information from Department of Defense and 
USFHP designated providers. GAO-14-684. 

Note: The years reported in this table are calendar years and were 
selected to illustrate how the number of USFHP designated providers 
has changed over 20 years. While some USFHP designated providers have 
existed for this entire timeframe, some of their names have changed 
over the years. 

[A] Originally known as Bayley Seton Hospital, this designated 
provider is now known as St. Vincents Catholic Medical Centers and 
owns and operates three health centers in New York: the Bay Ridge 
Family Health Center, the Mitchel Field Family Health Center, and the 
Fort Wadsworth Family Health Center. 

[B] CHRISTUS Health was formerly known as the Sisters of Charity 
Health Care System. Under that name, the health care system sold the 
St. Mary's Hospital (Galveston) to the University of Texas Medical 
Branch. St. Mary's (Galveston) is no longer part of CHRISTUS Health. 

[C] Lutheran merged with Fairview Hospital in 1995, and in 1997 became 
part of the Cleveland Clinic Health System. Officials from the 
Department of Defense told us that this designated provider decided to 
end its USFHP contract with the department in 2007. Affected 
beneficiaries were transitioned to TRICARE or Medicare. 

[End of table] 

[End of section] 

Appendix II: US Family Health Plan (USFHP) Designated Provider 
Characteristics: 

Designated Provider: Johns Hopkins Medical Services Co.; 
Geographic Service Area: Maryland, Washington, D.C., and parts of 
Delaware, Pennsylvania, Virginia, and West Virginia; 
Total Number of USFHP Enrollees[A]: 41,752 (of which 8,602 are 65+). 

Designated Provider: Brighton Marine Health Center; 
Geographic Service Area: Massachusetts, Rhode Island, and northern 
Connecticut; 
Total Number of USFHP Enrollees[A]: 14,288 (of which 5,497 are 65+). 

Designated Provider: Martin's Point Health Care; 
Geographic Service Area: Maine, New Hampshire, Vermont, upstate and 
western New York, and the northern tier of Pennsylvania; 
Total Number of USFHP Enrollees[A]: 41,991 (of which 12,573 are 65+). 

Designated Provider: CHRISTUS Health; 
Geographic Service Area: Southeast Texas and southwest Louisiana; 
Total Number of USFHP Enrollees[A]: 11,803 (of which 6,596 are 65+). 

Designated Provider: Pacific Medical Centers; 
Geographic Service Area: Puget Sound area of Washington state; 
Total Number of USFHP Enrollees[A]: 13,062 (of which 7,354 are 65+). 

Designated Provider: St. Vincents Catholic Medical Centers; 
Geographic Service Area: New Jersey, New York City, southern New York, 
western Connecticut, and southeastern Pennsylvania; 
Total Number of USFHP Enrollees[A]: 11,164 (of which 3,575 are 65+). 

Source: GAO analysis of information and data from Department of 
Defense and the USFHP designated providers. GAO-14-684. 

[A] Enrollment as of October 2013. 

[End of table] 

[End of section] 

Appendix III: Discounts and Services Offered by Designated Providers 
in Addition to the TRICARE Prime Benefit as of June 2014: 

Discount or Service: Vision Discounts[A]; 
Brighton Marine Health Center: [Check]; 
CHRISTUS Health: [Check]; 
Johns Hopkins Medical Services Co.: [Check]; 
Martin's Point Health Care: [Check]; 
Pacific Medical Centers: [Check]; 
St. Vincents Catholic Medical Centers: [Check]. 

Discount or Service: Dental Discounts[B]; 
Brighton Marine Health Center: [Empty]; 
CHRISTUS Health: [Check]; 
Johns Hopkins Medical Services Co.: [Check]; 
Martin's Point Health Care: [Empty]; 
Pacific Medical Centers: [Empty]; 
St. Vincents Catholic Medical Centers: [Empty]. 

Discount or Service: Alternative Medicine Discounts[C]; 
Brighton Marine Health Center: [Check]; 
CHRISTUS Health: [Empty]; 
Johns Hopkins Medical Services Co.: [Check]; 
Martin's Point Health Care: [Check]; 
Pacific Medical Centers: [Check]; 
St. Vincents Catholic Medical Centers: [Empty]. 

Discount or Service: Hearing and Hearing Aid Discounts[D]; 
Brighton Marine Health Center: [Check]; 
CHRISTUS Health: [Check]; 
Johns Hopkins Medical Services Co.: [Check]; 
Martin's Point Health Care: [Check]; 
Pacific Medical Centers: [Empty]; 
St. Vincents Catholic Medical Centers: [Empty]. 

Discount or Service: Transportation[E]; 
Brighton Marine Health Center: [Empty]; 
CHRISTUS Health: [Check]; 
Johns Hopkins Medical Services Co.: [Empty]; 
Martin's Point Health Care: [Check]; 
Pacific Medical Centers: [Empty]; 
St. Vincents Catholic Medical Centers: [Empty]. 

Discount or Service: Nutrition or Fitness Discounts[F]; 
Brighton Marine Health Center: [Check]; 
CHRISTUS Health: [Empty]; 
Johns Hopkins Medical Services Co.: [Check]; 
Martin's Point Health Care: [Check]; 
Pacific Medical Centers: [Check]; 
St. Vincents Catholic Medical Centers: [Check]. 

Discount or Service: Elective Cosmetic Surgery Discounts[G]; 
Brighton Marine Health Center: [Empty]; 
CHRISTUS Health: [Empty]; 
Johns Hopkins Medical Services Co.: [Check]; 
Martin's Point Health Care: [Empty]; 
Pacific Medical Centers: [Empty]; 
St. Vincents Catholic Medical Centers: [Empty]. 

Discount or Service: Infertility[H] Services Discounts; 
Brighton Marine Health Center: [Empty]; 
CHRISTUS Health: [Empty]; 
Johns Hopkins Medical Services Co.: [Check]; 
Martin's Point Health Care: [Empty]; 
Pacific Medical Centers: [Empty]; 
St. Vincents Catholic Medical Centers: [Empty]. 

Source: GAO analysis of information from US Family Health Plan 
designated providers. GAO-14-684. 

[A] Discounted vision services can include a free annual eye exam, 
discounts on glasses and lenses at select providers, or LASIK vision 
correction. 

[B] Dental services offered by the designated providers can include a 
free initial exam plus a 15 percent discount on services. 

[C] Services offered at a discount under this category can include 
chiropractic care, acupuncture, yoga, and massage therapies. 

[D] Designated providers offer a free annual hearing exam, plus 
discounts on hearing aids. 

[E] Designated providers offer up to four round-trips (eight one-way) 
to approved covered medical services. 

[F] Services offered at a discount under this category can include 
nutritional counseling or gym memberships. 

[G] This designated provider offers enrollees a $500 discount on any 
procedure including anti-aging procedures, such as face lifts and 
rhinoplasty and a 15 percent discount on all injectables including 
Botox. 

[H] Enrollees receive an unspecified discount for all in vitro 
fertilization and intrauterine insemination procedures. 

[End of table] 

[End of section] 

Appendix IV: Comments from the Department of Defense: 

The Assistant Secretary of Defense: 
Health Affairs: 
1200 Defense Pentagon: 
Washington, DC 20301-120: 

July 15, 2014: 

Debra Draper: 
Director: 
Health Care: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Ms. Draper: 

This is the Department of Defense's (DoD) response to the U.S. 
Government Accountability Office (GAO) Draft Report titled, "Defense 
Health Care: U.S. Family Health Plan is Duplicative and Should be 
Eliminated (GAO-14-684)," GAO Code 291114 dated July 1, 2014. 

Thank you for the opportunity to review and comment on the Draft 
Report. The GAO recommendation to eliminate the statutory requirement 
for the U.S. Family Health Plan is addressed to Congress and DoD 
defers to Congress to consider it. DoD believes GAO's factual 
determinations are correct. Our specific comments are enclosed. 

The points of contact on this matter are Ms. Danielle McCammon 
(Functional) and Mr. Gunther Zimmerman (Audit Liaison). Ms. McCammon 
may be reached at (703) 681-8675, or Danielle.McCammon@dha.mil. Mr. 
Zimmerman may be reached at (703) 681-4360, or 
Gunther.Zimmerrnan@dha.mil. 

Signed by: 

Jonnathan Woodson, M.D. 

Enclosure: As stated. 

GAO-14-630: 
Defense Health Care: The U.S. Family Health Plan (USFHP) Is 
Duplicative And Should Be Eliminated (GAO-14-684): 

Matter For Congressional Consideration: 

To eliminate unnecessary duplication and to achieve increased 
efficiencies and potential savings within the integrated Military 
Health System (MHS), Congress should terminate the Secretary of 
Defense's authority to contract with the USFHP designated providers in 
a manner consistent within a reasonable transition of affected USFHP 
enrollees into TRICARE's regional managed care program or other health 
care program or other health care programs as appropriate. 

DOD Response: 

The GAO recommendation to eliminate the statutory requirement for the 
U.S. Family Health Plan is addressed to Congress and DoD defers to 
Congress to consider it. DoD believes GAO's factual determinations are 
correct. Specific comments follow. 

* The USFHP operates essentially as a sole source contract earmark. 
This is an exception to the general Congressional and DoD policy 
favoring competition in contracting. 

* We recognize that duplication exists as the USFHP provides the same 
TRICARE Prime benefit that is offered through the three regional 
managed care support contractors (MCSCs). Specifically, there is 
significant overlap with benefits, geographic service areas and 
provider networks. The duplication also adds cost, as necessary care 
is available through the MCSCs and the direct care system. 

* DoD is unable to promote the efficient use of DOD's direct care 
system through the USFHP, as it operates independently of the 
integrated Military Health System (MHS) as a distinct statutory 
program. This is an exception to the general DoD policy favoring 
recapturing of care into MTFs as a means to support readiness and cost-
effectiveness. 

* The USFHP providers are not limited to the TRICARE provider 
reimbursement rates, and therefore have the flexibility to offer their 
providers higher rates and other incentives to render care. This 
creates a competitive advantage for the USFHP and draws beneficiaries 
away from the more cost effective MCSCs. Although this contributes to 
high beneficiary satisfaction rates, it is an exception to the general 
Congressional and DoD policy favoring a uniform TRICARE benefit. 

* DoD is required to annually negotiate capitation payment amounts 
with each of the six USFHP providers, a process that lasts 8 months on 
average and requires DoD to expend considerable resources in 
developing data and committing personnel to the negotiations.
Should Congress decide to eliminate this statutorily-required program, 
it will be important to make provisions to carefully transition the 
137,000 USFHP beneficiaries to other federal programs. This includes 
Medicare-eligible beneficiaries and procedures to facilitate Part B 
enrollment for a small group of those not currently enrolled. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Debra A. Draper (202) 512-7114 or draperd@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Bonnie Anderson, Assistant 
Director; Kaitlin Coffey; Christine Davis; Sylvia Jones; Drew Long; 
Samantha Poppe; James Rebbe; and William T. Woods made key 
contributions to this report. 

[End of section] 

Footnotes: 

[1] TRICARE-eligible beneficiaries include active duty personnel and 
their dependents, medically eligible Reserve and National Guard 
personnel and their dependents, and retirees and their dependents and 
survivors. 

[2] Prior to October 1, 2013, the TRICARE Management Activity, an 
entity within DOD, was responsible for overseeing the TRICARE program. 
In response to increasing pressure on its budgetary resources, DOD 
established the Defense Health Agency on October 1, 2013, to assume 
management responsibility of numerous functions of its medical health 
system, including the former TRICARE Management Activity, which was 
terminated on that date. For additional information, see GAO, Defense 
Health Care Reform: Additional Implementation Details Would Increase 
Transparency of DOD's Plans and Enhance Accountability, [hyperlink, 
http://www.gao.gov/products/GAO-14-49] (Washington, D.C: Nov. 6, 2013). 

[3] All beneficiaries who are eligible for DOD health care and who are 
under the age of 65, except active duty servicemembers, are eligible 
for USFHP enrollment. However, each year the number of USFHP enrollees 
may not exceed 110 percent of the previous year's enrollee population. 
See National Defense Authorization Act (NDAA) for Fiscal Year 1997, 
Pub. L. No. 104-201, § 724(b), 110 Stat. 2422, 2595 (1996) (codified 
at 10 U.S.C. § 1073 note). In this report, future citations to the 
NDAA for Fiscal Year 1997 will identify the applicable section of law 
without providing a full citation, as set forth here. 

[4] The Military Construction Authorization Act, 1982 deemed these 
facilities to be facilities of the uniformed services, then known as 
Uniformed Services Treatment Facilities. See Pub. L. No. 97-99, § 911, 
95 Stat. 1359, 1386 (1981). 

[5] NDAA for Fiscal Year 1997, § 723(a). 

[6] Congressional Budget Office, Long-term Implications of the 2012 
Future Years Defense Program, Pub. No. 4281 (Washington, D.C.: June 
2011). These numbers are reported in nominal dollars and have not been 
adjusted for inflation. 

[7] See [hyperlink, http://www.gao.gov/products/GAO-14-49]. 

[8] S. Rep. No. 112-173, at 131-132 (2012). For our work on TRICARE 
pharmacy service contracts, see GAO, Defense Health Care: Evaluation 
of TRICARE Pharmacy Services Contract Structure Is Warranted, 
[hyperlink, http://www.gao.gov/products/GAO-13-808] (Washington, D.C.: 
September 2013). For our work on TRICARE managed care support 
contracts, see GAO, Defense Health Care: Acquisition Process for 
TRICARE's Third Generation of Managed Care Support Contracts, 
[hyperlink, http://www.gao.gov/products/GAO-14-195] (Washington, D.C.: 
March 2014). For our work on TRICARE dental services contracts, see 
GAO, Defense Health Care: TRICARE Dental Services Contracts' 
Requirements and Structure, [hyperlink, 
http://www.gao.gov/products/GAO-14-497] (Washington, D.C.: June 2014). 

[9] We did not assess the department's compliance with the program's 
requirements. 

[10] The USFHP Alliance is the association that represents the 
interests of the six designated providers in interactions with DOD and 
Congress. 

[11] See GAO, 2014 Annual Report: Additional Opportunities to Reduce 
Fragmentation, Overlap, and Duplication and Achieve Other Financial 
Benefits, [hyperlink, http://www.gao.gov/products/GAO-14-343SP] 
(Washington, D.C.: April 8, 2014). 

[12] The FAR defines uniform policies for the acquisition of supplies 
and services across the federal government. The FAR is codified in 
title 48 of the Code of Federal Regulations. 

[13] Under capitation payments, health care plans are prospectively 
paid a fixed monthly rate per enrollee to provide or arrange for most 
health care services. 

[14] See NDAA for Fiscal Year 1997, §§ 721-727. 

[15] Specifically over the years, some hospitals that were formerly 
separate designated providers were consolidated under CHRISTUS Health. 

[16] One former designated provider, Lutheran Medical Center, merged 
with Fairview Hospital in 1995 and in 1997 became part of the 
Cleveland Clinic Health System. DOD officials told us that this 
designated provider decided to end its USFHP contract with the 
department in 2007. 

[17] Previously, all Medicare-eligible individuals aged 65 and older 
were also allowed to enroll in the USFHP. The NDAA for Fiscal Year 
2012 amended the law, requiring beneficiaries enrolling in USFHP after 
September 30, 2012 to discontinue their USFHP coverage and transition 
to TRICARE For Life once they reach 65 years of age. Beneficiaries 
enrolled with a USFHP designated provider on September 30, 2012 did 
not have to discontinue their USFHP coverage after reaching 65 years 
of age. Pub. L. No. 112-81, § 708, 125 Stat. 1298, 1474 (2011), 
amending section 724(e) of the NDAA for Fiscal Year 1997. 

[18] NDAA for Fiscal Year 1997, § 722(e). 

[19] NDAA for Fiscal Year 1997, § 722(b)(2). 

[20] See NDAA for Fiscal Year 1997, § 722(b)(2). Offerors competing 
for commercial item contracts may not be required to provide certified 
cost or pricing data during contract negotiations. FAR § 15.403-
1(b)(3). Section 2.101 of the FAR defines cost or pricing data as all 
facts that buyers and sellers would reasonably expect to affect price 
negotiations. In acquisitions where certified cost or pricing data are 
required, section 15.406-2 of the FAR provides that contractors must 
certify that required cost or pricing data are accurate, complete, and 
current as of a specified date. 

[21] NDAA for Fiscal Year 1997, § 726(a). 

[22] The final rates are the results of negotiations involving two 
rates: (1) rates that are proposed by the designated providers, and 
(2) rates that are proposed by DOD. 

[23] NDAA for Fiscal Year 1997, § 726(b). 

[24] Prime Service Areas have been established in zip codes that are 
within a 40 mile radius of an MTF or Base Realignment and Closure 
site. As of October 1, 2013, DOD eliminated the additional Prime 
Service Areas that were not near MTFs or Base Realignment and Closure 
sites in an effort to reduce health care costs. This change affected 
approximately 181,600 beneficiaries previously eligible for the 
TRICARE Prime option. 

[25] Base Realignment and Closure sites are military installations 
that have been closed or realigned as a result of decisions made by 
the Commission on Base Realignment and Closure. 

[26] TRICARE also offers several other plans, including TRICARE Young 
Adult-Standard Option (for beneficiaries' dependents up to age 26) and 
TRICARE Reserve Select (for certain National Guard and Reserve 
servicemembers). 

[27] We have previously defined duplication as a situation where two 
or more programs are engaged in the same activities or strategies to 
meet a need, or provide the same services to the same target 
recipients or individuals. See [hyperlink, 
http://www.gao.gov/products/GAO-14-343SP]. 

[28] Specifically, section 723(a) of the NDAA for Fiscal Year 1997 
requires designated providers to offer enrollees the health benefit 
option prescribed by section 731 of the NDAA for Fiscal Year 1994. 
This refers to the TRICARE Prime benefit option applicable to MCSCs, 
which is to be as uniform as possible throughout the United States. 
Both provisions are codified, as amended, at 10 U.S.C. § 1073 note. 

[29] Operating guidelines and instructions for the MCSCs and the 
designated providers are included in several TRICARE manuals, 
including the TRICARE Policy Manual. 

[30] Enrollees in the USFHP must live in specific zip codes that are 
near one of the six designated providers. 

[31] The MCSCs are responsible for providing health care services to 
beneficiaries under 65 years of age. Once these beneficiaries reach 65 
and are Medicare eligible, they must transition to TRICARE For Life. 
If the USFHP did not exist, current USFHP enrollees who are Medicare 
eligible would likely be transitioned to TRICARE For Life. 

[32] We limited our analysis to include only providers with a Doctor 
of Medicine or Doctor of Osteopathic Medicine degree. The inclusion of 
other types of providers, including nurse practitioners or physician's 
assistants, could potentially affect the degree of overlap. 

[33] Neither the USFHP designated providers' officials nor the MCSCs' 
officials could tell us the extent to which their providers contracted 
with other plans because this is considered proprietary information. 

[34] Department of Defense, United States Department of Defense Fiscal 
Year 2015 Budget Request: Overview (March 2014). 

[35] MTF commanders have the authority and responsibility to set 
priorities for enrollment to MTF Primary Care Managers in order to 
maximize the use of their facilities. 

[36] DOD is statutorily prohibited from reducing designated providers' 
geographic service areas, but it does have the authority to approve or 
deny requests for expansion. 

[37] In contrast, the MCSCs are paid on a cost reimbursement basis for 
allowable benefits. 

[38] DOD officials do not know the extent to which these additional 
discounts and services divert enrollees from the MCSCs and, thus, the 
direct care system. 

[39] By law, TRICARE reimbursement rates for civilian providers are 
generally limited to Medicare rates, but network providers may agree 
to accept lower reimbursement rates as a condition of network 
membership. 

[40] The average capitation payments were based on average amounts 
paid for USFHP enrollees over and under 65 years of age, and were 
broken out by portions that would cover the cost of health care 
services for USFHP enrollees, as well as the designated providers' 
administrative costs and profits margins. 

[41] See NDAA for Fiscal Year 1997, § 722(b)(2). The FAR exempts 
commercial item contracts from the requirement to provide certified 
cost or pricing data during contract negotiations. 

[42] One of the two designated providers whose beneficiary populations 
are entirely comprised of USFHP enrollees also has another line of 
business; specifically, the designated provider told us it also 
operates a medical malpractice insurance business For the remaining 
two designated providers, USFHP enrollees comprise 14 and 15 percent 
of their total beneficiary populations. These two designated providers 
told us they are subsidiaries of larger corporations, and their total 
beneficiary populations include beneficiaries enrolled with the USFHP 
and beneficiaries enrolled in other health care programs through the 
larger corporations. 

[43] The data support contractor is responsible for collecting data 
submitted by the designated providers and interfacing them with DOD's 
Defense Enrollment and Eligibility Reporting System for the purpose of 
collecting enrollment and eligibility data as well as sharing USFHP 
enrollee demographics with DOD, among other things. 

[44] DOD officials told us that this contract primarily provides 
administrative and management assistance for the Defense Health 
Agency's TRICARE Health Plan Directorate senior leadership. 
Additionally, this contract also supports one of TRICARE's dental 
programs. 

[45] It is possible that if the USFHP enrollees were transitioned to 
the MCSCs, DOD could experience some upfront costs with doing so; for 
example, the department may have to pay the MCSCs additional money to 
cover some costs associated with absorbing new enrollees into their 
networks. However, it is also possible that the MCSCs' nationwide 
presence, the economies of scale related to their large beneficiary 
populations, and the competitive award process related to their 
contracts could reduce any costs associated with transferring 
enrollees from the smaller USFHP contracts to these larger contracts. 

[46] See [hyperlink, http://www.gao.gov/products/GAO-14-343SP]. 

[47] DOD officials told us contract modifications can occur due to 
reasons such as changes to the TRICARE manuals. The TRICARE manuals 
provide instruction, guidance, and responsibilities in addition to the 
requirements set forth in the designated providers' contracts or in 
the incorporated federal statutes and regulations. These manuals are 
incorporated by reference into the USFHP contracts, and abiding by 
them is part of the designated providers' contractual requirements. 

[48] The last iteration of USFHP contracts was for one base year and 
four option years, for a total duration of 5 years. The current 
contracts have been awarded to include one base year plus nine option 
years, for a total duration of 10 years. These contracts went into 
effect October 1, 2013. 

[49] NDAA for Fiscal Year 1997, § 726(c). 

[50] This contractor currently supports DOD's TRICARE contracts by 
providing services such as (1) budgeting, pricing, and financial 
analyst support; (2) policy support; (3) contract cost adjustment; and 
(4) reimbursement support. 

[End of section] 

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