Government savings from 2007 TRICARE law subject to change

A law restricting an employer’s ability to lower its health care costs by offering incentives for working-age military retirees to use TRICARE instead of an employer-sponsored plan could save the federal government tens of millions annually -- but those savings might be reduced due to rising private sector health care costs.

A recent Congressional Budget Office estimate found that a requirement enacted as part of the 2007 National Defense Authorization Act could save the federal government $30 million annually and the Defense Department up to $55 million per year, after adjusting for revenue effects.

The statute, known as Section 707, was enacted in 2010 and requires employers to stop offering certain incentives to TRICARE-eligible employees. Before the law, employers seeking to keep their costs low gave TRICARE-eligible employees cash or TRICARE supplements to use the military health program. Now, under Section 707, employers are still able to offer enticements to find alternatives to their health plans, but the incentives must be extended to all employees, regardless of military status. They also can offer TRICARE through group plans if the TRICARE-eligible employee pays the full out-of-pocket cost.

The purpose of the law is to net savings for the government. Military compensation and benefits currently account for nearly one-third of total Defense spending, and the fiscal 2013 budget proposal includes signifcant changes to the structure of TRICARE that require higher fees for enrollees.

Because military members often can retire after 20 years of service, many are young enough to continue working in the private sector, where they can choose an employer-provided health care plan. The CBO estimate found that 75 percent of working-age retires still choose TRICARE, however. It concluded that rising health care costs from employer-sponsored plans could reduce savings expected from Section 707.

“If the growth in out-of-pocket expenses arising under employer-sponsored health care plans continues to outpace those under TRICARE by significant margins, more retires are likely to leave employer-sponsored care and enroll in TRICARE, which will probably reduce the savings attributable to Section 707,” CBO wrote. “However, the path of out-of-pocket expenses under TRICARE will depend to a large extent on future decisions about the administration of that program.”

CBO also found that some beneficiaries continue to use TRICARE even without the employer-subsidized supplements, and “almost always” use TRICARE Standard, the fee-for-service plan, rather than TRICARE Prime. CBO speculated this will change due to Section 707.

“With employers no longer subsidizing the supplements for TRICARE Standard, it is likely that many working-age military retirees have stopped using Standard and have instead enrolled in TRICARE Prime (the managed care option of the TRICARE benefit) because it has very low out-of-pocket costs,” CBO wrote. “However, the average cost to the federal government for TRICARE Prime is at least 15 percent higher than it is for TRICARE Standard. Therefore, the change in behavior by these people probably raises the government’s costs.”

CBO conducted its analysis based on a model that simulates certain assumptions of choices, and conceded that it was difficult to completely measure outcomes.

The report was originally requested by Sen. Lindsey Graham, R-S.C., and addressed to him as well as the chairman and ranking members of congressional defense committees.