The Defense Department, seeking to hold down costs, has proposed a sweeping restructuring of the health insurance it provides for those military personnel, families and retirees who do not have ready access to military facilities.
The proposal has prompted intense interest from companies eager for a share of approximately $1.6 billion in prospective contracts, among the largest ever available in the health-care field.
The Pentagon this week asked the companies to comment on its proposal for reforming the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS), which pays the medical bills of more than 6 million enrollees.
Through the CHAMPUS program, the government offers insurance for services used at civilian health facilities by dependents of soldiers and by military retirees. A separate network of military hospitals and clinics provides most health care for active-duty soldiers, as well as, in some cases, for their families and for retirees.
Under the current system, the government essentially allows CHAMPUS beneficiaries to use local doctors and hospitals and pays their bills.
Pentagon officials are now proposing to pay a single company a fixed fee for providing all the health care used by enrollees outside of military facilities in a region.
The Defense Department is planning to award three regional contracts, each of which could be worth several hundred million dollars, in a nationwide competition expected to begin this fall. Each of the winners would set up a network of hospitals and doctors to treat CHAMPUS enrollees, including subcontracting some of the services.
Dependents and retirees would continue to use military facilities if space were available, as part of the military's effort to give its doctors a steady stream of work.
While enrollees would continue to be able to choose their civilian doctors and hospitals, financial incentives will be built into the system to use certain "preferred providers" in the winning bidders' networks, officials say.
The proposal, in the works for more than a year, is aimed in part at containing the escalating costs of the CHAMPUS program, which Defense Department officials say have been growing at a 15 percent rate in the past three years -- much faster than the general inflation rate in the industry. The Pentagon hopes to obtain discounted prices for health care in exchange for offering the bidders a huge number of prospective patients.
Officials said they also hope to streamline CHAMPUS, which has come under heavy criticism recently for providing slow and inadequate care to enrollees.
"It is viewed as a huge, inefficient, complex system with a record of slow paying for both beneficiaries and providers," acknowledged David Newhall III, one of the key Defense Department officials in charge of revamping the program.
The new system has drawn the interest of a number of health-care giants, including Hospital Corp. of America, Humana Inc., Cigna Corp. and Aetna Life Insurance Co.
These are among the firms seeking to build the first regional and national networks of doctors and hospitals, through which employers can obtain from one company an array of health care and insurance products. Winning one of the CHAMPUS contracts could give these efforts a big boost, industry experts say.
With the CHAMPUS budget currently exceeding $1.6 billion, health-care industry officials say the prospective contracts would be among the largest ever available to the private sector.
"Even if you divide that up three ways, that's a lot of money," said Dale L. Thomas of Voluntary Hospitals of America, the largest alliance of nonprofit hospitals in the country. "For the VHA, this represents a way of increasing potential revenue in our hospitals and in our physicians' offices," he added.
Voluntary Hospitals recently joined with Aetna in a joint venture to offer health insurance products to employers, and this joint venture is seriously examining the Pentagon proposal, Thomas said.
"We're looking at it, and we're interested," added W. Earl Reed, director of acquisitions and development for Humana, the hospital chain based in Louisville.
"This is, in one fell swoop, going to be the largest HMO, if you will, in the country," he said. An HMO, or health maintenance organization, offers health services for a set fee.
Industry officials added that because of the complexity of the Pentagon requirements, companies are expected to be very cautious in approaching the program. Under the plan, the winning bidder would have to swallow any costs of the program above the bid price.