The Department of Defense’s (DOD) annual health care costs are projected to reach $70 billion by 2028. As health care consumes an increasingly large portion of the overall DOD budget, it is important for DOD to operate its health care system efficiently, while also ensuring high-quality care. In fiscal year 2013, 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. For each of the three TRICARE regions in the United States (North, South, and West), DOD contracts with private sector companies—referred to as managed care support contractors—to administer TRICARE’s benefit options, including TRICARE Prime, its managed care option.
Separately, in certain locations, TRICARE Prime is also offered to approximately 134,000 enrollees through the US Family Health Plan (USFHP), a statutorily required component of DOD’s Military Health System, at a cost of more than $1 billion in fiscal year 2013. The USFHP was initially incorporated into the Military Health System in 1982 when enacted legislation transferred ownership of certain U.S. Public Health Service hospitals to specific health care providers, referred to as designated providers under the program. 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. However, the USFHP has largely remained unchanged since the NDAA for Fiscal Year 1997, and its role has not since been reassessed within the Military Health System.
Today, the USFHP is an association of six designated providers located throughout the country. Each of the designated providers—and their respective service areas—is located within one of the three TRICARE regions that are served by a managed care support contractor. The figure below illustrates the location of the USFHP designated providers relative to the locations of the three TRICARE regions.
Location of Six US Family Health Plan (USFHP) Designated Providers within the Three TRICARE Regions
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.
Congressional Budget Office, Long-Term Implications of the 2014 Future Years Defense Program, Pub. No. 4616 (November 2013).
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.
The statutory basis for the USFHP is the National Defense Authorization Act (NDAA) for Fiscal Year 1997 Pub. L. No. 104-201, §§ 721-727, 110 Stat. 2422, 2592-2597 (1996) codified, as amended, at 10 U.S.C. § 1073 Note. 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.
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).
NDAA for Fiscal Year 1997, Pub. L. No. 104-201, § 723(a).
In July 2014, GAO reported that the USFHP’s role within DOD’s Military Health System is duplicative because it offers military beneficiaries the same TRICARE Prime benefit that is offered by the managed care support contractors across much of the same geographic service areas and through many of the same providers. Specifically,
Furthermore, the USFHP operates as a distinct statutory program that is not integrated with the rest of the Military Health System. This limits DOD’s ability to increase efficiency through its goal of maximizing the use of its direct care system of military hospitals and clinics. USFHP enrollees are generally precluded from receiving care at military treatment facilities due to the program’s payment structure, a fixed-price capitation payment that is intended to cover all of the health care costs of enrollees. In contrast, TRICARE’s managed care support contractors are required to optimize the use of the direct care system for their Prime enrollees as part of an integrated Military Health System. For example, the TRICARE managed care support contractors first assign Prime enrollees to a Primary Care Manager located at a military treatment facility until the facility’s enrollment capacity has been reached, at which point enrollees are assigned to a Primary Care Manager from the contractors’ civilian provider networks. Given the extent of the designated providers’ overlap with the managed care support contractors’ Prime Service Areas, which are generally around military treatment facilities, thousands of USFHP enrollees are precluded from using the direct care system.
The duplication and related overlap between the USFHP and the managed care support contractors’ offering of the TRICARE Prime option has been long-standing in part because the program’s role has not been reassessed since TRICARE was implemented in the 1990s. DOD officials told GAO that there is not a function that the USFHP designated providers serve that the managed care support contractors could not perform. However, because the USFHP is statutorily required, DOD does not have the authority to eliminate it. Additionally, officials with all three managed care support contractors—who currently serve more than 4.5 million Prime enrollees—stated that they likely would have the capacity and capability to provide TRICARE coverage to all of the current USFHP enrollees.
As a result of the USFHP’s duplicative role, DOD has incurred added costs by paying the USFHP designated providers to simultaneously administer the same benefit to the same population of eligible beneficiaries in many of the same locations as the managed care support contractors. 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. DOD also incurs other expenses for the USFHP through support contracts, including a data support contract that is exclusive to the USFHP designated providers and does not exist for the managed care support contractors. Further, DOD must expend resources managing various aspects of the USFHP, including the annual negotiation of capitation payments—a process that lasts approximately 8 months. Eliminating the USFHP would allow DOD to potentially realize savings and better focus its resources on managing other aspects of the TRICARE program.
Although the USFHP’s role is duplicative because it offers the same TRICARE Prime benefit that is offered by the managed care support contractors, beneficiaries must choose to enroll with the USFHP designated providers or with the managed care support contractors—they are not allowed to enroll with both; therefore, there are no current concerns that DOD is incurring duplicate costs for individual beneficiaries.
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 section refers to the TRICARE Prime benefit option applicable to the managed care support contractors, 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.
The remaining two designated providers had 41 percent and 57 percent of their service area zip codes included in areas where the managed care support contractors offer TRICARE Prime. These two designated providers are located in areas that have few or no military treatment facilities or Base Realignment and Closure sites, sites where managed care support contractors are required to establish Prime geographic service areas.
Under capitation payments, health care plans are prospectively paid a fixed monthly rate per enrollee to provide or arrange for most health care services.
GAO suggested in its July 2014 report that to eliminate unnecessary program duplication and achieve increased efficiencies and potential savings within the integrated Military Health System, Congress should
DOD could potentially realize both savings and increased efficiencies with the elimination of this program. However, the actual cost of the program’s duplication is unknown. This is because the USFHP contracts are statutorily required to be treated as commercial item contracts under the Federal Acquisition Regulation (FAR), and this designation prohibits DOD from requiring the designated providers to provide certified cost or pricing data. Furthermore, according to DOD officials, the designated providers also have been unwilling to share uncertified cost or pricing data when the department has requested it. As a result, even though DOD negotiates amounts for administrative costs and profits as part of the designated providers’ capitation payments, it does not know how much of the approximately $1 billion annual payment ultimately goes toward the designated providers’ administrative costs and profit and how much goes to the actual costs of providing health care services to USFHP enrollees. GAO obtained a breakdown of the average capitation payments DOD made to the designated providers for USFHP enrollees for fiscal year 2013 and estimated that the negotiated 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). GAO also obtained the costs of relevant USFHP support contracts, including a data support contract that is expected to cost $21 million over 5 years. Based on these cost data, GAO concluded DOD would potentially save millions of dollars if the USFHP were eliminated. Furthermore, eliminating this statutorily required program would help support DOD’s efforts to control rising health care costs and increase efficiencies by freeing up departmental resources that could be better used to manage and oversee the TRICARE program.
See Pub. L. No. 104-201, § 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.
The information contained in this analysis is based on findings from the product listed in the related GAO product section. To conduct this work, GAO reviewed requirements relevant to the USFHP and the TRICARE program, including those established in federal laws and regulations, contracts, policy manuals, and benefit handbooks. To assess the extent to which the USFHP designated providers and the TRICARE managed care support contractors engage in the same activities or strategies to provide the same services to the same target recipients or individuals, GAO reviewed and applied its framework for assessing fragmentation, overlap, and duplication. Additionally, GAO interviewed officials from the six USFHP designated providers and the three managed care support contractors to learn about the benefits, geographic service areas, and provider networks of the respective contractors. To understand the costs of the program, GAO interviewed DOD officials and officials from DOD’s actuarial contractors to obtain the information that was available, albeit limited, about the costs of the USFHP. GAO requested DOD’s contractor provide it with a breakdown of the average capitation payments paid to the designated providers for fiscal year 2013, which included amounts that were expected to cover the costs of health care services provided to USFHP enrollees, as well as the administrative costs and profit margins for the designated providers. Finally, GAO obtained information from DOD officials about the resources they use to manage the program, and DOD’s annual process for negotiating the designated provider capitation payments.
Table 4 in appendix V lists the programs GAO identified that might have similar or overlapping objectives, provide similar services, or be fragmented across government missions. Overlap and fragmentation might not necessarily lead to actual duplication, and some degree of overlap and duplication may be justified.
GAO did not assess the department’s compliance with program requirements.
In commenting on the July 2014 report on which this analysis is based, DOD stated that since GAO’s suggestion to eliminate the USFHP was addressed to Congress, the department deferred to Congress to consider it. DOD confirmed that GAO’s factual determinations about the USFHP were correct. DOD also reiterated GAO’s statement that if the USFHP were eliminated, it would be important to make provisions to carefully transition USFHP enrollees to other health care programs.
GAO provided a draft of this report section to DOD for review and comment. The department did not provide comments on this report section.
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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 ow...