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[Senate Hearing 109-263]
[From the U.S. Government Publishing Office]

                                                        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

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                     COMMITTEE ON VETERANS' AFFAIRS

        .........................................................

                    Larry E. Craig, Idaho, Chairman
Arlen Specter, Pennsylvania          Daniel K. Akaka, Hawaii, Ranking 
Kay Bailey Hutchison, Texas              Member
Lindsey O. Graham, South Carolina    John D. Rockefeller IV, West 
Richard Burr, North Carolina             Virginia
John Ensign, Nevada                  James M. Jeffords, (I), Vermont
John Thune, South Dakota             Patty Murray, Washington
Johnny Isakson, Georgia              Barack Obama, Illinois
                                     Ken Salazar, Colorado

                  Lupe Wissel, Majority Staff Director
               D. Noelani Kalipi, Minority Staff Director

                            C O N T E N T S

                              ----------                              

                             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

 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 resources 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. 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 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.
    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 administration'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 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.''
    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 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 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.
    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.
    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.
    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.
    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, 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 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.
    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 long-term 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 2\1/2\ to 3\1/2\ years 
ahead of budget execution.
    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 mid-year 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 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 2\1/2\ 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 long-term-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 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 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.
    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 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----
    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?
    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.
    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.
    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.
    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.
    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 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.
    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.
    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?
    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 
happening 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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