VA operates one of the nation’s largest health care systems to provide care to approximately 5.2 million veterans who receive health care through 158 VA medical centers (VAMC) and almost 900 outpatient clinics nationwide. The VA health care system also consists of nursing homes, residential rehabilitation treatment programs, and readjustment counseling centers. In 1986 Congress authorized VA to collect payments from third-party health insurers for the treatment of veterans with nonservice-connected disabilities, and it also established copayments from veterans for this care. Funds collected were deposited into the U.S. Treasury as miscellaneous receipts and were not made specifically available to VA to supplement its medical care appropriations. The Balanced Budget Act of 1997 established a new fund in the U.S. Treasury, the Department of Veterans Affairs Medical Care Collections Fund, and authorized VA to use funds in this account to supplement its medical care appropriations. As part of VA’s 1997 strategic plan, VA expected that collections from first- and third-party payments would cover the majority of the cost of care provided to veterans for nonservice-connected disabilities. VA has determined that some of these veterans, about 25 percent of VA’s user population in fiscal year 2002, were required to pay a copayment because of their income levels. In September 1999, VA adopted a fee schedule, called “reasonable charges,” which are itemized fees based on diagnoses and procedures. This schedule allows VA to more accurately bill for the care provided. To implement this, VA created additional bill-processing functions— particularly in the areas of documenting care, coding the care, and processing bills for each episode of care. To collect from health insurers, VA uses a four-function process with 13 activities to manage the information needed to bill and collect third-party payments—also known as the MCCF revenue cycle (see fig. 1). First, the intake revenue cycle function involves gathering insurance information on the patient and verifying that information with the insurer as well as collecting demographic data on the veteran. Second, the utilization review function involves precertification of care in compliance with the veteran’s insurance policy, including continued stay reviews to obtain authorization from third-party insurers for payment. Third, the billing function involves properly documenting the health care provided to patients by physicians and other health care providers. Based on the physician documentation, the diagnoses and medical procedures performed are coded. VA then creates and sends bills to insurers based on the insurance and coding information obtained. Finally, the collections, or accounts receivable, function includes processing payments from insurers and following up on outstanding or denied bills. See appendix II for a description of the activities that take place within each of the four functions. VA’s Chief Business Office utilizes a performance measure—an efficiency rating it refers to as “cost to collect”—that reflects VA’s cost to collect one dollar from first- and third-parties. To calculate the efficiency rating VA divides the costs of generating a bill and collecting payments from veterans and private health insurers by the actual revenue received from these sources. To measure the cost, cost data are extracted from two financial accounts, or cost centers, which are intended to capture field office costs and central office costs. Specifically, cost centers are used for classifying costs related to each of the 13 functional activities and the organizations that support these activities. According to an official with the Healthcare Financial Management Association, because business practices differ among entities, there are many variables that entities include in their calculations of the cost for collecting funds from first and third parties. Thus, a comparison of collection efficiency—the cost to collect one dollar—between different entities would be difficult. However, according to the official, it is reasonable to expect that business practices within the same organization such as the VA can be standardized, which would facilitate such a comparison internally. The VA health care system has unique rules and regulations governing its billing practices. For instance, VA is generally not authorized to bill Medicare or Medicaid for care provided to Medicare- or Medicaid-eligible veterans. VA must pay for all inpatient and outpatient care associated with a service-connected disability—it cannot collect copayments or bill third- party insurers for this care. VA uses third-party collections to satisfy veterans’ first-party debt. Specifically, if VA treats an insured veteran for a nonservice-connected disability, and the veteran is also determined by VA to have copayment responsibilities, VA will apply each dollar collected from the insurer to satisfy the veteran’s copayment debt related to that treatment. As we stated in a previous report to Congress, the statutes governing VA recoveries from private health insurers and veteran copayments do not clearly specify the relationship between the two provisions. In the absence of definitive guidance in the law, VA’s General Counsel has determined that insurance recoveries should be used to satisfy veterans’ copayment debt. The law and the relevant legislative history are not clear on whether third-party collections can be used for this purpose. VA has not provided guidance to the Chief Business Office or VISNs for accounting for the costs associated with collecting payments from veterans and private health insurers. As a result, we found that VA’s Chief Business Office and VISNs did not allocate certain costs associated with activities related to collecting first- and third-party payments to the two cost centers used in the calculation of cost to collect. In addition, we found inconsistencies in the way VISNs allocated these costs to the field office cost center. Consequently, reported costs to collect are inaccurate. We found that some costs incurred by VA’s central office as part of its efforts for collecting first- and third-party payments were not allocated to the central office cost center. For example, the following activities are costs incurred by organizations that support the Chief Business Office, but are not included in the central office cost center: Staff at the Health Eligibility Center spend a portion of their time determining veterans’ copayment status. Staff at the Health Revenue Center processed first-party refunds resulting from a settlement with a third-party payer regarding claims submitted from January 1995 through December 2001. VA reported that about 15 full- time staff members are dedicated to this effort. Staff assigned to Health Informatics assisted with contractor-developed software to review third-party claims for accuracy. Some costs incurred by field locations also were not always allocated to the field office cost center. Cost allocation differences occur because VA does not provide guidance to its field locations on which costs to allocate to specific cost centers. Thus, each of VA’s health care VISNs makes a determination as to which cost center to use when allocating costs for specific revenue cycle functions—such as patient intake and registration and utilization review. Figure 2 shows inconsistencies among VISNs in the way they allocate costs to some of the activities within the revenue cycle functions. For example, for precertification and certification activities within the utilization review function, 13 VISNs allocated all of the cost, 3 VISNs allocated some costs, and 5 VISNs allocated none of the cost to the field office cost center. In addition, the following are examples of costs that are related to collection activities but were not included in the costs for collecting payments: A veteran call center in VISN 8 (Bay Pines, Florida)—staffing resources valued at about $635,000 designed to assist veterans with questions about bills they receive and, if necessary, the arrangement of payment plans. Two service contracts in VISN 2 (Albany, New York)—approximately $470,000 in contract expenses for collecting third-party payments and a service contract estimated at $104,000 for insurance verification. Two service contracts in VISN 10 (Cincinnati, Ohio)—approximately $100,000 in contract expenses to use a software package that reviews claims sent to third-party insurers for technical accuracy. Also not included was an estimated $425,000 to license the use of insurance identification and verification software. In an attempt to standardize how MCCF staff carry out the revenue cycle functions and to instill fiscal discipline throughout its entire health system, VA is piloting the Patient Financial Services System (PFSS) in VISN 10 (Cincinnati, Ohio). PFSS is a financial software package that contains individual patient accounts for billing purposes. According to the Chief Business Office, the system is a key element to standardize MCCF operations throughout the entire VA health care system. PFSS is expected to improve first- and third-party collections by capturing and consolidating inpatient and outpatient billing information. However, PFSS is not currently designed to capture the cost of staff time for these activities—a key element for assessing the efficiency of VA’s collection efforts. VA’s practice of satisfying veterans’ copayment debt with collections from third-party insurers has reduced overall collections and increased administrative expenses. VA does not quantify the lost revenue from veterans’ copayments that is not collected and could be used to supplement its medical care appropriation. Based on interviews with network officials and site visits to individual medical facilities, we did not discover any locations that track the volume of first-party debt that is not collected and its relative dollar value. Hence, the exact dollar value of first-party revenue that was not collected is unknown. Seventeen of the 21 network officials we interviewed stated that considerable administrative time is dedicated to the process required to satisfy first-party debt with third-party collections—resources that could be invested elsewhere if the practice did not exist. One facility official estimated that approximately 5 full-time equivalent staff are used to satisfy first-party debt. Furthermore, one VISN official estimated that its medical facilities use approximately 11 full-time equivalent staff on this process. Collections staff routinely receive insurance payments that include voluminous reports that detail each claim. For example, one medical center provided us with a report that contained approximately 1,000 line items, each representing a pharmaceutical reimbursement. Staff at the medical center must sort through each line item and manually match it to a claim in the veteran’s file to determine if the veteran was charged a copayment for the pharmaceutical. In those cases where VA receives a reimbursement and the veteran was charged a copayment, VA will issue a credit or refund to the veteran—in the case of pharmaceuticals this amount can be up to $7. VA will delay billing copayments to veterans with private health insurance for 90 days to allow time for the insurer to reimburse VA. However, when insurers reimburse VA after the 90-day period, VA must absorb the cost of additional staff time for processing a refund if the veteran has already paid the bill. In our 1997 report, we discussed that VA’s practice of satisfying copayment debt with recoveries made from third-party insurers has resulted in reduced overall cost recoveries and increased administrative expense. In the report we suggested that Congress consider clarifying the cost recovery provisions of title 38 of the U.S. Code to direct VA to collect copayments from patients regardless of any amounts recovered from private health insurance except in instances where the insurer pays the full cost of VA care. VA does not provide guidance to its Chief Business Office and VISNs for accounting for the costs associated with collecting payments from private health insurers and veterans. As a result, VA’s Chief Business Office and VISNs did not allocate certain costs associated with activities related to collecting first- and third-party payments to the two cost centers used by the Chief Business Office in its calculation of cost to collect. In addition, we found inconsistencies in the way VISNs allocated these costs to the field office cost center. Consequently, VA’s reported cost-to-collect measure is inaccurate. Furthermore, VA has determined that it should use collections from private health insurers to satisfy veteran copayment debt. The law is silent on this point. VA’s determination has resulted in increased administrative expenses and reduced overall collections, thus making fewer dollars available for veteran health care. We believe our previous suggestion to Congress—that it consider clarifying the cost recovery provisions of title 38 of the U.S. Code to direct VA to collect copayments from patients regardless of any amounts recovered from private health insurance except in instances where the insurer pays the full cost of VA care—is still valid. Such action would reduce the administrative burden on VA staff, reduce VA administrative expenses, and allow VA to maximize collections to help meet its costs for providing health care. To accurately determine and report the cost to collect first- and third-party payments, we recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to provide guidance for standardizing and consistently applying across VA the accounting of costs associated with collecting payments from veterans and private health insurers. We provided a draft of this report to VA for comment. In oral comments, an official in VA’s Office of Congressional and Legislative Affairs informed us that VA concurred with our recommendation. We are sending copies of this report to the Secretary of Veterans Affairs, interested congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov/. If you or your staff have any questions about this report, please call me at (202) 512-7101 or Michael T. Blair, Jr., at (404) 679-1944. Michael Tropauer and Aditi Shah Archer contributed to this report. To do our work, we reviewed our prior work and Department of Veterans Affairs (VA) Office of Inspector General reports on VA’s first- and third- party revenue collection for the Medical Care Collections Fund (MCCF). We obtained and reviewed copies of VA policies and regulations governing these collection activities. Also, we reviewed statements by the Federal Accounting Standards and Advisory Board on managerial cost accounting concepts and standards for the federal government. We interviewed officials at VA’s Chief Business Office, which provides policy guidance to MCCF field staff, and obtained information on what they consider to be direct expenses of collecting first- and third-party revenue and documentation on how they calculate the cost to collect first- and third-party revenue. This information was validated through telephone interviews of key officials at each of VA’s 21 networks and site visits to 4 medical facilities. Also, we obtained information on the organizational structure for each network and its medical facilities and obtained the views of VISN and medical facility officials on the accuracy of the Chief Business Office’s cost reporting. In addition, we obtained information from the Healthcare Financial Management Association on other health care industry practices for reporting the cost to collect first- and third- party payments. Regarding the practice of satisfying first-party debt with third-party revenue, we reviewed past opinions and decisions by VA’s Office of General Counsel, applicable laws and regulations, and existing GAO matters for consideration. We also discussed the implementation of VA’s Office of General Counsel’s decisions with staff from VA’s Chief Business Office and medical facilities. In 1986, Congress authorized VA to collect payments from third-party health insurers for the treatment of veterans with nonservice-connected disabilities, and it also established copayments for this care. Funds collected were deposited into the U.S. Treasury as miscellaneous receipts and not made specifically available to the VA to supplement its medical care appropriations. The Balanced Budget Act of 1997 established a new fund in the U.S. Treasury, the Department of Veterans Affairs Medical Care Collections Fund, and authorized VA to use funds in this account to supplement its medical care appropriations. To collect from health insurers, VA uses a four-function process with the following 13 activities to bill and collect third-party payments. 1. Patient Registration: Collecting patient demographic information, determining eligibility for health care benefits, ascertaining financial status, and obtaining consent for release of medical information. 2. Insurance Identification: Obtaining insurance information from veteran, spouse, or employer. 3. Insurance Verification: Confirming patient insurance information and contacting third-party insurer for verification of coverage and benefit structure. 4. Precertification and Certification: Contacting third-party insurer to obtain payment authorization for VA-provided care. 5. Continued Stay Reviews: Reviewing clinical information and obtaining payment authorization from third-party insurer for continuation of care. 6. Coding and Documentation: Reviewing and assigning appropriate codes to document diagnosis of patient ailment and treatment procedures and validating information documented by the physician. 7. Bill Creation: Gathering pertinent data for bills; authorizing and generating bills; and submitting bills to payers. 8. Claims Correspondence and Inquiries: Providing customer service for veterans, payers, Congress, and VA Regional Counsel. 9. Establishment of Receivables: Reviewing outstanding claims sent to third-party insurers and identifying amount of payment due to VA for collection follow-up work. 10. Payment Processing: Reviewing, posting, and reconciling payment received. 11. Collection Correspondence and Inquiries: Following up with payers; resolving first-party bankruptcies, hardships and waivers; processing refund requests, repayment plans, and returned checks; referring claims to utilization review; and generating probate action. 12. Referral of Indebtedness: Referring delinquent first-party debt to the U.S. Treasury for collection against any future government payment to the veteran, such as reducing an income tax refund by the amount of the first-party debt. 13. Appeals: Receiving notification of partial or nonpayment from the third-party insurer, reviewing documentation, initiating an appeal to the third-party insurer for payment, and following up for appropriate payment. VA Health Care: VA Increases Third-Party Collections as It Addresses Problems in Its Collections Operations. GAO-03-740T. Washington, D.C.: May 7, 2003. VA Health Care: Third-Party Collections Rising as VA Continues to Address Problems in Its Collections Operations. GAO-03-145. Washington, D.C.: January 31, 2003. VA Health Care: VA Has Not Sufficiently Explored Alternatives for Optimizing Third-Party Collections. GAO-01-1157T. Washington, D.C.: September 20, 2001. VA Health Care: Third-Party Charges Based on Sound Methodology; Implementation Challenges Remain. GAO/HEHS-99-124. Washington, D.C.: June 11, 1999. VA Medical Care: Increasing Recoveries From Private Health Insurers Will Prove Difficult. GAO/HEHS-98-4. Washington, D.C.: October 17, 1997. 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Summary: During a May 2003 congressional hearing, questions were raised about the accuracy of the Department of Veterans Affairs' (VA) reported costs for collecting payments from veterans and private health insurers for its Medical Care Collections Fund (MCCF). Congress also had questions about VA's practice of using third-party collections to satisfy veterans' first-party debt. GAO's objectives were to determine: (1) the accuracy of VA's reported cost for collecting first- and third-party payments from veterans and private health insurers, and (2) how VA's practice of satisfying first-party debt with third-party payments affects the collections process. VA has not provided guidance to its Chief Business Office and Veterans Integrated Service Networks (VISN) for accounting for the costs associated with collecting payments from veterans and private health insurers. As a result, GAO found that the Chief Business Office and VISNs excluded some costs associated with collecting first- and third-party payments. In addition, GAO found inconsistencies in the way VISNs allocate these costs. Consequently, VA's reported costs to collect are inaccurate. VA's practice of satisfying--or paying for--first-party, or veterans' copayment debt, with collections from third-party insurers has resulted in a reduction in overall collections and increased administrative expenses due to the reconciliation process. VA has taken the position that payments made from third-party insurers should be used to satisfy veterans' first-party debt. The law and legislative history are not clear on whether third-party collections can be used for this purpose.