Preserving the military health care benefit: Needed steps for reform | AEI

By: John Kokulis

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As Washington struggles to deal with the national debt and the size and reach of the federal government, the defense budget has become an increasingly attractive target for savings. The Obama administration has already enacted or proposed cuts of close to $1 trillion over the next decade. These have dramatically reduced the US Department of Defense’s (DoD’s) capacity to modernize aging military inventories.

Such investment is critical to protecting American national interests. Yet, the current fiscal environment affords little hope for a larger defense budget, and political gridlock could put in place even more reductions. Although it remains unclear whether Congress will be able to reach a compromise to avert the remainder of sequestration’s almost $500 billion in defense cuts, all indications are that even if Congress were to reach something short of a “grand bargain,” defense would be expected to contribute a large share of the savings—perhaps in amounts almost totaling the original sequestration package.

Despite the threat of almost $1.5 trillion in cuts to the US military, top-line reductions are only one component of the multitude of challenges facing the Pentagon. The rising cost of personnel within the Department of Defense is squeezing the budget from within as military health care costs, the largest personnel cost driver, grow exponentially. Although the cost of military pay, allowances, and health care has risen 90 percent since fiscal year (FY) 2001, the active-duty personnel count has risen by less than 3 percent.[1]

These pay and benefits increases were created with the best of intentions in the midst of two brutal wars, but they have reached the point where they are simply unsustainable. This spending is set to rise further, threatening to crowd out crucial modernization spending and leave the United States behind the cutting edge. In the words of former defense secretary Robert Gates, “Health-care costs are eating the Defense Department alive.”[2]

In FY 2013, DoD requested a total of $48.7 billion for military health care—approaching 10 percent of its base budget. Increasingly, this money is going to individuals no longer in the military, while active-duty service members are seeing a decreasing share of DoD health benefits. According to TRICARE’s 2012 annual report to Congress, active-duty members make up only 15 percent of all military health care beneficiaries, while retirees of all ages and their family members make up 53 percent.[3] In less than a decade, defense health care spending increased by over $25 billion, from $17.4 billion in FY 2000 to $42.5 billion in FY 2008, a 144 percent increase.[4] At this rate, health care spending is growing faster than the Defense Department’s discretionary spending.

Given demographic trends and spiraling health care costs across the wider US economy, this trend will only grow more pronounced in future years. The Congressional Budget Office (CBO) projects that military health care costs will increase to $65 billion by 2017 and $95 billion by 2030—nearly a 100 percent increase from today.[5]

Demographic trends and rising private-sector health care costs are only part of the explanation for unsustainable military health care practices. For one, as CBO notes, the “growth rates of per-person costs in the military health system over the past six years have been significantly higher than the corresponding national averages.”[6] Much of this cost growth was due to generous TRICARE benefits and relatively low cost sharing. This led many enrollees in TRICARE Prime, for instance, to consume health care at a much higher rate than civilians enrolled in traditional plans. A related issue is how the military health system provides private-sector care for its beneficiaries, especially retirees. From FY 2001 to FY 2006, costs for purchased care increased by 19.6 percent per year, while direct care costs grew by only 6.2 percent annually.[7]

These cost increases are not going unnoticed. A consensus has begun to emerge that the rising cost of military health care is unsustainable and poses a challenge as spiraling costs undermine the military’s ability to train, equip, and supply America’s men and women in uniform. As retired Marine Corps General Arnold Punaro has said, “I am very concerned that as current trends continue, this country will not have the strong military it needs 20 years from now, because all of the money is going to go to pay people that are no longer serving.”[8]

Punaro is not alone in this concern. In fact, in 2011, the Joint Chiefs of Staff penned a 24-star letter—signed by the chairman, vice chairman, and four service chiefs, in support of modest increases in TRICARE cost-sharing requirements as a first step to getting rising spending under control.[9] The letter insisted that fee increases would not break faith with those in uniform but, rather, were necessary given increasing budgetary pressure—which has only since increased.

America’s political leadership is not blind to this reality. The bipartisan 2010 Quadrennial Defense Review Independent Panel recommended a host of reforms to modernize military compensation, including reforms to health care and retirement benefits. As Stephen Hadley, former national security adviser and cochair of the independent panel, put it, “At some point the money won’t be there, either for the All-Volunteer Force or for adequate force structure for modernization, and that is the train wreck we talk about.”[10]

Despite this broad understanding of the problems surrounding the rapid increase in military health care costs, reform has thus far proven elusive. Congress has been understandably cautious about reducing benefits for those who have served, particularly given the past decade of war. In the FY 2013 National Defense Authorization Act, Congress overturned Pentagon-proposed TRICARE Prime enrollment fees while giving ground on small adjustments such as increasing pharmacy copays. However, fee increases are not the only kind of reform. Despite widespread congressional opposition to fee increases alone, an unclaimed space remains for modest fee increases if offered as part of a holistic approach that presents both pain and gain.

Although it is unrealistic to expect that the pressure to put off health care reform will dissipate anytime soon, it is also unrealistic to expect that the status quo can persist in a time of contracting budgets.

If programs such as TRICARE are to be preserved for veterans and their families, they must first be strengthened through common-sense and much-needed reforms. The true threat to the long-term health of these programs is inaction, and that inaction has consequences for America’s military families. Sooner or later, the political process will reflect this reality. The only question is whether change comes as part of a long-term and carefully planned vision or haphazardly, when the whole system can no longer support itself.

In this paper, John Kokulis, a former deputy assistant secretary of defense for health budgets and financial policy, takes just such a long-term look at the military’s escalating health care costs and offers a worthy solution to bringing costs under control. Kokulis’s proposal aims to produce savings by incentivizing care for beneficiaries at Military Treatment Facilities. He lays out a compelling case for the necessity of change, along with a plausible roadmap to get costs on a more sustainable trajectory, all while minimizing the burden America’s military families feel.

Although the proposals offered in this paper are not ends in and of themselves, they do represent a beginning of a much larger and more systematic conversation regarding how we compensate those in uniform. Comprehensive reform must start somewhere, and we view these proposals as an excellent and outside-the-box way to get the reform process moving in the right direction.

As Congress focuses on the way forward in 2014 and beyond, we hope that this paper contributes to the current debate over military spending and provides policymakers with a fresh look at a topic that deserves our attention and dutiful action.

—Mackenzie Eaglen and Charles Morrison
American Enterprise Institute

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