Limit the TRICARE Benefit for Military Retirees and Their Dependents

The Department of Defense (DoD) provides medical care to military beneficiaries through the TRICARE program, which combines access to military hospitals and clinics with coverage for services received from civilian health care providers. Currently, military retirees and their dependents who are not yet eligible for Medicare represent about 40 percent of the TRICARE-eligible population. Those beneficiaries may use one of three plans: TRICARE Standard (a fee-for-service plan allowing free choice of providers but subject to coinsurance and deductibles), TRICARE Extra (a preferred provider plan offering lower coinsurance when using network providers), or TRICARE Prime (a managed care plan with lower out-of-pocket costs but a small annual enrollment fee).1 About three-quarters of all retired military beneficiaries not yet eligible for Medicare have access to employer-sponsored insurance through civilian employment. 2 Because the out-of-pocket cost of TRICARE coverage has grown much more slowly since 1995 than the corresponding costs under insurance provided by most civilian employers, many of those beneficiaries have dropped their employer-sponsored coverage in favor of full-time reliance on TRICARE. In 1999, 55 percent of military retirees and their dependents had signed up for other health insurance, but by 2009 that figure had dropped to 29 percent. TRICARE spending more than doubled in real terms over that same 10-year period.

This option would preclude military retirees and their dependents from enrolling in TRICARE Prime, which is the TRICARE option with the lowest out-of-pocket cost.3 Military retirees and their dependents could enroll in TRICARE Standard or Extra during the annual open enrollment period or when a life event occurred (for example, a change in marital status, birth of a child, or change in employment status). Enrollees would pay a monthly enrollment fee that would be set at 28 percent of the cost of providing benefits for that group, to be updated annually based on the average cost the group incurred in the previous year. In addition, the catastrophic cap (maximum out-of-pocket expenses) for military retirees and their dependents would be raised from the current $3,000 per family to $7,500 per family, the level at which it was set before January 2002. That catastrophic cap would increase in future years, with changes indexed to nationwide growth in per capita health care spending.

Military retirees and their dependents would still have the option of seeking care at no cost on a space-available basis at military treatment facilities. However, such patients are considered lower priority than active-duty service members and their dependents, and as a result, they might have difficulty obtaining such space-available care. For that reason, military retirees and their dependents would have an incentive to obtain other coverage rather than rely on military treatment facilities as their main source of medical care.

Those changes in TRICARE coverage options for military retirees and their families would bring the value of TRICARE coverage closer to that of health plans available through civilian employment. The Congressional Budget Office anticipates that among this group of beneficiaries, the share relying entirely on TRICARE would drop by half, from 71 percent to 35 percent. In addition, for those who did not enroll and pay an annual premium, TRICARE would no longer act as secondary payer to civilian health insurance, thereby reducing federal outlays for the 29 percent of beneficiaries who currently have civilian health insurance (and who presumably would continue that coverage). For those who do enroll in TRICARE, the higher cost sharing under TRICARE Standard or Extra (as compared with TRICARE Prime) would reduce the use of health care services by many beneficiaries. However, some retirees and their dependents might turn to other federal programs for which they may be eligible rather than to private civilian options. As a result, CBO anticipates that some additional costs would be incurred by the Veterans Health Administration, the Medicaid program, and the Federal Employees Health Benefits plan.

CBO estimates that this change would reduce discretionary outlays by $39 billion over the 2012-2016 period and by $105 billion over the 2012-2021 period.

CBO projects that approximately 35 percent of military retirees and their dependents would sign up for TRICARE under the new rules outlined in this option and that increases in cost sharing would also result in a decrease in DoD's per capita spending on that group of beneficiaries. CBO estimates that the change would increase mandatory spending for the Medicaid program and for health benefits for annuitants by $4 billion over the 2012-2021 period. (Total 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 the 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 rapid increase in TRICARE spending since 1999 can be traced in part to a migration of retirees from civilian to TRICARE coverage. In an era of fiscal constraint, rapidly rising health care costs may result in fewer resources available for DoD to purchase and maintain weapon systems and other equipment or to use for other defense budget 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 free or very low-cost medical care 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.