Introduce Minimum Out-of-Pocket Requirements Under TRICARE for Life

Background

TRICARE for Life (TFL) was introduced in 2002 as a supplement to Medicare for military retirees and their Medicare-eligible family members. The program pays nearly all medical costs not covered by Medicare and requires few out-of-pocket fees. Because the Department of Defense (DoD) is a passive payer in the program—it neither manages care nor provides incentives for the cost-conscious use of services—it has virtually no means of controlling the program's costs. In contrast, most supplemental Medicare policies control spending by requiring enrollees to pay deductibles or copayments up to a specified threshold. In 2017, DoD spent $10 billion for the care delivered to Medicare-eligible beneficiaries by military treatment facilities and by civilian providers (in addition to the amount spent for those patients through Medicare).

Option

This option would introduce minimum out-of-pocket requirements for TFL beneficiaries. For calendar year 2022, TFL would not cover any of the first $750 of an enrollee's cost-sharing payments under Medicare and would cover only 50 percent of the next $6,750 in such payments. Because all further costs would be covered by TFL, enrollees would not be obligated to pay more than $4,125 in 2022. Those dollar limits would be indexed to growth in average Medicare costs (excluding Part D drug benefits) for later years. Currently, military treatment facilities charge no copayments for hospital services provided to TFL beneficiaries. To reduce beneficiaries' incentives to avoid out-of-pocket costs by switching to military facilities, this option would require TFL beneficiaries seeking care from those facilities to make payments that would be roughly comparable to the charges they would face at civilian facilities. DoD would need to establish procedures for collecting payments from TFL beneficiaries who received care from military treatment facilities.

Effects on the Budget

This option would reduce spending for Medicare as well as for TFL because higher out-of-pocket costs would lead beneficiaries to use somewhat fewer medical services. Altogether, including some implementation costs in 2020 and 2021, the option would reduce federal spending devoted to TFL beneficiaries by $27 billion between 2020 and 2028, the Congressional Budget Office estimates. About two-fifths of those savings would come from reduced spending for medical services—both by Medicare and from the fund that pays for TFL expenditures—because of reduced demand for those services. The rest would represent a shift in spending: The federal government would spend less, and military retirees and their families would spend more. The estimated savings could be altered by changing the amount of health care costs that people would need to pay out of pocket, but the relationship would not be proportional—that is, doubling out-of-pocket costs would not necessarily double the savings. One reason for that relationship is that the number of people using TFL under different cost-sharing scenarios would not change proportionally: Relatively healthy people, who do not spend the deductible under the current system, for example, would not change their demand for health care services if that deductible increased.

The greatest source of uncertainty in the estimate is the extent to which beneficiaries would reduce their spending on health care. CBO relies on studies that have shown that an increase in out-of-pocket costs leads to a decrease in the use of health care. The RAND Health Insurance Experiment conducted from 1974 to 1982, for example, examined a nonelderly population and showed that health care spending was about 45 percent higher for participants without any cost sharing than for those who effectively faced a high deductible; average spending for people with intermediate amounts of cost sharing fell between spending for those two groups (Newhouse and the Insurance Experiment Group 1993). More recent studies also concluded that higher cost sharing led to lower health care spending (for example, Swartz 2010). Nevertheless, the behavior of military retirees might be different from that of the studied populations, and changes in the cost and availability of other Medicare supplemental insurance would affect the estimated amount of savings.

Other Effects

An advantage of this option is that greater cost sharing would increase TFL beneficiaries' awareness of the cost of health care and promote a corresponding restraint in their use of medical services. Research has generally shown that introducing modest cost sharing can reduce medical expenditures without causing measurable increases in adverse health outcomes for most people.

A disadvantage is that the change could discourage some patients (particularly low-income patients) from seeking preventive medical care or from managing their chronic conditions under close medical supervision, which might negatively affect their health.