Military Cash Compensation Package

The military compensation package includes both cash compensation (including deferred cash in the form of retirement pay) and noncash benefits (such as health care, housing, child care, and commissaries). Increases in that package were at the top of DoD's priorities in its budget for 2000 and continue to receive emphasis in the budget request for 2001. A military compensation package that can attract and retain high-quality, versatile personnel, who are able to learn new tasks and adapt to new practices quickly, might be an especially wise investment today--when the major threat to national security is diffuse and uncertain and deployments can involve a wide range of tasks that are not the focus of standard training.

The options in the sections below take varying approaches to the military's concerns about retaining a high-quality force. Some would add resources to compensation programs to improve DoD's ability to meet its personnel requirements; others would reduce the cost of meeting those requirements by changing the mix and type of benefits in the compensation package; and still others would lower costs or increase capabilities by changing the number or mix of personnel that DoD identifies as required.

Another tool that DoD might use to attract and retain personnel is working conditions--a category that includes such diverse elements as the frequency of deployments, the condition of facilities and equipment, the quality of military leadership, and opportunities for meaningful, patriotic service. Although such conditions are often determined by operational needs and are not normally considered part of the overall compensation package, failure to provide satisfying conditions of work can affect recruiting and retention. Many of the options in this chapter that address the condition of facilities and equipment--as well as some of the options in other chapters, such as the one that would increase staffing in military units--are aimed in part at changing the conditions of work for service members.

Cash Compensation

The Congress included a variety of pay changes in the National Defense Authorization Act for Fiscal Year 2000 in an effort to make military service more attractive and address the personnel problems reported by the Joint Chiefs. Those changes raised retirement benefits for service members who entered the force after 1986, provided an across-the-board pay raise of 4.8 percent (with a provision for future raises that would continue to exceed the growth of private-sector earnings), and restructured the military pay table to increase the importance of promotions rather than time in service. Those actions are expected to boost retention in the military as a whole (compared with what it would otherwise have been). But whether they will resolve the services' specific recruiting and retention problems is unclear.

Moreover, those gains in overall retention will be costly. One reason for the high cost is that service members--like others in U.S. society--place a much higher value on current income than future income. Thus, existing manpower models indicate that the increases in retirement pay are likely to be a less cost-effective tool for increasing recruiting and retention than additional pay raises would be. Another reason for the high cost of those provisions--and their questionable impact on DoD's most serious personnel shortages--is that the pay raises are not targeted toward those shortages. The 4.8 percent across-the-board raise will be paid not only to people in occupations where DoD has shortages but also to people in occupations where DoD has excess personnel.

Because frequent changes in any retirement system can disrupt expectations, further changes in the military retirement system may not be appropriate right now. But changes in basic pay are determined by DoD and the Congress on an annual basis. The options below examine possible policies for setting future pay raises, the potential for using special pay targeted toward personnel whose skills are in short supply, and the role of the unemployment compensation program in rewarding separation from active duty. An additional option would eliminate the difference between pay for married and single personnel; it illustrates how some analysts believe the military compensation system might be fundamentally restructured to make it more cost-effective.

Option 4-01
Modify Planned Pay Raises for Military Personnel
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In 1999, the Congress established temporary procedures designed to increase basic pay in the military at a greater rate than pay in the private sector. Those procedures set the annual military pay raise between 2001 and 2006 at 0.5 percentage points above the increase in the employment cost index (ECI) for wages and salaries of private-sector workers. According to widely published reports, a "pay gap" of more than 13 percent separates military personnel from workers in the civilian sector. In advocating the new pay procedures, the Senate Armed Services Committee cited the need to "close the gap between military pay and private sector wages." The House Armed Services Committee called for smaller raises (equal to the increase in the ECI), referring only to the services' recent negative trends in retaining personnel. The temporary procedures enacted in 1999, combined with the raise authorized for 2000, will increase basic pay by about 3.3 percent (with compounding) above the change in the ECI.

This option would change the procedures that the Congress established, providing for either larger annual increases or smaller ones. The alternative of larger raises would increase basic pay by 2 percentage points more than the change in the ECI each year from 2001 through 2006, thus eliminating the reported pay gap. That change would add $612 million to defense outlays in 2001 and a total of $46.1 billion through 2010. The second alternative would follow the example of the House Armed Services Committee, limiting raises to the annual increase in the ECI without an additional 0.5 percentage points and leaving pay almost 3 percent lower in 2006 and beyond than under the temporary procedures. That alternative would save $204 million in 2001 and $14.8 billion through 2010.

Various policymakers and analysts disagree about the need to increase military pay relative to pay in the civilian sector. That disagreement centers on two issues: the meaning of the reported pay gap and the severity of current problems in recruiting and retaining military personnel.

The common approach to comparing increases in military and civilian pay has several shortcomings, according to studies by RAND (a federally funded research center) and the Congressional Budget Office. A 1999 paper by CBO noted that the 13 percent gap reported in the press measures changes in relative pay between the two sectors rather than absolute levels of pay, takes no account of the age and education level of workers, and uses an essentially arbitrary starting point, 1982. CBO's analysis indicated that among all groups of military personnel, on average, pay increases since 1982 have roughly matched those among comparable workers in the civilian economy. Moreover, the level of pay for military personnel, whether officer or enlisted, falls at about the 75th percentile of pay rates for workers in the civilian sector of the same age and education.

Notwithstanding such analyses, some proponents of higher military pay continue to argue that military personnel are paid less than they could earn in civilian jobs. The Chairman of the Joint Chiefs of Staff stated in 1998 that "You can argue about how big the pay gap is . . . but nobody [in the Pentagon] denies there's a gap." Some Members of Congress reportedly favored a plan to "close the pay gap" over three years through raises several percentage points higher than the average increase in private-sector pay. Thus, regardless of what the true situation may be, belief in the existence of a large pay gap remains a powerful force in discussions about the best course for military pay policy.

Advocates of smaller pay raises would probably take strong issue with the assertion that a pay gap exists or even matters. First, they would point out, no one has demonstrated a gap as proponents of higher pay think of it--a difference between civilian and military pay scales. Second, they would say, the pay of military personnel overall has not fallen relative to the pay of civilian workers of the same age and education level. In addition, they could argue, the notion of a pay gap--a measured difference between levels of pay in the military and civilian sectors--is not relevant to decisions about military pay. Depending on how service members and potential recruits view the advantages and disadvantages of military service, the armed forces might have to pay considerably more than civilian employers, or conceivably less, to attract and retain enough qualified personnel.

A second issue of contention is the services' recent ability to meet their personnel needs. The Air Force reported unusually heavy losses of experienced personnel in recent years, perhaps because of the large number of small-scale deployments during the 1990s. Such deployments affect both the personnel sent overseas and those who stay behind (see option 2-12 in Chapter 2. In addition, reenlistment rates among Air Force personnel completing their first and second enlistment terms have fallen recently. Moreover, every service but the Marine Corps had trouble meeting its recruiting objective in 1999, and the Army succeeded only because it reduced its objective. Advocates of larger pay raises would argue that increased pay could mitigate retention and recruiting problems that might otherwise become more severe.

Proponents of smaller pay raises might argue that retention problems are not widespread and that if recruiting difficulties persist, they are better addressed through less expensive policies than an across-the-board pay raise. The Army has been as stressed by deployments as the Air Force, those proponents might argue, yet the Army was able to reduce its planned accessions of recruits in 1999 because it retained more enlisted personnel than it had expected. The Air Force's problems, they might say, should be solved by the greater predictability of deployments under the service's new Expeditionary Aerospace Force concept or dealt with by expanding reenlistment bonuses (see the next option). Finally, proponents of smaller raises could argue that increasing pay is an expensive way to solve recruiting problems; less expensive alternatives include increasing the number of recruiters, spending more on advertising, and offering more generous education benefits or enlistment bonuses.

Opponents of both alternatives in this option--people who would prefer the status quo of planned pay raises slightly exceeding average increases in private-sector pay--might offer two arguments for their position. Some would say that if the reported pay gap or retention problems warrant raising military pay, slow change is the best approach. Better to see the effects of the planned raises and improvement in retirement benefits, they would argue, than to commit immediately to a large pay increase. Others would contend that even if retention problems are not serious or the reported pay gap does not exist, the planned increases are necessary because service members believe the reports that they are underpaid and their perceptions will determine their actions. According to advocates of the status quo, when the service chiefs supported members' belief that they were underpaid and the Congress set out to increase military pay, a course was set that could not be reversed without serious consequences.

Option 4-02
Increase Reliance on Selective Reenlistment Bonuses
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Selective reenlistment bonuses (SRBs) are monetary incentives used to encourage the reenlistment of qualified service members in occupational specialties with high training costs or demonstrated shortfalls in retention. Eligible personnel generally receive half of their bonus when they reenlist and the remainder in annual anniversary payments over the course of their additional obligated service. Each service regularly adjusts its SRBs to address current retention problems, adding or dropping eligible specialties and raising or lowering bonus levels. Despite their use of reenlistment bonuses and other incentives, however, each of the services has at times had difficulty meeting its need for career personnel, particularly in some occupations.

This option would increase the services' spending on initial bonus payments to $400 million annually--roughly double the 1999 levels--and remove current restrictions on the maximum bonus amount that an individual can receive. Compared with funding for new bonuses in 2000, the higher level would represent an increase of 27 percent (the Congress responded to concerns about poor retention by adding $79 million for new bonuses to the services' budget request for 2000). Total spending on initial and anniversary SRB payments would rise from roughly $340 million and $465 million in 1999 and 2000, respectively, to more than $770 million in 2006 and beyond. That increase reflects both the cost of this option--$78 million in outlays in 2001 and $1.4 billion over 10 years--and the long-run cost of the earlier growth in initial payments.

Although this option would have a substantial direct effect on defense costs, the actual increase in personnel costs could be much smaller, or even negative. Increased spending on reenlistment bonuses should improve retention, allowing policymakers to slow the growth of basic pay or other elements of military compensation (see option 4-01). The estimated costs of this option do not reflect those offsetting savings, however, because the extent of the savings would depend on what actions, if any, policymakers took.

The four services use SRBs to differing extents. In late 1999, for example, almost half of the Navy personnel completing their initial enlistment term who were eligible for a bonus could receive one equal to a year's basic pay or more if they reenlisted for four years. In the Army, by contrast, only about 15 percent of equivalent personnel could receive a bonus equal to more than four months of pay for a four-year reenlistment. Large bonuses were less prevalent in the Air Force and the Marine Corps than in the Navy, but far more common than in the Army.

Advocates of expanding the SRB program might argue that current bonus levels are too small to provide meaningful differences in pay among occupations. One year's basic pay for a four-year reenlistment--the bonus level for first-term Air Force personnel in several computer-related occupations and the largest bonus that the Army offers--actually amounts to only about a 13 percent addition to total pay over four years after accounting for the other elements of cash compensation and for pay raises over those four years (which do not affect the bonus). The largest bonuses add somewhat more than one-third to recipients' pay, but only the Navy offers bonuses at that level and only for a few occupations that involve operating and maintaining nuclear power plants on ships and submarines. In the civilian sector, by contrast, differences in average pay of one-third or more are common, even among blue-collar occupations.

Proponents of this option would argue that larger pay differences among occupations would be a cost-effective tool for improving military readiness. Compared with across-the-board increases in pay or benefits, bonuses are more efficient because they can reduce shortages of experienced personnel in those occupations most critical for readiness without contributing to surpluses in other occupations. Bonuses can also be focused on the years of service in which personnel make career decisions. (Pay raises can be focused on certain grades or years of service, but policymakers have rarely been willing to do so.) And compared with pay increases, bonuses avoid the heavy cost of "tag-alongs"--the elements of compensation, such as retirement benefits, that are tied to levels of basic pay.

Some critics of expanding reenlistment bonuses would argue that large pay differences among occupations violate a longstanding principle of military compensation: that personnel with similar levels of responsibility should receive similar pay. In their view, reenlistment bonuses should be limited to a few critical specialties with severe shortages. Other critics of bonuses and other special and incentive pays would turn the "tag-along" argument of proponents on its head. Increasing reenlistment bonuses, those critics would say, unfairly deprives service members of the retirement and other benefits that they would receive if that money were instead made part of basic pay throughout their career.

Other opponents of this option might agree that the military should offer large pay differences among occupations but criticize the origin or timing of the expansion in bonuses. They would argue that decisions about reenlistment bonuses should be left to the individual services, who are better able than outsiders to compare the cost of added bonuses with the cost of alternatives for addressing shortages of experienced personnel, such as recruiting and training new personnel. Those critics might also point out that the Congress recently improved retirement benefits for many personnel and committed itself to increasing military pay at a rate greater than the increase in private-sector pay. Thus, they would argue, bonuses are not an alternative to across-the-board increases but an addition to them, and the results of those increases should be seen before the Congress considers expanding other incentives.

Option 4-03
Eliminate Differences in Pay Between Married and Single Service Members
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The military generally pays married personnel more than single personnel performing the same job. The difference derives from the military's unique system of either providing food and housing to its members directly or paying them cash allowances to cover food and housing costs. Married personnel are generally thought to need more housing than single personnel, so both DoD-provided housing and housing allowances are larger for service members with dependents than for those without dependents. In addition, most single personnel in the junior enlisted pay grades (E-5 and below) are expected to eat in government dining facilities and live in DoD housing; they may provide their own meals and rent an apartment if they choose, but without specific authorization they cannot receive cash allowances to help cover the cost.

This option would eliminate the pay differences between married and single personnel by dropping the separate allowances for food and housing--in other words, moving to a salary system. Over a five-year transition period beginning in 2001, housing allowances for single personnel would gradually rise to the married level. In 2006, the food allowance and all but the locality-specific component of the housing allowance would be rolled into basic pay. (The locality-specific component would be combined with an existing allowance that accounts for differences in nonhousing costs.) An additional amount would be added to basic pay to compensate members for the increased liabilities they would incur for Social Security and federal income taxes when the nontaxable allowances were converted to taxable pay. Also in 2006, computation procedures for retirement pay and other elements of compensation that are linked to basic pay would be revised to prevent any increase in their costs. Making those changes would add $72 million to defense outlays in 2001 and a total of $34.2 billion through 2010--or about 6 percent to military personnel costs once the transition was completed in 2006. Increased tax receipts, however, would offset about $14.4 billion of the costs in the 2006-2010 period.

Since long before the modern volunteer military began in 1973, outside studies and government-sponsored commissions have recommended adopting a salary system for the military. A common argument is that paying two people with the same rank and job at different rates simply because one is married and the other unmarried is inequitable. The pay difference also creates an incentive for service members to marry, which raises the military's costs for dependents' health care and other benefits. In addition, proponents note that eliminating the separate food and housing allowances would make total military compensation more visible and thus more effective. It would also increase the visibility of another portion of defense costs: the tax revenues that are forgone because the current allowances are tax-free. Another advantage of this option is that most of the cost reflects a pay increase for single personnel, which could improve their retention.

Some critics might argue that this option would represent an ill-advised meddling with a pay system that has served the military well for over 50 years. But the most recent DoD study of moving to a salary system focused on the practical difficulties of making the transition. For example, devising payment schemes for the elements of compensation now tied to basic pay could prove difficult, in part because converting the allowances into basic pay would raise the basic pay of some groups of personnel more than that of others. Most of the difficulties, however, would derive from the current tax-free nature of the allowances. Calculating the increase in federal tax liabilities for a typical service member in each pay grade would be straightforward, but some personnel would wind up better off than before the transition and others worse off. In addition, Congressional budget rules might make it difficult to recognize the increase in tax receipts that would occur when the allowances were converted into taxable pay as an offset to the costs of this option. Finally, the cost estimate for this option assumes that service members would not be compensated for their additional liabilities for state and local taxes because those would depend on where members chose to establish residency; critics could point out that ignoring state and local taxes would effectively cut the pay of military personnel.

Another question that would arise in the transition to a salary system would be how to set rents for government housing for both single and married personnel once the current practice of charging an implicit rent equal to the service member's housing allowance was no longer practical. The cost estimate for this option assumes that rents would be based on the housing allowances at the end of the transition period, adjusted annually for changes in local housing costs. Rents for family housing would be equal to the full allowance. For bachelor housing, a "dorm fee" would gradually decline from the full allowance at the beginning of the transition period to half the allowance at the end. The estimate assumes that the services would continue their current policy of expecting most single personnel in grade E-5 or below to live in barracks or aboard ship; for such personnel, the dorm fee would be mandatory.

An alternative plan for family housing that might be appropriate after the transition would be to raise rents to levels sufficient to eliminate waiting lists for the available government housing. That alternative is examined in option 4-13.

Option 4-04
Deny Unemployment Compensation to Service Members Who Leave Voluntarily
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Many military personnel who voluntarily leave active-duty service are eligible for unemployment benefits. That situation contrasts with the situation of civilian workers--who must have left their job involuntarily to qualify for unemployment compensation--even though payment amounts for the two groups are calculated the same way.

This option would subject former military personnel to the same rules as members of the civilian labor force; in other words, only personnel who left the service involuntarily would be eligible to receive unemployment benefits. That change would reduce the number of departing personnel eligible for benefits by at least two-thirds and save an average of $185 million annually through 2010. Because the Department of Defense ultimately reimburses the Department of Labor for the cost of unemployment payments to former service members, most of those savings ($1.8 billion through 2010) would occur in the defense budget. A small portion of the savings ($57 million through 2010) would occur in the Department of Labor's budget. (The latter savings would be in mandatory spending.)

Most personnel who leave military service do so voluntarily. Many choose not to reenlist after completing a term of service; others, who have served for a minimum of 20 years, opt for voluntary retirement. A much smaller group is separated involuntarily for reasons related to job or promotion performance or, in recent years, to the drawdown of military forces. Although the pressures associated with the drawdown may have blurred the line between voluntary and involuntary separation in the past, the end of the drawdown has restored that distinction.

Proponents of this option would argue that in addition to saving money, it would subject military personnel to the same rules as the rest of the workforce. Thus, in their view, it would make more equitable use of an entitlement program that was established with the intent of aiding people who lost their job involuntarily.

Critics, by contrast, might argue that the frequent moves associated with military service mean that members who separate voluntarily are unlikely to take up residence in the area of their final posting, making it difficult for them to find a new job before they leave the service. In those critics' view, voluntary separation from military service is not comparable with voluntary termination of civilian employment and therefore should not be subject to the same restrictions on eligibility for unemployment compensation.

Health Care Benefits

Health care, which costs DoD about $17 billion annually, is arguably the most important noncash element in the military's overall compensation package. A service member's degree of satisfaction with the military health care system can play an important role in his or her decision to remain in the military. That system is likely to be the focus of much DoD and Congressional attention this year. The Joint Chiefs of Staff recently created an advisory panel, the Defense Medical Oversight Committee, to help them identify how the military health care system could be improved. Thus, options that examine potential changes to that system may be especially timely.

The Structure of the Military Health Care System

The fundamental reason for the military to have a medical system is to keep service members ready for duty and provide them with care during military operations. During the Cold War, the military medical system was structured to fit scenarios involving mass casualties in a major European war. In peacetime, that structure would be available to provide large amounts of care to beneficiaries not on active duty, including the families of active-duty personnel, military retirees, surviving military spouses, and their dependents. More recent planning scenarios require less medical capacity; as a result, DoD has substantially reduced its system of military treatment facilities. Yet even with those reductions, the system is much larger than that required for current wartime scenarios. Most of its budget is devoted to caring for non-active-duty beneficiaries. Of the 8.1 million people eligible to use the system, only about one in six is a service member on active duty.

Active-duty personnel receive free health care through DoD's hospitals and clinics (called the direct care system) and a closely affiliated network of civilian providers. Family members and other beneficiaries who are not on active duty (and are not yet eligible for Medicare) have two health care options. One is to enroll in the plan known as Tricare Prime and agree to seek treatment through the same direct care system and network of civilian providers that serve active-duty personnel. Patients who use Tricare Prime face low (often no) fees and copayments for comprehensive care in exchange for the limited flexibility of a managed care approach. The second option is to use Tricare Standard or Extra--insurance programs that allow military beneficiaries to seek care from a larger number of civilian providers. Those plans feature benefits, copayments, and deductibles similar to the ones in private-sector fee-for-service plans and preferred provider plans, respectively. Beneficiaries who choose Tricare Standard or Extra can also receive care at very little cost from DoD's direct care system. But unlike people enrolled in Tricare Prime, they can do so only when space is available.

When military retirees and dependents reach age 65 and become eligible for Medicare, they may no longer use Tricare. However, they may still receive free care at military hospitals and clinics when space is available. They may also continue to fill prescriptions and get laboratory services free of charge at military treatment facilities.

Criticisms of Military Health Care

Three interrelated criticisms are often directed at DoD's health care system. First, some Tricare users complain of long waits for appointments at military hospitals and clinics or difficulty getting access to the limited number of specialists available through Tricare's networks of preferred providers. Some Tricare beneficiaries have also found it hard to get care when they are away from home.

To some extent, those concerns about access may reflect growing pains in the Tricare system, which DoD started in 1995 but only gradually expanded nationwide. Under Tricare, DoD relies on private contractors in different regions of the country to provide advice lines staffed by nurses, schedule appointments with military and civilian providers, set up networks of providers, negotiate payment rates, and process claims for reimbursement. Many of the complaints about Tricare focus on the service that those contractors provide. However, enrollees' satisfaction with Tricare has generally improved as the contractors and DoD have gained experience with the system and with coordinating benefits across different regions of the country.

Yet some of the reported problems with access to care under Tricare may reflect more fundamental problems. Long delays for patients seeking treatment in military facilities may indicate a lack of focus on customers' needs, inefficiency in the use of doctors' time, or the crowding out of Tricare Prime enrollees by other, lower-priority beneficiaries. Moreover, patient behavior is such that a medical system that does not use copayments to control usage may have to rely instead on implicit costs in the form of waiting time. In the absence of copayments, increasing the capacity of the system could lead to an increase in the number of patients, with no significant change in the average waiting time for a visit.

Second, some retirees over age 65, who are excluded from Tricare, claim that DoD has reneged on a promise to provide them with free lifetime medical care. Although the legal basis for such a claim has been denied by the U.S. Court of Appeals, many defense officials say they recognize an obligation to offer some care to older beneficiaries. But in some areas, base closures have limited DoD's ability to provide them with care on a space-available basis.

One reason that many older military beneficiaries would like comprehensive health coverage through DoD is that they face significant out-of-pocket costs under Medicare. Besides paying Part B premiums (about $550 per year), beneficiaries who receive treatment through Medicare's fee-for-service program must typically pay deductibles and coinsurance. Some military retirees over 65 get supplemental coverage through employers who hired them after their military service; others invest in medical savings accounts to cover future out-of-pocket costs or enroll in Medicare +Choice managed care plans. In addition, more than 50 percent of military retirees report that they buy private supplemental insurance, known as medigap policies, to cover some of the costs that Medicare does not.

Third, critics maintain that DoD's medical system has trouble planning for and controlling health care costs. Civilian health care plans must also plan for and control costs, but the structure of military health care benefits makes those tasks particularly difficult for DoD. Planning is complicated by the fact that beneficiaries who choose not to enroll in Tricare Prime can still turn to space-available care at military facilities or to Tricare Standard or Extra whenever that coverage is convenient for them. As a result, the amount of medical care they will seek from DoD in any given year is uncertain.

Cost control is complicated by the fact that care at military hospitals and clinics is free (or nearly free) to its recipients. Although DoD tries to manage the use of care, the system's incentive structure causes beneficiaries to use substantially more care than other U.S. residents--even though more care does not necessarily lead to better health outcomes. In addition, as private-sector employers and insurers have required beneficiaries to pay more of the cost of their care, beneficiaries who are also eligible for DoD's system have increased their reliance on military facilities for services, such as pharmacy and laboratory services, that would otherwise entail out-of-pocket costs.

The experience of private-sector health care programs suggests that charging a nominal copayment for routine outpatient visits and pharmacy services gives consumers an incentive to use care more prudently without significantly affecting their health. In the past, DoD has characterized options that would institute copayments for treatment in military facilities as cost-cutting initiatives that would harm the quality of life of service members. (In fact, the Administration's proposed budget for military health care includes additional funds in 2001 to eliminate existing copayments for active-duty family members enrolled in Tricare Prime who are treated by civilian providers.) Nevertheless, beginning to charge copayments at both military and civilian facilities could be viewed as a way to make DoD's efforts to provide improved access to health care and more uniform benefits affordable. Under the current system, high costs could limit efforts to expand benefits for retirees over 65 and to improve access for Tricare beneficiaries.

The options presented below represent a mix of approaches to those and other problems. Some of the options would try to provide better and more uniform benefits by adding resources to the military medical system; others would combine efforts to expand benefits with copayments aimed at making those initiatives more affordable; and still others would fundamentally restructure DoD's role in providing health care in the post-Cold War era.

Option 4-05
Increase Access to Health Care for Active-Duty Families at Military Treatment Facilities
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Most families of active-duty personnel enroll in Tricare Prime, a health plan that promises comprehensive care at minimal cost. But many of those families complain that obtaining appointments to receive care at military hospitals and clinics--where Tricare Prime is centered--is difficult.

This option would improve access for active-duty personnel and their families at military treatment facilities through three approaches. It would expand DoD's capacity to offer outpatient services at those facilities by hiring more civilian staff to support military health care providers. It would also increase the number of exam rooms available for outpatient visits at military facilities. And it would change the incentives of physicians who supply care at military hospitals and clinics. Together, those measures would cost $1.2 billion through 2005, or a total of more than $2.7 billion over 10 years.

Some DoD planners say the military health care system is greatly in need of support staff, such as registered nurses and other skilled personnel who provide technical assistance and follow-up care. Over the past 10 years, DoD has cut the number of civilian workers in its system by 22 percent, while the number of military medical personnel has fallen by 13 percent. According to DoD analyses, military outpatient clinics have a lower ratio of support staff to health care providers (including physicians, physical therapists, and psychologists) than many health maintenance organizations (HMOs) in the private sector.

In a 1998 hearing before the House National Security Committee, the Surgeons General of the Army and Navy both identified support staff as a high-priority need within the military health system, since those personnel can free up physicians' time to see more patients. For its part, the Air Force has set a goal of having 3.5 support personnel per provider throughout its clinics based on what it believes are norms among HMOs. This option would give DoD new funding to bring its ratio of support staff to providers of outpatient care closer to private-sector levels.

Besides staffing, military facilities also differ from the private sector in their physical capacity for outpatient care. Most DoD hospitals were built decades ago and were designed to focus on inpatient beds rather than outpatient visits. Many civilian HMOs, by contrast, do not operate their own inpatient facilities at all. This option would provide new funding to build more rooms for outpatient exams at military facilities.

Although these measures would expand DoD's capacity for outpatient visits at base facilities, they might not be sufficient to improve access to care among active-duty families. For example, physicians could resist moves to add to their current workload of patients. This option would try to counter that possibility through monetary incentives for military physicians. Specifically, providers who serve as primary care managers would be eligible to receive up to $22,000 per year in bonus compensation that would be tied to the productivity of a group of military physicians, as measured by quality of care and patients' satisfaction and access. Bonuses would be divided among groups of physicians rather than awarded to individuals for two reasons: to use peer pressure to ensure that providers offered high-quality care, and to avoid the need to adjust measures of an individual physician's productivity for the relative complexity of his or her cases.

Supporters of this option would argue that expanding outpatient capacity and changing the incentives of providers could make the military health care system more accessible. Those changes could reduce waiting times and make it easier to schedule appointments at military hospitals and clinics. In addition, if health care is a key consideration in service members' decisions about whether to leave or stay in the military, such measures might help increase retention.

Opponents of expanding the number of support staff at military clinics might argue that DoD should have a lower ratio than is common in the private sector. DoD's health care providers must furnish more on-the-job training than civilian providers do, since active-duty support personnel often have not had much instruction in health care before entering military service. Moreover, critics of this option would contend that before DoD devotes more funding to hiring support staff or building exam rooms, it should first look at how it can better manage its current resources. Some might argue that DoD has too many physicians on active duty.

Other critics of this option contend that increasing the capacity of the system could do little to reduce delays in appointments because, in the absence of copayments, the additional capacity might simply induce beneficiaries to seek more care. (Such delays might be reduced, however, if DoD also began charging nominal copayments for outpatient visits; see option 4-09 below.) Moreover, the performance bonuses for physicians could create an incentive for them to provide unnecessary or poorer-quality care.

Option 4-06
Offer Comprehensive Health Coverage to Older Military Retirees
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Over the past decade, DoD has closed 35 percent of its military hospitals and replaced others with smaller clinics, leaving less capacity in its direct care system. Because beneficiaries age 65 and older are eligible for health benefits through DoD only if space is available at military facilities, some of those people have had to seek care elsewhere, which increases the share of costs they bear themselves. As a result, service organizations that lobby on behalf of military retirees argue that DoD has broken a promise to provide free health care for life to people who agreed to pursue a career in the military.

This option would give military beneficiaries age 65 and older comprehensive health coverage through DoD using one of two distinct approaches. Under the first approach, beneficiaries would receive a payment from DoD approximately equal in value to a basic type of medigap plan (a supplemental insurance policy for Medicare). Beneficiaries could use that payment to buy supplemental coverage or could apply it toward any health expenses they now pay out of pocket. The second approach would offer beneficiaries coverage under the Federal Employees Health Benefits (FEHB) program, with DoD paying the same share of an enrollee's premium that it does for federal civilian workers. That approach would be more costly to DoD but more generous to older beneficiaries. To offset some of DoD's costs for either form of coverage, older military retirees who chose to accept the new benefit would no longer be permitted to use military health care facilities.

About half of older military beneficiaries report that they purchase private medigap insurance to protect themselves from high out-of-pocket expenses under Medicare. Ten standard medigap plans exist. Their annual premiums can vary widely--from about $600 per person to more than $2,000--depending on the types of benefits covered and the state in which the policyholder lives. In addition, if beneficiaries wait more than six months after turning 65 to buy a medigap plan, insurers may subject them to a waiting period for coverage or even refuse to sell them a policy because of their medical history or health status.

Under this option's first approach, the payment that DoD provided to older military retirees and dependents would roughly equal the value of a standard medigap "A" plan, the least generous type that covers core benefits such as copayments for physicians' services and long inpatient stays. (That value is about $700 in 2000.) Beneficiaries could use that payment to offset the cost of any medigap or employer-sponsored wraparound plan they chose, although they would have to make up the difference in price for plans with more generous benefits. Alternatively, they could deposit the tax-exempt payment in a medical savings account or apply it toward out-of-pocket premiums and copayments charged by managed care providers in the Medicare+Choice program.

Those payments would cost DoD $3 billion