GAO-06-359R Limited Support for VA’s Efficiency Savings

United States Government Accountability Office

Washington, DC 20548 

February 1, 2006 

The Honorable Daniel K. Akaka 

Ranking Member 

Committee on Veterans’ Affairs 

United States Senate 

The Honorable Lane Evans 

Ranking Member 

Committee on Veterans’ Affairs 

House of Representatives 

Subject: Veterans Affairs: Limited Support for Reported Health Care Management 

Efficiency Savings 

The Department of Veterans Affairs (VA) provides a uniform set of health care 

services to eligible veterans who enroll to receive such care and seek it from VA. 

These services include preventive and primary health care, a full range of outpatient 

and inpatient services, and prescription drugs. VA provides additional services, such 

as nursing home and dental care and other services, as required by law for some 

veterans and makes these services available to other veterans on a discretionary 

basis as resources permit. Most of the nation’s 24 million veterans are eligible for 

some aspect of VA’s health care services if they choose to enroll. In fiscal year 2005, 

about 7 million veterans were enrolled to receive VA health care services. In that 

year, VA planned to provide health care services to about 5 million veterans based on 

its initial budget request of $ 30.2 billion.1

 Funding for VA’s health care program has 

increased substantially in recent years. 

Congress appropriates funds annually for VA to provide health care services to 

eligible veterans. Congressional budget deliberations start when the President 

 

1

For fiscal year 2005, the President requested $27.8 billion in appropriations and $2.4 billion in estimated 

collections, together amounting to a request for $30.2 billion in discretionary budget authority to the Veterans 

Health Administration (VHA) for providing health care. See Budget of the United States Government—Appendix, 

Fiscal Year 2005, at 869-70, 873. In the Departments of Veterans Affairs and Housing and Urban Development, 

and Independent Agencies Appropriations Act, 2005, Pub. L. No. 108-447, div. I, 118 Stat. 3285, 3287-89 (Dec. 8, 

2004), Congress ultimately appropriated $28.3 billion for health care. Later in fiscal year 2005, in response to the 

President’s request for $975 million in supplemental appropriations, Congress provided an additional $1.5 billion 

in supplemental appropriations for veterans’ health care to be available through fiscal year 2006. See the 

Department of the Interior, Environment, and Related Agencies Appropriations Act, 2006, Pub. L. No. 109-54, title 

VI, 119 Stat. 499, 563-64 (Aug. 2, 2005). Finally, in the Budget of the United States Government—Appendix, Fiscal 

Year 2006, the President reported that VA’s estimated collections for fiscal year 2005 would be $1.95 billion. Id. at 

893. 
submits his annual budget request to Congress as the Budget of the United States 

Government. This is soon followed by VA providing the Congress with a more 

detailed budget justification of the President’s policy and funding proposals for its 

programs.2

 In each of the President’s budget requests for fiscal years 2003 through 

2006, the proposals assumed implementation of management efficiency initiatives 

that would save money without reducing the quality of service. Indeed, over these 4 

fiscal years, the President’s budget proposals assumed that these initiatives reduced 

funding requests by billions of dollars. 

Since savings from management efficiencies were expected to help reduce the level 

of annual appropriations, you asked us to examine (1) VA’s methodology for 

projecting the health care management efficiency savings that were assumed in the 

President’s budget requests for fiscal years 2003 through 2006 and (2) VA’s support 

for reported actual savings achieved through management efficiency initiatives 

during fiscal years 2003 and 2004—including the methodology and documentation 

used to track and report achieved savings. As agreed with your staff, we also 

summarized prior GAO and VA Office of the Inspector General (OIG) reports that 

have identified management inefficiencies at VA. 

To examine VA’s health care management efficiency initiatives, we interviewed 

officials with VHA’s Office of the Chief Financial Officer (CFO). We also interviewed 

officials from VA’s Procurement Reform Task Force, the Pharmacy Benefits 

Management Strategic Health Care Group, the Office of Prosthetic and Clinical 

Logistics Group, and the Office of Information Technology, all of which VA reported 

as the primary sources of the agency’s management efficiency savings. We requested 

documentation for the assumed savings amount from each source. We also 

interviewed officials responsible for reporting actual savings achieved from 

management efficiency initiatives at all 21 of VA’s regional health care networks. In 

addition, we obtained and analyzed documentation provided by VA in support of its 

projected savings and reported actual savings achieved from management 

efficiencies—including guidance provided to each of the regional health care 

networks on reporting actual savings achieved as well as documents and 

spreadsheets used to collect and report efficiency savings. We could only evaluate 

VA’s achieved savings for fiscal years 2003 and 2004 because as of the end of our 

fieldwork, VA had not yet compiled its fiscal year 2005 achieved savings figures. We 

also reviewed prior GAO and VA OIG reports to identify management inefficiencies at 

VA. We conducted our work from September 2005 through January 2006 in 

accordance with U.S. generally accepted government auditing standards. We 

requested and received written comments on a draft of this report from VA and have 

reprinted VA’s comments in enclosure II. Enclosure I contains further details on our 

scope and methodology. 

 2

An agency provides budget justification materials – referred to as the congressional budget justification – to its 

appropriations subcommittees after the Office of Management and Budget has reviewed the information for 

consistency with the President’s budget request. Although the congressional budget justification is transmitted 

after the President’s budget, the format and timing is determined by the needs of the relevant appropriations 

subcommittee. 

Page 2 GAO-06-359R Limited Support for VA’s Efficiency Savings
Results in Brief

VA lacked a methodology for making the health care management efficiency savings 

assumptions reflected in the President’s budget requests for fiscal years 2003 through 

2006 and, therefore, was unable to provide us with any support for those estimates. 

VA officials told us that the management efficiency savings assumed in these requests 

were savings goals used to reduce requests for a higher level of annual appropriations 

in order to fill the gap between the cost associated with VA’s projected demand for 

health care services and the amount the President was willing to request. 

Further, VA lacks adequate support for the $1.3 billion it reported as actual 

management efficiency savings achieved for fiscal years 2003 and 2004 because it 

lacked a sound methodology and adequate documentation for calculating and 

reporting management efficiency savings. Specifically, there was little consistency 

with respect to what VA’s regional networks reported as management efficiency 

savings, how savings were calculated, and what type of documentation was available 

to support the savings figures reported. In addition, VA’s regional networks 

sometimes reported savings resulting from cost-cutting measures as management 

efficiency savings. Although both can achieve savings, cost-cutting measures, unlike 

management efficiency initiatives, are not consistent with VA’s objective of providing 

the same or higher quality and quantity of service at a lower cost. Finally, VA does 

not have a reliable basis for determining whether it has realized the management 

efficiency savings that were reflected in the President’s budget requests for fiscal 

years 2003 and 2004. Specifically, VA’s use of its savings calculation for its national 

procurement initiatives is misleading because VA calculates actual savings for these 

initiatives on a cumulative basis and compares these savings figures with savings 

goals that are reflected on an incremental basis. 

In recent years, the VA OIG and we identified management inefficiencies that, if 

unaddressed, could contribute to requests for higher amounts of appropriations that 

could otherwise have been avoided. For example, although VA has instituted a 

number of procurement reform initiatives aimed at leveraging its purchasing power 

and improving the overall effectiveness of its procurement actions, the VA OIG and 

we continue to identify problems with VA’s procurement processes. Moreover, the 

VA OIG identified deficiencies in VA’s procurement practices as one of the agency’s 

most serious management challenges. For instance, recent GAO and VA OIG reports 

disclosed significant problems with VA’s acquisitions involving Federal Supply 

Schedule (FSS) contracts; procurement of health care services; VA construction; 

acquisition support weaknesses; and inadequate management and oversight of major 

system initiatives. In addition, recent GAO and VA OIG reports have identified both 

serious control weaknesses in the agency’s inventory management and shortfalls in 

the agency’s efforts to provide reliable cost data to accurately assess the efficiency 

and effectiveness of VA’s programs and initiatives. 

VA concurred with our recommendations but disagreed that it had used its 

management efficiency savings goals to fill the gap between the cost associated with 

VA’s projected demand for health care services and the amount the President was 

willing to request. However, VA officials uniformly described VA’s process for 

Page 3 GAO-06-359R Limited Support for VA’s Efficiency Savings
determining its management efficiency savings goals in this manner and it did not 

provide us any other explanation. Further, VA did not provide us with any support 

for the methodology used to develop its management efficiency savings goals. 

Accordingly, we continue to believe that this characterization is appropriate. 

Background

In the mid-1990s, VA began to change fundamentally the way it delivers health care to 

veterans to increase the efficiency of its health care system and to improve access to 

medical services. Applying lessons learned from the private sector’s experiences with 

managed health care, VA began emphasizing certain managed care practices, such as 

primary, outpatient, and preventive care, and de-emphasizing practices such as 

inpatient care. To support its health care reform efforts, VA decentralized the 

management structure of the agency to coordinate the organization of hospitals, 

outpatient clinics, and other facilities into 21 regional networks or Veterans 

Integrated Service Networks (VISN). One aspect of VA’s health care reorganization 

was to establish organizationwide goals for improving efficiency and access and to 

create performance measures to hold network directors accountable for achieving 

these goals.

To maximize the health care provided to veterans with available resources—although 

not required as part of the budget process—the President’s budget request has 

included expected savings achieved through various management efficiency 

initiatives. We have previously reported on the likelihood of VA achieving the 

management efficiency savings included in the President’s budget request. In 

September 1999, we reported that VA had identified management efficiency initiatives 

that it expected would result in savings totaling $1.2 billion.3

 Our 1999 report 

concluded that it seemed unlikely that VA’s savings goal would be achieved through 

management efficiency initiatives because many of VA’s initiatives were not 

consistent with VA’s objective to provide the same or higher-quality services at lower 

costs. Instead, anticipated savings could possibly cause service delays or diminished 

service quality. Initiatives that appeared not to affect service quality negatively 

accounted for only $600 million. 

Then, in March 2005, as part of a review of VA’s congressional budget justification, 

we prepared an issue paper on the likelihood of VA achieving significant management 

efficiency savings in fiscal year 2006. We reported that VA’s fiscal year 2006 estimate 

of $590 million in management savings appeared to be achievable based on prior 

work by GAO and the VA OIG. In conducting the budget justification work, as stated 

in our issue paper, we did not test the reliability and validity of the data used to 

calculate the projected savings. With respect to our current engagement, for which 

you asked us to validate the data used to calculate projected and achieved savings, 

our work included tests of the reliability and validity of the data used. 

VA Lacks a Methodology for Projecting Savings 

Resulting from Management Efficiency Initiatives

 3

GAO, Veterans’ Health Care: Fiscal Year 2000 Budget, GAO/HEHS-99-189R (Washington D.C.: Sept. 14, 1999). 

Page 4 GAO-06-359R Limited Support for VA’s Efficiency Savings
VA lacked a methodology for making the health care management efficiency savings 

assumptions reflected in the President’s budget requests for fiscal years 2003 through 

2006 and, therefore, was unable to provide us with any support for the savings. VA 

officials told us that the management efficiency savings assumed in these requests 

were savings goals used to reduce requests for a higher level of annual appropriations 

in order to fill the gap between the cost associated with VA’s projected demand for 

health care services and the amount the President was willing to request. 

In its congressional budget justifications, VA has provided additional details on the 

management efficiency savings reflected in the President’s budget request for fiscal 

years 2003 through 2006. As shown in table 1, VA presented these savings goals on 

both an annual and a cumulative basis. However, the level and type of detail 

provided in the justifications varied from year to year. For example, in fiscal year 

2004, the detailed savings amounts presented in VA’s budget justification sum to the 

cumulative amount of $950 million—whereas, in fiscal year 2006, the detailed savings 

sum to the annual amount of $590 million. In fiscal years 2003 and 2005, VA did not 

provide information linking savings goals to specific management efficiency 

initiatives—making it difficult to determine how much savings was expected from 

each initiative and whether VA’s budget justification detail was intended to support 

its annual or cumulative savings assumptions. 

Table 1: VA’s Health Care Management Efficiency Savings Goals, Fiscal Years 2003–2006 

 Dollars in millions

Fiscal 

year 

Reported 

annual 

savings 

Reported 

cumulative

savings

VA reported justification for savings goals 

2003 $316 $316 Standardization of procurement activities, evaluation of 

operational community-based outpatient clinics, evaluation 

of centrally managed programs 

2004 634 950 $150 million - implement competitive sourcing plan 

$250 million - procurement standardization 

$300 million - maintain administrative costs at 2003 level 

$100 million - improve employee productivity 

$150 million - shift from inpatient to outpatient care 

2005 340 1,290 Improve standardization policies in procurement of 

supplies, pharmaceuticals, and other capital purchases 

2006 590 1,790 $431 million - operational efficiencies 

$159 million - competitive sourcing; improved 

standardization policies in procurement of supplies, 

pharmaceuticals, and other operational efficiencies 

Source: GAO analysis of VA’s annual budget justifications for fiscal years 2003 through 2006.

The Senate Appropriations Committee also found problems with VA’s fiscal year 2006 

budget justification details—concluding that VA’s estimated management efficiencies 

are not supported by adequate details in its congressional budget justification.4

 

Consequently, the Senate Appropriations Committee and its House and Senate 

conferees—in their reports related to VA appropriations for fiscal year 2006—

directed VA to provide more detail on its justification for management efficiencies in 

future congressional budget justifications on the premise that savings projections 

 4

See Military Construction and Veterans Affairs and Related Agencies Appropriation Bill, 2006, S. Rep. No.

109-105, at 42-43, 55 (July 21, 2005). 

Page 5 GAO-06-359R Limited Support for VA’s Efficiency Savings
that are well-grounded and supported in the budget request are more likely to be 

achievable.5

 

VA Lacks Adequate Support for Actual Management Efficiency Savings Achieved

VA also does not have adequate support for the $1.3 billion it reported as actual 

management efficiency savings achieved for fiscal years 2003 and 2004 because it 

lacked a sound methodology and adequate documentation for calculating and 

reporting actual management efficiency savings. Specifically, there was little 

consistency with respect to what VA’s VISNs reported as management efficiency 

savings, how savings were calculated, and what type of documentation was available 

to support reported savings figures. In addition, VA does not have a consistent basis 

for reporting actual savings achieved—reporting savings for some initiatives on a 

cumulative basis and others on an incremental basis—which can be misleading given 

the context of an annual budget. By reporting some savings on a cumulative basis, 

VA does not have a reliable way to determine whether it has realized the planned 

management efficiency savings that are reflected in VA’s budget justifications for 

fiscal years 2003 and 2004. As shown in table 2, VA reported realized management 

efficiency savings in two broad areas—savings resulting from local or VISN-level 

initiatives and savings from national or VA-wide initiatives. 

Table 2: Reported Actual Savings Achieved from Management Efficiency Initiatives for Fiscal Years 2003 

through 2004 

Dollars in Millions

Source: VHA Office of the CFO.

Fiscal year VISN inventory management, 

administrative consolidations, 

VA/Department of Defense resource 

sharing, competitive sourcing, and 

other initiatives 

National procurement 

standardization initiatives 

Total 

2003 $231 $396 $627

2004 235 414 $649

Total for 2-

year period 

$466 $810a $1,276

a

Of the $810 million, according to VA officials, $756 million was related to pharmaceutical procurements and $54 

million was related to other equipment procurements. 

Because VA had not yet compiled the savings information for fiscal year 2005 as of 

the end of our fieldwork, we could not evaluate VA’s achieved savings figures for that 

fiscal year. However, according to VA officials, they planned to use the same process 

as was used in prior years to arrive at VA’s fiscal year 2005 achieved savings. 

VA Lacks a Clear, Consistent Methodology for Tracking and Reporting 

Achieved Savings Resulting from VISN Initiatives 

VA’s methodology for tracking, reporting, and documenting actual savings achieved 

through VISN-level initiatives lacked consistency with respect to what was reported 

as management efficiency savings, how savings were calculated, and type of 

documentation available to support the savings figures reported. Consequently, VA 

 5

Id.; H.R. Conf. Rep. No. 109-305, at 44 (Nov. 17, 2005).

Page 6 GAO-06-359R Limited Support for VA’s Efficiency Savings
did not have a consistent basis for reporting actual savings achieved—reporting 

savings for some initiatives on a cumulative basis and others on an incremental basis. 

In other cases, based on the information provided by VISN officials, VISNs appeared 

to include cost-cutting measures that, unlike management efficiency initiatives, are 

not consistent with VA’s objective of providing the same or higher quality and 

quantity of service at a lower cost. 

Each year, VHA’s Office of the CFO requests information on savings achieved through 

local, or VISN-level, management efficiency initiatives. To obtain this information, 

the Office of the CFO provides a template to each of VHA’s 21 VISNs that outlines 

general savings categories—which include standardization of pharmaceuticals, 

supplies, and material procurement; inventory management; administrative overhead 

reductions; Department of Defense (DOD) and VA resource sharing activities; 

productivity improvements; and other initiatives. Using this template, each VISN 

requests savings figures from the medical centers, clinics, and other organizations 

within the regional health care network. Beyond a limited description of each of the 

savings categories, VA provided no other written guidance to the VISNs on what their 

roles were in providing oversight to the process, what constitutes management 

efficiency savings, how savings should be calculated, and what type of 

documentation should be maintained in support of the reported savings figures. 

 

Based on our interviews and documents provided by VISN officials, the type of 

documentation available in support of the management efficiency savings reported 

varied widely across the VISNs. According to the 21 VISN officials we interviewed, 

some received only a completed template, or the summary-level information, from 

medical centers, clinics, and other organizations within their region and performed 

only a cursory review of the savings figures before forwarding the information on to 

the VHA Office of the CFO. Others obtained more detailed information on savings 

and were involved in calculating the savings figures. 

In addition, the VISNs were not consistently defining what constituted a management 

efficiency. For example, several of the VISNs reported management efficiency 

savings for actions such as temporary and permanent reductions in full-time 

equivalent (FTE) workers from one year to the next, delays in hiring, reductions in 

overtime, and reductions in available resources due to budget cuts—which may not 

represent management efficiency savings because they are not consistent with VA’s 

objective of providing the same or higher quality and quantity of service at a lower 

cost. For example, for fiscal year 2003, one network reported more than $2.8 million 

of savings resulting from controlled hiring—or delayed hiring of authorized staff. For 

that same fiscal year period, another network reported savings of $131,000 for 

reductions in overtime and $264,000 for staffing reductions—without any explanation 

of whether and, if so, how these savings were achieved without a reduction in the 

level or quality of service. 

Finally, there was little consistency with respect to how savings were calculated. 

Some VISNs calculated productivity savings based on reductions in the unit cost of 

providing health care services, while others calculated it based on the decreased cost 

associated with a reduction in the number of FTEs on board. In some instances, VA 

reported actual savings achieved on a cumulative basis, instead of an incremental 

basis. For example, according to one VISN, it reported the savings in fiscal year 2003 

Page 7 GAO-06-359R Limited Support for VA’s Efficiency Savings
resulting from closing one of its hospitals in that year and claimed the same savings 

again in fiscal year 2004. However, due to inconsistencies in the type of 

documentation available to support management efficiency savings, we were unable 

to determine the extent to which VA reported savings on an incremental versus a 

cumulative basis. 

Methodology for Calculating Achieved Savings Resulting from National 

Procurement Standardization Initiatives Is Not Appropriate 

VA does not have a reliable basis for determining whether it has realized the 

management efficiency savings that were reflected in the President’s budget requests 

for fiscal years 2003 and 2004. Specifically, VA’s use of its savings calculation for its 

national procurement initiatives is misleading because VA calculates actual savings 

for these initiatives on a cumulative basis and compares these savings figures with 

savings goals that are reflected on an incremental basis. 

Annually, VHA’s Office of the CFO requests information on the agency’s national 

procurement standardization initiatives, which accounted for most of the agency’s 

reported actual management efficiency savings. Using spreadsheets, the Office of the 

CFO accumulates summary-level efficiency savings data from the Pharmacy Benefits 

Management Strategic Healthcare Group, the Office of Prosthetics and Clinical 

Logistic Group, and the Office of Information Technology. According to VA officials, 

these actual savings figures provide the basis for VA to determine whether it has 

realized previously reported savings goals. 

VA officials told us that the achieved savings for VA’s national procurement 

standardization initiatives were based on data obtained from its pharmaceutical and 

medical and surgical supplies prime vendor6

 databases. VA officials said that the 

achieved savings amount represents costs that were avoided by utilizing national 

contracts in lieu of other available sources. To compute this amount, VA compares 

the actual cost of each item purchased on contract with the estimated cost of that 

same item had the contract not been awarded. VA estimated what the cost would be 

without the contract by multiplying the weighted average price per unit that existed 

during the 3-month period before the contract took effect by the quantity purchased 

in the current fiscal year. For example, VA determined that a contract for 

rabeprazole (used to treat ulcers of the stomach and gastro esophageal reflux 

disease) awarded in May 2001 resulted in fiscal year 2003 cost avoidance of $134 

million (54 percent of the actual cost) because the cost of the drug purchased on 

contract in fiscal year 2003 was $115 million, and the estimated cost of the drug 

without the contract was $249 million. 

VA’s national procurement contract initiatives are not new. The agency has been 

awarding national contracts to take advantage of larger discounts based on volume 

purchasing since 1993. However, VA calculates achieved savings each year as if it 

were the first year of the contract and the savings were occurring for the first time. 

 6

Prime vendors are contractors that buy inventory from a variety of suppliers, store the inventory in commercial 

warehouses, and ship it to customers when ordered. VA’s medical and surgical prime vendor distribution contract

has been in effect since fiscal year 2002. The contract provides that the prime vendor reimburse VA about 3 

percent of sales to VA medical centers. 

Page 8 GAO-06-359R Limited Support for VA’s Efficiency Savings
As a result, VA’s methodology for calculating actual savings achieved from its 

national contract initiatives does not clearly distinguish recurring savings from

incremental savings—which precludes VA from calculating actual savings figures on 

an incremental basis. 

Using hypothetical figures, table 3 illustrates VA’s savings calculation approach. As 

noted, actual figures were not available because VA’s savings calculation 

methodology does not clearly distinguish recurring savings from incremental savings. 

Table 3 shows that during the first year of a contract, VA would calculate savings by 

comparing the actual cost of an item purchased on contract with the estimated cost 

of the same number of items using precontract prices. Based on this calculation, VA 

would report savings in year one of $100. Because it is the first year of the contract, 

the $100 savings figure reflects an incremental amount. In the second year, assuming 

utilization increases to 150 units and the contract price remains the same, VA again 

would calculate savings by comparing the cost of the item purchased on contract 

with the estimated cost of the item using precontract prices. 

Table 3: Comparison of Cumulative and Incremental Savings Computations

VA’s savings computation methodology

1st year 2nd year 

Incremental savings 

computation 

2nd year 

Actual cost when 

purchased on

standardized contract 

$1.5 x 100 units = 

$150 

$1.5 x 150 units = 

$225 

$1.5 x 50 units = $75 

Estimated cost using 

weighted average 

historical price 

$2.5 x 100 units = 

$250 

$2.5 x 150 units = 

$375 

$2.5 x 50 units = $125 

Savings 

(actual – estimated)

$100 $150 $50

Source: GAO.

Based on this calculation, VA would conclude that it had achieved savings of $150 

million. However, $100 of the $150 reported in year two represents recurring savings 

from year one—only $50 would be incremental savings associated with year two. The 

same principle would also hold for year three and subsequent years. That is, VA 

would calculate savings as if each year being considered was the first year of the 

contract and thereby, report savings on a cumulative rather than incremental basis. 

If, as reflected in table 3, VA used the incremental savings computation, for year two, 

$50 would be reported in incremental savings—capturing only the additional costs 

avoided associated with increased utilization. Taking this logic a step further, any 

additional reductions in contract unit costs also should be captured as incremental 

savings in the first year in which they occur. 

Presenting actual savings achieved on a cumulative basis can be misleading because 

VA compared these savings with the original savings goals, which were reported on 

an incremental basis. In determining whether VA met its savings goals, VA compared 

its total achieved savings amount for both its national procurement initiatives and 

VISN-level initiatives with the assumed savings included VA’s budget justification. 

However, as shown in table 4, VA reports its achieved savings from its national 

procurement standardization initiatives on a cumulative basis and, as discussed

previously, reports its VISN-level initiatives using a combination of cumulative and 

annual reporting. In table 4, VA compares these figures with the assumed savings 

Page 9 GAO-06-359R Limited Support for VA’s Efficiency Savings
reflected in VA’s budget justifications for fiscal years 2003 and 2004—which are 

calculated on an incremental basis. 

Table 4: VA’s Reported Actual Cost Savings Compared with Savings Assumed in VA’s Budget 

Justifications for Fiscal Years 2003 and 2004 

Dollars in Millions

Reported management efficiency initiatives Basis of

reporting 

Fiscal year 

2003 

Fiscal year 

2004

National procurement standardization initiatives Cumulative $396 $414

VISN-level initiatives Cumulative 

and annual 

$231 $235

Total reported by VA as realized or achieved Cumulative

and annual

$627 $649

Savings assumed in VA’s budget justifications Annual $316 $634

Source: VHA Office of the CFO.

Although VA does not have a reliable basis for determining whether it has achieved 

its savings goals, this does not mean that new savings have not occurred or that new 

savings are not achievable in the future. GAO and the VA OIG have reported7

 that 

VA’s procurement standardization initiatives have saved hundreds of millions of 

dollars and concluded that additional savings could be achieved through increased 

resource sharing—especially in the areas of medical services and joint procurement 

of medical and surgical supplies. Nonetheless, without a sound methodology for 

tracking and reporting achieved savings, the true extent of VA’s actual management 

efficiency savings cannot be determined. 

Inefficiencies in VA’s Processes Remain

In recent years, the VA OIG and we identified management inefficiencies that, if 

unaddressed, could contribute to requests for higher levels of annual appropriations 

that could otherwise have been avoided. Although VA has instituted a number of 

procurement reform initiatives aimed at leveraging its purchasing power and 

improving the overall effectiveness of procurement actions, the VA OIG and we 

continue to identify problems with VA’s procurement processes as well as VA’s ability 

to provide timely and reliable cost data needed to measure program efficiency. 

Further, the VA OIG has identified deficiencies in VA’s procurement practices as one 

of the agency’s most serious management challenges. 

As shown in table 5, recent GAO and VA OIG reports disclosed significant problems 

with VA’s acquisitions involving FSS contracts; procurement of health care services; 

VA construction; acquisition support weaknesses; and inadequate management and 

oversight of major system initiatives—including the implementation of VA’s Core 

Financial and Logistics System (CoreFLS) and E-Travel service. In addition, recent 

reviews continue to identify serious control weaknesses in the agency’s inventory 

management, and shortfalls in the agency’s efforts to provide reliable cost data to 

 7

GAO, Contract Management: Further Efforts Needed to Sustain VA's Progress in Purchasing Medical Products 

and Services, GAO-04-718 (Washington, D.C.: June 22, 2004) and Department of Veterans Affairs, Office of 

Inspector General, Audit of VA Medical Center Procurement of Medical, Prosthetic, and Miscellaneous

Operating Supplies, Report No. 02-01481-118 (Washington, D.C.: Mar. 31, 2004). 

Page 10 GAO-06-359R Limited Support for VA’s Efficiency Savings
accurately assess the efficiency and effectiveness of VA’s health care initiatives and 

programs. 

Table 5: Summary of Recent Reports That Cite Management Inefficiencies at VA 

Reporting issues/findings Report number

VA is at risk of paying excessive prices for goods and services 

due to weaknesses identified in VA’s preaward and postaward 

reviews of FSS proposals and contacts. 

Based on the results of preaward reviews, VA could negotiate 

reduced prices totaling over $1 billion. 

Based on the results of postaward reviews, $2.3 million in 

contractor overcharges were identified, which VA subsequently

recovered. 

VA OIG, Review of Federal Supply Schedule 

Proposal Submitted by Sandoz, Inc., Under 

Solicitation Number M5-Q50A-03, Report No. 

04-01682-132 (Washington, D.C.: Apr. 28, 

2005). 

VA OIG, Review of Federal Supply Schedule 

Proposal Submitted by Eastman Kodak 

Company Under Solicitation Number M5-

Q50A-03, Report No. 04-01763-138 

(Washington, D.C.: May 18, 2005). 

VA OIG, Review of Proposal Submitted by 

New York University, School of Medicine, 

Under Solicitation Number RFP 10N3-102-05

for Cardiothoracic Surgery Services at 

Department of Veterans Affairs, New York 

Harbor Healthcare System, Report No. 05-

01215-146 (Washington, D.C.: May 24, 2005). 

VA OIG, Review of Federal Supply Schedule 

Proposal Submitted by BioMerieux Inc., Under 

Solicitation Number RFP-797-FSS-03-0001,

Report No. 05-00452-150 (Washington, D.C.: 

June 7, 2005).

Recent reports cite weaknesses in VA’s acquisition 

management processes including poor acquisition planning, 

inadequate risk management and senior management 

oversight, conflict of interest violations, poorly written 

solicitations, excessive prices, and inadequate contract 

negotiations. 

VA’s acquisition management processes do not adequately 

protect the interest of VA or veteran patients and may result in 

VA paying excessive prices for goods and services. 

VA OIG, Evaluation of VHA Sole-Source 

Contracts with Medical Schools and Other 

Affiliated Institutions, Report No. 05-01318-85

(Washington, D.C.: February 2005). 

VA OIG, Audit of VA Medical Center 

Procurement of Medical, Prosthetic, and 

Miscellaneous Operating Supplies, Report No. 

02-01481-118 (Washington, D.C.: Mar. 31, 

2005).

Weaknesses were identified in VA’s contract management, 

construction contract award, and administration processes. 

Based on a review of over 30 major construction contracts, the 

VA OIG determined that several projects valued at $133.6 

million were at risk of being excessively priced. 

GAO, Contract Management: Further Action

Needed to Improve Veterans Affairs 

Acquisition Function, GAO-06-144 

(Washington, D.C.: Oct. 19, 2005). 

GAO, Contract Management: Further Efforts

Needed to Sustain VA’s Progress in 

Purchasing Medical Products and Services, 

GAO-04-718 (Washington, D.C.: June 22, 

2004). 

VA OIG, Department of Veterans Affairs, 

Office of Inspector General, Audit of VHA 

Major Construction Contract Award and 

Administration Process, Report No. 02-02181-

79 (Washington, D.C.: February 2005). 

Weaknesses were identified in VA’s contracting, acquisition 

support, and program management for major system 

development initiatives—including the deployment of VA’s 

CoreFLS and implementation of E-Travel service. 

After spending roughly $249 million on its development of 

CoreFLS, VA discontinued implementation of the system in 

VA OIG, Issues at VA Medical Center Bay 

Pines, Florida and Procurement and 

Deployment of the Core Financial and 

Logistics System (CoreFLS), Report No. 04-

01371-177 (Washington, D.C.: Aug. 11, 

2004). 

Page 11 GAO-06-359R Limited Support for VA’s Efficiency Savings
September 2004. 

VA’s E-Travel initiative duplicated the General Services 

Administration’s (GSA) efforts to provide E-Travel service

options that all federal agencies must use. The VA OIG

reported that the agency could save $7.4 million over the next 

10 years by using one of GSA’s approved E-Travel service 

options.

 

VA OIG, Review of VA Implementation of the 

Zegato E-Travel Service, Report No. 04-

00904-124 (Washington, D.C.: Mar. 31, 2005).

VA’s medical centers did not adequately manage their 

inventories for medical, prosthetic, engineering, and operating

supply requirements—often keeping more than the maximum 

30-day standard supply level on hand. 

VA could potentially reduce excess inventories and save 

hundreds of millions of dollars in funds that are tied up in

maintaining excess inventories.

VA OIG, Summary of Combined Assessment 

Program Reviews at Veterans Health 

Administration Medical Facilities October 2003 

through September 2004, Report No. 04-

03310-94 (Washington, D.C.: Mar. 7, 2005).

Source: Summary of GAO and VA OIG reports. 

Finally, in our recent report and testimony8

 on VA’s managerial cost accounting 

practices, we raised concerns about the completeness and accuracy of nonfinancial 

data VA routinely uses to generate cost information to support decisions relating to 

internal budgeting; resource allocation; performance measurement; and cost finding 

for programs, activities, and outputs. We found that VA was unable to readily 

produce documentation that describes the mechanism used to assign costs to cost 

objects. We concluded that such inaccurate nonfinancial data could skew cost 

calculations and any resulting managerial decisions, and limit the reliability of data 

used by management to analyze and properly assign costs. 

Conclusion

As with most federal agencies, VA is under increasing pressure to find ways to do 

more with less. To reduce amounts requested for annual appropriations, VA has 

relied, in part, on anticipated savings resulting from management efficiency 

initiatives. However, without a sound methodology for projecting management 

efficiency savings VA runs the risk of falling short of its management efficiency 

savings goals, which may ultimately require VA to take actions—including revisiting 

the assumptions, priorities, and levels of service assumed in the budget—to stay 

within its level of available resources. If VA continues to rely on management 

efficiencies as a means of savings, a sound and well-documented methodology for 

consistently and accurately reporting both projected and achieved savings related to 

management efficiency initiatives will be an important factor in providing reliable 

information for congressional decision makers. 

 8

GAO, Managerial Cost Accounting Practices: Leadership and Internal Controls Are Key to Successful

Implementation, GAO-05-1013R (Washington, D.C.: Sept. 2, 2005) and Managerial Cost Accounting Practices: 

Departments of Labor and Veterans Affairs, GAO-05-1031T (Washington, D.C.: Sept. 21, 2005). 

Page 12 GAO-06-359R Limited Support for VA’s Efficiency Savings
Recommendations for Executive Action

If VA continues to plan and budget for management efficiency savings, we 

recommend that the Secretary of Veterans Affairs should direct the Assistant 

Secretary for Management to 

 develop a methodology to project savings for management efficiency 

initiatives that provides key data and assumptions used to estimate the 

savings. 

To better determine whether management efficiency savings are being achieved as 

planned, we recommend that the Secretary of Veterans Affairs should direct the 

Assistant Secretary for Management to establish methodologies for tracking and 

reporting actual savings achieved through implementation of proposed management 

efficiencies, including 

 clear criteria for what constitutes savings resulting from management 

efficiencies, 

 controls to ensure that actual savings are reported on the same basis as 

projected savings in the budget request, and 

 documentation of such savings. 

Agency Comments and Our Evaluation 

In its written comments, which are reprinted in enclosure II, VA concurred with our 

recommendations and said that VA’s Assistant Secretary for Management will 

establish processes and procedures to ensure proper documentation of savings and a 

methodology on how realized savings should be tracked and reported. However, VA 

disagreed that it used its management efficiency savings goals to fill the gap between 

the cost associated with VA’s projected demand for health care services and the 

amount the President was willing to request. It said that identifying goals, setting 

challenging targets, and forecasting management efficiency savings are entirely 

appropriate for a large health care organization like VA. 

We agree that VA and other federal agencies have a basic responsibility to identify 

goals, set challenging targets, and forecast management efficiency savings. However, 

VA management officials, in three separate interviews, uniformly described VA’s 

process for determining its management efficiency savings goals in terms of filling 

the gap between the cost associated with VA’s projected demand for health care 

services and the amount the president was willing to request. At the time of our 

review, VA did not provide another explanation and was unable to provide us with 

any support for the methodology used to develop its management efficiency savings 

goals. Therefore, we continue to believe that this characterization is appropriate. 

VA also provided technical comments for which we have revised our report, as 

appropriate, as shown in enclosure II. 

Page 13 GAO-06-359R Limited Support for VA’s Efficiency Savings
We are sending copies of this report to the Secretary of Veterans Affairs, interested 

congressional committees, and other interested parties. We will make copies of the 

report available to others upon request. This report is also available at no charge on 

GAO’s home page at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me at (202) 

512-9095 or williamsm1@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. GAO staff 

making major contributions to this report are listed in enclosure III.

McCoy Williams 

Director, Financial Management and Assurance 

Enclosures - 3 

Page 14 GAO-06-359R Limited Support for VA’s Efficiency Savings
Enclosure I 

Objective, Scope, and Methodology

To examine the Department of Veterans Affairs’ (VA) methodology for determining 

the projected management efficiency savings assumed in the President’s budget 

requests for fiscal years 2003 through 2006 and VA’s support for reported actual 

management efficiency savings achieved—including methodology and 

documentation used to track and report achieved savings, we interviewed various VA 

officials from the Veterans Health Administration (VHA) Office of the Chief Financial 

Officer, including the Deputy Chief Financial Officer, Budget Office Director, and 

chief financial officers for all 21 Veterans Integrated Service Networks (VISN), who 

were responsible for documenting and reporting projected and realized management 

efficiency savings at VA. We also interviewed officials responsible for implementing 

VA’s National Pharmaceutical/Pharmacy and Medical Supplies and Equipment 

Procurement Initiatives—which accounted for over half of VA’s reported 

management efficiency savings during fiscal years 2003 through 2006, including the 

Chair of the former VA Procurement Reform Task Force, Chief and Deputy Chief 

Consultants for the Pharmacy Benefits Management Strategic Healthcare Group, 

Chief of the Prosthetics and Clinical Logistics Office, Deputy Chief of the Clinical 

Logistics Office, and Chief for the Office of Information Technology. 

In addition, we obtained and analyzed VA’s congressional budget justifications; 

documentation provided by VA officials in support of its projected and achieved in 

savings, including guidance provided to each of the VISNs on reporting management 

efficiency savings; documents and spreadsheets used to collect and report efficiency 

savings for fiscal years 2003 through 2006; and documentation of VA’s approach for 

calculating efficiency savings amounts. To obtain a broader view of the VA’s national 

procurement initiatives, we reviewed VA’s Procurement Reform Task Force report 

(May 2002) and other documents relating to the Procurement Reform Task Force 

initiatives. 

To summarize prior GAO and VA Office of the Inspector General (OIG) reports that 

have identified management inefficiencies at VA, we reviewed GAO and VA OIG 

reports issued during fiscal years 2003 through 2006 that addressed management 

challenges and inefficiencies in VA’s health care programs, processes, and related 

health care activities. 

We conducted our work from September 2005 to January 2006 in accordance with 

U.S. generally accepted government auditing standards. We requested comments on 

a draft of this report from the Secretary of Veterans Affairs or his designee. We 

received written comments from the Deputy Secretary of Veterans Affairs and have 

reprinted VA’s comments in enclosure II. 

Page 15 GAO-06-359R Limited Support for VA’s Efficiency Savings
Enclosure II 

Comments from the Department of Veterans Affairs 

See comment 1. 

Page 16 GAO-06-359R Limited Support for VA’s Efficiency Savings
Enclosure II 

See comment 1. 

Page 17 GAO-06-359R Limited Support for VA’s Efficiency Savings
Enclosure II 

See comment 2. 

See comment 3. 

See comment 4. 

See comment 5. 

See comment 6. 

Page 18 GAO-06-359R Limited Support for VA’s Efficiency Savings
The following are GAO’s comments on VA’s letter dated January 30, 2006. 

GAO Comments

1. See the Agency Comments and Our Evaluation section of this report. 

2. Although our footnote is intended to provide an overview of the budget 

process followed by executive branch agencies—not VA’s specific 

process—we have removed the reference to OMB’s role in transmitting 

agencies’ budget justifications to the Congress. 

3. Our report now references the VHA Office of the CFO. 

4. Based on the documentation provided by VA officials, VA reported actual 

management efficiency savings achieved of $1.3 billion for fiscal years 2003 

and 2004. Management efficiency savings amounts assumed in the 

President’s budget requests for fiscal years 2003 and 2004 totaled 

$950 million. 

5. We recognize that VA’s budget justifications include both an incremental 

and a recurring component. However, we continue to believe that VA’s use 

of its savings calculation for its national procurement initiatives is 

misleading because VA calculates actual savings for these initiatives on a 

cumulative basis and compares these savings figures with savings goals 

that are reflected on an incremental basis. 

6. We reaffirm our view that reductions in workforce, delays in hiring, and 

reductions in overtime and available resources due to budget cuts are costcutting measures—not management efficiencies—and therefore are not 

consistent with VA’s objective of providing the same or higher quality and 

quantity of service at a lower cost.

Page 19 GAO-06-359R Limited Support for VA’s Efficiency Savings
Enclosure III 

GAO Contact and Staff Acknowledgments

McCoy Williams, (202) 512-9095 

Acknowledgments

In addition to the contact named above, Diane Handley, Assistant Director; Fannie 

Bivins, Francine DelVecchio, Denise Fantone, Carmen Harris, James Musselwhite, 

Tiffany Tanner, and Michael Tropauer made key contributions to this report. 

(195070) 

Page 20 GAO-06-359R Limited Support for VA’s Efficiency Savings
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