The Veterans’ Health Care Eligibility Reform Act of 1996 authorized VA to provide certain medical services not previously available to veterans with non-service connected conditions. The Balanced Budget Act of 1997 authorized VA to use third-party health insurance payments to supplement its medical care appropriations. As part of VA’s 1997 strategic plan, VA expected that collections from third-party payments and co-payments would cover the majority of costs of care for these veterans, some of which VA has determined to have higher incomes. For fiscal year 2002, about a quarter of VA’s user population were higher income veterans. In September 1999, VA adopted a new 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. By linking charges to the care provided, VA created new bill-processing demands—particularly in the areas of documenting care, coding that care, and processing bills per episode of care. First, VA must be prepared to provide the insurance company with supporting medical documentation for itemized charges. Second, VA must accurately assign medical diagnoses and procedure codes to set appropriate charges, a task that requires coders to search through medical documentation and various databases to identify all billable care. Third, VA must prepare a separate bill for each health care provider involved in the patient’s care and an additional bill when a hospital facility charge applies. To collect from health insurance companies, VA uses a four function process to manage the information needed to bill and collect third-party payments—also known as the Medical Care Collection Fund (MCCF) Revenue Cycle (see fig. 1). First, the patient intake function involves gathering insurance information and verifying that information with the insurance company as well as collecting demographic data on the veteran. Second, utilization review involves precertification of care in compliance with the veteran’s insurance policy, including continued stay reviews to determine medical necessity. Third, billing functions involve 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 insurance companies based on the insurance and coding information obtained. And fourth, the collections or accounts receivable function includes processing payments from insurance companies and following up on outstanding or denied bills. As discussed in prior OIG and GAO reports, reasons for untimely third- party billings were heavy caseloads and backlogs for cases to be coded. VA was unprepared to bill under reasonable charges initially in fiscal year 2000, particularly because of its lack of proficiency in developing medical documentation and coding to appropriately support a bill. As a result, VA reported that many of its medical centers developed billing backlogs. In January 2003, we reported that after initially being unprepared in fiscal year 2000 to bill reasonable charges, VA began improving its implementation of the processes necessary to increase its third-party billings and collections. In fiscal year 2002, VA submitted over 8 million third-party insurance bills that constituted a 54 percent increase over the number in fiscal year 2001. VA officials attributed increased third-party billings to, among other reasons, reductions in billing backlogs and an increasing number of patients with billable insurance. We also reported that collections could be increased by addressing operational problems such as unpaid accounts receivable and missed billing opportunities due to insufficient identification of insured patients, inadequate documentation to support billings, coding problems, and billing backlogs. To address these issues and further increase collections, VA has several initiatives under way and is continuing to develop additional ones. In September 2001, VA introduced its Veterans Health Administration Revenue Cycle Improvement Plan. This plan initially included 24 actions to improve revenue performance. After the establishment of the Chief Business Office (CBO) in May 2002, VA issued the Revenue Action Plan (Plan) that superceded the 2001 plan and includes 16 objectives. With the implementation of several actions in the Plan, VA has reported increases in the number of billings. For example, in fiscal year 2003, VA submitted 10 million bills, a 25 percent increase over the number of bills in fiscal year 2002 and a 160 percent increase over fiscal year 2000. VA also reported that its collections of third-party payments over the past few years continue to increase as shown in figure 2. For fiscal year 2003, VA reported that it collected third-party payments of $804 million, a 6 percent increase over the $760 million collected in 2002 and a 49 percent increase over the $540 million collected in fiscal year 2001. To gain an understanding of VHA’s policies and procedures and the related internal controls for the billings and collections, to identify key control activities, and to assess the design effectiveness of those controls, we obtained and reviewed VA and VHA directives, handbooks, and other policy guidance, and previous reports issued by VA’s OIG. We also conducted interviews and walkthroughs with VHA personnel and reviewed previous GAO reports. To assess whether key control activities for the two areas of operation were effectively implemented, we used a case study approach, reviewing transaction documentation at three VA medical centers. We selected medical centers with varying success in meeting established performance goals and other factors. Because we used a case study approach the results of our study cannot be projected beyond the transactions we reviewed. To determine whether key internal controls for billings were effectively implemented, we discussed billing requirements and procedures with VHA headquarters and medical center personnel. Because billing records were not in a usable format and time constraints did not permit us to put them in a usable format, we could not select a statistical sample. Instead, we made a non-statistical selection of 30 patients from each of the three medical center’s inpatient and outpatient billing records to perform tests to assess compliance with policies and procedures and to determine the number of days to bill third-party insurance companies. To determine whether key internal controls for collections were effectively implemented, we discussed requirements and procedures with VHA headquarters and medical center personnel. At each medical center we visited, we used the same 30 patients chosen for our billing tests to also assess compliance with accounts receivable policies and procedures, including VA Handbook 4800.14, Medical Care Debts (Handbook) and the Accounts Receivable Third-Party Guidebook. We reviewed and used as guides, the Standards for Internal Control in the Federal Government and the Internal Control Management and Evaluation Tool. The Comptroller General issued these internal control standards to provide the overall framework for establishing and maintaining internal control. According to these standards, internal control, also referred to as management control, comprises the plans, methods and procedures used to meet the missions, goals, and objectives of an organization. Internal control also serves as the first line of defense in safeguarding assets and preventing and detecting errors and fraud. We performed our work at VA medical centers in Cincinnati, Ohio; Tampa, Florida; and Washington, D.C., and at the VHA’s Chief Business Office in Washington, D.C. We conducted our review from March 2004 through June 2004 in accordance with U.S. generally accepted government auditing standards. We requested comments on a draft of this report from the Secretary of Veterans Affairs or his designee. Written comments were received from the Secretary of Veterans Affairs and are reprinted in appendix I. Although VA has decreased the number of days it takes to bill for patient services and has increased its collections from third-party insurance companies since 2000, problems remain. At the three medical centers we visited, we found continuing weaknesses in the billings and collections processes that impair VA’s ability to maximize the amount of dollars paid by third-party insurance companies. For example, medical centers did not always bill insurance companies in a timely manner. According to medical center officials, timeliness of billing is affected by, among other things, (1) VA’s ability to verify and update a patient’s third-party insurance information, (2) whether physicians and other health care providers properly document the patient’s treatment so a bill can be coded appropriately, (3) the extent of manual intervention to process the bill, and (4) workload. We believe that improvements could be made in each of these areas. Further, the three medical centers we visited did not always pursue collections of accounts receivable in a timely manner or follow up on certain partially paid claims. Weaknesses in VA’s collection activities hamper its ability to collect all monies due to the agency from third-party insurance companies to pay for veterans’ growing demand for care. VA’s current Plan to implement and sustain effective collections operations is in process. However, the Plan has not been fully implemented. Therefore, it is too early to determine the extent to which it will address operational problems and increase collections. While VA reported that it has decreased the average number of days it takes to bill for patient services, we found that medical centers could further improve billing timeliness by continuing to address operational problems that slow down the process. These operational problems include, among other things, delays in verifying and updating patient insurance information, incomplete or inaccurate documentation of patient care by health care providers, manual intervention, and workload. VA’s billing process cuts across four functional areas, as shown in figure 3. Each phase of the billing process is dependent on the completeness and accuracy of information collected in the prior phases. Breakdowns occurring during any part of the process can affect the timeliness of billings. VA’s policies and procedures do not specify the number of days for a bill to be issued once health care services are rendered. In fiscal year 2003, VA’s Business Oversight Board established performance goals that were incorporated into the network and medical directors’ performance contracts. The goal for sending a bill within a set number of days was reduced periodically during fiscal year 2004. During the time of our review, the performance goal for billing third party insurance companies was an average of 50 days from the date of patient discharge.