United States General Accounting Office

GAO Testimony

Before the Subcommittee on VA, HUD, and Independent

Agencies, Committee on Appropriations, U.S. Senate

For Release on Delivery

Expected at 9:00 a.m.

Friday, March 8, 1996

VA HEALTH CARE

Opportunities to Increase

Efficiency and Reduce

Resource Needs

Statement of David P. Baine, Director

Health Care Delivery and Quality Issues

Health, Education, and Human Services Division

G O A

years

1921 - 1996

GAO/T-HEHS-96-99

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss ways in which the Department

of Veterans Affairs (VA) could operate more efficiently and thereby reduce

the resources needed to meet the health care needs of veterans in what is

commonly referred to as the mandatory care category. With a fiscal year

1995 appropriation of $16.2 billion, VA’s system faces increasing pressures

to contain or reduce spending as part of governmentwide efforts to

achieve a balanced budget.

Our comments today will focus on (1) VA’s forecasts of future resource

needs, (2) opportunities to operate VA’s system more efficiently,

(3) differences between VA and the private sector in terms of incentives to

become more efficient, and (4) recent VA efforts to reorganize its health

care system and create incentives to operate more efficiently.

During the past several years, we have visited over 75 VA hospitals and

outpatient clinics to assess operating policies, procedures, and practices.

These efforts have resulted in a wide range of recommended actions to

improve the efficiency and effectiveness of the VA system. Some involve

ways to restructure existing delivery processes to lower costs, while

others identify ways to increase the recovery of the costs of health care

provided to veterans and others. Our comments are based primarily on the

results of these efforts as well as studies done by the Veterans Health

Administration (VHA), VA’s Office of Inspector General (IG), and others.

In summary, VA’s health care system should be able to make a significant

contribution toward deficit reduction over the next 7 years. First, the

system may not need to expend the level of resources it previously

estimated to meet the health care needs of veterans in the mandatory care

category. These resources are overstated because (1) VA does not

adequately reflect the declining demand for VA hospital care in estimating

its resource needs and (2) much of the care VA provides is discretionary

(that is, VA is required to provide the services only to the extent that space

and resources permit). Second, VA could reduce operating costs by billions

of dollars over the next 7 years by completing actions on a wide range of

efficiency improvements. Actions are already under way or planned on

many of the improvements.

The success of these efforts, however, depends on the extent to which VA

and its health care facilities are held accountable for how they spend

appropriated funds. Unlike private health care providers, VA’s system bears

Page 1 GAO/T-HEHS-96-99
few of the risks associated with inefficient operating practices and, as

such, has little economic incentive to reduce costs. VA managers frequently

blame inefficiencies on the law, but this appears to us to be unfair.

Historically, VA’s central office provided few incentives for facilities to

become more efficient. The central office put little pressure on facilities to

treat patients in the most cost-effective manner and shifted few resources

among facilities to promote efficiency. At the facility level, however, VA

managers are often able to find ways to operate more efficiently when they

need resources to implement new services or expand existing ones.

Recent changes at VA are starting to create the types of efficiency

incentives that have long existed in the private sector. For example, VA’s

reorganization of its health care facilities into 22 Veterans Integrated

Service Networks (VISN) includes several encouraging elements that show

promise for providing the management framework needed to realize the

system’s full savings potential. First, VA plans to hold network directors

accountable for VISN’s performance by using, among other things,

cost-effectiveness goals and measures that establish accountability for

operating efficiently to contain or reduce costs. Second, the Under

Secretary for Health (1) distributed criteria that could guide VISN directors

in developing the types of efficiency initiatives capable of yielding large

savings and (2) gave VISN and facility directors authority to realign medical

centers to achieve efficiencies. Finally, VHA’s plans to develop a capitation

funding process could provide greater incentives to improve efficiency,

provided data problems are resolved.

Background The VA health care system was established in 1930, primarily to provide for

the rehabilitation and continuing care of veterans injured during wartime

service. VA developed its health care system as a direct delivery system in

which the government owned and operated its own health care facilities. It

grew into the nation’s largest direct delivery system.

Veterans’ health care benefits include medically necessary hospital and

nursing home care and some outpatient care. Certain veterans, however,

have a higher priority for receiving care and are eligible for a wider range

of services. Such veterans are generally referred to as Category A, or

mandatory care category, veterans.

More specifically, VA must provide hospital care, and, if space and

resources are available, may provide nursing home care to certain

Page 2 GAO/T-HEHS-96-99
veterans with injuries related to their service or whose incomes are below

specified levels. These mandatory care veterans include those who

• have service-connected disabilities,

• were discharged from the military for disabilities that were incurred or

aggravated in the line of duty,

• are former prisoners of war,

• were exposed to certain toxic substances or ionizing radiation,

• served during the Mexican Border Period or World War I,

• receive disability compensation,

• receive nonservice-connected disability pension benefits, and

• have incomes below the means test threshold (as of January 1995, $20,469

for a single veteran or $24,565 for a veteran with one dependent, plus

$1,368 for each additional dependent).

For veterans with higher incomes who do not qualify under these

conditions, VA may provide hospital care if space and resources are

available. These discretionary care category veterans, however, must pay a

part of the cost of the care they receive.

VA also provides three basic levels of outpatient care benefits:

• comprehensive care, which includes all services needed to treat any

medical condition;

• service-connected care, which is limited to treating conditions related to a

service-connected disability; and

• hospital-related care, which provides only the outpatient services needed

to (1) prepare for a hospital admission, (2) obviate the need for a hospital

admission, or (3) complete treatment begun during a hospital stay.

Separate mandatory and discretionary care categories apply to outpatient

care. Only veterans with service-connected disabilities rated at 50 percent

or higher (about 465,000 veterans) are in the mandatory care category for

comprehensive outpatient care. All veterans with service-connected

disabilities are in the mandatory care category for treatments related to

their disabilities; they are also eligible for hospital-related care of

nonservice-connected conditions, but, with the exception of veterans with

disabilities rated at 30 or 40 percent, they are in the discretionary care

category. Most veterans with no service-connected disabilities are eligible

only for hospital-related outpatient care and, with few exceptions, are in

the discretionary care category.

Page 3 GAO/T-HEHS-96-99
From its roots as a system to treat war injuries, VA health care has

increasingly shifted toward a system focused on the treatment of

low-income veterans with medical conditions unrelated to military service.

In fiscal year 1995, only about 12 percent of the patients treated in VA

hospitals received treatment for service-connected disabilities. By

contrast, about 59 percent of the patients treated had no

service-connected disabilities. About 28 percent of VA hospital patients had

service-connected disabilities but were treated for conditions not related

to those disabilities. (See fig. 1.)

Figure 1: VA Hospital Users by

Purpose of Treatment, FY 1995 Percent of Discharges

0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Treated for SC Condition

SC, Treated for NSC Condition

NSC With Pension

NSC Without Pension

Nonveteran

Type of Care

12.1

28.3

10.4

48.6

0.6

Notes: Data are based on the fiscal year 1995 VA patient treatment file.

SC = service connected; NSC = nonservice connected.

Page 4 GAO/T-HEHS-96-99
Between fiscal years 1980 and 1995, VA facilities underwent some

fundamental changes in workload. The days of hospital care provided fell

from 26 million in 1980 to 14.7 million in 1995; number of outpatient visits

increased from 15.8 million to 26.5 million; and the average number of

veterans receiving nursing home care in VA-owned facilities increased from

7,933 to 13,569. (See fig. 2.)

Figure 2: Changes in VA Facilities’

Workload, FY 1980-95 Days/Visits in Thousands

0

5000

10000

15000

20000

25000

30000

1980 1985 1990 1995

Fiscal Year

Hospital Days

Outpatient Visits

Nursing Home Days

During this same time period, VA’s medical care budget authority grew

from about $5.8 billion to $16.2 billion. (See fig. 3.)

Page 5 GAO/T-HEHS-96-99
Figure 3: VA Medical Care Budget Authority, FY 1980-95

Dollars in Billions

0

5.0

10.0

15.0

20.0

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Fiscal Year

Administration Request

Final Budget Authority

Note: Numbers have not been adjusted for inflation.

For fiscal year 1996, VA sought medical care budget authority of about

$17.0 billion, an increase of $747 million over its fiscal year 1995 authority,

to maintain and operate 173 hospitals, 376 outpatient clinics, 136 nursing

homes, and 39 domiciliaries. VA expects its facilities to provide (1) about

14.1 million days of hospital care, (2) nursing home care to an average of

14,885 patients, and (3) about 25.3 million outpatient visits.

On July 29, 1995, the Congress adopted a budget resolution providing VA

medical care budget authority of $16.2 billion annually for 7 years (fiscal

years 1996-2002). The budget resolution would essentially freeze VA

spending at the fiscal year 1995 level.

VA estimated that such a freeze would result in a cumulative shortfall of

almost $24 billion in the funds it would need to maintain current services

Page 6 GAO/T-HEHS-96-99
to the veteran population through 2002.1

 As used by VA, current services

encompasses maintaining the currently funded workload, including

services to veterans in both the mandatory and discretionary care

categories and services to nonveterans.

Resources Needed to

Meet Needs of

Veterans in Mandatory

Care Category Are

Overstated

The resources VA facilities will need over the next 7 to 10 years to provide

hospital and certain outpatient care to veterans in the mandatory care

category are, in our view, overstated for the following reasons:

• VA did not adequately consider the impact of the declining veteran

population on future demand for inpatient hospital care.

• A significant portion of VA resources is used to provide services to

veterans in the discretionary care category who are eligible for care only

to the extent space and resources are available.

• Considerable resources are expended on services that are not covered

under veterans’ VA benefits.

• Medical centers tend to overstate their workloads and therefore their

resource needs.

• VA included resources for facility and program activations in estimating the

resources it would need to maintain current services even though such

activations represent an expansion over current services.2

• Services provided to nonveterans through sharing agreements are

included in VA’s justifications of future resource needs even though the

provision of services through sharing agreements is to be limited to sales

of excess capacity.

Declining Veteran

Population Will Reduce

Future Resource Needs

In estimating the resources it will need to maintain current services over

the next 7 fiscal years, VA assumed that the number of hospital patients it

treats will remain constant. The number of hospital patients VA treats,

however, actually dropped by 56 percent over the past 25 years and should

continue to decline in the future. In addition, because of the declining

demand for inpatient care over the past 25 years, the number of operating

beds in the VA health care system declined by about 50 percent between

1969 and 1994. About 50,000 VA hospital beds were closed or converted to

1

In September 1995, we reported that VA overestimated the potential budget shortfall because it

assumed that there would be (1) an increase in the VA facility workload in fiscal year 1996 and that it

would be sustained during the entire 7-year period, (2) limited savings achieved through improvements

in the efficiency with which services are provided by VA facilities, and (3) steadily increasing costs,

workload, and staffing due to opening or expanding facilities. (Medical Care Budget Alternatives

(GAO/HEHS-95-247R, Sept. 12, 1995.)

2

Activations include opening new facilities and expanding existing facilities and programs through

modernization and new construction.

Page 7 GAO/T-HEHS-96-99
other uses. The decline in psychiatric beds was most pronounced from

about 50,000 beds in 1969 to 17,300 beds in 1994. (See fig. 4.)

Figure 4: Operating Beds in VA

Hospitals, FY 1969-94 Operating Beds in Thousands

0

10

20

30

40

50

60

70

80

90

100

110

1969 1974 1979 1984 1989 1994

Fiscal Year

Total

Medical

Surgical

Psychiatric

Further declines in operating beds are likely in the next 7 to 10 years as

the veteran population continues to decline. If veterans continue to use VA

hospital care at the same rate that they did in 1994—that is, if VA continues

services at current levels—days of care provided in VA hospitals should

decline from 15.4 million in 1994 to about 13.7 million by 2010. (See fig. 5.)

Our projections are adjusted to reflect the higher usage of hospital care by

older veterans.3

3

The declining veteran population will lead to significant declines in VA acute hospitalization even as

the acute care needs of the surviving veterans increase. The veteran population is estimated to decline

from about 26.3 million in 1995 to just over 20 million in 2010. Although the health care needs of

veterans increase as they age, the overall decline in the number of veterans will more than offset the

increase and should lead to a further reduction in the number of days of VA hospital care. In addition,

many veterans leave the VA system when they become Medicare-eligible.

Page 8 GAO/T-HEHS-96-99
Figure 5: Projected Age-Adjusted Days

of VA Hospital Care, 1994-2010 Days in Thousands

0

2000

4000

6000

8000

10000

12000

14000

16000

1994

(Actual)

1996 1998 2000 2002 2004 2006 2008 2010

Year

15434 15414 15387 15272 15114 14878 14568 14186 13743

Source: Based on VA annual reports, fiscal years 1980-94, and VA projections of the veteran

population by age through 2010.

Much VA Care Is

Discretionary

VA has underestimated the extent to which its health care resources are

spent on services for veterans in the discretionary care categories.

Specifically, about 15 percent of veterans using VA medical centers have no

service-connected disabilities and have incomes that place them in the

discretionary care (that is, care may be provided to the extent that space

and resources permit) category for both inpatient and outpatient care. In

addition, VA incorrectly applied inpatient eligibility categories to its

outpatients, thus overestimating the amount of outpatient care that is

subject to the availability of space and resources. VA does not, however,

differentiate between services provided to veterans in the mandatory and

discretionary care categories in justifying its budget request. As a result,

the Congress has little basis for determining which portion of VA’s

discretionary workload to fund.

A portion of VA’s workload is composed of higher-income veterans with no

service-connected disabilities. In fiscal year 1991, about 10.7 percent of the

555,000 veterans receiving hospital care in VA facilities were veterans with

Page 9 GAO/T-HEHS-96-99
no service-connected disabilities with incomes of $20,000 or more.4

Including both inpatient and outpatient care, about 11 percent (91,520) of

the single veterans with no service-connected disabilities (832,000) and

57 percent (227,430) of the married veterans with no service-connected

disabilities (399,000) using VA medical centers in 1991 had incomes of

$20,000 or more. Among married veterans with no service-connected

disabilities who used VA medical centers, 15 percent (59,850) had incomes

of $40,000 or more.5

In March 1992, VA’s Inspector General estimated, on the basis of work at

one typical VA outpatient clinic, that about half of the patients and about

one-third of the visits veterans made to VA outpatient clinics should have

been classified as discretionary rather than mandatory care. This occurred

because VA was applying inpatient eligibility provisions to its outpatients.

While VA is required to provide needed hospital treatment to the 9 million

to 11 million veterans in the mandatory care category, over 90 percent of

those veterans are in the discretionary care category for outpatient care

other than for services related to treatment of a service-connected

disability.

Extensive Resources Spent

on Noncovered Services

The VA Inspector General further reported that about 56 percent of

discretionary care outpatient visits were to provide services that were not

covered under the veterans’ VA benefits. Most veterans’ outpatient benefits

are limited to hospital-related care. An estimated $321 million to

$831 million of the approximately $3.7 billion VA expended on outpatient

care in fiscal year 1992 may have been for treatments provided to veterans

in the discretionary care category that were not covered under VA health

care benefits.6

Medical Centers Tend to

Overstate Workload

VA medical centers frequently overstate the number of inpatients and

outpatients treated and therefore their resource needs. VA has long had a

problem with veterans failing to keep scheduled appointments. But once

an outpatient visit is scheduled, it is entered into VA’s computerized

4

VA Health Care: A Profile of Veterans Using VA Medical Centers in 1991 (GAO/HEHS-94-113FS,

Mar. 29, 1994).

5

In 1991, a veteran without dependents was in the mandatory care category for inpatient hospital care

and hospital-related outpatient care if he or she had income below $18,171; the income threshold

increased by $3,634 for one dependent and $1,213 for each additional dependent.

6

VA Office of Inspector General, Audit of the Outpatient Provisions of Public Law 100-322, Report No.

2AB-A02-059 (Washington, D.C.: Mar. 31, 1992).

Page 10 GAO/T-HEHS-96-99
records and counted as an actual visit unless action is taken at the medical

center to delete the record.

VA’s IG identified problems in the reporting of both inpatient care and

outpatient visits at several medical centers. For example, the IG found that

9 percent of the visits at the Milwaukee VA medical center and 7 percent of

the visits at the Murfreesboro medical center were not countable

workload because they represented “no shows.”7

 Similarly, a 1994 IG

report found that actual surgical workload at the Sepulveda VA medical

center was 37 percent lower than reported.8

Resource Needs for

Activations Appear

Overstated

The resources VA believes it needs to maintain current services include

resources needed to support new workload generated through activation

of programs and facilities. Almost 25 percent of the budget shortfall VA

estimated to occur over the next 7 fiscal years under the congressional

budget resolution would result from the lack of funds for facility

activations and planned workload expansions. Delaying or stopping

activations is, however, a difficult political decision, particularly for those

projects already under way.

In its analysis of the resources it will need to maintain current services

over the next 7 fiscal years, VA assumed that it will continue to incur

additional costs, add staff, and attract new users through facility

activations. For example, VA’s estimate that it will need $20.9 billion

dollars in the year 2000 to maintain current services includes increases of

over $993 million and 10,000 full-time-equivalent (FTE) employees for

activations. In other words, the inclusion of activation costs overstates the

resources VA will need in the year 2000 in order to maintain current

services by almost $1 billion.

In addition, the funds VA seeks for activations may be overstated because

the activations planning process is not integrated with the resource

planning and management (RPM) system workload forecasting process. VA

sought about $108 million and 1,509 FTEs in its fiscal year 1996 budget

submission to support a projected increase in the number of veterans

seeking care. These estimates, based on workload forecasts developed

7

VA Office of Inspector General, Audit of Clement J. Zablocki VA Medical Center, Milwaukee,

Wisconsin, Report No. 2R4-F03-112 (Washington, D.C.: Mar. 25, 1992) and Audit of Alvin C. York VA

Medical Center, Murfreesboro, Tennessee, Report No. 2R3-F03-029 (Washington, D.C.: Dec. 16, 1991).

8

VA Office of Inspector General, Special Inquiry of Veterans Health Administration Medical Centers

Sepulveda and West Los Angeles, CA, Report No. 4R4-A01-111 (Washington, D.C.: Sept. 21, 1994).

Page 11 GAO/T-HEHS-96-99
through RPM, reflect historical trend data that could include workload

increases resulting from prior years’ facility and program activations. In

other words, the resources requested for workload increases projected

using RPM likely include resources for some of the estimated workload to

be generated through fiscal year 1996 activations. VA sought an additional

$208 million for facility activations based on the separate activations

planning process. VA officials agree that some double counting may be

occurring because of the separate planning processes, but believe that the

amount of duplication is minimal. We are currently exploring the extent of

such duplication for this Subcommittee.

VA Includes Sharing

Agreement Workload in

Budget Justification

VA counts services provided to nonveterans through sharing agreements

with military and private sector hospitals and clinics in justifying the

resources it will need during the next fiscal year. In other words, VA

essentially builds in “excess” resources to sell to the Department of

Defense (DOD) and the private sector. VA also bills, and is allowed to retain,

the costs of services provided through sharing agreements.

Health resources sharing, which involves the buying, selling, or bartering

of health care services, can be beneficial to both parties in the agreement

and helps contain health care costs by making better use of medical

resources. For example, it is often cheaper for a hospital to buy an

infrequently used diagnostic test from another hospital than it is to

purchase the needed equipment and provide the service directly. Similarly,

a hospital that is using an expensive piece of equipment only 4 hours a day

but is staffed to operate the equipment for 8 hours could generate

additional revenues by selling its excess capacity to other providers.

To allow federal agencies’ resources to be used to maximum capacity and

avoid unnecessary duplication and overlap of activities, VA is authorized to

sell excess health care services to DOD. In addition, VA can share

specialized medical resources with nonfederal hospitals, clinics, and

medical schools. Medical resources can be sold to DOD and the private

sector only if the sale does not adversely affect health care services

available to veterans. As an incentive to share excess health care

resources, the VA facilities providing services through sharing agreements

are allowed to recover and retain the cost of the services from DOD or the

private sector facility.

In fiscal year 1995, VA sold about $25.3 million in specialized medical

resources to private sector hospitals and about $33.0 million in health care

Page 12 GAO/T-HEHS-96-99
services to the military health care system. Although VA facilities received

separate reimbursement for the workload generated through these sharing

agreements, the workload was nevertheless included in VA’s justification of

its budget request.

VA’s Resource Needs

Should Be Further

Reduced Through

Increased Efficiency

In its assessment of the potential budget shortfall VA would face if its

budget were frozen at fiscal year 1995 levels for 7 years, VA assumed that

there would be no change in the efficiency with which it delivers health

care services beyond the unspecified savings of $335 million expected to

occur in fiscal year 1996. VA should be able to further reduce its resource

needs by billions of dollars over the 7-year period through improved

efficiency and resource enhancements.

During the past 5 to 10 years, GAO, VA’s IG, VHA, the Vice President’s

National Performance Review, and others identified numerous

opportunities to

• use lower-cost methods to deliver veterans’ health care services,

• consolidate underused or duplicate processes to increase efficiency,

• reduce nonacute admissions and days of care in VA hospitals,

• close underused VA hospitals, and

• enhance VA revenues from services sold to nonveterans and care provided

to veterans.

VA has actions planned or under way to take advantage of many of these

opportunities. Such actions should reduce VA’s resource needs over the

next 7 to 10 years by several billion dollars.

Use Lower-Cost Methods

for Delivering Health Care

Services

Numerous opportunities to achieve savings through changes in the way VA

delivers health care services to veterans should allow VA facilities to

provide services of equal or higher quality at a lower cost. For example:

• Providing 90-day rather than 30-day supplies of low-cost maintenance

prescriptions enabled VA pharmacies to save about $45 million in fiscal

year 1995. The savings resulted because VA pharmacies handled over

15 million fewer prescriptions. Although VA encouraged its medical centers

to implement multi-month dispensing in response to our January 1992

Page 13 GAO/T-HEHS-96-99
report, the full potential has not been achieved because medical centers

have been slow to adopt multi-month dispensing.9

• Purchasing services from community providers when they can provide the

care at a lower cost could also potentially result in savings. VA has

encouraged its medical centers to establish “access points” that can

provide services at lower cost than at VA outpatient clinics and, at the

same time, improve accessibility for veterans. To date, only a few medical

centers have established such access points, but many others are

developing plans to shift care to lower-cost community settings. Although

it appears that community providers can often provide services at lower

cost than VA, the ultimate effect of access points on overall VA spending

depends on such issues as the extent to which the access points attract

new users and the extent to which current users increase their use of in

response to improved accessibility.

• VA should save in excess of $225 million over a 7-year period by adopting

Medicare fee schedules. VA’s IG compared the amount paid by VA under its

fee-basis program with Medicare fee schedules and found that VA paid

more than the Medicare rate in over half of the cases reviewed. VA plans to

adopt Medicare fee schedules for both its outpatient fee-basis payments

and for payment of inpatient physician and ancillary services at non-VA

hospitals.10,11 VA expects to begin using Medicare fee schedules by

July 1996.

• Through the establishment of primary care teams, VA hospitals should be

able to reduce veterans’ inappropriate use of more costly specialty clinics

and achieve significant savings in staff costs. As we reported in

October 1993, VA hospitals allow many veterans to receive general medical

care in specialty care clinics after their conditions are stabilized.

Transferring such veterans to primary care clinics in a timely manner will

allow lower-cost primary care staff to meet their medical needs rather

than higher-cost specialists.12

• By purchasing specialized medical care services, such as PET scans and

lithotripsy, from community providers rather than buying expensive, but

seldom used, equipment, VA could reduce its costs of providing such

services and at the same time improve accessibility of such care for

9

VA Health Care: Modernizing VA’s Mail-Service Pharmacies Should Save Millions of Dollars

(GAO/HRD-92-30, Jan. 22, 1992).

10VA Office of Inspector General, Audit of Fee-Basis Payments for Inpatient Medical Care, Report No.

5R3-A05-108 (Washington, D.C.: Sept. 29, 1995).

11VA Office of Inspector General, Audit of Fee-Basis Payments for Outpatient Medical Care, Report No.

5R3-A02-063 (Washington, D.C.: May 25, 1995).

12VA Health Care: Restructuring Ambulatory Care System Would Improve Services to Veterans

(GAO/HRD-94-4, Oct. 14, 1993).

Page 14 GAO/T-HEHS-96-99
veterans. For example, although the Albuquerque VA medical center

treated a total of only 24 veterans for kidney stone removal in fiscal years

1990 through 1992, the hospital purchased a lithotripter, a machine that

breaks up kidney stones so that they can be eliminated without surgery, at

a cost of almost $1.2 million. During its first year of operation, 34 veterans

received treatment. A private provider in the same city provided lithotripsy

services for $2,920 a procedure. Thus, the hospital could have met the 34

veterans’ needs at a cost of about $100,000 compared with its expenditure

of $1.2 million plus operating costs. Although the hospital sold lithotripsy

services to more nonveterans than it provided to veterans, the hospital has

used the equipment at less than one-fifth of its normal operating

capacity.13

• VA expects to also achieve savings by establishing a national drug

formulary. Historically, each VA facility has established its own

formulary—that is, a list of medications that are approved for use for

treating patients. VA noted that establishing a national formulary should

increase standardization, decrease inventory costs, heighten efficiency,

and lower pharmaceutical costs through enhanced competition. VA has not

estimated the potential savings, but could realize a $100 million savings if

using the national formulary can achieve a 10-percent reduction in the cost

of purchasing medications.

• VA expects to save $168 million over a 6-year period by phasing out and

closing its supply depots and establishing a just-in-time delivery system for

medical care supplies and drugs, as recommended by the Vice President’s

National Performance Review. The depots were closed at the end of fiscal

year 1994, and contracts for just-in-time delivery of drugs are in place.

Actions to award just-in-time contracts for medical supplies and

subsistence items are expected to be completed within the next 4 months.

Consolidate Underused or

Duplicate Processes

VA also has several nationwide initiatives under way to integrate,

consolidate, or merge duplicate or underused services. Such actions

should result in additional savings over the next 7 years. For example:

• By creating several bulk processing facilities to fill mail-order

prescriptions, VA will reduce its handling costs by two-thirds, providing a

savings of about $26 million in fiscal year 1996. As we reported in

January 1992, VA was mailing prescriptions to veterans from over 200

locations resulting in uneconomically small workloads and labor-intensive

processes. To date, VA has four operating bulk processing facilities using

13VA Health Care: Albuquerque Medical Center Not Recovering Full Costs of Lithotripsy Services

(GAO/HEHS-95-19, Dec. 28, 1994).

Page 15 GAO/T-HEHS-96-99
newly designed automated equipment and processes; another three

facilities are not yet operational. Prescription workload is being

transferred systematically from VA hospitals to the new bulk processing

centers.14 When they are fully operational, these facilities could save about

$74 million a year.

• By consolidating 14 laundry facilities over a 3-year period, VA expects to

achieve one-time equipment and renovation savings of about $38 million

as well as recurring savings of about $600,000 per year from operational

efficiencies. Under a management improvement initiative, VA identified

facilities for integration that were scheduled for or had requested funding

for new equipment or renovation. Five of the 14 consolidations were

completed in 1995; the remaining 9 are scheduled to be completed within

the next 2 years.

• An internal VA Management Improvement Task Force predicted in 1994

that VA could save up to $73 million in recurring personnel costs by

integrating management of VA facilities. Among other things, the task force

recommended that the administrative and clinical management of 60

facilities be integrated into 29 partnerships. The task force expected that

these facility integrations could reduce service and staffing duplication,

integrate clinical programs, achieve economies of scale, and free

resources to invest in new services. To date, about one-third of the

recommended integrations have been approved. To the extent that

measurable savings occur, however, VA allows the facilities to reinvest the

savings into providing more clinical programs. Examples of reinvestment

include equipment, construction projects, opening of access points, and

increasing specialty and subspecialty clinics. Our ongoing work for this

Subcommittee will assess the extent that these and other management

improvement initiatives recommended by the task force have been

implemented and are achieving measurable savings.

Reduce Nonacute

Admissions and Days of

Care

Establishing preadmission certification procedures for admissions and

days of care similar to those used by private health insurers could save VA

hundreds of millions of dollars by reducing nonacute admissions and days

of care in VA hospitals.

VA hospitals too often serve patients whose care could be more efficiently

provided in alternative settings, such as an outpatient clinic or nursing

home. In 1985, we reported that about 43 percent of the days of care that

VA medical and surgical patients spent in the VA hospitals reviewed could

14GAO/HRD-92-30, Jan. 22, 1992.

Page 16 GAO/T-HEHS-96-99
have been avoided.15 Since then, a number of studies by VA researchers and

the IG have found similar problems.

For example, a 1991 VA-funded study of admissions to VA acute medical

and surgical bed sections estimated that 43 percent (+/- 3 percent) of

admissions were nonacute. Nonacute admissions in the 50 randomly

selected VA hospitals studied ranged from 25 to 72 percent. The study

suggested several reasons for the higher rate of nonacute admissions to VA

hospitals than to private sector hospitals, including the following:

• VA facilities do not have the necessary financial incentives to make the

transition to outpatient care;

• VA, unlike the private sector, does not have formal mechanisms to control

nonacute admissions, such as mandatory preadmission review; and

• VA, unlike the private sector, has a significantly expanded social mission

that may influence the use of resources for patients.16

A 1993 study by VA researchers reported similar findings. At the 24 VA

hospitals studied, 47 percent of admissions and 45 percent of days of care

in acute medical wards were nonacute; 64 percent of admissions and

34 percent of days of care in surgical wards were nonacute. Reasons cited

for nonacute admissions and days of care included nonavailability of

outpatient care, conservative physician practices, delays in discharge

planning, and social factors. Although the study cited VA eligibility as

contributing to some inappropriate admissions and days of care, the study

recommended only minor changes in VA eligibility provisions. Rather, it

suggested that VA establish a systemwide utilization review program. VA,

however, has not established an internal utilization review requirement

nor contracted for external reviews.

By contrast, all fee-for-service health plans participating in the Federal

Employees Health Benefits Program are required to operate a

preadmission certification program to help limit nonacute admissions and

days of care.

15Better Patient Management Practices Could Reduce Length of Stay in VA Hospitals (GAO/HRD-85-92,

Aug. 8, 1985).

16For example, VA facilities may admit patients who travel long distances for care or keep veterans in

the hospital longer than medically necessary because they lack a social support system to assist them

after discharge.

Page 17 GAO/T-HEHS-96-99
Close or Convert

Underused Hospitals

If the actions discussed above are taken to reduce the number of nonacute

admissions and days of care provided by VA hospitals, the demand for care

in some hospitals could fall to the point where it is no longer economically

feasible to keep the hospital open. VA has taken over 50,000 beds out of

service over the past 25 years but has not closed any hospitals because of

declining utilization.17

Closing wards clearly results in some savings through reduced staffing

costs. But, with fewer patients over whom to spread the fixed costs of

operating the facility, the cost per patient treated rises. At some point, it

may become less expensive to close the hospital and provide care either

through another VA hospital or through contracts with community

hospitals. Closing hospitals and contracting for care, however, entails

some risk. Allowing veterans to obtain free hospital care in community

hospitals closer to their homes could result in increased demand for

VA-supported hospital care, offsetting any savings achieved through

contracting.

The feasibility of closing underused hospitals was demonstrated when VA

recently closed the Sepulveda VA medical center after it was damaged in an

earthquake and transferred the workload to the West Los Angeles medical

center. VA’s IG found that the reported numbers of inpatients treated at

both Sepulveda and West Los Angeles had declined significantly over the

prior 4-year period and that the declining workload may have been even

greater than VA reported because the facilities’ workload reports were

overstated. VA does not plan to rebuild the Sepulveda hospital but plans to

establish an expanded outpatient clinic at the site.

The IG concluded that West Los Angeles had sufficient existing resources

to care for the hospital needs of veterans formerly using the Sepulveda

hospital. Savings from the closure have been limited, however, because

Sepulveda staff were temporarily reassigned to the West Los Angeles

medical center.

The only other hospital VA has closed in the last 25 years was the Martinez

VA medical center. Like Sepulveda, it was closed because of seismic

deficiencies and its workload transferred to other VA medical centers.

Unlike Sepulveda, however, VA plans to build a replacement hospital.

Funds for the construction have not yet been appropriated.

17Two VA hospitals, in Martinez and Sepulveda, California, were closed because of structural

problems. VA plans to replace the Martinez hospital but not the Sepulveda hospital.

Page 18 GAO/T-HEHS-96-99
Actions to Enhance

Revenues

In addition to actions to improve the efficiency of its operations, VA should

generate millions in additional revenues by (1) setting more appropriate

prices for services sold to private sector providers and (2) determining

whether veterans should be required to contribute toward the cost of their

care.

By establishing appropriate prices for services sold to nonveterans

through sharing agreements, VA can generate revenues that can be used to

serve veterans. In response to our December 1994 report on recovering the

full costs of lithotripsy services at the Albuquerque VA medical center, VA

recently encouraged its facilities to ensure that they price services

provided to nonveterans so as to fully recover all costs, and to include a

profit where appropriate.18 For example, the Albuquerque medical center

increased its price for basic lithotripsy services to nonveterans by over

125 percent. The new price could generate over $300,000 a year in

additional revenues for the hospital.

By verifying veterans’ reported income, VA expects to generate about

$46 million in copayment revenues between January 1, 1996, and June 30,

1997. In a September 1992 report, we found that VA had not taken

advantage of the opportunity to verify veterans’ incomes through the use

of tax records. Through our own match against tax records, we identified

over 100,000 veterans who may have owed copayments. In 1994, VA began

routinely using such data to determine veterans’ copayment status.19

Lack of Incentives

Can Hinder Further

System Efficiencies

Although cost savings can and are being realized, the VA health care system

lacks overall incentives to further increase efficiency. Unlike private

sector hospitals and providers, VA facilities and providers bear little

financial risk if they provide (1) expensive medically inappropriate care or

(2) services not covered under a veteran’s VA benefits. Unlike private

health insurance, where the insurance company bears most of the risk, the

veteran, rather than VA, bears most of the financial risk for veterans’ health

benefits. However, when VA facilities are given an incentive, such as the

desire to fund new programs, they appear to be able to identify

opportunities to achieve savings through efficiency improvements.

18GAO/HEHS-95-19, Dec. 28, 1994.

19VA Health Care: Verifying Veterans’ Reported Income Could Generate Millions in Copayment

Revenues (GAO/HRD-92-159, Sept. 15, 1992).

Page 19 GAO/T-HEHS-96-99
VA Facilities Bear Little

Risk From Providing

Inappropriate Care

Private insurers increasingly require their policyholders to obtain prior

authorization from an independent utilization review firm before the

insurers will accept liability for the hospital care. Frequently, this

authorization also sets a limit on the number of days of care the insurer

will cover without further authorization regarding the medical necessity of

continued hospitalization. Because compliance with these requirements

directly affects their revenues, private sector hospitals pay close attention

to them.

Similarly, the Medicare program has, since 1982, paid hospitals a fixed fee

based on the patient’s diagnosis. The fixed fee is based on the national

average cost of treating the patient’s condition. If the hospital provides the

care for less than the Medicare payment, it makes a profit. But if the

hospital keeps the patient too long, is inefficient, or provides unnecessary

treatments, then it will suffer a loss. This creates a strong incentive in the

private sector to discharge Medicare patients as soon as possible.

Those same financial incentives to increase efficiency and provide care in

the most cost-effective setting are largely absent in the VA system. Even in

those cases in which a private health insurer’s preadmission certification

requirement applies, the hospital’s revenues are not affected by failure to

obtain such certification. A VA hospital that admits a patient who does not

need a hospital level of care incurs no penalty. In fact, facility directors

often indicated that VA’s methods of allocating resources to its medical

centers favored inpatient care.

VA’s current RPM system is attempting to remove the prior incentive to

provide care in the hospital rather than an outpatient clinic and create

incentives to provide care in the most cost-effective setting. As used

during the last two budget cycles, however, the system has done little to

create such incentives. Because VA chose to shift few funds between the

highest- and lowest-cost facilities, facility incentives to become more

efficient were minimal. For fiscal year 1995, VA reallocated $20 million

from 32 high-cost to 27 low-cost facilities. VA officials told us that they plan

to use RPM to reallocate more money in fiscal year 1996 and to provide VISN

directors a “risk pool” of contingency funds to help facilities unable to

work within their budgets. It is yet unclear how VISN directors plan on

using these funds.

And unlike private sector health care providers, VA has no external

preadmission screening program or other utilization review program to

provide incentives to ensure that only patients who need a hospital level of

Page 20 GAO/T-HEHS-96-99
care are admitted and that patients are discharged as soon as medically

possible. VA gives private sector hospitals providing care to veterans under

its contract hospitalization program incentives to limit patients’ lengths of

stay by basing reimbursement on Medicare prospective payment rates. VA

does not, however, give its own hospitals the same incentives by basing

their payments on the Medicare rates.

Veteran, Rather Than VA,

Bears Financial Risk

Unlike private health insurance and Medicare, the veteran is at risk of

being denied care, rather than VA being at risk of losing funds, if a VA

facility runs out of resources. Because it is at little risk, the VA system does

not have a strong incentive to operate efficiently.

A private insurer or managed care plan guarantees payment for covered

services in exchange for a fixed premium. The insurer or managed care

plan thus has a strong financial incentive to make certain that only

medically necessary care is provided and that care is provided in the most

cost-effective setting. Otherwise, the insurer may suffer a financial loss.

Unlike private health insurance, however, the VA system does not

guarantee the availability of covered services. As a result, the ability of

veterans to obtain covered services depends on resource availability. If a

VA facility is inefficient and the resources allocated to the facility are not

sufficient to meet anticipated workload, the VA facility is allowed to deny

(that is, ration) services to eligible veterans. In 1993, we reported that 118

VA medical centers reported rationing some types of care to eligible

veterans when the centers ran short of resources.20

VA Facilities Find

Efficiencies When They

Need Funds for New

Programs

The ability of facilities to find ways to become more efficient when they

want to fund a new program, such as establishing an access point clinic,

indicates that when they are given an incentive to become more efficient,

they do so.

For example, VA’s Under Secretary for Health encouraged hospitals to take

all steps within their means to improve the geographic accessibility of VA

care. But he told the hospitals that they would have to use their own

resources to do this. Over half of VA’s hospitals quickly developed plans to

establish so-called access points. For example, the Amarillo VA medical

20VA Health Care: Variabilities in Outpatient Care Eligibility and Rationing Decisions

(GAO/HRD-93-106, July 16, 1993).

Page 21 GAO/T-HEHS-96-99
center identified ways to save over $850,000 to pay for the establishment

of access points:

• The medical center saved an estimated $250,000 a year by consolidating

inpatient medical wards and reducing the number of surgical beds it

staffed. As a result of these consolidations, the center eliminated nine

nursing positions, achieving a savings in salaries and related benefits.

Officials said that the consolidations coincided with declining workloads,

attributable to lower admissions and lengths of stay, and as such would

not affect the availability or quality of care the center provides.

• The medical center expects to save up to $150,000 by reviewing patients’

use of prescription medications. These reviews have led to a reduction in

the number of medications provided, resulting in a savings in the cost of

procuring, storing, and dispensing the drugs.

• It expects to reduce future pharmacy costs by $250,000 by trying to change

patients’ lifestyles as a means of reducing cholesterol. Center officials

estimate that this approach has reduced the use of lipid-lowering drugs by

half. The medical center established health education classes, which teach

correct eating and exercise techniques. Before this, physicians had

routinely prescribed lipid-reducing drugs to lower cholesterol levels.

Officials are planning to establish similar health clinics for patients with

high blood pressure and other common conditions that may be effectively

treated without prescription drugs.

• The medical center expects to save $200,000 or more by using a managed

care contract to purchase radiation therapy services. Radiation therapy

involves a series of treatments, which the center has historically paid for

on a fee-for-service basis. The hospital recently signed a contract with a

private sector hospital to provide each series of radiation treatments at a

capitated rate based on Medicare’s reimbursement schedule. Officials are

currently negotiating similar contracts for other medical services.

Establishment of

Service Networks

Should Lead to

Increased Emphasis

on Efficiency

Last year, the Under Secretary for Health proposed criteria for potential

service realignment that would facilitate the types of changes needed to

achieve efficiency comparable to private sector hospitals and clinics. For

example, he encouraged VHA directors to identify opportunities to

• buy services from the private sector at lower costs,

• consolidate duplicate services, and

• reduce their fixed and variable costs of services directly provided to

veterans.

Page 22 GAO/T-HEHS-96-99
VA’s assessment of its resource needs over the next 7 to 10 years did not

include any projected savings from the increased efficiencies that should

result from establishment of VISNs. VISNs should improve facility planning

by assessing needs on a network rather than facility basis. This will allow

hospitals serving veterans in the same geographic area to pool their

resources and reduce duplication.

A planned move to capitation funding should create incentives for

facilities to provide care in the most cost-effective setting. However, VA has

much to do before it can set appropriate capitation rates. For example,

while VA’s RPM data show a wide variation in operating costs among

facilities VA considers comparable, VA has done little to determine the

reasons for these variations. Without such an understanding, there is no

assurance that capitation rates can be set at the level that promotes the

most efficient operation.

Part of gaining a better understanding of facility or VISN cost variations

must involve improving the information VA has on the operating costs of its

hospitals. While the automated Decision Support System (DSS) that VA is

implementing has potential to be an effective management tool for

improving the quality and cost effectiveness of VHA operations, VA has not

developed a way to verify the accuracy of the cost and utilization data

going into DSS. Some of the data provided to DSS from other VA information

systems are incomplete and inaccurate, limiting VA’s ability to relay on

DSS-generated information to make sound business decisions.21

It will take time for the new VISN directors to achieve significant savings.

They have been in place for only a few months, so it is too early to tell how

successful they will be in achieving increased efficiency. It will be

important that VA implement clear mechanisms and useful management

data by which to hold VISN directors accountable for workload, efficiency,

and other performance targets. Without such mechanisms and improved

data, the VISN structure holds some risk in further decentralizing VHA

authority and responsibility for achieving efficiencies.

Concluding

Observations

Given VA’s overstatement of future resource needs, the system does not

need to spend as many resources as previously expected. Moreover, the

potential magnitude of future efficiency savings not factored into VA’s

21VA Health Care Delivery: Top Management and Leadership Critical to Success of Decision Support

System (GAO/AIMD-95-182, Sept. 29, 1995).

Page 23 GAO/T-HEHS-96-99
assessments of future resource needs indicates that VA’s system may have

more discretionary resources available than was previously expected. This

suggests that an operating goal of $16.2 billion a year may be achievable.

In any event, it seems likely that the impact of such funding levels would

not, by necessity, result in the extent of budget shortfalls that VA

estimated.

Mr. Chairman, this completes my prepared statement. We will be happy to

answer any questions that you or other Members of the Subcommittee

may have.

Contributors For more information on this testimony, please call Jim Linz, Assistant

Director, at (202) 512-7110 or Paul Reynolds, Assistant Director, at

(202) 512-7109. Katherine Iritani, Linda Bade, Walt Gembacz, and Frank

Pasquier also contributed to the preparation of the statement.

(406120) Page 24 GAO/T-HEHS-96-99
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