```
VA Health Care: Albuquerque Medical Center Not Recovering Full Costs of
Lithotripsy Services (Letter Report, 12/28/94, GAO/HEHS-95-19).

The price charged by the Department of Veterans Affairs' (VA) medical
center in Albuquerque, New Mexico, for lithotripsy--a procedure that
uses shock waves to crush kidney stores into small pieces that can be
passed through a patient's urinary tract--did not fully recover the
center's costs. The main reason for the problem--a flawed price-setting
methodology--can be corrected. First, the Albuquerque medical center
should develop the lithotripsy charges using a workload estimate that is
based on historical workload for veterans and potential demand under
sharing agreements. Second, the center should include an equipment
depreciation cost that is based on a shorter useful life. Without such
actions, it seems likely that the Albuquerque center's pricing practices
will continue to fail to recoup costs and may harm the market for
lithotripsy services in the Albuquerque area.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-95-19
     TITLE:  VA Health Care: Albuquerque Medical Center Not Recovering 
             Full Costs of Lithotripsy Services
      DATE:  12/28/94
   SUBJECT:  Veterans hospitals
             Hospital care services
             Health care costs
             Contract administration
             Price adjustments
             Cost analysis
             Medical equipment
             Unfair competition
             Overhead costs
             Health centers
IDENTIFIER:  Albuquerque (NM)
             
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Cover
================================================================ COVER

Report to the Ranking Minority Member, Human Resources and
Intergovernmental Relations Subcommittee, House Committee on
Government Operations

December 1994

VA HEALTH CARE - ALBUQUERQUE
MEDICAL CENTER NOT RECOVERING FULL
COSTS OF LITHOTRIPSY SERVICES

GAO/HEHS-95-19

VA Lithotripsy Costs

Abbreviations
=============================================================== ABBREV

  UNM - University of New Mexico
  VA - Department of Veterans Affairs

Letter
=============================================================== LETTER

B-256149

December 28, 1994

The Honorable Steven H.  Schiff
Ranking Minority Member
Human Resources and Intergovernmental
 Relations Subcommittee
Committee on Government Operations
House of Representatives

Dear Mr.  Schiff: 

The Department of Veterans Affairs (VA) operates 157 medical centers,
including one in Albuquerque, New Mexico.  Since 1992, the
Albuquerque center has provided lithotripsy to veterans.\1 In January
1993, the University of New Mexico (UNM) Health Sciences Center
contracted with the Albuquerque center for the use of the Albuquerque
center's equipment and related support services.  Under this
contract, UNM provides lithotripsy services to nonveterans on a
space-available basis. 

In January 1994, you expressed concern that the Albuquerque center's
contracting practices may have resulted in unfair competition with
other lithotripsy providers in the Albuquerque area.  At your
request, we determined if the Albuquerque center was charging prices
that fully recovered the government's cost of providing lithotripsy
services to nonveterans.  We also assessed what effect, if any, the
center's pricing actions may be having on the market for lithotripsy
services in the Albuquerque area. 

In doing this, we visited all major organizations involved in the
Albuquerque lithotripsy market; we interviewed officials and reviewed
records.  To evaluate the center's lithotripsy prices, we identified
all cost components involved in the provision of lithotripsy, such as
staffing and supplies, and assessed the methodology and cost data
that the center used in determining the charges needed to recover the
costs for each component.  To assess the market implications of the
center's pricing actions, we compared the services available and
prices charged by the Albuquerque center and UNM to the services and
prices charged by all the other providers.  At each provider, we
discussed pricing practices, reviewed billing and utilization data,
and discussed key factors affecting a consumer's choice of a
lithotripsy provider in the Albuquerque market.  Appendix I presents
additional details on the scope of our fieldwork and methodologies
used. 

--------------------
\1 A process using shock waves to fracture kidney stones. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The Albuquerque VA medical center's prices for lithotripsy services
sold to UNM did not fully recover the center's costs.  For example,
the center charged $1,469 for each basic lithotripsy procedure
provided in 1993.  This amount was considerably below costs, which we
calculated to be about $3,360.  This price difference occurred
primarily because the center's rate-setting process spread the
recovery of fixed costs, such as equipment depreciation and
maintenance, over an unrealistically high annual workload estimate of
882 procedures.  Because the center performed significantly fewer
procedures, it did not recover about $91,000 of the costs for 48
contract procedures provided to UNM patients in 1993. 

In setting a 1994 price, the center lowered its projected annual
workload estimate to 500 procedures.  This estimate still appears to
be unrealistically high, given that the center has performed fewer
than 100 procedures during the first half of 1994.  In addition, the
center extended the period of time for recovery of equipment
depreciation costs from 5 years to 9 years.  Because these changes
had offsetting effects on costs charged per procedure, the 1994
charge for basic lithotripsy is $1,451--slightly less than the 1993
charge.  Consequently, the center will apparently fail to recover
depreciation costs, totaling thousands of dollars, for contract
procedures provided to UNM patients in 1994. 

The Albuquerque center's pricing practices for procedures provided to
UNM may affect the competitive balance among providers in the
Albuquerque lithotripsy market.  For example, in late 1993, UNM
lowered its charges to insured patients and others by about 30
percent, setting them at a level significantly below market rates. 
This pricing action may not have been possible if the Albuquerque
center had charged UNM for the full costs of the contract procedures
provided.  Because UNM's charges had previously been consistent with
market rates, the reduced prices may likely shift market demand from
other area providers to UNM.  However, the potential market impact is
difficult to estimate because consumers' health care decisions are
affected by such additional factors as access and quality of care in
addition to price. 

   BACKGROUND
------------------------------------------------------------ Letter :2

VA's 157 medical centers serve about 2.3 million veterans each year
at a cost of about $14 billion.  The Albuquerque medical center
provides a wide range of inpatient and outpatient care to about
31,000 veterans who reside primarily in New Mexico, the southern part
of Colorado, and the western part of Texas.  The center spends about
$65 million annually. 

VA medical centers are authorized to enter into affiliation
agreements with nearby medical schools.  Through these agreements, VA
centers and medical schools may share excess services as a means of
improving efficiency of operations and providing patients access to
advanced technologies.  This may be done through joint acquisition of
equipment or contracts that require one party to reimburse the other
for the costs of services shared.  According to hospital officials,
the Albuquerque center currently shares more than 150 medical
services, including lithotripsy, with the UNM medical school (see
app.  II for a detailed discussion of VA's authority to share
services with medical schools). 

      LITHOTRIPSY IS A SPECIALIZED
      TREATMENT OF KIDNEY STONES
---------------------------------------------------------- Letter :2.1

Lithotripsy (in Greek, "stone crusher") is a process that uses shock
waves to fracture kidney stones into pieces small enough to pass
through a patient's urinary tract.  While patients may be able to
pass smaller stones on their own, many stones are too large to pass
through the ureter, which is a gradually narrowing tube within the
urinary tract.  Before lithotripsy, surgical procedures were often
used to remove such stones, requiring a hospital stay.  Lithotripsy,
by contrast, is generally performed as an outpatient procedure. 

A specialized piece of equipment--an extracorporeal shock-wave
lithotripter--produces the shock waves that break up the kidney
stone.  Medical personnel needed for the procedure may include a
technician to operate the lithotripter, a urologist to monitor and
supervise the procedure, and an anesthesiologist or anesthesiology
certified registered nurse to administer pain medications and monitor
the patient's overall health during the procedure. 

      FIVE HOSPITALS PROVIDE
      LITHOTRIPSY IN ALBUQUERQUE
---------------------------------------------------------- Letter :2.2

Two public and three private hospitals provide lithotripsy in
Albuquerque.  The Albuquerque VA center provides lithotripsy services
to veterans who meet VA's eligibility criteria.  Veterans choosing
not to use VA services and nonveterans can obtain lithotripsy
services through four other hospitals in Albuquerque--the UNM Health
Services Center, a state-operated institution, or three private
hospitals (Kaseman Presbyterian, St.  Joseph's, and Lovelace). 

Each of the latter four hospitals contracts for the use of
lithotripsy equipment from one of two sources.  UNM has a contract to
use VA's lithotripter at the Albuquerque center; the three private
hospitals use a lithotripter supplied under contract with Southwest
Therapies, a for-profit company.  VA and Southwest Therapies are the
only equipment owners in Albuquerque.  Previously, hospitals had to
send patients needing lithotripsy to health care providers outside
the Albuquerque area. 

The two contractual arrangements for lithotripsy equipment use in
Albuquerque differ in several key aspects.  The UNM/VA arrangement is
based on treatment with a lithotripter permanently located at the
Albuquerque center.  Under this arrangement, VA provides the site,
equipment, technician, nurses, anesthesiologist or anesthesiology
certified registered nurse, recovery room, and facility support,
while UNM provides the urologist and handles the patient billing
services. 

The arrangement between each of the private hospitals and Southwest
Therapies, by contrast, is based on treatment with a mobile
lithotripter that is taken to each hospital on a regularly scheduled
basis.  Southwest Therapies provides the equipment and a technician,
while the hospital provides the site, utilities, recovery room,
nurses, and other facility support.  Under this approach, the
urologist and anesthesiologist are private physicians who bill the
patient or the patient's insurance separately for their services, as
table 1 shows. 

                          Table 1
          
             Comparison of Contract Lithotripsy
                  Services in Albuquerque

                    UNM/VA
                    arrangemen  Southwest Therapies
                    t           contract
------------------  ----------  --------------------------
Service provider    UNM         Private hospitals (Kaseman
                                Presbyterian, St.
                                Joseph's, and Lovelace)

Equipment supplier  VA          Southwest Therapies

Treatment site      VA          Hospital (mobile
                                lithotripter moved from
                                hospital to hospital)

Technician          VA          Southwest Therapies

Urologist           UNM         Private physician

Anesthesiology      VA          Private physician

Other clinical      VA/UNM      Private hospital
support
----------------------------------------------------------
Over one-quarter of all lithotripsy procedures for Albuquerque-area
patients (353) in 1993 were performed using the Albuquerque center's
lithotripter (see table 2).  The procedures were divided nearly
equally between VA and UNM patients. 

                           Table 2
           
             Distribution of Lithotripsy Services
           Performed for Albuquerque Area Patients
                            (1993)

Hospital                                Therapies
------------------  ------------------  --------------------
Albuquerque VA             46\a         --
 Medical Center
UNM                         48          --
Kaseman                     --          120
 Presbyterian
St. Joseph's                --          71
Lovelace                    --          68
============================================================
Total                      94\b         259
------------------------------------------------------------
\a Includes 34 veterans and 12 military patients referred from nearby
Kirtland Air Force Base who were served under a sharing agreement
between the Department of Defense and VA. 

\b The Albuquerque center also treated 61 veterans who were
transferred from VA medical centers in surrounding states, bringing
the total number of treatments it performed to 155 in 1993. 

   ALBUQUERQUE CENTER'S 1993 PRICE
   DID NOT RECOVER FULL COST OF
   LITHOTRIPSY SERVICES
------------------------------------------------------------ Letter :3

Medical centers are generally required to recover the full variable
and fixed costs of contract services provided to patients of
affiliated medical schools, according to VA's rate-setting policy. 
Specifically, the Albuquerque center should include all costs for
staffing, equipment usage (including depreciation), supplies, and
administration. 

Variable costs refer to expenses that are incurred only when a
lithotripsy procedure is performed, such as staffing, supplies, and
administration.  For example, if the center used supplies costing
$200 for an individual procedure, this amount should be included in
the charge.  Thus, if 10 procedures were performed, the total cost
would be $2,000; likewise, there would be no cost if the center did
not perform any procedures. 

By contrast, fixed costs refer to those expenses that the center
incurs regardless of the number of procedures performed.  These
include equipment depreciation and maintenance, as well as building
management.  For example, depreciation represents the annual expense
of using an asset, such as the lithotripter.  Generally, annual
depreciation costs are determined by dividing the equipment's
purchase price (less any salvage value) by the number of years of
useful life.  By allocating this cost evenly over the number of
procedures performed, the center can recover its initial investment. 

The Albuquerque center included the appropriate fixed and variable
cost components in its rate-setting process.  Nonetheless, the
center's rates were not sufficient to recover all costs.  For
example, the center charged $1,469 for a basic lithotripsy procedure
provided to each UNM patient receiving contract services in 1993.\2
The center had unrecovered costs of $1,894 for each procedure,
consisting of $1,670 in fixed costs and $224 in variable costs, as
the following sections show. 

--------------------
\2 A basic lithotripsy service covers the routine fracturing of the
kidney stones, without any related procedures or complicating
factors.  See appendix IV for other levels of lithotripsy services
and the rates the center charges for them. 

      MOST FIXED COSTS WERE NOT
      RECOVERED
---------------------------------------------------------- Letter :3.1

The Albuquerque center incurred total annual fixed costs of $360,387
for lithotripsy services in 1993.  The center estimated that a charge
of $655 would be sufficient to recover fixed costs in its overall
charge for each lithotripsy procedure in 1993.\3 Depreciation costs
accounted for the majority of the fixed costs, as table 3 shows. 

                          Table 3
          
           Comparison of Total Annual Fixed Costs
              and Amount Charged Per Procedure

                          Total annual  Single lithotripsy
Fixed cost component              cost    procedure charge
--------------------  ----------------  ------------------
Equipment                     $249,645                $408
 depreciation
Equipment                       72,865                 204
 maintenance
Building management             37,877                  43
==========================================================
Total                         $360,387                $655
----------------------------------------------------------
Our analysis showed that a charge of $655 per lithotripsy procedure
was not sufficient to recover the center's fixed costs.  This can be
seen by comparing the revenues such a charge would produce against
the total fixed costs of $360,387 that Albuquerque incurred. 
Collecting $655 for each of the 155 lithotripsy procedures conducted
in 1993 would recover about $101,525, leaving a shortfall of about
$258,862 or $1,670 per procedure.\4

This shortfall occurred because the Albuquerque center's charges were
based on an unrealistically high estimate of the total number of
lithotripsy procedures it would perform in 1993.  The center assumed
that its fixed costs would be spread over 882 procedures during the
year; the number of procedures actually performed was 155, less than
20 percent of this estimated workload.  When we asked how the
estimate of 882 had been developed, officials at the center said they
based it on a low estimate of the equipment's annual capacity. 

VA policy recommends, but does not require, that workload be
developed on the basis of a center's actual usage during the previous
year (historical workload) and expected usage under new sharing
agreement(s) (potential demand).  If this approach had been used by
the Albuquerque center, workload would have been estimated at 256
procedures--140 veterans and military beneficiaries served in 1992
and 116 patients targeted in the UNM contract for 1993.  Our
discussions with center officials indicated that they were unaware of
this suggested workload estimating methodology when they developed
their 1993 workload estimates. 

VA's policy also recognizes that the accuracy of projections will
greatly affect the charges assessed for a service that is provided
under a sharing agreement with an affiliated medical school. 
Accordingly, VA recommends that the projected total workload be
reviewed quarterly and the charges be adjusted if the revised
workload estimate shows the per-procedure cost would change by more
than 5 percent. 

Officials at the center made no effort to revise the charges for the
fixed-cost components during 1993 and said that they were unaware of
this provision.  During 1993, the number of procedures averaged 39
per quarter, with a low of 34 in the second quarter.  That the number
of procedures performed would be well below the estimated workload
was clear early in 1993.  Adjustments should have been made to the
charges then but were not. 

--------------------
\3 Appendix III discusses each fixed cost component in more detail. 

\4 The center does not charge for all 155 procedures because many are
for veterans who do not have to pay.  Such an analysis is necessary,
however, to determine if patients who should be charged for the
service are paying enough to recover their portion of total fixed
costs. 

      FULL RECOVERY OF FIXED COSTS
      REQUIRES SIGNIFICANTLY
      HIGHER LITHOTRIPSY CHARGES
---------------------------------------------------------- Letter :3.2

To illustrate the effect of this overstated workload on the center's
recovery of contract lithotripsy costs, we examined the center's
charge of $1,469 for a basic lithotripsy procedure.  The center's
basic charge may be divided into two cost categories--$755 for the
lithotripter and technician and $714 for facilities support,
including anesthesiology services.  These categories are consistent
with those used by other Albuquerque lithotripsy providers and they
facilitate our comparative analysis with these providers.  Each
category contains variable costs (staffing, supplies, or
administration) as well as fixed costs (equipment depreciation and
maintenance or building management). 

To estimate the amount of unrecovered costs, we compared the center's
1993 charges for these cost categories using the center's workload
estimate of 882 and its actual workload of 155 procedures.  To fully
recover the Albuquerque center's fixed costs spread over the 155
procedures provided, the center would have needed to charge about
$3,360 rather than the $1,469 it actually charged.  These charges are
summarized in table 4.\5

                           Table 4
           
             Comparison of 1993 Charges for Basic
            Lithotripsy Service Based on Estimated
                    and Actual Procedures

                     procedures         procedures
Component           (estimated)          (actual)
----------------  ----------------  ------------------  ----
Lithotripter (including technician)
------------------------------------------------------------
Staffing                $143               $143           $0
Equipment               408               1,611         1,20
 depreciation                                              3
Equipment               204                470           266
 maintenance
============================================================
Subtotal                $755              $2,224        $1,4
                                                          69

Facilities support (including anesthesiology)
------------------------------------------------------------
Staffing                $245               $245           $0
Supplies                194                194             0
Administration          232                456          224\
                                                           a
Engineering/             43                244           201
 building
 management
============================================================
Subtotal                $714              $1,139        $425
============================================================
Total                  $1,469             $3,363        $1,8
                                                          94
------------------------------------------------------------
\a The administrative costs are variable costs that are primarily
determined by applying a fixed percentage to the total costs of the
other components.  As a result, the center's understatement of the
other fixed costs ($1,670), as discussed earlier, also caused a $224
understatement of administrative costs. 

--------------------
\5 Appendix V provides a detailed explanation of the factors that
resulted in the center's pricing structure being too low. 

   CENTER'S 1994 PRICE ALSO
   UNLIKELY TO RECOVER LITHOTRIPSY
   COSTS
------------------------------------------------------------ Letter :4

In February 1994, the center revised its lithotripsy charge for UNM
patients.  This revision included an adjustment in the expected
number of procedures as well as changes to key assumptions and cost
data.  Because these adjustments had an offsetting effect, there was
essentially no change in the rate--$1,451 for 1994, compared with
$1,469 for 1993.  Two key assumptions in the center's calculations
indicate that the center may again recover only a small portion of
the fixed costs of lithotripsy services provided to UNM patients. 

      ESTIMATED WORKLOAD APPEARS
      UNREALISTICALLY HIGH
---------------------------------------------------------- Letter :4.1

The Albuquerque center computed its 1994 prices on the assumption
that it would conduct 500 lithotripsy procedures at the center in
1994.  While this represents a 43-percent reduction from the center's
estimate of 882 a year earlier, it still appears unrealistic given
the experience of the past several years--140 procedures actually
conducted in 1992 and 155 procedures actually conducted in 1993. 
Center officials were not able to offer support for their projection
that the number of procedures would more than double. 

The center's estimated workload would have been 223 procedures if it
had been developed on the basis of historical workload and potential
demand under UNM's sharing agreement.  During 1993, the center
conducted 107 procedures on veterans and military beneficiaries,\6
and the UNM sharing agreement calls for it to provide 116 procedures
in 1994. 

The center's charge of $1,451 should fully recover costs if the
estimated workload (500 procedures) is performed.  However, a higher
charge would be needed to cover costs if fewer procedures are
performed.  As of June 30, 1994--halfway through 1994--the center had
performed 97 procedures and we were told that the rate of utilization
was not expected to increase significantly.  Although adjustments to
the charge appear warranted, Albuquerque center officials told us
that they have no plans to do so. 

--------------------
\6 This consists of 46 Albuquerque center patients and 61 transferred
from VA medical centers in surrounding states; it excludes 48 UNM
patients who received contract services. 

      EQUIPMENT DEPRECIATION
      PERIOD APPEARS EXCESSIVELY
      LONG
---------------------------------------------------------- Letter :4.2

Albuquerque center officials computed the 1994 charges on the
assumption that the lithotripter's initial acquisition costs would be
depreciated over a period of 9 years--4 years longer than the period
used to determine the 1993 charges.  Center officials told us that
this adjustment was made to reflect the lower than anticipated
utilization rate during the first 2 years of operations.  Extending
the recovery period reduces the amount of acquisition costs to be
recovered each year and, hence, the amount charged for each procedure
performed. 

Although the lithotripter's manufacturer has guaranteed the
Albuquerque center that service and parts will be available for 10
years, technological advances in medicine are sometimes so rapid as
to call into question an assumption that a piece of equipment like a
lithotripter will not become technologically obsolete before it
reaches the end of its useful life.  Using such a long recovery
period increases the risk that its costs will not be recovered before
the treatment of kidney stones moves on to new equipment or other
types of medical procedures.  In this regard, Southwest Therapies
told us that they are depreciating their lithotripters over a 5-year
period. 

VA policy calls for annual depreciation costs to be calculated using
the actual purchase price, less any assigned salvage value, divided
by the number of years of expected useful life.  In its 1993
depreciation determination, the Albuquerque center assumed a 5-year
useful life, with no resulting salvage value.  On this basis, the
annual depreciation for the lithotripter was $249,645, which
represents one-fifth of the lithotripter's purchase price
($1,248,225).  Because of the low utilization, the center realized
only $120,360 of the almost $500,000 (less than 25 percent) expected
during the first 2 years of operation.  As a result, the center has
yet to realize $1,127,865 in depreciation costs. 

VA policy does not provide guidance for developing a change in the
estimated useful life of equipment.  However, generally accepted
accounting principles provide that when a change in estimated useful
life is determined to be necessary, the remaining value of the asset
is to be divided by the remaining estimated life.  In setting the
1994 charges, the center's officials extended their estimate of the
lithotripter's useful life from 5 years to 9 years.  This gave the
center 7 years (1994-2000) to depreciate the remaining acquisition
costs rather than the 3 years remaining from their original estimate
of a 5-year useful life. 

This change should have resulted in an annual depreciation cost of
$161,124, or a per-procedure charge of $322 spread over the center's
annual workload estimate of 500 procedures, if done in accordance
with generally accepted accounting principles.  However, the center's
officials decided to ignore the first 2 years of accumulated
depreciation realized ($120,360) and divided the total acquisition
costs of $1,248,225 by the estimated 7 years of remaining useful
life.  This resulted in an annual depreciation cost of $178,318, or a
per-procedure charge of $357 spread over 500 procedures annually.  In
effect, this approach would fully depreciate the lithotripter's costs
in a little over 6 years. 

To illustrate the effects of these assumptions on the center's basic
lithotripsy charge, we evaluated what would happen if the center had
used a more reasonable workload estimate of 223 procedures (computed
as suggested by VA's policy) rather than 500 and a depreciation
period of 5 years (as used in 1993 pricing structure) rather than 9
years.  In all, changing the assumptions in this way would result in
a 1994 charge of about $3,271 rather than $1,451.  For the
lithotripter and technician, the charge would rise from $658 to about
$2,168, of which $1,686 represents depreciation costs.  For
facilities support, the charge would rise from $793 to about $1,103. 
Appendix VI provides further details on how we developed these
estimates. 

To assess how the center's assumptions about the lithotripter's
useful life affect the center's charges, we estimated annual
depreciation costs for periods of 3, 5, and 7 years, using a workload
estimate of 223 procedures.  For these time periods, the center's
charges to recover the remaining acquisition costs ($1,127,865 as of
January 1994) range between $723 and $1,686 as table 5 shows. 

                          Table 5
          
          Comparison of Lithotripter Depreciation
          Costs for Recovery Periods of 3, 5, and
                          7 Years

Remaining                                    Per-procedure
years of                               depreciation charge
useful life    Annual depreciation          (223 per year)
------------  --------------------  ----------------------
7                         $161,124                   $ 723
5                         $225,573                  $1,012
3                         $375,955                  $1,686
----------------------------------------------------------

   VA'S PRICING ACTIONS MAY AFFECT
   THE ALBUQUERQUE MARKET
------------------------------------------------------------ Letter :5

By charging UNM for less than half of its 1993 costs to provide basic
lithotripsy procedures, the Albuquerque VA center is not recovering
its equipment depreciation costs.  More specifically, the center did
not charge UNM about $91,000 of the costs of the 48 lithotripsy
services provided to UNM patients in 1993.  The unrecovered costs
averaged nearly $1,900 per procedure. 

In theory, UNM could keep the entire savings or it could pass some or
all of it on to patients or their insurers.  Our analysis of UNM's
pricing actions suggests that both situations occurred in 1993. 
Also, a comparison of rates charged by UNM and other providers
suggests that VA could fully recover its costs and remain competitive
in the Albuquerque market. 

      ALBUQUERQUE CENTER'S PRICES
      FOR LITHOTRIPSY PROCEDURES
      BENEFIT UNM
---------------------------------------------------------- Letter :5.1

As previously discussed, to fully recover its fixed and variable
costs, VA should have charged about $3,360 for each of its basic
lithotripsy procedures in 1993, rather than the $1,469 per procedure
charge.  The effect of VA's price to UNM is difficult to determine
precisely because there is not always a direct relationship between a
service's cost and its price in a complex, competitive market. 

A provider may have, in effect, several prices for the same
procedure.  For example, a hospital may have a different charge for
certain types of insured patients and those paying individually.  In
addition, an insurer may have a policy of not paying beyond a
specified amount, even if the hospital's charge is higher.  Also, one
insurer may negotiate a rate that is different from the rate the
hospital submits to other insurers or to individual patients. 

For most of 1993, UNM appears to have greatly benefited by its
contract with VA.  While UNM paid the Albuquerque VA center only
$1,469 for each procedure, UNM's lithotripsy charge to individuals
and insurance companies was the highest in the area.  UNM kept some
or all of the savings in the form of increased revenues.  Table 6
shows the breakdown of charges under the most prevalent UNM rate
during 1993 and under one of the private hospital/Southwest Therapies
packages.\7 While UNM's total charges under the two packages were the
highest, the charges were relatively comparable ($9,029 vs.  $7,977). 
However, the breakdown of charges for service components shows major
differences, two in particular.  First, the center's charge of $755
for the lithotripter and technician was about one-quarter of
Southwest Therapies' charge of $2,920.  Second, the combined
Albuquerque VA's and UNM's charges of $5,750 for facilities support
were over twice the $2,617 charge of the private hospital. 

                                     Table 6
                     
                       Comparison of Lithotripsy Charges in
                                Albuquerque (1993)

                                        phys
Service                           hosp  icia
component           Therapies     ital     n
------------  ----  ------------  ----  ----  ----  ------------  --------------
Lithotripter  $2,9  $2,920          --    --     $     $ 755            --
and             20                             755
technician

Urologist     1,80  --              --  $1,8  2,45       --           $2,450
                 0                        00     0

Anesthesiolo   640  --              --   640    74       74             --
gy

Facilities    2,61  --            2,61    --  5,75      640           5,110
support          7                   7           0

================================================================================
Total         $7,9  $2,920        $2,6  $2,4  $9,0     $1,469         $7,560
                77                  17    40    29
--------------------------------------------------------------------------------
Toward the end of 1993, changes in UNM's pricing for lithotripsy
services may have had the effect of passing the savings to UNM
patients, insurers, and health maintenance organizations in the form
of lower rates.  In October 1993, UNM reduced its existing charge for
lithotripsy from $9,029 to $6,950, a 23-percent reduction.  UNM's
Chief Financial Officer said that UNM did so after deciding that its
charges for lithotripsy were too high.  The reduction came entirely
from UNM's portion of facilities support. 

At about the same time, UNM also negotiated an even lower lithotripsy
rate of $3,550 with a local health maintenance organization.  This
49-percent reduction in the $6,950 rate, came from two places:  a
reduction of $1,180 in the urologist's fee, and a reduction of $2,220
in UNM's facilities support charges.  Table 7 shows a breakdown of
these two new rates. 

                                     Table 7
                     
                       UNM's New Lithotripsy Price and Its
                      Price Negotiated with QualMed (October
                                      1993)

Service
Component
------------  ----  ------------  ------------  ----  ------------  ------------
Lithotripter  $755      $755           --       $755      $755           --
 and
 technician
Urologist     2,45       --          $2,450     1,27       --          $1,270
                 0                                 0
Anesthesiolo    74       74            --         74       74            --
 gy
Facilities    3,67      640          3,031      1,45      640           811
 support         1                                 1
================================================================================
Total         $6,9     $1,469        $5,481     $3,5     $1,469        $2,081
                50                                50
--------------------------------------------------------------------------------
In commenting on a draft of this report, the Vice President for
Health Services, UNM, explained the rationale for the reduction.  A
large percentage of the discount, she said, is because patients
enrolled in this health maintenance organization have their
prelithotripsy work-up and postlithotripsy follow-up performed by
private urologists, and the UNM urologists and UNM clinical
facilities are engaged for only that portion of care directly
associated with delivery of lithotripsy treatment.  She noted that
the remainder of the discount is associated with increased volume,
case management, and similar factors that ordinarily provide the
basis for offering discounts from usual and customary charges to
managed care organizations. 

During 1994, UNM discussed the possibility of providing lithotripsy
services with another health maintenance organization.  This health
maintenance organization purchases lithotripsy from one of the
private Albuquerque hospitals.  The negotiations have included a
number of factors, including cost.  At this time, however, UNM and
the health maintenance organization have postponed further
negotiations until our concerns about VA's charges are resolved. 

--------------------
\7 To provide some point of comparison between hospitals, we asked
the four hospitals to provide what they considered to be a
representative bill for a basic lithotripsy procedure in 1993.  For
the three private hospitals, the bills ranged from $7,977 to $8,963;
for UNM, the bill was $9,029. 

      ALBUQUERQUE CENTER'S CHARGES
      COULD RECOVER FULL COSTS AND
      REMAIN COMPETITIVE IN THE
      ALBUQUERQUE MARKET
---------------------------------------------------------- Letter :5.2

The effect of changes in the center's pricing practices on its
competitiveness in the market for lithotripsy services in Albuquerque
is also difficult to determine precisely.  This occurs because the
center's price is only one of many variables, including access and
re-treatment rates, that may affect decisions about which providers
of lithotripsy services to use. 

On the basis of price, it appears that the Albuquerque center could
comply with VA policy by charging enough to fully recover its costs
and still offer a price that is competitive with the services
provided by Southwest Therapies and other providers.  For example,
the center's 1994 price for use of the lithotripter and technician is
$658; Southwest Therapies' price is $2,920.  If the center charged a
price that fully recovered costs within 5 years, the charge for this
portion of its services would be about $2,168--still below Southwest
Therapies. 

Likewise, it appears, on the basis of price, that UNM could pay the
Albuquerque center for the full costs and still charge insurers and
others a price that is competitive in the Albuquerque market.  For
example, since October 1993, the regular price for the UNM service
has been $6,950; bills from private hospitals indicate that the total
price for the service they offer with Southwest Therapies remains
between $8,000 and $9,000.  If the center charged a price for its
lithotripter and technician ($2,168) and facilities support and
anesthesiology ($1,103) that fully recovered costs within 5 years,
the charge to UNM would need to increase by about $1,820 over the
$1,451 now charged.  If UNM passed on all of these costs to patients
and insurers, its regular charge would increase to about $8,770. 

In theory, patients have the flexibility to choose among the various
lithotripsy providers.  Clearly, patients who pay their own medical
bills or who have medical insurance, such as Blue Cross/Blue Shield,
have greater latitude in selecting providers.  If they belong to a
health maintenance organization, patients seeking lithotripsy
treatment may have less choice in where they can go to obtain
services.  Such organizations may have contracts with specific
hospitals for such services.  For example, HealthPlus, a local
organization, contracts for services from Kaseman Presbyterian
Hospital.  However, some health maintenance organizations, such as
QualMed, may contract for lithotripsy services with more than one
hospital. 

When selecting a lithotripsy provider, patients' choices may be
affected by the recommendation of the urologist or other specialist
who diagnosed their condition.  Medical and administrative staff of
the Albuquerque lithotripsy providers and user organizations
indicated that several factors, in addition to cost, could also play
a part in patients' decisions, as discussed below. 

      ACCESS TO CARE
---------------------------------------------------------- Letter :5.3

Scheduling of services could potentially vary substantially between
providers.  The private hospitals rely on a lithotripter that
Southwest Therapies transports from hospital to hospital on a regular
schedule.  This lithotripter is generally at a hospital only 1 or 2
days a month and, as such, may not always be available when needed. 
By contrast, the Albuquerque center generally schedules UNM patients
for one day each week, but the center also treats these patients on
other days, if medically necessary. 

      TYPES OF ANESTHESIA
---------------------------------------------------------- Letter :5.4

The types of anesthesia vary between providers, generally due to the
type of lithotripters used.  The private hospitals use general
anesthesia, which produces complete unconsciousness, muscular
relaxation, and absence of pain sensation during the procedure. 
These hospitals use the Southwest Therapies' lithotripter and the
manufacturer recommends the use of general anesthesia with that
equipment. 

UNM uses local anesthesia as recommended by the manufacturer of the
lithotripter used by the Albuquerque center.  Local anesthesia
produces muscular relaxation and absence of pain sensation in a
limited part of the body; patients maintain consciousness during the
procedure.  Many health care practitioners regard local anesthesia as
somewhat less risky than general anesthesia because it decreases the
chance of complications or potentially bad outcomes. 

      RATES OF RE-TREATMENT
---------------------------------------------------------- Letter :5.5

Southwest Therapies and VA have re-treatment rates that vary. 
Re-treatment rates refer to the frequency which patients must return
for a second treatment because the first was not effective. 
Re-treatment may be needed, for example, if the stone did not
fracture sufficiently to pass through the patient's system. 
According to a VA urologist, the national re-treatment rate is about
20 percent.  By comparison, the Albuquerque center reported a
re-treatment rate of 15 percent and Southwest Therapies reported a
rate of about 5 percent.  Both providers require full payment for any
re-treatment. 

   CONCLUSIONS
------------------------------------------------------------ Letter :6

The Albuquerque medical center's charges for lithotripsy services do
not recover the full costs of services provided.  The main reason for
the problem--a flawed price-setting methodology--can be corrected. 
First, the Albuquerque medical center should develop the lithotripsy
charges using a workload estimate that is based on historical
workload for veterans and potential demand under sharing agreements. 
Second, the center should include an equipment depreciation cost that
is based on a shorter useful life.  Without such actions, it seems
likely that the Albuquerque center's pricing practices will continue
to fail to recoup costs and may adversely affect the market for
lithotripsy services in the Albuquerque area. 

   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

The Secretary of Veterans Affairs should direct the Director of the
Albuquerque medical center to

raise the price of lithotripsy services provided to nonveterans to a
level that will recover the full fixed and variable costs of the
services provided, as VA policy requires; and

implement a process for periodically reviewing the adequacy of
workload projections as VA procedures recommend, and use the results
to adjust prices, as appropriate. 

   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

We requested written comments on a draft of this report from the
Department of Veterans Affairs and the University of New Mexico
School of Medicine.  The University's Vice President for Health
Sciences, in a letter dated October 18, 1994 (see app.  VII),
provided some clarifying observations that are included in the report
where appropriate.  However, she declined to offer an opinion on the
appropriateness of VA's pricing policies and procedures. 

The Secretary of Veterans Affairs provided written comments in an
October 31, 1994, letter (see app.  VIII) wherein he agreed that the
Albuquerque medical center has not been recovering the full costs of
its lithotripsy services provided to UNM.  He also agreed with our
assessment of why this situation occurred--a flawed price-setting
methodology that set usage rates significantly higher than the actual
rate. 

The Secretary, however, disagrees with our recommendations.  First,
he does not believe that the center's lithotripsy prices should be
raised to a level that will recover the full costs of the services
provided.  Rather, he prefers to raise the basic lithotripsy price by
only $162, a significantly lower amount than is needed to fully
recover costs.  Second, he prefers to allow the center to review
prices on an annual rather than on a quarterly basis as VA policy
recommends.  In our draft report provided for the Secretary's review,
we had recommended that the Albuquerque center adhere to VA's policy. 
While we agree that annual pricing reviews may be a reasonable
alternative, we disagree with the Secretary's view that the center
should not be required to fully recover costs. 

      VA DISAGREES THAT THE
      ALBUQUERQUE MEDICAL CENTER
      SHOULD FULLY RECOVER
      LITHOTRIPSY COSTS
---------------------------------------------------------- Letter :8.1

Depending upon the number of years that VA chose to recover its
acquisition costs for the Albuquerque lithotripter, the medical
center, in our opinion, would have recovered the full costs of its
basic lithotripsy service in 1994, if it had charged between $2,308
and $3,271 per procedure.  The lower charge could recover initial
equipment acquisition costs over a 9-year period, whereas the higher
charge could achieve full recovery in 5 years.  Toward this end, we
recommended that the Albuquerque center raise its price to achieve
full cost recovery and indicated in the report our preference that
such recovery be achieved in the shortest time period possible; that
is, 5 years rather than 9 years. 

In his response, the Secretary stated that the Albuquerque medical
center will raise its basic lithotripsy price from $1,451 to $1,613
for fiscal year 1995.  He concluded that this is an appropriate price
even though he recognizes that it may not recover the full costs of
the services provided.  He considers it to be consistent with law and
VA policy, which states that costing shall be based on

     "a methodology that provides appropriate flexibility to the
     heads of facilities concerned to establish an appropriate
     reimbursement rate after taking into account local conditions
     and needs and the actual costs to the providing facility of the
     resource involved."

He also indicated that it is consistent with cost recovery practices
that other VA medical centers have developed to price contract
services involving low-volume, high-technology equipment. 

The Secretary concluded that the Albuquerque medical center qualifies
to use a low-volume, high-technology equipment pricing practice
because its lithotripter has an annual workload of 200 procedures. 
He explained that this practice involves a different methodology for
determining the amount of equipment depreciation costs to be
recovered per procedure than the one previously used in 1993 and
1994.  In 1993 and 1994, the center used a methodology that allocated
the equipment acquisition costs ($1,248,225) over the number of
procedures to be actually performed during the equipment's useful
life (9 years).  For example, the center expected to recover $178,318
in each of the 9 years and, using a projected workload of 500
procedures in 1994, included a charge of $357 in its basic
lithotripsy price ($1,451) for that year. 

The 1995 methodology bases the depreciation charge on the number of
procedures the equipment is capable of performing during its useful
life.  In this case, the center estimates that the equipment can
perform 4,500 procedures in its life and, as such, decided to recover
depreciation costs of $250 per procedure, or 1/4,500 of the equipment
acquisition cost ($1,248,225 minus salvage value of $124,823).\8

We find the Secretary's approval of this methodology to be
troublesome for several reasons.  In general, it

exposes the medical center (and taxpayers) to an unreasonably high
risk of a large unrecovered equipment acquisition cost;

ignores local market conditions, which seem to indicate that a faster
recovery of equipment cost (and lower risk of unrecovered costs) is
possible; and

ignores the impact that such pricing practices may have on the
competitive environment in the Albuquerque lithotripsy market. 

--------------------
\8 An Albuquerque medical center official told us that the center
revised the charges for several cost elements in setting its proposed
price of $1,613.  In addition to the $107 decrease in the equipment
depreciation charge, the center also reduced administration costs by
$37.  These decreases were offset by increases of $218 to the
building maintenance charge and $88 to the equipment and building
management charge.  He said that these increased charges reflect the
spreading of fixed costs over an expected workload of 200 procedures
a year, compared with the 500 procedures that were used in the 1994
price. 

         FULL RECOVERY OF COSTS
-------------------------------------------------------- Letter :8.1.1

The Albuquerque medical center's 1995 pricing methodology would
result in a slower recovery of equipment acquisition costs than the
center's previous pricing practice--a situation that greatly
increases the likelihood of potentially large unrecovered costs.  The
amount recovered will drop from $357 per procedure in 1993 to $250 in
1994.  As a result, the center will recover about $50,000 a year
compared with $71,000 at current usage rates of about 200 procedures
a year. 

If usage continues to average 200 procedures a year, the center will
recover less than half of the equipment acquisition costs, unless the
equipment's useful life greatly exceeds 9 years (the useful life that
the center used in setting its 1994 price).  Over a 9-year period,
the center could expect to perform about 1,800 procedures, which
would recover $450,000 of the almost $1.2 million acquisition costs. 

In contrast, the center would need to operate the equipment for 25
years to fully recover costs at current usage rates of 200 procedures
per year.  This seems unrealistic in that (1) the manufacturer has
guaranteed parts for and maintenance of the lithotripter for only 10
years and (2) advances in medical technology would likely render the
equipment obsolete well before the end of 25 years. 

It appears that VA will need an almost three-fold increase in
utilization (about 500 procedures) if it is to fully recover costs
within 9 years under its pricing policy.  Given that there were only
353 procedures performed by all lithotripsy providers in Albuquerque
during 1993, it seems that the center would have trouble reaching
this utilization level even if all demand for lithotripsy services
shifted to UNM. 

         LOCAL MARKET CONDITIONS
-------------------------------------------------------- Letter :8.1.2

The local market in Albuquerque for lithotripsy services consists of
two equipment providers--Southwest Therapies and the Albuquerque
medical center.  As pointed out in our report, Southwest Therapies
charges medical facilities $2,920 per procedure for use of its
lithotripter and technician compared with the Albuquerque center's
charge of $755 for use of its lithotripter and technician.  In 1993,
three hospitals in Albuquerque purchased 259 procedures from
Southwest Therapies.  Thus, it seems that the Albuquerque center
could raise its price--to cover a more reasonable depreciation
charge--by over $1,300 and still offer UNM a competitive alternative
to the market price. 

         COMPETITIVE ENVIRONMENT
-------------------------------------------------------- Letter :8.1.3

The Albuquerque center's below-cost pricing practice may also affect
the competitive environment in the Albuquerque lithotripsy market
because such a practice greatly increases the disparity between the
costs for the use of lithotripter and technician paid by UNM and
other competing hospitals.  Because the Albuquerque center will
continue to charge UNM less than half of the depreciation costs, the
center, in effect, is underwriting the costs of lithotripsy services
provided to UNM's patients--a pricing practice that appears to foster
an unlevel playing field in the Albuquerque lithotripsy market. 

The Secretary, in an attachment to his letter, indicated that the
center considered UNM's charges to third parties when it determined
its prices.  In this regard, it suggests that UNM's charges do not
equate to receipts, given that UNM serves indigent patients.  While
there may be some rationale for reducing the costs of care for UNM's
indigent patients, we find it difficult to comprehend why VA would
want to subsidize the costs of care provided to UNM's insured
patients.  Our analysis of UNM's charges indicates that it is passing
on the savings to its customers in the form of lower prices and
retaining some or all of the savings for its own use in certain
situations. 

As we pointed out earlier, a local health maintenance organization
contracted with UNM to obtain a greatly reduced rate of $3,550 for
the entire service, including the attending physician.  This $3,550
price represents a 55-percent reduction from the price charged by a
private hospital providing lithotripsy in the Albuquerque market. 
Also, as discussed earlier, another local health maintenance
organization has inquired about purchasing UNM's services.  Such
large price reductions would seem to provide a powerful incentive for
other organizations to contract for use of UNM's services. 

         CONCLUDING OBSERVATIONS
-------------------------------------------------------- Letter :8.1.4

The Secretary noted that he will ask VA's Assistant Secretary for
Finance and Information and Resources Management, as well as VA's
Under Secretary for Health, to examine VA's policies and assess their
continued appropriateness to enable VA to recover its actual cost. 
We support this action and strongly urge the Assistant Secretary and
Under Secretary to revise the center's pricing practice so that it
reduces the government's risk of potentially large unrecovered
equipment costs, while appropriately taking into account local market
conditions so as to maintain a fair and competitive environment for
lithotripsy providers in Albuquerque. 

VA policy appropriately states that medical centers should be fully
reimbursed for the costs of services provided to affiliated medical
schools (such as UNM).  But in this case, the Secretary concludes
that the Albuquerque center's 1995 pricing practice is appropriate
for low-volume, high- technology equipment, even though the pricing
practice does not fully recover equipment costs.  In fact, the center
sold a service to UNM for $1,451 in 1994 and will sell it for $1,613
in 1995, when the service actually costs between $2,308 and $3,271. 
This looks like a bad business deal for VA (and taxpayers) and a good
business deal for UNM. 

In summary, we believe that VA's pricing policy should adhere to a
guiding principle that equipment acquisition costs should be
recovered as quickly as market conditions allow.  Toward this end, we
continue to recommend that the medical center raise its price to a
level that will recover the full costs of lithotripsy services within
the shortest possible time period.  We continue to favor the center's
original methodology; that is, spreading the depreciation costs
evenly over a prescribed recovery period and basing the charge on the
expected number of procedures to be actually performed during each
year, as long as the charges are competitive in the market. 

      VA DISAGREES THAT PRICES
      SHOULD BE REVIEWED ON A
      QUARTERLY BASIS
---------------------------------------------------------- Letter :8.2

In our draft report, we recommended that the Albuquerque center
implement a process to review the adequacy of workload projections on
a quarterly basis, as VA policy recommends.  In his response, the
Secretary said that annual reviews would be more appropriate.  Our
recommendation was aimed at bringing the Albuquerque center into
compliance with VA's policy because we found quarterly reviews to be
a reasonable approach.  We do not disagree with the Secretary's views
that annual rather than quarterly reviews could meet VA's pricing
requirements.  Given the Secretary's desire to require annual reviews
for the Albuquerque center, we believe that it would be appropriate
for the Secretary to update VA's policy statement on workload reviews
so that it advises other centers that annual reviews are acceptable. 
As such, we have modified our recommendation to require the
Albuquerque center to implement a process for periodically reviewing
the adequacy of workload projections. 

---------------------------------------------------------- Letter :8.3

Unless you publicly announce its contents earlier, we plan no further
distribution of this report for 30 days.  At that time, we will send
copies to the Secretary of Veterans Affairs and interested
congressional committees.  We will

This report was prepared under the direction of Paul Reynolds,
Assistant Director, Federal Health Care Delivery Issues.  Please call
Mr.  Reynolds at (202) 512-7101 or Linda Bade, Senior Evaluator, at
(503) 235-8507 if you or your staff have any questions.  Susan
Poling, Assistant General Counsel, also contributed to this report
and can be reached at (202) 512-5881.  Other evaluators who made
contributions to this report include Dwayne Curry, William Stanco,
and Stanley Stenersen. 

Sincerely yours,

David P.  Baine
Director, Federal Health
 Care Delivery Issues

SCOPE AND METHODOLOGY
=========================================================== Appendix I

   WORK CONDUCTED AT VA'S
   ALBUQUERQUE CENTER
--------------------------------------------------------- Appendix I:1

At the Albuquerque center, our work focused on reviewing the center's
agreement for the sharing of lithotripsy services and assessing
whether the prices charged were fully recovering costs as stipulated
in VA policy guidance.  To obtain background on the issue, we
discussed with Albuquerque center officials the factors that were
involved in the decision to acquire lithotripsy equipment and to
enter into a VA/UNM sharing agreement.  To help ensure that we fully
understood VA policy on the pricing of shared services, we also
talked with VA headquarters officials from the offices in charge of
surgical services and sharing with other institutions. 

To help assess the agreement's pricing structure, we held discussions
with officials at the Albuquerque center, including the Director,
Associate Director, Chief of Quality Management (who has
responsibility for oversight of lithotripsy services), and members of
the center's fiscal office.  These officials explained the processes
that were used to develop the center's price for lithotripsy services
in 1993 and 1994, including a detailed description of the individual
cost components.  They also described the methodology used to
allocate costs for each component and provided documents supporting
the cost data used.  We compared the center's pricing processes to
VA's policies and guidance and tested the reasonableness of the
documentation provided.  We also reviewed VA's utilization and
billing records for the nonveterans served under this sharing
agreement in calendar year 1993 and confirmed these against similar
documentation obtained from UNM. 

   WORK CONDUCTED AT UNM
--------------------------------------------------------- Appendix I:2

Our work at UNM focused on activities relating to its contract with
VA for lithotripsy services.  We discussed the sharing agreement and
UNM's related pricing information with officials in the finance and
managed care offices at UNM.  We obtained and analyzed utilization,
billing, and other records relating to the treatment of UNM patients,
as well as UNM's pricing of the services it provided.  We also
discussed negotiations UNM was conducting with regard to providing
lithotripsy services for other medical facilities or health
maintenance organizations in the Albuquerque area. 

   OTHER WORK CONDUCTED IN THE
   ALBUQUERQUE AREA
--------------------------------------------------------- Appendix I:3

We also obtained pricing information for the services provided by
other hospitals providing lithotripsy in the Albuquerque
area--Kaseman Presbyterian, St.  Joseph's, and Lovelace.  At VA and
UNM, we had access to all records, because the providers are
government agencies; at these other providers, which are all private
institutions, our access to information was limited to those
utilization and pricing documents that they were willing to provide. 
Specifically, we obtained a sample of actual bills for lithotripsy
services that the providers told us were representative of their
charges, and we discussed the processes the providers used to develop
the charges billed. 

At Southwest Therapies, the only other provider of lithotripsy
equipment in the Albuquerque area, we obtained and reviewed 1993
billings and utilization data.  We compared the service provided, the
financial data, and the utilization information we obtained with the
information supplied by the Albuquerque center, conducting follow-up
discussions as needed. 

At the three private hospitals in the Albuquerque area (Kaseman
Presbyterian, St.  Joseph's, and Lovelace), we interviewed hospital
officials and obtained sample billing documents and other related
documentation.  To the extent possible, we compared the information
provided with the information obtained from the Albuquerque center
and UNM. 

To help gain an understanding of how the Albuquerque center's pricing
actions might be affecting the market for lithotripsy services in the
Albuquerque area, we spoke with officials at the three hospitals and
with an official of a local health maintenance organization (QualMed)
about their desire to either change their current service provider or
expand their own capabilities in the provision of these services. 

We also discussed the provision of anesthesia services connected with
lithotripsy (as it is provided at Kaseman Presbyterian Hospital) with
the Anesthesiology Medical Consultant's Group in Albuquerque, New
Mexico.  We obtained data related to how anesthesiologists develop
their per-procedure rates and a range within which they might bill
for such services. 

Our review was performed from January 1994 to August 1994 in
accordance with generally accepted government auditing standards. 

OVERVIEW OF VA'S AUTHORITY TO
SHARE SERVICES WITH AFFILIATED
MEDICAL SCHOOLS
========================================================== Appendix II

Title 38, section 8153 of the United States Code provides VA with
contracting authority to share specialized medical resources with
non-VA health facilities.  These contracts are generally called
sharing agreements (38 U.S.C.  section 8153 (Supp.  IV 1992), as
amended by P.L.  103-210, section 3(c), Dec.  20, 1993).  Under the
statute, sharing agreements may not result in "diminution of services
to veterans" (38 U.S.C.  section 8151 (Supp.  IV 1992), as amended by
P.L.  103-210, section 3(a), Dec.  20, 1993). 

Specialized medical resources are defined to include equipment,
space, or personnel, which are either unique in the medical community
or are subject to maximum utilization only through mutual use because
of cost, limited availability, or unusual nature (38 U.S.C.  section
8152(2)(Supp.  1992) as amended by P.L.  103-210, section 3(b), Dec. 
20, 1993).  VA can use section 8153, for example, to share equipment
it owns with outside providers or to gain access to equipment owned
by others. 

Sharing agreements may be used to secure specialized medical
resources that otherwise might not be feasibly available or to
effectively utilize certain other medical resources when the
Secretary determines it is in the best interest of the prevailing
standards of the Department medical care program.  However, under
section 8153, the Secretary may only enter into sharing agreements if
the contract will obviate the need for a similar resource to be
provided in a VA facility or the VA resources that are the subject of
the agreement and that have been justified on the basis of veterans'
care are not used to their maximum effective capacity (which is the
case with the lithotripter at the Albuquerque center). 

The law is not very specific with regard to how VA is to price the
medical resources that it provides to medical schools, health care
facilities, and research centers.  The law states that reimbursement
must be based on a methodology that provides appropriate flexibility
to the heads of VA facilities after taking into account local
conditions and needs and the actual costs to the providing facility
of the resource involved. 

The guidance (VA Manual, G-13, M-1, Part I, p.  3, Mar.  11, 1986) in
effect when the VA Albuquerque entered into its sharing agreement
with the University of New Mexico Medical Center for lithotripter
services generally required that charges cover the full cost of
services rendered; supplies used, including normal depreciation; and
amortization of equipment, according to life expectancy.  In
commenting on a draft of this report, the Secretary of Veterans
Affairs approved the use of an alternative pricing practice for
low-volume, high-technology equipment contained in VA Manual G-12,
M-1, Part 1, appendix B.  This pricing practice may not fully recover
costs.  (see app.  VIII.)

The current VA manual states that when a proposed sharing agreement
involves the contractor's use of federally owned property, such as
medical space or medical equipment (which is the case with the
lithotripter at Albuquerque), VA should obtain a fair market value in
accordance with comparable commercial practices.  The negotiated cost
need not be limited to the recovery of costs and may produce net
revenue to the government (M-1, Part 1, chapter 34, July 14, 1993). 
The guidance also references OMB Circular A-25 (Sept.  23, 1959),
which includes in its definition of full cost an appropriate share of
depreciation of equipment; this circular provides a basis upon which
user charges are to be set. 

Another provision of Title 38 permits VA to enter into agreements
with institutions for the joint acquisition of medical equipment (38
U.S.C.  section 8157 (Supp.  IV 1992)).  Under this provision, the
Secretary may not pay more than one-half of the purchase price, the
equipment must be jointly titled to the United States and the
institution, and the Secretary and the institution must have arranged
by contract under 38 U.S.C.  section 8153 for the exchange or use of
the equipment before the equipment is acquired.  Although this
section does not apply to the Albuquerque acquisition, other VA
medical centers have jointly purchased lithotripters in partnership
with affiliated medical schools. 

OVERVIEW OF ALBUQUERQUE CENTER'S
FIXED COSTS FOR LITHOTRIPSY
SERVICES
========================================================= Appendix III

Medical centers are to recover the full cost of contract services
provided to patients of affiliated medical schools, according to VA's
rate-setting policy.  Specifically, the Albuquerque center must
charge, at least, all fixed costs for equipment and building usage. 
The Albuquerque center incurred an annual fixed cost of $360,387 to
provide lithotripsy services to veterans and nonveterans in 1993, as
table III.1 shows.  This appendix explains how the estimates for each
of these cost components were developed. 

                         Table III.1
           
           Estimated 1993 Costs for Providing Basic
                     Lithotripsy Services

Component                                 amount
-----------------------------  -----------------------------
Equipment depreciation                   $249,645
Equipment maintenance and                 72,865
 repair
Engineering and building                  37,877
 management
============================================================
Total                                    $360,387
------------------------------------------------------------

   EQUIPMENT DEPRECIATION
------------------------------------------------------- Appendix III:1

Depreciation represents the expense of using an asset such as the
lithotripter.  VA policy calls for annual depreciation costs to be
calculated using the actual purchase price, less any assigned salvage
value, divided by the number of years of expected useful life.  In
its initial depreciation determination, the Albuquerque center
assumed a 5-year useful life, with no resulting salvage value.  On
this basis, the annual depreciation for the lithotripter was $249,645
which represents one-fifth of the lithotripter's purchase price
($1,248,225). 

   EQUIPMENT MAINTENANCE AND
   REPAIR
------------------------------------------------------- Appendix III:2

This cost component covers the contract with the manufacturer for
service and repair of the lithotripter and associated component
parts.  The cost for this category ($72,865) was the actual cost of
the maintenance and repair contract for 1993. 

   ENGINEERING AND BUILDING
   MANAGEMENT
------------------------------------------------------- Appendix III:3

This component covers such costs as utilities and general maintenance
for the area where the lithotripter is located.  VA policy calls for
establishing the general cost within this category by determining
what percentage of the facility's total square footage is devoted to
the medical procedure and applying this percentage to the facility's
total engineering and building management costs.  Our 1993 estimate
uses the amount ($37,877) developed by the center. 

ALBUQUERQUE CENTER'S LEVELS OF
LITHOTRIPSY SERVICES AND RELATED
PRICES
========================================================== Appendix IV

Our analysis was based mainly on the center's basic level of
lithotripsy services.  However, the center has four levels of
services, each one involving some differences in terms of the amount
of time, equipment, material, supplies, and staff resources involved
in conducting the procedures.  The four are as follows: 

Basic procedure:  encompasses the fracturing of kidney stones by the
lithotripter without the need for additional procedures or
instrumentation. 

Cystocopsy:  involves the use of special instruments and equipment to
perform related urology procedures as well as lithotripsy. 

Uteral catheterization:  involves the placement of a uteral catheter
to assist in the visualization of some types of kidney stones under X
ray.  Lithotripsy is performed after the placement of this catheter. 

Stent:  the most time consuming of the four levels, this involves
placing a tube in the patient's ureter, usually after lithotripsy, in
order to allow the kidney to drain properly and to relieve pain. 

In addition to these four levels of services, the Albuquerque center
also provided the option of conducting the procedure at any of the
four levels using VA's staff urologist or a certified\9 urologist
from the UNM Health Services Center.  This means that each level of
service has two rates--one including the cost of the VA urologist,
the other not including it. 

Table IV.1 shows the resulting eight rates for the four levels of
service as they were specified in the original sharing agreement for
1993.  The rates range from $1,469 for a basic procedure without a
VA-supplied urologist to $2,216 for a procedure using a stent and
with a VA urologist performing the procedure. 

                          Table IV.1
           
              Rates for Lithotripsy and Related
                       Services (1993)

Level of lithotripsy service
-----------------------------  -----------------------------
Basic procedure
------------------------------------------------------------
Without VA urologist           $1,469

With VA urologist              $1,752

Cystoscopy
------------------------------------------------------------
Without VA urologist           $1,640

With VA urologist              $2,008

Uteral catheterization
------------------------------------------------------------
Without VA urologist           $1,654

With VA urologist              $2,022

Stent
------------------------------------------------------------
Without VA urologist           $1,796

With VA urologist              $2,216
------------------------------------------------------------
Under the contractual agreement, these services include equipment,
space, materials, ancillary services (such as X ray), and the
following staff costs:  physician assistant, registered nurse,
anesthesiologist, technician, and secretarial services.  The rates
include depreciation and maintenance, which are discussed in more
detail in appendix III. 

--------------------
\9 Certified to operate the extracorporeal shock-wave lithotripter
owned by the Albuquerque VA Medical Center.  Such physicians also are
required to be approved to practice in the VA hospital. 

ANALYSIS OF ALBUQUERQUE CENTER'S
1993 BASIC LITHOTRIPSY PRICE
=========================================================== Appendix V

To fully recover its costs for a basic lithotripsy procedure in 1993,
the Albuquerque center would have needed to charge about $3,360
rather than the $1,469 it actually charged.  The charge of $3,360 per
procedure would have been consistent with VA policy, which requires
that the price for services sold under sharing agreements should
recover the full cost of services rendered and supplies used,
including the depreciation cost of equipment.  This price is to
include the following cost components:  staffing, supplies, equipment
(depreciation and maintenance), administration, and engineering and
building management. 

This appendix compares the center's actual costs for the major cost
components of its basic lithotripsy service to the amounts the center
charged for each component.  The Albuquerque center's $1,469 charge
may be separated into two parts: 

a $755 charge for operation of the lithotripter, including the
services of a technician, and

a $714 charge for facilities support, including anesthesiology
services. 

The $1,469 charge would have recovered the center's costs if the
center had performed 882 procedures or more in 1993.  However, the
center only performed 155 procedures and, as a result, did not
recover $258,862 of the $360,387 in fixed costs spent to provide
lithotripsy services.  As the following sections show, most of the
shortfall relates to the center's charge for operating the
lithotripter and only a small portion was attributable to the
center's charge for facilities support. 

   LITHOTRIPTER AND TECHNICIAN
--------------------------------------------------------- Appendix V:1

We estimate that the Albuquerque center should have charged $2,224
for its lithotripter and technician, rather than the $755 charged. 
Most of this difference relates to the allocation of depreciation
costs over 882 procedures rather than 155 procedures.  Table V.1
separates the difference by the specific cost components included in
the charge. 

                         Table V.1
          
              1993 Charge for Lithotripter and
            Technician, Based on 882 Procedures
          (Albuquerque Center) and 155 Procedures
                           (GAO)

                Price as set          Price as
              by Albuquerque     determined by
Component             center               GAO  Difference
------------  --------------  ----------------  ----------
Staffing                $143              $143          $0
Equipment                408             1,611       1,203
 depreciation
Equipment                204               470         266
 maintenance
==========================================================
Total                   $755            $2,224      $1,469
----------------------------------------------------------

      STAFFING
------------------------------------------------------- Appendix V:1.1

VA's calculations for staffing were not affected by its
overestimation of the number of procedures that would be performed in
1993.  This is because staffing costs are assessed on a
procedure-by-procedure basis, not on estimated workload. 

VA policy calls for staffing costs to include professional
administration and quality control, clerical and technical support
personnel, and fringe benefit and bonus amounts associated with these
categories.  Salary, fringe, and bonus costs were computed based on
average salaries for the classes of staff involved in the procedure,
not on salaries for the individual staff actually participating in a
particular procedure.  Although this approach is likely to produce
some distortions in individual cases,\10 it would be difficult for
the center to account for each variation that could exist.  As a
result, we found the center's determination of costs to be consistent
with VA's policy. 

--------------------
\10 For example, staffing costs for anesthesiology are billed at the
average cost for a certified registered nurse anesthesiologist.  In
some cases, however, anesthesiologist physicians serve as staff for
the procedure.  In such an instance, the rate charged would
understate the center's staffing cost, because an anesthesiologist's
salary is higher than the certified nurse's. 

      EQUIPMENT DEPRECIATION
------------------------------------------------------- Appendix V:1.2

For 1993, the center's fiscal staff used $1.8 million as the purchase
amount for the lithotripter, adopted a period of 5 years as the
lithotripter's useful life, assumed it would have no salvage value at
the end of the 5-year period, and divided the resulting depreciation
amount of $360,000 by 882 estimated procedures to arrive at a
per-procedure equipment depreciation charge of $408. 

This amount was incorrect for two reasons.  First, the computation
was based on the amount that had been obligated for the lithotripter
rather than its actual price.  The obligated amount was $1.8 million,
but the purchase price was $1,248,225--a difference of $551,775. 
This created an overstatement of $110,355 in the annual depreciation
expense allocated to the 882 lithotripsy procedures.  The second
reason was the use of the unrealistic workload, and it had the
opposite effect--it understated the per-procedure cost.  Because the
center performed only 155 total procedures instead of the estimated
882, each procedure understated the depreciation amount by more than
$1,900.  Adjusting this amount to account for the understatement
caused by using the incorrect price, the difference between the
center's actual depreciation charge and our recalculated amount was
$1,203. 

A related consideration is whether a salvage value could have been
assigned to the equipment, thereby decreasing the depreciation
amount.  A representative of the company manufacturing the
lithotripter told us that the maximum salvage value after a 10-year
period would be 20 percent of the purchase price or about $250,000. 
The representative said his company had guaranteed service and repair
for 10 years from the date of purchase--5 years beyond the useful
life assigned for depreciation purposes.  After that time, the
company did not guarantee that parts would be available.  The
representative said medical technology advances would also affect the
equipment's resale value during the 10-year period.  Because of these
uncertainties, we accepted the Albuquerque center's judgment that no
salvage value should be included in the depreciation cost estimate. 

      EQUIPMENT MAINTENANCE AND
      REPAIR
------------------------------------------------------- Appendix V:1.3

The same two factors that caused errors in the equipment depreciation
charge also caused errors in the charge for equipment maintenance and
repair.  When the charge for this component was developed, the actual
contract price had not been determined.  Thus, the charge was based
on an amount equal to 10 percent of the $1.8 million that had been
obligated to buy the lithotripter.  This amount overstated the actual
amount of the maintenance contract by $107,135.  However, as with the
charge for depreciation, the overstatement is dwarfed by the
understatement that resulted from dividing the total by 882 expected
procedures.  If the charge is recomputed using the actual price of
the contract and the actual number of procedures performed, the
per-procedure amount would be $470, which is $266 more than the
center actually charged. 

   FACILITIES SUPPORT
--------------------------------------------------------- Appendix V:2

To fully recover costs, we estimate that the Albuquerque center would
have needed to charge $1,139 per procedure for facilities support and
anesthesiology, rather than the $714 charged.  This difference
relates to the insufficient allocation of costs for administration
and building management over 882 procedures instead of 155
procedures.  Table V.2 separates the difference by specific cost
components included in the charge. 

                         Table V.2
          
            1993 Charge for Facilities Support,
            Based on 882 Procedures (Albuquerque
              Center) and 155 Procedures (GAO)

                Price as set          Price as
              by Albuquerque     determined by
Component             center               GAO  Difference
------------  --------------  ----------------  ----------
Staffing                $245              $245          $0
Supplies                 194               194           0
Administrati             232               456         224
 on
Engineering/              43               244         201
 building
 management
==========================================================
Total                   $714            $1,139        $425
----------------------------------------------------------

      STAFFING AND SUPPLIES
------------------------------------------------------- Appendix V:2.1

Because staffing and supply costs are calculated on a per-procedure
basis, they are unaffected by the center's overestimate of the number
of procedures that would be performed in 1993.  As previously
discussed for the lithotripter and technician, we found the center's
determination of staffing costs to be consistent with VA's policy. 

VA guidance calls for the cost of supplies to be based on the actual
acquisition cost.  As with staffing costs, we made no adjustments to
the center's determination of supply costs. 

      ADMINISTRATION
------------------------------------------------------- Appendix V:2.2

This component covers the Albuquerque center's indirect
administrative staff and resource costs related to the providing of
lithotripsy procedures.  It also reflects two other factors related
to the center--building depreciation and interest on net capital
investment--as well as administrative costs for VA's central office
in Washington, D.C.  The administrative portion is the prorated share
of headquarters administrative costs assigned to the Albuquerque
center, which is 1 of 157 VA medical centers throughout the nation. 

The center's indirect administrative staff and resource costs are
based on determining what percentage of direct care (as measured by
full-time-equivalent positions) that lithotripsy procedures represent
relative to all types of direct care provided by the center.  This
percentage is then applied to the center's total administrative costs
to arrive at the portion to be allocated to lithotripsy procedures. 
VA policy guidance does not stipulate how the calculation is to be
made.  We reviewed the center's methods and found no reason to adjust
their results. 

Under VA policy, the charge to be assessed for central office
administration, Albuquerque center building depreciation, and
investment interest is a designated percentage of the total costs for
all other components.  We reviewed the center's methods and found no
reason to adjust their results. 

We found the cost for this component to be understated, because the
Albuquerque center had underestimated the total cost for the other
components.  Our computations of the other components produced a
total of $2,966, which was $1,670 more than the amount the
Albuquerque center had used.  Applying the designated percentage to
the higher total raised the amount for this component to $456, an
increase of $224. 

      ENGINEERING AND BUILDING
      MANAGEMENT
------------------------------------------------------- Appendix V:2.3

We found that the per-procedure charge for this component was
understated.  Although VA had allocated the appropriate percentage of
engineering and building maintenance costs to the lithotripsy
function, these costs had again been divided by the estimate of 882
procedures, resulting in a per-procedure charge of $43.  Dividing the
costs by the 155 procedures actually performed yields a cost of
$244--a net increase of $201. 

ANALYSIS OF ALBUQUERQUE CENTER'S
1994 BASIC LITHOTRIPSY PRICE
========================================================== Appendix VI

The Albuquerque center's 1994 charge to UNM for basic lithotripsy
services is $1,451.  Two key assumptions in the center's calculations
make it unlikely that this rate will be sufficient for VA to recover
the costs of providing lithotripsy services to UNM patients. 

The first assumption is the estimate of the number of procedures that
will be performed.  The center estimated the number as 500.  As of
June 30, 1994, however--halfway through the year--the center had
performed 97 procedures. 

The second assumption is the length of time for recovering the
lithotripter's cost.  The center used an approach that had the effect
of extending the total period for recovering the cost to 9 years--4
years longer than the period used for the 1993 estimate. 

This appendix compares the center's estimated charges for the major
cost components of its basic lithotripsy service to the amounts that
would be chargeable, using different assumptions regarding workload
and investment recovery period.  Our assumed workload was 223
procedures rather than the 500 assumed by the Albuquerque center.\11
The investment recovery period we used was the same period the center
had used in its 1993 price determination. 

The Albuquerque center's 1994 charge may be separated into two parts: 

a $658 charge for operating the lithotripter, and

a $793 charge for facilities support. 

These charges will recover the center's fixed and variable costs if
500 procedures or more are performed and the equipment is operated
for 9 years or more.  The center, however, will experience a
significant shortfall if it performs less than half of the expected
procedures, a situation that appears likely given the workload
generated during the first half of 1994.  As the following sections
show, most of the shortfall will be related to the center's charge
for operating the lithotripter and only a small portion will be
attributable to its facilities support charge. 

--------------------
\11 We developed our assumption by following the approach suggested
in VA's policy guidance--adding (1) the actual usage by VA patients
during the previous year and (2) the expected usage under the sharing
agreement.  In 1993, the center performed 107 procedures for VA
patients, and in 1994, its sharing agreement set a goal of providing
116 procedures. 

   LITHOTRIPTER AND TECHNICIAN
-------------------------------------------------------- Appendix VI:1

Under the assumptions we used, the Albuquerque center's charge for
its lithotripter and technician would be $2,168 rather than the $658
charged.  Most of the difference relates to the depreciation charge. 
Table VI.1 separates the differences by the specific cost components
included in the charge. 

                         Table VI.1
          
               1994 Rate for Lithotripter and
            Technician, Based on 500 Procedures
          (Albuquerque Center) and 223 Procedures
                           (GAO)

                Price as set          Price as
              by Albuquerque     determined by
Component             center               GAO  Difference
------------  --------------  ----------------  ----------
Staffing                $155              $155          $0
Equipment                357             1,686       1,329
 depreciation
Equipment                146               327         181
 maintenance
==========================================================
Total                   $658            $2,168      $1,510
----------------------------------------------------------

      STAFFING
------------------------------------------------------ Appendix VI:1.1

VA's calculations for staffing were not affected by its estimate of
the number of procedures that would be performed in 1994.  This is
because staffing costs are assessed on a procedure-by-procedure
basis, not on estimated workload. 

      EQUIPMENT DEPRECIATION
------------------------------------------------------ Appendix VI:1.2

This component resulted in the largest difference between the
center's calculation and ours--$357 as set by the center, and $1,686
as we calculated it, a difference of $1,329.  Two main factors
contributed.  One was the methodology the center used for changing
the lithotripter's useful life.  The other was the estimated number
of lithotripsy procedures over which the 1994 depreciation amount
could be spread. 

In determining the annual amount of depreciation for the pricing
computation, the center made two adjustments to its 1993
procedures.\12 First, it used the acquisition price of the equipment
rather than the amount that had been obligated to purchase the
equipment.  As we pointed out in appendix V, this was the more
appropriate figure to use as a starting point.  Second, it changed
the lithotripter's useful life from 5 years to 9 years.  VA policy
does not provide guidance for developing a change in the estimated
useful life of equipment, but general accounting procedure does.  The
method to be used is as follows:  when a change in estimated useful
life is determined to be necessary, the remaining value of the asset,
less any salvage value assigned, is to be divided by the remaining
estimated life. 

The center did not follow this approach.  Instead, it based its
calculation on the full value of the asset (its original acquisition
cost) and divided by the remaining 7 years of the 9-year useful life. 
In so doing, the center determined that an annual depreciation cost
of $178,318 over 7 years would recover the initial acquisition costs
of $1,248,225.  Given the center's estimated annual workload of 500
procedures, officials determined that a charge of $357 would be
sufficient to realize the annual depreciation cost. 

The effect of this approach was to overstate the portion of the
lithotripter's cost to be depreciated each year, as well as the
resulting charge per procedure.  Because the center's lithotripter
had been operational for 2 years, and 295 procedures had been
performed since that date, the center should have recognized an
accumulated depreciation of $120,360, based on the $408 depreciation
amount per procedure in the original rate (see table V.1).  By
adjusting the initial acquisition costs to reflect this accumulated
depreciation, the remaining value of the lithotripter would be
$1,127,865, which represents the amount to be depreciated over the
remaining useful life.  This approach would have yielded a
depreciation charge of $322 per procedure over the center's estimated
workload of 500 procedures. 

By ignoring the accumulated depreciation, the center would recover
more than the cost of the asset over its useful life.  For example,
if 500 procedures are performed for each of the next 7 years, the
center would have a total recognized depreciation of $120,360 more
than the $1,248,225 purchase price. 

Our recalculation of the amount to be depreciated is based on a
5-year useful life rather than a 9-year life.  We used this shorter
period in order to remain more consistent with the center's previous
methodology for determining costs and because we regard 5 years as a
more appropriate period for recovering costs on equipment that can
quickly become technologically obsolete even though it is still
operable.  Since 2 years of the period have gone by, 3 years remain
over which to depreciate the equipment.  We adjusted the purchase
price by the $120,360 in accumulated depreciation and divided the
remaining balance by the remaining 3 years to obtain an annual amount
of depreciation of $375,955.  This compares with the center's
computation of $178,318 in depreciation to be recovered during 1994. 

The other adjustment we made was to divide our annual depreciation
amount by an estimate of 223 procedures to be performed during the
year.  The center had divided its annual depreciation amount by its
estimate of 500 procedures.  The combination of all of these
adjustments produced our per-procedure recalculation amount of
$1,686. 

--------------------
\12 In making the calculation, the center followed its 1993 practice
of not assigning any salvage value to the lithotripter.  As we
pointed out in appendix V, the lithotripter may have some salvage
value.  However, for consistency's sake, we took the center's
approach and did not assign salvage value in making our calculations. 

      EQUIPMENT MAINTENANCE AND
      REPAIR
------------------------------------------------------ Appendix VI:1.3

This cost component covers the contract with the manufacturer for
service and repair of the lithotripter and associated component
parts.  The center used the actual annual contract cost, as did we. 
The difference between the center's price and our recalculation is
again the number of procedures over which the cost is spread--the
center used 500, and we used 223.  This results in a difference of
$181 per procedure. 

   FACILITIES SUPPORT
-------------------------------------------------------- Appendix VI:2

Under the assumptions we used, the Albuquerque center's charge for
facilities support and anesthesiology would be $1,103 rather than the
$793 charged.  This difference relates solely to the allocation of
costs for administration and engineering and building management, as
table VI.2 shows. 

                         Table VI.2
          
          1994 Rate for Facilities Support, Based
           on 500 Procedures (Albuquerque Center)
                  and 223 Procedures (GAO)

                Price as set          Price as
              by Albuquerque     determined by
Component             center               GAO  Difference
------------  --------------  ----------------  ----------
Staffing                $273              $273          $0
Supplies                 215               215           0
Administrati             229               445         216
 on
Engineering/              76               170          94
 building
 management
==========================================================
Total                   $793            $1,103        $310
----------------------------------------------------------

      STAFFING AND SUPPLIES
------------------------------------------------------ Appendix VI:2.1

Because staffing and supply costs are calculated on a per-procedure
basis, they are unaffected by the different assumptions regarding
workload and investment recovery period. 

      ADMINISTRATION
------------------------------------------------------ Appendix VI:2.2

As appendix V explained, this component is composed of several types
of costs besides the administrative costs of VA's headquarters in
Washington, D.C., and is based on a percentage computed at the local
level and applied to all other costs.  We found the cost for this
component to be understated, because the problems previously
discussed for other cost components had produced a total for the
other costs that was lower than it should have been.  Applying the
designated percentage to the higher total raised the amount for this
component to $445, an increase of $216. 

      ENGINEERING AND BUILDING
      MANAGEMENT
------------------------------------------------------ Appendix VI:2.3

This cost component allocates a prescribed percentage of engineering
and building maintenance costs to the lithotripsy services.  The
difference between the center's charge and our recalculation is the
number of procedures over which the cost is spread--the center used
500, and we used 223.  This results in a difference of $94 per
procedure. 

(See figure in printed edition.)Appendix VII
COMMENTS FROM THE UNIVERSITY OF
NEW MEXICO HEALTH SCIENCES CENTER
========================================================== Appendix VI

(See figure in printed edition.)

(See figure in printed edition.)Appendix VIII
COMMENTS FROM THE DEPARTMENT OF
VETERANS AFFAIRS
========================================================== Appendix VI

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

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