The law directs VA to compensate veterans for their service-connected physical or mental conditions according to a schedule of disability ratings, which represents the average impairment in earning capacity that results from these conditions. The first schedule was developed in 1919 and has undergone many changes since then. The Schedule for Rating Disabilities includes a list of physical and mental conditions with disability ratings assigned to each. These ratings are used to determine the amount of compensation that veterans are entitled to receive on the basis of their specific conditions. Federal law (38 U.S.C. 1110 and 1155) requires VA to “adopt and apply a schedule of ratings of reductions in earning capacity from specific injuries or combination of injuries” to determine the amount of compensation disabled veterans are entitled to receive. The ratings are to be based, “as far as practicable, upon the average impairments of earning capacity resulting from such injuries in civil occupations.” The law gives the chief administrator of VA the discretion to define “average impairments in earning capacity” and the authority to readjust the schedule to help ensure that disability ratings reflect VA’s experience. The War Risk Insurance Act of 1917 called for the creation of the first rating schedule. The schedule was developed in 1919 and provided an early framework for the basic design of the current compensation and pension programs for disabled veterans. It underwent major revisions in 1921, 1925, 1933, and 1945, becoming more comprehensive with each major revision (see fig. 1). The last major revision to the schedule was made in 1945. The Schedule for Rating Disabilities contains medical criteria and disability ratings. The medical criteria consist of a list of diagnoses organized by body system and a number of levels of medical severity specified for each diagnosis. The schedule assigns a percentage evaluation, commonly referred to as a disability rating, to each level of severity associated with a diagnosis. The disability rating conceptually reflects the average impairment in earning capacity associated with each level of severity. For example, VA presumes that the loss of a foot as a result of military service results in a 40-percent impairment in earning capacity, on average, among veterans with this injury. All veterans who lose a foot as a result of military service, therefore, are entitled to a 40-percent disability rating whether this injury actually reduces their earning capacity by more than 40 percent or not at all. Ratings for individual diagnoses in the schedule range from 10 percent to 100 percent in gradations of 10 (see table 1). The amount of compensation veterans are awarded for their disabilities is based on (1) the disability rating the schedule assigns to a veteran’s specific condition and (2) the specific benefit amount the Congress sets for each of these disability rating levels. To determine what basic compensation a veteran with a service-connected condition is due, first the veteran’s condition is medically evaluated to determine its severity. Then VA compares the results of the evaluation with the medical criteria in the schedule to determine what disability rating is warranted given the severity of the veteran’s condition. The veteran will receive the amount the Congress has set for that disability rating. The Congress has adjusted the benefit amounts for each disability rating level annually. In fiscal year 1995, the basic monthly benefit amount ranged from $89 for conditions assigned a rating of 10 percent to $1,823 for conditions assigned a rating of 100 percent (see table 2). Although the primary purpose of VA’s disability compensation program is compensation for impairment in earning capacity, the program also provides for additional monthly compensation over and above the amount based on the schedule, for loss of “physical integrity.” Loss of physical integrity is defined as tissue loss, loss of body parts, or any disease or injury that makes an individual less functionally whole. The law (38 U.S.C. 1114) provides for additional monthly compensation for such things as the loss of a hand, foot, eye, or procreative organ. VA regulations also allow veterans to receive “extra-schedular” awards when VA determines that the severity of a veteran’s condition is not adequately captured by the rating the schedule assigns to it. Extra-schedular awards allow veterans to receive compensation for a rating higher than the one specified in the schedule for their condition. In a case of unemployability, for example, if the criteria in the schedule indicate that a veteran’s condition warrants at least a 60-percent disability rating but VA determines that, on the basis of that veteran’s unusual circumstances, he or she is unable to obtain and sustain gainful employment, VA can raise the compensation for that veteran to the amount provided for a 100-percent rating. VA regulations also allow veterans to be compensated for “social inadaptability” or “social impairment” to the extent it affects industrial adaptability. Social inadaptability contemplates those abnormalities of conduct, judgment, and emotional reactions that affect economic adjustment, that is, that impair earning capacity. In 1995, about 70 percent of the 2.2 million veterans on the rolls were being compensated for conditions with disability ratings of 30 percent or less for a total of nearly $2.8 billion, or about 25 percent of total benefits paid to veterans that year. Those rated 100 percent accounted for only 6 percent of those on the disability rolls that year and received $3.7 billion, or about 32 percent of the total amount of benefits paid (see table 3). Disability ratings in the current schedule may not reflect the actual economic loss that disabled veterans, on average, now experience. While the law contains no definition of “impairments in earning capacity,” ratings assigned to conditions in the schedule are based more on judgments of the loss in functional capacity, rather than in earning capacity, resulting from these conditions. Advances in medicine and technology and changes in the economy and public policy and in the field of rehabilitation since 1945 raise questions about whether ratings for specific conditions set 50 years ago reflect the average loss in earning capacity today among veterans with these conditions. In addition, studies conducted in the mid-1950s and the late 1960s concluded that the ratings in the schedule did not accurately reflect the reduction in earning capacity that disabled veterans experienced at those times and that the ratings needed to be updated. The law gives the Secretary of Veterans Affairs the authority to determine what is meant by “average impairments in earning capacity” in civilian occupations. Although VA’s Economic Validation of the Rating Schedule (ECVARS) in the late 1960s defined reduction in earning capacity as “the loss or lowering of average income from wages or employment,” VA has not defined in regulations what is meant by average impairment in earning capacity other than to generally describe it as an economic or industrial handicap. Beginning at least as early as 1923, when assigning a rating to a condition, VA used the loss in physical or overall functional capacity resulting from that condition (or some other proxy, such as the average veteran’s ability to compete for employment in the job market) as an indicator of average impairment in earning capacity. According to an official in VA’s Office of General Counsel, the average impairment in earning capacity in civilian occupations means the impairment of an individual’s ability to engage in any type of work available in the economy. The actual loss in earnings associated with a service-connected condition has not been considered when determining the degree to which that condition impairs earning capacity. Nor has it been considered when determining the rating that condition should be assigned in the schedule. In 1945, when the framework for the current schedule was developed, the job market was oriented toward physical labor, and physical capacity was expected to have a major influence on earning capacity. At that time, a Disability Policy Board, consisting of doctors and lawyers, set the disability ratings for the conditions contained in the schedule. According to a former Director of VA’s Compensation and Pension Service, VA’s Department of Medicine and Surgery, now the Veterans Health Administration, provided the Board with a medical monograph—a detailed description of etiology and manifestations—for each of the conditions included in the schedule at that time. The Board used these monographs to estimate the relative effects different levels of severity of a condition have on the average veteran’s ability to compete for employment in the job market. It set disability ratings on this basis. Thus, ratings for conditions that limited physical ability, such as the loss of the use of an arm or leg, were expected to greatly impair veterans’ average earning capacity and were given a relatively high rating. Since 1945, VA has made many revisions to the schedule. The revisions have included modifications to medical criteria associated with the ratings, changes in the maximum convalescence period allowed before requiring reevaluation of the condition, and addition of more levels of evaluations or ratings. The revisions, however, have not been based on empirical data on the effects certain conditions have on veterans’ earnings. According to VA Compensation and Pension officials, the basic procedure used to determine what disability rating to assign to a condition has not changed since 1945. This determination has been and continues to be based on the judgment of individuals with knowledge and expertise in this area. When adjusting ratings for conditions already in the schedule or assigning ratings to new conditions added to the schedule, VA’s goal has been to maintain the internal consistency of the schedule over time. In doing so, VA tries to ensure that new or adjusted ratings are consistent with the ratings of analogous conditions and reasonable relative to all other conditions. As a result, the ratings in the 1945 schedule have been, in effect, the benchmark for all the ratings adjusted and added since then, and VA officials acknowledge that the ratings in the current schedule are consistent with the ratings developed in 1945. Even if functional capacity accurately approximated disabled veterans’ reduction in earning capacity in 1945, changes have occurred since then that have implications for how accurately those ratings reflect disabled veterans’ reduction in earning capacity today. Numerous technological and medical advances have taken place, as well as economic changes, that have created more potential for people to work with some conditions and less potential for people to work with other conditions.