VA Health Care: Third-Party Collections Rising as VA Continues to Address Problems in Its Collections Operations
Published: 2003-01-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Veterans Affairs (VA) collects health insurance payments, known as third-party collections, for veterans' health care conditions it treats that are not a result of injuries or illnesses incurred or aggravated during military service. In September 1999, VA adopted a new fee schedule, called "reasonable charges," that it anticipated would increase revenues from third-party collections. In 2001, GAO testified that problems in VA's collections operations diminished VA's collections. For this report, GAO was asked to examine VA's third-party collections and problems in collections operations for fiscal year 2002 as well as its initiatives to improve collections.
section_title: What GAO Found
paragraphs: VA's fiscal year 2002 third-party collections rose by 32 percent, continuing an upward trend that began in fiscal year 2001. The increase in collections reflected VA's improved ability to manage the larger billing volume and more itemized bills required under its new fee schedule. Billings increased mainly due to a reduction of billing backlogs and improved collections processes--such as better medical documentation prepared by physicians, more complete identification of billable care by coders, and more bills prepared per biller--according to VA managers in three regional health care networks. However, VA continues to address operational problems, such as missed billing opportunities, that limit the amount VA collects. To address operational problems and further increase collections, VA has several initiatives under way and is developing additional ones. VA has been implementing initiatives in its 2001 improvement plan that was designed to address operational problems, such as unidentified insurance for some patients, insufficient documentation of services for billing, shortages of coding staff, and insufficient pursuit of accounts receivable. VA's last formal status report in May 2002 designated only 8 of the plan's 15 initiatives scheduled for completion by that time as having been completed. VA continues implementation of this plan and is also developing new initiatives, such as an automated financial system to better serve billing needs. It is too early to evaluate the extent to which VA's full implementation of its 2001 plan and new initiatives will be able to address operational problems and further increase third-party collections. In commenting on a draft of this report, VA generally agreed with our findings.

section_title: Letter
paragraphs: The Department of Veterans Affairs (VA) provides health care to eligible  veterans and, under certain circumstances, VA is authorized to collect  reasonable charges from their health insurers. Specifically, VA can bill  insurers for treatment of conditions that are not a result of injuries or  illnesses incurred or aggravated during military service. VA cannot bill for  health care conditions that result from military service, nor is it generally  authorized to collect from Medicare and Medicaid. In fiscal year 2002, VA  collected $687 million in insurance payments, which are known as third- party collections. These collections were VA’s largest source of revenue to  supplement its $21 billion medical care appropriation, and they helped pay  for veterans’ growing demand for care. The total number of veterans VA  treated has increased from 2.6 million in fiscal year 1996 to 3.8 million in  fiscal year 2001, and VA predicts continuing growth in its patient  workload.
Over the past several years, we and others have raised concerns about  VA’s ability to maximize its third-party collections to enhance revenue. For  example, a VA Inspector General report stated that VA missed billing  opportunities, had billing backlogs, and did inadequate follow-up on  accounts receivable in fiscal years 2000 and 2001. We testified in  September 2001 that problems in VA’s collections operations—such as  inadequate patient intake procedures to gather insurance information,  insufficient physician documentation, a shortage of qualified coders, and  insufficient automation—diminished VA’s collections.
At your request, we have examined VA’s progress with third-party  collections since September 2001. In this report, we are providing an  update on (1) VA’s third-party collections and problems in collections  operations for fiscal year 2002 and (2) VA’s initiatives to improve  collections. To conduct our review, we examined VA’s collections data for  fiscal years 2001 and 2002; reviewed relevant VA documents, such as its  2001 collections improvement plan; and interviewed officials in VA  headquarters and in 3 of VA’s 21 health care networks—Network 2  (Albany), Network 9 (Nashville), and Network 22 (Long Beach)—to better  understand the reasons for increased collections. Our work was  performed from February 2002 through January 2003 in accordance with  generally accepted government auditing standards. For more details on  our scope and methodology, see appendix I.
subsections: section_title: Background
paragraphs: Although VA has been authorized to collect third-party health insurance  payments since 1986, it was not allowed to use these funds to supplement  its medical care appropriations until enactment of the Balanced Budget  Act of 1997. Part of VA’s 1997 strategic plan was to increase health  insurance payments and other collections to help fund an increased health  care workload. The potential for increased workload occurred in part  because the Veterans’ Health Care Eligibility Reform Act of 1996  authorized VA to provide certain medical care services not previously  available to veterans without service-connected disabilities or low  incomes. VA expected that collections from third-party payments,  copayments, and deductibles would cover the majority of costs for higher- income veterans without service-connected disabilities. These veterans  increased from about 4 percent of all veterans treated in fiscal year 1996 to  about 20 percent in fiscal year 2001.
To collect from health insurers, as shown in figure 1, VA uses five related  processes to manage the information needed to bill and collect. The  patient intake process involves gathering insurance information and  verifying that information with the insurer. The medical documentation  process involves properly documenting the health care provided to  patients by physicians and other health care providers. The coding process  involves assigning correct codes for the diagnoses and medical procedures  based on the documentation. Next the billing process serves to create and  send bills to insurers based on the insurance and coding information.  Finally, the accounts receivable process includes processing payments  from insurers and following up with insurers on outstanding or denied  bills.
In 1999, VA adopted a new fee schedule, called “reasonable charges,”  which are itemized fees based on diagnoses and procedures, and the new  schedule allows VA to bill in a way that more accurately captures the care  provided. Previously, VA had nine charges for inpatient care and one  charge for outpatient care. These charges were not specific to the care  provided. For example, VA had charged the same per diem rate for any  patient in a surgical bed section regardless of the care provided. In  addition, before adopting the new fee schedule, VA had billed all  outpatient visits, including surgery, based on VA’s average outpatient cost  of $229, a single rate that had limited VA’s ability to collect higher amounts  for more expensive care. In contrast, when the reasonable charges fee  schedule was adopted in September 1999, an outpatient hernia surgery  charge increased to about $6,500; and an office visit charge for an  established patient decreased to a range of about $22 to $149, depending  on the care given.
By linking charges to the care provided, VA created new bill-processing  demands—particularly in the three areas of documenting care, coding that  care, and processing bills per episode of care. First, VA must be prepared  to provide an insurer supporting medical documentation for the itemized  charges. Second, VA must accurately assign medical diagnoses and  procedure codes to set appropriate charges, a task which requires coders  to search through medical documentation and various databases to  identify all billable care. Third, in contrast to a single bill for an episode of  care under the previous fee schedule, under reasonable charges VA must  prepare a separate bill for each provider involved in the care and an  additional bill if a hospital facility charge applies.
section_title: Collections Are Increasing, but Operational Problems Limit Insurance Payments
paragraphs: For fiscal year 2002, VA collected third-party payments of $687 million, a  32 percent increase over its fiscal year 2001 collections. The increased  collections in fiscal year 2002 resulted from VA’s submitting and collecting  for more bills than previously. According to three network revenue  managers we interviewed, billings increased mainly because of a reduction  of billing backlogs and improvements in the processes necessary to collect  under the new reasonable charges fee schedule. Nevertheless, VA’s ability  to collect was limited by problems such as missed billing opportunities.  VA does not know how many dollars remain uncollected because of such  limitations.
subsections: section_title: Third-Party Collections Increased
paragraphs: For fiscal year 2002, VA collected $687 million, up 32 percent compared to  the $521 million collected during fiscal year 2001. The increased  collections reflected VA’s processing a higher volume of bills than it did in  the prior fiscal year. VA processed and received payments for over 50  percent more bills in fiscal year 2002 than in fiscal year 2001. VA’s  collections grew at a lower percentage rate than the number of paid bills  because the average payment per paid bill dropped 18 percent compared  to the prior fiscal year. Average payments dropped primarily because a  rising proportion of VA’s paid bills were for outpatient care rather than  inpatient care. Since the charges for outpatient care were much lower on  average, the payment amounts were typically lower as well.
VA had difficulties establishing the collections processes to bill under a  new fee schedule, processes which were necessary to achieve the  increased billing and collections in fiscal year 2002. Although VA  anticipated that the shift to reasonable charges would yield higher  collections, collections dropped in fiscal year 2000 after implementing the  new fee schedule in September 1999. VA attributed that drop to its being  unprepared to bill under reasonable charges, particularly because of its  lack of proficiency in developing medical documentation and coding to  appropriately support a bill. As a result, VA reported that many VA medical  centers developed billing backlogs after initially suspending billing for  some care.
As shown in figure 2, VA’s third-party collections increased in fiscal year  2001—reversing fiscal year 2000’s drop in collections—and increased  again in fiscal year 2002. After initially being unprepared in fiscal year 2000  to bill reasonable charges, VA began improving its implementation of the  processes necessary to bill and increase its collections. According to VA,  by the summer of 2000, facilities had sufficiently implemented processes  to move forward with billing under reasonable charges. By the end of  fiscal year 2001, VA had submitted 37 percent more bills to insurers than in  fiscal year 2000. VA submitted even more in fiscal year 2002, over 8 million  bills that constituted a 54 percent increase over the number in fiscal year  2001.
VA officials cited various sources for an increased number of bills in fiscal  year 2002. Managers we spoke with in three networks—Network 2  (Albany), Network 9 (Nashville), and Network 22 (Long Beach)—mainly  attributed the increased billing to reductions in billing backlogs. They also  cited an increased number of patients with billable insurance as a factor  for the increased billing. In addition, a May 2001 change in the reasonable- charges fee schedule for medical evaluations allowed billing for a facility  charge in addition to billing for the professional service charges, a change  that contributed to the higher volume of bills in fiscal year 2002.
Increased collections for fiscal year 2002 reflected VA’s improved ability to  manage the volume and billing processes required to produce multiple  bills under reasonable charges, according to three network revenue  managers. Networks 2 (Albany) and 9 (Nashville) reduced backlogs, in  part by hiring more staff, contracting for staff, or using overtime to  process bills and accounts receivable. Network 2 (Albany), for instance,  managed an increased billing volume through mandatory overtime for  billers. Managers we interviewed in all three networks noted better  medical documentation provided by physicians to support billing. In  Network 22 (Long Beach) and Network 9 (Nashville), revenue managers  reported coders were getting better at identifying all professional services  that can be billed under reasonable charges. In addition, the revenue  manager in Network 2 (Albany) said that billers’ productivity had risen  from 700 to 2,500 bills per month over a 3-year period, as a result of  gradually increasing productivity standards and a streamlining of their  jobs to focus solely on billing.
section_title: Operational Problems Limit Collections, but VA Lacks an Estimate of Uncollected Dollars
paragraphs: Studies have suggested that operational problems—missed billing  opportunities, billing backlogs, and inadequate pursuit of accounts  receivable—limited VA’s collections in the years following the  implementation of reasonable charges. After examining activities in fiscal  years 2000 and 2001, a VA Inspector General report estimated that VA  could have collected over $500 million more than it did. About 73 percent  of this uncollected amount was attributed to a backlog of unbilled medical  care; most of the rest was attributed to insufficient pursuit of delinquent  bills. Another study, examining only professional-service charges in a  single network, estimated that $4.1 million out of $4.7 million of potential  collections was unbilled for fiscal year 2001. Of that unbilled amount, 63  percent was estimated to be unbillable primarily because of insufficient  documentation. In addition, the study found coders often missed services  that should have been coded for billing.
According to the Director of the Revenue Office, VA could increase  collections by working on operational problems. These problems included  unpaid accounts receivable and missed billing opportunities due to  insufficient identification of insured patients, inadequate documentation  to support billing, and coding problems that result in unidentified care.  During April through June 2002, three network revenue managers told us  about backlogs and processing issues that persisted into fiscal year 2002.  For example, although Network 9 (Nashville) had above average increases  in collections for both inpatient and outpatient care, it still had coding  backlogs in four of six medical centers. According to Network 9’s  (Nashville) revenue manager, eliminating the backlogs for outpatient care  would increase collections by an estimated $4 million for fiscal year 2002,  or 9 percent. Additional increases might come from coding all inpatient  professional services, but the revenue manager did not have an estimate  because the extent to which coders are capturing all billable services was  unknown. Moreover, although all three networks reported that physicians’  documentation was improving for billing, they reported a continuing need  to improve physicians’ documentation. In addition, Network 22 (Long  Beach) reported that accounts receivable staff had difficulties keeping up  with the increased volume of bills because it had not hired additional staff  or contracted help for accounts receivable.
As a result of these operational limitations, VA lacks a reliable estimate of  uncollected dollars, and therefore does not have the basis to assess its  systemwide operational effectiveness. Some uncollected dollars resulting  from currently missed billing opportunities—such as billable care missed  in coding—are not readily quantified. Other uncollected dollars—such as  those from backlogged bills and uncollected accounts receivable—are  either only partially quantifiable or their potential contribution to total  collections is uncertain. For example, even though the uncollected dollars  in older accounts receivable can be totaled, the yield in payments through  more aggressive pursuit of accounts receivable is uncertain. This is  because, according to VA officials, some portion of the billed dollars is not  collectable due to VA inappropriately billing for services not covered by  the insurance policy, billing against a terminated policy, or not closing out  the accounts receivable after an insurer paid the bill.
section_title: VA Is Implementing Planned Actions and Developing Other Initiatives to Address Problems in Collections Operations
paragraphs: VA continues to implement its 2001 improvement plan and is planning  more improvements. Although the improvement plan could potentially  improve operations and increase collections, it is not scheduled for full  implementation until December 2003. In May 2002, VA created a new  office in VHA, the Chief Business Office, in part to address collections  issues. According to VA officials, this office is developing a new approach  to improvements, which will include initiatives beyond those in the  improvement plan.
subsections: section_title: 2001 Plan to Improve Collections Is Partially Implemented
paragraphs: VA’s improvement plan was designed to increase collections by improving  and standardizing its collections processes. The plan’s 24 actions are to  address known operational problems affecting revenue performance.  These problems include unidentified insurance for some patients,  insufficient documentation for billing, shortages of coding staff, gaps in  the automated capture of billing data, insufficient pursuit of accounts  receivable, and uneven performance across collections sites.
The plan seeks increased collections through standardization of policy and  processes in the context of decentralized management, in which VA’s 21  network directors and their respective medical center directors have  responsibility for the collections process. Since management is  decentralized, collections procedures can vary across sites. For example,  sites’ procedures can specify a different number of days waited until first  contacting insurers about unpaid bills and can vary on whether to contact  by letter, telephone, or both. The plan intends to create greater process  standardization, in part, by requiring certain collections processes, such as  the use of electronic medical records to provide coders better access to  documentation and legible records.
When fully implemented, the plan’s actions can improve collections to the  extent that they can reduce operational problems such as missed billing  opportunities. For example, two of the plan’s actions—requiring patient  contacts prior to scheduled appointments to gather insurance information  and electronically linking VA to major insurers to identify patients’  insurance—are intended to increase the number of patients identified with  insurance. A recent study estimated that 23.8 percent of VA patients in  fiscal year 2001 had billable care, but VA actually billed for the care of only  18.3 percent of patients. This finding suggests that VA could have billed  for 30 percent more patients than it actually billed.
VA has implemented some of the improvement plan’s 24 actions, which  were scheduled for completion at various times through 2003, but is  behind the plan’s original schedule. The plan had scheduled 15 of the 24  actions for completion through May 25, 2002, but, as shown in figure 3, VA  had designated only 8 as completed, as of the last formal status report on  the plan in May 2002.
Some of the plan’s actions that VA has designated as completed needed  additional work. For example, although VA designated electronic billing as  completed in the May 2002 report, in August 2002 a VA official indicated  that 20 hospitals were still working on a step required to transmit bills to  all payers. In other cases, VA has designated an action completed by  mandating it in a memorandum or directive. However, mandating an  action in the past has not necessarily ensured its full implementation. For  example, although an earlier 1998 directive required patient  preregistration, the 2001 improvement plan reported that preregistration  was not implemented consistently across VA and thus mandated its use.
section_title: VA Is Developing Other Improvement Initiatives
paragraphs: Officials in VHA’s new Chief Business Office told us that this office is  developing a new approach for improving third-party collections.  According to the Chief Business Officer, the Under Secretary of Health  proposed, and the Secretary approved, the establishment of the Chief  Business Office to underscore the importance of revenue, patient  eligibility, and enrollment functions; and to give strategic focus to  improving these functions. He said the new approach can help increase  revenue collections by further revising processes and providing a new  business focus on collections.
Officials in this office told us that the new approach will combine these  and other actions with the actions in the improvement plan. For example,  the Chief Business Office’s improvement strategy incorporates electronic  transmission of bills and of third-party payments, which are part of the  2001 improvement plan. The new approach also encompasses initiatives  beyond the improvement plan, such as the one in the Under Secretary of  Health’s May 2002 memorandum that directed all facilities to refer  accounts receivable older than 60 days to a collection agency, unless a  facility can document a better in-house process. According to the Deputy  Chief Business Officer, this initiative has shown some sign of success— with outstanding accounts receivables dropping from $1,378 million to  $1,317 million from the end of May to the end of July 2002, a reduction of  about $61 million or 4 percent.
Another initiative in the new approach is the Patient Financial Services  System (PFSS). PFSS is an automated financial system focused on patient  accounts, which is intended to overcome operational problems in VA’s  current automated billing system. For example, VA’s automated system for  clinical information was not designed to provide all of the episode-of-care  information, such as the health care provider and diagnoses, that are  required for billing. The development of PFSS is tied to a demonstration  project of a financial system, which is now being designed for Network 10  (Cincinnati). According to the Deputy Chief Business Officer, VA  anticipates awarding a PFSS contract by April 1, 2003. The Chief Business  Office’s plan is to install this financial system in other facilities and  networks if it is successfully implemented in the Network 10 (Cincinnati)  demonstration.
The Chief Business Office also intends to improve collections by  developing better performance measures, which will be similar to those  used in the private sector. For example, the office intends to use the  measure of gross days revenue outstanding, which indicates the pace of  collections relative to the amount of accounts receivable. During fiscal  year 2003, the office plans to hold network and facility directors  accountable for collections through standards that are tied to these  performance measures. In addition, the Chief Business Officer said that  tracking performance with these measures could help identify further  opportunities for collections improvements.
The Chief Business Office is developing the new initiatives, which it had  not formalized into a planning document as of August 2002. Certain key  decisions were under consideration. For example, the Chief Business  Officer was considering whether to centralize some processes at the  network or national level and was developing the performance standards  that would be required for holding network and facility directors  accountable. Moreover, according to the Chief Business Officer,  implementing PFSS will require the office to resolve some issues,  including making its existing systems provide sufficient data to support  the new financial system.
section_title: Concluding Observations
paragraphs: As VA faces increased demand for medical care, third-party collections for  nonservice-connected conditions remain an important source of  alternative revenue to supplement VA’s resources. Our work and VA’s  continuing initiatives to improve collections suggest that VA could collect  additional supplemental revenues because it has not collected all third- party payments that it could in fiscal year 2002. However, VA does not  have an estimate of the amount of uncollected dollars, which it needs to  assess the effectiveness of its current processes.
VA has been improving its billing and collecting under the new fee  schedule established in 1999, but VA has not completed its efforts to  address problems in collections operations. In this regard, fully  implementing VA’s 2001 improvement plan could help VA maximize future  collections by addressing problems such as missed billing opportunities.  However, the plan’s reliance on directives, in some cases, to achieve  increased collections is not enough to ensure full implementation and  optimal performance. The Chief Business Office’s new approach could  also enhance collections. VA’s new Chief Business Office’s challenge is to  ensure such performance by identifying root causes of problems in  collections operations, providing a focused approach to addressing the  root causes, establishing performance measures, and holding responsible  parties accountable for achieving the performance standards. However, it  is too early to evaluate the extent to which VA will be able to address  operational problems and further increase collections by fully  implementing its 2001 plan and new approach.
section_title: Agency Comments and Our Evaluation
paragraphs: The Department of Veterans Affairs provided written comments on a draft  of this report, which are found in appendix II. VA generally agreed with  our findings that it continues to make improvements in increased  collections and VHA’s Business Office is developing new initiatives to  further enhance collections. In addition, VA clarified that it may, under  limited circumstances, collect from Medicare although generally it may not  do so. We changed our report accordingly.
VA also suggested that our title was misleading because it stated that VA  continues to address problems in its collections operations rather than  stating that VA is building infrastructure to implement effective collections  operations. We believe that our title is accurate because VA continues to  address problems that we and others have identified in VA’s collections  operations. VA has acknowledged such problems in the past, including  unidentified insurance for some patients, insufficient documentation for  billing, and shortages of coding staff. VA continues to implement the 2001  improvement plan that it developed to address these and other problems.  VA’s new initiatives also address problems, such as gaps in automated  capture of billing data, that have been previously identified.
As arranged with your office, unless you release its contents earlier, we  plan no further distribution of this report until 30 days after its issuance  date. At that time, we will send copies of this report to the Secretary of  Veterans Affairs, interested congressional committees, and other  interested parties. We will also make copies available to others upon  request. In addition, this report will be available at no charge on GAO’s  Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please call me at  (202) 512-7101. James Musselwhite and Terry Hanford also contributed to  this report.
section_title: Appendix I: Scope and Methodology
paragraphs: To assess the Department of Veterans Affairs’ (VA’s) progress with  collections in fiscal year 2002, we obtained and examined data on VA’s  third-party bills and collections. We also interviewed officials in VA  headquarters and in three VA health care networks to understand the  reasons for the increased collections compared to fiscal year 2001 as well  as any operational problems. To provide information on VA’s 2001  improvement plan and its emerging new approach to improvements, we  reviewed relevant VA documents and interviewed VA officials.
We conducted interviews from April through June 2002 with managers in  three networks concerning collections. In addition, we gathered data on  third-party bills and collections for fiscal years 2001 and 2002. Our review  of the improvement plan’s implementation started with its completion  status in March 2002 and ended with its status through May 2002, which  was the date of VA’s last formal report on the plan’s status. An official in  the Chief Business Office told us in September 2002 that a new status  report for the 2001 plan was planned but not yet available. During August  through October 2002, we gathered information from officials in the Chief  Business Office about additional improvement initiatives.
To better understand the increased collections in fiscal year 2002 and any  limitations to those collections, we judgmentally selected three networks  for more detailed study. These networks provided different examples of  above- and below-average growth in collections, considered separately for  inpatient care and outpatient care. (See table 1.) Based on available data at  the time of selection, Network 9 (Nashville) had above-average collections  increases for both inpatient care and outpatient care bills. Network 2  (Albany) exceeded average collections increases for only outpatient care  bills, whereas Network 22 (Long Beach) had above-average collections  increases for only inpatient care bills.
Although we did not verify VA data on collections and bills, we used the  data reported by VA’s Revenue Office in its analyses of third-party  collections. The data source is VA’s Veterans Health Information Systems  and Technology Architecture National Database. This database includes  data for collections from various sources—including third-party payments,  patient copayments, and proceeds from sharing agreements in which VA  sells services to the Department of Defense and other providers.
section_title: Appendix II: Comments from the Department of Veterans Affairs