VA operates one of the nation’s largest health care systems to provide care to approximately 5.2 million veterans who receive health care through 158 VA medical centers (VAMC) and almost 900 outpatient clinics nationwide. The VA health care system also consists of nursing homes, residential rehabilitation treatment programs, and readjustment counseling centers. In 1986 Congress authorized VA to collect payments from third-party health insurers for the treatment of veterans with nonservice-connected disabilities, and it also established copayments from veterans for this care. Funds collected were deposited into the U.S. Treasury as miscellaneous receipts and were not made specifically available to VA to supplement its medical care appropriations. The Balanced Budget Act of 1997 established a new fund in the U.S. Treasury, the Department of Veterans Affairs Medical Care Collections Fund, and authorized VA to use funds in this account to supplement its medical care appropriations. As part of VA’s 1997 strategic plan, VA expected that collections from first- and third-party payments would cover the majority of the cost of care provided to veterans for nonservice-connected disabilities. VA has determined that some of these veterans, about 25 percent of VA’s user population in fiscal year 2002, were required to pay a copayment because of their income levels. In September 1999, VA adopted a fee schedule, called “reasonable charges,” which are itemized fees based on diagnoses and procedures. This schedule allows VA to more accurately bill for the care provided. To implement this, VA created additional bill-processing functions— particularly in the areas of documenting care, coding the care, and processing bills for each episode of care. To collect from health insurers, VA uses a four-function process with 13 activities to manage the information needed to bill and collect third-party payments—also known as the MCCF revenue cycle (see fig. 1). First, the intake revenue cycle function involves gathering insurance information on the patient and verifying that information with the insurer as well as collecting demographic data on the veteran. Second, the utilization review function involves precertification of care in compliance with the veteran’s insurance policy, including continued stay reviews to obtain authorization from third-party insurers for payment. Third, the billing function involves properly documenting the health care provided to patients by physicians and other health care providers. Based on the physician documentation, the diagnoses and medical procedures performed are coded. VA then creates and sends bills to insurers based on the insurance and coding information obtained. Finally, the collections, or accounts receivable, function includes processing payments from insurers and following up on outstanding or denied bills. See appendix II for a description of the activities that take place within each of the four functions. VA’s Chief Business Office utilizes a performance measure—an efficiency rating it refers to as “cost to collect”—that reflects VA’s cost to collect one dollar from first- and third-parties. To calculate the efficiency rating VA divides the costs of generating a bill and collecting payments from veterans and private health insurers by the actual revenue received from these sources. To measure the cost, cost data are extracted from two financial accounts, or cost centers, which are intended to capture field office costs and central office costs. Specifically, cost centers are used for classifying costs related to each of the 13 functional activities and the organizations that support these activities. According to an official with the Healthcare Financial Management Association, because business practices differ among entities, there are many variables that entities include in their calculations of the cost for collecting funds from first and third parties. Thus, a comparison of collection efficiency—the cost to collect one dollar—between different entities would be difficult. However, according to the official, it is reasonable to expect that business practices within the same organization such as the VA can be standardized, which would facilitate such a comparison internally. The VA health care system has unique rules and regulations governing its billing practices. For instance, VA is generally not authorized to bill Medicare or Medicaid for care provided to Medicare- or Medicaid-eligible veterans. VA must pay for all inpatient and outpatient care associated with a service-connected disability—it cannot collect copayments or bill third- party insurers for this care. VA uses third-party collections to satisfy veterans’ first-party debt. Specifically, if VA treats an insured veteran for a nonservice-connected disability, and the veteran is also determined by VA to have copayment responsibilities, VA will apply each dollar collected from the insurer to satisfy the veteran’s copayment debt related to that treatment. As we stated in a previous report to Congress, the statutes governing VA recoveries from private health insurers and veteran copayments do not clearly specify the relationship between the two provisions. In the absence of definitive guidance in the law, VA’s General Counsel has determined that insurance recoveries should be used to satisfy veterans’ copayment debt. The law and the relevant legislative history are not clear on whether third-party collections can be used for this purpose. VA has not provided guidance to the Chief Business Office or VISNs for accounting for the costs associated with collecting payments from veterans and private health insurers. As a result, we found that VA’s Chief Business Office and VISNs did not allocate certain costs associated with activities related to collecting first- and third-party payments to the two cost centers used in the calculation of cost to collect. In addition, we found inconsistencies in the way VISNs allocated these costs to the field office cost center. Consequently, reported costs to collect are inaccurate. We found that some costs incurred by VA’s central office as part of its efforts for collecting first- and third-party payments were not allocated to the central office cost center. For example, the following activities are costs incurred by organizations that support the Chief Business Office, but are not included in the central office cost center: Staff at the Health Eligibility Center spend a portion of their time determining veterans’ copayment status. Staff at the Health Revenue Center processed first-party refunds resulting from a settlement with a third-party payer regarding claims submitted from January 1995 through December 2001. VA reported that about 15 full- time staff members are dedicated to this effort. Staff assigned to Health Informatics assisted with contractor-developed software to review third-party claims for accuracy. Some costs incurred by field locations also were not always allocated to the field office cost center. Cost allocation differences occur because VA does not provide guidance to its field locations on which costs to allocate to specific cost centers. Thus, each of VA’s health care VISNs makes a determination as to which cost center to use when allocating costs for specific revenue cycle functions—such as patient intake and registration and utilization review. Figure 2 shows inconsistencies among VISNs in the way they allocate costs to some of the activities within the revenue cycle functions. For example, for precertification and certification activities within the utilization review function, 13 VISNs allocated all of the cost, 3 VISNs allocated some costs, and 5 VISNs allocated none of the cost to the field office cost center. In addition, the following are examples of costs that are related to collection activities but were not included in the costs for collecting payments: A veteran call center in VISN 8 (Bay Pines, Florida)—staffing resources valued at about $635,000 designed to assist veterans with questions about bills they receive and, if necessary, the arrangement of payment plans. Two service contracts in VISN 2 (Albany, New York)—approximately $470,000 in contract expenses for collecting third-party payments and a service contract estimated at $104,000 for insurance verification. Two service contracts in VISN 10 (Cincinnati, Ohio)—approximately $100,000 in contract expenses to use a software package that reviews claims sent to third-party insurers for technical accuracy. Also not included was an estimated $425,000 to license the use of insurance identification and verification software. In an attempt to standardize how MCCF staff carry out the revenue cycle functions and to instill fiscal discipline throughout its entire health system, VA is piloting the Patient Financial Services System (PFSS) in VISN 10 (Cincinnati, Ohio). PFSS is a financial software package that contains individual patient accounts for billing purposes. According to the Chief Business Office, the system is a key element to standardize MCCF operations throughout the entire VA health care system. PFSS is expected to improve first- and third-party collections by capturing and consolidating inpatient and outpatient billing information. However, PFSS is not currently designed to capture the cost of staff time for these activities—a key element for assessing the efficiency of VA’s collection efforts. VA’s practice of satisfying veterans’ copayment debt with collections from third-party insurers has reduced overall collections and increased administrative expenses. VA does not quantify the lost revenue from veterans’ copayments that is not collected and could be used to supplement its medical care appropriation. Based on interviews with network officials and site visits to individual medical facilities, we did not discover any locations that track the volume of first-party debt that is not collected and its relative dollar value. Hence, the exact dollar value of first-party revenue that was not collected is unknown. Seventeen of the 21 network officials we interviewed stated that considerable administrative time is dedicated to the process required to satisfy first-party debt with third-party collections—resources that could be invested elsewhere if the practice did not exist. One facility official estimated that approximately 5 full-time equivalent staff are used to satisfy first-party debt. Furthermore, one VISN official estimated that its medical facilities use approximately 11 full-time equivalent staff on this process. Collections staff routinely receive insurance payments that include voluminous reports that detail each claim. For example, one medical center provided us with a report that contained approximately 1,000 line items, each representing a pharmaceutical reimbursement.