Military contracts present growth opportunities - includes related article on defense budget cuts and local contracting

Healthcare Financial Management, April, 1990 by Scott A. Honiberg

Healthcare organizations interested in new markets should consider military contracting opportunities now available in many areas of the United States. To ensure a competitive bid, however, knowledge of military procurement procedures and bidding demand's is needed. Like any other venture, doing business with the Federal government depends on the capabilities of the organization and the nature of the services to be provided.

An increased demand for healthcare services among U.S. military beneficiaries and a shortage of military care givers are combining to create new contracting opportunities for private healthcare organizations.

Changes being explored by the U.S. Department of Defense (DoD) affect healthcare delivery for people covered by the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS), as well as those in active duty. And opportunities for contracting often extend beyond geographic boundaries or areas where military hospitals are slated for closing.

In fact, the DoD has launched contracting initiatives throughout the nation for a broad selection of providers- from hospitals, physicians, and health insurers to health maintenance organizations (HMOs), preferred provider organizations (PPOs), and suppliers.

With the DoD moving aggressively toward managed care, the landscape is changing rapidly for civilian organizations providing care to military beneficiaries. In recent contracts, the DoD often has negotiated relationships with preferred providers in exchange for what amounts to a "franchise" on certain segments of local military care. While not as widespread or as highly publicized as the CHAMPUS Reform Initiative affecting military healthcare providers in Hawaii and California, these smaller agreements still offer substantial benefits to participating providers. Military health services

Two major components make up the U.S. Military Health Services System: a direct care system of approximately 1,968 treatment facilities and more than 800 clinics worldwide; and CHAMPUS, a health insurance plan for eligible beneficiaries modeled after high-option benefits packages, such as Blue Cross and Blue Shield. These groups represent more than 8 million patients, an estimated 2 million active duty staff members, and about 6 million CHAMPUS beneficiaries (military retirees and dependents of current and retired military staff members).

While the active duty population usually is treated at military healthcare facilities, the non-active population receives care in several ways. One option is to seek treatment at a military health facility at no charge, depending on the availability of space, equipment, and appropriate staff. Another option involves seeking treatment from private healthcare providers and filing for reimbursement through CHAMPUS, which administers benefits according to applicable deductible and copayment amounts.

Providing "free care" to CHAMPUS beneficiaries at military healthcare facilities has created serious problems in the military healthcare system. Reducing healthcare prices to CHAMPUS beneficiaries using military treatment facilities has created enormous inequities in the demand for services and personnel.

Aside from the fact that military hospitals and clinics often are overwhelmed by the demand for services, providing primary care also contradicts the DoD's healthcare objectives. Its direct care system was designed to treat U.S. armed forces during periods of war or hostility and to train providers for those needs.

Finally, the inability of the direct care system to accommodate these demands ultimately creates substantial budget problems for CHAMPUS. Beneficiaries who prefer to be treated in the direct care system often are forced to seek more expensive care at private hospitals because military services are not available in their areas. As a result, CHAMPUS expenses surpass budgeted amounts-an excess estimated by the Federal government to total $200 million in FY89.

Contracting initiatives

To correct the problem, the DoD began exploring various managed care approaches popular in other sectors. These plans target cost containment as well as quality of service.

Many of the plans present business opportunities for civilian providers. They include:

* The CHAMPUS Reform Initiative, a $3 billion program being tested in California and Hawaii;

* Private contracts to develop and operate Primary Medical Care for the Uniformed Services (PRIMUS) clinics in many areas of the United States;

* Partnership agreements that allow military treatment facilities to expand capacity in clinical speciality areas;

* Catchment area management, which involves agreements between military facilities and local providers to handle regional care needs; and

* Medical service contracts for treating CHAMPUS beneficiaries at military facilities staffed and managed by civilian providers.

Virtually every type of product or service used in health care is bought by the government for its beneficiary population. As the volume of healthcare services purchased by the military from private providers increases, the government naturally tries to achieve the same benefits that private payers negotiate with healthcare organizations.