VA policy is to allocate comparable resources for comparable workloads in its 22 health care networks as an important step in ensuring equitable access to care for the nation’s veterans. To achieve this allocation in its national health care system, VA has used VERA since fiscal year 1997 to prospectively allocate resources to the networks. VERA allocates nearly 90 percent of VA’s medical care appropriation in six categories: complex patient care, basic patient care, equipment, nonrecurring maintenance, education support, and research support. Resources for the first four categories are allocated on the basis of patient workload and account for approximately 96 percent of the resources VERA allocates. Allocations for education support and research support are based on workload measures specific to those activities within the VA health care system. Developed in response to a legislative mandate, VERA was designed to correct regional inequities in resource allocation created by shifts in the veteran population from the northeast and midwest to the south and west (see fig. 1) without a corresponding shift in resources. The resources did not shift before VERA was implemented because resource allocation was based primarily on facilities’ historical expenditures. VA expects that veteran population shifts from the northeast and midwest to the south and west will continue at least through 2020. Two other major changes to VA health care provision accompanied the implementation of VERA as a result of the Veterans’ Health Care Eligibility Reform Act of 1996. The first change was a major shift in VA health care delivery from an inpatient to an outpatient emphasis that was consistent with changes in health care delivery outside of VA. The act eliminated restrictions that previously prevented VA from treating some veterans in outpatient care settings, allowing VA to shift its focus from inpatient to outpatient care delivery. For example, VA no longer had to admit certain veterans to an inpatient setting to make them eligible for outpatient treatment or to receive prosthetic devices, such as crutches. As a result of eligibility reform, VA has been successful in shifting medical care to outpatient settings by taking advantage of advances in medical technology and practices, such as laser, endoscopic surgery, and other less invasive surgical techniques. VA has also identified alternatives to inpatient care, such as home-based care, for many chronically ill patients. From fiscal year 1996 through fiscal year 2000, VA closed almost 24,000 acute inpatient beds, a 52 percent reduction systemwide. During this time period, VA’s inpatient admissions decreased and outpatient visits increased from approximately 29 million to 40 million visits, a 36 percent increase systemwide. The second change was the introduction of a veterans’ enrollment system to manage access in relation to available resources due to the expected increase in demand on the VA system as a result of the new eligibility rules. As required by the act, VA established seven priority categories for enrollment. A higher priority for enrollment is given to veterans who have service-connected disabilities, lower incomes, or other statuses such as former prisoners of war. These higher priority enrollees are ranked in priority order from 1 through 6. The lowest enrollment priority is given to veterans not included in priorities 1 through 6, referred to as Priority 7 veterans. These veterans are primarily nonservice-connected veterans with higher incomes. The act requires VA to restrict enrollment consistent with these enrollment priorities if sufficient resources are not available to provide care that is timely and acceptable in quality to all priority categories. If needed, enrollment restrictions would begin with the lowest priority category. For, fiscal year 2002, VA has decided to continue enrolling veterans in all priority categories. VERA has been a key part of VA’s strategy to change its health care system. First, VERA shifted substantial resources among regions reflecting shifts in workload. Second, VERA, in concert with other VA initiatives, has provided an incentive for networks to serve more veterans. VERA has shifted substantial resources from networks located primarily in the northeast and midwest to networks located in the south and west (see fig. 2). VERA shifted approximately $921 million among networks in fiscal year 2001 compared to what allocations would have been if networks received the same proportion of funding they received in fiscal year 1996, the year before VERA was implemented. This included additional resources Congress appropriated from fiscal year 1996 through fiscal year 2001. VERA shifted the most resources—approximately $198 millionto Network 8 (Bay Pines), and VERA shifted the most resources from Network 3 (Bronx)approximately $322 million. The shift occurred because VERA allocated resources based primarily on patient workload rather than continuing VA’s prior process of incrementally funding facilities based on historical expenditures. VERA’s implementation resulted in 10 of VA’s 22 networks receiving a smaller share of VA’s medical care appropriation in fiscal year 2001 than in fiscal year 1996. However, because VA’s total medical care appropriation rose 22 percent during this period, all but two of these networks received more resources in fiscal year 2001 than in fiscal year 1996. The two networks with fewer resources from fiscal year 1996 to 2001 were Network 1 (Boston) and Network 3 (Bronx), which experienced 1 percent and 10 percent declines, respectively. VA has also used VERA as one component of a larger strategy to improve access to care by increasing the number of veterans treated. Because VERA allocates resources based on workload, it provides incentives for networks to increase the number of veterans treated. The number of veterans treated nationally in VA, in all priority groups, increased from 2.6 million in fiscal year 1996, the year before VERA was implemented, to 3.8 million in fiscal year 2001, an increase of 47 percent. All 22 networks contributed to this increase (see fig. 3). This includes networks from which VERA shifted resources. VA’s reduction in inpatient care, closure of acute care beds, shift in emphasis to less expensive outpatient care delivery, and a 22 percent increase in VA’s annual medical care appropriation since fiscal year 1996 have provided additional capacity allowing networks to increase workloads. VERA’s design promotes the allocation of comparable resources for comparable workloads to VA’s 22 health care networks consistent with principles used by other payers, such as the Medicare and Medicaid programs, and expert views on the design of payment systems. VERA allocates resources based primarily on networks’ patient workloads. To ensure the comparability of networks’ resources with their workloads, VERA adjusts these allocations for factors beyond networks’ control, namely patient health care needs and certain local costs. By adjusting allocations only for costs beyond a network’s control, VERA holds networks accountable for providing services efficiently. Also, VERA provides protection for patients from the risk that a health care network would not be able to provide services because its expenditures exceed available resources. VERA allocates resources primarily on the basis of network patient workload. Each network receives an allocation based on a predetermined dollar amount per veteran served. This is consistent with how other federal health care payers allocate resources to managed care plans to care for their patient workload. Because VERA uses workload to allocate resources, networks that have more patients generally receive more resources than networks that have fewer patients (see table 1). However, allocation adjustments result in some situations in which networks with fewer patients receive higher total and per patient allocations. For example, Network 3 (Bronx) received a larger VERA allocation in fiscal year 2001 than Network 9 (Nashville) even though Network 3 (Bronx) had a smaller workload. By receiving funding based on workload, VA’s health care networks have an incentive to focus on aligning facilities and programs to attract patients rather than focusing on maintaining existing operations and infrastructure regardless of the number of patients served. VERA seeks to ensure that comparable resources are allocated for comparable workloads by adjusting for differences in networks’ patient health care needs and certain local costs in calculating networks’ allocations. Without these adjustments, networks with justifiably higher costs could face pressure to compromise access to care or lower health care quality, while networks with lower costs could receive more resources than needed. To prevent this problem, VERA, like other federal health care payment systems, makes adjustments to its per patient allocations or capitation amounts. VERA adjusts for patient health care needscase mixby first classifying patients into categories by overall level of health care need and then by setting capitation amounts for each of these patient categories. VERA classifies patients into one of three categories according to the level of health care needs and associated costs. The first category is complex care, which includes patients who generally require significant high-cost inpatient care as an integral part of their rehabilitation or functional maintenance, and is about 4 percent of VA’s workload. This category includes most patients in VA’s special disability programs such as those with spinal cord injuries and serious mental illness. The second category is basic vested care, which includes patients who have relatively routine health care needs and are principally cared for in an outpatient care setting. These patients84 percent of VA’s workloadrely primarily or completely on VA for meeting their health care needs, may require short- term inpatient admissions, and typically require significantly fewer resources than complex care patients. The third category is basic non- vested care which is 12 percent of VA’s workload. This category includes patients who also have relatively routine health care needs but receive only part of their care through VA, are less costly to VA than basic vested patients, and have not undergone a comprehensive medical evaluation by a VA practitioner. The adjustments to capitation amounts for each category reflect whether patients in a category are more or less costly than patients in another category. These adjustments, or case-mix weights, determine what proportion of VERA resources will be allocated to networks to care for patients in each case-mix category, such as complex care. As a result, VERA’s patient case-mix adjustment provides more funding to networks with greater proportions of complex care patients.