The VA health care system is one of the nation’s largest direct health care delivery systems. VA operates 173 hospitals, over 400 outpatient clinics, 133 nursing homes, and 40 domiciliaries. VA provides health care services to veterans with and without service-connected disabilities on a priority basis defined by the level of service-connected disability, income, and other factors. About 10 percent of the nation’s veterans use VA health care services. To provide these services in fiscal year 1998, VA requested a medical care appropriation of almost $17 billion. In addition, VA requested a legislative change to authorize it to retain private health insurance and Medicare reimbursements. The Congress has responded by authorizing VA to retain private health insurance payments and certain other payments in the Balanced Budget Act of 1997. VA estimates this would provide an additional $468 million in fiscal year 1998 after deducting administrative costs for collections. The Balanced Budget Act of 1997, however, does not authorize VA to receive Medicare reimbursements. In 1995, VA began a major reform of its health care services to become more cost efficient and improve the quality and accessibility of its health care. VA is reforming its system to better align VA health delivery and financing with major changes in the national health care industry such as expanding primary care and emphasizing outpatient care, while de-emphasizing inpatient care. VA is trying to reform its health care delivery by restructuring the managing and financing of its services. A major element of VA’s restructuring is the creation of 22 VISNs in 1996 as the basic budgetary and decision-making unit of VA’s health care system. VISNs have responsibility for making a wide range of decisions about care delivery options, including contracting with private providers for health care services and generating revenue by selling excess services. VERA shows promise for improving the equity of veterans’ access to care because it makes VA’s allocation of resources to networks more equitable. VERA allocates resources to the 22 networks on the basis of the number of high-priority veterans served. It also includes incentives for networks and their facilities to serve additional veterans. If fully implemented in fiscal year 1999 as planned, VERA could substantially shift regional allocations. VA continues to explore refinements to improve VERA’s equitable resource allocation. VERA was designed to allocate resources for services provided in a network whose costs VISN management can control. For the fiscal year 1997 allocation, VERA was designed to allocate 88 percent of the $17 billion medical care appropriation to the 22 regional networks. VERA allocates resources on the basis of two key components: network workloads and national capitation rates. Workloads are the estimates of the number of high-priority veterans a network can serve. High-priority veterans— commonly referred to as Category A veterans—are those with service-connected disabilities, low incomes, or special health care needs. The networks in turn allocate these resources to their facilities. VERA provides more comparable levels of resources to each network for each high-priority veteran served than the process it replaced, which allocated resources primarily on the basis of facilities’ historical budgets.VERA provides more comparable levels of resources by classifying patients on the basis of the cost of their health care into two workload groups— basic care and special care. Basic care patients generally receive routine services that are less expensive than those received by special care patients. Special care patients often have complex or chronic conditions, such as spinal cord injuries, advanced acquired immunodeficiency syndrome (AIDS), chronic mental illness, or end-stage renal disease or require care in settings such as nursing homes (see app. III for complete list of special care patient classifications). The VERA special care category also includes some adjustment for age to account for expected changes in the age distribution of veterans in a network. VERA determines a national capitation rate for each workload group. (See fig. 1 for fiscal year 1997 capitation rates.) VERA allocations to each network are based primarily on patient workloads and the two national capitation rates. To account for differences in regional labor costs, VERA increases patient allocations for networks with higher labor costs and reduces them for networks with lower labor costs.In addition, each VISN receives funding for other health-related functions, including research support, education support, equipment, and nonrecurring maintenance. Funding for these activities is determined using national cost estimates for each activity and each network’s workload in that activity. (See fig. 2 for an example of how a network allocation is made.) VERA creates incentives for networks to serve more high-priority veterans. Because allocations are based on high-priority veteran workload, networks serving more high-priority veterans compared with other networks gain resources under VERA; those serving fewer such veterans compared with others lose resources. This takes place because all networks receive the same national capitation rates for the workload they serve. Network officials have responded to VERA’s incentives by increasing the number of high-priority veterans served, according to officials we contacted. For example, VISN 2 (Albany) facilities had served 7,442 high-priority veterans through the first half of fiscal year 1997 whom they had never served before, officials told us. Similar efforts are under way at the other VISNs we contacted. In addition, VERA has incentives for reducing costs. Because network allocations are based on a national standard (the national capitation rate), networks have an incentive to keep their costs below the national rate. Networks that are more efficient (that is, with patient costs below the national capitation rate) have more funds available for local initiatives. However, those with patient care costs above the national capitation rate (that is, less efficient networks) must increase efficiency to have such funds available. Network and medical center officials are taking a variety of actions to reduce costs because of VERA’s incentives and other VA initiatives, they said. These officials represented networks gaining and losing resources under VERA. Among these actions are providing more care on an outpatient basis, decreasing more costly inpatient care; reducing lengths of stay in nursing homes; and expanding primary care to prevent or postpone the need for more costly care. In addition, some networks are developing plans to reduce duplication by integrating the management structures of nearby hospitals or consolidating the delivery of certain services into one location. Although VA began phasing in VERA in fiscal year 1997, VA did not shift substantial amounts of resources among networks. VERA’s immediate impact was lessened because its adjustments to network allocations only affected budgets for the second half of the fiscal year and caps were placed on the amount of funds moved. Networks with reduced funding needed time for management to implement less costly ways of providing quality care while improving access, VA officials said. Networks gaining funding needed time to plan for and use new funds to provide the best quality and most cost-efficient services. The partial implementation of VERA in fiscal year 1997 moved resources from the Northeast and Midwest, where per veteran costs have been higher than the national average, to the South and West, where per veteran costs have been lower than the national average. Five networks received less funding in fiscal year 1997 than in fiscal year 1996 and 17 received more. The largest network reduction in fiscal year 1997 was about 1 percent, and the largest increase was about 7 percent (see fig. 3). If VA had fully implemented VERA in fiscal year 1997, it would have substantially shifted funding among the networks, ranging from a reduction of 14 percent to an increase of 16 percent when compared with fiscal year 1996 allocations (see fig. 3). VA plans full implementation of VERA in most networks by fiscal year 1998, although networks whose resources will be reduced most may not have full implementation until fiscal year 1999. However, two of the networks expected to absorb the largest reduction under VERA—VISN 3 (Bronx) and VISN 1 (Boston)—have plans to fully absorb all reductions by fiscal year 1998 if VA headquarters agrees to their plans. VISN 2 (Albany), by contrast, plans to phase in reductions through fiscal year 1999. VERA will incorporate the most current VISN workload and national capitation data each year to allocate resources. These data will reflect changes in the number of veterans served and any changes in VA appropriations. As a result, some VISNs that received reduced allocations under VERA in fiscal year 1997 could receive increased allocations in future years if the number of veterans they serve increases significantly. Alternatively, some networks that gain resources in 1997 could lose resources in future years if the number of veterans they serve does not keep pace with those served by other VISNs. VA is exploring several options for improving allocations. First, it is exploring whether it can better measure workload and determine capitation rates to improve equity of resource allocation. Because most of VERA’s allocations are based on patient care capitation and workload measures, these two measures are the ones most likely to contribute to any inappropriate resource shifting. VA continues to examine the method for setting capitation rates by trying to better account for differences in regional costs for each veteran served. We have previously noted the importance of such an examination. VERA assumes that all differences in regional costs—after adjusting for the basic and special care case mix and differences in labor costs—result from differences in efficiencies. Although differences in network efficiencies play a major role, to the extent that any of the remaining differences do not result from efficiencies, VERA may allocate some resources inappropriately. For example, some of these differences could result from differences in veterans’ health status not captured by VERA’s case mix. VA’s recently released data on veterans’ self-reported physical and mental health status, however, tend to support VERA’s regional shift in allocations.Veterans in northeastern and midwestern VISNs, which received reduced funds under VERA, tended to report being healthier than veterans in southern VISNs, which gained funds under VERA.