Increase Medical Cost Sharing for Military Retirees Who Are Not Yet Eligible for Medicare

In the mid-1990s, the Department of Defense (DoD) created the TRICARE program to reform its system for providing health care for members of the military and their dependents, as well as for eligible military retirees and their families. About 15 percent of enlisted service members and approximately 50 percent of officers remain in the military for an entire career and therefore qualify for health care benefits as retirees. Because most military personnel enter the armed forces between the ages of 18 and 22 and are able to retire after serving 20 years, they become eligible for retiree health care benefits at a relatively young age (as early as age 38) and retain some form of eligibility for the remainder of their lives.

TRICARE offers participants three different alternatives for obtaining health care coverage: a plan that operates like a health maintenance organization (HMO), called TRICARE Prime; a plan that operates as a preferred- provider network, called TRICARE Extra; and a traditional fee-for-service plan, called TRICARE Standard. Military retirees who are not yet eligible for Medicare (generally those ages 38 to 64) may enroll in TRICARE Prime by paying an annual enrollment fee of $230 (for single coverage) or $460 (for family coverage). In addition, those Prime enrollees make a $12 copayment for each outpatient visit to a civilian physician or other civilian health care provider. (Visits to military providers are free.) Retirees who do not choose to enroll in TRICARE Prime may receive benefits under TRICARE Extra or Standard without paying an enrollment fee. Participants in those plans must pay an annual deductible of $150 (for single coverage) or $300 (for family coverage) before typical cost-sharing rates apply. TRICARE enrollment fees, copayments, and deductibles have not changed since 1995.

Military retirees enrolled in TRICARE Prime incur smaller costs than they would owe under typical civilian plans for which they might be eligible (through their current employers, for example). DoD has estimated that, in 2009, a typical military retiree and his or her family who enrolled in the Prime plan incurred about $860 in annual out-of-pocket costs (that is, TRICARE copayments and the enrollment fee). By contrast, again according to DoD's estimates, a similar retiree with family coverage who enrolled in an HMO through a civilian employment-based plan typically paid $5,200 in premiums (not including the share paid by his or her employer) and copayments. TRICARE Prime beneficiaries also use the system more than do comparable civilian beneficiaries: DoD estimates that Prime enrollees use services at rates that are higher by 77 percent for inpatient services and 55 percent for outpatient services than the rates for civilian HMO enrollees.

This option would raise the enrollment fees, copayments, and deductibles for younger military retirees--those younger than 65--who wished to use TRICARE. Beneficiaries with single coverage could enroll in TRICARE Prime by paying a $550 annual fee, and those with family coverage could enroll for $1,100 annually. The family enrollment fee of $1,100 per year is approximately equivalent to the $460 fee first instituted in 1995, after adjusting for the nationwide growth in health care spending per capita. Under this option, each medical visit to a Prime provider in the civilian network would entail a copayment of $30, which, again, is approximately equivalent to the amount that was established in 1995. Copayments for mental health visits and inpatient care would also be adjusted accordingly. Single retirees (or their surviving spouse) who used TRICARE Standard or Extra would face an annual deductible of $350; the annual deductible for families would be $700. Those increases would also be consistent with the nationwide growth in per capita health care spending. In addition--and for the first time--users of TRICARE Standard or Extra would be required to enroll and pay a $50 annual fee for single coverage or a $100 annual fee for family coverage. All of those new or increased fees, copayments, and deductibles would be indexed in the future to reflect the nationwide growth in per capita spending for health care.

The Congressional Budget Office estimates that if TRICARE fees, copayments, and deductibles were modified according to this option, discretionary outlays for DoD's TRICARE program would be reduced, on net, by about $28 billion over the 2012-2021 period, assuming that appropriations would be reduced accordingly. But the option could cause some eligible retirees to switch to other federal programs, such as Medicaid (if the individual has low income), the Federal Employees Health Benefits (FEHB) program (if the person is employed as a civilian by the federal government), or programs of the Veterans Health Administration. This option would increase mandatory spending for Medicaid and for FEHB annuitants by about $440 million over the same period. (Total additional costs would be greater, but some have already been incorporated in the baseline. See the note to the above table.) The estimates do not include the reduction in individual income and payroll tax revenues that might result from a shift of some labor compensation from a taxable to a nontaxable form.

One rationale for this option is that TRICARE coverage and space-available care at military treatment facilities were originally considered a supplement or a safety net to ensure the availability of health care for military retirees and their dependents, not as a replacement for benefits offered by postservice civilian employers. The migration of retirees from civilian to TRICARE coverage is one factor behind the rapid increase in TRICARE spending since 1999, which may mean that fewer resources are available for DoD to purchase and maintain weapon systems and other equipment or for other defense priorities. This option would begin to curtail the growth in health care costs, freeing those resources for other important uses.

An argument against changing access to TRICARE coverage for military retirees and their dependents is that those retirees made decisions about continuing their period of active-duty service with the understanding that they would receive medical care free or at a very low cost after retiring from the military. Significant limitations on TRICARE coverage for military retirees and their dependents would impose a financial cost on many of those beneficiaries and could adversely affect military retention. Another potential disadvantage of this option is that the health of users who remained in TRICARE might suffer if they were discouraged from seeking health care or treating their illnesses in a timely manner because of higher copayments. However, their health might not be affected significantly if the higher copayments fostered more disciplined use of medical resources and only discouraged the use of low-value health care.