Veterans aged 65 or older are increasing both in number and in the percentage of the veteran population receiving VA health care services. More significantly, the number of veterans aged 75 and older, the heaviest users of nursing home care, is increasing rapidly. VA estimates that the number of veterans aged 75 and older will increase from about 2.6 million in 1995 to about 4.0 million in 2000. All veterans with a medical need for nursing home care are eligible to receive such care in VA nursing homes and community nursing homes under contract to VA. VA also pays a portion of the cost of care for veterans served in state veterans nursing homes. Because most veterans receive care financed through other government programs (Medicare or Medicaid), private insurance, or personal assets, however, these VA programs provide only a portion of the nursing home care that veterans receive. VA serves veterans essentially on a first-come, first-served basis up to the limits of VA’s budget authority for nursing home care. VA is authorized to pay for care in community nursing homes for a period generally not longer than 6 months for nonservice-connected veterans and for an indefinite period for veterans with service-connected conditions. No maximum service period exists, and only higher income, nonservice-connected veterans must contribute to the cost of their care in VA nursing homes. State veterans homes establish their own admissions policy, and, although they receive per diem payments from VA, state homes generally rely on patient cost sharing to help cover expenses. VA operates 129 VA nursing homes (in 45 states), contracts with 3,766 community nursing homes (in all 50 states, the District of Columbia, and Puerto Rico), and pays a portion of the costs for veterans served in 80 state veterans homes (in 38 states). Obligations for VA and state veterans nursing homes have increased each year from 1985 through 1995; obligations for community nursing homes have fluctuated over the same period. Overall, VA reports that nursing home obligations have grown from about $710 million in 1985, serving 72,889 veterans, to $1.6 billion in 1995, serving 79,373 veterans as shown in table 1. To control construction of VA nursing homes and encourage placement of veterans in less costly community nursing homes, the Office of Management and Budget (OMB) established guidelines in 1987 for both the market share (16 percent) of the estimated demand by veterans for nursing home care and the distribution of veterans in the various types of facilities. The patient distribution goal is 30 percent in VA nursing homes, 40 percent in community homes, and 30 percent in state veterans homes. Management of nursing home resources in VA is changing with the reorganization of the VA health care system. The reorganization involves trimming unnecessary management layers, consolidating medical services, and using more community resources. Called the Veterans Integrated Service Network (VISN), the reorganized VA health care system will be administered and provided through 22 local network service areas and encompass the assessment, planning, and budgeting aspects of providing VA nursing home care in each service area. Implementation of the VISN will shift nursing home resource management decisions from individual VA medical centers to VISN directors. VA’s transition to the VISN was in its early stages at the time of our review. The distribution of veterans in the three types of nursing homes differs greatly from VA’s target of 30 percent in VA homes, 40 percent in community homes, and 30 percent in state homes. Figure 1 shows the distribution based on the average daily census during fiscal year 1995. Appendix I shows, by state, the number of nursing homes that VA uses and the average daily census by each type of facility in fiscal year 1995. The distribution pattern has also shifted considerably over the years. In fiscal year 1985, for example, about 40 percent of veterans (figure based on the average daily census) receiving VA-financed or -provided nursing home care were cared for in community nursing homes. Also, VA’s average daily census in community nursing homes was over 3,000 patients greater in 1985 than in 1995. Figure 2 shows the average daily census in the three types of nursing homes from fiscal years 1985 through 1995. The distribution shift was the result of major reductions in expenditures for community nursing homes that occurred in the late 1980s and early 1990s. For example, in 1989 VA delegated community nursing home budget decisions to VA medical centers. Some medical center directors left their programs intact, while others used community nursing home funds for other medical center activities. Most community nursing home programs shrank considerably. According to a VA official, in fiscal year 1990, VA reversed its decision to delegate budget authority to medical centers because VA medical centers did not support the community nursing home program. VA’s use of community nursing homes has not returned to pre-1989 levels, however. From fiscal years 1988 to 1993, the average number of community nursing homes under contract to each VA medical center decreased from 24 to 21, and the average number of veterans placed in community homes by each VA medical center decreased from 183 to 129. Community nursing home funds have also been used to meet VA budget emergencies and to fund VA-sponsored noninstitutional care programs. According to VA budget documents, in fiscal year 1992, $35 million of VA’s community nursing home program budget was reprogrammed to meet the increased costs of special pay rates for physicians and dentists. According to a VA official, the reprogramming of these funds was cleared by OMB and VA appropriations committees. Also, in fiscal year 1993, VA’s Homemaker and Day Care programs, alternatives to institutional care, began to share community nursing home budget resources. This action was also supported by the Congress through language in VA’s appropriations bill designed to increase VA’s use of long-term care alternatives. For fiscal year 1995, VA obligated $1.1 billion for VA nursing home operations, about $361 million for community nursing homes, and about $166 million for state veterans homes. According to VA-reported costs for fiscal year 1995, VA’s daily patient cost was $213.17 for veterans in VA nursing homes, $118.12 for veterans in community nursing homes, and $35.37 for veterans in state veterans homes (where only a portion of costs are funded by VA). Actual costs are unknown, however, because VA data systems neither reflect all costs nor captured all costs in a consistent way to make accurate cost comparisons. We have reported that VA’s cost accounting system distributes costs inconsistently and is generally not reliable as a source for precisely comparing VA program costs. We have also noted that VA cost reports are not subject to audit and rely on each medical center to determine the distribution of costs among different activities. VA budget and program officials we contacted recognize that cost reports do not provide useful, reliable cost information. Because decisions on staff allocation costs and, in some cases, workload are made at the facility level, data are inconsistent among facilities. For example, VA’s cost data do not include the cost of all services provided to community nursing home patients by VA medical centers, such as radiology and laboratory services, clinical visits, and medications. In addition, VA’s costs for transporting veterans between community nursing homes and VA medical centers for treatment are generally excluded from VA’s cost data for community homes. The inconsistent distribution of costs among VA cost centers leads to both overallocation and underallocation of overhead and variable costs (such as laundry, linen, janitorial, and administrative services) to VA nursing home units. Information was not available to determine the overall effect of cost distribution inconsistencies on VA nursing home daily costs. Factors that contribute to cost differences between VA and community nursing homes include patient case mix differences and more intensive staffing patterns in VA homes than in community nursing homes. For example, VA’s Nursing Home Cost Study issued in August 1996 reported that among patients sampled as of October 1, 1995, about 16 percent of VA nursing home patients were in a heavy care category requiring special rehabilitation services (thus requiring more care and higher costs) compared with 3 percent of community nursing home patients. Conversely, more community nursing home patients were in a less resource-demanding category—22 percent for community nursing home patients compared with 17 percent for VA nursing home patients. The study also noted that VA nursing homes have an overall higher level of staffing than community nursing homes (.69 patient care personnel per resident at VA facilities compared with .58 at community nursing homes) and that facilities have different types of staff. RNs make up 36 percent of the staff at VA nursing homes but only 12 percent at community nursing homes. Aides, on the other hand, make up 67 percent of the staff at community nursing homes but only 32 percent of the staff at VA facilities. In July 1995, VA began implementing a decision support system (DSS) at 38 hospitals. Current VA plans call for the deployment of DSS to all VA hospitals by fiscal year 1998. Such support systems in the private sector have proved to be an effective management tool for improving quality and cost- effectiveness, and VA expects DSS to do the same for its health care operations. DSS can compute the cost of services provided to each patient by combining patient-based information on services provided with financial information on the costs and revenue associated with those services. VA expects DSS to provide VA managers and health care providers with variance reports identifying areas for reducing costs and improving patient outcomes and clinical processes. In a September 1995 report on the implementation of DSS, we noted that VA had not developed a business strategy for effectively using DSS as a management tool. We also noted that VA had not yet developed business goals and associated plans to guide the organization, determine the proper location and use of resources, and provide a framework for using management tools such as DSS. VA is developing business plans that should be completed by December 1996.