VA Health Care: Issues Affecting Eligibility Reform Efforts
Released: 1996-09-11T00:00:00

Letter

Introduction

The Department of Veterans Affairs (VA) operates one of the nation’s largest health care systems, including • a health benefits program for over 26 million eligible veterans and • a health care delivery program consisting of 173 hospitals, 376 outpatient clinics, 136 nursing homes, and 39 domiciliaries in fiscal year 1996.

The two programs are closely intertwined. For example, VA outpatient clinics are not allowed to use available resources to provide services to many veterans because (1) the services, such as prosthetics, are not covered under a particular veteran’s health care benefits and (2) the clinics are not permitted under the law to sell noncovered services to veterans.

In administering the veterans’ health benefits program authorized under title 38 of the U.S. Code, some of VA’s responsibilities are similar to those of the Health Care Financing Administration (HCFA) in administering Medicare benefits and to those of private insurance companies in administering health insurance policies. For example, VA is responsible for determining under the statute (1) which benefits veterans are eligible to receive, (2) whether and how much veterans must contribute toward the cost of their care, and (3) where veterans can obtain covered services (in other words, whether they must use VA-operated facilities or can obtain needed services from other providers at VA expense). Similarly, VA, like HCFA and private insurers, is responsible for ensuring that the health benefits provided to its beneficiaries—veterans—are (1) medically necessary and (2) provided in the most appropriate care setting (such as a hospital, nursing home, or outpatient clinic).

In operating a health care delivery program, VA’s role is similar to that of the major private sector health care delivery networks such as those operated by Columbia/HCA and Kaiser Permanente. For example, VA strives to ensure that its facilities (1) provide high quality care, (2) are used to optimum capacity, (3) are located where they are accessible to their target population, (4) provide good customer service, (5) offer potential patients services and amenities comparable to competing facilities, and (6) operate effective billing and collection systems.

For fiscal year 1996, VA received an appropriation of about $16.6 billion to maintain and operate its facilities, which are expected to provide inpatient hospital care to 930,000 patients, nursing home care to 35,000 patients, and domiciliary care to 18,700 patients. In addition, VA outpatient clinics are expected to handle 25.3 million outpatient visits.

Eligibility for Veterans’ Health Benefits

Any person who served on active duty in the uniformed services for the minimum amount of time specified by law and who was discharged, released, or retired under other than dishonorable conditions is eligible for some VA health care benefits. The amount of required active duty service varies depending on when the person entered the military, and an eligible veteran’s health care benefits depend on factors such as the presence and extent of a service-connected disability, income, and period or conditions of military service.

Persons enlisting in one of the armed forces after September 7, 1980, and officers commissioned after October 16, 1981, must have completed 2 years of active duty or the full period of their initial service obligation to be eligible for benefits. Veterans discharged at any time because of service-connected disabilities and those discharged because of personal hardship near the end of their service obligation are not held to this requirement. Also eligible are members of the armed forces’ reserve components who were called to active duty and served the length of time for which they were activated.

Although all veterans meeting the basic requirements are “eligible” for hospital, nursing home, and at least some outpatient care, the VA law establishes a complex priority system—based on such factors as the presence and extent of any service-connected disability, the incomes of veterans with nonservice-connected disabilities, and the type and purpose of care needed—to determine which services are covered and which veterans receive care within available resources.

Generally, veterans can obtain health services only in VA-operated health care facilities. There are three primary exceptions: • VA-operated nursing home and domiciliary care is augmented by contracts with community nursing homes and by per diem payments for veterans in state-operated veterans’ homes. • VA pays private sector physicians and other health care providers to extend care to certain veterans when the services needed are unavailable within the VA system or when the veterans live too far from a VA facility (commonly referred to as fee-basis care). VA has limited the use of fee-basis physicians primarily to veterans with service-connected disabilities. • Veterans can obtain emergency hospitalization from any hospital and then be transferred to a VA hospital when their conditions stabilize.

In addition, veterans being treated in VA facilities can be provided specific scarce medical resources from other public and private providers through sharing agreements and contracts between VA and non-VA providers.

Hospital and Nursing Home Care

All veterans’ health care benefits include medically necessary hospital and nursing home care, but certain veterans, referred to as Category A, or mandatory care category, veterans, have the highest priority for receiving care. More specifically, VA must provide hospital care, and, if space and resources are available, may provide nursing home care to veterans who • have service-connected disabilities, • were discharged from the military for disabilities that were incurred or aggravated in the line of duty, • are former prisoners of war, • were exposed to certain toxic substances or ionizing radiation, • served during the Mexican Border Period or World War I, • receive disability compensation, • receive nonservice-connected disability pension benefits, or • have incomes below the means test threshold (as of January 1996, $21,001 for a single veteran or $25,204 for a veteran with one dependent, plus $1,404 for each additional dependent).

For higher-income veterans who do not qualify under these conditions, VA may provide hospital and nursing home care if space and resources are available. These veterans, known as Category C, or discretionary care category, veterans, must pay a part of the cost of the care they receive.

Outpatient Care

VA provides three basic levels of outpatient care benefits: • comprehensive care, which includes all services needed to treat any medical condition; • service-connected care, which is limited to treating conditions related to a • hospital-related care, which provides only the outpatient services needed to (1) prepare for a hospital admission, (2) obviate the need for a hospital admission, or (3) complete treatment begun during a hospital stay.

Separate mandatory and discretionary care categories apply to outpatient care. Only veterans who have service-connected disabilities rated at 50 percent or more (about 465,000 veterans) are in the mandatory care category for comprehensive outpatient care. VA may provide comprehensive outpatient care to veterans who (1) are former prisoners of war, (2) served during the Mexican Border Period or World War I, or (3) are housebound or in need of aid and attendance. In other words, all medically necessary outpatient care is covered for these groups of veterans, subject to the availability of space and resources.

All veterans with service-connected disabilities are in the mandatory care category for treatment related to their disabilities. Veterans seeking outpatient services needed to treat medical conditions related to injuries suffered as a result of VA hospitalization or while participating in a VA rehabilitation program are also in the mandatory care category for such services. Other medically necessary care is noncovered unless the veteran also qualifies for comprehensive care or meets the conditions for hospital-related care.

Veterans (1) with service-connected disabilities rated at 30 or 40 percent and (2) whose annual incomes do not exceed VA’s pension rate for veterans in need of regular aid and attendance are in the mandatory care category for hospital-related outpatient care. VA may, to the extent resources permit, furnish limited hospital-related outpatient care to veterans not otherwise eligible for outpatient care, providing they agree to pay a part of the cost of care. For veterans qualifying for outpatient care only under the hospital-related care provisions, all other medically necessary outpatient care is noncovered.

Figure 1.1 summarizes VA eligibility provisions.

VA Facilities Generally Restricted to Providing Covered Services to Veterans

The distinction between “covered” and “noncovered” services in discussing veterans’ health benefits is important because VA facilities are generally restricted to providing covered services to veterans. In addition, VA can sell health care services in only a few situations. Specifically, statutes authorize VA hospitals and outpatient clinics to enter into agreements to sell • health care services to Department of Defense (DOD) and other federal • specialized medical resources to federal and nonfederal hospitals, clinics, and medical schools.

VA cannot, however, sell health care services directly to veterans or others.

To allow VA’s resources to be more effectively used and avoid unnecessary duplication and overlap of activities, VA has been authorized for over 60 years to sell or share its resources with other federal agencies. For example, all VA medical centers within 50 miles of a DOD hospital currently have sharing agreements to provide one or more services to DOD beneficiaries. In 1989, the Congress enacted legislation specifically authorizing the use of Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) funds to reimburse VA for care provided to CHAMPUS beneficiaries under sharing agreements. As of April 1996, three VA medical centers were providing services to CHAMPUS beneficiaries. Finally, in June 1995, VA and DOD completed work on an agreement that will allow VA facilities to compete with private sector facilities to serve as providers under DOD’s new TRICARE program.

Since 1966, VA facilities have also had limited authority to share health care resources with federal and nonfederal hospitals, clinics, and medical schools. This authority, however, is limited to sharing of “specialized medical resources,” medical techniques, and education. Such resources include equipment, space, or personnel, which, because of their cost, limited availability, or unusual nature, are either unique in the medical community or can be fully used only through mutual use. VA facilities cannot provide routine patient care services to veterans’ dependents or other nonveterans, even if they have the capacity to do so and the patients are willing to pay for the services.

Similarly, VA facilities cannot sell noncovered services to veterans. This restriction primarily affects outpatient care because hospital care is a covered service for all veterans. However, routine outpatient care is not a covered service for most veterans, and VA cannot sell routine outpatient care to most veterans even if they are willing to pay for the care.

Objectives, Scope, and Methodology

In July 1995 and March 1996, respectively, we testified before the House and Senate Committees on Veterans’ Affairs on major issues affecting reform of VA health care eligibility. At the request of the Chairman, Senate Committee on Veterans’ Affairs, this report expands on the information presented at those hearings. Specifically, it discusses the evolution of the VA health care system and VA eligibility; the problems that VA’s current eligibility and health care contracting provisions create for veterans and providers; the extent to which VA provides veterans with health care services for which they are not eligible; legislative proposals to reform VA eligibility and contracting rules and their potential effect on the ease of administration, equity to veterans, costs to VA, and clarity of eligibility for veterans’ health benefits; and • approaches that could be used to limit the budgetary effects of eligibility reforms.

In addressing these objectives, we relied primarily on the results of reviews that we conducted over the last 5 years that detailed problems in administering VA’s outpatient eligibility provisions, compared VA benefits and eligibility with those of other public and private health benefits programs and with the veterans’ health benefits programs in other countries, and assessed VA’s role in a changing health care marketplace. A list of related GAO products is at the end of this report.

In addition, in developing information on the evolution of the VA health care system and veterans’ health benefits, we relied on the legislative history of the veterans’ health care provisions of title 38 of the U.S. Code and articles and reports prepared by or for the Brookings Institution (1934), the House Committee on Veterans’ Affairs (1967), the National Academy of Sciences (1977), VA’s Commission on the Future Structure of Veterans Health Care, the Congressional Research Service, the Twentieth Century Fund (1974), and VA.

In assessing the extent to which VA hospitals and clinics provide inappropriate and noncovered services, we relied primarily on studies prepared by VA researchers and VA’s Office of Inspector General (OIG). In reviewing these studies, we paid particular attention to the underlying causes for the problems identified to determine the extent to which the problems were attributed to VA eligibility provisions.

In evaluating eligibility reform proposals, we focused on those proposed by members of the Senate or House Veterans’ Affairs Committees, VA, and the major veterans service organizations (VSO). We focused on the extent to which the proposals would (1) change VA health care funding from discretionary to mandatory, (2) expand eligibility for VA health care services, (3) create a uniform benefit package(s), (4) guarantee availability of covered services, and (5) provide new sources of funding for expanded benefits.

On the basis of this work and discussions with officials from VA and the major VSOs, we identified a series of issues that could be considered in future debate on eligibility reform.

We did our work between March 1995 and June 1996 in accordance with generally accepted government auditing standards.

Evolution of Veterans’ Health Care Coverage

The United States has a long tradition of providing benefits to those injured in military service, but the role of the federal government in providing for the health care needs of other veterans has evolved and expanded over time. The federal role, initially limited to a program of financial assistance for those injured in combat, has expanded to include a combination of financial assistance and direct provision of health care services to a wide range of combat and noncombat veterans.

Just as VA’s role in meeting veterans’ health care needs has broadened over time, the role of public and private health insurance in meeting the health care needs of veterans (and other Americans) has also grown. About 90 percent of veterans now have public or private health insurance or both in addition to their VA health care benefits. As a result, many veterans now have multiple options for paying for basic hospital and physician services.

Changes in the veteran population have also contributed to the evolution of VA from a system focused on treatment of war injuries to a system increasingly focused on treatment of veterans with no service-connected disabilities and on treatment of disabilities associated with aging. For example, the number of veterans is declining, fewer in the veteran population served during wartime, and a growing proportion of veterans are over age 65.

Our work identified many difficult questions facing the Congress as it considers future changes in the mission of the veterans’ health care system. For example, what do veterans perceive as the nation’s obligation to meet their health care needs and how does that perception differ from the commitment made by the Congress and the administration? Similarly, with the growth of public and private health insurance, are changes needed in VA’s role as a safety net provider? Finally, with an aging veteran population, are changes needed in VA’s role in meeting the long-term care needs of veterans?

Federal Role in Veterans’ Health Care

In the nation’s early years, the federal role was limited to direct financial payments to veterans injured during combat; direct medical and hospital care was provided by the individual colonies, states, and communities. The first colonial law establishing veterans’ benefits, enacted by the Pilgrims of Plymouth Colony in 1636, provided that any soldier injured in the war with the Pequot Indians would be maintained by the colony for the rest of his life. Other colonies enacted similar provisions.

The Continental Congress, seeking to encourage enlistments during the Revolutionary War, provided federal compensation for veterans injured during the war and their dependents. Similarly, the first U.S. Congress passed a veterans’ compensation law.

The federal role began to expand in 1833 with the opening of the first domiciliary and medical facility for veterans—the U.S. Naval Home. A second federal home for disabled and invalid soldiers—the Old Soldiers and Sailors Home—authorized in 1851, is still in operation in Washington, D.C. Although the federal role was no longer limited to financial support for war-disabled veterans, medical care was only an incidental part of the homes, which were primarily residential facilities.

Direct Medical Care Expanded During and Following the Civil War

The federal role in veterans’ health care significantly expanded during and following the Civil War. During the war, the government operated temporary hospitals and domiciliaries in various parts of the country for disabled soldiers until they were physically able to return to their homes. Following the war, the number of disabled veterans, and veterans unable to cope with the economic struggle of civilian life, became so great that the government built a number of “homes” to provide domiciliary care.Incidental medical and hospital care was provided to residents for all diseases and injuries, whether or not they were service related.

In addition to indigent and disabled veterans of the Civil War, eligibility for admission to the homes was subsequently extended to veterans of the Indian Wars, Spanish-American War, Mexican Border Period, and discharged regular members of the armed forces.

Onset of World War I Ushered in New Veterans’ Benefits

The modern era of the veterans’ health care system began with the onset of World War I. During World War I a series of new veterans benefits were added: voluntary life insurance, allotments to take care of the family during service, reeducation of those disabled, disability compensation, and medical and hospital care for those suffering from wounds or diseases incurred in the service.

Throughout the 1800s, the federal role had been limited to the provision of (1) compensation to war-disabled veterans and (2) domiciliary care and incidental medical care to veterans with injuries incurred during wartime service or to veterans who are incapable of earning a living because of a permanent disability, tuberculosis, or neuropsychiatric disability suffered after their wartime service.

During World War I, however, Public Health Service (PHS) hospitals treated returning veterans and at the end of the war, several military hospitals were transferred to PHS to enable it to continue serving the growing veteran population. In 1921, those PHS hospitals primarily serving veterans were transferred to the newly established Veterans’ Bureau.

Casualties returning from World War I soon overwhelmed the capacity of veterans’ hospitals to treat injured soldiers. The Congress responded by increasing the number of veterans’ hospitals with an emphasis on treatment of veterans’ disabling conditions. In 1921, eligibility for hospital care was expanded to include treatment for all service-connected conditions.

Eligibility Expanded When Supply Exceeded Demand for Care

After most of the immediate, postwar, service-connected medical problems of veterans were met, VA hospitals began to experience excess capacity instead of a shortage of beds. Proposals were made to close underutilized hospitals. The VSOs lobbied for free hospital care for medically indigent veterans without service-connected disabilities. The Congress, in 1924, gave wartime veterans with nonservice-connected conditions access to Veterans’ Bureau hospitals, provided space was available and the veterans signed an oath indicating they were unable to pay for their care.

VA Established to Better Coordinate Veterans’ Programs

During the 1920s, three federal agencies—the Veterans Bureau, the Bureau of Pensions in the Interior Department, and the National Home for Disabled Volunteer Soldiers—administered various benefits for the nation’s veterans. With the establishment of the Veterans Administration (VA) in 1930, previously fragmented care for veterans was consolidated under one agency.

During the Great Depression, demand for VA hospital care was unprecedented. As part of efforts to curtail federal spending, President Roosevelt, in 1933, issued regulations making veterans ineligible for hospital treatment of nonservice-connected conditions. The following year, however, the Congress restored eligibility for treatment of nonservice-connected conditions. Subsequently, in 1937, President Roosevelt authorized construction of additional VA hospital beds to (1) meet the increased demand for neuropsychiatric care and treatment of tuberculosis and other respiratory illnesses and (2) provide more equitable geographic access to care.

Care During and Following World War II Led to Further Eligibility Expansions

Rapidly rising demand for hospital care brought on by the onset of U.S. involvement in World War II led to construction and expansion of VA hospitals. Because of the heavy demand for care, World War II veterans were initially eligible only for treatment of service-connected disabilities. In 1943, however, new eligibility requirements were established for World War II veterans identical to those for World War I veterans.

Demand for care was so great, however, that in March 1946 VA had a waiting list of over 26,000 veterans seeking care for nonservice-connected conditions. As had occurred following the end of World War I, the initial high demand for medical services for returning casualties soon declined and VA once again had excess hospital capacity. In 1947, the Congress created a presumption that a diagnosis of a chronic psychiatric condition within 2 years of discharge would be regarded as service-connected.

The next significant expansion of hospital eligibility occurred in 1962, when legislation was enacted that defined as a service-connected disability any condition traceable to a period of military service, regardless of the cause or circumstances of its occurrence. Before that time, care for service-connected conditions was not assured unless they were incurred or aggravated during wartime service.

In 1973, eligibility for hospital care was extended to treatment of nonservice-connected disabilities of peacetime veterans unable to defray the cost of care. Previously, treatment of nonservice-connected disabilities was limited to wartime veterans.

Finally, in 1986, the Congress extended eligibility to higher-income veterans with no service-connected disabilities. Previously, only those veterans with nonservice-connected disabilities who signed a poverty oath were eligible for VA hospital care. To be eligible for VA hospital care, higher-income veterans must agree to contribute toward the cost of their care.

Eligibility for Outpatient Care Expanded More Slowly

“The possible adverse effects of the proposed legislation should also, I believe, be considered. This bill would for the first time mean that non-service-connected veterans would be receiving outpatient treatment even though we have endeavored to make revisions which would relate this only to hospital care. The outpatient treatment of the non-service-connected might be an opening wedge to a further extension of this type of medical treatment.”

Thirteen years later, the Veterans Health Care Expansion Act of 1973 (P.L. 93-82) further expanded eligibility for outpatient care. The act (1) made veterans with service-connected disabilities rated at 80 percent or higher eligible for free comprehensive outpatient care and (2) authorized outpatient treatment for any nonservice-connected disability to “obviate the need of hospital admission.” Three years later, in 1976, the mandatory care category for free comprehensive outpatient services was extended to include veterans with service-connected disabilities rated at 50 percent or higher.

In 1986, the Congress expanded eligibility for outpatient care to include higher-income veterans agreeing to contribute toward the cost of their care. Previously, only those veterans with nonservice-connected disabilities who signed a poverty oath were eligible for outpatient care.

The last major expansion of outpatient eligibility occurred in 1988 when veterans with (1) service-connected disabilities rated at 30 or 40 percent or (2) with incomes below the maximum pension rate were placed in the mandatory care category for outpatient treatment for prehospital and posthospital care and for care that would obviate the need for hospital care.

Veterans’ Other Health Care Options Have Improved Since 1930

When the VA health care system was established, there was no public or private health insurance program to assist veterans in paying for needed health care services. Private health insurance, which typically pays for services provided by physicians and health care facilities on a fee-for-service basis, began to emerge in the 1930s with the establishment of Blue Cross and Blue Shield and commercial plans. The industry expanded rapidly during the 1950s, and in 1959, the Federal Employees Health Benefits Act authorized the federal government to provide health care benefits to millions of federal employees and retirees and their dependents through private health insurance. By 1993, over 182 million Americans were covered by private health insurance.

In 1965, the Congress enacted legislation establishing the two largest public health insurance programs—Medicare, serving elderly and disabled Americans, and Medicaid, a jointly funded federal-state program serving low-income Americans. The following year, the Congress established CHAMPUS to enable military retirees and the dependents of active duty and retired military personnel to obtain health care in the private sector when services are not available or not accessible in DOD facilities.

Although each of the major public and private programs has a different target population, overlaps between target populations result in many veterans having coverage under multiple programs. Table 2.1 describes potential overlaps in populations served by the VA health care system and other health care programs.

Veterans’ Utilization of VA Health Care

With the growth of public and private health insurance, more than 9 out of 10 veterans now have alternate health insurance coverage, decreasing the importance of VA’s safety net mission. (See fig. 2.1.)

1.6% VA and Other Combinations of Coverage (Includes Medicaid)

Veterans with higher incomes, alternate health insurance coverage, and no service-connected disabilities are significantly less likely to seek care from VA health care facilities than are veterans with service-connected disabilities, low incomes, and no health insurance. The following data illustrate: • Over 82 percent of veterans with health insurance had never used VA, compared with about 56 percent of veterans with no health insurance.• Over 88 percent of veterans with incomes of $40,000 or more had never used VA, compared with over 63 percent of veterans with incomes under $10,000. • Over 70 percent of veterans with no service-connected disabilities had never used VA health care services, compared with 30 percent of those with service-connected disabilities.

Significant Changes Are Occurring in the Veteran Population

Changes in the size and composition of the veteran population also contribute to the evolution of the VA health care system from one primarily treating war-related injuries to one increasingly focused on veterans with no service-connected disabilities. As the nation’s large World War II and Korean War veteran populations age, their needs for nursing home and other long-term care services are increasing.

The veteran population, which totaled about 26.4 million in 1995, is both declining and aging. The number of veterans has steadily declined since 1980 and is expected to decline at an accelerated rate through 2010. Between 1990 and 2010, VA projects the veteran population will decline 26 percent. (See fig. 2.2.)

Veterans Increasingly Need Nursing Home and Other Long-Term Care Services

As the veteran population continues to age, the decrease will not be evenly distributed among age groups. The decline will be most notable among veterans under 65 years of age—from about 20.0 million to 11.5 million (42 percent). The number of veterans aged 65 to 84 will increase from 7.0 million to 8.9 million in the year 2000, then will drop to about 7.2 million by 2010. In contrast, the number of veterans aged 85 and older will increase more than eight-fold, from 154,000 to 1.3 million by 2010. At that time, veterans aged 85 and older will constitute about 6.3 percent of the veteran population. (See fig. 2.3.)

Old age is often accompanied by the development of chronic health problems, such as heart disease, arthritis, and other ailments. These problems, important causes of disability among the elderly population, often result in the need for nursing home care or other long-term care services. With the veteran population continuing to age rapidly, VA faces a significant challenge in trying to meet increasing demand for nursing home care. Over 50 percent of veterans over 85 years old are expected to need nursing home care compared with 13 percent of those 65 to 69 years old.

Declining Numbers of Veterans Have Wartime and Combat Duty

Coinciding with the overall decline in the number of veterans is a decline in the percentage of the veteran population that served during wartime. Because of the higher death rate of veterans who served in World War II (they currently account for almost three of every four veteran deaths), the population of veterans who served during wartime will decrease faster than the total veteran population—35 percent verses 26 percent. VA projects the number of total wartime veterans will decline from 21.0 million in 1990 to 13.6 million in 2010. (See fig. 2.4.)

Even more dramatic is the shift in the number of wartime veterans by period of service. In 1990, the largest group of wartime veterans were World War II veterans, followed by Vietnam and Korean War veterans, respectively. By 1995, however, deaths of World War II veterans had reached the point where Vietnam-era veterans outnumbered surviving World War II veterans by about 826,000. By 2010, Persian Gulf War veterans are expected to outnumber both Korean War and World War II veterans. (See fig. 2.5.)

Most veterans who served during wartime saw no combat exposure. As a result, about 35 percent of U.S. veterans were actually exposed to combat. (See fig. 2.6.)

About 8.3 percent of veterans have compensable service-connected disabilities. Veterans who served during peacetime are almost twice as likely to have service-connected disabilities as veterans of the Korean War and only slightly less likely to have service-connected disabilities than Vietnam-era and Persian Gulf War veterans. Most likely to have service-connected disabilities are World War II veterans. (See fig. 2.7.)

Of the over 2.2 million veterans with compensable service-connected disabilities, over half have disability ratings of 10 or 20 percent. Of the remaining veterans with service-connected disabilities, about 464,000 had disabilities rated at 50 percent or higher and 488,000 had disabilities rated at 30 or 40 percent. (See fig. 2.8.)

Multiple Issues Face VA and the Congress in Planning Changes in VA’s Health Care Mission

Many of the health care benefits for which veterans are now eligible were added after they were discharged from the military. For example, most World War II and Korean War veterans were discharged before nursing home benefits were added to the VA system in 1964. Similarly, higher-income veterans were not eligible for VA health care until 1986, when the means test was added. More importantly, outpatient benefits, other than for treatment of service-connected disabilities, were not available even for pre- and posthospital care until 1960. And broader outpatient benefits to cover services needed to obviate the need for hospital care were not added until after the Vietnam War. In other words, not one of the three largest groups of veterans—World War II, Korean War, or Vietnam War—was discharged with a promise of comprehensive health care for both service-connected and nonservice-connected conditions.

Although many of the health benefits for which veterans are now eligible were not covered at the time they were discharged, were servicemembers led to believe, either as an inducement to enlist or as a promise upon discharge, that the government would provide for their health care needs for the remainder of their lives?

The first, and perhaps most important, issue to be addressed in considering changes in veterans’ health care eligibility is the nation’s commitment to its veterans. But what is and what should that commitment be? Since colonial times, there has been little doubt that servicemembers injured in combat are entitled to compensation for their injuries. There is less agreement, however, on the role and responsibility of the federal government in meeting the other health care needs of veterans.

Decisions made with regard to what the nation’s commitment is to its veterans will largely drive decisions on whether eligibility distinctions should continue to be based on factors such as degree of service-connected disability and income. If a decision is made that all veterans should be eligible for the same comprehensive health benefits, then eligibility distinctions will, in the future, be used only to determine veterans’ relative priorities for care. If, however, a decision is made that certain veterans should be given more extensive benefits than others, then such distinctions will continue to be used to define the differences in benefits. For example, certain categories of veterans might be eligible for a broader range of services or lower cost sharing. The question then would become whether to keep the same distinctions as in the current law or base the distinctions on other factors.

In three other countries that operated direct delivery systems for veterans (United Kingdom, Australia, and Canada), declining use of veterans’ hospitals prompted actions to open them to nonveterans. It was hoped that caring for community patients would allow the hospitals and staff to maintain their medical expertise and expand services. Should our veterans’ health care system similarly be opened to nonveterans? Among the options that could be considered would be extending veterans’ benefits to more dependents. If a veteran is uninsured and lacks health care options, his or her family is also likely to be uninsured and without adequate health care.

Once a benefit has been established, it can be difficult to change the cost-sharing requirements. As new benefits are added, however, an opportunity exists to determine to what extent the government and the veteran will share the cost of the added benefits.

Because of the limitations on coverage of routine outpatient services, VA’s health care safety net is structured more like a catastrophic health insurance plan than comprehensive health insurance. Most veterans are responsible for paying for routine health care services not needed to obviate the need for hospital care. For veterans with other public or private insurance, this limitation likely has a minimal effect on their use of health care services. But low-income veterans without public or private insurance must either use their own funds to obtain routine health care services or forgo needed care. An important issue, then, in considering eligibility reform is whether changes need to be made in VA’s safety net mission.

Veterans frequently have unmet needs for nursing home and other long-term care services. Medicare and most private health insurance cover only short-term, post-acute nursing home, and home health care. Although private long-term care insurance is a growing market, the high cost of policies places such coverage out of the reach of many veterans. As a result, most veterans must pay for long-term nursing home and home care services out of pocket until they spend down most of their income and assets on health care and qualify for Medicaid. Although VA has a nursing home benefit, it is a discretionary benefit for all veterans. Should changes be made in the nursing home benefit to enable VA to meet the long-term care needs of more veterans?

Because of the overlapping populations, changes in one health care program can have a significant effect on demand for care under other programs. For example, expanded availability of private health insurance would likely decrease demand for VA health care. Similarly, changes in the Medicare program, such as those proposed by some in the Congress, could affect future demand for VA health care services, although it is unclear whether they would increase or decrease demand for VA care. To what extent should changes in other health care programs affect the design of VA eligibility reforms?

These issues are discussed in more detail in appendix I.

Eligibility Provisions Frustrate Veterans and Limit VA’s Ability to Meet Veterans’ Health Care Needs

Unlike public and private health insurance, the VA health benefits program does not (1) have a well-defined benefit package or (2) entitle veterans to services or guarantee that services are covered. Similarly, as a health care provider, VA, unlike private sector providers, is severely limited in its ability to both buy health care services from and sell health care services to individuals and other providers. These differences help make VA’s eligibility provisions a source of frustration for veterans, VA physicians, and VA’s administrative staff. The problems created by these provisions include the following: • Veterans are often uncertain about which services they are eligible to receive and what right they have to demand that VA provide them. • Physicians and administrative staff find the eligibility provisions hard to administer. • Veterans have uneven access to care because the availability of covered services is not guaranteed. • Physicians are put in the difficult position of having to deny needed, but noncovered, health care services to veterans.

Because of these problems, veterans may be unable to consistently obtain needed health care services from VA facilities.

Designing solutions to these problems will require both administrative and legislative actions. VA and the Congress will face many difficult choices. For example, in designing legislative solutions, decisions will need to be made on whether the availability of services should be guaranteed for one or more groups of veterans and whether a defined benefit package should be developed.

Veterans Uncertain About Which Services Are Covered

Because public and private insurance policies generally have a defined benefit package, both policyholders and providers generally know in advance which services are covered and what limitations apply to the availability of services. Defined benefit packages also preserve insurers’ flexibility by permitting them to trade benefits against program costs. For example, by eliminating certain benefits (such as dental care or prescription drugs), an insurer can restrain the growth in premiums. An insurer can also offer multiple policies with varying benefits, but individuals with the same policy have the same benefits.

Like private insurance, VA essentially offers multiple health benefits “policies” with varying benefits. Unlike private insurance, however, veterans with the same “policy” will not necessarily receive the same services. Only those veterans whose “policy” covers all medically necessary care—primarily veterans with service-connected disabilities rated at 50 percent or higher—have clearly defined, uniform, benefits. Because coverage of outpatient services for most veterans varies on the basis of their medical conditions, a veteran may be eligible to receive different services at different times. For example, if a veteran with no service-connected disabilities is scheduled for admission to a VA hospital for elective surgery, he or she is eligible to receive any outpatient service needed to prepare for the hospital admission, including a physical examination with X rays and blood tests. However, if the same veteran sought a routine physical examination from a VA outpatient clinic, he or she would not be eligible because there is no apparent need for hospital-related care.

The benefit packages under public and private insurance programs frequently cover preventive health services, such as routine physical examinations and immunizations. In contrast, VA health benefits are focused on the provision of medical services needed for treatment of a “disability.” For example, a woman veteran may obtain treatment for the complications of pregnancy, but may not obtain prenatal care or delivery services for a routine pregnancy through the VA health care system.

Because of the lack of a well-defined benefit package, veterans are often confused by VA’s complex eligibility provisions. The services they can get from VA depend on such factors as the presence and extent of any service-connected disability, income, period of service, and the seriousness of the condition. The VA system limits veterans’ access to covered services (that is, it rations care to certain veterans), rather than narrowing the scope of services offered to all veterans in the same coverage group.

To further add to veterans’ confusion about which health care services they are eligible to receive from VA, title 38 of the U.S. Code specifies only the types of medical services that cannot be provided on an outpatient basis. Except for service-connected disabilities, VA outpatient clinics generally cannot provide, for example, • prosthetic devices, such as wheelchairs, crutches, eyeglasses, and hearing aids, to veterans not eligible for comprehensive outpatient services; • dental care to most veterans unless they were examined and had their treatment started while in a VA hospital; and • routine prenatal care and delivery services.

Outpatient Eligibility Requirements Are Difficult to Administer

Veterans are not the only ones confused by VA eligibility provisions. Those tasked with applying and enforcing the provisions on a daily basis—VA physicians and administrative staff—express similar frustration in attempting to interpret the provisions. Although the criterion limiting outpatient services to those needed to obviate the need for hospitalization is most often cited as the primary source of frustration, VA administrative staff must also enforce a series of other requirements, which add administrative costs not typically incurred under other public or private insurance programs.

“shall be based on the physician’s judgment that the medical services to be provided are necessary to evaluate or treat a disability that would normally require hospital admission, or which, if untreated would reasonably be expected to require hospital care in the immediate future. . . .”

To assess medical centers’ implementation of this criterion, we used medical profiles of six veterans developed from actual medical records and presented them to 19 medical centers for eligibility determinations.At these 19 centers, interpretations of the criterion ranged from permissive (care for any medical condition) to restrictive (care only for certain medical conditions). In other words, from the veteran’s perspective, access to VA care depends greatly on which medical center he or she visits. For example, if one veteran we profiled had visited all 19 medical centers, he would have been determined eligible by 10 centers but ineligible by 9 others.

“. . . is so vaguely worded that every doctor can come up with one or more interpretations that will suit any situation. . .. Having no clear policy, we have no uniformity. The same patient with the same condition may be denied care by one physician, only to walk out of the clinic the next day with a handful of prescriptions supplied by the doctor in the next office.”

With thousands of VA physicians making eligibility decisions each working day, the number of potential interpretations is large.

In addition to interpreting the obviate-the-need criterion, VA physicians or administrative staff must evaluate a series of other eligibility requirements before deciding whether individual veterans are eligible for the health care services they seek. For example, they must • determine whether the disability for which care is being sought is service-connected or aggravating a service-connected disability, because different eligibility rules apply to care for service-connected and nonservice-connected disabilities; • determine the disability rating for veterans with service-connected disabilities because the outpatient services they are eligible for and their priority for care depend on their rating; • determine the income and assets of veterans with no service-connected disabilities because their eligibility for (and priority for receiving) care depends on a determination of their ability to pay for care; and • determine whether the veteran’s medical condition may have been related to exposure to toxic substances or environmental hazards during service in Desert Storm or Vietnam, in which case care may be provided without regard to other eligibility provisions.

Availability of VA Health Care Is Uncertain

Under private health insurance, Medicare, and Medicaid, the coverage of services is guaranteed. For example, all beneficiaries who meet the basic eligibility requirements for Medicare are entitled to receive all medically necessary care covered under the Medicare part A benefit package. Similarly, those Medicare beneficiaries who enroll for part B benefits are entitled to receive all medically necessary care covered under the part B benefit package. Medicare is authorized to spend as much as necessary to pay for covered services, creating guaranteed access to covered services. Under private health insurance, policyholders are essentially guaranteed coverage of medically necessary services under their benefit package. In other words, under both Medicare and private insurance, the insurer—either the government in the case of Medicare or an insurance company in the case of private health insurance—assumes the financial risk for paying for covered services.

Under the VA health care system, however, the government does not assume the same degree of financial risk for providing covered services. Being in the mandatory care category for VA health care services does not entitle veterans to, or guarantee coverage of, needed services. The VA health care system is funded by a fixed annual appropriation; once appropriated funds have been expended, the VA health care system is not allowed to provide additional health care services—even to veterans in the mandatory care category. Although title 38 of the U.S. Code contains frequent references to services that “shall” or “must” be provided to mandatory care group veterans, in practical application the terms mean that services “shall” or “must” be provided up to the amount the Congress has authorized to be spent. Being in the mandatory care category essentially gives veterans a higher priority for treatment than veterans in the discretionary care category.

In effect, veterans, rather than the government, assume a significant portion of the financial risk in the VA health care system because there is no guarantee that sufficient funds will be appropriated to enable the government to provide services to all veterans seeking care. Historically, however, sufficient funds have been appropriated to meet the health care needs of all veterans in the mandatory care category as well as most of those in the discretionary care categories. Rationing of health care has occurred when individual facilities or programs run short of funds because of unanticipated demand, inefficient operations, or inequitable resource allocation.

Because the provision of VA outpatient services is conditioned on the availability of space and resources, veterans cannot be assured that health care services are available when they need them. Even veterans in the mandatory care category are theoretically limited to health care services that can be provided with available space and resources. If demand for VA care exceeds the capacity of the system or of an individual facility to provide care, then health care services are rationed.

The Congress established general priorities for VA to use in rationing outpatient care when resources are not available to care for all veterans. VA delegated rationing decisions to its medical centers; that is, each must independently make choices about when and how to ration care.

Using a questionnaire, we obtained information from VA’s 158 medical centers on their rationing practices. In fiscal year 1991, 118 centers reported that they rationed outpatient care for nonservice-connected conditions and 40 reported no rationing. Rationing generally occurred because resources did not always match veterans’ demands for care.

When the 118 centers rationed care, they also used differing methods. Some rationed care according to economic status, others by medical service, and still others by medical condition. The method used can greatly affect who is turned away. For example, rationing by economic status will help ensure that veterans of similar financial means are treated similarly. On the other hand, rationing by medical service or medical condition helps ensure that veterans with similar medical needs are treated the same way.

The 118 medical centers’ varying rationing practices resulted in significant inconsistencies in veterans’ access to care both among and within centers. For example, higher-income veterans frequently received care at many medical centers, while lower-income veterans or those who also had service-connected disabilities were turned away at other centers. Some centers that rationed care by either medical service or medical condition sometimes turned away lower-income veterans who needed certain types of services while caring for higher-income veterans who needed other types of services.

A recent VA survey of its medical centers found that 6 of 162 facilities had either turned away or provided only a single limited treatment to category A (mandatory care) veterans who needed hospital care. The survey also found that 22 VA outpatient clinics had denied treatment or provided only a single treatment to category A veterans.

Restrictions on VA’s Authority to Sell Noncovered Services Makes Eligibility Decisions More Difficult

One major source of frustration for VA facilities is their inability to provide needed health care services to veterans when those services are not covered under their veterans’ benefits. Unlike private sector physicians, who can generally provide any available outpatient service to patients willing to pay, VA facilities and physicians are generally unable to provide noncovered services to veterans. In the private sector, physicians and clinics can sell their services to any person regardless of whether the service is covered by insurance. Essentially, the patient assumes the financial responsibility for any services not covered under his or her health insurance.

Although VA health care facilities are in general restricted to use by veterans, VA actually has greater authority to sell health care services to, for example, medical school hospitals serving nonveterans through sharing agreements than it does to sell the same services directly to veterans. Specifically, VA hospitals and clinics cannot, under current law, sell veterans those services not covered under their veterans’ health care benefits even if the veterans (1) have public or private health insurance that would pay for the care or (2) agree to pay for the services out of their own funds.

By contrast, VA hospitals and clinics can share or sell any available health care service to (1) other federal health care facilities and (2) CHAMPUS beneficiaries. VA facilities can also share with federal and nonfederal hospitals, clinics, and medical schools, but such sharing is limited primarily to sharing of specialized medical resources. VA has no authority to sell these or other health care services directly to nonveterans.

VA’s inability to sell noncovered health care services to veterans makes eligibility decisions more difficult. For private sector providers, a determination of eligibility under public or private health insurance is essentially a determination of the source of payment; if the service is not covered under the patient’s insurance, the physician can still provide the service and bill the patient. But for VA physicians, a determination that a service is not covered under a veteran’s health benefits means that the patient must be denied care. Even if the patient has private health insurance that would pay for the care or is willing to purchase the service, VA physicians are not allowed to provide noncovered services. This puts the physician in the difficult position of examining veterans to identify their need for health care but then turning them away without providing needed health care services if the service is not one the veteran is eligible to receive from VA.

Some Veterans Forgo Care When Turned Away From VA Facilities

In a 1993 review, we examined veterans’ efforts to obtain care from alternative sources when VA medical centers did not provide it. Through discussions with 198 veterans turned away at six medical centers, we learned that 85 percent obtained needed care after VA medical centers turned them away. Most obtained care outside the VA system, but some veterans returned to VA for care, either at the same center that turned them away or at another center.

The 198 veterans turned away needed varying levels of medical care. Some had requested medications for chronic medical conditions, such as diabetes or hypertension. Others presented new conditions that were as yet undiagnosed. In some cases, the conditions, if left untreated, could be ultimately life-threatening, such as high blood pressure or cancer. In other cases, the conditions were potentially less serious, such as psoriasis.

Solving Problems Will Require a Combination of Administrative and Legislative Actions

Developing solutions to the problems discussed in this chapter will require both administrative and legislative actions. Several approaches could be used to improve veterans’ equity of access to VA health care services without legislation. First, VA could better define the conditions under which the provision of outpatient care would obviate the need for hospitalization. Such action would help promote consistent application of eligibility restrictions, but VA physicians would still be placed in the difficult position of having to deny needed health care services to veterans when treatment of their conditions would not obviate the need for hospitalization. This part of the problem can be addressed only through legislative action to (1) make veterans eligible for the full range of outpatient services or (2) authorize VA to sell noncovered services to veterans.

A second approach VA could take to reduce inconsistencies in veterans’ access to care would be to better match veterans integrated service networks’ (VISN), and individual medical centers’, resources with the volume and demographic makeup of eligible veterans requesting services at each center. A third approach to improving equity of access would be to place greater emphasis on use of the fee-basis program to equalize access for those veterans with service-connected disabilities who do not live near a VA facility or who live near a facility offering limited services.

Solutions to some of the eligibility-related problems would, however, require changes in law. For example, legislation would be needed before VA could (1) sell noncovered services to veterans, (2) provide prostheses and equipment to most veterans on an outpatient basis, (3) admit veterans with no service-connected disabilities directly to community nursing homes, (4) develop uniform benefit packages, or (5) provide routine prenatal and maternity care.

An important part of the decision about the nation’s commitment to its veterans is the extent to which VA health care benefits are “earned” benefits, which the government should have a legal obligation to provide. Currently, the provision of VA health care services, even for treatment of service-connected disabilities, is discretionary.

Guaranteed benefits would have important advantages for veterans. For example, veterans with guaranteed benefits would no longer face the uncertainty about whether health care services will be available when they need them. Guaranteed funding, however, could significantly increase government spending unless limits are placed on the number of veterans covered by the entitlement.

One way to control the increase in workload likely to be generated by eligibility expansions is to develop a defined benefit package patterned after public and private health insurance. This could be used to trade off services veterans obtain from VA against the level of funding available. VA could adjust the benefit package periodically on the basis of the availability of resources.

The significance of VA eligibility restrictions could be lessened if legislation was enacted authorizing VA to sell to veterans those health care services not covered under their veterans’ health benefits. With enactment of such legislation, VA physicians would no longer be placed in the difficult position of having to deny needed health care services to veterans when not covered under their health benefits package. Instead, physicians, or administrative staff, would decide whether the veteran would be expected to pay for the service.

Eligibility reform would address some but not most veterans’ unmet health care needs. This is because many of the problems veterans face in obtaining health care services appear to relate to distance from a VA facility or the availability of the specialized services they need rather than to their eligibility to receive those services from VA. Legislation to expand VA’s authority to purchase care from private sector providers would be needed to address unmet needs created by geographic inaccessibility.

These issues, including advantages and disadvantages of alternate approaches where appropriate, are addressed in more detail in appendix II.

VA Provides Services That Veterans May Not Be Eligible to Receive

VA may be spending billions of dollars providing health care services to veterans not eligible for the services provided. VA officials estimate that 20 percent of the patients treated in their hospitals do not need hospital care but would not be eligible to receive the services they are provided on an outpatient basis. In addition, VA’s OIG estimated that from $321 million to $831 million of the money VA spent on outpatient care in fiscal year 1992 was used to provide veterans outpatient services that they were not eligible to receive.

VA cites a series of studies to support its view that 20 percent of VA hospital patients were admitted to circumvent restrictions on their eligibility to receive needed health care services on an outpatient basis. Our review of the studies, however, revealed that they do not contain the types of data needed to link nonacute admissions (meaning the patients did not need to be admitted to the hospital) to eligibility restrictions. The studies, and reviews conducted by the OIG, suggest that most of the nonacute admissions were the result of inefficiencies in VA facilities and conservative physician practice patterns.

If most nonacute admissions are caused by inefficiencies rather than ineligible treatments, then changes in the law to expand eligibility would probably not significantly reduce nonacute admissions to VA hospitals. VA’s announced plans to implement a preadmission certification program, if the program is effectively implemented, could essentially eliminate nonacute admissions with or without eligibility reform. As a result, it has important implications for veterans. If 20 percent of VA’s hospital patients would not be eligible to receive needed health care services on an outpatient basis, then a preadmission certification program that denies admission of patients not needing a hospital level of care could result in significant unmet health care needs. On the other hand, if treatment of most of the patients on an outpatient basis would obviate the need for hospital care, then the certification program would reduce costs without creating unmet needs.

Veterans Admitted to VA Hospitals Do Not Circumvent Restrictions on Outpatient Eligibility

VA studies issued in 1991 and 1993 found that over 40 percent of the admissions to VA acute care hospitals could have been avoided if the patients had been treated on an outpatient basis. VA officials contend that these studies show that remaining restrictions on veterans’ eligibility for outpatient care are causing inappropriate hospitalizations. In addition, VA officials cite anecdotes to suggest that its hospitals are admitting patients who do not need hospital care in order to give them crutches and eyeglasses they are not eligible to receive on an outpatient basis. They estimate that 20 percent of all VA hospitalizations could be avoided if eligibility were expanded to give all veterans coverage of comprehensive outpatient care. Our review, however, found little basis for linking most inappropriate hospitalizations to VA eligibility provisions.

A 1991 VA-funded study of admissions to VA acute medical and surgical bed sections estimated that 43 percent (+/- 3 percent) of admissions were nonacute. Nonacute admissions in the 50 randomly selected VA hospitals ranged from 25 to 72 percent. A 1993 study by VA researchers reported similar findings. At the 24 VA hospitals studied, 47 percent of admissions and 45 percent of days of care in acute medical wards were nonacute; 64 percent of admissions and 34 percent of days of care in surgical wards were nonacute.

VA officials believe that 20 percent of veterans admitted to VA hospitals are admitted to provide them services that they are not eligible to receive on an outpatient basis. In addition, they believe that veterans admitted to VA hospitals to circumvent outpatient eligibility restrictions are kept in the hospital an average of 7 days. In other words, VA estimates that it is spending over $750 million dollars a year to provide noncovered outpatient services to veterans on an inpatient basis.

We believe that VA overestimates the extent to which it provides noncovered services to veterans on an inpatient basis to circumvent the law. Linking the problems identified in the studies to eligibility restrictions is problematic because the studies did not contain the types of data needed to make such a link. Specifically, the studies did not ascertain the eligibility category of the veterans. For example, the studies did not determine whether the patients inappropriately admitted to VA hospitals had service-connected or nonservice-connected disabilities, the degree of any service-connected disability, whether they were in the mandatory or discretionary care category for outpatient care, or whether they would have been eligible to receive the services they needed on an outpatient basis. Had such information been included in the studies, it would be possible to determine whether a higher incidence of nonacute admissions occurred for veterans eligible for only hospital-related outpatient services than for those eligible for comprehensive outpatient services.

The studies point more toward inefficiency, conservative physician practice patterns, and the slow development of ambulatory care alternatives as the primary causes of nonacute admissions. Our evaluation of the studies and VA’s efforts to link their findings to the need for eligibility reform are discussed in more detail in appendix V.

Similarly, while the anecdotes VA cites, such as one about a veteran admitted to a VA hospital in order to get a pair of crutches, represent real limitations in VA eligibility provisions that need to be addressed, VA lacks data to show how many inappropriate hospital admissions resulted from the limitations. For example, how many of the approximately 7,000 patients admitted to VA hospitals in fiscal year 1994 for fractures of the arms and legs were treated on an outpatient basis and then admitted for the purpose of providing crutches? Only 765 of the 7,000 admissions were for 1 day, the most likely length of stay for patients admitted to enable VA to give them a pair of crutches or other routine outpatient care.

In a May 10, 1996, letter to the Ranking Minority Member of the Senate Committee on Veterans’ Affairs, the Veterans Health Administration (VHA) said that all nonacute admissions are not the result of eligibility limitations but that such limitations have been the precursor explanation influencing many of the more specific clinical reasons documented in the medical records. VHA said that VHA has very conservatively estimated that less than half of the totally nonacute admissions can be attributed to the need for eligibility reforms and thus could be shifted to alternative levels of care.

VHA’s estimate of nonacute admissions attributable to eligibility restrictions is not conservative because VHA assumed that 20 percent of all admissions would be shifted to outpatient settings, including admissions to long-term psychiatric and intermediate care units, when the studies address only acute medical and surgical care; and for veterans currently eligible for comprehensive outpatient services (veterans with service-connected disabilities rated at 50 percent or higher, former prisoners of war, World War I veterans, and veterans receiving a pension with aid and attendance).

To shift the number of patients VA assumed would be shifted to outpatient settings from only acute medical and surgical wards, and from only veterans not already eligible for comprehensive outpatient care, would require that VA shift over 30 percent of acute medical and surgical admissions.

Studies Show Continuing Problems in Enforcement of Outpatient Eligibility

Studies by the VA OIG show problems in VA’s enforcement of eligibility provisions for outpatient care that have continued for over 12 years. VA has yet to initiate action to strengthen enforcement of its eligibility requirements, stating that rather than enforce current requirements, it would seek eligibility reforms that would make the provision of the services legal.

In a 1983 review at nine VA medical centers, the OIG found treatment of ineligible veterans ranging from 7.2 percent to 26.8 percent of outpatient visits. The study evaluated only determinations of whether outpatient care provided to veterans with nonservice-connected disabilities was necessary to obviate the need for hospital care or reasonably necessary to complete hospital care for which the veteran was eligible. Although medical center directors generally agreed with the findings and promised corrective actions, the OIG, in subsequent reviews completed in 1991 through 1992, identified a continued and possibly growing problem. For example, the OIG found the following: • About 24 percent of the outpatient visits reviewed at the Muskogee, Oklahoma, medical center were provided to veterans not eligible for the care provided. The OIG reviewed a random sample of visits provided to veterans with service-connected disabilities rated at 20 percent or lower and veterans with no service-connected disabilities who were not receiving VA pension benefits.• About 37 percent of the outpatient visits reviewed at the Fort Lyon, Colorado, medical center were determined to be ineligible for the outpatient services provided. The OIG found that the medical center did not have an effective system to ensure that eligibility certifications were complete and current.• About 38 percent of the outpatient visits reviewed at the Denver medical center were for treatments for which the veteran was not eligible. The OIG found veterans with nonservice-connected disabilities whose outpatient treatment (1) was not discontinued after their conditions became stable, (2) was for conditions unrelated to the condition for which they were hospitalized, and (3) was not needed to obviate the need for immediate hospitalization.

In a review of the Allen Park, Michigan, medical center, the OIG found that the outpatient clinic was incorrectly reporting discretionary care patients as mandatory care patients. The OIG estimated that about one-half of the patients and one-third of outpatient visits were provided to veterans in the discretionary care category. Further, the OIG estimated that more than 50 percent of the visits provided to veterans in the discretionary care category were provided for ineligible conditions. The OIG estimated that from $321 million to $831 million of the $1 billion to $1.5 billion VA spent on discretionary outpatient care in fiscal year 1992 may have been for ineligible outpatient treatments.

As of April 1996, VHA had not issued guidelines to ensure that outpatient visits are properly reported in accordance with outpatient eligibility criteria.

“. . . VHA has never requested a legal opinion of the meaning or intent of the language. Also, we are unaware of any attempt by VHA to define the term in its own program guides or other instructions to clinical staff. Instead, VHA’s practice has been to allow each clinician to interpret its meaning and application for each individual patient. In practice, we found the concept is either ignored or perfunctorily applied to every treatment provided to every patient.”

“The phrase ‘obviate the need for hospital care’ is, however, a very difficult, if not impossible concept to define and to apply at the clinical level. It is one of the major problems clinicians face in attempting to determine eligibility for treatment. Often, conditions which appear stable and chronic, will deteriorate and result in hospitalization if treatment is discontinued. The decision to obviate the need for hospital care is made on individual cases by the clinician caring for the patient . . . .”

“We do not believe there is a basis to conclude it is an ‘impossible concept to define,’ rather the absence of a definition creates a significant weakness in controls over VA’s outpatient programs. Without a policy definition or other instructions to clinical staff, inconsistent application of criteria among facilities and clinicians is certain.”

VHA officials said that they have no plans to further define the concept of obviating the need for hospital care. They said that the practice of medicine does not determine whether to treat patients on the basis of whether they would otherwise be hospitalized. VHA is focusing its efforts on legislation to expand outpatient eligibility rules to eliminate the obviate-the-need provisions and permit VA facilities to provide comprehensive health care services to all veterans. VA submitted such a legislative proposal to the Congress in September 1995.

In its May 10, 1996, letter, VHA said that VA’s General Counsel found that VHA had defined the concept of obviating the need for hospitalization reasonably well in its guidance. VHA said that what GAO does not recognize, and has not assessed, is that applying the guidance at the clinical level does not automatically result in the type of consistency of application GAO seeks because of the complexities presented by each patient and the decisions of the clinicians providing the care.

We do recognize, and have assessed, the inconsistencies that result from application of the VA guidance at the clinical level. As discussed in chapter 3, we asked clinicians at 19 VA medical centers to make eligibility determinations of six veterans based on medical profiles developed from actual medical records. The interpretations ranged from permissive (care for any condition) to restrictive (care only for certain medical conditions). We agree with VHA that because of differences among patients and differences in the way doctors view patients, there will always be inconsistencies in how patients are treated. Clearer guidance, however, should help reduce the level of inconsistency.

VHA also said that while documentation may have been lacking to demonstrate that the care provided was consistent with the guidance, it should not be assumed on the basis of the OIG study that the care is neither appropriate nor advisable, nor that it was not necessary to obviate the need for hospitalization. The results of the OIG’s study of one facility should not, VHA said, be extrapolated to the system.

“selected as the review site in consultation with VHA program officials because it was considered to be a typical outpatient environment in an urban tertiary care facility.”

In addition, the report found lax enforcement of eligibility provisions at many other medical centers as described previously. One of the recommendations in the report was that VHA conduct reviews of each facility’s outpatient workload in order to identify the proportion of visits properly classified as mandatory, discretionary, and ineligible using the definitions relevant to current law. VHA, however, was apparently unwilling to conduct such reviews, which might potentially have disproved the OIG’s findings or shown the problems to be isolated to a few facilities. As of June 1996, VHA had not conducted the reviews.

Issues Need to Be Addressed Concerning Enforcement of VA Eligibility

Many issues need to be addressed in strengthening enforcement of VA eligibility provisions. Strict enforcement of VA eligibility requirements, or VA’s planned implementation of a preadmission certification program, could increase veterans’ unmet health care needs. Enforcement of existing eligibility rules, with VHA’s interpretation of the obviate-the-need criterion, would force many veterans to seek routine outpatient care outside the VA system or forgo needed health care. Similarly, to the extent that VA hospitals admit veterans in order to provide health care services the veterans are not eligible to receive as outpatients, then preadmission certification procedures to prevent admission of patients who do not need a hospital level of care could increase unmet needs.

The VA health care benefit was not designed to meet all of the health care needs of most veterans. Under current law, VA is intended to provide comprehensive health care services primarily to veterans with service-connected disabilities rated at 50 percent or higher. Other veterans must find health care services from other sources when the needed services exceed the limits of their VA eligibility or if VA lacks the resources to provide covered services.

Unlike private sector providers, VA facilities are not financially at risk for inappropriate admissions, unnecessary days of care, and treatment of ineligible beneficiaries. Private sector health care providers are facing increasing pressures both from private health insurers and public health benefits programs such as Medicare and Medicaid to eliminate inappropriate hospitalizations and reduce hospital lengths of stay. For example, private health insurers increasingly use preadmission screening to ensure the medical necessity of hospital admissions and set limits on approved lengths of stay for their policyholders. While private sector hospitals are not prevented from admitting patients without an insurer’s authorization, the hospital and the patient, rather than the insurer, become financially responsible for the care.

Significant savings can accrue from shifting a sizable portion of VA’s inpatient workload to other settings if entire wards or facilities are closed. Current eligibility provisions do not, however, appear to prevent VA from shifting much of its current workload to ambulatory care settings through administrative actions. Twice before, in 1960 and 1973, the Congress expanded VA outpatient eligibility for the express purpose of reducing inappropriate admissions to and unnecessary days of care in VA hospitals.

In 1960, the Congress enacted Public Law 86-639 authorizing provision of outpatient care to veterans with nonservice-connected conditions if such care was needed in preparation for or as a follow-up to hospital care. VA hospitals are still not effectively using this authority more than 30 years after the enactment of this law. Among the primary reasons for nonacute days of care identified in the studies discussed in this chapter are premature admission of patients and delayed discharge of patients who could have been treated as outpatients.

Issues related to the enforcement of VA eligibility requirements and the potential effects of eligibility expansions on nonacute admissions to VA hospitals are discussed in more detail in appendix III.

Increased Demand Generated by Eligibility Reform Could Cause Extensive Rationing Unless VA Appropriations Are Increased

Each of the eligibility reform proposals developed during the past year would make VA benefits easier to understand and administer. Four of the proposals would retain the discretionary funding of VA health care but would expand the number of veterans eligible for comprehensive VA outpatient services from about 465,000 to over 26 million. Such expansions are likely to generate significant new demand for VA care. If appropriations are not increased to satisfy the increased demand, VA faces the prospect of extensive rationing, including turning away many current users. The fifth proposal, developed by the American Legion, would avert the potential for increased rationing by converting veterans’ health benefits into a true entitlement for about 9 million to 11 million veterans, potentially adding billions of dollars to VA appropriations. Other veterans, and veterans’ dependents, would be allowed to buy into VA managed care plans.

Our work identified a number of issues concerning the potential effect of the eligibility reform proposals on demand for VA health care services. For example, to what extent would increased demand for outpatient services result in corresponding increases in demand for hospital and nursing home care? Similarly, would VA efforts to improve customer service and make VA care more accessible to veterans further increase demand?

House Veterans’ Affairs Committee Bill Would Provide Most Modest Eligibility Expansion

Although each of the five eligibility reform proposals would significantly expand eligibility for VA health care, the House Veterans’ Affairs Committee bill would provide the most modest expansion. Table 5.1 compares the key provisions of the five proposals.

Following are other major provisions of eligibility reform proposals: • S. 1345 (VA) (1) expands the definition of covered services to include virtually any necessary inpatient or outpatient care, drugs, supplies, or appliances and (2) allows VA to retain a portion of third-party recoveries. • S. 1563 (VSO) (1) includes nursing home care as mandatory service; (2) provides that the mandatory care category would include catastrophically disabled veterans; (3) allows adult dependents to become eligible for VA care, provided they reimburse VA; and (4) allows VA to bill and retain collections from Medicare. • H.R. 1385 (Montgomery/Edwards) (1) requires VA to provide veterans similar access regardless of their home state, (2) allows VA to use a system of enrollment and priorities for care, and (3) allows VA to retain a portion of third-party recoveries to expand outpatient care. • H.R. 3118 (House Veterans’ Affairs) (1) requires VA to establish a system of annual enrollment based on priorities for care, and (2) creates a new category of priority for catastrophically disabled veterans. • American Legion proposal (1) funds VA appropriations on a capitated basis; (2) establishes separate benefit packages for basic, supplemental, and specialized services; (3) allows VA to bill and retain payments from Medicare, Medicaid, the Federal Employees’ Health Benefits Program, and private insurers; (4) allows dependents to enroll in VA health plans; (5) exempts VA from federal procurement laws; (6) deems VA to be a qualified provider under federal and state health programs; and (7) allows VA to preempt state and local regulations relating to health insurance or plans.

Appendix VI contains a more detailed summary of each proposal.

H.R. 3118 would, like the other proposals, expand eligibility for comprehensive outpatient services to all veterans. It contains provisions, however, intended to make it easier for VA and the Congress to ration care. Specifically, the bill does the following: • Expressly states that the availability of health care services for veterans in the mandatory care category is limited by the amounts appropriated in advance by the Congress (S. 1345 also contains this provision). Although services for mandatory care category veterans are currently subject to the availability of resources, such services are frequently viewed as an entitlement. The language of H.R. 3118 and S. 1345 would make it clear that mandatory care category veterans do not have an entitlement to VA care. • Removes about 1.2 million veterans with noncompensable service-connected disabilities from the mandatory care category. H.R. 1385 would also shift such veterans from the mandatory to discretionary care category. By contrast, S. 1345 would move veterans with noncompensable service-connected disabilities to a higher priority within the mandatory care category than most low-income veterans with no service-connected disabilities. • Requires VA to establish an enrollment process as a means for managing demand within available resources. Veterans with disabilities rated at 30 percent or higher would have the highest priority for enrollment. A similar enrollment process would be optional under H.R. 1385. • Allows VA to determine the extent to which eyeglasses and hearing aids would be covered and limits the provision of prosthetics to veterans under VA care. Other than the American Legion proposal, which would require enrollment, the other bills would essentially remove all restrictions on provision of prosthetics on an outpatient basis, allowing veterans to come to VA for the sole purpose of having a prescription for eyeglasses or hearing aids filled.

Proposals Would Make Benefits Easier to Administer and Understand, but Other Problems Would Continue

Each of the five proposals would make VA health care benefits easier to administer and understand by eliminating the obviate-the-need criterion for accessing outpatient care. The proposals generally do not, however, address the other provisions in current law that contribute to inappropriate use of VA health care resources and uneven access to health care services.

Eliminating the obviate-the-need restriction on access to ambulatory care would simplify administration of health care benefits because VA physicians would no longer need to determine whether a patient would likely end up in the hospital if he or she was not treated. Eliminating the restriction would also promote greater equity by reducing the inconsistencies in eligibility decisions. Finally, eliminating the restriction would make benefits more understandable by essentially making veterans eligible for the full continuum of inpatient and outpatient care.

Most of the proposals do not address the other major restrictions on VA eligibility and the ability of VA to sell noncovered services to veterans. Specifics follow: • Four of the proposals would retain the discretionary funding of VA health care. The American Legion proposal would create new funding mechanisms resulting in guaranteed benefits. • Under the four bills that would retain the discretionary funding of VA health care services, VA would continue to be unable to provide noncovered services directly to veterans. Because all veterans would become eligible for comprehensive outpatient services, there would, however, be fewer noncovered services. If adequate funds are not appropriated to allow VA facilities to serve all veterans seeking care, veterans turned away could not use their insurance or other resources to buy care from VA. • Current restrictions on provision of dental care would not be changed under any of the proposals. Restrictions on the provision of prenatal and maternity care would be removed only under the American Legion proposal. • S. 1345 and the American Legion proposal would remove the restriction on direct admission of veterans with no service-connected disabilities to community nursing homes. The other bills would not, however, remove this restriction. • Of the four proposals that would retain discretionary funding of VA health care, only H.R. 1385 specifically addresses the uneven availability of VA care. That bill would require VA to expand its capacity to provide outpatient care and allocate resources to its facilities in a way that would give veterans access to care that is reasonably similar regardless of where they live. The other bills do not address the uneven availability of VA health care services caused by resource limitations, VA’s limited provider network, and inconsistent VA rationing policies. These problems could, however, be addressed through the expanded contracting authority VA would be given under S. 1345 and H.R. 3118. The American Legion proposal contains specific provisions intended to make the availability of services more equitable. In addition, the American Legion proposal would force VA to address the uneven availability of services through the use of contracting because benefits would be guaranteed.

Exempting VA From Contracting and Personnel Laws and Regulations Would Create Significant Risks

The American Legion proposal to grant VA exemptions to most federal contracting and personnel laws and regulations and deem VA facilities to be qualified providers under both federal and state health programs could create significant risks. Specifically, the American Legion proposal would • deem a VA health plan or facility to be a qualified provider or carrier under a federally administered health care program, including Medicare, Medicaid, CHAMPUS, the Indian Health Service, and the Federal Employees Health Benefits Program; • authorize VA to plan and implement administrative reorganization, consolidation, elimination, or redistribution of offices, facilities, functions, or activities notwithstanding any other provision of law; • allow VA to enter into agreements with non-VA health care plans, insurers, health care providers, health care professionals, health care facilities, medical equipment suppliers, and related entities notwithstanding any law or regulation pertaining to competitive procedures, acquisition procedures or policies, source preferences or priorities, or bid protests; • preempt and supersede any state or local law or regulation that relates to health insurance or health plans to the extent such law or regulation is inconsistent with provisions of the VA law; and • require that a VA plan be considered a qualified provider or carrier under any state health care reform plan, law, or regulation.

Reducing contracting requirements heightens the potential for fraud and abuse. VA has a long history of problems in administering contracts and sharing agreements. Because VA medical centers’ senior managers often receive part-time employment incomes from medical schools that receive millions of dollars through VA contracts, conflicts of interest could arise.

The expanded contracting envisioned under the American Legion proposal would greatly increase the potential for conflicts of interest.

In addition to exemptions from general contracting requirements, VA health plans would be exempt from specific requirements relating to risk contracting, such as those that apply to Medicare health maintenance organizations (HMO). Because VA has little experience in risk contracting, such exemptions might heighten the potential for fraud and abuse and could affect veterans’ access to needed medical services.

VA facilities and health plans would also not be accountable to Medicare or other federal, state, or local health plans because of their deemed status. Other programs would have little recourse against VA health plans and facilities if they failed to enforce program safeguards.

Eligibility Expansions Likely to Generate Increased Demand

The five reform proposals would likely generate significant new demand for both outpatient and inpatient care. The increased demand could be heightened by the synergistic effects of other changes in the VA health care system to improve access and customer service and expand contracting.

Under the four bills that would retain the discretionary nature of VA funding, over 26 million veterans would become eligible to receive services that currently are available primarily to the approximately 465,000 veterans with service-connected disabilities rated at 50 percent or higher. Similarly, under the American Legion proposal, about 9 million to 11 million veterans with service-connected disabilities would become entitled to free VA health care services. The American Legion proposal would make veterans with service-connected disabilities rated at 50 percent or higher entitled to any needed health care service included in the comprehensive and supplemental care packages; other veterans currently in the mandatory care group for hospital care, with the exception of those with noncompensable service-connected disabilities, would be entitled to the basic benefit package for free. Two additional groups of veterans would become entitled to the basic benefit package: veterans with catastrophic illnesses that render them destitute and veterans proven uninsurable in the private market.

Increased demand would likely come from both increased use of VA services by current users unable to obtain all of the health care services they need from VA and from veterans seeking VA services for the first time. Even many veterans who rely on other health care coverage for most of their needs are likely to attempt to take advantage of added VA benefits such as prescription drugs, which are not typically covered under other health insurance. Medicare does not cover most outpatient prescription drugs, making VA an attractive alternative. Medicare-eligible veterans already make significant use of VA outpatient prescriptions even with the current eligibility limitations. Removing the restrictions on access to outpatient care would likely significantly increase demand for outpatient prescriptions.

Another area where workload would likely increase dramatically is prosthetic devices, such as eyeglasses, contact lenses, and hearing aids. In addressing the restriction in current law on provision of crutches to veterans with broken legs, the five proposals would also eliminate the restriction on provision of other prosthetic devices, such as eyeglasses, contact lenses, and hearing aids. H.R. 3118 would, however, give the Secretary of Veterans Affairs the authority to restrict the provision of eyeglasses, contact lenses, and hearing aids.

A 1992 VA eligibility reform task force developed estimates of the changes in demand likely to be generated through several alternative approaches to eligibility reform. VA’s task force estimated that if eligibility was reformed to make all current VA users (defined by the task force as veterans who had used VA in the past 2 years) eligible for the full continuum of VA health care services, then demand for outpatient care would increase by about 8.4 million visits annually. Similarly, expanding eligibility to all veterans would increase demand for outpatient care by about 32.8 million visits annually. The task force further estimated that demand for inpatient care would increase by 1.8 million patients treated, primarily because of demand generated by new users.

The methods VA used to develop its projections were reviewed by the Congressional Budget Office (CBO). CBO found VA’s methods reasonable.

Other Improvements in VA Health Care System Could Heighten Increased Demand

If concurrent changes are made in the accessibility of VA health care services, in VA customer service, and in the extent to which veterans are allowed to use private providers under contract to VA, the effect of eligibility reforms on demand for VA care will likely be heightened. As it strives to make the transition from a hospital-based system to an ambulatory-care-based system, VA is attempting to bring ambulatory care closer to veterans’ homes. Because distance is one of the primary factors affecting veterans’ use of VA health care, actions to give veterans access to outpatient care closer to their homes, either through expansion of VA-operated clinics or through contracts with community providers, will likely increase demand for services.

VA’s recent efforts to improve access by establishing separate access point clinics have attracted many new users. As we reported in April 1996, 12 new access points operate in a variety of locations, including three areas that are more than 100 miles from a VA facility; six areas between 50 and 100 miles from a VA facility; and three areas less than 50 miles from a VA facility (including 1 access point located 8 miles from a VA medical center in a large urban area). Four clinics are operated by VA; the remaining eight are operated via contracts with county and private clinics. The clinics have been successful in attracting veterans who have not used VA health care for several years as well as veterans who have never used VA health care. Forty percent of the 5,000 veterans enrolled at the 12 clinics had not received VA care in the past 3 years—1 clinic served only new users.

Three proposals, S. 1345, H.R. 3118, and the American Legion proposal, would facilitate the expansion of access points by giving VA broader authority to contract with private sector providers. Such contracting might enable veterans to use the same physicians, clinics, and hospitals they use now but have VA rather than their private insurance or Medicare pay for the care. More importantly, they would no longer be required to meet the cost-sharing requirements of Medicare and private health insurance.

Similarly, our reports over the past 5 years have identified continuing problems in VA customer service, including long waiting times, poor staff attitudes, and lack of such amenities as bedside telephones. As part of its response to the National Performance Review, VA has developed detailed plans to improve customer service that include installing bedside telephones, reducing waiting times, and training staff. These efforts are likely to help VA retain current users and will likely attract new users as VA’s reputation for customer service improves. These improvements also heighten the potential for increased demand to be generated through eligibility expansions.

Expanding Eligibility While Constraining Budgetary Increases Could Result in Extensive Rationing

Expanding eligibility without providing adequate funds to pay for the expected increase in demand could significantly increase the number of veterans turned away from VA facilities. The four bills that would retain the discretionary funding of VA health care services would, however, provide little or no new revenue to offset the costs of increased demand. Expanding eligibility with a fixed or declining budget could give veterans false expectations of what services they can obtain from VA. In addition, many current users might be shut out of the VA system as veterans with higher priority increase their use of VA services.

Both the President and the House of Representatives propose declining VA medical care budgets after fiscal year 1997, although these budgets would increase slightly after the turn of the century. (See table 5.2.)

Because low-income veterans would be the third or fourth highest priority for care, and the law does not differentiate between low-income veterans with and without other health care coverage, reforms that provide a richer benefit package or increase the number of higher-priority veterans, or a combination of both, could reduce funds available to treat low-income, uninsured veterans. For example, under the new definition of health care in VA’s reform proposal (S. 1345), veterans in the top three priority categories would be in the mandatory care category for virtually any service other than nursing home care offered by VA. Under the VA proposal, about 1.8 million veterans currently eligible for limited outpatient care would be placed in the highest priority group for comprehensive care. The VA proposal would also place veterans with noncompensable service-connected disabilities (estimated to number about 1.2 million) above low-income veterans with no service-connected disabilities in the priority ranking of veterans in the mandatory care category for comprehensive outpatient services.

Increased demand for routine health care services generated by these expansions could leave fewer resources available to pay for essential health care services for uninsured veterans. Only after the increased demand for nonservice-connected care generated by the 3 million veterans VA proposes to add to the mandatory care category for free comprehensive outpatient services was met could VA use its resources to provide essential hospital and other services to low-income, uninsured veterans without service-connected disabilities. With steady or declining budgets it could be increasingly difficult for VA to fulfill its safety net mission after meeting the increased demand for care generated through eligibility expansions.

Although two bills (H.R. 3118 and H.R. 1385) propose establishing an enrollment process to help VA ration care if adequate funds are not appropriated to meet the increased demand likely to be generated by eligibility expansions, such a process would not protect VA’s safety net mission. Only after veterans in the top three priority categories were enrolled for comprehensive health care services could low-income veterans with no public or private health insurance enroll. One VA official told us that she did not think VA would enroll veterans below the highest priority category under H.R. 3118—veterans with service-connected disabilities rated at 30 percent or higher. As a result, veterans with no health care options might no longer be able to use VA health care services, including the hospital-related services they now receive.

The four bills that retain discretionary funding of VA health care contain few new sources of revenues to offset the costs of eligibility expansions. The bills essentially assume that eligibility reform will not require new sources of revenue because the savings generated by shifting patients from inpatient to outpatient care would offset the costs of increased demand for outpatient care. Although we agree that savings can occur by shifting nonacute hospital admissions to outpatient settings, it is not clear that sufficient savings will occur to offset the potential increase in demand, especially if hospital beds emptied by shifts to outpatient care are filled with new users enticed to use VA by the eligibility expansion.

As discussed in chapter 3, problems in VA’s methods for allocating resources to its facilities result in unequal access to VA health care services. Some facilities have adequate resources to treat veterans in both the mandatory and discretionary care categories while others are forced to ration care to veterans in the discretionary care category. Because most of the reform proposals do not address the uneven availability of VA services, the increased demand for care generated by eligibility expansions could heighten the problems VA already faces in trying to equitably distribute available resources.

Prospects of Extensive Rationing Would Create Pressure to Increase Appropriations

In the past, VA has been unable to provide the Congress the types of data on VA users that the Congress would need to make informed decisions on appropriate funding levels. The increased demands for care generated by the eligibility expansion proposals would put pressure on the Congress to appropriate the additional funds needed to avoid extensive rationing.

A 1992 VA eligibility reform task force estimated that, without resource constraints, expanding eligibility for comprehensive VA care could increase VA spending by about $38 billion per year. Although VA and CBO arrived at strikingly different conclusions about the budgetary effects of the current reform proposals, we find CBO’s arguments about the potential costs of eligibility expansions more compelling because they incorporate the costs of meeting the potential increased demand predicted by VA’s 1992 eligibility reform task force.

Controlling Budgetary Increases Would Be Difficult

Historically, the Congress has fully funded both VA’s anticipated mandatory and discretionary workload. VA does not, however, provide the Congress data on the extent to which its resources are used to provide services to veterans in the mandatory and discretionary care categories for hospital and outpatient care in justifying its budget request. Considering the significant portion of VA resources currently used to provide services to veterans in the discretionary care category and the limited data VA provides the Congress on which to base funding decisions, it would be difficult for the Congress to appropriate funds for the care of only a portion of the veterans in the mandatory care category. As a result, the Congress has little basis for determining which portion of VA’s discretionary workload to fund.

Our work shows that a significant portion of appropriated funds are used to serve veterans in the discretionary care category. We matched VA’s fiscal year 1990 treatment records against federal income tax records and found that about 15 percent of the veterans with no service-connected disabilities who used VA medical centers had incomes that placed them in the discretionary care category for both inpatient and outpatient care. In a May 10, 1996, letter to the Ranking Minority Member, Senate Committee on Veterans’ Affairs, VHA said that our estimate was either inaccurate or a very old estimate. According to VHA, only 4 percent of all veterans treated in 1994 were in the discretionary care category.

Our estimate more accurately reflects the extent to which care is provided to veterans in the discretionary care category. VHA’s estimate is apparently based on unverified data provided by veterans when they apply for care; such data underestimate veterans’ incomes. We developed our estimate through a match of VA treatment records and income tax data. Our match showed that VA may have incorrectly placed as many as 109,230 veterans in the mandatory care category in 1990. Tax records for these veterans showed they had incomes that should have placed them in the discretionary care category. We estimated that VA could have billed as much as $27 million for care provided to these veterans.

Although data from our study are now 6 years old, data from VA’s own tax matches are yielding similar results. VA has now established its own income verification program. Its initial match found that about 18 percent of veterans with no service-connected conditions underreported their income. VA’s matching agreement with the Internal Revenue Service indicates that VA expects its match of fiscal year 1996 treatment records against tax data to generate about $30.5 million in copayment collections for care provided to veterans who were incorrectly classified as mandatory care category veterans. Accordingly, our estimate—and VA’s own data—show that about 15 percent of veterans with nonservice-connected disabilities using VA medical centers are in the discretionary care category for both inpatient and outpatient care.

VHA recently advised us that it cannot provide the Congress with information on the extent to which VA services are provided to veterans in the mandatory and discretionary care categories for inpatient and outpatient care. VHA advised us that VA does not have accounting systems in place that would allow VA to differentiate between mandatory and discretionary care. VHA said that developing the accounting systems capable of differentiating between the categories would be extremely difficult and may not be cost-effective.

Without such information, the Congress could find it difficult to set limits on VA appropriations. For example, it would not know whether the funds appropriated were adequate to meet the health care needs of all veterans with service-connected disabilities likely to seek VA care.

1992 VA Task Force Estimates Costs of Eligibility Reform

In March 1992, the Acting Secretary of Veterans Affairs established a task force to develop alternative proposals for reforming eligibility for VA health care. The task force developed four proposals, which ranged from retaining current eligibility provisions to expanding eligibility to make all veterans eligible for a full continuum of services. Specifically, the four proposals were as follows: • Alternative 1: Limit the system to current users with no eligibility reform. • Alternative 2: Limit the system to current users with no eligibility reform, but implement managed care. • Alternative 3: Limit the system to current users, but expand eligibility to cover the full continuum of services without budgetary constraints. • Alternative 4: Expand eligibility to cover the full continuum of care for all veterans with no resource constraints.

The task force also developed cost estimates for each alternative, assuming both no budget offsets and different combinations of veteran cost sharing and third-party recoveries from private insurers, Medicare, and Medicaid. The cost estimates ranged from $11.0 billion (alternative 3 with offsets) to $53.6 billion (alternative 4 with no offsets). (See table 5.3.)

The task force noted that the cost increases would result more from the number of new users attracted to the VA health care system than from providing existing users the full continuum of care. Much of the cost increases, the task force notes, are for inpatient and outpatient care for new users.

VA’s Current Estimate Is Based on Questionable Assumptions

Although its eligibility reform task force had developed detailed estimates of the increased demand and costs of reform options, VA developed a new formula for estimating the effects of eligibility reform as part of its National Performance Review efforts. Neither the original formula, nor the recent revision to it, adequately considered the increased demand for outpatient care likely to be generated by the proposed eligibility expansions. In addition, if VA had accurately applied its original formula and assumptions, it would have predicted an increase rather than a decrease in costs resulting from eligibility reform. VA made a number of other questionable assumptions in its calculations.

VHA originally developed what appears to be a complex formula for estimating the cost effects of eligibility reform on the basis of the overall assumption that eligibility reform would enable VA to divert 20 percent of its hospital patients to outpatient care. The results from applying VHA’s original formula were sensitive to a series of assumptions about such things as how many veterans are inappropriately admitted to VA hospitals because of restrictions on outpatient eligibility; how long, on average, those veterans stay in the hospital; how the average costs of treating patients remaining in VA hospitals after eligibility reform would be affected; and how eligibility reform would affect demand for outpatient care. The original formula could show either a decrease or increase in costs depending on the assumptions made.

VA did not include a key portion of the original formula—a 10-percent increase in the costs of treating those patients remaining in VA hospitals after eligibility reform—in its calculations and, therefore, reported that its analysis showed that eligibility reform would result in savings of about $268 million. Including that portion of the formula in the calculation results in the claimed savings becoming a cost increase of $51 million.

VA subsequently revised its formula to delete the adjustment for the costs of treating those patients remaining in the hospital. As a result of this change, whatever assumptions are made about the percentage of care shifted and the average days of hospital care avoided, the formula will result in net savings. Even under the assumption that no inpatients are transferred to outpatient care, the formula shows that expanding eligibility would result in savings of about $39 million. What appeared on the surface to be a formula taking many factors into account is, in its current form, actually a simple calculation—eligibility reform will save 30 percent of the costs of inpatient care shifted to outpatient settings plus 10 percent of the total costs of fee-basis and travel reimbursements. The formula includes no adjustments for increased demand for outpatient care by veterans other than those shifted from inpatient to outpatient care.

VA’s revised formula for estimating the cost effects of eligibility reform is also independent of the provisions of eligibility reform. In other words, it would yield the same result when applied to any of the five reform proposals or if changes were made in the proposals to increase or reduce the number of veterans in the mandatory care category. Specifically, it would yield the same savings estimate regardless of • which benefits are included, • whether and to what extent veterans are required to contribute toward the costs of the expanded benefits, the number of veterans placed in the mandatory and discretionary care categories, and • whether veterans’ health benefits remain discretionary or are made an entitlement.

Our specific concerns about VA’s analysis are discussed in the following sections.

Formula Does Not Adequately Account for Increased Demand

The formula assumes that an increase in demand for outpatient care would not occur other than demand generated by veterans shifted from inpatient to outpatient care. VA anticipates limited new demand because, according to headquarters officials, the administration proposal and H.R. 3118 were designed to give VA added flexibility by eliminating the obviate-the-need-for-hospitalization criterion, not to attract new users. VA’s 1992 task force, however, estimated that most new demand would be generated through new users. Although headquarters officials anticipate few new users, some medical centers are already aggressively pursuing new users. As discussed earlier, about 40 percent of the veterans using VA access points had not used VA health care within the 3 years preceding their enrollment at the access point.

Adjustment for Higher Costs of Treating Remaining Patients Not Included in VA Calculations

“ecause less sick patients will be shifted to outpatient care, the remaining in-patients will be sicker and will have a 10% higher cost per admission . . . .”

VHA, however, did not include the calculation in its savings estimates. VHA officials indicated that they would provide an explanation for why the adjustment was not included in the calculations, but in later discussions, the VHA economist who applied the formula declined to provide an explanation for why the adjustment was not made. Including this adjustment in the original formula would have turned VHA’s projected savings of $268 million into a cost increase of $51 million.

In a May 10, 1996, letter to the Ranking Minority Member of the Senate Committee on Veterans’ Affairs, VHA said that GAO has consistently misunderstood that no change is taking place with the actual length of stay of the admissions not shifted. The patients with longer lengths of stay would remain as inpatients, but, according to VHA, neither their lengths of stay nor the costs of their care would increase.

Research has consistently shown that moving the least costly patients out of hospitals increases the average cost of caring for the patients who remain even though there is no change in an individual patient’s length of stay or cost of care. This phenomenon occurs because removing a group of patients with shorter lengths of stay and fewer care needs (none of the patients VA envisions shifting needed hospital-related care) raises a hospital’s average length of stay and average cost per discharge. The following example illustrates this.

A VA hospital treats two inpatients. Patient A has congestive heart failure and spends 7 days in the hospital. Treatment for this patient costs the hospital $10,000. Patient B is treated on an outpatient basis for a broken leg and then admitted to the hospital and provided a pair of crutches. Patient B stays in the hospital 1 day, and the cost of providing the care is $1,000. The average length of stay for the two patients was 4 days [(7 days + 1 day)/2 patients], and the average cost per day of care provided to the two patients was $1,375 .

If, following eligibility reform, patient B is provided crutches on an outpatient basis rather than being admitted to the hospital, the average length of stay and cost per day for the remaining patient(s) would increase. The hospital’s average length of stay for the remaining patient would be 7 days (7 days/1 patient), and the average cost of treating the patient would be $1,429 a day ($10,000/7 days).

Other Concerns About VA’s Assumptions and Calculations

Our review identified a number of other concerns about the reasonableness of VA’s assumptions and calculations. The following paragraphs illustrate some of these concerns: Eligibility reform would enable VA to eliminate 20 percent of hospital admissions. One argument frequently used to promote the need for eligibility reform is that the obviate-the-need provision prevents VA from providing care in the most cost-effective setting. The presumed savings from removing the restrictions on access to ambulatory care services would then be used to offset the costs of expanded benefits.

It is possible to achieve savings by shifting inappropriate inpatient services to other settings. But, as discussed earlier in this report, current eligibility provisions are not a major contributor to inappropriate admissions, nor do those provisions prevent VA from shifting a significant portion of inappropriate inpatient services to ambulatory care settings. Actions such as the preadmission certification program previously discussed could, however, generate savings that could be used to offset some of the costs of eligibility reform.

VA applied the assumed 20-percent reduction in hospital admissions across all inpatient care, not just acute medical and surgical admissions. Although the studies VA cites as supporting its assumption that 20 percent of admissions could be shifted to outpatient care addressed only acute medical and surgical admissions, VA applied the 20-percent reduction to all inpatient care, including intermediate care and both acute and long-term psychiatric admissions. Such admissions account for over 25 percent of VA admissions. Applying the 20-percent reduction only to acute medical and surgical admissions would reduce projected savings. To maintain the total number of shifted admissions, VA would have to assume that more than 27 percent of acute medical and surgical admissions would be shifted under eligibility reform.

VA assumed a 10-percent savings in fee-basis costs. The fee-basis program is used to pay for outpatient care veterans obtain from private sector providers when VA care is either not available or not convenient. Therefore, shifting veterans from VA hospital beds to outpatient settings should have no effect on current fee-basis use or costs.

VA claims the savings in fee-basis costs will result from establishment of access points. As of April 1996, VA operated 12 access points on a pilot basis, and it is too early to tell whether they will affect fee-basis costs. Moreover, because access points are attracting new users, they may increase rather than decrease VA’s fee-basis costs. VA provides no other basis for estimating that eligibility reform will reduce fee-basis costs.

VA assumes that travel reimbursements will decline by 10 percent as a result of eligibility reform. VA indicates that travel reimbursements will decline because of the creation of access points. While travel reimbursements might decline for those veterans living near an access point, any such reduction would not result from eligibility reform. Under VA’s assumption that veterans shifted from hospital care to outpatient care will receive an average of 17 additional outpatient visits, beneficiary travel could significantly increase rather than decrease. Rather than receiving travel reimbursement for one trip to the hospital, veterans qualifying for beneficiary travel would, under VA’s assumptions, receive travel reimbursement for 17 outpatient visits.

Beneficiary travel includes (1) medically necessary ambulance travel; (2) medically necessary travel by wheelchair van, stretcher, or other means of special travel; (3) intrafacility travel; (4) travel for compensation and pension examinations; and (5) all other travel, which includes transportation by common carrier, bus, taxi, or privately owned vehicle.

Beneficiary travel is provided at the discretion of the Secretary of Veterans Affairs to certain types of veterans: (1) veterans with service-connected disabilities rated at 30 percent or higher; (2) veterans with service-connected disabilities of 20 percent or less for travel related to treatment of their service-connected disabilities; (3) veterans receiving a VA pension; (4) veterans traveling in connection with an examination for compensation or pension, or both; and (5) veterans whose income is less than or equal to the maximum VA pension rate with aid and attendance.

Most of the veterans eligible to receive beneficiary travel are already eligible to receive, on an outpatient basis, the care that qualifies them for travel reimbursement. For example, veterans with service-connected disabilities rated at 20 percent or less are in the mandatory care category for outpatient treatments related to their service-connected disabilities, the only care for which they are eligible to receive travel reimbursement.

An average of 7 days of hospital care would be saved for every patient diverted to outpatient care. This assumption may not be sound given VA’s argument that the patients it would be diverting were admitted in order to provide them routine outpatient care. Because the inpatients VA expects to shift to outpatient care are essentially self-care patients with no acute medical need, VA would most likely be drawing from patients with the shortest lengths of stay—such as veterans admitted to provide them crutches or as a prerequisite to placement in a community nursing home. In fiscal year 1994, about 37 percent of VA medical and surgical patients had 1- to 3-day stays. It appears that it would be more reasonable to assume the average length of stay of patients to be diverted to outpatient care to be 1 to 3 days.

In providing comments to the Ranking Minority Member, Senate Committee on Veterans’ Affairs, on our March 20, 1996, testimony, VHA said that it has a sound basis for its assumption that the average length of stay for shifted admissions would be 7 days. VHA said that the same research that initiated the estimates of VA nonacute days of hospital stays also provided VA information on the average length of stay of the totally nonacute admissions included in the study. According to VHA, the research showed the average length of stay to be a little longer, not less, than 7 days. VHA said that VA’s estimate of 7 days was also confirmed by preliminary current VA utilization management information.

However, the average length of stay for the totally nonacute admissions in the study cited was 5.5 days, not over 7 days. In addition, the average length of VA acute medical/surgical admissions in fiscal year 1986—the year studied—was slightly over 16 days. By fiscal year 1995, however, the average length of stay of VA acute medical/surgical patients had declined to 11.6 days, a 28-percent decline. VA’s progress in reducing its average length of stay should also be considered in its assumptions. Finally, VA’s 1992 eligibility reform task force estimated that 1- and 2-day admissions would be shifted to outpatient settings following eligibility reform.

Changing the assumption about average length of stay alters VA’s savings estimates. Substituting 3 days for VA’s assumption of a 7-day average length of stay would decrease VA’s projected savings of $268 million from eligibility reform to about $137 million.

CBO’s Conclusions on Costs of Eligibility Reform

Last year, CBO estimated that the eligibility reform provisions contained in H.R. 3118 could increase the deficit by $3 billion or more annually if the Congress fully funds the increased demand for outpatient care that the eligibility expansions would likely generate. CBO’s estimates were based in part on tables contained in what at the time was VA’s newly released 1992 National Survey of Veterans. VA claimed that CBO misinterpreted one of the tables in the survey—which VA acknowledged was confusing—and raised concerns about CBO’s methodology and the accuracy of its projections.

After reviewing VA’s concerns, CBO determined that any problem in interpreting the survey data did not affect its overall conclusion that the bill would not be budget neutral because the expanded eligibility would generate significant new demand. CBO assumed in conducting budgetary impact analyses that if demand increases under a discretionary program, funds will be appropriated to meet that demand. CBO estimated that the cost of providing outpatient care to the 10.5 million veterans who are currently eligible only for hospital-related outpatient care would far outweigh the savings from shifting inpatients to outpatient care. Further, CBO concluded that VA could incur significant costs under provisions that expand VA’s authority to provide prosthetic devices on an outpatient basis. Finally, CBO noted that the bill could increase costs by billions more if the induced demand for outpatient care resulted in corresponding increases in demand for hospital care.

On July 15, 1996, CBO provided the House Veterans’ Affairs Committee a revised cost estimate for H.R. 3118, as reported by the Committee on May 8, 1996. Expanding eligibility for outpatient services would, CBO estimated, ultimately increase the cost of veterans’ medical care by $3 billion a year, assuming appropriation of the necessary amounts. CBO noted that the bill would affect direct spending and is subject to pay-as-you-go procedures under section 252 of the Balanced Budget and Emergency Deficit Control Act of 1985.

In its July 18, 1996, report on H.R. 3118, the House Committee on Veterans’ Affairs disagreed with CBO’s cost estimate and estimated that the bill would be budget neutral for annual outlays in fiscal year 1996 and in each of the 5 following fiscal years.

Further Evaluation of Potential Effects of Eligibility Reforms on Demand Are Needed

Eligibility reforms that would increase the number of veterans eligible for comprehensive outpatient services would likely generate new demand for outpatient care in three primary ways. First, current VA users are likely to seek previously noncovered services, such as preventative health care. Second, veterans who previously had not used VA because of its eligibility restrictions might begin using VA, particularly for those services not covered under their public or private health insurance. Third, some care might be shifted from inpatient to outpatient settings as patients admitted to circumvent eligibility restrictions are treated on an outpatient basis.

VA’s 1992 Eligibility Reform Task Force conducted the most comprehensive study of the potential effects of eligibility reform, but it was not based on any of the current proposals. The current VA evaluation assesses only one of three ways eligibility reforms are likely to increase demand for outpatient care and is based on questionable assumptions.

Among the issues that could be considered in future analyses are the following: Increased demand could be lower than anticipated if VA facilities are currently circumventing the eligibility restrictions and providing noncovered services. As discussed in chapter 4, studies by VA’s OIG found that VA outpatient clinics are providing significant numbers of noncovered services. This suggests that at least some current VA users may already receive comprehensive health care services from VA and, therefore, their use of VA services might not significantly increase under eligibility reforms that essentially make legal what is already happening in practice. • Expanded outpatient eligibility could result in a corresponding increase in demand for hospital care. After removing 1- and 2-day hospital stays (assumed to be shifted to outpatient care), VA’s 1992 eligibility reform task force estimated that demand for inpatient care could nearly triple from 987,000 to about 2.8 million patients treated. • Eligibility reform that would authorize direct admission of veterans with nonservice-connected disabilities to contract community nursing homes could increase demand. As VA moves patients from costly inpatient care to less intensive settings, demand for nursing home care is likely to increase. The increased demand for nursing home care could, however, be offset to some degree by greater use of home care and residential care for patients requiring less intensive treatment. • Concurrent changes to make VA health care services more accessible to veterans could increase the potential effect of eligibility reform on outpatient, and, indirectly, on inpatient workload. As it strives to make the transition from a hospital-based system to an ambulatory-care-based system, VA is attempting to bring ambulatory care closer to veterans’ homes. Because distance is one of the primary factors affecting veterans’ use of VA health care, actions to give veterans access to outpatient care closer to their homes, either through expansion of VA-operated clinics or through contracts with community providers, will likely increase demand for services even without eligibility reform. • Giving VA broader authority to contract for health care services with private hospitals and providers might give veterans greater freedom to choose health care providers closer to their homes. If this happens, then increased demand for VA-supported health care is likely with or without eligibility reform.

In addition to further assessing the potential effects of eligibility and other reforms on demand for outpatient care, further assessments appear warranted to determine how reforms would affect the availability of specialized services. Provisions in the major VA eligibility reform proposals could have both positive and negative effects on VA’s specialized services. Reforms that increase VA’s efficiency could free resources that could be reprogrammed to increase specialty services. Unanticipated new demand for routine outpatient services could, however, outstrip VA’s capacity to provide specialized services such as treatment of spinal cord injuries, substance abuse, and the blind.

These issues are discussed in more detail in appendix IV.

Approaches for Limiting the Budgetary Impact of Eligibility Reforms

The cost of eligibility reform depends on a number of factors, including the benefits covered, the number of veterans offered the benefits, and the extent to which veterans are expected to pay for or contribute toward the cost of their health care benefits. The four proposals that would retain the discretionary funding of the VA health care system would essentially make all 26 million veterans eligible for comprehensive inpatient and outpatient care with little or no change in the system’s sources of revenue or in the methods used to establish VA’s appropriation.

Our work identified five basic approaches that could be used, individually or in combination, to limit the budgetary impact of eligibility reforms. These are (1) setting limits on covered benefits, (2) limiting the number of veterans eligible for health care benefits, (3) generating increased revenues to pay for expanded benefits, (4) allowing VA to “reinvest” savings achieved through efficiency improvements in expanded benefits, and (5) providing a methodology in the law for setting a limit on VA’s medical care appropriation.

The American Legion proposal, which as of July 1, 1996, had not been introduced, combines some of the above approaches that could be used to constrain the growth of the VA budget. It would make significant changes in VA funding streams and would turn VA health benefits into an entitlement for certain veterans. In addition, it would authorize VA to sell health benefit plans to other veterans and veterans’ dependents. The number of veterans to be covered under the entitlement—9 million to 11 million—would likely result in the proposal, in its current form, adding billions of dollars to the budget deficit.

Set Limits on Covered Benefits

One way to control the increase in workload likely to result from eligibility expansions would be to develop one or more defined benefit packages patterned after public and private health insurance. This would narrow the range of services veterans could obtain from VA, allowing workload reductions from the eliminated services to offset the workload from increased demand for other services. Like private health insurers, VA could adjust the benefit package periodically on the basis of the availability of resources.

Creating a defined benefit package could result in some veterans receiving a narrower range of services than they receive now, while others would receive additional benefits. This approach would essentially take some benefits away from veterans with the greatest service-connected disabilities and give additional benefits to veterans with lesser service-connected disabilities and to veterans with no service-connected disabilities.

One option for addressing the redistribution of benefits issue is to establish separate benefit packages for each type of veterans. For example, veterans with disabilities rated at 50 percent or higher might continue to be eligible for any needed outpatient service, while a narrower package of outpatient benefits—perhaps excluding such items as eyeglasses, hearing aids, and prescription drugs—could be provided to higher-income veterans with no service-connected disabilities.

Of the five major reform proposals, only the American Legion proposal would require VA to develop defined benefit packages. The American Legion proposal would require VA to establish both comprehensive and basic packages as well as a supplemental benefit package to cover specialized services.

Limit the Number of Veterans Eligible for VA Health Care

Another way to limit the budgetary effects of eligibility reform would be to pay for expanded eligibility for some veterans by restricting or eliminating eligibility for others. Under current law, all veterans are eligible for VA hospital and nursing home care and at least some outpatient care, but there is a complex set of priorities for care based on such factors as presence and degree of service-connected disability, period of military service, and income. In practical application, however, these priorities have little effect on the VA health care system. In the preparation of VA budget justifications, no distinction is made between veterans in the mandatory and discretionary care categories, let alone those in different priority groups within the mandatory and discretionary care categories.

Among the approaches that could be used to limit the number of veterans taking advantage of expanded benefits is to limit VA eligibility to those veterans who lack other public or private insurance. Exceptions could be made for treatment of service-connected disabilities and for services not covered under veterans’ public or private insurance. Such an approach might help target available funds toward those veterans most in need.

The Congress would face a difficult choice, however, in determining whether VA health care is (1) a benefit of military service that should be available regardless of alternate coverage or (2) a safety net available only to those veterans who lack health care options.

Limiting eligibility of veterans with nonservice-connected disabilities to those whose income is below the current, or some new, means test limit would allow VA to retarget some resources currently used to provide services to higher-income veterans. Because about 15 percent of veterans with no service-connected disabilities who use VA health care services have incomes above the means test threshold, eliminating their eligibility would make additional resources available to offset increased demand for outpatient services by veterans in higher-priority categories. Such veterans could be allowed to purchase services from VA facilities on a space-available basis.

Another way to limit the number of veterans eligible for expanded VA benefits is to restrict enrollment in VA health care to current VA users. This approach would limit the potential for nonusers to be enticed by improved benefits into becoming users and thereby reduce the costs of eligibility reforms. While current users might increase their use of VA health care in response to expanded benefits, most of these veterans already obtain those services they are unable to get from VA from private sector providers through their public and private insurance. As a result, this approach might enable those higher-income veterans with nonservice-connected disabilities already using VA services to shift all of their care to VA, while veterans who had not previously used VA services, but would like to start using them, would essentially be shut out of the system. This would include veterans with higher priorities for care, such as those with service-connected disabilities and low incomes. Similarly, restricting enrollment to current users might prevent VA from fulfilling its safety net mission by denying care to veterans whose economic circumstances change.

The American Legion proposal is the only major proposal that would specifically limit the number of veterans, and the number of services, covered under VA’s medical care appropriation. The expanded benefits to be provided for veterans covered under the entitlement would, however, likely result in a significant increase in VA’s medical care appropriation.

Generate Increased Revenues

Several approaches could be used to generate additional revenues to pay for expanded benefits. These include increased cost sharing, authorizing recoveries from Medicare, and allowing VA to retain funds from third-party recoveries.

Increase Veteran Cost Sharing

Increased veteran cost sharing could help offset the costs of increased demand. For example, through contracting reform, VA might be authorized to sell veterans any available health care service not covered under their current veterans’ benefits without changing existing eligibility provisions. In other words, veterans could purchase, or use their private health insurance to purchase, additional health care services from VA.

Such an approach would not eliminate the problems VA physicians have in interpreting the obviate-the-need provision, but it would lessen the importance of the decision. Physicians would no longer be forced to turn away veterans needing health care services. Instead, obviate-the-need decisions would determine who would pay for needed health care services—the government or the veteran. In addition, VA could issue regulations better interpreting the obviate-the-need provision. Because uninsured veterans may be unable to pay for many additional health care services, an exception could be made to help such veterans.

A second approach for offsetting the costs of eligibility expansions through cost sharing could be to impose new cost-sharing requirements for existing services. For example, VA could be authorized to increase cost sharing for nursing home care—a discretionary benefit for all veterans—either through increased copayments or estate recoveries. Resulting funds could be used to help pay for benefit expansions. Similarly, copayments and deductibles for hospital and outpatient care could be adjusted to be more comparable with other public and private sector programs.

Cost sharing could also be increased by redefining the mandatory care group. In other words, the income levels for inclusion in the mandatory care category could be lowered or copayments imposed for nonservice-connected care provided to veterans with service-connected disabilities of 0 to 20 percent.

Authorize Recoveries From Medicare

Proposals have been made in the past few years to authorize VA recoveries from Medicare either for all Medicare-eligible veterans or for those with higher incomes. For example, S. 1563 would allow VA to bill and retain recoveries from Medicare. Such proposals, though, appear to offer little promise for offsetting the costs of eligibility expansions. First, many of the services, such as hearing aids and prescription drugs, that Medicare-eligible veterans are likely to obtain from VA are not Medicare-covered services. Second, most such proposals would not require VA to offset the recoveries against its appropriation. As a result, they would not affect VA’s budget request and would increase overall federal expenditures for health care. Authorizing VA recoveries from Medicare would, however, further jeopardize the solvency of the Medicare trust fund. Such an action would essentially transfer funds between federal agencies while adding administrative costs.

Allowing VA to bill and retain recoveries from Medicare would create incentives for VA facilities to shift their priorities toward providing care to veterans with Medicare coverage. VA facilities would essentially receive duplicate payments for care provided to higher-income Medicare beneficiaries unless recoveries were designated to fund services or programs for which VA did not receive an appropriation. For example, if VA was authorized to sell noncovered services to veterans and did not receive an appropriation for such services, then veterans should be allowed to use their Medicare benefits to help pay for the services just as they would use private health insurance to do so.

The American Legion proposal would allow VA to recover and retain funds from Medicare. The proposal is not clear, however, on whether recoveries would be limited to those services not covered by VA’s medical care appropriation. American Legion officials agreed that the proposal is unclear, but said that they intended for VA to recover and retain funds from Medicare only for those veterans not covered under VA’s appropriation. Assuming that VA receives payments from Medicare at rates no higher than private sector providers, it would be appropriate for VA to retain recoveries under this scenario. One limitation to this approach, however, is that VA does not have accounting and information systems adequate to keep funds appropriated for patient care separate from funds generated through such third-party recoveries.

Another limitation is that the American Legion proposal would deem VA facilities to be Medicare providers without requiring them to meet Medicare quality, utilization, and reporting requirements.

Allow VA to Retain a Portion of Third-Party Recoveries

Proposals, such as the ones contained in S. 1345 and H.R. 1385, that would allow VA to retain a portion of recoveries from private health insurance beyond what it needs to finance its recovery program would also represent a form of double payment. For the same reasons already discussed related to Medicare, unless recoveries from private insurance were earmarked for some purpose other than to pay for care covered by an appropriation, proposals to allow VA to retain a portion of its third-party recoveries would essentially result in duplicate payments.

Reinvest Savings From Efficiency Improvements

During the past 5 to 10 years, we, VA’s OIG, VHA, and others have identified numerous opportunities to improve the efficiency of the VA health care system and enhance revenues from sales of services to nonveterans and care provided to veterans. Savings from such initiatives could be “reinvested” in the VA health care system to help pay for eligibility expansions.

VA has historically used savings from efficiency improvements to fund new programs. For example, VA is allowing its facilities to reinvest savings achieved by consolidating administrative and clinical management of nearby facilities into providing more clinical programs. Similarly, VA allows medical centers to use savings from efficiency improvements to fund access points.

Through establishment of a preadmission certification requirement similar to those used by many private health insurers, VA could reduce nonacute admissions and days of care in VA hospitals and save hundreds of millions of dollars, assuming that facilities that are made excess by this are eliminated. While such inappropriate admissions and days of care to a large extent are unrelated to problems with VA eligibility provisions, savings resulting from administrative actions to address the problem could nonetheless be targeted to pay for expanded benefits.

Actions to reinvest savings from efficiency improvements would, however, limit VA’s ability to contribute to deficit reduction.

Provide a Methodology in the Law for Limiting VA Appropriations

One way to control increases in VA appropriations in response to the increased demand likely to be generated through eligibility expansions would be to state in the law which portion of the demand would be funded. For example, the law would state which groups of veterans, such as those with service-connected disabilities rated at 30 percent or higher, would be covered by the appropriation. Other groups that might be included in the appropriation could be veterans already eligible for comprehensive care, such as former prisoners of war and veterans of World War I and the Mexican Border Period. To preserve VA’s safety net mission, funds might also be appropriated to cover veterans with no public or private health insurance who have incomes below the means test threshold or some other level.

Such an approach would make it easier to limit appropriation increases, but they would result in significant rationing (see ch. 5) unless revenues from other sources were available to VA. This approach could be combined with other approaches that increase VA revenues to enable VA to provide any available health care service to any veteran. For example, VA might be authorized to sell available health care services to veterans in eligibility categories not covered by the appropriation. (Such an approach would be used under the American Legion’s eligibility reform proposal.) Because VA would have received no appropriation to serve these veterans, VA might be authorized to bill and retain recoveries from private health insurers, Medicare, Medicaid, and CHAMPUS. Veterans’ copayments and deductibles could be administered in accordance with the provisions of their insurance coverage. In effect, care for veterans not covered by the appropriation would be fully funded through insurance recoveries and veterans’ cost sharing.

Such an approach would help control budgetary increases without forcing VA to ration care. All veterans would have the opportunity to choose VA as their health care provider. VA would, however, for those veterans not covered by the appropriation, be competing with private sector providers on a more level playing field.

By limiting VA’s appropriation to specified categories of veterans, VA would be given an incentive to focus outreach efforts on those veterans with the highest priority and greatest need for VA services in order to maximize its appropriation. In addition, VA facilities would have a stronger incentive to provide cost-effective care because they would be more dependent on recoveries from public and private insurance to offset their operating costs. In becoming more dependent on outside payers, VA would be subject to many of the cost-containment pressures exerted on private sector hospitals over the past decade. For example, VA facilities could no longer count on appropriations to cover the costs of care denied by private insurers as not medically necessary or not requiring hospitalization.

H.R. 3118, as passed by the House of Representatives, would set a limit on the growth of VA medical care appropriations. It would authorize medical care appropriations not to exceed $17,250,000 for fiscal year 1997 and $17,900,000 for fiscal year 1998. If funds are appropriated at the authorized levels, H.R. 3118 would allow essentially no increase in VA medical care spending for fiscal year 1997 over the levels contained in the administration’s 7-year balanced budget plan and the House budget resolution. For fiscal year 1998, H.R. 3118 would limit the increase in budget authority to $1.7 billion over the administration’s budget plan and $1.1 billion over the House budget resolution.

The final House bill also contains provisions requiring VA to assess the effects of the bill on demand for VA health care. For example, VA would be required to include in a report to the Veterans’ Affairs committees detailed information on the numbers of and costs of providing care to veterans who had not received care from VA within the preceding 3 fiscal years.

Conclusions and Agency Comments

The VA health care system was neither designed nor intended to be the primary source of health care services for most veterans. It was initially established to meet the special care needs of veterans injured during wartime and those wartime veterans permanently incapacitated and incapable of earning a living. Although the system has evolved since that time, even today it focuses on meeting the comprehensive health care needs of only about 465,000 of the nation’s 26.4 million veterans. In other words, its primary mission is to meet the comprehensive health care needs of veterans with service-connected disabilities rated at 50 percent or more. For other veterans, the system is primarily intended to provide treatment for their service-connected disabilities and to serve as a safety net to provide health care to veterans with limited access to health care through other public and private programs.

Because 9 out of 10 veterans now have other public or private health insurance that meets their basic health care needs, relatively few veterans today need to rely on VA as a safety net. Rather, most of them turn to private sector providers for all or most of their care, using VA either not at all or to supplement their use of private sector health care.

Reforms of VA eligibility that would significantly expand veterans’ eligibility for comprehensive care in VA facilities would significantly alter VA’s health care mission and place VA in more direct competition with the private sector. To the extent veterans are given expanded benefits that are either free or have lower cost sharing than other public and private health insurance, the VA system will gain a competitive price advantage over its private sector competitors. Coupling eligibility reform with other changes, such as improved accessibility and customer service, could heighten the increased demand for VA services. Because most veterans currently use private sector providers, any increased demand generated by eligibility expansions would come largely at the expense of those providers.

For most veterans, VA eligibility reform might provide an additional option for health care services or additional services not covered under their public or private insurance. For those veterans who do not have public or private health insurance, however, eligibility reform is more important. It could improve their access to comprehensive health care services, including preventive health care services.

Historically, VA’s mandatory and discretionary care workload has been fully funded. The four eligibility reform bills that would retain the discretionary nature of funding of veterans’ health benefits could significantly increase demand for VA health care services by expanding all veterans’ benefits to include comprehensive inpatient and outpatient care services. This could result in increased VA appropriations to fully fund at least the demand generated by the 9 million to 11 million veterans added to the mandatory care category for comprehensive free outpatient services.

However, by not fully funding VA’s anticipated increase in workload, VA would be faced with developing rationing policies that would ensure the funds appropriated are directed toward those veterans with the highest priorities for care. This would likely entail turning away many of the veterans currently using VA health care. Depending on the level of funding, those turned away could include low-income uninsured veterans. The funds needed to meet the increased demand for routine health care services could also jeopardize VA’s ability to provide specialized services, such as treatment of spinal cord injuries, not readily available through other providers.

If eligibility reforms focus on strengthening VA’s safety net mission while preserving its ability to provide specialized services veterans may be unable to obtain through their public and private insurance, several approaches could be pursued that would also limit the extent to which the government competes with the private sector. These approaches generally involve placing limits on the number of veterans given expanded benefits, narrowing the range of benefits added, or increasing cost sharing to offset the costs of added benefits. The American Legion proposal contains a framework for accomplishing such changes, but is unrealistic in the number of veterans who would be covered under the entitlement it would create. A significant reduction in the number of veterans covered by the entitlement would be needed if the proposal was to be budget neutral. For example, the entitlement for low-income veterans might be restricted to those who lack other public or private insurance coverage, or the income cutoff might be lowered to reduce the number of veterans covered by the new entitlement.

Agency Comments

VA said that GAO’s report, in presenting a summation of many years of discussion concerning eligibility reform issues, shows how confusing, convoluted, and difficult even debate on the issues can be. VA noted that unanimous passage of H.R. 3118 by the House of Representatives and the recent reporting of a bill by the Senate Committee on Veterans’ Affairs support the need for change. See appendix VII for VA’s comments.