Analysis of Private Sector Care Reform Authorities and Savings

Budgetary pressures facing the Military Health System (MHS) have necessitated the consideration of various cost-saving reform options. This paper reviews past savings efforts within a strategic framework for MHS reform, identifying reform of the Department of Defense (DoD)’s contracts for private sector care as a key neglected reform area. Current DoD contracting practice is out of step with civilian trends in healthcare. We estimate that incentivizing the insurance carriers (TRICARE contractors) who administer the program to adopt value-based purchasing (VBP) methods could save somewhere between $400 million and $1.5 billion annually under the most comprehensive approach (savings are larger if also applied to Medicare-eligible population). These savings are similar in magnitude to those achieved by DoD’s proposals to raise cost shares, but would be generated by improving efficiency through better incentive structures rather than cutting benefits. We also examine how VBP incentives can be introduced into the contracts. We find that the TRICARE contracts should be restructured in a manner that increases competition between contractors in a given geographic market, increases contractor risk-bearing, and improves the contractor’s flexibility in negotiating with the delivery system.