The United States has a long tradition of providing benefits to those injured in military service, but the role of the federal government in providing for the health care needs of other veterans has evolved and expanded over time. In the nation’s early years, the federal role was limited to direct financial payments to veterans injured during combat; direct medical and hospital care was provided by the individual colonies, states, and communities. The Continental Congress, seeking to encourage enlistments during the Revolutionary War, provided federal compensation for veterans injured during the war and their dependents. Similarly, the first U.S. Congress passed a veterans’ compensation law. The federal role in veterans’ health care significantly expanded during and following the Civil War. During the war, the government operated temporary hospitals and domiciliaries in various parts of the country for disabled soldiers until they were physically able to return to their homes. Following the war, the number of disabled veterans unable to cope with the economic struggle of civilian life became so great that the government built a number of “homes” to provide domiciliary care. Incidental medical and hospital care was provided to residents for all diseases and injuries. The modern era of veterans’ benefits began with the onset of World War I. During World War I, a series of new veterans’ benefits was added: voluntary life insurance, allotments to take care of the family during military service, reeducation of those disabled, disability compensation, and medical and hospital care for those suffering from wounds or diseases incurred in the service. During World War I, Public Health Service (PHS) hospitals treated returning veterans, and, at the end of the war, several military hospitals were transferred to PHS to enable it to continue serving the growing veteran population. In 1921, those PHS hospitals primarily serving veterans were transferred to the then newly formed Veterans’ Bureau. During the 1920s, three federal agencies—the Veterans’ Bureau, the Bureau of Pensions in the Interior Department, and the National Home for Disabled Volunteer Soldiers—administered various benefits for veterans. With the establishment of the Veterans Administration in 1930, previously fragmented services for veterans were consolidated under one agency. The responsibilities and programs of the Veterans Administration grew significantly during the ensuing decades. For example, the VA health care system grew from 54 hospitals in 1930 to include 173 hospitals, more than 375 outpatient clinics, 130 nursing homes, and 39 domiciliaries in 1996; the World War II GI Bill is said to have affected the American way of life more than any other law since the Homestead Act almost a century before, and further educational assistance acts were passed for the benefit of veterans of the Korean conflict, the Vietnam era, the Persian Gulf War, and the current all-volunteer force; and in 1973, the Veterans Administration assumed responsibility for the National Cemetery System, and VA is now charged with the operation of all national cemeteries, except for Arlington National Cemetery. In 1989, the Department of Veterans Affairs was established as a cabinet-level agency. VA’s major benefits programs are divided among the Veterans Health Administration (VHA), headed by the Under Secretary for Health; the Veterans Benefits Administration, headed by the Under Secretary for Benefits, which administers compensation for service-connected disabilities, pensions for low-income war veterans, education loans, life insurance, and home loans; and the National Cemetery System, headed by a Director. Figure 1 shows the organizational structure of VA. In our testimony 2 years ago, we pointed out that VA lagged far behind the private sector in improving the efficiency of its health care system. Specifically, we said that the VA system lacked oversight procedures to effectively assess the operations of its medical systems to shift significant resources among medical centers to provide consistent access to VA care, information systems capable of effectively coordinating patient care among VA facilities, and a corporate culture that valued economy and efficiency. VA has made significant progress in improving the efficiency of its health care system. For example, it has consolidated management of nearby hospitals to reduce administrative costs, increased the use of ambulatory surgery, and reduced average lengths of stay. Under the leadership of the Under Secretary for Health, VA has a new emphasis on both economy and efficiency and customer service. Two years ago, we told you that VA’s central office lacked much of the systemwide information it needed to effectively (1) monitor the performance of its medical centers, (2) ensure that corrective actions are taken when problems are identified, and (3) identify and disseminate information on innovative programs. Since then, VA has established a new decentralized management structure and established performance measures to hold managers accountable for improving efficiency and ensuring the quality of services. VA reorganized its health care facilities into 22 VISNs. This reorganization contains several elements that hold promise for providing the management framework needed to realize the system’s full potential for efficiency improvements. First, VA plans to hold network directors accountable for VISNs’ performance by using, among other things, cost-effectiveness goals and measures that establish accountability for operating efficiently to contain or reduce costs. Second, the Under Secretary for Health (1) distributed criteria that could guide VISN directors in developing the types of efficiency initiatives capable of yielding large savings and (2) gave VISN and facility directors authority to realign medical centers to achieve efficiencies. Finally, VHA developed a new method for allocating funds to its VISNs with the intent of creating additional incentives to improve efficiency. Consistent with the requirements of GPRA, VHA established five basic goals for its health care system. These goals are to provide excellence in health care value, provide excellence in service as defined by customers, provide excellence in education and research, be an organization that is characterized by exceptional accountability, and be an employer of choice. Under each goal, VHA established objectives and performance measures for gauging progress toward meeting both the specific objectives and overall program goals. For example, VHA’s performance measures include goals to decrease the number of bed-days of care provided per 1,000 unique users by 20 percent from the 1996 level, increase the percentage of patients reporting their care as “very good to excellent” by 5 percent annually, enroll 80 percent of patients in primary care, and increase the number of medical care residents trained in primary care. Contracts with individual VISN directors reflect these goals and performance measures. In addition, each VISN has developed a business/strategic plan. The plans are generally organized around the five broad goals. Two years ago, we testified that VA could reduce inconsistencies in veterans’ access to care by better matching medical centers’ resources to the volume and demographic makeup of eligible veterans requesting services at each medical center. Although VA had developed a new resource allocation system, the Resource Planning and Management (RPM) system, we pointed out that the system had shifted few resources among medical centers and allocated resources on the basis of prior workload without any consideration of the incomes or service-connected status of veterans who make up that workload. VA plans to begin shifting resources among VISNs using the new system. The system is based on calculations of the cost per veteran-user in each VISN. VISNs that have the highest costs per veteran-user will lose funds, while VISNs with the lowest costs per veteran-user will get additional funds. Adjustments are included for the higher labor costs in some VISNs and for differences in the costs of medical education, research, equipment, and nonrecurring maintenance. We applaud VA’s efforts to develop a simple, straightforward method for allocating resources. However, we have the same basic concern about VERA that we had about RPM. That is, VA has not determined the “right” amount of dollars that need to be shifted to ensure equity of access. Our concern is based on the fact that VA has not adequately determined the reasons for differences between VISNs in costs per veteran-user. Without a better understanding of why the costs vary, VA cannot, with any certainty, determine the appropriate amount of resources to shift among VISNs. VA data can give starkly different pictures of the comparability of veterans’ access to VA care depending on the basis used for the comparison. For example, basing a comparison of equity of access on the percentage of the total veteran population in a VISN that is provided VA services would suggest that veterans in the Sunbelt generally have better access to VA care than do veterans from the Midwest and Northeast. Over 17 percent of veterans in VISN 18 (Phoenix) received VA services in fiscal year 1995, compared with about 8 percent of veterans in VISN 4 (Pittsburgh). Similarly, about 14 percent of veterans in VISN 9 (Nashville) received VA health care services in fiscal year 1995, compared with about 8 percent of those in VISN 11 (Ann Arbor). Such data could suggest the need to shift resources from VISNs where VA has a high market share of the veteran population to VISNs where VA has lower market shares. attempting to develop data on the demographics of the veteran population by VISN to better understand the basis for differing market shares. Other VA data suggest that VISNs in the Northeast and Midwest may receive more than their fair share of VA resources. For example, VISN 18 received $3,197 per veteran served in fiscal year 1996, compared with $4,829 per veteran served in VISN 4. Similarly, VISN 9 received $4,071, compared with $4,360 in VISN 11. Both VERA data and data from prior allocation models suggest that differences in efficiency are a major factor in the variation in spending per veteran-user. Veteran-users in VISN 3 (the Bronx) are hospitalized over three times as often as are veterans in VISN 18.