Approaches to Reducing Federal Spending on Military Health Care

Report
January 16, 2014

In 2012, the Department of Defense (DoD) spent $52 billion on health care for service members, retirees, and their families. The department offers health care to nearly 10 million people through its TRICARE program, an integrated system of military health care providers and regional networks of civilian providers. Established in 1993, TRICARE now consists of three major plans: TRICARE Prime, TRICARE Standard, and TRICARE Extra. The following groups of people are eligible to participate in TRICARE (with the respective populations in 2012 shown in parentheses):

  • All members of the four military branches as well as members of the Coast Guard and the commissioned corps of the Public Health Service and of the National Oceanic and Atmospheric Administration (1.8 million);
  • Families of current service members (2.6 million); and
  • Retired service members and their families (5.2 million).

The cost of providing that care has increased rapidly as a share of the defense budget over the past decade, out-pacing growth in the economy, growth in per capita health care spending in the United States, and growth in funding for DoD’s base budget (which finances the department’s routine activities but has excluded funding for operations in Iraq and Afghanistan). Between 2000 and 2012, funding for military health care increased by 130 percent, over and above the effects of overall inflation in the economy. In 2000, funding for health care accounted for about 6 percent of DoD’s base budget; by 2012, that share had reached nearly 10 percent. By 2028, health care would claim 11 percent of the cost of implementing DoD’s plans, CBO estimates.

The Budget Control Act of 2011 (as modified by sub-sequent legislation) capped funding for national defense between 2014 and 2021 at about 10 percent below CBO’s projection of the cost of DoD’s plans as of November 2013, using DoD’s estimates of prices. The share of health care costs in future budgets will depend on how DoD adjusts its plans to comply with those caps. For example, if the growth in health care costs is unconstrained by new policies and cuts are made in funding for other defense activities (such as the development and procurement of weapon systems), then health care costs could account for an even larger percentage of the department’s future spending.

What Have Been the Primary Causes of Growth in Spending for Military Health Care?

The rapid increases in the cost of military health care are often attributed to the following factors:

  • New and expanded TRICARE benefits. Lawmakers have expanded the TRICARE benefit in various ways. TRICARE for Life, a new benefit established in 2002, eliminates most of the out-of-pocket costs faced by Medicare-eligible military retirees and their families. Other expanded benefits provide coverage to members of the National Guard and Reserves when they are not serving on active duty.
  • Increased utilization fostered by financial incentives to use TRICARE. The share of health care costs that TRICARE users pay is much lower than the costs paid by most civilian consumers who use private or employment-based health insurance. Depending on which plan people select, the cost of TRICARE may include enrollment fees (which are charged annually and are similar to health insurance premiums in the civilian market), copayments (which are fees charged each time medical care is accessed), and deductibles (which are the amounts that users must pay before TRICARE will pay a claim). TRICARE’s comparatively low out-of-pocket costs have had two effects: First, the number of users has increased as people switched from more expensive plans to TRICARE; and second, TRICARE participants have increased the volume of health services they consume. (The total number of people enrolled in TRICARE Prime—the most costly plan to DoD—rose by 8 percent between 2003 and 2012. And DoD estimates that, in 2012, the average person enrolled in TRICARE Prime used 50 percent more outpatient services than a civilian of comparable age participating in a health maintenance organization.)
  • Medical costs of recent wars. Although DoD has received supplemental funding for combat-related medical care, that funding has been relatively small and should decrease as operations end and as service members who participated in those operations separate from the military and transition to other sources of health care, including the Veterans Health Administration.

CBO finds that the first two factors explain most of the growth in military health care costs since 2000; the third has had a comparatively small effect on DoD’s spending.

What Are Some Approaches to Controlling Costs?

DoD’s total budget will be constrained through 2021 by caps on funding for national defense that were established under the Budget Control Act of 2011 (and modified by the American Taxpayer Relief Act of 2012 and the Bipartisan Budget Act of 2013). In a fiscal climate in which the department’s overall budget can increase only slowly, continued rapid growth in military health care costs could force DoD to reduce spending in other areas, such as force structure, military readiness, and weapons modernization.

Policymakers have considered various initiatives to slow federal spending for health care in general, some of which could apply to DoD. CBO examined three:

  • Better management of chronic diseases,
  • More effective administration of the military health care system, and
  • Increased cost sharing for retirees who use TRICARE.

In CBO’s judgment, only the last of those approaches has the potential to generate significant savings for DoD. The other two could generate modest savings, but they would not address the primary drivers of health care costs for DoD.

Better Management of Chronic Diseases

Disease management programs aim to reduce costly emergency room visits and hospitalizations by better monitoring and controlling patients’ symptoms before they become acute. Although disease management programs have the potential to improve health outcomes, DoD’s experience to date suggests that savings from such programs would probably be relatively small, perhaps several tens of millions of dollars each year.

More Effective Administration of the Military Health Care System

CBO explored two such approaches: close DoD’s medical school, the Uniformed Services University of the Health Sciences (USUHS), while expanding the number of scholarships provided to students attending civilian medical schools; and hire more auditors to reduce fraud. Substituting scholarships for tuition-free medical education at USUHS would reduce costs but by only a small amount because the school itself is small. Reducing fraud by increasing the number of auditors is intuitively appealing, but DoD’s Office of Program Integrity is small, so even doubling its size would result in relatively little savings.

The savings realized from either of those measures would range from a few million dollars to about $150 million a year, significantly less than the savings that would result from cost-sharing options.

Increased Cost Sharing for Retirees Who Use TRICARE

CBO analyzed three options for increasing the share of health care costs borne by users of TRICARE:

  • Option 1: Increase medical cost sharing for beneficiaries who have already retired from the military but who are not yet eligible for Medicare (sometimes called working-age retirees, they are generally between the ages of 40 and 65).
  • Option 2: Make working-age retirees and their families ineligible for TRICARE Prime, the most costly program for DoD, but allow them to continue using other TRICARE plans after paying an annual fee.
  • Option 3: Introduce minimum out-of-pocket requirements for Medicare-eligible retirees and their family members (generally those over 65 years of age) to access TRICARE for Life.

Assessing the budgetary effects of the options is complicated because each option could affect the behavior of current TRICARE beneficiaries. For example, higher out-of-pocket costs for TRICARE would cause some current users to switch to other forms of health insurance. If they switched to other federal plans (such as that offered by the Veterans Health Administration), spending for those plans would increase. If they switched to health insurance provided by their current employer, a greater share of their compensation would become nontaxable, reducing federal tax revenues.

The reduction in the federal deficit from these options over the next 10 years, including effects on spending by DoD and the other uniformed services, the Department of Veterans Affairs, Medicare, the Federal Employees Health Benefits program, and Medicaid, would range from roughly $20 billion to $60 billion, if lawmakers reduced total appropriations accordingly (see the first three columns in the table below).

Military Retirees' Cost Sharing table

The estimated reductions for the three options may not be additive, however. In particular, if Option 2 was implemented and working-age retirees were prohibited from enrolling in TRICARE Prime, Option 1—allowing those enrollments but at a higher fee—would be precluded. In addition, the size of the savings would depend on the way in which the new fees were implemented. These estimates reflect the assumption that the options would be fully implemented in 2015. If the new measures were phased in more slowly, or if exemptions were provided for retirees in poor health or for those with lower earnings, the estimated spending reductions would be smaller.

Putting aside the effects on other agencies, the effect of those options on DoD alone would be different (see the fourth column in the table above). Option 2, which would eliminate the TRICARE Prime benefit for all military retirees and their families, would have the largest effect, reducing DoD’s funding for health care by about $90 billion (or 17 percent) over the 2015–2023 period, CBO estimates. Implementing either Option 1 or Option 3 would lower DoD’s budget for military health care by $24 billion (or 5 percent) and $18 billion (or 3 percent), respectively, from 2015 through 2023.

Those options could discourage some people from using health care services, and some patients could have adverse health outcomes if the higher costs caused them to delay seeking care. Moreover, some military retirees argue that they initially joined the military and remained for their entire careers with the understanding that they would receive medical care for free or at a very low cost after retiring. Significantly limiting TRICARE coverage for military retirees and their dependents would impose a financial cost on many of those beneficiaries and could adversely affect military retention. Some observers note, however, that the current system favors only a small fraction of military retirees because most people who join the military do not serve an entire career and will never qualify for retiree medical care through TRICARE. They argue that military health care benefits were originally intended to supplement, and not replace, benefits offered by civilian employers or by Medicare once service members retired.