Although VA has been authorized to collect third-party health insurance payments since 1986, it was not allowed to use these funds to supplement its medical care appropriations until enactment of the Balanced Budget Act of 1997. Part of VA’s 1997 strategic plan was to increase health insurance payments and other collections to help fund an increased health care workload. The potential for increased workload occurred in part because the Veterans’ Health Care Eligibility Reform Act of 1996 authorized VA to provide certain medical care services not previously available to veterans without service-connected disabilities or low incomes. VA expected that collections from third-party payments, copayments, and deductibles would cover the majority of costs for higher- income veterans without service-connected disabilities. These veterans increased from about 4 percent of all veterans treated in fiscal year 1996 to about 20 percent in fiscal year 2001. To collect from health insurers, as shown in figure 1, VA uses five related processes to manage the information needed to bill and collect. The patient intake process involves gathering insurance information and verifying that information with the insurer. The medical documentation process involves properly documenting the health care provided to patients by physicians and other health care providers. The coding process involves assigning correct codes for the diagnoses and medical procedures based on the documentation. Next the billing process serves to create and send bills to insurers based on the insurance and coding information. Finally, the accounts receivable process includes processing payments from insurers and following up with insurers on outstanding or denied bills. In 1999, VA adopted a new fee schedule, called “reasonable charges,” which are itemized fees based on diagnoses and procedures, and the new schedule allows VA to bill in a way that more accurately captures the care provided. Previously, VA had nine charges for inpatient care and one charge for outpatient care. These charges were not specific to the care provided. For example, VA had charged the same per diem rate for any patient in a surgical bed section regardless of the care provided. In addition, before adopting the new fee schedule, VA had billed all outpatient visits, including surgery, based on VA’s average outpatient cost of $229, a single rate that had limited VA’s ability to collect higher amounts for more expensive care. In contrast, when the reasonable charges fee schedule was adopted in September 1999, an outpatient hernia surgery charge increased to about $6,500; and an office visit charge for an established patient decreased to a range of about $22 to $149, depending on the care given. By linking charges to the care provided, VA created new bill-processing demands—particularly in the three areas of documenting care, coding that care, and processing bills per episode of care. First, VA must be prepared to provide an insurer supporting medical documentation for the itemized charges. Second, VA must accurately assign medical diagnoses and procedure codes to set appropriate charges, a task which requires coders to search through medical documentation and various databases to identify all billable care. Third, in contrast to a single bill for an episode of care under the previous fee schedule, under reasonable charges VA must prepare a separate bill for each provider involved in the care and an additional bill if a hospital facility charge applies. For fiscal year 2002, VA collected third-party payments of $687 million, a 32 percent increase over its fiscal year 2001 collections. The increased collections in fiscal year 2002 resulted from VA’s submitting and collecting for more bills than previously. According to three network revenue managers we interviewed, billings increased mainly because of a reduction of billing backlogs and improvements in the processes necessary to collect under the new reasonable charges fee schedule. Nevertheless, VA’s ability to collect was limited by problems such as missed billing opportunities. VA does not know how many dollars remain uncollected because of such limitations. For fiscal year 2002, VA collected $687 million, up 32 percent compared to the $521 million collected during fiscal year 2001. The increased collections reflected VA’s processing a higher volume of bills than it did in the prior fiscal year. VA processed and received payments for over 50 percent more bills in fiscal year 2002 than in fiscal year 2001. VA’s collections grew at a lower percentage rate than the number of paid bills because the average payment per paid bill dropped 18 percent compared to the prior fiscal year. Average payments dropped primarily because a rising proportion of VA’s paid bills were for outpatient care rather than inpatient care. Since the charges for outpatient care were much lower on average, the payment amounts were typically lower as well. VA had difficulties establishing the collections processes to bill under a new fee schedule, processes which were necessary to achieve the increased billing and collections in fiscal year 2002. Although VA anticipated that the shift to reasonable charges would yield higher collections, collections dropped in fiscal year 2000 after implementing the new fee schedule in September 1999. VA attributed that drop to its being unprepared to bill under reasonable charges, particularly because of its lack of proficiency in developing medical documentation and coding to appropriately support a bill. As a result, VA reported that many VA medical centers developed billing backlogs after initially suspending billing for some care. As shown in figure 2, VA’s third-party collections increased in fiscal year 2001—reversing fiscal year 2000’s drop in collections—and increased again in fiscal year 2002. After initially being unprepared in fiscal year 2000 to bill reasonable charges, VA began improving its implementation of the processes necessary to bill and increase its collections. According to VA, by the summer of 2000, facilities had sufficiently implemented processes to move forward with billing under reasonable charges. By the end of fiscal year 2001, VA had submitted 37 percent more bills to insurers than in fiscal year 2000. VA submitted even more in fiscal year 2002, over 8 million bills that constituted a 54 percent increase over the number in fiscal year 2001. VA officials cited various sources for an increased number of bills in fiscal year 2002. Managers we spoke with in three networks—Network 2 (Albany), Network 9 (Nashville), and Network 22 (Long Beach)—mainly attributed the increased billing to reductions in billing backlogs. They also cited an increased number of patients with billable insurance as a factor for the increased billing. In addition, a May 2001 change in the reasonable- charges fee schedule for medical evaluations allowed billing for a facility charge in addition to billing for the professional service charges, a change that contributed to the higher volume of bills in fiscal year 2002. Increased collections for fiscal year 2002 reflected VA’s improved ability to manage the volume and billing processes required to produce multiple bills under reasonable charges, according to three network revenue managers. Networks 2 (Albany) and 9 (Nashville) reduced backlogs, in part by hiring more staff, contracting for staff, or using overtime to process bills and accounts receivable. Network 2 (Albany), for instance, managed an increased billing volume through mandatory overtime for billers. Managers we interviewed in all three networks noted better medical documentation provided by physicians to support billing. In Network 22 (Long Beach) and Network 9 (Nashville), revenue managers reported coders were getting better at identifying all professional services that can be billed under reasonable charges. In addition, the revenue manager in Network 2 (Albany) said that billers’ productivity had risen from 700 to 2,500 bills per month over a 3-year period, as a result of gradually increasing productivity standards and a streamlining of their jobs to focus solely on billing. Studies have suggested that operational problems—missed billing opportunities, billing backlogs, and inadequate pursuit of accounts receivable—limited VA’s collections in the years following the implementation of reasonable charges. After examining activities in fiscal years 2000 and 2001, a VA Inspector General report estimated that VA could have collected over $500 million more than it did. About 73 percent of this uncollected amount was attributed to a backlog of unbilled medical care; most of the rest was attributed to insufficient pursuit of delinquent bills. Another study, examining only professional-service charges in a single network, estimated that $4.1 million out of $4.7 million of potential collections was unbilled for fiscal year 2001. Of that unbilled amount, 63 percent was estimated to be unbillable primarily because of insufficient documentation. In addition, the study found coders often missed services that should have been coded for billing. According to the Director of the Revenue Office, VA could increase collections by working on operational problems. These problems included unpaid accounts receivable and missed billing opportunities due to insufficient identification of insured patients, inadequate documentation to support billing, and coding problems that result in unidentified care. During April through June 2002, three network revenue managers told us about backlogs and processing issues that persisted into fiscal year 2002. For example, although Network 9 (Nashville) had above average increases in collections for both inpatient and outpatient care, it still had coding backlogs in four of six medical centers. According to Network 9’s (Nashville) revenue manager, eliminating the backlogs for outpatient care would increase collections by an estimated $4 million for fiscal year 2002, or 9 percent. Additional increases might come from coding all inpatient professional services, but the revenue manager did not have an estimate because the extent to which coders are capturing all billable services was unknown. Moreover, although all three networks reported that physicians’ documentation was improving for billing, they reported a continuing need to improve physicians’ documentation. In addition, Network 22 (Long Beach) reported that accounts receivable staff had difficulties keeping up with the increased volume of bills because it had not hired additional staff or contracted help for accounts receivable. As a result of these operational limitations, VA lacks a reliable estimate of uncollected dollars, and therefore does not have the basis to assess its systemwide operational effectiveness. Some uncollected dollars resulting from currently missed billing opportunities—such as billable care missed in coding—are not readily quantified. Other uncollected dollars—such as those from backlogged bills and uncollected accounts receivable—are either only partially quantifiable or their potential contribution to total collections is uncertain. For example, even though the uncollected dollars in older accounts receivable can be totaled, the yield in payments through more aggressive pursuit of accounts receivable is uncertain. This is because, according to VA officials, some portion of the billed dollars is not collectable due to VA inappropriately billing for services not covered by the insurance policy, billing against a terminated policy, or not closing out the accounts receivable after an insurer paid the bill. VA continues to implement its 2001 improvement plan and is planning more improvements. Although the improvement plan could potentially improve operations and increase collections, it is not scheduled for full implementation until December 2003. In May 2002, VA created a new office in VHA, the Chief Business Office, in part to address collections issues. According to VA officials, this office is developing a new approach to improvements, which will include initiatives beyond those in the improvement plan. VA’s improvement plan was designed to increase collections by improving and standardizing its collections processes. The plan’s 24 actions are to address known operational problems affecting revenue performance. These problems include unidentified insurance for some patients, insufficient documentation for billing, shortages of coding staff, gaps in the automated capture of billing data, insufficient pursuit of accounts receivable, and uneven performance across collections sites. The plan seeks increased collections through standardization of policy and processes in the context of decentralized management, in which VA’s 21 network directors and their respective medical center directors have responsibility for the collections process. Since management is decentralized, collections procedures can vary across sites. For example, sites’ procedures can specify a different number of days waited until first contacting insurers about unpaid bills and can vary on whether to contact by letter, telephone, or both. The plan intends to create greater process standardization, in part, by requiring certain collections processes, such as the use of electronic medical records to provide coders better access to documentation and legible records. When fully implemented, the plan’s actions can improve collections to the extent that they can reduce operational problems such as missed billing opportunities. For example, two of the plan’s actions—requiring patient contacts prior to scheduled appointments to gather insurance information and electronically linking VA to major insurers to identify patients’ insurance—are intended to increase the number of patients identified with insurance. A recent study estimated that 23.8 percent of VA patients in fiscal year 2001 had billable care, but VA actually billed for the care of only 18.3 percent of patients. This finding suggests that VA could have billed for 30 percent more patients than it actually billed. VA has implemented some of the improvement plan’s 24 actions, which were scheduled for completion at various times through 2003, but is behind the plan’s original schedule. The plan had scheduled 15 of the 24 actions for completion through May 25, 2002, but, as shown in figure 3, VA had designated only 8 as completed, as of the last formal status report on the plan in May 2002. Some of the plan’s actions that VA has designated as completed needed additional work. For example, although VA designated electronic billing as completed in the May 2002 report, in August 2002 a VA official indicated that 20 hospitals were still working on a step required to transmit bills to all payers. In other cases, VA has designated an action completed by mandating it in a memorandum or directive. However, mandating an action in the past has not necessarily ensured its full implementation. For example, although an earlier 1998 directive required patient preregistration, the 2001 improvement plan reported that preregistration was not implemented consistently across VA and thus mandated its use. Officials in VHA’s new Chief Business Office told us that this office is developing a new approach for improving third-party collections. According to the Chief Business Officer, the Under Secretary of Health proposed, and the Secretary approved, the establishment of the Chief Business Office to underscore the importance of revenue, patient eligibility, and enrollment functions; and to give strategic focus to improving these functions. He said the new approach can help increase revenue collections by further revising processes and providing a new business focus on collections. Officials in this office told us that the new approach will combine these and other actions with the actions in the improvement plan. For example, the Chief Business Office’s improvement strategy incorporates electronic transmission of bills and of third-party payments, which are part of the 2001 improvement plan. The new approach also encompasses initiatives beyond the improvement plan, such as the one in the Under Secretary of Health’s May 2002 memorandum that directed all facilities to refer accounts receivable older than 60 days to a collection agency, unless a facility can document a better in-house process. According to the Deputy Chief Business Officer, this initiative has shown some sign of success— with outstanding accounts receivables dropping from $1,378 million to $1,317 million from the end of May to the end of July 2002, a reduction of about $61 million or 4 percent. Another initiative in the new approach is the Patient Financial Services System (PFSS). PFSS is an automated financial system focused on patient accounts, which is intended to overcome operational problems in VA’s current automated billing system. For example, VA’s automated system for clinical information was not designed to provide all of the episode-of-care information, such as the health care provider and diagnoses, that are required for billing. The development of PFSS is tied to a demonstration project of a financial system, which is now being designed for Network 10 (Cincinnati). According to the Deputy Chief Business Officer, VA anticipates awarding a PFSS contract by April 1, 2003. The Chief Business Office’s plan is to install this financial system in other facilities and networks if it is successfully implemented in the Network 10 (Cincinnati) demonstration. The Chief Business Office also intends to improve collections by developing better performance measures, which will be similar to those used in the private sector. For example, the office intends to use the measure of gross days revenue outstanding, which indicates the pace of collections relative to the amount of accounts receivable. During fiscal year 2003, the office plans to hold network and facility directors accountable for collections through standards that are tied to these performance measures. In addition, the Chief Business Officer said that tracking performance with these measures could help identify further opportunities for collections improvements. The Chief Business Office is developing the new initiatives, which it had not formalized into a planning document as of August 2002. Certain key decisions were under consideration. For example, the Chief Business Officer was considering whether to centralize some processes at the network or national level and was developing the performance standards that would be required for holding network and facility directors accountable. Moreover, according to the Chief Business Officer, implementing PFSS will require the office to resolve some issues, including making its existing systems provide sufficient data to support the new financial system. As VA faces increased demand for medical care, third-party collections for nonservice-connected conditions remain an important source of alternative revenue to supplement VA’s resources. Our work and VA’s continuing initiatives to improve collections suggest that VA could collect additional supplemental revenues because it has not collected all third- party payments that it could in fiscal year 2002. However, VA does not have an estimate of the amount of uncollected dollars, which it needs to assess the effectiveness of its current processes. VA has been improving its billing and collecting under the new fee schedule established in 1999, but VA has not completed its efforts to address problems in collections operations. In this regard, fully implementing VA’s 2001 improvement plan could help VA maximize future collections by addressing problems such as missed billing opportunities. However, the plan’s reliance on directives, in some cases, to achieve increased collections is not enough to ensure full implementation and optimal performance. The Chief Business Office’s new approach could also enhance collections. VA’s new Chief Business Office’s challenge is to ensure such performance by identifying root causes of problems in collections operations, providing a focused approach to addressing the root causes, establishing performance measures, and holding responsible parties accountable for achieving the performance standards. However, it is too early to evaluate the extent to which VA will be able to address operational problems and further increase collections by fully implementing its 2001 plan and new approach. The Department of Veterans Affairs provided written comments on a draft of this report, which are found in appendix II. VA generally agreed with our findings that it continues to make improvements in increased collections and VHA’s Business Office is developing new initiatives to further enhance collections. In addition, VA clarified that it may, under limited circumstances, collect from Medicare although generally it may not do so. We changed our report accordingly. VA also suggested that our title was misleading because it stated that VA continues to address problems in its collections operations rather than stating that VA is building infrastructure to implement effective collections operations. We believe that our title is accurate because VA continues to address problems that we and others have identified in VA’s collections operations. VA has acknowledged such problems in the past, including unidentified insurance for some patients, insufficient documentation for billing, and shortages of coding staff. VA continues to implement the 2001 improvement plan that it developed to address these and other problems. VA’s new initiatives also address problems, such as gaps in automated capture of billing data, that have been previously identified. As arranged with your office, unless you release its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send 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. James Musselwhite and Terry Hanford also contributed to this report. To assess the Department of Veterans Affairs’ (VA’s) progress with collections in fiscal year 2002, we obtained and examined data on VA’s third-party bills and collections. We also interviewed officials in VA headquarters and in three VA health care networks to understand the reasons for the increased collections compared to fiscal year 2001 as well as any operational problems. To provide information on VA’s 2001 improvement plan and its emerging new approach to improvements, we reviewed relevant VA documents and interviewed VA officials. We conducted interviews from April through June 2002 with managers in three networks concerning collections. In addition, we gathered data on third-party bills and collections for fiscal years 2001 and 2002. Our review of the improvement plan’s implementation started with its completion status in March 2002 and ended with its status through May 2002, which was the date of VA’s last formal report on the plan’s status. An official in the Chief Business Office told us in September 2002 that a new status report for the 2001 plan was planned but not yet available. During August through October 2002, we gathered information from officials in the Chief Business Office about additional improvement initiatives. To better understand the increased collections in fiscal year 2002 and any limitations to those collections, we judgmentally selected three networks for more detailed study. These networks provided different examples of above- and below-average growth in collections, considered separately for inpatient care and outpatient care. (See table 1.) Based on available data at the time of selection, Network 9 (Nashville) had above-average collections increases for both inpatient care and outpatient care bills. Network 2 (Albany) exceeded average collections increases for only outpatient care bills, whereas Network 22 (Long Beach) had above-average collections increases for only inpatient care bills. Although we did not verify VA data on collections and bills, we used the data reported by VA’s Revenue Office in its analyses of third-party collections. The data source is VA’s Veterans Health Information Systems and Technology Architecture National Database. This database includes data for collections from various sources—including third-party payments, patient copayments, and proceeds from sharing agreements in which VA sells services to the Department of Defense and other providers.

Summary: The Department of Veterans Affairs (VA) collects health insurance payments, known as third-party collections, for veterans' health care conditions it treats that are not a result of injuries or illnesses incurred or aggravated during military service. In September 1999, VA adopted a new fee schedule, called "reasonable charges," that it anticipated would increase revenues from third-party collections. In 2001, GAO testified that problems in VA's collections operations diminished VA's collections. For this report, GAO was asked to examine VA's third-party collections and problems in collections operations for fiscal year 2002 as well as its initiatives to improve collections. VA's fiscal year 2002 third-party collections rose by 32 percent, continuing an upward trend that began in fiscal year 2001. The increase in collections reflected VA's improved ability to manage the larger billing volume and more itemized bills required under its new fee schedule. Billings increased mainly due to a reduction of billing backlogs and improved collections processes--such as better medical documentation prepared by physicians, more complete identification of billable care by coders, and more bills prepared per biller--according to VA managers in three regional health care networks. However, VA continues to address operational problems, such as missed billing opportunities, that limit the amount VA collects. To address operational problems and further increase collections, VA has several initiatives under way and is developing additional ones. VA has been implementing initiatives in its 2001 improvement plan that was designed to address operational problems, such as unidentified insurance for some patients, insufficient documentation of services for billing, shortages of coding staff, and insufficient pursuit of accounts receivable. VA's last formal status report in May 2002 designated only 8 of the plan's 15 initiatives scheduled for completion by that time as having been completed. VA continues implementation of this plan and is also developing new initiatives, such as an automated financial system to better serve billing needs. It is too early to evaluate the extent to which VA's full implementation of its 2001 plan and new initiatives will be able to address operational problems and further increase third-party collections. In commenting on a draft of this report, VA generally agreed with our findings.