The Department's first tri-service site for coordinated care, also known as Tricare, is in the Tidewater area of Virginia. The Navy has the lead in bringing this program into operation. This year also has seen extensive work by the Army and the Air Force to ready themselves to transition into the mode of coordinated care. The Army has initiated its Gateway to Care program which incorporates many of the coordinated care features and which serves as a solid interim step toward the full implementation. The Air Force, like the Army, is introducing such features to its health care delivery system which will facilitate full transition over the next few years. So, I am confident that the military departments are ready to proceed and that their efforts will be successful.

Within those parameters, I have established a joint service task force to analyze strategies for possible initiatives in non-catchment areas, which I know preoccupied you. Those are areas that are not served by a military hospital, yet having sizable beneficiary populations. I believe the non-catchment area strategies may offer alternatives for our beneficiaries affected by the base realignment and closure actions and the preoccupation expressed by Senator McCain.

Less visible to our beneficiaries, but equally important are a number of system-wide initiatives which will complement our local coordinated care health care delivery sites.

Quality assurance and utilization management are very important to me. The assurance that the care we provide and the care we purchase is of the highest quality remains paramount in my mind. To be able to offer this assurance, we developed a comprehensive quality management plan this year addressing quality issues for care received both within our hospitals and through CHAMPUS.

Health promotion and disease prevention I know is of concern to you. A key component of the program is a scientifically based, quantifiable health promotion and disease prevention program. The program I believe to be particularly important because it holds the promise for individually enhancing our beneficiaries' quality of life. With education and encouragement, each of us can improve our health and in the long term become less routinely reliant on a health care system.

In terms of CHAMPUS payment reform, you indeed gave us strong support to continue to reform the way payment amounts are determined for health care services purchased through CHAMPUS. Effective the first of this month, we began paying based upon local prevailing charges, rather than statewide prevailing charges. We also will reduce payments for overpriced procedures while increasing the level of payments for routine and primary care visits.

Within our beneficiary population, there is also a demand for specific procedures requiring the skills of highly trained specialists and the use of sophisticated and, in many instances, highly costly technology. This demand will be met in those hospitals where that talent and technology are aggregated and present, in specialized treatment facilities, if you will. We have developed the guidance for designating and maintaining hospitals, military and civilian, as specialized treatment facilities. So, with support from this committee, we can now designate those facilities on a regional or a nation

al basis for our beneficiaries and in so doing, assure our patients of the quality that we are seeking.

In conclusion, Mr. Chairman, the military health benefit is a substantial one, one that our beneficiaries identify as the top priority. Preservation of this benefit for our military families and other eligible beneficiaries is essential so that we in military medicine can serve equitably the largest number of patients with quality health care and be prepared to serve our forces wherever and whenever the country needs them. These are our major goals. They are the same as your goals. In seeking these goals, I hope that the committee will continue its strong and its willing support of them. Thank you, Mr. Chairman.

[The prepared statement of Dr. Mendez follows:]

PREPARED Statement by DR. ENRIQUE MENDEZ, JR., ASSISTANT SECRETARY OF

DEFENSE FOR HEALTH AFFAIRS

Mr. Chairman, distinguished members of the committee, I am delighted to be here before you today. And, I appreciate the opportunity to review with you the progress made in the past year toward strengthening and coordinating the Military Health Services System. As we have moved forward, we have tried to be responsive to those with compelling interests in military health care. This committee, in particular, has provided both encouragement and support for our beneficiaries' health care and for our ability to manage the system that provides that care.

One aspect of military medicine that has been of preeminent importance to this committee is our readiness mission-our ability to provide medical support to our Armed Forces in both usual and unusual circumstances. A year ago I outlined the demonstrated capability of the Army, Navy and Air Force to medically support our forces in the Persian Gulf Conflict. That effort was impressive. We established a comprehensive, sophisticated health care delivery system in a harsh desert environment 8,000 miles away.

To be ready, many years and considerable effort was expended to ensure the manpower, equipment, training and supplies were what we needed. I know, and the military services know, the strong role this committee has had in urging and supporting many of our readiness initiatives.

Understanding the essentiality of medical readiness, I know you appreciate the necessity of a viable medical structure in which and from which our medical support for the unusual circumstance can be trained and drawn.

Our system of medical facilities, research and our education programs our dayto-day operation of military medicine is what enables us to meet the challenges of a Desert Storm and continue to care for our military families and other eligible beneficiaries. We must focus on strengthening and coordinating this system if we are to continue in preparation for achieving our future readiness requirements.

MANAGEMENT OF MILITARY MEDICINE

On October 1, 1991, the Deputy Secretary of Defense directed several actions to strengthen military medicine. He placed responsibility for the effective execution of the medical missions of the Department with a single official, the Assistant Secretary of Defense for Health Affairs. Medical personnel, facilities, programs, funding and other resources within the Department are subject to my authority, direction and control. Exercise of those new authorities is through the issuance of instructions to the secretaries of the military departments and the Chairman of the Joint Chiefs of Staff.

Additionally, as the responsible official, I prepare, present, justify and defend a unified medical program and budget to provide resources for all medical activities within the Defense Health Program. These responsibilities I have undertaken in full recognition of their prominence given the outlook for continued escalation in health care spending throughout our Nation. The Department of Commerce estimates that both hospital and physician services will increase 11 percent, and total health care spending will consume 14 percent of the GNP in 1992. Growth in the Department of Defense health care costs presently is programmed at less than 4 percent per year through fiscal year 1997. This increase, small in comparison to national trends, looms large in a declining Defense budget.

A Defense Medical Advisory Council has been established to advise me in the execution of the Department's medical missions. This council consists of a Presidential appointee from each military department and a general or flag officer from each of the military services. Also, a general or flag representative of the Chairman of the Joint Chiefs of Staff and the President of the Uniformed Services University of the Health Sciences round out the membership. As Assistant Secretary, I chair the council.

This council of senior leadership from the military departments is essential for both communicating health policy to the services and apprising me of their operations and programs.

Finally, I was directed to implement a health care program that ensures coordination of the provision of care in our own medical facilities with that purchased through CHAMPUS. The objectives are to improve access and to maximize cost effectiveness in the delivery of high quality health care. The declining budget realities demand that we accomplish this coordination prudently so as to provide quality care for our eligible beneficiaries.

Since issuance of these new directions, I have met with the service secretaries; chaired three meetings of the Advisory Council; expanded my budget and programs office with temporary assistance from the military medical departments in order to oversee fiscal year 1992 program execution, prepare the fiscal year 1993 medical budget justification and develop the fiscal years 1994-1999 Defense Health Program (DHP) Program Objective Memorandum (POM); and, issued initial guidance to the military services for implementing the Coordinated Care Program.

THE COORDINATED CARE PROGRAM

Rationale

Well known to the Congress, and to this committee, are the dramatic events occurring within the Armed Forces and the factors which are precipitating these events. In this era of building down and reshaping, it is my responsibility to ensure the continuation of a quality health benefit for all 8.4 million of our beneficiaries, and to do so in a cost effective manner.

For several years, creative initiatives have been applied to either the military treatment facilities or the CHAMPUS program to enhance beneficiary access and to stem the rise in costs. These initiatives have met with varied levels of success. However, to gain full effectiveness of the Military Health Services System, and to achieve the direction of the Deputy Secretary, I must consider the entire system of health care delivery. We must build on strengths and introduce new policy and programs where needed, thereby enabling us to effectuate systemic change. Coordinated Care offers that ability.

Considering the whole of military medicine, it is clear that any opportunity for systemic improvement will have the military hospital as the focus. Most of our beneficiaries live near military hospitals. That is where most of our patients receive their care and where the majority of military beneficiaries want to go for their care . . . for many reasons: care is excellent; doctors, nurses, hospitals are a part of their system; care decisions are made without regard to insurance or payment potential; care costs are nominal; medications are without cost.

As you know, our supplemental health care system, CHAMPUS, was established to offer our beneficiaries assistance in paying for their health care when a military treatment facility, or specific treatment, is not available. This program, in operation for over 25 years, was established with co-insurance and deductibles. As a percentage of regular military compensation, today's CHAMPUS deductible is about the same as it was when the program began. In recent years, as the costs of CHAMPUS steadily rose, management initiatives were applied, and demonstration projects were employed to determine whether those rising costs could be contained. In some demonstrations generous incentives were included to ensure beneficiary participation. Viewing the delivery of care in the Military Health Services System today, one sees variability in access to military health care and in out-of-pocket costs across the country. Clearly, we recognize that the same level and intensity of care cannot be provided in each and every location. However, with the assistance provided by this committee, there is much we can do managerially to bring consistency and equity to all of our beneficiaries. The many features of Coordinated Care support these goals, in particular the networks of preferred providers. Through these networks the care needed by our patients, and not available in the military hospital, can be provided quickly, at reasonable cost and with assurance of quality.

Embodied in Coordinated Care is the mandate for cost effectiveness in military medicine. We must achieve this for the entire system of health care delivery, and at

a time of declining Defense budgets. As I previously mentioned, the Defense medical program would increase a modest 4 percent per year over the next several years. In fact, the medical portion of the President's Fiscal Year 1993 Amended Budget for DOD approximates $15.3 billion. Of this amount, $9.5 billion comprises the newly established Defense Health Program (DHP) appropriation, which funds medical operations and maintenance (including CHAMPUS) at $8.9 billion, procurement at $294 million, and medical research and development at $313 million. Military medical personnel represent another $5.5 billion. Medical military construction funding of $240 million, in a separate appropriation, continues under my direction and control.

In fiscal year 1992, $8.1 billion was appropriated to the Defense Agency, Operations and Maintenance account for the medical program. Previously, these funds were part of the military departments' O&M accounts. An additional $600 million was retained in the Services and Defense Agencies medical O&M accounts. The fiscal year 1993 O&M medical program of $8.9 billion reflects an increase of $171.4 million... less than 2 percent. . . over the fiscal year 1992 current estimate.

This budget submission reflects a fully funded CHAMPUS program of $3.9 billion, primarily based on the CHAMPUS Actuarial Projection Systems (CAPS) model forecast for the CHAMPUS benefit program, estimates for contracts and demonstration projects, and adjustments for known program changes. The budget includes the newly authorized disabled care benefit and the authorized increase to the dental benefit. Significantly, fiscal year 1991 CHAMPUS costs remained within appropriated funds, and we are confident fiscal year 1992 costs will not exceed the appropriated amount.

In addition to health care delivery, the Defense Health Program supports the fiscal year 1993 requirements of three field activities:

the Defense Medical Program Activity (DMPA)

the Office of CHAMPUS (OCHAMPUS)

the Uniformed Services University of the Health Sciences (USUHS).

The $294 million in the medical procurement account is to fund the purchase of capital equipment for medical treatment facilities as well as other equipment requirements. Examples include initial outfitting of new, expanded or altered health care facilities being constructed under major construction programs; equipment for modernization and replacement of worn-out, obsolete, or uneconomically reparable items; information processing requirements and equipment supporting pollution control, clinical investigation, and occupational and environmental health programs. The military medical research and development account of $313 million funds the efforts to prevent illness and injury to the fighting forces. These medical research and development efforts are directed at resolving military unique problems that affect all activities of the active duty force from training to mobilization and deployment, through redeployment to home base. These efforts focus on infectious disease, protection against biological and chemical agents, environmental hazards, military systems health hazards and developing combat casualty care treatment regimens and materiel to save life and limb.

Phase-funding of major medical construction initiatives has allowed us to get several much needed large projects started which will help modernize our aging hospital inventory. One caution however, is that based on the increasing portion of the military construction budget being consumed by phase-funded projects, maintaining adequate resources to ensure appropriate maintenance, upgrades and alterations to existing facilities becomes increasingly difficult.

Funding for medical military personnel, Reserve component personnel, combat support medical units and activities, and certain management headquarters are included in the budgets of the military departments and are not part of the consolidated Defense Health Program budget. In addition, regarding medical personnel, the new management authorities do not allow for change in the structure of the chain of command within a military department or within a unified or specified command for those personnel.

Certainly one of the major assists to me in assuring the effective execution of the military medical mission is this committee's direction that sufficient medical manpower be retained on active duty.

STATUS OF COORDINATED CARE

One of the most important characteristics of the Coordinated Care Program is the ability to adapt many different organizational models of care under a management umbrella that promotes consistency and equity of benefits for our military families. Evidence of this characteristic is reflected in the many efforts now underway

throughout our system, some of which involve migrating demonstration projects to permanent Coordinated Care programs.

CHAMPUS Reform Initiative. Perhaps one of the best known demonstrations is the CHAMPUS Reform Initiative (CRI), in California and Hawaii. As you are aware, the Department faced a dilemma when conflicting congressional direction was received last year regarding this project. Consequently, we extended the current contract until July 31, 1993, to ensure no interruption to our beneficiaries' health care coverage. Additionally, we developed and issued a new Request for Proposals (RFP) with the health care delivery start date pending the ruling of the Comptroller General. That ruling favored the language of the Defense Authorization Act; therefore, the start date for health care delivery will be August 1, 1993.

The new RFP retains much of CRI, but now reflects the features of Coordinated Care. The modifications will promote a stronger role for the military hospital commanders regarding the management of health care finders, coordination between the military hospital and network providers, and resource sharing. Our Medicare eligible beneficiaries will be offered the opportunity to enroll. The quality and utilization management requirements will be uniform, in keeping with the Department's Quality Management Program. There will be a single claims processing system for network and non-network providers of care. And, the cost sharing provisions of Coordinated Care will apply.

A pre-proposal conference was conducted on March 25 in the Denver, Colorado, area for prospective bidders on this new RFP. We counted over 150 registered attendees representing some of the major health care companies in the United States. This signals a solid, competitive procurement. Bids from interested vendors are due on May 22, 1992.

I am concerned about the interpretation of published findings that portray CHAMPUS costs in CRI areas as continuing to grow much slower than other CHAMPUS area costs. We feel it is prudent to be cautious about any conclusion on overall cost effectiveness until we have results from the comprehensive evaluation. Catchment Area Management. The Catchment Area Management demonstrations were designed and are operated by the military services. There are currently five demonstration sites, the longest running since June 1989 at Fort Sill, Oklahoma, and the newest operating since October 1990 at Charleston Naval Base, South Carolina. These projects, like CRI, will transition to Coordinated Care sites at the end of their demonstration periods. While the CAMs now incorporate many Coordinated Care features, there will be some adjustments necessary.

Southeast Region Fiscal Intermediary Preferred Provider Organization. Another demonstration is the Southeast Region Fiscal Intermediary Preferred Provider Organization. The Southeast region includes the States of Alabama, Florida, Georgia, Mississippi, and Tennessee. This project involves the fiscal intermediary in network development and offers utilization management for network care through a subcontractor specializing in that field. Transitioning this demonstration project to Coordinated Care will involve adding several key features of Coordinated Care, such as enrollment and primary care managers.

These projects have employed management improvements and various features of managed care for the CHAMPUS portion of our health care delivery system. It is the reasonable, and judicious, course for me to capitalize on those management improvements realized in the CHAMPUS program and to incorporate them now into permanent systemic reforms for the entire Military Health Services System. The Coordinated Care Program is the vehicle for accomplishing precisely that.

Coordinated Care Guidance. Last year I reported to you that the environment for coordinated care had been created. This year I am able to report that on January 8, I transmitted to the service secretaries the instructions to begin the Department's 3year phased implementation of our Coordinated Care Program. This managed care initiative is designed to enhance accomplishment of the medical mission by improving access to quality health care services, while controlling health care cost growth. This program will provide medical treatment facility commanders with the tools, authority and flexibility needed to perform more effectively the health care mission. The centerpiece of the program will be local health care delivery systems and networks based on arrangements between military and civilian health care providers and organizations.

With the instructions to implement Coordinated Care, I have issued policy guidance to the military departments concerning enrollment, site selection, network development, specialized treatment facilities, education, communication strategies, quality management, health promotion and disease prevention, and program evaluation. The 3-year phased implementation will involve 25 percent of stateside military hospitals in the first year, an additional 50 percent in the second year, and the