The Medicare Subvention Demonstration

The Medicare subvention demonstration permitted DOD to create managed care organizations that participate in the Medicare+Choice program and enroll older retirees. Instead, it was mostly due to Senior Prime enrollees’ heavy use of services. A smaller part of the difference reflected DOD’s coverage of prescription drugs. Prescription drugs for enrollees—not included in the Medicare benefit package—cost DOD on average $55 per month per enrollee. The Capitated Rate Exceeded What Medicare Would Have Spent on Senior Prime Enrollees Without the Demonstration

Without the demonstration, Medicare in 1999 would have spent 55 percent of the Senior Prime capitation rate on retirees enrolled in Senior Prime. BBA Payment Rules Resulted in No Medicare Payment to DOD

The BBA payment rules for the demonstration limited what Medicare could pay DOD for care rendered to Senior Prime enrollees, reflecting the fact that DOD had an additional source of funds for retiree health care—its appropriations. Under these rules, DOD was required to spend as much as it had historically spent on all seniors in the demonstration areas before it could be paid by Medicare. The rules also required that the payment be adjusted upward or downward according to whether Senior Prime enrollees were sicker or healthier than comparable Medicare beneficiaries. The BBA rules prevented the government from paying twice for the same care and protected the Medicare program from a large increase in its spending for Senior Prime enrollees. The LOE requirement applied only to Medicare-covered services, for which DOD incurred high costs.
What GAO Found

The Balanced Budget Act of 1997 authorized the Department of Defense (DOD) to conduct the Medicare subvention demonstration for a three-year period. Under this demonstration, DOD formed Medicare managed care organizations--collectively called TRICARE Senior Prime--at six sites that provided the full range of Medicare-covered services as well as additional DOD-covered services, notably prescription drugs. The Medicare program was to pay DOD for Medicare-covered care of the enrolled military retirees if DOD continued to spend on all aged military retirees at least as much as it had historically. Under the subvention demonstration, Senior Prime enrollees' care in 1999 cost DOD far more than the Medicare capitation rate that was established for the demonstration. This mainly resulted from enrollees' heavy use of medical services, but DOD coverage of prescription drugs--not included in the Medicare benefit package--also contributed to its high costs. Without the demonstration, Medicare spending in 1999 for retirees who enrolled in Senior Prime would have been, on average, about 55 percent of the Senior capitation rate. The Balanced Budget Act's payment rules resulted in no Medicare payment to DOD in 1999. This was because they were designed to prevent the government from paying twice for the same care--once through DOD appropriations and again through Medicare. The rules also required that the payment be adjusted to account for Senior Prime enrollees' health status.