VA is responsible for providing federal benefits to veterans. Headed by the Secretary of Veterans Affairs, VA operates nationwide programs for health care, financial assistance, and burial benefits. In fiscal year 2007, VA received appropriations of over $77 billion, including over $35 billion for health care and approximately $41.4 billion for other benefits. The Congress appropriated more than $87 billion for VA in fiscal year 2008. VHA is responsible for implementing the VA medical assistance programs. In fiscal year 2007, VHA operated more than 1,200 sites of care, including 155 medical centers, 135 nursing homes, 717 ambulatory care and community-based outpatient clinics, and 209 Readjustment Counseling Centers. VHA health care centers provide a broad range of primary care, specialized care, and related medical and social support services. The number of patients treated increased by 47.4 percent from 3.8 million in 2000 to nearly 5.6 million in 2007 due to an increased number of veterans eligible to receive care. As shown in figure 1, VHA has organized its health care centers under 21 Veterans Integrated Service Networks (VISN), which oversee the operations of the various medical centers and treatment facilities within their assigned geographic areas. During fiscal year 2007, these networks provided more medical services to a greater number of veterans than at any time during VA’s long history. VA has used “Estimated Miscellaneous Obligation or Change in Obligation” (VA Form 4-1358) to record estimated obligations for goods and services for over 60 years. According to VA policy, miscellaneous obligations can be used to record obligations against appropriations for the procurement of a variety of goods and services, including fee-based medical, dental, and nursing services; non-VA hospitalization; nursing home care; beneficiary travel; and rent and utilities. The policy states that miscellaneous obligations should be used as obligation control documents when a formal purchase order or authorization is not required, and when necessary to record estimated obligations to be incurred by the subsequent issue of purchase orders. The policy also states that the use of miscellaneous obligations should be kept to an absolute minimum, consistent with sound financial management policies on the control of funds, and should only be used in cases where there was a bona fide need for the goods and services being procured. In September 2006, VA policy for miscellaneous obligations was revised in an attempt to minimize the use of miscellaneous obligations as an obligation control document. The revision states that miscellaneous obligations should not be used as obligation control documents unless the head contracting official for the station has determined that a purchase order or contract will not be required. However, the policy provides that fiscal staff can use miscellaneous obligations as a tracking mechanism for obligations of variable quantity contracts, as well as for public utilities. In January 2008, VA issued interim guidance on the use of miscellaneous obligations; however, the guidance did not apply to the fiscal year 2007 miscellaneous obligations we reviewed. In recent years VHA has attempted to improve its oversight of miscellaneous obligations. For example, VHA’s Clinical Logistics Group created the IFCAP system database in April 2006 to analyze the use of miscellaneous obligations agencywide. The database is updated monthly and contains information on the miscellaneous obligations created monthly by the 21 VISN offices and their associated stations. VHA officials are using the IFCAP database to (1) analyze the number and dollar amounts of procurements being done using contracts and purchase cards, and recorded using miscellaneous obligations, and (2) identify the types of goods and services recorded as miscellaneous obligations. Prior to the creation of the IFCAP database, such information on the use of miscellaneous obligations nationwide was not readily available to VHA upper-level management. The creation and processing of miscellaneous obligations (VA Form 4-1358) is documented in IFCAP—a component of VA’s Veterans Health Information System and Technology Architecture (VISTA). The miscellaneous obligation request passes through several stages illustrated in figure 2. The IFCAP database shows that in fiscal year 2007 nearly 132,000 miscellaneous obligations, with a total value of nearly $9.8 billion, were created (see table 1). While VA’s Central Office had $2.9 billion in miscellaneous obligations during fiscal year 2007, our review focused on the $6.9 billion in miscellaneous obligations used by VHA’s 129 stations, located in every VISN throughout the country, for a variety of mission- related activities. (See app. III for a list of the uses of miscellaneous obligations by VISN, and app. IV for a list of the uses of miscellaneous obligations by station). According to available VHA data, VHA used miscellaneous obligations to record estimated obligations of over $6.9 billion for mission-related goods and services. As shown in figure 3, about $3.8 billion (55.1 percent) was for fee-based medical and dental services for veterans, and another $1.4 billion (20.4 percent) was for drugs, medicines, and hospital supplies. The remainder was for, among other things, state veterans homes, transportation of veterans to and from medical centers for treatment, and logistical support and facility maintenance for VHA medical centers nationwide. Other, such as dietetic proviion, operting supplie, clening ervice, nd d processing. Trporttion of peron/thing. Ste home nd homeless vetersupport. Rent, commniction, nd tilitie inclding gas, electricity, wter, ewer, nd phone. Supplie inclding dr, medicine, hopitsupplie, lood prodct, nd prothetic supplie. Service inclding fee-bas phyicin, ning, dentl, hopitliztion , rerch, nd prothetic repir. According to VHA contracting and fiscal service officials, using miscellaneous obligations tends to reduce administrative workload and facilitates the payment for contracted goods and services, including drugs, medicines, and transportation, and for goods and services for which no preexisting contracts exist, such as fee-basis medical and dental services and utilities. VHA officials stated that miscellaneous obligations facilitate the payment for contracted goods and services when the quantities and delivery dates are not known. A miscellaneous obligation can be created for an estimated amount and then modified as specific quantities are needed or specific delivery dates are set. When a purchase order is created, however, the obligated amount cannot be changed without a modification of the purchase order. According to VHA officials, the need to prepare numerous modifications to purchase orders could place an undue burden on the limited contracting personnel available at individual centers and could also require additional work on the part of fiscal services personnel. VHA officials stated that the use of miscellaneous obligations can simplify the procurement process when no preexisting contract or purchase order exists. For example, providing medical care on a fee-basis to veterans outside of VHA medical centers may involve the services of thousands of private physicians nationwide. Attempting to negotiate a separate agreement or contract with each of these individuals would be a difficult task for VHA’s contracting staff. Under the policies and procedures in place during fiscal year 2007, VHA centers could use miscellaneous obligations as umbrella authorizations for fee-based medical services performed by a number of different physicians. In effect, in cases for which there is no preexisting contract, the miscellaneous obligation form becomes the record of an obligation. However, use of miscellaneous obligations may also increase the risk of fraud, waste, and abuse. Consequently, mitigating controls must be designed to help compensate for the lack of a negotiated contract. Absent contractual terms, one risk area is the authorized fee schedule for the medical services being provided. In this case, federal regulations call for payments to non-VA physicians for services associated with outpatient and inpatient care provided at non-VA facilities to be the lesser of the amount billed or the amount calculated using the formula developed by the Department of Health and Human Services under Medicare’s participating physician fee schedule for the period in which the service is provided. However, we did not verify that VHA officials were properly following the fee schedule. VA policies and procedures were not designed to provide adequate controls over the use of miscellaneous obligations. According to our Standards for Internal Control in the Federal Government, agency management is responsible for developing detailed policies and procedures for internal control suitable for their agency’s operations and ensuring that they provide for adequate monitoring by management, segregation of duties, and supporting documentation for the need to acquire specific goods in the quantities purchased. We identified control design flaws in each of these oversight areas, and we confirmed that these weaknesses existed at the three locations where we conducted case studies. Collectively, these control design flaws increase the risk of fraud, waste, and abuse (including employees converting government assets to their own use without detection). New guidance for the use of miscellaneous obligations was released in January 2008 and finalized in May 2008. We reviewed the new guidance and found that while it offered some improvement, it did not fully address the specific control design flaws we identified. Furthermore, VA officials told us that this guidance was not subject to any legal review. Such an analysis is essential to help ensure that the design of policies and procedures comply with all applicable federal appropriations law and internal control standards. We reviewed 42 miscellaneous obligations at the three case study locations and developed illustrative, more detailed information on the extent and nature of these control design flaws. Table 2 summarizes the locations visited, the miscellaneous obligations reviewed at each location, and the extent and nature of control design deficiencies found. To help minimize the use of miscellaneous obligations, VA policy stated that miscellaneous obligations would not be used as obligation control documents unless the contracting authority for a station had determined that purchase orders or contracts would not be required.