A Real Domestic Threat: How Health-Care Spending Strains the U.S. Military

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Avik S. A. Roy

Lots of people have views about U.S. military spending. Liberals and libertarians think we spend far too much on defense. On the other side, Mitt Romney speaks for many conservatives in arguing that we should spend more: "If you do not want America to be the strongest nation on Earth," says Romney, "I am not your President. You have that President today." But while we usually think of military spending in terms of foreign wars and joint strike fighters, we often neglect one of the biggest growth drivers of the U.S. defense budget: health care.

"Health care costs are eating the Defense Department alive," said former Defense Secretary Robert Gates in 2011. Military spending consumes over half of all federal discretionary spending: $712 billion out of $1,277 billion in 2011 discretionary outlays. Defense analyst Todd Harrison calculates that military health spending is about 9.5 percent of the base defense budget: $52.5 billion out of the $559 billion that the Defense Department requested for fiscal year 2012. On top of that, the Department of Veterans Affairs, which has a separate budget, seeks to spend $51 billion of its $132 billion 2012 budget request on health care.

We spend $520 billion a year on Medicare, $450 billion a year on Medicaid, and $300 billion a year on the employer health insurance tax deduction. Still, $100 billion in annual military health spending is real money. And while defense spending as a percentage of GDP nears historic lows (about 4 percent today, compared to 6 percent in the 1980s), the military's health-care spending is increasing at rates much faster than inflation, just like health spending elsewhere.

Curbing the Defense Health Program

The $52.5 billion in requested DoD health spending for FY 2012 can be broken down into three parts: $32.2 billion for the Defense Health Program, a.k.a. TRICARE, which provides health care for active-duty service members; $10.7 billion for TRICARE for Life, a Medicare supplemental insurance program for military retirees; and a mish-mash of other stuff, including military hospitals and pay for military health-care workers. Overall, the program covers 9.6 million Americans.

The Congressional Budget Office has come up with a number of options for reducing military health spending, including: (1) introducing minimum out-of-pocket requirements under TRICARE for life ($43 billion in savings from 2012-2021); (2) limiting the TRICARE benefit for military retirees and their dependents ($115 billion); (3) increase cost-sharing for prescription drugs under TRICARE ($26 billion); (4) increase cost-sharing for military retirees not yet eligible for Medicare ($30 billion); and (5) end enrollment in VA medical care for high-income veterans without service-connected disabilities ($30 billion).

The DOD's FY 2013 budget request, a product of last year's debt ceiling deal that requires $487 billion in defense cuts, reflects some of these ideas. The new budget request proposes to increase and means-test TRICARE premiums, nearly quadrupling them in some cases. (Today, TRICARE premiums are far lower than those for civilian insurance.) Some believe that the Obama Administration is seeking to drive more service members into the PPACA exchanges. In addition, the proposal will charge new annual enrollment fees for TRICARE for Life, the military retiree program.

As you can imagine, these cuts have elicited a vigorous reaction from military personnel groups. "We think it's absolutely wrong," said Kathryn Beasley of the Military Officers Association of America. "This is a breach of faith [with those who have served]."

Personally, I'm not sure what to do about TRICARE. It seems like an inefficient mess. Servicemen I know complain incessantly about the program, and believe that it provides inadequate care. Would vouchers for conventional private insurance be an improvement? They could be, though they might also expose servicemen to the high cost of conventional private insurance.

Is the Veterans Health Administration a Single-Payer model?

Unlike TRICARE, which contracts with private-sector insurers and providers in the U.S., the Veterans Health Administration is a single-payer system, along the lines of the British National Health Service, in which the government owns the hospitals along with paying the bills.

When I was a medical student in the 1990s, I did a couple of clinical rotations at the VA Hospital in West Haven, Connecticut. It was a terrible experience. Poor conditions led to a higher rate of hospital-borne infections and surgical complications, among other problems. Since then, there have been some improvements to the VA system, leading some to describe it as a model for single-payer health care. But the VA has many of the rationing and access problems that plague other single-payer systems, and spending continues to increase at similar rates to those of the private sector.

Here's a chart from the Congressional Budget Office that compares the Congressional budget baseline for VA health spending, which assumes that veterans' health spending grows in line with inflation, to two more realistic scenarios: "Scenario 1," in which health spending grows at historical rates; and "Scenario 2," which takes the growth rates of Scenario 1 and adds in the larger contingent of veterans emerging from Iraq and Afghanistan.

Privatize the VA

The VA system is an anachronism. It made sense in the World War II era, when tens of millions of Americans served in war, and when America did not yet have a national network of full-service hospitals. Today, however, that isn't true.

The VA system could be turned into a huge asset for our nation's health-care system if it were privatized. One of the big drivers of rising health spending is hospital monopolies: when one or two hospitals dominate a particular region, those hospitals have the power to charge whatever they want to insurers and patients. If civilians were allowed to use VA hospitals, and vice-versa for veterans, we could significantly improve this problem. In addition, if the VA hospitals have indeed come up with operational efficiencies, competing private-sector hospitals would be forced to adopt those efficiencies, or lose patients.

If liberals are right, and the VA is a model, competition will force private hospitals to improve on both quality and cost. If conservatives are right, and VA hospitals are terrible, privatization would allow veterans to gain access to superior private-sector health care, while increasing provider competition. Seems like a win-win.

Follow Avik on Twitter at @aviksaroy.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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