Order Code RS22402
Updated April 6, 2007
Increases in Tricare Costs:
Background and Options for Congress
Richard A. Best Jr.
Specialist in National Defense
Foreign Affairs, Defense, and Trade Division
Summary
In its FY2007 budget submission, the Department of Defense (DOD) proposed
increases in Tricare enrollment fees, deductibles, and pharmacy co-payments for retired
beneficiaries not yet eligible for Medicare. The raises were justified by DOD as
necessary to constrain the growth of health care spending as a proportion of the overall
defense budget in the next decade. Many beneficiaries argued that the proposed hikes
were unfair and unnecessary. The proposed increases found favor in neither chamber
and ultimately the FY2007 Defense Authorization Act (P.L. 109-364) prohibited
increases in premiums, deductibles and co-payments prior to September 30, 2007.
However, the Act also established a DOD Task Force to look at the costs of sustaining
Defense health care over the long term. The Government Accountability Office (GAO),
in cooperation with the Congressional Budget Office (CBO), was also tasked to review
of the budgetary implications of DOD health care. For FY2008, the Administration has
based its budget submission on the assumption of fee increases. However, the House
budget resolution (H.Con.Res. 99) passed on March 29, 2007 reflected opposition to fee
increases. This report will be updated as needed.
Background
The dollar amounts allocated to health care in the budget of the Department of
Defense (DOD) have almost doubled during the past five years, from $19 billion in
FY2001 to over $37 billion in FY2006, even as the size of the active duty force has
remained relatively steady. DOD projections for health care indicate that even further
growth can be realistically anticipated, perhaps reaching $64 billion in FY2015. In 1990,
according to DOD estimates, health-care expenses constituted 4.5% of DOD’s budget; by
2015 they could reach 12%. This growth in health-care costs could have a substantial
effect on spending for other defense programs and/or the overall size of defense spending
within the federal budget.
The Defense health system, which is open to some 9.2 million potential
beneficiaries, is large and complicated, but, in brief, DOD provides varying kinds of care
to different elements of the eligible population: (1) a complete medical-care benefit to

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active duty personnel and to their dependents; (2) a benefit program with annual
enrollment fees and co-payments to retired military personnel and their dependents who
are not eligible for Medicare; and (3) a program for those retirees who are eligible for
Medicare (and enrolled in Medicare Part B), known as Tricare for Life (TFL), that covers
almost all costs that Medicare does not cover (and is funded with an accrual fund that is
considered part of the defense budget). Military retirees aged 65 and above also remain
eligible for military health care on a space or service-available basis.
Care is delivered through one of four plans. The first is Tricare Prime, a health
maintenance organization (HMO), which is required for active duty personnel and open
to dependents and many retirees. Two other plans are Tricare Extra, a preferred provider
option in which beneficiaries seek care from providers who have agreed to an established
fee structure, and Tricare Standard (formerly CHAMPUS) in which beneficiaries can seek
care from any licensed provider and obtain partial reimbursement.1 A fourth plan, TFL,
serves as a supplemental payer to Medicare for care by licensed providers. Prescriptions
are available from military pharmacies at no cost; they can also be obtained from civilian
pharmacies linked to DOD or by mail order with relatively low co-payments (e.g., $3 for
a generic prescription; $9 for a brand; $22 for a non-formulary prescription).
Several factors associated with these plans have led to current and projected cost
growth. First, increases in costs of delivering medical services and of prescriptions reflect
trends in medical care delivery throughout the civilian economy.2 Second, the
establishment of TFL in the FY2001 Defense Authorization Act (P.L. 106-398) greatly
increased costs by extending a significant medical benefit to millions of Medicare-eligible
retirees and their dependents whose previous access to Defense health care had been
limited to a diminishing number of military medical facilities. Third, access to defense
health care for some non-active duty reservists was provided in the Defense Authorization
Acts for FY2005 and FY2006 (P.L. 108-375 and P.L. 109-163). In addition, co-payments
in Tricare Prime have been eliminated and the catastrophic cap for retirees has been
lowered from $7,500 to $3,000, increasing costs to DOD.
Several additional factors have contributed to concerns about the costs of defense
health care. In comparison to other plans, including those available to civil servants under
the Federal Employees Health Benefit Plan (FEHBP), DOD provides an especially
generous benefit with limited contributions and co-payments required of beneficiaries.
Some note also that much defense health care is not directly related to tending to combat
injuries. In recent decades, the multi-billion dollar system has been directed towards care
of dependents, especially in the areas of obstetrics and pediatrics, and to the care of
retirees at stages of their lives when medical needs tend to increase. Even with the need
to care for injuries resulting from the U.S. commitment to Operation Iraqi Freedom, the
bulk of DOD medical care is currently provided to dependents and retirees — not to the
operating forces.
1 This explanation is generalized; there are many special provisions. For further information, see
CRS Report RL33537, Military Medical Care Services: Questions and Answers. For specific
provisions, see the Tricare website [http://www.tricare.osd.mil]; relevant regulations are at 32
C.F.R. 199.
2 See CRS Report RL32545, Health Care Spending: Context and Policy, by Jennifer Jenson.

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Furthermore, Tricare beneficiaries, both active duty and retired, tend to make greater
use of professional care than other sectors of the population. In FY2004, according to one
estimate, in Tricare Prime the outpatient utilization rate was 44% higher than in civilian
HMOs; the inpatient utilization rate was 60% higher.3 Health-care analysts tend to ascribe
this to lower out-of-pocket costs for DOD beneficiaries.4
Low cost to beneficiaries and increases in the quality and efficiency of Defense
health care in recent years have reportedly led many retirees with civilian jobs to choose
Tricare even when they have access to other plans through their civilian employers.
Moreover, some employers and state governments have encouraged employees to take
advantage of DOD health care, offering them special supplements to cover any co-
payments that might be required. Former Secretary of Defense Donald Rumsfeld noted
this phenomenon in testimony to the Senate Armed Services Committee on February 7,
2006: “In effect, the military is increasingly subsidizing the health care costs of private
corporations, organizations, and state and local governments. This is a classic example
of good intentions leading to unintended, unwelcome, and expensive consequences.”
In the FY2007 budget request, DOD proposed changes to constrain the costs of
health care by focusing on care for retirees and their dependents who are not Medicare-
eligible. For these beneficiaries, DOD proposed charging, for the first time, annual
enrollment fees for Tricare Standard, and also significantly increased annual enrollment
fees for Tricare Prime. Annual deductibles would have also been increased. No
initiatives were proposed that would affect active duty military and their dependents, nor
were changes proposed for health-care benefits available to retirees eligible for Medicare
(those aged 65 and over along with a much smaller number of disabled retirees) who are
covered by TFL. The TFL-eligible beneficiaries would, however, have been required to
make somewhat higher co-payments for some prescriptions.
DOD also strongly urged that, in the future, cost shares be adjusted annually for
inflation. The fact that enrollment fees for Tricare Prime were set at $230 (for individuals)
and $460 (for individuals and their dependents) in 1995 and not subsequently adjusted has
been viewed as an important contributing factor to the current budgetary situation.
The Administration’s FY2008 budget submission was based on the assumption of
$1.8 billion in proposed assumed savings to be derived from “benefit reform.”
Congressional Responses
The FY2007 defense authorization bill (H.R. 5122) approved by the House on May
11, 2006, included a provision (section 704) precluding increases in premiums,
deductibles, and co-payments during the period April 1, 2006, through December 31,
2007. Section 731 would have increased co-payments for prescriptions obtained through
retail pharmacies.
3 Department of Defense, Evaluation of the Tricare Program: FY2005 Report to Congress, Mar.
1, 2005, pp. 63, 57.
4 Congressional Budget Office, Growth in Medical Spending by the Department of Defense, Sept.
2003, p. 27.

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The Senate Armed Service Committee in its version of FY2007 defense
authorization legislation (S. 2766) took a slightly different approach from H.R. 5122;
section 705 would have prohibited an increase in enrollment fees for coverage under
Tricare Prime in FY2007, but did not address Tricare Standard or Extra. In effect, the
legislation would have omitted the statutory authority that would be needed for instituting
enrollment fees for Tricare Standard. The Senate bill, in section 702, would also have
required that beneficiaries obtain prescriptions for maintenance medications from the
National Mail Order Pharmacy while it would have removed co-payments from generic
and brand named medications that are medically necessary.
The final version of the legislation which was approved by the House on September
29, 2006, and the Senate the following day prohibited DOD from increasing premiums,
deductibles, co-payments, and other charges through September 30, 20075. The
legislation did not preclude use of retail pharmacies for maintenance medications but the
accompanying report (H.Rept. 109-702) indicated an expectation that DOD “will proceed,
under current authority, to eliminate co-payments for generic drugs dispensed through the
Tricare national mail-order program, as a minimum.” It is anticipated that the removal
of some co-payments would serve as an inducement to use the mail order pharmacy over
retail pharmacies. In the enacted defense authorization act, P.L. 109-364, Congress also
adopted provisions (in Section 707) to prohibit most civilian employers (including state
and local governments) from actively encouraging or offering incentives to employees
who are retired servicemembers to rely on Tricare.
Although Congress did not adopt many of DOD’s proposals for increasing fees and
discouraging access to retail pharmacies, requests for high-level studies of trends in
military health care spending indicate that there may be renewed attempts to address the
health-care budget issues in the future, perhaps in the context of FY2008 authorization
legislation.
A House provision adopted in conference (section 711) requires the establishment
of a DOD Task Force, composed of military and civilian officials with experience in
health-care budget issues, to examine and report on efforts to improve and sustain
Defense health care over the long term including the “beneficiary and Government cost
sharing structure required to sustain military health benefits.” The Task Force will have
12 months to complete the study but an interim report is due on May 31, 2007, with
findings and recommendations “particularly with regard to cost sharing under the
pharmacy benefits program.”
Another provision (section 713) requires the Government Accountability Office
(GAO) in cooperation with the Congressional Budget Office (CBO) to prepare an audit
of the costs of health care to both DOD and beneficiaries between 1995 and 2005. A
report, with recommendations, is to be submitted to Congress by June 1, 2007.
Congressional opposition to the Administration’s proposed FY2008 budget which
assumed higher fees is reflected in the House’s budget resolution (H.Con.Res. 99) that
5 For further information on this legislation, see CRS Report RL33571, The FY2007 National
Defense Authorization Act: Selected Military Personnel Policy Issues, by Charles A. Henning,
David F. Burrelli, Lawrence Kapp, and Richard A. Best Jr.

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was passed on March 29, 2007. The accompanying report (H.Rept. 110-69) stated: “High
among our priorities is the health care guaranteed our armed forces, not only while they
are in harm’s way, but when they return home from combat with injuries. For that reason,
this resolution opposes Tricare fee increases and call for a substantial increase in the
veterans’ health care system.6” The question of fee increases for military retirees may be
addressed during consideration of F2008 defense authorization legislation when reports
from the Task Force on the Future of Military Health Care and the GAO are available.
More Ambitious Approaches
The fact that both armed services committees have called for extensive outside
reviews of military health-care financing indicates that Congress may revisit proposals for
fee increases at some point as part of more comprehensive changes in defense health-care
budgeting. A number of different approaches have already been suggested. One option
that has been mentioned by CBO would provide an opportunity for retirees to forego
defense health care until they turn 65 in exchange for a lump-sum payment.7 The size of
the payment would be adjusted to a level that would be less costly to DOD over the longer
term than the current programs. The acceptability of this approach to retirees is uncertain;
the number of retirees who would take such a payout is unknown and might be very
limited given the attractiveness of Tricare.
Another approach would be to offer beneficiaries a “cafeteria plan” under which they
would receive an annual cash allowance for health care. Using this allowance they could
then select a Tricare plan, a new option involving lower enrollment fees and higher co-
payments and deductibles, or apply some of the funds against premiums for civilian health
insurance. This could in effect allow retirees to establish health savings accounts (HSAs)
for themselves and their dependents. CBO estimates that such an approach could reduce
DOD’s outlays by 25% not including the cost of the cash allowance.8 Secretary Rumsfeld
indicated on February 7, 2006, that DOD wants to explore “new, innovative benefit
alternatives such as health savings accounts.” However, HSAs are controversial and
making them available to military retirees could raise concerns among both beneficiaries
and others with an interest in government health programs.9
Another approach would be to readjust budgetary categories to remove health-care
spending for retirees — both for those not yet eligible for Medicare and the accrual fund
for TFL — from defense appropriation acts. Section 589 of the House version of H.R.
5122 would have required that contributions to the accrual fund be made by the Treasury
rather than DOD, but this provision was not accepted by the conference. This provision
would have simply shifted spending to other budgetary accounts and would not have
affected overall spending totals. Some have argued that this approach would encourage
more meaningful analyses of current defense issues by removing the need to consider
6 The veterans health care system is not part of defense authorization legislation; see CRS Report
RL33409, Veterans’ Medical Care: FY2007 Appropriations, by Sidath Viranga Panangala.
7 See CBO, Growth in Medical Spending,, pp. 18-19.
8 Ibid., pp. 19-20.
9 For additional background on HSAs, see CRS Report RL32467, Health Savings Accounts, by
Bob Lyke, Chris L. Peterson, and Neela K. Ranade.

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trade-offs with retiree health care. Others have countered that such a maneuver would
undermine analysis by obscuring the true costs of decisions affecting military manpower.
Conclusion
The DOD proposals set forth in early 2006 proved very controversial and they were
not accepted by Congress. This rejection occurred despite a widespread awareness of the
challenges posed by the growth in military medical spending. Most observers note that
there are pressures on many parts of the defense budget — new procurement, research and
development, and the need to compensate and retain well-qualified and highly motivated
servicemembers. Defense spending itself is one part of the federal budget, which is itself
under pressure from many directions.10 These pressures lead some to suggest that medical
spending may face some constraints. On the other hand, the Military Officers Association
of America (MOAA), a large organization of retired and active duty personnel, argues that
instead of seeking to raise fees for retirees health care, DOD “should be asking Congress
for a bigger defense budget to pay for the needed benefit improvements Congress has
enacted.”11
DOD maintained in 2006 that there is a need to adjust fees to make up for their
having been frozen for a decade and that the proposed rates are still much lower than the
fee structures of civilian plans including those in the FEHBP.12 Retiree organizations
countered that proposed raises in enrollment fees and co-payments were unfair, that the
requirements of military service are unique and extraordinary and that health-care
premiums are paid in service and sacrifice. They also claim that DOD’s health-care
benefit has significant influence on recruiting and retaining an all-volunteer force. Some
further argue that fee hikes are especially inappropriate for retiring servicemembers who
have borne the costs of the war on terror during the past several years.
There are complex considerations with regard to any of the various approaches to
dealing with the growth of miliary medical spending. To some extent, the issues
involving Defense health care reflect larger health-care issues that affect the entire
country. In the case of retired servicemembers and their dependents, most recognize a
special responsibility inasmuch as health care after retirement is undoubtedly an important
incentive to follow a difficult and often dangerous career. Nevertheless, many observers
also appear to believe that competing requirements for defense funds also exist and that
funds for medical care should not be seen as unlimited. The issues were present during
deliberations on the FY2007 Defense Authorization Act and may well be present during
consideration of FY2008 authorization legislation.
10 See CRS Report RL32877, Defense Budget: Long-Term Challenges for FY2006 and Beyond,
by Stephen Daggett.
11 “‘Health Tax’ Looms,” Military Officer, Mar. 2006, p. 27.
12 There remain some retired servicemembers who claim they are entitled to free medical care for
the rest of their lives on the basis of alleged earlier promises. Congress has never, however,
accepted the principle of completely free medical care. See CRS Report 98-1006, Military
Health Care: the Issue of ‘Promised’ Benefits, by David F. Burrelli.

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