dingly. DoD could support those efforts by trying to understand clinical variations among the services as well as differences in practice patterns among physicians.

A more serious problem that relates directly to the issue of care is the possibility that the number of eligible military beneficiaries electing to use the military health care system might grow. With more beneficiaries, the problems of excess demand, rationing, and declines in the quality of service would be greater than assumed here, because the number of

physicians assumed in this option might not be sufficient to meet HMO staffing patterns for the military.

In view of these uncertainties, this option makes the conservative assumption that beneficiaries receive all of their health care at military medical facilities, though currently they actually receive about 20 percent of their care from civilian providers paid by DOD. Indeed, accounting for the care that beneficiaries receive from civilian providers could lower the number of physicians needed to meet civilian HMO staffing standards by as much as 20 percent--or from the 8,060 assumed here to 6,450.

About 8.2 million people are eligible to use the military health care system. That total includes all men and women on active duty, their spouses and children, and retired military personnel and their dependents and survivors. Yet only about 6.4 million of them actually use the military's system of care. Many of those who are eligible choose instead to rely on other insurance coverage. Eligible people do not have to enroll or otherwise commit themselves to use the military system. Instead, they can elect to use military care on a case-by-case basis, thus creating major cost and management uncertainties for military providers.

Beneficiaries who choose to use the military's health care system receive most of their care in the military's hospitals and clinics (referred to as the direct care system). Other care is given by civilian providers who are reimbursed by a traditional feefor-service insurance program known as the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS). Of all the military beneficiaries admitted to hospitals in 1993, 75 percent were admitted through the direct care system and only 25 percent through CHAMPUS. Care furnished in military facilities is virtually free to the beneficiary, whereas CHAMPUS users bear higher out-of-pocket costs for the care they receive, although they are not required to pay an insurance premium.

The Department of Defense, however, is now implementing a plan, known as Tricare, for reforming the current system of military health care. DoD plans to make Tricare available to all military beneficiaries nationwide by the summer of 1997. Under that plan, beneficiaries can choose among three options for health benefits: Tricare Prime, a plan mod

eled after private-sector health maintenance organizations (HMOs); Tricare Standard, the standard CHAMPUS benefit plan; or Tricare Extra, a preferred provider option that beneficiaries participating in Tricare Standard are allowed to use on a case-bycase basis. Only Tricare Prime requires beneficiaries to enroll. Active-duty personnel and their dependents do not pay an annual enrollment fee, but retirees pay $230 for single and $460 for family coverage. (Beneficiaries who are 65 years of age or older are not allowed to enroll in Tricare Prime under provisions governing CHAMPUS eligibility.)

Tricare makes many changes to the military health care system, but those changes may not be sufficient to remedy the inefficiencies that have beset DoD's management and delivery of health care. In an effort to improve the Tricare program, this option would make two modifications to the military health care benefit. The first would require all beneficiaries, except those who are 65 years of age or older, to enroll in either Tricare Prime or Tricare Standard as a precondition for using the military health care system. Annual enrollment fees for Tricare Standard would be modeled after the fees established for Tricare Prime. Active-duty personnel and their dependents would pay no fee, but retirees under the age of 65 would pay an annual fee of $115 for single and $230 for family coverage.

The second modification would equalize the cost-sharing requirements for outpatient care for all beneficiaries regardless of whether that care was received in a military or civilian setting. New costsharing requirements for direct military health care would be modeled after the civilian cost-sharing requirements for Tricare Prime.

Savings under this option could amount to about $200 million in 1997 and about $1.2 billion through 2002 compared with the Administration's 1996 plan. Those savings would stem from the revenue generated from enrollment fees, increased charges, and the reductions in patterns of use by beneficiaries in response to higher cost sharing. Some of those savings, however, would be offset by the cost of modifying existing automated information systems to collect the higher fees, which has not been included.

All three Tricare plans would require that beneficiaries seek care through the direct care system before going to a civilian provider. Beneficiaries using the direct care system would continue to pay very little out of pocket. The costs for hospital care would not change: most beneficiaries would pay between $4.75 and $9.70 per day, and retired enlisted personnel would pay nothing. Moreover, outpatient visits and prescriptions would continue to be free for all beneficiaries.

Beneficiaries using civilian providers would generally continue to pay more out of pocket for their care under Tricare than if they used the direct care system. How much more would depend on the beneficiary's choice of plan. Enrollees in Tricare Prime would pay the least out of pocket for the care that they obtained from a civilian network provider: most beneficiaries would pay about $11 per day for hospital care and between $6 and $12 for outpatient care. The cost-sharing requirements for Standard and Extra users would generally be higher.

Aside from raising revenue, this option would yield many other benefits. An efficiently managed system would require DoD to be able to identify the population for whom health care was provided.

Tricare begins to build a better foundation for DoD by requiring people who choose Tricare Prime to enroll. But DoD would still face a challenge in planning for people who did not enroll. Military providers need to be able to plan for the health care needs of a defined population to develop per capita budgets and build cost-effective health care delivery networks. Those strategies can be put into effect only if all beneficiaries commit themselves either to use a military plan or to rely on nonmilitary sources of care. The universal enrollment requirement in this option would accomplish that. Charging more for direct care would also help curb excessive use of services in military facilities by creating the same incentives for beneficaries who used the military treatment facilities as for those who used civilian providers. Finally, this option would eliminate the inherent inequity of providing more generous health care benefits to people who live near a military hospital or clinic.

This option also has drawbacks. Because medical care is a key part of military compensation, military families might view increased charges as an erosion of benefits. That could be of particular concern during a major drawdown of forces, which has already created considerable uncertainty among military families. Recruitment and especially retention could suffer, although enrollment in Tricare would continue to be free for active-duty personnel and their dependents, in contrast to the premiums typically required for enrolling in other medical plans offered to civilian employees in either the federal government or the private sector. Nor should rising charges necessarily harm health, because evidence shows that people at ages and income levels typical of military beneficiaries seek needed care even when they share costs.

During the Cold War, wartime military medical requirements were based largely on the scenario of an all-out conventional war in Europe. The expected high casualty and injury rates generated demands for far more hospital beds and physicians' services than military budgets could afford. The military built large medical systems incorporating some 30,000 hospital beds in the United States and requiring the services of 13,000 active-duty physicians.

This option would restructure the military health care system based on the reduction in wartime medical requirements that has occurred since the Cold War ended. Although the size of the system has been reduced slightly in response, wartime requirements have plummeted so sharply that the military medical establishment in the United States now has more than twice the capacity needed to meet the projected wartime demand for medical care. Substantial reductions in the number of facilities--and personnel--in the military health care system may therefore be possible.

According to a study for the Department of Defense conducted by RAND, for example, the military could eliminate all but 11 of today's 99 hospitals in the United States. That would reduce the wartime capacity of the system in the United States, as mea

sured by the number of hospital beds, by more than two-thirds--from over 18,000 beds to about 5,500 beds. In doing so, DoD's health care system would be able to meet about 60 percent of the total wartime requirement for 9,000 beds, a significantly higher percentage than it ever met during the Cold War. As DoD has traditionally planned, the Department of Veterans Affairs and the civilian sector would provide the additional beds during wartime.

To date, DoD has no plans to make such deep reductions in the size of its medical establishment. Military medical officials argue that military medical facilities and the care those facilities provide in peacetime are essential to train physicians and ensure medical readiness for wartime. In addition, they claim that they must maintain a large enough establishment to attract, recruit, and retain medical personnel. In principle, however, DoD could separate its responsibility to provide beneficiaries with access to medical care from its direct provision of peacetime health care in military facilities. Indeed, given that the department reimburses beneficiaries for care received from civilian providers through the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS), it already makes that separation to a degree.

Downsizing the military's medical system to such an extent would obviously have a major impact on training and preparing for wartime. Such an effort would require DoD to strengthen its affiliation with the civilian sector to provide wartime training for military medical personnel, meet some of the requirements for active-duty personnel, and ensure an adequate supply of wartime beds. Developing those closer ties with the civilian sector might be worth the effort, since practicing medicine in the civilian sector

would probably afford military medical personnel more experience in treating the diseases and injuries that they might be required to deal with in wartime than would treating mostly civilian patients in military medical facilities. (See Congressional Budget Office, Restructuring Military Medical Care, July 1995, for a fuller discussion of this subject.)

This option would also have a significant impact on the way that DoD provides health care to the millions of people who rely on the military system. A downsized medical establishment would drastically limit the ability of DoD to provide care directly to its beneficiaries, including military personnel. Activeduty personnel would receive their health care in both military and civilian settings; other beneficiaries--dependents of active-duty personnel and retirees and their families--would have to depend entirely on the civilian sector.

Carrying out such an aggressive restructuring of the military medical system would offer substantial savings. Net savings would be $270 million in 1997 and more than $11 billion over six years. Those net savings reflect both the costs avoided by downsizing the military health care system and the costs of providing an alternative source of health care coverage for non-active-duty beneficiaries.

Costs Avoided by Downsizing. Under one definition of wartime readiness, DoD could reduce its net annual costs by about $770 million in 1997 and more than $39 billion through 2002. That estimate of savings accounts for the eventual elimination of CHAMPUS, the provision of health care to activeduty personnel, and the costs of closing down the military medical system; it does not, however, reflect the costs to the federal government of cleaning up hospital sites, because DoD would have to pay those costs anyway.

Costs of Health Care. Any serious effort to restructure the military health care system would probably consider the costs of providing an alternative source of health care coverage for non-active-duty beneficiaries. For that reason, this option assumes for illustrative purposes that DoD would offer non-active

duty beneficiaries the opportunity to enroll voluntarily in the Federal Employees Health Benefits (FEHB) program. As an employer, DoD would pay the government's share of the premiums for the plans that beneficiaries selected, modeled on the premiumsharing arrangements between the government and nonpostal employees. Another key assumption of this option is that DoD would ensure that all of its beneficiaries over the age of 65 had full coverage under Medicare.

Assuming gradual implementation of this option, the total cost to the government of providing an alternative source of health care to non-active-duty beneficiaries would be about $500 million in 1997, growing to almost $28 billion over the next six years. Based on that estimate, the government's cost would be substantially less than the savings it could realize by downsizing and restructuring the military health care system.

This option might be opposed for several reasons. Beneficiary groups might object because enrolling in a plan offered under the FEHB program would cost them substantially more on average than what they pay out of pocket for care in the military health care system today. Nevertheless, many FEHB plans would offer improved coverage to military beneficiaries and so might be worth the higher out-ofpocket costs.

This option would also require DoD and the Congress to proceed unambiguously with separating peacetime care from wartime readiness. Military medical officials strongly oppose downsizing the military medical system on the grounds that such actions would jeopardize medical readiness. But in fact, this option would make wartime medical readiness the primary objective of DoD's medical planning. In the past, DoD has had difficulty balancing the wartime mission with peacetime care. DoD has stated that it has not always been able to serve its wartime mission well given its tendency to emphasize the delivery of peacetime care at the expense of wartime preparedness. This option would help to address that problem by redefining the responsibilities of the department.