tHE dEPARTMENT OF vETERANS aFFAIRS 

hEALTH cARE BUDGET mODELING AND

mETHODOLOGIES

Hearing

before the

Committee on 

Veterans’ Affairs

House of Representatives

one hundred ninth congress

first session

June 23, 2005

Printed for the use of the Committee on Veterans’ Affairs

Serial No. 109-12

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22-366.PDF
Committee on Veterans’ Affairs

Steve Buyer, Indiana, Chairman

Michael Bilirakis, Florida Lane Evans, Illinois, Ranking

Terry Everett, Alabama Bob Filner, California

Cliff Stearns, Florida Luis V. Gutierrez, Illinois

dan burton, Indiana Corrine Brown, Florida

Jerry Moran, Kansas Vic Snyder, Arkansas

richard H. baker, Louisiana Michael H. Michaud, Maine

Henry E. Brown, Jr., South Carolina Stephanie Herseth, South 

Jeff Miller, Florida Dakota

John Boozman, Arkansas Ted Strickland, Ohio

Jeb Bradley, New Hampshire Darlene Hooley, Oregon

Ginny Brown-Waite, Florida Silvestre Reyes, Texas

Michael R. Turner, Ohio ShellEy Berkley, Nevada

 Tom Udall, New Mexico

JAMES M. LARIVIERE, Staff Director

(II)
CONTENTS

June 23, 2005

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The Department of Veterans Affairs Health Care Budget

 Modeling and Methodologies ..................................................

OPENING STATEMENTS

Chairman Buyer ......................................................................... 

Hon. Lane Evans, Ranking Democratic Member ......................

Witnesses

Perlin, Jonathan B., M.D., Ph.D., M.S.H.A., Under Secretary

for Health, Department of Veterans Affairs .........................

Prepared statement of Dr. Perlin .............................................

Kokulis, John, Deputy Assistant Secretary of Defense for 

 Health Affairs for Health Budgets and Financial Policy .............................................................................................

Prepared statement of Mr. Kokulis ..........................................

Patterson, Kathi S., F.S.A., M.A.A.A., Senior Consulting Actuary, Milliman, Inc. .................................................................

Robertson, Steve, Director, National Legislative Commission

 The American Legion .............................................................

Prepared statement of Mr. Robertson ......................................

Vollmer, Douglas K., Associate Executive Director, Government Relations, Paralyzed Veterans of America .................

Prepared statement of Mr. Vollmer .........................................

Feeser, Tim, FSA, Principal, Reden & Anders, LTD. ..............

Prepared statement of Mr. Feeser ............................................

INFORMATION FOR THE RECORD

White Paper on the Independent Budget .................................

Copy of letter from VA Medical Center in Alexandria, LA .....

 

(III)
(1)

The Department of Veterans Affairs Health

Care Budget Modeling and Methodologies

thursday, June 23, 2005

U.S. House of Representatives, 

Committee on Veterans’ Affairs,

Washington, D.C.

 The Committee met, pursuant to call, at 10:30 a.m., in Room 334, 

Cannon House Office Building, Hon. Steve Buyer [Chairman of the 

Committee] presiding.

 Present: Representatives Buyer, Bilirakis, Moran, Brown of South 

Carolina, Miller, Evans, Filner, Brown of Florida, Michaud, Herseth, 

Berkley, and Udall. 

The Chairman. The full Committee on Veterans’ Affairs will come 

to order. Today, June 23, 2005, we will conduct a hearing examining 

the budget modeling and methodologies used by the Department of 

Veterans’ Affairs to develop veterans’ health cost and utilization projections for future years. This hearing will come to order.

 We are here today to examine the budget modeling and methodologies used by the Department of Veterans’ Affairs to forecast the cost 

of veterans’ health care and to project usage of the system for future 

years. The discretionary budget for health care accounts for about 

half of the VA’s funding. More than 7 million veterans are enrolled 

in the VA system, and 5 million of them currently use the system. In 

1996, before eligibility reform, there were about half that number in 

the system.

 Since 1996, there has been a 1,200 percent increase in the lower 

priority enrollees, veterans who have no compensable service connected disabilities, who are not catastrophically disabled, or who 

have higher incomes. That is a twelve-fold increase in utilization. 

And we are treating the nonservice connected injuries and illnesses 

of our service disabled veterans.

 In 1996, we did not see this coming. Yet, as anyone in the health 

care industry would tell us, forecasting is critically important to providing high quality care to those who are eligible to receive it. A budget is only as good as the data that informs it and the assumptions 

that are used to create it. And we must not only have good data, but 
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we must also have the right data, and we also must have the right 

assumptions in our forecasting. It is the heart of the budgetary process.

 The purpose of today’s hearing is to learn how we can more accurately forecast the health care demand. That job is complicated by 

operational challenges that we must acknowledge.

 I suggest forecasting challenges of the model include not only the 

economic assumptions that are used, the effects of eligibility reform, 

the rise in pharmaceutical costs, and uncertainties of demand in connection with veterans returning from the global war on terror, the 

wars in Afghanistan and Iraq in particular, medical inflation, dental 

costs, accurate and adequate collections, expenditures, et cetera.

 We must have a thoughtful and responsive process to ensure that 

health care will be there for our veterans. We must ask difficult questions today. We must question the assumptions, the data, the input, 

and assume that we can do better.

 Our dialogue should help shed light on this very complex process 

that is critical to the long-term vitality of the health system for America’s veterans. We owe our veterans the best of care.

 Today, VA will provides quality health care that in many respects 

is the envy of the medical community, and we must preserve that 

quality. And I am proud of the jobs that are done by the men and 

women, the employees who care for our veterans in the VA. In fact 

the VA’s new Under Secretary for Health, Dr. John Perlin, in his 

previous position was the first Deputy Under Secretary to regularly 

see patients at the Washington VA Medical Center. His new job has 

changed that a bit, but I understand that he has volunteered for the 

midnight shift, and I respect you for that. He exemplifies the very 

best and what is good about our system.

 It is the responsibility of Congress and this Committee to ensure 

that Dr. Perlin has the resources necessary to do his job. Sound 

health care forecasting is essential to doing precisely that, and I look 

forward to this hearing and the engagement of my colleagues.

 The only experience I share with my colleagues that I had with this 

prior to the TRICARE for Life, when we were under the CHAMPUS

and we had the military retirees going through base closures. We 

were trying to figure out health care budgets, and we had this huge 

ebb and flow of a ghost population in and out of the health system, so 

our modeling had tremendous errors. We had a very extensive hearing on how to improve that. Once we went to TRICARE for Life we 

also brought predictability into the system. I don’t know if you can 

call it a science. I suppose you can, you know, the science of health 

modeling, and then we can begin to be more accurate.

 What is often being done in this town is everybody throws and uses 

numbers out there with regard to our budgets. Let’s try to figure this 

out, and I have not seen that done in the 13 years I have been on this 
3

Committee. And so we are going to do this today. This will be hard. 

It will be a heavy lift. And I think by reading the statements last 

night, all of you have put a tremendous effort in this, and I appreciate your efforts.

 I now yield to Mr. Evans for opening statement.

Mr. Evans. Thank you, Mr. Chairman.

 Budgets are not just numbers. They order our national priorities 

and establish policy. Sometimes it is easy to forget the human component when we talk about these numbers. Sometimes it is hard to 

remember that often the numbers we use are poor substitutes for the 

reality we are trying to measure. I look forward to hearing from all 

of our witnesses that appear before us today.

 It is vitally important to accurately identify the real resource requirements of the VA health care system. It is vital that we then provide these resources free from arbitrary fiscal considerations. Sadly, 

it does not matter how accurate budget forecasts turn out to be, if 

those forecasts are not fully funded.

 I agree with the voices of veterans who across the country have 

called our attention to the disparity between what the VA needs and 

what it too often gets. There was a concern with the presidential task 

force which drew attention to, quote, current mismanagement, including the demand for VA services and funding. My Assured Funding bill would do just that by requiring the Federal Government to 

provide adequate funding based on the number of veterans enrolled. 

I am looking forward to the hearing on H.R. 515. I look forward to 

the day when we are developing and providing veterans with benefits 

based on their need and their support.

 Thank you, Mr. Chairman.

 The Chairman. Thank you, Mr. Evans. Any other colleagues have 

an opening statement?

 Mr. Filner.

Mr. Filner. Just a question, if I may, for the Chairman. Clearly, 

the balance of powers in the Constitution gives us oversight authority over the executive branch, and this hearing is very important for 

the VA to come to us and let us know how they are doing. I would 

associate myself with the remarks Mr. Evans made about the budget 

process.

 I frankly don’t understand the second panel. That is, we do not 

have oversight over independent groups. The motivation for this 

panel is suspicious to me. The American Legion can say anything 

they want about the budget, and we can ask them when they testify 

how they came up with those figures. But for us to put VSOs in the 

equivalent position of the VA and demand that they be here and explain how they did something seems to me a hidden agenda, or not so 

hidden, a pretty open agenda. On the record, I want to object to the 

structure of this hearing.
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Mr. Miller. Mr. Chairman, if I could ask Mr. Filner a question.

 The Chairman. You are recognized for an opening statement.

Mr. Miller. My opening statement is without fail, year after year, 

that the annual budget for VA Health Administration is subject to 

great debate and we all know that more and more veterans are relying on VA for their health care needs. And it is important that we do 

understand the Department’s methodology for forecasting health care 

costs and utilization projections. I do look forward to hearing from all 

of today’s witnesses, and I do have a question for Mr. Filner.

 I must be blind, but I don’t understand. What do you think the 

agenda is with the second group of folks? I am sorry.

 Mr. Filner. If the gentleman would yield, the Chairman has taken 

issue with the legitimacy of the Independent Budget in open hearings 

where some of us have used it as a Bible, and he wants to undermine 

the credibility of the Independent Budget in my view.

Mr. Miller. You may be a little mistaken when the hearing is 

over, but we all question the validity of the Independent Budget. So I

put myself and associate myself with the Chairman in this particular 

case.

The Chairman. Does the gentleman yield back? Ms. Brown.

Ms. Brown of Florida.Thank you, Mr. Chairman. I want to thank 

all the witnesses here today to enlighten us as to how they determine 

future costs. I appreciate your explanations. But all of this discussion 

does not get to the root of the question. Every year the VA does its 

budget modeling, OMB has its views as to what the numbers should 

be and the Independent Budget comes out with its own numbers.

 It seems almost as if everyone agrees that the VA needs more funding to complete its mission, the mission being to provide the best 

health care to our nation’s veterans.

 Everyone is discussing numbers. How can we cut costs, save a 

little bit here, cut some fat there? We are talking about people, and 

many of them come to my office. Are we budgeting for better health 

care for our veterans or are we budgeting for saving money?

 The Independent Budget comes out with its estimates every year. 

A coalition of veterans groups get together and figure out what veterans need. The President comes out with his budget every year. This 

budget effects every aspect of our lives, and he decides to pay for the 

war in Iraq on the backs of our veterans.

 The Independent Budgets say that we need an additional $3 billion, and I don’t disagree with them. How can these two numbers be 

so different?

 Everyone begins with the same starting point. There is a known 

number of veterans and a procedure costs X amounts of dollars. What 

happens to the VA’s numbers after they are modeled when OMB gets 

ahold of them and cuts it by almost 90 percent? I mean the budget 

that VA starts out with and then when it goes to OMB, it is totally 
5

different. What is the rationale for cutting veterans benefits?

 Whether the veterans have a service connected rating of 100 percent or is Priority 8 and not homeless, each served his or her country 

honorably and deserves care from the VA.

 I am hoping that this Committee can get back to its purpose of 

serving the veterans. We are independent from the administration, 

and we should act that way.

 I yield back the balance of my time.

The Chairman. Mr. Brown.

Mr. Brown of South Carolina. Thank you, Mr. Chairman. I would 

like to thank you and the Ranking Member for holding today’s hearings and highlighting an issue that I think is critical for all veterans, 

health care costs modeling and appropriate funding for health care 

of the VA.

 First, Mr. Chairman, let me begin by welcoming and congratulating 

Dr. Perlin on his recent nomination and confirmation for his position 

of Under Secretary of Health at the VA. I believe that his assumption of that post marks an important milestone as this Committee 

continues to work with the VA to improve the quality of care provided 

to our Nation’s veterans. So again welcome and congratulate you, Dr. 

Perlin.

 In addition to Dr. Perlin, I believe we have two panels of folks here 

today that can help us better understand the efforts that VA goes 

through in determining how much funding is annually required to 

maintain the excellent care VA is providing nationwide.

 It is my hope that my colleagues will come away today with a better 

sense of two important issues: Number one, the inherent challenge 

that faces those who try to accurately forecast the demands for care 

inside the VA; and number two, the level of strain it puts on the Department and our veterans when those projections fail to meet the 

mark. To that end I am interested in hearing today how the VA’s 

modeling process compares to that of the Department of Defense, the 

Independent Budget, the American Legion demand model, and finally to help us look towards the private sector to gauge health care 

costs and demand for medical services.

 More importantly, I want to explore how the VA can become more 

efficient in accurately engaging the demands for health services and 

how we as Members of the Congress can be assured that our veterans 

will continue to receive the level of care they have come to rely on.

 Mr. Chairman, again I thank you and Ranking Member Evans for 

holding this hearing today. I look forward to the testimony of our 

panels in the hopes that we can explore the modeling process today. 

We continue to remember that the numbers are important, but our 

main concern should always be that our veterans are treated with 

respect and afforded the level of care that VA has become so efficient 

in providing.
6

 Thank you, Mr. Chairman, and I yield back the balance of my 

time.

The Chairman. Thank you, Mr. Brown.

 Ms. Berkley.

Ms. Berkley. Thank you, Mr. Chairman. I also think this is a very 

important hearing today, and I am very delighted that we are discussing the VA budget process and the modeling used to determine 

the future needs of our vets.

 As you have heard me say on many occasions, southern Nevada 

has one of the fastest growing veteran populations in the country. 

Over 50,000 of my veterans depend on the VA for their health care 

needs. Every year it is very difficult going back home after our hearings and explaining to my veterans that their service organizations’ 

projections and the amount of money that we know it would require 

to take care of our veterans adequately is not what we are voting on. 

They don’t understand the disparity and they don’t understand the 

difference.

 Not only in my opinion should the VA use the most accurate tools to 

determine what veterans’ needs will be in the future but we, Congress, 

must provide the resources that are necessary to provide health care 

services to our veterans, and I can never get out of my mind when we 

had hearings with then VA Secretary Principi and somebody asked 

the Secretary after he made his presentation on how much money 

he was requesting of Congress to satisfy the health care needs of the 

veterans. The question was asked, is this the amount that you presented to the President? His response was no. And apparently his 

presentation to the President had requested at least, if I am not mistaken, $1.2 billion more than he actually presented to Congress.

 Mr. Filner. Would you yield on that point?

Ms. Berkley. Yes, I will yield.

Mr. Filner. You bring up the key question that is going to be neglected on the first panel. I would ask the Chairman if he invited 

OMB to be here because it doesn’t matter what the VA models. If 

OMB says no, OMB has the word on what the budget is going to be, 

and these models do not matter. OMB makes that decision, and we 

ought to be checking that; this is what we ought to be doing.

 I yield back.

 Ms. Berkley. Thank you, Mr. Filner. And if I could reclaim my 

time, although I agree very much with what you are saying, I am also 

very concerned with our returning soldiers. The VA has treated more 

than 85,000 of the 360,000 veterans from Operation Iraqi Freedom 

and Enduring Freedom deployment as of May 2005.

 Mr. Chairman, I have another protocol hearing for IR that I have to 

be at by 11 o’clock, but I have a question that I would like to submit, 

and I am very sorry I am not going to be here to listen to this.

The Chairman. Mrs. Berkley, do you have it?
7

Ms. Berkley. Yes.

The Chairman. Why don’t you ask it? They will write it down.

Ms. Berkley. Great. If you can incorporate this into your comments, I would like to know how the VA is ensuring that returning soldiers are being put in these models and ensuring that they 

accurately project and provide the needed resources for these new 

veterans in the VA health care system. Southern Nevada is going 

to be overwhelmed by people coming home from Iraq, and not necessarily our current residents, but that is the place that the returning 

veterans are going to be moving, and we are going to need to ensure 

that we have the adequate resources for the needs of these veterans. 

And I suspect that they are going to be extraordinary needs, not only 

physical, but mental as well.

 And I thank you, Mr. Chairman, for your courtesy.

The Chairman. Thank you. Any other opening statements? Mr. 

Michaud. 

 Mr. Michaud. Thank you very much, Mr. Chairman. I would like 

to thank you and Ranking Member Evans for having this hearing. I

am looking forward to hearing the panel. I believe that budgets are 

a reflection of our priorities, Mr. Chairman. In the interest of time, I 

would ask that my opening statement be submitted for the record.

 The Chairman. Without objection.

 Any other members have opening statement to be submitted for 

the record?

 Hearing none, what I would like to do for my colleagues -- I don’t 

normally do this, but I am going to introduce each one of these individuals that are in front of us on the first panel and I will also introduce right now the second panel and explain an opportunity that 

we have to be very constructive in the process here. And the reason 

I need to do this is the second panel is the Independent Budget and 

the American Legion that operates outside the Independent Budget. 

As we all know, under the rules the minority has rights and we in 

cooperation decide who the witnesses are going to be and the second 

panel is the request of the Democrats.

Dr. Jonathan Perlin serves as the Chief Executive Officer of the 

Veterans Health Administration, the country’s largest integrated 

health system. Dr. Perlin recently was sworn in as the current Under 

Secretary for Health in the Department of Veterans’ Affairs, having 

served as acting in that role since April of 2004. He has a background 

in health care quality management, health information technologies, 

medical education, and health service research.

 To his right is Ms. Rita Reed. She manages and directs all VA budget activities as the Deputy Assistant Secretary for Budget. She is 

responsible for managing over 68.5 billion under the fiscal year 2005 

enacted budget. Ms. Reed has worked on budget issues since she 

started with VA in 1978.
8

 We also have directly in front of me Mr. Jimmy Norris. He serves 

as the principal financial advisor to the Under Secretary for Health 

in his role as Chief Financial Officer of the Veterans’ Health Administration and he oversees the budget formulation, justification and 

execution process of the VHA, as well as the financial management 

systems.

 Over here on our far left is Mr. Arthur Klein. He oversees the actuary’s health care demand model and its integration into development 

of health care policy, impacting VHA as the Director of Policy Analysis and Forecasting Office in VHA’s Office of the Assistant Deputy 

Under Secretary for Health for Policy and Planning.

 We also have to the right of Mr. Norris, Mr. John Kokulis.

Mr. Kokulis. Yes.

The Chairman. To our right is Mr. Norris.

 He serves as the Deputy Assistant Secretary of Defense for Health 

Budgets and Financial Policy, and is the Chief Financial Officer for 

the TRICARE management activity.

 He is also the principal staff assistant and advisor to the Assistant Secretary of Defense for Health Affairs for all financial policies, 

programs and activities for the military health system in the Department of Defense. He also provides the medical financial interface 

between DOD and VA.

 To his right -- his left, as I appear to the right -- is Ms. Kathi Patterson. She serves as a principal and consulting actuary for Milliman 

Incorporated with a background of 19 years in health actuarial experience. She leads this company’s practice in research and analysis 

of veteran data as an expert in actuarial modeling for the veteran 

population. That is our first panel.

 So let me now yield to Mr. Perlin.
9

STATEMENTS OF THE HON. JONATHAN B. PERLIN, M.D.,

 PH.D., MSHA, FACP, UNDER SECRETARY FOR HEALTH, 

 DEPARTMENT OF VETERANS’ AFFAIRS; ACCOMPANIED BY

 RITA A. REED, DEPUTY ASSISTANT SECRETARY FOR BUD-

 GET; JIMMY A. NORRIS, VHA CHIEF FINANCIAL OFFICER;

 ARTHUR J. KLEIN, DIRECTOR, POLICY AND FORECAST-

 ING SERVICE; THE HON. JOHN KOKULIS, DEPUTY ASSIS-

 TANT SECRETARY OF DEFENSE FOR HEALTH AFFAIRS

 FOR HEALTH BUDGETS AND FINANCIAL POLICY, DEPART-

 MENT OF DEFENSE; KATHI S. PATTERSON, F.S.A, M.A.A.A.,

 SENIOR CONSULTING ACTUARY, MILLIMAN, INC. 

STATEMENT OF THE HON. JONATHAN B. PERLIN

Dr. Perlin. Good morning, Mr. Chairman, Ranking Member Evans, members of the Committee.

 First, let me start by thanking you for your support to veterans and 

the VA and the opportunity to be here this morning to discuss the Department of Veterans’ Affairs actuarial health care demand model.

 Mr. Chairman, I will present a summary of my testimony with your 

approval and submit my full statement for the record.

The Chairman. No objection. So ordered.

 Dr. Perlin. Mr. Chairman, the Veterans’ 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 whether resources 

are available to provide timely quality care for all enrollees.

 In the past VHA budgets were based on historical expenditures 

and were adjusted for inflation and then increased based on proposed 

new initiatives. With the implementation of eligibility reform and a 

shift to ambulatory care, VHA needed to more rationally budget for 

veteran requirements in the transformed health care system. We 

also needed to be able to continually adjust budgetary projections for 

the effects of shifting trends in the veteran population and health 

care delivery.

As a result, the VA engaged the firm of Milliman, Incorporated to 

produce actuarial projections of veteran enrollment health care utilization and expenditures. Milliman consults to health insurers and 

as such is the largest and most respected actuarial firm in providing 

actuarial health care modeling.

 The VHA Enrollee Health Care Demand Model develops estimates 

of future veteran enrollment and the enrollees’

expected utilization for 55 discrete health care services, the costs associated with that utilization. These projections are consolidated and 
10

are available by fiscal year, enrollment priority, age, VISN, market 

and facility and are provided for a 20-year period.

 The actuarial data are then used to support budget planning and 

future resource requirements. Because of the federal budgeting process, data are used for budget planning approximately 2 to 3 years 

forward. Of course, the near term projections, such as for the oneyear window, are more reliable than further out.

The model provides risk adjustment and reflects enrollees’ morbidity, mortality and their changing health care needs as veterans age. 

Because some enrollees have other health care options, the model 

reflects how much care enrollees received from the VA health care 

system versus that of other health care providers. And this concept 

is knownas VA reliance.

 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 data inputs on 

the model and the modeling methodology. On average for the past 

3 years, patient projections have been within minus 0.6 percent of 

actual patients and enrollee projections have been within plus 1.9 

percent of actual enrollees. There might be slightly more variants 

this year, and in a system as large as VA a modest percentage change 

equates to a very large number of veterans.

 Some services the 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 characteristics of the enrollee 

population and known reliance factors to account for such attributes 

as distance, multiple eligibilities, and case management and then to 

project demand for both nursing home care and community-based 

care.

 In conclusion, the development of the actuarial model has been 

an evolutionary process. Future planned improvements include access to data on enrollees’ use of Medicaid, TRICARE and the military 

treatment facilities, as well as the integration of the VHA long-term 

care modeling into the actuarial model and modeling of additional 

services such as dental care.

 Mr. Chairman, the VHA enrollee health care demand model is a 

valuable budgeting and planning tool for projecting VHA health care 

utilization to ensure that VA can provide safe, effective, timely, efficient and compassionate health care to veterans. We combine VA’s 
11

substantial experience with a contractor with unrivaled expertise in 

health care modeling to achieve best actuarial projections possible.

 This completes our statement. We would be pleased to answer 

your questions.

 The statement of Dr. Perlin appears on p. 46]

Mr. Miller. [presiding.] Mr. Kokulis.

STATEMENT OF THE HON. JOHN KOKULIS

 Mr. Kokulis. Mr. Chairman, and distinguished members of this 

Committee, I want to thank you for the opportunity to discuss modeling and budgeting for health care costs in the Military Health System. We have three distinct missions in the MHS: First, to deploy 

a healthy military force; second, to deploy a ready medical force; and 

third, to manage our beneficiary care through the administration of 

our TRICARE benefit. In my statement here today I will focus on our 

forecasting and our modeling of the TRICARE benefit since it makes 

up the largest portion of our MHS budget.

The Department of Defense offers the TRICARE benefit to approximately 9 million eligible beneficiaries. 19 percent of this population 

is made up of uniformed services personnel. Their family members 

make up another 27 percent and retirees and their family members 

and survivors account for the remaining 54 percent.

TRICARE offers our beneficiaries a variety of options for attaining 

this health care coverage. Beneficiaries can obtain health care coverage at a military treatment facility, from a civilian provider who is 

part of our private sector network, or from a certified civilian provider 

of their choice. Our beneficiaries can also obtain their prescriptions 

through our MTFs, through retail outlets or through our TRICARE

mail order pharmacy.

 The challenges we face as we prepare our annual budget requests 

include predicting how many of our eligible beneficiaries will use the 

TRICARE benefit, what options they will select, how often they will 

require care and prescriptions, what inflation rates will impact on 

procurement of services, and the impact of recently enacted changes 

in benefits.

 In developing projected trends for these underlying care costs our 

analysis includes consideration of the following: An actuarial forecast of our population for the coming year; second, recent trends in 

our contractors’ health care costs due to the attraction of new users, 

volume trends and inflation; third, recent and projected trends in private sector health plans and the national health care sector in general; and fourth, effects and changes in the TRICARE program itself, 

such as benefit changes, changes in provider reimbursement policies 

and contract transitions.
12

 Using our claims database, we then decompose the historical trends 

in these underlying health care costs to determine what factors would 

be ongoing versus one-time events. These factors includes the global 

war on terrorism, changes in the number of TRICARE eligibles under 

the age of 65, changes in the percentage of that group who actually 

use TRICARE, and changes in the cost per user, including changes in 

unit costs and the volume of services per user.

 In addition, we assess the forecast growth in pharmacy, both for 

increase in users and increase in unit price. These methodologies 

enable us to construct a forecast for our expenditures for the coming 

year.

 Given the growth and volatilities of these expenditures our department is engaged in the continuous effort to reduce our costs and 

improve the predictability of our obligations. These activities have 

included: One, a consolidation and realignment of the TRICARE

health care regions from 12 regions down to three, allowing us a more 

streamlined administration of those plans and enhanced portability 

for our beneficiaries; second, a movement to performance based budgeting for our MTFs with a phased implementation of a new prospective budgeting approach. We intend to base MTF budgets on 

workload output such as hospital admissions and clinic visits rather 

than relying on historical resource levels such as number of staff employed, supply costs and other materials. Once fully implemented, 

prospective payment should allow us for better management performance at our MTFs.

 And third, the redesign of our pharmacy program into a single integrated program allowing us to more effectively manage this effort. 

We are also standardizing formulary management and are promoting 

the use of more cost effective products and points of service.

 In addition to these and other activities, we are also actively working with the Department of Veterans’ Affairs where we can share 

resources to increase access, improve quality and more efficiently deliver the health care benefit to our beneficiaries. We currently have 

12 projects being funded this year from our joint DOD-VA intensive 

fund.

 In summary, the Military Health System has many factors that 

drive its annual expenditures. The Department has made progress 

in our efforts to better forecast and control these expenditures and 

will continue these efforts in the future. There is more work to be 

done. Through it all we will continue to focus on job one, which is to 

appropriately fund our medical readiness requirement and to provide 

exceptional care to our active duty personnel, their families and our 

retirees who have sacrificed so much for our country.

 Thank you, Mr. Chairman, for inviting me here today, and at your 

convenience I will be happy to respond to your questions.

[The statement of Mr. Kokulis appears on p. 56]
13

The Chairman. [presiding.] Thank you very much. I don’t know 

the answer to this. I just have to ask, with regard to your budgets, 

when we did one of the supplementals did you participate, did DOD

Health participate in one of the supplementals we sent over to the 

VA for 2005? For the 2005 supplemental, did you give monies out on 

supplemental?

Mr. Kokulis. Yes, we did.

The Chairman. Do you remember in what amount?

Mr. Kokulis. I want to say it was approximately $680

Million.

The Chairman. 680 million.

Mr. Kokulis. Yes, for the GWOT supplemental.

The Chairman. Now you are transitioning to a performance based 

budgetary methodology?

Mr. Kokulis. Yes.

The Chairman. And your provider methodology was more demand?

Mr. Kokulis. It was more based on what is your historical cost.

The Chairman. Trends, simplify it.

 Mr. Kokulis. And now we are actually saying okay, what workload 

are you doing in terms of number of visits, hospital visits, number 

of clinic visits, and then taking a reimbursement rate based on the 

private sector and then reimbursing the MTFs for those visits versus 

paying them on a historical average.

The Chairman. So the VA and their model, do you have any knowledge about their modeling? Just basically what you know.

 Mr. Kokulis. No. I joined the DOD in April so I am busy ramping 

up on my own.

The Chairman. Have you read Dr. Perlin’s testimony?

Mr. Kokulis. I have not.

The Chairman. Your model, is it a one year?

Mr. Kokulis. No. We actually go out many years. It is like Dr. 

Perlin says, a 3-year look in terms of our obligation.

The Chairman. This is two and a half?

Mr. Kokulis. Yes, but basically when you get into -- the key to our 

whole modeling is that actuarial forecast of your population, and that 

is really where you got the granularity so that you can have some 

numbers that you can have some confidence in, and that is really a 

12-month look.

The Chairman. Ms. Patterson, the private sector is what you use 

for your model?

Mr. Kokulis. Private sector. You do your 3-year plan or -- 

The Chairman. Ms. Patterson.

Mr. Kokulis. I am sorry.

[The statement of Ms. Patterson appears on p. 69]
14

 Ms. Patterson. I am sorry. It is more typical to budget out for one 

year rather than 3 or 5 or 10.

The Chairman. Your company does budget contracting for a lot of 

the private health systems in the country, does it not?

 Ms. Patterson. That is correct.

 The Chairman. So in the private sector when it comes to for profit, 

they are doing it for one year. So DOD is doing a 3-year model and 

VA is doing a two and a half year model?

Dr. Perlin. Two and a half to 3-year window.

The Chairman. Two and a half to 3 window, all right.

 With regard to DOD’s budget, you participated in this supplemental in 2005?

Mr. Kokulis. Yes.

The Chairman. Did you participate in the supplemental in 2004 

and in 2003?

Mr. Kokulis. I will have to take that for the record and get back to 

you. I am not sure.

[The information follows: Yes. In 2004 we received $658 million 

and in 2003 we received $596 million.]

The Chairman. I know that that operations, OIF, OEF, are having 

some strains on your system, are they not?

Mr. Kokulis. They are definitely.

The Chairman. And so 680 was your bogey that we have to plus 

up?

 Mr. Kokulis. Yes.

The Chairman. Any other with regard to your modeling in your 

trends and forecasts or methodologies; as you move to this new model, were their errors or corrections or things that you needed to do 

for better forecasting? Because we already gave you, we passed your 

2006 budget. So are you in a little more comfort?

Mr. Kokulis. There are always things that pop up such as emerging requirements, whether it be all of a sudden we need a Tamiflu 

vaccine for avian flu virus. And that is an emerging requirement 

that has to be funded and we have to find offsets. But as far as the 

implementation of prospective payment, we are in its infancy and as 

we roll it out and do lessons learned on ourselves what we are finding 

in the initial round is we did a poor job on incorporating readiness.

 We have a dual mission. We have the regular health care mission, 

and then you have readiness. So we get into what is the cost of readiness and how do you reimburse the MTFs for things they are doing to 

prepare the troops as they get prepared for battle. So we need to do 

a better job there.

The Chairman. So Dr. Perlin, now that we recognize that the military health delivery system was short about 680 million covered in 

the supplemental appropriations, in practical terms, if OIF and OEF
15

contribute to actuarial and budgetary challenges for fiscal year 2005 

or 2006 within DOD, it has got to be there for you too.

Can you please comment on OIF, OEF’s challenges with regard to 

what it is doing to your budget forecasting.

Dr. Perlin. Sure. First, we are proud, privileged to take care of 

our U.S. Combat veterans. In the last few years we are aware, as we 

testified, in a recent period of seamless transition that as of -- in April 

we were aware of 360,674 separated from service in that period. Of 

that, as of in April, about 85,857 had presented for care in VA. Most 

of them are the issues of the younger generation, and another 17,274, 

so together in excess of 100,000, that 17,000 had presented to our 

Veterans Readjustment Counseling Center. Two and a half to three 

and a half years ago when this budget was formulated, there would 

have been no way to predict that these combat veterans would have 

come to VA.

The Chairman. Let’s break it out. Part of the medical services that 

you are providing for them, part of this surge in utilization is coming 

from what?

Dr. Perlin. Sir, it ranges the spectrum. Unfortunately, the majority of young men and women coming to us come with the issues and 

illness of that age. We are prepared for and have taken care of additional mental health care needs and there are a number who are 

grievously injured and that we provide very intensive care, rehabilitation to those.

The Chairman. And is it not true there is a trend with DOD right 

now, saying with regard to guardsmen and reservists, that see, Congress has said, “Tell you what, we will open up the VA, we will take 

care of these guardsmen and reservists and give them access to the 

VA.” We recognize that was in not in your budgeting forecast, okay. 

But with regard to dental, what is happening?

Dr. Perlin. Well, we are working together with DOD. It is very 

close collaboration. But there is a difference between dental health, 

which VA is helping to restore, and operational readiness. In the 

area of dental we have collectively identified a number of $90 million 

of unanticipated dental health care needs in this alone.

The Chairman. If you have identified 90 million that you didn’t 

anticipate with regard to dental and you have got this surge in medical utilization from these other soldiers that are now accessing your 

system, have you been able to put a number on that?

Dr. Perlin. We are working on identifying a number, but obviously 

we are using additional resources that we didn’t anticipate at the 

time that we budgeted two and a half years ago.

The Chairman. I know, my colleagues, I have exceeded my time. 

If I could go for two more questions, because I think we are getting 

close here.

 With regard to your forecasting, you are two and a half years out, 
16

you have some challenges today that were not anticipated. Does the 

VA usually do a midyear review? Do you not?

Dr. Perlin. Yes, sir we do.

The Chairman. With regard to your budgets, you make sure how 

you are going to do right?

Dr. Perlin. Yes, sir.

 The Chairman. Congress, authorizes DOD to be able to have a carryover, right?

 Mr. Kokulis. Yes, 2 percent.

The Chairman. What do you carry over?

 Mr. Kokulis. Two percent.

The Chairman. Two percent, which is actually 400-plus million?

 Mr. Kokulis. 298 million this year.

 The Chairman. Normally it will carry over?

 Mr. Kokulis. For next year it will be approximately 350 million, so 

close to your 400 million.

The Chairman. What is your normal carryover, Dr. Perlin?

 Dr. Perlin. 2006 we had anticipated bringing forward $482 million. At this point we have assessed and we think it will be closer to 

75, perhaps as low as 50 in that particular account.

The Chairman. Because of some -- 

 Dr. Perlin. Unanticipated increased utilization has committed us, 

unanticipated by the actual model, increased health care associated 

in part with new combat veterans coming to us for service, as well 

as unanticipated increase because of projections that weren’t on the 

mark from the actuarial model required us to use resources that at 

the point of budgeting had been intended to carry forward and, to be 

fair, we are bringing all resources to make sure that we can provide 

timely and effective care to veterans. That is going beyond their budget projections for 2005 as well.

The Chairman. Can I keep going for a second?

 How far off do you believe you may be from, you know, the contracted model that you have to where we are potentially right now?

 Dr. Perlin. Right. Well, this is the most rational and effective 

way to predict. I think we have to realize that we are pushing the 

performance envelope on this model. As Ms. Patterson said, it is 

at its best when one projects in the immediate year ahead, because 

with the Federal budgeting process we are projecting two and a half 

to three and a half years ahead, and in fact the plan was for 2.3 percent growth and the actual growth is 5.2 percent. And that is at 2.9 

increase, annualized. We have had some months this year where we 

are headed further to 3.4 percent ahead. I know 3.4 percent sounds 

pretty darn good on an actuarial model, and it is, but that small number translates into a very large number of veterans.

The Chairman. A large number of veterans, large with regard to 

projected dollars. You know, if you project this out between now and 
17

the beginning of the next fiscal year, you are going to have to be moving some monies around in order to maintain the quality of care and 

the access of care to those veterans. So you are going to have to be 

moving some funds, are you not?

Dr. Perlin. That is correct.

The Chairman. And you know about how much or from what sources you are going to be able to do that?

Dr. Perlin. Right, in addition to using resources which had been 

intended to be carryover, we have used some of the funds associated 

with capital, of nonrecurring maintenance. Now I do need to tell you 

that after 4 years of very robust support by the administration we 

have invested in the infrastructure, but this year we are using some 

of those capital dollars to make sure that we provide timely care to 

the veterans who are coming to us.

The Chairman. Right now based on your testimony, if we take about 

80 on dental and you talk about the carryover, around 350, we are approaching half a billion.

 Are there some other challenges out there that we don’t know about 

with regard to getting to the fiscal year end, maybe a surge from 7s 

and 8s or something else?

Dr. Perlin. There appears to be increased utilization among -- you 

referred to the concept of ghost users. What we have, the patients 

who use the system and the enrollees there appears to be very instrumental as well in terms of the relationship of patients to enrollees, 

with greater utilization there as well.

The Chairman. And are you able to give a projection dollar figure 

that you are going to have to use from potential capital accounts, as 

you indicated?

Dr. Perlin. We are still working on the final number but it could 

be as high as $600 million.

 The Chairman. I can do pretty easy math. That is a billion dollars.

Dr. Perlin. Yes, sir.

The Chairman. So can I go one more? Can I keep going for a second?

Congratulations on your new job. You have a tremendous challenge in front of you. We have a challenge also. We have a model, 

and we do everything we can to address forecasting, assumptions, 

actuarial data, morbidity, utilization, you name it. On top of that, we 

are engaged in a global war on terror and so we also are taking care of 

soldiers who are coming back, plus we have an increase in utilization 

by our veterans of the past, which causes a variance in your present 

budget in a model that has pressed the boundary of its forecast. Am 

I close, Ms. Patterson?

Ms. Patterson. Actually you would press the boundaries of any 

forecasting model to go out 3 years.
18

The Chairman. This is already constructive. Last one, and I am going to yield, unless you have something off of what I just said.

Ms. Herseth. Thank you, Mr. Chairman. I would like to get this 

question before I have to leave momentarily because I think it goes 

along the line of questioning you are pursuing and a comment you 

made at the beginning, and that is how you are integrating base realignment and closure rounds into the model? Because I just came 

from Ellsworth Air Force Base, which is on there currently, and if 

we have people that work in that area that may lose their employee 

sponsored coverage because of businesses that are affected, then they 

are seeking access to the VA system as we have seen in other parts 

of the country whether it is a BRAC closure or a closure of a mill or 

what have you.

 Has that been incorporated? I think the Chairman mentioned in 

the past there has been a concern about whether or not a BRAC was 

incorporated in the model, and if you are looking two and a half to 

three and a half years out is this another anticipated cost we could be 

seeing, maybe not this year’s end because the closures won’t happen 

for about another 2 years?

 Dr. Perlin. I would ask our Art Klein to elaborate on how the model incorporates such actions as potential realignments under base realignment economies.

 Mr. Klein. We know it is going to take time, especially when some 

of these construction actions are going to take place, and what we 

are doing is planning to include that into our actuary model in the 

future. 

The Chairman. Before I am going to yield to Mr. Evans, it appears 

we have some tremendous challenges in front of us, the Committee, 

with regard to oversight. We are going to continue to get into how 

you do your methodology and your forecasting. At the same time we 

now realize that you have a tremendous challenge in meeting the 

present need and requirements, and that you have money and you 

are about to move around accounts. We are going to need to learn 

and understand more about how you are going to be moving monies 

to meet particular needs and what effect that is going to have if you 

have this shortfall of approximately 1 billion in 2005.

 I yield to Mr. Evans.

Mr. Evans. Thank you, Mr. Chairman. I would like to yield my 

time to the gentlemen from Wisconsin, Mr. Michaud.

 The Chairman. No objection.

Mr. Michaud. Thank you, Mr. Chairman, and Ranking Member 

Evans. I have got a couple sets of questions.

 Early in the process, the VA must estimate the funding gap it will 

be faced with. What is the, what does it attempt to do, you know, to 

close that gap? At what point in time does the ideal model become affected by nonhealth care considerations? Second part of that question 
19

is, when are we essentially modeling to fit predetermined outcomes 

and not modeling based on health care and patient requirements?

Those are my first two questions. The next two relate to an article 

on Tuesday in the Washington Post which was entitled Health Care 

Costs Spending Up: More Middle Class Could Join Ranks of Uninsured. The article points out that spending for those with private 

insurance rose 8.2 percent in 2004. The medical cost growth has outstripped the growth in wages, and that 45 million Americans, nearly 

50 percent of our population, are uninsured and many veterans who 

previously relied on their health care insurance are now turning to 

the VA. And voicing similar concerns to Congresswoman Herseth 

and the Chair, how are the effects of growing numbers of uninsured 

accounted for in the models? And it is not only the BRAC process 

which will definitely affect but all the number of job losses. How does 

that affect, the outside factors in the model?

Dr. Perlin. Thank you, Mr. Michaud, for the question. I think I

will divide it into a couple of parts, your first and second comments. 

The model runs independently. It factors in the transient health utilization and secular and environmental trends in terms of the health 

services delivery and use of health insurance for anything else that 

may be going on in the environment.

 In terms of how these things are factored in, I would defer to the actuary who really is most knowledgeable about describing that aspect 

in the operation of the model.

Ms. Patterson. The model has two components that can address 

that. One is we project enrollment into the VA health care system, 

and once those veterans have enrolled then we project their health 

care needs. Dr. Perlin addressed the trend rates that we employ in 

the model to address some of the health care changes over time, anticipated health care changes over time. With respect to enrollment, 

if in fact there is an increase in the unemployment rate in particular 

areas and what not, that would need to be handled within the enrollment projections and we base enrollment projections on historical 

trends.

 We have what we call priority transition within the model which 

also takes into account -- just one tiny example of this transition is 

Priority 7 and Priority 8 veterans transitioning into Priority 5 veterans. So those would be the poorer of the nonservice connected disabled veterans. And so it takes it into account in many different 

aspects.

 It also has the functionality to actually measure the impact of a 

potential major downturn in the economy and such. We have not 

modeled that to date, but it does have the capability of doing that the 

way it is set up.

Mr. Michaud. If I might follow up, Mr. Chairman, that is a good 

point. You are using averages in models. What really concerns me is 
20

we have heard a lot of -- particularly in the last year, in the election 

year, how well the economy is going around the country. But that 

might not be necessarily factual in certain regions. And that is my 

big concern because we have had labor markets in Maine whose unemployment rate was as high as 35 percent. Particularly when you 

look at Maine, 16 percent of our population are veterans. We have a 

high number who are in the Guard and Reserve who have been over 

in Iraq and Afghanistan.

 So that is why I am requesting the overall model and assumptions, 

how accurate is that model when you look at the unemployment rate 

particularly in separate regions of the country.

Ms. Patterson. Right, and we can address that and yes, it does use 

historical data to develop some of the future assumptions. But our 

enrollment assumptions are at the sector level, they are not at the 

county level. We have something we called sectors which are groupings of counties and for the most part large counties become a sector 

but some of the rural counties that are quite small are grouped into 

sectors. But we do calculate enrollment rates at that detailed level 

and by three different age bands, so that hopefully if there has been a 

chronic unemployment issue in a particular area that will be reflected in the enrollments rates. If there is something that is happening 

or expected to happen in the future, if we are made aware of that, we 

can certainly model that in the current modeling program.

Mr. Michaud. And Dr. Perlin, the second part of that question is, 

at what point in time do you throw out the model and your budget 

request is primarily driven by monetary aspects in -- 

Dr. Perlin. The model comes forth intact, and basically in any 

given year it will be development of new policy initiatives. I believe 

they are pretty transparent though we had vigorous debate and discussion of some of the policy initiatives that came forward in the year. 

So the model comes forward intact.

 Mr. Michaud. So in other words the budget that the VA requested 

to the administration reflects what the model actually impacts and 

it is not inaccurate so, in other words, does the VA disagree with the 

Independent Budget as far as the assumptions put together in the 

Independent Budget?

 Dr. Perlin. In general, the model comes forward and then there are 

policy initiatives, as I mentioned, and then perhaps other assumptions, such as efficiencies, that constitute the entirety of the overall 

budget that is presented.

Mr. Michaud. If I may, one other question, Mr. Chairman.

 You had mentioned using capital funds, which might be good for 

the short-term. -- two-part question. I guess my concern is, even 

though you are using capital funds to meet your current needs now, 

which is strained, what long-term effect will that have on the budget, 

whether it is cost-effective?
21

 The other concern is, and I can tell you, using Togus hospital in 

Maine, the Togus facilities had to put up scaffolding over the doors 

to block bricks from falling on patients or staff. It is a big concern 

of mine, shifting money around like that. Have you done analysis 

on the long term -- actually increase the budget of the VA by taking 

away those capital dollars?

Dr. Perlin. Thanks for the question.

 We appreciate the robust support that the VA budget has had over 

the last 4 years which has allowed us to invest in a number of capital 

areas. We recognize this is a short-term strategy. The short-term 

strategy ensures, between that and using the carryover, we have 

enough resources to care for veterans this year. It is not viable in 

perpetuity not to invest in the infrastructure. Sooner or later, you 

have to make that investment. And the things that are curtailed first 

are -- those things are, first cut, cosmetic; deeper cuts, modernization, 

remodeling.

The Chairman. Thank you.

 Before I yield to Mr. Bilirakis, I have to correct a statement prior to 

my yielding to Mr. Evans when I referred to this billion dollar challenge for ‘05, or as I call it, a shortfall. I am trying to figure out what 

you have for ‘06, not for ‘05. You have monies that you are utilizing 

for a workaround, moving dollars from your capital accounts and using a cushion account. But we just passed a budget with regard to 

‘06 and an appropriation that gave you an additional billion over and 

above what the President had requested. We are going to have to get 

in here and figure out how we need to help you with regard to your 

‘06.

 I yield now to Mr. Bilirakis.

Mr. Bilirakis. Thank you, Mr. Chairman.

 Ms. Patterson, you have been assigned by Milliman to VA since 

1996. 

Ms. Patterson. I didn’t work directly for VA back in 1996, but I was 

involved in the first discussions of a new model.

Mr. Bilirakis. You also do private work, I mean, other than the VA, 

private firms?

Ms. Patterson. Yes, but my major other clients are Medicaid, either States or health plans.

Mr. Bilirakis. All government. You have done actuary work for 

private clients?

Ms. Patterson. Yes, I have.

Mr. Bilirakis. What was the age of the data that you used for those 

private clients?

Ms. Patterson. For private sector, depending on whether we are 

using our health cost guidelines from our firm or whether we are using some of the client’s actual data, it is usually as most current as 

it can be. We have something called lag or run-out where you make 
22

sure your claims data is complete and the providers have had time 

to actually get it submitted, paid and into the system. But using the 

most recent year of data is incorporated into any modeling effort.

Mr. Bilirakis. Most recent year -- 

Ms. Patterson. Six-month to a nine-month lag.

Mr. Bilirakis. What is your opinion about the fact that VA uses 

2-plus-year-old data? 

Ms. Patterson. I guess in consideration of the fact that you need to 

budget out that far, you don’t really have a choice.

Mr. Bilirakis. You are budgeting out that far ahead. I am talking 

about using old data.

Ms. Patterson. We are using the most recent projection for fiscal 

year 2004.

 Mr. Bilirakis. For 2007?

Ms. Patterson. Yes, that is the most complete data at the time we 

do the modeling; and that is very consistent with what is done in the 

private sector. It is just they would be budgeting for a more current 

period.

Mr. Bilirakis. This $1 billion that has been talked about, this shortfall, call it what we will, which is being made up for on an internal 

basis, as the good doctor explained, that is the result of what, in your 

opinion? It is not bad actuarial figures on your part, right?

Ms. Patterson. I don’t know that is an appropriate question for me, 

but I will go with it.

 My opinion is that the model forecasts as well as the data that goes 

into it, I think some of the things that have occurred over the past 

year or so were not reflected in the model because they occurred in 

the last year or so and they weren’t anticipated. The biggest miss is 

simply due to the fact the assumptions going forward did not hold 

true.

Mr. Bilirakis. I would ask, I guess, both you and Dr. Perlin, based 

on this current history, $1 billion shortfall, is that the result of a 

reasonable error that nobody could do anything about or is that the 

result of lack of efficiency or whatever the case might be? But your 

request for next year, 2006, and the bill is already at the Senate, is it 

already off by at least that $1 billion?

Dr. Perlin. Sir, I think if your summation of that -- 

Mr. Bilirakis. I don’t know if it is a good summation.

Dr. Perlin. The statement you make, has the use of resources in 

2005 affected the budget assumptions going into 2006? And I think 

it is absolutely fair to say that it has. We had intended to carry over 

more than we would be able to, but -- 

Mr. Bilirakis. You talked about the capital in responding to Mr. 

Michaud. You talked about using capital dollars. So those capital 

dollars, assuming they are needed dollars, will now have to be made 

up for in ‘06, but that is already past us now unless the Senate can 
23

do something with it. It might even carry over to ‘07. Are we robbing 

Peter to pay Paul?

 Dr. Perlin. The investments in infrastructure will eventually have 

to be made.

Mr. Bilirakis. They have to be made up somewhere along the 

line.

Dr. Perlin. The resources are there to assure the care for veterans 

in 2005. It doesn’t factor 2006.

Mr. Bilirakis. I appreciate the fact that resources are there for 

2005; and, based on the question here, we were satisfied that that 

is the case. But we have 2006 ahead of us, and that is being compounded by virtue of the fact that some of the resources used in 2005 

for this purpose were intended to be used for another purpose.

 I am just going to ask one quick question, and this is the fastest 5 

minutes I have ever experienced. But, Ms. Patterson, are you getting 

complete cooperation from the VA in terms of your advice to them 

and whatnot?

Ms. Patterson. Yes, they provide any data I request. They provide 

experts when I need additional information. 

Mr. Bilirakis. Are they using the data that you recommend to 

them, the actuarial data that you recommend to them?

Ms. Patterson. I can’t attest to that. I provide it, and that is as 

far as I go.

The Chairman. Mr. Udall.

Mr. Udall. Thank you, Mr. Chairman.

I guess my first question is for Mr. Perlin and Mr. Kokulis. How is 

the VA making sure that returning soldiers are being put into these 

models and how are you ensuring that they are accurately projected 

and that they provide the needed resources for these new veterans as 

they come into the VA health care system?

Dr. Perlin. Thank you, Mr. Udall, for that question.

 The Secretary has made an absolute commitment that new combat 

veterans receive priority and accessing care in our system. Let me assure you, with the good partnership with the Department of Defense, 

we have more awareness than ever in terms of meeting the clinical 

needs of new veterans. They send us rosters to help us identify these 

new veterans; and, in fact, when a veteran needs care at a military 

treatment facility, we have social workers and they have uniformed 

personnel placed in military treatment facilities and VA hospitals.

 To the point of your question, 2-1/2 to 3-1/2 years ago, the budgeting couldn’t anticipate these current numbers with the numbers that 

we are now commenting on. These veterans have come to us with 

their eligibility following combat service. That is being incorporated 

into the model going forward.

Mr. Udall. Let me just follow up on that. What you are saying 

is 2-1/2 to 3 years ago, because this was a new situation, having as 
24

many troops in combat as we had, it was a very unpredictable situation, how many injuries you would get, the kinds of things that you 

would see, now, having a more stable kind of situation, you are able 

to predict? Is that a fair characterization what you are saying?

Dr. Perlin. Previously, we used separation data, and we got that 

periodically in 2001 because the trends of separation were fairly constant. With the increased OPTEMPO and veterans who have unique 

eligibility by virtue of combat service, they have 2 years of eligibility, 

and we welcome those veterans, that couldn’t have been anticipated 

2-1/2 to 3-1/2 years ago. It is to the best we could incorporate it. But 

2005 predicts for 2008; 2004 for 2007.

Mr. Kokulis. The only thing I could add to of Dr. Perlin’s comments would be it really gets into that first snapshot you take in the 

beginning of your fiscal year with regard to your population. Rather 

than using a static snapshot of where everybody is, you really need 

to take that actuarial look that estimates where people are going to 

be based on deployments, expected major movements in retirement, 

et cetera, to get the best idea where everybody is going to be, so when 

you do put that forecast in place with that population, you can appropriate the money in the right places for those people.

 Dr. Perlin’s comment that partnership between DOD and VA works 

well in that sharing of information, for the DOD specifically where 

our forecast is challenged is in the whole TRICARE benefit. Discussions a little bit earlier about as retirements come in and where do 

people get their health care, our ability to forecast the take rate for 

these people who are eligible for TRICARE and those who decide to 

keep their own private insurance has been the tougher part. The 

actual care for the active duty and then going to the VA we feel we 

have a good handle on it. That take rate for that retiree group, you 

know, the under 65 retired or over 65 retired, is where we find our 

biggest challenge.

Mr. Udall. I am shifting direction a little bit here. One of the 

big problems that I see is Congress passing laws and requiring that 

health care be given to veterans and then we give discretion to the 

Department to create priorities and categories and all of that. Clearly, we have this big debate about Category 7 and 8 and the different 

kind of care that different veterans get. I think many of us on this 

Committee would like to see the Congress fully fund health care for 

all veterans, and there have been bills to that effect. When you do 

your modeling, could you tell us what it would cost in terms of dollars 

to not have these kinds of categories in various priorities and say we 

are going to make sure that all veterans have the kind of health care 

they need? What kind of numbers would we be looking at?

 That is what the next panel tries to do, I think, when they look at 

an Independent Budget. They are not looking at the constraints the 

various departments have. They are looking at what kind of dollars 
25

are you going to put into the system to make sure that every veteran 

gets health care -- adequate health care in a timely way and that is 

quality health care.

Dr. Perlin. Congressman, that is really the point of the model, 

the ability to predict the utilization, be it by category or disease or 

condition, exactly what resources are needed to provide safe, timely, 

effective, efficient, compassionate care for the veteran. And I defer to 

the actuary for any elaboration, because we do believe it is a useful 

tool, albeit this year we pushed the performance envelope in terms of 

the lag time and missed the mark by about -- 

Ms. Patterson. The model itself has the capabilities of estimating 

the impact of many policy decisions. And one -- if you are going to 

open up the system even more, we can estimate the impact of that 

and the actual dollars associated with opening the doors even wider 

and maybe even enticing more veterans to enroll and seek health 

care. It is absolutely in the realm of an eligible projection.

Mr. Udall. I see my time is out, and I appreciate that very much.

The Chairman. There is a vote on the rule. I intend to stay here 

and keep this going.

 Mr. Brown.

Mr. Brown of South Carolina. Mr. Chairman, just one question. 

I noticed in our discussion that the Department of Defense really 

acknowledged they were having a shortfall in their health care and 

asked for some money in the supplemental. And I was -- my question 

goes to Dr. Perlin. Did you not all sense that or did you not have the 

opportunity to do the same?

Dr. Perlin. Thank you, Congressman Brown, for that question.

 When we look at the utilization numbers, the number of veterans 

requiring care every month, through February things were looking 

pretty on target. Actually, in the months -- really, in April began to 

ramp up and see more increase against utilization.

 As mentioned earlier, thanks to the robust support in the past years 

going into this year and because of being fairly much on target, we 

felt that and still do believe we have the resources for this year, 2005. 

It has been discussed, and it does predict some challenges in 2006.

Mr. Brown of South Carolina. If I might follow up on that.

 I notice the -- is there some kind of a trend that maybe the enlisted 

personnel is not re-upping as regular -- are we getting more folks 

leaving the service earlier that might be shifting more of the costs 

to the VA that if they stayed in service their health care would be 

funded by DOD? Is there any trend in that direction?

Mr. Kokulis. I will take that for the record.

[The information provided is as follows: No Active duty enlisted 

retention remains strong. We anticipate that the Army and Marine 

Corps meet or exceed FY 2005 retention goals. Navy and Air Force 

retention is sound although below historical averages -- a deliberate 
26

response as both Services reduce their end strength by retraining 

and converting members from overmanned skills to undermanned 

skills to balance their forces. The bottom line is that DoD enlisted 

retention is very sound and we are retaining the right mix of quality 

members.]

 I can’t speak of any trend that I have seen. To reiterate, the trend 

we have seen is, in the enlisted population, the actuarial analysis and 

the estimates tend to be rather consistent with what we modeled. It 

is that retired over 65 and under 65 and the take rates that end up 

surprising us on any given forecasting period.

 Mr. Brown of South Carolina. Just one follow-up question then. 

Is there any -- in the trend model, is the projected amount of money 

coming from third-party pay? Is that on target or is there a shortfall 

in that projection?

Mr. Kokulis. I guess the best way to answer, it is never where you 

want it to be. We have some targets, and we continue our efforts, 

but there is a lot more we can do, and we are always looking for good 

ideas whether it is in-house, whether it is working with contractors. 

I know the Navy does both in-house and contracts out for third-party 

collections. The Air Force is 100 percent contracted out, and the Army 

does its own in house. So everybody is looking for best practices in 

trying to up it and increase our third-party collections.

 Mr. Brown of South Carolina. Thank you for coming and being 

part of this discussion and helping us work through a tough situation. 

The Chairman. I don’t know how well prepared, Dr. Perlin, you are 

to put some dollars on this, but I am trying to understand this a little 

bit better. So as we go into the ‘05 budget, that was sort of laid out 

in ‘03?

Dr. Perlin. ‘05, based on ‘02 data.

The Chairman. Based on ‘02 data for ‘05.

 Dr. Perlin. That is right.

 The Chairman. And in ‘02 data, I am trying to figure out what is the 

variance to come up with this present-day challenge that you have to 

face and you have to move funds around? So outside OIF, OEF, dental, cat 7s and 8s utilization, what else was there? Pharmaceutical? 

Or is that part of the utilization costs?

 Dr. Perlin. We have tried to anticipate the pharmaceutical growth. 

We have made efficiencies in pharmaceutical utilization, but we continue to push for those efficiencies, and they have gotten harder. Once 

you have gone from equally effective drugs to ones that are equally 

effective but less expensive, there is no more there. We are pushing 

in that regard. Mr. Kokulis mentioned the avian flu, unanticipated.

The Chairman. The what?

Dr. Perlin. Mr. Kokulis from the Department of Defense gave an 
27

example of a completely unanticipated contingency. As you know, 

people have concerns about the avian flu being a world pandemic and 

with our population, particularly with a lot of older and chronically 

ill veterans, we had to expend $25 million to make sure we had adequate storage of this treatment for that avian flu.

The Chairman. Tsunami wasn’t in yours either, and that was a 

large cost.

With regard to medical inflation, the medical inflation data was 

input from ‘02, and then what happened in ‘05, how were we off? Not 

off?

Mr. Klein. The model certainly looks at the health care industry 

trends, and Milliman has a very robust price trending that they use. 

Obviously, it is looking at historical, but it does go out into the future, 

too. If ‘02 was the time frame for which actual data was available for 

the budget, the actuary would come forward to VA and bring in their 

price trend experts and we would discuss which of those trends and 

utilizations are related to VA and then we would resolve and agree to 

the price trending for the future. That is incorporated in the model 

every year, and we update that annually.

The Chairman. Is this a work product that belongs to your company 

that others utilize or do you rely on data input from someone else?

Ms. Patterson. We have certain experts within the firm who every 

year update some of our tools that are strictly for measuring health 

care cost trends. They are involved in these meetings, and they fully 

understand the health care trends and what moves them in different 

directions and why and when. Those discussions are held with many 

folks at VHA to determine which ones are applicable to the VA health 

care systems and which ones are not.

 For instance, typical provider discounts aren’t typically applicable 

in the VHA, and so we know to remove the impacts of those. The actual research that goes into these products are used by private sector 

and other government entities, but we do modify it for VHA.

The Chairman. Let us get into your last statement on the modification for VHA. Over the last 5 years, would you be able to tell me what 

numbers you utilized in the private sector, if they range from 9 to 16 

percent? Is that about right?

Ms. Patterson. I would not be able to give you a number for that, 

no.

The Chairman. Am I close when I say between 9 and 16 percent?

 Ms. Patterson. It depends. When you are looking at a full, comprehensive health care package, trends can be deceiving, because each 

benefit package can generate a different trend.

 I apologize for not being able to answer. 

The Chairman. Let me ask you this, why pick a number? Let us say 

that you call it the health care cost index.

 Ms. Patterson. That is what our product is called, yes.
28

The Chairman. Let us say, for example, hypothetical, it is 8 percent 

next year. You come up with a different number with regard to what 

you put in the model for VHA. Why?

 Ms. Patterson. Why?

 The Chairman. Why do we use a different number for VHA?

 Ms. Patterson. Well, for one thing, we don’t use a single number. 

We use many different trend rates for different things. We have a 

utilization trend rate, we have an inflationary trend rate, we have an 

intensity trend rate, and they all differ by type of service. When you 

say 8 percent, that could be 8 percent inflation and intensity trends 

for pharmacy. We look at that and say the pharmacy trends in the 

private sector are going up by X amount. But in VA you have much 

more price control -- VA is a huge purchaser of prescription drugs, so 

they have a lot of buying power. So that is dampened and we want to 

reflect that and we don’t want it to skyrocket like the private sector.

 The Chairman. Are you comfortable with regard to the calculation 

of that number that is utilized within the model?

 Ms. Patterson. Yes, I am, sir.

Dr. Perlin. Mr. Chairman, forgive me, but the follow-up -- we are 

having an internal discussion, and I think we can flesh out the question you asked a little bit better. You asked what other sorts of things 

can vary, and let me give you some examples.

 In terms of building off of what we have been discussing, the increased utilization by veterans in this current year, that has the 

effect not only of producing health care costs for the care of those 

individuals but caring for additional staff on board; and that is an 

additional and unanticipated expense.

 There are other items that are outside the actuarial model. The 

actuarial model accounts for 87 percent of the clinical budget, and 

some of those areas are also inflating. One is a program, CHAMPVA, which is the program for 100 percent service-connected veterans’ 

families, dependents or the families and dependents of deceased 100 

percent service-connected veterans; and those expenditures increase 

as well.

 Not in the actuarial model is the long-term care, and we have had 

robust discussion about long-term care with this Committee previously. But, as everyone is aware, that is a very important area, an 

area we are trying to extend our dollars by serving veterans in the 

community to an even greater extent; and there are some assumptions that we think are overly ambitious. I note that there have been 

reports about what possibilities there might be in contracting care 

as a new example. But some of those are extremely ambitious; and, 

in an aggregate, that really is what generates the challenges we are 

discussing.

The Chairman. I guess what I am going to try to do here -- I am 

going to take all of your testimony and take the statements and be 
29

a very good student and get the input also from my colleagues and 

staff with regard to the model itself, looking at, yes, how Congress 

also does its budgeting processes, recognizing that, understandably, 

that DOD wants to go to a more predictable model. So I am going to 

be sensitive to why you made these judgments and decisions. At the 

same time, I am going to say, are there lessons learned that can be 

applicable here; and, hopefully, you two can have those discussions 

-- 

Dr. Perlin. By all means.

The Chairman. -- so we can have some better predictability. Because I am tortured here that we have passed recently an 2006 budget that came to us from the administration. Even though we plussed 

it up $1 billion, I now don’t know what the right number is supposed 

to be for 2006. So we have to carry on discussions with regard to 

these trends.

 And you mentioned about these risk adjustments. So somewhere 

in here that even though you are pressing the bounds or going to the 

horizon on these projections, there really is, we call it the nebulous, 

that risk adjustment area. It is that gut check at the end of what 

are the possibilities or the potentials that we missed, you missed, 

right? And these things just weren’t calculated. Congress has to be 

responsive; and that is where we want to work with you with regard 

to these ‘06 numbers. 

 Be watchful and good listeners with regard to workaround and 

with regard to its impact in the system and, as I just heard you say in 

your testimony, to maintaining the quality of care.

 Obviously, there will be an interest with regard to access also, recognizing that Congress set up the prioritization with regard to access 

of care. I know in your testimony the first words out of your mouth 

were, we are taking care of those men and women coming back.

 I want to thank all of you for coming. This is very constructive, 

what you have done here today. You have been very helpful, and we 

are going to continue with regard to the actual science of this. It is 

hard. It is difficult. You have an expertise, I am appreciative. We 

are going to need that.

Please don’t become so defensive of the model. Allow us to figure 

out how we use this model from the private sector and how to best 

forecast with regard to our budgets and predictability, recognizing 

now, today, that we are pressing the limits of your model, correct?

Ms. Patterson. That is correct, of any model.

The Chairman. Especially the one we care about is the veterans 

piece and equally the DOD piece.

 I want to thank you.

 The second panel let me do by way of an introduction, and then I

have to exit, and hopefully I can make it back. If any of you can stay, 

that is wonderful. If you can’t, if you could have some of your staff 
30

stay, it would be wonderful.

 The second panel is:

 Mr. Steve Robertson. He serves as Director of the National Legislative Commission of the American Legion. Prior to joining the 

American Legion, Mr. Robertson served as Disabled Veterans Program Specialist for the Job Service, North Dakota, and as a military 

policeman in the D.C. Army National Guard. He is also a veteran of 

the Gulf War.

 Testifying also is Mr. Doug Vollmer, Associate Executive Director 

of Government Relations for PVA. Mr. Vollmer is involved in a variety of issues concerning PVA’s members, such as the veterans and 

disability rights, for 26 years for the PVA.

 We also have Tim Feeser. He is a principal with Reden & Anders, 

with a background in actuarial consulting services in the management of health care for 18 years. He has previously worked extensively with forecasting health care demand and has provided assistance to hospitals regarding service demand planning.

 So I want all of you to know what we have attempted to do here 

today is not only examine what you do in the private sector, what you 

have done within DOD, the transitions you are doing to DOD through 

a new model and what your model has done. Even though it has 

pressed the horizons, you have been very fortunate for the last 4, 5 

years. This year, regarding the challenges and workaround solutions 

for which we will be attentive and provide our oversight, please help 

us in a bipartisan fashion as we move forward into 2006.

 We will receive our input from the veterans service organizations. 

We are all advocates. That is what I like about this. Whether on the 

Committee or in the VA or DOD or the VSOs, no one has the corner 

on the advocacy for our veterans.

 Thank you very much. Panel one is excused.

 Mr. Boozman. [presiding.] We appreciate you all coming.

 Our second panel consists of Mr. Steve Robertson, who serves as 

Director of the National Legislative Commission of the American Legion. Prior to joining the American Legion, Mr. Robertson served as 

the Disabled Veterans Program Specialist For Job Service, North Dakota, and is a military policeman in the D.C. Army National Guard. 

He also served in the U.S. Air force for 12 years. My father was 

retired Air Force.

 Mr. Douglas Vollmer is the Associate Executive Director, Government Relations, for Paralyzed Veterans of America. Mr. Vollmer has 

been involved in a variety of issues concerning PVA’s members, such 

as veterans and disability rights for 26 years at PVA.

 Mr. Tim Feeser is a principal with Reden & Anders, Limited, with 

a background of actuarial consulting services in the managed health 

care arena for 18 years. He has previously worked extensively with 

forecasting health care demand and has provided assistance to hospi-
31

tals regarding service demand planning.

 Your prepared statements will be entered into the record.

STATEMENTS OF STEVE ROBERTSON, DIRECTOR, NATIONAL

 LEGISLATIVE COMMISSION, THE AMERICAN LEGION;

 DOUGLAS K. VOLLMER, ASSOCIATE EXECUTIVE DIREC-

 TOR, GOVERNMENT RELATIONS, PARALYZED VETERANS

 OF AMERICA; AND TIM FEESER, FSA, PRINCIPAL, REDEN

& ANDERS, LTD.

 Mr. Boozman. I now recognize Mr. Steve Robertson.

STATEMENT OF STEVE ROBERTSON

Mr. Robertson. Thank you, Mr. Chairman; and I do agree this is a 

very important hearing.

 The American Legion continues to advocate for adequate funding 

levels to ensure America’s veterans receive the health care and benefits they have earned through their honorable military service.

 The basic difference between the American Legion’s VA budget 

recommendation and that of the President’s budget request and the 

Congress’ budget is that the American Legion’s budget is demanddriven, whereas yours are often budget-driven. The American Legion’s recommendations are probably more consistent with what the 

VA sends to OMB before the initial pass-back.

 Mr. Chairman, of all of the budgeting models and methodologies 

available, Congress’ budget process is probably the least effective to 

provide proper funding for the VA. The VA’s Office of Assistant Secretary for Management and the folks who were here earlier are well 

staffed and are very competent professionals. However, the Congress 

and the American taxpayers are not getting their money’s worth. The 

true budgetary needs of the VA are submitted to the OMB.

Clearly, if Congress and the American people were allowed to see 

the initial product, rather than the watered-down version, everyone 

involved in the budget process could work towards a solid product -- 

supported by the President, supported by Congress and supported by 

the American people. Nobody wants to shortchange America’s veterans and their families. Nobody.

 The American Legion does not advocate simply throwing money at 

a problem without accountability. However, we do believe that VA

needs the fiscal resources to operate the very best system possible. 

Maintaining a strong national defense is a top national priority, while 

VA is the end-product of winning wars and maintaining peace.

Clearly, there are tremendous differences between the budgeting 

models and methodologies between VA and DOD medical care. In 

the VA health care delivery system, not all veterans have equal ac-
32

cess to the quality of care that they want to receive, even if they are 

willing to pay for it. Currently, new Priority Group 8 veterans -- 

those most likely to have resources and third-party insurance coverage -- are denied enrollment regardless of their honorable military 

service in combat or peacetime.

Within the Department of Defense, all eligible beneficiaries are 

welcomed to enroll and have equal access to timely health care within 

their assigned regions.

 The American Legion’s budget methodology basically relies on internal and external factors. Some of the internal factors are: A System Worth Saving, a publication we put out each year; the CARES

Task Force, another internal organization -- program of our organization; a formal network of service-officers that actually work in 

and around VA medical facilities; a network of homeless veterans 

program advocates and providers; information we receive from other 

advocacy groups; and, of course, informal government resources.

 External factors include such things as the Presidential task force 

that we just completed that was to look into ways to improve health 

care delivery for our Nation’s veterans. The President’s budget request is very helpful. The budget resolution gives us a look ahead of 

where you are planning on going. Of course, the annual VA budget.

 The American Legion’s health care modeling. We were deeply concerned in the ‘80s with the fact that few veterans had access to the 

system. Primarily service-connected disabled veterans, economically 

indigent, and CHAMPVA eligibles were the ones that had access, but 

even that access was very, very complicated. Military beneficiaries 

were also having trouble with CHAMPUS, having trouble with timely access and soaring costs. The American Legion believed there was 

a better way to meet the health care needs of American veterans and 

their families. After much deliberation, the American Legion offered 

to Congress a new health care model that was extremely visionary for 

the VA health care delivery; and we called it the GI Bill of Health.

 Some of the key factors of that talked about mandatory versus discretionary funding, Medicare reimbursement for the VA, third-party 

reimbursements not being counted as an offset to the discretionary 

account, the enrollment process, the defined benefits package so 

there was no doubt as to what kind of health care you were entitled 

to, timely access standards, availability of services, and also how the 

money was distributed within a VSIN.

 Mr. Chairman, VA, Congress and the American Legion all share 

the same goal. That is, meeting the needs of America’s veterans. 

Working together, we can achieve that goal. It is all about national 

priorities.

 Mr. Chairman, that concludes my testimony.

Mr. Boozman. Thank you, Mr. Robertson.

[The statement of Steve Robertson appears on p. 75]
33

 Mr. Boozman. Mr. Vollmer.

STATEMENT OF DOUGLAS K. VOLLMER

Mr. Vollmer. Thank you, Mr. Chairman; and I want to thank the 

members of the Committee on behalf of Paralyzed Veterans of America. We appreciate this opportunity to present our views and experiences on the methodology used in formulating the annual recommendations contained in the Independent Budget. In general, I will keep 

my remarks centered on the major budget accounts supporting the 

provision of VA medical care.

The first Independent Budget was published 19 years ago. The former VA Chief Medical Director and Surgeon General of the Navy, Retired Vice Admiral Donald Custis, suggested that the four veterans’ 

service organizations form a unique partnership to develop and publish yearly VA budget views and estimates. The resulting Independent Budget would be used to demonstrate the actual financial needs 

of VA health care and other programs in the face of administration 

budget requests and congressional appropriations that were far too 

often influenced more by political considerations and the changing 

pressures of Federal budget policy than by objective budget modeling.

 The Independent Budget presents a full budget model. It is the 

same model that VA uses at the beginning of its annual budget process. The VA and administration generally abandon this process at 

that point. At this time the VA budget then leaves the arena of pure 

budget modeling and enters the long road to OMB and the congressional budget and appropriations process, as being shaped by “what 

the freight will bear” in the competition for funding with all other 

domestic discretionary programs.

 The IB does not take this course. It simply takes the amount of the 

current year appropriations and adds to each account assumptions 

regarding inflation and salary increases to arrive at a current services estimate for the upcoming year. The current services baseline 

is a commonly understood concept in Congress. In fact, the Congressional Budget Office is mandated by law to treat discretionary funding in what is essentially a current services model.

 A current services estimate provides a baseline that presents a 

theoretical value of what it would cost to provide the same level of 

services in the following year as was provided in the current year. 

From that point, the Independent Budget presents an estimate as to 

the cost of individual recommendations found within the document, 

such as increased FTE, increased patient loads and changes to current policies.

 I am attaching a white paper prepared and submitted to the Com-
34

mittee at the request of the Chairman earlier this year, and I request 

that it be placed in the record. This paper provides additional technical detail of how we assess the impact of annual wage and salary 

increases as well as formulas for estimating the effect of general inflation and other specialized indices on the VA budget accounts.

[Information provided appears on p. 89]

 In closing, PVA, on behalf of the other Independent Budget veterans’ services organizations, believes we can present and defend the 

full funding methodology that provides our annual recommendations. 

By contrast, any similar medical model that VA itself might put forward in initial recommendations for the following fiscal year becomes 

muddied in the actual ensuing budget and appropriations processes 

that follow. Overall budget increase requests are artificially skewed, 

claiming so-called increases that are only unrealistic management efficiencies. Budgets are inflated by equally unachievable third-party 

collections.

 In terms of real requests for real additional appropriations, most 

administrations submit budgets on the cheap. They use no real medical model and leave it to the Congress to try to make the fix. The end 

result has no reality to the actual need, cost and demand of health 

care services. And from year to year, with the uncertainty of the budget and appropriations process, VA managers and the veterans they 

serve have little assurance that full support for their programs will 

be there when they need that support.

 The Independent Budget VSOs can only come to the realization 

that the current budget system is flawed, unscientific and does not 

meet the true needs of the veteran population. For this reason, we 

endorse a new approach that will apply a realistic medical model to a 

guaranteed funding base that will support veterans’ health care services to the extent that veterans need them and when veterans need 

them. Such a system is good public policy and good medicine.

 This concludes my testimony, and I will be happy to answer any 

questions you may have.

 Mr. Boozman. Thank you, sir.

[The statement of Douglas K. Vollmer appears on p. 84]

 Mr. Boozman. Mr. Feeser.

STATEMENT OF TIMOTHY J. FEESER

 Mr. Feeser. Thank you, Mr. Chairman and distinguished members 

of the Committee on Veterans’ Affairs. I thank you for the opportunity to testify before you on the private sector approach to health care 

expense forecasting.
35

 I am Tim Feeser, a principal with Reden & Anders. We are a national actuarial, clinical and management consulting firm that specializes in financial and business support decisions for the health care 

industry. In discussing our approach to the health care expense forecasting process, I would like to summarize how historical health care 

claims experience is used, how health care expense trend assumptions are developed and their application to historical experience to 

produce a forecasted health care expense budget. I will conclude with 

comments regarding the emerging practices seen as improvements to 

the health care expense forecasting process.

 First, I will address the use of historical experience.

 We would like to collect as much historical experience as we possibly can for an existing block of business as referred to in the industry. 

We would like to go back at least a minimum of 2 years, more if the 

data has been collected.

 We then need to make adjustment to that information for estimated unpaid claims. That involves performing a lag analysis, which is 

used to complete that recent year’s worth of experience, since at the 

time of performing your projections the total payments have not been 

made for all services delivered in that last calendar year of experience to be projected.

 That is an important point in that, if you do not complete that experience, your base period will be understated; therefore, your future 

forecast would be understated, assuming your trends were correct.

 After performing the lag analysis and completing your experience, 

you want to summarize that experience into meaningful expense 

categories before performing your projections. Typically within the 

industry we see groupings such as hospital inpatient care, with inpatient setting defined by type of stay, be that a medical stay, surgical 

stay, deliveries and the like. For outpatient hospital care, patient 

categorizations in the facilities include emergency room services, surgeries, diagnostic tests and other services.

On the physician side, services are grouped based on definition of 

service, using the CPT codes as the definition of classification. Meaningful categorizations are sensitive to how benefits change over time 

and helps in the modeling process, for example, categorizing physician services by routine office visits, elective surgeries, allergy, immunizations and the like, which are high-volume services delivered 

to the patient population.

 Prescription drugs are also summarized separately by brand name 

prescriptions and separately for generic prescriptions.

 Finally, you want to track your historical experience and segment 

it into what is referred to as allowed claims versus net paid claims, 

the difference being what the member pays as their out-of-pocket 

costs, whether that is copayments, deductibles and co-insurance.

 I will address trend assumptions. In developing trend assump-
36

tions, we want to develop them specific to the medical expense categories that we discussed. We want to break out trend components, 

utilization and unit price, often referred to as medical cost inflation.

 As an example to illustrate how the private sector drills down into 

analyzing the cost component, I will focus on the inpatient setting. 

A large insurer has several contracts with various hospital facilities 

across the country. Those contracts are renegotiated in a staggered 

way over time such that a high-volume hospital could become due for 

renegotiation and the health plan may expect a spike in their unit 

price that year for the hospital due to the hospital having not renegotiated their contracts for several years.

 At the onset of those negotiations, the plan tries to gauge how rapidly those inpatient costs may increase, which could be as much as 20 

percent if the hospital has not updated the contract with the health 

plan for several years. Inflator clauses are built into those agreements that may last 2 to 3 years out at a much lower rate. 

 So this drill-down analysis involves getting to an aggregate unit 

price trend based on how the individual facilities contracts come due 

over time, which affects the ultimate trend assumption implied for 

the unit price on the hospital side. This approach is used on the outpatient, physician and prescription drug side as well in developing 

unit costs.

 After your trend assumptions are developed, you apply them to 

your historical experience to arrive at a forecasted budget, whether 

you are a self-insured employer or a health plan, forecasting your 

total expenses that underlie your pricing.

 Finally, in closing, some advanced recent practices that are being 

used to help improve the forecasting process include more drill-down 

analysis of the impact of past technologies and new emerging technologies, a look at brand prescriptions going off patent and the impact 

of lower-cost generic prescriptions and the impact on trends and increased utilization of lower-cost generics and, finally, the importance 

of new disease management vendors that are having a great impact 

on managing chronic disease cohorts within an insured population 

base.

 That concludes my testimony on the private sector’s approach to 

health care expense forecasting. I would be happy to take any questions.

[The statement of Timothy Feeser appears on p. 93]

Mr. Boozman. Mr. Vollmer, a lot has been made about the disparity 

between the VA budgeting process and the Independent Budget. Can 

you describe again the basic fundamental differences as to how you 

arrive at your information versus the VA?

 Mr. Vollmer. I believe we start at the same place the VA does, 

and we use a lot of VA data. We look at current services, what was 
37

appropriated for the given year. We look at what the projected salary or wage increases will be, the rates of inflation, medical inflation, 

and build those up to make a VA budget for the next year that will 

reflect the same level of services that are currently being provided. 

At that time, we look at any additional costs or recommendations we 

would then be recommending within the context of the Independent 

Budget.

 The VA does that at the same time when they initially develop 

their budget. But when they go through the pass-back series and it 

moves away from modeling and gets into the realm of political policy, 

their budget begins to be muddied and is pressured by the requirements for other domestic programs, for administration priorities, for 

all kinds of things; and it loses the true clean nature, I think, that it 

had when the first numbers were put together. That is when certain 

policies or decisions might be made to reduce 7s or 8s. 

 We predicate the Independent Budget funding for all veterans that 

would come into the system and not restricting access to certain categories of veterans. I think that is where we depart, particularly at 

the time of the pass-back and it moves out of the VA and into the 

broader political arena.

Mr. Boozman. The VA uses Milliman to validate their process. Do 

you use an outside source to validate it?

 Mr. Vollmer. In the original development of the Independent Budget some 19 years ago, we had outside sources that worked with us. 

We brought some of those sources in house. We have had consultants 

over time that tweak or fine-tune the mechanism we need; and, in 

fact, in some modeling at VA we work with the Milliman people on 

developing modeling, various spinal cord injury care, for example.

Mr. Boozman. Mr. Robertson, your modeling is a little bit different 

in that it is a demand-based model, can you reiterate as to why you 

feel that is more accurate?

Mr. Robertson. Ours is validated by patients being turned away 

from the system, patients being denied timely access, facilities that 

are in need of repair, backlogs of inventory and equipment, robbing 

Peter to pay Paul accounts to keep the system going, to where we had 

to shut the doors at the end of the year. That is a pretty good validation process, because it deals with the lives of veterans. 

 I mentioned our program, that we have a system. We started this 

3 years ago, where our national commander is visiting facilities -- our 

national commander right now is in Denver visiting the VA facilities 

in that area -- to compile a report.

 A lot of the information we get comes back from VA employees. We 

sent questionnaires to all the facilities. We got back 125 out of the 

163 we distributed. And this is all done with the help of the VA. In 

fact, we focused strictly on budget issues, and we sent out a second 

questionnaire that was a more narrowed focus on the facilities.
38

 So, clearly, we can have all kinds of models and they can work really well if they are done the way they are advertised. But once it 

gets into this bureaucratic process -- 

 And we all understand budgets. My boss sends me a thing telling 

me to do a budget. I put down what I want; and he tells me, this is 

what you are going to get. Do we run short? Absolutely. Does he 

know we are going to run short? Absolutely. And we deal with it 

down the road.

 When you are dealing with the lives of veterans and their family 

members, we shouldn’t be playing that kind of game. When we are 

talking about a decision to give them the best prescriptions possible 

or find the cheapest deal we can get away with, that is not honoring 

the service of the men and women that are allowed to go to the VA

facilities.

Mr. Boozman. You mentioned mandatory funding as a method 

to make things better, and certainly that is being discussed here. I

guess one of the concerns I have is that if you look at the countries 

that have done that then it seems inevitably it leads to the rationing 

of care. In other words, you wait a long time to get your hip replacement or knee replacement and things like that. Can you comment 

on that?

 Mr. Robertson. There was one comment about setting up a system 

where all veterans would have access to the system.

 First of all, if you look at every other health care system that is out 

there, whether it is DOD, Medicare or whatever, their enrollment 

participation of the number of people that are eligible versus the 

number of people actually enrolled probably runs 85 to 90 percent. 

People that are entitled to those benefits are using those benefits in 

large numbers.

 Out of the VA health care system, there are 24 million veterans. 

Seven million have enrolled. So there is a little self-governing in here 

that needs to be understood.

 If you do a mandatory funding formula or the guaranteed full funding formula that the American Legion has talked about, that still 

complies with the laws on the books. In other words, 7s and 8s, if 

they are being treated for nonservice-connected conditions, they will 

reimburse the government. There is still the obligation of them helping to pay for their care, which will help drive down the formula because of how much is actually having to be spent on health care.

 Secondly, the VA, if you look at the cost per patient, is probably 

the best deal in the entire health care industry; and I think that was 

verified during the Presidential task force when they would show the 

cost of care for VA versus Medicare and versus DOD.

 I think it is something that needs to be looked at. I think there 

are veterans that we say, in title 38, the Secretary shall provide care 

for and without question they should be included in that mandatory 
39

funding cycle. All other veterans that come into the system, we have 

no objections with them paying for their care.

The final point is the Medicare reimbursements. I guarantee you 

there is not a health care professional in this country -- and I guess 

I am including you, too -- that you have a Medicare patient and the 

government told you you couldn’t bill them, I don’t think you would 

think that is a very good idea. And that is what we have done with 

the VA system. Right now, the VA is subsidizing Medicare to the 

tune of $3 billion because we can’t bill for treatment of nonserviceconnected medical conditions. 

 So many of these Medicare-eligible veterans want to come to the 

VA for so many good reasons: quality doctors, a database that maintains all their records in one place, a prescription plan that is affordable. I mean, the fact that if you go to a doctor on the outside, you 

have to find someone who is accepting new Medicare patients. If he 

sends you to a specialist, you have to go find a specialist that is accepting new Medicare patients. It is a hassle.

 The VA system, because of its reputation of the quality of care, because of its accessibility, is a natural magnet for a lot of these folks. 

Why can’t we take advantage of that? Why can’t Medicare reimburse 

VA for the services it is rendering, because that is part of the discretionary budget?

 Finally, counting the third-party collections as an offset, you have 

already talked about how bad the collection process is. That is a major part of the problem. When you offset the discretionary account, 

you are already putting everybody in the hole. When every distribution is made and the goals are given out to every medical facility, they 

are unachievable, and everybody knows it. So the VA directors are 

already working at a disadvantage.

 And places where the collections are very good, what is their reward? They get a higher goal the next year. Places that do miserable, what is their reward? They get a higher goal. So there are a lot 

of problems that need to be fixed. 

Our funding model, it may not be the most scientific in the world, 

but it is the most realistic in the world because we base it upon the 

services that are actually getting to GI Joe and Jane.

Mr. Boozman. Mr. Michaud.

Mr. Michaud. The first question goes to Mr. Feeser. What would 

you do that would be dramatically different from what Milliman is 

currently doing in their modeling effort, if anything?

Mr. Feeser. It would be difficult to really answer the question accurately without knowing a lot about the VA program in the level of 

detail that I need to know to comment on differences on modeling 

techniques.

 But from what I gathered in the conversation this morning, it appears as such that the mechanics seem fairly standard of the indus-
40

try in the approach taken, looking at historical utilization experience, 

and unit pricing assumptions and attempting to complete that experience for lag and then projecting that out to a future point in time.

 I believe the point was also made that the model’s forecast is as accurate as it can be for the first year of the budget you are projecting. 

The ensuing years after that, the projections would be very soft. As 

more information emerges that was unknown and gets accounted for 

in a second forcast, that forcast should be improved. 

It is hard for me to specifically point to differences in what we do 

versus what has been done. 

Mr. Michaud. My next question is both for Mr. Robertson and Mr. 

Vollmer. You both talked a lot of your members, and I guess I am 

looking at the outcome. And we heard the Assistant Secretary of 

the VA talk this morning about taking care of the veterans needs. 

Are you hearing that from your veterans as far as demand for health 

care? Is it being met?

 Mr. Vollmer. Steve, if I may.

 Mr. Robertson. Go ahead.

Mr. Vollmer. I would say that with the veterans returning from 

Iraq and Afghanistan getting into the system, as Dr. Perlin has said, 

the things that concern us is that the older veterans are getting 

pushed out the back end as they are moving in the front end. They 

have been put on the curb. But their appointments are being delayed. Time is being stretched out. I think we will see more of that 

as we talk to individual hospital directors and health care providers 

around the country.

 The shortfall Dr. Perlin acknowledged for this year where they are 

borrowing from all types of accounts to keep the ship afloat, they realize come October first, if not sooner, that when they are dealing 

with the 2006 appropriated level they are going to be in even more 

trouble.

 We talk about the problems that transpire with just the budget that 

is sent from down the street up to here for the Congress to wrestle 

with. Well, that included a 2.3 percent salary increase and just this 

week the Appropriations Committee passed a 3.1 percent increase 

for pay raises for employees. The VA has over 180,000 employees. 

That money is going to have to be eaten by managers in every station 

around the country, and the only way that gets eaten is by either having fewer employees or treating fewer veterans.

 So while the statement is made that we aren’t turning veterans 

away by extending either waiting times or services available -- and I

got a call other day, you know. There are some beds that are closed 

because they haven’t been able to recruit staff and that may be a 

manager’s way of just extending his budget as far as possible.

Mr. Robertson. As far as how is it coming out at the other end of 

the pipeline, every veteran that I know, most of the ones that I know 
41

who use the VA system rave about the quality of care. They are 

happy about going to VA and it is usually their health care provider 

of choice. The problem is the ones that can’t get in or the ones that 

have delayed access and they have to go some place else because their 

medical condition needs more timely attention.

 But it is things like this, the letter that came out of the VA medical 

facility in Alexandria where they are acknowledging to the new 7s 

that maybe want to enroll in the system that they have suspended 

-- the suspension of appointments is temporary, depending on the 

availability of resources. It will affect all VA medical facilities within 

the south central VA hospital health care network. This came from 

the hospital director to folks, telling them you can enroll but we are 

not going to be making any appointments for you. That is the most 

classic example.

 The most shocking thing I think I heard today, I think, is the comments made about, well, we plussed up the budget by about a billion 

dollars. If you look at that account, most of that billion dollars came 

from taking money away from VA administration and VA facilities, 

the exact same thing Dr. Perlin was talking about, shifting money 

from one pot to the other.

 So, yes, in the press release we have got a one billion dollar increase, 

but in reality we just rearranged the deck chairs. And I think that 

that is -- when you take the money away from those accounts, that is 

where the doctor gets his money to be able to stretch out the budget 

to the end of the year, and you have already done that for him.

Mr. Michaud. Mr. Chairman, I would ask that that letter be submitted for the record.

The Chairman. Without objection.

[The information appears on p. 111]

Mr. Michaud. Did you have a follow-up.

 Mr. Vollmer. Yes, sir, we sat here and heard about all this modeling and how surprised people were that there is a billion dollar plus 

shortfall and there may be shortfalls in the future. I would just like 

to mention 2 years ago then Under Secretary of Health, Dr. Robert 

Roswell, testifying before this Committee, when questioned about 

mandatory funding just kind of on the back of an envelope sketched 

out how he viewed, without a lot of sophisticated modeling, where 

prices would go and just in a sentence I would quote Dr. Roswell. 

So a 7 percent increase associated with the enrollment in our highest priority groups coupled with another 2 to 3 percent of increased 

utilization costs coupled with a conservative estimate of health care 

inflation rates of 4.5 to 5 percent yield a 13 or 14 percent per year increase in the money available to take care of just our core population. 

I think that, you know, using 13 to 14 percent every year we shouldn’t 

be off by a billion dollars.
42

Mr. Michaud. I notice there is a rep still here from Milliman. I am 

just wondering what was the total dollar figure as far as using their 

funding model, and what was actually needed?

 Mr. Robertson. I don’t think that information was given out to 

date. I didn’t hear it. I would have loved to have heard it. 

 Mr. Michaud. Mr. Chairman, actually since we are talking about 

doing models, and I know since someone here is still from Milliman, I

was wondering what the funding model that was presented, what the 

dollar figure was. And she is here. And I was wondering what that 

dollar figure was, if she could let me know.

 Mr. Boozman. Sure.

Ms. Patterson. I don’t have the numbers with me. I apologize. I

didn’t realize I was coming today to testify about values. We provide 

many different models.

 Mr. Michaud. Would you provide that model to the Committee, the 

dollar? Using your modeling method, you came up with a number 

and I would like to know what that number is. If you can provide it 

to the Committee.

 Ms. Patterson. It is -- I apologize. It is not mine. I develop it for 

VHA.

 Mr. Boozman. Why don’t you come up and say that in the microphone.

Ms. Patterson. The model is produced for VHA by my firm and, 

given their permission, we will provide whatever it is that you would 

like to see.

 Mr. Michaud. Is there still someone in here from the Department?

 Mr. Boozman. Come on up. I know it is a hassle.

 Mr. Klein. When the budget is presented, it passes through what 

one would assume is a current services budget, but it includes the 

assumptions of other policies that change that dollar level. For instance, in the 2006 budget it had the 250 dollar enrollment fee, which 

reduces the overall dollar estimate for the medical care appropriation. 

It also contained the increase in the pharmacy copay. So you could 

almost back into the number that the actuary model would provide. 

It also included -- in that budget are efficiencies that -- 

Mr. Michaud. If I might interrupt. I don’t want to back into anything or do any assumptions. I would like to get to the point where we 

are talking about modeling and how accurate it is, the Independent 

Budget, you know their modeling. And I would like to know what 

that model recommended that was adequate to take care of the VA. 

And I think if we get that number of what that model is and what it 

is going to take to deal with the VA, I think we have a better idea on 

the assumptions, you know, where the model might be going wrong 

versus what actually was submitted because what was submitted 

does not take into account -- will take into account but it is driven by 
43

dollars. It is not driven by a natural model. If we are going to figure 

out whether that model is accurate we have to figure out what that 

number is in that model, not what we are dealing with in terms of the 

actual budget, and that is why I would like to know under that modeling what is that number so we can figure out whether it was accurate 

or not and where we have to adjust the model to make sure we do get 

an accurate account.

Mr. Klein. I think we can provide that for the record.

Mr. Michaud. Thank you very much, appreciate it.

[The information follows: Although I must adhere to the embargoed nature of the information and discussions that go into building 

a President’s budget, it is important to address your request. The 

model is one of many inputs to building the budget. Taken out of context, the model projections do not represent the entire health care requirements supported by the budget as it excludes non-modeled programs such as readjustment counseling, dental care, long-term care 

and CHAMVA. In addition, since the model was used to estimate teh 

impact of the user fee proposals, the model’s total expenditure projection would have been reduced by these budgeted policies.]

Mr. Robertson. I do have one concern with that model because as 

it was pointed out during the testimony there are several different 

models that are used in conjunction with that. And I think about 

CARES that we just completed. The long-term care in the mental 

health portion of CARES was not included as part of the evaluation 

of CARES because they said the modeling for that was not what they 

really thought it should be.

 So I mean we have got a situation now where we have veterans 

coming back where they are going to be in need of long-term care and 

yet we don’t even know if we have the modeling to adequately provide 

for the treatment of long-term health or mental health problems of 

those returning veterans.

Mr. Michaud. That is a good point and I guess if we are going 

to look at modeling and trying to figure out what the actual dollar 

amount is going to be needed to take care of our veterans, I think we 

have to be aboveboard and look at what we currently have and look 

at the whole system. And as you heard a statement made earlier, at 

the earlier panel, that former Secretary Principi was aboveboard and 

honest with the Committee when he said he needed another $1.2 billion to adequately meet the needs of our veterans.

 I appreciate someone who is willing to be honest with the Committee, and I think it is important that we have that not because we 

are going to try to point blame or anything. It is just that as elected 

officials, if we are going to do our job and do a job that is effective, 

we have got to have accurate information. And I am not looking at 

pointing blames. I want to make sure we take care of our veterans. 
44

And that is why I think it is important to know, number one, what 

the VA actually requested versus what we are dealing with but also, 

number two, what the modeling was actually given to VA just so we 

can compare the three. And I think it is very important for us to have 

that information.

Mr. Robertson. Well, piggybacking on the comment the gentleman just made, when the initiatives were listed in the budget for 

third party -- I mean for increased copayments for prescriptions and 

the enrollment fee, the modeling said that there would probably be 

1.1 million veterans that would probably disenroll from the system 

rather than pay those increased rates. So it does have an impact on 

what is going to be the reaction of the veterans population. Are we 

really in the business of driving people out of the system? And I think 

the answer is no.

 Mr. Michaud. And I agree.

Mr. Boozman. I want to thank our panel. Do you have any other 

things? You are free to go. Okay, good.

 Again I want to thank both panels for being here today. I think 

this was a very, very good hearing. Certainly, we all share frustration, I think, of trying to get this right. As Mr. Michaud said, we need 

accurate information to be able to make a determination of where 

we go with this. I was in Landstuhl, Germany 3 or 4 weeks ago and 

visited with a young guy -- we were there at 2 o’clock in the afternoon. 

This individual had run over a explosive device at 4 o’clock the previous morning Iraqi time. Cleaned him up and flown him there -- and 

literally was just coming out of surgery. But he wanted to tell us his 

story as to what had happened. He lost both legs below his waist and 

he wanted to know two things. He wanted to know about his wife. 

He hadn’t been married very long, was she going to come, and they 

reassured him that yes, she would be reunited with him the next day. 

They were going to fly him to Walter Reed or Bethesda and that was 

taken care of. And the last thing he said to us, he said I saw it happen 

to my friends and my buddies. I saw it happen to my other guys in 

my unit. I never thought it would happen to me. And then he said, 

do you think I will ever get to walk again? And so we reassured him 

that was going to be the case.

 So that is why I am on this Committee. Mr. Michaud and the rest 

of us, we do want to get this right.

 The other problem is that tomorrow I am going to a funeral of my 

favorite uncle, he is a World War II guy and he has been very ill for 

the last 6 months and died as a result of congestive heart failure 

leading to needing massive, really significant surgery and just didn’t 

come out of that. His medical bills in the last 6 months have exceeded 

all of his medical bills up to now. So there really are things like that, 

that are going on and make it so difficult.

 We are running into the same problem with health care, not only 
45

with the VA system, which is a wonderful system right now, but we 

are running into the same thing with Medicaid. We are running into 

it with private insurance. Health care now is very difficult to model 

by any sector that is doing it, whether it is the insurance company, whether it is the VA or whatever. So it is not something that I

think there is any blame. I appreciate the Chairman, I appreciate 

the Ranking Member, for calling this meeting and this hearing. This 

is something that we do have together to get our arms around and I

think there is a commitment to do that.

 Mr. Robertson. May I make one comment in reference to the young 

man that you visited in the medical facility? You know we are going 

to take care of him, and we are going to take care of his family. But 

we also need to take care of the guys that rescued him off the battlefield, the ones who that flew him to the hospital and the ones that 

are going to treat him until he is discharged from the military. All of 

them should have access to the system, not just him.

 Mr. Boozman. I understand and look, I said my wife’s uncle, he was 

a World War II guy, and we have taken care of him. So I agree with 

you totally. And you can see when you go over to Iraq and you see 

those young guys and then you see our older vets, and can just see in 

the faces of both. They are just the same folks. I agree with you totally, so again that is our commitment, and I think today was a good 

step in that direction. So thank you very much.

[Whereupon, at 12:46 p.m., the Committee was adjourned.]

 
(46)

APPENDIX

STATEMENT OF

THE HONORABLE JONATHAN PERLIN, MD, PhD, MSHA, FACP

UNDER SECRETARY FOR HEALTH

VETERANS HEALTH ADMINISTRATION

DEPARTMENT OF VETERANS AFFAIRS

BEFORE THE

COMMITTEE ON VETERANS’ AFFAIRS

U.S. HOUSE OF REPRESENATIVES

JUNE 23, 2005

******

Mr. Chairman and Members of the Committee: I am pleased to be 

here this morning to discuss the Department of Veterans Affairs’ 

(VA’s) actuarial health care demand model. Accompanying me this 

morning are Rita Reed, VA’s Deputy Assistant Secretary for Budget, 

Jimmy Norris, VHA’s Chief Financial Officer, and Art Klein, Director for VHA’s Policy and Planning. Mr. Chairman, I would like to 

submit a copy of my testimony for the record.

Background

Mr. Chairman, the Veterans’ 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 whether resources are 

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 
47

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. We 

believe our modeling and forecasting have seen dramatic improvements as well.

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. We appreciate the Committee issuing a separate invitation to testify to Kathi 

Patterson, a principal and consulting actuary with Milliman and the 

lead actuary working with VHA. 

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 
48

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 three 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 six 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. The projections 

have been used throughout the CARES process to inform VHA’s 

capital planning efforts and to support the development of VISN

and program strategic plans. 

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 
49

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. 

The development of the actuarial model has been an evolutionary 

process, starting with the first model which provided single-year 

projections that were used only for the Secretary’s annual enrollment decision on resource availability and enrollment levels. Enhancements 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 to ensure that VA can provide 

safe, effective, timely and efficient care. We combine VA’s substantial experience with a contractor with unrivalled expertise in health 

care modeling to achieve the best actuarial projections possible.

This completes my statement. I will be happy to respond to questions from the Committee.
50

OVERVIEW STATEMENT BY

THE HONORABLE JOHN L. KOKULIS

DEPUTY ASSISTANT SECRETARY OF DEFENSE

FOR HEALTH BUDGETS AND FINANCIAL POLICY

BEFORE THE

COMMITTEE ON VETERANS’ AFFAIRS

U.S. HOUSE OF REPRESENTATIVES

MODELING AND BUDGETING FOR HEALTH CARE

IN THE DEPARTMENT OF DEFENSE

JUNE 23, 2005

NOT FOR PUBLIC RELEASE UNTIL

10:00 AM ON JUNE 23, 2005
51

 Mr. Chairman and distinguished members of this committee, I

want to thank you for the opportunity to discuss modeling and budgeting for health care costs in the Military Health System. 

 The Department of Defense (DoD) offers the TRICARE benefit to 

approximately nine million eligible beneficiaries. 19% of this population is made up of Uniformed Services personnel (Army, Navy, 

Air Force, Marine Corps, Coast Guard, Public Health Service and 

National Oceanic and Atmospheric Administration); their family 

members make up another 27%. Retirees, their family members 

and survivors account for 54% of our beneficiaries. 

 Approximately 20% of our beneficiaries are entitled to Medicare. 

DoD’s share of their health care costs are paid from the DoD Medicare Eligible Retiree Health Care Fund, an accrual type fund established by Congress that began operations in Fiscal Year 2003.

 For the rest of our beneficiaries, we must estimate and budget 

for the cost of their care as well as for the myriad of military unique 

readiness health care activities performed by the medical services 

of the Army, Navy and Air Force. We have three distinct missions 

in the Military Health System (MHS): Deploying a healthy and fit 

force, which involves force health protection activities such as the 

development and administration of vaccines and improving, medical 

surveillance, deployment health appraisals, and other health promotion activities (smoking cessation, etc.) to maintain the fitness of 

our war fighters; deploying a ready medical force capable of combat 

health support, which involves the movement into the theater of 

operations of field and fleet medical units such as combat support 

hospitals and aeromedical evacuation assets; and managing beneficiary care through the administration of the TRICARE benefit.

TRICARE, the Military Health Plan

 TRICARE offers our beneficiaries a variety of options for obtaining health care coverage. TRICARE Prime is a health maintenance 

organization type option that requires enrollment. active duty 

personnel are required to use military treatment facilities (MTF) 

unless assigned to a remote location where there is no nearby MTF. 

In these cases, active duty personnel are enrolled in TRICARE

Prime Remote and assigned a private sector primary care provider. 

Retirees, retiree family members and survivors have three options; 

TRICARE Prime, TRICARE Extra, and TRICARE Standard. Those 

age 65 and over may choose TRICARE for Life or TRICARE Plus. 

For TRICARE Prime, retirees and their family members under age 

65 pay an annual enrollment fee ($230 for an individual and $460 
52

for a family). Enrollees have the option of enrolling with a primary 

care manager at a local MTF if one is available or with a primary 

care manager in the private sector who is a part of the TRICARE

network established under three regional Managed Care Support 

Contracts. Care in the TRICARE network requires nominal copays 

whereas care in the MTFs does not. TRICARE Extra is a preferred 

provider organization type benefit where private sector network 

providers agree to accept reduced fees in exchange for being included in the network. TRICARE Extra offers reduced beneficiary 

out of pocket costs compared to TRICARE Standard but has a more 

limited choice of providers. TRICARE Standard is a fee for service 

benefit that offers the greatest choice of providers but includes higher deductibles and cost shares than other TRICARE options. Outpatient pharmacy services are offered free at MTF pharmacies and 

with three tiered copays through the TRICARE Retail Pharmacy 

network, and the TRICARE Mail Order Pharmacy program. Copays 

are lowest for generic drugs included in the TRICARE formulary, 

higher for name brand drugs in the formulary, and highest for drugs 

not included in the uniform formulary.

 We have now transitioned to new regional TRICARE Managed 

Care Support Contracts which include incentives for care referred 

by the contractor back to local MTFs, helping us to ensure maximum utilization of our in house care services. 

 The challenges we face as we prepare our annual budget requests 

include predicting how many of our eligible beneficiaries will use 

their TRICARE benefit, what option they will select, how often they 

will require care or prescriptions, what inflation rates will impact 

our procurement of services from the private sector, and the impact 

of recently enacted changes in benefits.

 The expansion of benefits, such as those for Reservists and our 

senior retirees, contributes to the growing size of our budget. At 

Congress’ direction, we implemented new TRICARE Reserve benefits that facilitate the individual medical readiness of members of 

the National Guard and Reserve, and contribute to the maintenance 

of an effective Reserve Component force. The National Guard and 

Reserve are doing an outstanding job and they deserve an outstanding benefit. We provide that to them. We have made permanent 

their early access to TRICARE upon notification of call-up, and their 

continued access to TRICARE for six months following active duty 

service for both individuals and their families. We have implemented the TRICARE Reserve Select (TRS) coverage for Reserve 

Component personnel and their families who meet the requirements 

established in law. TRS is a premium-based health care plan, at 
53

very attractive rates, available to eligible members of the National 

Guard and Reserves who have been activated for a contingency 

operation, on or after September 11, 2001. 

MHS Funding

 We face tremendous challenges in funding a benefit design that 

does not always reward the efficient use of care. Further, we are 

increasingly out of step with the benefit design approaches and 

trends of the private sector. We must address these issues, engage 

in constructive dialogue, and do what is right for our current and 

our future generations. Our primary goal is to ensure the military 

has a high quality, yet affordable, health benefit program for the 

long term.

 Defense Health Program (DHP) costs continue to rise due to 

increased utilization of the MHS. The Fiscal Year 2006 DHP funding request is $19.8 billion to finance the MHS mission. Our funding growth is the result of expanded benefits for our beneficiaries, 

to include the Reserve Components; increased health care costs 

in the private sector; increased utilization of health care services 

and pharmaceuticals; the inherent design of the current benefit 

structure (e.g., no copayments for active duty family members, no 

non-availability statements, decreased catastrophic caps, etc.); and 

the decision of eligible beneficiaries, principally our retirees, to drop 

private insurance coverage and rely upon TRICARE.

 DoD has taken several actions to better manage resources. The 

MHS is implementing performance-based budgeting, focusing on 

the value of services delivered rather than using old cost reimbursement methods. We are introducing an integrated pharmacy benefits 

program that uses a standardized formulary that is clinically and 

fiscally sound. Quality management programs continue to ensure 

that care provided is clinically appropriate and within prescribed 

standards. 

 With the phased implementation of a new Prospective Payment 

budgeting approach, we are moving to performance-based budgeting for our MTFs. We intend to base MTF budgets on workload 

output such as hospital admissions and clinic visits, rather than on 

historical resource levels such as number of staff employed, supply 

costs, and other materials. We will pay a “competitive market price” 

for these outputs, providing financial incentives and rewards for 

efficient health care delivery. In addition to paying for heath care 

delivered, we are also developing methods to determine the cost to 

our MTFs of maintaining a medically ready force as well as a ready 
54

medical force. Some of these costs are included in the costs of health 

care delivered, but others are above this amount. Once fully implemented, PPS should allow for better management and performance 

of all three of the MHS missions.

 Our pharmacy budget has increased five-fold since Fiscal Year 

2001 and now stands at $5.5 billion ($1.9 billion of this amount 

is not in our budget request as it is funded by the DoD Medicare 

Eligible Retiree Health Care Fund). The redesign of our pharmacy 

programs into a single, integrated program, beginning in June 2004, 

simplifies and allows us to more effectively manage this program. 

We are standardizing formulary management, achieving uniform 

access to all medications, enhancing portability, and involving beneficiaries in formulary decision-making. We will promote the use of 

more cost-effective products and points of service. 

 We strive continuously to improve the quality of care delivered 

throughout the MHS, employing sound management practices and 

metrics to ensure appropriateness of care through a variety of quality management programs. We monitor the health of our population 

using Healthy People 2010 goals as a benchmark, and we measure 

the quality of care provided using Joint Commission on Accreditation of Health care Organizations Oryx indicators.

Sharing Initiatives with DVA

 We continue to explore new avenues of partnership with the 

Department of Veterans Affairs. Our Executive Council structure 

serves as the setting in which the Departments jointly set strategic 

priorities, monitor the implementation of those priorities and ensure 

that appropriate accountability is incorporated into all joint initiatives. 

 The Joint Executive Council developed a Joint Strategic Plan for 

FY2005 that includes goals and objectives for the year, as well as 

performance metrics in the following areas:

• Leadership Commitment and Accountability

• High Quality Health Care

• Seamless Coordination of Benefits

• Integrated Information Sharing

• Efficiency of Operations
55

• Joint Contingency/Readiness Capabilities

 We have worked closely with the VA to develop and implement 

the demonstrations projects and the Joint Incentive Fund (JIF) 

projects requested by Congress. Seven demonstrations are now 

underway, twelve incentive fund projects are in varying stages of 

initiation and 56 new JIF proposals have been submitted for review. 

 We are especially pleased with our work with the Department of 

Veterans Affairs for the seamless, responsive and sensitive support 

to Soldiers, Sailors, Airmen and Marines as they return to duty or 

transition from active duty to veteran status. An important aspect 

of this transition is having the individual medical records available 

when a separated service member presents at a VA hospital for the 

first time. We made significant strides forward by transferring DoD 

electronic health information of service members who leave active 

duty to a central repository at the VA Austin Automation Center. 

Some examples of data transfer provided through this repository 

include: VA clinicians and claims adjudicators have access to DoD

laboratory results, radiology results, outpatient pharmacy data, 

allergy information, discharge summaries, consult reports, admission, disposition and transfer information, elements of the standard 

ambulatory data records and demographic data. To date, we have 

transferred this electronic health information on more than 2.9 million separated service members to this repository, and the VA has 

accessed more than 1 million of those records. We believe that this 

collaborative effort with the VA has been going extremely well and 

together, the DoD and VA are improving services to our veterans.

Modeling and Budgeting for Health Care

 The DHP consists of three appropriations: Operation and Maintenance (O&M), Procurement, and Research, Development, Test and 

Evaluation (RDT&E). O&M, which comprises approximately 97% 

of the DHP budget request, is available for obligation for one fiscal 

year and is used to pay for the majority of our day to day operations. In recognition of the volatility of health care expenditures 

and the changes that occur in our program each year, Congress has 

allowed up to 2% of the DHP O&M appropriation to be carried over 

from one fiscal year into the next, essentially making that portion 

of the appropriation available for obligation for two fiscal years. 

Approximately 80% of the DHP resources are dedicated to provision 

of medical and dental care in both the direct care system and the 

private sector; the balance funds military unique requirements and 

specific readiness missions. Procurement, which comprises approxi-
56

mately 2% of the DHP budget request, is available for obligation for 

three fiscal years and is used to pay for the acquisition of specific 

items or systems with a unit cost of $250,000 or more. RDT&E, 

which comprises less than 1% of the DHP appropriation, is available 

for obligation for two fiscal years and is used to pay for the development of new systems, such as basic and applied research, advanced 

technology development, demonstration and validation, engineering 

development, developmental and operational testing, and the evaluation of test results. We typically receive about $400 million above 

our DHP RDT&E request to fund Congressional interest items. 

All DHP appropriations are allocated in accordance with guidance 

provided by the Secretary of Defense and more detailed guidance 

provided by the Assistant Secretary of Defense (Health Affairs).

 In addition, DoD also budgets for two more appropriations not 

included in the DHP. The Military Personnel Appropriation pays 

for military personnel assigned to MHS activities, such as hospitals 

and clinics, and the Military Construction appropriation pays for 

new construction or major modification of MTFs, medical research 

facilities, and other medical buildings.

 The DHP O&M appropriation is divided into seven Budget Activity Groups (BAGs). Funding within each BAG is further separated 

into commodities and inflated at specified OMB inflation rates.

 BAG 1 – In-House Care – Funds patient care and pharmacy 

services in Medical and Dental Treatment Facilities world wide. 

This BAG is further divided into three major categories: health care 

delivered in MTFs, dental care and pharmaceuticals.

 This budget activity group comprises about 27% of the total O&M 

appropriation. Budgeting for health care in MTFs is currently 

undergoing a phased transition to the Prospective Payment System, the performance based budgeting process previously described. 

For the Fiscal Year 2006 DHP budget, 50% of this category will 

be funded through prospective payment and 50% based on historical resource levels such as number of staff employed, supply costs, 

contracts, and other categories adjusted for inflation using OMB inflation rates. We plan to base our Fiscal Year 2007 budget request 

on 75% implementation of Prospective Payment and move to full 

implementation in Fiscal Year 2008. The DHP-resourced medical 

services of the Military Departments (Army, Navy and Air Force; 

health care services for the Marines are provided by the Navy) 

develop detailed business plans to determine the amount and type 

of inpatient and outpatient workload that they will produce and be 

funded for by Prospective Payment during the budget year.
57

 Budgeting for dental care currently is based on historical resource 

levels adjusted for inflation but we plan to develop and implement a 

prospective payment process for this category in the near future.

 Pharmacy, as previously mentioned, has been an area of significant cost growth in recent years. For the In-House Care BAG, 

budgets are based on historical costs adjusted both for inflation and 

for actuarially derived trends in utilization; the development of new 

drugs has resulted in increased numbers of prescriptions for existing TRICARE users, and the previously mentioned effect of beneficiaries who were not using TRICARE but are now dropping their 

private insurance has also increased demand for pharmaceuticals.

 BAG 2 – Private Sector Care – Funds patient care and pharmacy 

services purchased from private sector providers (Managed Care 

Support Contracts, Retail and Mail Order Pharmacy, Supplemental Care, Purchased Dental Care, the Uniformed Services Family 

Health Plan, and other requirements). 

 This budget activity group comprises about 53% of the total O&M 

appropriation. Private Sector Care requirements depend heavily 

on accurate estimates of workload produced by MTFs, as well as accurate actuarial forecasts of private sector health care cost growth, 

increased utilization of health care services by TRICARE users, and 

increased numbers of TRICARE beneficiaries who use TRICARE 

as their primary insurance. In addition, changes to the TRICARE

benefit directed by Congressional action have a significant impact 

on the funding required in the budget.

 We have developed a Private Sector Care Requirements Model 

that takes these factors (as well as many others) into account in 

forecasting budgetary requirements for this BAG. 

 BAG 3 – Consolidated Health Support – Funds entrance examining activities, occupational health, veterinary services, aeromedical evacuation, the Armed Forces Institute of Pathology and other 

military unique health activities.

 This budget activity group comprises about 6% of the total O&M 

appropriation. The primary cost drivers are the volume of force 

health protection activities, aeromedical evacuation requirements, 

and volume of entrance examinations (recruits). Budgeted amounts 

are based on historical resource levels adjusted for inflation using 

OMB inflation rates, plus any new missions or initiatives directed 

by senior leaders (“programmatic” changes) or by Congress. For 
58

example, the recently directed increases in Army and Marine end 

strength drive increased requirements for military service entrance 

examination activities.

 BAG 4 – Information Management/Information Technology 

(IM/IT) – Funds both the Central and non-central, Service Medical 

IM/IT programs. The Central program funds system program management, system and infrastructure sustainment, annual software 

licensing and equipment lease costs. The non-central funds provide 

for unique military service and Tri-service systems, communications 

and computing infrastructure, information assurance, long haul/

wide area communications, office automation, video-teleconferencing, and other technical activities.

 This budget activity group comprises about 4% of the total O&M 

appropriation. The primary cost drivers are the phased fielding requirements of corporate information systems, life cycle replacement 

costs of these systems, and internally or externally directed security 

requirements.

 BAG 5 – Management Activities – Funds the military department 

medical commands and the TRICARE Management Activity.

 This budget activity group comprises about 1% of total O&M. We 

project requirements primarily based on the historic funding baseline adjusted for inflation at OMB rates.

 BAG 6 – Education and Training – Funds the Health Professions 

Scholarship Program, the Uniformed Services University of the 

Health Sciences and other education and training programs.

 This budget activity group comprises about 2% of total O&M. The 

primary cost drivers are the number and composition of our medical 

force structure (military and civilian) and the projected recruiting 

requirements for clinical professionals through the Health Professions Scholarship Program (HPSP), the Health Professions Loan 

Repayment Program (HPLRP), the Financial Assistance Program 

(FAP) and the Uniformed Services University of the Health Sciences 

(USUHS). The major areas of concern within this budget activity group are the escalating costs of tuition and the recruiting and 

retention rates of clinical personnel. 

 The military service medical departments have student output 

models that drive the requirements for in-house training requirements. This is based on personnel being promoted, separated or 

retiring. Additionally, we have an Intraservice Training Review 
59

Organization (ITRO) that manages additional training requirements from the Services and determines the most efficient means to 

train them. Many medical courses have been consolidated and are 

structured to be used by all military services to achieve more cost 

effective use of available resources.

 Total Student Allocations are determined by law with the Assistant Secretary of Defense (Health Affairs) determining the number 

of funded student allocations. Service force management offices 

determine requirements for student allocation by analyzing specialty outputs (retirement, separation) and inputs (direct accessions, 

military academies, the Reserve Officer Training Corps). These 

numbers are entered into a Force Management Tool to determine 

requirements for each specialty.

 BAG 7 – Base Operations/Communications – Funds Facility Restoration, Modernization and Sustainment, Real Property Services, 

Communications, Environmental and Base Operations Support 

costs.

 This budget activity group comprises about 6% of total O&M. 

While this BAG supports many facilities-related activities, it is 

worth noting how the specific process by which we fund the normal 

maintenance of our existing DHP infrastructure. We in the DHP

are responsible for a large, diverse inventory of facilities with a 

replacement value of approximately $19 billion. To properly sustain 

this inventory, we use the Facilities Sustainment Model (FSM) that 

integrates:

• Real property inventories

• Unit cost factors for sustainment differentiated between 

facility types by using DoD\Facility Analysis Category 

(FAC) codes

• Business rules for assigning sub-organization and fund

source responsibilities

• Forecasts of planned inventory changes, such as new construction and disposals

 For each of the FAC codes, a unit cost factor for sustainment was 

developed based upon commercial cost benchmarks and tailored 

to the specific facility composition. The FSM itself combined the 

standardized inventory and unit cost factors with a host of busi-
60

ness rules to generate an objective, auditable facilities sustainment 

requirement in sufficient detail to be useful to all MHS users.

DHP Procurement Appropriation 

 Roughly half of DHP procurement funding supports the purchase 

of information systems, and half supports purchase of medical and 

dental equipment. Requirements are driven by lifecycle replacement, new technology advances, and construction of new or renovation of existing facilities.

DHP RDT&E Appropriation 

 The DHP RDT&E Appropriation represents less than 1% of the 

total DHP appropriation and has historically primarily supported 

information management and information technology development 

efforts. Beginning in Fiscal Year 2006, the DHP RDT&E appropriation will also fund medical research laboratories transferred from 

the line Navy; the Armed Forces Radiobiology Research Institute 

transferred from the Director, Defense Research and Engineering; 

and two new initiatives - the Epidemiologic Outbreak System, and 

the SuperVision program. The Epidemiologic Outbreak System will 

provide a bio-defense system for early threat warning, rapid threat 

identification, and focused treatment and outbreak containment. 

SuperVision, a human performance enhancement program, will 

maximize war-fighter effectiveness to operate under adverse conditions. We typically receive about $400 million above our request to 

fund Congressional interest medical research.

Military Personnel (MILPERS) appropriation 

 MILPERS costs are estimated by the military services using a 

“composite” or “programming” rate that takes many factors into 

account, such as authorized end strength, grade mix, promotion timing, separation/retention rates, pay raises, recruiting costs, travel 

and temporary duty costs, and contributions to the DoD Medicare 

Eligible Retiree Health Care Fund, among other factors.

Military Construction (MILCON) appropriation

 The MILCON Appropriation provides for the design and construction of projects that allow us to replace or update our current facilities. Additionally, modernization work over the O&M Appropriation 

limit of $750,000 (or $1,500,000 if the project is strictly to alleviate 

health or safety deficiencies) is included in this account. As part of 
61

the life cycle cost analysis of our medical facilities, we monitor the 

facilities’ recapitalization rate. Recapitalization is a combination of 

restoration and modernization. Restoration returns performance to 

original levels or, alternatively, to the level defined by the normal 

degradation curve. Modernization, on the other hand, raises performance to a new level, beyond the original level. An example is the 

incorporation of force-protection enhancements into modernization 

projects at defense facilities. The modernized facilities will perform 

better, due to the addition of force-protection features, than they did 

originally.

 Since recapitalization can include restoration and modernization, 

as well as replacement, we employ both MILCON and O&M to keep 

our facilities current with modern health care practices and market 

conditions. The cost of maintaining and upgrading facilities is a 

major component of the operations and capital budgets of medical 

facilities. The DoD target rate for recapitalization is equal to the 

estimated service life of facilities (50 years for medical facilities and 

67 years on average for all DoD facilities). The ability to retain our 

critical medical infrastructure base in a safe, secure, fiscally and 

operationally efficient manner is a challenge. Even when optimally 

maintained, facilities eventually either physically wear out or become functionally obsolete. Appropriate investments are required to 

“reset” the life expectancy of our aging infrastructure. 

Conclusion

 We operate an incredibly complex and capable health care system--one that provides world class health care both at fixed facilities 

here in the United States and abroad and within the deployable 

units world wide that support the Global War on Terrorism. It is 

our enduring responsibility to ensure we maintain a healthcare 

system that delivers a fit and ready force on the battlefield, and also 

secures the well-being of families and other beneficiaries here at 

home. We face many challenges in meeting these missions in a cost 

effective manner without degrading the support we provide to current and retired members of our Nation’s Uniformed Services and 

their families. We are exercising prudent management in our cost 

control efforts but increasing demand, added benefits and high inflation for health care services tend to obscure our efforts, particularly 

when we are estimating costs for services to which our beneficiaries 

are entitled by law within the limits of the rules of appropriations 

law.

 We are exercising our strategic and business planning processes 

to ensure we effectively address readiness, capital needs, and chang-
62

ing infrastructure. We continue to pursue higher levels of system 

efficiency and clinical effectiveness and deploy information technologies and management systems that support greater performance, 

clarity and accountability. We are implementing critical new cost 

control initiatives such as prospective payment and improved Managed Care Support Contracts.

 The military medical community has often been a powerful influence in building national relationships that foster freedom and 

liberty. Today, we also directly support our Service members who 

fight to help others secure their freedom. Our MHS is truly a precious national asset. The reason military medicine has succeeded 

and why it will continue to succeed goes beyond ‘hard work’ -- it goes 

to the will and character of the American people. We are confident 

that our mission -- caring for the Uniformed Service members who 

keep this Nation safe and secure, and to care for their families -- has 

no greater calling or cause.

 Thank you.
 Budgetary Inflation Rates Applied to the 

Defense Health Program

63
64

Defense Health Program Operation and 

Maintenance Appropriation

Program Element Account Structure – Fiscal 

Year 2006 President’s Budget ($000s)

Private Sector Care Requirements Model
Overview

The Private Sector Care (PSC) Requirements Model currently divides PSC into the following 12 Program Elements (PE’s):

- 807702 TRICARE Mail Order Pharmacy (TMOP)

- 807703 Retail Pharmacy

- 807723 Managed Care Support (MCS) contracts (the recently 

 awarded T-Nex regional MCS contracts, excluding Mili-

 tary Treatment Facility (MTF) Primary Care Manager 

 (PCM) enrollee care and non-underwritten care)

- 807738 MTF PCM enrollee care for non-active duty (these costs are

 also included in the T-Nex MCS contracts’ underwriting 

 provisions, except for MTF enrollees in Alaska)

- 807741 Dental – non-active duty

- 807742 Uniformed Services Family Health Plan (USFHP)

- 807743 Supplemental Care - Health Care (primarily purchased 

 health care for active duty)

- 807745 Supplemental Care – Dental (for active duty)

- 807747 Continuing Health Education/Capital Investment (CHE/

 CAP) payments made to civilian hospitals for a portion of 

 their costs related to graduate medical education and capi-

 tal investments

- 807749 Overseas Purchased Health Care

-807751 Miscellaneous Purchased Health Care (includes Reserve

 Select health care costs, demonstrations, and other miscel-

 laneous health care cost items)

-807752 Miscellaneous Support Activities (e.g., the Marketing & 

 Education contract, the National Quality Monitoring Pro-

 gram contract)

The PSC Requirements Model does not include costs associated with 

the DoD Medicare Eligible Retiree Health Care Fund.

The three most significant PE’s are the MCS contracts (807723), 

65
MTF PCM enrollee care for non-active duty (807738), and Retail 

Pharmacy (807703). These three PEs account for approximately 

three-fourths of the PSC total. 

 Underlying Contractor Health Care Costs:

• The most significant portion of the costs in the T-Nex MCS 

and retail pharmacy contracts is the underlying health care cost 

paid by the contractors to civilian providers. 

• In developing its projected trends for these underlying 

health care costs, our analysis includes consideration of the following: 

1. Recent trends in the contractors’ health care costs (due to attraction of new users, volume trends, inflation);

2. Recent and projected trends in private sector employer 

health plans and the national health care sector in general; 

and

3. Effects of planned changes in the TRICARE program (benefit changes, change in provider reimbursement policies, 

contract transitions, etc.). 

• Using our claims database, we decompose the historical 

trends in its underlying health care costs to determine what factors 

would be ongoing versus one-time effects. Factors accounted for 

include: 

1. Global War on Terrorism (GWOT) effects (e.g., mobilized 

reservists, to be excluded from future projections);

2. Changes in the number of TRICARE eligibles under age 65

based on Defense Enrollment Eligibility Reporting System

(DEERS) data;

3. Changes in the percentage of retiree eligibles under age 65

who actually use their TRICARE benefit (the “users” trend

effect, discussed in more detail below); and

4. Changes in the cost per user (including changes in unit costs 

and volume of services per user).

• We assess these elements distinctly for pharmacy versus 

66
non-pharmacy costs.

Attraction of New TRICARE Users:

• One of the trend effects we consider is the past and future 

trend in the percentage of TRICARE-eligible retirees and retiree 

family members under age 65 who actually use TRICARE rather 

than other health insurance (OHI), typically sponsored by the retiree or retiree spouse’s current employer. 

1. To measure this effect, we define a user as an individual 

with at least one MTF or TRICARE civilian physician visit 

during the year. 

2. The most recent data indicate that the user rate among 

eligible retirees under age 65 and their family members 

increased approximately three percent in 2002, four percent

in 2003, and four percent in 2004. 

• This increasing users trend among retirees under age 65 is 

driven by two factors:

1. Private sector employer plans are increasing employee 

premium contributions, deductibles, copays, etc. Thus, 

employees’ out-of-pocket costs are increasing, making OHI

coverage less attractive to many retirees. 

2. Meanwhile, TRICARE’s benefit has become more generous 

and attractive over time. Recent benefit changes have 

lowered out-of-pocket costs for many services, and TRICARE

has not raised its deductibles, enrollment fees, or remaining copays since the benefit was first implemented. Adding 

the TRICARE for Life (TFL) benefit also meant retirees no 

longer had to stay in their employer’s OHI plan to qualify 

for an employer-sponsored “wrap-around” benefit once they 

became eligible for Medicare. 

Trends in private sector employer health plans and the national 

health care sector. 

• Evidence of civilian employer health plan cost trends is 

available from the Federal Employees’ Health Benefit Plan (FEHBP) and several annual surveys of employer health plans. 

1. FEHBP premiums increased 13% in 2002, 11% in 2003, 10%

in 2004, and 8% (estimated) in 2005.

2. The annual Kaiser Family Foundation-Health Research and 

67
 Educational Trust survey indicates that health care costs 

among large, self-insured employers increased 9% in 2001, 

12% in 2002, 12% in 2003, and 11% in 2004. Trends for selfinsured employers are especially relevant because there is 

no effect from the “health insurance underwriting cycle.”

• We also monitor trend projections made by the Centers for 

Medicare and Medicaid Services (CMS). Recent CMS projections 

are less relevant for TRICARE, however, because CMS’s model assumes downward pressure on utilization trends because of employers raising deductibles, copays, etc., a dampening effect that would 

not apply to TRICARE. 

Effects of Planned Changes In The TRICARE Program:

• We also make adjustments for a given year if significant program changes are planned. Examples can include benefit changes, 

changes in provider reimbursement policies, or scheduled contract 

transitions. 

Projected Requirements For The Other PSC Program 

Elements:

• For the other PSC PE’s, our requirements methodology: 

1. Reviews actual historical expenditures and trends;

2. Adjusts this baseline for one-time effects; and 

3. Applies future trend assumptions for the out-year projections. 

68
69

STATEMENT OF

KATHI PATTERSON, FSA, MAAA

PRINCIPAL AND CONSULTING ACTUARY

MILLIMAN, INC.

BEFORE THE

COMMITTEE ON VETERANS AFFAIRS

U.S. HOUSE OF REPRESENATIVES

JUNE 23, 2005

*****

 Mr. Chairman and Members of the Committee: I am pleased to be 

here this morning to discuss Milliman’s role in the development of the 

Department of Veterans Affairs’ (VA’s) actuarial health care demand 

model. Mr. Chairman, if I may I would like to present a summary of 

my testimony and submit the longer version for the record.

Background

 My name is Kathi Patterson and I am a principal and consulting 

actuary with Milliman, an international firm of actuaries and consultants. Milliman has been evaluating financial risk for clients since 

1947. Our firm is broadly acknowledged to be the leading consulting 

firm to health care insurers and providers. Health care utilization 

and expenditure projections are at the core of the actuarial consulting that we, as health actuaries, provide to our clients. As a firm, we 

have served thousands of clients in the area of health care modeling, 

each effort with specific needs, characteristics, and applications. 

 Our health care clients consist of the majority of the health insurers in the nation, including Blue Cross Blue Shield plans, HMOs, 

and health insurance companies. In addition, our consultants provide cost modeling services to many health care providers, including 

hospitals, physician groups, pharmacy benefit managers, and other 

provider organizations. Our firm contracts with a number of governmental agencies to assist them with health care cost forecasting, including state Medicaid programs, state mental health agencies, state 

employee plans, state insurance departments, numerous county and 

municipal entities, and other federal agencies, such as Department of 

Defense and Centers for Medicaid & Medicare Services. 

 In addition to our direct client work, we have remained committed to conducting front-line industry research, and developing and 

maintaining a series of consulting tools that have shaped the way we 

measure health care costs and efficiency. One such tool that is integral to VA’s actuarial health care demand model, referred to as the 

VHA Enrollee Health Care Demand Model, is our Health Cost Guidelines© (HCG) series, which was launched almost 50 years ago. Over 

the years the HCGs (now published in seven volumes) have become 
70

an industry standard and are used in-house by more than 90 insurers in understanding or estimating expected health care insurance 

claim costs. Among the critical data recorded in the guidelines are 

utilization rates for specific health care services and variations in service costs observed within each state across the country. Traditional 

health carriers and managed care organizations use this information 

in product pricing. It also provides utilization benchmarks for managed risk arrangements.

 Our firm also publishes the Health Cost Index® database, which 

provides measurements of national and regional monthly rates of increase in health care provider net revenues, capturing the impact 

of price, utilization, and mix/intensity changes in providing health 

care. The Index’s database contains indices for hospital inpatient, 

hospital outpatient, physician, and prescription drug benefits. The 

research that goes into producing this publication has been a valuable resource while working with VHA to establish the trend rates 

used in the VA projection model.

 VHA was in need of the expertise to develop a demand model. As 

actuarial consultants, we are frequently called upon to design and 

implement projection models for our clients, particularly when those 

models include elements of financial risk. Public and private health 

systems, even those with health actuaries on their staff, frequently 

use Milliman actuaries for their broad experience base and access to 

extensive research and data. A large consulting firm, such as Milliman, offers an extensive range of experts who specialize in all aspects 

of health care financial risk. In addition, an outside actuarial firm 

offers clients an external perspective deemed valuable to the client 

and its actuaries.

 I have 19 years of health actuarial experience and I have been 

consulting with Milliman for the past 10 years. I am a Fellow in the 

Society of Actuaries and a member of the Academy of Actuaries. I

have been involved with VHA as a consultant since 1996 when they 

first began exploring ideas on how to measure the impact of eligibility 

reform legislation. Moving from an inpatient-based system to a comprehensive health care network, Milliman and VA determined that 

historical costs were not necessarily appropriate to use for projecting 

future demands on the VA health care system. Until March of this 

year Milliman worked as a subcontractor to develop a health care 

demand projection model for VHA. As of March 2005, Milliman was 

awarded a direct contract with VHA to provide continued support for 

this model. 

 Over the years, VA and Milliman have developed a strong partnership. Milliman brings specialized expertise, access to extensive 

amounts of data, and first rate research to the modeling effort. VA 

experts provide valuable input to the majority of the individual analyses used to develop the model assumptions. In addition, VA experi-
71

ence data is incorporated into many of the analyses. This partnership of experts and data from both VA and Milliman is a powerful 

combination that provides VA with the best resources to develop an 

outstanding model. 

General Health Care Projection Modeling Concepts

 Traditionally, VHA developed expenditure forecasts based on trended historical expenditures. With the implementation of Eligibility Reform, the evolving VA health care system created the need for a more 

flexible and comprehensive enrollment, utilization, and expenditure 

projection model. Under eligibility reform, veterans, with some exceptions, are required to enroll in the VA health care system in order 

to receive health care services. The previous patient-based system 

was transformed into an enrollee-based system, similar to existing 

private and public sector health plans. Once enrolled, VA takes on 

the responsibility for providing the health care services requested by 

enrollees. Health plans/insurers have been dealing with the task of 

pricing their member- (enrollee-) based products since their inception 

and Milliman health actuaries have played a major role in developing 

the projection models needed to accomplish this task.

 Generally, in an enrollee-based health care system, the carrier (in 

this case VHA) is financially responsible (except for any cost sharing requirements) for providing any covered health care services requested by the enrollee. Therefore, in order to estimate the expected 

future costs of the system, health care service utilization must be 

modeled for each covered enrollee, as well as the expected costs for 

providing each of those services. Within the health care system it 

is understood that some enrollees will not require any health care 

services, some will require low or medium cost services and a few will 

require very high cost services during any given year. Certain enrollee characteristics can be used to help predict these future health 

care needs, such as age and gender. The general concepts for modeling health care services and costs for an enrollee based health care 

system are outlined below.

Concept 1: Each enrollee in a health care system has a unique

 health care profile

Concept 2: Individual enrollee health care profiles change over

 time

Concept 3: New enrollees are continually entering and current en-

 rollees are continually leaving (death or choosing an-

 other system such as Medicare) the health care system

Concept 4: A health care system is made up of all their enrollees

 with their respective health care profiles

Concept 5: A health care system can change policies (benefits, eli-

 gibility, delivery system, cost sharing, etc.) 
72

Concept 6: VHA is a health care system

 Concepts 1 through 5 must be considered when modeling the costs 

for a health care system because health care systems are not static. Each of these general modeling concepts are applicable to VHA, 

which is a dynamic health care system. For concept 1, the typical 

health care profile of a veteran patient of the VHA health care system prior to Eligibility Reform is different from the typical health 

care profile of today’s veteran enrollee. The health care profiles of 

veteran patients and enrollees changes over time (Concept 2) due to 

such things as aging, life style, medical advances, etc. Concept 3 relates to the fact that a different mix of veterans was coming to VHA

for services prior to eligibility reform than is coming today. Concept 

4 refers to patients of VHA prior to eligibility reform and as well as 

veteran enrollees today. Policy changes under Concept 5 could impact the entire health care system. 

 VHA is a dynamic health care system, therefore, it is appropriate 

to use generally accepted health care modeling techniques to forecast future health care expenditures. Historical budget forecasting 

methodologies previously used by VHA have extreme limitations in a 

dynamic environment. We have worked very closely with VHA to develop a demand model, employing the above modeling concepts, that 

reflects the unique characteristics of the veteran enrolled population, 

the unique characteristics of the VHA health care system, and other 

exogenous variables such as anticipated medical advances, inflation, 

technology, etc.

 The resulting model is a set of very detailed health care utilization and expenditure projection models. We model multiple health 

care services separately for many different enrollee profiles (age, gender, priority level, etc.) and geographic regions. This produces over 

40,000 individual utilization and expenditure models for each projection year. Given this level of detail, policy changes can be readily 

measured with this type of model. 

 Enrollment is projected using veteran population estimates, current enrollment levels, historical rates of enrollment, and enrollee 

mortality assumptions. The expenditure model, in general, begins 

with benchmarks that are adjusted to reflect the age, gender, reliance, and morbidity mix of the projected veteran enrollee population. 

They are also adjusted to reflect the VA benefit package, any enrollee 

cost-sharing, health care practice patterns specific to the VHA health 

care system and VA unit costs. The model assumptions are developed using both VA and non-VA data. For example, reliance, which 

measures the portion of an enrollee’s total health care demand that is 

provided by VHA, is estimated using both VA and CMS data.

 Annually, the model is updated and fine-tuned to ensure that the 

model reflects, as best possible, actual VHA expenditures. Milliman 
73

and VHA regularly monitor model projections with actual outcomes. 

In addition, Milliman conducts an extensive model validation study. 

The results of this study identify any strengths and weaknesses of 

the model and provide information about how the model can be improved. These studies are also used to evaluate the impact of proposed or implemented model enhancements. The following graphic 

depicts the modeling process.
74

 The expenditure projections produced by the model are used as 

the basis for the VHA budget process. The model assumptions can 

be modified to reflect various policy scenarios to measure the estimated impacts of these policies on projected enrollment, patients, 

workload, expenditure and cost-sharing revenue. The model also has 

the functionality to measure impacts of other factors such as changing economic conditions, future military conflicts, and policy changes 

impacting other private or public health care systems.

Conclusion

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

Care Demand Model is based upon sound health care projection modeling techniques and is appropriate for use in the budget formulation 

process. This completes my statement. I will be happy to respond to 

questions from the Committee.
75

STATEMENT OF

STEVE A. ROBERTSON, DIRECTOR,

NATIONAL LEGISLATIVE COMMISSION

THE AMERICAN LEGION

BEFORE THE

COMMITTEE ON VETERANS’ AFFAIRS

U.S. HOUSE OF REPRESENTATIVES

ON

THE BUDGET MODELING AND METHODOLOGIES USED BY

THE DEPARTMENT OF VETERANS AFFAIRS

JUNE 23, 2005

Mr. Chairman and Members of the Committee:

Thank you for this opportunity to participate in this important hearing to examine the budget modeling and methodologies used by the 

Department of Veterans Affairs (VA) in developing and forecasting 

veterans’ health care costs and utilization projections for future years. 

The American Legion welcomes this chance to address its approach 

to health care modeling for VA. 

The American Legion continues to advocate for adequate funding levels to ensure America’s veterans receive the health care and benefits 

they have earned through their honorable service to this country. 

With young service members currently deployed to more than 130 

countries, it is the responsibility of this Committee to ensure VA is 

indeed capable of meeting its obligation to provide for timely access 

to services for America’s veterans that choose VA as their preferred 

health care provider. The American Legion commends the Committee for holding this hearing to discuss this important matter.

Former British Prime Minister William Gladstone once said, “Budgets are not merely affairs of arithmetic, but in a thousand ways go 

to the root of prosperity of individuals, the relation of classes, and the 

strength of kingdoms.”

The basic difference between The American Legion’s Department of 

Veterans Affairs’ (VA’s) budget recommendation and the President’s 

VA budget request and the congressional VA budget is The American 

Legion’s is demand-driven, whereas the other two are budget-driven. 

In fact, The American Legion’s recommendations are probably more 

consistent with VA’s initial submission to the Office of Management 

and Budget (OMB) before the initial “pass-back.”
76

Mr. Chairman, of all of the budget modeling and methodologies available, the congressional budget process is the least effective in properly funding VA. Will Rogers said, “The budget is a mythical bean 

bag. Congress votes mythical beans into it, and then tries to reach in 

and pull real beans out.”

VA’s Office of the Assistant Secretary for Management is staffed with 

very competent professionals. However, Members of Congress and 

the American taxpayers are not getting their money’s worth because 

the best product, the true budgetary needs of VA, is submitted to the 

Office of Management and Budget (OMB). 

What Congress and the American people see is a skewed budget recommendation that meets the President’s budget needs rather than 

the actual needs of VA; therefore, an inaccurate and unprofessional 

product. It is a challenge for Congress to build a good budget when 

even national priorities are tainted to meet artificial, bureaucratic, 

and political parameters.

Clearly, if Congress and the American people were allowed to see 

the initial budget recommendation, rather than the watered-down 

version, everyone involved in the budgetary process could work towards a solid product – supported by the President, Congress, and 

the American people. Nobody wants to shortchange America’s heroes 

and their families.

For a moment, let’s assume that the President’s budget request accurately reflects VA’s needs:

• Why is “timely access” a problem?

• Why are eligible veterans being denied enrollment?

• Why are third-party collections inadequate?

• Why create “an annual enrollment fee” for certain veterans?

• Why increase co-payments for certain veterans?

• Why do claims take so long to be processed?

• Why are there waiting lists for VA nursing homes?

• Why are there hiring freezes throughout VA?

• Why is medical inflation within VA viewed differently than

medical inflation in the rest of the health care industry?

The American Legion believes the underlying answer to each of these 

questions is an inadequate funding paradigm. The American Legion 

does not advocate simply “throwing money at the problem” without 

any accountability; however, we do believe VA needs the fiscal resources to operate the very best system possible. Good budgeting 

should not be the homogeneous allocation of inadequate funding, but 

rather a solid statement of national priorities. Maintaining a strong 
77

national defense is a top national priority, while VA is clearly an endproduct of winning wars and maintaining peace.

It is the hope of The American Legion that eligible Members of Congress would want to seek their health care first from VA medical facilities rather than the Department of Defense or the private sector.

Clearly, there is a tremendous difference in the budgetary modeling 

and methodology between VA and DoD medical care. In the VA health 

care delivery system, not all veterans have equal access standards to 

quality health care, regardless of their willingness to pay. Currently, 

new Priority Group 8 veterans – those most likely to have resources 

and third-party insurance coverage – are denied enrollment regardless of their honorable military service in combat or peacetime. 

Within DoD medical care, all eligible beneficiaries are welcomed to 

enroll and have equal access to timely health care within their assigned region. Active-duty service members are primarily taken care 

of within the Military Treatment Facilities (MTFs), while all other 

beneficiaries may be treated in MTFs or civilian health care facilities 

based upon their contracted health care provider’s decision.

Likewise, trying to compare the enrollment fees for TRICARE Prime 

beneficiaries and proposed enrollment fees for Priority Group 7 and 

8 veterans is an awkward and inaccurate comparison. All TRICARE

Prime beneficiaries enjoy the same priority for care; whereas, Priority 

Group 7 and 8 veterans are at the end of the prioritization list for care 

and may very well exceed VA’s own acceptable access standards. 

The American Legion also recognizes that most military beneficiaries 

with veterans’ status have earned the right to use both health care 

delivery systems. The decision is normally based on individual health 

care needs – for example, long-term care or other specialized care not 

available through DoD, TRICARE, or TRICARE for Life. However, 

there are recently separated military retirees (since January 2003) in 

Priority Group 8 that are currently denied enrollment in VA. To gain 

access, these veterans would have to be specifically referred to VA by 

TRICARE for Life via some kind of sharing agreement.

The American Legion’s Budget Methodology

The American Legion’s budget recommendations are based on both 

internal and external factors:

• Internal Factors
78

1. A System Worth Saving – findings from on-site visits to local 

 VA medical facilities. The American Legion has spent a great 

 deal of time, energy, and effort to get an “up close and personal”

 view of a patient’s experiences throughout the VA health care 

 system. Preparation of this annual report is based on actual site

 visits to VA medical facilities. During these visits, both “official”

 and “unofficial” information is collected and documented. 

 Clearly, there are problems – some fiscal and others manage-

 rial – but each problem can be resolved. In most cases, there 

 are no “cookie-cutter” solutions, but there are two unquestion-

 able trends – funding and staffing shortfalls.

2. CARES Task Force – reports from local veterans’ advocates 

 closely monitoring activities, situations, and observations at 

 local VA medical facilities. The American Legion created a

 CARES Task Force to work with VA personnel and other stake-

 holders during the entire life of the CARES study. This group of

 Legionnaires will continue to monitor the CARES process 

 through-out the implementation phase. They continue to provide

 valuable input and assessments – such as reports of budgetary

 shortfalls in FY 05 and anticipated budgetary cuts in FY 06.

3. Formal network of service-officers -- The American Legion’s

 network of dedicated service-officers, at both the local and state

 level, have plenty of daily contact with veterans seeking assis-

 tance. Too often these service-officers see veterans experiencing

 major obstacles in receiving their earned benefits. Sometimes 

 they need help with disability claims, while others need health

 care assistance, especially VA’s specialized services. Again, these

 service-officers report of problems encountered in assisting veter-

 ans in need.

4. Formal network of homeless veterans’ program advocates

 and providers -- The American Legion has a formal network of

 homeless veterans’ program advocates that share information of

 the challenges faced by homeless veterans they assist.

5. Information from other advocacy organizations -- The

 American Legion works closely with a number of veterans’ and 

 military service organizations, health care professional organiza-

 tions, and other such advocacy groups. We share information 

 and observations with regard to not only VA funding, but serv-

 ices provided and the quality of health care delivered.

6. Information from informed government sources -- through

 close association with numerous government agencies and off-
79

 icials, a great deal of information – official and unofficial – is 

 collected by not only The American Legion’s professional staff,

 but also Legionnaires actively engaged within their local commu-

 nity. Such information like OMB’s “spring guidance” to all Fed-

 eral budget offices and the Bureau of Labor Statistics’ medical

 inflation rates are extremely useful.

• External Factors

1. The President’s Task Force to Improve Health Care 

 Delivery For Our Nation’s Veterans report -- among the 

 numerous findings of this Presidential Task Force was the mis-

 match between demand for services and available resources. 

 Even the Task Force could not agree on “the best solution,” but

 unanimously agreed that the issue needed immediate attention. 

 As a result, several bills have been introduced offering possible

 solutions. The American Legion has joined ranks with 9 other 

 major veterans’ service organization in support of a full funding

 formula approach that would remove VA medical services from

 the annual discretionary appropriations process, such as Medi-

 care, Social Security, VA compensation and pension, et al.

2. President’s budget request -- provides a great deal of facts,

 figures, and statistics from the Office of the Assistant Secretary 

 for Management. Although this document fails to reflect the

 “true” budgetary needs of VA and we disagree with many of its 

 VA legislative initiatives contained therein, it reflects changes

 in funding, workloads, staffing, services, and other extremely 

 useful information. The American Legion testifies before a joint

 session of the Veterans’ Affairs Committees each fall with the 

 goal of impacting the President’s budget request as it is being

 crafted for presentation in February.

3. Budget Resolution -- provides The American Legion with the

 views and estimates of the Veterans’ Affairs Committee, as well 

 as the leadership of both sides of the aisle. The 5 or 10-year pro-

 jections provide valuable insight.

4. Annual VA appropriations – serves as the platform for 

 building the next fiscal year recommendations. Unfortunately,

 for the last three years, this bill has been a part of an omnibus 

 appropriations bill enacted well into the new fiscal year. Clearly,

 this adversely impacts the long-range planning efforts of local VA

 medical center directors, medical researchers, as well as VISN

 Directors. 
80

The American Legion’s Health Care Modeling

In the late 1980s, The American Legion was deeply concerned with 

the health care delivery problems faced by veterans and military 

beneficiaries. Within VA, service-connected disabled veterans, economically disadvantaged veterans, and Civilian Health and Medical Program for VA (CHAMPVA) eligible beneficiaries were the only 

individuals with complex access standards to an inpatient-oriented 

health care delivery system. Military beneficiaries had to navigate 

an extremely costly and inefficient Civilian Health and Medical Care 

for Uniformed Services (CHAMPUS) program that failed to provide 

timely access. The American Legion believed there was a better way 

to meet the health care needs of America’s veterans and their families. After much deliberation, The American Legion offered to Congress a new health care model for VA health care delivery in the 21st 

Century, it was called the GI Bill of Health.

Fundamentally, the GI Bill of Health called on Congress to create an 

integrated health care delivery system accessible to all veterans and 

their eligible family members. Building on VA’s current infrastructure and contracting authority, VA would build a network of qualified 

health care providers working with its medical school affiliations; the 

military health care system; Public Health Service, to include Indian 

Health Services; the Federal Employee Health Benefit Program; and 

the Centers of Medicare and Medicaid Services (CMS); and contracted health care providers.

The GI Bill of Health called on the Veterans Health Administration 

(VHA) to establish an enrollment process accessible to all veterans 

and their eligible family members. Also, VHA would develop defined 

health benefit packages for basic care, comprehensive care, and specialized services.

Congress would authorize the creation of a Veterans Health Plan 

Fund to serve as a repository for all appropriated dollars (mandatory 

and discretionary), premiums, co-payments, coinsurance, deductibles, and third-party reimbursements. Funds would be expended 

for the timely delivery of health care services.

 

•Mandatory vs. discretionary funding. The American Legion 

points out that Title 38, United States Code (USC), clearly identifies priority veterans, non-priority veterans, and dependents of 

veterans. Congress mandates the Secretary of Veterans Affairs 

to provide health care services to certain priority veterans and 

dependents of veterans at no cost to the beneficiary. All other veterans and dependents should be required to cover the cost of their 
81

health care services through premiums, co-payments, or thirdparty reimbursements.

The American Legion believes the funding needed to provide the 

care required to those priority veterans and dependents of veterans 

should be guaranteed (mandatory funding). However, this does not 

relieve Congress of its responsibilities of appropriating discretionary 

appropriations for other VHA costs, such as medical facilities, medical administration, homeless veterans, and other such discretionary 

programs.

•Medicare reimbursements. Under current law, VA is prohibited from billing Medicare for the treatment of nonservice-connected medical conditions of enrolled Medicare-eligible veterans. 

Medicare eligibility is not a criteria for enrollment in the VA health 

care delivery system; therefore, VA is funded to treat Medicareeligible veterans. When Medicare is listed as the veteran’s health 

insurance provider, VA should be authorized to bill CMS for the 

treatment of allowable nonservice-connected medical conditions 

just as any other health care provider (just like DoD’s TRICARE

for Life or PHS’ Indian Health Services).

•Third-party reimbursement offsets. Third-party reimbursements are essential for VA to meet its budgetary requirements. 

The current practice of offsetting third-party collections from the 

discretionary appropriations puts each VA medical facility in the 

“red” pending future collections. As previously mentioned, VA’s 

inability to collect from CMS is a major obstacle since over half 

of VA’s enrolled patient population is Medicare-eligible. In addition, VA’s current Medical Care Collection Fund’s inability to 

achieve the projected collection goal is unacceptable and must be 

corrected.

•Enrollment. Enrollment is a critical element of the GI Bill of 

Health because it identifies not only who is enrolled, but more importantly, how that medical care will be paid for. For priority veterans and dependents of veterans, they will identify VA as the primary payer and any third-party insurers. Military beneficiaries 

would identify DoD and any third-party insurers. Non-priority 

veterans and dependents of veterans would identify their thirdparty insurers. For veterans and dependents with no third-party 

insurers, VA should be authorized to offer premium-based health 

benefit packages (similar to TRICARE or FEHBP).

•Defined health benefit packages. The GI Bill of Health called 

for defined benefits packages so that veterans and dependents 
82

would understand health care services available to them under 

each benefit package. VA would offer a basic plan, comprehensive plan, and specialized services plan(s). At enrollment, each 

enrolled veteran or dependent would be placed in the appropriate 

health benefit plan(s).

•Timely access standards. Under the GI Bill of Health, all 

veterans would be subject to VA’s own timely access standards. 

To achieve this objective, VA will have to closely monitor appointments and patient populations. With VA’s transformation to integrated care, the number of outpatient clinics has grown dramatically. With the addition of a more diverse patient population 

with a significant increase in women and children, VA will need 

to adjust its own health care professional staffing and contracted 

services.

•Availability of services. The GI Bill of Health emphasizes 

the timely delivery of quality health care in the most appropriate setting. This philosophy is consistent with the overall objective of the Capital Assets Realignment for Enhanced Services 

(CARES) program. Throughout the 1990s in the midst of VA’s 

transformation, hundreds of community-based outpatient clinics 

were opened to move health care delivery closer to where veterans 

lived. The American Legion believes VA should collaborate with 

other Federal health care providers where opportunities expanding VA health care services may be practical, especially in rural 

areas. Working in close co-ordination with DoD’s Base Realignment and Closure Commission, the availability of military medical facilities destined for closure many present opportunities for 

future community based outreach clinics, especially if there is a 

large military retirement community in the catchment area.

•VERA formula. One of the major problems with the current 

Veterans Equitable Resource Allocation (VERA) formula is that 

it ends at the VISN rather than the facility levels. This flawed 

process allows the VISN director to withhold resources that were 

allocated based on the criteria determined by the individual medical facilities within the VISN. Allocated dollars should not be held 

in reserve accounts – each facility should receive its earned allocation. 

Conclusion

Mr. Chairman and Members of the Committee, The American Legion’s Medical Care Modeling is designed to:

• Enable the Veterans Health Administration to provide time-
83

 ly access to quality health care for all enrolled patient 

 population;

• Assure all enrolled patients identify means of payment for 

 their health care treatment;

• Assure adequate funding through Federal appropriations 

 (both direct and discretionary), co-payments, premiums, and

 third-party reimbursements from Federal and private health

 insurers;

• Assure all service-connected disabled veterans have timely 

 access to quality health care for treatment of their service-

 connected condition at no cost to the veteran;

• Increase the number of access points for VA health care 

 services;

• Assure all enrolled patients are assigned to the appropriately

 defined health benefits package(s);

• Eliminate unnecessary, duplicative, or contradictory 

 regulations that would hamper timely access to quality health

 care services; 

• Expand the diversity of VA patient population; and

• Continue to honor the military service of those enrolled 

 veterans, survivors, and other family members. 

Mr. Chairman, VA, Congress, and The American Legion share the 

same goal – meeting the needs of America’s veterans and by working 

together, we can achieve that goal. This concludes my testimony 

and I appreciate this opportunity to present The American Legion’s 

approach to health care modeling.
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