VA Health Care: Assessment of VA's Fiscal Year 1998 Budget Proposal

Published by the Government Accountability Office on 1997-05-01.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on VA, HUD, and Independent
                          Agencies, Committee on Appropriations, U.S. Senate

For Release on Delivery
Expected at 2:00 p.m.
Thursday, May 1, 1997
                          VA HEALTH CARE

                          Assessment of VA’s Fiscal
                          Year 1998 Budget Proposal
                          Statement for the Record by Stephen P. Backhus, Director
                          Veterans’ Affairs and Military Health Care Issues
                          Health, Education, and Human Services Division

VA Health Care: Assessment of VA’s Fiscal
Year 1998 Budget Proposal

               Mr. Chairman and Members of the Subcommittee:

               We are pleased to contribute this statement for the record for the
               Subcommittee’s deliberations on the President’s 1998 budget request for
               the Department of Veterans Affairs (VA) health care system. With a 1997
               medical care appropriation of $17 billion and a declining veteran
               population, VA faces increasing pressure to contain or reduce spending as
               part of governmentwide efforts to achieve a balanced budget. Last year,
               we reported that VA’s health care system had the opportunity to reduce its
               operating costs by billions of dollars over the next several years.1

               VA’s 1998 budget proposal requests a medical care funding level of $17.6
               billion, consisting of an appropriation of almost $17 billion and a
               legislative proposal to retain insurance payments and other third-party
               reimbursements.2 VA characterizes this as the first step in a 5-year plan to
               reduce its per patient cost by 30 percent, increase patients served by 20
               percent, and finance 10 percent of its expenditures using nonappropriated
               revenues by the year 2002. VA proposes to use appropriations of about
               $17 billion over the next 5 years and to supplement this with increases in
               third-party reimbursements that are estimated to be $1.7 billion in 2002.

               Our comments focus on VA’s 5-year plan, including the outlook for
               attaining the stated targets and the potential effects on veterans and
               others. In addition, as requested by the Subcommittee, we also offer our
               preliminary observations on VA’s progress on two major initiatives:
               developing a method to more equitably allocate resources and establishing
               a decentralized management structure to more efficiently and effectively
               deliver services. We plan to provide the Subcommittee more detailed
               information on these two initiatives at a later date.

               Our comments on VA’s budget proposal are based on past and ongoing
               work to assess operating policies, procedures, and practices of VA
               hospitals and clinics.3 We spoke with hundreds of VA officials and
               examined a wide array of documents, including VA’s budget submission,
               annual reports, and studies done by VA’s Office of Inspector General and

                VA Health Care: Opportunities for Service Delivery Efficiencies Within Existing Resources
               (GAO/HEHS-96-121, July 25, 1996) and VA Health Care: Opportunities to Increase Efficiency and
               Reduce Resource Needs (GAO/T-HEHS-96-99, Mar. 8, 1996).
                This includes $123 million of administrative costs for third-party insurance recoveries and $68 million
               of reimbursements for veterans compensation and pension examinations.
                A list of related GAO testimonies and reports appears at the end of this statement.

               Page 1                                                                           GAO/T-HEHS-97-121
             VA Health Care: Assessment of VA’s Fiscal
             Year 1998 Budget Proposal

             others. Our comments on VA’s decentralized management and resource
             allocation initiatives are based on information obtained from discussions
             with officials at headquarters and seven networks as well as a review of
             documents they provided.

             In summary, while VA’s budget goals may be attainable, they also carry
             implications such as limited deficit reduction contributions and potential
             risks to low-income, uninsured veterans. Achieving increased efficiency is
             not contingent on either increases in patients served or resources. VA’s
             ongoing efforts to restructure its health care system could yield billions of
             dollars in savings during the next 5 years. A large part of these savings
             would be realized through more efficient use of its workforce, which will
             allow the existing patient base to be served with fewer employees. In fact,
             sufficient savings could be generated to afford VA an opportunity to
             increase patients served without new resources or to increase its
             contribution to deficit reduction. Furthermore, VA can significantly
             decrease its reliance on appropriated resources by using its existing
             authority to sell excess capacity to help other federal agencies meet their
             beneficiaries’ health care needs.

             VA’s proposal to generate billions of dollars in new revenue to serve
             20 percent more patients intensifies VA’s direct competition with the
             private sector and potentially leaves low-income, uninsured veterans
             vulnerable. VA may be able to attain its revenue goals only by attracting
             thousands of new users who have higher incomes or public or private
             insurance. And such new VA users are likely to be drawn from private
             providers who may see their revenue base erode as patients shift to VA
             care. Moreover, VA may spend unreimbursed resources on these veterans,
             which could reduce the availability of resources for low-income,
             uninsured veterans.

             VA also faces a difficult challenge as it takes steps to implement a new
             resource allocation method to improve veterans’ access to VA care and a
             decentralized management structure to improve resource utilization.
             These initiatives promise improvements in equity and have stimulated
             significant changes in efficiency. However, VA’s challenge will be to
             adequately monitor these changes to identify and correct unintended
             effects such as those that limit equity of access.

             VA’s role in providing for the health care needs of veterans has evolved
Background   over time. During its first 50 years, VA predominantly served veterans who
             had disabilities caused or aggravated by military service and other

             Page 2                                                      GAO/T-HEHS-97-121
                         VA Health Care: Assessment of VA’s Fiscal
                         Year 1998 Budget Proposal

                         low-income, uninsured veterans in need of a health care safety net. Over
                         the past 10 years, VA has also served higher income and insured veterans
                         with nonservice-connected conditions. Over time, however, VA’s patient
                         base has been shifting from serving primarily veterans with
                         service-connected conditions to those without service-connected
                         conditions. Currently, VA operates over 750 facilities, including 173
                         hospitals and over 400 outpatient clinics. These facilities serve 2.6 million
                         of the nation’s almost 26 million veterans as well as about 300,000

                         In 1995, to promote greater efficiency and services to veterans, VA created
                         a new decentralized management structure, forming 22 Veterans
                         Integrated Service Networks (VISN). These networks replaced the previous
                         structure’s four regions and expanded local authority. The VISN is now the
                         basic budgetary and decision-making unit of VA’s health care system and
                         exercises management authority over VA facilities in its geographic area.
                         This system of networks clearly places value on efficiency and customer
                         service, and the networks are empowered to make a wide range of
                         decisions regarding care delivery options. Under the recently enacted
                         eligibility reform legislation (P.L. 104-262), for example, networks can
                         contract with a broader range of private providers to purchase services at
                         prices lower than VA’s costs and generate revenue by selling excess
                         services. In April 1997, VA implemented the Veterans Equitable Resource
                         Allocation (VERA) system to allocate medical care appropriations among
                         the 22 VISNs. VERA is intended to improve the equity of resource distribution
                         throughout VA’s health care system.

                         Last year, we testified that VA could save billions of dollars over the next 7
Efficiency Savings Not   years through improved efficiency. As noted before, the Congress
Dependent on             subsequently gave VA the two additional tools—eligibility reform and
Increased Number of      expanded contracting authority—that VA said were key to the success of
                         its efforts to increase efficiency. With these tools, VA can help veterans
Veterans Served          prevent costly hospital admissions and access lower cost services,
                         regardless of where veterans reside. VA’s 1998 budget request, however,
                         suggests that VA will be able to achieve 30 percent efficiency savings over
                         the next 5 years only if it has the additional resources to serve 20 percent
                         more patients.

                         Over the past 18 months, VA has taken aggressive steps to change the way
                         it operates to reduce costs and improve services to veterans. These
                         initiatives are expected to save billions of dollars by avoiding unnecessary

                         Page 3                                                       GAO/T-HEHS-97-121
    VA Health Care: Assessment of VA’s Fiscal
    Year 1998 Budget Proposal

    expenditures. Most of the initiatives involve a resizing and more efficient
    use of its workforce, which accounts for over $10 billion of VA’s medical
    care budget. For example, VA is shifting patient care from inpatient to
    outpatient settings as well as reducing average lengths of inpatient stays. It
    is also consolidating management and clinical services of nearby hospitals
    to reduce costs. Moreover, VA is exploring opportunities to contract with
    other health care providers for services at costs lower than VA’s.

    These restructuring efforts should save billions of dollars without
    attracting new users as the following examples indicate:

•   VA established a pre-admission screening process for hospitals that, if
    effectively implemented, could save $8.4 billion over the next 5 years.
•   VA integrated the management of two or more nearby facilities in 26
    different locations, which should result in savings of $230 million over the
    next 5 years.
•   VA shifted substance abuse treatment from an inpatient to an outpatient
    setting in one service location, which is expected to result in savings of
    $10 million over the next 5 years.

    Currently, VA has teams exploring additional opportunities for streamlining
    operations and reducing workforce needs. Many of these teams are
    identifying ways to use lower cost methods for delivering services within
    individual facilities. For example, many facilities are

•   reducing patient bed-days of care, including one location that would close
    seven medical wards and generate potential savings of almost $50 million
    over the next 5 years, and
•   shifting inpatient surgeries to ambulatory settings, including one location
    that shifted enough workload among facilities to close two surgical wards
    and potentially save over $15 million during the next 5 years.

    VA also has many teams exploring ways to consolidate services at nearby
    facilities. Such actions should result in significant savings over the next 5
    years as shown by the following examples:

•   Facilities in one service area are planning to integrate eight pathology and
    laboratory medicine services into a single business unit with two central
    laboratories. This integration is expected to save about $10 million over
    the next 5 years.

    Page 4                                                       GAO/T-HEHS-97-121
                            VA Health Care: Assessment of VA’s Fiscal
                            Year 1998 Budget Proposal

                        •   Facilities in another area are exploring ways to consolidate small
                            purchases into one location, which is expected to save over $20 million
                            during the next 5 years.

                            Additional savings opportunities could be available in later years from the
                            closing of hospitals whose workloads may be shifted to nearby hospitals
                            that have sufficient unused capacity to efficiently and effectively meet
                            veterans’ needs. For example, closing a facility with about 300 beds could
                            save over $100 million in overhead costs alone during a 5-year period.

                            VA could expand its current patient base if its efficiency savings exceed
Efficiency Savings          payroll and other cost increases. These costs are expected to be about
Could Provide               $637 million in 1998 and to increase by a rate of about 4 percent a year
Opportunities to            over the next 5 years.

Serve More Veterans         The effect of VA’s efficiency savings is to increase its purchasing power
Without Additional          each year. For example, most of the savings are attributable to reductions
                            in VA’s workforce, which currently numbers about 189,000 full-time
Resources                   equivalents. VA may need to reduce its workforce by about 6,800 full-time
                            equivalents to realize an annual savings of $637 million. This level of
                            reductions would decrease VA’s resource needs by comparable amounts in
                            succeeding years. Thus, an annual appropriation of $17 billion could be
                            sufficient to serve 2.9 million patients in 2002 if efficiency savings and cost
                            increases approximate $637 million a year, on average. Moreover, VA could
                            increase its patient base if its efficiency initiatives yield greater savings.

                            VA’s 1998 budget proposes reinvesting all efficiency savings and using
Adding Resources            additional resources to expand its patient base. VA expects to add a total of
Further Enhances VA’s       $5.8 billion in new resources over the next 5 years (from public and
Opportunity to Serve        private insurers and others), starting with $737 million in 1998 and
                            increasing to $1.7 billion in 2002. VA expects that these additional
More Veterans               resources will allow it to increase the number of veterans served by
                            587,000, which would increase its patient base from 2.9 million to
                            3.5 million in 2002.

                            If the targeted resource levels are attained, VA appears capable of
                            attracting 587,000 new users by 2002. Recent expansion of VA’s contracting
                            authority and veterans’ eligibility for care should facilitate creation of new
                            access points, referred to as community-based outpatient clinics, which

                            Page 5                                                       GAO/T-HEHS-97-121
                      VA Health Care: Assessment of VA’s Fiscal
                      Year 1998 Budget Proposal

                      along with VA’s efforts to improve accessibility of existing hospital-based
                      clinics are likely to attract new workload.

                      For example, VA has opened or developed plans to open 86 new
                      community-based clinics over the last 3 years. These clinics provide only
                      primary care and refer veterans to VA hospitals for more specialized care.
                      Last month, we surveyed the 12 clinics that had at least 2 years’ operating
                      experience and found that they had attracted 3,000 new veterans. These
                      clinics experienced the largest growth in their initial year and smaller
                      growth in subsequent years. VA estimates that the remaining 74 clinics will
                      serve over 128,000 users a year but has not estimated how many will be
                      new VA users. Twenty-two of the new clinics estimated that between 5 and
                      60 percent of the patients served will be new users, while the rest
                      expected to serve no new users or were unsure whether new users would
                      be served.

                      Although it plans to open many more clinics, VA told us that it is too early
                      to estimate how many or where they will be located. Our analysis suggests
                      that VA could need between 1,200 and 1,800 additional clinics to attract
                      587,000 new users if each clinic attracts between 250 and 500 new
                      veterans. The first 12 clinics averaged 250 in their initial years. These
                      clinics also appear to provide an affordable way for VA to attract new

                      In addition, VA’s efforts to improve veterans’ access to existing facilities
                      should also attract new users. These initiatives include expanding primary
                      care by extending operating times for hospital-based clinics to night and
                      weekend hours as well as ways to reduce waiting times. For example, one
                      hospital-based clinic reported enrolling 3,000 new veterans for care during
                      the first year after having made such accessibility improvements.

                      VA’s revenue goal of $1.7 billion in 2002 includes estimated recoveries of
Expanding VA’s        about $902 million from private insurance, $557 million from Medicare,
Resource Base Poses   and $178 million from federal agencies and others. Attaining these targets
Challenges            may present a challenge as VA would probably have to attract thousands of
                      new revenue-generating veterans. VA has provided, however, little
                      information on the numbers of new veterans needed to meet revenue goals
                      or how much of the revenue will come from inpatient or outpatient
                      services. This lack of information creates uncertainties about VA’s ability to
                      achieve its revenue goals.

                      Page 6                                                      GAO/T-HEHS-97-121
                                 VA Health Care: Assessment of VA’s Fiscal
                                 Year 1998 Budget Proposal

Increasing Recoveries            VA currently serves insured veterans and recovers some or all of its costs
From Private Health              of care from insurers. Presently, VA returns all recoveries to the Treasury,
Insurance May Be Difficult       except those needed to cover VA’s billing and collection costs. In 1996, VA
                                 deposited $455 million into the Treasury and used $119 million for
                                 administrative costs. VA’s recovery of $574 million represents a decline in
                                 recoveries from 1995, despite an increase in the number of users.

                                 VA’s ability to increase future recoveries from its current insured patient
                                 base is uncertain for several reasons:

                             •   Veterans are increasingly covered by health maintenance and preferred
                                 provider organizations from which VA generally cannot recover.
                             •   As an increasing proportion of VA users become eligible for Medicare, their
                                 private health insurance becomes secondary, so potential recoveries drop.
                             •   As VA shifts from inpatient to outpatient settings, insurance recoveries
                                 decrease and the cost of recovery increases.
                             •   VA found that Medigap insurers have been paying VA too much, which will
                                 result in decreased future recoveries and refunds of about $150 million a
                             •   VA’s authority to recover from private health insurance for care provided to
                                 service-connected veterans for non-service-related conditions expires
                                 September 30, 1998.

                                 As a result, to meet its revenue projections of $902 million from private
                                 insurance, VA will probably have to focus its marketing efforts on
                                 attracting veterans with fee-for-service private health insurance. In
                                 addition, the Congress would need to extend VA’s authorization to recover
                                 for certain services provided to service-connected veterans.

                                 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 VA would need to attract in order to generate its target

Attaining Medicare               VA proposes to collect about $557 million from Medicare in 2002 for
Recovery Target May Be           services provided to about 106,000 additional higher-income veterans who
Difficult                        are covered by Medicare. VA currently attracts only about 1 out of every
                                 100 higher-income Medicare-eligible veterans—about 41,000 veterans in
                                 1992. It thus appears questionable whether VA will be able to attract an

                                 Page 7                                                      GAO/T-HEHS-97-121
                        VA Health Care: Assessment of VA’s Fiscal
                        Year 1998 Budget Proposal

                        additional 106,000 higher-income Medicare-eligible veterans by the year

                        VA expects to recover from Medicare, on average, about $5,300 for each of
                        the 106,000 additional Medicare-eligible veterans it expects to serve in
                        2002, a target amount that seems achievable based on average Medicare
                        spending levels per patient nationwide. However, it may be difficult for VA
                        to achieve this collection rate if Medicare-eligible veterans use primarily VA
                        services that are not covered by Medicare, such as prescription drugs,
                        inpatient psychiatric care, and long-term nursing home care. Our
                        assessment of Medicare-eligible veterans’ use of VA services in 1994
                        suggests that most of these veterans use VA, at least in part, for services
                        not covered by Medicare.4

Increasing Recoveries   VA proposes to collect $178 million in 2002 through sales of excess services
From Other Sources      to federal agencies, affiliated medical schools, and others. This amount
Appears Attainable      represents over a 300-percent increase over VA’s collections of $43 million
                        in 1996.

                        Since 1966, the Congress has expanded VA’s authority on several occasions
                        to sell excess services in an effort to encourage VA facilities to generate
                        revenues in addition to those appropriated. Over the last 5 years, VA’s sales
                        have increased by about 37 percent, with most sales to the Department of
                        Defense (DOD) and affiliated medical schools. Last September, the
                        Congress took another step to expand VA’s ability to generate revenue by
                        authorizing VA to sell excess health care services to any health care plan,
                        insurer, or other provider.

                        VA could meet or exceed its goal of $178 million in 2002 if it markets its
                        excess capacity to other federal agencies. DOD and VA reached agreement
                        in 1995 that VA can provide health care services to active duty and retired
                        members of the military and dependents enrolled in DOD’s TRICARE
                        program. While some VA facilities have become TRICARE providers, most
                        have not. Similarly, few VA facilities have generated revenue by serving
                        beneficiaries of other federal agencies, such as the Indian Health Service
                        and the Bureau of Prisons, even though these agencies have expressed
                        interest in buying VA’s excess services.

                         Veterans’ Health Care: Use of VA Services by Medicare-Eligible Veterans (GAO/HEHS-95-13, Oct. 24,

                        Page 8                                                                       GAO/T-HEHS-97-121
                             VA Health Care: Assessment of VA’s Fiscal
                             Year 1998 Budget Proposal

                             Over the last 25 years, VA has served an increasing number of veterans
Expanding VA’s               without service-connected conditions, generally those low-income
Resource Base May            veterans in need of a health care safety net. During the last 10 years, VA has
Place Some Veterans          also served higher-income and insured veterans with its resources that
                             were in excess of those needed to provide care to service-connected and
and Others at Risk           low-income veterans.

                             Allowing VA to retain nonappropriated revenues may change VA’s
                             perspective. This is because the veteran population is, in effect, likely to
                             represent two distinct groups—non-revenue-generating veterans and
                             revenue-generating veterans. Within this later group are several potential
                             target populations: privately insured veterans; Medicare-eligible veterans;
                             higher-income veterans; and higher-income, privately insured, or
                             Medicare-eligible veterans.

Non-Revenue-Generating       VA may encounter difficulty attaining its revenue goals unless a significant
Veterans May Be at Risk of   number of new users have higher incomes or insurance. This could create
Having Access Limited        a strong incentive for VA to market services to attract revenue-generating
                             rather than non-revenue-generating veterans. This incentive could
                             manifest itself in several ways, including where VA decides to locate new
                             community-based outpatient clinics. For example, VA recently proposed
                             locating a community-based clinic in a homeless shelter that VA expects
                             could attract 2,040 new users in need of VA’s safety net and therefore not
                             likely to generate revenue. By contrast, VA has also proposed opening a
                             new clinic in one of the country’s more affluent counties. While the clinic
                             is intended to improve access for current users, it is also expected to
                             attract patients who could ultimately generate revenue.

Non-VA Providers May Be      Marketing VA services to generate revenue has the potential to draw
at Risk of Losing Workload   higher-income insured veterans from private providers who may then see
                             their revenue base erode, depending on the number of patients who shift
                             to VA care. If VA has to aggressively attract new users who are now
                             receiving health care elsewhere, it will intensify the competition between
                             VA and other state, county, and private providers for a larger share of a
                             shrinking veterans’ health care market.

                             VA’s success in attracting revenue-generating patients will be likely to
                             result in a shifting of health care costs from other financing organizations
                             to VA and to exacerbate financial hardships for those competing health
                             care providers that have excess capacities. For example, our interviews

                             Page 9                                                      GAO/T-HEHS-97-121
                            VA Health Care: Assessment of VA’s Fiscal
                            Year 1998 Budget Proposal

                            with 115 veterans using new access points last year revealed that
                            70 percent had Medicare coverage, 50 percent had private insurance, and
                            7 percent had Medicaid.5 Most said they paid for their own primary care or
                            used insurance coverage to obtain care at other providers before they
                            switched to VA care.

VA’s Proposal Could Lower   VA’s proposal to retain revenue generated from nonappropriated sources
Contribution to Deficit     would also affect VA’s contribution to deficit reduction. VA currently
Reduction                   returns recoveries to the Treasury, which, in effect, reduces the
                            government’s cost of VA health care. For example, VA expects to return
                            $438 million in 1997, which would reduce the amount of government
                            resources needed to serve VA’s patient base from its appropriated amount
                            of $17 billion to $16.6 billion. By contrast, under VA’s proposal it would
                            retain insurance recoveries of $590 million in 1998, increasing the
                            government’s cost to finance VA health care to $17.6 billion, or $1 billion
                            more than in the previous year.

                            In addition, VA’s proposal to reinvest efficiency savings and use additional
                            nonappropriated resources to increase the number of patients served
                            could affect VA’s contribution to deficit reduction. For example, VA would
                            need an appropriation of $17 billion a year to serve 2.9 million users if
                            savings equal payroll and inflation costs between 1998 and 2002. By
                            contrast, VA may be able to contribute up to $1 billion more in 2002 toward
                            deficit reduction if annual efficiency savings exceed cost increases by
                            $200 million, on average, over the 5-year period and such excess savings
                            are returned to the Treasury.

                            VA is using a new resource allocation method and a decentralized
New Allocation              management structure to address two long-standing issues: equity and
Method and                  efficiency. These initiatives are intended to improve the equity of veterans’
Decentralized               access to care and produce cost savings.

Management Show
Promise, but Risks

                             VA’s Health Care: Improving Veterans’ Access Poses Financial and Mission-Related Challenges
                            (GAO/HEHS-97-7, Oct. 25, 1996).

                            Page 10                                                                      GAO/T-HEHS-97-121
                       VA Health Care: Assessment of VA’s Fiscal
                       Year 1998 Budget Proposal

Allocating Resources   VA is using the Veterans Equitable Resource Allocation (VERA) system to
Equitably Seems        allocate 88 percent of the $17 billion medical care appropriation to the 22
Achievable With New    networks. This approach is a major shift away from VA’s historical process
                       for two reasons. First, it funds 22 networks rather than hundreds of
Methodology            facilities. Second, it allocates resources on the basis of costs per veteran
                       served rather than on the basis of facilities’ historical budgets. Funding
                       networks sends a clear message that each facility is a part of a larger
                       regional enterprise charged, in part, with a mission of achieving equity of
                       access. VERA recognizes that networks are the vehicles for fostering
                       regional change, eliminating redundancies, and facilitating cooperation
                       among medical facilities. Network officials have the authority to tailor
                       their VERA allocations to facilities and programs, within the parameters set
                       by national policy and guidelines, and to integrate services across facilities
                       for equity and other purposes.

                       The goal of VERA is to provide networks with comparable levels of
                       resources per veteran served. VA implemented VERA in an attempt to
                       allocate patient care resources on the basis of differences in patient needs
                       and regional differences in the price of their care. To do this, VERA
                       classifies patients into two groups—basic care and special care—as a
                       simple case mix adjustment. Basic care patients generally receive routine
                       services that are less expensive than those received by special care
                       patients. Special care patients often have complex or chronic conditions,
                       such as spinal cord injury or end-stage renal disease, or require care in
                       settings such as nursing homes. The VERA special care category also
                       includes some adjustment for age to account for the higher medical
                       demands of older population groups.

                       VERA  allocates resources to networks based on two key components:
                       network workloads and national prices. VA patient workloads are the
                       estimates of the number of patients—basic and special—a network may
                       serve. VA also calculates workloads for research support, education
                       support, equipment, and nonrecurring maintenance. To determine a
                       national price for each workload category, VERA divides national resources
                       available by the national workload for that category. VERA allocates funds
                       to a network by multiplying the network’s workload numbers by their
                       respective national prices. In addition, VERA adjusts for differences in
                       regional labor costs for patient care.

                       To the extent that VERA allocates comparable levels of patient care
                       resources for each veteran served, it provides incentives for networks to
                       obtain these resources by increasing workload and decreasing costs.

                       Page 11                                                     GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal
Year 1998 Budget Proposal

Networks that increase their patient workload relative to other networks
gain resources under VERA; those whose patient workloads decrease
relative to others lose resources. Networks that are more efficient, that is,
have patient care costs below the national price, have more funds
available for local initiatives. However, those with patient care costs above
the national price (that is, less efficient networks) must increase efficiency
to have such funds available. Thus, these incentives can result in cost
savings and enhanced access for veterans. VERA will not be fully
implemented until fiscal year 1999. As a result, few resources will move
among networks this year. (See fig. 1.) Five VISNs will receive fewer dollars
and 17 will receive more.6 VERA generally moves resources from the
Northeast and Midwest, where per veteran costs have been higher than the
national average, to the South and West where per veteran costs have been
lower than the national average. If VA had fully implemented VERA this year,
shifts in funding among the networks would have ranged from a reduction
of 14 percent to an increase of 16 percent.

 In VA’s Veterans Equitable Resource Allocation System Briefing Booklet, March 1997, VA shows that 6
networks will lose funds and 16 will gain funds in fiscal year 1997. However, VA excludes allocations
for equipment and nonrecurring maintenance. We included those amounts in our calculations to show
the impact of VERA more fully. Neither we nor VA includes funds not allocated by VERA in these

Page 12                                                                       GAO/T-HEHS-97-121
                                          VA Health Care: Assessment of VA’s Fiscal
                                          Year 1998 Budget Proposal

Figure 1: Changes Resulting From VERA Allocations (Fiscal Years 1996-97)

                                                                                      (Figure notes on next page)

                                          Page 13                                          GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal
Year 1998 Budget Proposal

Note: These numbers include all six VERA expenditure categories: basic care, special care,
research support, education support, equipment, and nonrecurring maintenance.

VERA, like any allocation model, has limitations. First, VERA may shift some
resources inappropriately because it may not fully account for justifiable
differences in regional cost variations. Although VERA adjusts for
differences in regional case mix with its basic and special care patient
categories and adjusts the allocations for differences in regional labor
costs, it assumes that all the remaining differences are based on
differences in efficiencies. While inefficiency is a major factor in these cost
differences, other factors may play a role. For example, to the extent that
veterans are sicker and need more health care services in different parts of
the country, additional case mix adjustments may be necessary to fully
explain regional cost differences. As we have said in the past, VA needs to
provide more information on why costs vary throughout the country.7 VA
officials told us they plan to examine this further.

Another potential issue is that basing VERA on veteran-users may result in
underallocation of funds in areas with low usage rates. If these rates result
from past inequities in access to services, VERA may need to incorporate
population-based data on veterans with highest priority for receiving
services rather than relying solely on user data.8 However, other factors,
such as number of veterans with health insurance coverage, could also
affect usage rates. Because adequate data were not available and VA
wished to implement VERA as quickly as possible, it did not include
population data in VERA. VA continues to examine the utility of doing so.

VERA’sincentives for lower per veteran costs and higher workload
numbers could lead to unintended consequences if not properly monitored
and corrected. In our discussions and visits with network and medical
center officials, we found efforts under way to increase the number of
veterans served. VA indicators for the first quarter of fiscal year 1997
generally show increases in the number of high-priority veterans (that is,
Category A veterans) seen, and the increases for some networks are
dramatic. We have concerns about whether the data accurately depict

 Veterans’ Health Care: Facilities’ Resource Allocations Could Be More Equitable (GAO/HEHS-96-48,
Feb. 7, 1996) and Department of Veterans Affairs: Programmatic and Management Challenges Facing
the Department (GAO/T-HEHS-97-97, Mar. 18, 1997).
 Category A veterans have the highest priority for receiving VA health care services. Included in
Category A are veterans with service-connected disabilities and those with service-connected
disabilities whose incomes fall below certain thresholds.

Page 14                                                                          GAO/T-HEHS-97-121
                            VA Health Care: Assessment of VA’s Fiscal
                            Year 1998 Budget Proposal

                            changes in workload. If the data are reliable, we are concerned that some
                            networks may be inappropriately increasing their workload numbers to
                            get more resources under VERA. For example, networks may be increasing
                            workload by increasing the number of one-visit patients. This may be good
                            primary or preventive care, or it could distort VERA allocations because
                            only minimal services are provided to get credit for increased workload. In
                            the short time since the indicators were published, however, we have been
                            unable to determine the accuracy of the data and the services the new
                            users received. VA officials told us that they recognize the importance of
                            monitoring, identifying, and correcting unintended consequences. They
                            said they will monitor data used in the allocation model, including
                            workload increases, to ensure that they reflect changes at the network and
                            medical center levels that are consistent with VA-wide policy and guidance.

                            Although VERA is a step toward a more equitable allocation of resources, it
                            does not specifically address equitable access to services. Networks are
                            ultimately responsible for allocating funds to ensure that veterans have
                            equal access to VA services. Each of the networks we contacted differs in
                            how it allocates funds. One funds its facilities using a flat rate for each
                            veteran-user. Another uses a combination of historical funding and
                            negotiation with medical center management regarding new initiatives.
                            Still another includes a feature in its allocation method that provides
                            payment for each additional veteran served. VA officials told us they will
                            examine these processes to ensure that different allocation mechanisms
                            increase equity of access to services while addressing other national VA

Networks Have Made          VA has taken a page from private sector organizations and empowered the
Significant Progress, but   network directors by delegating broad decision-making authority over
Decentralized Management    network budgets, facility staffing, health care delivery, and administrative
                            functions. This has resulted in notable accomplishments at VA, including
Poses Oversight             significant cost savings and improvements in access.
                            Decentralized decision-making at VA places a premium on effective
                            headquarters guidance and monitoring of VISN activities. The challenge is
                            to ensure that networks have a common understanding of VA-wide goals
                            and legislative requirements while permitting them flexibility in how to
                            achieve the goals. The challenge in monitoring network performance is to
                            have reliable, appropriate, and timely indicators to ensure that problems
                            are identified and corrected.

                            Page 15                                                     GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal
Year 1998 Budget Proposal

VA has provided guidance to managers and staff since the beginning of its
reorganization. For example, the Under-Secretary for Health issued two
volumes, “Vision for Change” and “Prescription for Change,” delineating
the type of organization he intended VA to become and the goals VA would
strive to attain. Network and medical center staff told us that these
publications and other communications, such as monthly meetings
between network and headquarters managers, help develop their
understanding of the structural and operational changes being made.

VA’s new performance measurement process also plays an important
guidance role by underscoring VA-wide organizational priorities. These
measures include key indicators such as reduced bed-days of care and an
increased percentage of surgeries performed on an ambulatory basis. The
measures are the main components of the network directors’ performance
agreements. In networks we visited, medical center directors’ performance
agreements also included these measures. Medical center directors we
contacted told us that network directors were exercising closer oversight
of their progress in achieving VA-wide goals than had occurred under
previous organizational structures.

Another strategy for reducing unnecessary variation has been the use of
clinical practice guidelines. These are intended to enhance the quality and
appropriate utilization of health care services by reducing variations in the
way a health condition—for example, stroke—is treated. Networks are
required to adopt 12 practice guidelines by the end of fiscal year 1997.
They can choose from those identified by headquarters or other sources.

Providing national guidelines but offering networks discretion on when to
follow these guidelines can create opportunities for local innovation but
problems for national oversight. If discretion results in variation across the
system, it will be difficult for VA to assess the impact of the guidelines.
Network flexibility may produce tension between headquarters and
networks. For example, officials in one network we visited told us that
they preferred the American Medical Association guidelines to the national
diabetes guidelines VA adopted.

Headquarters, network, and medical center officials told us that national
guidance had not been sufficiently clear on whether to notify headquarters
of significant program changes at the network level. They told us that they
had not always been clear on what constituted “significant” changes. In a
few instances, headquarters officials were not notified of impending
network-initiated changes such as closure of a surgical program at a

Page 16                                                     GAO/T-HEHS-97-121
               VA Health Care: Assessment of VA’s Fiscal
               Year 1998 Budget Proposal

               medical center. In May and September 1996, headquarters issued guidance
               for networks on prior notification and consultation with headquarters for
               network actions such as restructuring clinical services—including
               closures of major programs—and proposed changes to special emphasis
               programs such as those for spinal cord injury and prosthetics. VA has
               additional measures planned to ensure that headquarters is involved in
               significant network-initiated program changes.

               Performance measures and standards developed by headquarters are the
               key components of VA’s monitoring process. Headquarters holds network
               directors accountable for making progress toward VA goals by including
               measures and standards of performance in the directors’ contracts.
               Headquarters lengthened its list of measures for fiscal year 1997; it now
               includes about two dozen indicators. In networks we visited, directors are
               monitoring medical centers on these measures as well.

               VA’s 1998 budget presents the Congress with a fundamental choice about
Concluding     the future course of VA health care, a choice that will have an effect on
Observations   veterans, other health care providers, and efforts to achieve a balanced
               federal budget. In general, VA’s proposal to reinvest all savings and
               generate additional nonappropriated revenues may intensify the direct
               competition between VA and other providers. By contrast, a decision to
               limit VA’s retention of nonappropriated revenues will set VA on a course to
               becoming a more cost-efficient safety net for those non-revenue-
               generating veterans who have no other health care options.

               Currently, there is insufficient information to understand the full
               implications of VA’s budget proposal. VA states that the key elements of its
               proposal—namely, a 30-percent per patient cost reduction, a 20-percent
               increase in veterans served, and a 10-percent reduction of its reliance on
               appropriations—are inexorably linked but, in our view, this is not so. It
               seems plausible that any number of different scenarios could occur,
               depending on the magnitude of cost savings that VA will realize through its
               ongoing restructuring.

               For instance, VA could operate as a health care safety net for several years,
               with an appropriation of about $17 billion or less, given VA’s progress in
               identifying and implementing efficiency savings. Such efficiency savings
               could equal or exceed the potential nonappropriated revenues that VA
               estimates it can generate over the next 2 years if authorized to do so. For
               this reason, there appears to be time to obtain critical information from VA

               Page 17                                                     GAO/T-HEHS-97-121
    VA Health Care: Assessment of VA’s Fiscal
    Year 1998 Budget Proposal

    and others so that VA’s budget proposal may be more clearly understood
    and fully debated. In this regard, several critical issues could be addressed,
    including the following:

•   Should VA reinvest all efficiency savings to expand the number of patients
    served? If so, should VA’s expansion be limited to certain target groups of
    veterans, such as service-connected, low-income, or uninsured veterans in
    need of a health care safety net?
•   Should VA use nonappropriated revenue sources to help finance increased
    services to higher-income and insured veterans who have no
    service-connected conditions or continue relying solely on appropriated
    resources to finance increased services for service-connected and
    low-income veterans without service-connected conditions?
•   Should VA reinvest savings in excess of those needed to maintain its
    current patient base in order to serve more veterans or should it return
    some or all of the excess savings as a contribution toward deficit

    It would be less difficult to make such choices at this time if VA had
    provided a road map that clearly articulated (1) what operational changes
    would be needed to move along its newly proposed competitive course
    and (2) what consequences such competition would have for veterans and
    others. For example, additional information would be helpful about how
    different choices may affect (1) service-connected veterans and those in
    need of VA’s safety net; (2) VA’s existing hospitals, clinics, and other
    facilities; (3) VA’s workforce; and (4) other health care providers.

    Delaying a decision on VA’s legislative proposals until such critical
    information is available—including a plan describing how the system will
    look and operate in 2002—may result in a better legislative decision on
    VA’s budget proposal. It will also afford VA and the Congress time to better
    assess how VA’s future resource needs may be affected by the new
    decentralized management and resource allocation initiatives.

    VA’s new resource allocation process and decentralized management
    structure hold promise for improved operational efficiencies and equitable
    access. Responding to VERA’s incentives and VA’s goals, local managers are
    already producing substantial savings and increasing the number of
    veterans served. VA, however, needs to continue examining how price and
    workload data are determined under VERA to improve equity of resource
    allocation. VA also needs to carefully monitor the impact of VERA’s
    incentives on network and facilities performance. This is particularly

    Page 18                                                     GAO/T-HEHS-97-121
               VA Health Care: Assessment of VA’s Fiscal
               Year 1998 Budget Proposal

               important given the variation resulting from local managers’ flexibility in
               the decentralized system. We believe that identifying and correcting
               problems is essential to the success of VA’s proposed 5-year plan.

               For more information about this statement, please call Paul Reynolds,
Contributors   Assistant Director, at (202) 512-7109 or Bruce Layton, Assistant Director,
               at (202) 512-6837.

               Page 19                                                     GAO/T-HEHS-97-121
Related GAO Products

              Department of Veterans Affairs: Programmatic and Management
              Challenges Facing the Department (GAO/T-HEHS-97-97, Mar. 18, 1997).

              VAHealth Care: Improving Veterans’ Access Poses Financial and
              Mission-Related Challenges (GAO/HEHS-97-7, Oct. 25, 1996).

              VAHealth Care: Opportunities to Significantly Reduce Outpatient
              Pharmacy Costs (GAO/HEHS-97-15, Oct. 11, 1996).

              VAHealth Care: Issues Affecting Eligibility Reform Efforts (GAO/HEHS-96-160,
              Sept. 11, 1996).

              VAHealth Care: Opportunities for Service Delivery Efficiencies Within
              Existing Resources (GAO/HEHS-96-121, July 25, 1996).

              VA   Health Care: Challenges for the Future (GAO/HEHS-96-172, June 27, 1996).

              VAHealth Care: Efforts to Improve Veterans’ Access to Primary Care
              Services (GAO/T-HEHS-96-134, Apr. 24, 1996).

              VAHealth Care: Approaches for Developing Budget-Neutral Eligibility
              Reform (GAO/T-HEHS-96-107, Mar. 20, 1996).

              VAHealth Care: Opportunities to Increase Efficiency and Reduce Resource
              Needs (GAO/T-HEHS-96-99, Mar. 8, 1996).

              Veterans’ Health Care: Facilities’ Resource Allocations Could Be More
              Equitable (GAO/HEHS-96-48, Feb. 7, 1996).

              VA Health Care: Issues Affecting Eligibility Reform (GAO/T-HEHS-95-213,
              July 19, 1995).

              VAHealth Care: Challenges and Options for the Future (GAO/T-HEHS-95-147,
              May 9, 1995).

              VAHealth Care: Retargeting Needed to Better Meet Veterans’ Changing
              Needs (GAO/HEHS-95-39, Apr. 21, 1995).

              Veterans’ Health Care: Use of VA Services by Medicare-Eligible Veterans
              (GAO/HEHS-95-13, Oct. 24, 1994).

(406140)      Page 20                                                       GAO/T-HEHS-97-121
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 6015
Gaithersburg, MD 20884-6015

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:


or visit GAO’s World Wide Web Home Page at:


United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested