VA Health Care: Budget Formulation and Reporting on Budget Execution Need Improvement
Published: 2006-09-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Veterans Affairs (VA) estimates it will serve 5.4 million patients in fiscal year 2006. Medical services for these patients are funded with appropriations, after consideration by Congress of the President's budget request. VA formulates the medical programs portion of that request. VA is also responsible for budget execution--using appropriations and monitoring their use for providing care. For fiscal years 2005 and 2006, the President requested additional funding for VA medical programs, beyond what had been originally requested. GAO was asked to examine for fiscal years 2005 and 2006 (1) how the President's budget requests for VA medical programs were formulated, (2) how VA monitored and reported to Congress on its budget execution, and (3) which key factors in the budget formulation process contributed to requests for additional funding. To do this, GAO analyzed budget documents and interviewed VA and Office of Management and Budget (OMB) officials.
section_title: What GAO Found
paragraphs: The formulation of the President's budget requests for VA medical programs for fiscal years 2005 and 2006 was informed by VA's comparison of its cost estimate of projected demand for medical services to its anticipated resources. VA projected about 86 percent of its costs using an actuarial model that estimated veterans' demand for health care. To project the costs of long-term care (about 10 percent of the funds for VA medical programs in each of these years) and the remaining medical care costs (about 4 percent), separate estimation approaches were used that did not rely upon an actuarial model but used other methods instead. The agency anticipated resources based on prior year appropriations, guidance from OMB, and other factors. For both fiscal years, VA officials told GAO that projected costs--calculated from the actuarial model and other approaches--exceeded anticipated resources and that they addressed the difference in budget requests for those years with cost-saving policy proposals and management efficiencies. Although VA staff closely monitored budget execution and identified problems for fiscal years 2005 and 2006, VA did not report this information to Congress in a sufficiently informative manner. VA closely monitored the fiscal year 2005 budget as early as October 2004, anticipating challenges managing within its resources. However, Congress did not learn of these challenges until April 2005. VA initially planned to manage within its budget for fiscal year 2005 by delaying some spending on equipment and nonrecurring maintenance and drawing on funds it had planned to carry over into 2006. Instead, the President requested additional funds from Congress for both fiscal years 2005 (a $975 million supplemental appropriation in June 2005) and 2006 (a budget amendment of $1.977 billion in July 2005). Congress included in the 2006 appropriations act a requirement for VA to submit quarterly reports regarding the medical programs budget status during this fiscal year. These reports have not included some of the measures that would be useful for congressional oversight, such as patient workload measures to capture costs and the time required for new patients to be scheduled for their first primary care appointment. Unrealistic assumptions, errors in estimation, and insufficient data were key factors in VA's budget formulation process that contributed to the requests for additional funding for fiscal years 2005 and 2006. Unrealistic assumptions about how quickly cost savings could be realized from proposed nursing home policy changes contributed to the additional requests, as did computation errors measuring the estimated effect of one of these changes. Insufficient data in VA's initial budget projections also contributed to the additional funding requests. For example, VA underestimated the cost of serving veterans returning from Iraq and Afghanistan, in part because estimates for fiscal year 2005 were based on data that largely predated the Iraq conflict and because according to VA, the agency had challenges for fiscal year 2006 in obtaining data from the Department of Defense.

section_title: Letter
paragraphs: The Department of Veterans Affairs (VA) operates one of the largest health  care delivery systems in the nation. For fiscal year 2006, VA estimates it  will treat 5.4 million patients with appropriations of $31.5 billion. During  the past decade the number of patients served by VA has increased  rapidly, due in part to an expansion of the number of veterans eligible to  receive care. The Veterans’ Health Care Eligibility Reform Act of 1996  simplified eligibility standards for veterans in need of hospital and  outpatient care and made available services that previously had not been  made available to veterans without service-connected disabilities or low  incomes. The act required VA to provide a uniform set of medical benefits,  including hospital and outpatient care, to veterans who are eligible and  who enroll in its health care system. In addition to the uniform set of  medical benefits, VA is required to provide certain other services—such as  nursing home care—to some veterans, but not to others. If sufficient  resources are not available to provide hospital and outpatient care that is  timely and acceptable in quality, VA is required to restrict enrollment  based on veterans’ eligibility priorities.
For VA, like other agencies, formulation of a budget request begins  approximately 18 months before the start of the fiscal year to which the  request relates and about 10 months before transmission of the President’s  budget request, which usually occurs in early February. For this purpose,  the Veterans Health Administration (VHA), within VA, develops estimates  of its medical program budget for agency review and approval. In  preparing budget estimates, VA and its component organizations—such as  VHA—use policy and technical guidance from the Office of Management  and Budget (OMB), while preparing a budget submission to OMB that  reflects VA priorities. OMB is the office responsible for assisting the  President in overseeing the preparation of the federal budget and  supervising its administration. OMB reviews VA’s and other agencies’  budget requests from their submission in September through November  and then notifies agencies at the end of November on the level of funding  and policy proposals that will be included in the President’s budget  request. Agencies have very limited time to appeal these decisions to OMB  before they start preparing a congressional budget justification—a more  detailed presentation of the President’s budget request—for their  appropriations subcommittees’ consideration. Congressional budget  justifications are submitted to appropriations subcommittees following  transmission of the President’s budget request.
After the President submits his budget request, he may request further  changes in one of two ways, depending on the timing of the additional  request. If Congress has not completed action on an appropriations act,  the President can transmit a budget amendment. If an appropriations act  has already been enacted, the President can request a supplemental  appropriation; this is typically done in cases where the need for funds is  too urgent to postpone until enactment of the following year’s  appropriations bill.
Once an appropriations bill becomes law, OMB apportions the funds,  allowing an agency to obligate and expend the funds as authorized. Each  agency is responsible for obligating and expending funds efficiently and  effectively to carry out the programs and activities for which funds were  appropriated. Carrying out this responsibility is referred to as budget  execution and requires monitoring throughout the fiscal year to ensure  that funds are being used as authorized for agency program objectives—in  the case of VA medical programs to provide quality care to veterans—and  to ensure compliance with provisions of fiscal law. For example, the  Antideficiency Act prohibits VA and other agencies from making or  authorizing obligations or expenditures in excess of the available  appropriations.
Congress provided additional funds beyond those initially requested by the  President for VA medical programs for both fiscal years 2005 and 2006. In  June 2005, the President requested a $975 million supplemental  appropriation for fiscal year 2005, and in July 2005, the President  submitted a $1.977 billion budget amendment for fiscal year 2006. These  additional requests raised concerns in Congress and among stakeholders  regarding the reasons for the additional requests for funding. At your  request, we examined for fiscal years 2005 and 2006 (1) how the  President’s budget requests for VA medical programs were formulated,   (2) how VA monitored and reported to Congress on its budget execution,  and (3) which key factors in the budget formulation process contributed to  the requests for additional funding.
To perform this work, we interviewed VA officials responsible for the  agency’s medical programs budget issues, and for developing budget  projections. We also interviewed OMB officials. We analyzed and reviewed  budget documents including VA’s budget justifications for medical  programs for fiscal years 2005 and 2006. We also reviewed VA budget  estimates and other information VA reported that it used either to  formulate its submissions to OMB for fiscal years 2005 and 2006 or to  monitor the use of appropriated funds for those fiscal years. Our review of  how VA monitored its use of funds in the fiscal year 2006 budget includes  the first 11 months of the fiscal year. This work expands upon the  preliminary findings that we reported in February 2006. We conducted our  review from October 2005 through September 2006 in accordance with  generally accepted government auditing standards. For additional details  of our scope and methodology, see appendix I.
subsections: section_title: Background
paragraphs: VA, as part of its mission to provide benefits and services to America’s  veterans, administers one of the nation’s largest health care systems  through the VHA. As part of a uniform set of medical benefits provided to  eligible veterans who enroll, VA provides a range of services including  preventive and primary health care, a full range of outpatient and inpatient  services, and prescription drugs. VA also provides additional services,  such as nursing home and dental care and other services, as required by  law, for some veterans and makes these services available to other  veterans on a discretionary basis as resources permit. One of the largest of  these programs is VA’s nursing home care program, which provides care in  three settings. VA operates its own nursing homes in 134 locations; it pays  for care under contract in non-VA nursing homes, referred to as  community nursing homes; and it pays about one-third of the costs per day  for veterans in state veterans’ nursing homes. In its three settings, nursing  home services are provided to veterans, ranging from short-stay post-acute  care for patients recovering from a condition such as a stroke to long-stay  care for patients who cannot be cared for at home because of severe,  chronic physical or mental limitations.
To manage access to hospital and outpatient care in relation to available  resources, VA established an enrollment system with priority categories,  as required by the Veterans’ Health Care Eligibility Reform Act of 1996.  The act called for seven priority categories; subsequent legislation  provided for eight categories. Priority categories are generally  determined by a veteran’s degree of service-connected or other disability  or on financial need. VA gives veterans in Priority category 1 (with   50 percent or more service-connected disability) the highest preference for  services and gives lowest preference to those in Priority category 8 (no  disability, with income exceeding certain thresholds, and who were  enrolled as of January 16, 2003).
The act also required VA to restrict enrollment consistent with its priority  categories if sufficient resources are not available to provide care that is  timely and acceptable in quality. In January 2003, VA restricted  enrollment by no longer allowing Priority 8 veterans, those in the lowest  priority category, to enroll. However, Priority 8 veterans who were  already enrolled as of January 16, 2003, would continue to receive service.  This policy remained in effect as of August 2006.
In the mid-1990s, VA began to change the way it delivered health care to  veterans to increase the efficiency of its health care system and to improve  access to medical services. Applying lessons learned from the private  sector’s experiences with managed health care, VA began emphasizing  certain managed care practices, such as primary, outpatient, and  preventive care, and deemphasizing its reliance on inpatient care. Over the  10-year period from 1995 through 2004, for example, the ratio of outpatient  visits to inpatient hospital stays at VA increased from 29 to 1, to 92 to 1,  reflecting the change in how VA delivers medical care. To support its  health care reform efforts, VA decentralized the management structure of  the agency to coordinate the organization of hospitals, outpatient clinics,  and other facilities into 21 regional health care networks. These networks  have budget and management responsibilities that include allocating  resources to facilities, clinics, and programs within their networks and  ensuring access to appropriate health care services.
section_title: Formulation of President’s Budget Request for VA Medical Programs Informed by Comparing Cost of Projected Demand and Anticipated Resources
paragraphs: The formulation of the President’s budget requests for VA medical  programs for fiscal years 2005 and 2006 was informed by VA’s comparison  of its estimation of the cost of projected demand and anticipated  resources. Estimated costs for medical care exceeded anticipated  resources in both fiscal years 2005 and 2006, and, in formulating the  budget, VA addressed the difference with cost-saving policy proposals and  estimated savings from management efficiencies.
subsections: section_title: VA Estimated Costs of Medical Programs Based on Projected Demand for Medical Care
paragraphs: VA used an actuarial model to project demand and costs for about   86 percent of its medical programs budget estimate for fiscal years 2005  and 2006. (See fig. 1.) For this part of the medical programs budget  estimate, the model was used to project enrollment in the VA health care  system and then to estimate VA’s total health care services utilization by  estimating the proportion of enrollees’ total health care that was expected  to come from VA. The actuarial model used cost estimates associated with  particular health care services in conjunction with the enrollment and  utilization projections to project VA health care costs. The actuarial model  provided utilization projections for 55 health care services including  inpatient acute surgery, outpatient care, prescription drugs, and  prosthetics. The model used private sector benchmarks but made  allowances for the special characteristics of the VA enrollee population,  adjusting for age, sex, morbidity of enrollee population, and veterans’ use  of other health care providers reimbursed by payers such as Medicare and  Medicaid.
VA used a separate estimation approach, rather than an actuarial model, to  project long-term care demand and costs, which accounted for about   10 percent of the funds requested for medical programs for each of the  fiscal years 2005 and 2006. The long-term care estimation approach  projected demand by using historical expenditures to calculate the costs  of treating veterans and multiplying these estimates by projected  workload, which was calculated based on historical trends and policy  proposals. VA officials told us that they are working on incorporating the  projection of long-term care demand and costs into the actuarial model,  but could not provide a date when this would be completed. Similarly, VA  used other approaches, rather than an actuarial model, to project demand  and costs for the remaining 4 percent of the medical programs budget  request for fiscal years 2005 and 2006. These other methodologies included  adding inflation to actual expenditures and projecting trends based on  workload, expenditure, and other data provided by program officials. The  majority of these expenditure projections were for Civilian Health and  Medical Program of the Department of Veterans Affairs (CHAMPVA) and  dental care.
The actuarial model projections and the other estimation approaches for  the fiscal year 2005 budget were developed in March 2003. To estimate  costs for VA’s medical programs for fiscal year 2005, VA used fiscal year  2002 data, which were the most current fiscal year data available in the  spring of 2003. Similarly, VA used fiscal year 2003 data, in the spring of  2004, to project costs for fiscal year 2006.
section_title: VA Anticipated Resources Based on Prior Appropriation Levels, OMB Guidance, Collections, Reimbursements, and Projected Carryover of Unobligated Funds
paragraphs: VA anticipated its resources for fiscal years 2005 and 2006 based on its  prior year appropriations, guidance published by OMB that outlined the  President’s budget priorities, and other factors. For example, OMB’s  annual planning guidance for fiscal year 2005, published in April 2003,  directed executive agencies, including VA, to develop a budget for fiscal  year 2005 that was within the levels included in the fiscal year 2004 budget.  The guidance noted, for example, that any increases or amounts for new  initiatives should be offset by reductions in lower priority or ineffective  programs.
In addition, VA anticipated its funding based on resources it expected  from collections, reimbursements, and the projected carryover of  unobligated funds into the next fiscal year. VA may carry over from one  fiscal year to the next unobligated balances of funds made available  without fiscal year limitation and other funds appropriated for multiple  fiscal years. In fiscal year 2004, for example, VA collected $1.7 billion from  veterans and third-party insurers, which was available without fiscal year  limitation. VA carried over about $600 million from fiscal year 2004 into  fiscal year 2005; this amount consisted of collections from prior years and  multiyear funds that had not been obligated during fiscal year 2004.
section_title: Adjustments Were Made to Address the Difference Between Projected Costs for VA Medical Programs and Anticipated Resources
paragraphs: According to VA officials, for both fiscal years 2005 and 2006, projected  costs exceeded anticipated resources. VA officials stated that differences  between projected costs and anticipated resources in budget requests for  those years were addressed in two ways: (1) cost-saving policy proposals  and (2) management efficiency savings.
To develop a budget request consistent with anticipated resources, VA  officials told us they addressed the difference with cost-saving policy  proposals which were included in the President’s budget requests for  fiscal years 2005 and 2006. These cost-saving policy proposals totaled   $494 million and $734 million in fiscal years 2005 and 2006, respectively,  and were proposed to reduce the total appropriation requested. (See table  1.) More specifically, a proposed long-term care policy was designed to  reduce costs by reducing patient workload, while a proposed $250  enrollment fee and an increase in pharmacy copayments for Priority 7 and  8 veterans—primarily, those veterans with incomes or net worths above  applicable thresholds and no service-connected disability—would have  generated additional resources. The projected savings from these policy  proposals, which were designed to enhance revenue as a means of  protecting resources, were used to adjust projected costs. VA used the  actuarial model and long-term care estimates to project savings from these  proposals.
In addition to cost-saving policy proposals, VA developed estimates of  management efficiency savings of $340 million and $590 million in fiscal  years 2005 and 2006, respectively, which were included in the President’s  budget request. According to VA, these management efficiency savings  were initiatives designed to reduce costs without reducing quality. In a  February 2006 report, we reported that VA’s total projected management  efficiency savings in the President’s budget request for fiscal years 2003  through 2006 were used to fill the gap between the costs associated with  VA’s projected demand for health care services and anticipated resources.  In addition, we reported that VA lacked a methodology for measuring the  dollar effect of the health care management efficiency savings it had  detailed for fiscal years 2003 through 2006.
OMB and VA officials told us they did not include management efficiency  savings in the fiscal year 2007 budget request and do not have plans for  doing so in the future. However, they will continue to include other  efficiency savings, which VA calls clinical efficiencies, projected by its  actuarial model. Each year, a workgroup of VA officials and staff from the  developer of the actuarial model review VA and health care industry  trends and evaluate specific VA practices expected to affect health care  service utilization and cost and incorporate these expectations into the  actuarial model. For example, VA’s Advanced Clinical Access initiative is  intended to reduce the need for veterans to visit clinics to receive care by  implementing certain health care practices such as using follow-up  telephone calls by practitioners to reduce the number of in-person office  visits. VA officials told us that to calculate the savings from such an  initiative, the assumptions of reducing patient utilization are built into the  actuarial model. The actuarial model then produces estimates of the effect  of these efficiencies on the cost of health care services, according to VA  officials.
section_title: VA Closely Monitored Budget Execution and Identified Problems, but Did Not Report Them in a Timely and Sufficiently Informative Manner
paragraphs: Anticipating challenges in managing its medical care programs within  available resources, VA closely monitored its medical programs budget  execution from the beginning of fiscal year 2005. Similarly, in early fiscal  year 2006, the agency tracked how well it was managing to provide care to  veterans with available resources during the 12-month time period.  However, in fiscal years 2005 and 2006, VA reporting of budget execution  to Congress could have been more timely and informative.
subsections: section_title: VA Monitored Budget Execution Early, Anticipating Challenges in Providing Medical Care with Available Resources
paragraphs: Recognizing that fiscal year 2005 would be a tight budget year, VA closely  monitored budget execution from the beginning of the fiscal year. In early  fiscal year 2005, VA formed a workgroup, the Budgetary Challenges  workgroup, to develop a strategy the agency could take to manage within  its budget. This six-member workgroup was comprised of selected  network directors and an official from VA headquarters. In December  2004, in internal briefings to VA’s National Leadership Board, the Deputy  Under Secretary for Health for Operations and Management, and the  Deputy Secretary, the workgroup recommended that the agency consider  a number of budget options to manage within its fiscal year 2005 budget,  including limiting the implementation of new initiatives and shifting  resources from equipment and nonrecurring maintenance into direct  patient care.
VA officials told us that in the middle of fiscal year 2005, it became clear  that demand for health care services was increasing rapidly—confirming  what they had anticipated at the beginning of the fiscal year—and that  spending would have to be carefully controlled to manage within its fiscal  year 2005 budget for the remainder of the year. VA staff identified these  trends by analyzing the monthly reports they generate for VA senior  management. In its March 2005 report to senior management, VA found  that through January 2005 unique patient workload was about 4.1 million,  5.2 percent above what VA had expected by that time of the fiscal year,  suggesting a potential challenge to managing care with available  resources.
On the basis of this close monitoring which began as early as October  2004, VA took actions to shift resources it had originally allocated for  equipment and nonrecurring maintenance into direct patient care. VA  initially planned to manage within its budget for fiscal year 2005 by  deferring $600 million for equipment and nonrecurring maintenance and  reducing the fiscal year 2006 carryover balance by $375 million. However,  with a few months remaining in the fiscal year, in June and July 2005, the  President requested additional VA medical programs funds for fiscal years  2005 and 2006, asking for $975 million and $1.977 billion, respectively.
In June 2005, the President submitted a request for supplemental funding  for fiscal year 2005 that totaled $975 million. VA reported to Congress  that the following activities contributed to the request:    $273 million for medical care services provided to veterans returning from  Operation Iraqi Freedom (OIF) and Operation Enduring Freedom (OEF),    $226 million for long-term care,    $200 million for an increase in the number of Priority 1 though 6 veterans  using VA medical care,    $179 million for a greater-than-expected increase in the utilization of  medical services and intensity of patient workload,    $58 million to reduce the number of veterans on waiting lists to receive  medical care, and    $39 million to provide medical care for the health care needs of  dependents of veterans who are rated as having 100 percent service- connected disability.
In July 2005, the President submitted a budget amendment adding   $1.977 billion to his fiscal year 2006 request for VA Medical Services  appropriations. VA testified before the House Committee on Veterans  Affairs, in July 2005, that the following activities contributed to the  requests for additional funding:    $677 million for a 2 percent increase in the number of veterans using VA    $600 million to correct an error in VA’s estimate of long-term care costs  included in the President’s budget,    $400 million to cover an unexpected 1.2 percent increase in the average  cost per patient, and    $300 million to replace funds VA planned to carry over from fiscal year  2005 to fiscal year 2006.
To support these requests for additional funding for VA medical programs,  VA officials told us that they chose to highlight activities for fiscal years  2005 and 2006 that were of high programmatic priority to the  administration and Congress and could be supported by workload and  expenditure data (e.g., veterans returning from Iraq and Afghanistan).  They told us that there were a number of other ways the agency could  have presented the data in the President’s request for additional funding.  For example, additional funding requested by the President could have  been categorized by budget object code, which would have listed  expenditures by broad cost categories including personnel and travel.  However, VA officials believed that presenting the information primarily  by programmatic activity would be the most useful for Congress.
section_title: VA’s Reporting of Budget Execution Progress and Problems to Congress Could Have Been More Timely and Informative
paragraphs: Despite VA’s identification of potential fiscal year 2005 budget challenges  as early as October 2004, Congress did not learn of these challenges until  April 2005, when VA reported to Congress that it intended to use funds  allocated for equipment and nonrecurring maintenance to fund patient  care. It was not until June 2005, with 3 months remaining in the fiscal year,  that VA reported in congressional testimonies that it had greater-than- anticipated workload levels, likely to result in greater-than-anticipated  costs. It notified Congress at that time that it would not be able to manage  by using nonrecurring maintenance funds as planned, but rather that the  President planned to request additional funds from Congress.
OMB officials told us that they have taken a more active role in monitoring  VA’s execution of its fiscal year 2006 budget than they did in fiscal year  2005. VA and OMB officials now meet monthly to discuss the budget  situation. Further, in fiscal year 2006, VA began preparing a special  monthly report for OMB. The data in VA’s monthly status reports have  enabled OMB to help monitor VA’s budget execution during the fiscal year.  VA’s monthly status reports to OMB provide measures of financial and  workload data. For example, the report includes information on  obligations and patient workload such as patients by priority category,  outpatient visits, and nursing home average daily census.
Following the supplemental appropriation requested in fiscal year 2005  and the budget amendment requested for fiscal year 2006, Congress  included a provision in the fiscal year 2006 Military Quality of Life and  Veterans Affairs Appropriations Act requiring the Secretary of Veterans  Affairs to submit to the Committees on Appropriations of the U.S. Senate  and U.S. House of Representatives a quarterly report on the financial  status of the Veterans Health Administration. In addition, the conference  report accompanying the appropriations act directed VA to include waiting  list performance measures and whether equipment or nonrecurring  maintenance funds have been used to pay for operating expenses, among  other things.
VA has provided three congressional quarterly reports beginning with a  report on the first quarter of fiscal year 2006. While VA has 12 months to  execute its budget, it did not submit its first two quarterly reports to  Congress until nearly 2 months after the end of each quarter, using patient  workload data that were as much as 3 months old at the time of  submission. These data included a combination of actual and estimated  number of patients seen. The third quarterly report was submitted in  August, about 1 month after the end of the quarter, which was 1 month  faster than VA provided the first two quarterly reports. The third quarterly  report used estimated data for the number of unique patients seen.
We also found that these three quarterly reports did not include  information identified in the conference report that would be useful for  congressional oversight. Among measures identified in the conference  report and not provided by VA in the quarterly report was a particular  access measure—the time required for new patients to get their first  appointment. Although not the same measure, a similar measure produced  in one of VA’s monthly reports to its own senior management for use in  internal budget formulation showed the number of new patients waiting  for their first appointment to be scheduled almost doubled over   11 months, from April 2005 to March 2006, indicating a potential problem  in the first quarter of fiscal year 2006. (See fig. 2.) However, the quarterly  report for that period shows only the more favorable access measures for  existing patients—percent of primary care and percent of specialty care  appointments scheduled within 30 days of desired date—where VA is  actually exceeding its performance goals. VA did not provide other  measures requested, such as the status of equipment or nonrecurring  maintenance funds and whether these funds have been used to pay for  operating expenses.
Additionally, we found that information VA provides on patient workload  in its quarterly reports to congressional committees contrasted with the  more detailed program and clinical information VA uses to inform the  President’s budget request for VA medical programs—such as the patient  workload measures used to estimate costs in the actuarial model. The  information in the quarterly congressional reports also contrasts with the  more detailed patient workload information that VA provides in its  monthly reports to OMB. In its quarterly reports, VA uses a patient  workload measure, “unique patients,” that counts patients only once no  matter how many times they use VA services within the fiscal year. (For  example, a patient who used VA health care services in October would not  be counted again in the patient workload totals for November, December,  or January, even if that patient used VA medical services again during each  of those months.) However, the unique patient measure does not capture  the difference between patients predominately using low-cost services,  such as primary care outpatient visits, at an average $245 each, and  patients using more high-cost services, such as acute inpatient hospital  care, which costs about $1,500 a day, on average. In contrast, VA now  provides in its monthly reports to OMB other patient workload  measures—in addition to the number of unique patients—that provide a  more complete picture of whether new patients are receiving low- or high- cost services. Some of the patient workload measures VA provides to OMB  include nursing home patient workload, as measured by average daily  census, number of outpatient visits, and patient workload by priority  category.
section_title: Unrealistic Assumptions, Estimation Errors, and Insufficient Data Contributed to VA’s Requests for Additional Funding
paragraphs: The requests for additional funding for VA medical programs in fiscal  years 2005 and 2006 were caused, in part, by unrealistic assumptions,  errors in estimation, and insufficient data in its budget formulation  process. Unrealistic assumptions about the expected time frame in which  the cost savings could be realized from proposed nursing home cost- saving policies contributed to the subsequent request for additional  funding. Further, computational errors in measuring the estimated effect  of one of these cost-saving policies led VA to underestimate resources  needed in fiscal year 2006. Moreover, insufficient data in VA’s initial  budget projections contributed to the additional funding requests. For  example, VA underestimated the cost of serving veterans returning from  Iraq and Afghanistan, in part because estimates for fiscal year 2005 were  based on data that largely predated the Iraq conflict and because VA did  not have sufficient data for fiscal year 2006 due to challenges in obtaining  data needed to identify these veterans from DOD, according to VA  officials.
subsections: section_title: Unrealistic Assumptions and Errors in Estimating the Effect of Nursing Home Policies Contributed to Requests for Additional Funding
paragraphs: An unrealistic assumption about the expected time frame in which VA  could implement a fiscal year 2005 proposed nursing home cost-saving  policy contained in the President’s budget request—a reduction in nursing  home patient workload in VA-operated nursing homes—contributed to  $226 million of the request for supplemental funding for that fiscal year,  VA officials said. The President’s fiscal year 2005 budget request for VA  medical programs included a proposal to reduce patient workload on a  daily basis— average daily census—from about 12,000 to 8,500 in VA- operated nursing homes. In retrospect, agency officials told us this  assumption was particularly unrealistic because of its accelerated time  frame. VA projected the savings from this reduction in workload would be  realized on the first day of the fiscal year, a change which would have  required transferring or discharging, in an extremely compressed time  frame, potentially thousands of veterans, many of whom had severe,  chronic, physical or mental impairments. These veterans would have had  to seek financing from other sources, such as Medicaid or private health  insurance, or paid for their care out of pocket. Moreover, achievement of  substantial savings from this policy would have also likely required  reducing the number of VA employees. However, VA included no  discussion in its budget formulation on how this cost-saving policy was to  be implemented. Furthermore, VA officials told us that because VA had  established a precedent for providing care to veterans who receive nursing  home care on a discretionary basis, changing the policy on short notice  would be difficult.
Similarly, the fiscal year 2006 President’s budget request for VA medical  programs included unrealistic assumptions and computational errors in  estimating savings of a proposed nursing home policy. The assumption  and estimation errors contributed to $600 million of the budget  amendment requesting additional funding in fiscal year 2006. The  President’s fiscal year 2006 budget request for VA medical programs  included a policy proposal to reduce patient workload and costs by  prioritizing the veterans who would receive long-stay nursing home care  in its VA-operated nursing homes, community nursing homes, and state  veterans’ nursing homes. Long-stay care includes nursing home care  needed by veterans who cannot be cared for at home because of severe,  chronic physical or mental impairments such as the inability to  independently eat or the need for supervision because of dementia. Under  the proposed policy, many veterans receiving VA nursing home care would  no longer qualify for long-stay care.
An unrealistic assumption about the expected time frame in which VA  could implement the proposed policy contributed to $152 million of the  $600 million request for additional funding for nursing home care in that  fiscal year, according to VA officials. While VA had originally assumed the  savings could be realized in April 2005, before the start of the 2006 fiscal  year, VA staff said they later recognized with OMB that this date had been  unrealistic. In addition, VA said that the policy assumed a 90 percent  reduction in patient workload in state veterans’ nursing home workload  for patients requiring long-stay nursing home care but that the correct  estimate was a 20 percent reduction in workload per year. For VA- operated nursing homes, the policy assumed an 80 percent reduction in  patient workload over 1½ years; however, VA later stated the correct  estimate was closer to 30 percent.
Computation errors in estimating the effect of this proposed fiscal year  2006 policy contributed to about $445 million of the $600 million request  for additional funding for nursing home care in that fiscal year, according  to VA officials. In particular, VA underestimated patient workload— average daily census—and costs in all three nursing home settings.  Specifically, VA incorrectly estimated that the average daily census in VA- operated nursing homes was 9,795, when the correct estimated patient  count was 11,151. Similarly, while VA estimated that the per diem rate for  its homes was $471.16, it was actually $567.52. VA officials said that the  errors in estimating the effect of the proposed nursing home policy  resulted from calculations being made in haste during the OMB appeal  process, and that a more standardized approach to long-term care  calculations could provide stronger quality assurance to help prevent  future mistakes.
section_title: Insufficient Data on Certain Activities Contributed to the Requests for Additional Funding in Fiscal Years 2005 and 2006
paragraphs: Insufficient data on veterans returning from Iraq and Afghanistan—OIF  and OEF—accounted for $273 million of the request for supplemental  funding in fiscal year 2005. According to VA officials, the original cost  projections for providing care to OIF and OEF veterans were understated  for fiscal year 2005 in part because they were based on data from fiscal  year 2002 that predated the Iraq conflict, which began in March 2003.  While VA originally projected, in its fiscal year 2005 budget formulation,  that it would need to provide care to about 23,500 returnees from Iraq and  Afghanistan, revised projections indicated that it would serve about four  times that number of OIF and OEF veterans, nearly 100,000 returnees for  fiscal year 2005.
Insufficient data on returning OIF and OEF veterans continued to be a  problem in fiscal year 2006 budget formulation, accounting for   $276 million of the budget amendment requesting additional funding for  that year, according to VA officials. VA officials told us they did not have  sufficient data for fiscal year 2006 due to challenges obtaining data needed  to identify these veterans from DOD. VA later determined in late fiscal  year 2005, after the President submitted the fiscal year 2006 budget  request, that it expected to provide care to approximately 87,000 patients  beyond what it had initially projected. According to VA officials, VA now  receives the DOD data it requires to identify OIF/OEF veterans on a  monthly basis rather than the quarterly reports it used to receive.  However, VA has a 2-month lag in projecting costs associated with treating  these veterans at VA.
Insufficient data on whether VA achieved management efficiency savings  may have also contributed to the requests for additional funding. However,  VA’s calculations of management efficiencies obtained in fiscal year 2005  were based on the same approach we found to be inadequate in our earlier  work and therefore are not reliable. Data on whether management  efficiency savings were achieved for fiscal year 2006 were not available  during our work because the fiscal year was not complete. Because we  could not determine if the efficiency savings were achieved, we could not  conclude whether the estimation of savings was incorrect and therefore  may have contributed to the request for additional funding.
section_title: Conclusions
paragraphs: VA, like other federal agencies, faces fiscal challenges as demand for its  services increases while federal resources are constrained. Until recently,  VA had more options to meet this challenge because it could redirect  resources from more expensive inpatient care to less expensive outpatient  care to serve more veteran patients as it modernized the delivery of its  health care services. However, VA’s success in transforming its system to  emphasize outpatient care means that it will have fewer such options to  meet future fiscal challenges. In this context, sound budget formulation,  anticipatory monitoring of budget execution, and the reporting of  informative and timely information to Congress for oversight will become  increasingly important in order to provide high-quality, accessible, and  cost-efficient health care to veterans. Even with these actions, the  challenge of balancing veterans’ access to health care and the availability  of federal resources is likely to be more difficult in the future.
The lessons of the last few years show what can happen when budget  formulation is affected by calculation errors, unrealistic assumptions, and  insufficient data. Whether due to errors in calculating long-term care  patient workloads and costs, unrealistic assumptions about the expected  time frame in which long-term care policies can be changed and lack of  discussion in budget formulation on how such policies would be  implemented, or insufficient data on the number of people who will need  health care, such problems can result in mismatches in projecting service  provision and available resources. Although budget formulation is, by its  nature, based on assumptions and imperfect information, these  assumptions and information can be improved based on experience, and  complemented by reasonable projections for known events that will affect  the agency. Additional measures in VA’s quarterly reports, such as the time  new patients waited for their first health care appointments and measures  of patient workload in addition to unique patients, might help alert  Congress to potential problems VA may face in managing within its budget  in future years. VA’s budget execution and monitoring in fiscal years 2005  and 2006 were perhaps more vigilant than in prior years because VA  expected, from the beginning of fiscal year 2005, that it might experience  difficulties in managing its medical program within available resources.  When, as a result of this monitoring, VA found potential problems in  providing medical care programs within its appropriations, its reporting of  the information to Congress was not sufficiently timely or informative.  More recently, however, VA improved the timeliness of its reporting. VA  submitted its third quarterly report for fiscal year 2006 more quickly after  the end of the quarter than it had the first two quarterly reports.
section_title: Recommendations for Executive Action
paragraphs: To help improve VA’s budget formulation of its medical programs budget  and facilitate congressional oversight, we recommend that the Secretary of  Veterans Affairs take three actions:    Explain the relationship between implementation of proposed policy  changes and the expected timing of when cost savings would be achieved.  Improve its internal controls to provide stronger assurance that  calculations used to formulate policy projections in the President’s budget  submissions are accurate.  Incorporate into VA’s reporting to Congress (1) measures of patient  workload, in addition to unique patients, that would capture the costliness  of patient care; and (2) a measure of waiting times to schedule veterans’  first primary care appointment for new patients.
section_title: Agency Comments
paragraphs: We received comments on a draft of this report from VA (reproduced in  app. II). In commenting on the draft, VA stated that it substantially agreed  with our findings and conclusions and concurred with our  recommendations. VA also described steps it has taken and plans to take  to respond to our recommendations, including steps it took in developing  information for the President’s fiscal year 2007 budget request and in  monitoring the execution of its fiscal year 2006 resources.
We are sending copies of this report to the Secretary of Veterans Affairs  and the Director of the Office of Management and Budget, appropriate  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 contact me at   (202) 512-7101 or at ekstrandl@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: For fiscal years 2005 and 2006, we examined: (1) how the President’s  budget requests for the Department of Veterans Affairs (VA) medical  programs were formulated, (2) how VA monitored and reported to  Congress on its budget execution, and (3) which key factors in the budget  formulation process contributed to the requests for additional funding.  Our review of how VA monitored its fiscal year 2006 budget includes the  first 11 months of the fiscal year because the fiscal year was not over when  we completed our work.
For each of our reporting objectives, we interviewed senior officials in VA  and the Office of Management and Budget (OMB) to determine how the  President’s budget request for VA medical programs for fiscal years 2005  and 2006 was formulated, and how VA monitored and reported on its  budget execution. We interviewed VA officials in Washington, D.C. from  three primary offices responsible for budget issues related to VA’s medical  programs: (1) VA’s Office of the Deputy Assistant Secretary for Budget,   (2) Veterans Health Administration’s (VHA) Office of the Chief Financial  Officer, and (3) VHA’s Office of the Assistant Deputy Under Secretary for  Health for Policy and Planning. We also interviewed senior officials from  OMB responsible for VA budget issues to obtain their perspective on the  President’s budget request for VA’s medical programs and the subsequent  requests for additional funding for fiscal years 2005 and 2006.
For the purposes of our analysis, the President’s budget request for VA  medical programs primarily concerned four appropriation accounts:   (1) medical services, for direct patient care; (2) medical administration, for  administrative oversight and all information technology; (3) medical  facilities, for the maintenance and operation of hospitals and other  structures; and (4) medical research. VA funded nonrecurring  maintenance, for items such as roof repair, through the appropriations for  VA medical programs, and funds for these activities are included in our  analysis. However, we did not include more general construction  funding—i.e., for major construction and minor construction—in our  analysis, as these funds are provided in separate appropriations.
We obtained and analyzed documents and interviewed VA officials about  how each of the three primary projection methods was used in formulating  the budget: (1) an actuarial model; (2) a long-term care approach; and   (3) other methodologies, including adding inflation to actual expenditures.  For each method, we verified information VA officials told us in interviews  by analyzing the documents VA provided. For example, we confirmed that  the actuarial model accounted for about 86 percent of the President’s  budget request for VA medical programs for fiscal year 2005 through our  analysis of documents VA provided.
To determine how VA monitored and reported to Congress on its budget  execution, we conducted interviews and reviewed copies of monthly  reports prepared internally for VA senior managers, monthly reports  prepared for OMB, and quarterly reports prepared for the House and  Senate Appropriations Committees. For monthly reports prepared for VA  senior managers, we reviewed both the March 2005 and the March 2006  monthly reports. We reviewed a monthly report VA prepared for OMB for  the month of April 2006. For the quarterly reports, we reviewed the first,  second, and third quarterly reports VA prepared on the fiscal year 2006  budgets. We analyzed these documents to assess the comprehensiveness  of the reporting information included in these reports.
To identify key factors in the budget formulation process that contributed  to the requests for additional funding, we obtained and analyzed a number  of documents detailing estimated savings from various policy proposals,  calculation errors, and data gaps in the budget formulation process for  fiscal years 2005 and 2006. For example, we analyzed documents obtained  from VA showing calculation errors made in estimating the impact of a  proposed long-term care policy in fiscal year 2006. We also obtained and  analyzed revised estimates of veterans returning from Iraq and  Afghanistan and compared these to data available during the fiscal years  2005 and 2006 budget formulation process. In addition, we reviewed  publicly available documents such as transcripts of VA testimony to the  Senate and House Veterans’ Affairs Committees, the VA’s Medical  Programs Budget Submissions for fiscal years 2005 and 2006, and the  President’s formal requests to Congress for additional funding for VA  medical programs for fiscal years 2005 and 2006.
We assessed the reliability of the information we obtained about how VA  formulated, monitored, and reported on the President’s budget request for  medical programs in several ways. First, we checked the internal  consistency of documents VA provided detailing various budget estimates  for fiscal years 2005 and 2006 and information contained in the President’s  budget request in those years. Second, we interviewed agency officials  knowledgeable about the data used to formulate, monitor, and report on  the budget. We determined that the actuarial model appeared reasonable  for formulating the budget but we did not conduct a separate, detailed  audit of all data inputs into the actuarial model. Third, we relied on our  prior work to identify potential issues about data reliability. For example,  we determined that the assumptions used to project management  efficiencies were inaccurate, based on a report we had previously issued.  We determined that the data we used in our analyses were sufficiently  reliable for the purposes of this report.
We performed our review from October 2005 through September 2006 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Comments from the Department of Veterans Affairs
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Laurie E. Ekstrand, (202) 512-7101 or ekstrandl@gao.gov.
section_title: Acknowledgments
paragraphs: James Musselwhite, Assistant Director; Jennie Apter; Denise Fantone;  Michael Kendix; Dean Koulouris; Tiffany Tanner; Thomas Walke; and Greg  Whitney made key contributions to this report.
section_title: Related GAO Products
paragraphs: VA Long-Term Care: Data Gaps Impede Strategic Planning for and  Oversight of State Veterans’ Nursing Homes. GAO-06-264. Washington,  D.C.: March 31, 2006.
VA Health Care: Preliminary Findings on the Department of Veterans  Affairs Health Care Budget Formulation for Fiscal Years 2005 and  2006. GAO-06-430R. Washington, D.C.: February 6, 2006.
Veterans Affairs: Limited Support for Reported Health Care  Management Efficiency Savings. GAO-06-359R. Washington, D.C.:  February 1, 2006.
VA Long-Term Care: Oversight of Nursing Home Program Impeded by  Data Gaps. GAO-05-65. Washington, D.C.: November 10, 2004.
VA Health Care: Resource Allocations to Medical Centers in the Mid  South Healthcare Network. GAO-04-444. Washington, D.C.: April 21, 2004.
VA Long-Term Care: Service Gaps and Facility Restrictions Limit  Veterans’ Access to Noninstitutional Care. GAO-03-487. Washington, D.C.:  May 9, 2003.
Managing for Results: Efforts to Strengthen the Link Between Resources  and Results at the Veterans Health Administration. GAO-03-10.  Washington, D.C.: December 10, 2002.
VA Health Care: Allocation Changes Would Better Align Resources With  Workload. GAO-02-338. Washington, D.C.: February 28, 2002.