TRICARE Administrative Prices in the Northwest Region May Be Too High

HEHS-97-149R: Published: Jun 24, 1997. Publicly Released: Jun 24, 1997.

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GAO reviewed the Department of Defense's (DOD) TRICARE program, focusing on whether TRICARE managers in the Northwest Region had taken advantage of DOD's contractual authority to adjust administrative prices to correspond with a large health care price decrease.

GAO noted that: (1) the largest contract change to date in the Northwest Region, modification P00008, effective February 1, 1995, reduced the health care price by a total of $169 million, 33 percent, over the five option periods; (2) the reduction was calculated to reflect lower baseline population and military treatment facility utilization estimates; (3) despite a 33-percent reduction in health care prices, TRICARE contracting officers did not propose a second action to reduce administrative support prices; (4) TRICARE managed care services (MCS) contracts do not require that health care price reductions automatically trigger a corresponding reduction in the administrative support prices, nor do contracts require the reasons administrative prices are not reduced; (5) while administrative price adjustments are not part of the bid price adjustment process, administrative support price adjustments are not precluded under the federal acquisition regulation (FAR) changes provisions; (6) because modification P00008 was issued under the authority of FAR section 52.243-1, it is a change order that allows TRICARE Support Office (TSO) contracting officers to adjust administrative support prices; (7) while health care costs are not directly linked to administrative support costs in existing TRICARE MCS contracts, there is a clear relationship between the two; (8) the Defense Contract Audit Agency and Lead Agent officials told GAO that a 33-percent reduction in health care price should have been accompanied by a reduction, perhaps proportionally smaller, in the administrative support price or, at minimum, TSO contracting officers should have conducted further analysis to determine the extent to which an administrative support price reduction was warranted; (9) had TRICARE contracting officials applied the contractor's administrative support rates to the reduced health care prices in modification P00008, administrative support prices might be as much as $25 million less over the 5 years of the contract; (10) this projection, moreover, is at the upper range of potential savings because administrative support costs would likely not decrease in the same proportion as health care costs; and (11) nevertheless, renegotiating administrative support prices would not only give DOD valuable information on the true cost of administrative services in the Northwest Region, but also would ensure DOD pays fair and reasonable prices for these services.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On September 17, 1997, the TRICARE support office submitted a request to the Northwest Region MCS contractor (Foundation Health Federal Services) for an equitable adjustment affecting administrative support prices. FHFS did not believe an adjustment was warranted because the DOD had not sought to adjust the administrative prices in conjunction with other, regularly scheduled bid-price-adjustments. Nor did DOD assert a right to a price reduction under the changes clause by identifying a specific change made to an administrative task. Although the Acting ASH HA had agreed with the recommendation, the DOD contracting officer accepted the FHFS position that adjustment was foreclosed by specific agreement in modification P0008.

    Recommendation: To help ensure DOD pays fair and reasonable prices for administrative support in the Northwest Region, the Secretary of Defense should direct the Acting Assistant Secretary of Defense for Health Affairs to initiate action to determine the extent to which administrative support prices could be reduced as a result of a $169-million health care price reduction in modification P00008.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD is continuing its search for new approaches for pricing the administrative support functions of managed care support contractors, which would adjust for significant changes in the volume of health care required. Such new approaches will be incorporated into the next generation of TRICARE contracts.

    Recommendation: To better match administrative support prices with workload, GAO supports current Health Affairs efforts to develop contractual links between administrative support and health care workload prices. The Secretary of Defense should consider incorporating such a requirement in future cycles of TRICARE MCS contracts and, to the extent possible, in contracts under negotiation in the Northeast, Mid-Atlantic, and Heartland regions where it would not compromise the competitive procurement process.

    Agency Affected: Department of Defense


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