DOD’s Methods for Developing TRS Premiums

DOD is required by law to set premiums for TRS at a level that it  determines to be reasonable using an appropriate actuarial basis. The total premium for individual coverage under tier 1 was   72 percent higher than the average cost per plan of providing benefits  through the program. Similarly, the total premium for family coverage  under tier 1 was 45 percent higher than the average cost per plan of  providing benefits. In 2006, the Premium for Both Individual and Family Coverage under TRS Exceeded the Reported Costs per Plan of Providing Benefits through the Program

In 2006, the premium for both individual and family coverage under TRS  exceeded the reported costs per plan of providing TRICARE benefits  through the program. By statute, the  portion of the TRS premium paid by enrollees in tier 1—and all enrollees  as of October 1, 2007—is to cover 28 percent of the full premium. Had DOD been  successful in establishing TRS premiums that were equal to the average  reported cost per TRS plan in 2006, enrollees’ share of the premium would  have been $566 for single coverage and $2,099 for family coverage in that  year. Basing TRS Premiums on BCBS Premiums Is Unlikely to Successfully Align TRS Premiums with Benefit Costs

Basing TRS premiums on BCBS premiums is unlikely to align TRS  premiums with benefit costs because of several differences between the  TRS and BCBS populations and programs that DOD did not take into  account. DOD based TRS premiums on BCBS premiums because at the  time DOD was developing TRS, actual data on the costs of delivering TRS  benefits to the TRS population did not exist. DOD’s cost projections were too high  largely because it overestimated the number of reservists who would  enroll in TRS as well as the associated cost per plan of providing benefits  through the program. Prior to TRS’s implementation, DOD estimated that total costs of  providing benefits through the program would amount to about   $70 million in fiscal year 2005 and about $442 million in fiscal year 2006. In  contrast, reported costs in those years only amounted to about $5 million  and about $40 million, respectively. DOD officials told us that they considered TRS  cost and enrollment data when developing future year projections of  program costs and enrollment levels, but they chose not to use these data  as part of their projections because of uncertainty about whether they  would provide an accurate indication of likely future experience. However, cost data that reflect actual  experience under the program are now becoming available, and  limitations associated with them should decrease over time as DOD gains  more experience with the program and more reservists enroll in it. Nonetheless, due to the uncertainty associated with  predicting future health care costs, premiums are unlikely to exactly  match program costs, even when they are based on cost data from prior  years. Other insurance programs have methods to address discrepancies  between premiums and program costs, which are not provided to DOD in  the law governing TRS. Recommendations for Executive Action

With the goal of eventually eliminating reliance on BCBS premiums and to  better align premiums with the costs of providing TRS health care benefits,  we recommend that the Secretary of Defense direct the Assistant  Secretary for Health Affairs to stop basing TRS premium adjustments only  on BCBS premium adjustments and use the reported costs of providing  benefits through the TRS program when adjusting TRS premiums in future  years as limitations associated with the reported cost data decrease. Appendix II: Scope and Methodology

To compare the annual TRS premiums established by DOD to the reported  average costs per plan of providing benefits under TRS in 2006, we  reviewed DOD’s reported TRS enrollment data and data on the cost of  providing TRS benefits through TRICARE-authorized civilian providers or  hospitals, data on the administrative costs associated with providing TRS  benefits, and data on the costs of providing TRS benefits through military  treatment facilities (MTF). At the time covered  by our analysis, TRS included three tiers of eligibility with enrollees paying  different portions of the premium based on the tier for which they  qualified. To compare DOD’s projected costs for the TRS program before  implementation to DOD’s reported costs for the program in 2005 and 2006,  we reviewed the analyses prepared by DOD before TRS’s implementation  that projected (1) the number of individual and family plans in each tier of  the TRS program and (2) the costs per plan of providing the TRS benefit.
Why GAO Did This Study

(DOD) TRICARE Reserve Select (TRS) program allows most reservists to purchase coverage under TRICARE, the military health insurance program, when not on active duty. DOD intends to set premiums at a level equal to the expected costs of providing TRS benefits. The National Defense Authorization Act for 2007 required GAO to review TRS costs. As discussed with the committees of jurisdiction, GAO compared (1) the TRS premiums established by DOD to the reported costs of providing benefits under TRS in 2006 and (2) DOD's projected costs for TRS before implementation to DOD's reported costs for the program in 2005 and 2006. To do this work, GAO examined DOD analyses and interviewed DOD officials and external experts.

What GAO Found

In 2006, the premium for both individual and family coverage under TRS--which DOD based on Blue Cross and Blue Shield (BCBS) premiums--exceeded the reported average cost per plan of providing TRICARE benefits through the program. TRS currently serves less than 1percent of the overall TRICARE population, and unlike most other TRICARE beneficiaries, TRS enrollees pay a premium to receive health care coverage. At the time of GAO's analysis, TRS consisted of three tiers, established by law, with reservists in each tier paying different portions of the total premium, based on the tier for which they qualified. Over 90 percent of reservists who purchased TRS coverage enrolled in tier 1. The premium for individual coverage under tier 1 was 72 percent higher than the average cost per plan of providing benefits through the program. Similarly, the premium for family coverage under tier 1 was 45 percent higher than the average cost per plan of providing benefits. DOD based TRS premiums on BCBS premiums because, at the time DOD was developing TRS, actual data on the costs of TRS did not exist; however, these data are now available. Had DOD been successful in establishing premiums that were equal to the cost of providing benefits in 2006, the portion of the premium paid by enrollees in tier 1--which is set by law to cover 28 percent of the full premium--would have been lower that year. Reasons that TRS premiums did not align with benefit costs included differences between the TRS and BCBS populations and differences in the way the two programs are designed, which DOD did not consider in its methodology. According to experts, the most successful methods for aligning premiums with actual program costs involve using program cost data when setting premiums. The regulation governing TRS premium adjustments allows DOD to use either BCBS premiums or other means as the basis for TRS premiums. However, DOD officials told GAO that they plan to continue, at least for the near future, to base TRS premiums on BCBS premiums because of limitations associated with using currently available data to predict future TRS costs. However, these limitations should decrease over time as DOD gains more experience with the program and enrollment increases. Nonetheless, due to the uncertainty associated with predicting future health care costs, premiums are unlikely to exactly match program costs, even when they are based on cost data from prior years. Other insurance programs have methods to address differences between premiums and program costs, which are not provided to DOD in the law governing TRS. DOD overestimated the total cost of providing benefits through TRS. While the department projected that its total costs would amount to about $70 million in fiscal year 2005 and about $442 million in fiscal year 2006, DOD's reported costs in those years were about $5 million and about $40 million, respectively. DOD's cost projections were too high largely because it overestimated the number of reservists who would purchase TRS and the associated cost per plan of providing TRS benefits. DOD officials told GAO that they chose not to use TRS cost and enrollment data when projecting future year program costs and enrollment levels because of uncertainty about whether they would provide an accurate indication of future experience.