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Business Executives for National Security Modernizing Military Compensation Series

Summary of Findings, Perspectives, and Recommendations

• Setting the Context for the BENS Modernizing Military

Compensation Series

• Providing an Enduring Retirement Benefit

• Value Based Practices for Military Health Care

• The Commissary Benefit and Evaluating the Need for

Reform

• Review of Key Points and Recommendations

Overview

3

Our Purpose 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

As concern for military personnel cost and debate around compensation reform heightens, BENS believes there are private sector perspectives that are valuable to the discussion and business practices available that would improve the system.

4

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 on three areas where they believe they could provide the most value: Retirement Health Care Commissaries

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

FY14 DOD Compensation Budget

(in billions of dollars)

$144

Our Approach Bringing private sector insight to military

compensation reform

Note: Full explanation of calculation and sources to be available in forthcoming report.


Compensation Series




Reform


Overview

6

Providing an Enduring Retirement Benefit

Initial Findings

Modeling for the Defense Business Board raises cause for concern. There is continued growth in total government cost and liability.

Graph by: Defense Business Board

7

0

20

40

60

80

100

120

Year

19

89

19

94

199

9

20

04

20

09

20

14

20

19

20

24

20

29

20

34

20

39

20

44

20

49

20

54

20

59

Bill

ion

s ($

)

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 once. Moreover, Treasury’s 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

Acc

rual

Co

st

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 P

ay Co

st

Data: Department of Defense

9


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 or improved retention and force shaping tool.

* 11th Quadrennial Review of Military Compensation – Supporting Research Papers (2012)

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Initial Findings

Current system requires vesting and is inflexible: • More than 80% of all who serve do not

receive a retirement benefit – which includes many of those who served in combat for the past decade

• Military leaders cannot utilize the benefit 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 information. The current 20-year vesting provides little flexibility for rewarding/incentivizing those increasingly sought after individuals.

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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

Est. 30%

80% - 100%

Dependent on Vesting

Year

Service

Member 62

Defined Contribution-

Benefit Hybrid offered

by Department of

Defense in 2014

Est. 5% – 15% 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

• Open for all Service Members (current Service Members remain on current military retirement system)

• Higher payout for Service Members with >20 years of service

Benefit

• Govt contribution of 10% of military annual base pay for all vested Service members – transferable upon release

• 40% of “high three” base pay for life for 20+ year retiree

Vesting

•3 years

Payout Age

•59 ½ - 62

Proposed Hybrid Model - BENS

Eligibility

• Service Members with >20 years of service

Benefit

• 50% of “high three” base pay for life

Payout Age

• Based on current Social Security retirement age (Reduced benefits would be available at ages equal to Social Security early retirement)

Proposed Defined Benefit Plan - BENS

Eligibility • Open for all Service Members

(current Service Members remain on current military retirement system)

Benefit • Govt contribution of 22 % of

military annual base pay for all vested Service members – transferable upon release

• Can increase for longer service personnel

Vesting •3 or 5 years Service Member Tax Free Contribution Limit •Equal to IRS standard •$50,000 when member is in

designated combat zone Payout Age •Based on current Social Security

retirement age

Proposed Defined Contribution Plan - BENS

12


Comparison of Reform Proposals BENS Considered

All proposals grandfather current service members and retirees

13


Initial Perspectives & Recommendations

The current system, while not as unsustainable as some perceive, should be reformed

Portability and, particularly, flexibility should be important drivers of

change Studies should be conducted to determine how reforms would

improve or hinder recruitment and retention before implementation While transitioning to a defined-contribution plan would be ideal from

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


Compensation Series




Reform


Overview

15

Value Based Practices for Military Health Care

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.

• Promote use of best clinical and delivery system practices in accordance with broadly-defined evidenced based medicine and proven concepts in health care delivery.

• Implement pre- and post-service efforts to assure care is provided in conformance with well-recognized professional appropriateness guidelines.

• Require monthly maintenance 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: • Discourages providers from performing

tests and rendering services that do not correlate with better outcomes for patients.

• Results in better clinical outcomes and 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.

20


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:

• Advanced antibiotics should not be used when community data show proven basic antibiotics may be effective (American Academy of Pediatrics)

• Annual or periodic cardiac stress imaging in asymptomatic

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)

• Needle removal of fluid from a knee for treatment of

osteoarthritis is not warranted (American Academy of Orthopedic Surgeons)

21


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 outcomes. For example, according to peer-reviewed literature: • Patients with acute back pain are typically subjected to a wide

range of treatments often involving some interventional procedure or other technological approach. These have not been shown to improve outcomes and, in the worst case, can lead to unneeded surgery and worsening the patient’s clinical outlook.

• For cardiology, the ACC/AHA have published an extensive series of

appropriateness criteria for cardiac interventions and treatments. These have been used to study actual practice and substantial overuse and incorrect use of procedures and medications have been identified.

• In obstetrics it is generally accepted that C-sections should not be

performed solely at maternal request. This still occurs and leads to increased risks, potentially less satisfactory outcomes and more costs.

22


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: Orthopedics. Reduced use of knee arthroscopy for osteoporosis per latest guidelines led to a savings of $82-138 M in Florida alone (Howard, D et al; Health

Affairs 31 (2012))

Cardiology. Reduced percutaneous coronary interventions (PCI) under 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))

Obstetrics. Adherence to evidence-based best practice would reduce 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

• Require prior authorizations based on sound clinical criteria to eliminate excessive services that lack clinical appropriateness

• Consider reimbursement methods that create positive incentives for the provision of appropriate care.

Variations in the content of clinical care are best addressed through evidence-based care-management

• Highly effective initiatives manage diagnostic imaging; elective surgical/interventional procedures 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

• Optimizes the benefits achieved

• Minimizes additional administrative burdens for the providers

• Targeting technologies developed for commercial programs can be readily adapted as comparable efforts for TRICARE

Targeting of programs (predictive modeling to focus efforts on high-yield clinical activities and claims) is crucial for program efficiency

24


Highly Effective Post-service Pre-payment Audits Enhance Cost-containment Efforts

Utilization management efforts are most effective when accompanied by additional measures to address provider

pushback aimed at retaining excessive income levels

Retrospective (post-service) clinical reviews identify and stop non-conforming treatment patterns that Utilization Management does not identify

• If pre-service authorizations are not obtained, retrospective reviews can prevent payments for services which, based on evidence-based clinical protocols, were not medically necessary

• Also help to identify the effectiveness of utilization-management vendors

Targeted post-service pre-payment claims audits stop providers’ aggressive billing practices

• Targeting crucial for cost-effective results

• Verify that the services in a provider’s claim were in fact documented as having been performed

• Avoid payments of aggressive or fraudulent claims that overstate the services actually rendered to the patient.

25


Increase Purchasing of Monthly Maintenance Rx at MTF or by Mail-Order

$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)


Compensation Series




Reform


Overview

27

The Commissary Benefit and Evaluating the Need for Reform

Findings

1

1.05

1.1

1.15

1.2

1.25

1.3

1.35

1.4

1.45

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

$ 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

28


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 budget. Defense Commissary 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 Administration. Full explanation of calculation and sources to be available in forthcoming report.

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Proposal Potential for

Savings Considerations

Keep the Subsidy $0

• Highly valued benefit for many

• Viewed as ‘keeping faith’

• Commissaries provide jobs for military families

Coupon Approach – Allow

commissaries to close and

encourage area stores to offer

discounted prices to military families

Est. $1 B annually

• Some argue managing grocery stores is

inefficient and outside the core competency of

the Department

• Government will not be able to ensure level of

discount

Voucher Approach – Eliminate the

commissary subsidy while providing

a $500 increase in annual

subsistence and incorporating

commissaries into the Military

Exchange System

Est. $10 billion over 10 years

• Retains the readiness and convenience of on-

base grocery stores

• Provides direct compensation which could be

more efficient and valuable to more service

members and retirees

Surcharge Approach – Reduce the

discount offered at commissaries

and/or increase the surcharge

Est. $800 M - $1 B annually

• Reduces the need for a subsidy

• Reduction in savings on food stuff could

discourage patrons from shopping at

commissaries, reducing expected savings to

overall budgets


Comparison of Reform Proposals

Sources: Defense Business Board, Congressional Budget Office, Air Force Times

30


Recommendations

A survey to determine the value of the commissary benefit along with other facets of military compensation should be conducted to ensure policymakers are creating an optimized benefits system

Metrics derived from the survey results should drive the appropriate

reform of the commissary system/benefit


Compensation Series




Reform


Overview

32

Review of Key Points

Retirement • While concern over unfunded liability may not be necessary, retirement costs

have grown significantly -- largely driven by increased service member salaries • Retirement benefits may have little affect on initial enlistment, but a generous

retirement plan could drive reenlistment • The current defined benefit plan is inflexible and requires vesting

Health Care • Unless the Department’s total annual budget grows at the same rate of

expected growth in military health care costs, a greater portion of the total annual budget will underwrite health care rather than other priorities

• The Department has tremendous purchasing power and can use it to control rising costs and ensure health care recipients receive the best quality of care for the resources allocated

• Certain health care practices adopted in the private sector can be utilized in the military health care system to help address cost and quality issues

Commissaries • Cost of the commissary benefit has steadily risen for over a decade • While costing $1.4 billion, the commissary benefit saves service members,

retirees, and their families $3 billion

33

Retirement Reform the system Portability and, particularly, flexibility should be main drivers of change Conduct studies to determine how reforms would improve or hinder

recruitment and retention before implementation A hybrid defined benefit-contribution plan is a more ideal retirement model

Health Care Eliminate clinical variation through best practices Utilize in-stream compliance audits Require monthly maintenance drugs be filled at MTFs or by mail-order

Commissaries Conduct a survey to ensure policymakers are creating an optimized benefits

system Allow metrics derived from the survey results to drive the appropriate reform

to the commissary system/benefit

Review of Recommendations

BENS Military Compensation & Benefits Modernization Task Force

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 Dr. Paula Shaw Dr. Roger Shedlin

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 [email protected]

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