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The Balanced Budget Act of 1997 authorized a three-year test--called Medicare subvention--that allows military retirees, their dependents, and survivors to enroll in a new Department of Defense (DOD) health maintenance organization (HMO). The goal is to offer accessible, quality care while keeping costs down for DOD and Medicare. Care for these beneficiaries at military treatment facilities is now provided on a space-available basis that lacks the continuity so important to many older retirees. Under the Medicare subvention demonstration, Medicare will pay DOD for health care provided to retirees at six sites. DOD will provide enrollees with the full range of Medicare-covered services as well as some additional ones. In principle, beneficiaries, DOD, and Medicare could all gain under subvention. GAO is required to report annually on the demonstration's effect on Medicare costs. The demonstration was not fully implemented at all sites until January 1999, so there is not yet enough evidence to assess subvention's cost to Medicare. Consequently, this report focuses on the ability of DOD's data systems to (1) determine DOD's historical "level of effort" and Medicare payments and (2) manage the demonstration and assess its costs effects.