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GAO-01-164R 1 (2000-10-31)

handle is hein.gao/gaobaalnb0001 and id is 1 raw text is: I Accountability * Integrity * Reliability United States General Accounting Office Washington, DC 20548 October 31, 2000 Ms. Jeanne Fites Deputy Under Secretary of Defense, Program Integration Department of Defense Ms. Gwendolyn Brown Deputy Assistant Secretary of Defense, Health Budgets and Financial Policy Department of Defense Subject: DOD Retiree Health Benefits Liability: Evaluation of DOD's Sensitivity Analysis As part of our ongoing work with the Department of Defense (DOD) to prepare for auditable financial statements, we have worked extensively with the Office of Actuary and with Health Affairs on developing and reporting a reliable estimate for the postemployment health care benefits due to military retirees, their dependents, and survivors. To calculate the military retiree health care benefits liability, the DOD Office of Actuary has contracted with a private sector firm of actuaries and consultants, Milliman & Robertson (M&R), which has significant experience in estimating health related liabilities. M&R uses an actuarial model that relies on historical information about the retiree population and the numbers, types, and costs of medical services provided to them. The model also uses economic, actuarial, and other assumptions, such as future interest rates and projected rate increases for medical costs. Using the M&R model, DOD estimated its military retiree health care benefits liability to be $196 billion in its fiscal year 1999 financial statements. To help DOD and its auditors focus their data improvement and audit efforts on the elements that have the most significant impact on the resulting liability calculation, we asked the DOD Office of Actuary to prepare a sensitivity analysis. A sensitivity analysis identifies key elements-data and assumptions as discussed above-and varies a single element while holding the others constant to determine what amount of change in that element is required to raise or lower the resulting liability by a set amount. In this way, data and assumptions can be risk-ranked for decision-making and auditing. As agreed to, when the Office of Actuary completed the sensitivity analysis, we (1) evaluated its completeness and accuracy and (2) reviewed the methodology used by M&R to calculate the retiree health benefits liability, including the actuarial model and individual calculations. Because of the technical nature of actuarial projections, we contracted with an independent accounting firm, Ernst & Young LLP, to assist us in this work. Our contractor provided actuarial expertise in reviewing documentation prepared by the Office of Actuary and by GAO-01-164R DOD's Sensitivity Analysis

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