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Business Executives for National Security Modernizing Military Compensation Series Summary of Findings, Perspectives, and Recommendations www.bens.org Overview Setting the Context for the BENS Modernizing Military Compensation Series
www.bens.org
Summary of Findings, Perspectives, and Recommendations
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Bringing private sector insight to military compensation reform
“Our greatest challenge in this most dangerous world is strengthening the U.S. military in a weak economy whose foundation rests on the quicksand of deficit spending” MajGen Arnold Punaro, USMC (ret.) “A striking bipartisan consensus exists today across the think tank community on the need...for a comprehensive evaluation and modernization of the military compensation system.” Defense Reform Consensus “If we don’t make some tough choices here along the way, … then we’ll have a military that is heavily compensated, but probably a force that is not capable and not ready.” Chuck Hagel, Secretary of Defense
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A ten-member Task Force was formed and asked to provide perspective and recommendations that would help policymakers address key areas of military compensation. The Task Force focused
they believe they could provide the most value:
Basic Pay , $52.0 Other Pay & Allowances, $7.8 Housing Allowance, $19.4 Subsistence Food Allowance, $4.1 Health Care , $33.6 Commissary, $1.4 Retirement, $16.8 Retirement Health Care, $8.3
(in billions of dollars)
Bringing private sector insight to military compensation reform
Note: Full explanation of calculation and sources to be available in forthcoming report.
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Initial Findings
Graph by: Defense Business Board
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20 40 60 80 100 120 Year 1989 1994 1999 2004 2009 2014 2019 2024 2029 2034 2039 2044 2049 2054 2059
Billions ($)
Normal Cost Contributions from DoD and Unfunded Liability from Treasury
DoD, Normal Costs Treasury, Unfunded Liability
Initial Findings
While growing cost should be a concern, projections on liability may be speculative. The hundreds of billions of dollars of unfunded liability is a cumulative amount to be paid to retirees over the next 50 years, not all at
liability which resulted from the implementation of accrual accounting in 1985 will dissipate in 2025.
Data: Department of Defense Office of the Actuary (2010)
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42,000,000 44,000,000 46,000,000 48,000,000 50,000,000 52,000,000 54,000,000 56,000,000 58,000,000 10,000,000 11,000,000 12,000,000 13,000,000 14,000,000 15,000,000 16,000,000 17,000,000 18,000,000 19,000,000 20,000,000 2004 2006 2008 2010 2012 2014 Accrual Cost
Retirement Accrual & Basic Pay
Basic Pay Retirement Accrual .....
Initial Findings
Significant increases in basic pay over the past ten years directly correlates with increased cost of retirement. As basic pay cost begins to flatten or reduce due to expected reductions in force and limited increases to service member salaries, retirement cost is also expected to flatten.
Basic Pay Cost
Data: Department of Defense
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Initial Findings
Retirement benefits have little effect on initial enlistment, but the current defined benefit plan is a driving incentive for reenlistment – particularly for those reenlisting after 10 years of service.* However, it is unclear if a reduced benefit would significantly hurt retention. More study is needed to determine if other benefits, potentially those less costly to the Department like cash rather than in- kind compensation, could be used as an equivalent
* 11th Quadrennial Review of Military Compensation – Supporting Research Papers (2012)
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Initial Findings
Current system requires vesting and is inflexible:
receive a retirement benefit – which includes many of those who served in combat for the past decade
to shape the force as needed – Services may not necessarily want more traditional, 20 plus consecutive year career troops. Rather, they may prefer highly specialized members, i.e. cyber, to move between the civilian and military career in order to stay relevant in the latest technologies and
provides little flexibility for rewarding/incentivizing those increasingly sought after individuals.
11 Retirement Plan Potential for Annual Accrual Savings Percent of all Service Members Who Become Eligible Flexibility Burden of Risk Full Payout Age
Current Defined Benefit Plan w/ 20 year cliff vesting
0% 19% Government Immediate upon retirement
Defined Benefit Plan w/ 20 year cliff vesting, but recipient does not receive payments till Social Security age
Unknown Less than 19% Government 62
BENS Defined Contribution Plan w/ a 22% government contribution for service members who become vested at 3 or 5 years
80% - 100% Dependent on Vesting Year
Service Member 62
Defined Contribution- Benefit Hybrid offered by Department of Defense in 2014
100%
Shared 59½ - 62
Comparison of Reform Proposals
All proposals grandfather current service members and retirees
Sources: DoD – Office of the Actuary, Army Times Note: Modeling of the proposed BENS contribution plan done by Capital Group
Eligibility
(current Service Members remain
system)
Members with >20 years of service Benefit
military annual base pay for all vested Service members – transferable upon release
life for 20+ year retiree Vesting
Payout Age
Proposed Hybrid Model - BENS
Eligibility
years of service Benefit
pay for life Payout Age
Security retirement age (Reduced benefits would be available at ages equal to Social Security early retirement)
Proposed Defined Benefit Plan - BENS
Eligibility
(current Service Members remain
system) Benefit
military annual base pay for all vested Service members – transferable upon release
personnel Vesting
Service Member Tax Free Contribution Limit
designated combat zone Payout Age
retirement age
Proposed Defined Contribution Plan - BENS
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Comparison of Reform Proposals BENS Considered
All proposals grandfather current service members and retirees
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Initial Perspectives & Recommendations
should be reformed
change
improve or hinder recruitment and retention before implementation
a cost point-of-view, BENS recommends a hybrid defined benefit- contribution model that provides flexibility for force shaping while recognizing the likely importance of a defined benefit for retention
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Recommendation
DoD should require that their four regional contractors implement and/or further expand efforts to assure the provision appropriate care through the reduction of the observed variations in clinical patient care.
and delivery system practices in accordance with broadly- defined evidenced based medicine and proven concepts in health care delivery.
service efforts to assure care is provided in conformance with well-recognized professional appropriateness guidelines.
drugs be filled at MTFs or by mail-order
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Need for Intervention
It is generally accepted that health care
is improved by providers’ adherence to evidence-based clinical protocols that encourage use of effective diagnostics and treatments.
Such Protocols:
tests and rendering services that do not correlate with better outcomes for patients.
a reduction in costly services that are not medically necessary.
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There is a 7-fold difference in the rate of back surgery in Medicare members between the lowest, Honolulu (1.5 per 1000) and the highest, Casper, WY (10.1 per 1000); the US average is 4.7 per 1000
Source: Dartmouth Atlas
Need for Intervention – Substantial variation throughout the nation
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Source: Dartmouth Atlas
There is a 5-fold difference in the rate of total knee replacements between the lowest, Honolulu (3.4 per 1000) and the highest, Idaho Falls, ID (15.8 per 1000); the US average was 9.0 per 1000
Need for Intervention – Substantial variation throughout the nation
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Need for Intervention – Eliminating clinical variation could yield significant savings for TRICARE
For TRICARE, even common clinical situations
such as pregnancy/newborn care (132,479 cases in FY2013) and outpatient musculoskeletal conditions such as sprains, pain, arthritis, etc. (11.8 million encounters in FY 2013) offer substantial savings
from introduction of changes in practice patterns to accord with evidence-based best practices.
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Evidence-based Protocols Promote the Most Appropriate Care
Evidence-based protocols have been developed by clinical specialty societies as well as health plans, TPAs and care management companies. These identify commonly overused
procedures and provide guidance for appropriate utilization. The guidance often stresses conservative treatments for cases where providers typically use more complex, costly interventions, such as:
data show proven basic antibiotics may be effective (American Academy of Pediatrics)
patients and prophylactic placement of artery stent in a vessel which is not shown to be significantly narrowed are not appropriate (American College of Cardiology)
Orthopedic Surgeons)
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Evidence-based Protocols Promote the Most Appropriate Care Cont. By promoting conservative treatment when appropriate in the first instance, evidence-based approaches can reduce spend while
increasing quality and assuring the best possible patient
range of treatments often involving some interventional procedure
improve outcomes and, in the worst case, can lead to unneeded surgery and worsening the patient’s clinical outlook.
appropriateness criteria for cardiac interventions and treatments. These have been used to study actual practice and substantial
been identified.
performed solely at maternal request. This still occurs and leads to increased risks, potentially less satisfactory outcomes and more costs.
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Examples of Savings from Adherence to Evidence-based Protocols Studies have quantified significant cost savings when there is adherence to evidence-based best clinical practices. For example:
guidelines led to a savings of $82-138 M in Florida alone (Howard, D et al; Health
Affairs 31 (2012))
ACC/AHA guidelines would have eliminated more than 75,000 potentially inappropriate procedures in 2010 for a savings of at least $ 10 B, net of appropriate, alternative treatments. (Chan P et all; JAMA 306 (2011))
elective induced labor, unplanned cesarean sections and NICU admissions, saving $50 M/yr. in Utah alone, which would yield $3.5 B/yr. in savings across U.S. (James, B. and Savitz, L.; Health Affairs 30 (2010)) General Medicine. Increased use of proven preventive services would have saved the US at least $3.7 B in 2006 (Maclosek M et al; Health Affairs 29 (2010))
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Utilization Management Effectively Increases Protocol Compliance
lack clinical appropriateness
care.
Variations in the content of clinical care are best addressed through evidence-based care-management
that have high variation such as orthopedics, spine surgery, and cardiology/cardiac surgery; pain management; post-hospital care and rehabilitation.
The most effective programs use skilled like-specialty professionals to determine conformance with evidence-based protocols and proper billing practices
efforts for TRICARE
Targeting of programs (predictive modeling to focus efforts on high-yield clinical activities and claims) is crucial for program efficiency
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Highly Effective Post-service Pre-payment Audits Enhance Cost- containment Efforts
Retrospective (post-service) clinical reviews identify and stop non- conforming treatment patterns that Utilization Management does not identify
retrospective reviews can prevent payments for services which, based on evidence-based clinical protocols, were not medically necessary
utilization-management vendors
Targeted post-service pre-payment claims audits stop providers’ aggressive billing practices
were in fact documented as having been performed
claims that overstate the services actually rendered to the patient.
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Increase Purchasing of Monthly Maintenance Rx at MTF
$5 billion of the $7 billion in MHS pharmacy costs were for prescription
medication for beneficiaries over the
age of 65 that are Medicare eligible with chronic conditions requiring monthly maintenance medications.
Retail Pharmacy MTF Mail-Order Percent Savings Name Brand $130 $44 $67 66% - MTF 48% - Mail Generic $20 $11 $9 45% - MTF 55% - Mail Average Cost of 30-day Prescription
Source: Evaluation of the TRICARE Program: Access, Cost, and Quality (FY2013)
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Findings
1 1.05 1.1 1.15 1.2 1.25 1.3 1.35 1.4 1.45 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$ Billions
Cost of Commissary Subsidy Though only representing less than 1% of the total military compensation budget, cost of the commissary benefit has steadily risen over the last ten years not withstanding efficiency initiatives, with the subsidy now costing the Department $1.4 billion.
Data: Department of Defense
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Findings
48% 26% 7% 8% 4% 7% 63% 21% 3% 5% 2% 6%
Active Duty Compensation
Basic Pay Housing Allowance Subsistence Food Allowance Health Care Commissary Estimated Tax Advantage
However, the commissary benefit appears to have strong value.
The benefit makes up a larger percentage of all service members total direct compensation despite representing less than 1% of the Department’s compensation
Agency estimates a 2:1 return on investment. Moreover, initial survey results from CSBA indicate service members from all ranks and age groups value these stores more than they cost to provide. Though other studies produced conflicting results.
Note: Does not include deferred retirement benefit (pension & TFL) nor other benefits received through separate budget accounts, e.g., the Veterans
to be available in forthcoming report.
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Proposal Potential for Savings Considerations
Keep the Subsidy
$0
Coupon Approach – Allow commissaries to close and encourage area stores to offer discounted prices to military families
inefficient and outside the core competency of the Department
discount
Voucher Approach – Eliminate the commissary subsidy while providing a $500 increase in annual subsistence and incorporating commissaries into the Military Exchange System
base grocery stores
more efficient and valuable to more service members and retirees
Surcharge Approach – Reduce the discount offered at commissaries and/or increase the surcharge
discourage patrons from shopping at commissaries, reducing expected savings to
Comparison of Reform Proposals
Sources: Defense Business Board, Congressional Budget Office, Air Force Times
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Recommendations
policymakers are creating an optimized benefits system
reform of the commissary system/benefit
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Retirement
have grown significantly -- largely driven by increased service member salaries
retirement plan could drive reenlistment
Health Care
expected growth in military health care costs, a greater portion of the total annual budget will underwrite health care rather than other priorities
rising costs and ensure health care recipients receive the best quality of care for the resources allocated
military health care system to help address cost and quality issues
Commissaries
retirees, and their families $3 billion
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Retirement
recruitment and retention before implementation
Health Care
Commissaries
system
to the commissary system/benefit
Reginald Brack Theodore Carter
TIME, Inc. City of Jacksonville
Major General Mario Montero, USA (ret.) Brigadier General Robert Osterthaler, USAF (ret.)
Booz Allen Hamilton Engineering Services SES Government Solutions
Richard Rosenberg
Bank of America Skylar Group OrthoNet, LLC
Nigel Sutton Blaine Sweatt John R. Thomas
AeroVironment, Inc. Ivanhoe Design, Inc. MedSynergies Analysis Assistance by: Virginia Gibson, Grant Thornton Keiko McKibben, The Capital Group Mark Ritter, Grant Thornton Josie Sullivan, The Capital Group 34 Contact: James Whitaker jwhitaker@bens.org