DECEMBER 2007

The Health Care 

System for Veterans:

An Interim Report

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

P A P E R

CBO
Pub. No. 3016
The Congress of the United States O Congressional Budget Office

A

PAPER

CBO

The Health Care System for Veterans:

An Interim Report

December 2007
Note

The photograph on the front cover was provided courtesy of the Department of Veterans 

Affairs.
Preface

With the return of veterans having served in the conflicts in Iraq and Afghanistan and 

with a much larger number of veterans from earlier eras turning to the Department of Veterans Affairs (VA) for at least a portion of their health care, the department is now treating over 

5 million veterans each year. Many observers have suggested that the quality of that care has 

been bolstered by advances in health information technology as well as in other areas such as 

the coordination of care and the management of chronic diseases, which may have implications for other components of the nation’s health care system.

In response to requests from the Chairmen of the House Committee on Veterans’ Affairs and 

the Subcommittee on Military Construction, Veterans Affairs, and Related Agencies of the 

House Committee on Appropriations, the Congressional Budget Office (CBO) has prepared 

this interim paper that describes the incentives for quality that VA has included in its management system and its uses of health information technology. A final paper, anticipated next 

year, will consider whether other government or private-sector health systems would benefit 

from adopting those and other practices by VA. In keeping with CBO’s mandate to provide 

impartial analysis, this paper makes no recommendations.

Allison Percy of CBO’s National Security Division wrote the paper under the supervision of 

J. Michael Gilmore and Matthew S. Goldberg. Lyle Nelson served as the internal reviewer. 

David Auerbach, Tom Bradley, Keith Fontenot, Stuart Hagen, Arlene Holen, Sarah Jennings, 

Sam Papenfuss, and Michelle Patterson provided helpful comments on a draft of the analysis. 

Michael McLendon of the consulting firm McLendon & Associates reviewed the paper. (The 

assistance of an external reviewer implies no responsibility for the final product, which rests 

solely with CBO.)

John Skeen edited the paper, Loretta Lettner proofread it, and Victoria Liu checked it for 

accuracy. Cindy Cleveland produced drafts of the manuscript. Maureen Costantino prepared 

the report for publication and designed the cover. Lenny Skutnik produced the printed copies, 

Linda Schimmel handled the distribution, and Simone Thomas prepared the electronic version for CBO’s Web site (www.cbo.gov).

Peter R. Orszag

Director

December 2007

Contents

Description of VA’s Health System 1

The Quality of VA’s Medical Care 5

Evidence of the Quality of VA’s Health Care 6

Possible Explanations for VA’s Achievements in Quality of Care 14

How Other Systems Might Benefit from VA’s Experience 17

Potential Lessons from VA’s Performance Measurement and 

Management Systems 17

Potential Lessons From VA’s Health Information Technology 17

Figures

1. Veterans Enrolled in VA’s Health System, 1999 to 2007 2

2. Relative Cost of Care per Enrolled Veteran by Priority Group 4

3. Average Reliance on VA’s Care by Priority Group 5

Boxes

1. The Department of Veterans Affairs’ Health Care 

Priority Groups 3

2. Special Eligibility Period for Combat Veterans 6

3. Factors Affecting Medical Spending by the Department of 

Veterans Affairs 8

4. Satisfaction with TRICARE, Another Federal Health System 12

The Health Care System for Veterans:

An Interim Report

In recent years, the number of patients served by the 

medical system of the Department of Veterans Affairs 

(VA) has increased substantially. At the same time, VA’s 

ratings for the quality of care and customer satisfaction 

have apparently improved. Many people both within and 

outside the department have pointed to several factors as 

being key to achieving those results: 

B Organizational restructuring designed to share 

decisionmaking authority between officials in the central office, regional managers, and key personnel at 

dispersed medical facilities;

B Performance measurement targeted toward improving 

the quality of care; and

B Extensive use of health information technology 

(health IT).

This interim report provides a brief overview of VA’s 

medical system, summarizes some of the recent evidence 

on the quality of VA’s medical care and describes the 

incentives for quality that VA has included in its performance management system. The report also examines 

ways in which the department’s health IT may affect the 

quality of care. CBO’s final report, anticipated in early 

2008, will address the potential for other government and 

private health care providers to make use of VA’s experience, along with other issues. 

Description of VA’s Health System

The Department of Veterans Affairs, through the Veterans Health Administration (VHA), operates a system 

comprising 153 medical centers, 882 ambulatory care 

and community-based outpatient clinics, 207 Vet Centers, 136 nursing homes, 45 residential rehabilitation 

treatment programs, and 92 comprehensive home-based 

care programs—all providing medical and related services 

to eligible veterans. Those facilities provide inpatient 

hospital care, outpatient care, laboratory services, pharmaceutical dispensing, rehabilitation for a variety of 

disabilities and conditions, mental health counseling, and 

custodial care. VHA facilities employ about 200,000 fulltime-equivalent employees, including over 13,000 physicians and nearly 55,000 nurses.

In 2006, there were about 24 million living veterans of 

the U.S. military, according to VA’s estimates. In that 

year, the department provided medical services to over 

5 million of those veterans and to over 400,000 other 

patients.1 An additional 2.9 million veterans were 

enrolled in VA’s system but did not seek services from the 

department that year (see Figure 1).

VA’s enrollment system, begun in 1999 in accordance 

with provisions of the Veterans’ Health Care Eligibility 

Reform Act of 1996 (Public Law 104-262; 110 Stat. 

3177), calls for veterans who desire services to be assigned 

to a priority group based on service-connected disabilities, service-related exposures, income, assets, and other 

factors. Currently, there are eight priority groups (see 

Box 1). Those in the highest priority groups, 1 through 

3, have service-connected disabilities of varying degrees, 

while those in priority group 4 have serious disabilities 

1. Patients who are not veterans include employees (for example, 

ones receiving tests and vaccinations required for employment at 

VA facilities); dependents and survivors of disabled veterans who 

are eligible for the Civilian Health and Medical Program of the 

Department of Veterans Affairs program; and patients seen 

through sharing agreements with other providers, including 

the Department of Defense’s TRICARE program (the medical 

plan provided to military service members, retirees, and their 

dependents). 
2 THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT

Figure 1.

Veterans Enrolled in VA’s Health System, 1999 to 2007

(Millions of veterans)

Source: Congressional Budget Office based on data from and budget submissions by the Department of Veterans Affairs (VA)

Note: “Enrollees not seeking care” are veterans who were enrolled in VA’s system but who did not seek care in a particular year; “enrollees 

seeking care” were patients within VA’s system.

a. Projected.

that are not service-connected. Priority group 5 consists 

of low-income veterans, and priority group 6 includes 

those with environmental exposures (to Agent Orange, 

for instance) as well as many recent combat veterans. The 

veterans in priority groups 7 and 8 have no compensable 

service-connected disabilities and have higher income 

than those in priority group 5.

As part of its model for projecting its health care budget, 

VA has calculated the relative cost of health care for veterans in each priority group, including the impact of such 

factors as the age, sex, and morbidity of veterans in each 

group.2 With costs for veterans in priority group 1 (P1 

veterans, or those with a service-connected disability 

rated 50 percent or higher) considered as a reference, the 

average cost of services provided to most other groups is 

substantially less (see Figure 2). The costs of providing 

care to veterans in priority groups 2 and 3 are, respectively, just 53 percent and 48 percent as much as the 

amount for P1 veterans, while care for low-income veterans in priority group 5 costs about 57 percent as much. 

The most expensive group, however, is veterans in priority group 4 (most of whom are housebound with catastrophic disabilities not related to their military service), 

whose care costs 63 percent more than that for P1 veterans. The least expensive veterans are those in priority 

groups 6, 7, and 8, whose care costs between 37 percent 

and 45 percent as much as that for P1 veterans.

Veterans in some priority groups rely more heavily on VA 

for their care, while others receive the majority of their 

medical services from other sources, such as Medicare, 

Medicaid, private health insurance, the military health 

system, or public hospitals. VA estimates the dollar value 

of all medical care received by enrolled veterans from all 

sources (including out-of-pocket payments) and then calculates the percentage of that care received from VA. 

Disabled veterans receive the highest portion of their care 

from the department (see Figure 3). Veterans in priority 

groups 1 through 3, with service-connected disabilities, 

receive between 33 percent and 47 percent of their care, 

on average, from the department. Veterans in priority 

group 4 (mostly housebound veterans) receive about 

1999 2000 2001 2002 2003 2004 2005 2006 2007

0

1

2

3

4

5

6

7

8

9

Enrollees Seeking Care

Enrollees Not Seeking Care

a

2. The estimates exclude any reliance on other sources of care—that 

is, the relative costs are what would be incurred if veterans 

received 100 percent of their care from VA. (The impact of other 

sources of health care is estimated separately.)
THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT 3

Box 1.

The Department of Veterans Affairs’ Health Care Priority Groups

Priority Group 1 (P1)

Veterans with service-connected disabilities (SCDs) 

rated 50 percent or more disabling. 

Priority Group 2 (P2)

Veterans with SCDs rated 30 percent or 40 percent 

disabling.

Priority Group 3 (P3)

Veterans who are former prisoners of war; were 

awarded the Purple Heart; were discharged for 

SCDs; have SCDs rated 10 percent or 20 percent 

disabling; or were disabled by treatment or vocational 

rehabilitation provided by the Department of 

Veterans Affairs (VA).

Priority Group 4 (P4)

Veterans who are receiving aid and attendance benefits (cash payments from VA to eligible individuals 

who need assistance with daily activities because of a 

disability) or are housebound; and veterans who have 

been determined by VA to be catastrophically disabled.

Priority Group 5 (P5)

Veterans without SCDs or with noncompensable 

SCDs rated zero percent disabling who are living 

below VA’s means-test thresholds; veterans who are 

receiving pension benefits from VA; and veterans 

who are eligible for Medicaid benefits.

Priority Group 6 (P6)

Veterans of either World War I or the Mexican Border War; veterans seeking care solely for disorders 

associated with exposure in the line of duty to 

chemical, nuclear, or biological agents (including, 

for example, Agent Orange); veterans with compensable SCDs rated zero percent disabling; and combat 

veterans who are within the two-year special eligibility period (see Box 2).

Priority Group 7 (P7)

Veterans without SCDs or with noncompensable 

SCDs rated zero percent disabling who have income 

and/or net worth above VA’s means-test thresholds 

and below a geographic index defined by the Department of Housing and Urban Development (HUD).

Priority Group 8 (P8)

Veterans without SCDs or with noncompensable 

SCDs rated zero percent disabling who have income 

and/or net worth above both VA’s means-test thresholds and HUD’s geographic index.

Cost-Sharing Rules

VA provides treatment for service-connected conditions free of charge to all enrolled veterans. Veterans 

in the highest priority groups generally do not pay 

inpatient or outpatient copayments even for care 

unrelated to their service. Copayments for outpatient 

services for veterans in the lower priority groups are 

$15 for a primary care visit or $50 for a visit to a specialist. The copayment for inpatient services for the 

first 90 days of care during a 365-day period is $992 

and $496 for each additional 90 days of care during a 

365-day period. The per diem charge for inpatient 

services is $10. Those copayment rates may be 

reduced by 80 percent for veterans with income 

and/or net worth below HUD’s geographic index.

Copayments for medications are waived for veterans 

with very low income and those with SCD ratings of 

50 percent or higher. Those copayments are also 

waived for veterans in priority groups 2 through 6 

after they reach an annual cap of $960. Veterans in 

priority group 6 pay copayments only for services 

that are not related to their exposures or experience. 

Veterans in the lowest priority groups—7 and 8—pay 

copayments for all care that is not related to a serviceconnected condition. Even under the various circumstances in which copayments are waived, a veteran’s 

third-party insurer may be billed for treatment for 

conditions unrelated to his or her service.
4 THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT

Figure 2.

Relative Cost of Care per Enrolled Veteran by Priority Group

(Ratio of cost to that of a veteran in priority group 1)

Source: Congressional Budget Office based on data from the Department of Veterans Affairs. 

Note: In the figure, costs for veterans in priority group 1 serve as the reference and therefore are set at 1.0. Priority groups are defined in 

Box 1.

49 percent of their care from VA, on average. Lowincome veterans in priority group 5 turn to VA for about 

43 percent of their care. For veterans in priority group 6 

(which includes veterans suffering from exposure to toxic 

substances as well as recent combat veterans), the figure is 

24 percent; and for veterans in priority groups 7 and 8, 

the figures are 21 percent and 22 percent, respectively. 

In addition to the 7.9 million veterans currently enrolled, 

VA estimates that 5.8 million veterans who are not 

enrolled would be eligible to receive medical care from 

the VA health system if they applied and that about 

10.2 million veterans would be classified in priority 

group 8, for which new enrollment has been frozen since 

January 2003. Recent combat veterans may enroll regardless of disability or income status during a two-year special eligibility period (see Box 2).

To serve the population of eligible veterans, the Veterans 

Health Administration received $36 billion in budget 

authority in 2007 (including collections and supplemental appropriations). The agency’s budget has grown 

rapidly in the past decade, in part because of substantial 

growth in the number of veterans using the system (see 

Box 3).

In the 1990s, VA’s then-Undersecretary for Health Dr. 

Kenneth Kizer led a “reengineering” of the department’s 

health system, with the goals of better managing performance and systematizing improvements in quality and 

innovation.3

 In the early part of the decade, the system 

focused largely on inpatient care and care by specialists, 

lagging behind changes in the private sector, where many 

medical procedures had moved to an outpatient setting. 

In fact, rules prohibited outpatient care in many cases, 

raising concerns that VA could not provide coordinated 

primary care of the sort best suited to its population of 

mainly older male patients, many of whom had one or 

more chronic illnesses.4 The Veterans’ Health Care Eligibility Reform Act of 1996 substantially revised eligibility 

rules in an effort to provide a comprehensive medical 

benefit to each veteran who enrolled for care from VA, 

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0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Priority Group

Reference

Group

3. See Kenneth W. Kizer, John G. Demakis, and John R. Feussner, 

“Reinventing VA Health Care: Systematizing Quality Improvement and Quality Innovation,” Medical Care, vol. 38, no. 6 

(2000), pp. I-7–I-16. 

4. See Kenneth W. Kizer, Prescription for Change: The Guiding Principles and Strategic Objectives Underlying the Transformation of the 

Veterans Healthcare System (Department of Veterans Affairs, 

1996).
THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT 5

Figure 3.

Average Reliance on VA’s Care by Priority Group

(Percentage of care received from VA)

Source: Data provided to the Congressional Budget Office by the Department of Veterans Affairs (VA).

Note: Reliance on VA's care is measured in dollar terms. Priority groups are defined in Box 1.

including lifting the restriction on outpatient care. VA 

then substantially expanded its outpatient services, opening hundreds of clinics throughout the country so that 

services would be more accessible to patients and could 

be provided in the most medically appropriate setting. 

VA medical centers, outpatient clinics, and other facilities 

are organized into regional networks known as Veterans 

Integrated Service Networks (VISNs). There are currently 21 VISNs; a typical VISN includes 7 to 10 medical 

centers and a number of outpatient clinics and other 

facilities. The networks have the responsibility for allocating funds and for meeting performance goals set at the 

national level.

The Quality of VA’s Medical Care

VHA’s Office of Quality and Performance has adopted 

the definition of health care quality proposed by the 

Institute of Medicine (IOM): Quality is “the degree to 

which health services for individuals and populations 

increase the likelihood of desired health outcomes and are 

consistent with current professional knowledge.”5

The IOM also noted that health care should have the following attributes: 

B “Safe—avoiding injuries to patients from the care that 

is intended to help them.

B Effective—providing services based on scientific 

knowledge to all who could benefit and refraining 

from providing services to those not likely to benefit 

(avoiding underuse and overuse, respectively).

B Patient-centered—providing care that is respectful of 

and responsive to individual patient preferences, 

needs, and values and ensuring that patient values 

guide all clinical decisions.

B Timely—reducing waits and sometimes harmful 

delays for both those who receive and those who give 

care.

B Efficient—avoiding waste, including waste of equipment, supplies, ideas, and energy.

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10

20

30

40

50

60

Priority Group

5. Institute of Medicine, Committee on Quality of Health Care in 

America, Crossing the Quality Chasm: A New Health System for the 

21st Century (Washington, D.C.: National Academies Press, 

2001), p. 44.
6 THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT

B Equitable—providing care that does not vary in quality because of personal characteristics such as gender, 

ethnicity, geographic location, and socioeconomic 

status.” 6

VA tracks many aspects of its health care along the 

dimensions highlighted by the IOM. 

Evidence of the Quality of VA’s Health Care

VA officials have often cited studies that have given the 

department high ratings for the quality of its medical 

care. For example, then-Secretary of Veterans Affairs 

James Nicholson stated in a speech in July 2007, “We 

lead private and Government health care providers in 

almost every measure and our state-of-the-art quality care 

arcs from the research lab to a patient’s bedside.”7

Michael Kussman, then-Acting (now confirmed) Under 

Secretary for Health, gave testimony before the Congress 

in March 2007 in which he called VA “the Nation’s leader 

in providing high-quality health care” and cited a number 

of external research studies to support that claim.8

VA tracks the quality of its medical care using a variety of 

indicators for such areas as adherence to clinical guidelines, waiting times for access to services, and customer 

satisfaction. One key index is the Clinical Practice Guidelines Index, which measures the degree to which a provider follows nationally recognized standards of care that

Box 2.

Special Eligibility Period for Combat Veterans

More than 1 million active-duty military personnel 

have been deployed to either the Iraq or the Afghanistan theater of operation. Of the soldiers in the 

Army’s current force, more than half have been 

deployed in support of those operations at least once, 

and 15 percent have been deployed twice or more. In 

addition to the active-duty troops, reserve personnel 

have been mobilized in large numbers—a total of 

580,000 through March 2007; and more than 

410,000 reservists had been deployed to combat 

operations through December 2006. Troop levels in 

Iraq have climbed by between 30,000 and 40,000 

over the past six months, in turn increasing the number of service members who may qualify for VA medical care in the future.

Traditionally, reserve-component personnel who 

return from a deployment but remain on the military 

rolls would not qualify for VA health care until some 

later date when they were discharged from the service. However, legislation enacted in 1998, the Veterans Programs Enhancement Act (Public Law 105-

368), gave veterans and demobilized reservists returning from combat operations a special two-year period 

of eligibility for health care from the Department of 

Veterans Affairs (VA), waiving any requirements for 

them to satisfy a means test or to demonstrate a service-connected disability. Under that authority, VA 

provides health care for free for medical conditions 

potentially related to military service in combat operations.1

1. 38 U.S.C. 1710(e)(1)(D), as added by section 102 of the 

Veterans Programs Enhancement Act of 1998 (P.L. 105-368; 

112 Stat. 3315, 3321). 

6. Institute of Medicine, Crossing the Quality Chasm, pp. 5–6.

7. Remarks by R. James Nicholson to the Health Care Panel, Public 

Health Congress, Washington, D.C., July 16, 2007.

8. Statement of Michael J. Kussman, Acting Under Secretary for 

Health, Department of Veterans Affairs, before the Subcommittee 

on Military Construction, Veterans’ Affairs and Related Agencies, 

House Committee on Appropriations (March 6, 2007).
THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT 7

have been shown to improve health outcomes.9 Another 

is the Prevention Index II, which VA uses to track compliance with clinical guidelines for preventive care that 

research has tied to improved health and well-being.10 In 

2006, VA reported average scores of 87 percent on the 

Clinical Practice Guidelines Index and 90 percent on the 

Prevention Index II, exceeding the department’s targets of

Box 2.

Continued

VA has established three criteria for health conditions 

unrelated to military service, in which case VA will 

provide the care but may charge a veteran copayments or bill the veteran’s third-party insurance:

B Congenital or developmental conditions (for 

example, scoliosis),

B Conditions that are known to have existed before 

military service, and

B Conditions that began after military service (for 

example, bone fractures occurring after separation 

from the military).2

At the expiration of the two-year period, unless they 

are reclassified because of other factors (such as 

having service-connected disabilities or satisfying

a means test), those veterans will be moved into 

priority group 8, but their enrollment will be 

”grandfathered”—they will remain eligible for health 

care notwithstanding the freeze on new enrollments 

for that priority group (see Box 1 for a description of 

the priority groups).3

As of April 2007, about 320,000 active-duty veterans 

of Operation Iraqi Freedom and Operation Enduring 

Freedom had separated from military service and 

become eligible for health care provided by VA. In 

addition, about 370,000 members of the Reserve or 

National Guard had returned from those theaters of 

operation and become eligible, even though many of 

them remained affiliated with the military. Among 

those eligible veterans, about 110,000 of those who 

were on active duty and 115,000 of the reservists 

have received health care from VA thus far.

2. Department of Veterans Affairs, Veterans Health Administration, “Combat Veterans Are Eligible for Medical Services for 

Two Years After Separation from Military Service, Notwithstanding Lack of Evidence for Service Connection,” VHA 

Directive 2002-049, September 11, 2002.

3. H.R. 612, the Returning Servicemember VA Healthcare 

Insurance Act of 2007, would amend title 38 of the U.S. 

Code to extend the period of eligibility for health care for 

combat service in the Persian Gulf War or future hostilities 

from two years to five years after discharge or release. In May 

2007, CBO prepared a cost estimate for that bill, which is 

available at www.cbo.gov/ftpdocs/81xx/doc8129/hr612.pdf. 

The bill passed the House and was referred to the Senate for 

further action.

9. The Clinical Practice Guidelines Index is “a composite measure 

comprised of the evidence and outcomes-based measures for highprevalence and high-risk diseases that have significant impact on 

overall health status. The indicators within the Index are comprised of several clinical practice guidelines in the areas of 

ischemic heart disease, hypertension, diabetes mellitus, major 

depressive disorder, schizophrenia, and tobacco use cessation. The 

percent compliance is an average of the separate indicators.” See 

Department of Veterans Affairs, FY 2006 Performance and 

Accountability Report (November 2006), p. 184.

10. The Prevention Index II is “an average of nationally recognized 

primary prevention and early detection interventions for nine diseases or health factors that significantly determine health outcomes. The nine diseases or health factors include: rate of 

immunizations for influenza and pneumococcal pneumonia; 

screening for tobacco consumption, alcohol abuse, breast cancer, 

cervical cancer, colorectal cancer, and cholesterol levels; and prostate cancer education. Each disease has an indicator. Each indicator’s numerator is the number of patients in the random sample 

who actually received the intervention they were eligible to 

receive. The denominator is the number of patients in the random 

sample who were eligible to receive the intervention.” Ibid.
8 THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT

Box 3.

Factors Affecting Medical Spending by the Department of 

Veterans Affairs

A few news articles and publications have noted that 

the cost per patient or enrollee has remained relatively stable for the Department of Veterans Affairs 

(VA), while the costs faced by Medicare and other 

health plans have risen faster than general inflation.1

By one measure—the budget authority per enrollee 

for the Veterans Health Administration (VHA)—the 

cost fell by 29.0 percent in real (inflation-adjusted) 

terms between 1999 and 2005, reflecting an annual 

decrease of 5.6 percent. However, those figures do 

not take into account the changing mix of patients 

within the VA system, which has seen rapid growth in 

the overall number of patients and particularly in the 

enrollment by veterans whose care, on average, is less 

expensive than that for previous patients. Those less 

costly enrollees include patients who are younger, 

who are less disabled, or who seek only a small portion of their care from VA, as well as some enrollees 

who do not seek any care from the department in a 

given year. 

Adjusting for the changing mix of patients (using 

data on reliance and relative costs by priority group), 

the Congressional Budget Office (CBO) estimates 

that VHA’s budget authority per enrollee grew by 

1.7 percent in real terms from 1999 to 2005 (0.3 percent annually).2 Though not the decline in cost per 

capita that is suggested by the unadjusted figures, 

that estimate still indicates some degree of cost control when compared with Medicare’s real rate of 

growth of 29.4 percent in cost per capita over that 

same period (4.4 percent per year). 

One factor that has enabled VA to hold down its 

costs is the fact that federal law enables the department to purchase pharmaceutical products at prices 

that are less than those available to nearly any other 

purchaser.3

 In addition, VA uses a restrictive formulary to reduce its pharmaceutical costs even further. 

However, in 2006, pharmaceuticals made up 

13.5 percent of VA’s medical expenditures, compared 

with 10.1 percent of total national health expenditures. The higher percentage for the department 

despite its lower acquisition costs may reflect its older 

population of patients and the fact that some veterans 

rely on VA disproportionately for pharmaceuticals 

because of its relatively low copayment rate of $8 per 

prescription.

Until allowed by the Veterans’ Health Care Eligibility 

Reform Act of 1996, VA was prohibited by statute 

from providing outpatient care to many patients. So 

the department lagged behind other providers in 

moving health care from an inpatient to an outpatient setting. Providing care in an outpatient setting

1. See, for example, Phillip Longman, Best Care Anywhere: Why 

VA Health Care Is Better Than Yours (Sausalito, Calif.: 

PoliPointPress, 2007), p. 5; “The Best Medical Care in the 

U.S.,” BusinessWeek, July 17, 2006; and David Brown, “VA 

Takes the Lead in Paperless Care,” Washington Post, April 10, 

2007, p. F4.

2. CBO used information provided by VA from its actuarial 

model of enrollment in its system. CBO applied estimated 

rates of reliance and costs of care for VA patients by priority 

group (provided by the model and shown in Figures 2 and 3 

on pages 4 and 5) to the numbers of enrolled veterans in each 

priority group in 1999 and 2005 in order to isolate the effect 

of the changing composition of the population of veterans on 

VA’s cost growth. VA’s spending data reflect total costs, 

including collections and supplemental appropriations, and 

Medicare data reflect net federal costs. CBO used total costs 

for VA because the growth in the department’s net costs 

reflects, in part, increased billing efforts in recent years rather 

than changes in the level of spending on patients. (VA’s collections have increased over 250 percent since 1999.) 

3. For more information, see Congressional Budget Office,

Prices for Brand-Name Drugs Under Selected Federal Programs

(June 2005).
THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT 9

Box 3.

Continued

reduces the costs of many medical services, although 

not necessarily the total cost of care, as convenient 

access to VA outpatient care may increase the overall 

demand for medical services from VA (and perhaps 

from all sources). If the shift toward outpatient care 

has resulted in a reduction in per capita spending, 

it could have benefited VA more than Medicare during the period being analyzed here, 1999 to 2005, 

particularly if many of those seeking care from VA’s 

outpatient clinics were receiving medical services 

from other sources as well.

While VHA’s real per capita spending has increased 

little in recent years, the agency’s overall spending has 

grown rapidly. The agency’s medical budget has doubled in the past decade, rising from $17 billion in 

1996 to $36 billion in 2007, reflecting an annual 

compound growth rate of 7.4 percent in nominal 

terms (or 5.2 percent after accounting for inflation). 

That growth in the agency’s budget can be traced in 

large part to a rapidly expanding population of 

patients since the passage of the Veterans’ Health 

Care Eligibility Reform Act of 1996, from 4.2 million enrollees in 1999 (the first year in which the 

enrollment system established by that law was fully 

operational) to 7.9 million in 2006. However, in any 

given year, some enrollees do not seek any medical 

care from VA, either because they do not become ill 

or because they rely on other sources of care. In 2006, 

about 5.0 million veterans received services from a 

VA hospital or clinic, up from 3.2 million in 1999 

(see Figure 1). 

Many new patients who have entered the VA system 

fall into priority groups 7 and 8—veterans with no 

service-connected disabilities and with income and/

or net worth above established thresholds, who previously had very limited access to the department’s 

medical services. Those groups differ in some ways 

from VA’s traditional target population. Many 

enrolled veterans in those groups are older but have 

access to other sources of care, such as Medicare. On 

average, veterans in priority groups 7 and 8 receive 

only about 20 percent of their care from VA and the 

rest from other sources; as a result, the cost to VA of 

those enrollees is relatively small compared with the 

costs for veterans in priority groups 1 through 5 (see 

Box 1). 

In addition to the influx of older veterans in priority 

groups 7 and 8, recent combat veterans are enrolling 

in much higher numbers than recently discharged 

veterans have traditionally, perhaps partly because of 

the special eligibility period currently in place that 

allows enrollment regardless of income or serviceconnected disability status (see Box 2). Those enrollees are younger than the average for VA patients. 

While some have serious injuries, most are relatively 

healthy; the average cost of patients with special eligibility status was only $2,600 in 2006, compared with 

about $5,800 for all VA patients. 

VA has received supplemental appropriations in 

recent years that have contributed to the growth in its 

total medical budget. The Government Accountability Office has reported that 28 percent of VA’s 2005 

supplemental budget request ($273 million out of 

$975 million) was intended to meet the demand for 

medical treatment of recent combat veterans. The 

remainder went (in descending order of funding) to 

long-term care, unexpected numbers of patients in 

priority groups 1 through 6 (even omitting those who 

served in the Iraq or Afghanistan theater), unexpected increases in enrollees’ use of medical services, 

efforts to reduce waiting lists, and rapid growth in 

spending by the Civilian Health and Medical Program of the Department of Veterans Affairs.4

4. Government Accountability Office, VA Health Care: Budget 

Formulation and Reporting on Budget Execution Need Improvement, GAO-06-958 (September 2006).
10 THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT

77 percent and 88 percent, respectively.11 For both measures, the scores have improved in recent years. From 

2004, when the Clinical Practice Guidelines Index was 

put in place (replacing an older composite measure), to 

2006, VA’s score on the index rose 10 percentage points. 

VA’s score on the Prevention Index II rose 8 percentage 

points from 2002 to 2006. CBO was unable to identify 

any directly comparable scores for other government providers or for private providers because, even though VA’s 

indicators are composed of many individual measures 

that are commonly used throughout the health care 

industry, the indexes are composites developed specifically for VA. In 2008, VA is planning to adopt more quality measures that are industrywide, such as those in the 

Healthcare Effectiveness Data and Information Set 

(HEDIS), in order to improve comparability with other 

providers.12

Those key indexes used by VA focus on process measures 

of quality rather than outcome measures for several reasons. First, process measures are easier to track—for 

example, VA’s electronic health information system can 

easily identify what percentage of heart patients had their 

blood pressure checked during their last primary care 

visit. Second, process measures are easier to compare 

among facilities; they do not need to be adjusted for differences in the risk of the population of patients. Third, 

the process measures that are tracked are drawn from 

published clinical guidelines, which in turn are based on 

published research regarding health outcomes for 

patients. Nevertheless, it is important to examine health 

outcomes in addition to process measures, as some process measures have been shown to have a relatively tenuous connection to health outcomes.13

Although some studies have compared outcomes for VA 

patients with those for patients treated by other providers, they have not allowed for drawing broad conclusions.14 In such studies, adjusting for differences in the 

risks of the patients can be problematic. Also, VA patients 

may have other sources of health coverage (such as Medicare, Medicaid, or private insurance) and often seek some 

care outside of VA’s system, complicating the distinction 

between a “VA patient” and a “non-VA patient.” Thus, 

although it remains important to study the health outcomes of VA patients and to compare them to those for 

patients in other systems, VA is likely to continue to rely 

heavily on process measures in gauging and improving 

the quality of care in its facilities. 

VA also tracks measures of access to care, particularly, 

waiting times for appointments or procedures. VA 

reported that, in 2006, 96 percent of all veterans seeking 

primary medical care and 95 percent of all veterans seeking specialty care were seen within 30 days of their 

desired dates.15 However, according to a 2005 report by 

the VA Inspector General (IG), the department’s data on 

waiting times were not accurate, and, in fact, many fewer 

patients were receiving appointments within the 30-day 

window than the figures cited by the department in its 

official reports.16 In September 2007, in a follow-up 

audit, the VA IG found that established procedures were 

still not being followed and that, as a result, data on waiting times could not be relied upon.17

In addition to measuring quality and access, VA also 

tracks its performance in terms of patients’ satisfaction, 

including using the American Customer Satisfaction 

11. Ibid, p. 1.

12. HEDIS was designed by the National Committee for Quality 

Assurance and is used by most private health plans to measure performance in terms of quality of care and service.

13. According to a recent study, the process measures commonly 

used for acute myocardial infarction, for example, are only weakly 

correlated with risk-adjusted mortality rates. See E. Bradley and 

others, “Hospital Quality for Acute Myocardial Infarction: 

Correlation Among Process Measures and Relationship with 

Short-Term Mortality,” Journal of the American Medical Association, vol. 296, no. 1 (July 5, 2006), pp. 72–78.

14. See, for example, Eve A. Kerr and others, “Diabetes Care Quality 

in the Veterans Affairs Health Care System and Commercial 

Managed Care: The TRIAD Study,” Annals of Internal Medicine,

vol. 141, no. 4 (2004), pp. 272–281; Mary Beth Landrum and 

others, “Care Following Acute Myocardial Infarction in the 

Veterans Administration Medical Centers: A Comparison with 

Medicare,” Health Services Research, vol. 39, no. 6, part 1 (2004), 

pp. 1773–1792; and Laura A. Petersen and others, “Outcome of 

Myocardial Infarction in Veterans Health Administration Patients 

as Compared with Medicare Patients,” The New England Journal 

of Medicine, vol. 343, no. 26 (December 28, 2000), pp. 1934–

1941.

15. Department of Veterans Affairs, FY 2006 Performance and 

Accountability Report, pp. 120–121.

16. Department of Veterans Affairs, Office of the Inspector General, 

Audit of the Veterans Health Administration’s Outpatient Scheduling 

Procedures, Report No. 04-02887-169 (July 8, 2005).

17. Department of Veterans Affairs, Office of the Inspector General, 

Audit of the Veterans Health Administration’s Outpatient Waiting 

Times, Report No. 07-00616-199 (September 10, 2007).
THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT 11

Index (ACSI), which ranks customer satisfaction with a 

variety of federal programs and private-sector industries.18 In 2005, VA achieved a satisfaction score of 83 

(out of 100) on the ACSI for inpatient care and 80 (out 

of 100) for outpatient care, compared with averages for 

private-sector providers of 73 for inpatient care and 75 

for outpatient care. In 2004, the ratings were higher for 

both VA and the private sector. For VA, the scores for 

inpatient and outpatient care were 84 and 83, respectively, while the average scores for the private sector were 

79 and 81.19 Starting in 2008, VA hopes to track its 

patients’ satisfaction using the Consumer Assessment of 

Healthcare Providers and Systems (CAHPS), a set of 

standardized surveys developed by the Agency for Healthcare Research and Quality (AHRQ) that ask patients to 

evaluate their health care experiences. Using the CAHPS 

surveys could improve VA’s ability to compare its performance to that of the Department of Defense and the private sector. 

One potential concern about assessing the satisfaction of 

VA’s patients is the impact that the department’s low costsharing requirements may have on the ratings. Patients 

with service-connected disabilities receive care for those 

conditions free of charge. For the treatment of conditions 

not connected to service, VA may charge low copayments 

and can also bill veterans’ private insurance plans. The 

copayments for prescription drugs, outpatient visits, and 

inpatient care are relatively modest when compared with 

those faced by most users of private-sector health insurance. It is possible that individuals who face low or no 

costs for their care may be more satisfied than those who 

pay higher costs. However, it is also possible that veterans 

have high expectations of the level of service they should 

receive from VA’s health system as individuals who served 

their country in uniform, sometimes incurring disabilities 

in the process. 

Another potential concern about how to interpret VA’s 

satisfaction ratings is the fact that the ratings do not 

incorporate the satisfaction of veterans who cannot access 

the system (either because they are priority group 8 veterans who were not enrolled before the January 2003 freeze 

in enrollment for that group or because VA facilities are 

geographically inaccessible to them) or who choose not to 

use the system. However, for any health care system, satisfaction ratings reflect the views only of people who are 

patients within that system. 

VA is not alone among government health care providers 

in tracking patients’ satisfaction. In recent years, the 

Department of Defense’s TRICARE system has increasingly emphasized improving its beneficiaries’ satisfaction 

(see Box 4). Although TRICARE’s overall satisfaction ratings compare favorably to civilian benchmarks, activeduty service members, who generally must use the inhouse military health system, report lower satisfaction 

than do family members and retirees, who have better 

access to the civilian TRICARE network. Retirees report 

slightly higher levels of satisfaction with the system than 

active-duty personnel and their families do, despite the 

fact that retirees generally pay higher cost-sharing 

amounts.

The published literature includes a number of studies 

that address the quality of VA’s health care. A 2003 study 

examined the issue for patients in VA’s system in 1994 

and 2000 (before and after the reengineering of the system) and compared that care with that received by 

patients in Medicare’s fee-for-service program, in which 

patients can seek care from a wide variety of outpatient 

and inpatient providers.20 The study found statistically 

significant improvements in quality after VA’s reengineering. Moreover, it found that VA patients were more likely 

to have received “appropriate care,” as defined by adherence to certain clinical guidelines. The medical care 

18. See National Quality Research Center at the Ross School of 

Business at the University of Michigan, CFI Group, and the 

Federal Consulting Group, Veterans Health Administration––Inpatients, Veterans Affairs Customer Satisfaction Study: Final Report

(prepared for the Department of Veterans Affairs, December 

2006), and Veterans Health Administration––Outpatients, Veterans 

Affairs Customer Satisfaction Study: Final Report (prepared for 

the Department of Veterans Affairs, December 2006). More 

information about the ACSI is available at www.theacsi.org/

index.php?option=com_content&task=view&id=46&Itemid=43.

19. Department of Veterans Affairs, FY 2006 Performance and 

Accountability Report, p. 29, and FY 2005 Performance and 

Accountability Report (November 2005), p. 42. VA reports ACSI 

ratings in the year after each study was conducted, so that VA’s FY 

2006 Performance and Accountability Report contains its ACSI ratings from 2005. 

20. Ashish K. Jha and others, “Effect of the Transformation of 

the Veterans Affairs Health Care System on the Quality of 

Care,” The New England Journal of Medicine, vol. 348, no. 22 

(May 29, 2003), pp. 2218–2227. (It should be noted that three 

out of the four authors of the paper have a current or former 

affiliation with VA.) 
12 THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT

received by VA patients rated significantly better on 

nearly all quality-of-care indicators than that received by 

patients covered by the Medicare fee-for-service program. 

For some settings and conditions, between 93 percent 

and 98 percent of VA patients were found to have met 

the criteria for appropriate care in 2000, while the highest 

score for Medicare patients was 84 percent.

The authors attributed VA’s improvements in quality to 

its focus on measuring it:

“We believe that the reengineering of VA health care, 

which included the implementation of a systematic 

approach to the measurement of, management of, and 

accountability for quality, was at the heart of the 

improvement. Routine performance measurements for 

high-priority conditions such as diabetes and coronary 

artery disease, emphasizing health maintenance and 

management of care, were instituted. Performance 

contracts held managers accountable for meeting 

improvement goals. Whenever possible, quality indicators were designed to be similar to performance 

measures commonly used in the private sector. Data 

gathering and monitoring were performed by an independent agency—the External Peer Review Program. 

Critical process improvements, such as an integrated, 

comprehensive electronic medical-record system, were 

instituted at all VA medical centers. Finally, performance data were made public and were widely distributed within the VA, among key stakeholders such as

Box 4.

Satisfaction with TRICARE, Another Federal Health System

The other large federal system that directly provides 

health care is run by the Department of Defense 

(DoD). (By contrast, the Medicare and Medicaid 

programs receive federal and, in the case of Medicaid, 

state funding but purchase care from the private sector rather than providing care in-house at government facilities.) DoD’s TRICARE program supplies 

health care to military personnel and their families 

and to military retirees and their eligible family members, as well as to certain survivors. In 2006, TRICARE spent $15 billion on care purchased from the 

private sector and $20 billion (including overhead 

and administration costs) on care provided in-house 

at 70 military hospitals and medical centers (including 52 in the United States), another roughly 400 

ambulatory medical clinics, and about 400 dental 

clinics.1 TRICARE covered a total of 9.2 million 

beneficiaries worldwide, including nearly 1.5 million 

active-component uniformed service personnel and 

320,000 members of the Guard and Reserve.2

DoD publishes a self-assessment of its TRICARE 

program each year that, among other things, compares its beneficiaries’ satisfaction with civilian 

benchmarks.3

 The latest assessment compares data 

from the three most recent Health Care Surveys of 

DoD Beneficiaries (for 2004 through 2006), adjusted 

for beneficiaries’ age and health status, to civilian 

1. Funding for the TRICARE For Life Program is accrued 

via the Medicare-Eligible Retiree Health Care Fund 

(MERHCF), which received $10.8 billion from DoD’s military personnel appropriation in 2006 to pay for the future 

benefits of current active-duty personnel. Payments out of 

the fund for current Medicare-eligible military retirees and 

family members totaled $6.4 billion. Those beneficiaries 

contributed $4.8 billion to the total of $15 billion spent on 

purchased care and $1.6 billion to the total of $20 billion 

spent on in-house care. See Office of the Assistant Secretary 

of Defense (Health Affairs), Evaluation of the TRICARE Program: FY 2007 Report to Congress (February 27, 2007), pp. 18 

and 23, available at www.tricare.mil/ocfo/hpae/reports.cfm.

2. Guard and Reserve members become eligible for TRICARE 

when activated for a contingency operation for a period of 

more than 30 days. Further, if they receive advance notification, both they and their family members become eligible for 

up to 90 days prior to activation. About 32,000 Guard and 

Reserve personnel are covered even when not activated 

because they pay premiums to the TRICARE Reserve Select 

program.

3. See Office of the Assistant Secretary of Defense (Health 

Affairs), Evaluation of the TRICARE Program: FY 2007 Report 

to Congress.
THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT 13

veterans’ service organizations, and among members 

of Congress.”21

A 2004 study assessed the quality of care for VA patients 

and for patients in a national sample.22 Employing a 

cross-sectional design, the study compared indicators for 

a sample of VA patients drawn from 26 facilities located 

in 2 VISNs and for a national sample of patients from 12 

communities—using data collected between 1997 and 

2000, a period during which performance measurement 

and electronic medical records had been implemented 

throughout VA’s medical system. The authors chose to 

examine process measures, noting that such measures “are 

more readily actionable than outcomes measures, require 

less risk adjustment, and follow the structure of national 

guidelines.”23 Altogether, the study included 348 indicators drawn from national guidelines and the medical literature to address both inpatient and outpatient care, 

including screening, diagnosis, treatment, and follow-up 

activities. 

The study found that, on average, 67 percent of VA 

patients received the care specified by the indicators, 

Box 4.

Continued

benchmarks obtained from the national Consumer 

Assessment of Healthcare Providers and Systems 

(CAHPS) database. The major findings of the 2006 

comparison are these:

B Users of the military health system were about as 

satisfied with their health plan as were civilians in 

the database used as a benchmark. For TRICARE, 

55.9 percent were satisfied; in civilian plans, 59.4 

percent.

B Military users were nearly as satisfied as their civilian counterparts with their primary care physicians––67.2 percent versus 73.5 percent––and 

with their specialty physicians––69.2 percent versus 73.5 percent.

B Military users were less satisfied with the health 

care they received––59.2 percent satisfied versus 

72.4 percent––which may reflect dissatisfaction 

with the administration of the program rather 

than with TRICARE medical providers.

B Active-duty personnel consistently reported lower 

levels of satisfaction than did family members and 

retirees. In 2006, 51.3 percent of active-duty users 

reported satisfaction with their health plan. In that 

same year, 57.9 percent of family members of 

active-duty personnel reported being satisfied, 

while 59.9 percent of retirees and their family 

members were satisfied with their health plan. The 

difference may reflect the fact that active-duty 

personnel have fewer choices under TRICARE––

generally, they must seek care from a military 

treatment facility unless they are specifically 

referred to a civilian provider in the TRICARE 

network.

B Military beneficiaries who enroll in TRICARE 

Prime, the managed-care option, are assigned a 

primary care manager (PCM)—a health care professional or team that the patient sees first for 

health care. Those with a military PCM are more 

likely to be referred to in-house military facilities, 

while those with a civilian PCM are more likely to 

use civilian TRICARE providers in the community. Some 59.3 percent of the military beneficiaries who were assigned a civilian PCM reported 

being satisfied with the health care they received, 

whereas 55.9 percent of those with a military 

PCM reported being satisfied. 

21. Jha and others, p. 2224.

22. Steven M. Asch and others, “Comparison of Quality of Care for 

Patients in the Veterans Health Administration and Patients in a 

National Sample,” Annals of Internal Medicine, vol. 141, no. 12 

(December 21, 2004), pp. 938–945. (It should be noted that VA 

provided partial funding for this study and several of its authors 

have had an affiliation with the department.) 23. Asch and others, p. 939.
14 THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT

compared with 51 percent of the patients in the national 

sample. For both chronic care and preventive care, the 

ratings for VA patients were higher than for the others, 

but for acute care, slightly lower (although the difference 

was not statistically significant). For depression, diabetes, 

hyperlipidemia, and hypertension, VA patients received 

significantly better care.

VA’s performance measurement system appears to play a 

key role in explaining some of those differences in adherence to clinical guidelines. The authors noted that while 

the average difference between the scores for VA patients 

and patients in the national sample was 24 percentage 

points for those quality indicators that the department 

had made a point of tracking, the difference on indicators 

that the department did not track “barely reached conventional levels of statistical significance.”24

Such studies raise some questions, though, in that they 

are comparing the performance of systems with some 

fundamental differences; VA’s integrated system is quite 

different from ones made up of a variety of independent 

medical providers. Moreover, the fact that many of VA’s 

patients seek a substantial portion of their care outside of 

the department’s system poses some complications 

(including tracking compliance with clinical guidelines). 

Medical records from the wide variety of providers outside of VA’s integrated system may not fully reflect all services received. Also, such studies may focus on measures 

to which VA gives disproportionate weight, while 

neglecting to examine others. 

Possible Explanations for VA’s Achievements in 

Quality of Care

Observers have suggested a number of factors to explain 

VA’s higher scores on many measures of health care quality compared with those of other systems. In particular, 

VA’s structure as an integrated delivery system makes it 

easier for the department to apply two important tools:

B Incentives given to managers and providers to meet 

targets for quality of care and adherence to clinical 

guidelines and

B Health IT systems, which include reminders about 

tests and treatments recommended according to clinical guidelines.

Other factors may also be important in explaining VA’s 

performance—for example, the low out-of-pocket costs 

for the department’s health care reduce the disincentives 

for patients to seek medical care, thus potentially enhancing the department’s performance in meeting clinical 

guidelines for preventive care and the management of 

chronic diseases.

In this interim paper, CBO addresses the incentives provided by VA’s management structure and the features of 

the department’s health IT.

Incentives for VA Providers and Facilities. Most payment 

systems for health care do not align incentives well with 

the aim of quality.25 Instead, health insurance plans often 

pay providers on the basis of the number of services rendered rather than the quality of the care delivered. In fact, 

in most cases, providers are not directly reimbursed for 

investments in quality—for example, purchases of health 

IT to track adherence to clinical guidelines or spending 

on education and training to improve compliance with 

safety protocols. Although providers have some incentives 

to improve quality to gain accreditation, market their services, and improve their overall reputation, the return on 

investments in quality can often be elusive. By comparison, the return on investment is much more tangible for 

spending on equipment or facilities that create additional 

billing opportunities—for example, purchasing advanced 

radiological equipment or building a new surgical suite. 

Students and advocates of VA’s health system describe it 

as an industry leader in health care quality and point to 

the fact that VA faces a different set of incentives than 

most other health care providers.26 Like some other government agencies, VA has a budgeting process that generates substantially different financial incentives from those 

encountered within private health systems. In addition, 

VA has implemented a system for assessing the performance of its personnel at all levels that focuses on indicators of quality of care, access, patients’ satisfaction, and 

related areas. 

24. Asch and others, p. 942.

25. For a discussion of the topic, see Institute of Medicine, Committee on Redesigning Health Insurance Performance Measures, Payment, and Performance Improvement Programs, Rewarding 

Provider Performance: Aligning Incentives in Medicare (Washington, D.C.: National Academies Press, 2007).

26. Phillip Longman, “The Best Care Anywhere,” Washington 

Monthly, January/February 2005.
THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT 15

Incentives and Network Budgeting. When the VISNs were 

created in the 1990s, rather than allocating resources to 

the networks on the basis of historical budgets for the 

facilities in each network, VA implemented a capitationbased system called Veterans Equitable Resource Allocation (VERA). Under that system, networks were given a 

fixed amount per enrolled veteran for “basic care” 

patients and a higher fixed amount per enrollee for “complex care” patients. From 1997 to 1999, basic care 

patients made up 96 percent of the total number of 

patients but accounted for only 62 percent of VA’s medical expenditures, while the remaining 4 percent of 

patients in the category for complex care (many of whom 

required long-term care or other high-cost services) 

accounted for 38 percent of the resources.27 VERA has 

since been modified a number of times to define patient 

groups in greater detail but retains its basic structure as a 

capitated budgeting system.

VERA was designed to provide managers with incentives 

to provide care to patients in the most cost-effective and 

medically appropriate settings. Because the budgets allocated to VA facilities do not depend on the number of 

procedures performed, the facilities do not have incentives to sacrifice quality in order to increase their capacity 

to produce billable services.

Incentives for Managers. The regional managers of each 

VISN are held accountable for the performance of facilities within that region in providing preventive care and 

managing chronic conditions.28 VA’s key methodology 

for assessing the performance of managers was implemented first at the senior executive level and has now 

been expanded to include all management levels. The follow-on report to this one will provide details about the 

steps that VA uses to assess managers’ performance, 

including the role that quality indicators play in rating 

performance. 

Incentives for Providers. Physicians and other medical care 

providers are also given direct and indirect incentives to 

improve quality, access, and patients’ satisfaction. The 

Department of Veterans Affairs Health Care Personnel 

Enhancement Act of 2004 created a new payment system 

for VA physicians that includes bonuses linked to 

improved performance in those areas. CBO’s follow-on 

report will include additional information on monetary 

and nonmonetary incentives for VA providers.29

Health Information Technology. For every patient, VA 

has an electronic health record in an information system, 

the Veterans Health Information Systems and Technology Architecture (VistA). The system was developed by 

VA programmers beginning in the 1970s with the input 

of providers who would be using the system. VistA is 

integral to both VA’s system for providing care and its 

management of both providers and executives. Moreover, 

VistA is often cited by VA officials as a key to the department’s efforts to achieve high quality ratings and in helping to control medical care costs. 

Research on the impact of health IT has highlighted some 

of its potential advantages—and raised many issues about 

the feasibility of implementing such IT systems in health 

care systems composed of diverse providers and payment 

mechanisms. 

Most health care in the United States is delivered by independent providers, who may not be fully aware of the 

tests, examinations, procedures, and pharmaceuticals that 

have been prescribed to a patient by other providers. 

Most providers rely on paper records that give little information about the services that patients have received 

from other physicians or clinics. Moreover, results of laboratory tests or other information may be missing 

because of delays in filing information. As a result, laboratory tests might be repeated, a patient’s history missed, 

or incompatible pharmaceuticals prescribed. 

Some observers have suggested that electronic health 

records (EHRs) may address many such problems. The 

Institute of Medicine identified eight core functions that 

such a record can allow for or provide:

B Health information and data,

B Results management,

B Order entry/management,

B Decision support,

B Electronic communication and connectivity,

27. Kizer, Demakis, and Feussner, pp. I–11 to I–12.

28. Ibid., p. I-13. 29. P.L. 108-445; 118 Stat. 2636.
16 THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT

B Patient support,

B Administrative processes, and

B Reporting and population health management.30

In theory, an EHR could give providers up-to-date information about a patient at the point of care, including his 

or her history, allergies, and medications, along with relevant diagnoses and laboratory tests, enabling providers to, 

among other things, avoid duplicate tests and adverse 

drug interactions. Some research suggests that computerized provider order entry (CPOE)—in other words, electronic handling of prescriptions, laboratory tests, and 

radiological procedures—provides improvements in 

safety for patients and reduces errors.31 Research also 

indicates that computer reminders and prompts can significantly improve adherence to clinical guidelines, particularly for preventive care.32 Keyed to information in 

the patient’s file (for example, age, sex, comorbid conditions), the computer program can remind the provider 

that specific vaccinations, screening, or counseling about 

health or diet issues are recommended. However, other 

studies have raised concerns about the potential for 

CPOE or other health IT systems to increase the risk of 

certain types of medical errors.33

To date, most information technology that has been 

adopted by health care providers has focused on financial 

transactions, such as insurance billing. The incentives for 

adopting such financial information systems are clear: 

Generally, a provider must use them in order to be paid 

for services. The incentives to implement other types of 

health information technology, such as an electronic 

health record system, are much less clear, so the development of health IT has lagged. 

Many experts cite the potential for health IT to improve 

the quality of care. They argue that the coordination of 

care and the availability of complete medical information 

to all providers are key factors in improving the quality 

and safety of medical services, particularly in promoting 

adherence to clinical guidelines.34 Improvements in efficiency may enable providers who use health IT to reduce 

costs as well, although the evidence about cost reduction 

is mixed.35

VA may be uniquely positioned to take advantage of 

health IT’s potential. Independent providers, who 

interact with a variety of insurance systems, may have a 

harder time realizing those benefits. Issues of interoperability, the standardization of formats and records, 

privacy, ownership and control, and the education of 

and compliance by providers are all challenges to successful implementation that are far more difficult in a nonintegrated environment.

An electronic health record is most useful when it is complete—that is, when it contains all relevant medical information about a patient, including treatments or examinations received by outside providers. However, the sharing 

of information is limited because many of the EHRs currently in use do not conform to recognized standards for 

interoperability. Even VistA, which has been in place for a 

number of years now, has a very limited ability to interact 

directly with or use information from other EHR systems, despite the fact that many VA patients receive a 

substantial portion of their care outside the department’s 

system. VistA is able to draw some information from the 

Department of Defense’s (DoD’s) health information systems regarding the medical history of recently discharged 

veterans and patients receiving services from both military treatment facilities and VA hospitals or clinics. For 

non-DoD providers, such as private doctors and hospitals, information can be brought to VA by the patient or 

30. Institute of Medicine, Committee on Data Standards for Patient 

Safety, Key Capabilities of an Electronic Health Record System

(Washington, D.C.: National Academies Press, July 31, 2003).

31. See, for example, David W. Bates and others, “Effect of 

Computerized Physician Order Entry and a Team Intervention 

on Prevention of Serious Medication Errors,” Journal of the 

American Medical Association, vol. 280, no. 15 (October 21, 

1998), pp. 1311–1316.

32. See E. Andrew Balas and others, “Improving Preventive Care by 

Prompting Physicians,” Archives of Internal Medicine, vol. 160, 

no. 3 (February 14, 2000), pp. 301–308.

33. See Ross Koppel and others, “Role of Computerized Physician 

Order Entry Systems in Facilitating Medical Errors,” Journal of the 

American Medical Association, vol. 293, no. 10 (March 9, 2005), 

pp 1197–1203.

34. See Lucian L. Leape and Donald M. Berwick, “Five Years After To 

Err is Human: What Have We Learned?” Journal of the American 

Medical Association, vol. 293, no. 19 (May 18, 2005), pp. 2384–

2390. 

35. Basit Chaudhry and others, “Systematic Review: Impact of Health 

Information Technology on Quality, Efficiency, and Costs of 

Medical Care,” Annals of Internal Medicine, vol. 144, no. 10 

(May 16, 2006), pp. 742–752. See also Box 3.
THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT 17

sent by the outside provider and then entered into VistA 

manually. Paper records can be scanned in and attached 

to a VistA record, which allows providers to access them 

while reviewing the patient’s file, but the information 

generally cannot be searched or used for the monitoring 

or quality systems within VistA. 

How Other Systems Might Benefit from 

VA’s Experience

Because the Department of Veterans Affairs provides a 

large integrated delivery system financed primarily by 

public budgets, drawing lessons from VA’s experience 

may be easiest for other federal systems that provide services directly, such as the military treatment facilities run 

by the Department of Defense. Staff- or group-model 

health maintenance organizations may also find VA’s 

experience to be useful with relatively little adjustment 

for differences in organizational structure. Other systems, 

too, may also be able to learn from VA’s experience but 

would need to adjust the department’s methods to their 

own organizational environment. For its part, VA has in 

the past learned from the experience of other health care 

providers of all types and undoubtedly will continue to 

do so. This interim report discusses a few early findings 

about how other systems might benefit from VA’s experience with performance measurement and health information technology. 

Potential Lessons from VA’s Performance 

Measurement and Management Systems

VA’s experience demonstrates the potential for improving 

a system’s performance by sustained efforts to monitor 

indicators of quality, access, and satisfaction. Most of the 

criteria that VA uses for assessing the performance of 

senior-level executives, mid-level managers, and even 

health care providers relate directly to indicators of quality, access, and satisfaction for the facilities or units for 

which the individuals are responsible. The result has been 

notable improvements in many of the indicators, suggesting that tracking such indicators closely and consistently 

may be key to improving a health care system’s performance in those areas. 

VA’s structure as a vertically integrated system that 

operates on an appropriation may have helped the system 

to focus on providing the best quality of care possible for 

a given amount of funds. As noted earlier, for many private providers, fee-for-service payment creates an incentive to perform more billable services and procedures. 

Although VA’s integrated structure and capitated budgeting alone do not give providers or managers incentives to 

focus on quality, those attributes may have made it easier 

for the department to implement its management plan 

built around tracking and rewarding both managers and 

employees for improvements in performance.

Improvements in quality might also be encouraged in private settings through the development of more capitated 

payment systems or a blend of capitation and fee-forservice payment of physicians. Another alternative would 

be payment systems based on an aggregated physicianhospital unit, in which high volume is penalized. The 

Medicare Payment Advisory Commission has suggested 

changes to revamp Medicare’s payment systems in order 

to improve incentives for quality of care.36

Additional lessons from VA’s experience as well as the 

efforts of other systems to improve health care quality will 

be discussed in CBO’s follow-on report. 

Potential Lessons From VA’s Health Information 

Technology

As described, VA’s electronic health record system—

VistA—was developed internally and incrementally over 

years, with considerable input from the medical providers 

and others using the information. The same is true of the 

health IT systems with which a few other institutions 

have had well-documented success.37 Such development 

may be hard for other medical providers to emulate and 

may make “exporting” VistA to other health care systems 

difficult. VistA was developed to meet VA’s specific needs 

and goals, so it may not provide the information or feedback desired by other health providers, whose patients, 

employees, management structure, and financial needs 

differ substantially from those at VA. 

According to a 2005 study, “government hospitals are 

more likely than private nonprofit or for-profit hospitals 

36. See statement of Glenn M. Hackbarth, Chairman, Medicare Payment Advisory Commission, Improving Quality Through Medicare 

Payment Policy, before the Subcommittee on Health, House Committee on Ways and Means (March 18, 2004), available at 

www.medpac.gov/publications/congressional_testimony/

031804(WM)qualitytestimony.pdf).

37. They include the Regenstrief Institute at the Indiana University 

School of Medicine, Brigham and Women’s Hospital/Partners 

HealthCare in Boston, and LDS Hospital/Intermountain Health 

Care in Salt Lake City. See Basit Chaudhry and others, p. E-14.
18 THE HEALTH CARE SYSTEM FOR VETERANS: AN INTERIM REPORT

to report full implementation or good progress on CPOE 

[computerized provider order entry].”38 That study 

included only city, state, and local government hospitals, 

not VA or other federal government facilities, but the 

conclusion may indicate that the incentives within government hospitals are more favorable to investments in 

quality-enhancing health IT than those within private 

hospitals. Moreover, VA’s integrated structure may make 

providing the appropriate training on the use of health IT 

systems easier and thereby reduce the risks that may exist 

when providers are unfamiliar with a new system or when 

they have to work with multiple systems.

Additional lessons from VA’s experience in developing 

and using health IT will be included in CBO’s follow-on 

report. 

38. David M. Cutler, Naomi E. Feldman, and Jill R. Horwitz, “U.S. 

Adoption of Computerized Physician Order Entry Systems,” 

Health Affairs, vol. 24, no. 6 (November/December 2005), 

p. 1657.