VA, as part of its mission to provide benefits and services to America’s veterans, administers one of the nation’s largest health care systems through the VHA. As part of a uniform set of medical benefits provided to eligible veterans who enroll, VA provides a range of services including preventive and primary health care, a full range of outpatient and inpatient services, and prescription drugs. VA also provides additional services, such as nursing home and dental care and other services, as required by law, for some veterans and makes these services available to other veterans on a discretionary basis as resources permit. One of the largest of these programs is VA’s nursing home care program, which provides care in three settings. VA operates its own nursing homes in 134 locations; it pays for care under contract in non-VA nursing homes, referred to as community nursing homes; and it pays about one-third of the costs per day for veterans in state veterans’ nursing homes. In its three settings, nursing home services are provided to veterans, ranging from short-stay post-acute care for patients recovering from a condition such as a stroke to long-stay care for patients who cannot be cared for at home because of severe, chronic physical or mental limitations. To manage access to hospital and outpatient care in relation to available resources, VA established an enrollment system with priority categories, as required by the Veterans’ Health Care Eligibility Reform Act of 1996. The act called for seven priority categories; subsequent legislation provided for eight categories. Priority categories are generally determined by a veteran’s degree of service-connected or other disability or on financial need. VA gives veterans in Priority category 1 (with 50 percent or more service-connected disability) the highest preference for services and gives lowest preference to those in Priority category 8 (no disability, with income exceeding certain thresholds, and who were enrolled as of January 16, 2003). The act also required VA to restrict enrollment consistent with its priority categories if sufficient resources are not available to provide care that is timely and acceptable in quality. In January 2003, VA restricted enrollment by no longer allowing Priority 8 veterans, those in the lowest priority category, to enroll. However, Priority 8 veterans who were already enrolled as of January 16, 2003, would continue to receive service. This policy remained in effect as of August 2006. In the mid-1990s, VA began to change the way it delivered health care to veterans to increase the efficiency of its health care system and to improve access to medical services. Applying lessons learned from the private sector’s experiences with managed health care, VA began emphasizing certain managed care practices, such as primary, outpatient, and preventive care, and deemphasizing its reliance on inpatient care. Over the 10-year period from 1995 through 2004, for example, the ratio of outpatient visits to inpatient hospital stays at VA increased from 29 to 1, to 92 to 1, reflecting the change in how VA delivers medical care. To support its health care reform efforts, VA decentralized the management structure of the agency to coordinate the organization of hospitals, outpatient clinics, and other facilities into 21 regional health care networks. These networks have budget and management responsibilities that include allocating resources to facilities, clinics, and programs within their networks and ensuring access to appropriate health care services. The formulation of the President’s budget requests for VA medical programs for fiscal years 2005 and 2006 was informed by VA’s comparison of its estimation of the cost of projected demand and anticipated resources. Estimated costs for medical care exceeded anticipated resources in both fiscal years 2005 and 2006, and, in formulating the budget, VA addressed the difference with cost-saving policy proposals and estimated savings from management efficiencies. VA used an actuarial model to project demand and costs for about 86 percent of its medical programs budget estimate for fiscal years 2005 and 2006. (See fig. 1.) For this part of the medical programs budget estimate, the model was used to project enrollment in the VA health care system and then to estimate VA’s total health care services utilization by estimating the proportion of enrollees’ total health care that was expected to come from VA. The actuarial model used cost estimates associated with particular health care services in conjunction with the enrollment and utilization projections to project VA health care costs. The actuarial model provided utilization projections for 55 health care services including inpatient acute surgery, outpatient care, prescription drugs, and prosthetics. The model used private sector benchmarks but made allowances for the special characteristics of the VA enrollee population, adjusting for age, sex, morbidity of enrollee population, and veterans’ use of other health care providers reimbursed by payers such as Medicare and Medicaid. VA used a separate estimation approach, rather than an actuarial model, to project long-term care demand and costs, which accounted for about 10 percent of the funds requested for medical programs for each of the fiscal years 2005 and 2006. The long-term care estimation approach projected demand by using historical expenditures to calculate the costs of treating veterans and multiplying these estimates by projected workload, which was calculated based on historical trends and policy proposals. VA officials told us that they are working on incorporating the projection of long-term care demand and costs into the actuarial model, but could not provide a date when this would be completed. Similarly, VA used other approaches, rather than an actuarial model, to project demand and costs for the remaining 4 percent of the medical programs budget request for fiscal years 2005 and 2006. These other methodologies included adding inflation to actual expenditures and projecting trends based on workload, expenditure, and other data provided by program officials. The majority of these expenditure projections were for Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA) and dental care. The actuarial model projections and the other estimation approaches for the fiscal year 2005 budget were developed in March 2003. To estimate costs for VA’s medical programs for fiscal year 2005, VA used fiscal year 2002 data, which were the most current fiscal year data available in the spring of 2003. Similarly, VA used fiscal year 2003 data, in the spring of 2004, to project costs for fiscal year 2006. VA anticipated its resources for fiscal years 2005 and 2006 based on its prior year appropriations, guidance published by OMB that outlined the President’s budget priorities, and other factors. For example, OMB’s annual planning guidance for fiscal year 2005, published in April 2003, directed executive agencies, including VA, to develop a budget for fiscal year 2005 that was within the levels included in the fiscal year 2004 budget. The guidance noted, for example, that any increases or amounts for new initiatives should be offset by reductions in lower priority or ineffective programs. In addition, VA anticipated its funding based on resources it expected from collections, reimbursements, and the projected carryover of unobligated funds into the next fiscal year. VA may carry over from one fiscal year to the next unobligated balances of funds made available without fiscal year limitation and other funds appropriated for multiple fiscal years. In fiscal year 2004, for example, VA collected $1.7 billion from veterans and third-party insurers, which was available without fiscal year limitation. VA carried over about $600 million from fiscal year 2004 into fiscal year 2005; this amount consisted of collections from prior years and multiyear funds that had not been obligated during fiscal year 2004. According to VA officials, for both fiscal years 2005 and 2006, projected costs exceeded anticipated resources. VA officials stated that differences between projected costs and anticipated resources in budget requests for those years were addressed in two ways: (1) cost-saving policy proposals and (2) management efficiency savings. To develop a budget request consistent with anticipated resources, VA officials told us they addressed the difference with cost-saving policy proposals which were included in the President’s budget requests for fiscal years 2005 and 2006. These cost-saving policy proposals totaled $494 million and $734 million in fiscal years 2005 and 2006, respectively, and were proposed to reduce the total appropriation requested. (See table 1.) More specifically, a proposed long-term care policy was designed to reduce costs by reducing patient workload, while a proposed $250 enrollment fee and an increase in pharmacy copayments for Priority 7 and 8 veterans—primarily, those veterans with incomes or net worths above applicable thresholds and no service-connected disability—would have generated additional resources. The projected savings from these policy proposals, which were designed to enhance revenue as a means of protecting resources, were used to adjust projected costs. VA used the actuarial model and long-term care estimates to project savings from these proposals. In addition to cost-saving policy proposals, VA developed estimates of management efficiency savings of $340 million and $590 million in fiscal years 2005 and 2006, respectively, which were included in the President’s budget request. According to VA, these management efficiency savings were initiatives designed to reduce costs without reducing quality. In a February 2006 report, we reported that VA’s total projected management efficiency savings in the President’s budget request for fiscal years 2003 through 2006 were used to fill the gap between the costs associated with VA’s projected demand for health care services and anticipated resources. In addition, we reported that VA lacked a methodology for measuring the dollar effect of the health care management efficiency savings it had detailed for fiscal years 2003 through 2006. OMB and VA officials told us they did not include management efficiency savings in the fiscal year 2007 budget request and do not have plans for doing so in the future. However, they will continue to include other efficiency savings, which VA calls clinical efficiencies, projected by its actuarial model. Each year, a workgroup of VA officials and staff from the developer of the actuarial model review VA and health care industry trends and evaluate specific VA practices expected to affect health care service utilization and cost and incorporate these expectations into the actuarial model.