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 approximately 150 hospitals, 130 nursing homes, 800 outpatient clinics, as well as 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. VA develops a health care budget estimate each year of the resources needed to provide these services for 2 fiscal years. Typically, VA’s Veterans Health Administration (VHA), which administers VA’s health care program, starts to develop a health care budget estimate approximately 10 months before the President submits the budget request to Congress the following February. The 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 for health care services using the Enrollee Health Care Projection Model (EHCPM). VA uses other methods to develop the remaining parts of its budget estimate, that is, the costs of long-term care and other health care programs. VA’s annual budget estimate for a fiscal year includes estimates of anticipated funding from several sources. These sources include new appropriations, which refer to the appropriations to be provided during the current annual appropriations process for the upcoming fiscal year, and with respect to advance appropriations, the next fiscal year. For example, VA estimated it needed $52.7 billion in new appropriations for fiscal year 2013 and $54.5 billion for fiscal year 2014. In addition to new appropriations, sources of funding include resources expected to be available from unobligated balances and collections and reimbursements that VA anticipates it will receive in the fiscal year.include third-party payments from veterans’ private health care insurance for the treatment of nonservice-connected conditions and veterans’ copayments for outpatient medications. VA’s reimbursements include amounts VA receives for services provided under service agreements with the Department of Defense (DOD). VA’s health care budget estimate informs the President’s annual request for appropriations for VA health care services, which includes an advance appropriations request for these services. The budget estimate can change during each budget formulation cycle, due to the availability of updated data and the successively higher levels of review in VA and OMB before the President’s budget request is submitted to Congress. 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. VA prepares a budget justification that provides information supporting the policy and funding decisions in the President’s budget request. In its budget justification, VA includes estimates related to the following: Ongoing health care services, which include acute care, rehabilitative care, mental health, long-term care, and other health care programs. Initiatives, which are proposals by the Secretary of VA or by the President to provide, expand, or create new health care services. Some of the proposed initiatives can be implemented within VA’s existing authority, while other initiatives would require a change in law. Operational improvements, which are changes in the way VA manages its health care system to lower costs, such as changes to its purchasing and contracting strategies. Collections and reimbursements, which are resources VA expects to collect from health insurers of veterans who receive VA care for nonservice-connected conditions and other sources, such as veterans’ copayments, and to receive as reimbursement of services provided to other government agencies or private or nonprofit entities. The President’s fiscal year 2013 budget request for VA health care services was $165 million more than the advance appropriations request for the same year. This increase came about as a result of changes in the estimates supporting the two requests. Specifically, the President’s fiscal year 2013 request reflected an estimate of funding needed for initiatives that increased by $2 billion and an estimate for ongoing health care services that decreased by $2.1 billion, for a net decrease of $110 million. In addition, VA’s estimate of anticipated resources from collections and reimbursements decreased by $275 million. This decline in anticipated resources was partially offset by the $110 million decrease in expected obligations, which resulted in the net increase in the President’s request of $165 million. (See table 1.) Three factors accounted for most of the changes in the estimates that supported the President’s fiscal year 2013 budget request when compared to the earlier, advance appropriations request; however, VA, in its budget justification, was not transparent about two of the factors. The three factors that accounted for the $2 billion increase in the initiatives estimate and the $2.1 billion decrease in the ongoing health care services estimate were: (1) a new approach in reporting the estimate for initiatives, (2) updated assumptions and data to estimate ongoing health care services, and (3) additional funding needed for initiatives. The first factor—VA’s new reporting approach—accounted for $1.2 billion of the increase in VA’s initiatives estimate and a corresponding decrease in VA’s ongoing health care services estimate. The second factor accounted for a $900 million decrease in VA’s ongoing health care services estimate. This decrease was largely offset by the third key factor—an almost $800 million increase in additional funding for initiatives. (See table 2.) A new approach in reporting the estimate for initiatives. VA used a new reporting approach for initiatives that combined both funding for initiatives and funding for certain ongoing health care services in its initiatives estimate, which increased VA’s initiatives estimate and decreased VA’s ongoing services estimate. In prior budget justifications, VA’s estimated funding for initiatives only included funding identified for initiatives during that year while funding needs for all ongoing services were included in VA’s estimate for ongoing health care services. However, VA, in its budget justification, did not disclose that it had used a new reporting approach for initiatives. OMB staff and VA officials told us that the reason for this change in reporting was to be more transparent about the total amount of funding needed to support VA’s initiatives. Nevertheless, by not stating in its budget justification that it made this change, VA has not made it transparent that the estimate for initiatives is greater and the estimate for ongoing services is less than they would have been using VA’s past reporting approach. Updated data and assumptions to estimate ongoing health care services. As reported in its budget justification, VA used updated assumptions and data, which reduced VA’s estimate for ongoing health care services. Specifically, the amount of funding needed to support health care services estimated by the EHCPM decreased because VA updated some of the assumptions used in the EHCPM. For example, VA updated the EHCPM’s assumption accounting for the pay freeze for civilian employees in fiscal years 2011 and 2012, which reduced the base salary of VA employees in future years. VA also used updated data to adjust the estimates produced by the EHCPM and the estimates for long-term care and other health care programs. Updated data for long-term care and other health care programs generally indicated that costs for these services would grow at a slower rate than the data used to support the President’s fiscal year 2013 advance appropriations request indicated. Additional funding for initiatives. According to VA’s budget justification, as a result of the reduced estimate for ongoing health care services, VA increased the estimate of funding needed for its initiatives. This estimate of funding included funding for all initiatives for which funding was not requested in the fiscal year 2013 advance appropriations request and increased funding for some initiatives for which funding had been identified in the earlier request. However, in its fiscal year 2013 budget justification, VA did not make it clear that part of the additional increase in its initiatives estimate occurred because VA’s earlier estimate in support of the advance appropriations request did not include funding for all the initiatives the agency intended to continue. According to OMB staff, the purpose of the advance appropriations request is to provide assurance for the continuation of ongoing health care services and select initiatives that represent direct care to veterans. As a result, rather than including estimates of funding needed to support all initiatives in advance appropriations requests—including the fiscal year 2013 advance appropriations request and the fiscal year 2014 advance appropriations request—the funding needs for all initiatives are taken into account during the following budget formulation cycle. At that time, once updated data are available to produce revised estimates for ongoing health care services, VA and OMB assess the amount of likely resources available to fund initiatives in the context of overall budget constraints. However, VA did not state that some initiatives for which estimates were included in the fiscal years 2013 and 2014 advance appropriations requests would require additional funding if the initiatives were to be continued. (Table 3 indicates the difference in the fiscal year 2013 initiative estimates attributable to VA’s new reporting approach versus additional funding.) VA’s budget justification is used to provide Congress with relevant information for making decisions. The lack of transparency regarding the factors that changed VA’s estimates for ongoing health care services and initiatives results in unclear information for congressional deliberation. Our analysis of the estimates supporting the President’s fiscal year 2013 budget request found that VA’s supporting estimates (1) do not address historical discrepancies between estimated and actual NRM spending and (2) lack analytical support for expected savings from some operational improvements. Regarding NRM, VA’s fiscal year 2013 estimate does not appear to correct for the long-standing pattern of VA’s NRM spending exceeding its estimates and was based on a policy decision. In June 2011, we reported VA’s spending on NRM exceeded the estimates reported in VA’s budget justifications from fiscal years 2006 to 2010. More recently, we found that in fiscal year 2011 VA spent about $2 billion for NRM, which was $867 million more than estimated (see fig. 1). According to VA officials, NRM spending has exceeded estimates of needed funding in recent years because VA medical facilities have spent more funds on NRM projects that were originally expected to be spent on other activities— such as utilities, grounds maintenance, and janitorial services. This 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. When we asked VA officials if the fiscal year 2013 estimate addressed the historical discrepancies between amounts estimated and actual spending, VA officials said that all information was considered in developing the estimate. However, VA officials noted that the amount requested was a policy decision and did not specifically say whether these discrepancies were addressed. This explanation suggests that VA has not changed the way in which it determines the final NRM estimate; as we previously reported VA lowered its fiscal year 2012 estimate due to a policy decision to fund other initiatives. Because the fiscal year 2013 estimate of $710 million is significantly lower than past spending and lower than the estimate provided last year, it does not appear that medical facilities’ spending was addressed. Furthermore, VA estimates that the NRM backlog for health care facilities—which reflects the total amount needed to address facility deficiencies—will remain over $9 billion in fiscal year 2013. As such, the NRM information provided in VA’s budget justification may not be a reliable estimate of future spending for NRM. Regarding operational improvements, VA estimated savings for fiscal year 2013 using the same methodologies it used in the past, some of which we recently reported lacked analytical support or were flawed. The President’s budget request for fiscal year 2013 reflected VA’s estimate that it would save about $1.3 billion from the implementation of six operational improvements: Changing rates. Estimated savings from purchasing dialysis treatments and other care from civilian providers at Medicare rates instead of current community rates. Acquisitions. Estimated cost savings from changes to VA’s purchasing and contracting strategies. Fee Care. Estimated saving from purchasing care from non-VA providers at lower rates. Realigning clinical staff and resources. Estimated savings by using less costly health care providers, such as licensed practical nurses instead of certain types of registered nurses. Medical and administrative support. Estimated savings from employing resources more efficiently. VA real property. Estimated saving from initiatives including repurposing vacant or underutilized buildings, decreasing energy costs, and changing procurement practices for building maintenance. In a February 2012 report, we highlighted issues regarding VA’s methodology for estimating savings from some operational improvements, including changes to VA real property, medical and administrative support activities, and the realignment of clinical staff and resources. We also recommended that VA develop a sound methodology for estimating savings from its operational improvements. In response, VA concurred with the recommendation except for two real property initiatives where VA maintained that the savings estimates were not flawed. However, since our February report was issued after the release of the President’s budget request for fiscal year 2013, VA has not yet implemented our recommendations. VA officials told us during the course of our current review that the agency is taking steps to address deficiencies in the methodology used for estimating savings for some of its operational improvements. Without a sound methodology, VA runs the risk of falling short of its estimated savings, which may ultimately require VA to make difficult trade-offs to provide health care services with the available resources. We determined that the estimates for some of the operational improvements provided in VA’s budget justification may not be reliable estimates of future savings and therefore are of limited use for decision makers. VA’s budget justification is intended to provide Congress with estimates of resource needs and what the agency plans to achieve with requested appropriations. Our work shows that changes in the way that VA estimates and reports its required resources are responsible for the increase in the President’s fiscal year 2013 budget request for VA health care, when compared to last year’s advance appropriations request for the same year. However, VA was not transparent in its budget justification about two of the factors that accounted for the change in VA’s initiatives and ongoing health care services estimates. By neither disclosing that it used a new reporting approach for initiatives nor indicating that its advance appropriations requests did not include funding for continuing initiatives, VA did not provide Congress with information relevant to understanding these estimates. In addition, VA may not have provided Congress reliable information with which to make decisions regarding VA’s appropriations in regards to NRM and some operational improvements. VA’s most recent NRM estimates do not appear to correct for the long-standing pattern where VA’s NRM spending exceeds VA’s NRM estimates. VA’s estimates have not consistently accounted for additional spending by VA medical facilities. As a result, the NRM estimates may be unreliable, as they may continue to underestimate VA’s future spending for NRM. Also, VA continued to use flawed methodologies we identified in our prior work to develop savings estimates for operational improvements. We continue to believe that VA should improve its methodology as we previously recommended. Until these issues are addressed, VA’s estimates of NRM and operational improvements are of limited use for decision makers. To improve the transparency and reliability of information presented in VA’s congressional budget justifications that support the President’s budget request for VA health care, we recommend the Secretary of VA take the following three actions: State in future budget justifications whether the estimates for initiatives include funding for ongoing health care services. State in future budget justifications whether the estimates for initiatives in support of the advance appropriations request reflect all the funding that may be required if all initiatives are to be continued. Reflect in future budget justifications estimates of annual resource needs for NRM that fully account for resources that VA medical facilities have consistently spent for this purpose. We provided a draft of this report to the Secretary of VA and the Acting Director of OMB for comment. In its written comments signed by the Chief of Staff and reprinted in appendix I, VA concurred with two of our three recommendations, but did not concur with our recommendation related to the estimates for initiatives that support VA’s advance appropriations requests. In addition, VA stated in its comments that one aspect of our report is not accurate, that it disagrees with a second, and that it had concerns about a third. OMB staff provided a technical comment, which we incorporated. VA concurred with our first recommendation regarding funding for ongoing health care services. VA noted that to implement this recommendation it will include in future budget justifications a narrative description stating whether the estimates for initiatives include funding for ongoing health care services. VA also concurred with our third recommendation regarding its estimates for NRM. VA noted that in order to implement this recommendation, VA will reflect in future budget justifications annual estimates of resources needed for NRM that are consistent with policy decisions and account for past spending on NRM. VA did not concur with our second recommendation related to the estimates for initiatives that support VA’s advance appropriations requests. VA stated that it did not concur because the recommendation is not consistent with its multiyear approach to budgeting for advance appropriations, in which VA estimates what the agency calls essential initial funding for the advance appropriations year. VA then estimates full funding for initiatives in the next year based on updated information. However, we do not address VA’s approach to budgeting in this report and our recommendation is that VA state in future budget justifications whether the estimates for initiatives in support of the advance appropriations request reflect all the funding that may be required if all initiatives are continued. VA’s comments indicate that all funding for these initiatives is not included in the advance appropriations estimates. VA could implement our recommendation by making a statement to this effect in its budget justification. In addition to its comments on our recommendations, VA had comments on three sections of our report. VA questioned the accuracy of our assertion that VA did not disclose the new reporting approach for its initiatives, which included estimates for certain ongoing health care services. VA stated that a table footnote in its budget justification explained that the estimates for initiatives for fiscal years 2012, 2013, and 2014 represented total funding. We do not believe that a table footnote in a document, which consists of nearly 400 pages, provides adequate transparency in explaining a change of more than $1 billion that resulted from a new reporting approach. Moreover, because the footnote does not explain that this approach is new or that the estimate for ongoing services was also affected, we continue to believe that the transparency of VA’s reporting could be improved. We support VA’s plans to include an expanded narrative regarding its approach to reporting estimates for initiatives in future budget justifications and believe this will enhance transparency. VA also indicated that it disagreed with what VA characterized as our assertion that Congress cannot use VA’s estimates of costs for ongoing health care services or initiatives due to a lack of transparency. As evidence, VA pointed to the detailed information presented in the budget justification and described how the estimates are determined, including a description of the actuarial model it uses. However, we did not state that Congress cannot use VA’s estimates for the cost of ongoing health care services and initiatives. Instead, what we identified was that the lack of transparency regarding the factors that changed VA’s estimate for ongoing health care services and initiatives resulted in unclear information for congressional deliberation. VA’s concurrence with two of our recommendations and its implementation of them would address the concerns we raised and improve the transparency of the information that VA provides to Congress in its annual budget justifications. VA also expressed concern that our conclusions cast doubt on its strong commitment to stewardship of resources. VA noted that the agency and its resources need to be flexible and responsive to changes in veterans’ medical care needs, which may occur after its budget estimates are formulated. VA has the authority to respond to such changes. We have pointed out, for example, that VA’s NRM spending is consistent with its authority to increase and decrease the amounts VA allocates from the Medical Facilities account for NRM. However, in regard to NRM, the long- standing pattern in which NRM spending has significantly exceeded VA’s estimates needs to be better accounted for in VA’s budget estimates. Doing so will not decrease VA’s flexibility to be responsive to veterans’ needs. Moreover, we believe that VA’s plans to address our recommendation will provide Congress with more reliable estimates with which to make decisions about VA appropriations. We are sending copies of this report to the Secretary of Veterans Affairs and the Acting 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 website 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 williamsonr@gao.gov, or Melissa Emrey-Arras at (617) 788-0534 or emreyarrasm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. In addition to the contacts named above, James C. Musselwhite and Melissa Wolf, Assistant Directors; Kye Briesath, Deirdre Brown, Krister Friday, Lauren Grossman, Aaron Holling, Wati Kadzai, and Lisa Motley made key contributions to this report. VA Health Care: Estimates of Available Budget Resources Compared with Actual Amounts. GAO-12-383R. Washington, D.C.: March 30, 2012. VA Health Care: Methodology for Estimating and Process for Tracking Savings Need Improvement. GAO-12-305. Washington, D.C.: February 27, 2012. Department of Veterans Affairs: Issues Related to Real Property Realignment and Future Health Care Costs. GAO-11-877T. Washington, D.C.: July 27, 2011. Veterans’ Health Care Budget Estimate: Changes Were Made in Developing the President’s Budget Request for Fiscal Years 2012 and 2013. GAO-11-622. Washington, D.C.: June 14, 2011. 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. Federal Real Property: Progress Made in Reducing Unneeded Property, but VA Needs Better Information to Make Further Reductions. GAO-08-939. Washington, D.C.: September 10, 2008. VA Health Care: Budget Formulation and Reporting on Budget Execution Need Improvement. GAO-06-958. Washington, D.C.: September 20, 2006.

Summary: The Veterans Health Care Budget Reform and Transparency Act of 2009 requires GAO to report on the Presidents annual budget request to Congress for VA health care services. GAOs previous work found that VAs NRM spending exceeded its estimates in recent years and that some of VAs estimates of savings from operational improvements lacked analytical support or were flawed. Building on GAOs past work and the Presidents most recent request for VA health care, this report examines (1) key changes to the fiscal year 2013 budget request compared to the 2013 advance appropriations request, and certain aspects of the fiscal year 2014 advance appropriation request and supporting estimates; and (2) whether the issues GAO identified regarding NRM and operational improvements continue in the estimates for the most recent request. GAO reviewed the Presidents budget request, VAs budget justification, and VA data. GAO interviewed VA officials and staff from the Office of Management and Budget. The Presidents fiscal year 2013 budget request for the Department of Veterans Affairs (VA) health care services was $165 million more than the earlier advance appropriations request for the same year. This request reflected a $2 billion increase for initiatives and a $2.1 billion decrease for ongoing health care services, for a net decrease of $110 million in expected obligations. This decrease partially offset a decline in anticipated resources available to VA of $275 million, resulting in the net increase in the Presidents request of $165 million. Two of the three factors that accounted for most of these changes were not transparent. First, VA used a new reporting approach for initiatives that combined both funding for initiatives and for certain ongoing health care services in its initiatives estimate. Previously, VA had reported only funding it identified for initiatives during that year. This new reporting approach resulted in an increase in VAs initiatives estimate and a commensurate decrease in VAs ongoing services estimate. VA officials told GAO that this change was made to be more transparent about the total funding needed for initiatives. However, because VA did not disclose this change in its budget justification, VA has not made it transparent that its initiatives estimate is greater and its ongoing health care services estimate is lower than they would have been using VAs past approach. Second, VA included additional funding in its initiatives estimate, in part, to fund initiatives that were not identified in the fiscal year 2013 advance appropriations request. VA also did not make transparent in its budget justifications that some initiatives identified in its fiscal years 2013 and 2014 advance appropriations requests may require additional funding if the initiatives are continued. The lack of transparency regarding VAs estimates for initiatives and ongoing health care services results in unclear information for congressional deliberation. The issues GAO previously identified related to NRM (non-recurring maintenance), such as renovations and other improvements of VA medical facilities, and operational improvements remain. VAs fiscal year 2013 estimate for NRM$710 milliondoes not appear to correct for the long-standing pattern where VAs NRM spending exceeds VAs NRM estimates. For example, in fiscal year 2011 VA spent about $2 billion for NRM, which was $867 million more than estimated. According to VA officials, this pattern has occurred because VA medical facilities have spent more funds on NRM projects that were originally expected to be spent on other activitiessuch as utilities, grounds maintenance, and janitorial serviceswhich is consistent with VAs authority to allocate its appropriations. When GAO asked if the fiscal year 2013 estimate addressed the historical discrepancies between estimated and actual NRM spending, VA officials said that all information was considered in developing the estimate. However, they noted that the final estimate was a policy decision and did not say specifically whether these discrepancies were addressed. Regarding operational improvements, VA estimated savings for fiscal year 2013 using the same methodologies it used in the past, some of which GAO previously found lacked analytical support or were flawed. GAO previously recommended that VA develop a sound methodology for estimating savings from its operational improvements, which according to officials, VA is addressing for future estimates. Until these issues are addressed, VAs estimates of NRM and operational improvements may not be reliable and are of limited use for decision makers. GAO recommends that VA state in its budget justification whether the estimates for initiatives include funding for ongoing services and whether its advance appropriations request reflects funding that may be required if initiatives are continued. GAO also recommends that VAs NRM estimates fully account for the long-standing pattern of medical facilities spending more on NRM than originally expected. VA concurred except for the recommendation on advance appropriations, which GAO believes is needed to improve transparency.