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[H.A.S.C. No. 107–17]








MAY 17, 2001

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For sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2250
Mail: Stop SSOP, Washington, DC 20402-0001



JOHN M. McHUGH, New York, Chairman
LINDSEY GRAHAM, South Carolina
JIM RYUN, Kansas
ROB SIMMONS, Connecticut
JO ANN DAVIS, Virginia
ED SCHROCK, Virginia
W. TODD AKIN, Missouri

MARTY MEEHAN, Massachusetts
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BARON P. HILL, Indiana
SUSAN A. DAVIS, California

John D. Chapla, Professional Staff Member
Thomas E. Hawley, Professional Staff Member
Michael R. Higgins, Professional Staff Member
Edward P. Wyatt, Professional Staff Member
Debra S. Wada, Professional Staff Member
Nancy M. Warner, Staff Assistant






    Thursday, May 17, 2001, TRICARE Managed Care Support Contracts: Lessons Learned and Future Contracts

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    Thursday, May 17, 2001

THURSDAY, MAY 17, 2001


    McHugh, Hon. John M., a Representative from New York, Chairman, Military Personnel Subcommittee

    Sanchez, Hon. Loretta, a Representative from California, Acting Ranking Member, Military Personnel Subcommittee


    Backhus, Stephen P., Director, Veterans' Affairs and Military Health Care Issues, U.S. General Accounting Office

    Baker, David J., President and CEO, Humana Military Healthcare Services

    Farmer, Brig. Gen. Kenneth L., Jr., U.S. Army, Medical Corps, Commander, Western Regional Medical Command, Madigan Army Medical Center

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    Howes, David H., M.D., President and Chief Medical Officer, Martin's Point Health Care

    Martin, Rear Adm. Kathleen, U.S. Navy, Nurse Corps, Commander, National Naval Medical Center

    McIntyre, David J., Jr., President and CEO, TriWest Healthcare Alliance

    Nelson, David R., President, Sierra Military Health Services, Inc.

    Rodgers, Maj. Gen. Lee P., U.S. Air Force, Commander, 59th Medical Wing, Lackland Air Force Base

    Woys, James E., President and Chief Operating Officer, Health Net Federal Services


Backhus, Stephen P.

Baker, David J.

Farmer, Brig. Gen. Kenneth L., Jr.

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Howes, David H., M.D.

Martin, Rear Adm. Kathleen L.

McHugh, Hon. John M.

McIntyre, David J., Jr.

Nelson, David R.

Rodgers, Maj. Gen. Lee P.

Sanchez, Hon. Loretta

Woys, James E.


[The Documents submitted for the Record can be viewed in the hard copy.]


[The Questions and Answers submitted for the Record can be viewed in the hard copy.]

Ms. Davis of VA.
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Mr. McHugh


House of Representatives,
Committee on Armed Services,
Military Personnel Subcommittee,
Washington, DC, Thursday, May 17, 2001.

    The subcommittee met, pursuant to call, at 9:02 a.m., in room 2118, Rayburn House Office Building, Hon. John McHugh (chairman of the subcommittee) presiding.


    Mr. MCHUGH. Good morning. I call the subcommittee to order, and we want to welcome you all here today.

    We understand we will have votes at about 10 o'clock. So just to prepare everyone, we also have a number of other markups and classified briefings involving both the International Relations Committee and the Armed Services Committee of which I am a member. I, of course, will stay here, but I do think it will have some impact upon attendance. But we thank you for your presence.

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    As part of the implementation of the nationwide TRICARE managed-care system, military beneficiaries have several options for obtaining health care services outside of the military treatment facility (MTF). The outlet most commonly used was the Civilian Health And Medical Program of the Uniformed Services, also know as CHAMPUS. Under the CHAMPUS program, beneficiaries self-referred to providers for outpatient care and, under some circumstances, received inpatient services as well. Other sources of care included civilian contract clinics operated by the services. In the years leading up to TRICARE, several demonstration programs were conducted to evaluate alternative strategies for providing health care outside military hospitals and clinics. These included the Army Gateway-to-Care program, CHAMPUS Reform Initiative, Catchment Area Management and a small demonstration program known as TRICARE operating in the Tidewater region of Virginia.

    In response to runaway cost increases in the CHAMPUS program and in an attempt to get some control over the quality of care being provided to military beneficiaries, the Department of Defense implemented the current triple-option TRICARE program.

    The program is managed through 12 regional lead agent offices, each supported by a comprehensive managed care support contract. Five companies currently hold all 12 of those contracts.

    The first contract was awarded to Health Net, the former Foundation Federal Health Services, for care in TRICARE Region 11 covering the northwest of the United States, and that was in fiscal year 1995.

    The most recent award was to Sierra Military Health Services to support TRICARE in Region One, the northeast United States, in fiscal year 1998. Nine of the contracts are operating under the first generation contract vehicle, TRICARE 1.0, and there are three operating under the second generation, TRICARE 2.0.
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    Over the next several weeks, I am sure we will have ample opportunity to hear from the senior leaders in the Office of the Secretary of Defense and the Surgeons General of the military services on the future of TRICARE.

    Today, however, we are going to hear from senior managers who are directly accountable for ensuring patients get the care they need when they need it. As I was reviewing your statements, speaking to the first panel, I was struck by the themes that were common across all of the regions. And I have read all of the testimony. All contractors and both generations of contracts had these common themes. I was glad to read many of your references to maintaining the readiness of the military health care system. That is, after all, the main reason for having medical personnel in uniform at all.

    Beyond that, however, were several other common themes, including the need for program stability and predictable, full and timely funding. Your statements also recognize the importance of unifying the TRICARE brand and the essential partnering among all of the TRICARE shareholders in achieving TRICARE's goals.

    In today's hearing, we will explore these themes with two panels of witnesses. The first panel represents commanding officers of major military medical facilities and regional lead agents. Also on the first panel are representatives of the Uniformed Services Family Health Plan and the General Accounting Office.

    And, as I said, we welcome you all here this morning.

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    The second panel includes four of the presidents and chief executive officers of the five current managed care support contracts.

    We do, as I believe I mentioned, have a vote scheduled at 10. We also have a relatively ambitious schedule with the two panels. As we have done in the past, however, I would say to the Members, we will attempt to forego the five-minute rule.

    I think it is much more important that we have the opportunity for Members to fully explore their areas of concern and questions. And so, while we will attempt that, I would still urge the Members to try to be as direct as possible.

    And before we do turn to our first panel of witnesses, I am pleased to yield to the gentlelady from California, who is serving today, at least today, as our ranking member.

    Ms. SANCHEZ. Just temporarily.

    Mr. MCHUGH. Well, I can also hope, Loretta, so I am happy to yield to you, Loretta, please.

    [The prepared statement of Mr. McHugh can be found in the Appendix.]


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    Ms. SANCHEZ. Thank you, Mr. Chairman. And because I am losing my voice and I actually need some health care myself, my comments will be very short this morning. I want to join the chairman in welcoming today's witnesses.

    And, you know, the health care system of the United States in general is a very complicated issue. And yet, with the military retirees and family members, we are talking about a large portion, actually, of the United States people and what type of medical care they receive. So I think this is probably one of the most important hearings that we can hold.

    And, you know, over the last few years we have really tried to make some changes and tried to make the plans more flexible. And I am really looking forward to what the title of this hearing is about, lessons learned and what we can do to improve in an area we know costs continue to go up, as people are more spread out in the world today than ever before.

    You know, we spend about $18 billion on military health care. And of that, military treatment facilities spend nearly $8 billion for direct care and purchase $5.2 billion from the private sector to provide this health care service to the personnel, to retirees and to their family members.

    The managed care support contracts receive about $3.8 billion of the $5.2 billion allocated. But still there is this perception that within the direct care system that managed care support contracts are consuming the majority of these defense health program costs.

    This perception has created an apparent competition, I think, between the military treatment facilities and the managed care support contractors. And quite frankly, TRICARE was never established to compete directly against the military care system, but rather established to help improve the quality of health care to military beneficiaries to reduce cost and to support the dynamic changes within the direct health care system.
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    The 12 TRICARE regions are managed by military lead agent offices and are supported by managed care support contracts. And while the military lead agents are required to coordinate the activities of all the military treatment facilities in their region, along with the local managed care support contractor, they really virtually have no authority over resources allocated to their region. So instead of walking tall and carrying a big stick, lead agents are sometimes left carrying a twig.

    And last year, you know, we passed quite a few things with respect to health care, trying to improve the system, particularly for our Medicare eligible military retirees. And some of those things are coming to fruition.

    Seven weeks ago, the Department of Defense implemented a pharmacy benefit for our Medicare eligible military retirees, which I am told has been a resounding success. Seven weeks, I do not know, we will take a look at it and maybe you can give us some information on that.

    Another historic moment: The integration of Medicare eligible military retirees back into the TRICARE system is approaching. And so we really need to take a look at all of this: the military treatment facilities, the managed care contractors, the lead agents, the Uniformed Services Family Health Plan providers and really all of the stakeholders to see what we are doing right, to work towards a common goal to meet the health care needs of the military personnel, the retirees and their family members.

    So once again, Mr. Chairman, I want to thank the panelists before us. And I look forward to hearing with their own expressions what is happening in our health care system. Thank you.
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    Mr. MCHUGH. I thank the gentlelady and particularly appreciate her comments, which I think very well frame both the reason why we are here and, of course, the major challenges that we are facing.

    I would be happy to yield to any of the other members of the subcommittee who may wish to make an opening statement. Ms. Davis. Ms. Tauscher. Ms. Davis. They, like I, are very anxious to hear your comments.

    The first panel today is comprised of TRICARE lead agents and military treatment facility commanders, a representative, as I said, of the Uniformed Services Family Health Plan and of the General Accounting Office. Each of you has participated or closely observed the military health system (MHS) as the TRICARE program has matured from one fledgling contract to a nationwide managed care program.

    Your experiences and observations, I am sure, will help the committee to understand what works, what does not, and how we might support continued improvements in the TRICARE program. And again, thank you for being here and for offering your testimony.

    We do have another panel of witnesses. As you have heard, the five-minute rule is waived for you as well. However, we do have your full statements as prepared. They will be entered into the record in their entirety. So, to the extent possible, we would ask you to try to summarize those comments so we can get to the exchange between yourselves and the Members.

    And before we begin, let me just introduce the panel to those on the subcommittee and who have joined us here this morning. Major General Lee Rodgers, United States Air Force, Commander, 59th Medical Wing, Lackland Air Force Base; Brigadier General Kenneth Farmer, United States Army, Commander, Western Regional Medical Command, Madigan Army Medical Center; Rear Admiral Kathleen Martin, United States Navy, Commanding Officer, National Naval Medical Center; David H. Howes, M.D., President and Chief Medical Officer, Martin's Point Health Care; and Mr. Stephen Backhus, Director of Veterans' Affairs and Military Health Care Issues, United States General Accounting Office.
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    The last time I am going to say this to you this morning, welcome. And why don't we begin, as I have read those, starting from our left with Major General Rodgers. Sir?


    General RODGERS. Mr. Chairman, Ms. Sanchez, members of the committee, thank you for the opportunity to represent the Air Force Medical Service as a lead agent and facility commander.

    I am the Commander of the 59th Medical Wing at Wilford Hall Medical Center, Lackland Air Force Base, San Antonio, Texas, as well as the lead agent for TRICARE Southwest, which is DOD Region Six. This is a four-state area comprising most of Texas, Arkansas, Oklahoma and Louisiana.

    We serve approximately 1 million beneficiaries in our region making us one of the largest HMOs in the state and the region. Region Six beneficiaries are supported by a network of 17 military treatment facilities and more than 23,000 civilian providers and facilities.

    Our managed care support contractor and partner since 1995 is Health Net Federal Services, formerly known as Foundation Health. Our contractor support developed over the last five-plus years has matured, and we now have sufficient network coverage over the region.
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    Those areas with more limited network coverage are consistent with the general distribution of civilian services and providers available in these communities.

    I am happy to say that our patient and network provider surveys show high levels of patient satisfaction, growing provider support for the referral and claims payment process, and partnership and integration with our contractor.

    Another success is that the frequency and quality of communication between military departments has improved from sharing a common managed care support contract. Also, between the contractors themselves, I see improved continuity of care and portability for our beneficiaries. Our comprehensive approach to managing care for our populations, based on the principles of population-based health care, is strides ahead of the old standard, CHAMPUS.

    We are proud to state that, whether or not our beneficiaries are served by an MTF, they have the same access to and support from TRICARE service centers and support staff.

    Those who are not served by an MTF are directly enrolled to civilian primary care managers and enjoy the same level of HMO-type support as people served by our MTFs. The bottom line to this is that TRICARE Prime is now a recognized health care plan in this industry.

    However, we recognize there is still much room for improvement. A fundamental and inherent challenge to TRICARE is the requirement to squeeze an entitlement program into a risk-based model.
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    This has resulted in ill-defined performance expectations on the part of patients, conflicting incentives for MTF commanders and a dynamic and evolving benefit structure that presents significant challenges for both contractors and MTF commanders.

    TRICARE lead agents differ from our HMO managers in that while having the responsibility, we do not have the full authority over resource allocation decisions that directly impact the provision of health care.

    While we are able to optimize our services in many cases, we are limited from maximizing them. We do recognize that even if we had full authority, it would still take time for the culture and mindset of both staff and patients to accommodate that approach.

    Another concern is effective knowledge management. Our information management structure is only barely uniform across the services and even less so between contractors. We are all working hard to address this issue.

    Looking forward, I see a number of opportunities the MHS can pursue with the continued support of Congress. First, we are delighted with your success at fulfilling the promise for our retired members. I will not deny that it presents some challenges, but we are working jointly, the services, the Department of Defense and our contractors, to realize this important goal.

    I believe the key to our success will be turning first to our MTFs where we have a significant investment and developing broad-based, full-service clinical models and then building a national network of health care using contractor support systems.
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    We have a strong foundation at Wilford Hall Medical Center. A recent joint commission on accreditation of health care organizations rated Wilford Hall very high. It recognized our advances in developing an integrated clinical database, which has pushed us forward in automating our patient documentation.

    We are proud of other technological advances, such as digitized radiography, laboratory robotics and miniaturized deployable packages, all of which will help our people work smarter than ever possible in years before.

    We have also seen great success with our optimization efforts, carefully designed to meet the needs of a widely diverse population, from young basic trainees to active duty to our senior retired members.

    Wilford Hall and our other military medical treatment facilities around the globe stand ready to provide quality health care to millions of Americans who serve or who have served their country well. And TRICARE is the linchpin that has made this happen and will be the enabling force to support military medicine in the future.

    In closing, we all thank you for your continued support.

    [The prepared statement of General Rodgers can be found in the Appendix.]

    Mr. MCHUGH. Thank you, General. General Farmer.

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    General FARMER. Mr. Chairman, members of the committee, I am Brigadier General Kenneth L. Farmer, Jr., and it is my privilege to serve as the lead agent for TRICARE Northwest Region 11 and Commanding General of the Army's Western Regional Medical Command. I thank you for this opportunity to appear before your committee.

    This morning, I will present some of my lessons learned and observations as a lead agent working to make TRICARE successful. And I will summarize my written statement that I previously provided to you. And then will, of course, look forward to responding to your questions.

    TRICARE Northwest, or Region 11, serves 370,000 beneficiaries in Washington, Oregon and a small part of northern Idaho. In our six years of experience with the TRICARE program, we have matured to what many consider to be a very successful program for the delivery of TRICARE through regional partnering of our uniformed services military treatment facilities, or MTFs, and our managed care support contractors.

    TRICARE Northwest has been the test bed for many of the Department of Defense's (DOD), new initiatives. And since last October, we have been tasked to implement a pilot project recommended by the Defense Medical Oversight Committee and subsequently directed by the Undersecretary of Defense for Personnel and Readiness and the Assistant Secretary of Defense for Health Affairs.
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    The purpose of this project is to evaluate the role of an empowered, strengthened lead agent for regional management of the military health system in Region 11 while retaining existing command relationships within the services.

    Under the mandated pilot project, our TRICARE executive council developed a regional business plan with the basic premise that each of us realizes that our personal success is as much determined by the success of the region at large as by our performance at each individual facility.

    I have charged our MTF commanders with optimizing the productivity and utilization of their hospitals and clinics consistent with sound business practices. To do this requires adequate support staff for clinicians consistent with nationally recognized standards. We have begun making strides toward these standards, but we are not there yet.

    We are focusing on business initiatives that will clearly identify the payoffs for our investment. This type of targeted investment of resources and optimization of the direct care system is essential to its success and will decelerate the rising cost of health care in the region while improving access to health care and patient satisfaction.

    I hold MTF commanders accountable for all defense health program dollars expended, specifically in their respective catchment areas and collectively in the region, not only for the direct operations and maintenance dollars required to run the facilities, but accountability as well for the CHAMPUS money spent to provide care to beneficiaries they send downtown.
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    The trends identified over the past five years in our region were that MTF purchasing power was decreasing one percent a year, staffing was down two percent a year and MTF visits were down three percent a year with a concurrent increase in the managed care support contract costs of three percent a year. Our initiatives are based on reinvestment in the MTFs to reverse these trends.

    A significant challenge facing MTFs is competition with the civilian sector for hiring health care professionals, such as nurses, who we must pay significantly more to recruit and retain than just a few years ago.

    Our business plan initiatives involve the sharing of health care personnel between facilities in the region, such as our circuit-rider program utilizing specialists, largely from Madigan Medical Center, who travel to outlying facilities to provide care to beneficiaries who in the past have been referred downtown.

    We also implemented a regional capability to manage pharmacy expenditures, which, as you know, are skyrocketing nationally, as well as regional standardization of medical supplies and equipment. With regional incentive agreements, we will save, and have already begun to save, dollars and improve processes. As our business plan is a living document, we are aggressively exploring additional initiatives in all areas.

    I do believe that more regional control and authority vested in the lead agent will lead to improved business processes. In the realm of resource management, we should align funding flow with organizational responsibility and management authority.
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    The lead agent should be empowered to invest purchase care dollars to reinvest in the MTFs with the understanding that workload and dollars previously ceded to the contractor will be brought back into the MTFs. The lead agent must also have real-time visibility on budget execution across service lines and a voice in programming.

    The pilot project actively includes the managed care support contractor. The next generation of contracts needs to continue managed care concepts while encouraging contractors to utilize best industry practices to deliver health care and associated administrative services.

    This needs to be in a manner that focuses on customer satisfaction and is responsive to the changing needs of MTF commanders and their beneficiaries at the regional and local level. Implementation of health care policy and program benefits is more effectively managed at that local and regional level where there is the best understanding of needs.

    Historically, the Veterans Health Administration, VHA, and DOD medical facilities in our region have cooperated well. In April, I visited the Veterans Integrated Service Network Director and Medical Director in our region. Together, both parties expressed strong sentiment that further partnering was the right thing to do and we re-affirmed our commitment to this effort where it makes good sense.

    To paraphrase Lieutenant General James Peake, the Army Surgeon General, TRICARE Northwest is much more than an HMO. Our system of integrated care, combining a major Army teaching medical center, two Navy community hospitals, Air Force and Coast Guard health clinics, in teamwork with our partner, Health Net Federal Services, provides a base for the uniformed services and a readiness training platform to support them at home and abroad.
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    TRICARE Northwest stands ready to provide quality health care to the men and women who defend our Nation, their families and to those who came before them.

    I would like to thank this committee for your continued commitment and support to quality care for all of our beneficiaries. Thank you.

    [The prepared statement of General Farmer can be found in the Appendix.]

    Mr. MCHUGH. Thank you, General. Admiral Martin.


    Admiral MARTIN. Good morning, Mr. Chairman and distinguished members of the committee. Again, I am Rear Admiral Kathleen Martin, Commander, National Naval Medical Center, Bethesda, and it is my pleasure to be here.

    Today, I would like to present my observations regarding TRICARE from the perspectives of a commanding officer of a medical center in Region One. I have been the commanding officer of military treatment facilities in three very different regions: Southwest, Region Nine in California, Southeast, Region Three in South Carolina and now in the National Capital Area Region One.

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    What type of health care was TRICARE supposed to create? From a philosophical perspective, TRICARE was crafted to ensure that the patient was at the center of the entire health care delivery system. Goals of this system were to include: controlled costs, common business rules, high quality care, improved claims processing, standardized access, worldwide portability, seamless re-enrollment from region to region.

    At the local level, TRICARE was modeled on a premise that the patient would no longer wait for hours on the phone to make a telephone appointment or in a waiting room for their name to be called and would have one provider responsible for meeting and monitoring all of their primary health care needs in a timely manner.

    What was the actual outcome of TRICARE implementation? There has been noted improvements in the military health system since the advent of TRICARE, particularly in mature regions where TRICARE has existed the longest and where the civilian marketplace is accustomed to the managed care environment, such as in Southern California and in the Northwest.

    Region One, the newest region, has yet to reach this level of maturity. In Region One, I believe that there are two primary unmet goals: one, the patient is not the focus of our health care system; and second, the contracting process is so cumbersome and fragmented and clearly does not provide the hospital commanding officers the needed flexibility to ensure the patients are provided effective, efficient and high-quality health care.

    These unmet goals, in my opinion, are the result of a misaligned system that begins with the contracting process. In fact, I believe the contracting process has driven the design of our health care system by having first designed a health care system followed by the creation of a contract to support that system. This incongruity in contract development ultimately manifests itself at the local level with different incentives for each party involved.
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    The ability to meet our goals has also been hampered by the multiple changes to the two contracts in our system: the inability for the commanding officer to negotiate local terms, provide financing and regionalize central appointing, to name a few.

    What resources and systems do we still need? In defining what resources and systems military medicine needs to ensure TRICARE ultimately fits our original vision, I will begin with what Vice Admiral (R.A.) Nelson, the Navy Surgeon General, has previously relayed to various Congressional subcommittees. Namely, we need a stable, predictable and sufficient source of funding for the direct care system.

    Inclusive in the requirement for adequate and stable funding is the need to have adequate maintenance dollars to keep our facilities up-to-date. Additionally, we need to be able to restructure and increase flexibility in our military and civilian staffing regulations, so that we can compete with the salaries in the health care marketplace.

    From the systems point of view, I believe military medicine needs three improvements. First, command and control should be centralized so that the direct care system can make the best business decisions.

    Second, future versions of TRICARE contracts should provide the hospital commanding officer greater flexibility and responsibility on how limited TRICARE dollars are spent.

    And third, I believe that a hospital commanding officer needs adequate resources that would allow us to truly manage the appropriate health care of our vast array of beneficiaries.
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    What still must be done to continue the success of TRICARE? There is much to be done to ensure the success of TRICARE. Of all the changes that TRICARE must undergo, it must be noted that TRICARE has made us recognize that there must be greater integration and alignment at all levels.

    In closing, I wish to assure you that I, and all who work in the military health system, am committed to making TRICARE the very best health care system for our patients. And we are committed to working with Congress to ensure the right actions are taken by all involved with military health care.

    Thank you for listening and for your dedicated support.

    [The prepared statement of Admiral Martin can be found in the Appendix.]

    Mr. MCHUGH. Thank you, Admiral. Dr. Howes.


    Dr. HOWES. Mr. Chairman and distinguished committee members, thank you very much for the opportunity to testify today.

    I am Dr. David Howes, in the interest of full disclosure, a family physician and also the Chief Executive Officer of Martin's Point Health Care, a Uniformed Services Family Health Plan (USFHP), in Portland, Maine. I am here today representing the seven USFHP facilities, which grew out of the old public health direct care system and which have been providing care for military retirees, their dependents and other military beneficiaries now for 20 years.
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    In this system there are seven heterogeneous facilities. These include: PacMed clinics in Seattle; Johns Hopkins, well known to all of you, in Baltimore; Fairview Hospital, which is part of the Cleveland Clinic System; Christus Health, serving southeast Texas and western Louisiana; Brighton Marine Health Center in eastern Massachusetts and Rhode Island; St. Vincent Catholic Medical Centers, serving New York City and the New Jersey area; and, of course, Martin's Point up in Maine, serving all of Maine and southern New Hampshire.

    We very much appreciated the support of this committee over the past years in providing care to the military beneficiary and are, as you will hear, ardent believers in the value of the system and have a lot to teach you, in terms of lessons learned, we believe.

    What distinguishes these facilities? Why are these facilities different than other facilities? And why are they a unique part of this system?

    The first piece of this puzzle is that these are integrated health care delivery systems that are designed to and make their way by caring for enrolled populations. So they are very oriented about population health, and how do we design programs that are optimal for that program in that area? They are local, not-for-profit, mission-driven, provider-based enterprises. Care is approached from a provider rather than from an insurer perspective.

    On the other hand, we accept full risk for the services that we provide. Full risk provides us with the opportunity to flexibly design the care delivery system. And even more important, it provides us with the opportunity to invest in programs which, over the long term, will provide good care, good economy and high satisfaction for the patient populations that we serve.
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    At the center of our system, the primary care manager is really an absolutely essential member of the care team. And 90 percent of our members identify closely with their primary care managers.

    Last, we really have focused on our customer service. And the responsiveness and the quick resolution of problems in these systems has been a characteristic of the systems. If you take a look in the testimony that we gave you, you can see that the results of that are that we have very high patient satisfaction and very high retention over time.

    But another way to tell it is to tell you about the lady who I met on an airplane, one of those late-night airplanes into Portland, Maine, that had about six people on it, who began to chat with me and who asked me who I was and what I did. I told her that I was with Martin's Point Health Care. And she said, ''Oh, I am a member at Martin's Point. I just love it. I feel so badly for those people in managed care.'' [Laughter.]

    Your staff has asked us for some suggestions based on our experience with the care management of the over-65 retiree. And we have tried to distill down those things that we have learned over the past 20 years and, particularly, over the past 10 years, that we feel are essential for optimal care of this population. We have boiled it down to three suggestions and could certainly make more as time went on, were they of value for you.

    The first point is that TRICARE For Life must make allowances for the additional time and resources that the over-65 population require. These people are physically slower. Many of them have sensory limitations. Some of them have cognitive limitations. And at every step in the process, they require more time and more resources.
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    They have twice as many patient visits per year. And, in fact, they use five to 10 times as many hospital beds. So the resource requirement for this population is far in excess of the resource requirement for the populations for which we have been providing care heretofore.

    The second piece of this is that we feel that TRICARE For Life needs to recognize the significance our older military attach to their primary care manager. It is very important that these individuals be supported with excellent infrastructure.

    Over 90 percent of our patients identified their primary care manager by name and our elderly patients have often been with the same primary care manager for five to 10 years. It dramatically improves the quality of the experience for the patient. It dramatically improves the quality of care, and it provides the opportunity to derive economies.

    The last point that we would make is that care management models really need to be vigorously promoted as the best alternative for TRICARE For Life beneficiaries. We believe that the Department of Defense should develop incentives to enroll beneficiaries in care management models. And we believe that the costs of such incentives would be quickly realized by managing care within a structured environment.

    Without a structured environment, similar to the USFHP, we envision considerably higher costs, we envision much greater quality management challenges, and we believe, over time, we will see lower beneficiary satisfaction.

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    Just to use a homely example of a program where we have seen enormous beneficiary satisfaction, we look at our organization's congestive heart failure management program. In the first year, our congestive heart failure management program, which consists of an educational program for patients and families and a regular weekly phone call from a nurse who is in the clinic where the patient is cared for, have reduced hospital visits to the emergency room by 75 percent and they have reduced hospital days by 40 percent. But the best part of it, from our perspective, is that the patients love it, and we know that they are getting superb quality care.

    We have a lot of these lessons from our experience that we are very anxious to share and would love working with you to do so.

    In closing, we would like to recognize the hard work of the staff of the committee. And thank you for asking us to be a part of this important work.

    [The prepared statement of Dr. Howes can be found in the Appendix.]

    Mr. MCHUGH. Thank you, Dr. Howes. Mr. Backhus.


    Mr. BACKHUS. Thank you. Good morning, Mr. Chairman and members of the subcommittee. I am very, very pleased to be here today to discuss lessons learned from the TRICARE contracts in their implications for the future.
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    Over the years, TRICARE has matured and has made many positive strides. Today, 90 percent of beneficiaries are satisfied with the overall quality of their care. Some 80 percent or over 80 percent are satisfied with their access to care, and 96 percent of medical claims are now being processed within 30 days. These successes are due in large part to the partnership efforts of DOD and the TRICARE contractors.

    However, it has not been easy, as I believe there are shortcomings with the current contracts that those parties have had to work through. My statement today highlights some of these shortcomings, as well as issues to be considered in developing future TRICARE contracts. It is based on a substantial body of work we have performed over the last seven years.

    First, in response to DOD's contract solicitation, bidders have had to prepare complex and lengthy proposals which were costly to produce. For example, one complete proposal consisted of 33,000 pages, and as we have previously reported, these proposals cost between $1 million and $3 million just to develop. As a result, in our view, competition has been limited to companies with substantial financial resources.

    Obtaining sufficient competition may be key to obtaining the best quality for the best price. Therefore, for future contracts, DOD needs to carefully weigh the impact of its decisions on competition. Smaller, simpler contracts covering smaller geographic areas may well enhance competition. However, such contracts would also present their own set of unique management challenges.

    Next, DOD's contract solicitations have been very prescriptive. DOD officials have told us that this is necessary to ensure a nationwide program under which beneficiaries and providers alike would be subject to the same requirements and processes regardless of where they live. However, bidders have told us that less prescriptive requirements emphasizing outcomes would give them flexibility to employ their own best practices with greater savings, but without adversely affecting the quality of care. Partnering with private industry, as DOD has done in the past, is a worthwhile endeavor and should be helpful in determining the degree of prescriptiveness needed. Ultimately, the contract design needs to be flexible enough to maintain a balance between DOD's goal of providing uniform benefits nationwide with the realization that the delivery of health care is local.
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    And last, further complicating the TRICARE contracts are the numerous adjustments that DOD has made to them. The TRICARE contracts are designed to have periodic adjustments to the contract price. However, these adjustments have been the source of contention between the contractors for many reasons, such as inaccurate and incomplete data DOD uses in calculating the adjustment amounts.

    In addition, outside of these regularly scheduled adjustments, DOD has made a total of over 1,000 modifications to the contracts via contract change orders. These changes are the result of new laws, regulations or DOD's own initiatives. As we have recently reported, DOD's poor management of the change order process resulted in a large backlog, which, when combined with other contract adjustments, have contributed to program instability. Because payments for contract adjustments are retroactive, program costs are difficult to predict. This in turn has led to DOD requesting additional funding from Congress to address budget shortfalls.

    In fiscal year 2000, Congress provided a supplemental appropriation of $1.3 billion, nearly half of which was designed for contract adjustments. Again, in fiscal year 2001, the TRICARE Management Activity (TMA), estimates a shortfall of $1.4 billion, over a third of which is due to the recent settlement of contract adjustments. In light of these difficulties, a more stable environment for future contracts is needed. For example, contract change orders could be issued on a regularly scheduled basis, such as annually, rather than on a continual ad hoc basis. More stable environments should also help DOD estimate a budget and budget health care costs more accurately, which would help it avoid future funding shortfalls.

    In conclusion, Mr. Chairman, given the long range of budget pressures and escalating health care costs, DOD faces a formidable, yet necessary, challenge in creating a new contract approach. To ensure that progress continues, sustained management and congressional oversight will be necessary.
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    This concludes my prepared statement. I will be happy to respond to any questions you or other members may have.

    [The prepared statement of Mr. Backhus can be found in the Appendix.]

    Mr. MCHUGH. Thank you very much, Mr. Backhus. And we appreciate you and your officers' help in this very important matter.

    Let me, before I yield to the other subcommittee members—and there are a lot of areas here that I know we would like to cover with not a lot of time—start with two questions, which could probably both be put under the category and heading of integration versus specialization.

    General Farmer and others talked about the need to do a better job of integrating between the Veterans and DOD efforts in these areas. I think that General Farmer spoke about that generally, but in his prepared statement he actually delineates some of those potential areas of cooperation: pharmacy, medical logistics and contracts.

    I know for a couple of you this is your first time before a congressional subcommittee. Many of us, myself included, are new to this subcommittee, so we are trying to learn, both the potential for progress and the barriers to that.

    One of the things that I have repeatedly heard since first being assigned to this, sometimes unlofty, seat, is that the underlying question of readiness, an important one, as I try to make a point in my opening comments, at times precludes that kind of integration.
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    Nevertheless, to some of the uninitiated, such as myself, there does seem to be, at least some, if not many, areas in which we could do a better job, both in terms of patient care and in terms of savings. And I was wondering if any of you would like to expand upon that, particularly as to what you see as the barriers to this and what, if anything, the subcommittee and Congress might do to facilitate the realization of those kinds of integration efforts?

    And I do not know, maybe if, General Farmer, because you really did highlight that, if you would like to take the lead on that.

    General FARMER. Yes, sir, Mr. Chairman. As I said in my written statement, I have recently visited with our regional VISN 20, Veterans Integrated Service Network 20, leadership, and we re-affirmed our commitment to that. But we are already doing a number of things.

    For example, in the pharmacy arena, we are purchasing pharmaceuticals off of a VA contract to the tune last year of a cost savings of about $450,000 using that contract, as opposed to other options that might have been available to us.

    In nutrition care, for example, Madigan and Bremerton both purchased their food products using a combined VA-DOD contracting mechanism to the tune of about $74,000 in this last year over what it would have cost if we had done it on our own.

    In clinical shared services, for example, Madigan has purchased, in the last year, audiology services from the VA to the tune of about $40,000 in savings over what it would have cost us if we had gone out into the city and network.
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    And on the other side, VA has purchased some inpatient care, particularly ICU care, from Madigan to the tune of about $300,000 in savings. But we see a variety of other options and alternatives as good business and integration and sharing between those two.

    I think you asked in your question, really, two different issues: one is VA, and I cited a few examples there, but the other was a readiness question. I do not know whether you wanted me to respond to that now or deal with that separately, sir.

    Mr. MCHUGH. Well, let me refine my statement, if I can. When I and others talk to DOD officials or to the lesser extent, quite frankly, VA folks, as to why this has not happened more frequently, the thing I hear, and maybe it is just what I pick up on, is that, ''Well, you know, integration causes problems, and our primary mission is readiness of our troops. And we have to make sure that that core mission is protected, and we are afraid that that might be eroded through significant integration.''

    Now, maybe they are just patting me on the head and telling me to go away. There might be other reasons. But whatever the cause, I am just curious why you think more of this has not happened and what, if anything, we can do to facilitate it, short of writing it in the law and saying, ''You shall.''

    General FARMER. Historically, the VA, from the standpoint of their medical centers and their educational programs, have been very closely aligned with university teaching medical center programs. That has been a historical tie and a strength of the VA. We have, in many cases, had some relationship between our military medical center programs and local VAs, because they integrated.
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    There has been some pull of that regionally to those university-affiliated programs. We are relooking that to see where it makes sense to do it on an integrated DOD-VA relationship.

    I do not see integration between the two, VA and DOD, as a detriment, further sharing relations as a detriment to our readiness mission. We certainly see readiness as a primary part of what we are all about.

    Maintaining a robust, direct care system in our military treatment facilities and maintaining education and training programs is an inherent part of our readiness and ability to deploy worldwide to take care of our forces.

    Mr. MCHUGH. Well, I appreciate that. And I will tell those three stars that you said they are wrong. No, I am kidding. [Laughter.]

    For that, I happen to agree with you intuitively, but I am, obviously, not the expert. General, you are the other lead agent or one of the other lead agents here.

    General RODGERS. Yes, sir, I would agree with what General Farmer said to the greater degree. I have worked in VA hospitals from the time I was a medical student back in the early 1970s. And I have seen great improvement, both in the VA and in the DOD side, as far as where we have come. And I have worked in partnership in DOD. In a previous job I was a lead agent for Region 10 and Commander of David Grant Medical Center, where we had actually a ward of VA within our facility. We felt that was a strength for both facilities.
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    The one concern I would have in relationship to readiness is, as we move closer, we can improve. But if we then make ''business decisions'' and decrease our inherent capability to respond to the contingencies, then we have hurt both systems. That being said, I think there is great opportunity in logistics and pharmaceuticals and contracts.

    Mr. MCHUGH. General Farmer mentioned that he and the VA have executive-level quarterly meetings. Do you have any counterpart to that?

    General RODGERS. Yes, sir.

    Mr. MCHUGH. Formal? You do.

    General RODGERS. They are invited to be part of our TRICARE quarterly conference.

    Mr. MCHUGH. Admiral, your perspective is technically somewhat different, but your experiences are much the same. Do you have any thoughts on that?

    Admiral MARTIN. Well, you asked about partnering and meeting. We, in Region One, meet quarterly with the VA. We have a federal health council meeting. And we have many agreements and partnerships with graduate medical education. And again, we are exploring the issue of specialty care referrals, treating all of our over-65 in the national capital area as well.

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    Mr. MCHUGH. What about outright facility integration?

    Admiral MARTIN. In the national capital area, we do not have much in the way of facility integration.

    Mr. MCHUGH. The physical opportunity does not exist. The other two gentlemen, anything on physical facility integration?

    General FARMER. Physical facility integration, I guess, the shared exit physical exams might fall under that arena. For a number of years, for example, Fort Lewis soldiers departing active duty for retirement or end-of-tour service get their physical exams done over at the American Lake VA in a shared arrangement between the DOD Army facility and VA, so that that physical exam serves the functional requirements of both the military and the VA.

    Previously, a departing soldier would have an exit physical from the Army and then have to go to the VA to have a physical with some slightly different requirements and so forth, and we have combined that locally. And I know that many other places across the system have combined that, too. That is, a sharing of clinical, but also a sharing of physical space.

    Mr. MCHUGH. Let me add a component to the question. Even though you may not have that opportunity, there are places in this country where literally a VA facility is across the street from a DOD facility. What do you view, if any, to be the challenges of that kind of integration? Is readiness then a problem or do you think that is a manageable challenge?

    General RODGERS. Sir, we have actually built several facilities in the last decades. Las Vegas, primarily, is most well-known. In Albuquerque, the Air Force actually inhabits space in the VA hospital. Out in Anchorage, Alaska, we have a joint facility. And, as I said, at Travis Air Force Base, we have actually built a VA clinic on the campus of the David Grant Medical Center. So there are ways that we can work together and not necessarily impact readiness. But that will continue to be our concern, as we approach any change.
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    Mr. MCHUGH. As it should be. Yes, Mr. Backhus.

    Mr. BACKHUS. May I jump into this?

    Mr. MCHUGH. Why not? [Laughter.]

    Mr. BACKHUS. Okay. We have studied this sharing issue for several years, have probably written three or four reports on this over the last decade and have, as recently as a year ago, published a report demonstrating, I think, that there are significant benefits for this kind of sharing and integration, but that there are substantial barriers currently to more of it being done.

    Mr. MCHUGH. Tell me more.

    Mr. BACKHUS. The issue of readiness, I think, comes into play depending on what level of integration we are talking about. If people view this as a merger of the two systems, then there becomes significant concern over who is going to be in charge. And, obviously, there is this need to maintain the military capability first and foremost, and they need to be very certain about that.

    But there are other levels of integration where I do not think the readiness issue is quite as significant because the military still has command and control over their resources. There are eight of these joint ventures where the two departments operate in the same facility, but they are separate in terms of command and control.
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    They are separate in terms of budgeting. They are separate in terms of staffing. They even have separate wards. Sometimes they have separate entrances to the facilities. Yet the staff treat each other's patients.

    Believe it or not, that sounds good, but it is one of the largest barriers because they operate essentially independently of each other. There is a need to think more conceptually and broader, I think, about how they can share resources, maybe have a unified budgeting and resource allocation system, share information technology and actually begin to gain some additional efficiencies from each other.

    There is a need to better integrate the TRICARE contractors into this process because right now under the rules, VA, in order to participate, has to be a TRICARE contractor or part of the TRICARE contract network, if you will. And the TRICARE contractors, in many cases, make the decisions as to whether the VA will participate or not. Can the VA produce a bill like the rest of the private sector? That has been a problem. There are these kinds of financial and management decisions that historically they have been unable to work through because they are protecting their own systems, essentially.

    Mr. MCHUGH. Cultural, I see. Thank you very much. I cautioned everybody about trying to stick to five minutes, and I violated it, and I apologize to my colleagues. So I have a number of other questions, but I will happily yield to the gentlelady from California, Ms. Sanchez.

    Ms. SANCHEZ. Thank you, Mr. Chairman. And you are the chairman, so you get to decide how long you get to talk. But I actually do have a lot of questions, too, some of which I will submit for the record.
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    I was very interested, Admiral, in the layout of your discussion, your statement, in particular with respect to your experience between Region Nine and Region One. And you mentioned that there was better service in Region Nine versus Region One. You mentioned that it was, you thought, a more mature versus new over here.

    What are the barriers that occur that do not allow Region One to look at Region Nine and learn quicker, make that maturity process smaller so that they can be as efficient or as accessible to the patient? Is it different facilities? Is it numbers of people moving through the system? Is it lack of communication? Is there an effort by Region One to look at other regions and see what they can bring, what lessons they can learn? What seems to make it so difficult for Region One to get up and go?

    Admiral MARTIN. You know, isn't it amazing how sometimes we do not learn from one another, and all those shared things, we listen to them, but sometimes we do not take them to heart?

    Because I believe, as I travelled from region to region, it was almost as if each region, as they stood up, were new and independent and really tried to do it for themselves, although there was much to be gained by looking at various other regions.

    There are a couple issues in Region One. First of all is our environment. In the national capital area, we do not have a long history of managed care as they have on the West Coast. So it is a new type of a health care approach.

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    Second, our contractor, Sierra Health Care Systems, is a new managed care contractor. Some of the other contractors in other regions were mature contractors. They worked with managed care for quite a few years.

    So with dealing with a new environment and dealing with a brand new contractor who basically got started with TRICARE, I think those are two real major barriers that we have to mature with and work with.

    Perhaps the contracts are different also. As mentioned in the beginning, we have two different contracts. We have TRICARE 1.0 and TRICARE 2.0, which have different nuances. In TRICARE 2.0, we have revised financing, which is brand new for the military to deal with as well. We are at risk for our patients. So I think all of that makes us a little different. And it makes the system a little more challenging to work with.

    Ms. SANCHEZ. So would you, sort of, walk through a scenario of what a family who is in Region Nine now finds themselves moved to Region One, what the differences are for them, the impact at the actual patient level in trying to access the system and as far as time or money or effort? Could you, so that we can, sort of, get an idea of what we are talking about here in differences?

    Admiral MARTIN. Well, re-enrollment should be fairly painless to the individual. So if a family moves from Region Nine in California to the National Capital area, immediately when they get to the National Capital area, they would fill out an enrollment form to become enrolled in Region One.

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    That process right now takes often in excess of six months. So the patient is still enrolled in Region Nine because their paperwork has not truly gone through in Region One. And that makes it very difficult.

    Technically, they should be enrolled the minute their paperwork is submitted. However, that paperwork, because of the various individuals that it goes through, often is not registered within the computer. The patient does not immediately get an enrollment card. It has been a year, and they still do not have their enrollment card.

    Then they go to make an appointment. They do not go to make an appointment at the military treatment facility. They call central appointments which is located in Baltimore. And when the appointment clerk looks in the computer, their name is not in the computer. So the family member has to go through this long explanation about how they filled out their paperwork and they really should be in the computer. And then, many times, if they are referred outside the network, they would get a bill. And then there is the contest, who is going to pay the bill, Region Nine or Region One?

    So that is, kind of, the tip of the iceberg. And that is what the patient is experiencing right now. So we do not have a seamless re-enrollment process at the present time.

    Ms. SANCHEZ. Okay. Now, Major General, I did not see it in your written statement, but you spoke about portability for beneficiaries has actually improved in your region. Can you elaborate on what you meant by that?

    General RODGERS. Yes, ma'am. I would say that what the Admiral said is absolutely true. But that is going to be different moving from region to region. Now I would say if you are moving to one Health Net-covered region to another Health Net-covered region, moving from Nine or 10 into Region Six, that the chances of you being lost in the paperwork is much less.
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    And we talk about a uniform benefit, but we have 12 different contracts. And each one is somewhat different. They are almost the same, but not identical. I would equate that to saying that you have a uniform quality of life. If you compare living at Lemoore in California versus living in San Antonio, it is going to be similar, but not exactly the same. We are not having the same problems with portability as the Admiral has described.

    Ms. SANCHEZ. Back to the Admiral, you indicated that the current system does not provide incentives for each party to work together. What incentives or policies would you put in place to encourage this working together? How do we change that situation?

    Admiral MARTIN. I probably would start with the patient. And if I could put any incentive in place, I would put the incentive of patient satisfaction in place for both the contractors, the lead agents, as well as the individual MTF.

    Ms. SANCHEZ. Thank you, Admiral. Mr. Chairman.

    Mr. MCHUGH. I thank the gentlelady. She obviously is much younger and more nimble than I. She does not need as much time to get across the street to vote as I do.

    But they were very interesting questions with a very interesting response on the six months. We are aware of discussions that we are involved in to nationalize a number of pieces of this process. One would be a central registration, which the six-months' figure, which was unknown to me—I appreciate the gentlelady bringing it up—argues pretty strongly for that.
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    We do have to go vote. I apologize for that. If we could just stand at ease, smoke them if you have them, and we will try to get back as soon as we can. I would appreciate it. Thank you.


    Mr. MCHUGH. We will reconvene the hearing. Thank you for your patience. And let's get right back to the questions. The gentleman from Illinois, Mr. Kirk.

    Mr. KIRK. Thank you, Mr. Chairman. Mr. Chairman, I had basically two sets of questions. One, my first trip outside of my district was to see the Nellis Air Force Base joint VA-Air Force facility. I brought my suspicions to the table, that veterans would be in second place to active duty and that this might not be a true sharing agreement. I walked away a believer. And I saw really seamless care.

    I know at Kirtland and Travis and in Alaska, we have that. My question is, in a district in which the North Chicago VA Medical Center is across the street from the aging Great Lakes Naval Hospital, can we bring the Navy into this world as well?

    Just to summarize, at North Chicago VA Medical Center, we have four empty wards. The North Chicago VA is I would say mid-1990s technology rooms. The Naval Hospital is early 1970s technology rooms. So I think we would have a boost in care.

    But let me throw it open to the panel here, and see how we can also bring the Navy into this VA-DOD health care world.
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    Mr. BACKHUS. That is an area, a location, that we have spent some time looking at, and have made the suggestion that there be more integration of those two facilities.

    I think the issue is that there is some concern at a broader level as to what medical resources and requirements there are in the whole Chicago area from the VA's perspective, and the need to look at the situation from a broader perspective, not just between Great Lakes and North Chicago.

    And I think that is a justified, warranted, kind of, a position to take and that really, if we could look at the federal health care infrastructure from a more of a joint perspective, a market analysis, including the VA beneficiaries, the DOD beneficiaries—what are the medical needs, what are the resources that we have in place, and what are needed—compare that against all of the infrastructure in the area, we would probably have lots of opportunities for more consolidation.

    The whole idea here is to provide better care, more accessible care. I think it is conceivable here that in the case of Chicago, there is an opportunity for everybody to get together and perhaps provide and build a more modern, state-of-the-art facility to replace the existing old infrastructure. What can happen here as a result is you have better care, more accessible care, more modern care for these veterans in place of the facilities that are now old and need a lot of work.

    Mr. KIRK. Well, that does not really reflect our situation. We have a state-of-the-art VA facility. We do not have a state-of-the-art Naval hospital. So I have a unique situation where we have a under-utilized state-of-the-art VA facility.
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    The morbidity and mortality statistics at North Chicago are lower than at any other VA in the Chicago-land area. And there is a reason why: The building is brand new. Across the street, the Navy has advised me that they were thinking about a new Naval hospital in fiscal year 2008.

    As a taxpayer, it does not make any sense to have an under-utilized state-of-the-art facility across the street from an aging Naval hospital. And as somebody who just came from the fleet, I would much rather receive care at the VA.

    Mr. BACKHUS. That is a good case.

    Mr. KIRK. Right. And this is something I raised with Secretary Rumsfeld. I was his Congressman until he moved to the Pentagon. He lives just down the street from these two facilities, so he knows it well.

    The other issue I wanted to raise is that TRICARE in our area, currently run by Anthem, but to be bought by Humana. The people at Great Lakes—maybe this is a nationwide phenomenon—are told that no hospital in the entire state of Illinois would care for them.

    They have to drive all the way out-of-state to receive care, unless they are in a life-threatening situation. That is only a decision that somebody at Wright Patterson Air Force Base who has never been to Illinois could have made. But how do you advise me to handle that situation?
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    Mr. BACKHUS. Probably to defer to the next panel. [Laughter.]

    Mr. KIRK. Touche.

    Is this something we are finding elsewhere, the increasing number of hospitals dropping out and people driving farther and farther?

    Mr. BACKHUS. Well, for the most part, I think that the networks are adequate, but there are locations, isolated ones mostly, where there are problems getting enough providers and facilities to agree. I think there are opportunities here, though, for the VA to participate more in the TRICARE program.

    There has been substantial difficulties, though, between the contractors and the VA in trying to establish correct billing systems and accounting records and reimbursement rates and things like that that are inhibiting further progress. They need to work through this.

    Mr. KIRK. Well, Mr. Chairman, I think it is something for our committee to look at. I think we would be able to save the taxpayer a lot of money, and maybe not build a new Naval hospital but create a joint VA-Navy health care facility in northern Illinois.

    Mr. MCHUGH. I appreciate the gentleman's suggestion and, obviously, his continuing interest in that question in his district, and we certainly want to have the proper outcome here. The gentleman has repeatedly made this case in a very persuasive way, and I think it certainly merits our attention.
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    Let me ask you a bit about the perceived challenges that you see as we prepare to segue into TRICARE For Life.

    General Rodgers made some comments in his written testimony in talking about the fundamental issues in working managed care within the military health system is that we are attempting to take an entitlement program and squeeze it into a risk-based model. He goes on to say this has resulted in an ill-defined performance expectation on the part of patients, conflicting incentives for MTF commanders and a dynamic benefits structure which makes for significant management challenges for both the contractors and the MTF commanders.

    I was wondering, can that shoving one type of dynamic into another model ultimately work? What do you see as the challenges facing each of you in your regions as we are preparing to ramp up to TRICARE For Life? And specifically, is there anything that we, on this subcommittee and in the Congress, need to be doing to facilitate that?

    General RODGERS. Well, sir, since they were my comments, I will jump in.

    Mr. MCHUGH. Great.

    General RODGERS. What I was trying to say is that we have an entitlement for our beneficiaries. They have earned the right for care. At the same time, we are trying to manage dollars because that is what the taxpayer depends on us to do. And that does run into conflict.
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    I will use an example that I had heard. If the Army needs 10 tanks and they are given money for nine tanks, they buy nine tanks and the 10th one is not done. But if we have 10 of our beneficiaries that are going to deliver a baby, and we only have money to do nine of them within the direct care system, we will do that in the direct care system. The 10th one will be delivered, but it will be delivered out into the network or off-network. And the dollars will flow with that patient.

    What that then does is that, because we have one pool of dollars for the entire system, that pulls money out of the direct care system and that makes it more complicated for us who are in the military treatment facilities to be able to predict how much money we will have to provide the care that we are responsible for.

    Mr. MCHUGH. I appreciate that, but I think there is a broader application. We have created, through TRICARE For Life, a whole new universe of entitlement recipients under the health care system. That is going to befall you folks to manage and to implement.

    How do you think that is going? What do you think needs to be done? Because they are going to put a different kind of system, they probably will not be having a lot of babies, but they will have a lot of needs in the health care area.

    General RODGERS. Yes, sir.

    Mr. MCHUGH. What do you see on the horizon?
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    General RODGERS. First of all, we are excited to have the opportunity to take care of these people who have earned the right for care. And we want to take care of them within the military health system. It is partly because they are of us and they have earned the right to come to us. And many prefer to come to the military facilities because of the bond that we have.

    But there is no question that this is going to cost more money than we have planned on in the past. And so that is going to be a huge challenge. I think one of the things that is important for those of us in the direct care system is to be able to predict what our requirements are going to be and expect a budget that will support those requirements. And that has been a challenge for us because our budgets have been somewhat unpredictable.

    General FARMER. Mr. Chairman, there is a certain baseline level of over-65 care that we have been doing in the direct care system. That varies. For example, I have a facility that is part of the TRICARE Senior Prime program, and we would anticipate and hope to be able to continue that level of effort, if you will, that we are doing.

    Now there is some—and it varies with different facilities—there is some more capacity to deliver some of that TRICARE For Life benefit that is newly authorized. But in order to effect that and in order to use that capacity, we will have to be resourced at least for the marginal cost of delivering that care.

    And that is part of the uncertainty at this point in time is what resources will be available to us in the direct care system to optimize that capacity for that new benefit.
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    Mr. MCHUGH. Admiral?

    Admiral MARTIN. I had mentioned, and Admiral Nelson has mentioned in his various testimonies, again, that we need stable, predictable, adequate funding. And as we are trying to optimize our MTFs we are realizing that we do have capacity.

    However, we do not have the right mix of staffing and the right resources in order to bring on perhaps the numbers of over-65s that we would like to bring on. And what happens is we wait for the end of the year for that supplemental to come in, and therefore we cannot invest those dollars throughout the year and to really try to deliver the health care that we need to all year round.

    Mr. MCHUGH. So if I understand what you say and I am curious if my interpretation is correct, if Generals Rodgers and Farmer feel the same, that at the present time you are not able to configure your staff in a way that you anticipate would be necessary to handle this. Is that correct?

    Admiral MARTIN. Yes. There are probably three issues here. First of all, the stable funding, second the staffing. We all have hiring issues. We all have problems with gaining nurses in our system. We all have problems with competing with the health care marketplace, because we do not pay our providers, both active duty as well as civilian, the salaries that they can get in the outside marketplace.

    And the third is our facilities. Our facilities are aging. Our Maintenance and Repair of Property (MRP), is very low to really take care of the deteriorating facilities. But in many cases, we need to reconfigure our facilities to really meet health care delivery systems today.
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    Mr. MCHUGH. Gentlemen, feel the same? Feel differently?

    General FARMER. I would just, I guess, phrase it slightly differently. Again, I think there are several different levels of the response of what we can do, Mr. Chairman. There is a certain level of response that we can do in our system now. There is another level that we can do if we are resourced to pull in the marginal costs, the cost of x-rays and labs and care that we would deliver to those people in our system.

    And then I think what the Admiral is saying is then there is another level of care if we were given infrastructure costs to add on new capability in the direct care system for those people.

    I see three different levels of response. To, kind of, bring this back to what it means for the beneficiary, you know, many of them, I think, would prefer to have their care or much of it in our direct care system.

    As currently designed, most of them will continue, I believe, to get their care in the civilian sector with the Medicare participating providers that they are currently seeing. And they have a rich new benefit now with TRICARE as a second payer.

    That is a wonderfully enhanced benefit for them. But it will not meet some people's expectations of being able to immediately come into the direct care system and shift that care into the direct care system unless there are resources that follow that.

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    Mr. MCHUGH. General Rodgers, you talked about anticipated requirements. I believe you said, in effect, that it is difficult for you to anticipate your requirements down the road as to what is going to be necessary.

    Is part of that due to the fact that you do not yet know on TRICARE For Life what your potential patient profile is going to look like, and if so, would mandatory registration under TRICARE For Life be helpful to answering that question?

    General RODGERS. Sir, I do not know how to answer specifically about mandatory registration, but I will give you an example of San Antonio. We are one of the TRICARE Senior Prime test sites, as you know. We also, at Wilford Hall, have 1,900 people signed up on a waiting list to get into that program, even though there is no expectation that we are going to have opportunity to enroll them in that.

    To me what that says is there is an unknown group of people living in the San Antonio area who really would like to get their care in the military direct system.

    We do not know if that 1,900 is the entire group or is only a tip of the iceberg. And we would have to be able to define better how many people would come back to us. And that would be based on what we could honestly offer them.

    Mr. MCHUGH. I appreciate that clarification. Any of the other panel members have comments?

    Dr. HOWES. We believe that the TRICARE For Life initiative is an enormously beneficial but potentially extraordinarily costly entitlement. And I really want to harken back to my earlier words, in that I believe that these folks need to be encouraged to enroll in a population-based plan in which they have a primary care relationship which is of long duration.
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    These population-based systems need to have good data to understand what their needs are. They need to have investment to build programs that will both improve the care of the patient and will reduce the cost of care to those patients.

    We, I believe, need to get out front of this enormous and growing issue because I think it otherwise is going to burgeon out of control.

    Mr. MCHUGH. Thank you. Let me ask you one quick follow-up question and I am going to be happy to yield to Ms. Sanchez.

    Doctor, has the Defense Department asked your organizations to provide information regarding the best ways to manage this new beneficiary population?

    Dr. HOWES. Yes, we have been working with numerous levels of the Health Affairs group over the past couple of years, providing them with suggestions. And we are delighted to continue to do so.

    Mr. MCHUGH. So you are satisfied with that interaction and that receptivity?

    Dr. HOWES. It is very positive and we just want to continue to advocate for this approach.

    Mr. MCHUGH. Thank you. Ms. Sanchez.
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    Ms. SANCHEZ. Yes, Doctor, I had a question with respect to one of the recommendations that you made; was the implementation of TRICARE For Life to look at the cost of the care of this population as a whole government expense, a total government responsibility?

    Do you have any data or information? How do we go and talk to the Health Care Financing Administration (HCFA), about coming to the table and talking about how this really is going to increase, that this is a population that the costs will increase in that population set, not just for the Department of Defense, but also for HCFA?

    Dr. HOWES. That is an excellent question, and I have to tell you that I am so far from the process that for me to give advice would be probably unwise. I think that you are really talking about a management process at the government level, and we really do not have enough familiarity to give you good advice on that.

    Ms. SANCHEZ. One other question I had for the Admiral, you talked about competing for health care, the salaries of health care workers against the marketplace. Can you elaborate a little bit about that? Is it doctors? Is it nurses? Is it outside? Is it contract? What are you seeing as your real obstacles in the ability to compete well?

    Admiral MARTIN. Well, first with military, our military physicians are not paid nearly as much as their civilian counterparts. Right now, there is a study being conducted throughout the services on salaries and health care providers, and we are waiting for the outcome of that study.
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    Second, our civil service, our hiring process, it is an Office of Personnel Management (OPM), hiring process. It is a very antiquated hiring process. The classification process is an old classification process. And it is a very lengthy hiring process for our military hospitals. It could take up to three to six months to bring an individual on board, to hire them, because of that process. I believe they are looking at that to update that process, but that does hurt us.

    Additionally, for our government workers, they are not offered any sign-on bonuses. When you look at the health care industry, most civilian hospitals offer physicians, nurses, technicians large sign-on bonuses. So we have a very difficult time competing for the same individuals.

    Ms. SANCHEZ. Thank you, Admiral. No more questions, Mr. Chairman.

    Mr. MCHUGH. I thank the gentlelady. The gentleman from Texas, Mr. Thornberry.

    Mr. THORNBERRY. Mr. Backhus, Mr. Kirk was asking about providers leaving the TRICARE network. That just happened. The biggest group of physicians in my district decided to announce they were leaving.

    Do you see a trend? Have you looked at the data? Is it getting worse? Is it getting better? Are there just isolated examples where there are some difficulties? Is this something we need to worry about?
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    Mr. BACKHUS. Well, it does need attention. In my view, though, it is not of such significance that I think alarms are going off.

    We have recently examined this issue again, and hear the same things. There are some pockets. There are some locations around the country where it is hard for the managed care support contractors to find physicians who are willing to accept the maximum allowable charges in TRICARE.

    Those charges are pegged to Medicare rates. In many cases, the contractors are asking these providers to take discounts off of those rates. So it is not a thing that they are that willing to do. And TRICARE does not offer the kind of volume that might be able to entice providers to participate.

    So they are having a difficult time. But there are authorities in current legislation that permit waivers of the current provider reimbursement rates in cases where access is inhibited. And those authorities really have not been used to a very great extent. I think Alaska is the principal example of where it has.

    So there are other locations where this can happen, and I believe the Department is considering and may be about to move out in a couple of other areas besides Alaska, to do this.

    So yes, there are situations like you are speaking around other parts of the country. I think, for the most part, the Department is aware of them, certainly the contractors are aware of them. There are remedies already available to address it, and I believe action is about to be taken on this.
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    Mr. THORNBERRY. Okay. Thank you.

    Mr. MCHUGH. Thank the gentleman.

    There is a very little-known component of the Uniform Code of Military Justice that says the maximum sentence for appearance here is two hours. So we are just about there.

    We could all continue, but I think you have served your time and served it very well, I might add. We do, as a normal course of business, ask the panel members to continue their cooperation, and in the likely event we will submit some additional questions to you in writing, if you could respond to those, we would greatly appreciate it. There are a number of other areas dealing with questions that are particularly germane to your activities that we would appreciate your input and insight.

    So with that and our thanks, you are free to go. Thank you so much.

    We do have a second panel which, as the first panel makes their way out, we would ask to begin to make their way to the front table.

    As you are being seated, let me just say, our second panel today includes the presidents and CEOs of four of the managed care support contractors. And I thank all of you as well for being here today.

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    Before we hear your testimony, I want to take this opportunity, on behalf of the entire committee, to thank you personally and publicly for the effort your companies undertook to make your part of the TRICARE senior pharmacy program start up, I think in the minds of most, a complete success.

    Apart from what was a surprisingly small number of minor glitches, the program appears to be working as intended. In fact, the sound of applause is exceeded only by the sound of the ringing cash registers.

    In the first six weeks of the program, 660,000 prescriptions were filled for senior retirees at a cost of $36 million, and 480,000 of those prescriptions were filled by your network pharmacies at a cost of $21 million.

    And your performance in getting this program up and running in a very, very short time frame is clear evidence that each of you is a key partner in making TRICARE work. And this special relationship underscores the importance of making sure that the next round of contracts supports the continued development of these critical partnerships.

    I know we all look forward to your testimony. As I said to the previous panel, we waive the five-minute rule, but we do have your written statements in their entirety. They will be made part of the record. I have read them and appreciated all the work that went into them and your insights. And again, we thank you for being here.

    So by way of introduction, let me just say we are joined by: Mr. David J. Baker, who is President and CEO of Humana Military Healthcare Services; Mr. David J. McIntyre Jr., President and CEO of TriWest Healthcare Alliance; Mr. David R. Nelson, who is President of Sierra Military Health Services, Inc.; and Mr. James E. Woys, who is President and Chief Operating Officer of Health Net Federal Services.
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    So thank you. Again, welcome. And we might as well begin with you, Mr. Baker.


    Mr. BAKER. Thank you very much, Mr. Chairman.

    Chairman McHugh, Ms. Sanchez, members of the committee, thank you for inviting me to appear before you to provide Humana Military Healthcare Services' perspectives on the TRICARE program.

    Today, Humana is the Department of Defense contractor for managed care support in TRICARE Regions Three and Four, which encompass the southeastern United States.

    Recently, we announced our intent to acquire TRICARE regions Two and Five, the Mid-Atlantic and Heartland regions. This acquisition is currently pending approval by the Department of Defense.

    In my testimony today, I will attempt to provide you with real hands-on experience of how TRICARE is working from our perspective. In addition, I will furnish recommendations from our private sector viewpoint on how to improve TRICARE so that new benefits can be more effectively administered. And finally, I will offer some comments regarding funding of the defense health program.
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    As a life-long beneficiary myself, I believe TRICARE provides military families with better access to cost-effective, high-quality health care services than at any time in our history. To be sure, there are opportunities for improvement, but that fact should not diminish the TRICARE success story.

    As contractors, our principal responsibility is to lend our expertise to the military health system. Humana takes its responsibility seriously and we think we do an excellent job.

    For example, we have a 90 percent beneficiary re-enrollment rate, our provider turnover rate is far less than the national average, and we not only meet but exceed DOD standards for claims payments.

    Through our partnership with TMA, the lead agents, and military commanders, Humana has earned our second Partnership Award from the National Managed Health Care Congress. I believe this indicates increased satisfaction with military health care since the implementation of TRICARE.

    Over the life of our Regions Three and Four contracts, we estimate the government will achieve savings of over $300 million for the same level of service as existed when the contract started in 1996.

    In short, we believe TRICARE maximizes the strengths of the military health care system and that it effectively utilizes the expertise of managed care support contractors as partners in providing one of the most responsive, cost-effective, high-quality health systems in the Nation.
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    Throughout today's testimony, you will hear from all of the panelists that Congress must fully fund all elements of the defense health program. I echo that recommendation, but let me also mention some other ideas for you to consider as you evaluate the future of TRICARE.

    First, Congress and the Department of Defense would be well-served to support fully integrated managed care support contracts. In the face of severe resource constraints, increased readiness responsibilities and the need to preserve existing assets, coordination between a single contractor and military officials is more cost-effective, easier to manage and creates a seamless, integrated, responsive system.

    Second, TRICARE claim processing rules should more closely mirror Medicare claim rules. Cost of processing a TRICARE claim today is between $7 and $9. By comparison, Medicare's cost is approximately $5 to $6 on average, and some processing for as little as $2.

    Current TRICARE claim processing rules are nonstandard, complex and do not follow other national claim processes. And so we suggest the Department of Defense and Congress evaluate whether there is value in continuing to require such non-standard practices.

    Third, utilization review requirements should be relaxed. Current TRICARE policy places too much emphasis on prior approval of required medical services. Commercial managed care is moving away from such practices. TRICARE should consider doing the same.

    Fourth, shared risk for the provision of civilian health care services should be retained in the next generation of contracts. When all parties providing service share in the risk, there is, in my view, better collaboration, teamwork and a sense of partnership between military officials and managed care support contractors.
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    The model adopted in the contract for Regions Two and Five, and in Region One as described by Admiral Martin, strikes me as the ideal theoretical construct.

    Fifth, multi-year contracting should be continued. The five-year time frame seems appropriate in balancing the need to attract contractors, to furnish beneficiary and provider stability, and to furnish the opportunity for the government to adjust its approach to changing conditions.

    Sixth, DOD should strengthen the lead agent MTF command structure to ensure consistent regional policy, while simultaneously promoting local military control.

    Today, most lead agents have only limited authority over military facilities in their regions. We applaud the demonstration in Region 11 described by the earlier panel, and we look forward to the report of its results.

    Seventh, all managed care support contracts should be simultaneously awarded. In our view, this would ensure a consistent roll-out of new program features, attract only those bidders with substantive interest and presence in the regions, and reduce the time and expense devoted to the acquisition process itself.

    Eighth, TRICARE's change order process should be improved. I agree with the GAO recommendations noted above.

    And finally, as it considers new contracting options, DOD should consult industry experts, including its current TRICARE contractors.
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    Mr. Chairman, in the interest of time, I will stop there. You have my full testimony. I appreciate the opportunity to be before you.

    [The prepared statement of Mr. Baker can be found in the Appendix.]

    Mr. MCHUGH. I appreciate that, because if I have to run over there one more time, I am going to be in one of your facilities here. So we will vote, as we did, come back, as I hope we will. And we will reconvene then. Thank you.


    Mr. MCHUGH. Thank you for your patience.

    Mr. Baker, I do not want to cut you off short. Would you like to resume?

    Mr. BAKER. Well, sir, I will be happy to resume. I had only one more recommendation that I think we passed on and that is as it considers new contracting options, DOD should consult industry experts, including its current group of TRICARE contractors.

    Each of the panelists appearing before you today has extensive managed care expertise and all of us have years of experience with TRICARE. Such experience is not available anywhere else in this country. It would be a shame to see it squandered.

    I would like to move on to full funding for the defense health program very briefly. And for a variety of reasons the defense health program has had a history of being underfunded each year.
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    In my view, the program is an integrated system that must be adequately funded. Placing either the direct care system or the managed care support contractors in an underfunded position makes little business sense. Moreover, selectively funding or underfunding one element of the system creates conflicts between partners and shortfalls in the entire system.

    I believe that it is imperative that the entire defense health program, including TRICARE, be fully funded going forward. In order to do so, I strongly urge that improvements be made at all stages of the Congressional process, budgeting, authorizing and appropriations, using accurate, realistic estimates of existing program costs and the costs of expected changes.

    In conclusion, TRICARE was implemented to control costs, improve quality and to enhance beneficiary access and service. Working with experienced managed care support contractors, like Humana and others, the Department of Defense has accomplished those objectives, all in the face of significant military downsizing.

    We at Humana are proud of our accomplishments and look forward to continuing collaboration with Congress and the DOD to advance the TRICARE program.

    Thank you, Mr. Chairman, for the opportunity to share my views.

    Mr. MCHUGH. Thank you, sir. Mr. McIntyre.

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    Mr. MCINTYRE. Good morning, Mr. Chairman and Ms. Sanchez. Thank you for the opportunity to appear before you today to continue the dialogue about the TRICARE program and share with you some of our ideas about the outlook of the military health system.

    My name is Dave McIntyre. I am President and CEO of TriWest Healthcare Alliance, a corporation that was formed actually for the express purpose of delivering services under the TRICARE program. We actually serve the 16-state Central Region and are owned by 11 Blue Cross-Blue Shield plans and two university systems in that 16-state area.

    Given the fact that I have submitted my testimony for the record, if you will permit me, I would like to share my thoughts about briefly the progress that we have made over the last couple of years as I see it. But I would also like to focus, like Dave Baker did, on some recommendations for the future as we seek to mature the virtually integrated system that we are in the process of building.

    I would like to submit that while we have made progress, and substantial by some measures, to include high-quality customer service in most areas, better claims processing, greater access to care, certainly the 65-and-over pharmacy implementation and a more effective virtually integrated delivery system, there is actually a great deal of work that remains to be done if we are going to arrive at a mature system.

    My recommendations are as follows. First, I believe that reaching maturation in a virtually integrated system, such as the MHS, will only come if there is an active and vibrant partnership between the services themselves and between the services and the managed care support contractors, all of us who form the partnership that is essential to making this work.
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    Getting there requires, in my view, several things: parties that are willing to work together; second, an environment and approach that promotes partnership; third, the flexibility to make productive and effective changes that the partners believe will enhance performance at the local level as long as they are not cardinal changes; and accountability for results.

    I am pleased, like Dave Baker, to hear about the work that General Farmer has underway in Region 11. I applaud his leadership and look forward, as I know do all of you, to see the fruits of his labors. And I am confident that we will be able to learn a great deal from those efforts.

    As for the Central Region, however, we too have been forging a partnership. It started the day we won our contract. Our lead agent, our 26 MTFs in our region, and our selves have offered a partnership to the Department under this program.

    We began early on by implementing a change to utilization management throughout our region that made it more effective both for the beneficiary and for the taxpayer. Then we moved on to collaborate in the Internet area and create the first public-private integrated approach to the Internet to the benefit of the beneficiaries in the system.

    We recently are in the process of rolling out a collaborative education tool that is automated for both our MTF staff and our own staff in our corporation so that every one receives the same training on issues that are common. And we are in the process of redesigning the appointment system across the region to enhance services and the effectiveness.
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    Our next project is likely to involve a voluntary partnership in one of the substantial catchment areas in our region, where I have committed to sit down with the MTFs in that catchment area and open up the books if they will do the same on their side, so that we can look at where truly is the best place to maximize the taxpayer dollar and make sure that we provide the beneficiary needs.

    If this open-book process works, which is supported in concept, at least at this point, by the MTFs in our region, the lead agent and we believe it will be supported by the Surgeons General of the Army and the Air Force, we plan to roll that out across our region.

    These efforts have taken a great deal of time and effort on the part of all involved. They have required trust between the parties, but have paid huge dividends in the way in which we operate as a region. I would submit that getting to such a state across the entire MHS is likely to require a realignment of people, a realignment of authority and responsibility and a provision of incentives to all of those that are involved in the system.

    In addition, the lead agents need to be given more authority and control over what goes on at the local level.

    Second, like Dave Baker, and I address this a lot in my written testimony, so I am not going to spend any time on it, we have to mature the budget and estimating process for this system. It is broken. It is a substantial problem. And we cannot be budgeting for a system by looking at the resources that we think should be there and available to the system. We need to be looking at what the costs are to deliver the care.
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    I am very pleased at the work that has been done by Congress and the Department in this area embodied in the most recent budget that is on its way to the President for signature, and the fact that budgetary authority for 2001 and 2002 has been increased, I believe to sufficient levels to take care of the issue. But that does not take care of the systemic problems with estimating and those are things that need to be continued to be looked at.

    Third, we need to act on the work that the committee has done over the last couple of years in encouraging us to adopt operational performance and efficiency measures, to include, as Dave Baker said, claims processing reform and the like.

    Systems are critical. We do not have some systems in place that need to be put in place and we need to be borrowing from effective things that are being used in the private sector.

    Fourth, like the panelists in the last panel, I believe that there needs to be stronger integration between the VA and DOD and the TRICARE contractors. In our region we happen to have actually several models. Nellis is in our region. Kirtland is in our region. William Beaumont is in our region and El Paso. They share space.

    But you know what is really fascinating is we have two projects that are starting to show up on the horizon that may show some additional promise. One, the University of Colorado, which took over Fitzsimmons recently that was Base Realignment and Closure (BRACed), is talking to the VA about a joint-use facility, that in turn could also provide services to the Department of Defense.
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    The second thing that really excites me is a project in New Mexico, out at Alamogordo, where the Air Force and the private sector came together to build a facility and operate a facility that serves both populations. The VA is currently looking at the question of whether they should build a facility in that community.

    I am going to be meeting with the Secretary of the VA in the next several weeks and one of my challenges is going to be, ''Sir, if you are standing for integration, maybe what you ought to do is to join what is going on in Alamogordo and make that a three-service environment, one that delivers for the services, one that delivers for the VA and for the private community.''

    We have many VAs in our region in our network, but there truly are technical problems that need to continue to be worked.

    Fifth, I believe that there needs to be accountability for performance. I think we have some problems in this area and I think if we are honest with ourselves, we would admit that the current contracts do not provide sharp enough teeth to the government to keep people accountable for lack of performance. But performance accountability needs to be on both sides, and we need to do a better job of sharing where our challenges are but also where the rubs are and where our successes are so that we can keep each other accountable.

    I could talk about the next round of contracts and the like; I am not going to do that in the interest of the time. But I want to leave one last issue with you, and that is the Health Insurance Portability and Accountability Act (HIPAA), issue. One of the things that stands as a significant threat to the Department of Defense health system and the VA is the requirements of HIPAA. And the recently enacted regulations are going to be a significant challenge for the entire federal health operation. And I would encourage the committee to stay focused on that issue as we move forward.
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    In conclusion, I believe the system has come a long way in the last several years. Performance is enhanced and the like. I think that we have a long ways still to go though.

    And I would caution that throwing out the existing system that we have that has been underfunded but yet is maturing, probably is not the right way to go. The better answer is to mature what we have, fund what we have and see what the ultimate outcome is.

    It is a pleasure to serve this population. It is a pleasure to appear before you today. And I thank you for your time.

    [The prepared statement of Mr. McIntyre can be found in the Appendix.]

    Mr. MCHUGH. Thank you, sir. Mr. Nelson.


    Mr. NELSON. Mr. Chairman, Ms. Sanchez, members of the Military Personnel Subcommittee, thank you for the opportunity to testify this morning. I am David Nelson, President of Sierra Military Health Services.

    We are the TRICARE contractor for Region One, which includes the northeast and mid-Atlantic states. This year is monumental for health care thanks to the leadership of this subcommittee and the Congress.
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    In my two decades of experience with the military health system, I have never seen so many fundamental changes, from the restoration of benefits for the retired Medicare eligible population to enhancement of the existing benefits for active duty families. Implementation of these valuable changes presents a tremendous challenge to all components of the military health system.

    Please let me address the most immediate and pressing challenge: the implementation of TRICARE For Life benefit by the October 1 start date. Our two greatest hurdles are well known: time and money.

    The lead time necessary to operationalize a program of this magnitude is long. We must find and improve facilities, install telecommunications infrastructure and recruit and train employees on two very complex health benefits: Medicare and well as TRICARE. Every day is required to begin the program on time.

    Sierra faces an intense challenge in this regard. Only recently, in late April, did we receive direction to proceed with TRICARE For Life. The contract modification obligated funds equal to only 8 percent of our initial cost estimate.

    We then revised our initial estimate downward based on discussions with the Department. After revision, the obligated amount is still only 12 percent of what we and our subcontractors expect to spend to get ready by October 1. With so little funding available, my ability to make the necessary capital expenditures is severely limited. The amount the Department has obligated to Sierra for TRICARE For Life does not cover Sierra's lease exposure, much less telecommunications costs, site improvements or staffing. Exposure to such risks is not an acceptable business practice.
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    Despite these major obstacles, Sierra is fully committed to implementing TRICARE For Life by the start date. I would urge this committee and the Congress as a whole to ensure that the Department has the necessary funds to implement TRICARE For Life on time. Without that funding, it simply cannot be done. We are quickly approaching critical decision points.

    Another consequence of the lack of funding for TRICARE For Life is the inability of the program to afford additional up-front costs even when they would generate significant medical cost savings.

    Sierra has proposed a proven coordination-of-care model to the Department, a model supported by the comments made earlier by Dr. Howes regarding a structured approach, in his terms, for the delivery of care for over-age-65 beneficiaries.

    Consider for a moment that a few patients, most with chronic illnesses, consume the majority of Medicare resources. Unmanaged Medicare fee-for-service, however, targets acute episodes, not chronic conditions. Medical literature, some of which I have with me today, shows that early intervention can prevent hospitalization for those with chronic illnesses.

    Although Sierra's model would reduce government health care expenditures and give highly personalized service to patients, the Department is unable to even explore this model with us because of funding constraints. Without the ability to make an investment in a coordination-of-care model of service, the Department will have no way of controlling the health care costs for TRICARE For Life patients. And we know from our commercial experience that this is the most extensive segment and expensive segment of the beneficiary population.
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    I would like to say a few words about future procurements. When planning any future procurement, DOD must do a better job of forecasting health care costs.

    For example, DOD budgeted for the growth of health care costs in fiscal year 2000 a 2.25 percent increase. Yet respected and well-publicized studies have shown that the growth for prescription drugs alone increased almost 20 percent last year in our country. DOD's inability to properly forecast accurately health care costs makes any rational procurement plan nearly impossible. Lack of stable funding hurts both the direct care system, as you have heard earlier, as well as contractors, as well as beneficiaries who ultimately bear this burden.

    The second point I would like to make about future procurements is that, for managed care to really work, there must be an assessment of the complex interrelationships between the direct care system and the civilian system of care. To date, few of these relationships have been isolated and tested.

    Moreover, there must be a manager with the authority to make all parts of the system work together. In practice today, there is no unified command and control over military health care on a regionalized basis. Health care delivery decisions are shaped by many players.

    The person with the day-to-day responsibility for health care delivery in Region One, however, the lead agent, has little control over the assets in the region. Further, the lead agent has no authority over the contract or the contracting officers who are separate, both organizationally and geographically, from the actual delivery of health care and the most important customer, clearly, our military families.
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    Until DOD addresses this issue, there will not be comprehensive managed care in the military health system.

    Thank you, again, for this opportunity. I would be glad to answer any questions.

    [The prepared statement of Mr. Nelson can be found in the Appendix.]

    Mr. MCHUGH. Thank you, Mr. Nelson. Mr. Woys.


    Mr. WOYS. Thank you, Mr. Chairman. I guess it is still good morning, and distinguished members of the committee.

    Mr. MCHUGH. Barely. Yes.

    Mr. WOYS. We are just about there. My name is Jim Woys. I am the President and Chief Operating Officer of Health Net Federal Services, previously Foundation Health Federal Services. We are lucky to have the opportunity to administer three of the seven managed care support contractors for the Department of Defense, starting with Region 11, which is Washington, Oregon and northern Idaho, which you heard earlier from my partner lead agent, General Farmer; Region six, which is Texas, Oklahoma, Arkansas and Louisiana, excluding New Orleans and El Paso, which again you heard earlier from my partner lead agent General Rodgers; and last are Regions Nine, 10 and 12, which are California, Hawaii, Yuma, Arizona, and Alaska.
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    Again, thank you for the opportunity to address you on lessons learned in future contract considerations for the TRICARE program. It really is an honor to be invited back to share with you my perspectives on my team with 13 years of experience with DOD's health care programs.

    As the program continues to stabilize across the country, DOD, under the outstanding leadership of Dr. Clinton, Dr. Sears, our Surgeon Generals of General Carlton, General Peake and Admiral Nelson, our lead agents and the TRICARE contractors, are working hard in partnership every day to eliminate any remaining problems, plan for enhancements to the benefits, including TRICARE For Life, and support efforts to properly finance this program, both short term and long term.

    The government and the managed care support contractors must function as a team to deliver quality health care in one of the largest and most respected health care systems in the world. This partnership has been critical to the successes enjoyed by the program thus far, and will serve as the basis for advancing the DOD health care delivery system.

    Only after reviewing our past history, both good and bad, and making the educated assumptions on the future of military health care, can we provide advice on the future structure of the managed care support contracts. In our mature contracts, though most operational issues are working very well, several issues remain that impact program results.

    Remaining issues that need attention by DOD, Congress and the contractors is first and probably foremost the appropriate budget and funding of the system. We still have some provider access concerns, as you heard by Mr. Thornberry earlier.
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    We have some provider reimbursement issues that continue to grow at times for our civilian side. And we still have some MTF provider access issues, mainly because of downsizing activities and shortfalls in funding.

    We still have a concern about the uniformity and portability of the benefits, that it is the same from Washington state to Washington, D.C. And we have concerns still that the data integrity and comparability, both on the civilian side to the military side, still has some issues to be addressed.

    Based upon Health Net's extensive experience in managing health care programs, we identified many features that should be retained as we look to the future. Our experiences and lessons learned are derived from both successes and failures in operating these contracts.

    The things that we should retain are: strong partnering relationships with our military customer, accountability for performance, stability of the program, commercial network participation in TRICARE, and then we also believe that we need to have longer implementation periods for new contracts.

    Speaking as an experienced contractor in administering this benefit, I believe future contract vehicles must not place a direct care system in direct competition with the contractor, must not negatively impact the uniformity and portability of the benefit, must not unfairly distribute health care risk between a direct care system and the contract. It must align the incentives of the contractor with the direct care system. And it must include adequate funding.
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    Before we can suggest in detail what the future contract structure should look like, and which contractor responsibilities and requirements are needed, it is extremely important for the future environment to be defined.

    Thus, DOD must reestablish its vision. It must ask the following questions: Are the future goals of the military health program the same or different from the goals established in the early development of TRICARE? Is a radical change necessary or will it further destabilize the program?

    How will Secretary Rumsfeld's review of the defense programs impact military health care? What will the future relationships with the VA and HCFA look like? Will there be another round of BRAC? What will the future military infrastructure look like? And last, how will the readiness requirements change, if any, considering the above-mentioned review?

    Assuming there will be some changes, perhaps even material changes, we are concerned with the ongoing stability of the program for our beneficiaries. Thus, we suggest any contract changes that are made err on the side of conservatism, maintain stability and enhance our patients' satisfaction.

    Future TRICARE contracts should be based on a financing mechanism that encourages reasonable risk and gain, provides an incentive for the contractor to develop or invest in new technology, enables shared decision-making and coordination of contractor dollars with MTF dollars for the benefit of the total military health program through our lead agents. In addition, future TRICARE contracts should empower our lead agents, integrate civilian managed care industry practices with military health programs, provide for civilian networks that complement the military direct care system.
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    In summary, current operations are working very well. We are working in partnership with our customer to constantly improve the program, including the implementation of TRICARE For Life, for which we have just recently executed amendments to start implementation of TMA. Issues are being worked rapidly. We are very close to achieving what all major health delivery systems strive for: stability.

    As a result of our strong relationship with our customer, we have overcome the vast majority of barriers that previously stood in the way of delivering a predictable, portable and uniform benefit to our beneficiaries. We have learned that this program, as in any health care program, is extremely dynamic. Future change is needed. The contracts will need adjustment.

    However, before we can clearly identify exactly what needs to be changed, we must know the future structure of military medicine. The contracts are designed to support and supplement the direct care system. If the system changes, the contracts must adapt.

    Short of fully understanding the future design of the direct care system, we should protect the stability of the TRICARE program as recently achieved. We should focus on things that will improve the quality of care delivered, the coordination between the direct care system and the civilian delivery systems, and the full funding of the TRICARE program.

    Again, thank you, Mr. Chairman, and I welcome answering any questions.

    [The prepared statement of Mr. Woys can be found in the Appendix.]
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    Mr. MCHUGH. Thank you. Thank you all. There are a number of themes in your testimony, both oral and written. Certainly one of the major ones is money, which is an important theme. Mr. Baker spoke about the need for improvements in what he described as accurate, realistic estimates of costs. Mr. McIntyre, you talked about necessity to mature the budget and resourcing system. One of the frustrating aspects of trying to get our arms around this issue from the Congressional side is the repeated instances where the budget forecast models that are utilized to drive supposed resource needs prove so inaccurate, often just months down the road.

    Any suggestions on how those budget forecasting models might be made more realistic? Is it truly a failure of the model, or is it rather an issue of the budgeteers looking for a little breathing room?

    Mr. MCINTYRE. This is a complex area, and with the number of changes that the system has been going through of late it makes it more complicated. But the thing that I have found, and I have spent time on this issue over the last couple of years, and you will see a chart in my testimony, the formal written testimony, that actually contrasts the budgeting and the actual expenditure levels for this program and then trends that against the Federal Employees Health Benefit Plan (FEHBP) and Medicare and the private sector and the like, is that in the private sector, we all hire outside actuaries to look at what are the models? What is going on? What are the projections in different communities across the country and different lines of business?

    You cannot properly estimate without understanding what is going on in the rest of the marketplace. And in doing so, you have to take a blended approach to that, because what works in one community does not work in another. And I think that the Department would be well-advised to engage the services of an outside actuary that has talent in that area that does work for both the private and the public sectors in communities all across the country.
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    And then you are able to take a look at what are your budget assumptions in terms of reductions against what that model is. And that is the only way you have a fighting chance, as we do in our own corporations, to get to a point where you understand what reality is likely to look like.

    But even with that, everyone was caught unaware with the drug increases and some of the other things that are going on. But that is the only way, in my opinion, that you can get a fighting chance at having the right kind of model built.

    Mr. MCHUGH. Well, of course, I appreciate your comments. The Department does utilize various supposed independent sources. But what you are suggesting, I want to be clear, is that whatever those sources may be, they are not of a structure and of a direction that most of the independent health care services use.

    Mr. MCINTYRE. There are three or four major actuaries in the country that do this kind of work. In personal conversations with the leadership at the Office of Management and Budget (OMB), and leadership in the Department, they do not currently contract with any of those organizations to do the kind of modeling that I am talking about.

    Mr. NELSON. Mr. Chairman.

    Mr. MCHUGH. Mr. Nelson.

    Mr. NELSON. Our commercial business, which I will draw the analogy to, we have actuaries. We also have actuaries in our TRICARE business that assist us with our bid price adjustment and the analysis of data. But in our commercial business, we are able to reprice products on a real-time basis.
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    That is what insurance companies do. So our sales force today may quote you a price for a certain health benefit, but if that benefit were to change tomorrow, the day after our sales force would quote you a different price, you as the employer, oftentimes, or you as the individual, the cost for that benefit.

    Our benefit, as you heard earlier, I believe, by testimony, has changed over 1,000 times through change orders. As each of those changes are introduced, that benefit has become more expansive. And some have advanced that it is the richest benefit, in fact, in the country today. And I do not know that I would take that argument to try to discount it because I do believe this is a very, very rich benefit.

    But analogous to that generosity of benefits is the fact that you must pay for that benefit. And in fact, we believe, I believe as a group, that the individuals that are charged with forecasting what the cost of those 1,000 changes have far underestimated, in comparison to what our commercial products would be able to do, to estimate what that benefit is going to cost. And that is where this program has fallen down over recent years with the escalating inflation of health care at 10 to 12 percent premium increases per annum.

    Mr. MCHUGH. Well, you are introducing a pretty revolutionary concept in Congress where you are actually saying you have to pay for stuff you say you are going to give people. I am not sure we can handle that. [Laughter.]

    We will have to get back to you on that. Mr. Baker or Mr. Woys, any additional comments?
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    Mr. WOYS. I do have a couple of comments, if I can.

    Mr. MCHUGH. Yes, sir.

    Mr. WOYS. As Mr. McIntyre said, this is a very complicated environment. I think what we need to do is first to find what the military can deliver. I think too often we have not really focused on what is the capacity of the direct care system and making an investment into that direct care system to be able to fully optimize and maximize their capabilities.

    As you heard from the panel before us I think, their maintenance budgets are going down. It affects their ability to deliver care inside. Without knowing what they are going to be able to deliver in a particular year, we cannot properly estimate what we are going to deliver on the civilian side that has to be moved out to our delivery systems.

    I think first we need to really concentrate on the direct care system, make a real substantial investment back into the direct care system so we can enhance the capability of the direct care system, understand what their capabilities and their volumes are before we can determine what we have to supply out in the civilian sector.

    It is really hard to go look at the civilian costs and say they are going to rise 20 percent when we really do not know what is going to be either recaptured or shoved out from the military sector.

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    So the advice is to find some way to go back and make a substantial investment back into the military infrastructure to make it correct.

    And the second point, I would be remiss if I did not say it is that too often we are dealing with benefits that are not funded. Specifically last year, this committee authorized benefits that were never appropriated. And that tacks on to the more difficult challenge of trying to manage a budget that is already fixed without increasing the DOD's top line. Thank you.

    Mr. MCHUGH. I made a snide remark off microphone about my dear friend and predecessor on this subcommittee chair, but I will not say it.

    Mr. Baker, second?

    Mr. BAKER. Yes, sir. Yes, sir, I would like to offer a couple of comments. I appreciate Mr. Woys' comments on determining MTF capacity, workload capacity, and its influence on the contractors, on TRICARE in general, since that clearly is an element within this integrated system.

    And I appreciated Mr. Nelson's comments on the need for stability of the benefit structure. Changes in the program are expensive to implement. We have had a lot of them.

    I do applaud the Department, however. I think, as reflected in the recent GAO report, they are trying to get a handle on that. And I would encourage the high-level review of projected changes to, in fact, be implemented. I think everyone recognizes that.
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    I noted Mr. McIntyre's comments on employing outside actuarial help, and I truly subscribe to that endeavor. I think that is very, very necessary. I, frankly, think the Department has an opportunity with those of us at this table to consult with us in terms of our vision as to what program costs are going to be. To my knowledge, that has not taken place in the past.

    Mr. MCHUGH. Well, I am glad you brought that because that is another question I was going to ask. And yes or not will do. The other three gentlemen at the table: same experience in terms of consultation?

    Mr. MCINTYRE. Indeed.

    Mr. NELSON. Similar.

    Mr. WOYS. Yes, sir.

    Mr. MCHUGH. Thank you. Mr. Baker.

    Mr. BAKER. Having said all of that, I think that there are some systemic issues known to the committee and to the chairman in terms of, even with all of the accurate forecasting, the most accurate forecasting in the world, there are some issues in terms of actually communicating those estimates here to the Congress. And I think that system, in fact, needs to be adjusted.

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    Mr. MCHUGH. Thank you all very much. As you heard, we have a vote. I suspect by now you understand the process. We will be back.


    Mr. MCHUGH. We will reconvene once more. Thank you for your patience.

    One of the things that we have heard repeatedly, starting with the GAO, that talked about the very high number of contract changes, which has been reflected in virtually of your statements and comments.

    A general question and overview question: First of all, how do you feel that negotiations are going on right at the moment with the contract change orders that are necessary to stand up TRICARE For Life?

    Well? Not so well?

    Mr. WOYS. Let me just start. TRICARE For Life had two components, really, which was the pharmacy benefit, which we were, I believe, successful and had good negotiations with our customer in TRICARE for standing up the pharmacy benefit.

    On the medical benefit, a little more difficult. As Dave Nelson said, the amount of funding that was allocated for the implementation of this cost was far below what we initially estimated the cost to be.
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    Again, we are not quite sure what the costs are going to be because we really have not fully defined what our requirements are, so it is really hard for us to step up and say, ''We will do it for an X amount of dollars,'' in a not-to-exceed environment, when we do not understand really what the full requirements are. What are you going to ask us to do?

    We were able to work, I think, in a fairly collaborative partners arrangement with our contracting officers to make the contract amendment vehicle somewhat variable, to allow us to give some funding up front to get started, better defining what those requirements are, so we can then later adjust what our price is going to be for that implementation period.

    But as of right now, I could not tell you exactly what my requirements are under TRICARE For Life for implementing the medical benefit because we have not yet had those full discussions, going through what is called an alpha contracting process with our customer by functional area.

    But we do think we have an amendment with enough money to get us started, to start the facilities and our claims processors, which is very important to hire and train some of the key people and to start to get ready. But there still is a major process to go through before we end this game, but we think so far we are in pretty good shape.

    Mr. MCHUGH. So you are under way, but you have a ways to go.

    Mr. WOYS. Yes.
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    Mr. MCHUGH. Mr. Nelson?

    Mr. NELSON. Mr. Chairman, we are under way. We have a modification that I mentioned in my testimony. That modification calls for $1.6 million of funding. I have been asked to sign a lease for additional space in excess of $2 million to cover the overhead costs.

    I am not in a position to be able to do that. I believe our claims processor is also in the process of building a facility and hiring over 400 to 500 staff to support that enterprise.

    So these costs are adding up literally on a day-by-day basis, and quite honestly, $1.6 million does not cover nearly 10 percent of what my costs will be between now and September 30.

    So we are in discussions with the government. We are in discussions about a model, I believe, that is not optimal, that I have shared earlier. We would like to see greater coordination for greater concern about the aggregate government dollar that I believe, Ms. Sanchez, you mentioned earlier, in terms of looking at the TRICARE For Life program, as opposed to this differentiation between an administrative dollar and a health care dollar.

    And until we look at it in the aggregate for this program, I do not think we are going to have the optimal result for the beneficiary that we truly need.

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    I am hopeful. Hope always springs eternal it seems in these negotiations with our customer TMA, in terms of ultimately resolving these, but the direction from my board of directors is that we cannot any longer implement change orders absent adequate funding for them on the front end of these contractual changes.

    Mr. MCINTYRE. The time lines for implementation are short. If we were in an ideal world, we would probably have about twice as long as we have to do the work on both sides. I applaud the Department for the seriousness with which they are taking this issue.

    I think the issue that Jim Woys talked about, in terms of struggling with the requirements, has everything to do with the fact that this is a complicated undertaking that we are trying to accomplish here.

    And I think the Department is doing a good job of trying to grapple with how do they mature their processes in the change order area.

    I have been pleased with the way in which that process has worked to this point on TFL, in terms of our own contract and our own relationship with the Department. But it is required some flexibility and some willingness to understand that they are up against a wall just like we are.

    Mr. MCHUGH. Thank you. Mr. Baker.

    Mr. BAKER. I think I would echo the sentiments already expressed. This is a very, very complex process that we are about to launch. And we have not yet even defined what the requirements are going to be. I am concerned about that, very concerned.
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    At the same time, I also believe the Department is making a very good-faith effort to try to move forward as expeditiously as it possibly can. And the Department and the contracting officers are working with us as partners to try to define those requirements.

    Some, frankly, will be driven by costs. For the first time I think the TRICARE For Life and the pharmacy senior benefit in particular, for the first time, we looked at the front end of the process in terms of implementation strategies balanced against what those costs would be. And I applaud the Department in that regard.

    But frankly, the DOD is in a real box right now with its available funding. And this underscores the issue I tried to cover in my testimony about the viewpoint of this as one total integrated system. Shorting the funding in one area, whether it is TRICARE For Life or the direct care system or someplace else, has an inevitable impact elsewhere.

    Mr. MCHUGH. Thank you, sir. Ms. Sanchez.

    Ms. SANCHEZ. Thank you, Mr. Chairman.

    Well, let's see. Mr. Chairman, you talked entitlements or this being really one of the biggest entitlements that we are seeing in the federal budget. And each of the four gentlemen before us has, in one way or another, talked about more money, more money, or more funds toward this issue.

    I think, Mr. Nelson, you talked about DOD making a forecast of funding increases in this at a 2.25 percent level and saying that is pretty unrealistic. First of all, what would you think, I mean, you are in the field, what do you think in the last year, or maybe this year, that amount would really be?
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    Mr. MCINTYRE. Well, I can draw a comparison to our commercial enterprise where I mentioned earlier we reprice products on an ongoing basis in a real-time mode.

    We have introduced certain program structures into those benefits, such as what is termed three-tier copayments for pharmaceuticals, where customers are at increased cost and exposure for those things to lessen the impact of a pharmacy escalation of 20 to 25 percent escalation.

    But I can tell you, given the changes that we make on the structure of the benefit that pass more costs to the ultimate customer and greater financial exposure, we are still seeing 10 to 12 percent escalation per year over the last two years relative to our premium costs.

    Ms. SANCHEZ. So you are telling me that you are seeing 10 to 12 percent. And that is given the fact that you have restructured so that an individual has to put up more money out of his own pocket in order to receive the benefits that are under the plan.

    Mr. MCINTYRE. That is correct.

    Ms. SANCHEZ. And that just alone in pharmaceutical you are seeing about a 25 percent increase more or less? Okay. And so we are at 2.25 percent increase in the DOD equation.

    And then, let's see, Mr. Woys, you talked about—I think this is attributable to you—being conservative on your contracts because it is a moving target out there. And that when you go to look at your contracts, you would tend to, as I would, having had training as an economist, to look at a conservative approach to what you are going to provide and what it is going to cost. Isn't that true what you were saying?
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    So it seems to me like that we have that entitlement, and somebody else, and I do not know which one of you discussed this whole issue of last year we authorized a certain set of goods, package, but, of course, we did not appropriate to fit the certain goods. So you already started behind the ball.

    So it seems to me like we have a problem here that we have an entitlement, which we all, up here on this committee, and I think in the Congress, are saying, ''We want to honor our commitments. We want to give our service people, retirees and their families a good health care package.'' We are not estimating it by any means. I mean, 2.25 percent versus 10 or 12 or 25 percent is nowhere in the ballpark.

    You know, you are not the only ones who come in and tell us these things. I was looking at national missile defense the other day, and of course, our budget, Mr. Chairman, as you know, does not really include the $100 billion or so for that. And yet, we, as a Congress, are pushing forward a tax cut plan that is, you know, pretty hefty to move a lot of these funds out of the way.

    This is not to be political. This is to talk about the issues that we really face here in the Congress. Everybody comes through our door and says, ''More, more, more. We need to do what you guys want. You know, we want to honor this type of commitment and we need more monies to do it.''

    I have a question for you gentlemen, since I know that you are in a pretty high tax bracket given that you are CEOs, are you all pushing for the tax cut around town? [Laughter.]
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    Mr. MCINTYRE. I am pushing to make sure that the system is fully funded. Other people can figure out about the tax issue.

    I think your point is well taken. The challenge that we face, though, is this is an integrated system. And as people have said, you cannot fund one part and not fund the other.

    And I included in my testimony, on page nine, a chart that reflects what has been going on in health care inflation since 1996 and what has been budgeted for the defense health care program, writ large, contracts and direct care system, and what the actual experience has been.

    It is interesting to me that the number that was included in the budget as it came to the Hill for fiscal year 2002 was a 5 percent increase. FEHBP this year nationally is increasing by 10.5 percent. In the region that I serve, it is 15 percent.

    And the fact of the matter is, that you can make adjustments in benefits to tighten up what the cost of the service is, but you have to be real, real careful about when you do your cost projections to make sure that you are looking at what reality is and not what you think you might have in your wallet to spend. And that is where the rub has been. And you all need to be pushing on us as you are doing as an integrated system to look at how we can be more efficient and those kinds of things.

    But those that sit in whatever Administration happens to be in power and the people that are responsible for the budget process, and in turn the appropriations process, need to look at what we currently have on the books, what does it cost to deliver that service?
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    And what is the reasonable expectation for what it is going to cost in the successive year? And then look, as Dave Nelson has talked about, do we make changes as a way to bring down and tighten up that costs, whether it is administrative efficiencies, whether it is health care changes or the like?

    And Mrs. Sanchez, as an economist by background, you know that if you do not approach things that way, you are actually belying reality. And that is where we have been for the last number of years and we have all seen what the result is.

    Ms. SANCHEZ. Well, believe me, if I ran the place, we would be doing it the way you just suggested. Taking a real look at what numbers, what the real numbers, these types of things would cost us. Unfortunately, I do not run the place.

    I guess what I am just saying, gentlemen, is you know, I appreciate your coming in and saying, ''You really need to look at the cost of this, you really need to look at putting funds toward this, you need to be working through this process and making sure that funds are appropriated toward this.''

    But the reality of the situation here, as the budget is going through and as the tax cut is going through, is that you will not see those types of increases come under; at least I do not believe you will see those types of increases coming towards. So, given that, what is your next line of what we do?

    Mr. MCINTYRE. What is in the budget that is headed to the President for signature is additional authority on the authorizing for expenditures side a $1.4 billion for 2001 and $3.1 billion for 2002 beyond the President's request.
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    I personally believe that if we are careful about how we implement new benefits, that that probably is a sufficient enough ceiling to provide for the whole system. The question becomes, what happens in the appropriations process?

    The second part of this, though, what is really important is that that bill gets paid. We all just settled global settlements with the government because the government is obligated to us for what they push to us in the way of expense.

    The problem with that, though, is that when we do not provide sufficient funding for the entire system, the net fact is that we spend more of the taxpayers' money when we ultimately pay that bill.

    Because rather than providing the service inside the direct care system that could have been provided, it gets pushed downtown because the MTF commanders violate law if they spend money they do not have. We will ultimately get paid, but it is at a higher cost because that particular service could have been done at a lesser cost in the MTF and we ended up having to do it downtown at commercial rates.

    And so it is a very practical issue. We are going to pay it now or we are going to pay it later. And I believe personally that we are much better off confronting the issue, paying it now, because net we are going to end up spending less of the taxpayers' dollars and end up with a much better system for the beneficiaries, regardless of whether we are talking about TFL or the under-65 or whatever part of the benefit or the system we are talking about.

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    Ms. SANCHEZ. Anybody else have a comment to add?

    Mr. BAKER. Well, I agree wholeheartedly with Dave McIntyre on that issue. At the break I mentioned to one of my colleagues that if you look at the defense health program, if you imagine for a moment that that is a vehicle and you consider the fact that there is a cost to be paid to run the direct care system, there are costs associated with the readiness mission, we have now added benefits for the over-65 costs that have to be paid, and then there are costs associated with TRICARE.

    And in that vehicle, in your private vehicle, you would not put air in only three of the tires. But that is, in essence, what we have done in this circumstance.

    I think you have to view this as an integrated system and all of the elements need to be funded. And Dave is right on point. If you do not do it at the front end, it is always more expensive in the long run.

    Mr. NELSON. Ms. Sanchez, I would just add briefly that this is the inter-relationship and the complexities that I mentioned in my prepared testimony, as well as my oral testimony, that exist between the direct care system and the care that all of us provide.

    And as an economist, you well recognize these cause-and-effect relationships are complex. And as you push one place, it comes out another. And it clearly does.

    For example, if pharmaceuticals are not bought in MTFs because they do not have the Operations and Maintenance (O&M), funds and those pharmaceuticals are then bought out in our network, it costs more because the government pays us more to provide those drugs than it does in the MTFs.
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    These are simple examples, such as the active duty family member copayment elimination, which was again part of the National Defense Authorization Act, where we eliminated copayments. In the commercial world, copayments, financial risk, are going in the exact opposite direction.

    I just presented at an investor conference for our organization earlier this week, and we have a slide that shows the rest of the health care industry going in one direction, and it has TRICARE going in quite the opposite relative to financial exposure, if you will, to this beneficiary population.

    These are decisions that the Congress has made, but there is a price tag for them.

    Ms. SANCHEZ. Thank you. Now, correct me if I am wrong, Mr. Nelson, are you the Region One provider?

    Mr. NELSON. Yes, ma'am. That is correct.

    Ms. SANCHEZ. Can you comment back to this whole issue that the Admiral brought up on the last panel with respect to why it is taking six months or a year in some cases, as she indicated, to be able to switch into this area's provider network?

    Mr. NELSON. Surely. I believe the issue is regarding the portability of enrollments from one region to another. And I believe last year in this very same room, I testified regarding some of the limitations regarding the systems integration that complemented the accomplishment of this function. Specifically, there is a system for enrollment that each of us has that is proprietary other than Sierra Military.
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    Under our contract, and this also addresses, I believe, your question, Ms. Sanchez, about the differences in contracts, our contract under the enrollment process is materially different than the other gentlemen that are sitting at this table, in that we use a government system called CHCS, the Composite Health Care System.

    That system has had its challenges relative to the accomplishment of portability. I would say that the requirement that we meet 95 percent of the time is 12 days to process a portability enrollment.

    Would I sit here and say to you that there has not been challenges and occasions where that time line has been exceeded? Absolutely. It is not the norm, though, I will say, that six months to a year is what is, in fact, occurs in Region One, or I would imagine any other one of my colleagues' regions.

    These systems challenges have contributed to that delay. The implementation of the National Enrollment Database (NED) will support the portability program and further reduce even that 12-day period to process a portability. As you saw in my written testimony, I do have some concerns about the implementation of the National Enrollment Database.

    But in fact, in our region, what we have accomplished when a beneficiary does call us and their enrollment is in this transition period, we will appoint them, because we have created a field in the CHCS model that indicates that they are in transition. That was a manual work-around that we have worked with our office of lead agent.

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    So there are challenges in enrollment. I look for many of them to be corrected through the implementation of NED, which will present its own set of circumstances beginning in a mere two weeks for all of us. But that is not the norm.

    Ms. SANCHEZ. Thank you, gentlemen. No more questions, Mr. Chairman.

    Mr. MCHUGH. Help me to better understand, Mr. Nelson, the National Enrollment Database. Can that technically be considered a national enrollment system? Will it serve that function so that all of the regions will not have to have that question of portability, at least to the extent they do now?

    Mr. NELSON. By design, Mr. Chairman, that is correct. It is actually an international enrollment database in that it will address those members that are outside the United States, is my understanding, as well. But as initially designed, it was termed the National Enrollment Database.

    It will call for some significant transitions between the proprietary systems that I mentioned that each one of the gentlemen here at the table has, in addition to the government system that I use for enrollment. But as I look at the horizon right now and what are the threats—the term that was used earlier—to the program, this is an area that I have significant concern about.

    It is a system that would require significant testing, and the Department has begun that testing. Some of those tests have been successful. Some of them have been unsuccessful. But we are going live with this program. I believe, June 15 is the current date for implementation. I would like to see more testing between now and the to ensure my confidence level in its success.
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    Mr. MCHUGH. Anybody else care to add anything to that? Mr. Woys?

    Mr. WOYS. Our contract is maybe a little different than Mr. Nelson's. It really is a database that is a common database that all contractors can access that really will then give you what the eligibility of that patient is.

    We will continue to use our proprietary system, which will be fed information from this database so that we are consistent in our application. It should solve the majority of these portability issues that we have going back and forth.

    We do have concerns with the implementation activity of the National Enrollment Database. Again, I support Mr. Nelson's comments, some of the testing has not gone completely well. What we try to do is reconcile our enrollment databases to the databases of the CHCS or the government databases. And we are, you know, striving for a 98 percent match.

    Unfortunately, 98 percent sounds pretty good, but 2 percent of a million people that I have enrolled is a fairly substantial number of people who will then be knocked out of the enrollment system because they do not match when we turn this thing on June 18.

    So I am very concerned that if I have a 2 percent problem, I am not sure what my fellow contractors have, because the data is constantly changing from one database to another. There is no centralized control. This will eventually get us there, but when we start this thing up on June 18, 2 percent or 20,000 to 25,000 people in my region are going to be disenrolled.
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    We have to be prepared for that. I just notify the committee where we are at, and we are preparing to handle those things on an expeditious basis. But it is not perfect, and so hopefully this will get us there, but I have some grave concerns about where we are headed.

    Mr. MCHUGH. As someone who still struggles to program the VCR, help me to understand why these 2 percent are going to be left out. Is this a technical problem? Is it a problem of their enrollment profile?

    Mr. WOYS. Potentially. What we are doing, sir, is we are comparing the people who are enrolled in our proprietary systems, and I have a million people enrolled in TRICARE Prime.

    Mr. MCHUGH. Right.

    Mr. WOYS. We are comparing that list with the list that is on the government data systems, called CHCS or Defense Eligibility Enrolling and Reporting System (DEERS). And where there is not a match, those people, by definition, are going to be eliminated from the enrollment process.

    Mr. MCHUGH. Because they are required to be in DEERS?

    Mr. WOYS. Because they are required to be in DEERS, or that they are required to be CHCS correctly. If they are not in CHCS correctly, they will get kicked out as well.
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    Now, we all know that all the government systems are not perfect, and so we are going to end up with dealing with that back-end problem of trying to fix these. If I have a third of the country and they are in the same situation, we are not dealing with 25,000, we are really dealing with 75,000 people around the country who will, when they go to, they will get kicked out of enrollment.

    When they show up to get their pharmacy benefit, they will not get their pharmacy benefit. That kind of stuff is what we need to be concerned about, is that we have a chunk of people that are in implementation that we are going to have to deal with.

    Long term, this is the right solution, to get a common database. You know, unfortunately, part of the problem about keeping databases parallel is, how many people have access to change my database? It is all of my employees.

    How many people have access to change the government's database? Thousands upon thousands of people can go into any office and change your demographics or your eligibility status. And that is important to bring these databases together so we have one centralized database.

    Mr. MCHUGH. So in essence, the 2 percent will be a problem that in theory they are shorter-term problems?

    Mr. WOYS. Yes, we will fix them. I just want to inform the committee that you might hear some enrollment issues come in July and August.
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    Mr. MCHUGH. Oh, yes.

    Mr. WOYS. They will show up and we should then be prepared to deal with them.

    Mr. MCHUGH. You bet we will.

    You talked about national registration. There is a discussion that goes on, is regional structure for the TRICARE program, is that the most effective way of doing it? Admiral Martin said in her written testimony, because of her perspective, she felt that, like politics, all the health care delivery systems were local and local commanders needed flexibility.

    Are there other kinds of administrative procedures beyond enrollment that perhaps could be handled on a nationalized basis, whether it be prescription and pharmacy or some other? Do you see any opportunities in that field?

    Mr. WOYS. Let me give you my opinion.

    Mr. MCHUGH. Sure.

    Mr. WOYS. From my perspective I, kind of, divide the line between beneficiary services and provider services. Beneficiaries: The benefit ought to be portable and it ought to be uniform across the country, which means that we ought to have the same benefit in Washington state that we have in Washington, D.C., and there ought to be a common application.
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    And to the extent that we can look at the way that we deliver services to our beneficiary that has a common look and feel to them, because we have a very portable population who will go across the country, that when they get an ID card, it is the same in one region as it is the other. It does not look differently. The marketing materials, the education materials look the same. And then we can employ as many of the same common practices that we have a really national system.

    True, health care is delivered locally. That means that our relationships with our providers and how we deal with providers need to be done locally. They cannot be done on a national basis.

    So I, kind of, divide the line between those two areas and try to do as much as I can policy-wide and we deal with our beneficiary population so the look and feel looks common across the country. But when you get down to the patient-doctor relationship, it really is a local relationship and something that we have to deal with on a local basis.

    Mr. MCHUGH. So in theory, claims processing, pharmacy may be an opportunity to more nationalize the structure?

    Mr. WOYS. Yes. When we talked a little bit and I think what we are talking about is national-type carve-outs of the functionality of what we do.

    Mr. MCHUGH. Exactly.

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    Mr. WOYS. And let me just give you my perspective.

    Mr. MCHUGH. Because my thought was going to be how might that affect your willingness to participate in the regional contracts?

    Mr. WOYS. Probably less. Let me give you an example of claims processing. Though we should probably have a national claims processing system that has common application as to how we process the claim, the management of that claims processing system should be at somewhat the discretion of the contractors.

    As we implement our provider contract files, as we deal with our providers, if a provider comes to me, as Mr. Thornberry has an issue in his region, how am I going to get that claim paid timely?

    If it is some other contractor is doing it and they are not performing, I do not have the ability to go beat on them to go get it done. Where today, if Mr. Thornberry has a problem with a provider, I can go directly and get that provider fixed immediately. You lose control, lose the capability of really providing that level of customer service as you can. We will experience this a little bit in one carve-out here that is going to come up very recently with this NED implementation, which is ID cards. I have expressed my displeasure with the Department about carving out ID cards and doing that on a national basis.

    My problem with that is that when a beneficiary walks up to one of my TRICARE service centers and has an ID card problem, I cannot solve it. I have to point them to another phone number, yet to be decided, of where to go to get their ID card or how to get if fulfilled.
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    People see that ID card as an evidence of coverage, and so they think that they do not have coverage unless they have an ID card that they can walk into the pharmacy or to the provider's office to show them that they have insurance coverage.

    If they have a problem with their ID card, and it does not show up, it is wrong, I cannot fix it. They are used to coming to us for customer service. I cannot fix it. We will have to point them to another vehicle to get that done. And in our contracting world and in the government contracting world, which is full of bureaucracy, is that if I am going to get something fixed, I have to go to my contracting officer and ask them to talk to the contracting officer of the ID card vendor, who then can give direction to the ID card vendor to perform, if that is the case. And that ID card vendor, if it is out of scope, will ask for additional funds.

    Very complicated in the world that we live in, but I guess I am really worried about carve-outs in the aspect that we will then degrade the level of customer service that we have been working so hard to give to our beneficiaries, that all of things are components of a big wheel that fit together and work so closely together.

    You carve out claims processing. If it is done incorrectly you will screw up my enrollment process. If the enrollment is carved out and I do not have control over that, enrollment and the claims system talk together to determine what their benefits set is to determine how we process a claim. They are also integrated in what we do in a managed care environment and what we do as a contractor. And so I am very anti-carve-out because I think it denigrates the service that we deliver to our beneficiaries.

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    Mr. BAKER. I would like to second that sentiment. As a matter of fact, I am very concerned and that is why made the reference to approaching TRICARE as a fully integrated contracting vehicle.

    One of the issues clearly that Jim Woys is addressing is not being able to fix a problem that a beneficiary has, but there is a follow-on there: There is limited ability to fix responsibility for the problem.

    Today, an MTF commander can come to me, as the person responsible for all elements of the managed care support system in that catchment area, and if there is a problem it is up to me to figure out whether it is an enrollment issue, whether it is the loading of a provider file. Whatever it happens to be, I play detective, I determine where the problem is and I fix it. You start carving things out and there is no one you can go to do that. When everyone is in charge, no one is in charge. And that is what I fear will happen with the carve-outs.

    Mr. MCINTYRE. Part of the challenge with this issue is that there are probably some short-term economic gains and some short-term service gains to be realized by doing some of the carve-outs. But the long-term consequences could be disastrous, as both Jim and Dave have laid out. And I think people have to think very long and hard about how many moving parts are there in this system.

    But then how do we deal with the issue of accountability and lack of performance? And if someone is not building in the right contingency processes to anticipate problems with NED and there are problems with NED that could have been avoided on that person's part, then they should be accountable for that.
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    There are things that can be centralized in terms of strategy and approach. But there are very few insurance products in America that separate the kinds of components that some people are looking at separating. And there is a real reason for that.

    And it affects both the beneficiary and the provider. And you do not see many products that separate claims or enrollment or marketing or those kinds of things. They operate to common policy sometimes and common direction, but they do not separate the mechanics of those things. And that may end up being a short-term gain but a very long-term disastrous road to take.

    Mr. MCHUGH. Thank you. I just have one more question and it was based upon Mr. Baker's oral testimony. And where I think it is fair to say you express some frustration that TRICARE claims processing rules and procedures differ substantially from those of Medicare.

    Why do you think that happened? I mean we are talking about all kinds of standardization of claims processing et cetera, et cetera and yet apparently, as I am hearing you tell it, there is either reluctance, unwillingness or failure to move TRICARE to what appears to be a more certainly broadly based but perhaps more effective claims processing system. What is going on?

    Mr. BAKER. Well, it would be, I think, a bit presumptuous of me to try to articulate why the Department of Defense has determined a need to have different claims processing processes. But the fact of the matter is they do. I know that there is information gained that the Department feels is of benefit. My concern is whether the benefit justifies the added cost. And I think that is a question that would be, frankly, better directed toward the Department.
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    Mr. MCINTYRE. We did an analysis in this area a year and a half ago, and we are talking about the question of whether we could be given the authority to reengineer this area as it related to our region and take on the inherent risks to do that. Set that aside, because of the National Defense Authorization Act requirements believing that you could not handle both of those projects at the same time.

    The savings long-term, if we were to reengineer claims processing and go in the direction that Dave is talking about where the cost is similar to what you find in the marketplace, was on the order of $230 million to $280 million a year. That is real money when we are talking about the kind of resourcing issues that we have in this program.

    Second, claims processing and its complexity that is different than the rest of the market is part of the reason that contributes to problems in getting providers to either come into this program or stay in. So it is both a resource issue and it is an issue on the provider side.

    Because let's face it, the rates are aggressive. And I will tell you that I am going at full steam in a lot of the communities that I am in. I am in Idaho. I am in North Dakota. I am in South Dakota. A lot of the providers do not even do work with Medicare because they think that Medicare does not pay enough. And there is not enough volume of business to force them to do it.

    And when you come along and say, ''Hey, I have a deal for you. This is a population that you have a responsibility to join me in serving.'' They say, ''And you are going to require me to do what? And these are claims that I am only going to deal with 1 percent of the time in my business? I cannot do this.''
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    So it is a very practical issue that we all need to be challenged to look hard at. And quite frankly, this committee challenged us to do that a year or to ago in looking at the question of whether we should not be looking for administrative efficiencies. And one of them was in the claims processing area. And that was in the authorization bill two years ago.

    Mr. NELSON. That is absolutely correct, David. Mr. Chairman, and we proposed a value engineering change proposal to the Department, which is a technical term for a methodology of introducing an innovative and creative idea, if you will, to the contract and demonstrated significant cost savings in this regard that then could go back to enhance benefit, or pay for benefit, as opposed to what has been termed extraordinary claims processing costs. Unfortunately, that proposal was not accepted.

    There have been changes made by the Department to the processing. That is clear. Our standards are now, I believe it was earlier stated, 97 percent of claims are processed within 30 days. However, the fundamentals have not changed. And I believe that is an issue that would advance greater cost savings for the entire program if, in fact, they were enacted.

    Mr. MCHUGH. Thank you very much. Well, I said that would be my last question, and even though it is not an election year, I am going to try to keep that promise. Let me, again, express my appreciation to you all. You are very busy people, as evidenced by the testimony here today. And you have been very gracious with your time, as was the first panel. We appreciate it.

    As with the first panel, we would respectfully request your indulgence if we have further questions for the record that you could respond to us. We hope to be in repeated contact with you.
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    Obviously, the task you have before us is of immense importance, not just to this subcommittee and this Congress, but to the people that you serve. And in spite of what the track record may show, I can tell you, we want to be supportive in that effort in every way we can. So, thank you again. And with that, the hearing stands adjourned.

    [Whereupon, at 1:15 p.m., the subcommittee was adjourned.]


May 17, 2001
[The Appendix is pending.]