Potential Adverse Selection Effects Will Likely Be Minor and Offset by Capitation Adjustments

Our analysis of the potential effects on the USTFs of adopting the TRICARE cost shares showed that less than 10 percent of the members will disenroll, causing less than a 2-percent increase in operating costs. It also allows for negotiated adjustments in reimbursement rates for the effects of benefit and cost-sharing revisions, which may result in adverse selection. In contrast, the USTFs estimated that the new cost shares will cause about a 40-percent USTF disenrollment rate and cost increases of about 11 percent. However, the USTFs’ estimates are overstated because of weaknesses in their survey and health claims data, and the absence of out-of-pocket cost differences among the key plans that are significant enough to cause disenrollment of more than 10 percent. This is not the case. But for the USTFs to experience the 40-percent disenrollment rate they estimated, the cost differences would have to be significantly higher than what would exist between the USTFs’ new cost shares and TRICARE Standard. This estimated increase, however, will likely have no lasting negative financial impact on USTFs because DOD’s current reimbursement approach automatically adjusts USTF payments to account for changes in members’ age and gender. = 2.38). This in their opinion will increase USTF costs. The USTF and DOD beneficiary populations are already dissimilar. The USTFs serve proportionately more retirees and their dependents. But with the new USTF cost shares, the USTF population will actually move closer to the general DOD population as the healthy retirees under age 65 seek less costly medical coverage.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed the potential effects of the Department of Defense's (DOD) new health care benefit and cost-sharing package, which is part of its TRICARE managed health care program, on the Uniformed Services Treatment Facilities (USTF).

What GAO Found

GAO found that: (1) the new cost-sharing arrangement might leave USTF at risk for higher costs by causing some healthy members to disenroll, an outcome known as adverse selection; (2) adverse selection probably will not have long-term negative financial effects on USTF, because less than 10 percent of current USTF members are expected to disenroll, and USTF costs would not increase by more than 2 percent; (3) DOD capitation payments will automatically adjust for higher USTF costs caused by changes in enrollment, and USTF may negotiate payment adjustments for the effects of the benefit and cost-sharing revisions; (4) USTF estimated that cost-sharing would cause about 40 percent of their members to disenroll and increase costs by about 11 percent; (5) the USTF estimates are unreliable because of data and methodological weaknesses; (6) the USTF estimates included data for large claims which are unpredictable and dramatically affect cost estimates; (7) the difference in members' out-of-pocket costs between USTF and TRICARE Standard is not expected to be great enough to cause more than an estimated 10-percent USTF disenrollment; and (8) USTF already serve proportionally more retirees and their dependents who are under age 65 than exist in the general DOD population, but cost-sharing may reduce the proportion of younger retirees and their dependents in the USTF population.