United States General Accounting Office

GAO Testimony

Before the Subcommittee on VA, HUD, and Independent

Agencies, Committee on Appropriations, U.S. Senate

For Release on Delivery

Expected at 2:00 p.m. 

Thursday, May 1, 1997

VA HEALTH CARE

Assessment of VA’s Fiscal

Year 1998 Budget Proposal

Statement for the Record by Stephen P. Backhus, Director 

Veterans’ Affairs and Military Health Care Issues 

Health, Education, and Human Services Division

GAO/T-HEHS-97-121

VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

Mr. Chairman and Members of the Subcommittee:

We are pleased to contribute this statement for the record for the

Subcommittee’s deliberations on the President’s 1998 budget request for

the Department of Veterans Affairs (VA) health care system. With a 1997

medical care appropriation of $17 billion and a declining veteran

population, VA faces increasing pressure to contain or reduce spending as

part of governmentwide efforts to achieve a balanced budget. Last year,

we reported that VA’s health care system had the opportunity to reduce its

operating costs by billions of dollars over the next several years.1

VA’s 1998 budget proposal requests a medical care funding level of $17.6

billion, consisting of an appropriation of almost $17 billion and a

legislative proposal to retain insurance payments and other third-party

reimbursements.2 VA characterizes this as the first step in a 5-year plan to

reduce its per patient cost by 30 percent, increase patients served by 20

percent, and finance 10 percent of its expenditures using nonappropriated

revenues by the year 2002. VA proposes to use appropriations of about

$17 billion over the next 5 years and to supplement this with increases in

third-party reimbursements that are estimated to be $1.7 billion in 2002.

Our comments focus on VA’s 5-year plan, including the outlook for

attaining the stated targets and the potential effects on veterans and

others. In addition, as requested by the Subcommittee, we also offer our

preliminary observations on VA’s progress on two major initiatives:

developing a method to more equitably allocate resources and establishing

a decentralized management structure to more efficiently and effectively

deliver services. We plan to provide the Subcommittee more detailed

information on these two initiatives at a later date.

Our comments on VA’s budget proposal are based on past and ongoing

work to assess operating policies, procedures, and practices of VA

hospitals and clinics.3 We spoke with hundreds of VA officials and

examined a wide array of documents, including VA’s budget submission,

annual reports, and studies done by VA’s Office of Inspector General and

1

VA Health Care: Opportunities for Service Delivery Efficiencies Within Existing Resources

(GAO/HEHS-96-121, July 25, 1996) and VA Health Care: Opportunities to Increase Efficiency and

Reduce Resource Needs (GAO/T-HEHS-96-99, Mar. 8, 1996).

2

This includes $123 million of administrative costs for third-party insurance recoveries and $68 million

of reimbursements for veterans compensation and pension examinations.

3

A list of related GAO testimonies and reports appears at the end of this statement.

Page 1 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

others. Our comments on VA’s decentralized management and resource

allocation initiatives are based on information obtained from discussions

with officials at headquarters and seven networks as well as a review of

documents they provided.

In summary, while VA’s budget goals may be attainable, they also carry

implications such as limited deficit reduction contributions and potential

risks to low-income, uninsured veterans. Achieving increased efficiency is

not contingent on either increases in patients served or resources. VA’s

ongoing efforts to restructure its health care system could yield billions of

dollars in savings during the next 5 years. A large part of these savings

would be realized through more efficient use of its workforce, which will

allow the existing patient base to be served with fewer employees. In fact,

sufficient savings could be generated to afford VA an opportunity to

increase patients served without new resources or to increase its

contribution to deficit reduction. Furthermore, VA can significantly

decrease its reliance on appropriated resources by using its existing

authority to sell excess capacity to help other federal agencies meet their

beneficiaries’ health care needs.

VA’s proposal to generate billions of dollars in new revenue to serve

20 percent more patients intensifies VA’s direct competition with the

private sector and potentially leaves low-income, uninsured veterans

vulnerable. VA may be able to attain its revenue goals only by attracting

thousands of new users who have higher incomes or public or private

insurance. And such new VA users are likely to be drawn from private

providers who may see their revenue base erode as patients shift to VA

care. Moreover, VA may spend unreimbursed resources on these veterans,

which could reduce the availability of resources for low-income,

uninsured veterans.

VA also faces a difficult challenge as it takes steps to implement a new

resource allocation method to improve veterans’ access to VA care and a

decentralized management structure to improve resource utilization.

These initiatives promise improvements in equity and have stimulated

significant changes in efficiency. However, VA’s challenge will be to

adequately monitor these changes to identify and correct unintended

effects such as those that limit equity of access.

Background VA’s role in providing for the health care needs of veterans has evolved

over time. During its first 50 years, VA predominantly served veterans who

had disabilities caused or aggravated by military service and other

Page 2 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

low-income, uninsured veterans in need of a health care safety net. Over

the past 10 years, VA has also served higher income and insured veterans

with nonservice-connected conditions. Over time, however, VA’s patient

base has been shifting from serving primarily veterans with

service-connected conditions to those without service-connected

conditions. Currently, VA operates over 750 facilities, including 173

hospitals and over 400 outpatient clinics. These facilities serve 2.6 million

of the nation’s almost 26 million veterans as well as about 300,000

nonveterans.

In 1995, to promote greater efficiency and services to veterans, VA created

a new decentralized management structure, forming 22 Veterans

Integrated Service Networks (VISN). These networks replaced the previous

structure’s four regions and expanded local authority. The VISN is now the

basic budgetary and decision-making unit of VA’s health care system and

exercises management authority over VA facilities in its geographic area.

This system of networks clearly places value on efficiency and customer

service, and the networks are empowered to make a wide range of

decisions regarding care delivery options. Under the recently enacted

eligibility reform legislation (P.L. 104-262), for example, networks can

contract with a broader range of private providers to purchase services at

prices lower than VA’s costs and generate revenue by selling excess

services. In April 1997, VA implemented the Veterans Equitable Resource

Allocation (VERA) system to allocate medical care appropriations among

the 22 VISNs. VERA is intended to improve the equity of resource distribution

throughout VA’s health care system.

Efficiency Savings Not

Dependent on

Increased Number of

Veterans Served

Last year, we testified that VA could save billions of dollars over the next 7

years through improved efficiency. As noted before, the Congress

subsequently gave VA the two additional tools—eligibility reform and

expanded contracting authority—that VA said were key to the success of

its efforts to increase efficiency. With these tools, VA can help veterans

prevent costly hospital admissions and access lower cost services,

regardless of where veterans reside. VA’s 1998 budget request, however,

suggests that VA will be able to achieve 30 percent efficiency savings over

the next 5 years only if it has the additional resources to serve 20 percent

more patients.

Over the past 18 months, VA has taken aggressive steps to change the way

it operates to reduce costs and improve services to veterans. These

initiatives are expected to save billions of dollars by avoiding unnecessary

Page 3 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

expenditures. Most of the initiatives involve a resizing and more efficient

use of its workforce, which accounts for over $10 billion of VA’s medical

care budget. For example, VA is shifting patient care from inpatient to

outpatient settings as well as reducing average lengths of inpatient stays. It

is also consolidating management and clinical services of nearby hospitals

to reduce costs. Moreover, VA is exploring opportunities to contract with

other health care providers for services at costs lower than VA’s.

These restructuring efforts should save billions of dollars without

attracting new users as the following examples indicate:

• VA established a pre-admission screening process for hospitals that, if

effectively implemented, could save $8.4 billion over the next 5 years.

• VA integrated the management of two or more nearby facilities in 26

different locations, which should result in savings of $230 million over the

next 5 years.

• VA shifted substance abuse treatment from an inpatient to an outpatient

setting in one service location, which is expected to result in savings of

$10 million over the next 5 years.

Currently, VA has teams exploring additional opportunities for streamlining

operations and reducing workforce needs. Many of these teams are

identifying ways to use lower cost methods for delivering services within

individual facilities. For example, many facilities are

• reducing patient bed-days of care, including one location that would close

seven medical wards and generate potential savings of almost $50 million

over the next 5 years, and

• shifting inpatient surgeries to ambulatory settings, including one location

that shifted enough workload among facilities to close two surgical wards

and potentially save over $15 million during the next 5 years.

VA also has many teams exploring ways to consolidate services at nearby

facilities. Such actions should result in significant savings over the next 5

years as shown by the following examples:

• Facilities in one service area are planning to integrate eight pathology and

laboratory medicine services into a single business unit with two central

laboratories. This integration is expected to save about $10 million over

the next 5 years.

Page 4 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

• Facilities in another area are exploring ways to consolidate small

purchases into one location, which is expected to save over $20 million

during the next 5 years.

Additional savings opportunities could be available in later years from the

closing of hospitals whose workloads may be shifted to nearby hospitals

that have sufficient unused capacity to efficiently and effectively meet

veterans’ needs. For example, closing a facility with about 300 beds could

save over $100 million in overhead costs alone during a 5-year period.

Efficiency Savings

Could Provide

Opportunities to

Serve More Veterans

Without Additional

Resources

VA could expand its current patient base if its efficiency savings exceed

payroll and other cost increases. These costs are expected to be about

$637 million in 1998 and to increase by a rate of about 4 percent a year

over the next 5 years.

The effect of VA’s efficiency savings is to increase its purchasing power

each year. For example, most of the savings are attributable to reductions

in VA’s workforce, which currently numbers about 189,000 full-time

equivalents. VA may need to reduce its workforce by about 6,800 full-time

equivalents to realize an annual savings of $637 million. This level of

reductions would decrease VA’s resource needs by comparable amounts in

succeeding years. Thus, an annual appropriation of $17 billion could be

sufficient to serve 2.9 million patients in 2002 if efficiency savings and cost

increases approximate $637 million a year, on average. Moreover, VA could

increase its patient base if its efficiency initiatives yield greater savings.

Adding Resources

Further Enhances VA’s

Opportunity to Serve

More Veterans

VA’s 1998 budget proposes reinvesting all efficiency savings and using

additional resources to expand its patient base. VA expects to add a total of

$5.8 billion in new resources over the next 5 years (from public and

private insurers and others), starting with $737 million in 1998 and

increasing to $1.7 billion in 2002. VA expects that these additional

resources will allow it to increase the number of veterans served by

587,000, which would increase its patient base from 2.9 million to

3.5 million in 2002.

If the targeted resource levels are attained, VA appears capable of

attracting 587,000 new users by 2002. Recent expansion of VA’s contracting

authority and veterans’ eligibility for care should facilitate creation of new

access points, referred to as community-based outpatient clinics, which

Page 5 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

along with VA’s efforts to improve accessibility of existing hospital-based

clinics are likely to attract new workload.

For example, VA has opened or developed plans to open 86 new

community-based clinics over the last 3 years. These clinics provide only

primary care and refer veterans to VA hospitals for more specialized care.

Last month, we surveyed the 12 clinics that had at least 2 years’ operating

experience and found that they had attracted 3,000 new veterans. These

clinics experienced the largest growth in their initial year and smaller

growth in subsequent years. VA estimates that the remaining 74 clinics will

serve over 128,000 users a year but has not estimated how many will be

new VA users. Twenty-two of the new clinics estimated that between 5 and

60 percent of the patients served will be new users, while the rest

expected to serve no new users or were unsure whether new users would

be served.

Although it plans to open many more clinics, VA told us that it is too early

to estimate how many or where they will be located. Our analysis suggests

that VA could need between 1,200 and 1,800 additional clinics to attract

587,000 new users if each clinic attracts between 250 and 500 new

veterans. The first 12 clinics averaged 250 in their initial years. These

clinics also appear to provide an affordable way for VA to attract new

users.

In addition, VA’s efforts to improve veterans’ access to existing facilities

should also attract new users. These initiatives include expanding primary

care by extending operating times for hospital-based clinics to night and

weekend hours as well as ways to reduce waiting times. For example, one

hospital-based clinic reported enrolling 3,000 new veterans for care during

the first year after having made such accessibility improvements.

Expanding VA’s

Resource Base Poses

Challenges

VA’s revenue goal of $1.7 billion in 2002 includes estimated recoveries of

about $902 million from private insurance, $557 million from Medicare,

and $178 million from federal agencies and others. Attaining these targets

may present a challenge as VA would probably have to attract thousands of

new revenue-generating veterans. VA has provided, however, little

information on the numbers of new veterans needed to meet revenue goals

or how much of the revenue will come from inpatient or outpatient

services. This lack of information creates uncertainties about VA’s ability to

achieve its revenue goals.

Page 6 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

Increasing Recoveries

From Private Health

Insurance May Be Difficult

VA currently serves insured veterans and recovers some or all of its costs

of care from insurers. Presently, VA returns all recoveries to the Treasury,

except those needed to cover VA’s billing and collection costs. In 1996, VA

deposited $455 million into the Treasury and used $119 million for

administrative costs. VA’s recovery of $574 million represents a decline in

recoveries from 1995, despite an increase in the number of users.

VA’s ability to increase future recoveries from its current insured patient

base is uncertain for several reasons:

• Veterans are increasingly covered by health maintenance and preferred

provider organizations from which VA generally cannot recover.

• As an increasing proportion of VA users become eligible for Medicare, their

private health insurance becomes secondary, so potential recoveries drop.

• As VA shifts from inpatient to outpatient settings, insurance recoveries

decrease and the cost of recovery increases.

• VA found that Medigap insurers have been paying VA too much, which will

result in decreased future recoveries and refunds of about $150 million a

year.

• VA’s authority to recover from private health insurance for care provided to

service-connected veterans for non-service-related conditions expires

September 30, 1998.

As a result, to meet its revenue projections of $902 million from private

insurance, VA will probably have to focus its marketing efforts on

attracting veterans with fee-for-service private health insurance. In

addition, the Congress would need to extend VA’s authorization to recover

for certain services provided to service-connected veterans.

VA officials told us that they do not know how many veterans in their

2.9 million patient base have insurance or how many insured veterans

receive billable care. This lack of information on key elements affecting its

projections creates considerable uncertainty about the number of new

insured users VA would need to attract in order to generate its target

revenues.

Attaining Medicare

Recovery Target May Be

Difficult

VA proposes to collect about $557 million from Medicare in 2002 for

services provided to about 106,000 additional higher-income veterans who

are covered by Medicare. VA currently attracts only about 1 out of every

100 higher-income Medicare-eligible veterans—about 41,000 veterans in

1992. It thus appears questionable whether VA will be able to attract an

Page 7 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

additional 106,000 higher-income Medicare-eligible veterans by the year

2002.

VA expects to recover from Medicare, on average, about $5,300 for each of

the 106,000 additional Medicare-eligible veterans it expects to serve in

2002, a target amount that seems achievable based on average Medicare

spending levels per patient nationwide. However, it may be difficult for VA

to achieve this collection rate if Medicare-eligible veterans use primarily VA

services that are not covered by Medicare, such as prescription drugs,

inpatient psychiatric care, and long-term nursing home care. Our

assessment of Medicare-eligible veterans’ use of VA services in 1994

suggests that most of these veterans use VA, at least in part, for services

not covered by Medicare.4

Increasing Recoveries

From Other Sources

Appears Attainable

VA proposes to collect $178 million in 2002 through sales of excess services

to federal agencies, affiliated medical schools, and others. This amount

represents over a 300-percent increase over VA’s collections of $43 million

in 1996.

Since 1966, the Congress has expanded VA’s authority on several occasions

to sell excess services in an effort to encourage VA facilities to generate

revenues in addition to those appropriated. Over the last 5 years, VA’s sales

have increased by about 37 percent, with most sales to the Department of

Defense (DOD) and affiliated medical schools. Last September, the

Congress took another step to expand VA’s ability to generate revenue by

authorizing VA to sell excess health care services to any health care plan,

insurer, or other provider.

VA could meet or exceed its goal of $178 million in 2002 if it markets its

excess capacity to other federal agencies. DOD and VA reached agreement

in 1995 that VA can provide health care services to active duty and retired

members of the military and dependents enrolled in DOD’s TRICARE

program. While some VA facilities have become TRICARE providers, most

have not. Similarly, few VA facilities have generated revenue by serving

beneficiaries of other federal agencies, such as the Indian Health Service

and the Bureau of Prisons, even though these agencies have expressed

interest in buying VA’s excess services.

4

Veterans’ Health Care: Use of VA Services by Medicare-Eligible Veterans (GAO/HEHS-95-13, Oct. 24,

1994).

Page 8 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

Expanding VA’s

Resource Base May

Place Some Veterans

and Others at Risk

Over the last 25 years, VA has served an increasing number of veterans

without service-connected conditions, generally those low-income

veterans in need of a health care safety net. During the last 10 years, VA has

also served higher-income and insured veterans with its resources that

were in excess of those needed to provide care to service-connected and

low-income veterans.

Allowing VA to retain nonappropriated revenues may change VA’s

perspective. This is because the veteran population is, in effect, likely to

represent two distinct groups—non-revenue-generating veterans and

revenue-generating veterans. Within this later group are several potential

target populations: privately insured veterans; Medicare-eligible veterans;

higher-income veterans; and higher-income, privately insured, or

Medicare-eligible veterans.

Non-Revenue-Generating

Veterans May Be at Risk of

Having Access Limited

VA may encounter difficulty attaining its revenue goals unless a significant

number of new users have higher incomes or insurance. This could create

a strong incentive for VA to market services to attract revenue-generating

rather than non-revenue-generating veterans. This incentive could

manifest itself in several ways, including where VA decides to locate new

community-based outpatient clinics. For example, VA recently proposed

locating a community-based clinic in a homeless shelter that VA expects

could attract 2,040 new users in need of VA’s safety net and therefore not

likely to generate revenue. By contrast, VA has also proposed opening a

new clinic in one of the country’s more affluent counties. While the clinic

is intended to improve access for current users, it is also expected to

attract patients who could ultimately generate revenue.

Non-VA Providers May Be

at Risk of Losing Workload

Marketing VA services to generate revenue has the potential to draw

higher-income insured veterans from private providers who may then see

their revenue base erode, depending on the number of patients who shift

to VA care. If VA has to aggressively attract new users who are now

receiving health care elsewhere, it will intensify the competition between

VA and other state, county, and private providers for a larger share of a

shrinking veterans’ health care market.

VA’s success in attracting revenue-generating patients will be likely to

result in a shifting of health care costs from other financing organizations

to VA and to exacerbate financial hardships for those competing health

care providers that have excess capacities. For example, our interviews

Page 9 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

with 115 veterans using new access points last year revealed that

70 percent had Medicare coverage, 50 percent had private insurance, and

7 percent had Medicaid.5

 Most said they paid for their own primary care or

used insurance coverage to obtain care at other providers before they

switched to VA care.

VA’s Proposal Could Lower

Contribution to Deficit

Reduction

VA’s proposal to retain revenue generated from nonappropriated sources

would also affect VA’s contribution to deficit reduction. VA currently

returns recoveries to the Treasury, which, in effect, reduces the

government’s cost of VA health care. For example, VA expects to return

$438 million in 1997, which would reduce the amount of government

resources needed to serve VA’s patient base from its appropriated amount

of $17 billion to $16.6 billion. By contrast, under VA’s proposal it would

retain insurance recoveries of $590 million in 1998, increasing the

government’s cost to finance VA health care to $17.6 billion, or $1 billion

more than in the previous year.

In addition, VA’s proposal to reinvest efficiency savings and use additional

nonappropriated resources to increase the number of patients served

could affect VA’s contribution to deficit reduction. For example, VA would

need an appropriation of $17 billion a year to serve 2.9 million users if

savings equal payroll and inflation costs between 1998 and 2002. By

contrast, VA may be able to contribute up to $1 billion more in 2002 toward

deficit reduction if annual efficiency savings exceed cost increases by

$200 million, on average, over the 5-year period and such excess savings

are returned to the Treasury.

New Allocation

Method and

Decentralized

Management Show

Promise, but Risks

Exist

VA is using a new resource allocation method and a decentralized

management structure to address two long-standing issues: equity and

efficiency. These initiatives are intended to improve the equity of veterans’

access to care and produce cost savings.

5

VA’s Health Care: Improving Veterans’ Access Poses Financial and Mission-Related Challenges

(GAO/HEHS-97-7, Oct. 25, 1996).

Page 10 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

Allocating Resources

Equitably Seems

Achievable With New

Methodology

VA is using the Veterans Equitable Resource Allocation (VERA) system to

allocate 88 percent of the $17 billion medical care appropriation to the 22

networks. This approach is a major shift away from VA’s historical process

for two reasons. First, it funds 22 networks rather than hundreds of

facilities. Second, it allocates resources on the basis of costs per veteran

served rather than on the basis of facilities’ historical budgets. Funding

networks sends a clear message that each facility is a part of a larger

regional enterprise charged, in part, with a mission of achieving equity of

access. VERA recognizes that networks are the vehicles for fostering

regional change, eliminating redundancies, and facilitating cooperation

among medical facilities. Network officials have the authority to tailor

their VERA allocations to facilities and programs, within the parameters set

by national policy and guidelines, and to integrate services across facilities

for equity and other purposes.

The goal of VERA is to provide networks with comparable levels of

resources per veteran served. VA implemented VERA in an attempt to

allocate patient care resources on the basis of differences in patient needs

and regional differences in the price of their care. To do this, VERA

classifies patients into two groups—basic care and special care—as a

simple case mix adjustment. Basic care patients generally receive routine

services that are less expensive than those received by special care

patients. Special care patients often have complex or chronic conditions,

such as spinal cord injury or end-stage renal disease, or require care in

settings such as nursing homes. The VERA special care category also

includes some adjustment for age to account for the higher medical

demands of older population groups.

VERA allocates resources to networks based on two key components:

network workloads and national prices. VA patient workloads are the

estimates of the number of patients—basic and special—a network may

serve. VA also calculates workloads for research support, education

support, equipment, and nonrecurring maintenance. To determine a

national price for each workload category, VERA divides national resources

available by the national workload for that category. VERA allocates funds

to a network by multiplying the network’s workload numbers by their

respective national prices. In addition, VERA adjusts for differences in

regional labor costs for patient care.

To the extent that VERA allocates comparable levels of patient care

resources for each veteran served, it provides incentives for networks to

obtain these resources by increasing workload and decreasing costs.

Page 11 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

Networks that increase their patient workload relative to other networks

gain resources under VERA; those whose patient workloads decrease

relative to others lose resources. Networks that are more efficient, that is,

have patient care costs below the national price, have more funds

available for local initiatives. However, those with patient care costs above

the national price (that is, less efficient networks) must increase efficiency

to have such funds available. Thus, these incentives can result in cost

savings and enhanced access for veterans. VERA will not be fully

implemented until fiscal year 1999. As a result, few resources will move

among networks this year. (See fig. 1.) Five VISNs will receive fewer dollars

and 17 will receive more.6 VERA generally moves resources from the

Northeast and Midwest, where per veteran costs have been higher than the

national average, to the South and West where per veteran costs have been

lower than the national average. If VA had fully implemented VERA this year,

shifts in funding among the networks would have ranged from a reduction

of 14 percent to an increase of 16 percent.

6

In VA’s Veterans Equitable Resource Allocation System Briefing Booklet, March 1997, VA shows that 6

networks will lose funds and 16 will gain funds in fiscal year 1997. However, VA excludes allocations

for equipment and nonrecurring maintenance. We included those amounts in our calculations to show

the impact of VERA more fully. Neither we nor VA includes funds not allocated by VERA in these

comparisons.

Page 12 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

Figure 1: Changes Resulting From VERA Allocations (Fiscal Years 1996-97)

(Figure notes on next page)

Page 13 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

Note: These numbers include all six VERA expenditure categories: basic care, special care,

research support, education support, equipment, and nonrecurring maintenance.

VERA, like any allocation model, has limitations. First, VERA may shift some

resources inappropriately because it may not fully account for justifiable

differences in regional cost variations. Although VERA adjusts for

differences in regional case mix with its basic and special care patient

categories and adjusts the allocations for differences in regional labor

costs, it assumes that all the remaining differences are based on

differences in efficiencies. While inefficiency is a major factor in these cost

differences, other factors may play a role. For example, to the extent that

veterans are sicker and need more health care services in different parts of

the country, additional case mix adjustments may be necessary to fully

explain regional cost differences. As we have said in the past, VA needs to

provide more information on why costs vary throughout the country.7 VA

officials told us they plan to examine this further.

Another potential issue is that basing VERA on veteran-users may result in

underallocation of funds in areas with low usage rates. If these rates result

from past inequities in access to services, VERA may need to incorporate

population-based data on veterans with highest priority for receiving

services rather than relying solely on user data.8

 However, other factors,

such as number of veterans with health insurance coverage, could also

affect usage rates. Because adequate data were not available and VA

wished to implement VERA as quickly as possible, it did not include

population data in VERA. VA continues to examine the utility of doing so.

VERA’s incentives for lower per veteran costs and higher workload

numbers could lead to unintended consequences if not properly monitored

and corrected. In our discussions and visits with network and medical

center officials, we found efforts under way to increase the number of

veterans served. VA indicators for the first quarter of fiscal year 1997

generally show increases in the number of high-priority veterans (that is,

Category A veterans) seen, and the increases for some networks are

dramatic. We have concerns about whether the data accurately depict

7

Veterans’ Health Care: Facilities’ Resource Allocations Could Be More Equitable (GAO/HEHS-96-48,

Feb. 7, 1996) and Department of Veterans Affairs: Programmatic and Management Challenges Facing

the Department (GAO/T-HEHS-97-97, Mar. 18, 1997).

8

Category A veterans have the highest priority for receiving VA health care services. Included in

Category A are veterans with service-connected disabilities and those with service-connected

disabilities whose incomes fall below certain thresholds.

Page 14 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

changes in workload. If the data are reliable, we are concerned that some

networks may be inappropriately increasing their workload numbers to

get more resources under VERA. For example, networks may be increasing

workload by increasing the number of one-visit patients. This may be good

primary or preventive care, or it could distort VERA allocations because

only minimal services are provided to get credit for increased workload. In

the short time since the indicators were published, however, we have been

unable to determine the accuracy of the data and the services the new

users received. VA officials told us that they recognize the importance of

monitoring, identifying, and correcting unintended consequences. They

said they will monitor data used in the allocation model, including

workload increases, to ensure that they reflect changes at the network and

medical center levels that are consistent with VA-wide policy and guidance.

Although VERA is a step toward a more equitable allocation of resources, it

does not specifically address equitable access to services. Networks are

ultimately responsible for allocating funds to ensure that veterans have

equal access to VA services. Each of the networks we contacted differs in

how it allocates funds. One funds its facilities using a flat rate for each

veteran-user. Another uses a combination of historical funding and

negotiation with medical center management regarding new initiatives.

Still another includes a feature in its allocation method that provides

payment for each additional veteran served. VA officials told us they will

examine these processes to ensure that different allocation mechanisms

increase equity of access to services while addressing other national VA

goals.

Networks Have Made

Significant Progress, but

Decentralized Management

Poses Oversight

Challenges

VA has taken a page from private sector organizations and empowered the

network directors by delegating broad decision-making authority over

network budgets, facility staffing, health care delivery, and administrative

functions. This has resulted in notable accomplishments at VA, including

significant cost savings and improvements in access.

Decentralized decision-making at VA places a premium on effective

headquarters guidance and monitoring of VISN activities. The challenge is

to ensure that networks have a common understanding of VA-wide goals

and legislative requirements while permitting them flexibility in how to

achieve the goals. The challenge in monitoring network performance is to

have reliable, appropriate, and timely indicators to ensure that problems

are identified and corrected.

Page 15 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

VA has provided guidance to managers and staff since the beginning of its

reorganization. For example, the Under-Secretary for Health issued two

volumes, “Vision for Change” and “Prescription for Change,” delineating

the type of organization he intended VA to become and the goals VA would

strive to attain. Network and medical center staff told us that these

publications and other communications, such as monthly meetings

between network and headquarters managers, help develop their

understanding of the structural and operational changes being made.

VA’s new performance measurement process also plays an important

guidance role by underscoring VA-wide organizational priorities. These

measures include key indicators such as reduced bed-days of care and an

increased percentage of surgeries performed on an ambulatory basis. The

measures are the main components of the network directors’ performance

agreements. In networks we visited, medical center directors’ performance

agreements also included these measures. Medical center directors we

contacted told us that network directors were exercising closer oversight

of their progress in achieving VA-wide goals than had occurred under

previous organizational structures.

Another strategy for reducing unnecessary variation has been the use of

clinical practice guidelines. These are intended to enhance the quality and

appropriate utilization of health care services by reducing variations in the

way a health condition—for example, stroke—is treated. Networks are

required to adopt 12 practice guidelines by the end of fiscal year 1997.

They can choose from those identified by headquarters or other sources.

Providing national guidelines but offering networks discretion on when to

follow these guidelines can create opportunities for local innovation but

problems for national oversight. If discretion results in variation across the

system, it will be difficult for VA to assess the impact of the guidelines.

Network flexibility may produce tension between headquarters and

networks. For example, officials in one network we visited told us that

they preferred the American Medical Association guidelines to the national

diabetes guidelines VA adopted.

Headquarters, network, and medical center officials told us that national

guidance had not been sufficiently clear on whether to notify headquarters

of significant program changes at the network level. They told us that they

had not always been clear on what constituted “significant” changes. In a

few instances, headquarters officials were not notified of impending

network-initiated changes such as closure of a surgical program at a

Page 16 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

medical center. In May and September 1996, headquarters issued guidance

for networks on prior notification and consultation with headquarters for

network actions such as restructuring clinical services—including

closures of major programs—and proposed changes to special emphasis

programs such as those for spinal cord injury and prosthetics. VA has

additional measures planned to ensure that headquarters is involved in

significant network-initiated program changes.

Performance measures and standards developed by headquarters are the

key components of VA’s monitoring process. Headquarters holds network

directors accountable for making progress toward VA goals by including

measures and standards of performance in the directors’ contracts.

Headquarters lengthened its list of measures for fiscal year 1997; it now

includes about two dozen indicators. In networks we visited, directors are

monitoring medical centers on these measures as well.

Concluding

Observations

VA’s 1998 budget presents the Congress with a fundamental choice about

the future course of VA health care, a choice that will have an effect on

veterans, other health care providers, and efforts to achieve a balanced

federal budget. In general, VA’s proposal to reinvest all savings and

generate additional nonappropriated revenues may intensify the direct

competition between VA and other providers. By contrast, a decision to

limit VA’s retention of nonappropriated revenues will set VA on a course to

becoming a more cost-efficient safety net for those non-revenuegenerating veterans who have no other health care options.

Currently, there is insufficient information to understand the full

implications of VA’s budget proposal. VA states that the key elements of its

proposal—namely, a 30-percent per patient cost reduction, a 20-percent

increase in veterans served, and a 10-percent reduction of its reliance on

appropriations—are inexorably linked but, in our view, this is not so. It

seems plausible that any number of different scenarios could occur,

depending on the magnitude of cost savings that VA will realize through its

ongoing restructuring.

For instance, VA could operate as a health care safety net for several years,

with an appropriation of about $17 billion or less, given VA’s progress in

identifying and implementing efficiency savings. Such efficiency savings

could equal or exceed the potential nonappropriated revenues that VA

estimates it can generate over the next 2 years if authorized to do so. For

this reason, there appears to be time to obtain critical information from VA

Page 17 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

and others so that VA’s budget proposal may be more clearly understood

and fully debated. In this regard, several critical issues could be addressed,

including the following:

• Should VA reinvest all efficiency savings to expand the number of patients

served? If so, should VA’s expansion be limited to certain target groups of

veterans, such as service-connected, low-income, or uninsured veterans in

need of a health care safety net?

• Should VA use nonappropriated revenue sources to help finance increased

services to higher-income and insured veterans who have no

service-connected conditions or continue relying solely on appropriated

resources to finance increased services for service-connected and

low-income veterans without service-connected conditions?

• Should VA reinvest savings in excess of those needed to maintain its

current patient base in order to serve more veterans or should it return

some or all of the excess savings as a contribution toward deficit

reduction?

It would be less difficult to make such choices at this time if VA had

provided a road map that clearly articulated (1) what operational changes

would be needed to move along its newly proposed competitive course

and (2) what consequences such competition would have for veterans and

others. For example, additional information would be helpful about how

different choices may affect (1) service-connected veterans and those in

need of VA’s safety net; (2) VA’s existing hospitals, clinics, and other

facilities; (3) VA’s workforce; and (4) other health care providers.

Delaying a decision on VA’s legislative proposals until such critical

information is available—including a plan describing how the system will

look and operate in 2002—may result in a better legislative decision on

VA’s budget proposal. It will also afford VA and the Congress time to better

assess how VA’s future resource needs may be affected by the new

decentralized management and resource allocation initiatives.

VA’s new resource allocation process and decentralized management

structure hold promise for improved operational efficiencies and equitable

access. Responding to VERA’s incentives and VA’s goals, local managers are

already producing substantial savings and increasing the number of

veterans served. VA, however, needs to continue examining how price and

workload data are determined under VERA to improve equity of resource

allocation. VA also needs to carefully monitor the impact of VERA’s

incentives on network and facilities performance. This is particularly

Page 18 GAO/T-HEHS-97-121
VA Health Care: Assessment of VA’s Fiscal

Year 1998 Budget Proposal

important given the variation resulting from local managers’ flexibility in

the decentralized system. We believe that identifying and correcting

problems is essential to the success of VA’s proposed 5-year plan.

Contributors For more information about this statement, please call Paul Reynolds,

Assistant Director, at (202) 512-7109 or Bruce Layton, Assistant Director,

at (202) 512-6837.

Page 19 GAO/T-HEHS-97-121
Related GAO Products

Department of Veterans Affairs: Programmatic and Management

Challenges Facing the Department (GAO/T-HEHS-97-97, Mar. 18, 1997).

VA Health Care: Improving Veterans’ Access Poses Financial and

Mission-Related Challenges (GAO/HEHS-97-7, Oct. 25, 1996).

VA Health Care: Opportunities to Significantly Reduce Outpatient

Pharmacy Costs (GAO/HEHS-97-15, Oct. 11, 1996).

VA Health Care: Issues Affecting Eligibility Reform Efforts (GAO/HEHS-96-160,

Sept. 11, 1996).

VA Health Care: Opportunities for Service Delivery Efficiencies Within

Existing Resources (GAO/HEHS-96-121, July 25, 1996).

VA Health Care: Challenges for the Future (GAO/HEHS-96-172, June 27, 1996).

VA Health Care: Efforts to Improve Veterans’ Access to Primary Care

Services (GAO/T-HEHS-96-134, Apr. 24, 1996).

VA Health Care: Approaches for Developing Budget-Neutral Eligibility

Reform (GAO/T-HEHS-96-107, Mar. 20, 1996).

VA Health Care: Opportunities to Increase Efficiency and Reduce Resource

Needs (GAO/T-HEHS-96-99, Mar. 8, 1996).

Veterans’ Health Care: Facilities’ Resource Allocations Could Be More

Equitable (GAO/HEHS-96-48, Feb. 7, 1996).

VA Health Care: Issues Affecting Eligibility Reform (GAO/T-HEHS-95-213,

July 19, 1995).

VA Health Care: Challenges and Options for the Future (GAO/T-HEHS-95-147,

May 9, 1995).

VA Health Care: Retargeting Needed to Better Meet Veterans’ Changing

Needs (GAO/HEHS-95-39, Apr. 21, 1995).

Veterans’ Health Care: Use of VA Services by Medicare-Eligible Veterans

(GAO/HEHS-95-13, Oct. 24, 1994).

(406140) Page 20 GAO/T-HEHS-97-121
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 6015

Gaithersburg, MD 20884-6015

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100