Although military capability depends on having the right size and configuration of forces with modern weapons, it also depends on how well those forces are supported. Do they have adequate numbers of experienced, trained personnel? Are the equipment and facilities they use maintained in good condition? The options in this chapter focus on the manpower, equipment, and facilities that support the readiness of U.S. forces. It includes options that would provide more funding for such resources as well as options that might allow the Department of Defense to meet its readiness goals at lower cost by changing the way the department manages its resources.
 

Resources and Readiness

Although the term readiness is used in different ways, the Joint Chiefs of Staff formally define it as the ability of units to deploy quickly and perform initially in wartime as they were designed to.⁽¹⁾ That ability reflects many factors. Traditional quantitative indicators of readiness compare units' resources--training, supplies, the condition of their equipment, and the number, grade, and skill distribution of their personnel--with standards based on wartime requirements. Other indicators of readiness examine the quality of recruits entering the force and the quality of the facilities in which military personnel live and work. Intangible factors, such as leadership and morale, also play an important role in readiness but are less easily quantified.

As U.S. forces were being reduced during the 1990s, both the Congress and DoD gave high priority to readiness. That commitment reflects the experience of senior military leaders, who, as junior officers during the post-Vietnam drawdown of the late 1970s, dealt first-hand with a military that was dubbed the "hollow force." Responding to fears that the post-Cold War drawdown could lead to similar problems, the three most recent Secretaries of Defense each identified readiness as the department's highest priority. That emphasis has been institutionalized through the creation of DoD's Senior Readiness Oversight Council and Congressionally mandated reports on readiness.

Perhaps because of that focus, the early years of the most recent drawdown brought little evidence of readiness problems. In 1994, a review by the Congressional Budget Office of trends in indicators of readiness concluded that the readiness of deployable units remained relatively good.⁽²⁾ The quality of new recruits, the experience level of the force, aggregate C-ratings (indicators of whether units have the resources required to perform their missions), and mission-capable rates for equipment were all high compared with historical levels. That study also cited factors that might lead to lower readiness in the future, such as shortfalls in funding to maintain real property. It also indicated that because the end of the Cold War left the military with a cushion of excess equipment, supplies, and personnel, DoD's ability to provide those things over the long run was not being tested.

Current Trends in Readiness

Today, reports of readiness problems are increasing. Many of those reports focus on personnel problems. Both the Army and the Air Force failed to meet their goals for recruiting enlisted personnel in 1999, and the Air Force also fell short of its goals for retaining enlisted personnel. In the case of officers, both the Navy and Air Force are unable to meet their stated requirements for pilots, the Army reports shortages of captains, and the Navy says it cannot retain enough young surface warfare officers. The Joint Chiefs cited concerns about recruiting, retention, and morale to explain why initiatives to increase compensation were their number one budget priority in 1999.

Military leaders have also expressed concern about the condition of equipment. The Air Force reports that mission-capable rates for its aircraft have declined by 10 percentage points--from 83 percent to 73 percent--since 1991. And rates of cannibalization (a measure of how often maintenance crews must take a part off one aircraft to maintain another) increased by 78 percent between 1995 and 1998, indicating a shortage of spare parts. The adequacy of training for Army units also became an issue in 1999 because of the poor performance of some armored units at the National Training Center.

Interpreting Current Trends

Readiness has clearly declined in some areas. But in many cases, the implications of such declines for national security and defense budgets are unclear. Do the reported readiness problems threaten national security, and if so, can they be resolved through additional funding?

Determining the policy implications of reported trends is complicated by the fact that some of those trends are spotty, affecting one service but not another. For example, in 1999, first- and second-term retention rates for enlisted personnel in the Air Force were at their lowest level in almost 20 years. But that same year, the Army experienced unusually high retention rates. Such a pattern makes it difficult to generalize about the adequacy of military compensation.

Another complication is that advocates of additional resources for readiness often overstate their case by measuring declines in readiness indicators from some peak level that existed only under exceptional circumstances. Thus, the Air Force reports its decline in mission-capable rates relative to the peaks achieved during and immediately after the Gulf War. Similarly, declines in the quality of recruits are often measured relative to the peaks achieved during the drawdown, when the services, having cut their demand for recruits more quickly than resources for recruiting, substantially exceeded their quality goals. At what point do declines from peak levels threaten national security? How much readiness is enough?

In addition, some of the most widely publicized problems with readiness appear to stem--at least in part--from management problems rather than from inadequate budgets. The roots of the current pilot shortage, for example, can be found in personnel-management decisions made during the drawdown. In 1993, the Air Force responded to a surplus of pilots by cutting the number of new pilots being trained so it could retain its older, more experienced pilots (including those in staff positions). Management issues may also contribute to the services' current recruiting shortfalls. Once the Navy recognized that the youth market had changed and that new approaches were necessary, it was able to overcome many of the recruiting problems it experienced in 1998.

An even more fundamental concern is that the ability of units to do what they were designed to do may not adequately define readiness in a period when national security depends, to a significant degree, on the ability of units to quickly undertake and successfully carry out new tasks. The commanders of two Army divisions that had units engaged in the Balkans reported recently that their divisions were not ready (the divisions were category C-4 in the Joint Chiefs' Status of Resources and Training System ratings). That assessment was accurate in the sense that, given the absence of the deployed units, those divisions could not deploy quickly to a major theater war and perform their primary mission as they were designed to. Yet the fact that some units from those divisions went to the Balkans--where they received not merely training but actual experience in peacekeeping--could contribute to the divisions' ability to respond to future contingencies.

Various Approaches to Readiness Issues

Evidence of declining readiness could be a sign that the military needs greater funding for such things as pay and health benefits, real property maintenance, equipment maintenance, and inventories of spare parts. Yet budget increases may not be the most appropriate solution for every readiness problem. In some cases, changes in Cold War programs or management and budgeting practices--an approach proposed by the 1996 Defense Science Board study of DoD infrastructure--may be necessary if high levels of readiness are not to prove prohibitively expensive. In other cases, either additional funding or management changes are already working their way through the system, or the readiness problem, although real, is a risk that DoD might choose to accept. Despite the department's stated commitment to readiness, many observers argue that it needs to strike a different balance between current readiness and the modernization and force-structure initiatives that are increasingly referred to as "future readiness."

The options in this chapter take varying approaches to improving readiness. Some would add resources without changing management practices. Those options involve the fewest risks and offer the greatest prospect for immediate increases in readiness. Other options would change traditional management practices--for example, by moving away from a pay system that differentiates between personnel on the basis of marital status; reducing DoD's direct role in providing housing, health care, and retail services; or consolidating depot maintenance functions. Whether accompanied by additional resources or not, those options could increase risks to readiness in the short run. But in the long run, they might lower the cost of maintaining readiness and free up resources for modernization.
 

The Military Compensation Package

The military compensation package includes both cash compensation (including deferred cash in the form of retirement pay) and noncash benefits (such as health care, housing, child care, and commissaries). Increases in that package were at the top of DoD's priorities in its budget for 2000 and continue to receive emphasis in the budget request for 2001. A military compensation package that can attract and retain high-quality, versatile personnel, who are able to learn new tasks and adapt to new practices quickly, might be an especially wise investment today--when the major threat to national security is diffuse and uncertain and deployments can involve a wide range of tasks that are not the focus of standard training.

The options in the sections below take varying approaches to the military's concerns about retaining a high-quality force. Some would add resources to compensation programs to improve DoD's ability to meet its personnel requirements; others would reduce the cost of meeting those requirements by changing the mix and type of benefits in the compensation package; and still others would lower costs or increase capabilities by changing the number or mix of personnel that DoD identifies as required.

Another tool that DoD might use to attract and retain personnel is working conditions--a category that includes such diverse elements as the frequency of deployments, the condition of facilities and equipment, the quality of military leadership, and opportunities for meaningful, patriotic service. Although such conditions are often determined by operational needs and are not normally considered part of the overall compensation package, failure to provide satisfying conditions of work can affect recruiting and retention. Many of the options in this chapter that address the condition of facilities and equipment--as well as some of the options in other chapters, such as the one that would increase staffing in military units--are aimed in part at changing the conditions of work for service members.
 

Cash Compensation

The Congress included a variety of pay changes in the National Defense Authorization Act for Fiscal Year 2000 in an effort to make military service more attractive and address the personnel problems reported by the Joint Chiefs. Those changes raised retirement benefits for service members who entered the force after 1986, provided an across-the-board pay raise of 4.8 percent (with a provision for future raises that would continue to exceed the growth of private-sector earnings), and restructured the military pay table to increase the importance of promotions rather than time in service. Those actions are expected to boost retention in the military as a whole (compared with what it would otherwise have been). But whether they will resolve the services' specific recruiting and retention problems is unclear.

Moreover, those gains in overall retention will be costly. One reason for the high cost is that service members--like others in U.S. society--place a much higher value on current income than future income. Thus, existing manpower models indicate that the increases in retirement pay are likely to be a less cost-effective tool for increasing recruiting and retention than additional pay raises would be. Another reason for the high cost of those provisions--and their questionable impact on DoD's most serious personnel shortages--is that the pay raises are not targeted toward those shortages. The 4.8 percent across-the-board raise will be paid not only to people in occupations where DoD has shortages but also to people in occupations where DoD has excess personnel.

Because frequent changes in any retirement system can disrupt expectations, further changes in the military retirement system may not be appropriate right now. But changes in basic pay are determined by DoD and the Congress on an annual basis. The options below examine possible policies for setting future pay raises, the potential for using special pay targeted toward personnel whose skills are in short supply, and the role of the unemployment compensation program in rewarding separation from active duty. An additional option would eliminate the difference between pay for married and single personnel; it illustrates how some analysts believe the military compensation system might be fundamentally restructured to make it more cost-effective.
 

Option 4-01
Modify Planned Pay Raises for Military Personnel
 

In 1999, the Congress established temporary procedures designed to increase basic pay in the military at a greater rate than pay in the private sector. Those procedures set the annual military pay raise between 2001 and 2006 at 0.5 percentage points above the increase in the employment cost index (ECI) for wages and salaries of private-sector workers. According to widely published reports, a "pay gap" of more than 13 percent separates military personnel from workers in the civilian sector. In advocating the new pay procedures, the Senate Armed Services Committee cited the need to "close the gap between military pay and private sector wages." The House Armed Services Committee called for smaller raises (equal to the increase in the ECI), referring only to the services' recent negative trends in retaining personnel. The temporary procedures enacted in 1999, combined with the raise authorized for 2000, will increase basic pay by about 3.3 percent (with compounding) above the change in the ECI.

This option would change the procedures that the Congress established, providing for either larger annual increases or smaller ones. The alternative of larger raises would increase basic pay by 2 percentage points more than the change in the ECI each year from 2001 through 2006, thus eliminating the reported pay gap. That change would add $612 million to defense outlays in 2001 and a total of $46.1 billion through 2010. The second alternative would follow the example of the House Armed Services Committee, limiting raises to the annual increase in the ECI without an additional 0.5 percentage points and leaving pay almost 3 percent lower in 2006 and beyond than under the temporary procedures. That alternative would save $204 million in 2001 and $14.8 billion through 2010.

Various policymakers and analysts disagree about the need to increase military pay relative to pay in the civilian sector. That disagreement centers on two issues: the meaning of the reported pay gap and the severity of current problems in recruiting and retaining military personnel.

The common approach to comparing increases in military and civilian pay has several shortcomings, according to studies by RAND (a federally funded research center) and the Congressional Budget Office. A 1999 paper by CBO noted that the 13 percent gap reported in the press measures changes in relative pay between the two sectors rather than absolute levels of pay, takes no account of the age and education level of workers, and uses an essentially arbitrary starting point, 1982. CBO's analysis indicated that among all groups of military personnel, on average, pay increases since 1982 have roughly matched those among comparable workers in the civilian economy. Moreover, the level of pay for military personnel, whether officer or enlisted, falls at about the 75th percentile of pay rates for workers in the civilian sector of the same age and education.

Notwithstanding such analyses, some proponents of higher military pay continue to argue that military personnel are paid less than they could earn in civilian jobs. The Chairman of the Joint Chiefs of Staff stated in 1998 that "You can argue about how big the pay gap is . . . but nobody [in the Pentagon] denies there's a gap." Some Members of Congress reportedly favored a plan to "close the pay gap" over three years through raises several percentage points higher than the average increase in private-sector pay. Thus, regardless of what the true situation may be, belief in the existence of a large pay gap remains a powerful force in discussions about the best course for military pay policy.

Advocates of smaller pay raises would probably take strong issue with the assertion that a pay gap exists or even matters. First, they would point out, no one has demonstrated a gap as proponents of higher pay think of it--a difference between civilian and military pay scales. Second, they would say, the pay of military personnel overall has not fallen relative to the pay of civilian workers of the same age and education level. In addition, they could argue, the notion of a pay gap--a measured difference between levels of pay in the military and civilian sectors--is not relevant to decisions about military pay. Depending on how service members and potential recruits view the advantages and disadvantages of military service, the armed forces might have to pay considerably more than civilian employers, or conceivably less, to attract and retain enough qualified personnel.

A second issue of contention is the services' recent ability to meet their personnel needs. The Air Force reported unusually heavy losses of experienced personnel in recent years, perhaps because of the large number of small-scale deployments during the 1990s. Such deployments affect both the personnel sent overseas and those who stay behind (see option 2-12 in Chapter 2). In addition, reenlistment rates among Air Force personnel completing their first and second enlistment terms have fallen recently. Moreover, every service but the Marine Corps had trouble meeting its recruiting objective in 1999, and the Army succeeded only because it reduced its objective. Advocates of larger pay raises would argue that increased pay could mitigate retention and recruiting problems that might otherwise become more severe.

Proponents of smaller pay raises might argue that retention problems are not widespread and that if recruiting difficulties persist, they are better addressed through less expensive policies than an across-the-board pay raise. The Army has been as stressed by deployments as the Air Force, those proponents might argue, yet the Army was able to reduce its planned accessions of recruits in 1999 because it retained more enlisted personnel than it had expected. The Air Force's problems, they might say, should be solved by the greater predictability of deployments under the service's new Expeditionary Aerospace Force concept or dealt with by expanding reenlistment bonuses (see the next option). Finally, proponents of smaller raises could argue that increasing pay is an expensive way to solve recruiting problems; less expensive alternatives include increasing the number of recruiters, spending more on advertising, and offering more generous education benefits or enlistment bonuses.

Opponents of both alternatives in this option--people who would prefer the status quo of planned pay raises slightly exceeding average increases in private-sector pay--might offer two arguments for their position. Some would say that if the reported pay gap or retention problems warrant raising military pay, slow change is the best approach. Better to see the effects of the planned raises and improvement in retirement benefits, they would argue, than to commit immediately to a large pay increase. Others would contend that even if retention problems are not serious or the reported pay gap does not exist, the planned increases are necessary because service members believe the reports that they are underpaid and their perceptions will determine their actions. According to advocates of the status quo, when the service chiefs supported members' belief that they were underpaid and the Congress set out to increase military pay, a course was set that could not be reversed without serious consequences.
 

Option 4-02
Increase Reliance on Selective Reenlistment Bonuses
 

Selective reenlistment bonuses (SRBs) are monetary incentives used to encourage the reenlistment of qualified service members in occupational specialties with high training costs or demonstrated shortfalls in retention. Eligible personnel generally receive half of their bonus when they reenlist and the remainder in annual anniversary payments over the course of their additional obligated service. Each service regularly adjusts its SRBs to address current retention problems, adding or dropping eligible specialties and raising or lowering bonus levels. Despite their use of reenlistment bonuses and other incentives, however, each of the services has at times had difficulty meeting its need for career personnel, particularly in some occupations.

This option would increase the services' spending on initial bonus payments to $400 million annually--roughly double the 1999 levels--and remove current restrictions on the maximum bonus amount that an individual can receive. Compared with funding for new bonuses in 2000, the higher level would represent an increase of 27 percent (the Congress responded to concerns about poor retention by adding $79 million for new bonuses to the services' budget request for 2000). Total spending on initial and anniversary SRB payments would rise from roughly $340 million and $465 million in 1999 and 2000, respectively, to more than $770 million in 2006 and beyond. That increase reflects both the cost of this option--$78 million in outlays in 2001 and $1.4 billion over 10 years--and the long-run cost of the earlier growth in initial payments.

Although this option would have a substantial direct effect on defense costs, the actual increase in personnel costs could be much smaller, or even negative. Increased spending on reenlistment bonuses should improve retention, allowing policymakers to slow the growth of basic pay or other elements of military compensation (see option 4-01). The estimated costs of this option do not reflect those offsetting savings, however, because the extent of the savings would depend on what actions, if any, policymakers took.

The four services use SRBs to differing extents. In late 1999, for example, almost half of the Navy personnel completing their initial enlistment term who were eligible for a bonus could receive one equal to a year's basic pay or more if they reenlisted for four years. In the Army, by contrast, only about 15 percent of equivalent personnel could receive a bonus equal to more than four months of pay for a four-year reenlistment. Large bonuses were less prevalent in the Air Force and the Marine Corps than in the Navy, but far more common than in the Army.

Advocates of expanding the SRB program might argue that current bonus levels are too small to provide meaningful differences in pay among occupations. One year's basic pay for a four-year reenlistment--the bonus level for first-term Air Force personnel in several computer-related occupations and the largest bonus that the Army offers--actually amounts to only about a 13 percent addition to total pay over four years after accounting for the other elements of cash compensation and for pay raises over those four years (which do not affect the bonus). The largest bonuses add somewhat more than one-third to recipients' pay, but only the Navy offers bonuses at that level and only for a few occupations that involve operating and maintaining nuclear power plants on ships and submarines. In the civilian sector, by contrast, differences in average pay of one-third or more are common, even among blue-collar occupations.

Proponents of this option would argue that larger pay differences among occupations would be a cost-effective tool for improving military readiness. Compared with across-the-board increases in pay or benefits, bonuses are more efficient because they can reduce shortages of experienced personnel in those occupations most critical for readiness without contributing to surpluses in other occupations. Bonuses can also be focused on the years of service in which personnel make career decisions. (Pay raises can be focused on certain grades or years of service, but policymakers have rarely been willing to do so.) And compared with pay increases, bonuses avoid the heavy cost of "tag-alongs"--the elements of compensation, such as retirement benefits, that are tied to levels of basic pay.

Some critics of expanding reenlistment bonuses would argue that large pay differences among occupations violate a longstanding principle of military compensation: that personnel with similar levels of responsibility should receive similar pay. In their view, reenlistment bonuses should be limited to a few critical specialties with severe shortages. Other critics of bonuses and other special and incentive pays would turn the "tag-along" argument of proponents on its head. Increasing reenlistment bonuses, those critics would say, unfairly deprives service members of the retirement and other benefits that they would receive if that money were instead made part of basic pay throughout their career.

Other opponents of this option might agree that the military should offer large pay differences among occupations but criticize the origin or timing of the expansion in bonuses. They would argue that decisions about reenlistment bonuses should be left to the individual services, who are better able than outsiders to compare the cost of added bonuses with the cost of alternatives for addressing shortages of experienced personnel, such as recruiting and training new personnel. Those critics might also point out that the Congress recently improved retirement benefits for many personnel and committed itself to increasing military pay at a rate greater than the increase in private-sector pay. Thus, they would argue, bonuses are not an alternative to across-the-board increases but an addition to them, and the results of those increases should be seen before the Congress considers expanding other incentives.
 

Option 4-03
Eliminate Differences in Pay Between Married and Single Service Members
 

The military generally pays married personnel more than single personnel performing the same job. The difference derives from the military's unique system of either providing food and housing to its members directly or paying them cash allowances to cover food and housing costs. Married personnel are generally thought to need more housing than single personnel, so both DoD-provided housing and housing allowances are larger for service members with dependents than for those without dependents. In addition, most single personnel in the junior enlisted pay grades (E-5 and below) are expected to eat in government dining facilities and live in DoD housing; they may provide their own meals and rent an apartment if they choose, but without specific authorization they cannot receive cash allowances to help cover the cost.

This option would eliminate the pay differences between married and single personnel by dropping the separate allowances for food and housing--in other words, moving to a salary system. Over a five-year transition period beginning in 2001, housing allowances for single personnel would gradually rise to the married level. In 2006, the food allowance and all but the locality-specific component of the housing allowance would be rolled into basic pay. (The locality-specific component would be combined with an existing allowance that accounts for differences in nonhousing costs.) An additional amount would be added to basic pay to compensate members for the increased liabilities they would incur for Social Security and federal income taxes when the nontaxable allowances were converted to taxable pay. Also in 2006, computation procedures for retirement pay and other elements of compensation that are linked to basic pay would be revised to prevent any increase in their costs. Making those changes would add $72 million to defense outlays in 2001 and a total of $34.2 billion through 2010--or about 6 percent to military personnel costs once the transition was completed in 2006. Increased tax receipts, however, would offset about $14.4 billion of the costs in the 2006-2010 period.

Since long before the modern volunteer military began in 1973, outside studies and government-sponsored commissions have recommended adopting a salary system for the military. A common argument is that paying two people with the same rank and job at different rates simply because one is married and the other unmarried is inequitable. The pay difference also creates an incentive for service members to marry, which raises the military's costs for dependents' health care and other benefits. In addition, proponents note that eliminating the separate food and housing allowances would make total military compensation more visible and thus more effective. It would also increase the visibility of another portion of defense costs: the tax revenues that are forgone because the current allowances are tax-free. Another advantage of this option is that most of the cost reflects a pay increase for single personnel, which could improve their retention.

Some critics might argue that this option would represent an ill-advised meddling with a pay system that has served the military well for over 50 years. But the most recent DoD study of moving to a salary system focused on the practical difficulties of making the transition. For example, devising payment schemes for the elements of compensation now tied to basic pay could prove difficult, in part because converting the allowances into basic pay would raise the basic pay of some groups of personnel more than that of others. Most of the difficulties, however, would derive from the current tax-free nature of the allowances. Calculating the increase in federal tax liabilities for a typical service member in each pay grade would be straightforward, but some personnel would wind up better off than before the transition and others worse off. In addition, Congressional budget rules might make it difficult to recognize the increase in tax receipts that would occur when the allowances were converted into taxable pay as an offset to the costs of this option. Finally, the cost estimate for this option assumes that service members would not be compensated for their additional liabilities for state and local taxes because those would depend on where members chose to establish residency; critics could point out that ignoring state and local taxes would effectively cut the pay of military personnel.

Another question that would arise in the transition to a salary system would be how to set rents for government housing for both single and married personnel once the current practice of charging an implicit rent equal to the service member's housing allowance was no longer practical. The cost estimate for this option assumes that rents would be based on the housing allowances at the end of the transition period, adjusted annually for changes in local housing costs. Rents for family housing would be equal to the full allowance. For bachelor housing, a "dorm fee" would gradually decline from the full allowance at the beginning of the transition period to half the allowance at the end. The estimate assumes that the services would continue their current policy of expecting most single personnel in grade E-5 or below to live in barracks or aboard ship; for such personnel, the dorm fee would be mandatory.

An alternative plan for family housing that might be appropriate after the transition would be to raise rents to levels sufficient to eliminate waiting lists for the available government housing. That alternative is examined in option 4-13.
 

Option 4-04
Deny Unemployment Compensation to Service Members Who Leave Voluntarily
 

Many military personnel who voluntarily leave active-duty service are eligible for unemployment benefits. That situation contrasts with the situation of civilian workers--who must have left their job involuntarily to qualify for unemployment compensation--even though payment amounts for the two groups are calculated the same way.

This option would subject former military personnel to the same rules as members of the civilian labor force; in other words, only personnel who left the service involuntarily would be eligible to receive unemployment benefits. That change would reduce the number of departing personnel eligible for benefits by at least two-thirds and save an average of $185 million annually through 2010. Because the Department of Defense ultimately reimburses the Department of Labor for the cost of unemployment payments to former service members, most of those savings ($1.8 billion through 2010) would occur in the defense budget. A small portion of the savings ($57 million through 2010) would occur in the Department of Labor's budget. (The latter savings would be in mandatory spending.)

Most personnel who leave military service do so voluntarily. Many choose not to reenlist after completing a term of service; others, who have served for a minimum of 20 years, opt for voluntary retirement. A much smaller group is separated involuntarily for reasons related to job or promotion performance or, in recent years, to the drawdown of military forces. Although the pressures associated with the drawdown may have blurred the line between voluntary and involuntary separation in the past, the end of the drawdown has restored that distinction.

Proponents of this option would argue that in addition to saving money, it would subject military personnel to the same rules as the rest of the workforce. Thus, in their view, it would make more equitable use of an entitlement program that was established with the intent of aiding people who lost their job involuntarily.

Critics, by contrast, might argue that the frequent moves associated with military service mean that members who separate voluntarily are unlikely to take up residence in the area of their final posting, making it difficult for them to find a new job before they leave the service. In those critics' view, voluntary separation from military service is not comparable with voluntary termination of civilian employment and therefore should not be subject to the same restrictions on eligibility for unemployment compensation.
 

Health Care Benefits

Health care, which costs DoD about $17 billion annually, is arguably the most important noncash element in the military's overall compensation package. A service member's degree of satisfaction with the military health care system can play an important role in his or her decision to remain in the military. That system is likely to be the focus of much DoD and Congressional attention this year. The Joint Chiefs of Staff recently created an advisory panel, the Defense Medical Oversight Committee, to help them identify how the military health care system could be improved. Thus, options that examine potential changes to that system may be especially timely.

The Structure of the Military Health Care System

The fundamental reason for the military to have a medical system is to keep service members ready for duty and provide them with care during military operations. During the Cold War, the military medical system was structured to fit scenarios involving mass casualties in a major European war. In peacetime, that structure would be available to provide large amounts of care to beneficiaries not on active duty, including the families of active-duty personnel, military retirees, surviving military spouses, and their dependents. More recent planning scenarios require less medical capacity; as a result, DoD has substantially reduced its system of military treatment facilities. Yet even with those reductions, the system is much larger than that required for current wartime scenarios. Most of its budget is devoted to caring for non-active-duty beneficiaries. Of the 8.1 million people eligible to use the system, only about one in six is a service member on active duty.

Active-duty personnel receive free health care through DoD's hospitals and clinics (called the direct care system) and a closely affiliated network of civilian providers. Family members and other beneficiaries who are not on active duty (and are not yet eligible for Medicare) have two health care options. One is to enroll in the plan known as Tricare Prime and agree to seek treatment through the same direct care system and network of civilian providers that serve active-duty personnel. Patients who use Tricare Prime face low (often no) fees and copayments for comprehensive care in exchange for the limited flexibility of a managed care approach. The second option is to use Tricare Standard or Extra--insurance programs that allow military beneficiaries to seek care from a larger number of civilian providers. Those plans feature benefits, copayments, and deductibles similar to the ones in private-sector fee-for-service plans and preferred provider plans, respectively. Beneficiaries who choose Tricare Standard or Extra can also receive care at very little cost from DoD's direct care system. But unlike people enrolled in Tricare Prime, they can do so only when space is available.

When military retirees and dependents reach age 65 and become eligible for Medicare, they may no longer use Tricare. However, they may still receive free care at military hospitals and clinics when space is available. They may also continue to fill prescriptions and get laboratory services free of charge at military treatment facilities.

Criticisms of Military Health Care

Three interrelated criticisms are often directed at DoD's health care system. First, some Tricare users complain of long waits for appointments at military hospitals and clinics or difficulty getting access to the limited number of specialists available through Tricare's networks of preferred providers. Some Tricare beneficiaries have also found it hard to get care when they are away from home.

To some extent, those concerns about access may reflect growing pains in the Tricare system, which DoD started in 1995 but only gradually expanded nationwide. Under Tricare, DoD relies on private contractors in different regions of the country to provide advice lines staffed by nurses, schedule appointments with military and civilian providers, set up networks of providers, negotiate payment rates, and process claims for reimbursement. Many of the complaints about Tricare focus on the service that those contractors provide. However, enrollees' satisfaction with Tricare has generally improved as the contractors and DoD have gained experience with the system and with coordinating benefits across different regions of the country.

Yet some of the reported problems with access to care under Tricare may reflect more fundamental problems. Long delays for patients seeking treatment in military facilities may indicate a lack of focus on customers' needs, inefficiency in the use of doctors' time, or the crowding out of Tricare Prime enrollees by other, lower-priority beneficiaries. Moreover, patient behavior is such that a medical system that does not use copayments to control usage may have to rely instead on implicit costs in the form of waiting time. In the absence of copayments, increasing the capacity of the system could lead to an increase in the number of patients, with no significant change in the average waiting time for a visit.

Second, some retirees over age 65, who are excluded from Tricare, claim that DoD has reneged on a promise to provide them with free lifetime medical care. Although the legal basis for such a claim has been denied by the U.S. Court of Appeals, many defense officials say they recognize an obligation to offer some care to older beneficiaries. But in some areas, base closures have limited DoD's ability to provide them with care on a space-available basis.

One reason that many older military beneficiaries would like comprehensive health coverage through DoD is that they face significant out-of-pocket costs under Medicare. Besides paying Part B premiums (about $550 per year), beneficiaries who receive treatment through Medicare's fee-for-service program must typically pay deductibles and coinsurance. Some military retirees over 65 get supplemental coverage through employers who hired them after their military service; others invest in medical savings accounts to cover future out-of-pocket costs or enroll in Medicare +Choice managed care plans. In addition, more than 50 percent of military retirees report that they buy private supplemental insurance, known as medigap policies, to cover some of the costs that Medicare does not.

Third, critics maintain that DoD's medical system has trouble planning for and controlling health care costs. Civilian health care plans must also plan for and control costs, but the structure of military health care benefits makes those tasks particularly difficult for DoD. Planning is complicated by the fact that beneficiaries who choose not to enroll in Tricare Prime can still turn to space-available care at military facilities or to Tricare Standard or Extra whenever that coverage is convenient for them. As a result, the amount of medical care they will seek from DoD in any given year is uncertain.

Cost control is complicated by the fact that care at military hospitals and clinics is free (or nearly free) to its recipients. Although DoD tries to manage the use of care, the system's incentive structure causes beneficiaries to use substantially more care than other U.S. residents--even though more care does not necessarily lead to better health outcomes. In addition, as private-sector employers and insurers have required beneficiaries to pay more of the cost of their care, beneficiaries who are also eligible for DoD's system have increased their reliance on military facilities for services, such as pharmacy and laboratory services, that would otherwise entail out-of-pocket costs.

The experience of private-sector health care programs suggests that charging a nominal copayment for routine outpatient visits and pharmacy services gives consumers an incentive to use care more prudently without significantly affecting their health. In the past, DoD has characterized options that would institute copayments for treatment in military facilities as cost-cutting initiatives that would harm the quality of life of service members. (In fact, the Administration's proposed budget for military health care includes additional funds in 2001 to eliminate existing copayments for active-duty family members enrolled in Tricare Prime who are treated by civilian providers.) Nevertheless, beginning to charge copayments at both military and civilian facilities could be viewed as a way to make DoD's efforts to provide improved access to health care and more uniform benefits affordable. Under the current system, high costs could limit efforts to expand benefits for retirees over 65 and to improve access for Tricare beneficiaries.

The options presented below represent a mix of approaches to those and other problems. Some of the options would try to provide better and more uniform benefits by adding resources to the military medical system; others would combine efforts to expand benefits with copayments aimed at making those initiatives more affordable; and still others would fundamentally restructure DoD's role in providing health care in the post-Cold War era.
 

Option 4-05
Increase Access to Health Care for Active-Duty Families at Military Treatment Facilities
 

Most families of active-duty personnel enroll in Tricare Prime, a health plan that promises comprehensive care at minimal cost. But many of those families complain that obtaining appointments to receive care at military hospitals and clinics--where Tricare Prime is centered--is difficult.

This option would improve access for active-duty personnel and their families at military treatment facilities through three approaches. It would expand DoD's capacity to offer outpatient services at those facilities by hiring more civilian staff to support military health care providers. It would also increase the number of exam rooms available for outpatient visits at military facilities. And it would change the incentives of physicians who supply care at military hospitals and clinics. Together, those measures would cost $1.2 billion through 2005, or a total of more than $2.7 billion over 10 years.

Some DoD planners say the military health care system is greatly in need of support staff, such as registered nurses and other skilled personnel who provide technical assistance and follow-up care. Over the past 10 years, DoD has cut the number of civilian workers in its system by 22 percent, while the number of military medical personnel has fallen by 13 percent. According to DoD analyses, military outpatient clinics have a lower ratio of support staff to health care providers (including physicians, physical therapists, and psychologists) than many health maintenance organizations (HMOs) in the private sector.

In a 1998 hearing before the House National Security Committee, the Surgeons General of the Army and Navy both identified support staff as a high-priority need within the military health system, since those personnel can free up physicians' time to see more patients. For its part, the Air Force has set a goal of having 3.5 support personnel per provider throughout its clinics based on what it believes are norms among HMOs. This option would give DoD new funding to bring its ratio of support staff to providers of outpatient care closer to private-sector levels.

Besides staffing, military facilities also differ from the private sector in their physical capacity for outpatient care. Most DoD hospitals were built decades ago and were designed to focus on inpatient beds rather than outpatient visits. Many civilian HMOs, by contrast, do not operate their own inpatient facilities at all. This option would provide new funding to build more rooms for outpatient exams at military facilities.

Although these measures would expand DoD's capacity for outpatient visits at base facilities, they might not be sufficient to improve access to care among active-duty families. For example, physicians could resist moves to add to their current workload of patients. This option would try to counter that possibility through monetary incentives for military physicians. Specifically, providers who serve as primary care managers would be eligible to receive up to $22,000 per year in bonus compensation that would be tied to the productivity of a group of military physicians, as measured by quality of care and patients' satisfaction and access. Bonuses would be divided among groups of physicians rather than awarded to individuals for two reasons: to use peer pressure to ensure that providers offered high-quality care, and to avoid the need to adjust measures of an individual physician's productivity for the relative complexity of his or her cases.

Supporters of this option would argue that expanding outpatient capacity and changing the incentives of providers could make the military health care system more accessible. Those changes could reduce waiting times and make it easier to schedule appointments at military hospitals and clinics. In addition, if health care is a key consideration in service members' decisions about whether to leave or stay in the military, such measures might help increase retention.

Opponents of expanding the number of support staff at military clinics might argue that DoD should have a lower ratio than is common in the private sector. DoD's health care providers must furnish more on-the-job training than civilian providers do, since active-duty support personnel often have not had much instruction in health care before entering military service. Moreover, critics of this option would contend that before DoD devotes more funding to hiring support staff or building exam rooms, it should first look at how it can better manage its current resources. Some might argue that DoD has too many physicians on active duty.

Other critics of this option contend that increasing the capacity of the system could do little to reduce delays in appointments because, in the absence of copayments, the additional capacity might simply induce beneficiaries to seek more care. (Such delays might be reduced, however, if DoD also began charging nominal copayments for outpatient visits; see option 4-09 below.) Moreover, the performance bonuses for physicians could create an incentive for them to provide unnecessary or poorer-quality care.
 

Option 4-06
Offer Comprehensive Health Coverage to Older Military Retirees
 

Over the past decade, DoD has closed 35 percent of its military hospitals and replaced others with smaller clinics, leaving less capacity in its direct care system. Because beneficiaries age 65 and older are eligible for health benefits through DoD only if space is available at military facilities, some of those people have had to seek care elsewhere, which increases the share of costs they bear themselves. As a result, service organizations that lobby on behalf of military retirees argue that DoD has broken a promise to provide free health care for life to people who agreed to pursue a career in the military.

This option would give military beneficiaries age 65 and older comprehensive health coverage through DoD using one of two distinct approaches. Under the first approach, beneficiaries would receive a payment from DoD approximately equal in value to a basic type of medigap plan (a supplemental insurance policy for Medicare). Beneficiaries could use that payment to buy supplemental coverage or could apply it toward any health expenses they now pay out of pocket. The second approach would offer beneficiaries coverage under the Federal Employees Health Benefits (FEHB) program, with DoD paying the same share of an enrollee's premium that it does for federal civilian workers. That approach would be more costly to DoD but more generous to older beneficiaries. To offset some of DoD's costs for either form of coverage, older military retirees who chose to accept the new benefit would no longer be permitted to use military health care facilities.

About half of older military beneficiaries report that they purchase private medigap insurance to protect themselves from high out-of-pocket expenses under Medicare. Ten standard medigap plans exist. Their annual premiums can vary widely--from about $600 per person to more than $2,000--depending on the types of benefits covered and the state in which the policyholder lives. In addition, if beneficiaries wait more than six months after turning 65 to buy a medigap plan, insurers may subject them to a waiting period for coverage or even refuse to sell them a policy because of their medical history or health status.

Under this option's first approach, the payment that DoD provided to older military retirees and dependents would roughly equal the value of a standard medigap "A" plan, the least generous type that covers core benefits such as copayments for physicians' services and long inpatient stays. (That value is about $700 in 2000.) Beneficiaries could use that payment to offset the cost of any medigap or employer-sponsored wraparound plan they chose, although they would have to make up the difference in price for plans with more generous benefits. Alternatively, they could deposit the tax-exempt payment in a medical savings account or apply it toward out-of-pocket premiums and copayments charged by managed care providers in the Medicare+Choice program.

Those payments would cost DoD $3 billion between 2001 and 2005, or a total of $9 billion over 10 years (assuming that most of the 1.4 million military beneficiaries in the United States age 65 and older would apply to receive such a payment). Over that 10-year period, however, DoD's costs would be more than offset by over $10 billion in savings from a smaller workload in the military health care system. Besides DoD's costs, the Medicare program would face an additional $13.7 billion in costs between 2001 and 2010. Those costs would arise because some beneficiaries who formerly received care at military treatment facilities would instead begin using Medicare and because a few who previously had no medigap coverage would tend to use more services once they had supplemental coverage. In sum, net costs under this option would total more than $12 billion through 2010.

Under the second approach, older military beneficiaries could enroll in one of the various health plans in the FEHB program each year and pay about 30 percent of the premium (the same share that other FEHB participants pay). In the case of a standard Blue Cross/Blue Shield policy, their share in 2000 would be $781 for an individual or $1,736 for a family. DoD would pay the remainder of the premium ($2,050 for an individual or $4,575 for a family policy, in this example). Such a plan would act as a wraparound policy for people enrolled in Medicare--covering most or all of Medicare's copayments and deductibles as well as most of the cost of prescription drugs. In many cases, an FEHB plan would cost Medicare beneficiaries less and provide more generous benefits than a private medigap policy. However, the total costs of such a plan--that is, the sum paid by DoD, Medicare, and enrollees--would be high.

This second approach would cost DoD more than $13 billion for FEHB premiums through 2005, or a total of more than $40 billion over 10 years (assuming that roughly 70 percent of older military beneficiaries would eventually choose to enroll in the FEHB program, including all those who now buy medigap plans, some who contribute toward employer-sponsored coverage, and a few who formerly relied on Medicare alone). Those 10-year costs, however, would be offset by more than $11 billion in savings over 10 years as fewer elderly patients went to DoD for care. As under the first approach, Medicare would also face higher costs--totaling $15 billion through 2010. When combined, net costs under this option would total $44 billion over the 10-year period.

Although neither approach in this option would be the same as providing free health care for life, either one would give older military retirees and their families a more uniform benefit than exists today. The reason is that the payment or FEHB enrollment would be available to all beneficiaries age 65 or older, whereas today only people who happen to live within driving distance of a military treatment facility receive many health care benefits. Supporters of this option would also point out that either approach is much more generous than the benefit that civilians receive through Medicare alone. In addition, the change would allow older military beneficiaries to choose from a broad range of civilian health care providers.

Opponents of the option could argue that either approach would impose significant new health care costs on the federal government without producing a clear effect on military recruiting and retention. In addition, some critics contend that excluding older beneficiaries from care at military treatment facilities would hurt DoD's ability to attract, train, and keep military doctors and other medical personnel because it would provide a less varied mixture of cases for them to treat.
 

Option 4-07
Offer a Nationwide Mail-Order Prescription Service to Older Military Retirees and Their Dependents
 

Any military beneficiary can fill a prescription--written by either a military or civilian physician--free of charge at DoD's pharmacies. For beneficiaries age 65 and older, prescription drugs can represent a major health expense, because older people are more likely to have chronic conditions than younger people and because fee-for-service Medicare does not cover the cost of most outpatient prescription drugs. Most of the 1.4 million military beneficiaries age 65 and older can obtain pharmacy services only if they are willing to travel to a military facility to have their prescriptions filled. Two exceptions to that system exist, however. In 1997, DoD added a mail-order pharmacy program for older beneficiaries who no longer have access to military facilities because of base closures and realignments. And beginning in spring 2000, DoD will provide a retail and mail-order pharmacy benefit to about 6,000 people age 65 and older if they choose to pay an enrollment fee to participate in the demonstration program.

This option would broaden the current mail-order pharmacy service to include all military retirees and their dependents age 65 and older living in the United States. Users of the mail-order service would pay $8 per prescription filled (up to a 90-day supply), which is similar to copayments that private-sector health maintenance organizations charge. Such a service would cover a wide variety of medications for chronic conditions (although retirees would probably still want to purchase drugs for acute illnesses at retail pharmacies rather than wait to receive them through the mail).

Expanding its mail-order service would cost DoD an additional $91 million in 2001 and $4.8 billion through 2010. That estimate is net of the revenue that DoD would collect in copayments.

Like other health care providers, DoD is facing rising pharmacy costs because of the broad availability of new drugs. Those costs increased by more than 6 percent a year between 1995 and 1997, according to the General Accounting Office, compared with an increase of just 1 percent a year in DoD's overall health care spending during that period. As pharmacy costs have risen, so has the value of DoD's drug benefit; thus, proponents of this option would argue, it might be reasonable to expect beneficiaries to share that increase by making copayments. In addition, studies suggest that charging a copayment gives consumers an incentive to use pharmacy products more prudently without significantly affecting their health.

This option would provide more uniform health care benefits to older military retirees and their dependents than the current system. And although beneficiaries would face some costs, those would probably be much lower than what most older civilians pay out of pocket to fill their prescriptions. In 1996, for example, Medicare enrollees spent an average of about $680 on pharmaceuticals, nearly half of which they paid out of pocket. (Many people hold medigap insurance policies to supplement their Medicare benefits, which may also help defray pharmacy expenses. People who buy a medigap policy must pick one of the more expensive types of plans to get any drug coverage at all and then pay half of the price of each prescription as well. In addition, their maximum pharmacy benefit is capped at $1,250 or $3,000 per year, depending on the type of medigap policy they buy.)

This option would have several potential disadvantages. First, it would add costs to DoD at a time when its budget already faces constraints. (However, an expanded mail-order pharmacy program would be less expensive to the federal government than helping older military beneficiaries buy supplemental coverage through a medigap policy or the Federal Employees Health Benefits program, as discussed in option 4-06.) Second, advocates for retirees would argue that a mail-order pharmacy benefit would not begin to provide the free health care for life that many retirees believe they were promised when they agreed to a career in the military.
 

Option 4-08
Downsize the Military Medical System
 

This option would substantially reduce the size of DoD's direct care system, cutting the number of beds in military facilities to the amount that DoD would need to care for two-thirds of the casualties it anticipates from two nearly simultaneous major wars. As part of that downsizing, DoD would convert many military hospitals into outpatient clinics, close other facilities, and reduce the number of active-duty physicians. This option would also discontinue the Tricare program for retirees and all types of dependents, requiring them to seek care in the civilian sector. Those younger than 65 would be offered coverage through the Federal Employees Health Benefits program, and those 65 or older (who now receive care at military hospitals and clinics only when space is available) would use their Medicare coverage and any private insurance they obtained.

Such restructuring of the military medical system would require additional spending in the near term but would offer substantial savings later on. Total net savings in outlays would be nearly $28 billion through 2010. That estimate reflects savings from operating a smaller military system, assuming that DoD faces the same upward pressures on the cost of care that private-sector providers and insurers do. It also takes into account higher Medicare spending (as older military beneficiaries rely more heavily on their Medicare benefits), the costs of closing facilities, and the costs of providing FEHB coverage to beneficiaries younger than 65. Under this option, DoD would pay the same share of the premiums for FEHB health plans that other federal agencies do for their civilian employees. In addition, families of active-duty service members who enrolled in FEHB would receive a voucher that covered much or all of the remaining share of the premium.

Supporters of downsizing note that although DoD's wartime medical requirements during the Cold War were based on the scenario of a large conventional conflict in Europe, more recent planning scenarios have led to sizable cuts in those requirements. Today, between military medical facilities, hospitals run by the Department of Veterans Affairs, and civilian facilities that have agreed to provide beds during a national emergency, the United States has more than twice the hospital capacity needed to meet the current wartime demand for 13,400 beds. Moreover, even after making the reductions in this option, DoD would still have about 9,000 beds in its expanded system--a much higher percentage of its wartime requirement than it met during the Cold War.

DoD would probably see several disadvantages, however, to making such deep cuts to its health care system. Military medical officials argue that DoD facilities and the care they provide in peacetime are essential for recruiting and training physicians and ensuring medical readiness. Downsizing that system to such an extent would require DoD to modify the way it trains and prepares for wartime. For example, it would need to strengthen ties with the civilian sector to provide casualty training for military medical personnel and to continue ensuring an adequate supply of beds for wartime.

Another potential drawback of this option is that those older beneficiaries who are able to rely on military facilities would have to seek care elsewhere. In addition, some beneficiaries who enrolled in FEHB plans would pay substantially more out of pocket than they do for care in the military system. Military retirees and their dependents would pay about 30 percent of their FEHB premium. (Dependents of active-duty members would pay little or no premium after receiving their voucher.) And enrollees in most FEHB plans would face copayments or deductibles for outpatient visits, prescription drugs, and other medical services.

Proponents of this option would counter that higher out-of-pocket costs could prompt more prudent use of medical care than in DoD's direct care system, where many services are provided at no or low cost. In addition, they might say, many FEHB plans would offer improved coverage and so might be worth the greater out-of-pocket expense. Moreover, the value of DoD's health benefits has grown dramatically with advances in technology and medical practices. Thus, proponents would argue, it is reasonable for military beneficiaries to share more of the costs associated with those advances--as many people covered by employer-sponsored plans in the private sector already do.
 

Option 4-09
Revise Cost Sharing for Military Health Benefits
 

This option would make three changes to the military health care system. First, all beneficiaries (except those on Medicare) would have to enroll in Tricare Prime, Standard, or Extra before using the military health care system. The annual enrollment fee for Tricare Prime would remain the same (no charge for active-duty personnel and their families and $230 for single coverage or $460 for family coverage for retirees). Under Tricare Extra or Standard, active-duty families would still pay no fee, but retirees would pay $115 a year for single or $230 for family coverage. Second, DoD would adjust enrollment fees for inflation by the annual change in the consumer price index for medical expenses. Third, users of Tricare Prime would pay the same copayments for outpatient care at military facilities (where they now pay nothing) as they do at civilian providers. In addition, all retirees would begin to pay small copayments if they chose to receive care at military facilities.

Together, those three changes would save DoD $327 million in 2001 and $4.1 billion through 2010. The savings would stem from enrollment fees, increased copayment charges, and more prudent use of care by beneficiaries. Under current law, DoD is allowed to spend some of the revenues it collects through copayments. This estimate assumes that the Congress would reduce DoD's appropriations by the amount of revenue collected under the option. However, if the Congress revoked DoD's automatic reimbursement authority, some of the estimated savings would take the form of an offset to mandatory spending.

By requiring beneficiaries to enroll, DoD could identify who uses its system. Military providers need to plan for the health care needs of a defined population to develop per capita budgets and build cost-effective delivery networks.

Proponents of this option could argue that the value of DoD's health benefits has risen with advances in medical technology, so users should expect to bear some of the associated cost, just as employees of private firms have. In addition, charging copayments would help curb excessive use of services by creating the same incentives for beneficiaries who receive care on-base as for those who use civilian providers. It would also eliminate the inequity of providing more generous benefits to people who live near a military hospital or clinic.

On the negative side, many military families and retirees would view even modest copayments at military facilities as an erosion of their benefits. Retention and morale might suffer, even though this option would still offer service members and their families more generous health benefits than most government or private-sector employers do.
 

Option 4-10
Have DoD and VA Purchase Drugs Jointly
 

In 1997, the Departments of Defense and Veterans Affairs (VA) spent about $1 billion and $1.3 billion, respectively, on pharmaceutical products for patients in their health care systems. Nationwide, spending on prescription drugs has grown roughly twice as fast in recent years as total national health spending. Constraining such cost growth is an important goal for DoD and VA: each operates its large health care system on a fixed annual appropriation, so spending more on prescription drugs means it has fewer resources to devote to other types of care for its beneficiaries.

This option would consolidate DoD's and VA's purchases of pharmaceutical products, as the Congressional Commission on Servicemembers and Veterans Transition Assistance has recommended. Specifically, it would require the two agencies to organize a joint procurement office and develop a common clinically based formulary (a list of prescription drugs that both agencies' health plans would agree to provide). Formularies can save money by encouraging providers to substitute generic versions for brand-name drugs or by selecting one or more preferred brand-name drugs within a therapeutic class. The joint formulary would apply throughout the VA health system, to mail-order pharmacy services, and at military hospitals and clinics. Once in place, it would allow the agencies to enter into more "committed-volume" contracts with pharmaceutical manufacturers, which generally lead to lower drug prices. In addition, this option would merge the two agencies' mail-order pharmacy services. Those changes would save DoD and VA a total of $21 million in outlays in 2001 and $810 million through 2010.

In recent years, DoD and VA have made efforts to combine some purchases, but that collaboration is limited, and they continue to maintain separate formularies and procurement offices. The VA's National Acquisition Center is responsible for purchasing prescription drugs for most federal agencies except DoD, and it negotiates and maintains the federal supply schedules of prices for those items. The Defense Supply Center Philadelphia (DSCP), an office of the Defense Logistics Agency, negotiates prices for pharmaceuticals and draws up contracts with vendors to buy and deliver those products to military treatment facilities. DSCP also makes plans to deliver those items overseas quickly in the event of a conflict.

Proponents of joint purchasing would argue that DoD and VA need to rein in the rapid growth of prescription drug costs. Without such measures, both agencies may be forced to ration more tightly the care they provide. In addition, those proponents would say, the need for separate procurement offices is not apparent. According to a 1998 report by DoD's Inspector General, only 0.05 percent of the items that the DSCP procures on behalf of military facilities are "militarily unique"; most are common items. VA officials maintain that the National Acquisition Center has already achieved significant savings on many of its pharmaceutical purchases through committed-volume contracts.

In developing a common formulary, the two agencies would need to adopt procedures by which physicians could prescribe nonformulary drugs to patients who needed them. (For example, a patient would require an alternative drug if he or she was allergic to the formulary drug in a therapeutic class.) The design and execution of such an exception process would affect the savings from this option. The stricter the process, the higher would be the cost of documenting and judging the patient's need for a nonformulary drug. A less restrictive process, however, would reduce the government's bargaining power and could reduce the savings from this option.

Critics of consolidation argue that such savings are unachievable anyway. The veterans who obtain health care from the VA make up a very different mix of medical cases than military beneficiaries do--for example, more of them suffer from mental illness, substance abuse, or severe disabilities (such as spinal cord injuries). Thus, the degree of overlap in prescription drugs dispensed by the two agencies may be limited.

Opponents of this option also argue that DoD and VA have already taken important steps to expand their joint procurement. They have entered into 19 joint national contracts to buy pharmaceutical products. Some officials believe that the agencies will achieve the bulk of any possible savings simply by sharing pricing data with one another so they can negotiate the lowest prices with pharmaceutical manufacturers and suppliers. Moreover, DoD officials contend that they must maintain their own procurement office to ensure that drug supplies will be available quickly in the event of war.

Other critics, however, might argue that this option would not go far enough. Savings could be even larger if DoD implemented a uniform formulary for all three types of pharmacies that its beneficiaries use: pharmacies at military hospitals and clinics, the mail-order service, and retail pharmacies (where beneficiaries receive partial reimbursement through insurance). DoD officials say that as they have tightened the formularies of drugs available at military facilities, beneficiaries have increasingly turned to retail outlets--which often costs DoD more than if the department had purchased the drugs at federal prices and dispensed them itself. (Consequently, the estimate for this option assumes that DoD's insurance claims for pharmacy services would increase.) If DoD could enforce a single formulary at all pharmacy outlets, it would enjoy more substantial savings.
 

Other Noncash Benefits

The military has traditionally provided a much broader array of noncash benefits than most civilian employers. Apart from health care, the list includes subsidized on-base housing; commissaries (on-base grocery stores); exchanges (general retail stores); child care; and morale, welfare, and recreation programs (golf courses, fitness centers, clubs, and the like). For the most part, DoD has chosen to rely on in-house organizations rather than private contractors to provide those subsidized goods and services.

In general, both economic theory and the commonsense notion that people are the best judge of where they would like to spend their money suggest that cash payments, rather than in-kind or noncash benefits, should play a dominant role in compensation. When private employers provide health care and other noncash benefits, it is often because that approach allows them to offer tax-free compensation or to take advantage of their ability to purchase goods and services at a lower price than employees could on their own.

Nonetheless, noncash benefits are likely to offer some special advantages to both individual service members and DoD. Those benefits mean that military personnel have familiar services readily available as they and their families move from one unfamiliar base to another. Noncash benefits, and the associated on-base lifestyle, can also provide a sense of belonging to an organization that cares for its members and their families. Likewise, such benefits can send the message that DoD is not just another employer and military service is not just a job. Among officers in critical specialties, military values and lifestyle and a sense of esprit de corps are the most frequently cited reasons to stay in the military.⁽³⁾

DoD's noncash benefit programs entail significant costs. In recent years, those costs have been raised by changes in the civilian economy (such as the growth of discount retailers that compete with on-base stores) or by the aging of DoD's infrastructure of housing and other facilities. In addition, post-Cold War rotation patterns could increase the number of service members who are able to spend much of their career at a single installation, making the advantages of distinct military communities less clear. A 1997 report by the Congressionally mandated National Defense Panel--a group that included four retired general officers--suggested that it might be time for DoD to reassess the role of military communities and noncash benefits.⁽⁴⁾ Panel members said that military personnel might be better off if some of the resources that DoD devotes to providing benefits such as housing, schools, medical care, and retail stores were instead devoted to raising cash compensation.

This section provides an array of options dealing with noncash benefits. Some of the options would increase funding for those programs. Others would reduce the cost of providing noncash benefits or replace them with cash payments. Still others would make the costs of noncash compensation more visible to encourage DoD and service members to make choices between cash and noncash benefits.
 

Option 4-11
Consolidate Military Personnel Costs in a Single Appropriation
 

More than 20 percent of the federal government's costs to recruit and retain military personnel fall outside the military personnel appropriation of the Department of Defense. The costs for many personnel benefits--commissaries, medical care, DoD schools, and on-base family housing--are paid by DoD out of other appropriations. Some additional benefits, such as the Montgomery GI Bill and veterans' disability payments, are paid by the Department of Veterans Affairs. This option would realign appropriations so the full cost of attracting and retaining military personnel appeared in DoD's military personnel account.

Under this option, each of the DoD-funded personnel-support costs mentioned above would become a budget activity or subactivity within the military personnel appropriation. Some VA programs might also be funded in the defense budget. The realignment of appropriations would have two related goals: to provide more accurate information about how much money is being allocated to support military personnel, and to give DoD managers more incentive to use resources wisely.

The current distribution of personnel costs among different appropriations makes it difficult for DoD, the Congress, or taxpayers to track the total level of resources devoted to supporting military personnel. Changes in the appropriation level for military personnel can be either offset or enhanced by changes in the resources devoted to health care, housing, or education benefits. The total picture is rarely, if ever, seen--making it hard to analyze total compensation or make comparisons with civilian compensation.

In addition, because personnel-support costs and military training and operating costs are mixed within the operation and maintenance (O&M) appropriation, interpreting trends in that important appropriation can be difficult. How much of the past growth in O&M spending per active-duty member resulted from growth in personnel costs, such as medical benefits, and how much resulted from changes in the cost of operating military units and installations?

The current distribution of personnel costs among appropriations and agencies can also distort the incentives that managers face. For example, because the costs of enhanced benefits under the Montgomery GI Bill would be paid by the VA, managers at DoD have little reason to ask whether other recruiting incentives might be more cost-effective. Similarly, compensation managers have little incentive to seek the most cost-effective mix of cash and in-kind benefits as long as DoD pays for in-kind benefits such as commissaries and housing out of different appropriations than cash benefits. With separate appropriations, no reliable mechanism exists to ensure that funds taken from in-kind benefits will be returned to service members in the form of pay raises. If both cash and in-kind benefits were paid from a single appropriation, the demand for greater in-kind benefits might be muted, and it might be easier for both the Congress and DoD managers to show service members that changes in benefits were not an erosion in the total compensation package. A consolidated budget for personnel support could even lead to growth of in-kind compensation when that was, in fact, the most cost-effective approach.

How much this option might save is unknown (thus, no savings table is shown). But with the total cost of supporting military personnel at about $95 billion a year, the potential savings from better management of those costs are substantial. (Savings of just 1 percent, for example, would equal almost $1 billion annually.)

In addition to providing savings, this option could lead to a realignment of responsibilities within the military services. Although no change would be required, the new approach to appropriations might eventually result in the consolidation of personnel-support functions under a single Assistant Secretary in each service and the Office of the Secretary of Defense. That realignment might in turn contribute to better coordination among the different personnel-support functions.

One potential disadvantage of this option is that it would require DoD to revise both the financial management systems used to track budget authority and outlays and the budget exhibits it prepares for the Congress. But because DoD already tracks the costs of its various personnel-support programs separately, moving those programs to a different appropriation would involve reorganizing current data rather than collecting new data.

A much more serious drawback of this option is that the new structure for appropriations could require changing the responsibilities and possibly the structure of the various Congressional subcommittees that authorize and appropriate funds for defense. That could prove difficult and controversial.
 

Option 4-12
Increase Housing Allowances to the Full Cost of Adequate Housing
 

The Department of Defense houses about one-third of military families in housing units it owns on military bases. Although many of those units are aging and in poor repair, the demand for on-base housing exceeds the supply in most areas. Military families who live off-base receive a cash allowance in lieu of housing; it typically covers only part of their housing costs, leaving them to pay 18.8 percent of those costs out of pocket. That situation contributes to the demand for on-base family housing and raises issues of equity between personnel living on- and off-base. Moreover, the fact that DoD cannot ensure that military families have access to high-quality housing presents a serious quality-of-life issue in the eyes of many senior military leaders.

This option would raise housing allowances to 100 percent of the estimated cost of adequate housing. Allowances would rise over a three-year period, reducing out-of-pocket costs to an average of 12 percent in the first year, 6 percent in the second year, and eliminating them in the third year. This option would increase allowances at a more rapid rate than the Administration's current proposal, which would reduce out-of-pocket costs to 15 percent in the first year and eliminate them within five years.

Raising housing allowances would directly benefit the roughly 752,000 active-duty personnel (both single and married) who live off-base. In addition, it would contribute indirectly to the quality of DoD's on-base units. Currently, DoD is experimenting with public/private partnerships designed to provide private capital to replace and revitalize on-base housing. Higher allowances would make the partnerships--whose return on investment typically depends on the size of housing allowances--more appealing to private firms. Another advantage is that service members would no longer have an incentive to accept on-base units that were not comparable in quality with available private-sector units. Queues for on-base housing would decline, and base commanders would have a strong incentive either to improve or to demolish substandard units.

The principal disadvantage of this option is its cost--approximately $1.4 billion a year more than the current system. This option would also further enshrine the current pay and allowance system, making it difficult to eliminate differences in pay between married and single personnel (see option 4-03). In addition, this option would represent a sharp break from DoD's historical goal of setting allowances to cover 85 percent of service members' housing costs. Although that practice holds down the cost of allowances, it contributes to long waiting lines for on-base units and to a perception that the department is not committed to providing service members and their families with a high quality of life.

The cost of this option would be equivalent to that of raising basic military pay by about 3 percent, but its impact would probably be much greater. Although service members accustomed to press reports that cite a 13 percent pay gap might not view a 3 percent pay raise as a major improvement in their quality of life, they would probably see the elimination of out-of-pocket housing costs as dramatic, visible evidence of DoD's commitment to improving service members' welfare. Thus, such a change could have an immediate impact on morale and retention. Further, the higher allowances might resolve DoD's housing problems by decreasing the demand for on-base units and allowing the department to reduce its role as a direct provider of housing.
 

Option 4-13
Increase Competition Between DoD and Private-Sector Housing
 

Most military families receive cash allowances for housing and buy or rent dwellings in the private sector. About one-third, however, live rent-free in on-base housing. It costs DoD about 35 percent more to provide a housing unit than it costs to rent a comparable unit in the private sector. Despite the cost, DoD intends to keep its inventory of housing. The department is experimenting with public/private partnerships that could provide private capital to replace or revitalize on-base housing units, many of which are nearing the end of their service life. But those partnerships are proceeding more slowly than planned, leaving many families in substandard units. Moreover, it is uncertain whether such partnerships will reduce the long-run costs to DoD of providing on-base housing.

This option would reduce the demand for on-base housing by requiring it to compete with private-sector housing. All military families would receive the cash allowance and be free to choose between DoD and private-sector units. DoD--and any companies it takes on as partners--would act like a private landlord, setting rents for on-base units at market-clearing levels (levels at which there would be neither excess vacancies nor waiting lists). On-base housing units would be replaced or revitalized if they met one of two criteria: their value to service members (the market-clearing rent they could command) was sufficient to cover both operating costs and amortized capital costs, or DoD deemed the units indispensable because of their historical nature or importance for military readiness. Those criteria would limit DoD to revitalizing or replacing about 25 percent of its existing housing stock.

The principal advantage of this option would be savings to DoD, which could amount to more than $5 billion in outlays through 2010. The main source of those savings would be lower revitalization and replacement costs as DoD retired aging units rather than investing in ones that could not cover their costs in competition with private-sector housing. Among other advantages, this option would let DoD focus on its warfighting mission rather than