To permit Medicare-eligible retired members of the Armed Forces and their Medicare-eligible dependents to enroll in the Federal Employees Health Benefits program.

Directs the Secretary of Defense to enter into an agreement with the Office of Personnel Management (OPM) under which current or former military personnel who are or become entitled to hospital insurance benefits under part A of title XVIII (Medicare) of the Social Security Act are offered enrollment in a Federal employees health benefits plan in lieu of receiving care in military treatment facilities or through the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS). Allows such enrollment for any dependent of such individual if the dependent is entitled to health care under CHAMPUS and is or becomes entitled to hospital insurance benefits under Medicare. Outlines provisions concerning: (1) contributions for such coverage; (2) management of member participation; and (3) cancellation of coverage. Directs the Secretary and the OPM Director to report jointly to the Congress each year on the provision of such services to eligible persons during the preceding fiscal year. Requires the Secretary to offer such health benefits option no later than October 1, 1997.