The Tricare Budget Drain

Aug. 1, 2001

Disagreements swirl like a tornado around military health care, but there is a point on which the surgeons general, members of the Joint Chiefs of Staff, Tricare contractors, and military service associations agree: The Clinton Administration badly mismanaged military health care budgets.

Tricare has seen costs soar in recent years, and the reason is no mystery.

The Clinton budget team, year after year, declined to properly fund the military’s own network of hospitals and clinics. As base medical facilities saw budgets get squeezed, they sent more and more of their patients “downtown” to use networks of Tricare civilian providers. However, network care costs much more than in-service care, a reality that forces health care costs ever higher.

Lt. Gen. Paul K. Carlton Jr., surgeon general of the Air Force, describes the phenomenon as a budget “death spiral.”

While there’s agreement on its cause, there’s no unanimity of opinion on how to end it. A logical solution, embraced by the Bush Administration and some members of Congress, is simply to start funding the direct care system properly, starting with the addition of $3.1 billion in “get well” money to Clinton’s Fiscal 2002 budget, his last.

The Joint Chiefs and the surgeons general, however, are open to more radical changes. Carlton believes it’s time to consider alternatives to Tricare and the multibillion dollar contracts that pay for civilian provider networks and which are first in line for resources, in front of military hospitals and clinics.

Company executives who manage the large support contracts argue that the only solution is proper funding of military health care, including the direct care system. Some service associations support that view; others argue it’s time to give service people access to the menu of health insurance options available to federal civilian employees, but with the government paying the premiums.

Needed: A Fire Wall

Sen. Ted Stevens (R-Alaska), the former chairman and now ranking minority member of the Senate’s defense appropriations subcommittee, favors dividing the defense health budget into two pieces and building a “fire wall” around spending earmarked for base hospitals and clinics. Carlton likes that idea, too, but service associations and Tricare contractors say it’s impractical and creates just the kind of rivalry for funds that shouldn’t exist.

The military Chiefs, meanwhile, are extremely upset about rising health care costs, which compete with readiness needs and other requirements. They are pressing for a change in the medical command structure. Army Gen. Henry H. Shelton, JCS Chairman, said military medicine needs a more aggressive management structure.

“This diversion of resources and the constant referral of patients to the private sector puts more funds into the coffers of contractors,” Shelton said. “We would be better served by funding the in-house [military] system. Care can be provided at a much cheaper rate in-house, while providing training for the military’s medical community in case we need to fight a war.”

Members of the JCS have urged the Defense Medical Oversight Committee-composed of the service vice chiefs, surgeons general, and top DOD health officials-to study new leadership structures for military medicine. One option would put a four-star line officer in charge of a new combined medical command, much as the Pentagon years ago put the special operations forces of all services under a single unified structure, US Special Operations Command.

Shelton said the Secretary of Defense should be able to put a “finger in the chest” of those who manage military medicine “and have them explain why they’ve got this [cost] growth.”

Shelton added, “Right now, we don’t have that. … The answer always is, ‘We need more money.’ “

In an April 24 memo to Defense Secretary Donald Rumsfeld, Shelton said military medicine not only is suffering from “a decade of underfunding” but from “an inadequate management structure.” He urged Rumsfeld to address this “not only as a near-term resource issue but also as part of your transformation efforts.”

Ironically, it was soaring costs that spurred the Defense Department in 1995 to begin transitioning to Tricare, its triple-option managed care system, the most dramatic transformation of military health care in 30 years. Defense officials also believed the shift to Tricare would make service hospitals and clinics more efficient and improve patient access to quality care.

Not much of that has happened. As a result, the debate over Tricare has greatly intensified. The future shape of military health care remains very much in doubt even as officials prepare to launch Tricare for Life, the improved benefit package for elderly military retirees, on Oct. 1.

Some of the toughest questions being raised about Tricare come not from disgruntled patients or health care providers but from the military surgeons general and commanders of military hospitals.

Unanswered Questions

In an interview, Carlton posed several tough rhetorical questions: “Have we really accomplished our goal of getting costs under control with [Tricare], as compared to the alternative CHAMPUS system? When we’ve kicked out the 65-and-older population? When two, three, four years down the road we’ve got all these [contractor] bills? Can we honestly say it was cheaper? I don’t know. And so I’m perfectly willing to look at other options at this time.”

Over the years, Tricare has generated mountains of complaints about claim processing delays and other aspects of its basic operations. Those complaints have begun to decline in frequency. However, military leaders and some lawmakers see it failing on two fronts: cost containment and protecting the direct care system.

Relative to the direct care system, Tricare support contracts are grabbing a larger slice of the defense budget pie each year. The trend has left base hospitals and clinics short of cash to modernize facilities and equipment. Air Force Military Treatment Facilities, warned Carlton, “are falling apart.”

He contrasted military medicine’s fiscal dilemma with that of military weapon procurement agencies. If the Army needs 10 tanks and Congress provides only enough money for nine, he said, then only nine tanks are bought that year. If a base hospital can do 10 appendectomies but gets budgeted to perform only nine, the 10th patient still gets care. But rather than use military care, the patient is referred to the civilian network. DOD still pays for the operation, eventually, when contracts are adjusted. If it had been done on the base, the cost would have been $300 (the cost of a surgical pack). On the outside, the same procedure will cost DOD $6,000 in payments to the Tricare contractor.

That charge is reasonable, Carlton said, but it shows the folly of shorting military hospitals in hopes of saving money.

“For want of $300, I’m spending $6,000,” said Carlton. “There’s no guilty party here. This is just an historical account of what has happened. That’s the [death] spiral I speak of.”

More-frequent use of civilian networks also has reduced the number of complex cases that military medical staffs need to keep skills sharp for wartime.

Maj. Gen. Lee Rodgers, commander of Wilford Hall Medical Center on Lackland AFB, Tex., said physicians there used to get challenging cases on a routine basis. Airlifters would bring them to Lackland from around the nation and the world. That’s changed.

“We move very few patients now,” he said. “Instead of a patient in North Dakota getting on air evac to San Antonio, San Diego, or Washington, they go to Minneapolis and Tricare picks it up.”

Patients still get quality care. Indeed, the new system generates less disruption for service families. “But,” said Rodgers, “very complex problems are not coming as much. … That has made it more difficult [finding] a wide range of patients for our residency training. That has a big impact.”

How To Fix It

The way to reverse these trends is to end chronic underfunding of military health care, said David McIntyre, president of TriWest Healthcare Alliance. His corporation has the managed care support contract for the 16-state Central Region of Tricare. McIntyre argues that DOD needs to hire actuaries who are experts at predicting health costs because its own estimates have been consistently off the mark.

“The problem isn’t Tricare,” said McIntyre. “The problem isn’t the contractors. The problem is the fundamental process of budgeting and estimating. Until you get that fixed, you don’t know where the rest of the system is.”

David Chu, the new undersecretary of defense for personnel and readiness, said in an interview that the direct care system and civilian contractors are in a “grand partnership” and, he suggested, that won’t change. Like McIntyre, he blamed chronic underfunding for creating “perverse incentives that produced some of the kinds of things that General Carlton complained about.”

Proper funding, he indicated, might correct the problem. He said it’s too early for the Bush team to decide on reorganizing the medical system. But if changes are needed, he suggested, it likely would be done at regional levels rather than another layer of command from Washington. Civilians who oversee military medicine have authority already to exercise proper fiscal leaderhip, he suggested, and under this Administration they will use it.

While military officials like Carlton don’t blame Tricare contractors directly for rising costs and deteriorating military hospitals, they still worry that, in competition for defense dollars, the direct care system might not be able to reverse the exodus of patients, staff, and resources.

McIntyre acknowledges that Air Force hospitals haven’t gotten the money they need to deliver services they can provide more efficiently than Tricare civilian networks. He added, “At the same time, I don’t believe we’re going to roll back the clock and rebuild [military medical] infrastructure.”

Neither do Sue Schwartz and Frank Rohrbough, health care analysts of The Military Coalition, an umbrella group of military service associations. Military Treatment Facilities “have been stripped,” Schwartz said. She said the surgeons general must, amid heightened concerns about costs, find a way to rebuild the MTFs.

“Does the military want to be in the business of running peacetime health care?” said Schwartz. “Is that going to be their product line? Put the money back in and build them back up to their former glory? It’s got to be a philosophical decision and a policy decision?”

The Clinton Administration shortchanged the military health system by an average of $500 million a year, Rohrbough said. That created the “vicious” cycle Carlton describes, with contractors picking up services that the military formerly had provided.

However, there’s a difference between properly funding a downsized, direct care system, which makes sense, Rohrbough said, and expanding the present direct care system beyond wartime needs, which he said does not make sense.

“To bring in more staff, where you have to pay salaries and retirement, is much more costly than to buy care downtown on the open market,” Rohrbough said.

To be fair to Carlton, he added, the Air Force doesn’t want to expand its military staff; it wants to make its current staff more efficient. However, the service can’t do that either unless the system is properly funded.

Who Gets Stuck

“Our fear,” said Schwartz, “is that, when people start to point fingers–and there are funding issues, with pie slices getting smaller and smaller–the person ultimately shortchanged is the beneficiary.”

Washington budget officials who expected that the end of the Cold War would slash military health care costs didn’t study the demographics, Carlton suggested.

Since the Berlin Wall fell in 1989, the active duty Air Force has shrunk by 35 percent. Air Force medical staff dropped almost as much. However, the number of retirees rose. The net of it is that the beneficiary population fell, overall, by no more than two percent.

More significantly, today’s beneficiary population is much older than that of a decade ago. When the health care requirement is measured in “equivalent lives,” an age-related yardstick used by the insurance industry, the military beneficiary population actually has grown nine percent since the end of the Cold War. That’s because older patients need five times as much care as active duty members.

“So, yes, the service is much smaller than it used to be,” said Carlton. “Our obligation is not.”

To make his point, Carlton held up a graph that charts Air Force health care spending, in current dollars, from 1992 through 1999. The line is essentially flat. “If you look at it inflation-adjusted,” Carlton said, “it’s going down.” The direct care funding trend forced the Air Force to send more and more patients downtown, though that meant higher overall costs when accounts were settled with Tricare contractors. To do otherwise, Carlton said, would have been illegal.

The threat this poses to the direct care system became disturbingly clear to the surgeons general last year after DOD’s health officials completed bid price adjustments with the Tricare contractors. Congress earlier had approved a Fiscal 2001 emergency health care supplemental of $1.4 billion. The services were to divide about half of that. Instead, DOD had to give all but $100 million or so to the contractors. The Air Force share of the $1.4 billion was $37 million.

“That doesn’t allow me to recapitalize my system at all,” said Carlton. But, he added, “We had a hard requirement to pay those contracts.”

Carlton points to another chart showing a six percent decline in the funding of Air Force hospital Operations and Maintenance in the period 1994-2001. During the same period, Air Force dollars pumped into managed care support contracts rose sixfold-from $231 million to more than $1.5 billion.

“It’s gone from a small percentage to a large percentage, and so it’s cut my O&M considerably,” Carlton said.

The Air Force’s medical facilities are deteriorating for lack of “maintenance, repair, construction, and equipment,” said the Air Force surgeon general. USAF has fallen short of the industry standard for maintenance spending by between $21 million and $54 million annually since 1997, Carlton said. He added that none of the shortfall has been offset with extra spending in later years. The cumulative shortfall just continues to grow.

Dollars to purchase hospital equipment follow a similar pattern, with shortfalls that average about $14 million a year since 1997 and are projected to grow to $20 million a year through 2004, with no catch-up in sight.

Creaking Infrastructure

“So our buildings are falling apart,” said Carlton, “and our expensive equipment, which is what fills the hospital [with patients], is well beyond its life expectancy. That’s why I’m talking about a death spiral.”

In the early 1980s, Carlton said, Air Force medicine was spending about $500 million a year on real property maintenance and new construction. The figure in 2001 is down to $30 million. The cumulative impact is that the Air Force needs an extra $1.6 billion over the next decade to “recapitalize” its direct care health system.

Stated another way, sustained yearly increases of three to four percent would put the direct care system back on the road to recovery and restore its competitiveness with civilian health care systems.

Even if the Bush Administration and Congress were to agree to that, Carlton would remain concerned. He said he would expect the Tricare managed care support contracts to continue to grow at a more rapid pace and eventually swallow much of whatever extra O&M money is earmarked for the services.

Carlton supports Stevens’s plan to split the defense health budget into two parts, with a fire wall around money earmarked for the direct care system. “The danger is there if we don’t,” he said, “because this managed care support contractor bill is huge. … Unless we can separate them, anything we propose would run the [risk] of being eaten” by support contract costs.

Schwartz and Rohrbough, for their parts, said the military health care budget can’t be divided. “It’s an integrated system,” said Schwartz. “They just need to define what they need for [medical] readiness-define the budget and find a way to pay for it. It’s not rocket science.”

Going Out of Business

Carlton doesn’t argue with Stevens’s contention that the direct care system has been cut too much and has turned away too many patients. “I pushed them out because I didn’t have the money to take care of them,” he said.

Rodgers at Wilford Hall said the Air Force spent $167 million to run the medical center in 1994. This year’s budget is $144 million, but so far he has gotten only $126 million, which “will not get me through the year.” The center has 19 operating rooms. By the end of the summer, it will be using just 12.

“That’s running at full capacity for the physicians we have,” said Rodgers.

Like the rest of the nation, the Air Force suffers from a shortage of nurses and anesthesiologists, but the primary reason that Wilford Hall operates below capacity is the sheer lack of money, said Rodgers. The center discontinued its organ transplant program because it couldn’t afford to do enough procedures to ensure safety.

Money and resources to treat more patients, Carlton said, likely will require a “complex partnership” with the Health Care Financing Administration, which oversees the Medicare program.

Even without bigger budgets, Carlton said, he intends to get more patient care out of every Air Force provider, with a target of treating 25 patients a day. For every provider, he also wants 1,500 beneficiaries enrolled in Air Force managed care.

“In the last year we’ve gone from 800 enrolled per primary care provider to 1,200,” he said. “We’re still not at 1,500 and that’s where, through efficiencies, we believe we can get [more of] our elderly population [enrolled].”

Despite the multibillion dollar cost of the new Tricare Senior Pharmacy and Tricare for Life programs, Carlton sees them as a “wonderful opportunity” to re-engage elderly beneficiaries and manage their care more efficiently. “I’m convinced that, just in the pharmacy alone, compared to what we buy downtown or by filling civilian prescriptions in our facilities, we can recapitalize our whole system,” he said.

Results from an experiment at MacDill Air Force Base in Tampa, Fla., he said, show that when the military manages an elderly retiree’s care, pharmacy costs average $500 a year, compared to $1,100 a year “when we filled their prescriptions but didn’t manage their care.” He called that “a world of difference.”

Tricare contractors do blame some rising costs on the penchant of Congress to legislate changes in benefits. Resulting instability produces frequent change orders, which further drive up costs. Also there’s general agreement that Tricare contracts setting up provider networks were overly complex and poorly designed. For example, reimbursements to contractors rise if the number of patients seen in military facilities falls below target. Contractors don’t have to show that they have seen more patients, only that the military has seen fewer than planned.

The weakness there, said Rodgers, is that a goal of managed care is illness prevention and healthier lives. Yet if this so-called “community health model” succeeds, and fewer patients need care, payments to contractors still rise. “If we do a real good job, [contractors are] going to get paid more because we are going to do less” patient care, Rodgers said.


Carlton conceded that changing the leadership structure for military health care is a “hot debate topic” in the DMOC. Shelton, the JCS Chairman, has asked, “Who do we pin the rose on?” But Carlton is satisfied with the current structure and its readiness for war.

“What makes sense to the Air Force is: Don’t muck up what’s working,” said Carlton. “If we’ve got a money problem, well, then fine, we’re happy to have a four-star or someone working the money piece. But don’t [change] command and control.”

Predicting costs in military medicine, he suggested, is more difficult than forecasting the numerical requirement for F-22s.

“I can’t control the science and technology,” said the surgeon general. “I can’t control the new information coming out of designer drugs for everything,” yet budget analysts, in predicting costs, “look back instead of forward.”

Carlton said he is willing to weigh alternatives to Tricare because health care systems have matured. Doctors must be more cost conscious or they won’t prosper, he said. The phrase is “economic credentialing.”

“We’re too complex,” said Carlton. I would like to take a look and say, ‘We made some big assumptions in 1993; in 2001, are the same assumptions true or is there a better way?’ And I’ve pushed for us to do that. What’s catching people’s attention is that health care is very expensive and doesn’t seem to be slacking off. How do we provide the best benefit when we don’t even know what the benefit is?”

Tom Philpott, a regular contributor to Air Force Magazine, is author of Glory Denied: The Saga of Jim Thompson, America’s Longest-Held Prisoner of War (W.W. Norton & Co.), published in 2001.