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13 July 2006

MHS: FINANCIAL UPDATE. 2006 Tri-Service Health Care Facilities Symposium Boston, MA. 13 July 2006. DoD Health Care Budget FY2007. Procurement: $0.4B. RDT&E: 3 $0.1B. In-House Care: $3.5B (9%). Medicare Eligible Retiree Health Care Fund: 2 $11.4B. Private Sector Care: $8.8B

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13 July 2006

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  1. MHS: FINANCIAL UPDATE 2006 Tri-Service Health Care Facilities Symposium Boston, MA 13 July 2006

  2. DoD Health Care Budget FY2007 Procurement: $0.4B RDT&E:3 $0.1B In-House Care: $3.5B (9%) Medicare Eligible Retiree Health Care Fund:2 $11.4B Private Sector Care: $8.8B (22%) (29%) MILCON: $0.4B MILPERs:1 $7.0B (18%) Pharmacy: $3.9B (10%) Other O&M: $4.0B (10%) FY2007 Total Budget: $39.5 Billion 2 1 – DHP Budget for Military Personnel comes directly from MILPERs Budget 2 – Normal Cost Contribution paid into the Medicare Eligible Retiree Health Care Fund 3 – Excludes Congressional additions which historically have been up to $0.5 billion

  3. Where Are We Growing Vs FY06 -75.7% -1.9% Procurement: RDT&E:3 Medicare Eligible Retiree Health Care Fund:2 In-House Care +4.1% +5.4% Private Sector Care: +5.0% MILCON: +23.5% MILPERs:1 Pharmacy: Other O&M: +1.3% +7.6% +11.1% FY2007 Total Budget: $39.5 Billion +4.1% 3 1 – DHP Budget for Military Personnel comes directly from MILPERs Budget 2 – Normal Cost Contribution paid into the Medicare Eligible Retiree Health Care Fund 3 - Excludes Congressional additions which historically have been up to $0.5 billion

  4. Scope Of The Problem • TRICARE today is one of the very best health plans in the world. • However: • the Defense Health Budget has more than doubled from $18B to $37B in five years, and now represents 7.5% of total DoD spending. • It is projected to reach $64B and more than 12% of the DoD budget by 2015. • Such growth, left unchecked, will put tremendous strain on the DoD Budget, crowding out transformational changes, investments in needed weapons systems and sustainment capabilities to fight the war on terrorism. • In fact, rapid growth in health spending is already creating significant stress among the Military Services.

  5. Past and Projected Resources For MHS (Billions of 2005 dollars) 5 Source: Congressional Budget Office

  6. What’s Causing This Growth • DoD Health cost growth is attributable to four main factors: • Expansion of TRICARE to cover more services and more beneficiary groups. • Beneficiary cost shares have remained unchanged for years, or decreased, or in some instances been eliminated. • Medical inflation rates higher than general inflation. These changes have been most pronounced since 2000. • Higher participation by eligible beneficiaries – Retirees <65 • TRICARE was expanded in 2001 to cover all costs not paid by Medicare, including prescription drugs, for those 65 and older. In addition, co-payments were eliminated for active duty, additional services added, and in (need year) the benefit expanded for guard/reserve called to active duty.

  7. Factor #1: Legislation Increasing Benefits Benefit Additions Are Also Increasing Costs • In 2001, military health care costs were expected to grow from $19B to $27B (+43%) by 2007 • In 2002, Congressionally mandated expansion of TRICARE coverage for military retirees became effective • With these expanded benefits, health care costs will grow to $39B (+107%) by 2007 • These expanded benefits add a cost of $68B over FY07-11 • This year, Congress may expand TRICARE coverage for Reservists (Graham amendment could cost over $6.5 Bil over 6 years) $39 $37 $36 $32 $30 $24 $19 7

  8. Factor #2: Cost Shares Have Remained Flat Comparison Of Cost Shares – TRICARE vs FEHBP1996-2005 • Includes premiums and co-payments. • Assumes all care received in the civilian sector for a family of 3. • FEHBP estimates from Checkbook Guide.

  9. Factor #3: High Cost Growth Pharmacy Expenditures Growing At A Rapid Rate $Billions

  10. Factor #4: Increase In Users – NADD < 65 Eligible Retirees are increasingly using TRICARE 87% 85% 82% 84% 80% 78% 75% 72% 69% 66%

  11. % $ Expenditure - Beneficiary Share Factor #4: Increase In Users – NADD < 65 Source: TRICARE Management Activity/Office of the Chief Financial Officer: Business and Economic Analysis Division

  12. Unchecked: MHS Budget Growth Will… If DoD Health Budget grows at recent trend rates, it will reach $64B, or 12% of DoD topline in 2015 If DoD Health Budget constrained at 8% of DoD topline 2005 DoD Health Budget 7% of DoD topline; projections call for 12% of topline by FY15

  13. Outpace Our Ability To Trim Costs Eliminate all of TMA – Eliminate all of Central IMIT – Double the Efficiency Wedge Reduce Supply costs in MTFs by 25% Total reduction in FY2015 - $2.3B out of $64.5B Program

  14. DoD Savings Initiatives Efforts To Offset These Increases

  15. Savings Initiatives Annual Savings Initiatives Trend Is Expected To Continue in FY2007 $973.3 $605.5 (Bars: $ Cost Reductions - $ Millions) (Red Line: Savings As A % Of Total O&M) $419.1 $218.1 $136.0 15

  16. Savings Pharmacy Savings Initiatives • Electronic transfer of prescriptions from MTF to TMOP: • Adds Options For Patients • Eases capacity/workload at MTFs • Promote TMOP over Retail • Use Incentives to Encourage Generics over Brand 16

  17. Savings DoD/VA Savings Initiatives • Joint Procurement • Consolidated Health Informatics • Increase in Non-GME training & education shared ventures • Joint Facility Demo Projects: i.e. North Chicago • Joint Incentive Fund Projects 17

  18. Savings Strategic Planning • The main purpose of this effort: what is the key focus of organization and what will we deem as PRIORITIES. • Efficiencies • IM/IT Investments • An outcome of this effort also is what we won’t deem as a priority; what we won’t spend our money, and what we will not allocate our limited resources to. 18

  19. Savings • QDR#8: Transform the Infrastructure • Opportunity to reshape our medical infrastructure business process and become more cost effective.  We need to find innovative ways to reduce cost and improve the quality and timeliness of recapitalizing medical facility infrastructure: • Developing a systematic and strategic approach to provide comprehensive visibility of its assets • Establishing a process to directly link facility investments with performance goals articulated in strategic and business planning and enhance joint operations and interagency collaboration. • Transforming the medical military construction (MILCON) planning, acquisition and recapitalization processes.

  20. Andrews AFB Fort Belvoir Walter Reed AMC Bethesda NMC Savings - BRAC Actions Major Realignment Close Inpatient Education Consolidation San Antonio Specialty Enlisted Training Fort Sam Houston Fort Knox Keesler AFB Lackland AFB Aerospace Medicine Wright-Patterson MacDill AFB Ft Sam Houston Centers of Excellence Battlefield Health and Trauma Fort Sam Houston NH Great Lakes NCR Scott AFB Hyperbaric & Undersea Med Walter Reed- Forest Glen NH Cherry Point Infectious Disease Walter Reed- Forest Glen Fort Eustis Aerospace Medicine Wright-Patterson AFB NH Cherry Point Joint Operations McChord AFB Medical Biological Defense Fort Detrick USAFA Biomedical RDA Mgmt Ctr Fort Detrick

  21. QUESTIONS ?

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