During the past several years, we have visited over 75 VA hospitals and outpatient clinics to assess operating policies, procedures, and practices. These efforts have resulted in a wide range of recommended actions to improve the efficiency and effectiveness of the VA system. Some of these actions involve ways to restructure existing delivery processes to lower costs; others identify ways to recover more of the costs of health care provided to veterans and others. This report is based primarily on the results of these efforts as well as studies by the Veterans Health Administration (VHA), VA’s Office of Inspector General (IG), and others. We initially presented the results of this work in testimony before your Subcommittee on March 8, 1996. The VA health care system was established in 1930, primarily to provide for the rehabilitation and continuing care of veterans injured during wartime service. VA developed its health care system as a direct delivery system in which the government owned and operated its own health care facilities. It grew into the nation’s largest direct delivery system. Veterans’ health care benefits include medically necessary hospital and nursing home care and some outpatient care. Certain veterans, however, have a higher priority for receiving care and are eligible for a wider range of services. Such veterans are generally referred to as Category A, or mandatory care category, veterans. More specifically, VA must provide hospital care, and, if space and resources are available, may provide nursing home care to certain veterans with injuries related to their service or whose incomes are below specified levels. These mandatory care veterans include those who have service-connected disabilities, were discharged from the military for disabilities that were incurred or aggravated in the line of duty, are former prisoners of war, were exposed to certain toxic substances or ionizing radiation, served during the Mexican Border Period or World War I, receive disability compensation, receive nonservice-connected disability pension benefits, and have incomes below the means test threshold (as of January 1995, $20,469 for a single veteran or $24,565 for a veteran with one dependent, plus $1,368 for each additional dependent). For veterans with higher incomes who do not qualify under these conditions—called discretionary care category veterans—VA may provide hospital care if space and resources are available. These veterans, however, must pay a part of the cost of the care they receive. VA also provides three basic levels of outpatient care benefits: comprehensive care, which includes all services needed to treat any service-connected care, which is limited to treating conditions related to a service-connected disability; and hospital-related care, which provides only the outpatient services needed to (1) prepare for a hospital admission, (2) obviate the need for a hospital admission, or (3) complete treatment begun during a hospital stay. Separate mandatory and discretionary care categories apply to outpatient care. Only veterans with service-connected disabilities rated at 50 percent or higher (about 465,000 veterans) are in the mandatory care category for comprehensive outpatient care. All veterans with service-connected disabilities are in the mandatory care category for treatments related to their disabilities; they are also eligible for hospital-related care of nonservice-connected conditions, but, with the exception of veterans with disabilities rated at 30 or 40 percent, they are in the discretionary care category. Most veterans with no service-connected disabilities are eligible only for hospital-related outpatient care and, with few exceptions, are in the discretionary care category. From its roots as a system to treat war injuries, VA health care has increasingly shifted toward a system focused on treating low-income veterans with medical conditions unrelated to military service. In fiscal year 1995, only about 12 percent of the patients treated in VA hospitals received treatment for service-connected disabilities. By contrast, about 59 percent of the patients treated had no service-connected disabilities. About 28 percent of VA hospital patients had service-connected disabilities but were treated for conditions not related to those disabilities. (See fig. 1.) Between fiscal years 1980 and 1995, VA facilities underwent some fundamental changes in workload. The days of hospital care provided fell from 26 million in 1980 to 14.7 million in 1995, the number of outpatient visits increased from 15.8 million to 26.5 million, and the average number of veterans receiving nursing home care in VA-owned facilities increased from 7,933 to 13,569. (See fig. 2.) During this same time period, VA’s medical care budget authority grew from about $5.8 billion to $16.2 billion. (See fig. 3.) For fiscal year 1996, VA sought medical care budget authority of about $17.0 billion, an increase of $747 million over its fiscal year 1995 authority. VA expects its facilities to provide (1) about 14.1 million days of hospital care, (2) nursing home care to an average of 14,885 patients, and (3) about 25.3 million outpatient visits. VA is also seeking budget authority of about $17.0 billion for fiscal year 1997. On July 29, 1995, the Congress adopted a budget resolution providing VA medical care budget authority of $16.2 billion annually for 7 years (fiscal years 1996-2002). The budget resolution would essentially freeze VA spending at the fiscal year 1995 level. VA estimated that such a freeze would result in a cumulative shortfall of almost $24 billion in the funds it would need to maintain current services to the veteran population through 2002. As used by VA, current services encompass maintaining the currently funded workload, including services to veterans in both the mandatory and discretionary care categories and services to nonveterans. The resources VA facilities will need in the next 7 to 10 years to provide hospital and certain outpatient care to veterans in the mandatory care categories for hospital and outpatient care are overstated for the following reasons: VA did not adequately consider the impact of the declining veteran population on future demand for inpatient hospital care. A significant portion of VA resources is used to provide services to veterans in the discretionary care category who are eligible for care only to the extent that space and resources are available. Considerable resources are spent on services not covered under veterans’ VA benefits. Medical centers tend to overstate their workloads and therefore their resource needs. VA included resources for facility and program activations in estimating the resources it would need to maintain current services even though such activations would expand current services. Services provided to nonveterans through sharing agreements are included in VA’s justifications of future resource needs even though the provision of services through sharing agreements is to be limited to sales of excess capacity. In estimating the resources it will need to maintain current services over the next 7 fiscal years, VA assumed that the number of hospital patients it treats will remain constant. The number of hospital patients VA treats, however, actually dropped by 56 percent over the past 25 years and should continue to decline. In addition, because of the declining demand for inpatient care in the past 25 years, the number of operating beds in the VA health care system declined by about 50 percent between 1969 and 1994. About 50,000 VA hospital beds were closed or converted to other uses. The decline in psychiatric beds was most pronounced: from about 50,000 beds in 1969 to 17,300 beds in 1994. (See fig. 4.) Further declines in operating beds are likely in the next 7 to 10 years as the veteran population continues to decline. If veterans continue to use VA hospital care at the same rate that they did in 1994—that is, if VA continues services at current levels—days of care provided in VA hospitals should decline from 15.4 million in 1994 to about 13.7 million by 2010. (See fig. 5.) Our projections are adjusted to reflect older veterans’ higher usage of hospital care. VA has underestimated the extent to which its health care resources are spent on services for veterans in the discretionary care categories. Specifically, about 15 percent of the veterans with no service-connected disabilities who use VA medical centers have incomes that place them in the discretionary care category (that is, care may be provided to the extent that space and resources permit) for both inpatient and outpatient care by inpatient eligibility standards. In addition, VA incorrectly reported outpatient workload using inpatient eligibility categories, overestimating the amount of outpatient care subject to the availability of space and resources. VA does not, however, differentiate between services provided to veterans in the mandatory and discretionary care categories in justifying its budget request. As a result, the Congress has little basis for determining which portion of VA’s discretionary workload to fund. A portion of VA’s workload involves treating higher income veterans with no service-connected disabilities. In fiscal year 1991, about 10.7 percent of the 555,000 veterans receiving hospital care in VA facilities were veterans with no service-connected disabilities with incomes of $20,000 or more.Of those using VA medical centers in 1991 for both inpatient and outpatient care, about 11 percent (91,520) of the single veterans with no service-connected disabilities (832,000) and 57 percent (227,430) of the married veterans with no service-connected disabilities (399,000) had incomes of $20,000 or more. Among married veterans with no service-connected disabilities who used VA medical centers, 15 percent (59,850) had incomes of $40,000 or more. In March 1992, VA’s IG estimated, on the basis of work at one typical VA outpatient clinic, that about half of the patients and about one-third of the visits veterans made to VA outpatient clinics should have been categorized as discretionary rather than mandatory care. This occurred because VA was reporting its outpatient workload using inpatient eligibility categories. While VA must provide needed hospital treatment to the 9 million to 11 million veterans in the mandatory care category, over 90 percent of those veterans are in the discretionary care category for outpatient care for services other than those related to treating a service-connected disability. The VA IG further reported that about 56 percent of discretionary care outpatient visits provided services that were not covered under the veterans’ VA benefits.