Veterans' Health Care Budget Estimate: Changes Were Made in Developing the President's Budget Request for Fiscal Years 2012 and 2013
Released: 2011-06-14T00:00:00

Letter

Background

VA provides health care services to various veteran populations— including an aging veteran population and a growing number of younger veterans returning from the military operations in Afghanistan and Iraq. VA operates 152 hospitals, 133 nursing homes, 824 community-based outpatient clinics, and other facilities to provide care to veterans. In general, veterans must enroll in VA health care to receive VA’s medical benefits package—a set of services that includes a full range of hospital and outpatient services, prescription drugs, and long-term care services provided in veterans’ own homes and in other locations in the community. VA also provides some services that are not part of its medical benefits package, such as long-term care provided in nursing homes.

To meet the expected demand for health care services, VA develops a budget estimate each year of the resources needed to provide these services. This budget estimate includes the total cost of providing health care services, including direct patient costs as well as costs associated with management, administration, and maintenance of facilities. VA develops most of its budget estimate using the EHCPM. The EHCPM’s estimates are based on three basic components: the projected number of veterans who will be enrolled in VA health care, the projected quantity of health care services enrollees are expected to use, and the projected unit cost of providing these services. The EHCPM makes these projections 3 or 4 years into the future for budget purposes based on data from the most recent fiscal year. For example, in 2010, VA used data from fiscal year 2009 to develop its health care budget estimate for the fiscal year 2012 request and advance appropriations request for 2013.

VA uses other methods to estimate needed resources for long-term care, other services, and health-care-related initiatives proposed by the Secretary of VA or the President. As previously reported, these methods estimate needed resources based on factors that may include historical data on costs and the amount of care provided, VA’s policy goals for health care services such as long-term care, and predictions of the number of users. For example, VA’s projections for long-term care for fiscal year 2012 were based on fiscal year 2010 data on the amount of care provided and the unit cost of providing a day of this care.

Typically, VA’s Veterans Health Administration (VHA) starts to develop a health care budget estimate approximately 10 months before the President submits the budget to Congress in February. The budget estimate changes during the 10-month budget formulation process in part due to successively higher levels of review in VA and OMB before the President’s budget request is submitted to Congress. For example, the successively higher levels of review resulting in the fiscal year 2012 President’s budget request are described in table 1. The Secretary of VA considers the health care budget estimate developed by VHA when assessing resource requirements among competing interests within VA, and OMB considers overall resource needs and competing priorities of other agencies when deciding the level of funding requested for VA’s health care services. OMB issues decisions, known as passback, to VA and other agencies on the funding and policy proposals to be included in the President’s budget request. VA has an opportunity to appeal the passback decisions before OMB finalizes the President’s budget request, which is submitted to Congress in February. Concurrently, VA prepares a congressional budget justification that provides details supporting the policy and funding decisions in the President’s budget request.

Each year, Congress provides funding for VA health care through the appropriations process. For example, Congress provided new appropriations of about $48.0 billion for fiscal year 2011 and advance appropriations of $50.6 billion for fiscal year 2012 for VA health care. In addition to new appropriations that VA may receive from Congress as a result of the annual appropriations process, funding may also be available from unobligated balances from multiyear appropriations, which remain available for a fixed period of time in excess of 1 fiscal year. For example, VA’s fiscal year 2011 appropriations provided for some amounts to be available for 2 fiscal years. These funds may be carried over from fiscal year 2011 to fiscal year 2012 if they are not obligated by the end of fiscal year 2011. VA and OMB consider anticipated unobligated balances when formulating the President’s budget request.

VA has statutory authority to collect amounts from patients, private insurance companies, and other government entities to be obligated for health care services. VA collects first-party payments from veterans, such as copayments for outpatient medications, and third-party payments from veterans’ private health insurers for deposit into the Medical Care Collections Fund (MCCF). Amounts in the MCCF are available without fiscal year limitation for VA health care and expenses of certain activities related to collections subject to provisions of appropriations acts. VA also receives reimbursements from services it provides to other government entities, such as the Department of Defense (DOD), or to private or nonprofit entities. For example, in 2006, we reported that VA received reimbursements from other entities by selling laundry services. These amounts also contribute to decisions on funding in the President’s budget request.

Congress provides funding for VA health care through three appropriations accounts: Medical Services, which funds health care services provided to eligible veterans and beneficiaries in VA’s medical centers, outpatient clinic facilities, contract hospitals, state homes, and outpatient programs on a fee basis; Medical Support and Compliance, which funds the management and administration of the VA health care system, including financial management, human resources, and logistics; and Medical Facilities, which funds the operation and maintenance of the VA health care system’s capital infrastructure, such as costs associated with nonrecurring maintenance, utilities, facility repair, laundry services, and grounds keeping.

Funding was appropriated for fiscal year 2012 for the three accounts in the following proportions: Medical Services at 78 percent, Medical Support and Compliance at 11 percent, and Medical Facilities at 11 percent.

Changes Were Made to VA’s Budget Estimate Based on Policy Decisions and Other Factors to Help Develop the President’s Budget Request

Changes to VA’s Budget Estimate Based on Policy Decisions and Operational Improvements Resulted in Reduced Requested Resource Levels

VA identified several changes that were made to its budget estimate to help develop the President’s budget request for VA for fiscal years 2012 and 2013. In one change, VA identified that the resources identified in its budget justification for non-recurring maintenance (NRM) were lower than the amount estimated using the EHCPM by $904 million for fiscal year 2012 and $1.27 billion for fiscal year 2013. Funds for NRM are used to repair and improve VA health care facilities and come from the Medical Facilities appropriations account. The President’s budget request reflected resource levels of $869 million for NRM for fiscal year 2012 and $600 million for fiscal year 2013. OMB staff said that amounts identified for NRM in VA’s congressional budget justification were lower than estimated amounts due to a policy decision to fund other initiatives and to hold down the overall budget request for VA health care without affecting the quality and timeliness of VA’s health care services. VA officials said NRM amounts that were identified for fiscal years 2012 and 2013 should be sufficient to maintain VA health care facilities in their current conditions.

In recent years, VA’s spending on NRM has been greater than the amounts identified in VA’s budget justifications and reflected in the President’s budget requests (see table 2). The higher spending is consistent with VA’s authority to increase or decrease the amounts VA allocates from the Medical Facilities account for NRM and with congressional committee report language. While VA’s NRM spending has exceeded amounts identified in VA’s budget justifications over the last several years, VA’s projection of the NRM backlog for health care facilities—which reflects the total amount needed to address facility deficiencies—has increased to nearly $10 billion.

Changes also were made to EHCPM estimates for health care equipment. For equipment purchases, VA identified that the resource request in its budget justification was $15 million lower than the amount estimated using the EHCPM for fiscal year 2012 and $410 million lower than the amount estimated using the EHCPM for fiscal year 2013. The President’s budget reflected a request of $1.034 billion for fiscal year 2012 and $700 million for fiscal year 2013 to purchase health care equipment. OMB staff said amounts identified for equipment were lower than estimated amounts due to a policy decision to fund other initiatives and to hold down the overall budget request for VA health care without affecting the quality and timeliness of VA’s health care services.

In addition, estimates of resource needs for employee salaries were reduced due to the enactment of a law requiring the elimination of across- the-board pay raises for federal employees in 2011 and 2012. This 2-year pay raise freeze led to a reduction of $713 million for fiscal year 2012 and $815 million for fiscal year 2013 from VA’s health care budget estimate. The amount of the reduction was calculated separately from the EHCPM because the EHCPM does not have an explicit assumption for pay increases. VA officials said that OMB staff calculated the impact on the President’s budget request for VA health care for fiscal year 2013. The lower salary base that resulted from the pay freeze in 2011 and 2012 also would reduce the overall salary level for fiscal year 2013.

According to VA’s budget justification, VA’s health care budget estimate was further reduced by $1.2 billion for fiscal year 2012 and by $1.3 billion for fiscal year 2013 to reflect expected savings from what VA identified as six operational improvements. Expected savings from these operational improvements are a result of planned changes in the way VA manages its health care system to lower costs. The operational improvements for fiscal years 2012 and 2013 from VA’s budget justification are the following: Acquisitions. The operational improvements with the largest amount of estimated cost savings are VA’s proposed changes to its purchasing and contracting strategies for which VA estimates a savings of $355 million a year for fiscal years 2012 and 2013. For example, VA has proposed savings by increasing competition for contracts that were formerly awarded on a sole-source basis.

Changing rates. VA proposed to purchase dialysis treatments and other care from civilian providers at Medicare rates instead of current community rates. VA estimates a savings of $315 million for fiscal year 2012 and $362 for fiscal year 2013 as a result of this rate change.

Fee care. VA proposed initiatives to generate savings from health care services that VA pays contractors to provide. VA estimates a savings of $200 million a year for fiscal years 2012 and 2013 from reductions in its payments for fee-based care.

Realigning clinical staff and resources. VA proposed to realign clinical staff and resources to achieve savings by using less costly health care providers. Specifically, VA plans to use selected non- physician providers instead of certain types of physicians, use selected licensed practical nurses instead of certain types of registered nurses, and more appropriately align required clinical skills with patient care needs. VA estimates a savings of $151 million a year for fiscal years 2012 and 2013 from clinical staff and resource realignment.

Medical and administrative support. VA proposed to employ resources more efficiently in various medical care, administrative, and support activities at each medical center and in other VA locations. For example, a VA official said that VA could examine job vacancies for medical and administrative support to see whether vacant positions need to be filled. VA estimates a savings of $150 million a year for fiscal years 2012 and 2013 for this operational improvement.

VA real property. VA proposed initiatives to repurpose its vacant or underutilized buildings, demolish or abandon other vacant or underutilized buildings, decrease energy costs, change procurement practices for building supplies and equipment, and change building- service contracts. VA estimates a savings of $66 million a year for fiscal years 2012 and 2013 from real property initiatives.

In the past, VA has proposed management efficiencies to achieve savings in order to reduce the amount of funding needed to provide health care services. However, in a 2006 report, we reported that VA lacked a methodology for its assumptions about savings estimates it had detailed for fiscal years 2003 through 2006, and we concluded that VA may need to take actions to stay within its level of available resources if VA fell short of its savings goals. According to VA officials, VA is planning to develop a system to monitor the operational improvements to determine whether they were generating the intended savings.

Changes to VA’s Budget Estimate Based on Administration’s Initiatives Resulted in Increased Requested Resource Levels

VA’s health care budget estimate was increased overall by about $1.4 billion for fiscal year 2012 and $1.3 billion for fiscal year 2013 to support health-care-related initiatives proposed by the administration, according to VA officials. Some of the proposed initiatives can be implemented within VA’s existing authority, while other initiatives would require a change in law.

VA officials estimated that the majority of initiatives would increase resource needs for new health care services or expanded existing services. Four initiatives which make up over 80 percent of the total amount for initiatives in the President’s budget request are: Homeless veterans programs. VA officials estimated that this initiative, which supports the agency’s goal to end homelessness among veterans, would increase VA’s resource needs by $460 million for fiscal year 2012 as well as for fiscal year 2013. This would allow VA to expand existing programs and develop new ones to prevent veterans from becoming homeless and help those veterans who are currently homeless, programs such as assisting veterans with acquiring safe housing, receiving needed health care services, and locating employment opportunities.

Opening new health care facilities. This initiative would provide VA with the resources to purchase equipment and supplies and complete other activities that are necessary to open new VA health care facilities and begin providing health care services to veterans. VA officials estimated that this initiative would increase VA’s resource needs by $344 million for fiscal year 2012 as well as for fiscal year 2013.

Additional services for caregivers. This initiative would give VA the resources to expand services to caregivers of the most severely wounded veterans returning from Afghanistan and Iraq, as required by the Caregivers and Veterans Omnibus Health Services Act of 2010. For example, this initiative would provide caregivers a monthly stipend and eligibility to receive VA health care benefits. To provide these additional services to caregivers, VA officials estimated that the agency’s resource needs would increase by $208 million for fiscal year 2012 and $248 million for fiscal year 2013.

Benefits for veterans exposed to Agent Orange. This initiative would provide VA with the resources to implement activities required by the Agent Orange Act of 1991 that directs the Secretary of VA to extend health care benefits to veterans with certain conditions, such as some types of leukemia, who were known to be exposed to Agent Orange and to issue regulations establishing presumptions of service connection for diseases that the Secretary finds to be associated with exposure to an herbicide agent. VA officials estimated that to provide these additional benefits, its resource needs would increase by $171 million for fiscal year 2012 and $191 million for fiscal year 2013.

VA officials estimated a small number of initiatives in the President’s budget request would decrease VA’s spending needs. These initiatives propose ways for VA to reduce costs. For example, the Medicare ambulatory rates initiative proposes that Congress amend current law to allow VA to reimburse vendors for certain types of transportation, such as ambulances, at the local prevailing Medicare ambulance rate in the absence of a contract. VA expects that by paying transportation vendors the Medicare rate over their current billing rate—which VA reported may be up to three to four times the Medicare rate—VA’s resource needs related to certain types of transportation would decrease by about $17 million for fiscal year 2012 as well as for fiscal year 2013.

Changes to VA’s Estimate Based on More Current Information and Other Factors Had a Mixed Impact on VA’s Estimate

VA’s overall estimate for long-term care and other services was reduced, according to VA officials and OMB staff, to reflect more current data that became available during the 10-month budget formulation process. To meet OMB’s timeline for preparing the President’s budget request, VA initially produced estimates for long-term care and CHAMPVA services in May 2010. These estimates were based on a mix of available data representing the actual amount of care provided and unit costs for these services to-date and projections for these services for the remainder of the 2010 fiscal year. VA had to project data because only partial-year data were available in May. Between May and November 2010, VA provided OMB with periodic updates of the most current data available. OMB staff, with input from VA officials, finalized the estimate for the President’s budget request using this information, which according to VA officials and OMB staff, resulted in a lower estimate overall for long-term care and other services than the estimate VA produced in May 2010. VA, however, did not provide us with the amount of the decrease in the estimate.

According to VA officials, VA’s health care budget estimate was increased by $420 million for fiscal year 2012 and by $434 million for fiscal year 2013 to account for the costs of providing health care to non-veterans, including active duty service members and other DOD beneficiaries under sharing agreements, and certain VA employees who are not enrolled as veterans. Since VA’s estimates from the EHCPM are based on the cost of treating veterans, the agency developed the estimates for providing health care to non-veterans separately.

VA’s estimate from the EHCPM was also increased by $220 million for fiscal year 2012 to reflect enhancements for rural health care for veterans, according to VA officials. Congress directed VA to spend $250 million on enhancements for rural health care in fiscal year 2009, and VA made a policy decision to continue spending this amount on enhancements for rural health care in subsequent years, according to VA officials. However, VA was not able to spend the entire $250 million in fiscal year 2009 and spent only $30 million. Since VA used data from fiscal year 2009 in the EHCPM to develop its health care budget estimate for fiscal year 2012, VA’s estimate projected $30 million in spending for enhancements for rural health care for that fiscal year. As a result, VA’s estimate was increased by about $220 million to reflect the agency’s planned $250 million spending for this policy change.

The President’s Budget Request for VA Health Care Relied on Funding from Various Sources and Included a Request for Contingency Funding

The President’s Budget Request for New Appropriations Was Based in Part on Consideration of Collections, Unobligated Balances, and Reimbursements

The President’s request for appropriations for VA health care for fiscal years 2012 and 2013 relied on anticipated funding from several sources. Of the $54.9 billion requested by the President for fiscal year 2012 to fund VA’s health care services, $50.9 billion was requested in new appropriations. This request was an increase of 5.5 percent from the amount requested for fiscal year 2011—the lowest requested percent increase in recent years. The request assumes the availability of about $4.0 billion from collections, unobligated balances of mulitiyear appropriations, and reimbursements. Similarly, of the $56.7 billion requested by the President for fiscal year 2013, $52.5 billion was requested in new appropriations—an increase of 3.3 percent from the fiscal year 2012 request. About $4.1 billion was expected to be available from other funding sources. (See table 3.) VA estimates the amount of funding from these other sources as part of its congressional budget justification supporting the President’s request.

As table 3 shows, the President’s budget request assumes that VA will collect about $3.1 billion for fiscal year 2012 and $3.3 billion for fiscal year 2013. These funds are from health insurers of veterans who receive VA care for nonservice-connected conditions, as well as from other sources, such as veterans’ copayments. VA has the authority to retain these collections in the MCCF and may use them without fiscal year limitation for providing VA medical care and services and for paying departmental expenses associated with the collections program.

According to VA officials, VA reduced its $3.7 billion estimate for collections included in the fiscal year 2012 advance appropriations request by approximately $600 million for the fiscal year 2012 President’s budget request. VA officials said that because of the depressed economy, fewer enrollees have comprehensive health insurance that VA can bill for third party payments for services that VA provides. In addition, even if enrollees do have health insurance that VA can bill, insurance companies are increasingly reducing payment amounts to levels stipulated in the insurers’ own policies. Finally, because the enrollee population is aging, the percentage of enrollees who are Medicare beneficiaries is rising. As a result, VA is increasingly limited to billing enrollees’ Medicare Supplement Insurance policies, because fewer enrollees have full health insurance policies that VA can bill.

The President’s budget request also assumes that VA will have unobligated balances left from fiscal years 2011 and 2012 totaling $1.1 billion to obligate in fiscal years 2012 and 2013. Specifically, VA proposes to carry over $600 million of the funds left from fiscal year 2011 to obligate in fiscal year 2012 and to carry over $500 million of the funds left from fiscal year 2012 to obligate in fiscal year 2013. VA assumes that Congress will provide some multiyear funding and thus, VA will be able to carry over any unobligated balances from one fiscal year to the next fiscal year. The fiscal year 2011 full-year continuing resolution provided that $1.2 billion would be available for 2 fiscal years, so VA has the ability to use unobligated balances in fiscal year 2012, including the $600 million proposed, if that amount remains available. If the fiscal year 2012 appropriations also provide funding that is available for 2 fiscal years, VA would be able to carry over the $500 million in unobligated balances, if available, from fiscal year 2012 into fiscal year 2013 as proposed.

The President’s budget request also assumes that VA will receive $343 million and $358 million in reimbursements for fiscal years 2012 and 2013, respectively, from services it provides to other government entities as well as prior year recoveries. For example, VA receives reimbursements for medical services it provides under sharing agreements with DOD, including to TRICARE beneficiaries. VA estimates that prior year recoveries will be approximately $3 million for each of the fiscal years 2012 and 2013.

The President’s Budget Request Included Funding Contingent on Certain Conditions

Of the $54.9 billion in total resources requested by the President for fiscal year 2012, $953 million represents contingency funding to be available under certain circumstances for health care services, supplies, and materials. This contingency funding would only be made available to VA through the Medical Services appropriations account if the Director of OMB concurs with the Secretary of VA’s determination that economic conditions warrant the additional funds. The Secretary’s determination would reflect an examination of national unemployment rates, the quantity of VA health care services enrollees use, and the amount of spending for VA’s health care services. According to staff at OMB, any unused contingency funds would expire at the end of the fiscal year and could not be used to fund VA health care services in future years.

OMB determined that the contingency funding request for fiscal year 2012 would be the amount projected by the EHCPM with some adjustment for OMB’s economic assumptions. This amount was calculated by estimating the potential impact of a recent downturn in the economy on veterans’ use of VA health care. VA conducted an analysis of unemployment rates and their effect on enrollees’ use of VA’s health care services. VA showed that enrollees under age 65 who lost their jobs, and therefore their access to employer-sponsored health insurance, relied more heavily on VA health care services. For the first time since developing the model, VA incorporated unemployment rates into estimates developed using the EHCPM to estimate the effect of the economic downturn on VA’s needed resources.

The President’s fiscal year 2012 budget request did not include contingency funding for fiscal year 2013 advance appropriations because OMB was uncertain if the increased costs VA anticipated as a result of the economic downturn would materialize. OMB staff said they planned to monitor VA’s fiscal year 2011 performance and would request contingency funding for fiscal year 2013 if needed, as part of the President’s fiscal year 2013 budget request.

Concluding Observations

Budgeting for VA health care, by its very nature, is complex because assumptions and imperfect information are used to project the likely demand and cost of the health care services VA expects to provide. The complexity is compounded because most of VA’s projections anticipate events 3 to 4 years into the future. To address these challenges, VA uses an iterative, multilevel process to mitigate various levels of uncertainty not only about program needs, but also about presidential policies, congressional actions, and future economic conditions that may affect funding needs in the year for which the request is made. VA’s continuing review of estimates in this iterative process does attempt to address some of these uncertainties, and as a result, VA’s estimates may change to better inform the President’s budget request. Essential to the usefulness of these estimates, as our prior work has shown, is obtaining sufficient data, making accurate calculations, and making realistic assumptions. However, the uncertainty inherent in budgeting always remains.

The President’s request for VA health care services for fiscal years 2012 and 2013 was based, in part, on reductions in VA’s estimates for certain activities that were made using the EHCPM or other methods. The changes in VA’s estimates reflected a decline in expected spending for these activities compared to what VA officials said would have been the case if the management and provision of health care services had continued unchanged. For example, VA estimated that various operational improvements would substantially reduce the costs for carrying out some activities, such as contracting and purchasing, in fiscal years 2012 and 2013. As a result of these anticipated changes, VA estimated that it would achieve savings that could be used for other purposes. However, in 2006, we reported on a prior round of VA’s planned management efficiency savings and found that VA lacked a methodology for its assumptions about savings estimates. If the estimated savings for fiscal years 2012 and 2013 do not materialize and VA receives appropriations in the amount requested by the President, VA may have to make difficult tradeoffs to manage within the resources provided.

Agency Comments

We provided a draft of this report to the Secretary of VA and the Director of OMB for comment. VA had no comments on this report. OMB provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to the Secretary of Veterans Affairs, the Director of the Office of Management and Budget, and appropriate congressional committees. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact Randall B. Williamson at (202) 512-7114 or at williamsonr@gao.gov, or Denise M. Fantone at (202) 512-6806 or at fantoned@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix I.

Appendix I: GAO Contacts and Staff Acknowledgments

Contacts

Acknowledgments

In addition to the contacts named above, James C. Musselwhite and Melissa Wolf, Assistant Directors; Rashmi Agarwal; Matthew Byer; Jennifer DeYoung; Amber G. Edwards; Krister Friday; Lauren Grossman; Tom Moscovitch; Lisa Motley; Leah Probst; and Steve Robblee made key contributions to this report.

Related GAO Products

Veterans’ Health Care: VA Uses a Projection Model to Develop Most of Its Health Care Budget Estimate to Inform the President’s Budget Request. GAO-11-205. Washington, D.C.: January 31, 2011.

VA Health Care: Spending for and Provision of Prosthetic Items. GAO-10-935. Washington, D.C.: September 30, 2010.

VA Health Care: Reporting of Spending and Workload for Mental Health Services Could Be Improved. GAO-10-570. Washington, D.C.: May 28, 2010.

Continuing Resolutions: Uncertainty Limited Management Options and Increased Workload in Selected Agencies. GAO-09-879. Washington, D.C.: September 24, 2009.

VA Health Care: Challenges in Budget Formulation and Issues Surrounding the Proposal for Advance Appropriations. GAO-09-664T. Washington, D.C.: April 29, 2009.

VA Health Care: Challenges in Budget Formulation and Execution. GAO-09-459T. Washington, D.C.: March 12, 2009.

VA Health Care: Long-Term Care Strategic Planning and Budgeting Need Improvement. GAO-09-145. Washington, D.C.: January 23, 2009.

VA Health Care: Budget Formulation and Reporting on Budget Execution Need Improvement. GAO-06-958. Washington, D.C.: September 20, 2006.

VA Health Care: Preliminary Findings on the Department of Veterans Affairs Health Care Budget Formulation for Fiscal Years 2005 and 2006. GAO-06-430R. Washington, D.C.: February 6, 2006.

Veterans Affairs: Limited Support for Reported Health Care Management Efficiency Savings. GAO-06-359R. Washington, D.C.: February 1, 2006.

VA Long-Term Care: Trends and Planning Challenges in Providing Nursing Home Care to Veterans. GAO-06-333T. Washington, D.C.: January 9, 2006.

VA Long-Term Care: More Accurate Measure of Home-Based Primary Care Workload Is Needed. GAO-04-913. Washington, D.C.: September 8, 2004.