VA Health Care: Changes Needed to Improve Resource Allocation to Health Care Networks
Published: 2002-05-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Veterans Affairs (VA) spent $21 billion in fiscal year 2001 to treat 3.8 million veterans--most of whom had service-connected disabilities or low incomes. Since 1997, VA has used the Veterans Equitable Resource Allocation (VERA) system to allocate most of its medical care appropriation.
section_title: What GAO Found
paragraphs: GAO found that VERA has had a substantial impact on network resource allocations and workloads. VERA shifted $921 million from networks primarily in the northeast and midwest to networks in the south and west in fiscal year 2001. VERA, along with other VA initiatives, has provided an incentive for networks to serve more veterans. In GAO's view, VERA's overall design is a reasonable approach to allocating resources according to workloads. It provides a predetermined dollar amount per veteran served to each of VA's 22 health care networks. This amount varies depending upon the health care needs of the veteran served and local cost differences. However, GAO identified weaknesses in VERA's implementation. First, VERA excludes about one fifth of VA's workload in determining each network's allocation. Second, VERA does not account well for cost differences among networks resulting from variation in their patients' health care needs. Third, the process for providing supplemental resources to networks through VA's National Reserve Fund has not been used to analyze how the need for such resources is caused by potential problems in VERA's allocation, network inefficiency, or other factors. This testimony is based on an April report (GAO-02-338).

section_title: Letter
paragraphs: We are pleased to be here today to discuss the Department of Veterans  Affairs’ (VA) health care resource allocation system and how it could be  improved.  In fiscal year 2001, VA used the Veterans Equitable Resource  Allocation (VERA) system to allocate $17.8 billion of its $20.3 billion health  care budget to 22 regional health care networks.  Networks allocate the  resources they receive from VERA to their respective facilities.  VERA was  intended to equitably allocate resources by providing comparable  resources to networks with comparable workloads.  Before VERA was  implemented, resources were allocated to facilities primarily on the basis  of their historical expenditures.  By aligning resources with workloads,  VERA shifted approximately $921 million among VA’s networks in fiscal  year 2001 compared to what the allocations would have been under the  previous allocation system.
In my remarks today, I will briefly discuss our conclusion that VERA’s  design is reasonable and highlight our recommendations for improving its  implementation to better align resources with workload.  My comments are  based on a report we issued on February 28, 2002.  To examine these  issues, we reviewed VA documents and consultants’ reports on VERA’s  original design, proposed VERA changes, and actual VERA changes.  We  also interviewed VA management officials in headquarters and eight  networks, conducted site visits in five VA health care networks,  interviewed VA and other public and private sector health care resource  allocation experts, and analyzed current literature on health care resource  allocation.  We also relied on our more than 10 years of work reviewing VA’s  resource allocation process in addition to other health care financing  work.  In addition, we analyzed changes that have been made in resources  allocated among the networks since VERA was implemented and the effect  of making adjustments to VERA.
In summary, VERA’s design is reasonable for equitably allocating resources,  but certain improvements to VERA’s implementation could result in a  better allocation of comparable resources for comparable workloads.   VERA’s design is reasonable because allocations are based primarily on  network workload and adjustments are made for factors beyond the  control of network management.  These include the health care needs of  veterans and certain local cost differences.  In addition, VERA’s design  protects patients from the effects of network budget shortfalls.  But  implementation weaknesses we identified result in approximately $200  million annually that could be reallocated to better align network resources  with workloads.  First, VERA’s measurement of network workload is not as  accurate as it could be to determine each network’s allocation because  VERA excludes most veterans with higher incomes who do not have  service-connected disabilities—about one-fifth of VA’s workload.  Second,  VERA does not adjust as accurately as it could for cost differences among  networks that result from differences in patients’ health care needs or case  mix across networks.  We also found that VA has not analyzed whether the  networks’ need for supplemental resources—provided through the  National Reserve Fund—is the result of potential problems in VERA,  network inefficiency, or other factors.  Without such information, VA can  neither ensure the appropriateness of supplemental funding nor take  corrective action.
We made recommendations to correct weaknesses in VERA’s workload and  case-mix measures.  Although VA concurred with all our recommendations,  in commenting on a draft of our report, VA stated that it planned to wait for  further study before determining how and whether to change VERA for  fiscal year 2003.  Given the already extensive study by VA and others of  VERA’s workload and case-mix measures, we believe VA should implement  these changes for fiscal year 2003.  In addition, VA’s response to our  recommendation regarding the supplemental funding process does not  fully address our recommendation because it does not provide information  on the relative contributions of specific factors to network shortfalls such  as network inefficiency, imperfections in VERA, and other factors.
subsections: section_title: Background
paragraphs: Before VERA was implemented during fiscal year 1997, VA based its  allocation of resources primarily on facilities’ historical expenditures. By  the 1990s, the share of the veteran population in the Northeast and Midwest  declined while the share of the veteran population in the South and West  increased.  However, resources continued to be allocated based on  historical expenditures, resulting in inequitable resource allocations to  some VA networks.  VERA was intended to correct these regional  inequities.
VERA allocates nearly 90 percent of VA’s medical care appropriation.   These allocations are for six categories of expenses: complex patient care,  basic patient care, equipment, nonrecurring maintenance, education  support, and research support.  Resources for the first four categories are  allocated on the basis of patient workload and account for approximately  96 percent of the resources VERA allocates.  Allocations for education  support and research support are based on workload measures specific to  those activities within the VA health care system.
As VERA was being implemented, two major changes in VA health care  occurred as a result of the Veterans’ Health Care Eligibility Reform Act of  1996.  First, by eliminating certain restrictions preventing VA from treating  some veterans in outpatient care settings, the act allowed VA to begin  delivering care, where appropriate, in outpatient rather than inpatient  settings—a practice consistent with care delivery throughout the health  care industry.  Second, VA introduced an enrollment system to manage  access to VA health care in relation to available resources.  As required by  the act, VA established seven priority categories for enrollment.  Higher  priority for enrollment is given to veterans with service-connected  disabilities, lower incomes, or other statuses such as former prisoners of  war.  Priority 7, the lowest priority level, is given primarily to veterans  without a service-connected disability, who have higher incomes.
section_title: VERA’s Design Is a ReasonableApproach to Resource Allocation
paragraphs: VERA’s design is a reasonable approach to resource allocation and has  helped promote more comparable resource allocations for comparable  workloads in VA.   Consistent with the literature and expert views on  resource allocation, VERA allocates resources primarily on the basis of  network patient workload, attempts to adjust network resources for  factors beyond the control of network management, and provides  protection to patients against network budget shortfalls.  As a result, VERA  has shifted substantial resources among regions to better reflect workload.
VERA is a reasonable approach because it allocates resources to networks  primarily based on workload.  Each network receives an allocation based  on a predetermined dollar amount per veteran served.  This is consistent  with how other federal health care payers, such as the Medicare and  Medicaid programs, allocate resources to managed care plans for their  patient workload.  Because VERA uses workload to allocate resources,  networks that have more patients generally receive more resources than  networks that have fewer patients.  By receiving funding based on  workload, VA’s health care networks have an incentive to focus on aligning  facilities and programs to attract patients rather than focusing on  maintaining existing operations and infrastructure regardless of the  number of patients served.
In addition, VERA adjusts network allocations for cost differences beyond  the networks’ control.  VERA does this through adjustments for networks’  case mix by classifying patients into one of three categories—complex  care, basic vested care, and basic “non-vested” care—which are based on  the level of patient health care need and the costs associated with that care.   Complex care comprises about 4 percent of VA’s workload and includes  patients who generally require significant high-cost inpatient care as an  integral part of their rehabilitation or functional maintenance.  Basic vested  care and basic non-vested care patients—who compose 84 percent and 12  percent of VA’s workload, respectively—include patients whose health care  needs are more routine and can be met in an outpatient setting.  These  patients typically require significantly fewer resources than complex care  patients.  However, basic vested care patients rely primarily or completely  on VA for meeting their health care needs, while basic non-vested care  patients receive only part of their care through VA and have not undergone  comprehensive medical evaluations by VA practitioners.  In fiscal year  2001, the capitation amount—or dollar amount per patient served—was  $42,765 for complex care, $3,126 for basic vested care, and $121 for basic  non-vested care.  In addition, VERA adjusts for cost differences beyond  networks’ control by applying a price adjustment factor to each network’s  allocation to account for uncontrollable geographic price differences.  The  adjustment lowers the VERA allocation for networks located in lower cost  areas and increases the allocation for networks located in higher cost  areas.
Also contributing to the reasonableness of VERA’s approach is that it  provides protection to patients against network budget shortfalls.  VERA  does this by providing supplemental resources through the National  Reserve Fund to networks that have difficulty operating within their  available resources.  These supplemental allocations protect patients from  the risk that a health care network would be unable to provide services if  its expenditures exceeded available resources.  Since fiscal year 1999,  resources distributed through the National Reserve Fund have  supplemented VERA allocations in six networks and averaged  approximately 1 percent of total VERA allocations.
As a result of VERA’s approach, resources have shifted among regions to  better reflect workload. Consequently, resources moved primarily from  networks located in the Northeast and Midwest to networks located in the  South and West.  In fiscal year 2001, VERA shifted approximately $921  million among networks compared to what the allocations would have  been if networks received the same proportion of funding they received in  fiscal year 1996, the year before VERA was implemented.  VERA shifted the  most resources in fiscal year 2001 to Network 8 (Bay Pines)— approximately $198 million—and the most resources from Network 3  (Bronx)—approximately $322 million—compared to what allocations  would have been if both networks had received the same proportion of  funding they received in fiscal year 1996.
section_title: Implementation Specifics Weaken VERA
paragraphs: Although VERA’s overall design is a reasonable approach to equitably  allocate resources, we identified weaknesses in its implementation that  compromise the achievement of its goal of allocating comparable  resources for comparable workloads.  To correct these weaknesses we  made several recommendations that, if implemented, would better align  approximately $200 million in resources with workloads in VA’s health care  networks.  Specifically, we recommended that VERA improve its workload  calculations to include all veterans served—including Priority 7 veterans,  the most rapidly growing proportion of VA’s workload.  We also  recommended that VA improve its adjustment for cost differences beyond  network control by incorporating more categories into VERA’s case-mix  adjustment to more accurately account for the differences in networks’  patient health care needs.  Finally, we recommended that VA improve its  process to protect patients from network budget shortfalls by determining  the extent to which different factors cause networks to need supplemental  resources in order to address factors, such as inefficiency, that may cause  budget shortfalls.
subsections: section_title: VA Could Better Align Resources with Workload and Network Cost Differences
paragraphs: To improve its network workload calculation, VERA should account for all  veteran workload served—including Priority 7 veterans, who have higher  incomes and no service-connected disabilities.   By excluding most  Priority 7 veterans from VERA’s workload calculation, networks with a  higher proportion of Priority 7 veterans have fewer resources per patient to  treat veterans than networks with a lower proportion of Priority 7 veterans.    For example, in fiscal year 2001, Network 3 (Bronx) had the highest  proportion of Priority 7 veterans, 37 percent, and Network 20 (Portland)  had the lowest proportion, 14 percent.  Nationally, VA’s proportion of  Priority 7 veterans was 22 percent of total workload in fiscal year 2001.
When VERA was established, the number of higher income veterans  without service-connected disabilities that VA treated was about 4 percent  of the total number of veterans treated in fiscal year 1996.  VA decided not  to include most of these Priority 7 veterans in VERA’s basic care workload  calculations because of their small numbers and the expectation that  collections from copayments, deductibles, and third-party insurance would  cover most of their costs.  However, Priority 7 veterans accounted for 22  percent of VA’s workload in fiscal year 2001—a substantial increase from  107,520 patients in fiscal year 1996 to an estimated 827,722 patients in fiscal  year 2001.  In addition, VA projects that the growth in Priority 7 patients  will continue at least through fiscal year 2010.  Although VA initially  expected to cover the majority of Priority 7 patient costs through  collections, VA collected only 24 percent of Priority 7 veterans’ costs in  fiscal year 2000.  As a result, networks pay for most of the costs of Priority  7 services through VERA allocations made for the service-connected and  low-income veteran workloads.
Inclusion of Priority 7 veterans in VERA’s basic vested care workload  would increase the comparability of resources among networks’ per  patient treated.  If VERA were to have funded Priority 7 basic vested  veterans at 50 percent of their costs, as VA had considered, resources  would have moved from networks with smaller proportions of Priority 7  veterans to networks with larger proportions of Priority 7 veterans based  on our simulation (see fig. 1).  VERA allocations would have increased to 9  networks in the Northeast and Midwest and decreased to 10 networks in  the South and West in the fiscal year 2001 VERA allocation.
To improve its adjustment for cost differences beyond networks’ control,  we also recommended that VERA use more case-mix categories to  adequately adjust for differences in patients’ health care needs across  networks.  Based on the results of our simulation, this change to VERA  would have the largest effect on resource allocation.  VERA’s three case- mix categories—complex, basic vested, and basic non-vested—are based  on 44 patient classes.  Because average costs of patients in the classes  within the VERA categories vary significantly and can be dramatically  higher or lower than their capitation amounts for the three case-mix  categories, VERA’s ability to allocate comparable resources for comparable  workloads is limited.  The wide variation in cost between home-based  primary care and ventilator-dependent care—two of the patient classes in  complex care—illustrates this point.  The national average cost for home- based primary care in fiscal year 2000 was about $24,000, roughly $18,000  less than the $42,153 capitation amount for complex care.  In contrast, the  average patient cost for ventilator-dependent care in that year was about  $163,000, roughly $121,000 more than the complex care capitation amount.   As a result of VERA’s having only three case-mix categories, networks with  proportionately more workload in less expensive patient classes, such as  home-based primary care, receive more resources relative to their costs  than other networks.  Similarly, networks with more workload in more  expensive patient classes, such as ventilator-dependent care, receive fewer  resources relative to their costs.
If VERA were to use VA’s current 44 patient classes rather than the three  case-mix categories, resources would move from networks having  proportionately fewer patients in expensive patient classes to networks  having proportionately more patients in expensive patient classes.  As  figure 2 shows, based on our simulation, there would be a significant  movement of resources—an average of 2 percent per network.
The combined effect of including basic vested Priority 7 veterans in VERA’s  workload and using all 44 VA patient classes in VERA’s case-mix adjustment  would provide additional resources to some northeastern and midwestern  networks and reduce resources for some southern and western networks  (see fig. 3).  The allocation change would represent about 2 percent of  networks’ budgets but would be more substantial for some networks.  The  two networks with the largest percentage change are Network 1 (Boston)  with an approximate 5 percent increase and Network 20 (Portland) with an  approximate 5 percent decrease.
While VA concurred with our recommendations to better align VERA’s  measure of workload with actual workload served and to incorporate more  (not necessarily 44) categories into VERA’s case-mix adjustment, it plans to  wait for further study before making a decision about modifications to  VERA for the fiscal year 2003 allocation.  VA and others have conducted  various studies on including all Priority 7 workload in VERA and increasing  the number of VERA case-mix categories.  Given the extensive studies by  VA and others of VERA’s workload and case-mix measures, we believe that  VA should make needed improvements to VERA for the fiscal year 2003  allocation and further refine VERA as needed in subsequent years.
section_title: Identifying Reasons for Budget Shortfalls Would Help VA Take More Appropriate Corrective Actions
paragraphs: To improve its process to protect patients from network budget shortfalls,  we also recommend that VA’s supplemental funding process determine to  what extent networks need supplemental resources due to such factors as  imperfections in VERA, lack of network efficiency, or lack of managerial  flexibility to close or consolidate programs or facilities. VA’s supplemental  funding processes have not collected the information necessary to make  these determinations.  As a result, VA cannot provide adequate assurance  that supplemental allocations are appropriate or correct problems that  cause networks to have budget shortfalls.
VA has focused its process for providing supplemental funding from the  National Reserve Fund almost solely on providing supplemental resources  to networks to get through a fiscal year, but it has not included in this  process an examination of the root causes of networks’ needs for  additional resources.  From fiscal years 1999 through 2001, VA used  different approaches for evaluating networks’ supplemental funding  requests and distributing a total of approximately $323 million in  supplemental resources to six networks.   However, in none of these  approaches has VA collected adequate information for determining the  extent to which certain factors cause budget shortfalls.  For example, in  fiscal year 2001, about half of the supplemental resources provided to  networks was for “inflation and miscellaneous program adjustments.”  All  networks experienced inflation, however, and VA did not distinguish  between the level of inflation in networks that requested supplemental  resources and those that did not.
VA concurred with our recommendation to improve the supplemental  funding process.  For fiscal year 2002, VA developed a different approach to  providing supplemental resources to networks, one that it indicates will  better identify factors, such as inefficiency, VERA imperfections, or other  factors, that cause networks to require supplemental resources.  However,  the actions VA discussed to improve the process do not address our  recommendation to identify the relative contributions of such factors to  network budget shortfalls.  Until VA implements our recommendation, it  cannot provide assurance that supplemental resources are appropriate or  take needed actions to reduce the likelihood of network shortfalls in the  future.
section_title: Concluding Observations
paragraphs: VERA’s design is a reasonable approach to resource allocation and has had  a significant effect on promoting more comparable resource allocations for  comparable workloads in VA.  Yet VA needs to correct weaknesses in  VERA’s implementation to better align resources with workload and to  adequately account for important variations in health care needs among  networks.  Our analysis shows that doing so would better allocate about  $200 million annually.  Although most of the reallocation at this time would  result from better case-mix adjustments in VERA to reflect differences in  health care needs among networks, the importance of including all Priority  7 veterans in VERA workload could increase in the future because the  number of Priority 7 veterans is projected to continue to increase at least  through fiscal year 2010.  Making changes to address these weaknesses in  VERA will add some complexity to how VA allocates resources, but  delaying these needed improvements to VERA will perpetuate inequities  that currently exist.
In addition, VA has not used the supplemental funding process to improve  VERA allocations and management of VA’s resources.  The amount of  resources provided to networks through the supplemental funding process  for the National Reserve Fund has continued to increase, yet VA has not  been able to determine the relative contribution of factors such as  imperfections in VERA, network inefficiency, or lack of managerial  flexibility to close or consolidate programs or facilities to the need for  supplemental resources.  Because VA has not identified the relative  contribution of factors that could cause network budget shortfalls, it is  unable to ensure that the supplemental funds provided are appropriate or  correct problems that cause networks to have budget shortfalls.   Without  knowing the extent to which VERA imperfections or other factors are  responsible for budget shortfalls, stakeholders may lose confidence in  VERA’s ability to allocate resources equitably.
Mr. Chairman, this concludes my prepared remarks.  I will be pleased to  answer any questions you or other members of the subcommittee may  have.
section_title: Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact me at  (202) 512-7101 or James Musselwhite at (202) 512-7259.  Marcia Mann and  Thomas Walke also contributed to this statement.