Why TRICARE Fee Increases?

In the 2014 budget overview, the DoD acknowledges some modest reductions in TRICARE costs, but refers to them only as an important first step. “The savings from these changes are not enough to sustain the benefit in the long-term,” the report states, “particularly in light of the economic crisis currently facing the nation and driving additional reductions in overall defense spending.”

The Military Health System now has 9.6 million eligible beneficiaries. Like the rest of the nation, it has seen its healthcare costs grow substantially over the last decade. From FY 2001, when MHS costs were budgeted at $19.1 billion, they have more than doubled; the 2014 medical budget request, even after the proposed $900 million in savings, is $49.4 billion.

“At its heart, what the DoD wrestles with – and as a country what we’re wrestling with – is the question of what we owe our service members, their families, and retirees. We need to acknowledge the sacrifice that’s been required of them – but also that this [issue of benefits] contributes to our ability to maintain the best and the brightest in the era of an all-volunteer force.”

Critics of the Pentagon’s TRICARE cost-sharing proposals say comparisons of the military and the private sector – or even of the military and other federal agencies – is unfair. To think of retired military personnel as mere pensioners, they claim, overlooks the singularity of their service: Unlike most Americans, they have sworn to give their lives, if necessary, for their country.

Nobody knows this better than the Pentagon leaders who took the same oath of enlistment, said Katherine Kidder, a research associate with the Military, Veterans and Society Program at the Washington, D.C.-based Center for a New American Security (CNAS). “I think this is a really difficult decision for DoD every year when they come out and say we have to look at a way to reduce the benefits that are currently offered,” she said. “I think it’s a heart-wrenching decision for them, and also for Congress. At its heart, what the DoD wrestles with – and as a country what we’re wrestling with – is the question of what we owe our service members, their families, and retirees. We need to acknowledge the sacrifice that’s been required of them – but also that this [issue of benefits] contributes to our ability to maintain the best and the brightest in the era of an all-volunteer force.”

The argument that TRICARE cost-sharing is unfair to active-duty service members is often made by opponents of the Pentagon’s plan. But Kidder points out that the nation is facing stark economic realities and contentious partisan politics that have the government facing two unpleasant certainties: budgets that can’t be strategically programmed because they are automatically cut by the BCA, and the government shutdown amid a partisan fight over provisions of the Affordable Care Act. In such a climate, Kidder argues, it is unlikely that military retirees and active-duty service members can continue to receive what they’ve become accustomed to.

“The difficult pinch right now,” she said, “is that it has become a zero-sum game: capability versus benefits. They are both eating away at an ever-shrinking pie.”

Russell Rumbaugh, a former Army infantry captain who directs the Budgeting for Foreign Affairs and Defense program at the nonpartisan Stimson Center, sees benefit cost-sharing as an inevitability – these costs must come down, along with the rest of the defense budget, in the coming years, and burden-shifting meets two objectives: It will make consumers more aware of costs when it comes to making decisions about services and pharmaceuticals, and it will bring the healthcare expenditures of military retirees closer to those of other Americans. “There is a big gap,” he said, “between what working-age military retirees pay and what the rest of the country pays.”

In July 2013, Carla Tighe Murray, a senior analyst at the Congressional Budget Office (CBO), announced the results of a CBO study that revealed two important findings: First, military retirees using TRICARE pay less than one-fifth – about 19 percent – as much for healthcare as their civilian counterparts. The average military retiree family on TRICARE Prime pays about $965 in out-of-pocket costs annually for healthcare, while civilians enrolled in an HMO pay an average of $6,080.

“I certainly think that retirees and service members and their families should pay well below what the civilian rate is,” Kidder said. “But there is a range at which that can happen and we can also reinvest in what is fundamentally owed to service members – which is the promise that they will be trained and equipped to complete the missions they’ve been called to do.” Rumbaugh agrees that such a gap is unsustainable. “Even taking into account the special nature of the service of military members,” he said, “that’s a really big difference. So closing some of that gap is probably a perfectly reasonable policy goal, without overly taxing those who have served.”

The CBO’s second finding was a projection of how TRICARE reforms would affect future budgets, compared to other changes often proposed by opponents of cost-sharing: focusing on wellness and preventive care, for example, or trimming pharmacy costs, or restructuring the Military Health System into a single unified command. The comparison was stark, according to Murray. All those approaches together would save about $100 million from future budgets, while raising TRICARE fees for working-age retirees could save billions.

“I certainly think that retirees and service members and their families should pay well below what the civilian rate is,” Kidder said. “But there is a range at which that can happen and we can also reinvest in what is fundamentally owed to service members – which is the promise that they will be trained and equipped to complete the missions they’ve been called to do.”

Why does military healthcare have such an outsized influence on the defense budget? Several factors contribute:

• When TRICARE was introduced in 1996, Murray pointed out, the portion of healthcare costs paid out of pocket by the average military retiree family was 27 percent; it’s now about 11 percent. The government, and taxpayers, have assumed a greater burden of retiree health costs since then. DoD healthcare costs continue to climb even amid the current drawdown, as the Pentagon subtracts 70,000 soldiers and 20,000 Marines from its ranks, for the simple reason that retirees remain in the system no matter how many active-duty members currently serve.

• At the same time, said Kidder, the cost of healthcare overall has risen. “In 1990, healthcare made up 4 1/2 percent of the DoD budget, and by 2012 it was 9.6 percent of the budget,” she said. “In constant dollars over the last two decades, that means a 118 percent increase. We can’t ignore the fact that healthcare costs have increased for the population at large – that’s something that isn’t DoD’s fault, but DoD has to grapple with it. I think that the expansion of the eligible pool of DoD health beneficiaries has added to [cost increases].” Tricare for Life, for example, was added in 2001 for military retirees over 65 who were unhappy with rising out-of-pocket Medicare costs.

• The reason government has assumed a greater share of military retirees’ healthcare costs is largely because until 2011, retirees were literally paying the exact same fee they paid in 1996. There was no indexing formula attached to account for future increases in healthcare costs. “The [TRICARE] fee didn’t move, but in those 15 years inflation did move,” Rumbaugh said. “When the dollar is worth less, you have to pay more to get the same level of care. That’s especially true for healthcare, which goes up at a rate three times inflation.”

Congress’ recent cost-sharing measures have been indexed to avoid such disparities in the future, but opponents have voiced displeasure with the peg – the rate of retirement pay increases – on which legislators have hung future adjustments. One of the most vocal and powerful critics, the Military Officers Association of America (MOAA), denounces tying benefits to pay as “means-testing,” which is not done with any other group of federal retirees.

“What kinds of things are means-tested?” wrote Steve Strobridge, MOAA’s then-director of government relations, when the Pentagon released its 2013 budget proposal. “Welfare programs, social insurance programs, and other unearned benefits that are provided as a government gift or ‘safety net’ for those in need of assistance. I’m sorry, but military healthcare benefits most emphatically are not a gift, and MOAA believes these proposals represent inappropriate increases for all grades, regardless of retired pay level.”

Rumbaugh believes retiree benefits such as TRICARE are bound to be indexed in the future – but indexing healthcare fees is tricky. For the 2011 TRICARE Prime fee increase, the Pentagon proposed indexing future increases to the medical inflation rate, which opponents such as MOAA categorically denounced as a factor out of retirees’ control. Congress compromised by tying fee increases to changes in retiree COLAs, which will increase much more slowly.

Opponents of any fee increases aren’t going to like them at all, no matter what they’re indexed to. But, said Rumbaugh, “You can’t argue, ‘Well, my pension should go up because the dollar is worth less, but my healthcare premium’ – which I think is a legitimate cost – ‘should not go up because I shouldn’t be responsible for inflation.’ You can’t have both.”