GAO-03-579R VA Contract Labor 

United States General Accounting Office 

Washington, DC 20548 

June 30, 2003 

The Honorable Lane Evans 

Ranking Democratic Member 

Committee on Veterans’ Affairs 

House of Representatives 

Subject: VA Health Care: Contract Labor Cost Analysis in RAND Study 

Dear Mr. Evans: 

The Department of Veterans Affairs (VA) spent about $23 billion to provide health 

care to over 4 million veterans in fiscal year 2002. To provide this care, VA relied 

primarily on its own employees, totaling about 190,000. VA also used contract 

employees, sometimes referred to as contract labor, to provide these services. In 

response to the requirements of the Federal Activities Inventory Reform Act of 1998 

(the FAIR Act),1

 VA compiled an inventory of more than 180,000 full-time equivalent 

(FTE) positions that it determined to be “health care commercial” in nature. This 

means that the work carried out in these positions is also done in the private sector 

and could potentially be done by contract labor. 

As part of its management initiatives, the Office of Management and Budget (OMB) 

has emphasized that competition should be used to determine the most effective and 

efficient way to provide commercial services. The process used to make this 

determination—referred to as competitive sourcing—is established in OMB Circular 

A-76. This process generally provides for competition between the government and 

the private sector on the basis of costs or costs and other factors. OMB has 

established competitive sourcing FTE targets for federal agencies to achieve as part 

of OMB’s management initiatives. In response to OMB’s FTE target for VA, VA 

established a plan to complete studies of competitive sourcing of 55,000 positions by 

2008. 

 

1

Pub.L. No. 105-270, 112 Stat. 2382. The FAIR Act requires federal agencies to submit an annual 

inventory to the Office of Management and Budget of all their activities performed by federal 

employees that are not inherently governmental functions, that is, they are commercial in nature. 

OMB has defined a commercial activity as one that “is a recurring service that could be performed by 

the private sector and is resourced, performed, and controlled by the agency through performance by 

government personnel, a contract, or a fee-for-service agreement.” OMB Circular A-76, p. A-3, 

May 29, 2003. 
2 GAO-03-579R VA Contract Labor 

RAND addressed limited aspects of the use of VA contract labor in a report that 

examined another subject.2

 In that report, RAND found that increased use of 

contract labor appeared to decrease the overall costs at VA health care facilities. 

However, the report’s finding differed from the interim finding that RAND briefed 

your staff on earlier. In that briefing, RAND stated that contracting for labor could 

result in higher, rather than lower, VA health care facility costs. Because of this 

difference in RAND’s findings and your ongoing concerns about the impact of using 

contract labor at VA, you asked us to (1) determine what data RAND used in its 

contract labor analysis, (2) explain why RAND’s final and interim findings differed 

regarding the effect of using contract labor on facility costs, and (3) assess whether 

RAND’s report finding provides an adequate basis for making competitive sourcing 

decisions. 

To perform our work, we reviewed the RAND study; interviewed officials in VA’s 

Resource Allocation and Analysis Office, which managed the RAND contract; and 

interviewed authors of the RAND study. We also reviewed VA data analyzed by 

RAND on contract labor costs to verify data in its report and to determine how 

contract labor was defined. In addition, we relied on our prior work on VA 

competitive sourcing.3

 We conducted our work from March 2003 through June 2003 

in accordance with generally accepted government auditing standards. 

Results in Brief 

RAND used contract labor data provided by VA from its financial accounting system. 

These data were for contract labor costs, such as for laundry and dry cleaning, for 

each VA health care facility in fiscal year 2000. According to VA officials, the costs in 

these accounts are predominately for contract labor costs. However, an 

undetermined proportion of these costs could also be for costs other than contract 

labor. 

Data refinements that RAND made explain most of the difference between RAND’s 

report finding and interim finding on the effect of contract labor on VA facility costs, 

according to the study authors. In its report, RAND found that increasing contract 

labor was associated with decreasing VA health care facility costs. In its interim 

finding, RAND reported the opposite, namely that contract labor was associated with 

higher, not lower, VA health care facility costs. RAND study authors told us that the 

difference between their interim finding and their report finding resulted from certain 

 

2

RAND, An Analysis of Potential Adjustments to the Veterans Equitable Resource Allocation (VERA) 

System (Santa Monica: California, 2003). The purpose of the study was to evaluate ways to improve 

the health care allocation formula--the Veterans Equitable Resource Allocation system--that VA uses to 

allocate resources to its 21 health care networks. Networks in turn allocate resources to their health 

care facilities. In this work, RAND examined factors that were associated with increased costs at the 

facility level. 

3

See Related GAO Products. 
3 GAO-03-579R VA Contract Labor 

data and analytical refinements that they made during the course of their research 

and data validation work after the briefing. The most important refinement was to 

exclude the costs of medical resident stipends and benefits from the contract labor 

analysis in the report. RAND excluded these costs for the report because they are 

not funded through the VA health care resource allocation system that RAND was 

examining. 

RAND’s finding on contract labor does not provide an adequate basis for making 

competitive sourcing decisions. First, RAND’s purpose was not to address this issue 

but instead to evaluate ways to improve VA’s health care resource allocation system, 

according to the RAND study authors. For example, RAND did not examine the 

effect of using contract labor for each contract service even though the association 

with facility costs may vary by type of service. Second, VA contract labor data have 

limitations that may affect their usefulness for analysis of the relationship between 

use of contract labor and facility health care costs. One of these is that the data may 

include some nonlabor costs. In addition, the small proportion of VA labor costs that 

are for contract labor and the small variation across VA in the use of contract labor 

limit the usefulness of these data for examining the relationship between contract 

labor and facility costs, according to the RAND study authors. 

In commenting on a draft of this report VA and RAND agreed with our findings. 

Rand Used Contract Labor Data from VA’s Financial Accounting System 

RAND used contract labor data provided by VA from its financial accounting system. 

These data were for contract labor costs for each VA facility in fiscal year 2000. In 

this system, VA has a number of budget accounts for contracted services such as 

laundry and dry cleaning and professional charges for contract hospital and 

outpatient treatment. (See table 1.) RAND used these budget accounts to determine 

contract costs for fiscal year 2000. According to VA officials, the costs are 

predominately for contract labor costs. However, an undetermined proportion of 

these costs could also be for costs other than contract labor. 
4 GAO-03-579R VA Contract Labor 

Table 1: VA Budget Accounts for Contract Labor Used by RAND 

Budget account Name of account 

2513 Automated Data Processing (ADP) Maintenance Support 

2514 Systems Programming 

2520 Repair of Furniture and Equipment 

2530 Storage of Household Goods 

2535 Interior Decorating Services 

2540 Laundry and Dry Cleaning Services 

2542 Operating Services (elevator inspection, garbage disposal, pest control) 

2543 Maintenance and Repair (roads, utility systems) 

2544 ADP Equipment and Computer Maintenance Contracts 

2553 Miscellaneous Contractual Services for Indigent Veterans 

2560 Medical Care Contracts and Agreements with Institutions 

2561 Fee Medical and Nursing, on station 

2562 Fee Medical and Nursing, off station 

2569 Emergency Treatment of Veterans 

2570 Fee Dental, off station 

2571 Fee Dental, on station 

2575 Other Contract Hospitalization (non-VA, non-Sharing) 

2576 Consultants and Attendings 

2579 Scarce Medical Specialist Contracts 

2580 Non-Medical Contracts and Agreements with Institutions 

2581 Non-Medical Contracts and Agreements with Individuals 

2586 Sharing Medical Resources 

2590 VA/Department of Defense (DOD) Sharing Agreements 

2598 Contract Hospital and Outpatient Treatment (physician and professional charges) 

Source: VA. 

Data Refinements Explain Most of the Difference Between Rand Report and 

Interim Findings Regarding the Effect of Contract Labor on Costs 

Data refinements that RAND made explain most of the difference between RAND’s 

report and interim findings on the effect of contract labor on VA facility costs, 

according to the study authors. In its report, RAND’s finding regarding contract labor 

was that an increased use of contract labor results in lower VA health care facility 

costs. This finding differs from RAND’s interim finding that contract labor was 

associated with higher, not lower, VA facility costs. 

RAND study authors told us that the difference between the interim briefing and 

report findings resulted from certain data and analytical refinements that RAND did 

after the briefing. The authors stated that the major data refinement was to eliminate 

the costs of medical resident stipends and benefits from the contract labor cost 

measure in RAND’s final analysis because these costs are not funded through the VA 

health care resource allocation system that RAND was examining. In fiscal year 2002, 

VA expenditures for medical resident stipends and benefits were about $383 million. 

The RAND study authors also told us that they made additional data edits to improve 

accuracy for the report and that these edits may also have contributed to differences 

in RAND’s contract labor finding. The study authors told us that a third factor also 
5 GAO-03-579R VA Contract Labor 

contributed to the difference between RAND’s interim and report finding on contract 

labor. The authors stated that they analyzed contract labor’s impact in combination 

with various measures of patient and health care facility characteristics. The interim 

and report findings differed because RAND used different combinations of these 

measures in its analysis of contract labor. 

Rand’s Report Finding on Contract Labor Does Not Provide an Adequate 

Basis for Making Competitive Sourcing Decisions 

RAND’s report finding on contract labor does not provide an adequate basis for 

making competitive sourcing decisions for several reasons. First, the study’s purpose 

was not to evaluate competitive sourcing but instead to evaluate ways to improve 

VA’s health care resource allocation system, according to the RAND study authors.4

 

These authors said RAND did not intend this finding on contract labor to be used to 

determine whether contracting with the private sector is a cost-effective alternative 

to using government employees. For example, RAND did not examine each contract 

labor account to determine if contract labor for that service, such as laundry and dry 

cleaning, resulted in higher or lower facility costs. This is important because the 

effect on facility costs of using contract labor may vary by type of service contracted. 

RAND did not examine the effect of each service but instead used the total dollar 

amount of all contract labor services at each facility in its analysis. 

In addition, VA contract labor data have limitations that may affect their usefulness 

for analysis of the relationship between use of contract labor and facility health care 

costs. One limitation is that the data may include some nonlabor costs and VA does 

not know the extent to which nonlabor costs may be included in these accounts. 

Another limitation is the relatively small proportion of VA labor costs that are for 

contracting, 5.2 percent, and the small variation in contract labor use across VA. This 

limits the ability to examine the association of contract labor with facility health care 

costs. The RAND authors told us that, because of the relatively small amount of labor 

contracted in VA and the relatively small amount of variation, VA should not make 

policy decisions based solely on these data. The proportion of contract labor costs 

varied by network ranging from 3.2 percent in Network 3 (Bronx) to 9.2 percent in 

Network 5 (Baltimore) in fiscal year 2000. (See table 2.) In fiscal year 2000, the 

amount of labor contracted totaled $619 million. 

 

4

See RAND 2003 for details on its analysis, including its examination of contract labor. 
6 GAO-03-579R VA Contract Labor 

Table 2: VA Contract Labor Costs, Fiscal Year 2000 

Networka (location) Contract labor costs Proportion of labor costs contracted

1 (Boston) $32,632,215 5.2%

2 (Albany) 13,091,491 4.1%

3 (Bronx) 23,567,097 3.2%

4 (Pittsburgh) 35,810,445 6.0%

5 (Baltimore) 36,056,219 9.2%

6 (Durham) 22,864,024 4.1%

7 (Atlanta) 32,618,472 5.1%

8 (Bay Pines) 29,936,565 3.5%

9 (Nashville) 18,862,213 3.5%

10 (Cincinnati) 34,084,148 7.6%

11 (Ann Arbor) 19,468,111 3.9%

12 (Chicago) 32,513,913 5.0%

13 (Minneapolis) 15,824,709 4.7%

14 (Lincoln) 10,903,448 5.1%

15 (Kansas City) 22,413,093 5.1%

16 (Jackson) 43,792,398 4.8%

17 (Dallas) 24,552,854 4.8%

18 (Phoenix) 20,737,333 4.8%

19 (Denver) 23,645,796 7.9%

20 (Portland) 29,245,793 5.8%

21 (San Francisco) 44,718,978 7.5%

22 (Long Beach) 51,513,721 7.3%

National total $618,853,035 5.2%

Sources: VA and RAND.

Note: At our request, RAND calculated the network proportion of contract labor costs by aggregating totals from VA health 

care facilities to the network level and dividing total contract labor costs by total labor costs. By contrast, the network 

proportion of contract labor costs in RAND’s report represented the average of each facility’s cost in the network. As a result, 

the numbers in this table differ somewhat from the numbers in that report. 

a

VA had 22 health care networks in fiscal year 2000. It combined networks 13 and 14 in fiscal year 2002 and currently has 21 

health care networks. 

Agency and Other Comments 

We provided a draft of this report to VA and to RAND for comment. In oral 

comments, an official in VA’s Office of Congressional and Legislative Affairs informed 

us that VA agreed with our findings. The RAND study authors told us that RAND 

agreed with our findings and they provided technical comments that we incorporated 

as appropriate. 

- - - - - 

We are sending copies of this report to the Secretary of Veterans Affairs and others 

who are interested. We will make copies available to others upon request. In 

addition, the report is available at no charge on GAO’s Web site at 

http://www.gao.gov. 
7 GAO-03-579R VA Contract Labor 

If you or your staff have questions about this report, please contact me at (202) 512-

7101 or James C. Musselwhite at (202) 512-7259. Thomas A. Walke and Daniel 

Montinez made key contributions to this report. 

Sincerely yours, 

Cynthia A. Bascetta 

Director, Health Care—Veterans’ 

 Health and Benefits Issues 
8 GAO-03-579R VA Contract Labor 

Related GAO Products 

Department of Veterans Affairs: Key Management Challenges in Health and 

Disability Programs. GAO-03-756T. Washington, D.C.: May 8, 2003. 

Major Management Challenges and Program Risks: Department of Veterans 

Affairs. GAO-03-110. Washington, D.C.: January 2003. 

VA Laundry Service: Consolidations and Competitive Sourcing Could Save 

Millions. GAO-01-61. Washington, D.C.: November 30, 2000. 

Inadequate Oversight of Laundry Facility at the Department of Veterans Affairs, 

Albany, New York, Medical Facility. GAO-01-207R. Washington, D.C.: 

November 30, 2000. 

VA Health Care: Expanding Food Service Initiatives Could Save Millions. GAO-01-

64. Washington, D.C: November 30, 2000. 

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