Veterans' Health Care: Fiscal Year 2000 Budget

Published by the Government Accountability Office on 1999-09-14.

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

United States
General Accounting Office
Washington, D.C. 20648

Health, Education, and
Human Services Division


 September 14,1999

 The Honorable Christopher S. (Kit) Bond
 Chairman, Subcommittee on VA, HUD,
 and Independent Agencies
 Committee on Appropriations
 United States Senate

 Subject: Veterans’ Health Care: Fiscal Year 2000 Budget

 Dear Mr. Chairman:

 The President’s fiscal year 2000 budget estimates total obligations of $18.4 billion for the
 health care system operated by the Veterans Health A dmimstration (VHA), within the
 Department of Veterans Affairs (VA). This includes a $17.3 billion current appropriation
 request and $1.1 billion in other available budget authority, primarily consisting of cost
 recoveries for medical care provided to insured veterans.

 This budget also assumes that VHA will reduce operating costs by $1.1 billion by
 implementing management efficiency initiatives. Such savings will, in effect, offset the
 need for additional appropriated funds. Over the past several months, however, we and
 others, including veterans’ service organizations, have questioned whether VHA can
 achieve that level of efficiency savings.’

 Jn late July, the Director of the Office of Management and Budget (OMB) informed you that
 VHA’s spending needs are greater than were expected when the President’s fiscal year 2000
 budget was prepared. Currently, VHA estimates the additional spending needs to be about
 $600 million. As a result, VT% would need management efficiency savings of $1.7 billion,
 additional appropriated funds in that amount, or a combination of efficiency savings and
 appropriated funds..

 The OMB Director informed you that he intends to amend VT&I’s fiscal year 2000 budget for
 veterans’ medical care by requesting an additional $900 million in appropriated funds2 As
 you requested, we examined VHA’s plans to spend the additional $900 million requested for
 veterans’ medical care and the likelihood of VHA’s achieving its proposed management
 efficiency savings. To develop the information for this letter, we interviewed VHA
 headquarters officials and reviewed records, including the President’s budget and
 supporting documents.

 ‘SeeVeterans’Affairs: Promessand Challengesin Transforming Health Care (GAO/T-HEHS-99-109, Apr.
 ?he Director also statedthat he wants to amendVHA’s budget for construction activities by adding $100
 million in appropriatedfunds. This includes $35 million to conduct market-basedstudiesthat we
 recommendedas a meansof facilitating neededrealignment of VHA’s capital assets.

                                             GAO/HEHS-99-189R          VHA’s Fiscal Year 2000 Budget
In summary, VHA intends to spend an additional $900 million appropriation for
expenditures that were originally to be financed through management efficiency savings.
More specifically, about $800 million is to fund payroll increases, inflation, and other
mandatory rate changes, such as for property rentals. VHA would use the remaining $100
million to enhance its extended care services. This, in effect, leaves $800 million of VIA’s
spending plan-primarily for service enhancements-to be offset by efficiency savings.

Although VHA can achieve significant management efficiency savings in fiscal year 2000, an
$800 million savings target seems unlikely. Our assessment indicates that VHA has
identified a wide array of efficiency initiatives that, if implemented in a timely manner,
could yield about $600 million of savings in fiscal year 2000. These initiatives include, for
example, shifting veterans’ care to more appropriate settings or reengineering clinical and
administrative processes-actions that in the past afforded VHA the opportunity to provide
the same or higher-quality services at lower costs.

As we have previously reported, beyond the savings that VHA can achieve by implementing
initiatives it has already identified, we believe a realignment of VHA’s capital assets is
critical to its continued ability to realize significant savings that could be reinvested to
enhance medical care for veterans. Therefore, it seems essential that VHA carry out its
commitment to systematically assess its major health care delivery markets as quickly as


C&er the past six decades, VI-IA’s health care system has grown into our nation’s largest
direct provider of health care, serving veterans at more than 600 locations nationwide.
WA’s system has focused primarily on hospital care, using technology and specialized
medicine. It has not keep pace, however, with a rapidly changing health care industry,
especially the rise of managed care practices.

In October 1995, VHA began to transform its system ii-am a hospital operator to a health
care provider that relies on community-based, integrated networks of VHA and non-VISA
providers to meet veterans’ needs more efficiently and effectively. In doing so, VHA
created 22 regional networks to make basic budgetary, planning, and operating decisions
for veterans living within defjned geographical areas.

In October 1996, the Congress furnished tools that VHA said were key to a successful
transformation. These included new eligibility rules that permit VHA to provide medical
care in the most appropriate settings and expanded authority to purchase services from
private providers.

In January 1997, VHA proposed a S-year plan to operate within a tied annual
appropriation of $17 billion through fiscal year 2002. To accomplish this, VHA planned to
reduce per patient costs by 30 percent while increasing the number of patients served by 20.
percent and its reducing reliance on appropriations by 10 percent.

As VHA requested, the Congress also authorized VHA to retain all collections from third
parties, copayments, per diems, and certain torts beginning July 1,1997. VHA may spend
these funds in the year collected or any subsequent year to supplement appropriations
available to meet veterans’ health care needs.

 2                                          GAOIHEHS-99-189R     VHA’s Fiscal Year 2000 Budget

VHA made significant progress toward transforming itself during fiscal years 1996 to 1998.
VHA enhanced benefits and served additional veterans each year while realizing a revenue
surplus of $496 million as of September 30, 1998.3 This surplus resulted primarily from
management initiatives that have significantly enhanced the efficiency and effectiveness of
WA’s health care delivery system.

In VHA’s fiscal year 2000 budget planning, its 22 networks identified 451 management
initiatives that they estimated could reduce operating costs by almost $1.2 billion. VHA
told us that these will be implemented, as VHA deems appropriate, to achieve fiscal year
2000 spending objectives.


VIEW’sfiscal year 2000 budget is intended to serve 3.65 million veterans, an increase of
54,000 over fiscal year 1999. VHA originally estimated that it could achieve this goal with a
current appropriation of $17.3 billion, other available budget authority of $1.1 billion, and
reduced operating costs of $1.1 billion, to be realized through management efficiency

VHA’s original spending plan estimated that $863 million of the efficiency savings would be
required to maintain the current service level. This involved primarily payroll increases for
existing employees, inflation, and other mandatory rate changes, such as for property
rentals and state veterans’ home programs. An additional $296 million of savings was
targeted to enhance services for veterans with Hepatitis C ($136 million), veterans needing
extended care services ($106 million), and homeless veterans ($40 million), and other
services ($14 million).

On July 26,1999, OMB’s Director informed you that VHA’s spending needs are greater than
were expected when the President’s fiscal year 2000 budget was prepared. He cited several
factors, including the treatment of 400,000 veterans who were newly enrolled in VJU’s

VHA has identified increased spending needs of about $600 million. Of this, VHA attributes
$366 million to higher-than-expected price increases for and use of pharmaceuticals and
prosthetic appliances.4 In this regard, several network directors commented to us that they
are experiencing increased demand from veterans whose care is primarily paid elsewhere
but who obtain Tom VHA the specially care and services not covered by their private
insurance or Medicare, such as pharmaceuticals, eyeglasses, and hearing aids.

VHA’s revised spending plan also includes an additional $210 million to enhance veterans’
services, including additional Hepatitis C treatments, expanded services for women
veterans and patients in state veterans’ homes, and reduced waiting times. In addition,

3VHA’s original fiscal year 2000 budget estimatedthat $280 million of this surpluswould be usedin fiscal
year 1999 and the rest in fiscal year 2000 as part of its estimated$1.1 billion in other available budget
4An estimated$132 million is inflation-related and $234 million relatesto increasedusage.

3                                                GAO/HEHS-99-IS9R        VHA’s Fiscal Year 2000 Budget

VHA plans to spend $34 million to enhance its revenue collection processes, which may
ultimately lead to higher medical care cost recoveries.5

As OMB’s Director previously informed you, he will request $900 million in additional
appropriations, leaving $800 million to be offset by management efficiency savings. VHA
expects to use $800 million of the additional funding to linance payroll increases for
existing employees and inflation. The remaining $100 million will be used to enhance
extended care services. The $800 million of efficiency savings is to be used to finance (1)
$200 million of VHA’s originally planned spending, primarily for Hepatitis C treatments and
medical care for homeless veterans, and (2) VHA’s newly identified spending needs of $600


Our assessment of the VHA networks’ 451 management initiatives, totaling an estimated
$1.2 billion, indicates that proposed actions could be divided into two broad categories:
(1) cost savings that could be achieved while providing the same or higherquality service
and (2) cost savings that could result in diminished service quality or unreasonable service
delays. We included in the second category 176 initiatives such as across-the-board
reductions in workforce or overtime, termination of services to new or current veterans,
lengthening of waiting times, and closures of community outpatient clinics. In total, these
initiatives account for about $600 million of estimated savings.

In contrast, we found that 275 proposed initiatives appear to be consistent with the goals
and objectives of VHA’s ongoing transformation. These initiatives appear to be comparable
to, in many instances, actions that in the past have afforded VHA the opportunity to
provide the same or higher-quality services at lower costs. These initiatives include actions
that would continue to shift care to appropriate levels, reengineer health care delivery
processes, and defer capital investments for equipment and nonrecurring maintenance.
These initiatives, if implemented in a timely manner, could yield about $600 million in

Shifting Care to Auuronriate Levels

A major objective of VHA’s transformation is to shift the focus of its health care system
from inpatient settings to less costly outpatient settings. Advances in medical technologies
and practices afford VHA significant opportunities to achieve this objective. VHA’s 22
networks proposed initiatives that would shift veterans’ care to more appropriate levels
and reduce excessive hospitalizations or medications VHA’s networks estimated that
these initiatives could result in efficiency savings of $90 million annually.

Nine networks, for example, proposed initiatives that could reduce unnecessary hospital
use. VITA’s networks have, in the past, used comparable initiatives to identify patients who
can be served more cost-effectively in alternatives to inpatient settings, including many
chronically and terminally ill patients who can be treated at home rather than in a hospital.

 ‘Enclosure I summarizesVHA’s original and revised spendingplan, basedon coststo maintain current
 servicesand enhancetargetedservicesin fiscal year 2000.
 6EnclosureII summarizesVIM’s coststo maintain current servicesand enhancetargetedservices,basedon
 the administration’s forthcoming appropriation requestof $900 million and managementefficiencies of $800

 4                                              GAOMEHS-99-189R        W-IA’s Fiscal Year 2000 Budget
Also, 10 networks advanced proposals to improve the safety, effectiveness, and efficiency
of drug prescription practices. Several networks, for example, plan to implement
“polypharmacy” reviews to identify veterans who may be taking combinations of drugs that
could be unsafe, duplicative, or needlessly costly.

Reengineerinn Clinical
and Administrative Processes

VHA’s transformation has, in the past, realized significant efficiency savings as a result of
reengineering clinical and administrative processes. Twenty networks have proposed
additional initiatives that would continue the reengineering efforts, including modernizing,
standardizing, and consolidating processes. In addition, networks identified opportunities
to increase efficiency through outsourcing. Networks estimated that efforts such as these
could lead to an estimated $400 million in savings.

Nearly all networks developed proposals to modernize processes. Seven, for example,
proposed advanced food preparation and delivery methods. Moreover, two proposed to
modernize pharmacy operations through automation, while two others cited telemedicine
as a means to improve efficiency.

Half of the networks advanced proposals to standardize processes. Seven, for example,
had proposals involving the uniform procurement of prosthetics, pharmaceuticals, and
supplies. Additionally, four identified such efficiencies as bulk purchasing, standardizing
laboratory processes, and standardizing laboratory equipment. Nationally, VHA plans to
reduce its prosthetics costs by at least 10 percent through such means as standardized
purchasing processes.

Virtually every network based proposals for efficiency improvements on consolidations of
administrative, support, or clinical processes. For example, networks said they could
consolidate laboratories, laundry operations, food services, pharmacy operations and drug
procurement, and various administrative activities.

Several networks included outsourcing options as a means of generating efficiency savings.
Four networks, for example, identified such facility support services as housekeeping and
tie fighting, as well as a variety of clinical and administrative services.

Deferring Canital Investments

Twelve networks proposed shifting about $110 million of maintenance and equipment
funds to the direct delivery of medical care for veterans in fiscal year 2000. This represents
about 15 percent of the maintenance and equipment funds that VHA has available in fiscal
year 2000.

As previously noted, VHA has requested an additional $35 million to assess service delivery
markets. These assessments, as we recommended, should include a determination of
veterans’ health care needs, a survey of existing assets, and an evaluation of alternatives
for meeting veterans’ needs in the most cost-effective manner. This should provide
opportunities, beyond fiscal year 2000, to significantly reduce the amount of funds used to

5                                          GAO/HEHS-99-189R     VIA’s   Fiscal Year 2000 Budget
operate and maintain unneeded or inefficient health care delivery locations and to reinvest
such savings to enhance care provided to veterans.

Until such assessments are completed, networks appear to lack critical information needed
to make difficult decisions concerning the efficient use of maintenance and equipment
funds. Deferring some capital investments until the market-based studies are completed
could result in a more efficient use of such funds.


If VHA’s revised spending plan for fiscal year 2000 is to be implemented, offsetting a
significant portion through management efficiencies seems desirable. It is difficult,
however, to estimate with certainty what level of savings VHA will ultimately realize in
fiscal year 2000. It seems optimistic, though, to assume that VHA’s efficiency savings will
reach the $800 million that its revised spending plan currently envisions. Our assessment
of VHA’s identified management initiatives indicates that potential savings could yield
about $600 million in fiscal year 2000 if initiatives are implemented in a timely manner.

Thus, it seems inevitable that VHA will need to reduce the level of planned spending or
increase the amount of appropriated funds requested if its revised spending plan is to be
fully implemented. Such changes, however, depend on the estimated savings level that
VHA can achieve. For example, if VHA can achieve $600 million in efficiency savings, then
it would require an additional $200 million above the forthcoming $900 million
appropriation request. If a lower or higher savings level is assumed, appropriations or
planned service enhancements would have to be adjusted accordingly.

Over the longer term, VHA’s continued ability to realize significant efficiency savings and
improve services to veterans is inextricably linked to a successful realignment of its capital
assets. In this regard, it seems essential that VHA use the $35 million as planned to
conduct needed market assessments. Directing VI-IA to do so may provide additional
assurance that such assessments will be completed in a timely manner.


VI-IA’s Chief Network Officer and Chief Financial Officer reviewed a draft of this
correspondence and concurred with its conclusions. Moreover, they agreed that the
contents provide an objective analysis of VHA’s revised spending plan for fiscal year 2000
and the likelihood of achieving proposed management efficiency savings.

Copies of this letter are being sent to the Honorable Barbara A. Mikulski, Ranking Minority
Member, Subcommittee on VA, HUD, and Independent Agencies, Senate Committee on
Appropriations; the Honorable Bob Stump, Chairman, and the Honorable Lane Evans,
Ranking Minority Member, House Committee on Veterans’ Affairs; the Honorable Arlen
Specter, Chairman, and the Honorable John D. Rockefeller IV, Ranking Minority Member,
Senate Committee on Veterans’ Affairs; the Honorable James T. Walsh, Chairman, and the
Honorable Allan B. Mollohan, Ranking Minority Member, Subcommittee on VA, HUD, and
Independent Agencies, House Committee on Appropriations; and the Honorable Togo
West, Secretary of Veterans Affairs. Copies will be made available to others on request.

 6                                          GAOIHEHS-99-189R     VHA’s Fiscal Year 2000 Budget

Paul Reynolds, Fred C&on, and Dawn Shorey developed information contained in this
letter. If you have any questions, please contact me at (202) 512-7101 or Mr. Reynolds at
(202) 512-7109.

Sincerely yours,

Stephen P. Backhus
Director, Veterans’ Affairs and
 Military Health Care Issues

Enclosures - 2

7                                         GAOD-IEHS-99-189R    W-IA’s Fiscal Year 2000 Budget
ENCLOSURE I                                                                          ENCLOSURE I

                             SUMMARY    OF VI-LA’S ORIGINAL AND REVISED
                                       FY 2000 SPENDING PLAN

Dollars in millions

                                                                       Maintain      Enhance          Total
                                                                     service level service level
VHA’s original    spending    plan”
Payroll for existing employees                                               $563                          $563
InfIation and other rate changes                                              267                           267
State home changes                                                             25              $7             32
CHAMPVA                                                                                         7              7
National archive storage                                                         3                             3
Real property rental                                                             3                             3
Costs for additional c@endar day in FY2000                                       2                             2
HI2 Unk$ (personnel and payroll system replacement)                              1                             1
Hepatitis C                                                                                   136            136
Extended care                                                                                 106            106
Homeless initiatives                                                                           40             40
Subtotal                                                                     $863            $296        $J,15gb

Revised spending      plan
PharmaceuticaIs’                                                              110              90              200
Prosthetic appIiancesd                                                         22             144              166
Increased hepatitis treatment’                                                                 43               43
Improved revenue collection process’                                                           34               34
Services for women veterans’                                                                   23               23
State home pharmaceuticaIsh                                                                    18               18
Initiatives to reduce waiting times                                                            75               75
Subtotal                                                                     $131            $428             $560
Total                                                                        $994           $724         $1,718

Notes: Numbers represent increases over the fiscal year 1999budget base.

Totals may not add because of rounding.

“VA, F’Y 2000 Budget Submission, Medical Programs, Volume 2 of 6 (Feb. 1999),pp. 2-67 .

?ncIudes $14 milhon in other budget authority.

‘An additional cost of $200 milhon is anticipated as a result of inflation and increased usage. Of this, $110
milhon is attributable to price increases that are higher than the rate used in VI-IA’s originaI budget
submission. The remaining $90 milhon is to provide new drug treatment regimes for 150,000veterans.

dAn additional cost of $166 mihion is anticipated as a result of inflation and increased usage. Of this, $22
million is attributable to price increases that are higher than the rate used in VHA’s original budget
submission. The remaining $144 milhon is to pay for increased use of prosthetic appliances, including
eyeglasses and hearing aids, for 240,000veterans.

8                                                       GAO/HEHS-99-189R VHA Fiscal Year 2000 Budget
ENCLOSURE I                                                                           ENCLOSURE I

‘An additional $43 million and 132FIB are anticipated to evaluate and treat veterans for the Hepatitis C
virus, based on a higher estimate of Hepatitis C prevalence among veterans than the estimate used for
WA’s original budget submission. The additional resources will enable VHA to screen approximately
179,000veterans and provide initial treatment to an additional 3,000.

‘An additional cost of $34 million and 193 FTEs are planned for improving compliance with reporting
requirements in order to increase revenue collections. Additional FTEs will enable VHA to evaluate
current compliance and train employees on the requirements for third-party reimbursements.

‘An additional cost of $23 million and 131 FTEs is anticipated in order to provide maternity care for 4,100
women veterans.

hAnadditional cost of $18 million is anticipated, as a result of a policy change, to provide medications for
veterans in state homes. Previously, VITA’s policy was to withhold state nursing home per diems when
veterans in state homes received medications from VHA. VHA estimates that medications will need to be
provided to about 8,500veterans, who had previously received medications from the state homes.

*An additional cost of $75 million and 750 FTEs, primarily clinical staff, are planned for implementing
initiatives to reduce the time periods veterans must wait to receive VHA care.

                                                       GAO/HEHS-99-189R      VI-IA Fiscal Year 2000 Budget
ENCLOSURE II                                                                                ENCLOSUREII

                      SUMMARY      OF POTENTLAL FUNDING             SOURCES FOR
                                 VHA’S REVISED SPENDING             PLAN

Dollars in millions

                                                                    Additional            Required
                                                                   appropriation         management
                                                                     requested           efficiencies

Maintain   current    services
Payroll increase .                                                             $533                $30
Inflation and other rate changes                                                267                132”
State home changesVA share of cost                                                                  25
National archive storage                                                                             3
Real property rental                                                                                 3
Cost for additional calendar day in FY 2000                                                          2
HR Link$ (personnel and payroll system replacement)
Subtotal                                                                       $800
Enhance    service level
Hepatitis C                                                                                         179
Extended care                                                                      100                6
Homeless initiatives                                                                                 40
Pharmaceuticals                                                                                      90
Prosthetic appliances                                                                               144
Improved revenue collection process                                                                  34
Services for women veterans                                                                          23
State home pharmaceuticals                                                                           18
State home change (workload)                                                                          7
CHAMPVA                                                                                               7
Initiatives to reduce waiting times
Subtotal                                                                       $100                $6;:

Total                                                                          $900               $818

Note: Totals may not add because of rounding.

“Cost increase attributable to higher-than-expected prices for pharmaceuticals and prosthetic appliances.


10                                                    GAO/HEHS-99-189R      VHA Fiscal Year 2000 Budget
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