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24–577 PDF 2006

S. HRG. 109–263

EMERGENCY HEARING TO EXAMINE THE

SHORTFALL IN VA’S MEDICAL CARE BUDGET

HEARING

BEFORE THE

COMMITTEE ON VETERANS’ AFFAIRS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 28, 2005

Printed for the use of the Committee on Veterans’ Affairs

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

(II)

COMMITTEE ON VETERANS’ AFFAIRS

LARRY E. CRAIG, Idaho, Chairman

ARLEN SPECTER, Pennsylvania

KAY BAILEY HUTCHISON, Texas

LINDSEY O. GRAHAM, South Carolina

RICHARD BURR, North Carolina

JOHN ENSIGN, Nevada

JOHN THUNE, South Dakota

JOHNNY ISAKSON, Georgia

DANIEL K. AKAKA, Hawaii, Ranking Member

JOHN D. ROCKEFELLER IV, West Virginia

JAMES M. JEFFORDS, (I), Vermont

PATTY MURRAY, Washington

BARACK OBAMA, Illinois

KEN SALAZAR, Colorado

LUPE WISSEL, Majority Staff Director

D. NOELANI KALIPI, Minority Staff Director

(III)

CONTENTS

JUNE 28, 2005

SENATORS

Page

Craig, Hon. Larry E., U.S. Senator from Idaho .................................................... 1

Letter from Kyl, Hon. Jon, U.S. Senator from Arizona ........................................ 2

Akaka, Hon. Daniel K., U.S. Senator from Hawaii .............................................. 2

Murray, Hon. Patty, U.S. Senator from Washington ........................................... 3

Letter from Secretary Nicholson ..................................................................... 4

Salazar, Hon. Ken, U.S. Senator from Colorado ................................................... 6

Prepared statement .......................................................................................... 7

Ensign, Hon. John, U.S. Senator from Neveda ..................................................... 8

Burr, Hon. Richard, U.S. Senator from North Carolina ....................................... 9

Hutchison, Hon. Kay Bailey, U.S. Senator from Texas ........................................ 10

Obama, Hon. Barack, U.S. Senator from Illinois .................................................. 11

Rockefeller IV, Hon. John D., U.S. Senator from West Virginia ......................... 12

Thune, Hon. John, U.S. Senator from South Dakota ........................................... 13

Jeffords, Hon. James M., U.S. Senator from Vermont ......................................... 31

WITNESSES

Nicholson, Hon. R. James, Secretary, U.S Department of Veterans Affair,

accompanied Perlin, Jonathan, Under Secretary for Health, U.S. Department of Veterans’ Affairs; and McClain, Tim S., General Counsel and

Chief Management Officer, U.S. Department of Veterans’ Affairs .................. 14

Prepared statement .......................................................................................... 16

Response to written questions by Hon. Daniel K. Akaka ............................. 29

(1)

EMERGENCY HEARING TO EXAMINE THE

SHORTFALL IN VA’S MEDICAL CARE BUDGET

TUESDAY, JUNE 28, 2005

U.S. SENATE, COMMITTEE ON VETERANS’ AFFAIRS, Washington, DC.

The Committee met, pursuant to notice, at 11:08 a.m., in room

SR–418, Russell Senate Office Building, Hon. Larry Craig (Chairman of the Committee) presiding.

Present: Senators Craig, Hutchison, Burr, Ensign, Thune, Akaka,

Jeffords, Rockefeller, Murray, Obama, and Salazar.

OPENING STATEMENT OF HON. LARRY CRAIG, U.S. SENATOR

FROM IDAHO

Chairman CRAIG. Good morning, everyone, Members of the Committee, Mr. Secretary. Let me first thank all of my colleagues for

their understanding and the recognition of a short notice on this

hearing, but we thought it was important to have it today and to

move as quickly as we could to address the issue that is before us.

Second, I want to welcome our Veterans Administration Secretary Jim Nicholson and his staff to the Committee and their

quick response to our request.

Five months ago, this Committee considered VA’s budget proposal for fiscal year 2006. Many of us, myself included, relied on

information VA provided and the assumptions the Administration

made about the needs for our Nation’s veterans when we voted on

that budget.

Then only 2 months later, the Senate debated a supplemental appropriation bill for fiscal year 2005. Again, we sought the Administration’s advice and many of us relied on that information when we

voted on issues concerning the health care needs of our veterans.

Now I sit here, having recently learned that the information provided to me thus far has been disturbingly inaccurate. Needless to

say, Mr. Secretary, I can’t be very pleased about that. So I asked

you to come here this morning to tell this committee four different

things: Why VA’s assumptions about the budget needs were wrong;

when did you know, or when did you find out they were wrong;

what the consequences are for transferring money to compensate

for these errors; and what is needed to address the problem for fiscal year 2005 and fiscal year 2006 and beyond.

In my opinion, the question of what to do for fiscal year 2006 and

beyond is the most important issue of the day. It may be that we

are too far into the 2006 appropriation process to consider other alternatives besides simply providing the necessary financial reVerDate 11-MAY-2000 08:00 Apr 07, 2006 Jkt 024577 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\24577.TXT DianeA PsN: DianeA
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sources to address the shortfall, but if we are going to do that, then

we must be accurate about what we do, again, so that we will not

have this kind of conversation 6 months from now.

Additionally, we must come face-to-face with the reality that adding funds to the 2006 budget would mean continual annual increases in the funding of VA health care at an average of 10 percent. At that rate, we will double VA’s health care budget every 8

years. This, on top of a system that already spends $82 million

every day and over a half-a-billion dollars every week, ladies and

gentlemen, that is an extraordinary amount of money even in

Washington terms.

While there is a good deal more I could say, I will stop there. I

know others of my colleagues have comments before we hear from

you, Mr. Secretary. I would hope that we could keep those as brief

as possible so we can get to the substance of your statement and

how we solve this problem.

I would also ask unanimous consent that I put into the record

a letter from Senator Jon Kyl expressing his concern about this

issue and addressing it in a forthright way so that our veterans are

served as we would expect them to be.

[The letter from Senator Kyl follows:]

JUNE 28, 2005.

Senator LARRY CRAIG, Chairman,

Senate Committee on Veterans Affairs, SR–412,

Washington, DC.

DEAR MR. CHAIRMAN: I am writing to express my deep concern about the recently

disclosed funding problems within the Department of Veterans Affairs and to commend you for your speedy effort to ensure accountability and devise solutions by inviting VA officials to testify before your Committee tomorrow.

Like you, I was distressed to learn that the information previously provided to the

Congress by the Department was incorrect. Like you, I relied on that information

and am quite displeased to learn that it was not as accurate as it ought to have

been. And like you, I am committed to supporting whatever measures are needed

to ensure that veterans’ access to the health care services upon which they are depending is maintained—and improved. I trust that your hearing will provide helpful

direction to me and to our colleagues in determining how to proceed and I look forward to working with you to ensure that this problem is addressed as soon as possible.

Sincerely,

JON KYL,

United States Senator.

Chairman CRAIG. With that, let me turn to my Ranking colleague, Democrat Senator Danny Akaka. Danny.

STATEMENT OF HON. DANNY AKAKA, U.S. SENATOR

FROM HAWAII

Senator AKAKA. Thank you very much, Mr. Chairman. Good

morning to everyone.

We all know why we are here, and that is to understand, as the

Chairman has said, what went wrong in planning for veterans’

health care needs and also to focus on what we must do to fix the

problem.

This is not simply about data or assumptions for the planning

models. This is about providing vital health care services for our

Nation’s veterans and we simply must keep focused.

We at least now have an admission that VA hospitals and clinics

are in the red, and this is the first step in turning things around.

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I, frankly, do not understand why this shortfall comes as a surprise, but we will hear about that. We have been hearing from

health care providers all over the country about how dire this situation is. For months now, reports have been coming in that beds

are deliberately kept empty or that failing equipment cannot be replaced and that mental health services are being denied. Every

day, clinic directors are making arbitrary decisions about which

veterans can come in for care. And, of course, this is in violation

of the law.

Despite the tremendous pressure to keep quiet, VA’s dedicated

providers have been forthright about the fact that they were raiding capital accounts just to make ends meet. Using capital funds

means that needed clinics like one in America Samoa will never

come to fruition.

We raised these issues earlier this year on the Senate floor, Senator Murray, myself, and others, and VA officials denied that trouble was ahead. During our debate on the shortfall in April, we

drew attention to the impact that the men and women returning

from Iraq and Afghanistan could have on the VA system. This is

an influx of patients that VA simply cannot easily absorb in addition to its huge current patient load.

I do think that in light of this crisis, we need to take a fresh look

at the proposal to guarantee full funding for VA health care. If we

cannot put faith in the current process, perhaps we need another

approach.

Finally, Mr. Chairman, let me just say that I am truly committed

to working with my colleagues and with you and this Committee

to ensure that existing veterans and returning servicemembers get

the health care they deserve. I have no doubt that we will restore

the funding. In fact, Senator Murray and I are moving to add these

funds to the Interior appropriations bill currently on the Senate

floor.

Thank you very much, Mr. Chairman.

Chairman CRAIG. Senator Akaka, thank you.

We will proceed in the order with which Members came to the

Committee today. We have also been joined by the chairman of the

appropriating subcommittee for Military Construction-VA and I

will turn to Chairman Hutchison in a few moments. Let me go next

to Senator Murray.

STATEMENT OF HON. PATTY MURRAY, U.S. SENATOR

FROM WASHINGTON

Senator MURRAY. Thank you very much, Chairman Craig and

Senator Akaka, for holding today’s hearing, and Secretary Nicholson for joining us today, especially so quickly after last Thursday’s

announcement that the VA is well over $1 billion short of funding

this year. I especially want to thank Chairman Craig for assuring

me he will get to the bottom of this issue, as well as Senator

Hutchison for their work in trying to figure out a solution to this.

Like all of the Members here today, I want to find a solution to

this problem as soon as possible and I hope this Committee today

can have a very open and honest discussion about the VA’s needs

and the best way that we can now move forward to provide adequate funding. This Committee, as the Chairman said, needs to

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know how this happened, and specifically, we need to know how

your staff estimated a 2.7 percent increase in the number of veterans accessing VA care when in reality we are, as we all knew,

seeing more than a 5 percent increase. This Committee also needs

to know when it was clear that the VA had a shortfall, how we can

fix this, and how we can prevent this from ever happening again.

During my attempt to include VA funding on the last direct war

supplemental, Chairman Craig said that if the VA came forward

with an announcement like this, that he would work with me to

get the funding the VA needed, and I am grateful for that commitment.

Mr. Secretary, I hope that as you address this Committee you

will outline how we got here today and how you plan to meet the

needs of our veterans. As this Committee knows, throughout the

budget and supplemental appropriations process, I fought to increase funding for care for our Nation’s veterans. I used my position on the Budget Committee, on the Appropriations Committee,

and on this Committee to get adequate funding for our veterans

and I introduced an amendment to the supplemental to provide for

our troops by assuring access to quality health care services and

benefits when they return home. I took these measures because I

have long believed that caring for our veterans is a fundamental

cost of war. Unfortunately, each time, my efforts failed.

Secretary Nicholson, in an April 5 letter to Military Construction

and Veterans’ Affairs Subcommittee Chairman Hutchison, you

wrote in this letter, and I want to quote, ‘‘I can assure you that

VA does not need emergency supplemental funds in fiscal year

2005 to continue to provide timely, quality service that is always

our goal,’’ end quote. I would like to ask unanimous consent to include this letter in the record for this hearing.

Chairman CRAIG. Without objection.

[The letter from Secretary Nicholson follows:]

Hon. KAY BAILEY HUTCHISON, Chairman,

Subcommittee on Military Construction and

Veterans Affairs Committee on Appropriations,

U.S. Senate,

Washington, DC.

DEAR MADAM CHAIRMAN: Before I begin the main purpose of this letter, I want

to take this opportunity to thank you for the consideration and interest you have

shown VA through your leadership in this year’s appropriation hearing and many

other endeavors on behalf of our veterans. I very much appreciate your proactive

involvement and commitment to providing for those who have served this country

with such dedication.

I write to you today to address certain issues regarding VA’s fiscal year 2005 fiscal situation. I know some have said that VA must have emergency supplemental

funds to continue providing the services for which veterans depend on us—timely

health care and delivery of benefits. Whenever trends indicate the need for refocusing priorities, VA’s leaders ensure prudent use of reserve funding for these purposes. That is just simply part of good management. It does not, however, indicate

a ‘‘dire emergency.’’ I can assure you that VA does not need emergency supplemental funds in fiscal year 2005 to continue to provide the timely, quality service

that is always our goal. We will, as always, continue to monitor workload and resources to be sure we have a sustainable balance. But certainly for the remainder

of this year, I do not foresee any challenges that are not solvable within our own

management decision capability.

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I look forward to continuing to work with you as we strive to provide the very

best service possible for those veterans who depend on us the most. Thank you

again for your leadership in this important area.

Sincerely yours,

R. JAMES NICHOLSON.

Senator MURRAY. Even during a June 9 hearing before this Committee, under direct questioning, Secretary Nicholson, you did not

indicate that your budget was in trouble. Now, less than 3 months

after this letter, and just 20 days after that hearing, you are here

to testify that we are short over $1 billion.

When I was fighting to get my veterans’ health care amendment

passed a few months ago, I warned my colleagues that what was

an emergency would become a crisis if we didn’t work together to

address this problem. With the VA’s announcement last week, that

emergency has now become a crisis.

Mr. Secretary, as Secretary of Veterans Affairs, you are our Nation’s veterans advocate. Your job is to fight for the needs of our

veterans. This funding shortfall is yet another indication that the

Administration has not taken the issue of veterans’ funding seriously.

Mr. Secretary, I know you have probably come here today prepared to tell us how you are going to get through this year. When

you and I spoke over the phone last Thursday evening, you told me

that you felt you could get through this shortfall by moving more

funds from capital accounts to the operations account. You said our

VA facilities were in top-notch shape, despite the fact that the VA’s

own community-based outreach clinics have been stymied due to

lack of capital funds, and most of our VISNs have delayed major

capital projects for more than 2 years now.

Now, I realize that moving funds between accounts is commonplace at the VA to meet the health care needs of our veterans, but

I want to be clear. Any plan to get us through this year based on

borrowing funds from future years is fundamentally flawed. Any

plan that involves borrowing funds from future years is fundamentally flawed. That type of solution is no solution at all. In fact, it

is not any different than any other budgetary gimmick. It is a shell

game that will really put us in jeopardy and in future crisis and

we cannot afford to do that.

What we really need now, I think is clear, and that is an infusion

of cash to stop the bleeding at the VA. If, as you say, this is truly

an unanticipated cost, then that is exactly what emergency supplemental bills are for.

I really regret that it has come to this, but now I believe it is

time for all of us to come together and provide the needed dollars

so our veterans have the quality, accessible care that they were

promised and that they deserve. Every indication is that we simply

do not have enough funding for our current services, and the VA

is increasingly unable to handle the increased number of veterans

who are coming home from Iraq and Afghanistan while still providing high levels of service to our previous veterans. It is not right

and it is not what our veterans were promised.

Mr. Secretary, I don’t know how you couldn’t foresee such an

enormous shortfall in VA funding, but I do intend to work with my

colleagues to find out and I hope that when the President addresses the Nation tonight on the war in Iraq, he adresses this adminisVerDate 11-MAY-2000 08:00 Apr 07, 2006 Jkt 024577 PO 00000 Frm 00009 Fmt 6633 Sfmt 6601 C:\DOCS\24577.TXT DianeA PsN: DianeA
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tration’s plan to take care of the needs of our Iraq war veterans,

and I stand ready to work with this Administration, our Republican colleagues and our Democratic colleagues to fix this problem

and what I believe the best solution will be, an emergency supplemental that we can enact as soon as possible. That is why I have

offered an emergency supplemental as a freestanding bill and why

I have filed an amendment to the appropriations bill that is currently pending.

But I do stand ready to work with the Chairman, both Chairmen

that are here, as well as the White House to get done what we

need to get done immediately for those men and women who have

served our country. I know this process requires White House participation. Congress can’t do it on its own. I will be looking to the

Administration to be serious, I hope, tonight when the President

addresses the Nation. The stakes, Mr. Chairman, are just too high

to be continuing to kick this can down the road.

Finally, I just want to assure the Chairman that I want to get

to the bottom of this problem, as I know he does. From what I have

learned, this shortfall is either deliberate misdirection or incompetence, but either way, it is unacceptable for us in Congress to get

that kind of information and we need to fix it, and we need to find

out how to recover from this and provide the dollars so that our

veterans don’t face this shortage. Thank you, Mr. Chairman.

Chairman CRAIG. Senator Murray, thank you.

Senator Salazar.

STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR

FROM COLORADO

Senator SALAZAR. Thank you, Chairman Craig and Ranking

Member Akaka, for holding this very important hearing, and thank

you, Secretary Nicholson, for coming here today.

Let me just say that we have a crisis on our hands, and from my

point of view, when you have this kind of a crisis on your hands,

the question is very simple. One is, how do we fix the problem, and

two, how do we make sure that this problem doesn’t occur again?

When I look at the numbers that we are talking about, it is

something that I believe we all should be very, very concerned

about, because a $1 billion shortfall when we have 3 months remaining in the fiscal year, if you annualize that, we end up with

a $4 billion shortfall, which I understand is somewhere between 12

and 15 percent of the overall health care budget for the Veterans

Administration, and so we are looking at a very severe problem in

terms of the provision of health care services to our veterans.

So what I would like to hear from you are the responses to the

questions that Senator Craig and Senator Akaka and Senator Murray have asked, but in particular, looking ahead in terms of how

we are not going to allow this problem to happen again.

Let me also say that I think that this may be one of those issues

that, frankly, has been decided above your pay grade, with all due

respect, Mr. Secretary, because I remember the hearing that we

had here in this Committee where we were talking about the budget. I remember learning about the letter from the VA that basically

said that the VA had all the money that it needed. And it seemed

to me that at the end of the day, that the decision on the allocation

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of money over to the VA is coming out of the White House and out

of OMB.

So you are relatively new in this job, and you are a person for

whom I have a great deal of personal respect. I think these decisions were, frankly, made outside of your control by people who are

above your pay grade, and that is OMB and the White House basically deciding to go ahead and to put arbitrary restrictions on the

level of funding for health care for veterans in America.

I think that is the wrong way to go and I am very hopeful that

when the President addresses the Nation tonight on the status of

Iraq, that he also addresses the question of how we are taking care

of our veterans when they are return home. When we look at the

fact we have approximately 350,000 veterans coming back from

Iraq and from Afghanistan, how we treat our veterans when they

return back home is a key component of how we are dealing with

this war on terror.

And so I would encourage you, and through this statement encourage the President of the United States tonight in addressing

the American people how exactly we are going to address this problem by answering the two questions which I hope you are able to

answer here today, how did we get into this mess and how we are

going to fix it, and second, how are we going to prevent this from

happening ever again.

Thank you, Mr. Secretary, and Mr. Chairman, I have a more formal opening statement that I will submit for the record.

Chairman CRAIG. Without objection, it will become part of the

record.

[The prepared statement of Senator Salazar follows:]

PREPARED STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR FROM COLORADO

Thank you, Chairman Craig and Senator Akaka, for moving quickly to address

this crisis.

I hope today’s hearing will be the beginning of an open and honest accounting of

how much more money the VA needs for this year and next year, what went wrong,

and what we can do to ensure that it never happens again.

Last week, America’s veterans were alarmed by the announcement that the VA

was short $1 billion for health care programs.

EXISTING BUDGET PROBLEMS

I’ve only been in Washington 6 months, but it doesn’t take that long to realize

that the VA was in trouble before this announcement. I said it, some Members on

this Committee said it, and the Veterans groups all said it—the VA did not have

the resources to do its job.

In Colorado, we’ve already seen the effects of extremely tight budgets. Now, there

is a virtual hiring freeze for new nurses at the Denver VA Medical Center. This has

led to nurse-to-patient ratios as high 1–15. Patients have to wait hours for scheduled medicines to be administered. Patients suffer the indignity of being bathed less

frequently and having their bandages changed less often than they should be.

The staff is heroically trying to fill the void, working overtime and having to actually prioritize the worst patients. As one nurse said, ‘‘We are getting frustrated,

knowing there is no light at the end of the tunnel.’’ In another sign of budget cuts,

we’ve seen staff cuts at community-based outpatient clinics. It has been clear for

some time that VA has been running in the red.

CREDIBILITY GAP

That is what I have been hearing from my constituents in Colorado, but you

would not know there were any such problems if you listened to White House officials. Time and again we asked, ‘‘Can VA do its job with the budget it has?’’ Time

and again the answer has been, ‘‘Yes.’’

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This started last year when the Administration submitted a VA budget that was $1.2 billion below what Secretary Principi asked for. The VSOs said that the VA

needed $3 billion more just to continue minimum service. The Administration disagreed.

In April, I joined Senators Murray and Akaka in an effort to increase the VA’s budget by $1.975 billion. That effort failed in part because VA officials wrote Members of Congress that they could finish the year with the funds it had. Turns out

that, like the VA’s numbers, their story did not add up.

The VA is blaming this new crisis on ‘‘unanticipated’’ growth. There is a lot more

to this story than what the VA is admitting. Behind talk of actuarial models and

complicated estimates is a history of chronic underfunding matched with unrealistic

sunny forecasts. In announcing a billion-dollar shortfall, the VA is finally showing

that it cannot hold the Administration’s line. Quite simply, this Administration has

shown it lacks credibility on the VA’s budget.

When it comes to the VA, the Administration lets its own politics trump the needs

of our veterans. The American Legion says it best when they say that VA spending

is budget-driven, not demand-driven. Every year, the VA is given an arbitrary and

meager budget to do a job that grows larger and larger. VA doctors and nurses are

left alone to handle more patients with fewer resources. And Members of Congress

are told tall tales of how great things are going.

MANDATORY FUNDING

During today’s hearing, I hope we get some honest answers about what the VA

needs to get through this year and next. We need to get honest answers about what

went wrong with the VA’s forecast, and why they did not tell Congress sooner. Most

importantly, we must work together to develop a budgetary process that better

serves our Nation’s veterans.

In the short run, we need to pass a supplemental appropriation immediately. In

the long run, we need to move toward mandatory funding of veterans’ health care.

Our Nation’s veterans should not have to hold their breath every year to find out

whether or not Washington is going to do its job and fund the VA. Their well being

should not be at risk because actuarial forecasts are wrong or budget directors are

trying to force bad numbers to add up.

At the end of the day, we have a duty to honor the men and women who have

sacrificed so much for our freedom. We can not let them down.

Thank you, Chairman Craig, Senator Akaka. I look forward to the hearing.

Chairman CRAIG. Senator Ensign.

STATEMENT OF HON. JOHN ENSIGN, U.S. SENATOR

FROM NEVEDA

Senator ENSIGN. Thank you, Mr. Chairman, and thank you for

holding this hearing on such short notice. I think it is very appropriate after what we have just gone through on our budget, and especially at a time of war, that we are keeping our promises to the

veterans in the budget process.

We, obviously working with the Chairman and others, added $410 million, I think it was, to the budget, thinking that that

would take care of the needs. That is what the Administration had

told us. Obviously, that was not adequate.

In Southern Nevada, and not to get parochial about this because

I think it is critical that we take care of veterans all over our country, but we are in a situation in Southern Nevada where we are

anticipating a new VA hospital. Secretary Principi was, out along

with Secretary Norton, to dedicate the site. We got the land from

the BLM dedicated in legislation last year for the new VA hospital.

We are the largest metro area, population-wise, in the country

without a VA hospital. Our veterans travel great distances to get

proper care, and that is a situation obviously that Secretary

Principi believed was very important to rectify.

What I would like to hear from you today is that, one, that that

project will be going forward on time, on budget, and two, reassure

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the veterans in Southern Nevada that this budget shortfall will

not, in fact, hurt the building of the new hospital in Southern Nevada.

And then, last, I would like to hear about what kind of goals you

have for squeezing out some of the inefficiencies in the Department

to be able to put those monies, instead of supporting a wasteful bureaucracy, actually into health care and related services for our

veterans.

Thank you, Mr. Chairman.

Chairman CRAIG. Thank you, Senator.

Senator Burr.

STATEMENT OF HON. RICHARD BURR, U.S. SENATOR FROM

NORTH CAROLINA

Senator BURR. Thank you, Mr. Chairman. Mr. Chairman, I may

not be as kind.

Mr. Secretary, I just read your testimony and I just honed in on

one paragraph. ‘‘I think the record shows the VA has been very

forthcoming with information regarding both the status of the

budget and responsible management decisions we have made as

2005 unfolds.’’

The first half of that, I would just totally disagree with. I don’t

question the integrity of anybody, but I don’t think that the VA has

been forthcoming in information. There is no way a $1.2 billion

shortfall could not have been at least—at least there should have

been some indications that there was trouble, and if there weren’t,

then I feel very confident that you will go back and look at the system and find out how, in fact, there couldn’t have been warning

signs.

I have gone back and read testimony from all Members in this

Committee, their questions. I don’t think we missed asking the

right questions. I think, in fact, we were very specific in what we

asked. As I heard my colleague from Nevada ask about a hospital

in Southern Nevada, I covered very thoroughly the six clinics in

North Carolina, that there was no expression of concern that there

would be funding for. Yet as I read here, your proposal to handle

the $1 billion, you would defer $600 million worth of non-critical

capital expenses for several months. I have to question, is that my

clinics? Is that John’s hospital? Where is that in the capital expenditures? I would suggest to you that the answers can’t be ‘‘yes’’

to all of it.

I look at this, Mr. Chairman, as one more try. I am more than

willing to do that with an increased commitment to you and to this

Committee to make sure that we are dogged in our oversight. But

I also look at the Secretary and say, this is one opportunity to redo

the numbers. Make sure that they are right this time. If, in fact,

you have to err, err on the side of the veterans. Err on the side

of making sure that the infrastructure has the capital that it needs

to meet the needs of those who need it.

I am sure that in John Ensign’s case, there is a reason that there

is a hospital targeted for Southern Nevada. In North Carolina’s

case, there is a reason there are six clinics targeted in North Carolina. We are the fastest-growing population of military retirees in

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the country. If, in fact, that does not happen on time, you will not

meet the health care needs of the veterans in North Carolina.

So the infrastructure is an absolutely essential piece to our ability to say, yes, we are meeting those needs. And if, in fact, that

can’t be met by delaying 3 months or 6 months or whatever, then

we need a number that gets us there on a time line that enables

you and us to answer the question, ‘‘Are we taking care of our veterans?’’ And that should be an affirmative answer.

Thank you, Mr. Chairman.

Chairman CRAIG. Senator, thank you.

We have been joined by the Chairman of the Appropriations Subcommittee on Military Construction and Veterans, Senator

Hutchison, and it will be through her and her staff and our staff

working jointly together in this Committee that we will accomplish

the needs necessary here and make sure that all that is done is

adequate. So I am extremely pleased that Kay has joined us today.

Senator Hutchison?

STATEMENT OF HON. KAY BAILEY HUTCHINSON, U.S.

SENATOR FROM TEXAS

Senator HUTCHISON. Yes. Thank you very much, Mr. Chairman.

I am pleased that you had this hearing scheduled and were able

to do it on a very timely basis because our Subcommittee was going

to markup this week for our ability to get on the floor in July. That

will not occur. We are going to delay the markup because we very

much want to work on a bipartisan basis with the Veterans Administration to do the right thing and do it at the right time.

Rather than waiting until we have a crisis, we would like to have

the input from the Veterans’ Affairs Department and add to the

budget. We assume that the President’s OMB is going to add to the

Veterans’ Affairs budget for 2006. I think we need to also address

2005.

I think from the testimony that you have already made on the

House side that many of us are tentative about taking from capital

accounts in 2005 to try to cover the needs. I would rather address

this, and I would like to have the input from the Administration

to address it fully now while we are still in the 2006 budget cycle

and can also dip back.

We still have budget authority from 2005 left that we could use

if we can get the input from the Administration on what it would

really cost to fully fund your capital needs, as well as not deplete

your rainy-day fund or your surplus ongoing fund. We want to keep

the VA in a good financial situation.

Mr. Secretary, you have not been on the job very long. You have

been there for a few months, and I think we have to—while we are

all very disappointed and we are all certainly looking to you for

guidance—we do have to acknowledge that you stepped up to the

plate and took it like a guy. I mean, you did step up and say, I

am not going to let this go on. We have just had our mid-year numbers and our projections which we have relied on for all these

years, and they have been accurate, are not accurate. You did that

and we appreciate it. Now, let us finish the job.

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You are a decorated veteran. You care about these people. So let

us work together to do what is right for 2005, as well as 2006.

Thank you. Thank you, Mr. Chairman.

Chairman CRAIG. Senator, thank you very much.

We have been joined by Senator Obama. Senator.

STATEMENT OF HON. BARACK OBAMA, U.S. SENATOR

FROM ILLINOIS

Senator OBAMA. Thank you very much, Mr. Chairman. I confess,

this is a frustrating hearing for me, and I know that may be true

for the Chairman and Ranking Member, as well.

I think a basic precept of this Committee, one that is shared by

the American people, is that when we send our troops to war, we

make a decision to care for them and support them when they return. I can’t imagine that there is anybody in this room who wants

to look a soldier in the eye who has returned and risked life and

limb for this country and say, ‘‘Sorry, when it comes to health care,

you are on your own.’’ But somehow, it seems that we are willing

to trot in front of flags and take photographs with soldiers, but

when it comes to the appropriations process, we are not there.

Back in April, I joined with Ranking Member Akaka and Senator

Murray in offering an amendment to the emergency war supplemental appropriations bill that would have added $1.9 billion in

funding. This amendment failed, I think in large part, at least that

was the argument that was made on the floor, because the VA said

that the money was not necessary. Now, Mr. Secretary, you assured Senator Hutchison, chairman of the Appropriations Subcommittee, that the additional funds were not needed. There was

no dire emergency.

Now we discover, somewhat by happenstance, that we are potentially a billion dollars short. I mean, even in Washington, a billion

dollars, that is real money. So as I understand it, at least, because

of the shortfall, the VA has now been forced to turn to its emergency accounts, capital improvement funds, to try to make ends

meet.

Think about that. We recently passed a budget where we had no

problem finding billions and billions of dollars to give away in tax

cuts, but when it comes to the priorities of providing health care

to veterans, we have got to dip into a rainy day fund, and it is not

even clear how solid that rainy day fund is.

So clearly, the Department, the Office of Management and Budget, and the Administration have to be more forthcoming and transparent in the budgetary calculations and they have got to be more

realistic about their cost predictions. It really benefits no one, I

think, to fudge the numbers on this.

We have a bipartisan consensus that veterans should be cared

for. I have no doubt, Secretary Nicholson, that you and your staff

want to care for veterans properly. But if we are starting to play

budgetary games, then it is hard for us to make the difficult

choices that are involved.

I think this current budgetary shortfall is an emergency. That is

why, once again, I am going to be joining my colleagues in an effort

to provide VA with the funding it needs to fully meet the health

needs of our veterans.

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Senator Murray’s emergency supplemental funding bill, is necessary to avoid what is an oncoming crisis in the VA health system.

Giving our veterans substandard treatment isn’t acceptable. Our

veterans deserve better.

Let me just say that I appreciate, Mr. Chairman, your calling

this hearing. I thank the witnesses for joining us. I hope we improve the budgetary planning process as a whole, and I hope that

this Administration recognizes that this is not an area where we

should be playing politics. The Democrats are happy to work with

the administration and Republicans to make sure that our veterans

are cared for, but we can’t do that if we are not getting the proper

information, and I think that is what the American people deserve.

That is what the Members of this Committee deserve. I think, most

importantly, that is what the veterans deserve.

Thank you, Mr. Chairman.

Chairman CRAIG. Senator, thank you.

I only caution that we need to get the Secretary into the substance as quickly as we can, but, of course, let me recognize Senator Rockefeller for any opening statement he would like to make.

STATEMENT OF HON. JOHN ROCKEFELLER IV, U.S. SENATOR

FROM WEST VIRGINIA

Senator ROCKEFELLER. Thank you, Mr. Chairman, and thank

you, as I always do, for your constant fairness, evenhandedness,

and pursuit of the facts in all of this, as obviously the Ranking

Member, Danny Akaka.

Secretary Nicholson, we have talked and I have pointed out from

time to time in these meetings that in some ways, you are not your

own person on this. OMB decides, and after them, the White House

decides. You have got to take whatever that is, and I fully understand that, as I do you. I really do.

But this can’t be left to stand. You know, the President is going

to go down to North Carolina this afternoon. He is going to give

a speech in front of a lot of soldiers, people on their way over to

Iraq and some to Afghanistan. It would be an awfully nice time for

him to correct this, because those folks are going to be hurting, and

I will say something about that in a moment.

But I hope that if he does correct it, he doesn’t correct it at the

expense of what I am sure that Senator Murray, who has just been

a champion throughout this whole thing, of the construction money

that is needed for this year. Because construction money isn’t sort

of like putting up air traffic control towers around VA hospitals, I

mean, it is basic. As you know, it is the basic way that you carry

on health care and the capacity for health care in an ever-enlarged

group of people.

I spent 3 hours with WV veterans and—I do this as many times

as I can when I go home. I was with 12 young men and women

who had just come back from, in one case Afghanistan, everybody

else, Iraq. With the exception of two—in my judgment, with the exception of two—all of them either admitted to forcefully having real

trauma, psychological trauma, PTSD. They are just back and they

need to be taken care of. Some of them were regular, some were

in the National Guard or Reservists. It doesn’t make any difference

to me. They were over there. They fought for us. They come back.

13

One of them was sitting actually next to a woman staff member

of mine, said that he can’t—his first reaction to everything is violent and he can’t help it and he can’t understand it. And once you

get them talking, they feed off each other and it is a story that gets

sadder and sadder.

Well, we now know that goes all the way back to World War I,

PTSD, but that is not for today. For today is correcting a shortfall

in a way which really does bring health care to veterans that need

it. It is not about the sophisticated accounting between 2005 and

2006. But it is about what is needed for 2005, as well as 2006, and

a correction that does it now.

It is incomprehensible to me, and frankly, sort of morally amazing to me, even hurtful, that we do shortchange funding. We go to

war and then these people come back with more tension on them

than ever. They don’t want to talk about anything. No veteran ever

does. They never want to talk about what they were in. They will

talk about their symptoms, but they won’t talk about what they did

to get those symptoms. And then, all of a sudden, we are cutting

the budget for their care.

I mean, I agree with Senator Obama. It is a matter of choice.

There is this fascinating process of making moral choices in America, about whether you want to do tax cuts or whether you want

to take care of people.

The people I represent don’t get much in the way of tax cuts.

Maybe about three or four of the population gets a little bit. The

rest of it, no. But we have a huge proportion of people that go into

the regular military, Reserves and Guard. I am going down to

North Carolina this afternoon to try and protect what is being

taken out of West Virginia. The Air National Guard has been

ranked No. 1 for 8 consecutive years in the country, but it is not

deemed necessary. That is different.

I just hope that the President will say something. I hope that you

can cause him to say something. It is in his interest to say something that gives closure to what is a gaping wound in the hearts

of all of us, both sides of the aisle, around this problem. Again, I

admire Chairman Craig because he knows there is a problem. It

is a little tricky for him, but you know he wants the right thing

done, and we all do.

I don’t know how we do this. We read about people, sophisticated

IEDs being set off. They pay some little boy $4 or $5 and he goes

and punches a cell phone button and new armor-piercing IEDs go

off, people get killed. Maybe they are Iraqis, maybe they are Americans. It is still a horrible situation. But when these folks come

home, ours, we have to take care of them.

Thank you, sir. Thank you, Mr. Chairman.

Chairman CRAIG. Thank you.

Senator Thune.

STATEMENT OF HON. JOHN THUNE, U.S. SENATOR FROM

SOUTH DAKOTA

Senator THUNE. Thank you, Mr. Chairman. I also want to thank

you and Senator Akaka for acting quickly to address this very important matter, and Secretary Nicholson, Dr. Perlin, Mr. McClain,

it is good to have you before us today.

14

This announcement obviously is about the billion dollar budget

shortfall. It is very untimely and very unfortunate and I don’t

think that we are here today to belabor the obvious. We are here

today to understand, one, how that shortfall happened, and two,

what we can do to fix it. I look forward to working with this Committee and with the VA to make that happen.

I attended the VFW convention the weekend before last and the

American Legion convention this last weekend. Obviously, this is

a matter of enormous concern to the service organizations around

the country. I also had an opportunity to visit with the administrator at the VA hospital in my State of South Dakota, from Sioux

Falls. I think that it is clear that we need to identify what is not

working here in terms of the procedures that are used to come up

with assessments about what the needs are going to be. And I

think as we do have more folks coming home from Iraq and Afghanistan, it is going to put a lot more pressure, and we all know

that.

But somehow, further being able to, in a more definitive way,

quantify what our needs are going to be is—I am very interested,

I guess, in hearing your thoughts about that, because clearly the

policy or the procedures we have to do that right now are not working and we don’t want to see this happen again. This affects not

only—this is a 2005 budget issue, but it is also, clearly, this is a

2006 budget issue and the ripple throughout subsequent years, and

so it is important that we get this fixed and that we get it right.

I hope that you can shed some light on how we go about doing that

today. This is a situation that is unacceptable and we need to make

sure that we get it fixed.

I thank you, Mr. Chairman, for calling the hearing and look forward to, Mr. Secretary, what you have to say in that regard.

Chairman CRAIG. Let me thank my colleagues for all of their

comments.

Mr. Secretary, we will now turn to you. You are the panel. The

Honorable James Nicholson, Secretary of Veterans’ Affairs. He is

accompanied by Jonathon Perlin, Under Secretary for Health, and

the Honorable Tim McClain, General Counsel and Chief Management Officer of the VA.

Mr. Secretary, the floor is yours. Please proceed.

STATEMENT OF HON. R. JAMES NICHOLSON, SECRETARY, U.S.

DEPARTMENT OF VETERANS’ AFFAIRS, ACCOMPANIED BY

JONATHAN PERLIN, UNDER SECRETARY FOR HEALTH, U.S.

DEPARTMENT OF VETERANS’ AFFAIRS; AND TIM S. McCLAIN,

GENERAL COUNSEL AND CHIEF MANAGEMENT OFFICER,

U.S. DEPARTMENT OF VETERANS’ AFFAIRS

Secretary NICHOLSON. Mr. Chairman, Members of the Committee, thank you for the opportunity to come here and discuss

budget forecasting and the finances of the Veterans Health Administration.

Mr. Chairman, in the past, VHA budgets were based on historical expenditures, adjusted for inflation, and then increased based

on proposed new initiatives. Today, eligibility reform, increases in

ambulatory care, shifting veteran population trends, rising demand

for services, and escalating costs of health care call for complex,

15

complicated actuarial modeling to dynamically adjust our projections. Actuarial modeling is a well-tested private sector tool that

the VHA applies to our 21st century health care system.

Over the past 6 years, we have successfully integrated the VHA

enrollee health care demand model projections into our health care

financial and management processes. In March 2005, the demand

trend line moved upward. My letter of April 5 to the Chairman of

the Senate Subcommittee on Military Construction and Veterans’

Affairs, Senator Hutchison, said whenever trends indicate the need

for reinforcing priorities, VA’s leaders ensure prudent use of reserve funding for these purposes. That is simply part of good management.

At his Senate confirmation hearing on April 7, then-Acting

Under Secretary Dr. Perlin testified that reserve funds were being

used to meet operational needs in 2005. That was on April 7.

On April 12, Dr. Perlin wrote that the projected carryover might

be diminished to address operational demands on our system and

noted that we do feel confident that DHA has sufficient resources

for the remainder of 2005.

On April 19, VA staff met with the Ranking Member and Members of the minority and majority staff of the House Appropriations

Subcommittee to discuss the Veterans Equitable Resource Allocation, or often termed VERA, model. During this meeting, there

were protracted discussions of the health system’s financial status

for 2005, including the reallocation of capital funds for direct patient care.

During that same week, I met with the Director of the OMB to

update him on the current status and to alert him to potential

issues for fiscal year 2006.

The model on which the 2005 budget was formulated relied on

data from 2002, before the beginning of Operation Iraqi Freedom,

and much has happened in those 3 years. In May of this year, we

performed an actuarial model update for fiscal year 2006 with more

current and accurate data from 2004, further indicating the significant increase in patient demand for fiscal year 2006.

In the first week of June, VA staff met with VA and DOD branch

staff of OMB for a mid-year management review and to discuss the

implications of fiscal year 2005 management decisions on the 2006

budget. Similarly, VA staff met on June 3 with majority staff members of the House and Senate Veterans’ Affairs Committees to discuss the implications of the reallocation and use of funds projected

for carryover into the base for fiscal year 2006 budget.

On June 23, the Under Secretary for Health offered testimony on

the actuarial model and its limitations and the 2005 workload

growth rate of 5.2 percent, compared with the 2005 forecast, which

was a growth rate of 2.3 percent.

We have been very forthcoming, we believe, with information regarding both the status of our budget and the responsible management decisions we have made as 2005 unfolds. For 2006, we are

working with OMB to reach a satisfactory resolution to assure for

all eligible veterans that VA services will continue unabated.

The additional resources relative to the President’s budget that

are necessary to provide timely, high-quality care to the veterans

in 2006 amount to approximately $1.5 billion. The Administration

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will soon present the Congress with a proposal to address this additional workload.

Mr. Chairman, in closing, the VHA enrollee health care demand

model is a valuable budgeting and planning tool for projecting VA

health care utilization. However, projecting health care trends and

utilization for a huge health care system such as VA is inherently

complex. It is significantly more challenging in the context of the

Federal budgeting time line, which requires projections not for the

next year or even for the next open season, as in private sector, but

2.5 to 3.5 years ahead.

We appreciate this opportunity for continuing dialog about management decisions to assure resources for direct patient care in

2005 and to provide recommendations for an augmented budget in

2006, all to fulfill our mission of providing world class health care

to our Nation’s veterans.

Thank you, Mr. Chairman.

Chairman CRAIG. Secretary, thank you.

[The prepared statement of Secretary Nicholson follows:]

PREPARED STATEMENT OF HON. R. JAMES NICHOLSON, SECRETARY, U.S. DEPARTMENT

OF VETERANS’ AFFAIRS

Mr. Chairman and Members of the Committee: Thank you for the opportunity to

discuss the budget forecasting and finances of the Veterans Health Administration.

Accompanying me this morning is our General Counsel and Chief Management Officer, Mr. Tim McClain and our Under Secretary for Health, Dr. Jon Perlin.

Background Mr. Chairman, in considering our budget planning and execution, I’d

like to address three topics. First, how does VA rationally project resource requirements for the health care needs of Veterans? Second, why is there discrepancy from

projections and what is the current status of resources? And, finally, what can we

do to improve the budget formulation process and the current budget status?

PROJECTING RESOURCE REQUIREMENTS

The Veteran’s Health Care Eligibility Reform Act of 1996 established a uniform

package of health care services for enrollees. The legislation also established a priority-based enrollment system and required the VA Secretary to annually assess

veteran demand for VA health care to determine which priority levels of veterans

will be eligible to enroll for care based on the resources available to provide timely,

quality care to all enrollees.

Eligibility reform contributed to the transformation of the Veterans Health Administration (VHA) from a health care system that provided episodic, inpatient care

to a health care system that provides a full range of comprehensive health care

services to enrollees. The focus on health promotion, disease prevention and chronic

disease management has resulted in more effective and more efficient health care.

As a result, the range of health care services utilized by VHA patients began to mirror that of other large health care plans. Therefore, VHA decided to follow private

sector practice and use a health care actuary to predict future demand for VA

health care services. Mr. Chairman, transforming from a hospital system to a health

care system has facilitated VA’s ability to take a leadership position in health care

quality in the United States. A recent Washington Monthly article stated the Veterans Health Administration gives the ‘‘best care anywhere.’’ Additionally, the results of a recent study conducted by the independent RAND Corporation revealed

that based on 348 measures of performance, VA provides systematically better care

in disease prevention and treatment.

In the past, VHA budgets (and most Federal budgets) were based on historical

expenditures that were adjusted for inflation and then increased based on proposed

new initiatives. However, rather than an arbitrary increase over prior budgets, with

the implementation of eligibility reform and the shift to ambulatory care, VHA

needed to more rationally budget for veteran requirements in a transformed health

care system. It also needed to be able to continually adjust its budgetary projections

for effects of shifting trends in the veteran population, increasing demand for services, and the escalating cost of health care, e.g., pharmaceuticals.

17

As a result, VA engaged Milliman, Inc., to produce actuarial projections of veteran

enrollment, health care service utilization, and expenditures. Milliman consults to

health insurers and as such, is the largest and most respected actuarial firm in the

country in the area of providing actuarial health care modeling.

VHA Enrollee Health Care Demand Model The VHA Enrollee Health Care Demand Model (model) develops estimates of future veteran enrollment, enrollees’ expected utilization for 55 health care services, and the costs associated with that utilization. These projections are available by fiscal year, enrollment priority, age,

VISN, market, and facility and are provided for a 20-year period.

The model provides risk-adjustment and reflects enrollees’ morbidity, mortality,

and their changing health care needs as they age. Because many enrollees have

other health care options, the model reflects how much care enrollees receive from

the VA health care system versus other health care providers. This is known as VA

reliance. Enrollee reliance on VA is assessed using VA and Medicare data and a survey of VA enrollees. The VA/Medicare data match provides VA with enrollees’ actual

use of VA and Medicare services, and the survey provides detailed responses from

enrollees regarding any private health insurance and their use of VA and non-VA

health care.

The model projects future utilization of numerous health care services based on

private sector utilization benchmarks that are adjusted for the unique demographic

and health characteristics of the veteran population and the VA health care system.

The actuarial data on which the benchmarks are based represent the health care

utilization of millions of Americans and include data from both commercial plans

and Medicare, and are used extensively by other health plans to project future service utilization and cost.

The model produces projections for future years using health care utilization, cost,

and intensity trends. These trends reflect the historical experience and expected

changes in the entire health care industry and are adjusted to reflect the unique

nature of the VA health care system. These trends account for changes in unit costs

of supplies and services, wages, medical care practice patterns, regulatory changes,

and medical technology.

Each year, the model is updated with the latest data on enrollment, health care

service utilization, and service costs. The methodology and assumptions used in the

model are also reviewed to ensure that the model is projecting veteran demand as

accurately as possible. VHA and Milliman develop annual plans to improve the data

inputs to the model and the modeling methodology. Notably, Mr. Chairman, perhaps

going to a focus of the Committee today, on average for the past 3 years, patient

projections have been within -0.6 percent of actual patients and enrollee projections

have been within +1.9 percent of actual enrollees.

As required by eligibility reform legislation, VA annually reviews the actuarial

projections and determines whether or not resources are available to meet the expected demand for VA health care and develops policies accordingly. For example,

the model’s projection of continued significant growth in enrollment in Priority 8

formed the basis of VA’s decision to suspend Priority 8 enrollment in January of

2003, to ensure that resources were available to provide timely, quality health care

to enrolled veterans.

Over the past 6 years, VHA has integrated the model projections into our financial and management processes. The VA health care budget is now formulated based

on the model projections, as are the impact of most policies proposed in the budget.

Some services VA provides are not modeled by Milliman. These include readjustment counseling, dental services, the foreign medical program, CHAMPVA, spina

bifida, and non-veteran medical care. Demand estimates and budgets for these programs are developed by their respective program managers.

Enrollee demand for long-term care services is modeled by VHA. The VHA longterm care model uses utilization rates from nationally recognized surveys adjusted

for the unique characteristics of the enrollee population and known reliance factors

to account for distance (access to VA facilities), multiple eligibilities, and case management to project demand for both nursing home care and community-based care.

DISCREPANCY FROM PROJECTIONS AND STATUS OF HEALTH CARE RESOURCES

Actuarial modeling is the most rational way to project the resource needs of a

health care system like the Veterans Health Administration. As noted, this is the

approach utilized private sector. Unlike private sector, however, where projections

are used to formulate budgets for the next year or even the next ‘‘open season,’’ the

Federal budget cycle requires budget formulation using data 21⁄2 to 31⁄2 years ahead

of budget execution.

18

For example, the data used to formulate the budget for 2005 derive from health

care utilization in 2002, in this case, the last full year of data before the Department’s 2005 budget formulation began. While it is remarkable that the budget has

been as accurate as it has, a lot can change in 3 years.

The actuarial projection model forecast numbers of enrollees. The number of patients from the enrollee pool is a derivative calculation based on what has been, to

date, a fairly constant relationship. One factor that has compounded the projections

is the increased utilization of health care services by enrolled Veterans in all priority levels and from all combat eras.

The actuarial model forecasted 2.3 percent annual growth in healthcare demand

in FY 2005. We discovered that growth has accelerated through April,2005 to 5.2

percent above FY 2004, which is almost 3 percent above our annual projection. This

constitutes a substantial increase in workload and resource requirements.

In 2002, we were not yet a Nation with large numbers of service members deployed to combat zones. Appropriately, VA continued to use separation data from

the Department of Defense to project potential rates of utilization separating service

members. Our FY2005 budget assumed that 23,553 VA patients (at a cost of $81

million) would be veterans of the Global War on Terrorism. The number of these

patients in 2005 is now estimated to be 103,000, so we are $273 million short. This

additional cost is a substantial but not a predominant (or even the majority) component of the increased medical care cost in 2005.

Fortunately, many are seeking routine services. Some require dental care that

was deferred as they deployed for combat. Others require more intensive care for

both the physical and psychological consequences of combat. About 60 percent of the

combat veterans who have come to VA are reservists or members of the National

Guard. Veterans deployed to combat zones are entitled to 2 years of eligibility for

VA health care services following their separation from active duty even if they are

not immediately otherwise eligible to enroll at VA. Because of this, these combat

veterans then come to VA in numbers much higher than if they were to separate

from DoD without a combat history. The general DoD separation trends data available from the routine 2001 separation planning report could not anticipate the numbers of reserve service members who were subsequently activated and then separated from service.

In summary, the increased medical care cost in 2005 is nearly $1.0 billion of which $273 million (28 percent) is associated with veterans returning from the current combat theatres.

Questions have been raised about the timing of the information disclosed about

VA’s 2005 budget situation. I want to be clear that we continue to feel that we can

meet the needs of timely, high-quality health care for veterans. In fact, I indicated

this in my letter of April 5 to Chairman Hutchison of the Senate Subcommittee on

Military Construction and Veterans Affairs, in which I stated that, ‘‘whenever

trends indicate the need for refocusing priorities, VA’s leaders ensure prudent use

of reserve funding for these purposes. That is just simply part of good management.’’

In a similar fashion, at his confirmation hearing on April 7, 2005, then Acting

Under Secretary for Health Perlin, testified to the Senate Veterans Affairs Committee that reserve funds were being used to meet operational needs in 2005. This

generated some subsequent questions from the Committee, and in a letter on April

12, Dr. Perlin wrote that the projected carryover might be diminished to address

operational demands on our system, including the care of returning combat veterans

of Operation Iraqi Freedom and Operation Enduring Freedom, noting that ‘‘we do

feel confident that VHA has sufficient resources for the remainder of 2005.’’

The following week, on April 19, VA staff met with Ranking Member and Members of the minority and majority staff of the House Appropriations Subcommittee

to discuss the Veterans Equitable Resource Allocation (VERA) model. During this

meeting there was protracted discussion of the health system’s financial status in

2005, including the management decision to reallocate capital funds for direct patient care. During that same week, I met with the OMB Director to update him on

the current status and to alert him to potential issues for Fiscal Year 2006 suggested by preliminary and incomplete data. We agreed to monitor the situation as

more complete and actual data emerged.

In May, we performed our periodic actuarial model update for FY 2006 with more

current and accurate data. This further validated the emerging phenomenon of increasing workload. This was discussed internally as part of the Department’s midyear financial review. In the first week of June, VA staff met with OMB staff for

its annual mid-year management review where we discussed in general terms the

implications of FY 2005 management decisions on the FY06 budget. Similarly, VA

staff met on June 3 with majority staff members of the House and Senate Veterans

Affairs Committee, where they had very candid dialog about the implications of the

19

reallocation and use of funds projected for carryover into the base for the FY 2006

budget.

On June 23, the Under Secretary for Health offered testimony on the actuarial

model and its limitations. Actuarial modeling for 2005 forecast a growth rate of 2.3

percent, and as of April 2005, VA was experiencing workload growth at the rate of

5.2 percent annually, explaining the need to reallocate funds and devote carryover

funds for patient care. As discussed in the hearing, VA’s 2005 increased medical

care cost is nearly $1.0 billion, which VA will manage by reducing the 2006 carryover balance by $375 million and deferring $600 million of non-critical capital expenses for a few months.

I think that the record shows that VA has been very forthcoming with information

regarding both the status of our budget and the responsible management decisions

we have made as 2005 unfolds. It is our first responsibility to provide the highest

quality care to veterans. It is our next responsibility to be good stewards of the substantial resources entrusted to us for that care. While resources have been adequate

to make reallocation decisions to meet the most essential needs in 2005, it is now

clear that the budget picture for 2006 needs to be revisited. We are working with

OMB to reach a satisfactory resolution for 2006 that assures VA is there for all eligible veterans.

After looking at what additional efficiencies may be possible in what is arguably

the nation’s most efficient health system, I believe that the additional resources relative to the President’s Budget that are necessary to provide timely, high quality

care to the Veterans in 2006 amount to approximately $1.5 billion. This includes

$375 million to repay the carryover, nearly $700 million for increased workload, and

$446 million for an error in estimating long-term care costs. The Administration will

come forward to the Congress shortly with a proposal to provide VA the additional

resources. This amount assumes enactment of the policies in the President’s Budget.

If Congress does not accept any of the policies in the President’s Budget, additional

resources will be needed.

PLANNED IMPROVEMENTS

In a sense, VA and other Federal agencies like DoD who use actuarial modeling

to project resource requirements 21⁄2 to 3 years hence push the performance envelope compared to private sector, which uses these data at 1 year. In fact, the 2.9

percent margin of error we experienced is far better than the 11 percent error that

occurred when budgets were projected by inflating an historical base. Mathematically, at 3 years, a 2.9 percent margin of error is pretty good. Still, we recognize

that the consequences are not.

In order to improve the model and budget process going forward, additional model

inputs are required. We must figure out how to better approximate changes needed

to compensate for the lag in data in our estimates. In addition, we need to do a better job of linking DoD experience with our input.

The development of the actuarial model has been an evolutionary process. It is

a prerequisite for the data necessary for the Secretary’s annual enrollment decision

which matches enrollment levels to resource availability. Enhancements to the

model include more detailed and robust adjustments for enrollee reliance, morbidity,

and mortality, adding new data sources, and expanding the number of services modeled. Future planned improvements include access to data on enrollee’s use of Medicaid, Tricare, and military treatment facilities, the integration of the VHA longterm-care model into the actuarial model, and modeling additional services such as

dental care.

CONCLUSION

Mr. Chairman, in closing, I believe that the VHA Enrollee Health Care Demand

Model is a valuable budgeting and planning tool for projecting VA health care utilization. We look forward to working with you to ensure that we continue to provide

timely and high-quality health care to our Nation’s Veterans.

Chairman CRAIG. Let me start the questions. We will go to 5

minute rounds and move through our colleagues as often as we

need to to complete this, with the clear intent of being able to understand exactly where you are now and what we must do with you

to correct this problem, Mr. Secretary.

I am confused as to know how this problem—how a problem of

this magnitude can catch everyone, even a cabinet Secretary, off

guard. Now, I can understand all of the dynamics that you just

20

spoke to. As I understand it, VA discovered the need to cover the

present-year shortfall during a mid-year review. Yet, Dr. Perlin

wrote to me in April during debate on the supplemental that operating requirements are addressed on a daily basis throughout VA.

When exactly did this mid-year review occur? That is my first

question. Wouldn’t data captured in this review be collected as a

routine matter by senior VA managers? And if so, wouldn’t that

suggest that VA should have known about this resource shortfall

well before it occurred?

Secretary NICHOLSON. Well, Mr. Chairman, review of the spending is an ongoing process, and I had meetings with the chairman

and other members of the VISN finance committee, the VISN being

our network directors who have a committee of themselves, sat

down with them months ago and discussed the fact that there may

not be enough in the budget allocations for the rest of this fiscal

year. So this has been an evolving process. It has not been a bolt

of lightning or a bolt of blue to me or our Department.

But, and this is probably where we disagree, in a sense, with

most of you here, in that we looked at this and made a decision

that it was going to take about a billion dollars more to get through

the end of this fiscal year—that is about 3 percent of our overall

budget—and for management to make some legally permissible

transfers to cover themselves to the end of the year seemed to me

to be prudent judgment and not an extraordinary thing to do. I

have that authority as the Secretary. I am tasked to inform the

Congress. I did that with letters to both bodies, and that is the way

we have proceeded.

So in the semantical realm, to those who say this is a crisis, I

do not agree. The defining job that we have at the VA is to take

care of our veterans and provide them with the world-class health

care service that they expect, that they are getting, and that they

deserve. So that is our mantra and we made a decision to use the

reserve that we had for that plus to use part of the money that was

allocated for maintenance and some capital acquisitions.

Chairman CRAIG. I understand reserve, the value of using that.

We will talk about that as we jump into 2006 and the move

through of that money. The capital issue, obviously, some have discussed that in their opening statements and I will let others pursue

that.

Dr. Perlin testified before the Committee in March of this year

that as of December 2004, 244,054 OIF and OEF veterans had separated from active duty. Approximately 20 percent of these veterans, 48,733, have sought health care from VA.

According to your testimony this morning, Mr. Secretary, the

2005 budget assumed only 23,553 veterans from the global war on

terrorism would use VA health care. It would seem, then, that you

knew very early on that your demand projections for returning OIF

and OEF veterans would be wrong. Why wasn’t that alarm sounded sooner?

Secretary NICHOLSON. Well, we did not get the hard data, the

confirming data for our model until after the first 6 months of the

fiscal year, and we have been tracking it on actual usage and we

were on plan. Then it began to spike since then, the 7th and 8th

and now in the 9th month. So we have gone back and looked at

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what that is versus what it was projected and it is a 126 percent

increase over what was projected.

The Operation Enduring Freedom and Iraqi Freedom portion of

that looks like 103,000 veterans. Many of those are returnees who

have been part of the Reserve component force who are eligible

now for VA services, and they are coming in in numbers far in advance of anticipation. In fact, because of the budget cycle, the data

used to project 2005 is 2002 and there was no Operation Iraq Freedom.

But as we tracked this, we realized, and have, we think, been

transparent about the fact that there was going to be a need for

transfer of a billion dollars.

Chairman CRAIG. Let me clarify and then turn to my colleague.

Of the number you just gave us, the 103,000, you are saying

103,000 servicemen and women who are eligible for or who are in

the system now?

Secretary NICHOLSON. That number that I referred to there was

just those eligible who are returnees from Operation Iraqi Freedom

and Enduring Freedom.

Chairman CRAIG. Eligible for services, but have not applied for?

Secretary NICHOLSON. No, those who have come in. They are all

eligible.

Chairman CRAIG. Come into the VA system?

Secretary NICHOLSON. Yes, sir.

Chairman CRAIG. OK.

Secretary NICHOLSON. They are all eligible under the law——

Chairman CRAIG. Yes.

Secretary NICHOLSON [continuing]. For a 2-year period. And

then, of course, if they have any service-connected——

Chairman CRAIG. Sure.

Secretary NICHOLSON [continuing]. Or actually, if they come in

and enroll, they are eligible, really, indefinitely. But I think I

should add for clarity that that is a large number, but that is not

the majority of our growth.

Chairman CRAIG. No, but you are saying that is new growth that

was not anticipated in the model?

Secretary NICHOLSON.Yes, sir.

Chairman CRAIG. OK. Thank you.

Senator Akaka?

Senator AKAKA. Thank you very much, Mr. Chairman.

Mr. Secretary, before Senator Murray and I offered our amendment to the supplemental, I want you to know that it was based

on our reaching out to providers in the field. They plainly told us

at that time about shortfalls and the raiding of capital accounts.

Some truly desperate providers shared spreadsheets with us, detailing the shortfall and what mechanisms they were using to stay

afloat.

At that time, the Senate was debating the supplemental bill, and

as you know, Senator Murray and I did offer amendments on increasing the funding for Veterans’ Affairs. In my case, I had recommended a $2.9 billion increase based on the information that we

had from the field. In your testimony this morning, you indicated

that you were aware that VA was facing financial problems back

in April.

22

Mr. Secretary, my question to you, was it possible that VA managers here in D.C. were aware of that crisis?

Secretary NICHOLSON. Senator, it is the fact, I think, that VA

managers were aware of—or became aware after we got the first

6 months’ look and then we started seeing it spike, that because

of that, there was not sufficient funds in the health delivery budget

to care for that increased demand on our health services. That is

where we made the management decision. It was about a 3 percent

transfer, which was to take the reserve funds and some of the

maintenance funds to get us through the end of the year.

I would also point out to you, because I think you mentioned it,

as did, I know, Senator Burr, that the money in this maintenance

account is not money for capital construction. It wouldn’t affect

that, does not affect that.

Senator AKAKA. Mr. Secretary, I am curious, curious as to how

exactly the supplemental funds are being distributed to the networks. Are they being allocated evenly through VERA, or through

some other mechanism driven by the central office? And does each

network need to submit a request to the central office?

Secretary NICHOLSON. I will answer that in a general way, Senator, and then ask Dr. Perlin to give you specifics. But we used the

VERA model, which is the Veterans Equitable Resource Allocation

model. It is based on the veteran population within the VISNs. So

we take the pie and see where the veterans are and it is allocated

to VISNs on that equitable model. I would ask Dr. Perlin if he

would like to respond in more detail to the second part of your

question.

Dr. PERLIN. Thank you, Mr. Secretary, Ranking Member Akaka.

As the Secretary stated, the Veterans Equitable Resource Allocation model distributes funds each year based on workload, based on

the complexity of patients. In this past year, there have been a

number of requests for additional resources in and above. That is

not unusual in any given year, that there are requests. I think Senator Murray knows that VISN 20 was exploring their requirements. We had a particular facility in the mid-South that suggested additional requirements. Our finance committee of the network directors actually reviews the resources and determines what

sort of resource requirements might be additionally needed.

Senator AKAKA. Mr. Nicholson, this whole situation really makes

the case for assured or mandatory funding. Please share with us

why you believe the current system of VA’s projections into the future is better than setting spending on a more guaranteed path.

Secretary NICHOLSON. I anticipated that you or that someone

who has expressed themselves on that might ask me that question,

Senator, and I have thought about that in a different way. As you

know, I think, our position has been pretty clear about that.

I think we all need to keep in mind what we are talking about

here. We are delivering this health care to the individual veteran.

There is no intermediary between us, the Federal Government and

that patient. There is no HMO. There is no third party provider.

It is us. So whatever comes in, we have to be able to administer.

We have to be able to take care of that patient.

I see this differently than I have, quite honestly, in the past. If

you had some mechanical formula of spending for the number of

23

veterans that came in and you multiplied that times those increases that we have just talked about, let us say the 103,000 from

the combat area, you couldn’t deliver. You would get the money

under your formula, but you wouldn’t have the facilities to take

care of them if you hadn’t gone through and tried to project what

it is going to be and anticipated it. You would have to do that.

You know, benefits, and we spend more money in the VA in benefits than we do in health care, and benefits are mandatory. Whatever it is, it is. But that is writing a check. Here, it is bringing

them into a facility and putting them in a bed and tending to them

with resources. So I don’t see how that would work.

Senator AKAKA. Thank you very much, Mr. Chairman.

Chairman CRAIG. Senator Murray.

Senator MURRAY. Mr. Secretary, when we offered the amendment to the emergency supplemental, we were basing that very

clearly on what we were seeing from our VISNs, what we were

being told, our preliminary looks at the mid-term budget review

that you are now going off of. Yet you wrote a letter to Secretary

Hutchison saying that there was not a problem. We had the information. We knew there was a problem. The VA was saying there

wasn’t. OK. We are here now. Do you think there is a problem?

Secretary NICHOLSON. I think that is a matter of definition.

When I wrote that letter to Senator Hutchison, we thought we had

a situation that we could handle, and I think that we were right

and——

Senator MURRAY. But do we have a problem now?

Secretary NICHOLSON. For 2005?

Senator MURRAY. Correct.

Secretary NICHOLSON. We certainly don’t have a crisis, no.

Senator MURRAY. Do we have a problem?

Secretary NICHOLSON. Well, I suppose——

Senator MURRAY. How much is it?

Secretary NICHOLSON. Well, we are talking about a billion dollars, but we have, as I have just said, Senator, we have the way

to take care of that within our 2005 resources.

Senator MURRAY. But we do have—we will get to that. We do

have a problem. It is one billion. I have heard 1.6, I have heard

1.4, I have heard 1. What is it?

Secretary NICHOLSON. For 2005, because this gets confusing——

Senator MURRAY. Well, we——

Secretary NICHOLSON [continuing]. 2005 and 2006. For 2005, we

are making transfers of approximately $1 billion.

Senator MURRAY. Approximately $1 billion for 2005. That doesn’t

even get to the 2006 problems.

Secretary NICHOLSON. That is correct.

Senator MURRAY. We are making transfers out of the construction account and of a——

Secretary NICHOLSON. Maintenance.

Senator MURRAY. Well——

Secretary NICHOLSON. Not capital construction.

Senator MURRAY. Mr. Secretary, we passed the 2005 budget. I have it here in front of me. You are talking about taking $600 million out of a $770 million, I think, $780 million account. I think

Congress and several Senators——

24

Chairman CRAIG. There is an operation and maintenance and a

capital account, two separate accounts——

Senator MURRAY. Correct. Mr. Secretary, how much is in the

maintenance account?

Chairman CRAIG. It is capital and——

Senator MURRAY. It is under construction, I believe is what you

have been saying in all your public statements, is the construction

account.

Chairman CRAIG. Let us make sure we clarify that. What are the

two accounts you are taking money from?

Secretary NICHOLSON. From medical facilities and from——

Senator MURRAY. Construction of medical facilities, I assume?

Secretary NICHOLSON. I think it is—excuse me—go ahead.

Dr. PERLIN. I think in the restructuring of the appropriations, it

came to three separate accounts, medical administration, medical

facilities, and operational dollars. It is not absolutely construction.

It includes some operational maintenance activities——

Senator MURRAY. But I have also heard, Secretary, you have

said——

Dr. PERLIN. There is a separate capital construction——

Senator MURRAY [continuing]. It will not affect the health care

of veterans. It will come from construction. I think the Senators

here have a right to know, since we are spending about $780 million out of the 2005 appropriations bill that we passed, if you are

not going to take it out of health care, you are going to have to take

it out of somebody’s facilities, whether it is Senator Ensign’s Nevada facility or whether it is the VA facility in Puget Sound or

whether it is the Texas CBOX. Whatever it is, it is going to not

happen.

These are funds that this Congress debated, we approved, we put

into our appropriations bill. You are going to go back and take that

money out and say we are not going to spend it. That is $600 million of your $1 billion problem, correct?

Secretary NICHOLSON. May I respond?

Chairman CRAIG. Please.

Secretary NICHOLSON. First of all, I respect—I know you are totally concerned about this. The fund from which we are taking that

$600 million was approved by the Congress——

Senator MURRAY. That is correct, in our appropriations.

Secretary NICHOLSON [continuing]. In an amount of $1.3 billion.

But that is not——

Senator MURRAY. Well, I will take your figure. Half of the

projects that we worked through, agreed in the Senate, agreed in

the House, went to conference, and approved——

Chairman CRAIG. Let us—I don’t want to interfere here or interrupt, but let us clarify. There is a capital account over here to build

new projects.

Senator MURRAY. That would be construction.

Chairman CRAIG. Then there is an O&M account that is both

O&M and maintenance, which includes construction within old

projects to modify them and modernize them.

Senator MURRAY. Correct, including asbestos——

Chairman CRAIG. Which of those two accounts are you borrowing

from?

25

Senator MURRAY. Including asbestos abatement and——

Secretary NICHOLSON. The latter.

Chairman CRAIG. The latter. So, in other words, if a new hospital

is planned and part of that is in the budget, that is not the account

you are borrowing from.

Secretary NICHOLSON. That is correct.

Chairman CRAIG. OK.

Senator MURRAY. So asbestos abatement that is happening in

some of our facilities. It will be projects where we have severe damage that needs to be replaced. Those kinds of accounts will not be

done? I know that you are not going to be able to hand this back

today, but I think we need to understand that is what we are talking about not funding this year, and those, I believe, are all critical

to the care of our veterans.

The other part of it you are talking about is this $400,000 surplus that I asked Dr. Perlin about that he said doesn’t exist, that

would actually, if it did exist, would be robbing from 2006, which

would compound the appropriations bill that Senator Hutchison is

currently putting in place.

I guess, Mr. Secretary, we have to be real about this. Every step

of the way, we have been told there is not a problem. There is not

a problem. If we paper this over today and are not real about what

our needs are, we are going to do a disservice to our veterans. We

need to know what the problem is for this year, $1.0 billion, $1.5

billion, and we need to take care of that, because Mr. Chairman,

if we don’t, that will defer all of these maintenance projects to

2006. We have already found out that the funding formula is incorrect at 2.3 percent. It is going to be more than that. Health care

costs have increased. We are going to have a problem.

If we defer all these maintenance problems until next year, we

are going to be sitting here 6 months from now, 1 year from now,

2 years from now, and we are going to have not just a $1 billion

crisis, we are going to have a $5 billion crisis. We need to make

sure that we put forward an accurate figure and we need from you,

Mr. Secretary, for the record, a list of the projects from that account, whatever you are calling it, as exactly what will not be done

if we don’t provide emergency supplemental funds this year.

Secretary NICHOLSON. We will—we can put together a list of

those kinds of things that you are talking about that are

intended——

Senator MURRAY. And what is the timing on that?

Secretary NICHOLSON [continuing]. That were intended for that

fund, yes, ma’am.

Senator MURRAY. What is the timing on that, because my guess

is with the $1.5 billion, whatever it is—and I have heard $1 to $1.6

billion is what I am now hearing—if it is that much, we can’t wait

until the last week of July or September to begin to address that.

We need to do it immediately, so when can we see this list of

projects that you, if we don’t come up with an emergency supplemental, will be deferred or not done?

Secretary NICHOLSON. I would say within a matter of days. We

will turn to it right away to develop that for you.

Senator MURRAY. I think that is critical for this Committee, and

I apologize for being rather angry, but I am rather angry.

26

Chairman CRAIG. Senator Salazar.

Senator SALAZAR. Secretary Nicholson, I would like you to speak

a little bit as to the actuarial modeling and the problems with respect to the modeling. As you explained what the shortfall is here

that we are facing and the adjustments that you are making, you

talked about how the budget that we are currently operating on

was based on the assumptions from the year 2002, prior to the engagements in Iraq and Afghanistan.

Secretary NICHOLSON. In Iraq.

Senator SALAZAR. In Iraq, OK. And then you later on said that

we have 103,000 returning veterans that are seeking assistance,

are eligible for assistance from that operation.

You are a businessman and a very successful businessman. It

just strikes me that for our Veterans Administration to somehow

not include into the actuarial model this reality that we are going

to have a significant surge in the number of veterans to take care

of coming out of both OEF and OIF is something that should not

have happened at all. So I was wondering whether you could comment on that.

Why did that, in fact, not happen, or why did the actuarial

model, and ultimately, it seems to me, that is a tool that basically

provides you with information on the kind of budgetary request

that you make. How did the Veterans Health Administration fail

to take into account this surge that we were going to have from

both of these operations that have involved so many of our men

and women?

Secretary NICHOLSON. Senator Salazar, they didn’t take it into

account because they didn’t know it. We are working right now on

the 2007 budget because we have to. We are sitting here in mid–

2005 and we only have preliminary data for 2005, so what we have

actual data is 2004. So the 2007 budget right now is being formulated based on 2004 numbers.

So if we back up to the 2005, which is what we have been talking

about now, that was based on 2002 for force. The timing of

that——

Senator SALAZAR. I understand that, that in 2002, obviously, we

did not know the level of engagement in either Iraq or Afghanistan

and the effect that that would have on our veterans. I understand

how the actuarial model is looking at what has happened in the

past and make projections into the future. But there is a sense of

reality that also hits the manager, and that is that we know and

have known since these two engagements that we are going to have

an increased demand on veterans’ health services for our country.

So why is it that the Veterans Administration from a management

point of view, as you were projecting your budgets, couldn’t make

those adjustments and only that that was a reality you were facing?

Secretary NICHOLSON. Well, I think those are——

Senator SALAZAR. And that is probably not——

Secretary NICHOLSON [continuing]. Good, logical questions, but

let me tell you, we monitor this all the time. For the first 6 months

of this fiscal year, we were right on plan even with Operations Enduring Freedom and Iraqi Freedom going on at the intensity that

they had been going.

27

Senator SALAZAR. So then is there a fundamental—you monitor

all the time, so we are not just looking at a number that was given

to us based on 2002. This is an ongoing monitoring of the needs

for veterans’ health care. So as you were monitoring, as this year

came along and now we have the $1 billion surprise, tell us how

we can avoid this problem in the future so that we don’t—and let

me not go back. We know we have a problem and you are correcting the problem with adjustments. There is an emergency supplemental that is going to be considered and we are going to try

to move forward.

But looking ahead, looking ahead, how do we change the actuarial model in such a way so that we don’t have this kind of problem in the future?

Secretary NICHOLSON. I think that is a very good question and

I was asked the same question this morning in the House. Given

these givens that we have of this long budget cycle, and we are

going to have to see if there is a better way to do that. This actuarial model—it is owned by Milliman and they have a very good

track record in the private sector with HMOs and other private insurers—it doesn’t model everything, by the way. It doesn’t model

long-term care, it doesn’t model prosthetics, and it doesn’t model

dentistry. And, in fact, dentistry is one of the material items that

has come up with these young folks returning from combat areas.

So we will have to, I think, take a look at what the—what somebody’s judgment is going to be about what it is going to be like.

Now, we are sitting here in June of 2005 and I am making commitments on the request side today, and we have a group working on

this right now, on 2007. Well, do you know what it is going to be

like in 2007 and what our demand is going to be vis-a-vis any combat going on and other increased propensity to use the VA, which

is really the majority of our phenomenon of growth? Is it that more

and more eligible veterans are coming in and using our facilities?

That is the challenge, is to see—and if we miss it, if we miss it

now because we are talking about 2007, we are going to have conditions like this where, in this case in 2005, we are about 3 percent

off. In 2006, because of what we now know that is happening, we

have not requested enough, and that is why we are talking with

OMB and you all about asking for more money for 2006.

Senator SALAZAR. My time is up, but let me just make this comment and this suggestion, Chairman Craig and Members of the

Committee. It seems to me that that is a very fundamental question that we need to work together on to address when we are looking ahead and wanting to make sure that we don’t miss the mark

next time. What is the soundness of this actuarial model? How is

Milliman going to help us make sure that we don’t have this problem in the future? What are the assumptions that are being made

in this actuarial model? How are those assumptions taking into account the numbers of veterans that we are getting back from Iraq

and Afghanistan that need the help of the veterans’ health system?

There are a whole host of questions around that very important

issue that I think it would help this Committee and it would help

the VA and certainly ultimately our veterans if we had a much better handle in understanding how we are making these projections.

Thank you, Mr. Secretary.

28

Chairman CRAIG. Thank you, Senator.

Senator Obama.

Senator OBAMA. Thank you, Mr. Chairman.

I would just say that Senator Murray and Senator Salazar

summed up, I think, a lot of the frustrations that I feel in this

process. I thought that Senator Salazar’s comment at the end was

constructive. How can we improve the system?

I have to say just a quick observation. It is surprising to me that

long-term care, prosthesis, and dentistry would not be included in

the modeling. Why we wouldn’t expect that there would be significant costs associated with those items is something that I am just

curious about, and maybe just very briefly, Secretary or Mr. Perlin,

can you just give me a sense of why wouldn’t we include such basic

items?

Secretary NICHOLSON. I would like to ask Dr. Perlin to respond,

Senator.

Senator OBAMA. Particularly something like prosthesis, where we

know that what is happening in Iraq is resulting in record numbers of amputees.

Dr. PERLIN. Thank you, Senator, for that question. Because they

are not actually in the actuarial model doesn’t mean they are not

budgeted for. Prosthetics is so very important that it is actually a

line item and the line item usage has gone up actually faster than

projected beforehand.

Your comments about long-term care are absolutely on target, as

well. Long-term care is something that should be projected, but to

date, there has been very little in the way of modeling for that. In

fact, now, we are beginning to contract with Duke University to develop long-term care actuarial projections and they will become

part of the models going forward.

As to dental, as well, dental is not a part of the standard benefits

package. It is very complex in terms of the eligibility for that. It

is so idiosyncratic that it would be impossible to model in the

standard actuarial projections.

But these things are, I assure you, accounted for in the budget,

because as you have rightly indicated, they are a critical part of

care.

Senator OBAMA. OK, well, let me say this, just to follow up on

Senator Salazar’s point. I think that there should be some time certain for some process or procedure whereby your office is reporting

back to this Committee very specifically in terms of how improvements are going to be made in this budget process.

I understand that budgeting is inevitably imprecise when you

have 2- or 3-year lag times in terms of your budgets and given the

magnitude of the Federal budget. But my sense is we know we can

do better than what we are doing right now.

And let me just add one other point on this, and that is a sense

of transparency in how this budget process works. Mr. Secretary,

this is not entirely directed at you, because as Senator Rockefeller

indicated, your hands are tied to some degree. But I will go ahead

and make the comment that this Administration seems to have a

chronic habit of understating costs during budget negotiations and

then suddenly we have, in the case of Iraq, $80, $90 billion emergency supplementals.

29

I don’t think the VA should get in that habit of emergency

supplementals. We should have a process where we are honestly

assessing the cost because I don’t think this is subject to politics

and I don’t think we should be trying to squeeze the budget just

to make the numbers look better and then have to scramble to

make sure that we have the resources.

One final question that I have specific to some of the issues that

I am hearing back in Illinois. I have heard some constituents complaining that veterans’ clinics have been reducing hours. Is there

any association to—if that is the case, is that one strategy to handle this shortfall? Are we reducing hours as a way of handling the

shortfall?

Secretary NICHOLSON. I will ask the Health Administrator to respond to that.

Dr. PERLIN. I will look into specific concerns in Illinois.

Senator OBAMA. OK. I would appreciate it, and this goes to Senator Murray’s important point. The bottom line is, are veterans

being impacted in terms of their health care? I would be deeply disturbed if it turns out that as a consequence of this, what you say

is managing this budget shortfall turns out to be simply scrimping

on the care that we are providing our veterans, so I would like a

specific answer to that.

Chairman CRAIG. Yes. Any additional questions that we don’t

have time for today will be handed in writing and we will get a response forthcoming. Thank you very much.

[The submitted questions follow:]

RESPONSE TO WRITTEN QUESTIONS FOR HON. R. JAMES NICHOLSON, SECRETARY, U.S.

DEPARTMENT OF VETERANS AFFAIRS, FROM SENATOR DANIEL K. AKAKA

Question: I would like a list of planned ‘‘non-critical capital expenses’’ that would

no longer be funded if the transferred $600 million is not replaced.

Response: The President submitted a supplemental request for fiscal year (FY)

2005 and a budget amendment for fiscal year 2006. With the resources provided

from the above, all needs, including those for non-critical equipment and non-recurring maintenance projects, known by VA will be met.

Chairman CRAIG. Senator Thune.

Senator THUNE. Thank you, Mr. Chairman.

Mr. Secretary, it seems like a lot of the—I am more concerned

with where we go from here and how do we fix this and how do

we make sure this doesn’t happen in the future, because this kind

of unpredictability and uncertainty and surprise obviously isn’t

well received up here, nor, I would think, is it received well by you

and your many facilities throughout the VA.

It seems like it comes down to having accurate data. I realize the

somewhat ambiguous nature of trying to make projections based

upon data that is dated, but doing a 2005 budget on 2002 data, or

a 2007 budget on 2004 data doesn’t seem to make much sense. I

know that the budgeting process around here, you are working out

there a ways. We are now working on the 2006 budget. But why

can’t we have more current data, and are you getting current data

from DOD, for example?

The question that was raised about amputees, we know, for example, that the number of amputees has gone from 3 percent to 6

percent as a result of this most recent conflict. Are you getting that

kind of information from DOD about the nature of the injuries that

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are out there and what the anticipated needs are going to be at the

VA as some of those folks start coming into the system? I just find

it hard to believe that we are going to be making decisions based

upon data that is 3 years old. That makes no sense. There has to

be a more—we ought to be able to capture more recent data on

which to base some of these decisions.

Secretary NICHOLSON. Senator, there is in most things, including

health care, there is a discipline and there is a system of metrics

with the people who develop these software programs, and this

company that we have been using now for 5 years, Milliman, has

a really solid track record. It is sort of uncanny how well they have

been able to predict what the growth is going to be on these big

systems, including the VA, up until 2005. They really were within,

I think, 1 percent of deviation either way, a little over 1 percent

1 year. So you have to have some basis from which to start to

project what your business demand is going to be out.

But we are in a unique business, and I think you raise a very

good point about DOD. We have been working with DOD and trying to get the best available release from active duty forecast that

they can provide us, because we are beginning to get a sense of the

percentage of these folks that are released that come back from the

combat theater that come in our doors. So that would be another

tool, and the sooner that we have it, as long as that ratio holds,

then we have another way to predict more closely what our needs

are going to be.

But it is complex and it is not an exact science, and it is something that we are just going to have to keep working on. But again,

as I said before, we are working right now on 2007 and trying to

develop the best data points that we can to make a good projection.

But I will have to say, because it is me. I mean, we are sitting

here and we are going to be sitting here in 2007 and I am off by

a billion dollars, I am—to me, that is not real unreasonable or, depending on how you respond to it, a crisis. In the 2005 context,

that is a 3 percent variation in a world that has changed quite a

bit.

Senator THUNE. Well, I guess the only thing I would say about

that is that I understand—and especially in 3 years, I mean, the

world can change dramatically in a 3-year period. And if you are

using information that is 3 years old when you are trying to make

projections—we have a hard time making projections around here,

obviously, from 1 year to the next.

But I just think that currency of information and data is going

to be critical in terms of trying to get a higher level of accuracy

going forward. So to the degree that we can be helpful in ensuring

that you all have—if the problem is getting information, good information—if there is some way we can compel that from DOD or

whatever, I just think that, Mr. Chairman, that is a big part of this

problem.

Is the shortfall distributed across all VA services? Is it medical

care? There are a whole range of things, of course, benefits, memorial and other services that are covered by the VA. Or is this just

specific to the health——

Secretary NICHOLSON. It is just health.

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Senator THUNE. OK. Well, I see my time has expired. I would

like to at some point pursue a question with respect to ideas that

you might have about alternative models of funding going forward,

too, because it seems to me maybe that there is some combination

of mandatory-discretionary funding that might help address some

of these issues so we don’t have this kind of uncertainty going forward. But I will explore that at another time. Thank you.

Thank you, Mr. Chairman.

Chairman CRAIG. Senator Jeffords, welcome.

STATEMENT OF HON. JAMES JEFFORDS, U.S. SENATOR FROM

VERMONT

Senator. JEFFORDS. Mr. Chairman, I greatly appreciate your

holding this hearing this morning, and I share your concern over

the situation. This news of a $1 billion shortfall in the veterans’

budget confirms what many of us have suspected for some time. I

don’t know why the Veterans Administration operated on such low

assumptions of patient growth in the face of clear evidence that

veterans from the conflicts in Iraq and Afghanistan were streaming

into the VA. We were hearing from the VISNs that they were going

to have trouble meeting projected needs.

I am also very disappointed that the Administration opposed our

efforts 2 months ago to add money to the Iraq supplemental for

care of our veterans. That was the time to fix this problem.

I am pleased that Senator Akaka and Senator Murray are moving to offer an amendment on the floor to provide additional emergency funding for the VA. I plan to cosponsor this amendment and

urge you to support it, also, as I expect you will.

I thank the Chairman for helping us to try to find answers to

this problem. We owe it to the veterans.

Mr. Secretary, I share my colleagues’ concern that we are not

meeting one of the Nation’s most sacred obligations, to care for the

wounds of those who have been borne in battle. I am also concerned that efforts to shift resources to treatment of Iraq and Afghanistan veterans will leave the system short of capacity to care

for the veterans already in the system. What about Priority 7 veterans? Does the VA need even more than the $1 billion so that

they can be covered, as well?

Secretary NICHOLSON. To get through the rest of this fiscal year,

Senator Jeffords, we are estimating a need for $1 billion because

of that surge in demand, both from returnees from the combat theaters and even more from other era veterans who have decided to

take advantage of their eligibility to use our services. The delivery

of health care is the No. 1 priority of the organization and continues to be. This transfer is coming, about 40 percent of it from

a reserve account and 60 percent of it from an operation and maintenance account to go into the health care account to ensure that

high-quality care continues.

Senator. JEFFORDS.Thank you. I am sure we will all be following

this very closely to make sure that our veterans get the care that

they need.

Thank you, Mr. Chairman.

Chairman CRAIG. Jim, thank you very much.

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Mr. Secretary, we are going to jointly solve this problem. We are

a bit unique in that—and you have heard two Senators refer to it—

we are in the midst of an appropriation bill on the floor and there

is angst and concern and there will be action taken during this moment in time, in the next day or day and a half, to resolve the current situation and possibly move us into a 2006 overview.

And so numbers are going to be tremendously important here, to

be as accurate as we can be so that we can put those numbers together. We are dealing with OMB. You have engaged OMB at this

moment and we expect some language to be forthcoming.

Here is my concern, because what you have basically said to us

is that the model didn’t work based on the standard and the input

and the dynamics of the environment in which you are currently

addressing needs. What I am sitting here thinking about, so that

we can stay current to the situation, because we have a dynamic

that is not modelable at this moment, and you are right to ask for

exit numbers and all of that as to how we make it more accurate,

dealing with a 2006 budget.

Therefore, maybe we are at a time when you and we need to do

a mid-year review collectively, concurrently, and to come back and

look at those numbers, anticipating, not fending off or fighting or

raiding other accounts, that there will be differences because we

think we are good, but we are not as good as we think we are in

relation to these models and the dynamics of health care, not the

other areas. Those are stageable. They are predictable. They are

controllable. But this is a new dynamic we are into.

So I would like you to think in that context as we address this

issue. I think that the question as to if we don’t address and resupply, I guess is a word I can use, the current accounts that you are

using, especially the O&M capital, what happens out there? Are

you canceling contracts? Are there a series of things that will happen as you pull money out of those accounts that would be

forthgoing, if there is any construction within these that are contracted out that you would be pulling? Do you know if that would

occur if this money is not replaced?

Secretary NICHOLSON. To my knowledge, we are not canceling

any contracts, Senator. Do you know, Dr. Perlin?

Dr. PERLIN. To the best of my knowledge, no, we are not. These

are deferment of repairs.

Chairman CRAIG. I appreciate that, but I was led to believe, Doctor, and maybe you can answer this, that some of these repairs

were quite significant and that you don’t just—and here we are in

the last 3 months of the budget cycle and you are pulling money

out of these accounts now. Was that construction underway? Is it

halted? Were there contracts canceled? How does that happen?

Dr. PERLIN. I think it is absolutely fair to say that we need to

invest in the infrastructure. I don’t think contracts were canceled

mid-course. There are probably certain things that were simply not

contracted for in terms of repairs.

Chairman CRAIG. OK. I would hope you would take a look at

that, because I am assuming that if you are going to do repairs in

July and August, the contracts have been let and those kinds of

things. Is that not the case?

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Dr. PERLIN. I don’t believe so, but as you rightly indicate, we

have to make the investments in the infrastructure for these repairs.

Chairman CRAIG. OK. We are going to determine here in the

Senate, because of the cycle we are in at the moment, we are going

to determine within the next 10 to 12 hours exactly what we are

going to do. So, Mr. Secretary, it is going to be awfully important

for you and your people and OMB to stay very connected with us

as we move through this. There is a vehicle on the floor that will

get amended. Already, there are two amendments up.

How that amendment is crafted to deal with 2005 and on into

2006 is going to be critical. Some would suggest we deal only with

2005. Others are suggesting we deal with 2005 and 2006, because,

if you will, we have a delay, as the Chairman spoke of, in Military

Construction-VA until the numbers are forthcoming so that we can

move, and we don’t want that delay to languish long, it might be

forthcoming today, and so we want to thank you for that.

I think the question that Senator Salazar has asked is the question that is the most opportune at the moment. We are going to fix

this problem, and there are dynamics in it that would suggest that

some of it was not in your control and obviously others would suggest that some of it might have been. But more importantly, we

have now recognized it. We now see it.

And there is one thing this Congress will do in a very bipartisan

way, and that is fund the necessary services to the veterans who

need them, period, end of statement. Whether we allow the reserve

to be depleted and moved through and be replenished in 2006 or

not is yet to be decided. But we will obviously serve those who are

in need.

Senator Salazar, do you have any other questions?

Senator SALAZAR. Just a brief comment, Mr. Chairman. First,

again, I applaud your leadership and I also have great confidence

in the intentions and the abilities of the people who are in charge

of the VA, including my friend, Secretary Nicholson.

I would suggest that as we get into this discussion about how we

move forward in the next few days that it is important that we

have accurate information on exactly what is going on. I would suggest that it might be useful for the Committee to have a letter with

a set of questions that we could get back, answers that we could

get back from the VA so that we are all operating off of the same

set of information.

For example, I would include in those questions the following:

One, the $1 billion budget adjustment that is underway for this

year, what specifically will that mean in terms of the projects and

the O&M part of the budget that will be impacted so that we will

know what we are talking about?

Two, when we look forward to the 2006 projections that have

come out of the actuarial modeling, what are we looking at in

terms of what those projections are? Are they still accurate? Are we

sure that all the assumptions are being dealt with in that actual

modeling?

Three, generally, with respect to the actuarial modeling, is it

something that we are comfortable with? What exactly is hapVerDate 11-MAY-2000 08:00 Apr 07, 2006 Jkt 024577 PO 00000 Frm 00037 Fmt 6633 Sfmt 6601 C:\DOCS\24577.TXT DianeA PsN: DianeA
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pening with the actuarial modeling to give us confidence that we

are going to have good predictions in the future?

I would say that it would be important for us, Mr. Chairman, if

you would find something that you want to undertake in this Committee, for us to try to get back together to see how we can move

forward together, because this is not a Republican problem. It is

not a Democratic problem. We may not call it a crisis yet, Secretary

Nicholson, but it certainly is a significant problem that I think has

gotten the attention of a lot of people and we have to move forward

as Republicans and Democrats, as executive and legislative branch,

to solve the problem onto the future.

Chairman CRAIG. I thank you for those suggestions. They are

very good ones. Let me suggest that all that we find out will be

very transparent and available to all the Committee Members and

any recommendations that I and Chairman Hutchison come up

with will be in full consultation with the Democrats on both of

those committees. We will both be involved in it as authorizing and

as appropriating, and I think that is tremendously important.

Whether we are effectively able to bring the committee back together or not is one thing. We may huddle in a corner somewhere

and share collective information prior to a decision being made.

But I pledge to you obviously full knowledge and transparency as

we move forward.

Senator SALAZAR. Thank you, Senator.

Chairman CRAIG. Mr. Secretary, gentlemen, Dr. Perlin, Mr.

McClain, thank you very much for being here this morning, as I

said early on in my opening statements, with the short notice involved, but I think you sense, as we do, the critical character of

this issue and that we get it answered. These are the kinds of

things that should not languish long, but when problems are understood and a clear picture of them is assessed, then for us to be

able to respond as quickly as we can is important for all of the parties involved.

So again, thank you very much. The Committee will stand adjourned.

[Whereupon, at 12:50 p.m., the Committee was adjourned.]

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