In 1982, the Congress enacted The Veterans’ Administration and Department of Defense Health Resources Sharing and Emergency Operations Act (Public Law 97-174) to promote greater sharing of health care resources and thus achieve greater efficiencies in the DOD and VA health care systems. One of the main objectives of this legislation was to reduce the costs of operating those systems by minimizing duplication and underuse of health care resources. Under this legislation, the DOD and VA entered into health care resource-sharing agreements, which allowed active-duty and eligible former service members to receive care in VA hospitals and vice versa. However, legislation did not provide for the use of CHAMPUS funds to reimburse VA under sharing agreements nor permit VA to treat dependents of active-duty and eligible former members. In a 1988 GAO report, we recommended that the Congress enact legislation specifically authorizing (1) the use of CHAMPUS funds to purchase care for CHAMPUS beneficiaries from VA medical centers and (2) the treatment of all categories of dependents at VA hospitals. Legislation accomplishing these two purposes was passed in 1989 and 1992, respectively. Under health resource-sharing agreements using CHAMPUS funds, CHAMPUS beneficiaries can receive services from the VA in noncatchment areas through authority provided in sharing agreements between DOD and VA headquarters officials and in catchment areas through local agreements between military hospital commanders and the VA medical center directors subject to headquarters approval. These agreements offer DOD the potential for (1) saving CHAMPUS funds because DOD will reimburse VA less than what it pays the private sector for similar services and (2) improving access to services for their beneficiaries. The VA can benefit by using the extra revenue generated from CHAMPUS funds to improve services to veterans. The information we developed for this report came from three sources: (1) a review of sharing legislation; (2) an examination of the various drafts of the CHAMPUS/Asheville VAMC sharing agreement, the DOD/VA memorandum of understanding, and related documents; and (3) discussions with DOD and VA officials responsible for the sharing program. The discussions focused on the reasons for delays in developing CHAMPUS/VA sharing agreements and in using CHAMPUS funds for sharing agreements between military hospitals and VA hospitals. We performed this work at the Office of the Assistant Secretary of Defense (Health Affairs) and VA headquarters in Washington, D.C.; the U.S. Army Medical Command (a component of the Army Surgeon General’s office) in San Antonio, Texas; CHAMPUS headquarters in Aurora, Colorado; and the Asheville VAMC (because it was negotiating the first CHAMPUS/VA sharing agreement). We supplemented these visits with telephone discussions with officials from the Air Force Surgeon General’s office and the Navy Bureau of Medicine (Surgeon General’s office) in Washington, D.C. We did our work from August 1993 to September 1994 in accordance with generally accepted government auditing standards. Differences between DOD and VA over provisions of a memorandum of understanding and the CHAMPUS/Asheville VAMC sharing agreement prevented CHAMPUS beneficiaries from receiving services in VA hospitals in noncatchment areas through the use of CHAMPUS funds. The differences over sharing provisions arose shortly after the passage of the 1989 legislation authorizing the use of CHAMPUS funds for treatment in VA hospitals and they continued throughout most of 1993. Due in large part to the intervention of the Chairman, House Committee on Veterans’ Affairs in October 1993, DOD and VA resolved their differences. Both parties signed (1) a sharing agreement in December 1993 to treat CHAMPUS-eligible beneficiaries in the Asheville VAMC and (2) a memorandum of understanding in February 1994 providing an overall framework for future CHAMPUS/VA health care resource-sharing agreements. The differences between DOD and VA centered mainly on whether VA’s hospitals would be treated more as military hospitals or as CHAMPUS civilian providers. These differences led to many revisions of the agreement. More specifically, according to VA officials, DOD wanted VA hospitals to follow CHAMPUS procedures for seeking reimbursement by filing claims with CHAMPUS fiscal intermediaries and collecting copayments and deductibles from beneficiaries. Also, DOD wanted to use its own payment methodology, the diagnosis related group system, for reimbursing VA hospitals for the care they provided. Further, DOD wanted VA to adhere to CHAMPUS standards for utilization review and quality assurance. VA, on the other hand, wanted its hospitals to be treated as military hospitals, which have no copayments and deductibles. VA also wanted to bill the military services directly and not use fiscal intermediaries, and it wanted to bill CHAMPUS on a per diem system rather than the diagnosis related group system. In addition, VA wanted to use its own utilization management and quality review systems. During 1993, the two agencies exchanged several proposals, and, at one point, it appeared that they had reached an agreement. In fact, representatives from the Asheville VAMC and DOD signed a sharing agreement in July 1993. However, DOD subsequently rescinded the agreement because, according to DOD health officials, the person signing for DOD did not have the authority to do so. It was not until the Chairman, House Committee on Veterans’ Affairs, called a meeting of DOD and VA officials in October 1993 and expressed frustration with the delays that any substantive progress occurred. By December 23, 1993, both DOD and VA had signed the CHAMPUS/Asheville VAMC sharing agreement, and the Asheville VAMC began treating CHAMPUS patients in February 1994. Under the agreement, the Asheville VAMC is treated as a CHAMPUS provider instead of a direct care provider; it collects CHAMPUS copayments and deductibles, and it bills through CHAMPUS fiscal intermediaries. CHAMPUS reimburses claims submitted by the Asheville VAMC for hospital inpatient charges at a 5-percent discount off the amount payable to civilian providers under the CHAMPUS diagnosis related group-based payment system; it will reimburse professional services claims at a 5-percent discount off the CHAMPUS maximum allowable charge. Although the Asheville VAMC will maintain a utilization review and quality assurance system, it will also be subject to CHAMPUS utilization review and quality assurance requirements. By February 3, 1994, both DOD and VA had signed a memorandum of understanding establishing a general policy and framework for subsequent CHAMPUS/VA health care resource-sharing agreements. To date, however, neither DOD nor VA has conducted a systemwide search to identify noncatchment areas with VA hospitals where sharing agreements can be implemented. Although a July 1994 VA directive encouraged its medical centers to take advantage of the opportunity to treat CHAMPUS beneficiaries, DOD officials told us that they will wait and see how the CHAMPUS/Asheville VAMC agreement fares before entering into additional sharing agreements. As of July 1994, DOD and VA were also developing a memorandum of understanding to establish policies and guidelines for VA to provide services to CHAMPUS beneficiaries in areas of the country where DOD has contracted with private companies to manage CHAMPUS beneficiaries’ health care. This particular memorandum of understanding would permit DOD contractors to contract with VA health care facilities. VA signed the memorandum of understanding in May 1994 and sent it to DOD for review. As of July 1994, the Office of the Assistant Secretary of Defense (Health Affairs) was reviewing it. In addition to the delay in implementing CHAMPUS/VA sharing agreements in noncatchment areas, such as Asheville, North Carolina, military hospital commanders in DOD catchment areas have not proposed using CHAMPUS funds for sharing agreements between their hospitals and VA hospitals. The commanders have not proposed using CHAMPUS funds for buying VA services through sharing agreements because they have been unclear about the interagency sharing program and their roles and authorities under it. The military services allocate CHAMPUS funds to military hospital commanders who are responsible for managing the care of all CHAMPUS beneficiaries in their catchment areas. The Army began allocating CHAMPUS funds to its hospitals in fiscal year 1992 and, in fiscal year 1993, expanded the allocations to all its U.S. hospitals except for three in California and one in Hawaii. In fiscal year 1994, Army hospitals were allocated about $540 million in CHAMPUS funds. The Air Force and Navy began allocating CHAMPUS funds to their hospitals in fiscal year 1994 when the Air Force allocated $476 million and the Navy allocated $356 million. Hospital commanders may use these funds to enhance and expand services available to CHAMPUS beneficiaries in their hospitals or to purchase services from outside providers, including sharing with VA. The intent is to use CHAMPUS money in the most cost-effective manner. However, all three services told us that their hospital commanders have not used any CHAMPUS funds for sharing agreements with VA. Further, as in noncatchment areas, DOD and VA have not done a comprehensive search of locations where sharing agreements using CHAMPUS funds can be implemented. Officials from the military services and the Office of the Assistant Secretary of Defense (Health Affairs) stated that military hospital commanders have the authority to submit proposals for using CHAMPUS funds for sharing agreements between their hospitals and VA hospitals if they so choose. However, these officials also said that, while no restrictions exist against using CHAMPUS funds for such sharing, neither do instructions exist for using CHAMPUS funds for such sharing. Further, these officials stated that military hospital commanders do not understand that they can propose using CHAMPUS funds for sharing agreements. Both DOD and VA can benefit from sharing agreements between CHAMPUS and VA hospitals and also between military and VA hospitals.