oversight

VA Medical Care: Increasing Recoveries From Private Health Insurers Will Prove Difficult

Published by the Government Accountability Office on 1997-10-17.

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 Oversight and Investigations,
                Committee on Veterans’ Affairs, House
                of Representatives

October 1997
                VA MEDICAL CARE
                Increasing Recoveries
                From Private Health
                Insurers Will Prove
                Difficult




GAO/HEHS-98-4
          United States
GAO       General Accounting Office
          Washington, D.C. 20548

          Health, Education, and
          Human Services Division

          B-271726

          October 17, 1997

          The Honorable Terry Everett
          Chairman, Subcommittee on Oversight
            and Investigations
          Committee on Veterans’ Affairs
          House of Representatives

          Dear Mr. Chairman:

          Since 1986, the Department of Veterans Affairs (VA) has been authorized to
          recover a portion of the costs VA incurs to provide health care services to
          veterans with no service-connected disabilities from veterans’ private
          health insurers. This includes individual and group insurance plans,
          Medicare supplemental insurance plans,1 and self-insured plans under the
          Employee Retirement Income Security Act of 1974 (ERISA). VA’s recovery
          authority was expanded in 1990 to include recoveries for care provided to
          veterans with service-connected disabilities, as long as that care was for
          treatment of conditions unrelated to the veterans’ service-connected
          disabilities.

          In fiscal year 1996, VA sought recovery of about $1.6 billion of its costs but
          only recovered 31 percent of the billed amount, or $495 million, a
          5-percent decline from fiscal year 1995 recoveries. In its fiscal year 1998
          budget submission, however, VA estimated that it will be able to increase
          its recoveries from private health insurance, reaching $826 million in fiscal
          year 2002. This is important because VA sought and was recently given
          authority to retain the funds it recovers and to use them to supplement
          future appropriations.

          This report responds to your request that we

      •   identify those factors that limit VA’s ability to recover more of its billed
          charges,
      •   evaluate VA’s ability to achieve its revenue targets by (1) identifying factors
          that could decrease future recoveries and (2) assessing the potential for VA
          initiatives to increase medical care cost recoveries, and



          1
           Medicare beneficiaries may be covered under individually purchased Medicare supplemental policies
          (“Medigap” insurance) or under employer-sponsored health insurance. According to a 1994 survey of
          large employers by Foster Higgins, a health care consulting firm, 40 percent of employers offer retirees
          “carve-out coverage,” a type of coverage that pays the difference between a plan’s allowed charge for
          the service and the amount that Medicare pays for the same service.



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              •   evaluate the way VA applies insurance payments to veterans’ copayment
                  liability for veterans in the discretionary care category.


                  To identify whether factors limit VA’s ability to recover more of its billed
Scope and         charges, we studied the recovery programs at VA’s Martinsburg, West
Methodology       Virginia, and Washington, D.C., medical centers. We selected the two
                  medical centers in consultation with officials working in VA’s Medical Care
                  Cost Recovery (MCCR) program. The Martinsburg medical center was
                  selected because it was (1) viewed by VA officials as operating an efficient
                  recovery program and (2) 1 of 10 medical centers participating in MCCR’s
                  reengineering pilot project.2 The recovery program at the Washington DC’s
                  medical center was chosen for contrast. Although Martinsburg’s medical
                  center is much smaller than Washington’s, it was recovering roughly the
                  same amount from private health insurance.

                  At the two medical centers, we examined a random sample of the bills VA
                  had submitted to insurers during May 1994.3 We focused our statistical
                  analyses on bills for which VA had completed recovery actions (closed
                  bills). For each bill, we examined the insurers’ explanation of benefits, VA’s
                  patient insurance information, and VA’s financial tracking reports to
                  determine (1) why insurers denied or partially paid VA bills and (2) what
                  actions VA had taken to determine whether additional funds could be
                  recovered. We discussed bills denied or partially paid for administrative or
                  other nonclinical reasons with VA staff at the medical centers to find out
                  which factors had affected recoveries. To the extent possible, we
                  reviewed, with the assistance of a registered nurse, the discharge
                  summaries for those inpatient claims denied for clinical reasons to
                  determine whether insurers’ denials were appropriate. We used
                  appropriateness-of-care criteria developed by InterQual, a utilization




                  2
                   In 1994, VA selected 10 facilities to participate in an effort to improve and automate the information
                  necessary to bill health insurers effectively. Components of the project included outpatient
                  preregistration to improve the collection of data on insurance coverage and automated capture of data
                  on outpatient services provided.
                  3
                   We chose bills submitted to insurers in May 1994 to be reasonably sure that bills this old would be
                  resolved by the time we did our work. We sampled about 56 percent of inpatient and 36 percent of
                  outpatient closed bills submitted by the Washington, D.C., medical center. For the Martinsburg
                  medical center, we sampled about 39 percent of inpatient and 11 percent of outpatient closed bills.



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                   B-271726




                   review firm, in our assessments.4 We confirmed the prevalence of these
                   findings with MCCR staff at other facilities and in VA’s headquarters.

                   To evaluate VA’s ability to achieve its revenue targets, we reviewed (1) VA’s
                   fiscal year 1998 budget submission, the MCCR program’s 1996 business
                   plan, and other documents detailing VA’s health care restructuring plans,
                   such as VA’s Prescription for Change, new budget allocation system, and its
                   use of performance measures; (2) interviewed MCCR and health care staff
                   from VA facilities and VA’s headquarters; and (3) interviewed staff and
                   reviewed documents from VA’s General Counsel and Regional Counsels.

                   To assess the application of discretionary veterans’ copayments to their
                   third-party liability, we reviewed VA’s General Counsel decisions and
                   discussed the implementation of these decisions with VA’s General Counsel
                   as well as MCCR staff from central office and VA facilities.

                   We did our work between May 1995 and July 1997 in accordance with
                   generally accepted government auditing standards.


                   Attaining VA’s goal to increase recoveries from private health insurance
Results in Brief   from $495 million in fiscal year 1996 to $826 million in fiscal year 2002 will
                   be difficult. First, for our sample, most of the charges VA was unable to
                   recover for bills submitted to private health insurers were appropriately
                   denied or reduced by the insurers. Insurers can deny or reduce payments
                   when (1) VA care is medically inappropriate, (2) VA bills Medicare
                   supplemental insurance for the full cost of VA services when such
                   insurance generally pays only Medicare deductibles and copayments,
                   (3) VA bills health maintenance organizations (HMO) and other managed
                   care plans that restrict payment for nonemergency care to participating
                   providers, and (4) policy provisions require policyholders to pay a portion
                   of covered charges.

                   Second, recoveries from private health insurance dropped for the first
                   time in fiscal year 1996 and have continued to drop during fiscal year 1997.
                   Several factors help explain the decreases and suggest that further
                   decreases are likely. These include (1) the declining and aging of the
                   veteran population, meaning that VA must serve a greater proportion of


                   4
                    InterQual, a utilization review firm, has developed level-of-care criteria to evaluate the
                   appropriateness of acute and critical medical care, based on an assessment of the patient’s clinical
                   status. The criteria encompass objective clinical findings to establish the severity of illness upon
                   admission, associated medical or other professional interventions to establish the intensity of service
                   to use during concurrent reviews, and clinical indicators to use as discharge screens.



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veterans to maintain its current workload and that more VA users will have
secondary, rather than primary, health insurance coverage in the future;
(2) veterans’ increased enrollment in HMOs and other managed care
plans—and decreased enrollment in fee-for-service plans—which reduces
the number of veterans covered by insurance from which VA can
reasonably expect to recover; (3) changes in how insurers process VA
claims that could result in refunds to insurers that VA estimates exceed
$600 million and could reduce future recoveries by over 20 percent; and
(4) shifts in care from inpatient to outpatient settings that, while both
needed and appropriate, could reduce private insurance recoveries and
increase recovery costs.5

VA has a number of initiatives to address some of these problems and to
help it attain its recovery goals. These include legislation to (1) allow VA to
retain recoveries from private health insurance and veteran copayments as
an incentive to improve the identification and pursuit of recoveries and
(2) extend lapsing authority to recover the costs of services provided to
veterans for conditions unrelated to their service-connected disabilities. In
addition, VA plans administrative actions to, among other things, improve
the identification of veterans’ insurance coverage, improve the process for
submitting claims to Medicare supplemental insurers, and develop new
billing rates and itemized bills. Finally, VA plans to increase the number of
veterans using the VA system by 20 percent, and expects many of the new
users to be higher-income, Medicare-eligible veterans, likely to also have
private insurance.

VA’s initiatives would address some, but not all, of the factors affecting
future recoveries. However, considerable uncertainty remains about VA’s
ability to achieve its revenue goal. VA was unable to provide an analytical
basis for its recovery projections. Projected increases in VA’s future
recoveries were not supported by or not attributed to improvements
related to its planned initiatives. Finally, VA’s General Counsel interprets
the relationship between recoveries from private health insurance and
veterans’ copayments as requiring that a portion of insurance recoveries
be used to reduce veterans’ copayment obligations. This will make it more
difficult for VA to attain its overall recovery goals under the MCCR program
and significantly increase administrative costs, particularly for pharmacy
bills.


5
 In a draft of this report, we noted that a portion of VA’s recovery authority was scheduled to lapse on
September 30, 1998, potentially precluding future recoveries for treatments of nonservice-related
conditions provided to veterans with service-connected disabilities. The Balanced Budget Act of 1997
extended the recovery authority until September 30, 2002.



Page 4                                            GAO/HEHS-98-4 VA Medical Care Cost Recovery
                 B-271726




                 We have identified a number of actions the Congress and VA could take to
                 improve operation of the MCCR program, increase recoveries, and prevent
                 recovery efforts from adversely affecting veterans.


                 VA collects money from third-party insurers and directly from some
Background       veterans to offset the cost of providing health care services for veterans’
                 nonservice-connected conditions. Until recently, these moneys, other than
                 amounts needed to operate the recovery program, have been returned to
                 the U.S. Treasury. In fiscal year 1996, the MCCR program retained almost
                 $119 million to offset the costs of operating the recovery program and
                 deposited $455 million in the Treasury. With passage of the Balanced
                 Budget Act of 1997 (P.L. 105-33), VA will retain amounts collected after
                 June 30, 1997, to supplement its annual appropriations and finance the
                 cost of serving additional veterans.

                 While the law prevents insurers from arbitrarily denying payment to VA for
                 services that would be covered in private sector facilities, VA, like other
                 health care providers, must generally comply with the terms and
                 conditions set out in veterans’ health insurance policies. Insurance
                 policies typically contain a number of provisions that limit the amount of
                 billed charges that the insurer is responsible for paying. In addition to
                 requiring that care be medically necessary and provided in an appropriate
                 setting, policies may

             •   require the policyholder to pay a specified amount (such as $500), referred
                 to as a deductible or out-of-pocket payment, for covered health care
                 services before the insurance begins paying;
             •   require policyholders to pay a certain percentage of covered charges,
                 known as a copayment or coinsurance;
             •   specify what services are covered and any limits on the days of coverage
                 or frequency of services;
             •   require, as a condition for payment, that providers or policyholders obtain
                 prior approval from the insurer before admission to a hospital;
             •   preclude or reduce payment (other than for emergency care) to providers
                 that are not members of HMOs, preferred provider organizations (PPO), or
                 point-of-service (POS) plans;6 and

                 6
                  A preferred provider organization (PPO) is a managed care plan that provides enrollees with a
                 financial incentive to receive care from a network of providers that are normally reimbursed at a
                 discounted fee-for-service rate. A point-of-service (POS) plan is a hybrid that combines features of
                 both managed care and indemnity insurance. Under POS plans, an enrollee decides whether to use a
                 network or nonnetwork provider at the time care is needed and usually is charged a sizable copayment
                 for selecting a nonnetwork provider. For additional information, see Health Insurance: Management
                 Strategies Used by Large Employers to Control Costs (GAO/HEHS-97-71, May 6, 1997).



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                      •   “wrap around” other insurance coverage and pay only that portion of
                          approved charges not paid by the primary insurance, such as Medicare.

                          Unlike most providers, however, VA does not bill health plans for the
                          individual tests and procedures it provides to its policyholders. Instead, VA
                          prepares bills based on its average costs for providing a day of hospital
                          care and an outpatient visit. In fiscal year 1997, VA billed insurers $1,046
                          per day for inpatient care provided in medical bed sections, $1,923 per day
                          for care provided in surgical bed sections, $194 for each outpatient visit,
                          and $20 for each prescription refill. In other words, the amount VA bills
                          insurers for a 5-day surgical stay is the same regardless of the type of
                          surgery performed. Similarly, it bills the same amount for an outpatient
                          visit regardless of the types or number of services provided during that
                          visit.

                          In fiscal year 1995, VA recovered $522.8 million from third parties,
                          including private health insurers, workers’ compensation programs, and
                          no-fault insurance. Recoveries declined to $495.2 million in fiscal year
                          1996 and to $213.4 million during the first two quarters of fiscal year 1997.

                          VA’s 1998 budget proposal requested medical care funding of $17.6 billion,
                          consisting of an appropriation of almost $17 billion and a legislative
                          proposal to retain insurance payments, veterans’ copayments, and other
                          third-party reimbursements estimated to total about $600 million in fiscal
                          year 1998. VA proposed to freeze its appropriation at about $17 billion over
                          the next 5 years and rely instead on increased efficiency and increases in
                          third-party reimbursements to offset the effects of inflation. VA estimated
                          that the third-party recovery authority would enable it to generate $1.7
                          billion in additional revenues in 2002, including $826 million from private
                          health insurance. The Balanced Budget Act of 1997 authorized VA to retain
                          recoveries and collections after June 30, 1997. The act provides that if the
                          amounts recovered in fiscal years 1998, 1999, or 2000 fall short of
                          projections by at least $25 million, VA will receive an additional
                          appropriation.7


                          Most VA bills in our sample prepared by the Martinsburg and Washington,
Most Charges Denied       D.C., medical centers that were denied or reduced by private health
by Insurers Are Not       insurers were appropriately closed by MCCR staff with little additional
Recoverable
                          7
                           VA also sought, but was not granted, authority to recover a portion of its costs from the Medicare
                          program for providing care to additional higher-income veterans with Medicare coverage.



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                                recovery possible. Additional amounts were generally not recoverable
                                because

                            •   insurers deemed VA’s inpatient care to be medically inappropriate;
                            •   VA billed Medicare supplemental insurance for the full cost of VA services,
                                even though such insurance generally pays only the Medicare inpatient
                                deductible and about 20 percent of the costs of outpatient care;
                            •   VA billed HMOs and other managed care plans for nonemergency care when
                                the VA facility was not a participating provider; and
                            •   insurers reduced payments to VA on the basis of the insurance plans’
                                cost-sharing requirements.

                                In addition, VA’s pursuit of additional recoveries is hindered because (1) VA
                                has limited knowledge of veterans’ insurance policies and terms of
                                coverage and (2) many insurers continue to use exclusionary clauses
                                denying payment for care given in VA facilities, although such clauses have
                                no legal effect.


Much of VA Inpatient Care       Nearly 30 percent of the unpaid charges for inpatient care at the
Denied as Medically             Martinsburg and Washington, D.C., medical centers resulted from insurers’
Inappropriate                   determinations that the care was medically inappropriate.8 Medically
                                inappropriate care includes care deemed to be medically unnecessary,
                                excessive lengths of stay, and care that should have been provided on an
                                outpatient basis. For example, insurers denied or reduced claims at the
                                Martinsburg medical center for cataract surgeries that were unnecessarily
                                performed on an inpatient basis. Similarly, insurers denied or reduced
                                claims when the medical center allowed veterans who traveled
                                considerable distances for care to be admitted early, to be discharged
                                later, or to receive inpatient treatment instead of outpatient services.

                                When such claims were reduced or denied, the Martinsburg medical center
                                often negotiated payment for ancillary and professional services
                                associated with inpatient care that should have been provided on an
                                outpatient basis. In addition, the medical center was sometimes able to
                                obtain payment for clinic visits and ancillary services provided to veterans
                                in the medical center’s nursing home and domiciliary beds. Such



                                8
                                 At the 95-percent confidence level, we estimate that 27.1 percent (plus or minus 13.2 percent) of the
                                charges at the Martinsburg medical center were unpaid because insurers considered the inpatient care
                                to be medically inappropriate; 29.7 percent (plus or minus 14.6 percent) of the charges at the
                                Washington, D.C., medical center were unpaid because insurers deemed the inpatient care to be
                                medically inappropriate.



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                            payments, however, accounted for significantly less than half of billed
                            charges.

                            Unlike Martinsburg, the Washington, D.C., medical center generally did
                            not vigorously pursue claims denied as medically inappropriate and
                            seldom pursued payment of ancillary or professional services. Since the
                            period covered by our claims review, however, the Washington medical
                            center has brought in a new manager for the recovery program and has
                            reorganized its functions to strengthen the billing, collection, and appeals
                            processes. Billing and collections staff are no longer in separate units but
                            are paired together in teams to expedite recovery actions. An August 1996
                            review of the Washington, D.C., program by MCCR staff from headquarters
                            and other VA facilities, however, identified the need for further
                            improvements. For example, the reviewers suggested that the facility
                            (1) develop a mechanism to consistently track patients’ inpatient and
                            outpatient treatments, (2) identify a physician adviser and establish a
                            multidisciplinary utilization review committee to assist with appeals, and
                            (3) develop procedures to identify and bill for professional fees where
                            appropriate.


Medicare Supplemental       VA bills Medicare supplemental insurers for the full cost of VA services,
Insurers Limit Payment as   even though such policies provide coverage that is secondary to Medicare.
Secondary Insurance         And because it does not have the authority to bill Medicare, VA does not
                            receive a determination of benefits—either a “remittance advice” or an
                            “explanation of benefits.” Medicare supplemental insurers typically use
                            such determinations to calculate their liability.

                            In the absence of a Medicare determination of benefits, supplemental
                            insurers use different methods to determine their liability as secondary
                            payers. For inpatient care, these insurers typically pay the Medicare
                            inpatient deductible ($760 in 1997) or the inpatient deductible plus
                            20 percent of the professional services component of the VA per diem rate.
                            As a result, VA recovers only a small percentage of its billed charges. For
                            example, VA can expect to recover only $760 to $835 for a 3-day VA hospital
                            stay for which it billed $3,138. Similarly, for an outpatient visit, Medicare
                            supplemental insurers typically pay no more than 20 percent of the billed
                            charges.

                            The largest Medigap insurer, the American Association of Retired People
                            (AARP), however, no longer pays VA 20 percent of billed charges for most of
                            its veteran policyholders. In September 1995, AARP began paying VA



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                                         20 percent of what it estimates Medicare would have paid for the service
                                         in a physician’s office for veterans in the mandatory care category
                                         (primarily those with service-connected disabilities or low incomes). AARP
                                         continues to pay 20 percent of VA’s billed charges for veterans in the
                                         discretionary care category (those with no service-connected disabilities
                                         and incomes above the “means-test” level, which is about $21,000 for a
                                         single veteran) who are subject to copayments to cover their out-of-pocket
                                         costs.

                                         The effect of this change on VA recoveries is unclear. For veterans in the
                                         mandatory care category who are not subject to VA’s copayments,
                                         recoveries are likely to decrease for outpatient bills involving routine
                                         office visits. For example, because Medicare pays about $54 for a routine
                                         office visit, AARP would pay VA less than $11 for such care under the new
                                         policy rather than almost $39 (20 percent of VA’s $194 outpatient rate) it
                                         would have paid under the old policy. On the other hand, to the extent that
                                         VA provides these veterans high-cost services or procedures, such as
                                         cataract surgery, as outpatient services, AARP’s payments to VA should
                                         increase under the new policy. (See fig. 1.)



Figure 1: Change in AARP Payment Policy for Medicare Supplemental Insurance, Given a $194 Outpatient Charge




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VA’s right to collect from Medigap insurers was upheld in earlier court
decisions.9 However, some insurers still contend that they are not liable
for the amounts sought by VA until they receive an adjudicated claim
indicating what portion of VA’s bill is covered by Medicare. The insurers
claim that calculating the amount owed to VA is unduly burdensome
because VA does not give them a Medicare remittance advice or
explanation of benefits explaining Medicare-approved charges.10 When the
matter is resolved, VA expects to recover on the backlog of claims
submitted to insurers involved in the case. Like other Medicare
supplemental policies, however, these plans would pay secondary rather
than primary benefits, and therefore most of VA’s billed charges would not
be collectable.

Because the Martinsburg medical center was billing Medicare
supplemental insurance more often than the Washington medical center, a
larger percentage of unpaid charges resulted from denials and reduced
payments by such insurers. About a third of Martinsburg’s unpaid charges
for inpatient care are attributable to billing Medicare supplemental
insurers.11 By contrast, only about 13 percent of the Washington, D.C.,
medical center’s unpaid inpatient charges are attributable to billing
Medicare supplemental insurance.12 Similarly, about 40 percent of the
unpaid outpatient charges for the Martinsburg medical center resulted
from billing Medicare supplemental insurance for the full cost of
outpatient care.13 Because the Washington, D.C., medical center did not
bill Medicare supplemental insurance as extensively, only 11 percent of its
unpaid charges resulted from billing the full cost of outpatient care.14




9
 See, for example, United States v. Blue Cross Blue Shield of Maryland, Inc., 989 F.2d 718 (4th Cir.
1993), cert. denied, 510 U.S. 914, and United States v. Blue Cross/Blue Shield of Alabama, 999 F.2d 1542
(11th Cir. 1993), cert. denied, 510 U.S. 1112, 1994.
10
   United Servs. Auto. Ass’n v. Jesse Brown, No. SA-94-CA-0379 (D. Tex. filed May 12, 1994). Other
plaintiffs include USAA Life Insurance, the Health Insurance Association of America, Hartford Life
Insurance Company, the Retired Officers’ Association, and several individuals.
11
 At the 95-percent confidence level, 32.4 percent (plus or minus 19.6 percent) of the Martinsburg
medical center’s inpatient unpaid charges were attributed to Medicare supplemental insurers.
12
 At the 95-percent confidence level, 12.7 percent (plus or minus 10 percent) of the Washington D.C.,
medical center’s inpatient unpaid charges were attributed to Medicare supplemental insurers.
13
 At the 95-percent confidence level, 41 percent (plus or minus 5.4 percent) of the Martinsburg medical
center’s outpatient unpaid charges were attributed to Medicare supplemental insurers.
14
 At the 95-percent confidence level, 11.3 percent (plus or minus 5.4 percent) of the Washington, D.C.,
medical center’s outpatient unpaid charges were attributed to Medicare supplemental insurance.



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HMOs Deny or Reduce       HMOs and certain other managed care plans generally will not pay a
Payments Because VA       nonparticipating provider for services rendered to their policyholders,
Facilities Are Not        except for emergency care. Neither the Washington, D.C., nor the
                          Martinsburg medical center has been able to negotiate provider
Participating Providers   agreements with any HMOs (see pp. 27-31.). About 19 percent of the claims
                          denied by insurers for inpatient care provided by the Washington, D.C.,
                          medical center, representing over 20 percent of the center’s unpaid
                          inpatient charges, were billed to HMOs and other managed care plans that
                          limit payments for nonemergency care to participating providers.15 About
                          19 percent of the bills insurers denied for outpatient care provided by the
                          Washington, D.C., medical center, representing about 35 percent of unpaid
                          charges, were billed to HMOs and other managed care plans that limit
                          payments for nonemergency care to participating providers.16 Because VA
                          could not provide support that the care was for a medical emergency, the
                          medical center had no basis for pursuing collection.

                          Denials by HMOs and certain other managed care plans did not account for
                          as much of the unpaid care at the Martinsburg medical center because that
                          facility generally did not bill managed care plans unless it was fairly
                          certain that the plan would pay for VA care. In addition, HMOs appear to
                          have a significantly lower market penetration in the Martinsburg area than
                          they do in the Washington, D.C., area. About 4 percent of Martinsburg’s
                          inpatient bills (representing about 3 percent of the unpaid charges) were
                          billed to managed care plans.17 About 3 percent of outpatient bills
                          (representing about 6 percent of unpaid charges) were billed to managed
                          care plans.18




                          15
                            At the 95-percent confidence level, 18.8 percent (plus or minus 6 percent) of the Washington, D.C.,
                          medical center’s inpatient bills were reduced and 22.3 percent (plus or minus 11.4 percent) of the
                          inpatient charges were unpaid because HMOs were billed for care that was neither emergency nor
                          preauthorized.
                          16
                           At the 95-percent confidence level, 18.7 percent (plus or minus 2.8 percent) of the Washington, D.C.,
                          medical center’s outpatient bills were reduced and 34.6 percent (plus or minus 6.6 percent) of the
                          outpatient charges were unpaid because HMOs were billed for care that was neither emergency nor
                          preauthorized.
                          17
                           At the 95-percent confidence level, 3.7 percent (plus or minus 2.6 percent) of the Martinsburg medical
                          center’s inpatient bills were reduced and 2.8 percent (plus or minus 2.6 percent) of the inpatient
                          charges were unpaid because HMOs were billed for care that was neither emergency nor
                          preauthorized.
                          18
                           At the 95-percent confidence level, 3 percent (plus or minus 1.8 percent) of the Martinsburg medical
                          center’s outpatient bills were reduced and 5.6 percent (plus or minus 3.4 percent) of the outpatient
                          charges were unpaid because HMOs were billed for care that was neither emergency nor
                          preauthorized.



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Insurers Reduce Payments   For both the Washington, D.C., and Martinsburg medical centers, insurers
on the Basis of            often reduced their payments to VA on the basis of the policies’
Cost-Sharing Provisions    cost-sharing provisions. Insurance policies typically require policyholders
                           to pay a certain amount for health care services out of pocket before
                           coverage begins. Such deductibles can either be a yearly amount or apply
                           to a specific episode of care such as a hospital stay. In addition, policies
                           frequently require policyholders to pay a certain percentage of charges (a
                           copayment or coinsurance). These provisions limit the insurers’ liability to
                           that portion of covered charges that is not the responsibility of the
                           policyholder.

                           Insurers reduced payments to the Washington, D.C., medical center on the
                           basis of cost sharing provisions for over half of the inpatient bills and over
                           70 percent of the outpatient bills we examined.19 Similarly, insurers
                           reduced payments for about 31 percent of the inpatient bills and about
                           56 percent of the outpatient bills we examined at the Martinsburg medical
                           center for the same reason.20

                           Reductions because of cost-sharing provisions had a greater impact on
                           recoveries from outpatient bills, accounting for about a third of the unpaid
                           outpatient charges at Martinsburg medical center and about 43 percent of
                           unpaid charges at Washington.21 By contrast, reductions on the basis of
                           cost-sharing requirements accounted for less than 10 percent of unpaid
                           inpatient charges at each facility.22

                           Since our study period, the percentage of outpatient charges that are
                           unpaid because of cost-sharing requirements has probably increased
                           because of the trend in fee-for-service health plans toward higher
                           copayments. For example, the Blue Cross and Blue Shield standard option
                           plan under the Federal Employees Health Benefits Program (FEHBP)

                           19
                            At the 95-percent confidence level, 51.6 percent (plus or minus 7 percent) of the Washington, D.C.,
                           medical center’s inpatient bills were reduced because of veterans’ cost-sharing requirements;
                           71.1 percent (plus or minus 4 percent) of outpatient bills were reduced.
                           20
                            At the 95-percent confidence level, 31 percent (plus or minus 10 percent) of the Martinsburg medical
                           center’s inpatient bills were reduced because of veterans’ cost-sharing requirements; 56 percent (plus
                           or minus 4.4 percent) of outpatient bills were reduced.
                           21
                             At the 95-percent confidence level, we estimate that 34.4 percent (plus or minus 5.4 percent) of the
                           unpaid outpatient charges at the Martinsburg medical center and 42.9 percent (plus or minus
                           7 percent) of the unpaid outpatient charges at the Washington, D.C., medical center were attributable
                           to veterans’ cost-sharing requirements.
                           22
                            At the 95-percent confidence level, we estimate that 9.5 percent (plus or minus 6.4 percent) of the
                           unpaid inpatient charges at the Martinsburg medical center and 5.7 percent (plus or minus 3.2 percent)
                           of the unpaid inpatient charges at the Washington, D.C., medical center were attributable to veterans’
                           cost-sharing requirements.



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                            increased the copayment on a $194 outpatient bill from approximately $49
                            to $100 between 1994 and 1996.23


Limited Knowledge of Plan   VA’s efforts to pursue recoveries from private health insurers are hindered
Provisions Hinders          by VA’s limited access to the terms and conditions of veterans’ insurance
Recovery                    policies. Neither the insurer nor the veteran is required to supply a copy of
                            the health benefit plan to VA. As a result, VA generally relies on telephone
                            calls to insurers to obtain information on the specific provisions of
                            veterans’ policies.

                            MCCR field staff indicated that insurers frequently refuse to give them
                            copies of veterans’ policies, benefit summaries, or booklets when
                            requested, citing privacy concerns. Although VA’s General Counsel
                            indicates that insurers can be compelled to provide contracts and policy
                            information during litigation, such extreme actions have seldom been
                            used. However, VA’s General Counsel has been able to obtain more than
                            300 policies from health insurers that are seeking refunds for what they
                            claim are overpayments.

                            MCCR staff at the Martinsburg and Washington, D.C., medical centers
                            generally billed insurers to identify what services were covered, what
                            policy restrictions existed, and where the veteran stood in relation to
                            annual deductibles or lifetime limits on benefits. Depending on the
                            information contained in the insurers’ remittance advice, MCCR staff made
                            follow-up telephone calls to see why payments were denied or reduced.
                            For example, after repeated telephone conversations with an
                            employer-sponsored health benefit plan, MCCR staff at the Martinsburg
                            medical center discovered that outpatient bills that had been denied for
                            apparent coverage limitations were in fact payable if billed on a different
                            form. On the basis of that information, the facility was able to obtain
                            additional recoveries by resubmitting previously denied outpatient claims
                            for other veterans.

                            VA’sother potential source of policy information—the veteran
                            policyholder—has little incentive to give VA detailed information about
                            insurance coverage. If a private sector provider has trouble obtaining
                            payment from an insurer, the policyholder is generally liable for any
                            unpaid charges and thus has a financial incentive to see that insurance
                            pays the maximum benefit in accordance with the plan provisions.

                            23
                              In 1994, Blue Cross standard option coverage paid member facilities 75 percent of the outpatient
                            facility charge. In 1996, this coverage paid member facilities 100 percent of the outpatient facility
                            charge after deducting a copayment of $100 payable by the covered person.



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                        Because most veteran policyholders obtaining services from VA facilities
                        do not have any financial liability for their care, they have little incentive
                        to intercede on VA’s behalf in obtaining detailed policy information.

                        On the other hand, veterans in the discretionary care category have some
                        financial incentive to help VA obtain information about their insurance
                        coverage because a portion of insurers’ payments is used to reduce their
                        copayments. For example, the Washington, D.C., medical center was able
                        to obtain payment from one employer-sponsored managed care plan after
                        a veteran in the discretionary care category gave VA information on policy
                        provisions indicating that his insurance would pay nonparticipating
                        providers.


Exclusionary Clauses    Before VA’s recovery authority was established, most health insurance
Hinder Recoveries and   plans and contracts contained exclusionary clauses indicating that the
Increase Costs          plans would not pay for care (1) provided in VA hospitals or (2) provided at
                        no cost to the policyholder. Such exclusionary clauses were eliminated as
                        a legal basis for denying payment of VA claims as part of the
                        Comprehensive Omnibus Budget Reconciliation Act of 1986 (P.L. 99-272).
                        Ten years later, however, exclusionary clauses that prohibit payment to
                        federal facilities appear to be fairly common. Although such clauses no
                        longer have any legal effect on VA recoveries, they can delay recoveries
                        and increase the cost of recovery actions. Follow-up actions by VA staff,
                        including VA’s regional and general counsels, may be necessary to
                        challenge the clauses and enable VA to recover from the health plans.

                        The regulation of insurance is primarily a state function. Insurance
                        policies, but not ERISA plans, must generally be reviewed and approved by
                        a state insurance commissioner before they can be offered for sale in the
                        state.24 For example, the Maryland Insurance Commission reviews all
                        policies approved for sale in Maryland. An official from the Maryland
                        Insurance Commission confirmed that the Commission continues to
                        approve policies containing clauses excluding payment for services
                        provided in VA facilities. Commission staff told us that such clauses are
                        common in health insurance policies sold in the state, and they expressed
                        a willingness to work with VA officials to help eliminate the clauses. VA
                        MCCR officials indicated that they rely on federal enforcement to require
                        insurers to pay and have not attempted to work with state insurance
                        commissions to remove exclusionary clauses.


                        24
                          ERISA plans fall under the purview of the Department of Labor.



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                                 Officials from one of the largest health plans in Maryland—Blue
                                 Cross—confirmed that their plans still contain exclusionary clauses. They
                                 told us that the language in the exclusionary clauses will be revised in
                                 future policies to make it clear that the insurer will pay for care VA
                                 provides for nonservice-related conditions.


                                 Many factors help explain the decline in VA recoveries from private health
Many Factors Could               insurance since fiscal year 1995 and make it likely that, without significant
Lead to Decrease in              changes in the recovery program and/or an increase in the number of VA
Future Recoveries                users with fee-for-service insurance coverage, declines will continue over
                                 the next 5 years. These factors include

                             •   the declining and aging of the veteran population,
                             •   increased enrollment in HMOs and other managed care plans,
                             •   changes in how insurers process VA claims,
                             •   shifts in care from inpatient to outpatient settings, and
                             •   difficulty identifying care provided to veterans with service-connected
                                 disabilities for treatment of nonservice-connected conditions.


Declining and Aging of the       The veteran population is projected to decline from 26.2 million to
Veteran Population               23.6 million between 1995 and 2002. This means that VA would have to
                                 increase the percentage of veterans using VA services just to maintain
                                 current workload. In 1995, VA facilities provided services to about
                                 2.6 million veterans, or roughly 1 out of 10 veterans. With fewer veterans,
                                 VA will need to attract roughly 1 of every 9 veterans in 2002 to maintain its
                                 current workload. To attain its goal of increasing by 20 percent the
                                 number of veterans using VA services by 2002, VA will have to attract more
                                 than one out of every eight veterans in 2002. (See fig. 2.)




                                 Page 15                              GAO/HEHS-98-4 VA Medical Care Cost Recovery
                                         B-271726




Figure 2: Declining Veteran Population
May Affect VA’s Ability to Increase
Number of Veterans Served




                                         Calculation of workload projection assumes a constant proportion of nonveteran users.




                                         Just as the declining numbers of veterans will make it more difficult to
                                         maintain recoveries, so too will the aging of the veteran population. As an
                                         increasing proportion of veterans become eligible for Medicare, potential
                                         recoveries decrease. Between 1995 and 2002, the percentage of veterans
                                         aged 65 and older is expected to increase from 34 to 39. This is important
                                         because at age 65, most veterans’ private health insurance becomes
                                         secondary to Medicare. Currently, about 60 percent of veterans who have
                                         health insurance and who are treated by VA are over 65 years of age.
                                         Typically, Medicare supplemental plans cover only the $760 deductible for
                                         the first 60 days of inpatient care and 20 percent of the outpatient charge.
                                         An increase in the percentage of insured veterans covered only by
                                         Medicare supplemental policies is thus likely to decrease future
                                         recoveries.




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Continued Increase in     Continued increases in enrollment in HMOs, PPOs, and POS plans are likely to
Managed Care Plan         reduce future VA recoveries from private health insurance. VA has had
Enrollment Could Reduce   limited success in negotiating to become a participating provider under
                          HMOs (see pp. 27-31) and therefore is generally unable to recover any of its
Future Recoveries         costs of providing routine care to HMO members. Between 1982 and 1994,
                          enrollment in HMOs increased from 9 million to over 50 million. Similarly,
                          because VA is not a preferred provider under any PPOs, its potential
                          recoveries are reduced. Although it may be able to recover from PPOs by
                          becoming a participating rather than preferred provider, it receives lower
                          reimbursement. Finally, POS plans allow their policyholders to obtain care
                          from any willing provider but typically require their members to pay a
                          larger portion of the cost of services they obtain from providers outside of
                          the plan, such as VA facilities. In other words, POS plans pay less of the
                          billed charges when care is provided by an out-of-plan provider, expecting
                          the member to pay the remainder.

                          Nearly three-fourths of workers with employer-provided health insurance
                          are now covered under a managed care plan, most by an HMO or PPO. In
                          1993, 49 percent of American workers with health insurance were covered
                          by a conventional fee-for-service plan, but by 1995 that percentage had
                          dropped to 27. By contrast, during the same time period, the percentage of
                          workers covered under HMOs or PPOs increased from 42 percent to
                          53 percent; workers covered under POS plans increased from 9 to
                          20 percent.25

                          Even recoveries from Medicare supplemental policies may decrease
                          because of the increased enrollment of Medicare beneficiaries in
                          risk-contract HMOs. Between 1987 and 1996, enrollment in Medicare
                          risk-contract HMOs increased from 2.6 percent to 10 percent of total
                          Medicare beneficiaries, and by 2002 enrollment is projected to be
                          22.9 percent of total beneficiaries.26

                          Even now, physicians from VA medical centers in California, Florida, New
                          Mexico, and other states have noted an increase in the number of elderly
                          veteran patients who seek care at VA facilities while enrolled in HMOs. Two
                          studies at individual VA facilities found that HMO enrollment ranged from
                          10 percent among veterans of all ages to about 25 percent among elderly



                          25
                           Gail A. Jensen and others, “The New Dominance of Managed Care: Insurance Trends in the 1990s,”
                          Health Affairs, Vol. 16, No. 1 (Jan./Feb. 1997).
                          26
                           Jo Ann Lamphere and others, “The Surge in Medicare Managed Care: An Update,” Health Affairs, Vol.
                          16, No. 3 (May/June 1997).



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veterans.27,28 Data from the West Los Angeles medical center suggest that
its elderly veteran users are opting to enroll in Medicare HMOs rather than
purchase Medigap insurance.29 For all VA facilities, approximately
1.5 percent of VA’s inpatient discharges and almost 2.5 percent of VA’s
outpatient visits in fiscal year 1995 were provided to veterans enrolled in
Medicare risk contracts.

The growth in Medicare HMO enrollment is likely to affect VA recoveries for
two primary reasons. First, VA is generally unable to recover any of its
costs for providing care to veterans enrolled in Medicare HMOs. Second,
increased enrollment in HMOs is accompanied by corresponding decreases
in the number of beneficiaries covered under Medicare supplemental
insurance, from which VA can attempt to recover.

FEHBP enrollment is also shifting away from fee-for-service insurance
toward managed care arrangements. In 1990, 26 percent of federal
employees and annuitants chose to enroll in HMOs. By 1997, 29 percent of
the FEHBP enrollees selected HMOs. In 1990, four fee-for-service plans
offered significant preferred provider options within the structures of their
plans.30 Under the plans, enrollees retain the freedom to choose providers
but have lower out-of-pocket payments if they use preferred providers. By
1997, all fee-for-service plans within FEHBP identified themselves as
“managed fee-for-service plans.” Most plans offered enrollees services
through PPOs, and several offered significant POS products. The number of
enrollees who use only the preferred providers in these hybrid plans is not
measured.

As veterans continue to shift from conventional fee-for-service health
plans to HMOs, PPOs, and POS plans, VA recoveries will likely continue to
decline unless VA facilities become preferred or participating providers. VA
efforts to this end have, however, generally been unsuccessful, as
discussed in the next section.


27
 E. Yano and others, Survey of Health and Medical Care for Veterans in Ambulatory Care (Sepulveda,
Calif.: VA Medical Center, Evaluation and Decision Support Service, 1994).
28
 R. Morgan, B. Virnig, and C. Devito, Medicare HMO Membership and Use of VAMC Medical Care
(Poster presentation at the 14th annual meeting, VA Health Services Research and Development
Service, Washington, D.C., Feb. 28-Mar. 1, 1996).
29
 L. Passman and others, “Elderly Veterans Receiving Care at a Veterans Affairs Medical Center While
Enrolled in Medicare-Financed HMOs: Is the Taxpayer Paying Twice?” Journal of General Internal
Medicine, 12 (4) (Apr. 1997), pp. 247-9.
30
 Francis Walton, “The Political Economy of the Federal Employees Health Benefits Program,” Health
Policy Reform, Competition and Controls (Washington, D.C.: American Enterprise Institute Press,
1993).


Page 18                                         GAO/HEHS-98-4 VA Medical Care Cost Recovery
                               B-271726




Changes in How Insurers        Changes in how insurers process VA claims could result in refunds of over
Process VA Claims Could        $600 million in overpayments and reduce VA’s future recoveries by over
Lead to Refunds and            20 percent. Specifically, some insurers
Reduced Recoveries         •   claim they overpaid VA under Medicare carve-out policies and are seeking
                               refunds,
                           •   are increasingly reluctant to pay any portion of billed charges when the
                               care was provided in a hospital unnecessarily, and
                           •   increasingly use pharmacy benefit managers (PBM) to administer
                               prescription benefits.


Possible Overpayments          A number of insurers maintain that they have overpaid VA claims under
Under Carve-Out Policies       Medicare carve-out policies. Such policies differ from Medigap policies in
                               that they offer the same health care benefits to both active employees and
                               retirees but contain provisions making their coverage secondary to
                               Medicare as the retirees become eligible for Medicare. Some insurers
                               offering such carve-out policies have paid VA for services provided to their
                               Medicare-eligible policyholders as the primary, rather than secondary,
                               insurer. As a result, they are seeking refunds of millions of dollars in prior
                               payments and are reducing current payments.

                               VA’s position is that it is entitled to recover from a health plan to the same
                               extent that the insurer would have been liable for the care if it was
                               provided in the private sector. If VA determines, following a review of an
                               insurer’s policy provisions, that the insurer overpaid VA under the terms of
                               its policy by paying primary when the insurer would have had a secondary
                               liability in the private sector, VA will refund timely and well-grounded
                               claims.31

                               On the basis of a review of fiscal year 1995 data on potential
                               overpayments, MCCR staff estimate that about 40 percent of the paid claims
                               for veterans aged 65 and older were paid at an amount greater than the
                               Medicare deductible and coinsurance. The MCCR staff estimated that
                               overpayments to all VA medical centers in fiscal year 1995 were
                               $110 million (+/- $35 million). Over the 6-year period of liability, refunds
                               could amount to as much as $600 million.



                               31
                                 The Department of the Army, which also bills insurers for care provided in its facilities, has a
                               different interpretation of how its facilities should be reimbursed under carve-out policies: It believes
                               the policies should pay its facilities as the primary insurer because its facilities, like VA facilities, are
                               not Medicare providers. See Third Party Collection Program, Report No. 96-113 (Washington, D.C.:
                               Department of Defense, Office of the Inspector General, May 7, 1996).



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                                Other issues related to carve-out policies could also affect future VA
                                recoveries. VA’s General Counsel determined that refunds for
                                overpayments made during the current year must be charged against that
                                year’s recoveries but that refunds of overpayments from prior years should
                                come out of the Treasury. This approach does, however, involve certain
                                risks:

                            •   Insurers could offset overpayments from prior years against payments for
                                current-year bills. One plan in Indiana has begun offsetting overpayments,
                                although other plans appear willing to wait for refunds to be paid out of
                                the Treasury.
                            •   Allowing VA to authorize refunds from the Treasury gives the agency little
                                incentive to protect the government’s interests in determining the
                                appropriateness of refund requests.
                            •   Aggressively reviewing refund requests could adversely affect current-year
                                recoveries because staff would be diverted from billing for current
                                services to verifying refund requests.

                                Like some private sector carve-out policies, FEHBP plans have been paying
                                VA as primary insurance for Medicare-eligible federal retirees. Officials in
                                the Office of Personnel Management (OPM) have indicated that federal
                                retirees’ health coverage will become secondary to Medicare when care is
                                provided to veterans covered by Medicare in VA facilities, as of the 1998
                                benefit year. OPM officials have indicated that existing policy will be
                                modified to implement this change prospectively and that FEHBP plans will
                                not seek refunds from VA. Since VA included FEHBP payments for
                                Medicare-eligible veterans in its estimate of amounts to be refunded, that
                                estimate is overstated. VA could not indicate the extent that payment
                                amounts from FEHBP plans were included in its refund estimate. This
                                benefit change will cause VA’s future recoveries from FEHBP plans to
                                decline.


Insurers Are Becoming           VA’s ability to obtain partial payment for care unnecessarily provided in an
More Reluctant to Provide       inpatient hospital is declining. As discussed earlier, the Martinsburg
Partial Payment                 medical center and, to an increasing extent, the Washington, D.C., medical
                                center, have been successful in obtaining partial payment from insurers
                                for inpatient care that should have been provided in an outpatient clinic.
                                At both medical centers, however, several major insurers have changed
                                their policies and will no longer make such partial payments.




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Changes in Processing of   VA’s ability to recover for prescription refills may be declining as plans’
Prescription Benefits      benefit designs change and use of pharmacy benefit managers (PBM)
                           increases. PBMs are companies that administer the prescription drug
                           coverage of health insurance plans on behalf of plan sponsors, such as
                           FEHBP plans, insurance companies, self-insured employers, and HMOs. Many
                           PBMs offer a range of services to plan sponsors, such as processing
                           prescription claims, operating mail order pharmacies, and developing
                           networks of retail pharmacies to serve plan enrollees.32 The PBMs’ mail
                           order and retail services provide enrollees prescription drugs at
                           discounted prices. To take advantage of these discounts, the plans offer
                           enrollees financial incentives to fill their prescriptions only through the
                           PBMs’ mail order programs or participating network retail pharmacies.


                           In 1989, PBMs managed prescription drug benefits for about 60 million
                           people. Four years later, they were managing prescription drugs for about
                           100 million people, almost 40 percent of the U.S. population. By the end of
                           1995, about 58 percent of FEHBP enrollees were covered by a PBM.

                           Because no VA medical centers or mail service pharmacies are
                           participating providers under PBMs, VA is generally unable to obtain
                           payment for prescription refills when veterans’ insurance plans contract
                           with PBMs. In such cases, VA facilities may submit their bills to the health
                           insurers for processing as outpatient claims. Changes in insurers’
                           copayment requirements for outpatient services, however, could further
                           reduce VA recoveries. For example, the FEHBP Blue Cross and Blue Shield
                           high-option plan will not pay the first $50 of outpatient charges submitted
                           by nonpreferred providers such as VA facilities. As a result, VA, which bills
                           $20 for a prescription refill regardless of type or amount of the drug
                           provided, can no longer recover any of its costs of providing prescription
                           refills from the Blue Cross plan unless it combines three or more refills
                           into a single bill.

                           Even though VA is not a participating provider, one PBM has been
                           authorized by 30 of its 2,000 plan sponsors to process and pay VA’s bills for
                           prescription refills. However, we also identified instances in which PBMs
                           paid the insured veteran directly rather than the VA medical center, since
                           VA is not a participating provider in the network. In such cases, VA has
                           difficulty in getting veterans to forward the payments.


                           32
                            For more information on services offered by PBMs, see Pharmacy Benefit Managers: FEHBP Plans
                           Satisfied With Savings and Services, but Retail Pharmacies Have Concerns (GAO/HEHS-97-47, Feb. 21,
                           1997) and Pharmacy Benefit Managers: Early Results on Ventures With Drug Manufacturers
                           (GAO/HEHS-96-45, Nov. 9, 1995).



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Shifts From Inpatient to     As VA shifts more of its care from inpatient to outpatient settings,
Ambulatory Care Reduce       insurance recoveries decrease and the cost of recovery increases.
Recoveries and Increase
                             VA has set goals to significantly reduce the amount of care provided in
Recovery Costs               inpatient settings. For example, it has set goals to reduce the hospital
                             bed-days of care provided per 1,000 unique users by 20 percent from the
                             1996 level, enroll 80 percent of users in primary care, and shift a large
                             portion of surgeries to ambulatory care settings. VA has also implemented
                             a new system for allocating resources to its networks—the Veterans
                             Equitable Resource Allocation system—that is intended to eliminate the
                             financial incentives previous allocation methods gave facilities to
                             unnecessarily admit patients to hospitals and to encourage facilities to
                             provide care in the most cost-effective setting. To the extent facilities
                             respond to such performance measures and financial incentives,
                             reimbursable inpatient care will decline and reimbursable outpatient care
                             will increase.

                             Under its current rate schedules, VA must generate approximately 20
                             outpatient bills to produce recoveries equivalent to one inpatient bill. In
                             addition, because MCCR staff have had to review medical records to
                             generate outpatient bills, it frequently costs more to generate an outpatient
                             bill for about $200 than it does to generate an inpatient bill for thousands
                             of dollars.


Billable Care Rendered to    Almost 40 percent of the funds VA recovers from private health insurance
Veterans With                is for services provided to veterans with service-connected conditions. VA
Service-Connected            loses opportunities for additional recoveries, however, because of the
                             nature of decisions as to what services are billable. Identifying and billing
Conditions Is Difficult to   the cost of care provided to veterans with service-connected disabilities
Identify                     for treatment of their nonservice-related conditions is administratively
                             cumbersome and often subjective.

                             Because data on veterans’ service-connected disabilities are not always
                             precise, it is often difficult for MCCR staff to determine whether the care
                             provided was related to the service-connected disability. For instance,
                             knee surgery provided to a veteran with a service-connected disability was
                             found to be billable when the MCCR staff discovered that his
                             service-connected condition was associated with injuries to his other leg.

                             In addition, the ability of MCCR staff to differentiate between treatments for
                             service- and nonservice-connected conditions depends on the quality of



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                             the documentation in the medical record and the cooperation of the
                             physician and other clinical personnel involved in providing the care. For
                             example, billable medical services provided to a veteran who has a
                             service-connected condition relating to hypertension can be difficult to
                             identify. Depending upon the documentation, MCCR staff may view an EKG
                             provided to this veteran as billable and view a routine physical (which
                             requires that the veteran’s blood pressure be checked) as unbillable.

                             Recent legislation minimized insurers’ ability to exclude coverage for
                             preexisting conditions. The Health Insurance Portability and
                             Accountability Act of 1996 (P.L. 104-191) (HIPAA) prevents private health
                             insurers from excluding payment for policyholders’ preexisting conditions
                             for more than 12 months for conditions diagnosed or treated within 6
                             months before becoming insured.33 Although service-connected
                             disabilities are preexisting conditions, the VA recovery program will not
                             benefit from this change, because VA’s recovery authority does not allow it
                             to bill health insurers for treatment related to a service-connected
                             disability.

                             Changing the statutory language in title 38 of the U.S. Code to authorize VA
                             to recover its costs from private health insurance for treating
                             service-connected conditions, consistent with the provisions of HIPAA,
                             could, however, be viewed as shifting to the private sector the
                             government’s obligation to provide care for veterans disabled during or as
                             a result of their military service. On the other hand, authorizing such
                             recoveries could generate significant additional revenues to be retained by
                             VA for improving health care services for veterans. In addition, it could
                             offset the incentives created by the Balanced Budget Act for VA facilities to
                             target their services toward privately insured veterans with no
                             service-connected disabilities.


                             VA officials identified a number of legislative and management initiatives
VA Initiatives Seek to       intended to address the previously mentioned factors and help it achieve
Reverse Decline and          its recovery goals. VA sought and was given legislative authority to
Increase Recoveries          (1) allow it to retain copayment and third-party recoveries and (2) extend
                             the lapsing recovery provisions. Planned administrative actions include

                         •   improving the process for identifying veterans’ insurance coverage;



                             33
                              Nonpayment for preexisting conditions may extend to 18 months in the case of a late enrollee in a
                             group plan.



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                       •   improving the process for submitting claims to Medicare supplemental
                           insurers;
                       •   developing new rate schedules that allow itemized billing;
                       •   strengthening follow-up on claims denied or partially paid;
                       •   negotiating provider agreements with HMOs and other managed care plans;
                       •   strengthening efforts to ensure the medical appropriateness of VA care; and
                       •   automating the capture of data on patient diagnoses, procedures, and
                           providers.

                           In addition, VA’s goal of increasing the number of veterans using the VA
                           health care system by 20 percent should bring additional insured veterans
                           into the system. It is not clear, however, whether these actions will allow
                           VA to counteract the factors contributing to declining recoveries, let alone
                           allow it to significantly increase future recoveries.


Seek New Legislative       Historically, facility directors have had little incentive to aggressively
Authority                  identify and pursue insurance recoveries because the funds, less the costs
                           of operating the recovery program, were returned to the Treasury. Under
                           the legislative proposal contained in its fiscal year 1998 budget
                           submission, VA sought authority to keep all funds recovered from private
                           health insurance. VA expects such authority to give VA facilities stronger
                           incentives to identify veterans’ insurance coverage and aggressively
                           pursue recoveries. They will also have stronger incentives to market their
                           services toward such revenue-generating veterans rather than
                           nonrevenue-generating veterans such as veterans without private health
                           insurance. The Balanced Budget Act of 1997 authorized VA to retain
                           recoveries from private health insurance and collections for veterans’
                           copayments after June 30, 1997.

                           The second problem VA sought to address through legislation was the
                           lapsing of its authority to recover its costs for providing health care
                           services to veterans with service-connected disabilities for conditions
                           unrelated to their service-connected disabilities. The Balanced Budget Act
                           of 1997 subsequently extended the authority until September 30, 2002.

                           With this legislation, VA expects to significantly increase recoveries for
                           services provided to veterans with service-connected disabilities. By the
                           year 2002, VA estimates that recoveries from private health insurance for
                           services provided to veterans with service-connected conditions will
                           increase to $253 million. Allowing VA to retain all insurance recoveries
                           creates a strong incentive for VA facilities to classify more of the care



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                        provided to veterans with service-connected disabilities as unrelated to
                        treatment of those disabilities.


Improve Methods for     VA has identified three approaches for improving identification of veterans
Identifying Insurance   with private health insurance and estimates that these initiatives could
Coverage                lead to increased recoveries totaling nearly $200 million per year.
                        However, VA appears to have overestimated the additional recoveries that
                        are likely to be generated by the initiatives. Moreover, a fourth option for
                        improving the identification of insurance coverage would be to include
                        such information in the enrollment database being created as part of the
                        implementation of eligibility expansions.

                        The first approach is to obtain, through a Medicare contractor,
                        information on Medicare-eligible veterans who have private health
                        insurance coverage that is primary. MCCR is particularly interested in
                        identifying Medicare-eligible veterans whose private health insurance is
                        primary. MCCR estimated that 5.9 percent of the over-65 population treated
                        by VA could be expected to have primary health insurance other than
                        Medicare. The MCCR program further estimated that if its assumption is
                        correct, potential recoveries from such veterans may total about
                        $97 million.

                        VA appears to overestimate the potential for additional recoveries under
                        this initiative. There are two basic groups of Medicare beneficiaries for
                        whom private health insurance is primary. The first group is beneficiaries
                        who are over 65 and still working or have a spouse who is still working.
                        Those Medicare beneficiaries still working are likely to be healthier and
                        thus likely to use fewer health care services, including services from VA.
                        The second large group of Medicare beneficiaries likely to have other
                        primary health insurance consists of individuals who retired from state
                        and local governments before April 1, 1986, or from the federal
                        government before January 1983.

                        In addition, VA does not know how many such veterans have already been
                        identified. As discussed earlier, 60 percent of the veterans VA currently
                        identifies as having private health insurance are over age 65. Accordingly,
                        even if the estimate of the percentage of Medicare-eligible veterans with
                        private health insurance that is primary is correct, the estimate of potential
                        recoveries is overstated because it does not back out current recoveries.




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On the other hand, VA may understate the potential for additional
recoveries resulting from matching VA and Medicare records because such
a match could also be used to identify Medicare beneficiaries under 65
years of age who have private health insurance that is primary. VA’s 1992
National Survey of Veterans estimates that 23 percent of VA users under
the age of 65 are covered by Medicare, and about a third of these veterans
have private health insurance. MCCR, however, does not currently plan to
use these data to identify private health insurance coverage for such
veterans under the age of 65.

The second approach MCCR tested for improving identification of insurance
coverage was the use of a contractor to identify insurance coverage. In
August 1995, VA provided Health Management Systems, Inc., the names
and identifiers of 38,748 patients for whom VA facilities had no insurance
information. The contractor, however, was able to identify only 649
matches with its insurance records. VA further determined that only 236, or
0.6 percent, of the records reviewed had billable insurance coverage.
However, even with the limited identification of insurance coverage, the
contract proved to be cost effective.

The final approach was the institution of a preregistration process under
which patients scheduled for outpatient visits within the next 10 days were
contacted to remind them of their appointment and to request updated
personal information, including employment and insurance data. On the
basis of results of the pilot test, VA estimated that nationwide
implementation of a preregistration process could result in an additional
$100 million in recoveries annually from newly identified insured patients.

It is not clear, however, whether the billable cases identified through the
preregistration process would not otherwise have been identified. In other
words, was preregistration a substitute for data-gathering efforts that
would have taken place at the time of the visit? In addition, the
preregistration process would also identify some insurance coverage that
also would be identified under the first two methods, so the additional
collections from the three approaches overlap and should not be fully
added together.

Implementation of VA’s health care enrollment process gives VA another
option for capturing and updating veterans’ health insurance data. Public
Law 104-262 expanded veterans’ eligibility for VA health care services and
required VA to establish a system of enrollment. After September 30, 1998,
veterans, other than those with service-connected disabilities rated at



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                     50 percent or higher or seeking treatment for a service-connected
                     disability, will not be able to obtain care from the VA health care system
                     unless they have enrolled. Capturing insurance information during the
                     enrollment process and including such data in the enrollment database
                     could facilitate billing efforts. Information obtained at the time of
                     enrollment and subsequent reenrollment could include the policy number
                     and, upon request, a copy of the policy. By including other information,
                     such as income and detailed information on adjudicated service-connected
                     disabilities, MCCR staff could more readily identify billable insurance and
                     prepare and process bills.

                     The effectiveness of such a process would, however, continue to be
                     dependent on (1) the willingness of veterans to give VA complete and
                     accurate information on their insurance coverage, employers, and incomes
                     and (2) the thoroughness of VA efforts to obtain and verify the information
                     provided. VA data show that much of the information VA currently gathers
                     is inaccurate—veterans fail to reveal their insurance coverage or
                     underestimate their incomes in applying for VA health care. For example,
                     the VA initiatives described indicate that VA is not currently obtaining
                     complete and accurate information on insurance coverage. Similarly, only
                     about 3 percent of veterans with no service-connected disabilities are
                     identified through VA’s admission process as having incomes that place
                     them in the discretionary care category. About 15 percent of veterans
                     identified during the admission process as having incomes that place them
                     in the mandatory care category, however, are subsequently identified
                     through matches with income tax data as having incomes that might place
                     them in the discretionary care category.

                     Currently, VA’s only recourse when it determines that veterans knowingly
                     provided false information in order to avoid copayments is to retroactively
                     seek recovery of those copayments. A VA official told us that VA medical
                     centers frequently waive such copayments. VA does not, however, maintain
                     data on the extent to which such copayments are actually billed
                     retroactively and recovered.


Negotiate Provider   The MCCR program is attempting to negotiate with HMOs and other managed
Agreements           care plans to enable VA facilities to become participating providers. HMOs,
                     however, have little incentive to accept VA as a participating provider
                     because, to the extent their enrollees obtain care from nonparticipating
                     providers, HMOs’ costs are reduced and profits increased. The MCCR




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Business Plan proposes that VA consider a legislative proposal that would
require HMOs to recognize VA as a preferred provider.

VA currently has a contract with only one HMO—Dakota Care—in South
Dakota. VA does not, however, view this contract as a model easily
transferrable to other HMOs because the VA medical center is in a small
state with limited health care options. VA has been negotiating with at least
two other HMOs—U.S Healthcare in Philadelphia and HMO Illinois, a
subsidiary of Blue Cross of Illinois—but, to date, discussions have not
resulted in provider agreements.

VA is having more success in negotiating provider agreements with POS
plans. Unlike HMOs and PPOs that may be able to avoid all payments to VA
(other than for emergency care) by excluding VA from their list of
participating providers, POS plans have less to gain by refusing to accept VA
as a participating provider. This is because a POS plan has an obligation to
pay any willing provider for nonemergency care, including those without a
provider agreement.

Since February 1995, VA’s Office of General Counsel has reviewed and
approved 32 provider agreements between VA facilities and managed care
plans submitted by regional counsels and medical centers. Twelve of those
agreements were signed; 5 agreements were closed with no further action,
and 15 agreements remain open. Neither VA’s General Counsel nor the
Veterans Health Administration maintained readily accessible information
on the number and status of contracts submitted for headquarters review
prior to February 1995. As a result, we could not determine how many
provider agreements are in effect or whether they are for preferred or
participating provider status.

However, even in instances in which managed care plans are willing to
accept VA as a participating provider, they may be unwilling to accept VA as
a preferred provider. This distinction is particularly important to VA
because being a participating provider essentially lowers VA recoveries.
For example, the Washington, D.C., VA medical center has an agreement
with Blue Cross of the National Capital Area as a participating, rather than
preferred, provider. This means that veteran policyholders who use the
Washington, D.C., medical center rather than a preferred provider are
subject to higher copayments. These higher copayments essentially mean
that the insurer pays less of the billed charges; thus VA recoveries are
lower than they would be if VA was a preferred provider.




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Although the Washington, D.C., medical center is trying to become a
preferred provider, Blue Cross of the National Capital Area has little
incentive to allow VA to join its preferred provider network. For one thing,
the VA medical center is surrounded by preferred providers in the Blue
Cross network; as the following map indicates, 4 of the 12 hospitals that
are preferred providers in Washington, D.C., are within a mile of the VA
hospital. Moreover, because the Washington, D.C., medical center’s billing
process differs from those of other hospitals, VA bills are perceived as
more difficult and costly for the insurer to process.




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Figure 3: Location of Participating Providers in Blue Cross Network Relative to Washington, D.C., VA Medical Center




                                          Page 30                                  GAO/HEHS-98-4 VA Medical Care Cost Recovery
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                    A number of other factors also affect VA’s ability to negotiate preferred
                    provider status. First, to become a preferred provider under some plans,
                    VA would be required to accept discounted payments. Historically, VA has
                    not been allowed to negotiate discounted payments.34 Second, VA may be
                    unwilling or unable to comply with the utilization management policies
                    and standards insurers often impose as requirements for preferred
                    provider status.

                    The 1996 business plan for the MCCR program identified plans to address
                    VA’s inability to recover from HMOs by seeking legislation requiring HMOs to
                    include VA as a preferred provider. VA has taken no official position on the
                    proposal contained in the MCCR business plan and has not estimated
                    potential revenues from this initiative, but revenues could be substantial
                    given the rapid increase in HMO enrollments. Such legislation, however,
                    would essentially require HMOs to treat VA providers differently than they
                    would other providers, raising questions of equity and fairness.

                    A number of alternative approaches could be taken to ensure that
                    government funds are not used to subsidize health plans unless the plan
                    includes VA as a participating provider. For example, legislation could be
                    enacted authorizing VA to (1) deny enrollment in the VA health care system
                    to any veteran enrolled in a managed care plan unless that plan includes VA
                    as a provider and (2) refuse to provide drugs to any veteran covered by
                    PBMs unless the sponsoring health plan reimburses VA, or the plan’s PBM
                    includes VA as a participating provider in the PBM’s pharmacy network.

                    Similarly, in instances in which health plans send their payments to
                    veterans rather than to VA and the veterans refuse to return the payments,
                    VA could be authorized to deny veterans enrollment in the VA health care
                    system or to recover the funds through an offset against other government
                    benefits. Because they are directed at veterans rather than at health plans,
                    such solutions would likely be viewed as reducing veterans’ benefits.


Provide Medically   VA actions aimed at providing care in the most cost-effective setting
Appropriate Care    consistent with good patient care should increase the percentage of billed
                    charges recovered, but would not necessarily increase overall recoveries.
                    At the two facilities included in our review, however, preliminary results
                    from the utilization reviews showed that most of the hospital admissions
                    continue to be medically unnecessary. Nevertheless, further actions could

                    34
                     Under the Balanced Budget Act, VA can recover the reasonable charge for care or services starting
                    October 1, 1997.



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be taken to strengthen utilization reviews or give physicians incentives to
provide services in the most cost-effective setting.

The Under Secretary for Health directed VA facilities to implement an
inpatient utilization review program no later than September 30, 1996, to
assess, monitor, and evaluate the appropriateness of hospital care
provided. As part of that program, all scheduled acute admissions are to
be assessed prospectively for the appropriateness of the level of care
provided. Following admission, nurse-reviewers are to monitor the
appropriateness of care through continuing stay reviews, that is, though
periodic reviews of a patient’s care during the hospital stay.

VA’s action addresses a long-standing problem with overutilization of
acute-care beds and inpatient services identified by the VA Inspector
General, VA researchers, and us. For example, a January 1996 study by VA
researchers reported that about 40 percent of the admissions to acute
medical and surgical services were assessed as nonacute; more than
30 percent of the days of care in the acute medical and surgical services of
the VA hospitals reviewed were nonacute.35 VA’s action responded to our
recommendation last year that it establish an independent, external
preadmission certification program.36

Systemwide data on the effectiveness of the new utilization review
program are not yet available. Data from the Martinsburg and Washington,
D.C., VA medical centers, however, indicate that about 45 percent of the
acute inpatient admissions and about 60 percent of the acute days of care
reviewed in both facilities since the implementation of the utilization
review program did not meet InterQual standards for acuity or intensity of
care.

In addition to implementing the utilization review program, the
Martinsburg medical center established (1) a subacute pilot program that
allows patients no longer needing acute care to be transferred to a special
unit offering care that is less intensive, (2) a 23-hour observation unit to

35
  C. Smith and others, “Overutilization of Acute-Care Beds in Veterans Affairs Hospitals,” Medical Care,
34 (1) (Jan., 1996), pp. 85-96. In the study, reviewers from 24 randomly selected VA hospitals applied
the InterQual criteria to assess the appropriateness of 2,432 fiscal year 1992 admissions and days of
care in acute medical, surgical, and psychiatry services. The study found similar rates of nonacute
admissions and days of care in all 24 hospitals. The nonacute admissions and days were attributed to
several factors, including lack of an ambulatory care alternative, conservative physician practices,
delays in discharge planning, and social factors such as homelessness and long travel distances to the
hospitals.
36
 VA Health Care: Opportunities for Service Delivery Efficiencies Within Existing Resources
(GAO/HEHS-96-121, July 25, 1996).



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allow patients to be monitored without being admitted to the hospital,
(3) a “hoptel” to provide temporary lodging for patients with
transportation problems, and (4) a Preadmission Surgical Screening
program through which preoperative tests are performed on an outpatient
basis so that patients can be admitted the morning of surgery. In addition,
daily reports on all nonacute admissions are given to the bed service
chiefs, and a weekly utilization review activity report is provided to bed
service chiefs and the chief of staff.

These initiatives enabled Martinsburg medical center to decrease nonacute
admissions to medical wards from 72 to 59 percent and nonacute
admissions for surgical wards from 78 to 70 percent. The data from
continuing stay reviews showed that nonacute days of care provided in
medical wards decreased from 92 to 79 percent, and nonacute days of care
provided in surgical wards decreased from 82 to 69 percent. Although
these are important improvements, with well over half of admissions and
days of care continuing to be nonacute, further actions appear warranted.
For example, under the current utilization review program, neither the
medical center nor the admitting physician suffer any financial
consequences from ignoring the findings of the reviewer and admitting
patients who could be cared for on an outpatient basis.

Managed care plans also control the use of hospital care through physician
incentives. These include profiling of physicians, preferred provider
arrangements, and specific financial incentives. Through profiling,
physicians are given specific data that compare their practice and
admission patterns with those of other physicians. Profiling largely relies
on peer pressure to achieve changes in practice patterns.

VA’s MCCR  program developed one form of profiling—a report indicating
how many days of care were denied by health insurers for each attending
physician. The report also shows the reasons for the insurer denials. It is
not clear, however, how many facilities have implemented the report or
whether the information is shared with the attending physicians. For
example, the Martinsburg medical center produces the report and
distributes it to the chief of Clinical Support, while the Washington, D.C.,
medical center does not produce the report.

A second method managed care plans use to create physician incentives is
through preferred provider arrangements. PPOs use physician profiling to
identify cost-effective providers. Those whose practice patterns vary




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                         significantly from the norm are not accepted or not retained as preferred
                         providers.

                         Finally, many HMOs use specific financial incentives to encourage
                         physicians to reduce hospital use. These incentives can range from
                         financial arrangements, in which physicians are placed at risk for a portion
                         of hospital costs, to bonuses if hospital use is kept below a certain level.
                         Such financial incentives, however, carry with them an increased risk that
                         physicians will overreact to the financial incentives and fail to admit
                         patients in need of hospital care. VA has limited legislative authority to
                         establish incentive pay provisions for physicians.

                         Actions to reduce claim denials because of inappropriate medical care are
                         largely beyond the control of the MCCR program. The MCCR program can
                         continue to (1) observe insurers’ certification procedures and (2) negotiate
                         for partial payments to the extent feasible, but it cannot resolve the core
                         issue.


Obtain Medicare          VA also expects to increase recoveries by improving its process for
Remittance Advice        submitting claims to Medicare supplemental insurers. As discussed earlier,
                         VA has considerable and increasing difficulty in collecting from Medicare
                         supplemental insurance, in part, because of VA’s inability to submit claims
                         to insurers similar to the claims of Medicare providers that have
                         accompanying remittance advice and explanation of benefits payment
                         vouchers. The MCCR program is exploring the feasibility and costs
                         associated with having a Medicare contractor prepare such documentation
                         for veterans covered by Medicare who use VA facilities. VA has not
                         estimated the potential increased recoveries from the initiative, but notes
                         that the initiative is important to prevent further decreases in recoveries
                         from Medicare supplemental policies.


Develop Itemized Bills   VA also expects to increase recoveries by developing new rate schedules
                         that allow itemized billing. In the past, Veterans Health Administration has
                         been limited to use of per diem and per-visit rates because of the lack of
                         detailed cost and workload data from its accounting and information
                         systems. As VA completes implementation of the Decision Support System
                         and other improvements to its information and accounting systems, it
                         proposes to implement new rate schedules to optimize third-party
                         recoveries.




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                       As VA shifts from inpatient to outpatient care, the importance of
                       developing a more detailed outpatient charge structure increases.
                       Although many high-cost services, such as cataract surgery, are
                       increasingly performed on an outpatient basis, under its current rate
                       structure, VA can bill only $194 for an outpatient visit, regardless of the
                       type and amount of services provided during the visit.

                       To resolve this problem, the MCCR program is developing a
                       procedure-specific rate schedule for outpatient physician services. These
                       rates will be billed along with a facility charge. VA plans to implement the
                       new rate structure in October 1997. Implementation of the new rates
                       should help compensate for the decline in recoveries likely to accompany
                       the shifting of care from inpatient to outpatient settings.

                       The 1996 MCCR business plan also estimated that VA should see between a
                       15- and 25-percent increase in collections if it uses a diagnosis-related
                       group (DRG) rate schedule for inpatient billing. Although the DRG rates are
                       still being developed, VA no longer intends to implement DRG billings in
                       fiscal year 1997. Rather, its efforts have turned to developing a rate
                       schedule for inpatient physician services. Other proposed changes in
                       billing rates are targeted for succeeding years, leading to implementation
                       of locally developed itemized rates in fiscal year 2000.


Strengthen Follow-Up   VA believes it can increase recoveries from currently billable insurance by
                       strengthening follow-up on claims denied or partially paid. The business
                       plan notes that some medical centers do not have utilization review
                       coordinators adequately trained in third-party recoveries to facilitate
                       requests for reconsideration of claims. The plan notes that some utilization
                       review coordinators have successfully negotiated payments from insurers;
                       it estimates that approximately 10 percent of denied claims could be
                       overturned and recovery achieved through strong utilization review
                       coordinators.

                       Our work at the Martinsburg and Washington, D.C., medical centers
                       confirmed that there is some potential to achieve additional recoveries
                       through follow-up action. It is unclear, however, whether such actions
                       would result in 10 percent of denied claims being overturned and recovery
                       achieved through follow-up actions. As discussed earlier, for most denied
                       claims, there is little, if any, recovery potential.




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                      The utilization review coordinator at Martinsburg was able to negotiate
                      partial payments for many claims denied because of medical necessity, but
                      such recoveries accounted for only a small portion of billed charges. While
                      the Washington, D.C., medical center did not actively pursue partial
                      payment during the time of our review, its ability to achieve the same
                      success in obtaining partial payment from insurers depends on a number
                      of factors, including the willingness of insurers to make partial payments.
                      As discussed earlier, insurers are increasingly denying all payment for
                      services unnecessarily provided in hospitals.


Automate Capture of   VA also expects its efforts to automate the capture of data on patient
Encounter Data        diagnoses, procedures, and providers to increase collections and reduce
                      recovery costs. Prior to April 1995, VA did not require its facilities to
                      include such data for outpatient visits in any of its computer databases. As
                      a result, the MCCR program had to manually review outpatient medical
                      records in order to prepare insurance billings.

                      In April 1995, the Under Secretary for Health changed Veterans Health
                      Administration policy to require the capture of diagnosis, procedure, and
                      provider data for all ambulatory care encounters and services. When fully
                      implemented, the MCCR program estimates that the automated capture of
                      encounter data will enable it to (1) utilize the automatic billing features of
                      its integrated billing system and (2) eliminate staff positions comparable to
                      572 full-time-equivalent employees currently used to manually review and
                      code data from patient medical records.

                      Among the benefits from the data capture initiative identified by a VA
                      contractor were improved identification of billable visits and increased
                      reimbursement because of improved capture and reporting of procedures.
                      These benefits would result from shifting the staff positions saved by
                      eliminating manual review to improving identification of insurance
                      coverage and follow-up on denied claims. The contractor estimated that
                      using the positions to strengthen identification and follow-up would
                      enable VA to generate about $100 million a year in additional outpatient
                      recoveries. In its fiscal year 1998 budget submission, VA indicates that the
                      automated capture of encounter data will also result in additional
                      recoveries of $23 million in fiscal year 1997, increasing to $116 million in
                      fiscal year 2002.




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Attract New Users      Another of VA’s goals is to increase the number of VA users by 20 percent
                       over the next 5 years. One way to meet its recovery projections would be
                       to focus its marketing efforts on attracting veterans with fee-for-service
                       private health insurance.

                       VA officials told us that they do not know how many veterans in their
                       2.9 million patient base have insurance or how many insured veterans
                       receive billable care. This lack of information on key elements affecting its
                       projections creates considerable uncertainty about the number of new
                       insured users it would need to attract or identify in order to generate its
                       target revenues.


                       VA’s General Counsel has determined that a portion of any payments
Use of Insurance       received from a veteran’s private health insurance should be applied
Payments to Pay        toward any copayments owed by the veteran, including both means test,
Veterans’ Copayments   per diem, and pharmacy copayments. While VA’s interpretation is
                       understandable as it applies to Medicare supplemental insurance policies,
Reduces Overall        it is more questionable to apply recoveries from primary insurance toward
Recoveries             veterans’ copayments. In addition, as interpreted by VA’s General Counsel,
                       the application of insurance recoveries to offset veteran copayments
                       creates a significant administrative burden for MCCR staff and reduces
                       overall third-party recoveries.

                       Under Public Law 99-272, certain veterans, in order to become eligible for
                       VA medical care, must agree to pay the lesser of the cost of that care or the
                       so-called “means test” copayment. The copayment for inpatient hospital
                       and nursing home care is based on the Medicare deductible, while the
                       copayment for outpatient care is equal to 20 percent of the average cost of
                       an outpatient visit. The means test copayments apply to veterans with no
                       service-connected disabilities who have incomes above the means test
                       threshold—$21,611 for a veteran with no dependents in 1997.

                       Public Law 101-508, effective November 5, 1990, added additional
                       cost-sharing requirements. First, it added per diem payments—$5 a day for
                       nursing home care and $10 a day for hospital care—to the means test
                       copayment. In addition, it created a new cost-sharing requirement for
                       prescription drugs. All veterans—other than those receiving treatment for
                       a service-connected condition, those with service-connected disabilities
                       rated at 50 percent or higher, and those with incomes below the maximum
                       VA pension level—are required to pay $2 for each 30-day supply of an
                       outpatient prescription.



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    The VA law is silent about the relationship between insurance recoveries
    and veteran copayments, and VA’s General Counsel provided guidance in
    1990 on how the two recovery programs should interact. Specifically, the
    General Counsel opinion, as expanded through a 1996 reevaluation,
    provides that

•   recoveries from Medicare supplemental insurance policies should be used
    first to satisfy veterans’ means test payments, per diem payments, and
    prescription copayments; and
•   for non-Medicare supplemental insurance, recoveries are to be divided in
    equal proportions between VA and the veteran; in other words, if the
    insurer pays 80 percent of allowable charges, then insurance proceeds will
    be used to pay 80 percent of the veteran’s copayment after the veteran has
    satisfied any deductible imposed by the insurer.

    VA’s interpretation of recovery provisions as they apply to supplemental
    insurance follows from an assessment that Medicare supplemental
    insurance is specifically intended to pay policyholders’ deductibles and
    copayments and is purchased or provided expressly for that purpose.
    However, using funds insurers provide to VA to pay for veterans’ financial
    obligation when these insurance policies have established deductibles and
    copayments to discourage unnecessary use of health services is harder to
    defend. One of the primary arguments insurers made against the
    enactment of the law authorizing VA recovery from private health
    insurance was the lack of VA cost-sharing provisions to discourage
    inappropriate use of health care services.

    VA argues that it should be treated by insurance companies the same way
    any private sector hospital is treated. But private sector hospitals do not
    give a portion of the payment they receive from a patient’s health
    insurance to the patient. Although VA may not collect more than the cost of
    its services, insurers typically pay VA less than VA’s billed charges because
    the insurers reduce the payment in accordance with their cost-sharing
    provisions. Only in instances in which the combined insurance recoveries
    and copayments would exceed the cost of VA services would VA be
    compelled to apply insurance recoveries toward veterans’ copayments.

    The administrative burden of applying insurance recoveries toward
    veteran copayments, particularly for $2 prescription copayments, may be
    an issue as well. In 1994, VA estimated that it cost it $.38 for each $1 it
    collected under the pharmacy copayment program. With the added burden
    of offsetting insurance recoveries against prescription copayments, the



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                  administrative costs are likely to exceed recoveries for veterans with
                  health insurance. This is because VA would typically be able to bill only
                  $.40 of a $2 copayment after the offset.


                  Although VA currently recovers less than a third of the amounts it bills to
Conclusions       private health insurers, opportunities to recover more of its billed charges
                  appear to be limited. The amounts that insurers deduct from their
                  payments to VA generally reflect application of insurance policy provisions
                  restricting payments for medically inappropriate care and setting
                  policyholder cost-sharing requirements. In addition, some Medicare
                  supplemental insurers contend that they have overpaid VA claims for years.
                  They are reducing payments and seeking refunds for past overpayments.

                  VA has set goals for its medical care cost recovery program that would
                  require it to almost double recoveries from private health insurance over
                  the next 5 years when VA’s estimates of past overpayments are considered.
                  Because there is little potential to increase recoveries through current
                  billings, the success of VA’s efforts depends largely on its ability to attract
                  new users with private health insurance or improve its efforts to identify
                  current users’ insurance coverage.

                  VA’s ability to achieve its goals is uncertain considering the many factors
                  likely to decrease future recoveries. Although VA has a number of
                  initiatives planned and under way to address some of these factors and
                  increase recoveries, it is not addressing other problems. For example, VA
                  has not

              •   contacted state insurance commissions to obtain their help in removing
                  exclusionary clauses in insurance policies that appear to preclude
                  payment to VA;
              •   developed procedures to ensure that the time-consuming tasks associated
                  with identifying, confirming, and returning overpayments are not
                  performed at the expense of current billing activities;
              •   established mechanisms to provide its physicians with incentives to make
                  appropriate use of VA hospitals; or
              •   developed adequate mechanisms for gathering complete and accurate
                  information on veterans’ health insurance policies.

                  Now that the Congress has authorized VA to retain health insurance
                  recoveries, VA needs to develop procedures to ensure that such authority
                  does not detract from services available to low-income veterans and



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                       veterans with service-connected conditions who have no health insurance.
                       Allowing VA to retain insurance recoveries creates strong financial
                       incentives for VA facilities to place a higher priority on serving insured
                       rather than uninsured veterans.


                       The statutes governing VA recoveries from private health insurance and
Matters for            veteran copayments do not clearly specify the relationship between the
Consideration by the   two provisions. In the absence of definitive guidance in the law, VA’s
Congress               General Counsel has determined that insurance recoveries should be used
                       to offset veterans’ copayment responsibilities. The effect of its
                       interpretation is a reduction in overall cost recoveries, increased
                       administrative expense, and reduced incentive for veterans to manage
                       their use of health care services.

                       The Congress may wish to consider clarifying the cost recovery provisions
                       of title 38 of the U.S. Code to direct VA to collect means test copayments,
                       per diem charges, and pharmacy copayments from patients regardless of
                       any amounts recovered from private health insurance except in instances
                       where the insurer pays the full cost of VA care.

                       The identification of billable care provided to veterans with
                       service-connected conditions is administratively cumbersome. Moreover,
                       HIPAA prevents private health insurance from excluding payment for
                       preexisting conditions for more than 12 months after the enrollment. The
                       Congress may wish to take advantage of the provisions of HIPAA to
                       authorize VA to recover the costs of service-connected treatments from
                       private health insurance after the specified exclusionary period.

                       A change in the statutory language in title 38 of the U.S. Code to authorize
                       VA to recover from private health insurance its costs for providing
                       treatment for service-connected conditions, consistent with the provisions
                       of HIPAA, could, however, be viewed as shifting to the private sector the
                       government’s obligation to care for veterans disabled during or as a result
                       of their military service. On the other hand, now that VA retains recoveries
                       from third-party insurers, this change could generate significant additional
                       revenues for improving health care services for veterans. Moreover, it
                       could offset the incentives created by the Balanced Budget Act for VA
                       facilities to target their services toward privately insured veterans with no
                       service-connected conditions.




                       Page 40                              GAO/HEHS-98-4 VA Medical Care Cost Recovery
                         B-271726




                         Finally, VA’s ability to increase recoveries is often hindered by incomplete
                         and inaccurate information on veterans’ employers, incomes, and
                         insurance coverage. Veterans, however, have little direct or indirect
                         incentive to cooperate with VA recovery efforts. The Congress may wish to
                         consider giving VA the authority to disenroll veterans from the VA health
                         care system who knowingly provide VA incomplete or inaccurate data
                         about their incomes, employers, or insurance coverage.


                         We recommend that the Secretary of Veterans Affairs do the following:
Recommendations
                     •   Establish procedures to work with state insurance commissions to ensure
                         that exclusionary clauses inconsistent with VA’s recovery authority are
                         removed from private health insurance policies.
                     •   Work with the Director, OPM, to identify options for including VA facilities
                         as preferred or participating providers under FEHBP plans, including HMOs
                         and preferred provider plans.
                     •   Design physician incentives to encourage appropriate use of hospital care.
                         Such incentives should not, however, be so strong that they would result
                         in denial of needed hospital care.
                     •   In designing the enrollment process for the veterans’ health care program,
                         develop procedures for gathering and updating detailed information on
                         veterans’ employment, insurance, and service-connected disabilities.
                     •   Assign adequate resources to MCCR activities to protect the government’s
                         interest in resolving insurers’ requests for refunds of claimed
                         overpayments.
                     •   Develop procedures to ensure that authority to retain health insurance
                         recoveries would not detract from services to veterans who lack private
                         health insurance.


                         We obtained comments on a draft of this report from the Acting Director
Agency Comments          of Medical Care Cost Recovery (MCCR) and other VA officials. The officials
and Our Evaluation       generally concurred with all but one of our recommendations. However,
                         according to a Senior Management Analyst, Management Review and
                         Administration, VA does not agree with our recommendation that it design
                         physician incentives to encourage appropriate use of hospital care. She
                         said that VA believes adequate incentives have already been established
                         through the new Veterans Equitable Resource Allocation system and
                         performance measures.




                         Page 41                             GAO/HEHS-98-4 VA Medical Care Cost Recovery
B-271726




Although the new allocation procedure and performance measures will
give veterans integrated service networks and VA facilities greater
incentives to provide appropriate care, we do not think that these
initiatives will provide sufficient inducement for individual physicians to
modify their practice patterns significantly. Existing efforts to reduce
inappropriate inpatient care, such as VA’s recently implemented utilization
review program, constitute a solid first step to addressing VA’s traditional
reliance on institutional care. However, as indicated by the extent of the
nonacute care that continues to be provided at the Martinsburg and
Washington, D.C., facilities since the program’s inception, this effort may
not be sufficient to address physicians’ lack of accountability for their
treatment decisions. In our view, VA needs to develop incentives such as
physician profiling or financial risk-sharing to encourage appropriate use
of hospital care.

The Acting Director emphasized that limited opportunities exist for VA to
collect more of its billed charges and that the key to increased recoveries
is improved identification of insurance coverage. He said that VA is
pursuing a match with Medicare records that should help to identify
private health insurance coverage of Medicare-eligible veterans.

In a draft of the report, we recommended that the Secretary of Veterans
Affairs work with the Director, OPM, to (1) determine the extent to which
FEHBP plans overpaid VA for care provided to veterans who were covered
by Medicare and the extent that overpayments should be refunded and
(2) develop mutually beneficial changes in how FEHBP plans will reimburse
VA for services provided to veterans covered by Medicare. In commenting
on the report, VA officials indicated that they had relied on the Department
of Justice to handle negotiations with OPM to discuss mutually beneficial
changes. After follow-up discussions with OPM, we revised the report to
indicate that FEHBP plans will pay VA facilities as secondary to Medicare for
those veterans who are covered by Medicare, that this benefit change will
occur prospectively, and that past payments will not be refunded. We have
also deleted the associated recommendations.

VA also provided several technical comments, which have been
incorporated in the report as appropriate.


We are sending copies of this report to appropriate congressional
committees; the Secretary of Veterans Affairs; the Director, Office of




Page 42                              GAO/HEHS-98-4 VA Medical Care Cost Recovery
           B-271726




           Management and Budget; and other interested parties. We will also make
           copies available to others upon request.

           This report was prepared under the direction of Stephen P. Backhus,
           Director, Veterans’ Affairs and Military Health Issues. Please call Mr.
           Backhus at (202) 512-7116 if you or your staff have any questions. Other
           contributors to this report included Jim Linz, Sibyl Tilson, Mary Ann
           Curran, Lesia Mandzia, and Greg Whitney.

           Sincerely yours,




           Richard L. Hembra
           Assistant Comptroller General




(406124)   Page 43                             GAO/HEHS-98-4 VA Medical Care Cost Recovery
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