VA's Health Care Budget: Preliminary Observations on Efforts to Improve Tracking of Obligations and Projected Utilization
Published: 2016-02-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: VA projected a funding gap in its fiscal year 2015 medical services appropriation account and obtained temporary authority to use up to $3.3 billion in Veterans Choice Program funding to close this gap. GAO was asked to examine VA's fiscal year 2015 projected funding gap and changes VA has made to help prevent potential funding gaps in future years. This statement is based on GAO's ongoing work and provides preliminary observations on (1) the activities or programs that accounted for VA's fiscal year 2015 projected funding gap in its medical services appropriation account and (2) changes VA has made to prevent potential funding gaps in future years. GAO reviewed data VA provided on its obligations and related documents to determine what activities accounted for the projected funding gap in its fiscal year 2015 medical services appropriation account, as well as the factors that contributed to the projected funding gap. GAO interviewed VA and Office of Management and Budget officials to identify the steps taken to address the projected funding gap. GAO also examined changes VA made to better track obligations and project future budgetary needs. GAO shared the information provided in this statement with VA and incorporated its comments as appropriate.
section_title: What GAO Found
paragraphs: GAO's ongoing work indicates that two areas accounted for the Department of Veterans Affairs' (VA) fiscal year 2015 projected funding gap of $2.75 billion. Specifically,
Higher-than-expected obligations for VA's longstanding care in the community (CIC) program—which allows veterans to obtain care from providers outside of VA facilities—accounted for $2.34 billion or 85 percent of VA's projected funding gap. VA officials expected that the new Veterans Choice Program—which was implemented in fiscal year 2015 and also allows veterans to access care from non-VA providers under certain conditions—would absorb veterans' increased demand for care after public disclosure of long wait times. However, administrative weaknesses slowed enrollment into this new program. The unexpected increase in CIC obligations also exposed VA's weaknesses in estimating costs for CIC services and tracking associated obligations. VA officials did not determine that VA faced a projected funding gap until April 2015—6 months into the fiscal year, after they compared estimated authorizations with estimated obligations for CIC.
Unanticipated obligations for hepatitis C drugs accounted for the remaining portion—$408 million—of VA's projected funding gap. VA did not anticipate in its budget the obligations for these costly, new drugs, which can help cure the disease, because the drugs did not gain approval from the Food and Drug Administration until fiscal year 2014—after VA had already developed its budget estimate for fiscal year 2015. VA officials told GAO that in fiscal year 2015 about 30,000 veterans received these drugs, which cost between $25,000 and $124,000 per treatment regimen.
GAO's ongoing work indicates that VA has taken steps to better track obligations and project future healthcare utilization, but systems deficiencies and budgetary uncertainties remain. Specifically, GAO's preliminary results indicate that VA has taken the following steps:
VA issued a standard operating procedure to help VA medical centers (VAMC) more accurately estimate the costs associated with authorizations for CIC.
VA directed VAMCs to compare their estimated costs for CIC authorizations with estimated obligations for CIC on a monthly basis.
VA allocated funds to each VAMC for CIC and hepatitis C drugs and began tracking VAMCs' obligations with monthly reports. Officials told GAO that once a VAMC has obligated its funds, it would have to request additional funds. VA would determine whether additional funds may be made available. These processes are necessary because continued deficiencies in VA's financial systems present challenges in tracking of obligations.
VA updated the model it uses to inform most of its budget estimates for medical services. It now includes more recent data that reflect increased healthcare utilization among veterans in fiscal year 2015. However, VA officials noted uncertainties remain about the forecasted utilization of the Veterans Choice Program and emerging health care treatments, which could affect the accuracy of the health care budget estimates.

section_title: Letter
paragraphs: I am pleased to submit this statement on preliminary observations from  our ongoing work examining the Department of Veterans Affairs’ (VA)  projected funding gap in its fiscal year 2015 medical services  appropriation account. As you know, VA’s Veterans Health Administration  operates one of the largest health care delivery systems in the nation— serving about 6.6 million patients—and had total budgetary resources of  nearly $51 billion for medical services in fiscal year 2015. In June 2015,  VA requested additional amounts from Congress because it projected a  funding gap of about $3 billion in its medical services appropriation  account. On July 31, 2015, the VA Budget and Choice Improvement Act  provided VA temporary authority to use up to $3.3 billion from the  Veterans Choice Program appropriation for obligations incurred for other  specified medical services, starting May 1, 2015 and ending October 1,  2015, to address its fiscal year 2015 projected funding gap. The  Veterans Choice Program, which was established by statute in 2014,  generally allows veterans to obtain care from a network of providers when  their local VA medical centers (VAMC) cannot provide the services due to  long wait times or the distance from veterans’ homes.
We and others have reported on past challenges VA has faced regarding  the reliability, transparency, and consistency of its budget estimates for  medical services used to support the President’s budget request, as well  as the agency’s ability to accurately track obligations for medical services.
For example, in February 2012, we reported that VA’s estimated savings  from operational improvements for providing medical services—used to  support both the President’s budget request for fiscal year 2012 and VA’s  advance appropriations request for fiscal year 2013—lacked analytical  support or were flawed, raising questions regarding the reliability of the  estimated savings. In addition, according to VA’s 2014 Performance and  Accountability Report, VA has financial system deficiencies and lacks an  adequate process to validate its reported obligations. In light of these  challenges, coupled with VA’s fiscal year 2015 projected funding gap,  members of Congress have questioned VA’s ability to accurately estimate  its budgetary needs for future years and track its obligations for medical  services.
My statement today will discuss our preliminary observations on  1.  the activities or programs that accounted for VA’s fiscal year 2015  projected funding gap in its medical services appropriation account,  and   2.  changes VA has made to prevent potential funding gaps in future  years.
My statement today is based on our ongoing work examining VA’s fiscal  year 2015 projected funding gap in its medical services appropriation  account. To examine the activities or programs that accounted for this  projected funding gap, we reviewed fiscal year 2015 obligation data and  documents provided by VA, including requests for VA’s fiscal year 2015  and 2016 budgets; VA’s requests to Congress for the authority to transfer  funds between its appropriations; internal memos and communications;  and documents related to the projection model used by VA to estimate  the utilization of and associated costs for activities funded through its  medical services appropriation account. We analyzed this information to  examine the activities or programs in VA’s medical services budget that  accounted for the projected funding gap in fiscal year 2015, as well as the  extent to which and reasons that each activity or program contributed to  the projected funding gap. We also interviewed officials from VA and the  Office of Management and Budget (OMB) to identify the steps taken to  address the projected funding gap.
To examine the changes VA has made or is planning to make to help  prevent potential funding gaps in future years, we obtained and reviewed  VA documents, including VA policy memoranda and internal reports, and  interviewed VA officials. We analyzed this information to identify new or  updated processes for projecting future budgetary needs and tracking  obligations. We conducted a data reliability assessment of VA’s fiscal  year 2015 obligation data that we used, which included checks for  missing values and outliers, and interviewed officials from the Office of  Finance within the Veterans Health Administration, who are  knowledgeable about the data. As a result of these steps, we determined  that the data were sufficiently reliable for our objectives. We obtained the  views of VA officials on the information provided in this statement and  incorporated their comments, as appropriate.
The work upon which this statement is based is being conducted in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: VA provides medical services to various veteran populations—including  an aging veteran population and a growing number of younger veterans  returning from the military operations in Afghanistan and Iraq. VA  operates approximately 170 VAMCs, 130 nursing homes, and 1,000  outpatient sites of care. In general, veterans must enroll in VA health care  to receive VA’s medical benefits package—a set of services that includes  a full range of hospital and outpatient services, prescription drugs, and  long-term care services provided in veterans’ own homes and in other  locations in the community.
The majority of veterans enrolled in the VA health care system receive  care in VAMCs and community-based outpatient clinics, but VA may  authorize care through community providers to meet the needs of the  veterans it serves. For example, VA may provide care through its Care in  the Community (CIC) program, such as when a VA facility is unable to  provide certain specialty care services, like cardiology or orthopedics.  CIC services must generally be authorized by a VAMC provider prior to a  veteran receiving care. In addition to the CIC program, VA may also  provide care to veterans through the Veterans Choice Program, which  was established through the Veterans Access, Choice, and Accountability  Act of 2014 (Choice Act), enacted on August 7, 2014. Implemented in  fiscal year 2015, the program generally provides veterans with access to  care by non-VA providers when a VA facility cannot provide an  appointment within 30 days or when veterans reside more than 40 miles  from the nearest VA facility. The Veterans Choice Program is primarily  administered using contractors, who, among other things, are responsible  for establishing nationwide provider networks and scheduling  appointments for veterans. The Choice Act created a separate account  known as the Veterans Choice Fund, which cannot be used to pay for VA  obligations incurred for any other program, such as CIC, without  legislative action. The Choice Act appropriated $10 billion to be  deposited in the Veterans Choice Fund. Amounts deposited in the  Veterans Choice Fund are available until expended and are available for  activities authorized under the Veterans Choice Program. However, the  Veterans Choice Program activities are only authorized through fiscal  year 2017 or until the funds in the Veterans Choice Fund are exhausted,  whichever occurs first.
As part of the President’s request for funding to provide medical services  to veterans, VA develops an annual budget estimate detailing the amount  of services it expects to provide as well as the estimated cost of providing  those services. VA uses the Enrollee Health Care Projection Model  (EHCPM) to develop most of the agency’s estimates of the budgetary  needs to meet the expected demand for VA medical services. Like  many other agencies, VA begins to develop these estimates  approximately 18 months before the start of the fiscal year for which  funds are provided. Different from many agencies, VA’s Veterans Health  Administration receives advance appropriations for health care in addition  to annual appropriations. VA’s EHCPM makes these projections 3 or 4  years into the future for budget purposes based on data from the most  recent fiscal year. In 2012, for example, VA used actual fiscal year 2011  data to develop the budget estimate for fiscal year 2014 and the advance  appropriation estimate for fiscal year 2015. Similarly, in 2013, VA used  actual fiscal year 2012 data to update the budget estimate for fiscal year  2015 and develop the advance appropriation estimate for fiscal year  2016. Given this process, VA’s budget estimates are prepared in the  context of uncertainties about the future—not only about program needs,  but also about future economic conditions, presidential policies, and  congressional actions that may affect the funding needs in the year for  which the estimate is made—which is similar to budgeting practices of  other federal agencies. Further, VA’s budget estimates are typically  revised during the budget formulation process to incorporate legislative  and department priorities as well as in response to successively higher  level of reviews in VA and OMB.
Each year, Congress provides funding for VA health care primarily  through the following appropriation accounts:
Medical Services, which funds, among other things, health care  services provided to eligible veterans and beneficiaries in VA’s  medical centers, outpatient clinic facilities, contract hospitals, state  homes, and outpatient programs on a fee basis. The CIC program is  funded through this appropriation account.
Medical Support and Compliance, which funds, among other things,  the administration of the medical, hospital, nursing home, domiciliary,  construction, supply, and research activities authorized under VA’s  health care system.
Medical Facilities, which funds, among other things, the operation and  maintenance of the Veterans Health Administration’s capital  infrastructure, such as costs associated with nonrecurring  maintenance, utilities, facility repair, laundry services, and  groundskeeping.
section_title: Higher-than-Expected Obligations for the CIC Program and Hepatitis C Drugs Accounted for VA’s Fiscal Year 2015 Projected Funding Gap
subsections: section_title: Higher-than-Expected Obligations for the CIC Program Accounted for 85 Percent of VA’s Projected Fiscal Year 2015 Funding Gap
paragraphs: Our preliminary work suggests that the higher-than-expected obligations  identified by VA in April 2015 for VA’s CIC program accounted for $2.34  billion (or 85 percent) of VA’s projected funding gap of $2.75 billion in  fiscal year 2015. These higher-than-expected obligations for the CIC  program were driven by an increase in utilization of VA medical services  across VA, reflecting, in part, VA’s efforts to improve access to care after  public disclosure of long wait times at VAMCs. VA officials expected that  the Veterans Choice Program would absorb much of the increased  demand from veterans for health care services delivered by non-VA  providers. However, veterans’ utilization of Veterans Choice Program  services was much lower than expected in fiscal year 2015. VA had  estimated that obligations for the Veterans Choice Program in fiscal year  2015 would be $3.2 billion, but actual obligations totaled only $413  million. Instead, VA provided a greater amount of services through the  CIC program, resulting in total obligations of $10.1 billion, which VA  officials stated were much higher than expected for that program in fiscal  year 2015. According to VA officials, the lower-than-expected utilization  of the Veterans Choice Program in fiscal year 2015 was due, in part, to  administrative weaknesses, such as provider networks that had not been  fully established, that slowed enrollment in the program and that VAMC  staff lacked guidance on when to refer veterans to the program.
The unexpected increase in CIC obligations in fiscal year 2015 exposed  weaknesses in VA’s ability to estimate costs for CIC services and track  associated obligations. While VA officials first became concerned that  CIC obligations might be significantly higher than projected in January  2015, they did not determine that VA faced a projected funding gap until  April 2015—6 months into the fiscal year. They made this determination  after they compared authorizations in the Fee Basis Claims System  (FBCS)—VA’s system for recording CIC authorizations and estimating  costs for this care—with obligations in the Financial Management System  (FMS)—the centralized financial management system VA uses to track all  of its obligations, including those for medical services. In its 2015 Agency  Financial Report (AFR), VA’s independent public auditor identified the  following issues as contributing to a material weakness in estimating  costs for CIC services and tracking CIC obligations:
VAMCs individually estimate costs for each CIC authorization and  record these estimates in FBCS. This approach leads to  inconsistencies, because each VAMC may use different  methodologies to estimate the costs they record. Having more  accurate cost estimates for CIC authorizations is important to help  ensure that VA is aware of the amount of money it must obligate for  CIC services.
VAMCs do not consistently adjust estimated costs associated with  authorizations for CIC services in a timely manner to ensure greater  accuracy, and they do not perform a “look-back” analysis of historical  obligations to validate the reasonableness of estimated costs.  Furthermore, centralized, consolidated, and consistent monitoring of  CIC authorizations is not performed.
FBCS is not fully integrated with VA’s systems for recording and  tracking the department’s obligations. Notably, the estimated costs of  CIC authorizations recorded in FBCS are not automatically  transmitted to VA’s Integrated Funds Distribution, Control Point  Activity, Accounting, and Procurement (IFCAP) system, a  procurement and accounting system used to send budgetary  information, such as obligations, to FMS. According to VA officials,  because FBCS and IFCAP are not integrated, at the beginning of  each month, VAMC staff must record in IFCAP estimated obligations  for outpatient CIC services, and they use historical obligations for this  purpose. Depending on the VAMC, these estimated obligations may  be entered as a single lump sum covering all outpatient care or as  separate estimated obligations for each category of outpatient care,  such as radiology. Regardless of how they are recorded, the  estimated obligations recorded in IFCAP are often inconsistent with  the estimated costs of CIC authorizations recorded in FBCS. In fiscal  year 2015, the estimated obligations that VAMCs recorded in IFCAP  were significantly lower than the estimated costs of outpatient CIC  authorizations recorded in FBCS. VA officials told us that they did not  determine a projected funding gap until April 2015, because they did  not complete their analysis of comparing estimated obligations with  estimated costs until then.
In addition, the Chief Business Office (CBO) within the Veterans Health  Administration, which is responsible for developing administrative  processes, policy, regulations, and directives associated with the CIC  program, had not developed and implemented standardized and  comprehensive policies for VAMCs, regional networks, and the office  itself to follow when estimating costs for CIC authorizations and for  monitoring authorizations and associated obligations. This contributed  to the material weaknesses the independent public auditor identified in  the AFR. The AFR and VA officials we interviewed stated that because  CIC was consolidated under CBO in fiscal year 2015 pursuant to the  Choice Act, CBO did not have adequate time to implement efficient and  effective procedures for monitoring CIC obligations.
To address the fiscal year 2015 projected funding gap, on July 31, 2015,  VA obtained temporary authority to use up to $3.3 billion in Veterans  Choice Program funds for obligations incurred for medical services from  non-VA providers, whether authorized under the Veterans Choice  Program or CIC, starting May 1, 2015 and ending October 1, 2015.
Based on our preliminary work, Table 1 shows the sequence of events  that led to VA’s request for and approval of additional budget authority for  fiscal year 2015.
section_title: Unanticipated Obligations for Hepatitis C Drugs Contributed to the Remaining Portion of VA’s Projected Fiscal Year 2015 Funding Gap
paragraphs: Our preliminary work also suggests that unexpected obligations for new  hepatitis C drugs accounted for $0.41 billion of VA’s projected funding  gap of $2.75 billion in fiscal year 2015. Although VA estimated that  obligations in this category would be $0.7 billion that year, actual  obligations totaled about $1.2 billion.
VA officials told us that VA did not anticipate in its budget the obligations  for new hepatitis C drugs —which help cure the disease—because the  drugs were not approved by the Food and Drug Administration until fiscal  year 2014, after VA had already developed its budget estimate for fiscal  year 2015. The new drugs costs between $25,000 and $124,000 per  treatment regimen, and according to VA officials demand for the  treatment was high. Officials told us that about 30,000 veterans  received these drugs in fiscal year 2015.
In October 2014, VA reprogrammed $0.7 billion within its medical  services appropriation account to cover projected obligations for the new  hepatitis C drugs, after VA became aware of the drugs’ approval.  However, in January 2015, VA officials recognized that obligations for the  new hepatitis C drugs would be significantly higher by year end than they  expected. VA officials told us that they assessed next steps and then  limited access to the drugs to those veterans with the most severe cases  of hepatitis C. In June 2015, VA requested statutory authority to transfer  funds dedicated to the Veterans Choice Program to VA’s medical  services appropriation account to cover the projected funding gap.
section_title: VA has Taken Steps to Better Track Obligations and Project Health Care Utilization, but Systems Deficiencies and Budgeting Uncertainties Remain
subsections: section_title: VA Has Taken Steps to Better Track Obligations, but Deficiencies Remain in the Systems for Tracking Obligations
paragraphs: Our preliminary work indicates that VA has developed new processes to  prevent funding gaps for fiscal year 2016 and future years by improving  its ability to track obligations for CIC services and hepatitis C drugs.
In August 2015, VA issued a standard operating procedure to all  VAMCs for recording estimated costs for inpatient and outpatient CIC  in FBCS. The procedure, among other things, stipulates that VAMCs  are to base estimated costs on historical cost data provided by VA. In  addition, VA developed a software patch—released in December  2015 to all VAMCs—that automatically generates estimated costs for  CIC authorizations, thereby eliminating the need for VAMC staff to  individually estimate costs and record them in FBCS. According to VA  officials, these changes should result in more accurate estimated  costs for CIC authorizations. However, VA officials told us that  accurately estimating the cost of CIC authorizations is challenging  because of several unknown factors, such as the number of times a  veteran may seek treatment for a recurring condition.
In November 2015, VA allocated funds for CIC and hepatitis C drugs  to each VAMC. In addition, VA officials told us that to identify  VAMCs that may be at risk for exhausting their funds before the end  of the fiscal year, VA began tracking VAMCs’ obligations for CIC and  hepatitis C drugs through monthly reports. Officials from the Office of  Finance within the Veterans Health Administration told us that once a  VAMC had obligated its CIC and hepatitis C drug funds, it would have  to request additional funds from VA. VA would, in turn, evaluate the  validity of a VAMC’s request and determine whether additional funds  may be made available. This practice could limit veterans’ access to  CIC services or hepatitis C drugs in some locations. Officials told us  that these steps are intended to reduce the risk of VAMCs obligating  more funds than VA’s budgetary resources allow.
In November 2015, VA also issued a policy requiring VAMCs to  identify and report on potentially inaccurate estimated costs for CIC  authorizations recorded in FBCS and any discrepancies between  estimated costs for CIC authorizations recorded in FBCS and the  amount of estimated obligations recorded in FMS. According to VA  officials, these discrepancies may signal a risk of VA under obligating  funds for CIC, leaving VA potentially unable to pay for authorized  care. VA’s policy also requires VAMCs to address concerns identified  by VAMCs in these reports—such as adjusting unreasonably low  estimated costs for CIC authorizations and unreasonably low  estimated obligations, to make the estimates more accurate. Under  VA’s new policy, network directors are required to certify monthly that  the reports have been reviewed and concerns addressed.
VA officials told us that these new processes are necessary to help  prevent future funding gaps because of the deficiencies in VA’s systems  for tracking obligations, which we have described previously.
Officials also told us that VA is exploring options for replacing IFCAP and  FMS, which officials describe as antiquated systems based on outdated  technology, and the department has developed a rough timeline and  estimate of budgetary needs to make these changes. Officials told us that  the timeline and cost estimate would be refined once concrete plans for  replacing IFCAP and FMS are developed. Officials told us that replacing  IFCAP and FMS is challenging due to the scope of the project and the  requirement that the replacement system interface with various VA legacy  systems, such as the Veterans Health Information Systems and  Technology Architecture, VA’s system containing veterans’ electronic  health records. However, as we have previously reported, VA has made  previous attempts to update IFCAP and FMS that were unsuccessful. In  October 2009, we attributed these failures to the lack of a reliable  implementation schedule and cost estimates, among other factors, and  made several recommendations aimed at improving program  management.
section_title: VA is Using More Recent Data to More Accurately Project Future Health Care Utilization, but Budgetary Uncertainties Remain
paragraphs: Our preliminary work indicates that VA updated its EHCPM to include  data from the first 6 months of fiscal year 2015, reflecting increased  health care utilization in that year, which VA officials told us will inform  VA’s budget estimate for fiscal year 2017 and advance appropriations  request for fiscal year 2018. Without this change, VA would have used  actual data from fiscal year 2014 to make its budget estimate and inform  the President’s budget request for fiscal years 2017 and 2018.
However, as we have previously reported, while the EHCPM projection  informs most of VA’s budget estimate, the amount of the estimate is  determined by several factors, including the President’s priorities.  Historically, the final budget estimate for VA has consistently been lower  than the amount projected for modeled services. VA officials told us that  they expect any difference between the fiscal year 2017 budget estimate  and the amount projected by VA’s model to be made up by greater  utilization of the Veterans Choice Program. However, VA’s authority to  use Veterans Choice Program funds is only available through fiscal year  2017 or until the funds are exhausted, whichever occurs first.
VA has also taken steps to help increase utilization of the Veterans  Choice Program. VA issued policy memoranda to VAMCs in May and  October 2015, requiring them to refer veterans to the program if timely  care cannot be delivered by a VAMC, rather than authorizing care  through the CIC program. With statutory authority, VA has also loosened  restrictions on veterans’ use of the Veterans Choice Program, eliminating  the requirement that veterans must be enrolled in the VA health care  system by August 2014 in order to receive care through the program.  While data from November 2015 indicate that utilization of care under the  Veterans Choice Program has increased, VA officials expressed  concerns that utilization would not reach the levels projected for fiscal  year 2016 because of continuing weaknesses in implementing the  program. For example, in November 2015, VA’s Office of Compliance and  Business Integrity identified extensive noncompliance among VAMCs  with VA’s policies for implementing the Veterans Choice Program and  recommended training for VAMC staff responsible for implementing the  program. The office also recommended that VA establish internal  controls to ensure compliance with VA’s policies. As of January 2016, VA  had not completed a plan for establishing these internal controls.
Like other health care payers, VA faces uncertainties estimating the cost  of emerging health care treatments—such as costly drugs to treat chronic  diseases affecting veterans. VA, like other federal agencies, prepares its  budget estimate 18 months in advance of the start of the fiscal year for  which funds are provided. At the time VA develops its budget estimate, it  may not have enough information to estimate the likely costs for health  care services or these treatments with reasonable accuracy. However, by  establishing appropriate internal controls, VA can help reduce the risks  associated with the weaknesses in its budgetary projections and  monitoring.
Chairman Miller, Ranking Member Brown, and Members of the  Committee, this concludes my statement for the record.
section_title: GAO Contacts & Staff Acknowledgments
paragraphs: If you or your staff members have any questions concerning this  statement, please contact Randall B. Williamson, Director, Health Care,  at 202-512-7114 or williamsonr@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this statement. GAO staff who made key contributions to this  statement include Rashmi Agarwal, Assistant Director; Luke Baron;  Krister Friday; Jacquelyn Hamilton; and Michael Zose.
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