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Health Net Inc/CA
UnitedHealth Group Inc
Patrick O’Rourke’s second parachute jump as an Army cadet marked him for life. Soon after leaping out of the plane over Fort Benning, Ga., he made a mistake that caused him to hit the ground hard and get knocked out. “That began a long career of getting banged up and knocked around,” says O’Rourke. Now 49, the retired lieutenant colonel has spent the past 20 years being treated for a host of foot, back, neck, and shoulder complaints.
The former paratrooper’s frequent trips to the doctor contribute to one of the military’s most intractable challenges: keeping a lid on soaring medical costs for active-duty personnel, retirees, and their dependents, which will reach an estimated $52.5 billion in 2012, up from $19 billion in 2001. With a congressional supercommittee hunting for as much as $1.5 trillion in future budget savings, the Pentagon’s health insurance program, known as Tricare, may be a target for reductions.
Tricare covers 9.6 million people, though less than 16 percent are on active duty. The vast majority are retirees. O’Rourke, for example, pays just $460 a year for family coverage under the program’s HMO-like plan, Tricare Prime. There are minimal or no annual deductibles or co-payments for treatment. Subscribers can sign up for a separate program for prescription drugs. Annual premiums for working-age retirees have been frozen since 1995.
“You’re hearing everyone screaming and hollering about Social Security and Medicare and Medicaid, but the Defense Dept.’s entitlements are every bit as big and as much of a future burden on the taxpayer and the warfighter,” says retired Marine Major General Arnold Punaro, a member of the Defense Business Board.
The U.S. taxpayers who underwrite military health care aren’t nearly as lucky. For civilians, the average out-of-pocket cost for employer-provided family health insurance has risen from $1,543 in 1999 to $3,997 today, says the Kaiser Family Foundation.
This year the Obama Administration proposed raising Tricare fees by $5 a month for families and $2.50 for individuals, a move Defense Secretary Leon Panetta calls a “first step.” It’s also a baby step: The increase would trim just $434 million from the program from 2012 to 2016, according to Pentagon estimates. Congress hasn’t blocked the measure.
The Pentagon’s earlier attempts to get Tricare users to shoulder more of the program’s costs failed, in part because of retiree objections. “The Department of Defense tried under the Bush Administration to get fee increases,” says Joyce Raezer, executive director of the National Military Family Assn. “It then just gave up because all the associations went to Congress and said, ‘No, no, no.’ ” Her association does not oppose the latest proposed fee hike.
In the 1990s the Pentagon began shifting patients to the private sector, in an attempt to close military treatment facilities and save costs. Those plans were accelerated by the nation’s response to the Sept. 11 terrorist attacks. Hundreds of military doctors, nurses, and pharmacists rushed to Afghanistan and Iraq, placing more Tricare patients in private care at a time when total health-care costs were surging about 10 percent a year. Approximately 65 percent of Pentagon health-care funds go to the private sector, according to a 2009 House Armed Services Committee memo.
Patient advocates concede the problem has been exacerbated by the habits of people in the Tricare pool. “We’re a lousy beneficiary population in terms of waste—too many ER visits, too many visits to the doctor’s office,” says Raezer.
Before 2003 the Tricare system consisted of 12 regional zones, each managed by a private insurer. The Pentagon then consolidated the system into three large regional contracts: North, South, and West, in an effort to cut administrative costs. The megacontracts have attracted private-care providers such as Humana (HUM), Health Net (HNT), and TriWest Healthcare Alliance.
Closely held TriWest was founded by David McIntyre Jr., a former chief of staff to Arizona Republican Senator John McCain. The Phoenix company won its first Tricare contract in 1996 to manage care for more than 740,000 patients in 16 Western states. In 2009, TriWest won control over the Western region under a contract worth as much as $17 billion over five years. That decision was overturned by the Defense Dept. in April after rival UnitedHealth Group (UNH) lodged a protest. When asked whether there was a backup plan if the Pentagon doesn’t reinstate the contract, McIntyre responded in an e-mail, “This is TriWest’s only business.” Federal procurement records show that the company has captured more than $21 billion in Tricare business since its inception.
Private insurers are fighting for Tricare work, as the program’s low cost is one factor that has prompted more people to sign up. The Defense Business Board says 80 percent of those eligible for the plan used it in 2009, compared with 60 percent a decade earlier.
Those already in the program, such as O’Rourke, know they have a good deal. In 2004 he refused insurance from his then-employer, defense contractor Science Applications International (SAI), even though the company provided full coverage for his family for free. “Tricare is an entitlement I paid into through 20 years of military service,” he says. “I will always stay close to those programs for which my service to the country qualified me.”
The bottom line: Reining in runaway health-care costs for military personnel and retirees is becoming a pressing issue as the Pentagon looks for savings.