The VA health care system, established in 1930, is one of the nation’s largest direct delivery systems. VA’s health care facilities provide services to veterans both with and without service-connected disabilities. Individual facilities vary widely in the inpatient, outpatient, and long-term care services they provide. For example, some facilities provide only basic clinical care; whereas, others have capabilities to provide special care such as for organ transplants, spinal cord injuries, or chronic mental illness. VA historically allocated funds to its facilities on the basis of the facilities’ past expenditures, with incremental increases for such factors as inflation and new programs. Beginning in 1985, VA modified its allocation system because it recognized the need to more directly relate funding to the work performed and the cost to perform it, and to improve the efficiency and productivity with which medical care is delivered to veterans. The Resource Allocation Methodology (RAM) was VA’s first attempt to better link resources to workload. VA ended RAM in 1989 because of concerns that facilities had inappropriate incentives to perform work beyond their resources, possibly affecting quality of care and resulting in a budget crisis at some facilities. Between 1990 and 1993, VA again based allocations on making incremental changes to facilities’ historical budgets. But to further its efforts to link resources and workload and to provide data that it could use to improve quality and efficiency in the system, VA implemented its current RPM system for the fiscal year 1994 allocation process. The Secretary of VA, in endorsing the new RPM system, stated he hoped it would improve VA’s management of limited medical care resources, enable VA to explore opportunities to improve quality and efficiency in its health care system, and better define future resource requirements. To those ends, VA’s stated goals for RPM are to (1) improve its resource allocation methodology, (2) move from retrospective to prospective workload management, and (3) reform medical care budgeting. VA has established high expectations for how RPM would improve the equity of its allocations. VA hoped to better link resources and facility workload, move to prospective workload management by forecasting workload changes, and provide for differences in facility efficiencies in the allocations. VA also hoped that by forecasting workload changes, it could better establish and justify its budget requests. VA envisioned the system overcoming inconsistencies in facilities’ provision of care to veterans by allowing for a more equitable distribution of resources to meet veteran needs systemwide. Finally, by identifying facility differences, VA intended that the system would provide managers with useful information, including the matching of resources to quality of care issues. Part of this effort to improve resource allocation involved linking the budget allocation process to VA’s strategic plan. The strategic plan was to be the driving force behind RPM, providing it with a set of goals, performance standards, and workload priorities. Furthermore, the system’s link to the strategic plan was intended to allow consideration of service distribution, practice patterns, geographic factors affecting costs, and access differences. RPM was also designed to be a patient-based system. It differs from past resource allocation processes in defining workload as patients served rather than as procedures performed—this is the basis for VA’s characterization of RPM as “capitation-based.” For resource allocation purposes, the RPM database, managed by VA’s Boston Development Center (BDC) in Braintree, Massachusetts, integrates workload data, case mix, and costs to project facility-specific resource needs. With significant input from VA managers in the field and Headquarters, BDC has developed a complex data analysis process to estimate facility unit costs. Generally, this process involves adjusting for case mix differences by classifying patients into clinical classes and groups, forecasting changes by class in the numbers of patients served, and developing average costs per patient type that are then applied to the number of expected patients in each group to achieve a preliminary budget estimate. The facility estimates are adjusted to reflect inflation, VA regional input, and facility efficiencies. A further discussion of the RPM system is in appendix II. Because resource allocation is a sensitive and complex undertaking in VA’s health care system, VA has made a considerable investment in it. Significant VA Headquarters and field managers’ time and effort is spent adjusting the RPM methodology from year to year—one reason the process is continually changing. In addition to the 26 BDC staff responsible for data processing and education efforts, VA Headquarters chief financial officer, quality management, operations, and clinical staff also provide input to the process through frequent meetings. Facility directors sit on the RPM Field Oversight Committee, a group of about 15 managers (with 10 to 20 support staff and visitors usually present) who meet regularly to discuss implementation issues. Six technical assistance groups comprising physicians and other clinicians in each clinical area generally represent the RPM clinical groups and advise on clinical issues such as the classification of patients. Other RPM committees include a Planning Group and a Financial Advisory Group, which assist in determining forecasting methodologies and advise on the correct allocation of costs. While many parties provide input to the RPM process, the Budget Policy and Review Committee, comprising VA associate chief medical directors and other senior VA managers, makes the final recommendation on the resource allocation methodology, which the Under Secretary for Health approves. The resource allocation system shows mixed results with regard to the two aspects of equity that we examined. The system design produces data that point to potential inequities so that VA can better link resources to facility workloads. However, VA has not yet used the system for this purpose. VA has not designed the system to address the goal of providing greater consistency in veterans’ systemwide access to services. The resource allocation system provides VA managers with data that compare facility costs on a standardized workload unit basis and in this way, provides data that could point to potential inequities in allocations.Through an outlier process, the system identifies facility cost differences, a feature that allows VA to reallocate monies from the budgets of the highest cost facilities to those with the lowest costs. VA places facilities into one of nine facility groups that it considers comparable based on a complex consideration of factors such as affiliation with teaching facilities and size. Then, to provide a fair comparison, the system “levels the playing field” by adjusting for differences among facilities such as case mix, locality costs, salaries, training, and research. After adjustments are made, the system considers variations in workload costs to be more indicative of efficiency differences than facility characteristics. Comparative data show that even after adjustments are made, significant facility cost variations remain. Variations typically ranged 30 percent or more within each facility group. Appendix III and figure III.3 provide an example of the variations the RPM data show in adjusted costs per workload for one group of facilities that VA considered comparable. Another important aspect of the RPM system is its ability to forecast workload changes. For each patient class, the system forecasts the number of patients that facilities are likely to see, based on historical trends. The forecasting process recognizes that facility workloads are changing at relatively different rates and that facilities’ clinical workloads or “case mix” are also changing. For example, the system forecasts that patient classes for pulmonary disease patients or ear, nose, and throat patients are generally expected to decrease in fiscal years 1994 and 1995; whereas, classes for outpatients or human immunodeficiency virus (HIV) patients are expected to increase. System forecasts showed rates of change for total patients expected to be seen at facilities ranging from an 8-percent decrease to a 15-percent increase between 1993 and 1995. Despite cost variations and differing workload changes among facilities reflected in RPM data, VA has done little to use the data to change facility allocations. We estimate that 1 percent was the maximum real decrease in allocations that any facility had in 1995 based on RPM budget adjustments. While one facility gained as much as 3.4 percent through the process, the average uninflated gain was also about 1 percent. Facility budget changes for RPM Facility Group 5 are shown in figure 1. Appendix IV contains data for facilities nationwide. VA made two significant decisions that limited the resource allocation adjustments to facilities’ budgets: By limiting the movement of resources between the high- and low-cost facilities, VA in effect allowed the wide variations in patient costs among facilities to continue. VA limited the amount of dollars moved between high- and low-cost facilities to $10 million in fiscal year 1994 and $20 million in fiscal year 1995. VA did not include enough resources in its RPM allocations to fully fund all the facilities’ expected needs and distributed the shortfall by limiting the amount of resources given to those facilities with growing workloads.Furthermore, for those facilities with decreasing workloads, VA chose to limit their budget decreases. These decisions led to funding for the projected cost of increased workload at approximately 17 cents on the dollar. At the same time, facilities with decreasing workloads were given more money than needed to support the forecasted workload. Appendix III discusses the impact of this decision in further detail. Both of these decisions on VA’s part had a greater impact on those facilities that historically had received less funding for their workloads—and therefore were shown to have lower workload costs—than those that had relatively faster growing workloads. For example, the Carl T. Hayden Medical Center adjusted workload costs were 16.8 percent lower than those of other facilities that VA considered comparable in mission and size, and its forecasted workload growth was 4.5 percent—third highest among comparable facilities between 1993 and 1995. However, because of VA’s decisions that limited the reallocation of funds, Carl T. Hayden experienced a 2.2-percent increase in uninflated funding between 1993 and 1995. By comparison, the Long Beach Medical Center—the “high outlier” in the same comparative facility group as Carl T. Hayden—had adjusted workload costs that were 13.9 percent higher than other facilities and a forecasted workload decrease of approximately 1 percent. Long Beach’s funding decrease was less than 1 percent in 1995 (before the inflation adjustment).