United States Government Accountability Office

GAO Report to Congressional Committees

ARMED FORCES 

INSTITUTE OF 

PATHOLOGY 

Business Plan’s 

Implementation Is 

Unlikely to Achieve 

Expected Financial 

Benefits and Could 

Reduce Civilian Role 

June 2005 

 

GAO-05-615 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2005

ARMED FORCES INSTITUTE OF 

PATHOLOGY 

Business Plan’s Implementation Is 

Unlikely to Achieve Expected Financial 

Benefits and Could Reduce Civilian Role

Highlights of GAO-05-615, a report to

congressional committees

DOD has raised concerns about 

certain business practices of the 

Armed Forces Institute of

Pathology (AFIP), including its role

in civilian medicine. In response,

AFIP implemented changes and

drafted a business plan. On May 13, 

2005, DOD recommended closing 

AFIP as part of the Base

Realignment and Closure process. 

The Senate Committee on Armed 

Services, in a report accompanying

the Ronald W. Reagan National

Defense Authorization Act for 

Fiscal Year 2005, directed that GAO 

study AFIP’s business plan. GAO 

(1) described the business plan’s 

key initiatives and projected

financial benefits, (2) evaluated the

business plan’s potential to

improve internal controls and 

achieve financial benefits, and

(3) assessed the likely impact of

the business plan on the role of

AFIP in military and civilian

medicine. GAO reviewed the major

assumptions and analyses for

developing the plan and

interviewed AFIP and DOD 

officials, and members of the 

civilian medical community. 

What GAO Recommends

In order to better manage changes 

being instituted at AFIP, GAO 

recommends that the Assistant 

Secretary of Defense for Health

Affairs reevaluate the financial

benefits projected in AFIP’s

business plan so that DOD will 

have a more reliable estimate of

AFIP’s revenues and expenses. 

DOD concurred with GAO’s

findings and recommendation. 

AFIP’s business plan has four key initiatives: improving AFIP’s business 

practices, increasing the amount of services it provides for the military, 

reducing staff, and consolidating its facilities. The business plan describes 

various efforts in support of each of these initiatives. AFIP estimated that 

the changes described in its business plan will result in $17.5 million in

annual financial benefits. 

Under the business plan, AFIP improved internal controls over some of its 

operations, particularly over AFIP’s consultation services and related 

finances; however, AFIP has not implemented other internal controls

described in the business plan such as developing a system to determine 

AFIP’s costs for performing specific activities. In addition, GAO’s review 

indicated that AFIP is unlikely to achieve all of the financial benefits 

projected in the business plan. Financial benefits from the business plan will

likely be approximately $5 million—$12.5 million less than AFIP projected. 

In implementing its business plan, AFIP has changed its balance of military 

and civilian work, and AFIP and civilian pathologists said that these trends 

are likely to continue. DOD and AFIP officials have stated that they want to 

preserve AFIP’s civilian work but do not want to fund it with increasingly 

scarce DOD funds. Over the last several years, AFIP has reduced the amount 

of consultation, research, and education services it provides for the civilian 

medical community and increased the amount of services it provides for the 

military. AFIP pathologists told GAO that they expect AFIP’s civilian 

consultation, research, and education to continue to decline in the future.

Half of AFIP’s 20 department chairs believe that the business plan would 

negatively affect AFIP’s ability to attract top pathologists in the future. 

Although DOD recently recommended the closure of AFIP as a part of the 

Base Realignment and Closure process, the process has not been completed.

Until the process is completed, AFIP’s inability to achieve its projected 

financial benefits could result in a budget shortfall because DOD officials 

said they intend to reduce AFIP’s funding by the amount of the financial

benefits projected in the business plan. 

www.gao.gov/cgi-bin/getrpt?GAO-05-615.

To view the full product, including the scope 

and methodology, click on the link above.

For more information, contact Marcia Crosse

at (202) 512-7101.
Contents 

Letter 1

Results in Brief 4 

Background 5

AFIP’s Business Plan Has Four Key Initiatives and Intends to

Achieve $17.5 Million in Annual Financial Benefits 11 

AFIP Has Improved Some Internal Controls; However, AFIP Is 

Unlikely to Achieve the Annual Financial Benefits Projected in

the Business Plan 16 

Implementation of the Business Plan Has Increased Services for 

the Military and Decreased Services for Civilians 22 

Conclusions 28

Recommendation for Executive Action 29 

Agency Comments 29 

Appendix I Objectives, Scope, and Methodology 31 

Appendix II The Armed Forces Institute of Pathology’s Missions 34 

Appendix III Analysis of the Armed Forces Institute of Pathology’s 

Consultation Revenue Projections 36 

Appendix IV Comments from the Department of Defense 42 

Tables 

Table 1: ARP’s Consultation Revenues, Education Revenues, and 

Research Grant Funding 8 

Table 2: Summary of Key Initiatives and Projected Financial

Benefits in AFIP’s Business Plan 15 

Table 3: Number of Staff Working at AFIP, 2000 to 2004 20 

Table 4: AFIP’s Analysis of 250 Sample Cases from 2002 37 

Table 5: AFIP’s Projection as Presented in the Business Plan 39 

Table 6: Calculation Using Actual Data from 2004 41 

Page i GAO-05-615 Armed Forces Institute of Pathology
Figures 

Figure 1: DOD Reviews of AFIP Leading to the Development of

AFIP’s Business Plan 9 

Figure 2: AFIP’s Business Plan Estimates and Actual 2004 Data for 

Civilian Consultations 19 

Figure 3: GAO’s Estimates of Likely Annual Financial Benefits from

Implementing the Business Plan 21 

Figure 4: AFIP Consultations by Type of Consultation, 2000 to 2004 23 

Figure 5: AFIP Research Protocols, 2000 to 2004 25 

Figure 6: Military and Civilian Attendees at AFIP Educational 

Courses, 2000 to 2004 26 

Abbreviations 

AFIP Armed Forces Institute of Pathology 

ARP American Registry of Pathology 

BRAC Base Realignment and Closure 

DNA deoxyribonucleic acid

DOD Department of Defense 

MID Management Initiative Decision 

PAE Office of Program Analysis and Evaluation 

PDM Program Decision Memorandum 

PIMS Pathology Information Management System 

VA Department of Veterans Affairs 

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Page ii GAO-05-615 Armed Forces Institute of Pathology
United States Government Accountability Office

Washington, DC 20548 

June 30, 2005 

The Honorable John Warner 

Chairman 

The Honorable Carl Levin 

Ranking Minority Member

Committee on Armed Services 

United States Senate 

The Honorable John Warner 

Chairman 

The Honorable Carl Levin 

Ranking Minority Member

Committee on Armed Services 

United States Senate 

The Honorable Duncan L. Hunter 

Chairman 

The Honorable Ike Skelton 

Ranking Minority Member

Committee on Armed Services 

House of Representatives 

The Honorable Duncan L. Hunter 

Chairman 

The Honorable Ike Skelton 

Ranking Minority Member

Committee on Armed Services 

House of Representatives 

The Armed Forces Institute of Pathology (AFIP) supports the Department

of Defense (DOD), other government agencies, and the civilian medical

community by providing pathology consultation, medical education, and 

research. Although AFIP is a military agency funded primarily by DOD, the

institute also has a mission to serve the civilian medical community. AFIP 

performs consultations—which are based on laboratory analyses of tissue

or other specimens used to diagnosis disease—for all branches of the 

military without charge, while offering this service on a reimbursable basis

for its civilian customers. AFIP also provides consultations for the 

Department of Veterans Affairs’ (VA) healthcare system in exchange for a 

specified number of VA staff positions assigned to AFIP. In 2004 AFIP 

performed over 50,000 consultations, provided educational instruction for 

over 2,000 medical professionals, and conducted 296 research studies. 

AFIP has collaborated with the American Registry of Pathology (ARP)—a 

nonprofit organization that serves as a fiscal intermediary between AFIP

and civilian medicine—to develop the world’s largest collection of rare

and unusual disease specimens and expertise in the field of pathology. 

The Armed Forces Institute of Pathology (AFIP) supports the Department

of Defense (DOD), other government agencies, and the civilian medical

community by providing pathology consultation, medical education, and 

research. Although AFIP is a military agency funded primarily by DOD, the

institute also has a mission to serve the civilian medical community. AFIP 

performs consultations—which are based on laboratory analyses of tissue

or other specimens used to diagnosis disease—for all branches of the 

military without charge, while offering this service on a reimbursable basis

for its civilian customers. AFIP also provides consultations for the 

Department of Veterans Affairs’ (VA) healthcare system in exchange for a 

specified number of VA staff positions assigned to AFIP. In 2004 AFIP 

performed over 50,000 consultations, provided educational instruction for 

over 2,000 medical professionals, and conducted 296 research studies. 

AFIP has collaborated with the American Registry of Pathology (ARP)—a 

nonprofit organization that serves as a fiscal intermediary between AFIP

and civilian medicine—to develop the world’s largest collection of rare

and unusual disease specimens and expertise in the field of pathology. 

In the late 1990s, DOD examined AFIP’s future role within the military

health system after AFIP requested that DOD build a new facility for AFIP

or repair AFIP’s primary facility, which is on the Walter Reed Army

Medical Center campus in Washington D.C., for an estimated cost of 

$250 million. From 1998 through 2002, DOD conducted a series of reviews 

that concluded that AFIP lacked controls over its financial operations and 

that it provided services for the civilian medical community without 

In the late 1990s, DOD examined AFIP’s future role within the military

health system after AFIP requested that DOD build a new facility for AFIP

or repair AFIP’s primary facility, which is on the Walter Reed Army

Medical Center campus in Washington D.C., for an estimated cost of 

$250 million. From 1998 through 2002, DOD conducted a series of reviews 

that concluded that AFIP lacked controls over its financial operations and 

that it provided services for the civilian medical community without 

Page 1 GAO-05-615 Armed Forces Institute of Pathology
adequate reimbursement. These reviews concluded that DOD, in effect, 

subsidized AFIP’s work for civilian customers. DOD also found it difficult

to estimate the amount of the subsidy because AFIP did not have adequate 

data to determine the costs of providing civilian services. 

In response to the concerns raised in the reviews, DOD directed AFIP to

develop and implement a business plan. Specifically, DOD directed AFIP

to develop a business plan to improve the institute’s internal controls so 

that AFIP could better account for the delivery and costs of its civilian and 

military work. DOD also required that the business plan outline steps for

increasing AFIP’s revenues and lowering its overall costs to reduce the 

level of funding provided to AFIP. According to DOD officials, this would 

eliminate DOD’s subsidy of AFIP’s civilian work. AFIP began to make 

changes to its operations as early as 2000 in response to findings from the 

DOD reviews. In 2002 and 2003, AFIP developed the written business plan, 

which included some changes that AFIP had already made in its 

operations.1

 AFIP planned to complete implementation of the business 

plan by October 2004. 

DOD is again in the process of evaluating the future role of AFIP and the 

services that it provides. On May 13, 2005, DOD recommended the closure 

of AFIP as a part of the Base Realignment and Closure (BRAC) process.

This would require that the services currently provided by AFIP be 

discontinued, transferred to other parts of DOD, or contracted out to the 

civilian medical community. 

The Senate Committee on Armed Services, in a report accompanying the 

Ronald W. Reagan National Defense Authorization Act for Fiscal Year 

2005, directed that we conduct a study of AFIP’s business plan.

2

 In this

report, we (1) describe the business plan’s key initiatives and projected 

financial benefits, (2) evaluate the business plan’s potential to improve 

AFIP’s internal controls and achieve its projected financial benefits, and 

(3) assess the likely impact of the business plan on the role of AFIP in

military and civilian medicine. 

 1

DOD and AFIP staff generally refer to the document describing planned changes to AFIP’s

operations as “the business plan.” However, its formal title is The Transformation Plan of 

the Armed Forces Institute of Pathology. In this report, we refer to this document as “the

business plan.”

2

S. Rep. No. 108-260, at 349 (2004). 

Page 2 GAO-05-615 Armed Forces Institute of Pathology
To describe the business plan’s key initiatives and projected financial

benefits, we reviewed the business plan as well as numerous studies of

AFIP that contributed to the plan’s development. We interviewed officials 

from AFIP; ARP; the Office of the Surgeon General of the Army; the Office

of the Assistant Secretary of Defense for Health Affairs; and the Office of

the Under Secretary of Defense, Comptroller. To evaluate the business 

plan’s potential to improve AFIP’s internal controls and achieve its 

projected financial benefits, we interviewed AFIP and ARP officials and 

reviewed the assumptions and analyses that led to specific elements of the 

business plan. In some cases, we were able to compare projections in the 

plan with information collected after specific changes had been 

implemented. In other cases, we evaluated the assumptions upon which 

specific analyses were based. We also interviewed officials and senior 

pathologists from AFIP to understand the effects of the business plan on 

the major areas of AFIP’s operations. To assess the likely impact of the 

business plan on the role of AFIP in military and civilian medicine, we

interviewed the AFIP staff described above, as well as pathologists from

both the civilian and military medical communities, including

representatives from the College of American Pathologists and members 

of AFIP’s Scientific Advisory Board.3

 We also reviewed data on AFIP’s

consultation, research, and educational services to see how they have 

changed since the development and implementation of the business plan. 

We evaluated a written copy of the business plan, dated October 2003, 

which was described by AFIP officials as the most current draft of the 

business plan at the time we performed our work. AFIP officials said that

there is no “final” version of the plan because it is an evolving document. 

While some of the changes described in the plan occurred as early as 2000, 

others occurred after that time or had not been implemented at the time of

our work. Therefore, in this report, we generally provide data from 2000 to 

2004. 

We interviewed AFIP and ARP staff to determine how data were collected 

and maintained, but we did not independently verify the accuracy of the 

data. Data reliability has been the subject of critical findings in DOD’s

reviews of AFIP. AFIP officials demonstrated the systems they use to 

maintain data and described their efforts to ensure the data’s accuracy. In 

 3

AFIP’s Scientific Advisory Board is made up of pathologists from both the civilian and 

military medical communities. The board provides the Director of AFIP and her staff with

scientific and professional advice in matters pertaining to the operational programs, 

policies, and procedures of AFIP. 

Page 3 GAO-05-615 Armed Forces Institute of Pathology
some cases, AFIP provided us with data that differed from those published

in earlier reports and occasionally provided updated data during the 

course of this review that differed from the data it had provided earlier. 

AFIP officials explained that this was due to ongoing efforts on their part

to improve the quality of their data. We determined that the AFIP data 

used in this report were adequate. We performed our work from August 

2004 through June 2005 in accordance with generally accepted 

government auditing standards. (See app. I for more details on our 

methodology.) 

AFIP’s business plan includes four key initiatives that are primarily 

intended to improve AFIP’s internal controls and reduce the amount of

DOD funds supporting AFIP’s civilian work. To do this, the business plan 

calls for AFIP to (1) improve its business practices, such as controls over 

its consultation services and related finances; (2) increase the amount of

services it provides for the military, such as an increase in defense-related 

research and educational services; (3) reduce staff from 820 to 685 

positions; and (4) consolidate its facilities. The business plan describes 

various efforts in support of each of these four key initiatives. AFIP 

estimated that the changes described in its business plan will result in

financial benefits from a combination of increased revenues and reduced 

costs that would allow DOD to reduce its annual funding of AFIP by 

$17.5 million. To ensure that AFIP reduces the amount of DOD funds 

supporting civilian work, DOD plans to reduce AFIP’s future funding by

the amount that AFIP estimates it will save. 

Results in Brief

In implementing its business plan, AFIP has improved some internal

controls over its services and related finances; however, AFIP is unlikely

to achieve the plan’s projected financial benefits. The implementation of 

the business plan improved a number of internal controls at AFIP, 

particularly over AFIP’s consultation services and related finances, but

AFIP has not implemented other internal controls described in the 

business plan. For example, AFIP has not developed a system to 

determine the costs associated with providing civilian services. In

addition, even if AFIP fully implemented its business plan, it would be 

unlikely to achieve the projected financial benefits of $17.5 million per 

year. Because many of these projections were developed using inaccurate 

or incomplete data, we estimate that the financial benefits from

implementing the business plan are likely to be significantly lower—

approximately $5 million annually. For example, AFIP projected that it

would increase its revenues by $7.4 million annually by increasing the fees 

it charges to civilians for consultation services and improving the 

Page 4 GAO-05-615 Armed Forces Institute of Pathology
collection rate of those fees. However, AFIP will probably achieve only 

$1 million in additional revenues from these changes, which is almost 

entirely the result of increased fees. 

In implementing its business plan, AFIP has changed its balance of military

and civilian work. AFIP and civilian pathologists told us that these trends 

are likely to continue as AFIP proceeds with the implementation of its 

business plan. DOD and AFIP officials have stated that they want to

preserve AFIP’s civilian work but do not want to fund it with increasingly 

scarce DOD funds. However, over the last several years, AFIP has reduced 

the amount of consultation, research, and education services it provides 

for the civilian medical community and increased the amount of services it

provides for the military. Many AFIP pathologists and civilian physicians 

told us that civilian work is essential for fulfilling the institute’s mission

because civilian cases help maintain the diagnostic expertise of AFIP’s

professional staff. AFIP has also lost expertise within the institute because

of staff reductions called for by the business plan. Half of AFIP’s 20 

department chairs said that the business plan would negatively affect

AFIP’s ability to attract top pathologists in the future. 

In order to better manage changes being instituted at AFIP, we

recommend that the Assistant Secretary of Defense for Health Affairs 

reevaluate the financial benefits projected in AFIP’s business plan so that

DOD will have a more reliable estimate of AFIP’s revenues and expenses. 

In commenting on a draft of this report, DOD concurred with the report’s

findings and recommendation, noting that DOD continues to monitor the 

implementation of AFIP’s business plan and the impact of the BRAC 

process on AFIP. DOD also said that the U.S. Army Audit Agency will

begin an audit of AFIP business practices to determine if the institute is 

operating effectively and efficiently, and possesses the tools to accurately 

articulate costs, accomplishments, and contributions to the military 

mission. 

AFIP originated as part of the Army Medical Museum in 1862 as a 

repository for disease specimens collected from Civil War soldiers. In 1888

the educational facilities of the museum were made available to civilian 

medical professionals. The Army Institute of Pathology was created as a

part of the museum in 1944, using the museum’s extensive collection of 

disease specimens to develop expertise in diagnostic pathology. By 1949 

the Army Institute of Pathology was renamed the Armed Forces Institute 

of Pathology, and the museum had become a unit within AFIP. The 

Department of Defense Appropriation Authorization Act, 1977, provided 

Background 

Page 5 GAO-05-615 Armed Forces Institute of Pathology
specific statutory authority for AFIP, establishing it as a joint entity of the 

Departments of the Army, Navy, and Air Force, subject to the authority, 

direction, and control of the Secretary of Defense.4

 The Secretary of

Defense has delegated authority, direction, and control over AFIP to the 

Assistant Secretary of Defense for Health Affairs. The Secretary of the 

Army is the Executive Agent for AFIP and has delegated Executive Agent 

authority to the Army Surgeon General.

5

AFIP’s Mission AFIP’s primary mission is to provide medical expertise in pathology 

consultation, education, and research for civilian and military medicine. 

Unlike most pathologists, AFIP pathologists specialize in a particular type

of consultation where they are asked to provide a second opinion for 

difficult cases. These consultations typically occur because another 

military or civilian pathologist was either unable to make a diagnosis or 

unsure of his or her initial diagnosis.

6

 In 2003, for example, AFIP 

pathologists made a major or minor change to the initial diagnosis in

nearly half of the cases they diagnosed. Because AFIP generally receives

tissue specimens in order to make these diagnoses, consultations have 

also been instrumental in expanding AFIP’s repository of disease 

specimens. AFIP has over 3 million disease specimens and their 

accompanying case histories dating back over 150 years. 

AFIP disseminates the knowledge gained from its consultation cases 

through its education and research activities. Each year, AFIP provides 

educational instruction for over 2,000 civilian and military medical 

professionals. In developing educational courses, AFIP staff query a

database of recent consultations, searching for cases where a physician

has either misdiagnosed a disease or the physician was unable to provide a 

diagnosis. AFIP then teaches courses in how to diagnose such diseases, 

with particular emphasis on identifying emerging diseases, offering new

insights into known diseases, and giving hands-on experience in

diagnosing difficult cases. AFIP also trains both civilian and military

 4

Pub. L. No. 94-361, § 811, 90 Stat. 923, 933-936 (1976) (codified at 10 U.S.C. §§ 176, 177

(2000)).

5

The DOD Executive Agent for AFIP is responsible for the administration of resources 

required to support the missions and functions of AFIP, as well as reporting on AFIP’s

activities to the Assistant Secretary of Defense for Health Affairs. 

6

For the purpose of this report, unless otherwise noted, “consultations” refers to secondopinion surgical consultations. 

Page 6 GAO-05-615 Armed Forces Institute of Pathology
residents and fellows in the fields of pathology, radiology, and veterinary

pathology. In addition to these educational activities, AFIP conducts

research that results in hundreds of scientific publications per year. For 

example, AFIP pathologists recently published new research on the 1918 

Spanish influenza virus using tissue specimens from a World War I soldier 

who died from the virus.

In addition to its mission of providing consultation, education, and 

research, AFIP has a number of other missions that have been established 

by Congress or DOD. For example, AFIP maintains the National Museum

of Health and Medicine, which serves as a repository of anatomic,

pathological, and historical artifacts. AFIP also houses the Office of the 

Armed Forces Medical Examiner, which was established at AFIP in 1988 

to provide DOD and other federal agencies with a variety of services in

forensic medicine. New technological developments in the forensic

sciences—such as the use of deoxyribonucleic acid (DNA)—have been 

incorporated into AFIP through additions such as the Armed Forces DNA 

Identification Laboratory. AFIP conducts a variety of other activities that

include 

• maintaining a DNA registry of all military personnel; 

• conducting research on biological agents, such as anthrax; 

• identifying the remains of soldiers of past wars; 

• collecting data on medical malpractice cases in the military; and 

• performing drug testing for the Armed Forces. 

(For a more complete description of AFIP’s missions, see app. II.) 

In the past, certain DOD officials were critical of AFIP’s interactions with

civilian medicine and AFIP’s relationship with ARP. In 1975, for example, 

the Army Surgeon General suggested that the relationship of ARP—a 

civilian organization—and AFIP—a military organization—was

inappropriate and directed that it be terminated. In the Department of

Defense Appropriation Authorization Act, 1977, Congress specifically 

authorized ARP to be established as a nonprofit corporation and further 

authorized a cooperative relationship between AFIP and ARP. ARP is

responsible for encouraging and facilitating collaborative work between 

AFIP and civilian medicine. 

Establishment of ARP 

Page 7 GAO-05-615 Armed Forces Institute of Pathology
To support its activities, AFIP draws upon several sources of funding. In 

fiscal year 2004, AFIP’s funding totaled approximately $100 million, the 

majority of which (approximately $80 million) consists of funds from

DOD’s Defense Health Program appropriation. An additional $13 million 

was from other appropriations for DOD activities, and approximately 

$7 million was provided by other federal agencies as reimbursement for 

AFIP’s services. In addition to these funds, which are provided directly to 

AFIP, ARP may collect fees and accept research grants in exchange for 

certain services provided for the civilian medical profession by AFIP. 

Funds from AFIP’s research, education, and consultation services are 

collected by ARP and used to support AFIP’s civilian mission. ARP acts as 

an intermediary between AFIP and the civilian medical community, 

performing a variety of tasks on behalf of AFIP. The costs incurred by ARP 

in support of AFIP’s missions are recouped from AFIP’s consultation, 

education, and research revenues, and the remainder of these funds is

placed in “registries,” or bank accounts, which are used to support AFIP in

a variety of ways at the request of authorized AFIP officials. In 2004 ARP 

received $5.7 million in revenues as payment for consultation and 

education services conducted by AFIP and $5.6 million in research grants. 

Table 1 shows the funds collected by ARP since 2000. 

Table 1: ARP’s Consultation Revenues, Education Revenues, and Research Grant 

Funding 

Year

Funds collected 2000 2001 2002 2003 2004

Consultation 

revenues $2,361,000 $2,656,000 $2,546,000 $2,714,000 $3,011,000a

Education revenues 2,272,000 2,480,000 2,149,000 2,392,000 2,691,000

Research grants 1,049,000 2,551,000 3,166,000 4,495,000 5,564,000

Source: ARP.

a

Prior to October 2004, all consultation revenues were collected by ARP. After that time, consultation 

revenues were billed and collected by both AFIP and ARP, depending on when the consultation 

arrived at AFIP. Total consultation revenues reflect collections by both AFIP and ARP for October,

November, and December 2004.

AFIP developed its business plan in response to DOD’s reviews of AFIP’s 

mission and operations. DOD conducted these reviews after AFIP

requested that DOD build a new facility for AFIP or repair AFIP’s primary 

facility. From 1998 through 2002, AFIP was the subject of three Program 

Decision Memoranda (PDM)—documents used by DOD for planning and

managerial oversight—four major DOD reviews and two DOD Inspector

Funding of AFIP and Its 

Relationship with ARP 

Development of AFIP’s

Business Plan 

Page 8 GAO-05-615 Armed Forces Institute of Pathology
General reviews. These reviews were critical of AFIP’s lack of internal 

controls and the amount of DOD funding supporting AFIP’s civilian 

mission.7

 In general, these reviews found that (1) AFIP’s civilian services 

exceeded its military services; (2) AFIP was not adequately reimbursed for

its civilian services and needed to increase its fees; and (3) AFIP lacked 

appropriate internal controls over its operations, particularly its ability to

monitor and track its consultation services and related finances. Figure 1 

shows a timeline of these reviews.8

Figure 1: DOD Reviews of AFIP Leading to the Development of AFIP’s Business Plan

Source: GAO.

1990s 2000s Plan

2003:

AFIP issues the 

current version of 

the business plan

PDM

Report

PDM

PDM

1998:

Program Decision 

Memorandum issued; 

resulted in DOD 

review entitled 

A Blueprint for the 

Future (issued 

February 1999)

2000:

Program Decision 

Memorandum issued; 

resulted in DOD 

review by the Center 

for Naval Analysis 

(issued February 

2001)

2001:

Program Decision 

Memorandum issued; 

resulted in DOD 

review by the Office 

of Program Analysis 

and Evaluation 

(submitted draft 

September 2002)

Between 1998 and 2002, AFIP was the subject of three Program Decision 

Memoranda–documents used by DOD for planning and managerial oversight– 

four major DOD reviews, and two DOD Inspector General reviews.

Report

1999:

DOD Inspector 

General issued two 

reports critical of 

AFIP’s management 

and operations

Briefing

2000:

DOD’s Health Affairs 

chartered the “Council 

of Colonels/Captains” 

to make recommendations for AFIP 

(recommendations to 

be provided 2001)

 7

An internal control is a component of an organization’s management. Internal controls are 

a series of actions and activities that occur on an ongoing basis which help managers

achieve key outcomes and minimize operational problems. For more information on

internal controls, see GAO, Standards for Internal Controls in the Federal Government, 

GAO/AIMD-00-21.3.1. (Washington, D.C.: November 1999). 

8

These reviews are listed in appendix I.

Page 9 GAO-05-615 Armed Forces Institute of Pathology
DOD issued its third PDM regarding AFIP in 2001. It directed DOD’s Office

of Program Analysis and Evaluation (PAE) to study alternative funding 

arrangements for AFIP. AFIP began drafting its business plan in 2002 to 

respond to many of DOD’s concerns. The business plan reflected changes 

to its operations that AFIP had made as early as 2000 in response to 

criticisms in the DOD reviews. The 2001 PDM resulted in a draft report, 

submitted by PAE to the Assistant Secretary of Defense for Health Affairs

in 2002, which recommended the transfer of most AFIP functions to the 

Department of Health and Human Services. The draft report further 

recommended that if this were not possible, DOD should end its financial

support for AFIP and transform it into a working capital fund, which, as 

the draft stated, would require congressional approval. This would require 

AFIP to generate enough revenues to independently finance its operations, 

through fees charged for its consultation, education, and research 

services.9

The Assistant Secretary of Defense for Health Affairs prepared a written

response in 2003 describing his reasons for not instituting the

recommendations of the draft report. He said that DOD should allow AFIP

to pursue the business and organizational strategies set forth in the 

business plan that AFIP was developing. Although AFIP originally planned

to implement the plan over a 6-year period beginning in October 2002, the

Assistant Secretary told AFIP officials that they should complete the plan’s

initiatives by October 2004. He also recommended that AFIP transform its 

relationship with ARP, noting that it might be more efficient for AFIP to

bill civilians directly for its consultation, education, and research 

activities, rather than relying on ARP to provide this service. 

DOD Recommended That 

AFIP Be Closed 

On May 13, 2005, the Secretary of Defense announced DOD’s 

recommendations to close or realign military facilities in the United States. 

As a part of the BRAC process, DOD recommended the closure of AFIP.

10

DOD recommended that the medical examiners’ functions and the DNA 

registry be moved to Dover Air Force Base, Dover, Delaware; some 

 9

The draft report recommended that the medical examiner function and the DNA registry

continue to receive funding through DOD. 

10This is a part of a larger initiative to close the Walter Reed installation in the District of

Columbia and to build a new facility for specialty and subspecialty medical services in

Bethesda, Maryland. This new facility will serve all of the military departments and will be

named the Walter Reed National Military Medical Center. 

Page 10 GAO-05-615 Armed Forces Institute of Pathology
education services to Fort Sam Houston, Texas; and the museum to Walter

Reed National Military Medical Center. Other services currently provided 

by AFIP would be discontinued, transferred to other parts of DOD, or

contracted out to the civilian medical community. For example, secondopinion pathology consultations for military personnel and their families 

would be sent to civilian laboratories and paid for on an as-needed basis.

The department’s recommendations will now be reviewed by the BRAC 

Commission, which will seek comments from the potentially affected 

communities. Once the commission has completed its review, it will

present its recommendations to the President and Congress. The process 

is expected to be completed by the end of 2005. 

AFIP developed its business plan to improve its internal controls and 

reduce its need for DOD funding by cutting costs and increasing its 

revenues from civilian work. To do this, the business plan has four key 

initiatives, which AFIP estimated would save the institute $17.5 million a 

year when fully implemented. 

Under the four key initiatives of AFIP’s business plan, the institute planned

to (1) improve its business practices, (2) increase the amount of services it

provides for the military, (3) reduce staff, and (4) consolidate its facilities. 

The business plan’s first initiative called for AFIP to improve its business 

practices. AFIP’s business practices were criticized in DOD reviews for

lacking sufficient internal controls, particularly over consultation services

and related finances. The initiative planned to address problems in AFIP’s 

business practices. Prior to the development of the business plan, AFIP 

had few internal controls governing its services, and many DOD officials

said that the fees that AFIP charged for its consultation services were too

low. 

AFIP’s Business Plan 

Has Four Key 

Initiatives and Intends 

to Achieve $17.5

Million in Annual 

Financial Benefits 

AFIP’s Business Plan Has 

Four Key Initiatives 

AFIP Planned to Improve Its

Business Practices 

The business plan stated that AFIP would develop internal controls to 

ensure that all consultations are properly billed and monitored by AFIP

managers. AFIP would also raise its fees for civilian consultations. The 

plan stated that AFIP needed to increase the fees it charged for civilian 

consultations so that they would accurately reflect prevailing market rates.

The plan also stated that AFIP managers needed to better monitor the 

Page 11 GAO-05-615 Armed Forces Institute of Pathology
delivery of consultation services through the expansion of an electronic 

system, which would be used to track individual consultation cases. Prior 

to the development of the business plan, AFIP had few internal controls

for monitoring its consultation services. AFIP officials said that they had 

no way to determine if staff were inappropriately waiving fees for civilian 

customers or performing tests that were not needed to provide a 

diagnosis. 

Next, the business plan stated that AFIP would develop internal controls

to ensure that all consultations are performed in a timely manner. This is 

important because over 90 percent of the cases sent to AFIP are tumor 

cases, requiring quick diagnoses so that the patient’s physician can 

determine the most appropriate course of treatment. In DOD reviews,

AFIP was criticized for providing slow diagnoses, which the business plan 

calls slow “turnaround time.” The plan defines turnaround time as the 

amount of time that elapses from the moment a consultation case arrives 

at the institute until the pathologist provides a diagnosis to the customer. 

In fiscal year 2003, AFIP’s average turnaround time for a consultation case 

was 15 days. In order to reduce its turnaround time, AFIP established a 

new set of guidelines in the business plan for each of its departments and 

laboratories and planned to monitor whether staff were following these 

guidelines.

11 The guidelines established time frames for the completion of

various tasks. For example, the guidelines state that a case should be 

delivered to a pathologist within 24 hours of its arrival at the institute and, 

depending on the complexity of the case, that most consultations should

result in a diagnosis by the pathologist within 2 to 5 days of the case’s 

arrival at the institute. 

AFIP would also seek legislative authority to collect and retain fees 

directly from civilian clients for consultation, education, and research. The

legislation formalizing AFIP’s relationship with ARP authorized ARP to

receive grants and fees and authorized ARP and AFIP to collaborate on 

medical research, consultation, and education with civilian medicine. In 

response to DOD’s criticism of AFIP’s financial relationship with ARP—

specifically, ARP’s lack of transparency and the costs of using ARP—AFIP 

planned to seek legislation to change their relationship. The plan stated 

that AFIP would increase the amount of revenues it collects and improve 

its internal controls if it were allowed to take this function over from ARP.

 11The business plan refers to these guidelines as Standard Operating Procedures or Practice

Guidelines. 

Page 12 GAO-05-615 Armed Forces Institute of Pathology
Finally, AFIP would develop internal controls that would allow it to

accurately determine the costs of providing services. DOD’s reviews 

criticized AFIP because it was unable to identify the costs associated with 

providing specific procedures or types of services. These reviews 

suggested that AFIP institute an accounting system that would allow AFIP 

to track the costs associated with providing all of its services.12 DOD 

officials concerned with overseeing AFIP also concluded that it would be 

difficult to end the DOD subsidy of civilian services if AFIP could not

identify its costs. 

Under the business plan’s second initiative, AFIP planned to increase the 

amount of services it provides for the military and decrease the amount of

services it provides for the civilian medical community. Under this 

initiative, AFIP would improve the marketing of its pathology services to 

military physicians by preparing promotional materials and presentations 

to make them aware of the services that AFIP can provide, decrease the 

amount of civilian research at AFIP that is funded by DOD, and increase 

the number of educational programs offered to the military. A major 

concern of DOD and AFIP officials had been that civilian use of AFIP’s

services significantly exceeded that of the military. According to the 

business plan, AFIP’s budget and staff had steadily increased over the last

several decades to meet the demands of its civilian workload. 

AFIP Planned to Increase the 

Amount of Services Provided 

for the Military 

According to AFIP’s business plan, the institute’s staffing levels had 

steadily increased in order to support its civilian workload; as a result, the

plan’s third initiative called for a reduction of staff from 820 to 685 

positions. The plan stated that the staff reduction was to be completed by

October 1, 2004. The business plan estimated that AFIP would be able to

absorb these staff cuts because of increased efficiencies that would come 

from implementing other initiatives of the business plan. In addition, the

plan predicted that these staff reductions would not reduce AFIP’s 

productivity or inhibit the institute’s ability to fulfill its mission 

requirements. 

AFIP Planned to Reduce Its

Staff 

The fourth initiative in the business plan called for AFIP to consolidate its 

facilities from nine to five and the number of locations from seven to

three. Prior to the development of the business plan, AFIP sought a 

solution to the deterioration of its primary facility at the Walter Reed 

AFIP Planned to Consolidate 

Its Facilities

 12The business plan refers to this type of system as an “activity-based cost accounting

system.”

Page 13 GAO-05-615 Armed Forces Institute of Pathology
campus by having DOD build a new facility. In 1998 DOD chose to fund the

continuing renovation of AFIP’s primary facility, and as of May 2005, 

AFIP’s primary facility had undergone extensive renovation. AFIP officials 

said that the facility is still not adequate, but they have run out of funds to 

continue the renovation.

The business plan also stated that AFIP would seek to replace its primary 

facility on the Walter Reed campus through an alternative funding 

mechanism, called an “enhanced use lease.” An enhanced use lease is a 

leasing agreement that allows a private company to build a building on

government land which is then leased back to the government. This type 

of arrangement would not require DOD to fund the entire cost of

construction. According to DOD officials, many government agencies—

including DOD—have favored this type of arrangement in recent years 

because annual appropriations need not be used for the full cost of 

construction, but only the annual lease payments to the private developer. 

AFIP officials have said that, although the business plan mentioned that

AFIP hoped to obtain an enhanced use lease, AFIP’s building 

consolidation could occur independently from this process. 

AFIP Estimated That It 

Would Save $17.5 Million 

by Implementing Its 

Business Plan 

The business plan projected that three of its four initiatives would save the 

institute $17.5 million a year when fully implemented. Specifically, the 

business plan estimated that some of the planned changes to business 

practices would result in additional revenues of $7.4 million annually, staff 

reductions would create cost savings of $6.6 million annually, and 

consolidations of facilities would save about $3.5 million annually. The 

initiative to increase the amount of services provided for the military was 

not intended to save money. AFIP projected that this combination of

increased revenues and reduced costs would allow DOD to reduce its

funding of AFIP by $17.5 million a year. Table 2 summarizes the business 

plan’s key initiatives and projected financial benefits. 

Page 14 GAO-05-615 Armed Forces Institute of Pathology
Table 2: Summary of Key Initiatives and Projected Financial Benefits in AFIP’s

Business Plan 

Initiative Description

Initiative one: 

improve business

practices 

• Develop internal controls to ensure that all consultations are

properly billed, and increase the fees charged for civilian 

consultations. 

• Develop internal controls to ensure that all consultations are

performed in a timely manner.

• Seek legislative authority to directly collect and retain fees from

civilian clients for consultation, education, and research services. 

• Develop internal controls to allow AFIP to determine the costs 

associated with its civilian work. 

• Initiative projected to result in $7.4 million in increased revenues. 

Initiative two:

increase the

amount of

services provided

for the military 

• Improve marketing of AFIP services to military physicians. 

• Decrease the amount of civilian research that is funded by DOD.

• Increase the amount of educational programs available to military 

attendees. 

Initiative three: 

staffing reductions

• Reduce the number of staff from 820 to 685. 

• Have no reduction in AFIP productivity or adverse affect on 

mission.

• Initiative projected to result in $6.6 million annual savings. 

Initiative four: 

facilities 

consolidation 

• Consolidate locations from seven to three.

• Consolidate AFIP facilities from nine to five. 

• Explore the option of an enhanced use lease. 

• Initiative projected to result in $3.5 million annual savings. 

Source: GAO analysis of The Transformation Plan of the Armed Forces Institute of Pathology. 

In 2004 DOD officials began to draft a Management Initiative Decision 

(MID), which would mandate cuts in AFIP’s budget in anticipation of the 

financial benefits described in the business plan.13 According to DOD 

officials, decreases in AFIP’s funding are intended to be offset by the 

increased revenues and cost savings generated by the business plan. They 

said that the budget reductions to be included in the MID are similar to the 

financial benefits identified in AFIP’s business plan. DOD officials told us

that as of May 2005, the final MID was on hold. DOD officials said that 

AFIP’s failure to achieve its projected financial benefits could result in a 

budget shortfall for AFIP. 

 13A MID is a decision document designed by DOD to institutionalize management reform 

decisions. 

Page 15 GAO-05-615 Armed Forces Institute of Pathology
AFIP has implemented some of the changes called for under the first

initiative of its business plan. This has resulted in improved internal

controls, particularly over the delivery of AFIP’s consultation services and 

related finances. However, AFIP has not made other improvements to

internal controls that were identified in the business plan. In addition, 

AFIP is unlikely to achieve the annual financial benefits of $17.5 million 

projected by the business plan. We found that the financial benefits from

implementing the business plan are likely to be significantly less. We 

estimate that the financial benefits will be approximately $5 million. This

is largely because the plan’s estimates were based on inaccurate and 

incomplete data. 

In implementing its business plan, AFIP improved internal controls, 

particularly over its consultation services and related finances. These 

improvements were described in the first initiative of the business plan, 

which called for AFIP to improve its business practices. As a result of

these changes, AFIP has improved its ability to accurately monitor and bill

its consultation cases. In addition, AFIP established new guidelines to help

ensure that the diagnosis of a consultation case is provided in a timely 

manner. In contrast, AFIP has not developed other internal controls

described in the business plan. For example, AFIP has not developed the 

ability to determine the costs associated with providing services for the 

civilian medical community. 

AFIP expanded the capabilities of its electronic-consultation-tracking 

system in early 2004 to improve the internal controls governing its 

consultation services. This system is called the Pathology Information 

Management System (PIMS). PIMS is an electronic database used by AFIP

staff to acknowledge the receipt of a consultation case and track case 

materials as they move through the institute.

14 In addition to improving 

AFIP’s ability to track its consultation cases, PIMS was expanded to

improve AFIP’s billing capability. AFIP officials said that all laboratory 

tests are now electronically ordered though this system and invoices are 

electronically generated based on the type of tests that were performed. 

According to AFIP officials, this electronic system represents a significant 

improvement over AFIP’s prior method for creating consultation invoices 

where all invoices were created by hand. AFIP officials said the new

system makes it impossible to waive a fee without additional scrutiny and

AFIP Has Improved 

Some Internal

Controls; However, 

AFIP Is Unlikely to 

Achieve the Annual 

Financial Benefits 

Projected in the 

Business Plan 

AFIP Has Improved Some 

Internal Controls but Has 

Not Implemented Others 

AFIP Developed Internal

Controls to Ensure That All 

Consultations Are Properly 

Monitored and Billed 

 14Case materials include such items as tissue samples, x-rays, and case histories.

Page 16 GAO-05-615 Armed Forces Institute of Pathology
ensures that AFIP’s customers are charged only for tests needed to make a 

diagnosis. 

In order to ensure that consultations are performed in a timely manner, 

AFIP implemented a strategy to reduce its turnaround time. In 2003 AFIP 

established a set of guidelines for each of its departments and laboratories. 

Also since early 2003, AFIP managers have used information from PIMS to 

track whether AFIP’s pathologists and laboratories are complying with

these guidelines. AFIP reduced its average turnaround time from 15 days

in fiscal year 2003 to less than 5 days at the end of 2004. 

AFIP Developed Internal 

Controls to Ensure That

Consultations Are Performed in 

a Timely Manner 

In October 2004, AFIP began billing civilian clients for consultation 

services. DOD did not pursue legislation to amend the financial

relationship between AFIP and ARP, but DOD officials determined that

AFIP could collect and retain fees for consultation services. It is too soon 

to measure the impact of this change, but AFIP officials said that by taking

over this function, AFIP will increase the amount of revenues that it 

collects and improve internal controls. ARP continues to collect and retain 

fees for AFIP’s educational services and manage research grants. 

AFIP Began to Bill Civilian 

Clients for Consultations

While AFIP has achieved control over the consultation revenues it

collects, it has also lost much of the flexibility it once had in spending

those revenues. The consultation revenues that had been collected by ARP 

were not subject to the restrictions placed on government funds, such as 

the need to spend all funds credited to an annual appropriation in the year 

for which the appropriation was made. In addition, AFIP officials said they 

had been able to spend the funds in ARP registries more quickly than they 

could have with other traditional government procurement methods. For 

example, when members of the Armed Forces Office of the Medial

Examiner were sent to Iraq in support of Operation Iraqi Freedom, the 

staff were able to use ARP registry funds to quickly obtain body armor for 

the staff members. AFIP staff said that obtaining supplies through

government procurement methods would have taken more time. 

AFIP did not implement other internal controls called for in the business 

plan. Specifically, AFIP has not developed the ability to determine the 

costs associated with providing civilian services. Although AFIP did 

institute a system in 2004 to begin tracking the time that pathologists were 

engaged in broad categories of activity, such as education, research, and 

consultation, as of May 2005, the institute did not have more specific data, 

such as the time spent working on an individual consultation case. AFIP 

officials are still considering developing such a system, but have not done 

AFIP Has Not Developed 

Internal Controls to Determine 

the Costs Associated with 

Civilian Services

Page 17 GAO-05-615 Armed Forces Institute of Pathology
so. These data would be a necessary component of any system that 

monitors the costs of providing AFIP’s services. 

The Business Plan’s

Projected Financial 

Benefits Were Based upon 

Inaccurate and Incomplete 

Data 

The business plan stated that changes to AFIP’s business practices, 

facilities, and staff cuts will result in $17.5 million in annual financial

benefits in the form of increased revenues and lower costs. Because many

of these projections were developed using inaccurate or incomplete data, 

we estimate that the financial benefits from implementing the business 

plan are likely to be significantly lower—approximately $5 million 

annually. 

AFIP’s business plan projected that AFIP would increase its revenues from

civilian consultations by $7.4 million annually by increasing the fees

charged to civilians for consultation services and improving the collection 

rate of those fees.15 However, we found that AFIP will more likely increase 

its revenues by $1 million annually, primarily as a result of its fee increase. 

AFIP raised fees for its civilian consultation services in January 2004 and 

assumed responsibility from ARP for the billing and collection of its 

consultation fees in October 2004. 

Increased Revenue from

Improved Business Practices 

Will More Likely Be $1 Million 

Instead of $7.4 Million

AFIP based its projection of $7.4 million upon a series of assumptions that

are presented in the business plan. In late 2002, before increasing fees for 

civilian consultations and before assuming responsibility for the billing 

and collection of fees, AFIP collected a judgmental sample of 250 cases 

out of the approximately 23,600 civilian cases that AFIP completed in 

2002. Using this sample of cases, AFIP developed a calculation to predict 

the amount of additional revenue that it would generate from raising fees 

and assuming the billing and collection function from ARP. (See app. III

for a description of AFIP’s analysis as presented in the business plan.)

Although AFIP will probably increase its revenues as a result of raising 

fees, AFIP’s projection overestimated the likely increase in revenues.

Specifically, AFIP’s analysis (1) overestimated the number of consultation 

cases that AFIP would receive, (2) overestimated the average revenue 

AFIP is likely to earn from each billable case and, (3) underestimated

ARP’s collection rate. We found that if actual 2004 data were used in

AFIP’s calculation, AFIP would achieve approximately $1 million in 

increased revenues over the revenues collected by ARP in 2003. Figure 2 

 15A collection rate is the ratio of revenues collected versus revenues billed. 

Page 18 GAO-05-615 Armed Forces Institute of Pathology
shows the estimates presented in the business plan compared with actual 

2004 data provided by AFIP. 

Figure 2: AFIP’s Business Plan Estimates and Actual 2004 Data for Civilian Consultations 

0 10,000 20,000 30,000

Cases

2003 

business 

plan 

estimates

2004 

actual

data

15,646

30,224

Number of consultation cases

DHP 

Appropriations

DHP 

Appropriations

Other

Revenues

DHP 

Appropriations

Source: GAO analysis of AFIP data.

0 100 200 300 400 500 600 0 10 20 30 40 50 60 70 80

Percent

2003 

business 

plan 

estimates

2004

actual

data

80%

55%

Collection rate

Dollars

2003 

business 

plan 

estimates

2004

actual

data

$300

$555

Revenue per case

In its business plan, AFIP projected annual financial benefits of $6.6 

million as a result of implementing staff cuts; however, as of May 2005, 

AFIP stated that it planned to achieve $4 million in annual savings from

these cuts. The business plan also stated that AFIP planned to reduce its 

total staff from 820 to 685 by October 2004. However, AFIP officials said

that at the time of the business plan’s development, they did not have an 

accurate count of the total number of staff working at AFIP. Officials 

stated that this was partially due to challenges resulting from a lack of 

central management over hiring, particularly with regard to contract staff 

hired through ARP.16 Since implementing its business plan, AFIP officials 

said that they have improved their ability to track the number of staff 

working at the institute. AFIP and DOD officials have agreed on a savings 

target of $4 million for reducing AFIP’s staff. AFIP has developed lists of

positions to be cut, but as of May 2005 these staff cuts were on hold. AFIP

has primarily relied on attrition to reduce its staff. Table 3 shows the 

Financial Benefits from Staffing 

Reductions Will More Likely Be 

$4 Million Instead of $6.6 

Million 

 16ARP assists AFIP in hiring staff in two ways. ARP manages several DOD-funded personnel 

contracts which allow ARP to hire and pay for contractors to work at AFIP. In addition, 

AFIP department chairs can ask ARP to hire contract personnel with funds available in 

their registries. AFIP officials explained that it was staff from the second category, staff

hired with funds from registries, that they had difficulty identifying at the time of the

business plan’s development.

Page 19 GAO-05-615 Armed Forces Institute of Pathology
number of staff working at AFIP and the primary funding source for their

positions. 

Table 3: Number of Staff Working at AFIP, 2000 to 2004 

Year

Source of funding 2000 2001 2002 2003 2004

Army 78 72 66 79 67

Navy 53 45 67 49 50

Air Force 49 53 51 50 53

VA 14 15 14 14 18

General Schedule/civilian employees 309 296 304 286 258

DOD-funded contractors 237 226 318 338 307

Total DOD-funded staff Not 

available 707 820 816 753

Contractors paid with external, nonDOD funding (e.g., funded by research 

grants, ARP registry funds, etc.) 

Included

above 63 43a 70 84

Total staff 740 770 863 886 837

Source: AFIP. 

Note: AFIP officials said they are confident that they have identified all staff working at AFIP in 2004 

regardless of their funding streams. They said they are less confident about staffing in prior years.

a

At the time of the business plan’s development in 2002, AFIP could not identify these 43 staff

members working under ARP contract and paid for with non-DOD sources of funding. AFIP officials

later identified these staff members but said that additional contractors who were not identified might

have been working at AFIP at this time.

Although AFIP’s business plan projected an annual financial benefit of $3.5 

million as a result of consolidating facilities, as of May 2005, AFIP officials 

said they will not be making the facilities changes described in the 

business plan and will therefore not realize the $3.5 million in annual

financial benefits from facilities consolidation. 

AFIP Will Likely Achieve None 

of the $3.5 Million Annual 

Financial Benefits Projected in 

the Business Plan from the 

Consolidation of Its Facilities

Since 2002 AFIP has sought to replace its primary facility on the Walter 

Reed campus through an alternative funding mechanism, called an 

“enhanced use lease.” However, several major developments have 

hindered AFIP’s ability to move forward with the lease and building 

consolidation. Communities from adjacent neighborhoods have been 

opposed to constructing a new building on the Walter Reed Campus, 

where AFIP hoped to have the new building located. In addition, AFIP has 

reevaluated its plans to consolidate all of its operations at its Walter Reed 

location because of concern about moving the Armed Forces Office of the 

Medical Examiner into Washington, D.C. AFIP officials have expressed 

Page 20 GAO-05-615 Armed Forces Institute of Pathology
concern that being located within Washington, D.C., could hamper the 

medical examiner’s ability to respond to a crisis that affected the city. 

In February 2005, AFIP’s Board of Governors decided to place all plans for 

facilities on hold while DOD reconsidered AFIP’s future mission.

17 All 

future decisions about AFIP’s primary facility and the consolidation of

facilities will be impacted by DOD’s recommendation in May 2005 that

AFIP be closed as a part of the BRAC process.

Figure 3 summarizes our findings regarding the annual financial benefits

projected in the business plan. 

Figure 3: GAO’s Estimates of Likely Annual Financial Benefits from Implementing the Business Plan 

Source: GAO analysis of AFIP data.

0 1 23 4 5 6 7 8

2003 

business 

plan 

estimates

2005

updated 

estimates

None

$3.5

Dollars, in millions

Savings from 

facilities consolidation

Other 

Revenues

012 3 4567 8

Dollars, in millions

0 1 23 4 5 6 7 8

2003 

business 

plan 

estimates

2005

updated 

estimates

$4.0

$6.6

Savings from 

staff reductions

Dollars, in millions

2003 

business 

plan 

estimates

2005

updated 

estimates

$1.0

$7.4

Improvements in 

business practices

 17The Board of Governors meets quarterly and establishes guidelines and broad 

administrative and professional policies, consistent with the objectives of the institute. The 

members of the Board of Governors are the Assistant Secretary of Defense for Health

Affairs; the Surgeons General of the Army, Navy, and Air Force; the U.S. Surgeon General; 

the Under Secretary for Health, Department of Veterans Affairs; and a former Director of

AFIP. 

Page 21 GAO-05-615 Armed Forces Institute of Pathology
In implementing its business plan, AFIP increased the amount of services 

provided for the military and decreased the amount of services provided 

for civilians. Many pathologists we interviewed said that these trends will

likely continue in the future. Over the last several years, AFIP has 

increased its military consultations and decreased its civilian 

consultations. In addition, AFIP has reduced its civilian research and the 

number of educational courses available to civilians. Staff reductions, as 

well as other recent changes called for in the business plan, have resulted 

in a loss of top pathologists. While AFIP has successfully increased the 

amount of services to the military, the pathologists and physicians we 

interviewed told us that the continued decline in civilian services has 

reduced—and will continue to reduce—AFIP’s overall level of expertise. 

In addition to these changes at AFIP, DOD recently recommended the 

closure of AFIP. If implemented, this would require that all services 

currently provided by AFIP be discontinued, transferred to other parts of

DOD, or contracted out to the civilian medical community. 

The number of military consultations sent to AFIP has increased while the 

number of civilian consultations has decreased. From 2000 through 2004, 

military consultations at AFIP increased by 30 percent while civilian

consultations decreased by 28 percent. Nearly all of the decrease in

civilian consultations occurred in the 2 years after AFIP announced that it 

would raise its consultation fees beginning in January 2003.18 The business

plan called for AFIP to increase civilian fees in order to reduce DOD funds

supporting civilian services. At the time of the plan’s development, AFIP 

officials anticipated a 20 percent drop in civilian consultations as a result

of its increased fees. 

Implementation of the 

Business Plan Has 

Increased Services for

the Military and 

Decreased Services 

for Civilians 

Military Consultations 

Have Increased While

Civilian Consultations 

Have Decreased 

Other reasons commonly cited for the decrease in civilian consultations 

are not directly attributable to the business plan. AFIP and civilian 

pathologists have said that a more competitive marketplace for 

consultations, an overall decline in AFIP’s reputation, and AFIP’s slow

turnaround time in providing diagnoses have also contributed to the 

decline. These pathologists also cited the loss of nationally recognized 

 18AFIP published an announcement of the fee increase in its newsletter dated December

2002, and AFIP sent a letter announcing the increase to all of its civilian customers. These 

announcements stated that AFIP would increase its fees on January 1, 2003. AFIP did not

raise its fees until a year later because of delays in developing the necessary accounting

infrastructure to support the fee increases. However, AFIP’s civilian clients were not 

notified of this delay.

Page 22 GAO-05-615 Armed Forces Institute of Pathology
experts at AFIP as another possible reason for the decline in the number 

of civilian consultations being sent to AFIP. The expertise of AFIP’s 

pathologists is one reason that many civilian customers send consultations 

to AFIP. Figure 4 shows trends in consultations since 2000. 

Figure 4: AFIP Consultations by Type of Consultation, 2000 to 2004 

Source: AFIP.

0

5,000

10,000

15,000

20,000

25,000

Military consultations

VA consultations

Civilian consultations

2000 2001 2002 2004 2003

Number of consultations

AFIP announced a fee increase for civilian consultations that would 

go into effect on January 1, 2003. After a 1-year delay, AFIP instituted 

its fee increase for civilian consultations on January 1, 2004.

Year

Note: AFIP performs consultations for VA in exchange for VA staff that work at AFIP. AFIP does not

charge VA fees for consultations.

The Amount of Civilian 

Research at AFIP Has 

Declined 

The business plan called for AFIP to decrease the amount of DOD-funded 

research that is not directly relevant to military operations. AFIP officials 

said that it could continue to do civilian research if AFIP pathologists were 

able to increase the amount of funding from outside agencies or 

foundations, such as the National Institutes of Health. AFIP shifted its 

DOD-funded research toward subjects that were of direct interest to the 

military and encouraged pathologists that wished to do civilian research to 

seek research grants from external sources. Although “militarily relevant”

research has not been well-defined, AFIP staff said it generally includes 

Page 23 GAO-05-615 Armed Forces Institute of Pathology
subjects of direct interest to the military, such as research on military 

body armor or bioterrorism.

19 AFIP staff said that they began to focus on 

increasing militarily relevant research and reducing DOD-funded civilian 

research as early as 2001. AFIP developed additional strategies to reduce 

DOD-funded civilian research in its business plan, which was issued in

2003. 

From 2000 through 2004, the number of research protocols at AFIP 

declined from 371 to 296. A research protocol is a detailed proposal, 

approved by AFIP’s research committee, that describes the research that 

will be completed. The decline in AFIP’s research protocols has

particularly affected one type of civilian research—clinical-pathological 

correlations—traditionally performed by AFIP researchers. In this type of

study, AFIP pathologists generally use the institute’s repository of disease 

specimens to describe the correlations that exist between the clinical 

symptoms or attributes exhibited by a patient and the pathological

abnormalities of a specific disease or type of tumor. The results of these 

studies are typically published by AFIP on its Web site, in books called 

“fascicles,” or in other scientific journals. Although clinical-pathological

correlations have helped to build the reputation of AFIP, many AFIP

pathologists we interviewed said this type of research will likely decline at

the institute in the future. Several department chairs commented that 

correlations are effective marketing tools that contribute to AFIP’s

reputation. Of the 17 department chairs who responded to this question, 14

suggested that the reduction of DOD-funded civilian research would 

negatively affect the institute.20 Figure 5 shows the number of active

research protocols from 2000 through 2004. 

 19Although this is generally the way DOD and AFIP officials have discussed “militarily

relevant” research within the context of the business plan, some AFIP officials believe that

if the research is relevant to medicine, it is relevant to military medicine because military

men and women and their families ultimately benefit from this research. 

20We surveyed or conducted interviews with 20 AFIP department chairs; however, 3 chairs

did not respond to this question. 

Page 24 GAO-05-615 Armed Forces Institute of Pathology
Figure 5: AFIP Research Protocols, 2000 to 2004 

0

50

100

150

200

250

300

350

400

Source: AFIP.

2000 2001 2002 2004 2003

Number of research protocols In 2001 the Center for Naval Analysis issued a report critical of DOD’s funding for 

civilian research. In 2003 AFIP completed the most recent draft of the business 

plan, which suggested that AFIP reduce DOD’s funding of civilian research.

Year

The Number of Military

Attendees at AFIP’s

Educational Courses 

Increased While the

Number of Civilian 

Attendees Decreased

From 2000 through 2004, the number of military attendees at AFIP’s

educational courses increased while the number of civilian attendees 

decreased. AFIP officials said that they began making changes to their 

educational programs in 2001 in response to DOD’s criticism of the 

amount of services that AFIP provided for civilians and the low fees 

charged to civilian attendees.21 Since 2001, fees for civilian courses were 

raised and AFIP has begun to offer more educational courses that attract

military attendees. Furthermore, the business plan established criteria to 

determine if an educational course at AFIP should be continued. AFIP

officials said that they generally will eliminate courses if fewer than 25 

percent of the attendees are in the military or if revenues do not exceed 

costs by at least 33 percent. Over the last several years, AFIP has used new

technology to offer additional courses for military physicians. For 

example, in 2004, AFIP used video teleconferencing to teach 24 courses to 

physicians at 35 military sites. In addition, AFIP has used Web-based 

technology to allow its educational services to reach more physicians and 

 

t f

21Center for Naval Analyses, An Analysis of Organizational and Funding Alternatives for the 

Armed Force Ins itute o Pathology (Alexandria, Va.: February 2001). 

Page 25 GAO-05-615 Armed Forces Institute of Pathology
researchers. At the same time that AFIP increased its course offerings for 

the military, it decreased the number of courses available to civilian 

attendees. In 2000 AFIP offered 41 courses that were open to civilian 

participants, whereas in 2004 AFIP offered 29 educational courses that

were open to civilians. Figure 6 shows the number of military and civilian 

attendees at AFIP educational courses from 2000 to 2004. 

Figure 6: Military and Civilian Attendees at AFIP Educational Courses, 2000 to 2004 

Source: AFIP.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Civilian attendees

Military attendees

2000 2001 2002 2004 2003

Number of attendees In 2001 the Center for Naval Analysis issued a report critical of DOD’s funding 

for AFIP’s civilian education. In 2003 AFIP completed the most recent draft of 

the business plan, which presented a strategy to increase military attendance 

and raise fees for civilian attendance.

Year

Page 26 GAO-05-615 Armed Forces Institute of Pathology
AFIP pathologists and civilian physicians said that AFIP’s civilian mission 

is essential for maintaining the institute’s expertise and that AFIP’s civilian 

services are likely to continue to decline as a result of implementing the 

business plan. DOD and AFIP officials have stated that they want to

preserve AFIP’s civilian work but do not want to fund it with increasingly 

scarce DOD funds. AFIP staff told us that consultations from civilian 

patients are critical for maintaining the diagnostic expertise of AFIP’s

professional staff primarily because rare and unusual disease specimens 

are not commonly found in relatively young, active-duty military 

personnel. AFIP pathologists have also provided research and education 

services for the civilian medical community, which allows AFIP to

maintain its professional medical contacts and utilize the institute’s 

repository of disease specimens. AFIP pathologists told us that civilian

pathologists with nationally recognized reputations have come to work at

AFIP because of its international reputation, the type of cases that AFIP 

receives, and its repository of disease specimens. AFIP pathologists also

said that the medical expertise gained from their interaction with civilian

medicine benefits the military through the consultations they provide for 

military servicemembers and their families and their education and 

research services, which cover a variety of topics that are useful to DOD. 

Staff reductions called for by the business plan, as well as other recent

changes at AFIP, have resulted in a loss of top pathologists, diminishing 

the institute’s overall level of expertise.22 Between 2000 and 2004, the total 

number of pathologists at AFIP—as well as the number of AFIP’s most

senior physicians and researchers—declined. Although some of the losses

of top pathologists were due to reasons not associated with the business 

plan, such as deaths and retirements, AFIP does not intend to replace 

those losses because of impending staff reductions called for in the 

business plan. The total number of pathologists and scientists at AFIP has 

declined from 133 in 2000 to 96 in 2004, and AFIP’s top pathologists and 

scientists—its Distinguished Scientists and Senior Executive Service 

employees—have declined from 19 in 2000 to 9 in 2004. Most of AFIP’s

Distinguished Scientists and Senior Executive Service employees are 

department chairs and have international reputations in the field of

pathology. According to representatives from the College of American 

Pathologists and 

Physicians Said That

AFIP’s Civilian Mission Is 

Essential for Maintaining

AFIP’s Overall Level of 

Expertise 

Staff Reductions and 

Recent Changes at AFIP 

Have Resulted in the Loss 

of Top Pathologists

 22The majority of AFIP’s staffing cuts have not yet occurred. In anticipation of AFIP’s need 

to save $4 million annually in personnel costs, AFIP is not refilling many of its vacant 

positions. In addition, in a move unrelated to the business plan, AFIP eliminated 55

positions in 2003 to address that fiscal year’s budget shortfall.

Page 27 GAO-05-615 Armed Forces Institute of Pathology
Pathologists, AFIP has historically had prestigious and well-respected 

experts in the field of pathology. They told us that there appears to be less

of an emphasis on this level of expertise at AFIP in recent years. 

Half of the 20 department chairs we interviewed said that the business

plan would negatively affect AFIP’s ability to attract top pathologists in the 

future and a quarter said they are less likely to remain at AFIP because of 

changes called for by the business plan. The department chairs’ most

commonly cited complaint with the business plan was that pathologists

must spend most of their time doing consultations rather than pursuing 

research or educational activities. The College of American Pathologists 

said that AFIP’s loss of top pathologists is likely to hurt its ability to attract 

civilian consultations in the future. 

AFIP officials responsible for implementing the business plan said that

AFIP continues to be staffed by top-level pathologists and that top 

pathologists and civilian consultations will continue to be attracted to

AFIP by the reputation of the institute rather than the reputation of

individual pathologists and scientists. 

Although the loss of some top pathologists can be directly attributed to the

business plan, other changes in civilian and military medicine have also 

affected the level of expertise at AFIP. Throughout the early part of the 

20th century, AFIP was the only institution in the country that maintained 

expertise in every major area of anatomical pathology. With a repository 

of millions of disease specimens and recognized expertise in numerous 

subspecialties of pathology, AFIP drew large numbers of consultations, 

research grants, and trainees on the basis of the institute’s unique

reputation. According to AFIP’s Scientific Advisory Board, many changes 

in modern medical practice over the last several decades have altered the 

environment in which AFIP operates. For example, AFIP must now

compete with 126 medical schools, many of which have in-house experts, 

as well as competitors, such as the Mayo Clinic, that have expertise in 

numerous subspecialties of pathology. 

AFIP developed a business plan to improve internal controls and reduce 

AFIP’s need for DOD funding by making its civilian work pay for itself. In

implementing the business plan, AFIP instituted some of the internal

controls described in the plan but has not instituted others. AFIP has also 

instituted business practices designed to make its civilian consultation,

education, and research activities less dependent on DOD funding. These 

Conclusions 

Page 28 GAO-05-615 Armed Forces Institute of Pathology
business practices appear to have had the effect of decreasing AFIP’s

civilian work in each of those areas. 

We estimate that AFIP’s financial benefits, in the form of increases in

AFIP’s revenues and reductions in AFIP’s costs, are likely to be 

significantly less than projected by the business plan. We found that this is

the case because the assumptions that AFIP used in its analysis were

inaccurate and because events that AFIP projected would result in 

savings, such as staff cuts and facilities consolidation, did not occur. 

Although DOD recently recommended the closure of AFIP as a part of the 

Base Realignment and Closure process, the process has not been 

completed. Until the process is completed, AFIP’s inability to achieve its 

projected financial benefits could result in a budget shortfall because DOD 

officials said they intend to reduce AFIP’s funding by the amount of the 

financial benefits projected in the business plan. 

In order to better manage changes being instituted at AFIP, we

recommend that the Assistant Secretary of Defense for Health Affairs 

reevaluate the financial benefits projected in AFIP’s business plan so that

DOD will have a more reliable estimate of AFIP’s revenues and expenses. 

We requested comments on a draft of this report from DOD. DOD 

provided written comments that are reprinted in appendix IV. In its 

comments, DOD concurred with the report’s findings and 

recommendation, noting that DOD continues to monitor the 

implementation of AFIP’s business plan and the impact of the BRAC 

process on AFIP. DOD also said that the U.S. Army Audit Agency will

begin an audit of AFIP business practices to determine if the institute is 

operating effectively and efficiently, and possesses the tools to accurately 

articulate costs, accomplishments, and contributions to the military 

mission. We also received technical comments from ARP on selected 

sections of this report, which we incorporated as appropriate. 

We are sending copies of this report to the Secretary of Defense, 

appropriate congressional committees, and other interested parties. 

Copies will also be made available to others upon request. In addition, this

report is available at no charge on GAO’s Web site at http://www.gao.gov. 

If you or your staff have any questions regarding this report, please call me

on (202) 512-7101 or Martin Gahart on (202) 512-3596. Tom Conahan, 

Recommendation for 

Executive Action

Agency Comments 

Page 29 GAO-05-615 Armed Forces Institute of Pathology
Krister Friday, and Meridith Walters also made key contributions to this

report.

Marcia Crosse 

Director, Health Care

Page 30 GAO-05-615 Armed Forces Institute of Pathology
Appendix I: Objectives, Scope, and Appendix I: Objectives, Scope, and Methodology 

Methodology 

The Senate Committee on Armed Services, in a report accompanying the 

Ronald W. Reagan National Defense Authorization Act for Fiscal Year 

2005, directed that we conduct a study of the Armed Forces Institute of

Pathology’s (AFIP) business plan.1 In this report, we (1) describe the 

business plan’s key initiatives and projected financial benefits, (2) evaluate

the business plan’s potential to improve AFIP’s internal controls and

achieve its projected financial benefits, and (3) assess the likely impact of 

the business plan on the role of AFIP in military and civilian medicine. We 

performed our work from August 2004 through June 2005 in accordance 

with generally accepted government auditing standards. 

To describe the business plan’s key initiatives and projected financial

benefits, we reviewed the business plan—called the The Trans orma on 

Plan of he Armed Forces Inst ute o Pathology—as well as numerous

Department of Defense (DOD) studies of AFIP that contributed to its

development. These studies included 

f ti

t it f

 

• a 1999 DOD review entitled A Blueprint for the Future; 

• two 1999 DOD Inspector General reports, the first reviewing AFIP’s 

administration and management, and the second reviewing AFIP’s

controls over case-related materials;2

• a 2001 study by the Center for Naval Analysis evaluating AFIP’s business

practices and analyzing a range of alternative funding structures for AFIP;3

• a 2000 Report to Congress on AFIP’s facilities issues; 

• slides from a 2001 Council of Colonels/Captains study of AFIP’s funding

arrangements, business practices, and oversight by DOD, chartered by 

DOD’s Office of the Secretary of Defense for Health Affairs; and 

• a 2001 draft report from DOD’s Office of Program Analysis and Evaluation,

studying alternative funding arrangements for AFIP. 

We evaluated a written copy of the business plan, dated October 2003, that 

was described by AFIP officials as the most current draft. AFIP officials 

said that there is no “final” version of the plan because it is an evolving 

i

t l

i

t f

1

S. Rep. No. 108-260, at 349 (2004). 

2

DOD, Office of the Inspector General, Adm nistration and Management of the Armed 

Forces Ins itute of Patho ogy: Report No. 00-010 (Arlington, Va.: October 1999), and DOD, 

Office of the Inspector General, Controls Over Case-Related Mater al at the Armed Forces

Institute of Pathology: Report No. 99-119 (Arlington, Va.: April 1999). 

3

Center for Naval Analyses, An Analysis of Organizational and Funding Alternatives for the 

Armed Force Ins itute o Pathology (Alexandria, Va.: February 2001). 

Page 31 GAO-05-615 Armed Forces Institute of Pathology
Appendix I: Objectives, Scope, and

Methodology 

document. While some of the changes described in the business plan 

occurred as early as 2000, others occurred after that or had not been

implemented at the time of our work. In evaluating the effects of the 

business plan for this report, we generally provide data from 2000 to 2004. 

We interviewed officials from AFIP; the American Registry of Pathology 

(ARP); the Office of the Surgeon General of the Army; the Office of the 

Under Secretary of Defense, Comptroller; and the Office of Assistant 

Secretary of Defense for Health Affairs. 

To evaluate the business plan’s potential to improve AFIP’s internal

controls and achieve its projected financial benefits, we interviewed AFIP

and ARP officials and reviewed the assumptions and analyses that led to 

specific elements of the business plan. In some cases, we were able to 

compare the plan’s projected financial benefits with information collected 

after specific changes had been implemented. In other cases, we evaluated 

the assumptions upon which specific analyses were based, by comparing 

the assumptions with data collected in 2004. 

We evaluated the analysis presented in the business plan, which predicted 

AFIP’s future revenues from taking over the billing and collection 

activities for civilian consultations from ARP. AFIP based its analysis upon

three primary assumptions: (1) an assumption of the average invoice per 

case under the new fee schedule, (2) an assumption of future civilian 

consultations, and (3) an assumption of ARP’s collection rate compared 

with that of AFIP. We compared the assumptions—which were based on 

data from 2002—with actual data from 2004 to evaluate their accuracy in 

predicting AFIP’s future civilian consultation revenues. In addition, we

asked AFIP to provide updates on other projections presented in the

business plan. We present these updated numbers and compare them with

the financial benefits projected in the business plan. 

We observed a demonstration of AFIP’s Pathology Information 

Management System (PIMS) as an example of the improvements made in 

establishing internal controls and improving data management. AFIP staff

demonstrated the types of data that could be retrieved using the system

and provided us with both hard copy and automated examples of the 

system’s output. However, we did not test the data in PIMS to verify their 

accuracy. 

AFIP provided us with data on pending and completed staff cuts, as well

as information about staffing levels and their funding sources over the last

4 years. AFIP officials explained how they developed lists of positions to 

be cut as part of the business plan’s staff reductions. We also interviewed 

Page 32 GAO-05-615 Armed Forces Institute of Pathology
Appendix I: Objectives, Scope, and

Methodology 

AFIP officials responsible for developing and implementing the business 

plan and 20 of AFIP’s 22 department chairs to understand the effects of the 

business plan on the major areas of AFIP’s operations.4

To assess the likely impact of the business plan on the services that AFIP 

provides for military and civilian medicine, we interviewed the AFIP staff 

described above, representatives from the College of American 

Pathologists, and members of AFIP’s Scientific Advisory Board. We also 

reviewed data on AFIP’s consultation, research, and educational efforts to

see how they have changed since the development and implementation of 

the business plan. 

We interviewed AFIP and ARP staff to determine how data were collected 

and maintained, but we did not independently verify the accuracy of the 

data. The reliability of the data has been the subject of critical findings in

DOD reviews of AFIP. AFIP officials demonstrated the systems they use to

maintain data and described their efforts to ensure their accuracy. In some

cases, AFIP provided us with data that differed from data published in

earlier reports and occasionally provided us with updated data during the 

course of this review that differed from data that it had provided us earlier.

AFIP officials explained that this was due to ongoing efforts on their part

to improve the quality of their data. We determined that the AFIP data 

used in this report were adequate for our use. 

 4

In December 2004, AFIP officials provided us with a current list of all AFIP department 

chairs. Since that time, some departments have been eliminated or experienced personnel 

changes.

Page 33 GAO-05-615 Armed Forces Institute of Pathology
Appendix II: The Armed Forces Institute of

Appendix II: The Armed Forces Institute of Pathology’s Missions

Pathology’s Missions 

The Armed Forces Institute of Pathology’s (AFIP) core mission is to 

provide consultation, research, and educational services for the civilian 

and military medical communities. In addition to this core mission, AFIP

has a variety of other missions mandated by Congress and the Department

of Defense (DOD). The DOD directive describing AFIP’s missions lists the 

specific responsibilities and functions for which AFIP is responsible.1

 It 

states that the Director, AFIP, as a national and international expert on 

human and veterinary pathology, supporting both military and civilian 

medicine, is responsible for 

• reviewing the diagnosis of pathology tissue for the Armed Forces; 

• conducting diagnostic and consultation services for military and civilian 

medicine using histopathology, electron microscopy, 

immunohistochemistry, and molecular biological tools with leverage of the 

latest technology to ensure innovative pathology; 

• conducting experimental, statistical, and morphological research and 

investigations to expand pathology and medicine beyond current levels of

knowledge in support of DOD planning, initiatives, and operations; 

• administering an effective Armed Forces Medical Examiner system; 

• contracting with the American Registry of Pathology for cooperative

efforts between the AFIP and the civilian medical profession; 

• maintaining the Armed Forces repository of specimen samples for the 

identification of human remains and storing reference samples suitable for 

deoxyribonucleic acid (DNA) analysis for identifying human remains while

assuring the protection of privacy; 

• supporting DOD medical quality assurance programs and risk management 

with the Department of Legal Medicine; 

• administering the Military Health System Patient Safety Center; 

• staffing the Center for Clinical Laboratory Medicine and providing 

oversight for compliance with the Clinical Laboratory Improvement 

Amendments of 1988; 

• serving as the DOD veterinary pathology resource expert, providing 

consultation, education, and research in pathology and laboratory animal

medicine; 

• maintaining medical illustration services for important illustrative 

material, except original motion picture footage; 

• maintaining, facilitating, expanding, and improving the advancement of the

activities of the National Museum of Health and Medicine pertinent to

collecting, preserving, interpreting, and financial reporting on the national

collection of medical artifacts, pathological and skeletal specimens,

 1

DOD Directive 5154.24, October 3, 2001.

Page 34 GAO-05-615 Armed Forces Institute of Pathology
Appendix II: The Armed Forces Institute of

Pathology’s Missions

research collections and archival resources, and applicable materials from

other federal medical sources and developing, presenting, and promoting 

public programs and exhibitions and participating in informational

activities that improve the understanding and awareness of military 

medical history, medical science, disease prevention, and health 

education; 

• maintaining a mechanism to access and track all case records and 

materials given to AFIP for consultation into a permanent, unified

repository system, and central database; 

• managing and directing the DOD Automated Tumor Registry and related 

activities, and overseeing access to the registry or a treatment facility’s

database, consistent with a research protocol approved through the 

institutional review board affiliated with the facility maintaining or giving 

oversight of the records or database; 

• providing, on a reimbursable basis, education and training programs in

pathology and other related areas of medicine for military and civilian 

participants throughout the United States and foreign countries; 

• maintaining a medically current collection of study materials, which may 

be made available to military and civilian medicine; 

• coordinating and enhancing genetic services in operational and clinical

medicine through AFIP’s Center for Medical and Molecular Genetics; 

• providing clinical and investigative studies in experimental pathology with

a focus on military relevancy and the protection of public safety; 

• developing collaborative research protocols to assess current technologies 

and their innovative applications, which bring together government, 

academia, and private industry; and 

• performing other duties as assigned by the Assistant Secretary of Defense 

for Health Affairs. 

Page 35 GAO-05-615 Armed Forces Institute of Pathology
Ap

A

P

R

pendix III: Analysis of the

rmed Forces Institute of

athology’s Consultation 

evenue Projections

Page 36 GAO-05-615

Appendix III: Analysis of the Armed Forces 

Institute of Pathology’s Consultation Revenue 

Projections 

In its business plan, the Armed Forces Institute of Pathology (AFIP) 

projected that it would increase its revenues from civilian consultations by 

$7.4 million annually as a result of increasing the fees it charges to

civilians for consultation services and improving the collection rate of

those fees. The business plan contains an analysis of how AFIP developed 

this projection. AFIP’s analysis was based upon three primary assumptions

about its future operations. It included (1) an assumption of the American

Registry of Pathology’s (ARP) collection rate, (2) an assumption of the 

number of civilian consultations that AFIP expected to receive in the 

future, and (3) an assumption of the average revenue per invoice under the 

new fee schedule. Based on 2004 performance data, we found that the 

values that AFIP assumed for each of these were inaccurate. Thus, the 

business plan’s estimate of financial benefits from changes to its business 

practices significantly overstated the actual benefits. 

To develop its assumptions, AFIP officials collected data from a 

judgmental sample of 250 consultation cases out of the approximately

23,600 civilian consultation cases that AFIP completed in 2002. AFIP 

officials said that they selected the sample of cases in such a way as to 

reflect the general distribution of consultations among AFIP’s 

departments. AFIP officials said they determined the total amount of

revenues that were invoiced, collected, and written off by ARP for each of 

the 250 cases.1

 AFIP officials then determined what they would have 

invoiced for these same 250 cases under their new schedule.2

 Table 4 

provides the information that AFIP compiled for these 250 cases. 

AFIP Developed a 

Judgmental Sample 

from 2002 Civilian 

Consultations 

 1

For a variety of reasons, some consultation cases were written off, or not charged to the 

client. In some cases, it was AFIP’s policy not to charge certain types of clients. For

example, AFIP did not charge clients from developing nations. In other cases, AFIP 

department chairs could write off consultation fees in instances where they had asked 

fellow physicians to send them rare cases for research purposes. However, these cases

were still counted as consultation cases in AFIP’s data. 

2

AFIP officials conducted this analysis in 2002, before they instituted the new fee schedule. 

However, they had already developed the fee schedule, and, therefore knew what the fees

would be. 

Armed Forces Institute of Pathology
Appendix III: Analysis of the

Armed Forces Institute of

Pathology’s Consultation 

Revenue Projections

Table 4: AFIP’s Analysis of 250 Sample Cases from 2002

Department Invoiced Collected Written-off Uncollected 

New invoice

if billed under 

new fee 

schedule

Total 

number of 

cases in 

sample

Armed Forces Medical Examiner $425 $0 $425 $0 $171 1

Department of Cadiovascular Pathology 1,220 600 150 470 3,433 7

Department of Cellular Pathology 990 240 600 150 2,555 5

Department of Dermatopathology 5,015 2,880 550 1,585 11,475 27

Department of Head and Neck Pathology 3,320 1,940 360 1,020 7,093 19

Department of Environmental and Toxicology 

Pathology 450 0 0 450 684 3

Department of Genitourinary Pathology 4,120 2,770 420 930 5,620 26

Department of Gynecology and Breast Pathology 6,435 4,845 270 1,320 14,242 27

Department of Hematopathology 2,350 1,000 975 375 14,187 8

Department of Hepatic and Gastroenterology 

Pathology 6,515 2,655 540 3,320 31,221 30

Department of Infectious and Parasitic Disease 

Pathology 1,645 1,125 0 520 6,122 8

Department of Neurological and Ophthalmic 

Pathology 5,330 2,620 1,460 1,250 14,442 18

Department of Oral and Maxillofacial Pathology 1,830 1,340 0 490 3,445 10

Department of Orthopedic Pathology 1,690 970 420 300 2,978 10

Department of Pulmonary and Mediastinal Pathology 3,910 2,640 0 1,270 5,728 15

Department of Radiological Pathology 0 0 0 0 342 2

Department of Soft Tissue Pathology 4,775 1,950 1,875 950 10,852 16

Department of Forensic Toxicology 120 0 0 120 513 3

Department of Telemedicine 275 0 200 75 1,456 2

Department of Veterinary Pathology 0 0 0 0 1,882 11

DOD DNA Registry 360 360 0 0 342 2

Total $50,775 $27,935 $8,245 $14,595 $138,785 250

Source: AFIP. 

Notes: DNA = deoxyribonucleic acid. DOD = Department of Defense.

AFIP used the information in table 4 to develop two of its three primary 

assumptions. First, AFIP officials used the data collected for these 250 

cases to determine that ARP had achieved a collection rate of 55 percent 

for those cases. AFIP assumed that by taking over the billing and 

AFIP’s Analysis

Included Three

Primary Assumptions 

Page 37 GAO-05-615 Armed Forces Institute of Pathology
Appendix III: Analysis of the

Armed Forces Institute of

Pathology’s Consultation 

Revenue Projections

collection function from ARP, it would be able to achieve a collection rate

of at least 80 percent. 

Second, AFIP determined what the average revenue per case would be if

each of the 250 cases from the sample was invoiced under its new fee 

schedule. AFIP estimated that it would bill $138,785 if the 250 cases were 

invoiced under the new fee schedule. AFIP divided $138,785 by 250, which 

resulted in an average invoice of $555 per case. AFIP assumed that under 

the new schedule, $555 would be the average revenue per invoice for all of 

its civilian consultation cases. 

AFIP’s third assumption, that it would receive 30,224 civilian consultations 

cases annually, was not derived from table 4. The business plan stated that 

this was the amount of civilian consultation cases that AFIP received in 

2002. Total revenues would be calculated from this baseline estimate of

consultation cases. AFIP assumed that the increase in fees would result in 

a 20 percent reduction in total consultation revenues. 

After developing these assumptions, AFIP officials developed a calculation

to predict the institute’s future revenues by multiplying the number of 

civilian consultation cases by the average invoice per case. Next, they 

estimated that there would be some reductions in revenues. They 

estimated that the implementation of new practice guidelines governing 

how consultation cases are handled within the institute would result in a 

10 percent reduction in revenues and that higher fees would result in an 

additional 20 percent reduction in revenues.3

From their calculation, AFIP officials estimated that they would generate a 

total of approximately $9.6 million in annual revenues in future years. 

AFIP reported that ARP collected approximately $2.2 million in 

consultation revenues in 2002. By subtracting ARP’s 2002 revenues from

AFIP’s estimated revenues, AFIP projected that it would generate 

$7.4 million in additional annual revenues. Table 5 shows how AFIP 

performed these calculations. 

 3

As a part of AFIP’s practice guidelines, AFIP established policies that were designed to 

ensure that only the minimum number of tests needed to provide a diagnosis was

performed. AFIP officials assumed that this would lower the total number of procedures

performed per consultation case, thereby affecting anticipated revenues. 

Page 38 GAO-05-615 Armed Forces Institute of Pathology
Appendix III: Analysis of the

Armed Forces Institute of

Pathology’s Consultation 

Revenue Projections

Table 5: AFIP’s Projection as Presented in the Business Plan 

Calculation Inputs Total

Step 1: AFIP identified 30,224 civilian consultation cases in 2002 30,224

Step 2: AFIP multiplied the number of cases by the estimated 

average invoice that would be generated by each case 30,224 x $555.14 $16,778,000

Step 3: AFIP assumed that it would be able to collect 80 percent of 

total invoices billed 80 percent of $16,778,000 13,423,000

Step 4: AFIP projected a 10 percent reduction in revenues due to 

the implementation of its new practice guidelines 

10 percent reduction of $13,423,000 

($13,423,000 minus $1,342,000) 12,081,000

Step 5: AFIP projected a 20 percent reduction in revenues due to 

the implementation of its new fee schedule 

20 percent reduction of $12,081,000 

($12,081,000 minus $2,416,000) 9,600,000

Estimate of the total amount collected by AFIP after taking over

billing and collection from ARP and increasing fees: 9,600,000

Step 6: AFIP estimated that ARP collected $2.2 million in

consultation revenues in 2002 2,200,000

Step 7: AFIP compared its estimated collections with those of ARP 

in 2002 $9,600,000 - $2,200,000

Estimate of annual increase in revenues $7,400,000

Source: GAO analysis of AFIP data. 

Note: Numbers may not sum because of rounding.

Using actual data from 2004, we determined that the three primary 

assumptions that AFIP used in its analysis were inaccurate. 

1. AFIP assumed that ARP achieved an annual collection rate of 55

percent. However, according to data provided by AFIP, ARP achieved 

a collection rate of 80 percent in 2004. One reason that the 250-case 

sample showed a significantly lower collection rate is that ARP 

collected payments for some of the cases shown in table 4 after 

November 2002—the time of AFIP’s data request to ARP. In the 5

months that followed AFIP’s analysis, ARP collected 37 additional 

payments, which AFIP did not consider when calculating ARP’s

collection rate. Including these additional collections would have 

increased ARP’s collection rate for the 250-case sample from 55 to 73 

percent.4

 In addition, ARP stated that the sample included 30 cases that

were not invoiced by ARP. For 17 of the cases, the pathologist did not

provide ARP with documentation of which medical procedures had

The Three Primary 

Assumptions Used in 

AFIP’s Analysis Were 

Inaccurate 

 4

According to data provided by AFIP, ARP also achieved an 80 percent collection rate for

all consultations revenues generated in 2003. 

Page 39 GAO-05-615 Armed Forces Institute of Pathology
Appendix III: Analysis of the

Armed Forces Institute of

Pathology’s Consultation 

Revenue Projections

been performed. For the other 13, it was AFIP’s policy not to bill for 

those types of cases.5

2. AFIP officials assumed that they would collect an average of $555 per 

case under AFIP’s new fee schedule. However, in 2004, the first year in 

which the new fee schedule was in effect, the average revenue per case

was $299.83. This is primarily because AFIP’s sample of 250 cases was 

not a reliable predictor of average cases over an entire year. 

3. In its business plan, AFIP assumed that it would receive 30,224 civilian 

cases a year. However, AFIP officials reported to us that the institute 

had received approximately 23,600 civilian cases in 2002. AFIP officials

said they made the larger assumption and used that number as a 

baseline for their calculation because at one time they had identified 

30,224 civilian cases for 2002. Since then, they have engaged in a 

quality review of their data and discovered that some of the 

consultations had been entered incorrectly. AFIP identified 15,646 

civilian consultation cases to be billed in 2004. 

If the assumptions presented in the business plan are replaced with actual

data collected by AFIP in 2004, AFIP stands to generate $6.4 million less in 

annual revenue than originally projected. Table 6 shows how we

developed our calculation of AFIP’s likely financial benefits using 2004 

data. We estimate that AFIP will achieve approximately $1 million in 

additional annual revenues. 

Results from Our 

Calculation Using 

Actual 2004 Data

 5

Prior to the expansion of AFIP’s electronic Pathology Information Management System, 

AFIP pathologists filled out work sheets (called “Green Sheets”) by hand which would 

indicate what medical procedures were performed on a consultation. This work sheet was

then sent to ARP, where an invoice was generated and the client was billed. 

Page 40 GAO-05-615 Armed Forces Institute of Pathology
Appendix III: Analysis of the

Armed Forces Institute of

Pathology’s Consultation 

Revenue Projections

Table 6: Calculation Using Actual Data from 2004 

Calculation Inputs Total

Step 1: AFIP identified 15,646 civilian consultation cases to be billed in 2004 15,646

Step 2: AFIP reported that the average invoice per consultation case in 2004 was 

approximately $300 under the new fee schedule $299.83 $299.83 

Step 3: Multiply average revenue per case by the number of anticipated cases 15,646 x $299.83 $4,691,000

Step 3: AFIP anticipates that it will achieve an 80 percent collection rate of invoices billeda 80 percent of $4,691,000 $3,753,000

Estimate of the total amount collected by AFIP after taking over billing and 

collection from ARP and increasing fees $3,753,000

Step 6: AFIP reported that ARP collected $2.7 million in 2003 $2,713,000

Step 7: AFIP’s new projected revenue compared with those of ARP in 2003 $3,753,000 - $2,713,000

New estimate of increased revenues $1 million

Source: GAO analysis of AFIP data. 

Note: Numbers may not sum because of rounding.

a

AFIP instituted its new fee schedule in January 2004. Since AFIP took over billing and collection from

ARP in October 2004, it is too early to accurately assess AFIP’s actual collection rate. AFIP assumed 

in its previous calculation that it could achieve an 80 percent collection rate; therefore, we used that

estimated percentage in our calculation.

Page 41 GAO-05-615 Armed Forces Institute of Pathology
Ap

of

pendix IV: Comments from the Department

 Defense

Page 42 GAO-05-615

Appendix IV: Comments from the 

Department of Defense 

(290395) Armed Forces Institute of Pathology
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