U.S. Department of Defense Disability Compensation Under a Fitness-for-Duty Evaluation Approach

When a service member incurs one or more conditions that may render the member unfit to perform his or her duties, “has a medical condition that represents an obvious medical risk to the health of the member or to the health or safety of other members, and/or, has a medical condition that imposes unreasonable requirements on the military to maintain or protect the service member,” he or she will be referred to the joint Department of Defense (DoD)–Department of Veterans Affairs (VA) Integrated Disability Evaluation System (IDES) (U.S. Department of Defense Instruction 1332.18, 2014).¹ The IDES evaluates the service member's fitness for duty and determines disability benefits for those who are found unfit to continue serving and consequently medically discharged. At any given time, thousands of service members are in the IDES; and while they are being evaluated, they are nondeployable, which affects readiness. So there is an incentive for the system to work as efficiently as possible.

This process for determining fitness for duty and disability compensation is complex and involves numerous stakeholders in DoD and the VA. This complexity results from an effort to ensure that service members are given a complete and thorough evaluation for any potentially unfitting condition. The complexity can have adverse consequences, leading to a lengthy and potentially confusing evaluation process for members and extra time and resource costs to DoD. Through a series of reforms, DoD, the VA, and the services have made considerable progress in reducing processing times from an average of 400 days in 2011 to 224 days in 2018 and, through a number of new initiatives, are close to achieving a goal of 180 days (U.S. Government Accountability Office, 2012).

DoD also has a priority to ensure that service members receive adequate and fair disability compensation and that the DoD disability compensation system works efficiently and compatibly with the IDES. As a result, it is important to occasionally review the current compensation system to ensure that it still achieves this goal as the characteristics and needs of DoD and service members evolve over time. Although a number of proposals have outlined alternative approaches to compensating disabled service members, a rigorous evaluation of what those alternatives might look like, and what their impact would be on service member benefits and costs to DoD, has never been conducted.

In 2019 the Offices of the Deputy Assistant Secretary of Defense for Health Services Policy and Oversight and the Deputy Assistant Secretary of Defense for Military Personnel Policy asked the RAND National Defense Research Institute to identify alternative disability compensation approaches that would support a more streamlined disability evaluation process and to consider the effects on benefits to the service member, personnel readiness, and, where feasible, the direction and amount of cost change to DoD. Our study examines a streamlined disability evaluation approach referred to as a fitness-for-duty evaluation system (FES) that reduces the reliance on DoD disability ratings for determining DoD disability compensation and focuses primarily on a single decision of whether a service member is fit to perform his or her duties.

We developed four alternative compensation systems that would be compatible with a streamlined FES. We evaluated the effects of each alternative on service member compensation, processing times, end strength, lost skills and experience, and readiness. Our focus in this study is specifically on the DoD disability compensation system. The alternative approaches we consider are hypothetical, and none are being pursued by DoD as of the writing of this document.

In February 2020 DoD directed a parallel ratings process in the IDES. This change, which was fully implemented by the end of 2020, has shown early signs of success in terms of streamlining the IDES and reducing processing time. The parallel processing track of the IDES process includes the medical evaluation board and informal physical evaluation board stages (both DoD responsibility) occurring parallel to the VA proposed rating. Before parallel processing, these stages would occur sequentially. In fiscal year (FY) 2020, 36 days were saved on average in the IDES process because of parallel processing (U.S. Department of Veterans Affairs, 2021).²

Parallel rating is one of many options that could be used to improve the efficiency of the evaluation process. We developed the alternatives in this study in 2019, before parallel ratings, and they offer distinct options to streamline the system. In some ways, it may be possible to achieve equal or better gains in processing time with parallel rating than with the alternatives we present here. Yet the alternatives in this study also offer potential efficiency gains to other stages in the process that could not be addressed by parallel rating. Our analyses offer an in-depth assessment of alternative ways to streamline the system beyond the current policy initiatives and offer other options that could be implemented should policymakers and DoD decide that such a shift in the DoD disability evaluation and compensation system is warranted.

Department of Defense Disability Compensation Today

DoD disability compensation is determined based on a complex set of formulas. The DoD disability rating—determined in the IDES—has a direct connection to the disability compensation that a service member receives from DoD. If a service member receives a DoD disability rating of less than 30 percent and has fewer than 20 years of service, he or she will receive a onetime DoD disability severance payment. Service members with DoD disability ratings of 30 percent or higher, or those with 20 or more years of service, receive a disability retirement benefit for the remainder of their lives.

The DoD disability retirement benefit is calculated in two different ways. The rating-based formula uses the DoD disability rating percentage (up to a maximum of 75 percent) to calculate the benefit. The retirement formula uses a retirement multiplier to calculate the benefit based on longevity of service instead of the disability rating. Title 10 USC 1212 states that the member is entitled to the highest benefit payment option.

Our analysis suggests that the retirement formula tends to yield a higher benefit for more-senior personnel; junior personnel tend to receive a higher benefit using the rating-based formula. Since most personnel in the IDES are relatively junior (E-4 to E-6), their disability benefits would be more likely to change (either increase or decrease) if use of DoD ratings were changed or eliminated. These differences need to be taken into account when considering alternative ways to compensate members under a FES, as they make it difficult to develop alternatives that have equal impact for all service members in the IDES.

Alternative Disability Compensation Approaches

We developed four alternatives for redesigning the DoD disability compensation system consistent with a FES:

• Alternative 1: Compensate based on current objectives. The current DoD compensation system formula incorporates the nature of the unfitting condition (e.g., musculoskeletal versus respiratory issues), the severity of the disability, and the military career accomplished to date. This alternative maintains these objectives of the current system. It has two options:
  • Alternative 1a: Alternative 1a presents the “lightest touch” option. The benefit for all service members would still rely on a disability rating and maintain the current DoD benefit formula, but unlike in the current IDES process, the rating would occur after discharge. Members would receive a transition benefit between the time that regular military compensation ends and the disability benefit begins.
  • Alternative 1b: Disability compensation for junior and senior personnel would be based on different formulas. Junior personnel would receive a disability rating and be compensated as they are under the current system. Compensation for senior personnel who are found unfit to continue serving would be based on a benefit formula that uses career metrics. This alternative formalizes the general pattern by which compensation is determined under the current system.
• Alternative 2: Compensate for military career. Service members would be evaluated for fitness for duty, and those found to be unfit would be compensated based on career metrics only. This alternative has three options:
  • Alternative 2a: This alternative takes a prospective approach. The current disability benefit would be replaced with a benefit based on an estimate of the expected value of the lost military career.
  • Alternative 2b: This alternative takes a retrospective approach. The disability benefit would be based on the career already served, using the current retirement pay formula with a floor of 12 years of service.
  • Alternative 2c: This alternative also takes a retrospective approach. The benefit would be based on the career already served, using the current retirement pay formula, but without any year-of-service floor, resulting in a lower cost than Alternative 2b.
• Alternative 3: Compensate for unfitting conditions. Service members would receive a fitness determination for each medical condition and receive a fixed payment for each condition that makes the member unfit for service. The severity of individual conditions would not be taken into account. Unfitting conditions could be defined using the Veterans Administration Schedule for Rating Disabilities.
• Alternative 4: Compensate like U.S. allies. As in the United Kingdom, Australia, and Canada, compensation under Alternative 4 would entail two payments: one payment to compensate for the disability itself and an annuity payment to compensate for the loss of the military career. In practice, this option would combine parts of Alternatives 2 and 3.

These alternatives highlight various possibilities of what a fitness-for-duty approach could look like. None of them is necessarily preferred. Any of these alternatives could be implemented by DoD, depending on its goals and priorities.

Changes in Disability Compensation Under the Alternatives

We considered how disability compensation could change under each of the alternatives. Although each compensation alternative would be feasible under a FES, each would change the value of compensation relative to the status quo for at least some service members or result in an increase in cost to DoD. The specific change in the disability benefit and the exact service members who would be affected depend on how the alternative would be implemented, but some general trends emerged from these assessments.

Alternative 1a would maintain benefits as under the current system. However, it moves the assignment of a DoD rating until after a member is discharged, which is not entirely compatible with the design of parallel ratings. Alternative 1b would also maintain benefits at the status quo level for most members, but senior members with relatively severe disability ratings would experience a decrease in benefit relative to the status quo.

Alternatives 2 and 3 yield mixed results, with some service members seeing an increase, others seeing a decrease, and others having no change relative to the status quo. Alternatives 2b, 2c, and 3 tend to result in larger decreases in benefits for service members with more severe disabilities (as measured by DoD ratings used under the current system). Under Alternative 2a, many service members would experience an increase in benefits relative to the status quo.

Alternative 4 would combine the benefits provided under 2a and 3. Both Alternatives 2a and 3 independently offer scenarios where service members could experience a decrease in benefits, and it is unclear which direction the effect will go when the benefits are combined. It is possible that many service members could see an increase in benefits relative to the status quo.

In sum, with the exception of Alternative 1a, none of the alternatives guarantee that all service members would see benefits at least as large as the benefits they would qualify for under the status quo. These alternatives also could have implications for costs to DoD. While a complete cost assessment is beyond the scope of our study, we provide estimates of the effect on cost for some alternatives. In particular, Alternative 1a would increase the overall cost to DoD due to the addition of a transition benefit and would require coordination with the VA to change the timing of the ratings step in the evaluation process.³ Figure 1 summarizes our findings on the effects on compensation and costs (where feasible) across each alternative.

Alternative 1a: Compensate based on current objectives

No change in disability benefits relative to the status quo, but total cost increases due to transition benefit if end strength is maintained.

Alternative 1b Compensate based on current objectives

No change in disability benefits relative to the status quo for junior or senior members whose current benefit is based on retirement

Decline in benefits relative to the status quo for senior members whose current benefit is based on ratings

Alternative 2 (a–c): Compensate for military career

Disability benefits relative to the status quo increase for some, decrease for others, depending on rating under current system, grade, and years of service

Alternative 3: Compensate for unfitting conditions

Disability benefits relative to the status quo depend on fixed payment amount: could increase for those with lower payments and fall for those with higher payments

Alternative 4: Compensate like U.S. allies

Hybrid of Alternatives 2 and 3: results vary depending on size of fixed payment

Other Implications of a Fitness Evaluation System

The value of benefits is only one dimension by which a FES should be evaluated. It is also important to understand the implications of removing ratings on the timing of the process itself, end strength, and human capital:

• IDES processing time. Eliminating or delaying ratings until after discharge would reduce the length of the IDES process by approximately 29 days on average, or about 13 percent of the average duration in 2018, and may also reduce some of the variability in the process. This time savings could be a lower-bound estimate if eliminating ratings lead to efficiencies in other steps in the process, such as the medical evaluation or appeals.
• This assessment of the time savings is estimated based on alternatives that do not make use of parallel ratings, and this reduction is based on data reflecting the average duration of the ratings stage under a sequential process. As noted earlier, preliminary estimates from FY 2020 suggest that 36 days were saved in the IDES process because of parallel processing, meaning that the implications of a parallel ratings system could be similar to what we estimate would be achieved under the FES alternatives we analyze.
• Change in end strength. Army enlisted represents the majority of IDES referrals. Under a FES, active-duty end strength for the Army enlisted force would fall by at most 0.2 percent more than under a sequential ratings system. We estimate that there would be similar, though slightly smaller, effects on the other services. This drop is among people who are not deployable, so the services could choose to maintain end strength with deployable members (through accessions or by increasing retention), thereby increasing readiness. Our analysis of one common occupation, Army-enlisted infantry soldiers (11B), showed that increasing accessions is the most cost-effective way of restoring end strength.
• Human capital loss. The loss of personnel who are discharged because of disability represents a loss of skills and experience. The process envisioned under the alternatives would accelerate human capital loss relative to the status quo as members are discharged faster. The most common occupations for members discharged through the IDES are general infantry and general medical care, supply, law enforcement, and automotive occupations. On average, the training associated with these occupations is relatively modest, although the training and experience of officers who exit the military as a result of disability are substantial.
• Policies and legislation. Finally, the policies and legislation underpinning the current system are complex and interconnected, and many of them directly rely on, or reference, disability ratings. For example, the term rating is used numerous times in Title 10, Chapter 61, and the DoDI for the IDES. Nearly all of these references are substantive in nature in that they serve to delineate how determinations of compensation are made, as well as what appellate options are available to those service members who are designated disabled. As a result, many aspects of Title 10, Chapter 61, would likely require repeal or amendment under a shift to a FES, and associated authorities would then require rescissions, changes, or reissuances.

Concluding Thoughts

While alternative approaches for compensation under a FES are possible, our analyses indicate that numerous process, legal, and compensation-related changes would be required. However, any FES should be evaluated not only on the direct costs and benefits but also on what objectives policymakers want the DoD compensation system to achieve.

For example, if DoD were to decide that DoD disability compensation should be based solely on career metrics and other compensation objectives should be addressed by the VA, that would provide justification for pursuing Alternative 2. Similar arguments could be made for other alternatives if broader policy objectives are best met by compensating on the basis of disability severity, unfitting conditions, or the approach undertaken by our allies. Furthermore, the end result could be a simpler and more streamlined disability compensation system.

A choice of any one of these alternatives over another is beyond the scope of this study, and none of these alternatives is actively under consideration at the time this study was published. However, the analyses discussed in this study offer a framework that decisionmakers could reference should the department consider moving to a FES in the future.