The midrange estimates of future medical spending by the Department of Defense (DoD) presented in this study are somewhat different from the Congressional Budget Office's (CBO's) estimates of such spending in its March 2003 baseline. Starting from essentially the same level of budget authority in 2003, the midrange estimates in this paper show spending increasing more quickly than it does in CBO's baseline. Table C-1 compares the two projections in nominal dollars. By the last year of CBO's baseline, or 2013, the baseline estimate is less than $40 billion, while the midrange estimate is nearly $47 billion--a difference of about 18 percent.

The two projections differ because CBO's baseline assumes lower inflation rates over the period. In the case of the midrange estimates, medical care furnished through the operations and maintenance (O&M) accounts and salaries for military doctors and nurses paid from the military personnel accounts are estimated to grow at an average annual rate of about 5.1 percent in nominal terms. The midrange estimates provided in this study represent a projection of what spending would be if it increased at the same rates as those expected for national health expenditures. Those growth rates more closely reflect what spending would need to be in order to keep benefits the same in the face of rising health care costs.

In contrast, CBO's baseline projection for DoD's medical care is constructed using methods specified under the Balanced Budget and Emergency Deficit Control Act, which requires the use of specific (and in this case, lower) inflators. In particular, CBO projects spending for medical care furnished through the O&M accounts and pay for military doctors and nurses by increasing the current year appropriations for those items by a rate of inflation that reflects both the gross domestic product deflator and the employment cost index. That overall rate of inflation, averaging about 2.5 percent per year in nominal terms, is much lower than the estimated average increase in health care expenditures over the 2004-2013 period.

Unlike the estimates for medical spending in general, both the midrange estimates and CBO's baseline project the accrual payments for defense health care to increase at an annual nominal rate of 6.25 percent. The accrual charges are paid out of the military personnel accounts, which are adjusted to reflect the higher inflation rate. Table C-1 summarizes the comparison of the accrual and nonaccrual portions of DoD's medical spending.