Defense bill at an impasse, but a solution is within reach

The chairmen of the House and Senate Armed Services Committees have focused this year’s 2016 defense policy bill on reform. The National Defense Authorization Act has passed both the House and Senate with a variety of positive changes that set the force on a better path for the future.

{mosads}A centerpiece of the legislation concerns acquisition reform. The Senate has endorsed strengthening the authority of the Service Chiefs and Secretaries within the purchasing process. Another significant shift concerns the future of the all-volunteer force and begins the process of reforming military compensation by introducing a retirement savings account for new enlistees. Finally, both bills also authorize increased funding — though not nearly enough — to deal with the crisis which the sequester has created.

Broadly speaking, the Congress is in agreement on sound policies that will benefit the Defense Department and U.S. military for years. Unfortunately, negotiations have stalled around a few key points. Among those is the Senate’s proposal to increase copayments for certain pharmaceutical purchases, largely affecting retirees.

Currently, most military retirees who participate in TriCare for Life can get prescriptions filled three ways:

• If they go to an active duty military base, they can get the prescriptions for free—brand name and generic. This is a viable option for about two-thirds of retirees who live within 40 miles of an installation.
• If receiving generic drugs through the mail, they can also get these same prescriptions for free.
• Or, recipients can get their prescriptions filled at a local pharmacy, in which case there is a copay of $8. That is roughly one-third of the average civilian copayment cost. In total, copay fees only account for about 7 percent of outpatient drug costs.

The Senate bill would increase the copayment for those choosing the third alternative by $1 per year until it reaches $14. By specifically targeting brand name drugs bought at retail pharmacies, the Senate is attempting to arrest the cost driver in military pharmaceuticals. 

While brand-name drugs cost four times more than generics at military treatment facilities ($46 vs. $13), they cost 10 times more at retail pharmacies. This is asking the taxpayer to spend $226 versus $22 for the same product simply offered to the recipient differently. About 51 percent of drug costs overall are incurred at retail pharmacies. With 72 percent of recipients using generic drugs currently, the Defense Department lags behind the private sector’s 81 percent generic utilization rate.

There are three reasons why the Senate approach is a needed reform. First, it discourages overutilization, a classic purpose of copays. Next, this modest cost sharing encourages retirees to get generic drugs through the mail or go to an installation — saving both them and the government money. Finally, the funds raised by the increased copays are a revenue source for the new retirement savings accounts created in both versions of the bill.

This last point is an important one. Both chambers agree that it is time to reform the military retirement system. Currently, service members who serve 20 years in the military can retire, regardless of age, and receive 50 percent of their salary. At the same time, service members who remain in the military less than 20 years have no retirement program whatsoever. The House and Senate both want to modestly reduce the payments to long-serving service members — grandfathering in those already in the system — while offering a thrift savings benefit to more junior personnel.

If enacted, the House and Senate bills will flip the system from one where 83 percent of personnel do not receive any retirement benefit currently to one where over 80 percent will receive something.

That’s a useful change and long overdue. But it has to be funded. The increased copay provision in the Senate bill will help fund the change. And as we have already said, it will nudge beneficiaries toward using generics and buying their drugs in a manner that saves both them and the taxpayer money.

The House is resisting the proposal, making the point that healthcare reform should come in one package and cover military and civilian employees at the same time. That’s a valid argument, but not powerful enough to justify defeating the steps toward better military healthcare efficiency in the Senate bill, or hold up the other compensation reforms that both Houses want.

The Senate copay proposal is a commonsense move toward efficiency. The money it raises or saves will be used for the important retirement reforms on which both chambers agree. Given the larger purposes of the authorization bill, we hope that cooler heads will prevail and that the defense bill moves forward with the Senate copay proposal and the other sound provisions.

In the long run, healthcare reform needs to focus on ensuring the long-term affordability of both civilian and military retiree healthcare, while at the same time preserving or improving access and quality. That is quite possible; the incentives in many of the programs today waste a great deal of money that could and should be spent on access and quality of care.

But the “long run” is at least two years away, since the administration has stubbornly refused to negotiate entitlement reforms of any kind. Meanwhile, the broader reforms in both the House and Senate bills, and the Senate’s proposed pharmacy copay changes, can create momentum for real change that will benefit active duty military personnel while holding most current retirees harmless and securing a better future for retirees down the road.

Talent is a former U.S. senator from Missouri, a senior fellow at the American Enterprise Institute (AEI) and director of the Marilyn Ware Center for Security Studies’ National Security 2020 Project at AEI. Eaglen is a resident fellow at the Marilyn Ware Center for Security Studies at AEI.