oversight

VA Disability Compensation: Disability Ratings May Not Reflect Veterans' Economic Losses

Published by the Government Accountability Office on 1997-01-07.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Chairman, Subcommittee
                on Compensation, Pension, Insurance
                and Memorial Affairs, Committee on
                Veterans’ Affairs, House of
                Representatives
January 1997
                VA DISABILITY
                COMPENSATION
                Disability Ratings May
                Not Reflect Veterans’
                Economic Losses




GAO/HEHS-97-9
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-274058

      January 7, 1997

      The Honorable Terry Everett
      Chairman, Subcommittee on Compensation,
        Pension, Insurance and Memorial Affairs
      Committee on Veterans’ Affairs
      House of Representatives

      Dear Mr. Chairman:

      The Department of Veterans Affairs’ (VA) disability program is required by
      law to compensate veterans for the average loss in earning capacity in
      civilian occupations that results from injuries or conditions incurred or
      aggravated during military service. These injuries or conditions are
      referred to as “service-connected” disabilities. Veterans with such
      disabilities are entitled to monthly cash benefits under this program even
      if they are working and regardless of the amount they earn.

      In fiscal year 1995, VA paid about $11.3 billion to approximately 2.2 million
      veterans who were on VA’s disability rolls at that time. Over the past 50
      years, the number of veterans on the disability rolls has remained fairly
      constant. During this period, the disability rolls were at their lowest level
      in fiscal year 1946 with a total of about 1.9 million veterans and at their
      highest during fiscal years 1978 through 1984 with a total of about
      2.3 million veterans each year.

      The amount of compensation veterans with service-connected conditions
      receive is based on the “percentage evaluation,” commonly called the
      disability rating, that VA assigns to these conditions. VA uses its “Schedule
      for Rating Disabilities” to determine which rating to assign to a veteran’s
      particular condition. VA is required by law to readjust the schedule
      periodically on the basis of “experience.” Since the 1945 version of the
      schedule was developed, questions have been raised on a number of
      occasions about the basis for these disability ratings and whether they
      reflect veterans’ current loss in earning capacity.

      This report responds to your request for information that would enable the
      Subcommittee to assess the need for a comprehensive study of the
      economic validity of VA’s rating schedule. It describes (1) the basis for the
      disability ratings assigned to conditions in the current schedule;
      (2) socioeconomic changes that have occurred since the original version
      of the schedule was developed that may have influenced the earning




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                   capacity of disabled veterans; (3) the results of a previous study that
                   examined the validity of ratings in the schedule; (4) VA’s efforts to help
                   ensure that the ratings do reflect disabled veterans’ average impairment in
                   earning capacity; and (5) the advantage of basing ratings in the schedule
                   on actual loss in earnings, and approaches that could be used to estimate
                   this loss.

                   To develop this information, we analyzed legislation and reviewed
                   documents on the history of the program and had discussions with current
                   and former VA officials and representatives from veterans service
                   organizations (VSO) familiar with the program’s history. We also reviewed
                   the results of the President’s Commission on Veterans’ Pensions (known
                   as the Bradley Commission) study and the Economic Validation of the
                   Rating Schedule (ECVARS). We discussed the ECVARS and its results with VA’s
                   Office of Inspector General and Compensation and Pension officials and
                   former VA officials familiar with this study.

                   To identify possible approaches VA could use to evaluate and update its
                   rating schedule to help ensure that ratings reflect the average reduction in
                   veterans’ earning capacity, we reviewed literature on research design and
                   methods and reviewed the ECVARS methodology. We also obtained the
                   views of Bureau of the Census, Social Security Administration, and Bureau
                   of Labor Statistics officials, economists, statisticians, and research
                   methodologists.

                   We did our work from April 1995 to December 1996 in accordance with
                   generally accepted government auditing standards.


                   The disability ratings in VA’s current schedule are still primarily based on
Results in Brief   physicians’ and lawyers’ judgments made in 1945 about the effect
                   service-connected conditions had on the average individual’s ability to
                   perform jobs requiring manual or physical labor. During fiscal year 1995,
                   disabled veterans’ basic monthly benefit ranged from $89 for conditions
                   rated at 10 percent to $1,823 for conditions rated at 100 percent. Veterans
                   rated at 100 percent who have special needs, however, could receive up to
                   a total of $5,212 monthly.

                   Although the ratings in the schedule have not changed substantially since
                   1945, dramatic changes have occurred in the labor market and in society
                   since then. The results of an economic validation of the schedule
                   conducted in the late 1960s indicated that ratings for many conditions did



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not reflect the actual average loss in earnings associated with them.
Therefore, it is likely that some of the ratings in the schedule do not reflect
the economic loss experienced by veterans today. Hence, the schedule
may not equitably distribute compensation funds among disabled veterans.

VA has done little since 1945 to help ensure that disability ratings
correspond to disabled veterans’ average loss in earning capacity. Despite
the results of the economic validation study, VA’s efforts to maintain the
schedule have concentrated on improving the appropriateness, clarity, and
accuracy of the descriptions of the conditions in the schedule rather than
on attempting to ensure that the schedule’s assessments of the economic
loss associated with these conditions are accurate. For example, some of
the criteria have been revised to describe more accurate measures of
disease severity or to recognize the effects of medical and technological
advances on particular disabilities.

Basing disability ratings at least in part on actual earnings loss rather than
solely on judgments of loss in functional capacity would help to ensure
that veterans are compensated to an extent commensurate with their
economic losses and that compensation funds are distributed equitably.
For example, according to the schedule, loss of the use of a hand has a
disability rating of 60 percent for the nonpredominant hand and 70 percent
for the predominant hand because such a loss is expected to reduce
veterans’ earning capacity on average by 60 and 70 percent, respectively.
However, VA’s economic validation study in the late 1960s showed that the
reduction in earning capacity that veterans who had lost the use of a hand
experienced was, on average, closer to 40 percent. In contrast, veterans
who had a disability rating of 70 percent for pronounced psychotic
conditions were found, on average, to have experienced a reduction in
earnings closer to 80 percent.

Our work demonstrates that there are generally accepted and widely used
approaches to statistically estimate the effect of specific
service-connected conditions on veterans’ average earnings. These
estimates could be used to set disability ratings in the schedule that are
appropriate in today’s socioeconomic environment. It could cost between
$5 million and $10 million to collect the data that produce these estimates,
a small fraction of the over $11 billion VA paid in disability compensation
to veterans in fiscal year 1995.




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                           The law directs VA to compensate veterans for their service-connected
VA’s Disability            physical or mental conditions according to a schedule of disability ratings,
Compensation               which represents the average impairment in earning capacity that results
Program                    from these conditions. The first schedule was developed in 1919 and has
                           undergone many changes since then. The Schedule for Rating Disabilities
                           includes a list of physical and mental conditions with disability ratings
                           assigned to each. These ratings are used to determine the amount of
                           compensation that veterans are entitled to receive on the basis of their
                           specific conditions.


VA’s Schedule for Rating   Federal law (38 U.S.C. 1110 and 1155) requires VA to “adopt and apply a
Disabilities               schedule of ratings of reductions in earning capacity from specific injuries
                           or combination of injuries” to determine the amount of compensation
                           disabled veterans are entitled to receive. The ratings are to be based, “as
                           far as practicable, upon the average impairments of earning capacity
                           resulting from such injuries in civil occupations.” The law gives the chief
                           administrator of VA the discretion to define “average impairments in
                           earning capacity” and the authority to readjust the schedule to help ensure
                           that disability ratings reflect VA’s experience.

                           The War Risk Insurance Act of 1917 called for the creation of the first
                           rating schedule. The schedule was developed in 1919 and provided an
                           early framework for the basic design of the current compensation and
                           pension programs for disabled veterans. It underwent major revisions in
                           1921, 1925, 1933, and 1945, becoming more comprehensive with each
                           major revision (see fig. 1). The last major revision to the schedule was
                           made in 1945.




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Figure 1: History of VA’s Schedule for Rating Disabilities


    1917                                • War Risk Insurance Act called for the creation of a rating schedule.
                                        • War Risk Insurance Act amendments called for adoption of a rating
    1918                                  schedule based on average impairment in earning capacity.
    1919
    1920
    1921                                • Rating schedule revised.
                                        • Schedule contained guidelines for rating disabilities.
    1922                                • Schedule divided into sections: neuropsychiatric and surgical
                                          disabilities; eye, ear, nose, and throat difficulties; and dental
    1923
                                          conditions.
    1924
    1925                                • Rating schedule revised.
                                        • Schedule followed the California workmen’s compensation system of
    1926                                  rating disabilities (not based on average impairment in earning
    1927                                  capacity for all occupations).
                                        • Schedule included general policy for rating disabilities.
    1928                                • Schedule contained index of diseases and injuries (beginning of
                                          diagnostic codes).
    1929                                • Instructions added on how to use the schedule.
    1930
    1931
    1932

    1933                                • Rating schedule revised.
                                        • VA reverted to the method of “averaging” for all occupations.
    1934                                • Revised ratings were based on the average impairment in earning
    1935                                  capacity.
                                        • Schedule added “multiple disabilities.”
    1936                                • Gynecological conditions added to schedule.

    1937

    1938
    1939
    1940

    1941
    1942                                • Rating schedule revised to reflect advances in science, technology,
                                          and medicine.
    1943                                • New diagnostic codes added.
                                        • Disabilities indexed numerically under systems.
    1944                                • Disabilities identified by a code series.
    1945                                • Schedule serves as benchmark for current rating decisions.




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                                        The Schedule for Rating Disabilities contains medical criteria and
                                        disability ratings. The medical criteria consist of a list of diagnoses
                                        organized by body system and a number of levels of medical severity
                                        specified for each diagnosis. The schedule assigns a percentage
                                        evaluation, commonly referred to as a disability rating, to each level of
                                        severity associated with a diagnosis. The disability rating conceptually
                                        reflects the average impairment in earning capacity associated with each
                                        level of severity. For example, VA presumes that the loss of a foot as a
                                        result of military service results in a 40-percent impairment in earning
                                        capacity, on average, among veterans with this injury. All veterans who
                                        lose a foot as a result of military service, therefore, are entitled to a
                                        40-percent disability rating whether this injury actually reduces their
                                        earning capacity by more than 40 percent or not at all. Ratings for
                                        individual diagnoses in the schedule range from 10 percent to 100 percent
                                        in gradations of 10 (see table 1).1

Table 1: Number of Veterans Receiving
Disability Compensation During FY                                                                                                 Number of
1995, by Degree of Disability           Degree of disability (percent)                                                             veterans
                                        0                                                                                              18,588a
                                        10                                                                                            886,279
                                        20                                                                                            365,241
                                        30                                                                                            308,377
                                        40                                                                                            183,679
                                        50                                                                                            108,583
                                        60                                                                                            106,798
                                        70                                                                                             60,770
                                        80                                                                                             37,488
                                        90                                                                                             16,592
                                        100                                                                                           143,280
                                        Total                                                                                       2,235,675
                                        a
                                          While 0-percent ratings are normally noncompensable, some veterans may receive special
                                        monthly compensation for such things as the loss of a procreative organ.

                                        Source: VA, Annual Report of the Secretary of Veterans Affairs—Fiscal Year 1995 (Washington,
                                        D.C.: VA, Mar. 1996).



                                        1
                                         A veteran can also receive a 0-percent noncompensable rating that may be increased to a
                                        compensable rating of 10 percent or more if the veteran’s condition worsens. A 0-percent rating
                                        generally means that VA has determined that a veteran has a condition that can be classified as service
                                        connected; however, it is not severe enough to qualify for monetary compensation on the basis of the
                                        medical criteria specified in the schedule. Some veterans with a 0-percent rating receive special
                                        monthly compensation under the VA disability program. On the basis of 1994 data, VA estimated there
                                        were about 1.2 million veterans who were rated at 0 percent and were not receiving disability
                                        compensation.



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Disability Compensation   The amount of compensation veterans are awarded for their disabilities is
Amounts                   based on (1) the disability rating the schedule assigns to a veteran’s
                          specific condition and (2) the specific benefit amount the Congress sets
                          for each of these disability rating levels. To determine what basic
                          compensation a veteran with a service-connected condition is due, first
                          the veteran’s condition is medically evaluated to determine its severity.
                          Then VA compares the results of the evaluation with the medical criteria in
                          the schedule to determine what disability rating is warranted given the
                          severity of the veteran’s condition. The veteran will receive the amount the
                          Congress has set for that disability rating.

                          The Congress has adjusted the benefit amounts for each disability rating
                          level annually. In fiscal year 1995, the basic monthly benefit amount
                          ranged from $89 for conditions assigned a rating of 10 percent to $1,823 for
                          conditions assigned a rating of 100 percent (see table 2).

                          Although the primary purpose of VA’s disability compensation program is
                          compensation for impairment in earning capacity, the program also
                          provides for additional monthly compensation over and above the amount
                          based on the schedule, for loss of “physical integrity.” Loss of physical
                          integrity is defined as tissue loss, loss of body parts, or any disease or
                          injury that makes an individual less functionally whole. The law (38 U.S.C.
                          1114) provides for additional monthly compensation for such things as the
                          loss of a hand, foot, eye, or procreative organ.

                          VA regulations also allow veterans to receive “extra-schedular” awards
                          when VA determines that the severity of a veteran’s condition is not
                          adequately captured by the rating the schedule assigns to it.
                          Extra-schedular awards allow veterans to receive compensation for a
                          rating higher than the one specified in the schedule for their condition. In
                          a case of unemployability, for example, if the criteria in the schedule
                          indicate that a veteran’s condition warrants at least a 60-percent disability
                          rating but VA determines that, on the basis of that veteran’s unusual
                          circumstances, he or she is unable to obtain and sustain gainful
                          employment, VA can raise the compensation for that veteran to the amount
                          provided for a 100-percent rating.

                          VA regulations also allow veterans to be compensated for “social
                          inadaptability” or “social impairment” to the extent it affects industrial
                          adaptability. Social inadaptability contemplates those abnormalities of
                          conduct, judgment, and emotional reactions that affect economic
                          adjustment, that is, that impair earning capacity.



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Table 2: VA Disability Compensation
Rates During FY 1995, by Degree of                                                                                                Monthly
Disability                            Degree of disability (percent)                                                                 rate
                                      10                                                                                                   $89
                                      20                                                                                                   170
                                      30                                                                                                   260
                                      40                                                                                                   371
                                      50                                                                                                   529
                                      60                                                                                                   666
                                      70                                                                                                   841
                                      80                                                                                                   974
                                      90                                                                                              1,096
                                      100                                                                                           $1,823a
                                      Note: Effective December 1, 1995, these rates were increased to the following: 10 percent—$91;
                                      20 percent—$174; 30 percent—$266; 40 percent—$380; 50 percent—$542; 60 percent—$683;
                                      70 percent—$862; 80 percent—$999; 90 percent—$1,124; and 100 percent—$1,870.
                                      a
                                        When veterans suffer from conditions that result in additional needs, such as special assistance
                                      in the home, they can receive up to $5,212 a month in disability compensation, including the
                                      basic benefit.

                                      Source: VA, Federal Benefits for Veterans and Dependents, 1995 ed., VA Pamphlet 80-95-1
                                      (Washington, D.C.: VA, 1995).



                                      In 1995, about 70 percent of the 2.2 million veterans on the rolls were
                                      being compensated for conditions with disability ratings of 30 percent or
                                      less for a total of nearly $2.8 billion, or about 25 percent of total benefits
                                      paid to veterans that year. Those rated 100 percent accounted for only 6
                                      percent of those on the disability rolls that year and received $3.7 billion,
                                      or about 32 percent of the total amount of benefits paid (see table 3).




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Table 3: Total Compensation Paid
During FY 1995 to Disabled Veterans,                                                                                       Percentage
by Degree of Disability                Degree of                                                                               of total
                                       disability             Number of       Percentage of                 Total             amount
                                       (percent)               veterans         all veterans          amount paid                 paid
                                       0                           18,588                 0.8         $ 14,917,200                     0.1a
                                       10                         886,279                39.6          950,119,200                     8.4
                                       20                         365,241                16.3          746,307,600                     6.6
                                       30                         308,377                13.8        1,068,338,400                     9.4
                                       40                         183,679                 8.2          913,666,800                     8.1
                                       50                         108,583                 4.8          762,907,200                     6.7
                                       60                         106,798                 4.8        1,256,940,000                    11.1
                                       70                          60,770                 2.7          892,731,600                     7.9
                                       80                          37,488                 1.7          659,898,000                     5.8
                                       90                          16,592                 0.7          330,303,600                     2.9
                                       100                        143,280                 6.4        3,707,430,000                    32.8
                                       Total                   2,235,675                100.0b    $11,303,559,600                 100.0b
                                       a
                                         While 0-percent ratings are normally noncompensable, some veterans may receive special
                                       monthly compensation for such things as the loss of a procreative organ.
                                       b
                                       Totals may not add to 100 percent because of rounding.

                                       Source: VA, Annual Report of the Secretary of Veterans Affairs—Fiscal Year 1995 (Washington,
                                       D.C.: VA, Mar. 1996).




                                       Disability ratings in the current schedule may not reflect the actual
Disability Ratings May                 economic loss that disabled veterans, on average, now experience. While
Not Reflect Economic                   the law contains no definition of “impairments in earning capacity,” ratings
Loss                                   assigned to conditions in the schedule are based more on judgments of the
                                       loss in functional capacity, rather than in earning capacity, resulting from
                                       these conditions. Advances in medicine and technology and changes in the
                                       economy and public policy and in the field of rehabilitation since 1945
                                       raise questions about whether ratings for specific conditions set 50 years
                                       ago reflect the average loss in earning capacity today among veterans with
                                       these conditions. In addition, studies conducted in the mid-1950s and the
                                       late 1960s concluded that the ratings in the schedule did not accurately
                                       reflect the reduction in earning capacity that disabled veterans
                                       experienced at those times and that the ratings needed to be updated.




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Impairments in Earning       The law gives the Secretary of Veterans Affairs the authority to determine
Capacity Not Defined in      what is meant by “average impairments in earning capacity” in civilian
the Law                      occupations. Although VA’s Economic Validation of the Rating Schedule
                             (ECVARS) in the late 1960s defined reduction in earning capacity as “the loss
                             or lowering of average income from wages or employment,” VA has not
                             defined in regulations what is meant by average impairment in earning
                             capacity other than to generally describe it as an economic or industrial
                             handicap.

                             Beginning at least as early as 1923, when assigning a rating to a condition,
                             VA used the loss in physical or overall functional capacity resulting from
                             that condition (or some other proxy, such as the average veteran’s ability
                             to compete for employment in the job market) as an indicator of average
                             impairment in earning capacity. According to an official in VA’s Office of
                             General Counsel, the average impairment in earning capacity in civilian
                             occupations means the impairment of an individual’s ability to engage in
                             any type of work available in the economy.


Functional Capacity Used     The actual loss in earnings associated with a service-connected condition
as an Indicator of Earning   has not been considered when determining the degree to which that
Capacity                     condition impairs earning capacity. Nor has it been considered when
                             determining the rating that condition should be assigned in the schedule.
                             In 1945, when the framework for the current schedule was developed, the
                             job market was oriented toward physical labor, and physical capacity was
                             expected to have a major influence on earning capacity. At that time, a
                             Disability Policy Board, consisting of doctors and lawyers, set the
                             disability ratings for the conditions contained in the schedule. According
                             to a former Director of VA’s Compensation and Pension Service, VA’s
                             Department of Medicine and Surgery, now the Veterans Health
                             Administration, provided the Board with a medical monograph—a detailed
                             description of etiology and manifestations—for each of the conditions
                             included in the schedule at that time. The Board used these monographs to
                             estimate the relative effects different levels of severity of a condition have
                             on the average veteran’s ability to compete for employment in the job
                             market. It set disability ratings on this basis. Thus, ratings for conditions
                             that limited physical ability, such as the loss of the use of an arm or leg,
                             were expected to greatly impair veterans’ average earning capacity and
                             were given a relatively high rating.

                             Since 1945, VA has made many revisions to the schedule. The revisions
                             have included modifications to medical criteria associated with the



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                            ratings, changes in the maximum convalescence period allowed before
                            requiring reevaluation of the condition, and addition of more levels of
                            evaluations or ratings. The revisions, however, have not been based on
                            empirical data on the effects certain conditions have on veterans’ earnings.

                            According to VA Compensation and Pension officials, the basic procedure
                            used to determine what disability rating to assign to a condition has not
                            changed since 1945. This determination has been and continues to be
                            based on the judgment of individuals with knowledge and expertise in this
                            area. When adjusting ratings for conditions already in the schedule or
                            assigning ratings to new conditions added to the schedule, VA’s goal has
                            been to maintain the internal consistency of the schedule over time. In
                            doing so, VA tries to ensure that new or adjusted ratings are consistent
                            with the ratings of analogous conditions and reasonable relative to all
                            other conditions. As a result, the ratings in the 1945 schedule have been, in
                            effect, the benchmark for all the ratings adjusted and added since then,
                            and VA officials acknowledge that the ratings in the current schedule are
                            consistent with the ratings developed in 1945.


Changes in the Economy      Even if functional capacity accurately approximated disabled veterans’
and Society Since 1945      reduction in earning capacity in 1945, changes have occurred since then
Indicate That Ratings May   that have implications for how accurately those ratings reflect disabled
                            veterans’ reduction in earning capacity today. Numerous technological and
Need Updating               medical advances have taken place, as well as economic changes, that
                            have created more potential for people to work with some conditions and
                            less potential for people to work with other conditions. There have also
                            been changes in the labor market and social attitudes toward the disabled
                            that may affect disabled veterans’ ability to work.

                            Since 1945, medical and technological advances have enabled individuals
                            with some types of disabilities to obtain and sustain employment.
                            Advances in the management of disabilities, like medication to control
                            mental illness or computer-aided prosthetic devices that return some
                            functioning to the physically impaired, have helped reduce the severity of
                            the functional loss caused by both mental and physical disabilities.
                            Electronic communications and assistive technologies, such as synthetic
                            voice systems, standing wheelchairs, and modified automobiles and vans,
                            have given people with certain types of disabilities more independence
                            and potential to work.




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There has also been a shift in the U.S. economy since 1945 from
predominantly labor and manufacturing to skill- and service-based jobs. In
the 1960s, earning capacity became more related to a worker’s skills and
training than to his or her ability to perform physical labor. Advancements
in technology, including computers and automated equipment, following
World War II and the Korean Conflict reduced the need for physical labor.
The goods-producing sector’s share of the economy—mining,
construction, and manufacturing—declined from about 44 percent in 1945
to about 21 percent in 1994. The service-producing industry’s share, on the
other hand—such areas as wholesale and retail trade; transportation and
public utilities; federal, state and local government; and finance,
insurance, and real estate—increased from about 57 percent in 1945 to
about 80 percent in 1994.

While the shift to a more service-oriented economy may have had a
positive effect on job opportunities for veterans with physical disabilities,
it may have had the opposite effect for those with some mental
impairments. However, new treatments and medications have made it
possible for individuals with some mental illnesses to function more fully
today. About 20 percent of the veterans on the disability rolls as of
September 30, 1995, were receiving compensation for psychiatric and
neurological conditions, whereas 80 percent were being compensated for
general medical or surgical conditions, or physical disabilities (see table
4).




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Table 4: Distribution of Veterans on
the Rolls in FY 1995, by Degree of                                    Total     Psychiatric and      General medical and
Disability and Major Medical Category       Degree of disability   number of neurological conditions  surgical conditions
                                                (percent)           veterans  Number of              Number of
                                                                               veterans     Percent   veterans      Percent
                                                                                             a              a
                                        0                              18,588                                      18,588              100
                                        10                            886,279       111,002              13       775,277              87
                                        20                            365,241         23,852               7      341,389              93
                                        30                            308,377         70,225             23       238,152              77
                                        40                            183,679         27,147             15       156,532              85
                                        50                            108,583         39,774             37        68,809              63
                                        60                            106,798         19,487             18        87,311              82
                                        70                             60,770         22,430             37        38,340              63
                                        80                             37,488         11,061             30        26,427              70
                                        90                             16,592          4,873             29        11,719              71
                                        100                           143,280         97,203             68        46,077              32
                                        Total                       2,235,675       427,054              19     1,808,621              81
                                        a
                                            Not applicable.

                                        Source: VA, Annual Report of the Secretary of Veterans Affairs—Fiscal Year 1995 (Washington,
                                        D.C.: VA, Mar. 1996).



                                        In addition, in recent decades there has been a trend toward greater
                                        inclusion of and participation by people with disabilities in the mainstream
                                        of society. Changes in public attitudes toward people with disabilities have
                                        resulted, over the past 2 decades, in public policy requiring the removal of
                                        environmental and social barriers that prevent the disabled from fully
                                        participating in the workforce as well as in their communities. The
                                        Americans With Disabilities Act of 1990 (ADA), which supports the full
                                        participation of people with disabilities in society, fosters the expectation
                                        that people with disabilities can work. The act prohibits employers from
                                        discriminating against qualified individuals with disabilities and requires
                                        employers to make reasonable work place accommodations for these
                                        individuals.


                                        Two major studies have been conducted since the implementation of the
Studies Have Found                      1945 version of the schedule to determine whether the schedule
That Ratings Need                       constitutes an adequate basis for compensating veterans with
Updating                                service-connected conditions. One was conducted by a presidential
                                        commission in the mid-1950s and a second by VA in the late 1960s. Both
                                        concluded, for various reasons, that at least some disability ratings in the



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schedule did not accurately reflect the average impairment in earning
capacity among disabled veterans and needed to be adjusted.

The President’s Commission on Veterans’ Pensions, commonly called the
Bradley Commission, was created in 1955 “to carry out a comprehensive
study of the laws and policies pertaining to pension, compensation, and
related nonmedical benefits” for veterans. As part of this study, the
Commission examined VA’s Schedule for Rating Disabilities. To determine
whether the schedule at that time constituted an adequate and equitable
basis for compensating disabled veterans, the Commission examined
(1) the medical criteria in the schedule and (2) the disability ratings
associated with these medical criteria.

On the basis of the results of a survey designed to obtain the views of
medical specialists nationwide, the Commission concluded that the
medical criteria in the schedule did not reflect the advances that had been
made in medicine since 1945. The Commission also asked 169 physicians
whether they believed the ratings fairly represented the average
impairment of earning capacity resulting from the various degrees of
severity of physical impairment. Forty percent of the 153 physicians who
responded believed that the ratings fairly represented average impairment
in earning capacity, 40 percent believed the ratings did not, and 20 percent
did not respond or gave vague responses. Many of those who believed the
schedule’s ratings in general fairly represented average impairment of
earning capacity, however, believed that the ratings for the lower disability
percentages (usually below 30 percent) did not.

The Commission’s comparison of the earnings and income of disabled
veterans with the earnings and income of nondisabled veterans and others
indicated that, with the exception of totally disabled veterans and elderly
disabled veterans, there was little difference in combined median annual
earned income of these groups. The Commission concluded that the
amount of disability compensation seemed to make up for the difference
in overall income between the two groups. But this compensation was not
based on the average impairment in earnings capacity. The Commission
observed that no studies had been conducted to measure the actual
impairment in earnings capacity among the disabled, and the standard
used to set disability ratings in the schedule was geared to the impairment
of the individual who performs manual labor. Thus, because “functional
physical capacity” has a major effect on a laborer’s ability to work, the
Committee concluded that physical impairment has been VA’s predominant
standard for setting disability ratings.



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In addition to presenting the results of its study, the Commission pointed
out that advances have been made in surgery, prosthetics, medical
treatment, and rehabilitation since the schedule was revised in 1945 and
that these advances could change the extent to which physical impairment
affects earning capacity. The Commission also noted that the job market
has shifted from predominantly manual labor jobs to more clerical and
service-oriented jobs. Thus, the Commission concluded that the rating
schedule tended to be less representative of the average impairment in
earning capacity of veterans who performed nonmanual labor jobs.

The Commission’s overall recommendation with regard to the schedule
was that it should be revised thoroughly on the basis of factual data to
ensure that it reflects veterans’ average reduction in earning capacity, as
required by law. The Commission stated that the basic purpose of the
program is economic maintenance and, therefore, it is appropriate to
compare periodically the average earnings of the working population and
the earnings of disabled veterans, and update the schedule accordingly to
help ensure that veterans are adequately compensated for the average
reduction in earnings they experience as a result of their
service-connected conditions.

In the late 1960s, VA conducted the ECVARS in response to the Bradley
Commission recommendations and recurring criticisms that ratings in the
schedule were not accurate. This study was designed to estimate the
average loss in earning capacity among disabled veterans by calculating
the difference between the earnings of disabled veterans, by condition,
and the earnings of nondisabled veterans, controlling for age, education,
and region of residence.2 The ECVARS is the most comprehensive
assessment of the validity of the ratings ever done. On the basis of the
results, VA concluded that of the approximately 700 diagnostic codes
reviewed, the ratings for 330 overestimated veterans’ average loss in
earnings due to their conditions, and about 75 underestimated the average
loss among veterans. For example, for the disarticulation of an arm
(amputation through the joint where the shoulder and arm join), VA
estimated a 60-percent rating more closely approximated veterans’ average
reduction in earning capacity than the 90-percent rating listed in the
schedule. VA also estimated that a 40-percent rating was more
representative of veterans’ average reduction in earning capacity for the
disarticulation of the thigh (with the loss of extrinsic pelvic girdle
muscles) than the 90 percent that was listed in the schedule. Some of the
ratings that underestimated veterans’ reduction in earning capacity were

2
 See app. I for a description of the scope and methodology of the ECVARS.



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                              assigned to mental conditions. For example, VA estimated that pronounced
                              neurotic symptoms so severe that they would impair a veteran’s ability to
                              obtain or retain employment would result in an 80-percent reduction in
                              earning capacity as opposed to the 70 percent listed in the schedule.


                              VA has not systematically reviewed and adjusted the disability ratings in
VA Has Not Taken              the schedule to reflect the current average impairment in earning capacity.
Adequate Steps to             Although the ECVARS found that many of the ratings in the schedule did not
Help Ensure That              correspond to the actual earnings loss experienced by veterans, no
                              changes were made to the schedule on the basis of these findings. Current
Ratings Reflect Loss          revisions VA is making to the schedule focus on updating medical criteria,
in Earnings                   not on ensuring that disability ratings accurately represent the effect that
                              service-connected conditions have on the average earning capacity of
                              disabled veterans, and few adjustments are being made to ratings in
                              conjunction with these revisions. When making adjustments to the ratings
                              or adding conditions to the schedule, VA relies on its experience
                              implementing the schedule and the responses it receives from the
                              proposed rule-making process to help ensure that ratings are appropriate.


Ratings Were Not Changed      On the basis of the results of the ECVARS, VA proposed adjustments to the
on the Basis of the Results   disability ratings and produced a revised schedule that included ratings it
of ECVARS                     believed more accurately represented the reduction in earning capacity
                              that veterans experience as a result of their service-connected conditions.
                              However, VA did not adopt this revised schedule. According to VA and VSO
                              officials, the schedule was not adopted because VA believed that the
                              Congress did not support it. Since the ECVARS was conducted, VA has not
                              done another comprehensive study to systematically measure the effect of
                              service-connected conditions on earnings.


Current Update Does Not       In a 1988 report,3 we reviewed the medical criteria in VA’s rating schedule
Assess the Extent to Which    to determine whether they were sufficiently current to ensure veterans
Ratings Reflect Economic      were being given accurate and uniform percentage ratings. We found that
                              VA could not ensure that veterans were given accurate and uniform ratings
Loss                          because the schedule had not been adjusted to incorporate recent medical
                              advances at that time. We recommended that VA update the medical
                              criteria in the schedule and keep them current. In response to these
                              recommendations, VA is in the process of systematically updating the

                              3
                                Need to Update Medical Criteria Used in VA’s Disability Rating Schedule (GAO/HRD-89-28, Dec. 29,
                              1988).



                              Page 16                                         GAO/HEHS-97-9 VA’s Disability Rating Schedule
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medical criteria in the rating schedule. VA is reviewing each major body
system in the schedule to ensure that the medical criteria for each
diagnosis are up to date. The objectives of the current update are to make
the criteria for assigning the disability ratings clearer, more objective, and
accurate.

To date, VA has revised the medical criteria for 8 of the 16 body systems
contained in the schedule. Revisions generally consist of such things as
(1) wording changes for clarification or reflection of current medical
terminology, (2) addition of alternative criteria, (3) addition of medical
conditions not in the schedule, (4) deletion of conditions that through
advances in treatment are no longer considered disabling, and
(5) reductions in the time period for reevaluating unstable conditions.4

Few revisions involved the disability ratings themselves. Of about 68
diagnostic codes subject to revision in the first 4 body systems VA
reviewed, the ratings for 12 were modified in some way. Of these 12
modifications, 3 resulted in obvious reductions in ratings, while none
resulted in obvious increases.5 None of these reductions in ratings,
however, will result in lower ratings for veterans currently on the
disability rolls. Federal law (38 U.S.C. 1155) specifies that changes in the
rating schedule will, in no event, reduce a veteran’s rating in effect when a
change occurs, unless the veteran’s condition has improved.

When a revision in the medical criteria or the addition of a new condition
to the schedule requires VA to adjust or set ratings for conditions, these
adjustments are generally based on the judgments of VA’s Compensation
and Pension staff. VA’s goal is to maintain the internal consistency of the
schedule over time by trying to ensure that new or adjusted ratings are
consistent with the ratings of analogous conditions and reasonable relative
to all others. For example, when VA added endometriosis to the schedule,
it tried to find a condition already listed in the schedule that was
analogous or comparable in terms of the physical impairment. On the basis
of the Veterans Health Administration’s medical monograph for this
condition, VA determined that the most severe outcome of having
endometriosis would be a hysterectomy, which was already in the
schedule under another diagnosis and has a disability rating of 50 percent.
VA, therefore, set the maximum evaluation for endometriosis at 50 percent.


4
 See app. II for examples of the types of changes made as a result of the current update of the rating
schedule.
5
 See app. III for a summary of the types of changes made to the rating schedule as a result of updating
4 of the 16 body systems.



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                                  VA then set disability ratings for the less severe symptoms associated with
                                  endometriosis. In setting the rates for the less severe symptoms, VA
                                  Compensation and Pension personnel told us that they used their best
                                  judgment or experience, or both, to estimate the amount of time an
                                  individual might lose from work as a result of this condition. VA set the
                                  rating at 30 percent for moderate symptoms and 10 percent for milder
                                  symptoms (see table 5).

Table 5: Disability Ratings for
Endometriosis                                                                                                     Disability
                                                                                                                     rating
                                  Symptoms                                                                        (percent)
                                  Lesions involving bowel or bladder confirmed by laparoscopy, pelvic pain
                                  or heavy bleeding not controlled by treatment, and bowel or bladder
                                  symptoms                                                                               50
                                  Pelvic pain or heavy or irregular bleeding not controlled by treatment                 30
                                  Pelvic pain or heavy or irregular bleeding requiring continuous treatment for
                                  control                                                                                10



VA’s Process for Setting          When it proposes changes to the schedule, VA relies on its experience in
and Adjusting Ratings             implementing the schedule, on feedback from veterans and VSOs, and on
Does Not Factor in Loss in        the comments it receives from the public. According to VA officials, the
                                  feedback they have received from veterans and VSOs over time about the
Earnings                          schedule and VA’s experience implementing it indicate that veterans
                                  appear to be generally satisfied with the ratings in the schedule. The VSO
                                  officials we contacted believe that VA’s disability rating schedule is a
                                  well-constructed document that has withstood the test of time. They also
                                  believe that ratings in the schedule generally represent the average loss in
                                  earning capacity among disabled veterans.

                                  Under the proposed rule-making process, proposed changes to the
                                  schedule are published in the Federal Register, and veterans and others
                                  are given the opportunity to comment on these changes before they are
                                  adopted. According to VA officials, veterans have made relatively few
                                  comments on changes currently proposed, which they believe suggests
                                  that current changes are acceptable.

                                  Because the schedule appears to be widely accepted, VA officials believe
                                  that the process they use is adequate to ensure that ratings fairly
                                  accurately represent veterans’ average impairment in earning capacity,
                                  and therefore there is no need to further assess their appropriateness.




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                   Although VA has chosen not to do so, using an estimate of actual loss in
Using Data on      earnings to approximate loss in earning capacity would help VA make
Earnings Has       certain that veterans are compensated to an extent commensurate with
Advantages in      the economic losses attributable to service-connected conditions. This
                   would also help to ensure that disability compensation funds are equitably
Determining        distributed among disabled veterans given today’s work environment.
Impairment in      Unlike judgments about loss in functional capacity, estimates of actual
                   loss in earnings are objective and economic indicators of loss in earning
Earning Capacity   capacity.

                   When the 1945 schedule was developed, no study was done to determine
                   whether ratings based on loss in functional capacity correlated with
                   disabled veterans’ loss in earnings. Even if ratings did correlate with loss
                   in earnings at that time, in 1956 the Bradley Commission found that they
                   did not. The Commission recognized that the basic purpose of the program
                   was economic maintenance and that it was appropriate to compensate
                   disabled veterans on the basis of the average reduction in earnings they
                   experience as a result of their service-connected conditions. It
                   recommended updating the schedule periodically, primarily by using
                   estimates of the average loss in earnings experienced by disabled veterans.
                   The results of the ECVARS again illustrated that functional loss, even if it
                   had correlated with economic loss in 1945, did not accurately approximate
                   the economic loss associated with service-connected conditions in the late
                   1960s. When ratings based on functional capacity were compared with the
                   estimated loss in earnings experienced by disabled veterans, they often did
                   not coincide.

                   There are several advantages to using empirical data, as opposed to
                   judgments, to determine impairment in earning capacity. Estimates of the
                   loss in earnings resulting from service-connected conditions based on
                   empirical data are objective and more reliable than individuals’ judgments
                   about the effect these conditions may have. Such judgments can vary
                   greatly, as the results of the Bradley Commission’s survey of physicians
                   illustrate. Half of the physicians who responded to the survey believed the
                   ratings in the schedule fairly represented the average loss in earning
                   capacity resulting from the various degrees of severity of physical
                   impairment. The other half disagreed.

                   Judgments about the effect certain conditions may have on the ability to
                   function, work, or earn money do not allow VA to determine whether the
                   program is compensating disabled veterans to an extent commensurate
                   with their economic loss. If VA compared estimates of loss in earnings,



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                             based on empirical data, for specific conditions with the ratings for these
                             conditions, it could objectively determine whether the program was
                             achieving this goal and was distributing disability compensation equitably.


It Is Feasible to Base       The average impairment in earning capacity associated with specific
Estimates of Impairment in   service-connected conditions can be estimated by calculating the
Earning Capacity on          difference between what veterans with those conditions earn, on average,
                             and what they would have earned if they did not have those conditions.
Earnings Loss                The average loss in earnings associated with specific service-connected
                             conditions can be determined by using widely applied research designs for
                             estimating the effect of one variable on another. A number of decisions
                             would have to be made, however, with respect to an overall methodology
                             for a study that would produce these estimates, and a number of options
                             are related to each. Each option has implications for the cost of such a
                             study and the validity of its results. Our work suggests that it could cost
                             between $5 million and $10 million to conduct a study like this.


Widely Applied               Some generally accepted research designs for estimating the effect of one
Approaches Can Be Used       variable on another can be used to estimate the average loss in earnings
to Quantify the Effect of    associated with specific service-connected conditions. These designs are
                             widely applied. While no study that measures the effect of
Service-Connected            service-connected conditions on earnings loss will give absolutely
Conditions on Earnings       definitive results, many studies have demonstrated that it is possible to
                             produce acceptable estimates of the impact of one variable on another.
                             These designs have been used in policy analyses to examine the factors
                             affecting the growth of Social Security Administration disability programs,6
                             the role vocational rehabilitation plays in the tendency of disabled persons
                             to return to work,7 and the impact of job training on employment among
                             ex-offenders.8




                             6
                             K. Rupp and D. Stapleton, “Determinants of the Growth in the Social Security Administration’s
                             Disability Programs—An Overview,” Social Security Bulletin, 58:4 (Winter 1995), pp. 43-70.
                             7
                              J.C. Hennessey and L. S. Muller, “The Effect of Vocational Rehabilitation and Work Incentives on
                             Helping the Disabled-Worker Beneficiary Back to Work,” Social Security Bulletin, 58:1 (Spring 1995),
                             pp. 15-28.
                             8
                              M.A. Finn and K.G. Willoughby, “Employment Outcomes of Ex-Offender Job Training Partnership Act
                             (JTPA) Trainees,” Evaluation Review, 20:1 (Feb. 1996), pp. 67-83.



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                           Such designs have also been used in many studies that specifically
                           measured the impact of such things as military service,9 functional
                           impairments,10 and medical conditions such as epilepsy11 and arthritis12 on
                           wages and earnings. VA’s ECVARS is an example of one of these. It relied on
                           a design that is often used in policy analysis and program evaluation to
                           estimate the effect of service-connected conditions on the average
                           earnings of veterans on the VA disability rolls at that time. Given that other
                           studies have successfully employed methods for quantifying the effect
                           functional impairment and specific disabilities have on earnings, these
                           methods can also be applied to the question of how service-connected
                           conditions affect disabled veterans’ earning capacity.


Options for a Design and   In deciding how to conduct a study to estimate the effect of disability on
Methodology for            earning capacity, questions related to such things as scope and study
Estimating Loss in         design, data collection, and analysis would need to be addressed. The
                           feasibility and cost of a study designed to estimate the effect of
Earnings                   service-connected conditions on earnings would depend on the options
                           chosen relative to each of these. Following are some options we identified
                           during our review of the literature and discussions with experts.

Study Scope                The study’s scope—how comprehensive and specific it should be—would
                           need to be determined. Decisions about the scope will affect the overall
                           cost and feasibility of the study and the validity of the results. The study
                           could attempt to measure every condition’s effect on earnings at each
                           disability rating level or could select only certain conditions, depending on
                           (1) the extent to which a condition is thought to represent or be
                           represented by other conditions in the schedule or (2) the number of
                           veterans on the rolls with that condition. The more conditions examined
                           individually, the more costly and complicated the study is likely to be.
                           However, estimates for individual conditions are more valid if those
                           conditions are examined individually.

                           9
                            R.R. Bryant, V.A. Samaranayake, and A. Wilhite, “The Effect of Military Service on the Subsequent
                           Civilian Wage of the Post-Vietnam Veteran,” The Quarterly Review of Economics and Finance, 33:1
                           (Spring 1993), pp. 15-31.
                           10
                            M.L. Baldwin, L.A. Zeager, and P.R. Flacco, “Gender Differences in Wage Losses From Impairments:
                           Estimates From the Survey of Income and Program Participation,” The Journal of Human Resources,
                           29:3 (Summer 1994), pp. 865-87.
                           11
                            M. Famulari, “The Effects of a Disability on Labor Market Performance: The Case of Epilepsy,”
                           Southern Economic Journal, 58:4 (Apr. 1992), pp. 1072-87.
                           12
                             T. Pincus, J.M. Mitchell, and R.V. Burkhauser, “Substantial Work Disability and Earnings Losses in
                           Individuals Less Than Age 65 With Osteoarthritis: Comparisons With Rheumatoid Arthritis,” Journal of
                           Clinical Epidemiology, 42:5 (1989), pp. 449-57.



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Study Design                      It is possible to quantify the effect of service-connected conditions on
                                  earnings by estimating the difference between the actual earnings of
                                  veterans on the disability rolls and what their earnings would have been if
                                  they did not have their service-connected conditions. The actual earnings
                                  of disabled veterans can be measured directly. If it were possible to
                                  control which veterans would incur service-connected conditions,
                                  veterans could be randomly assigned to groups with or without a
                                  disability, and the difference between the earnings of these two groups
                                  would constitute the effect of disability on earnings. Since this is not
                                  possible, what disabled veterans would have earned if they were not
                                  disabled has to be approximated.

                                  The earnings of the disabled prior to the onset of their disabilities, or the
                                  earnings of a group of individuals who were not disabled, could be used
                                  for this approximation. Given the data requirements associated with
                                  estimating loss in earnings by comparing the earnings of veterans before
                                  and after the onset of disability, it may be more feasible to estimate this by
                                  comparing the earnings of disabled veterans with those of a comparison
                                  group of nondisabled individuals.

                                  When using the difference between the earnings of the disabled and
                                  nondisabled to estimate the effect of a service-connected condition on
                                  earnings, the goal would be to use a nondisabled group that is similar in as
                                  many ways as possible to the disabled group. The more equivalent the two
                                  groups are, the more able we are to assume that the difference in earnings
                                  is the result of the condition and not some other factor. Veterans who are
                                  not on the disability rolls, therefore, would seem to be an appropriate
                                  comparison group. However, veterans not on the disability rolls may differ
                                  from disabled veterans in other characteristics that could explain earnings
                                  differences, including gender, age, and whether the veteran has been out
                                  of the workforce for reasons such as institutionalization. Some of these
                                  factors could be considered when selecting the final comparison group for
                                  the study or conducting the statistical analysis of the data (see next
                                  section).

Controlling for Other Variables   If the study design chosen compared the earnings of the disabled with
That Affect Earnings              those of the nondisabled, the simple difference between the two would not
                                  necessarily represent the effect of the condition on earnings. To isolate the
                                  condition’s effect on earnings, other variables that may differ between the
                                  disabled and nondisabled group and also influence earnings would have to
                                  be controlled for. The more variables influencing earnings that are




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                             controlled for simultaneously, the more valid the estimates of the effect of
                             service-connected conditions on earnings.

                             Which variables to control for is another issue that the study’s
                             methodology would need to address. Some of the characteristics of both
                             disabled and nondisabled veterans that are believed to have an impact on
                             earnings are age, education, gender, race, and region of residence. The
                             number of variables controlled for could influence the cost and
                             complexity of the study.

                             Cross-tabulation and multiple regression are two statistical approaches
                             that can be used to control for the differences in the characteristics of
                             disabled and nondisabled veterans, other than disability status, that may
                             account for the difference in earnings. Cross-tabulation would involve
                             making comparisons of disabled with nondisabled veterans within
                             potentially many different subgroups of the control variables (for example,
                             age, gender, and education). Multiple regression allows the analyst to
                             more efficiently analyze a larger number of variables simultaneously than
                             does a series of cross-tabulations. Recent studies have used multiple
                             regression to estimate the influence of different variables on wages and
                             earnings.

Data Sources                 Where and how to obtain data on earnings and the characteristics of
                             veterans that may influence earnings is another decision to be made when
                             developing an overall approach for this type of study. Existing
                             administrative databases, such as Social Security Administration earnings
                             records and Internal Revenue Service tax records, as well as data from
                             national surveys, including the Survey of Income and Program
                             Participation and the Current Population Survey conducted by the Bureau
                             of the Census, contain information on earnings and, in some cases, other
                             characteristics of the general population. These databases could be used
                             in conjunction with information in VA administrative files to identify the
                             effect service-connected conditions have on disabled veterans’ earnings. If
                             data from these sources do not meet the requirements of this study or it is
                             not feasible to use these sources, original data need to be collected. If this
                             approach is necessary, sampling and data collection strategies for surveys
                             of veterans on and off the disability rolls would need to be developed.


Cost of Estimating Average   As a result of their experience with similar studies, officials at the Bureau
Impairment in Earning        of the Census estimated that it would cost between $5 million and
Capacity                     $10 million to conduct a study to determine the average impairment in



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               earning capacity resulting from all, or nearly all, the conditions in the
               schedule. The precise cost would depend on the study’s design and
               methodology.


               VA’s disability rating schedule has served as a basis for distributing
Observations   compensation among disabled veterans relative to their level of
               impairment in earning capacity since 1945. The schedule’s ratings do not,
               however, reflect the many changes that medical and socioeconomic
               conditions may have had on veterans’ earning capacity over the last 51
               years. Thus, the ratings may not accurately reflect the levels of economic
               loss that veterans currently experience as a result of their disabilities.

               Estimates of disabled veterans’ average loss in earnings attributable to
               specific service-connected conditions could be (1) compared with the
               ratings for these conditions to determine whether the ratings correspond
               to economic loss and (2) used to adjust ratings that do not reasonably
               reflect this loss. There are pros and cons, however, to developing
               earnings-based disability ratings.

               It is uncertain what overall effect earnings-based ratings would have on
               total program outlays in the short term. Estimates of loss in earnings might
               show that ratings are appropriate and accurately represent the average
               loss in the earnings veterans experience. On the other hand, they might
               show that ratings assigned to some conditions are not appropriate and
               either overestimate or underestimate veterans’ average loss in earnings.
               Even if a significant number of ratings in the schedule are reduced on the
               basis of these estimates, it would not result in any short-term reduction in
               program outlays. Veterans on the rolls are protected by law from being
               adversely affected if the disability ratings assigned to their conditions are
               reduced. If estimates indicate that some ratings should be increased, the
               Secretary of VA has the discretion to increase these ratings for veterans on
               the rolls at that time. If the Secretary decides to do so, in the short term,
               total program outlays would increase.

               The long-term effect of an earnings-based schedule on total program
               outlays is also uncertain. Depending on (1) the number of ratings
               increased and reduced, (2) which rating levels change, (3) how much the
               levels change, and (4) the number of people that are affected by these
               changes over time, total program outlays might increase, decrease, or
               remain about the same over the long term.




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                  It could cost between $5 million and $10 million to develop estimates of
                  the average loss in earnings veterans experience as a result of specific
                  service-connected conditions. The cost, however, represents a small
                  fraction of the approximately $11.5 billion in disability compensation
                  benefits paid to veterans in fiscal year 1995.

                  In our opinion, there is a distinct benefit to be derived from developing
                  these estimates and using them to adjust disability ratings in the schedule.
                  We recognize the uncertainty surrounding the effect that basing ratings on
                  loss in earnings might have on long-term program outlays. However, we
                  believe this uncertainty does not outweigh the benefit of ensuring that
                  disabled veterans receive appropriate and equitable compensation. In
                  addition, the cost of developing these estimates is not substantial relative
                  to the program benefits paid annually.


                  VA’sdisability ratings do not reflect the effect economic, medical, and
Matter for        other changes since 1945 may have had on disabled veterans’ earning
Congressional     capacity. Therefore, the Congress may wish to consider directing VA to
Consideration     determine whether the ratings for conditions in the schedule correspond
                  to veterans’ average loss in earnings due to these conditions and adjust
                  disability ratings accordingly.


                  In commenting on a draft of our report, VA said that the “schedule as it is
Agency Comments   currently structured represents a consensus among Congress, VA and the
                  veteran community” and that the “ratings derived from the schedule
                  generally represent the average loss in earning capacity among disabled
                  veterans.” VA considers total disability to be “a purely medical
                  determination,” and it contends that changing the basis for the ratings in
                  the schedule would serve no useful purpose. In addition, VA believes that
                  “economic factors converge with” disability ratings primarily when the
                  Congress establishes the amount of compensation payable for each
                  disability rating level, and the Congress may adjust these amounts
                  whenever it determines they are not appropriate.

                  VA also expressed concern that basing ratings in the schedule on average
                  loss in earnings would (1) result in disparate awards based on such things
                  as rank or education, (2) preclude the use of extra-schedular evaluations
                  for exceptional disabilities, (3) not allow for meaningful input from VSOs,
                  and (4) require annual revisions to the schedule to keep up with changing
                  economic and vocational conditions.



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Although the schedule may represent a consensus among the program’s
key stakeholders, there is no assurance that this consensus produces
ratings for conditions in the schedule that accurately represent the average
impairment in earning capacity currently associated with these conditions.
Furthermore, while total, or 100 percent, disability may be a reasonable
reference point from which to establish ratings for partial disability, we do
not agree with VA’s contention that disability is or should be solely a
medical determination. Other programs define disability as loss in the
ability to earn wages or work as a result of an impairment. An impairment
is defined as a medical diagnosis of a specific abnormality, such as
“paralysis of upper and lower limbs—one side.”13 Studies have shown that
medical conditions are poor predictors of incapacity to work, that is,
disability.14

We agree with VA that the Congress can adjust the rate—that is, the
amount of compensation—it establishes for each rating level (10 through
100 percent) in the schedule when it believes that these benefit amounts
are not appropriate. However, the primary responsibility to ensure that
veterans are compensated commensurate with the average impairment in
earning capacity they experience because of these conditions rests with
the VA. This can be done by establishing ratings for conditions contained in
the schedule that reflect veterans’ average economic losses attributable to
these conditions.

Basing ratings on estimates of the average earnings loss among veterans
would not necessarily result in disparate treatment of veterans.
Service-connected conditions that result in a high-percentage loss in
earnings, on average, among veterans with these conditions would be
assigned a rating higher than conditions that result in a low-percentage
loss in earnings. As with the current schedule, veterans who have
conditions that are assigned the same disability rating would receive the
same basic monthly compensation regardless of such circumstances as
their military rank or education.

We believe disability ratings in the schedule should be based primarily but
not solely on estimates of veterans’ average loss in earnings. Therefore,

13
 World Health Organization, International Classification of Impairments, Disabilities, and Handicaps
(Geneva: World Health Organization, 1980).
14
 For example, see S.O. Okpaku and others, “Disability Determinations for Adults With Mental
Disorders: Social Security Administration vs. Independent Judgments,” American Journal of Public
Health, Vol. 84, No. 11 (Nov. 1994), pp. 1791-95, and H.P. Brehm and T.V. Rush, “Disability Analysis of
Longitudinal Health Data: Policy Implications for Social Security Disability Insurance,” Journal of
Aging Studies, Vol. 2, No. 4 (1988), pp. 379-99.



Page 26                                           GAO/HEHS-97-9 VA’s Disability Rating Schedule
B-274058




earnings-based ratings would not preclude extra-schedular evaluations.
Nor would an earnings-based schedule prevent VA from obtaining and
taking into account comments from VSOs and others when it revises the
schedule just as it does today. Finally, the economists we consulted agreed
that ratings based on earnings loss would need to be validated only once
every 10 to 20 years to keep pace with changes in the economy and
advances in medicine and technology that might influence the earning
capacity of veterans with service-connected conditions.

We have modified the report where appropriate in response to VA’s
technical comments on the draft report. The complete text of VA’s
comments appears in appendix IV.


We are sending copies of this report to the Chairman and Ranking
Minority Member of the Senate Committee on Veterans’ Affairs; the
Ranking Minority Member, Subcommittee on Compensation, Pension,
Insurance and Memorial Affairs, House Committee on Veterans’ Affairs;
other appropriate congressional committees; the Secretary of Veterans
Affairs; and other interested parties. We will also make copies available to
others on request.

If you have any questions about this report, please call Clarita Mrena,
Assistant Director, at (202) 512-6812, or Shelia Drake, Evaluator-in-Charge,
at (202) 512-7172. Other major contributors to this report are listed in
appendix V.

Sincerely yours,




David P. Baine
Director, Veterans’ Affairs and
  Military Health Care Issues




Page 27                              GAO/HEHS-97-9 VA’s Disability Rating Schedule
Contents



Letter                                                                        1


Appendix I                                                                   30

Design and
Methodology for the
Economic Validation
of the Rating Schedule
Appendix II                                                                  33

Examples of Changes
Made to the Rating
Schedule During the
Current Update
Appendix III                                                                 34

Results of VA’s
Current Review and
Update of the
Disability Rating
Schedule—Number
and Types of
Diagnoses Changed,
by Type of Change
Appendix IV                                                                  35

Comments From the
Department of
Veterans Affairs




                         Page 28   GAO/HEHS-97-9 VA’s Disability Rating Schedule
                   Contents




Appendix V                                                                                        38

GAO Contacts and
Staff
Acknowledgments
Tables             Table 1: Number of Veterans Receiving Disability Compensation                   6
                     During FY 1995, by Degree of Disability
                   Table 2: VA Disability Compensation Rates During FY 1995, by                    8
                     Degree of Disability
                   Table 3: Total Compensation Paid During FY 1995 to Disabled                     9
                     Veterans, by Degree of Disability
                   Table 4: Distribution of Veterans on the Rolls in FY 1995, by                  13
                     Degree of Disability and Major Medical Category
                   Table 5: Disability Ratings for Endometriosis                                  18
                   Table III.1: Number of Diagnoses Added to and Deleted From the                 34
                     Schedule, by Body System
                   Table III.2: Changes in Medical Criteria—Number of Diagnoses                   34
                     Changed in Each Body System, by Type of Change
                   Table III.3: Changes in Disability Ratings—Number of Diagnoses                 34
                     Changed in Each Body System, by Type of Change

Figure             Figure 1: History of VA’s Schedule for Rating Disabilities                      5




                   Abbreviations

                   ADA        Americans With Disabilities Act of 1990
                   ECVARS     Economic Validation of the Rating Schedule
                   VA         Department of Veterans Affairs
                   VSO        veterans service organization


                   Page 29                              GAO/HEHS-97-9 VA’s Disability Rating Schedule
Appendix I

Design and Methodology for the Economic
Validation of the Rating Schedule

                       The Economic Validation of the Rating Schedule (ECVARS) was designed to
Study Objectives       provide information that could be used to

                   •   estimate the average economic loss attributable to individual
                       service-connected disabilities,
                   •   recognize trends toward increases or decreases in the rate of economic
                       loss that can be expected with the passage of time and aging of the veteran
                       population,
                   •   recognize and evaluate the basic differences between the disability
                       evaluation policy of VA and that of other federal agencies for comparable
                       disabilities, and
                   •   formulate proposals for the refinement of the schedule on the basis of
                       these estimates and evaluations.


                       To determine the average impairment in earning capacity resulting from
Study Design           specific service-connected conditions on the rating schedule, the ECVARS
                       calculated the difference between the median earnings of veterans on the
                       VA disability rolls, grouped by their disability’s diagnosis, and the median
                       earnings of veterans not on the rolls. The earnings of nondisabled veterans
                       were used to approximate what the earnings of disabled veterans would
                       have been if they did not have their disability.


                       To estimate the average loss in earnings experienced by disabled veterans
Sample Design          as a result of their specific service-connected condition, all disabled
                       veterans on the disability rolls at that time were stratified into groups by
                       the diagnosis assigned to their disability. While all disabled veterans in
                       strata that contained 500 or fewer veterans were selected for this study,
                       samples of disabled veterans were drawn from strata that contained more
                       than 500. Sample sizes for each stratum ranged from about 200 to about
                       1,900 veterans.

                       In total, 485,000 of the approximately 2 million veterans who were
                       receiving disability compensation when this study was done were chosen
                       to participate. Not included were female veterans on the disability rolls,
                       veterans with multiple disabilities, and veterans whose VA disability
                       compensation was based on the 1925 schedule.

                       The ECVARS’ estimates of the median earnings of nondisabled veterans
                       were based on the earnings of a sample of noninstitutionalized,
                       nondisabled veterans selected from lists of individuals in the general



                       Page 30                              GAO/HEHS-97-9 VA’s Disability Rating Schedule
                        Appendix I
                        Design and Methodology for the Economic
                        Validation of the Rating Schedule




                        population that the Bureau of the Census was using at that time to draw
                        samples for its ongoing Current Population Survey. In total, approximately
                        14,000 nondisabled veterans were chosen for this survey.


                        The ECVARS did not validate all diagnoses on the schedule, nor did it
Study Scope             validate each individually. Diagnoses that accounted for very small
                        numbers of veterans on the VA disability rolls at that time were excluded
                        from the study. Diagnoses with fewer than 200 veterans and similar
                        symptoms were combined and validated as a single diagnosis. Diagnoses
                        accounting for at least 200 veterans were validated individually unless they
                        were what VA referred to as “adequately represented” by another diagnosis
                        or group of diagnoses, in which case they were not validated. The ECVARS
                        validated about 400 diagnosis strata, each containing at least one diagnosis
                        from the schedule.


                        The ECVARS used a mail survey to collect data on earnings from disabled
Survey Methods          and nondisabled veterans. The Bureau of the Census administered this
                        survey for VA. Census mailed out a total of approximately 500,000
                        questionnaires in February 1968, which asked the veterans for data on
                        earnings and other characteristics during the prior year. Census mailed out
                        two additional follow-up questionnaires to nonrespondents and conducted
                        telephone and face-to-face interviews to obtain data from those who did
                        not respond to the mail questionnaire. Data collection was completed in
                        the first quarter of fiscal year 1969.


                        In addition to data on earnings, the ECVARS collected data on the age,
Method for Estimating   education, and geographic residence of veterans. The age variable was
Loss in Earnings        split into four categories—under age 30; ages 30 to 49; ages 50 to 64; and
                        age 65 and over. Education was classified as less than a high school
                        graduate, high school graduate, and 1 or more years above high school
                        graduate. There were two categories for the regional variable—the South
                        and all other geographical regions.

                        When calculating the difference between the earnings of the disabled and
                        nondisabled, each diagnosis stratum was paired with a unique “control”
                        group that contained nondisabled veterans who were equivalent with
                        respect to age, education, and region of residence to the disabled veterans
                        in that diagnosis stratum. By controlling for the influence of these other




                        Page 31                                   GAO/HEHS-97-9 VA’s Disability Rating Schedule
Appendix I
Design and Methodology for the Economic
Validation of the Rating Schedule




variables, the study attempted to isolate the effect that the
service-connected condition alone had on earnings.

The ECVARS calculated a separate estimate of loss in earnings for each
rating level associated with a specific diagnosis stratum. Study results
were presented in terms of disabled veterans’ annual dollar loss in
earnings, disabled veterans’ median percentage loss in earnings relative to
the median earnings of nondisabled veterans, and disabled veterans’
median loss in earnings relative to the median earnings of production
workers.




Page 32                                   GAO/HEHS-97-9 VA’s Disability Rating Schedule
Appendix II

Examples of Changes Made to the Rating
Schedule During the Current Update


Diagnostic code   Old rating schedule             Revised rating schedule Type of change                   Rationale
7501              Kidney, abscess of: rate        Kidney, abscess of: rate       Change in criteria        New system of three
                  for residuals                   as urinary tract infection                               general areas of
                                                                                                           dysfunction
7505              Kidney, tuberculosis of,        Kidney, tuberculosis of:  Change in wording              Editorial changes only
                  active or inactive: active -    rate in accordance with
                  100; inactive - see 4.88b       4.88b or 4.89,a whichever
                  and 4.89a                       is appropriate
7619              Ovaries, removal of both:       Ovary, removal of:             Change in convalescent    To account for improved
                  with complete extirpation       for 3 months after             period; change in         surgical techniques, to
                  and artificial menopause,       removal - 100; thereafter,     heading; and change in    make this diagnostic
                  for 6 months after              complete removal of both       evaluation criteria       code explicitly
                  excision - 100; thereafter,     ovaries - 30; removal of                                 applicable to the removal
                  30; removal of one with         one with or without partial                              of one and two ovaries,
                  or without partial removal      removal of the other - 0                                 and to make removal of
                  of the other - 10               (review for entitlement to                               one ovary
                                                  special monthly                                          noncompensable
                                                  compensation under                                       because it does not
                                                  3.350 of this chapter)a                                  ordinarily impair earning
                                                                                                           capacity
                                     a
                                         Reference is to 38 C.F.R. parts 0-17 (1995).



                                     Source: VA, Rating Schedule Amendments Training Package, Vol. II (Washington, D.C.: VA, 1995).




                                     Page 33                                            GAO/HEHS-97-9 VA’s Disability Rating Schedule
Appendix III

Results of VA’s Current Review and Update
of the Disability Rating Schedule—Number
and Types of Diagnoses Changed, by Type of
Change
Table III.1: Number of Diagnoses
Added to and Deleted From the                                                               Body system
Schedule, by Body System                                                            Oral/                                Hemic/
                                                                   Genitourinary   dental       Gynecological         lymphatic   All
                                            Diagnoses before
                                            review/update                    31       14                    17              15    77
                                            Diagnoses
                                            eliminated                        4        1                      0              4     9
                                            Diagnoses remaining              27       13                    17              11    68
                                            Diagnoses added                  11        3                      2              1    17
                                            Diagnoses after
                                            review/update                    38       16                    19              12    85



Table III.2: Changes in Medical Criteria—Number of Diagnoses Changed in Each Body System, by Type of Change
                                                                    Body system
                                   Genitourinary         Oral/dental       Gynecological        Hemic/lymphatic                   All
Type of change in medical              (out of 27          (out of 13          (out of 17              (out of 11          (out of 68
criteria                             diagnoses)          diagnoses)          diagnoses)             diagnoses)           diagnoses)
Wording change                                 6                   3                    11                        5               25
Criteria changed                              17                   0                    10                        7               34
Alternative criteria added                     2                   1                        0                     2                5
Reduction in minimum
convalescence period before
medical reevaluation                           2                   0                        3                     1                6
Increase in minimum
convalescence period before
medical reevaluation                           0                   0                        0                     0                0



Table III.3: Changes in Disability Ratings—Number of Diagnoses Changed in Each Body System, by Type of Change
                                                                    Body system
                                   Genitourinary         Oral/dental       Gynecological        Hemic/ lymphatic                  All
                                       (out of 27          (out of 13          (out of 17               (out of 11         (out of 68
Type of change in rating             diagnoses)          diagnoses)          diagnoses)              diagnoses)          diagnoses)
Reduction in existing rating                   1                   0                        1                     1                3
Increase in existing rating                    0                   0                        0                     0                0
Addition of new evaluation
levels or combination of
evaluation levels                              1                   1                        0                     5                7
Elimination of minimum
percentage evaluation                          1                   0                        1                     0                2




                                            Page 34                                 GAO/HEHS-97-9 VA’s Disability Rating Schedule
Appendix IV

Comments From the Department of
Veterans Affairs




              Page 35     GAO/HEHS-97-9 VA’s Disability Rating Schedule
Appendix IV
Comments From the Department of
Veterans Affairs




Page 36                           GAO/HEHS-97-9 VA’s Disability Rating Schedule
Appendix IV
Comments From the Department of
Veterans Affairs




Page 37                           GAO/HEHS-97-9 VA’s Disability Rating Schedule
Appendix V

GAO Contacts and Staff Acknowledgments


                  Clarita Mrena, Assistant Director, (202) 512-6812
GAO Contacts      Shelia Drake, Evaluator-in-Charge, (202) 512-7172



                  The following individuals made important contributions to this report:
Staff             Connie D. Wilson, Senior Evaluator, collected a major portion of the
Acknowledgments   evidence presented; Timothy J. Carr, Senior Economist, reviewed the
                  literature on the relationship between disability and earnings and provided
                  advice on methodology; Steven Machlin, Statistician, provided guidance on
                  research design and statistical methods; and Stefanie Weldon, Attorney,
                  served as legal advisor.




(105746)          Page 38                             GAO/HEHS-97-9 VA’s Disability Rating Schedule
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