VA Health Care: Challenges in Budget Formulation and Issues Surrounding the Proposal for Advance Appropriations
Published: 2009-04-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Veterans Affairs (VA) estimates it will provide health care to 5.8 million patients with appropriations of about $41 billion in fiscal year 2009. It provides a range of services, including primary care, outpatient and inpatient services, long-term care, and prescription drugs. VA formulates its health care budget by developing annual estimates of its likely spending for all its health care programs and services, and includes these estimates in its annual congressional budget justification. GAO was asked to discuss budgeting for VA health care. As agreed, this statement addresses (1) challenges VA faces in formulating its health care budget and (2) issues surrounding the possibility of providing advance appropriations for VA health care. This testimony is based on prior GAO work, including VA Health Care: Budget Formulation and Reporting on Budget Execution Need Improvement (GAO-06-958) (Sept. 2006); VA Health Care: Long-Term Care Strategic Planning and Budgeting Need Improvement (GAO-09-145) (Jan. 2009); and VA Health Care: Challenges in Budget Formulation and Execution (GAO-09-459T) (Mar. 2009); and on GAO reviews of budgets, budget resolutions, and related legislative documents. We discussed the contents of this statement with VA officials.
section_title: What GAO Found
paragraphs: GAO's prior work highlights some of the challenges VA faces in formulating its budget: obtaining sufficient data for useful budget projections, making accurate calculations, and making realistic assumptions. For example, GAO's 2006 report on VA's overall health care budget found that VA underestimated the cost of serving veterans returning from military operations in Iraq and Afghanistan. According to VA officials, the agency did not have sufficient data from the Department of Defense, but VA subsequently began receiving the needed data monthly rather than quarterly. In addition, VA made calculation errors when estimating the effect of its proposed fiscal year 2006 nursing home policy, and this contributed to requests for supplemental funding. GAO recommended that VA strengthen its internal controls to better ensure the accuracy of calculations used to prepare budget requests. VA agreed and, for its fiscal year 2009 budget justification, had an independent actuarial firm validate savings estimates from proposals to increase fees for certain types of health care coverage. In January 2009, GAO found that VA's assumptions about the cost of providing long-term care appeared unreliable given that assumed cost increases were lower than VA's recent spending experience and guidance provided by the Office of Management and Budget. GAO recommended that VA use assumptions consistent with recent experience or report the rationale for alternative cost assumptions. In a March 23, 2009, letter to GAO, VA stated that it concurred and would implement this recommendation for future budget submissions. The provision of advance appropriations would "use up" discretionary budget authority for the next year and so limit Congress's flexibility to respond to changing priorities and needs. While providing funds for 2 years in a single appropriations act provides certainty about some funds, the longer projection period increases the uncertainty of the data and projections used. If VA is expected to submit its budget proposal for health care for 2 years, the lead time for the second year would be 30 months. This additional lead time increases the uncertainty of the estimates and could worsen the challenges VA already faces when formulating its health care budget. Given the challenges VA faces in formulating its health care budget and the changing nature of health care, proposals to change the availability of the appropriations it receives deserve careful scrutiny. Providing advance appropriations will not mitigate or solve the problems we have reported regarding data, calculations, or assumptions in developing VA's health care budget. Nor will it address any link between cost growth and program design. Congressional oversight will continue to be critical.

section_title: Letter
paragraphs: We are pleased to be here today as the committee considers issues in  budgeting and funding for the Department of Veterans Affairs (VA) health  care programs. These programs form one of the largest health care  delivery systems in the nation and provide, for eligible veterans, a range of  services, including preventive and primary health care, outpatient and  inpatient services, long-term care, and prescription drugs. VA estimated  that in fiscal year 2009, its health care programs would serve 5.8 million  patients with appropriations of about $41 billion.
VA health care programs are funded through the annual appropriations  process along with other areas of critical importance and high priority to  the nation, including national defense, homeland security, transportation,  energy and natural resources, education, and public health. VA formulates  its health care budget by developing annual estimates of its likely spending  for all of its health care programs and services. This is by its very nature  challenging, as it is based on assumptions and imperfect information on  the health care services VA expects to provide. For example, VA is  responsible for anticipating the service needs of two very different  populations—an aging veteran population and a growing number of  veterans returning from the military operations in Afghanistan and Iraq— calculating the future costs associated with providing VA services, and  using these factors to develop the department’s budget request submitted  to the Office of Management and Budget (OMB). VA provides its annual  congressional budget justification to the appropriations subcommittees,  providing additional explanation for the President’s budget request.
VA uses an actuarial model to develop its annual budget estimates for  most of its health care programs, including inpatient acute surgery,  outpatient care, and prescription drugs. This model estimates future VA  health care costs by using projections of veterans’ demand for VA’s health  care services as well as cost estimates associated with particular health  care services. In fiscal year 2006, VA used the actuarial model to estimate  about 86 percent of its projected health care spending for that year. VA  uses a separate approach to project long-term care demands and costs,  which accounted for about 10 percent of VA’s estimated health care  spending for fiscal year 2006. VA used other approaches to project demand  and costs for the remaining 4 percent of the medical programs budget  request for fiscal year 2006.
In 2006 and 2009, we issued reports that examined some of the challenges  VA faces in budget formulation; these reports pertained to VA’s overall  health care budget as well as portions of its budget that pertain to long- term care. We also testified in March 2009 before the House  Subcommittee on Military Construction, Veterans Affairs, and Related  Agencies, Committee on Appropriations, about challenges VA faces in  formulating and executing its budget. You asked us to discuss budgeting  for VA health care. As agreed, today we will discuss (1) challenges VA  faces in formulating its health care budget and (2) some issues  surrounding the possibility of providing advance appropriations for VA  health care.
For our 2006 report on VA’s overall health care budget for fiscal years 2005  and 2006, we analyzed and reviewed budget documents, including VA’s  budget justifications for health care programs for fiscal years 2005 and  2006, and interviewed VA officials responsible for VA health care budget  issues and for developing budget projections. In addition, from August to  September 2008, we reviewed VA documents to determine whether VA had  implemented the recommendations we made in our 2006 report. For our  2009 report on VA’s long-term care budget, we reviewed VA’s fiscal year  2009 congressional budget justification and related documents. We also  interviewed VA officials. VA did not initially comment on the  recommendations in our 2009 report, but said it would provide an action  plan. VA provided this action plan in a March 23, 2009, letter to GAO. For  this statement we reviewed VA’s letter and action plan. For the discussion  of appropriations and budgeting we reviewed previous GAO work,  budgets, budget resolutions, and related legislative documents.
We conducted our work for these performance audits in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives. We discussed the contents of this statement with VA  officials.
subsections: section_title: VA Faces Challenges in Formulating Its Health Care Budget
paragraphs: Our prior work highlights some of the challenges VA faces in formulating  its budget: obtaining sufficient data for useful budget projections, making  accurate calculations, and making realistic assumptions. Our 2006 report  on VA’s overall health care budget found that VA underestimated the cost  of serving veterans returning from military operations in Afghanistan and  Iraq, in part because estimates for fiscal year 2005 were based on data that  largely predated the Iraq conflict. In fiscal year 2006, according to VA, the  agency again underestimated the cost of serving these veterans because it  did not have sufficient data due to challenges obtaining data needed to  identify these veterans from the Department of Defense (DOD). According  to VA officials, the agency subsequently began receiving the DOD data  needed to identify these veterans on a monthly basis rather than quarterly.
We also reported challenges VA faces in making accurate calculations  during budget formulation. VA made computation errors when estimating  the effect of its proposed fiscal year 2006 nursing home policy, and this  also contributed to requests for supplemental funding. We found that VA  underestimated workload—that is, the amount of care VA provides—and  the costs of providing care in all three of its nursing home settings. VA  officials said that the errors 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. In 2006, we recommended that VA  strengthen its internal controls to better ensure the accuracy of  calculations it uses in preparing budget requests. VA agreed with and  implemented this recommendation for its fiscal year 2009 budget  justification by having an independent actuarial firm validate the savings  estimates from proposals to increase fees for certain types of health care  coverage.
Our 2006 report on VA’s overall health care budget also illustrated that VA  faces challenges making realistic assumptions about the budgetary impact  of its proposed policies. VA made unrealistic assumptions about how  quickly the department would realize savings from proposed changes in its  nursing home policy. We reported the President’s requests for additional  funding for VA’s medical programs for fiscal years 2005 and 2006 were in  part due to these unrealistic assumptions. We recommended that VA  improve its budget formulation processes by explaining in its budget  justifications the relationship between the implementation of proposed  policy changes and the expected timing of cost savings to be achieved. VA  agreed and acted on this recommendation in its fiscal year 2009 budget  justification.
In January 2009, we found that VA’s spending estimate in its fiscal year  2009 budget justification for noninstitutional long-term care services  appeared unreliable, in part because this spending estimate was based on  a workload projection that appeared to be unrealistically high in relation  to recent VA experience. VA projected that its workload for  noninstitutional long-term care would increase 38 percent from fiscal year  2008 to fiscal year 2009. VA made this projection even though from fiscal  year 2006 to fiscal year 2007—the most recent year for which workload  data are available—actual workload for these services decreased about   5 percent. In its fiscal year 2009 budget justification, VA did not provide  information regarding its plans for how it would increase noninstitutional  workload 38 percent from fiscal year 2008 to fiscal year 2009. We  recommended that VA use workload projections in future budget  justifications that are consistent with VA’s recent experience with  noninstitutional long-term care spending or report the rationale for using  alternative projections. In its March 23, 2009, letter to GAO, VA stated it  concurs with this recommendation and will implement our  recommendation in future budget submissions.
In January 2009, we also reported that VA may have underestimated its  nursing home spending and noninstitutional long-term care spending for  fiscal year 2009 because it used a cost assumption that appeared  unrealistically low, given recent VA experience and economic forecasts of  health care cost increases. For example, VA based its nursing home  spending estimate on an assumption that the cost of providing a day of  nursing home care would increase 2.5 percent from fiscal year 2008 to  fiscal year 2009. However, from fiscal year 2006 to fiscal year 2007—the  most recent year for which actual cost data are available—these costs  increased approximately 5.5 percent. VA’s 2.5 percent cost-increase  estimate is also less than the 3.8 percent inflation rate for medical services  that OMB provided in guidance to VA to help with its budget estimates. We  recommended that in future budget justifications, VA use cost  assumptions for estimating both nursing home and noninstitutional long- term care spending that are consistent with VA’s recent experience or  report the rationale for alternative cost assumptions. In its March 23, 2009,  letter to GAO, VA stated it concurs with our recommendations and will  implement these recommendations in future budget submissions.
section_title: Issues in Changing the Appropriations for VA Health Care
paragraphs: Consideration of any proposal to change the availability of the  appropriations VA receives for health care should take into account the  current structure of the federal budget, the congressional budget  process—including budget enforcement—and the nature of the nation’s  fiscal challenge. The impact of any change on congressional flexibility and  oversight also should be considered.
In the federal budget, spending is divided into two main categories:   (1) direct spending, or spending that flows directly from authorizing  legislation—this spending is often referred to as “mandatory spending”— and (2) discretionary spending, defined as spending that is provided in  appropriations acts.
It is in the annual appropriations process that the Congress considers,  debates, and makes decisions about the competing claims for federal  resources. Citizens look to the federal government for action in a wide  range of areas. Congress is confronted every year with claims that have  merit but which in total exceed the amount the Congress believes  appropriate to spend. It is not an easy process—but it is an important  exercise of its Constitutional power of the purse.
Special treatment for spending in one area—either through separate  spending caps or guaranteed minimums or exemption from budget  enforcement rules—may serve to protect that area from competition with  other areas for finite resources. The allocation of funds across federal  activities is not the only thing Congress determines as part of the annual  appropriations process. It also specifies the purposes for which funds may  be used and the length of time for which funds are available. Further,  annually enacted appropriations have long been a basic means of exerting  and enforcing congressional policy.
The review of agency funding requests often provides the context for the  conduct of oversight. For example, in the annual review of the VA health  care budget, increasing costs may prompt discussion about causes and  possible responses—and lead to changes in the programs or in funding  levels. VA health care offers illustrations of and insights into growing  health care costs. This takes on special significance since—as we and  others have reported—the nation’s long-term fiscal challenge is driven  largely by the rapid growth in health care costs.
Both the Congress and the agencies have expressed frustration with the  budget and appropriations process. Some members of Congress have said  the process is too lengthy. The public often finds the debate confusing.  Agencies find it burdensome and time consuming. And the frequent need  for continuing resolutions (CR) has been a source of frustration both in  the Congress and in agencies. Although there is frustration with the  current process, changes should be considered carefully. The current  process is, in part, the cumulative result of many changes made to address  previous problems. This argues for spending time both defining what the  problem(s) to be solved are and analyzing the impact of any proposed  change(s).
In considering issues surrounding the possibility of providing advance  appropriations for VA health care—or any other program—it is important  to recognize that not all funds provided through the existing  appropriations process expire at the end of a single fiscal year. Congress  routinely provides multi-year appropriations for accounts or projects  within accounts when it deems it makes sense to do so. Multi-year funds  are funds provided in one year that are available for obligation beyond the  end of that fiscal year. So, for example, multi-year funds provided in the  fiscal year 2010 appropriations act would be available in fiscal year 2010  and remain available for some specified number of future years.  Unobligated balances from such multi-year funds may be carried over by  the agency into the next fiscal year—regardless of whether the agency is  operating under a continuing resolution or a new appropriations act. For  example, in fiscal year 2009 about $3 billion of approximately $41 billion  for VA health care programs was made available for two years. Congress  also provides agencies—including VA—some authority to move funds  between appropriations accounts. This transfer authority provides  flexibility to respond to changing circumstances.
Advance appropriations are different from multi-year appropriations.  Whereas multi-year appropriations are available in the year in which they  are provided, advance appropriations represent budget authority that  becomes available one or more fiscal years after the fiscal year covered by  the appropriations act in which they are provided. So, for example,  advance appropriations provided in the fiscal year 2010 appropriations act  would consist of funds that would first be available for obligation in fiscal  year 2011 or later.
In considering the proposal to provide advance appropriations, one issue  is the impact on congressional flexibility and its ability to consider  competing demands for limited federal funds. Although appropriations are  made on an annual cycle, both the President and the Congress look  beyond a single year in setting spending targets. The current  administration’s budget presents spending totals for ten fiscal years. The  concurrent Budget Resolution—which represents Congress’s overall fiscal  plan—includes discretionary spending totals for the budget year and each  of the four future years. The provision of advance appropriations would  “use up” discretionary budget authority for the next year. In doing so it  limits Congress’s flexibility to respond to changing priorities and needs  and reduces the amount available for other purposes in the next year.
Another issue would be how and when the limits on such advance  appropriations would be set. Currently the concurrent Budget Resolution  both caps the total amount that can be provided through advance  appropriations and identifies the agencies or programs which may be  provided such funding. It does not specify how the total should be  allocated among those agencies.
A related question is what share of VA health care funding would be  provided in advance appropriations. Is the intent to provide a full  appropriation for both years in the single appropriations act? This would  in effect enact the entire appropriation for both the budget year and the  following fiscal year at the same time. If appropriations for VA health care  were enacted in two-year increments, under what conditions would there  be changes in funding in the second year? Would the presumption be that  there would be no action in that second year except under unusual  circumstances? Or is the presumption that there would be additional funds  provided? These questions become critical if Congress decides to provide  all or most of VA health care’s funding in advance. Even if only a portion  of VA health care funding is to be provided in advance appropriations,  Congress will need to determine what that share should be and how it  should be allocated across VA’s medical accounts.
While providing funds for 2 years in a single appropriations act provides  certainty about some funds, the longer projection period increases the  uncertainty of the data and projections used. Under the current annual  appropriations cycle, agencies begin budget formulation at least   18 months before the relevant fiscal year begins. If VA is expected to  submit its budget proposal for health care for both years at once, the lead  time for the second year would be 30 months. This additional lead time  increases the uncertainty of the estimates and could worsen the challenges  VA faces when formulating its health care budget.
section_title: Concluding Observations
paragraphs: Given the challenges VA faces in formulating its health care budget and the  changing nature of health care, proposals to change the availability of the  appropriations it receives deserve careful scrutiny. Providing advance  appropriations will not mitigate or solve the problems noted above  regarding data, calculations, or assumptions in developing VA’s health care  budget. Nor will it address any link between cost growth and program  design. Congressional oversight will continue to be critical.
No one would suggest that the current budget and appropriations process  is perfect. However, it is important to recognize that no process will make  the difficult choices and tradeoffs Congress faces easy. If VA is to receive  advance appropriations for health care, the amount of discretionary  spending available for Congress to allocate to other federal activities in  that year will be reduced. In addition, providing advance appropriations  for VA health care will not resolve the problems we have identified in VA’s  budget formulation.
Mr. Chairman, this concludes our prepared remarks. We would be happy  to answer any questions you or other members of the Committee may  have.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: For more information regarding this testimony, please contact Randall  B.Williamson at (202) 512-7114 or williamsonr@gao.gov or Susan J. Irving  at (202) 512-8288 or irvings@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. In addition to the contributors named above, Carol Henn  and James C. Musselwhite, Assistant Directors; Katherine L. Amoroso,  Helen Desaulniers, Felicia M. Lopez, Julie Matta, Lisa Motley, Sheila  Rajabiun, Steve Robblee, and Timothy Walker made key contributions to  this testimony.
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