Federal Budget: Cap Military Raises, Hike Retiree Health Fees

Trying once more to get military compensation costs "under control," the Obama administration has asked Congress to cap annual active duty and reserve component pay raises, and to phase in over four years a complex formula for raising TRICARE fees on retirees of all ages and their families.

The five-year budget plan unveiled Wednesday proposes that annual pay raises be held at one percent from 2014 through 2016 and be raised to 1.5 percent in 2017 and to 2.5 percent in 2018, said Robert Hale, the Department of Defense's under secretary and comptroller.

The first year's pay cap alone, which would trim just eight-tenths of a percentage point off a scheduled 1.8 percent increase to match of private sector wage growth, would save $540 million in 2014 and $3.5 billion through 2018, officials said.

As in years past, the administration seeks to cut health costs by having retirees and families pay more under all three options of TRICARE.

Here are details of these proposals:

TRICARE Prime – The current family enrollment fee of $539 for working-age retirees (under age 65) would increase next year to equal 2.95 percent of the individual's gross retired pay. But for 2014 the fee would be subject to an annual minimum, or floor, of $548 and a ceiling of $750 ($900 for flag officers). The fee would be raised to 3.3 percent of gross retired pay in 2015 with a floor of $558 and ceiling of $900 ($1200 for flag); 3.65 percent in 2016 with floor of $569 and ceiling of $1050 ($1500 for flag); and so on until reaching 4 percent of gross retired pay in 2018 with a floor of $594 and ceiling of $1226 ($1840 for flag).

Fees for single coverage would be half these amounts.

TRICARE Standard/Extra – For the first time, users of these options would face an annual enrollment fee, starting at $70 for single coverage or $140 for family, and rising each year until reaching $125 (individual) and $250 (family) in 2018. Also, the current annual deductible of $150 (individual) and $300 (family) would gradually increase, starting in 2014 and until it reached $290 (individual) and $580 (family) in 2018.

Adjustments – After 2018, all TRICARE enrollment fees, floors and ceilings, and deductibles for retirees would climb yearly by the same percentage increase of cost-of-living adjustments (COLAs) for military retired pay to keep pace with inflation.

TRICARE for Life – Beneficiaries 65 and older can use TRICARE for Life as a golden supplement to Medicare. Officials said a comparable individual policy in 2009 would cost $2100 in the private sector. So, they reason, military elderly should at least pay a small enrollment fee. But these changes would be grandfathered to impact only retirees who become TFL beneficiaries after enactment.

The fee would equal one half of one percentage point of gross retired pay in 2014; one percent in 2015; 1.5 percent in 2016, and two percent in 2017 and in 2018. But the fees would have ceilings: no more $150 a year in 2014; no more than $300 in 2015, $450 in 2016, $600 in 2017 and no more than $618 in 2018. Flag officers would face higher ceilings though not substantial. After 2017, these fees would be adjusted by the percentage of retiree COLAs.

Pharmacy Fees – The administration wants to follow last year's increases in pharmacy co-pays with additional increases phased in to encourage greater use of mail order and generic drugs.

Catastrophic Cap – The current cap on total out-of-pocket costs TRICARE costs of $3000 a year would be raised for retirees in two ways: by excluding any TRICARE enrollment fees from counting toward the cap; and by raising the cap annually by the percentage of retiree COLA.

Officials hope tying the size of fees to level of retired pay will soften resistance in Congress. Also, this year's plan would exempt from any fee increases the survivors of members who die on active duty and persons medically retired from service. And the department no longer is asking that TRICARE fees be adjusted annually based on medical inflation.

That concession to use retiree COLAs instead might be less than it appears. The Obama budget proposes, as part of a larger debt-reduction deal, that all federal COLAs, including for social security, veteran benefits and retirement plans, switch to a "chain" Consumer Price Index to measure inflation. This CPI would save the billions of dollars annually by shaving every COLA by a fraction of a percentage point.

Obama's support for it is conditional; Republicans must agree to close some corporate tax loopholes and to raise taxes on the wealthy. Still, Obama support of chain CPI has drawn fire from some Democrats and liberals in Congress. Sen. Bernie Sanders, an independent from Vermont who chairs the veterans affairs committee, added language to the Senate's non-binding budget resolution to oppose it. If the chain CPI is adopted, said Sanders, "veterans who started receiving VA disability benefits at age 30 would have their benefits reduced by $1,425 [a year by] age 45."

In unveiling the 2014 defense budget request, Defense Secretary Chuck Hagel said the smaller pay raises and TRICARE changes would save $1.4 billion next year and $12.8 billion over just five years. The TRICARE changes, he said, would "bring the beneficiary's cost-share closer to the levels envisioned when the program was first implemented."

In 1996, officials said, retirees covered 27 percent of total TRICARE costs with enrollment fees, deductibles or co-payments. Today, their out-of-pocket costs cover only 11 percent.

Asked to recall how hard it was to vote for higher TRICARE fees when he was a senator, Hagel said times are different now. When he left Congress in 2009 the global financial crisis was just beginning. Today, the Department of Defense is struggling with $41 billion in automatic cuts this year from budget sequestration. It faces $500 billion in more cuts over the next decade if the administration and Congress can't partner on a solution.

The $527 billion defense budget for 2014 assumes that a large debt-reduction deal is reached and sequestration ends. The defense share of the deal would be $150 billion in cuts over the decade versus $500 billion under sequestration. If slowing compensation growth isn't as part of that $150 billion cut, Defense officials said, deeper force cuts are inevitable.