Veterans' Affairs: Progress and Challenges in Transforming Health Care

Published by the Government Accountability Office on 1999-04-15.

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 9:30 a.m.
Thursday, April 15, 1999
                           VETERANS’ AFFAIRS

                           Progress and Challenges in
                           Transforming Health Care
                           Statement for the Record by Stephen P. Backhus, Director
                           Veterans’ Affairs and Military Health Care Issues
                           Health, Education, and Human Services Division

Veterans’ Affairs: Progress and Challenges in
Transforming Health Care

                  Mr. Chairman and Members of the Subcommittee:

                  We are pleased to contribute this statement for the record for the
                  Subcommittee’s deliberations on the fiscal year 2000 budget request for
                  the Department of Veterans Affairs’ (VA) health care system. In this
                  request, VA is seeking a funding level of $18.4 billion to serve 3.65 million

                  Between its establishment in 1946 and 1995, VA’s health care system grew
                  into our nation’s largest direct provider of health care, serving veterans at
                  over 600 locations nationwide. These included 181 locations where VA
                  owned over 4,700 buildings and 18,000 acres of land. VA’s system focused
                  primarily on hospital care, using high technology and medical

                  VA’s system, however, did not keep pace with such societal and industry
                  changes as

              •   a market-based restructuring of American healthcare, including the rise of
                  managed care;
              •   a rapid growth in scientific and medical knowledge available to treat
                  illnesses and injuries; and
              •   an overall aging of the veteran population, including declining numbers of
                  potential system users and evolving medical needs.

                  In October 1995, VA began to transform its system from a hospital operator
                  to a healthcare provider that relies on community-based, integrated
                  networks of VA and non-VA providers to meet veterans’ needs more
                  efficiently and effectively. In January 1997, VA proposed a 5-year plan to
                  operate within a fixed annual appropriation of $17 billion through fiscal
                  year 2002. To accomplish this, VA planned to reduce per patient costs by
                  30 percent, increase patients served by 20 percent, and reduce reliance on
                  appropriations by 10 percent.

                  Since VA’s transformation began, we have visited over 100 VA medical
                  facilities and spoken with over 500 officials, as well as many veterans,
                  including representatives of veteran service organizations. We also
                  examined hundreds of documents, including VA’s budget submissions and
                  studies done by VA’s Office of Inspector General and others. Based on the
                  insights developed during these efforts, our statement today focuses on

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(1) VA’s transformation progress to date, (2) challenges that remain to be
confronted, and (3) the implications for VA’s fiscal year 2000 budget.1

In summary, VA’s transformation continues to make significant progress.
Over the last 3 years, VA has enhanced benefits and served 500,000
additional veterans, while realizing a nonappropriated revenue surplus of
$496 million that remains available for future use. This was accomplished
primarily because VA’s management initiatives reduced operating costs by
almost $1 billion. The most notable initiatives involved shifting veterans’
care to appropriate settings and reengineering administrative and clinical

This year, however, our work shows that VA’s transformation appears to be
losing momentum. VA, for example, has prolonged decisions concerning
much needed restructuring of aged capital assets, including hospital
closures, which could result in unnecessary expenditures of billions of
dollars over the next several years. VA’s transformation cannot be
successfully completed until these and other critical challenges are
adequately addressed.

In our view, VA’s fiscal year 2000 budget is based on the unduly optimistic
expectation that its ongoing transformation will generate needed
efficiencies of $1.4 billion in savings. VA assumes, for example, that
employment reductions in fiscal year 2000 will be more than 3 times
greater than expected fiscal year 1999 reductions. VA has not taken the
underlying management actions—such as aggressively addressing all
potential facility integrations and service consolidations—that appear
necessary to make a threefold reduction possible. If VA had made such
difficult decisions earlier, it might not need to realize this level of savings.
Moreover, VA may ultimately need to use less desirable management
actions, including large-scale employee furloughs, to operate within its
proposed budget. Such actions could adversely affect all veterans’ quality
of care, especially waiting times. VA could avoid such undesirable
outcomes for higher priority veterans if, as the Congress intended, VA uses
its new enrollment process to manage access to VA health care services
within available resources.

 For 1996 and 1997 hearings of this subcommittee, we provided assessments of VA’s transformation
progress. See VA Health Care: Opportunities to Increase Efficiency and Reduce Resource Needs
(GAO/T-HEHS-96-99, Mar. 8, 1996) and VA Health Care: Assessment of VA’s Fiscal Year 1998 Budget
Proposal (GAO/T-HEHS-97-121, May 1, 1997).

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                 VA’s health care system currently touches the lives of 15 percent of our
Background       nation’s 25 million veterans. The rest rely on private insurance, other
                 public programs, or their own resources to finance their health care needs.

                 VA uses hundreds of delivery locations to provide services such as primary
                 care, specialized medical care, mental health, geriatrics, and extended
                 care. In addition, VA supports medical education and research through its
                 affiliation with 107 medical schools, and provides medical backup to the
                 Department of Defense and other federal, state, or local agencies during
                 national emergencies.

                 VA began its transformation by creating 22 regional offices to make basic
                 budgetary, planning, and operating decisions for veterans living within
                 defined geographical areas; VA’s headquarters and over 150 large hospitals
                 made such decisions previously. These offices oversee between 5 and 11
                 large hospitals, as well as many clinics or other delivery locations.

                 The primary focus of VA’s transformation is to reduce reliance on large
                 hospitals by developing local or regional networks that provide a
                 continuum of care grounded in ambulatory settings. To encourage this
                 transformation, VA implemented a new resources allocation process that
                 bases funding decisions on user populations rather than facilities.

                 In addition, the Congress passed the Veterans Health Care Eligibility
                 Reform Act of 1996, which furnished tools that VA said were key to a
                 successful transformation and provided VA the means to develop its 5-year
                 financial plan, including

             •   new eligibility rules which allow VA to treat veterans in the most
                 appropriate setting;
             •   introduction of managed care principles, such as a uniform benefits
                 package, which allows VA to provide a continuum of services, including
                 preventive medicine; and
             •   an expanded ability to purchase services from private providers and to
                 generate revenue by selling excess services to nonveterans.

                 At that time, both the Congressional Budget Office and we concluded that
                 such reforms could generate additional demand for services, primarily due
                 to increased use of outpatient services. The Congressional Budget Office
                 also estimated that rising utilization would, by extension, produce
                 dramatic cost increases, potentially billions of dollars.

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                       To address such concerns, the Eligibility Reform Act also required VA to
                       implement a veterans’ enrollment system to manage access in relation to
                       available resources. It established seven priority categories, with the
                       highest priorities given to veterans with service-connected disabilities.

                       Each year, VA is to enroll veterans in those priority categories for which
                       there are sufficient resources to provide care that is timely and acceptable
                       in quality. The act also requires VA to maintain capacity for veterans with
                       special disabilities, including treatment for spinal cord injury, blindness,
                       amputation, and mental illnesses.

                       At VA’s request, the Congress also authorized VA to retain all collections
                       from third parties (including recoveries from insurance companies and
                       certain tort claims), copayments, and per diems, beginning July 1, 1997. VA
                       is to deposit these collections in a Medical Care Collections Fund and use
                       them to supplement appropriations to meet veterans’ health care needs. VA
                       may spend these funds in the year collected or any subsequent year.

                       As part of the transformation, VA’s networks have implemented hundreds
VA Has Taken Major     of management initiatives that have significantly enhanced the efficiency
Steps Forward in Its   and effectiveness of VA’s health care system.2 For example, during fiscal
Transformation         years 1996 through 1998, VA reduced inpatient workload by 38 percent and
                       bed days of care per 1,000 veterans by 47 percent. This allowed over 20,000
                       hospital beds to be closed and numerous administrative and clinical
                       services to be consolidated.

                       At the same time, VA used savings from its efficiencies to finance
                       improvements in veterans’ access to, and quality of, care. For example, VA
                       served an additional 500,000 veterans, in part, by opening over 183 new
                       community-based clinics, creating about 1,000 primary care teams, and
                       purchasing specialty care from private providers. VA’s performance
                       indicators suggest that the quality of care is improving overall. Veterans’
                       rating of ambulatory care quality has risen and the reported numbers of
                       problems have fallen.

                       VA appears on track toward meeting its goals of reducing per-patient costs,
                       serving more veterans, and increasing nonappropriated revenue sources
                       by fiscal year 2002. Compared with its fiscal year 1997 baseline, VA
                       projected and realized the results shown in table 1 for fiscal year 1998
                       (year 1 of VA’s 5-year plan).

                        VA Health Care: Status of Efforts to Improve Efficiency and Access (GAO/HEHS-98-48, Feb. 6, 1998).

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Table 1: VA’s 5-Year Goals
                                                                                                                       VA fiscal year
                                                                                   VA fiscal year 1998                     2002
                                            30-20-10 initiatives                    Results                   Goal                   Goal
                                            Reducing per-patient costs                   10%                    6%                    30%
                                            Serving more veterans                         9%                    5%                    20%
                                            nonappropriated funding                       4%                    4%                    10%

                                            More importantly, VA expects to have more resources available in fiscal
                                            year 1999 than its 5-year plan projected, as shown in table 2.

Table 2: Comparison of VA’s Estimates
for Its FY 1999 Budget                                                                        VA’s 5-year plan’s VA’s current FY
                                                                                              projection for FY 1999 estimate
                                            Funding                                           1999 (1/97)        (1/99)
                                            Appropriated                                      $17.0 billion          $17.3 billion
                                            Other sources                                     $.9 billion            $ 1.1 billion
                                            Total                                             $17.9 billion          $18.4 billion

                                            Because of efficiency savings, VA needed to spend, in fiscal year 1998, only
                                            $170 million of its medical care collections. This allowed VA to carry
                                            forward about $496 million for use in fiscal year 1999.

                                            VA’s management initiatives that contributed to these dramatic results

                                        •   establishing primary care as the dominant delivery model;
                                        •   shifting medical care from inpatient to outpatient settings;
                                        •   consolidating administrative and clinical services; and
                                        •   establishing networks of VA and non-VA providers.

Establishing Primary Care                   VA established primary care case management to help ensure that patients
as Dominant Delivery                        are served in the most appropriate settings and resources are coordinated
Model                                       and best organized to address patients’ specific medical conditions.

                                            Before 1995, primary care providers managed less than 20 percent of VA’s
                                            patients. Since then, VA has successfully oriented veterans to the principal
                                            concept of primary care. VA, for example, reports that close to 80 percent
                                            of veterans responding to its annual patient survey are aware that one
                                            provider or primary care team has responsibility for managing their

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                               medical care. This, in effect, relieves high-cost specialists from day-to-day
                               patient management responsibilities.

                               To enhance primary care access, VA has established over 1,000 primary
                               care teams at large medical facilities and opened over 183
                               community-based outpatient clinics. These clinics provide primary care
                               closer to veterans’ homes, especially those living in underserved, often
                               remote, areas. Currently, VA has approved 272 community clinics to open
                               in fiscal years 1999 and 2000 and expects to open about 200 more by fiscal
                               year 2003.

Shifting Medical Care to       Advances in medical technology and practices, for example, have afforded
Outpatient Settings            VA significant opportunities to shift medical care to outpatient settings.
                               Because of such new technologies as laser, endoscopic, and other less
                               invasive surgical techniques, many surgeries are now performed in a
                               doctor’s office or outpatient clinic or require shorter lengths of stay when
                               performed in hospitals.

                               In addition, changes in medical practice and the development of
                               psychotherapeutic drugs to treat mental illness have led to fewer and
                               shorter hospital admissions for psychiatric patients and to the
                               deinstitutionalization of many long-term psychiatric patients.

                               VA has implemented management initiatives to identify patients who can
                               be served more cost-effectively in alternatives to inpatient settings,
                               including treatment of many chronically and catastrophically ill patients at
                               home rather than in a hospital.

                               Before 1996, VA had no systemwide external preadmission screening
                               program or other utilization review programs to ensure that patients are
                               treated in the most appropriate settings. In that year, we recommended
                               that VA develop such programs.3 Subsequently, VA implemented
                               management initiatives to

                           •   review 100 percent of planned admissions to determine patients’
                               appropriate level of care and
                           •   perform continuing stay reviews to determine the appropriateness of each
                               additional day of hospitalization.

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

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                              During fiscal years 1996 through 1998, VA’s inpatient workload declined
                              38 percent and bed days of care per 1,000 patients dropped by 47 percent.
                              This allowed VA to close 20,000 hospital beds, a 40-percent reduction.

                              This decrease in inpatient usage has been matched by major increases in
                              VA’soutpatient care workload. During fiscal years 1996 through 1998, VA’s
                              outpatient visits increased 19 percent. Of note, VA performed over
                              90 percent of certain surgeries, including colonoscopies, arthroscopies,
                              cystoscopies, breast biopsies, and cataract surgeries, on an ambulatory
                              basis in fiscal year 1998.

Consolidating                 VA also has implemented a variety of initiatives that consolidated duplicate
Administrative and Clinical   or underused services. VA, for example, integrated the management teams
Services                      of two or more large medical facilities in 24 markets; this effort involved a
                              total of 50 facilities. VA also consolidated many other administrative and
                              clinical services at these facilities, which saved millions of dollars in
                              unneeded operating costs.4

                              Based on our work, VA appears to have an opportunity to achieve even
                              more significant savings by consolidating duplicate or underused services.
                              This is because VA still operates 17 large medical facilities that compete
                              with these newly integrated facilities in 10 markets, as well as operating 44
                              large facilities in 19 other markets that compete with each other to serve

                              Recently, we recommended, and VA agreed, that veterans’ needs should be
                              assessed in these 40 markets and steps taken to integrate, consolidate, or
                              close unneeded services. This could result in billions of dollars in
                              additional savings over the next 5 years that could be reinvested to
                              improve veterans’ access to high-quality care.5

Establishing Networks of      VA has implemented important initiatives to establish integrated networks
VA and Non-VA Health          of VA and non-VA providers. VA has made the most progress by far in
Care Providers                establishing new community-based clinics. Some notable progress,
                              however, has been made purchasing inpatient care from private hospitals

                               VA Health Care: Lessons Learned From Medical Facility Integrations (GAO/T-HEHS-97-184, July 24,
                              VA Health Care: Capital Asset Planning and Budgeting Need Improvement (GAO/T-HEHS-99-83,
                              Mar. 10, 1999).

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                            or military facilities, as well as developing joint ventures and sharing
                            agreements with the Department of Defense.

                            About half of VA’s new community clinics operated through contracts with
                            non-VA providers during fiscal years 1996 through 1998. These clinics
                            helped to reduce VA’s costs and improve access because they are located
                            closer to veterans’ homes. VA expects these clinics primarily to refer
                            veterans to VA facilities for specialized diagnostic procedures, treatment,
                            or hospital admissions, although referrals may also be made to other
                            non-VA providers.

                            In addition, some VA hospitals located in rural areas have contracted to
                            provide inpatient care with non-VA hospitals. These initiatives, according
                            to VA, have been successful from a cost-efficiency perspective and also
                            have received high satisfaction scores from veterans.

                            At the close of fiscal year 1998, VA and the Department of Defense had
                            negotiated almost 1,000 facility-level sharing agreements covering more
                            than 10,000 services ranging from laundry, blood, and laboratory services
                            to major medical and specialty care services. There are also four joint
                            ventures under way for the construction and operation of medical
                            facilities, with four additional agreements near completion.

                            We are currently reviewing these sharing agreements to assess the benefits
                            for veterans, military members, and beneficiaries, as well as efficiency
                            savings for VA. Recently, the Congressional Commission on
                            Servicemembers and Veterans Transition Assistance reported that
                            opportunities exist for greater sharing and partnering between VA and the
                            Department of Defense. Of note, the Commission made several
                            recommendations, including the development of a joint, clinically based
                            formulary and joint procurement of future information technology.

                            As VA’s transformation proceeds through its fourth year, it now turns to
Further                     face the most onerous challenges it has encountered to date. These
Transformation              include
Progress Will Require
                        •   closing unneeded hospitals,
VA to Confront          •   restructuring capital assets,
Formidable              •   restructuring VA’s medical education role,
                            maintaining capacity to serve special disabilities,
Challenges              •
                        •   improving resource allocations,

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                   •   improving revenue collections, and
                   •   implementing an enrollment process.

                       VA’s failure to aggressively confront these challenges could result in the
                       unnecessary expenditure of billions of dollars over the next several years.

Closing Unneeded       The success of VA’s strategies to transform its health care system—shifting
Hospitals              inpatient care to more appropriate settings, establishing primary care in
                       community clinics, and improving efficiency through staff reductions,
                       service consolidations, and bed closures—has produced excess inpatient
                       capacity at most VA hospitals. As VA’s transformation continues, VA’s need
                       for a large number of full-service hospitals will continue to diminish,
                       thereby challenging VA to make difficult decisions concerning hospital

                       VA and the private sector have reacted very differently to declining
                       inpatient workload. In the private sector, over 500 hospitals were closed as
                       health care practices were transformed. As we have reported, VA instead
                       has chosen to reduce operating beds at its hospitals or shift services such
                       as inpatient surgery among hospitals.6 This approach often leaves VA
                       operating only a small part of most hospitals’ inpatient capacity.

                       VA demonstrated the feasibility of closing underused hospitals when it
                       closed the Martinez, California, hospital because of earthquake concerns.
                       VA replaced it with a modern outpatient clinic supplemented by existing VA
                       inpatient locations and contract care, efficiently meeting veterans’ needs
                       in that market. VA reports that veterans’ satisfaction with these changes is
                       high, including satisfaction with quality of care.

                       At a March 1996 hearing before this Subcommittee, VA stated that it would
                       look to close additional facilities; since then, VA in essence has closed four
                       hospitals by shifting inpatient care to other VA locations or contracting
                       with non-VA providers. In each location, VA continues to provide outpatient
                       care as well as nursing home care in three locations.

                       Last year, we reported that VA could save $20 million a year and care could
                       be improved if veterans were served at one less location in Chicago.7

                        VA Hospitals: Issues and Challenges for the Future (GAO/HEHS-98-32, Apr. 30, 1998).
                        VA Health Care: Closing a Chicago Hospital Would Save Millions and Enhance Access to Services
                       (GAO/HEHS-98-64, Apr. 16, 1998) reports that asset operations and maintenance costs for four VA
                       hospitals in Chicago generally represent about 25 to 35 percent of the hospitals’ operating budgets.

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                        Veterans’ benefits, for example, could be enhanced if VA used the savings
                        to purchase primary care closer to veterans’ homes. In response to our
                        recommendation, VA agreed to initiate a market-based assessment of its
                        health care delivery in the Chicago market. This market assessment is
                        scheduled for completion soon.

                        VA is to be commended for its willingness to study how it could improve its
                        efforts to meet veterans’ needs in this market. The extent to which VA is
                        committed to taking action on the basis of study findings remains
                        uncertain, however. Last month, VA stated publicly that no additional
                        hospitals will be closed in fiscal years 1999 or 2000. This decision seriously
                        threatens the continued progress of VA’s health system transformation.

Restructuring Capital   VA’s massive, aged infrastructure could be the biggest obstacle confronting
Assets                  VA’s ongoing transformation efforts. VA’s challenges in this arena are
                        twofold: deciding how its assets should be restructured, given the
                        dramatic shifts in VA’s delivery practices, and determining how a
                        restructuring can be financed in a timely manner.

                        VA spends a major part of its health care budget—about 1 out of every 4
                        health care dollars—to operate, maintain, and improve its facilities,
                        generally referred to as the costs of asset ownership. Without a major
                        restructuring, billions of dollars will be used in the operation of hundreds
                        of unneeded VA buildings over the next few years.

                        VA’s transformation has largely ignored this capital asset dilemma, as VA’s
                        plans call for assets to continue operating over the next 5 years essentially
                        as they do today. Given VA’s current and proposed budgets, it seems
                        inevitable that VA’s ownership of unneeded assets will eventually
                        compromise veterans’ health care services. On the other hand,
                        restructuring its capital assets could reduce budget pressures or generate
                        revenues that could be used to enhance veterans’ health care benefits.

                        Recently, we recommended that VA’s capital asset planning should be
                        based on rigorous market analyses, a business tool that has produced
                        positive results in the private sector.8 Such analyses include the
                        determination of veterans’ health care needs in a market, a comparison of
                        life-cycle costs of asset ownership, and alternatives analysis to enable VA
                        to evaluate options for meeting needs in the most cost-effective manner.

                        VA Health Care: Capital Asset Planning and Budgeting Need Improvement (GAO/T-HEHS-99-83,
                        Mar. 10, 1999).

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                             We identified 106 markets in which VA owns 4,700 buildings and 18,000
                             acres of land, which it uses to operate 181 major delivery locations. VA has
                             agreed to conduct market analyses in the 40 markets where multiple VA
                             facilities compete with each other to serve veterans (VA operates assets at
                             115 locations in these markets) as well as 66 markets served by a single VA

                             Until VA completes these market assessments, it will be challenged to
                             make capital investment decisions to ensure that scarce resources are not
                             invested in assets that VA will vacate in a few years. Recently, we
                             recommended, and VA agreed, that more of its capital investment
                             decisions—specifically minor construction and certain nonrecurring
                             maintenance—should be subjected to more rigorous management review.
                             Toward that end, VA plans to institute an improved investment
                             decision-making process that involves top managers’ review and approval,
                             based on newly enhanced guidance and criteria for assessing the future of
                             the affected asset within VA’s ongoing transformation.

                             Once VA has developed an asset restructuring plan, it will be challenged to
                             finance needed investments in a timely manner. Toward that end, VA
                             proposes a 5-year demonstration that would allow it to sell, transfer, or
                             exchange up to 30 excess or underutilized properties, deposit proceeds
                             into a new Capital Asset Fund, and use the Fund to invest in more
                             appropriate assets. This proposal is compelling because it would provide
                             VA incentives to dispose of properties no longer needed to meet veterans’
                             needs. VA asserts, and we agree, that disposals are currently a cumbersome
                             and lengthy undertaking with limited benefits to VA, primarily because
                             proceeds’ use is limited to improving nursing homes.

Restructuring VA’s Medical   Transforming VA’s health care delivery system from an inpatient to an
Education Role               outpatient focus, increasing reliance on primary care, and integrating
                             services in fewer hospitals require VA and medical schools to restructure
                             their affiliation arrangements.

                             Since VA’s medical education program began in 1946, 132 VA medical
                             facilities have affiliated with 107 medical schools to provide training
                             opportunities for medical students and residents. These agreements
                             complicate VA’s restructuring efforts, particularly integrating
                             administrative and clinical services across two or more medical facilities.

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VA assists in the training of health professionals for its own needs and for
those of the nation through its partnerships with affiliated academic
institutions. Each year, about 91,000 medical and other students receive
some or all of their clinical training in VA facilities. In fiscal year 1999, VA
expects to spend $750 million for education and training of health

VA also assists in supporting medical research in connection with the
provision of medical care and treatment to veterans. The affiliated medical
schools are an integral part of VA’s research effort. For fiscal year 1999, VA
expects to spend $682 million for research ($316 million from the medical
and prosthetic research appropriation and $366 million in medical support
from the medical care appropriation).

VA’s successful transformation to a predominantly primary care model,
with its consequent deemphasis of inpatient, specialty care, has direct
implications for VA’s education role. As previously discussed, VA’s
management initiatives have decreased inpatient usage by 38 percent and
increased outpatient workload by 19 percent. This underscores a need to
train more primary care physicians and fewer specialty physicians.

In light of these changes, VA established a Residency Realignment Review
Committee and a Research Realignment Advisory Committee. In response
to these committees’ recommendations, VA set a goal to more equally
divide resident training positions between specialty and primary care by
2002; previously, about 70 percent of residents were enrolled in specialty
training and 30 percent in primary care. In doing this, VA plans to eliminate
250 specialty positions and shift another 750 to primary care. To date, VA
appears on track toward meeting its goals.

As VA’s transformation continues, its management initiatives should
increasingly involve consolidating programs to eliminate redundancy
among nearby VA facilities or the potential closing of facilities. This will, by
necessity, increase the potential for conflict between medical schools’ best
interests and veterans’ best interests.

Because VA provides a major source of medical training and research
opportunities, medical schools clearly have a vested interest in VA
hospitals staying open. As such, it will be difficult to achieve a proper
balance between VA’s primary mission—serving veterans’ health care
needs—and its secondary missions—supporting education and research.

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                             VA must take care to prevent stakeholders, such as medical schools, from
                             unduly influencing the ongoing transformation of its health care system.

                             At present, medical schools have concerns about potential consolidations
                             of VA medical facilities. It seems inevitable that medical schools will need
                             increasingly to share inpatient educational and research opportunities at a
                             single VA facility. VA must work closely with medical schools to ensure that
                             such restructuring is accomplished without compromising VA’s efforts to
                             improve its efficiency and effectiveness.

Maintaining Capacity to      VA is struggling in its efforts to address congressional concerns that it is
Serve Special Disabilities   not appropriately maintaining its level of certain high-cost specialized
                             services as its transformation progresses.

                             The Congress required VA to ensure that its capacity to provide specialized
                             treatment and rehabilitative services for veterans with certain disabling
                             conditions is not reduced below October 1996 levels and that veterans
                             with these conditions have reasonable access to care. The Congress
                             identified four disabling conditions requiring specialized care: spinal cord
                             dysfunction, blindness, amputation, and mental illness. For this
                             requirement, VA defined mental illness to include only veterans with
                             serious mental illness and included two additional conditions: traumatic
                             brain injury and post-traumatic stress disorder.

                             VA cites a 2-percent increase in patients served as evidence that it is
                             maintaining capacity to serve special disabilities. But this aggregate
                             measure could mask potential adverse effects experienced by individual
                             services and delivery locations. VA plans to develop outcome measures to
                             reflect the overall capacity of its special disability services.

                             Last year, we noted that unclear service definitions and cumbersome data
                             systems hindered VA’s development of additional outcome measures. As a
                             result, it is difficult to establish a baseline for comparison purposes, assess
                             the accuracy of reporting at the local level, and reconcile differences
                             among individual facilities’, networks’, and headquarters’ data.9

                             To date, VA has designed functional measures for seriously mentally ill
                             patients and patients with a primary diagnosis of substance abuse. VA,
                             however, has generally not performed the program evaluations necessary

                              VA Health Care: VA’s Efforts to Maintain Services for Veterans With Special Disabilities
                             (GAO/T-HEHS-98-220, July 23, 1998).

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                     to determine whether these are the most appropriate or sensitive
                     measures for assessing responses to treatment and changes in health

                     Until adequate outcome measures are available, VA continues to use its
                     traditional process measurements, such as number of veterans served and
                     resources expended, including dollars, staffing, and beds. These measures
                     remain important indicators and should be continually reviewed.

Improving Resource   VA’s new resource allocation system is improving the equity of resource
Allocation           allocations among networks. The system’s promise for achieving equitable
                     access may not be fulfilled, however, because of VA’s inadequate oversight
                     of how resources are allocated within networks and historical access
                     inequities are addressed.

                     To improve equitable access to care, the Congress enacted legislation in
                     1996 requiring VA to develop a plan for equitably allocating resources to
                     ensure that veterans with similar economic status and eligibility priority
                     have similar access to VA health care, regardless of the region in which
                     they live. In response, VA began implementing a new allocation process.

                     Previously, VA allocated resources directly to facilities on the basis of their
                     budget for the previous year. VA’s new process allocates funds to the 22
                     networks based on the number of veterans each serves. Networks, in turn,
                     allocate resources to the facilities in their geographic area.

                     As we reported to you in September 1997, this new process is correcting
                     long-standing regional funding imbalances that have impeded veterans’
                     equitable access to services.10 Over the last 2 years, funding has shifted
                     from the Northeast and Midwest to the southern and western regions
                     where more veterans reside. Each network has increased the number of
                     veterans it serves, albeit to varying degrees, and improved current users’
                     access to care.11 VA’s management efficiencies were instrumental in
                     achieving this outcome.

                     VA, however, maintains that networks should not use its new process to
                     allocate resources to facilities and that they should, instead, develop

                      VA Health Care: Resource Allocation Has Improved, but Better Oversight Is Needed
                     (GAO/HEHS-97-178, Sept. 17, 1997).
                      VA Health Care: More Veterans Are Being Served, but Better Oversight Is Needed
                     (GAO/HEHS-98-226, Aug. 28, 1998).

                     Page 14                                                                     GAO/T-HEHS-99-109
                    Veterans’ Affairs: Progress and Challenges
                    in Transforming Health Care

                    allocation methods appropriate to local circumstances. Such resource
                    allocations are the crucial link in VA’s allocation strategy to convert
                    resources to services.

                    In spite of this enormous challenge, VA has done little to ensure that
                    networks achieve equitable allocations. VA says that it has not provided
                    criteria for equitable allocation of resources within networks because
                    developing such criteria would be contrary to its reengineering
                    philosophy, which decentralizes authority and accountability for these
                    allocations to the network directors. In addition, VA has not adequately
                    reviewed the equity of networks’ allocations or measured improvements in
                    the equity of veterans’ access to care.

                    Networks we analyzed have not incorporated criteria in their allocations
                    to improve equity in spite of historical inequities they identified. As a
                    result, in spite of the considerable effort VA has invested in its new
                    resource allocation process, resources may not be equitably allocated in
                    many markets.

                    Monitoring networks’ progress in achieving equitable access to care
                    represents a significant challenge. Today, VA does not know what progress,
                    if any, is being made towards equitable access to care for our nation’s
                    veterans. This is because VA has neither developed indicators needed to do
                    so nor included equity of access as a performance goal for network

                    Developing and implementing such indicators will be a major challenge
                    both technically and in obtaining stakeholders’ agreement. Without
                    establishing such indicators and monitoring them, however, VA can neither
                    assure stakeholders that equity of veterans’ access is improving nor take
                    corrective actions, if needed, to improve resource allocations.

Improving Revenue   VA faces a major challenge increasing its medical care collections from
Collections         third parties and veterans, as well as reimbursement from sharing
                    agreements with the Department of Defense.

                    VA’s collections grew slightly between fiscal years 1997 ($520 million) and
                    1998 ($560 million). VA’s 1998 collections were about 94 percent of its
                    stated goal. For fiscal year 1999, VA set a goal of $637.5 million. As of
                    March 1999, collections averaged about $46 million a month, which
                    appears sufficient to meet VA’s goal, given that collections were historically

                    Page 15                                                     GAO/T-HEHS-99-109
Veterans’ Affairs: Progress and Challenges
in Transforming Health Care

higher during the last quarters of fiscal years 1997 and 1998. VA’s fiscal year
2000 budget sets a goal of about $762 million, and VA expects collections to
grow to more than $1.2 billion by fiscal year 2004.

VA expects such growth for three reasons. First, VA assumes that changing
its medical care billing rates to reasonable charges for inpatient and
outpatient procedures will increase revenues. VA, however, has neither
historical data nor experience to estimate the effect of reasonable charges
on revenues.

Second, VA assumes that it will increase its revenues by identifying more
insured patients. However, VA finds it very difficult to keep this
information current because veterans are not required to tell VA if they
have insurance or when changes occur in their insured status.

Third, VA plans to improve its debt collection improvement efforts to boost
revenues. In 1998, VA’s Inspector General cited uncollected debt as one of
VA’s significant management problems. To improve medical care debt
collection, VA has efforts under way to more aggressively pursue insurance
claims, including timely appeals of denied claims. For example, VA is using
a centralized approach to monitor claims and is exploring ways to recover
debts as an offset to veterans’ federal income tax refunds.

Despite a large number of sharing agreements for services between VA and
the Department of Defense, several barriers are likely to inhibit effective
sharing or prevent new agreements from being reached. These barriers
include conflicting agency guidelines, beneficiary perceptions about
sharing, and incompatible or unreliable information systems. VA and
Defense have recently embarked on a joint initiative to revitalize sharing
efforts at the national level for certain critical services.

In its fiscal year 2000 budget, VA again asks the Congress to authorize VA’s
reimbursement from the Medicare Trust Fund for medical services it
provides to Medicare-eligible veterans. VA seeks this authorization
anticipating that Medicare reimbursement will become an important
source of revenue.

If authorized, VA’s efforts to realize such revenues, without adversely
affecting veterans, could pose a daunting challenge. Since VA initially
proposed receiving Medicare reimbursements, it implemented a new
veterans’ enrollment process that has significantly increased workload. As
such, VA faces considerable uncertainty about its capacity to target another

Page 16                                                      GAO/T-HEHS-99-109
                     Veterans’ Affairs: Progress and Challenges
                     in Transforming Health Care

                     patient population. Doing so could place veterans’ access to care at risk if
                     this increased workload forces VA to choose between serving veterans who
                     have Medicare and those who do not.

Implementing an      VA faces a significant challenge determining how many veterans to enroll,
Enrollment Process   given the uncertainties surrounding new enrollees’ medical needs and VA’s
                     available resources.

                     The Eligibility Reform Act of 1996 required VA to establish and operate a
                     system of annual patient enrollment to manage access to VA health care
                     services within available resources. VA began testing an enrollment
                     process on October 1, 1997, prior to the mandated enrollment date of
                     October 1, 1998. At that time, VA announced its decision to enroll all
                     veterans that apply during fiscal year 1999, that is, for enrollment priorities
                     1 through 7. As of December 1998, VA enrolled about 3.9 million veterans,
                     according to VA’s budget office.

                     VAis also challenged to assess the impact of its fiscal year 1999 enrollment
                     decision on veterans’ health care delivery. VA, for example, lacks the
                     baseline data needed to assess the impact of its fiscal year 1999 enrollment
                     decision on the timeliness of veterans’ medical care.

                     During the course of our ongoing review of VA’s enrollment process,
                     almost all of VA’s network directors reported that enrollment has increased
                     demand for services. About half cited a slight increase in the waiting times
                     to schedule both primary and specialty care appointments. Over one-third
                     noted that access to care for higher priority veterans (priority groups 1 to
                     4) has been adversely affected to some extent.

                     Finally, several directors commented that they are experiencing increased
                     demand by veterans whose primary care is provided elsewhere but who
                     obtain from VA the specialty care and services not covered by their private
                     insurance or Medicare, such as pharmaceuticals, eyeglasses, and hearing

                     VA is assessing the cost implications of its fiscal year 1999 enrollment
                     decision. VA’s data shows that, after the first 3 months of fiscal year 1999,
                     about $3.6 billion was spent meeting veterans’ health care needs. Of this,
                     about half was spent serving veterans in priority categories 1 to 4, and half
                     was spent serving categories 5 to 7. Of note, veterans in category 5
                     accounted for about 46 percent of the $3.6 billion.

                     Page 17                                                      GAO/T-HEHS-99-109
                    Veterans’ Affairs: Progress and Challenges
                    in Transforming Health Care

                    VA plans to announce its fiscal year 2000 enrollment decision by August 1,
                    1999. VA, however, publicly stated last month a desire to enroll all veterans
                    who apply and to serve all enrollees in fiscal year 2000. VA’s current
                    projections show that about 4.4 million veterans could be enrolled by the
                    end of fiscal year 1999.

                    VA could find this to be quite challenging because, as the following section
                    discusses, VA’s fiscal year 2000 budget does not contain sufficient funding
                    to maintain current service levels (3.6 million veterans), unless VA’s
                    transformation produces required savings.

                    VA will be severely challenged to serve all veterans seeking to enroll and
VA Faces a Budget   maintain quality of care in fiscal year 2000 with an $18.4 billion budget.
Dilemma in Fiscal   This is primarily because VA’s budget is based on an unduly optimistic
Year 2000           assumption that VA’s transformation will save $1.4 billion in fiscal year
                    2000. VA’s cost estimates also may be significantly understated, given the
                    increased enrollments over the last 6 months and considerable
                    uncertainties surrounding veterans’ medical needs.

                    VA estimates that $19.23 billion would be needed to maintain current
                    service levels (3.6 million veterans) in fiscal year 2000 if no management
                    efficiencies are realized. By contrast, VA estimates its fiscal year 1999
                    spending level to be $18.36 billion. This $870 million difference involves
                    primarily payroll increases for existing employees, inflation, and other
                    mandatory rate changes.

                    VA plans to use another $525 million of its efficiency savings to enhance
                    services. Of this, $281 million will be used to: treat veterans with hepatitis
                    C ($135 million); enhance extended care services ($106 million); and
                    expand services for homeless veterans ($40 million). In addition, VA
                    proposes that $244 million be used to expand its benefit package for
                    certain veterans. VA requests congressional authorization to finance
                    emergency care at non-VA facilities for veterans enrolled in priority
                    categories 1 to 3. Currently, only certain veterans with special eligibility
                    have such benefits.

                    To allow VA to operate within a proposed budget of $18.4 billion, VA needs
                    to achieve management efficiencies of $1.4 billion. In general, VA estimates
                    that initiatives could yield about $514 million in personal services savings,
                    essentially by reducing its employment level by 8,529 full-time equivalents.

                    Page 18                                                      GAO/T-HEHS-99-109
Veterans’ Affairs: Progress and Challenges
in Transforming Health Care

This presents a formidable challenge, given that an employment reduction
goal of 8,529 is significantly higher than the reduction of 3,606 that VA
achieved in 1998 or the 2,518 that VA expects to achieve in 1999.
Interestingly, VA had initially set goals of 3,978 and 2,607 in its budget
requests for fiscal years 1998 and 1999, respectively.

To achieve a personal services savings goal of $514 million in fiscal year
2000, VA needs to achieve the 8,529 employment reduction before fiscal
year 2000 starts, only 5 months from now. The longer VA needs to reach
this goal during fiscal year 2000, the greater the number of employees that
ultimately must be reduced (to meet its goal) because VA will have to
spend some projected savings to pay salaries and benefits in fiscal year

VA estimates that the remaining $876 million will be achieved through
nonpersonal services savings. If VA is unable to meet its employment
reduction goal, it will have to increase nonpersonal services savings
beyond this target level. This, too, could prove challenging, given the rapid
increases in nonpersonal costs, especially medications and prosthetics.

VA’s budget did not specify the nature of the management initiatives. VA’s
networks, however, have identified over the past year a variety of
efficiency initiatives, including additional facility integrations, bed
closures, and service consolidations, which reflect necessary shifts in
patient care delivery practices. In most cases, these changes will require
reductions in force, as well as staffing adjustments through normal
attrition, in order to better configure VA’s workforce to meet VA’s
transformation objectives.

VA’s networks are currently revising their plans to develop alternative ways
to realize savings of $1.4 billion in fiscal year 2000. At a recent
congressional hearing, officials from three networks expressed concerns
about their abilities to achieve required efficiency savings. They testified
that their plans would likely include significant furloughs of workers, as
well as curtailment of proposed service enhancements and delay of
services when medically appropriate.

In addition, VA may need to save more than $1.4 billion because veterans’
demand for medical care, as well as the numbers of veterans demanding
care, may be significantly higher than VA estimated at the time its fiscal
year 2000 budget was developed.

Page 19                                                     GAO/T-HEHS-99-109
                   Veterans’ Affairs: Progress and Challenges
                   in Transforming Health Care

                   VA’s budget, for example, included $135 million to expand treatment of
                   veterans who have hepatitis C, based on an assumed prevalence rate of
                   5.5 percent among its veteran user population. VA data, based on a small,
                   unscientific sample, suggests that this rate, and hence treatment costs,
                   could be much higher. To better estimate costs, VA recently conducted a
                   nationwide sample of veterans using VA facilities and expects results to be
                   available shortly.

                   VA’s budget also assumes that an additional 54,000 veterans will be served
                   in fiscal year 2000, bringing the total served to 3.65 million. To date,
                   3.9 million veterans have enrolled, and VA currently estimates that
                   4.4 million could enroll by the end of fiscal year 1999.

                   VA’s rapidly rising fiscal year 1999 enrollments could also increase VA’s
                   fiscal year 2000 efficiency savings requirements by $200 million or more.
                   This is because VA plans to carry forward $216 million of fiscal year 1999
                   revenue collections to finance fiscal year 2000 health care costs. VA could
                   be required to spend this potential surplus in fiscal year 1999 if newly
                   enrolled veterans require greater-than-expected health care expenditures
                   in fiscal year 1999.

                   VA has made significant progress transforming its health care system but
Concluding         appears to have a long way to go before achieving its goal of operating
Observations       integrated networks of VA and non-VA providers that efficiently and
                   effectively serve veterans. VA needs to aggressively confront its pending
                   challenges, especially capital asset and medical education restructuring, in
                   order to maintain the impressive momentum generated during its
                   transformation’s initial years. Absent this, VA could waste billions of
                   dollars to meet veterans’ needs over the next several years.

                   Meeting veterans’ medical needs within VA’s proposed spending level will
                   be problematic. To do so, VA needs to achieve significant management
                   efficiencies, but has no clear sense of the true magnitude of its resource
                   needs. To remedy this, VA needs answers to such critical questions as

               •   How many veterans will enroll for VA health care in fiscal year 2000?
               •   How prevalent are enrolled veterans’ high-cost medical needs, especially
                   for hepatitis C?
               •   How many management efficiency savings will be realized in fiscal years
                   1999 and 2000?

                   Page 20                                                    GAO/T-HEHS-99-109
               Veterans’ Affairs: Progress and Challenges
               in Transforming Health Care

           •   What will the Congress decide to do concerning VA’s proposed benefit

               VA’s budget dilemma forces it to confront difficult choices concerning its
               fiscal year 2000 enrollment decision—namely, how many priority
               categories can be prudently enrolled, given the uncertainty of estimates of
               potential costs and available resources. VA’s current data suggest that
               sufficient resources may not be available to serve veterans enrolling in all
               seven priority enrollment categories. VA’s uncertainties become more
               manageable if VA enrolls veterans in the manner the Congress
               intended—namely, veterans in those priority categories for which there are
               sufficient resources to provide timely access to high-quality care.

               We remain concerned about VA’s ability to deal with such uncertainties,
               primarily because of VA’s publicly stated desire to serve all veterans who
               apply for enrollment. If VA experiences significantly higher costs than it
               currently estimates or significantly lower efficiency savings, enrolling all
               veterans who apply could require VA to take actions, such as large-scale
               employee furloughs, that could adversely affect the quality of care for all

(406165)       Page 21                                                      GAO/T-HEHS-99-109
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