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The Joint Chiefs of Staff support a sharp rise in Tricare fees for under-65 retirees and their families, they say, because retiree health costs are soaking up dollars needed to buy weapons and sustain force readiness.

The problem they describe is real but their solution is flawed, says Dov Zakheim, Department of Defense comptroller from 2001 to 2004. Zakheim doesn’t oppose raising Tricare fees. His “sympathies,” he said, are with DOD officials struggling with soaring personnel costs and a Congress that has approved “one benefit after another benefit after another.”

But the proposed Tricare fee increases, for all the angst they’ve caused, are a weak response to the “inexorable” cost growth of military health care seen in recent years, Zakheim said.

A far more effective solution, he argued, would be to shift part or all of current health care expenses out of the defense budget. But, Zakheim suggested, the fee hikes so unpopular with younger retirees as well as the current career force will be no more effective than a speed bump in slowing health care costs.

Those costs have jumped from $19 billion in 2001 to almost $42 billion in 2006. Factors behind that growth, Zakheim said, include elimination of Tricare co-payments for active-duty families; startup of Tricare for Life (TFL) for Medicare-eligible retirees; expansion of Tricare Prime remote for servicemembers and families assigned away from base; expanded Tricare eligibility for reserve and National Guard members, and medical inflation.

The growth won’t slow substantially, Zakheim said, “even if the Department of Defense is able to realize every single one of its proposed savings measures.”

Higher fees or not, he said, the “health program will continue to consume ever larger portions of the defense budget.” That could leave the Joint Chiefs in just a few years with the same sort of budget pressure they’re dealing with now.

A problem with the planned fees, Zakheim said, is they aren’t aimed at 1.7 million Medicare-eligible retirees whose health care needs are a “major driver” behind escalating costs. Also the fees aren’t large enough to make Tricare less attractive when compared to other health plans. Finally, Congress is poised to continue to expand health benefits, particularly for reservists, adding perhaps $6.4 billion to military health care costs within five years.

Zakheim said legal authorities already are in place to begin to shift medical costs out of the defense budget starting with Tricare for Life, the military’s prized supplement to Medicare. After TFL began in 2001, Congress set up an accrual fund to pay for it. The services made monthly payments to this Retiree Health Care Fund to cover future costs of current members and their families.

The fiscal 2005 defense authorization bill changed that payment procedure, directing the Treasury, rather than the Defense Department, to make the payments, saving DOD about $11 billion a year. By contrast, the planned Tricare fee increases would save just $11.2 billion over 10 years.

The logic of moving TFL costs off budget is that care for elderly beneficiaries is an “entitlement” that must be funded, like Social Security and Medicare, Zakheim said. It shouldn’t have to compete with “discretionary” spending needed to buy weapons, maintain equipment or train troops.

If allowed to take effect, the shift would slice about a quarter off the cost of military health care. But the White House’s Office of Management and Budget has “effectively obviated this initiative,” Zakheim told a House subcommittee on military personnel March 31. It did so by directing DOD officials to continue to “score” TFL costs as a defense health expense, even though the Treasury Department has begun picking up the tab for future users.

Zakheim said that’s a mistake. If he had his way, the full Tricare program would be viewed as an entitlement and removed from the defense budget. OMB, however, wants the real cost of TFL or other military medical benefits exposed to keep pressure on DOD and Congress to make cuts.

The 2005 change to payment procedures for the retiree fund aligned “treatment of retired military personnel over 65” with that of “U.S. government employees,” Zakheim argued. That is, health spending on current employees, military and civilian, remains discretionary while health care for older retirees is mandatory spending, funded by the Treasury.

Obviously, said Zakheim, the shift of $11 billion in health funding to Treasury has no beneficial impact on the federal deficit. But it could relieve budgetary pressure on the services from their health care accounts.

“That’s terribly important, whether it’s one dollar or all $11 billion of them,” Zakheim said.

In response to Zakheim’s criticisms, OMB said TFL is funded exactly like the Military Retirement System and the Federal Employees Retirement System. But in OMB’s view, last year’s move to have Treasury make military TFL payments had the effect of excusing DOD from paying “its fair share” of accrued health benefits.

Zakheim said removing Tricare for Life obligations from the defense budget would trim DOD medical costs by $100 million through 2014, giving the services a lot of budgetary breathing room.

OMB signaled that’s not going to happen.

“OMB, the Senate Budget Committee, the House Budget Committee, and the Congressional Budget Office all agreed that [full] budget authority and outlays” will continue to found in the annual defense appropriations bills,” the official said, “regardless of whether DOD or Treasury makes payment to the fund.

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