Budget Options
December 8, 2016

Mandatory Spending Health Option 6

Function 550 - Health

Introduce Minimum Out-of-Pocket Requirements Under TRICARE for Life

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Mandatory Outlays                        
  MERHCF 0 * * -1.4 -2.4 -2.6 -2.8 -3.0 -3.2 -3.3 -3.7 -18.6
  Medicare 0 0 0 -0.4 -1.1 -1.3 -1.4 -1.4 -1.5 -1.6 -1.5 -8.7
    Total 0 * * -1.9 -3.4 -3.9 -4.1 -4.4 -4.7 -5.0 -5.2 -27.3

This option would take effect in January 2020.

MERHCF = Department of Defense Medicare-Eligible Retiree Health Care Fund; * = between zero and $50 million.

TRICARE for Life (TFL) was introduced in 2002 as a supplement to Medicare for military retirees and their Medicare-eligible family members. The program pays nearly all medical costs not covered by Medicare and requires few out-of-pocket fees. Because the Department of Defense (DoD) is a passive payer in the program—it neither manages care nor provides incentives for the cost-conscious use of services—it has virtually no means of controlling the program’s costs. In contrast, most public and private programs that pay for health care either manage the care or require enrollees to pay deductibles or copayments up to a specified threshold. In 2015, DoD spent $10 billion for the care delivered to Medicare-eligible beneficiaries by military treatment facilities and by civilian providers (in addition to the amount spent for those patients through Medicare).

This option would introduce minimum out-of-pocket requirements for TFL beneficiaries. For calendar year 2020, TFL would not cover any of the first $750 of an enrollee’s cost-sharing payments under Medicare and would cover only 50 percent of the next $6,750 in such payments. Because all further costs would be covered by TFL, enrollees would not be obligated to pay more than $4,125 in 2020. Those dollar limits would be indexed to growth in average Medicare costs (excluding Part D drug benefits) for later years. Currently, military treatment facilities charge very small or no copayments for hospital services provided to TFL beneficiaries. To reduce beneficiaries’ incentives to avoid out-of-pocket costs by switching to military facilities, this option would require TFL beneficiaries seeking care from those facilities to make payments that would be roughly comparable to the charges they would face at civilian facilities.

This option would reduce spending for Medicare as well as for TFL because higher out-of-pocket costs would lead beneficiaries to use somewhat fewer medical services. All together, including some small implementation costs in 2018 and 2019, this option would reduce federal spending devoted to TFL beneficiaries by $27 billion between 2018 and 2026, the Congressional Budget Office estimates. About two-fifths of those savings would come from reduced spending for medical services both from Medicare and from the fund that pays for TFL expenditures because of reduced demand for those services. The rest would represent a shift of spending from the federal government to military retirees and their families.

An advantage of this option is that greater cost sharing would increase TFL beneficiaries’ awareness of the cost of health care and promote a corresponding restraint in their use of medical services. Research has generally shown that introducing modest cost sharing can reduce medical expenditures without causing measurable increases in adverse health outcomes for most people.

A disadvantage is that this option could discourage some patients (particularly low-income patients) from seeking preventive medical care or from managing their chronic conditions under close medical supervision, which might negatively affect their health.