Approximately 3.5 billion dollars of the Defense Budget for Fiscal Year 1997 was allocated for the care of non-active duty beneficiaries. This thesis is a pilot study exploring one option to restructure the military beneficiary health system. Two methods of health care delivery are examined: traditional fee-for-service plans, and health maintenance organizations (HMO) . The advantages, disadvantages, and cost implications associated with%inpatient care, in TRICARE Region 10, under the TRICARE Program and the Federal Employees Health Benefits Program are explored, using some recent historical data. The FEHBP fee-for-service costs were found to be higher than TRICARE Standard costs. It is inferred that allowing non-active duty military beneficiaries to participate in the HMO option of the FEHBP reduces out-of-pocket inpatient cost to the enrollee, and maintains or improves access to and quality of care. Costs to the government for inpatient care are reduced. Four cases are examined, determining out-of- pocket enrollee cost as well as savings to the government. Lastly, a Health Care Demands and Cost Probability model is developed; the model generalizes and is consistent with assumptions made for previous calculations, and could be adapted to determine outpatient costs as well. It allows government estimates of random variations in health care costs to be made.