When veterans receive care from VA for non-service-connected conditions, the law allows VA to bill the veterans’ private health insurers and retain these third-party collections to supplement its appropriations for health care. Third-party insurers include individual and group insurance plans, Medicare supplemental insurance plans, and self-insured employer plans. In January 1997, VA proposed a 5-year plan to operate with a flat annual appropriation of $17 billion per year through fiscal year 2002. As part of this plan, VA anticipated that by the end of fiscal year 2002, it would obtain 10 percent of its funding from third-party collections and other alternative revenue streams, such as veteran copayments, Medicare payments, and proceeds from sharing agreements (where VA sells services to the Department of Defense, private hospitals, and other providers). In fiscal year 2000, VA acknowledged that it would not meet its 10-percent goal, in part because the Congress did not authorize Medicare payments to VA for health care provided to Medicare enrollees. For fiscal year 2002, VA estimates that revenue from alternative sources would be about 4 percent of its medical care funding, or $896 million. VA’s third-party revenue operations consists of five sequential processes. (See table 1.) With the exception of six networks that have consolidated some of these processes, revenue operations management is currently decentralized and the processes are performed at each medical center where health care is provided to veterans. In the 1990s, VA sponsored two studies comparing the cost-effectiveness of contracting out most revenue operations. The results of these studies were not fully conclusive and were contradictory. The first study, conducted by Birch and Davis and reported on in 1995, concluded that VA’s costs would be slightly less if operations were maintained in-house instead of using a contractor. In contrast, the second study, conducted by Coopers and Lybrand and reported in 1998, found that, based on three contractors’ estimates, contracting out would be less expensive. If VA’s current pattern of third-party collections continues into the last months of fiscal year 2001, VA will significantly increase its third-party collections for the first time since fiscal year 1995. However, the increased collections are likely the result of VA’s generally charging more for each episode of care—which occurred with the implementation of billing reasonable charges for individual services. Not only do long-standing problems in revenue operations appear to persist—which have been heightened with the implementation of reasonable charges—when compared to private sector benchmarks, VA’s collections performance is poor. Moreover, the revenue program’s information systems and lack of departmentwide standardization create overarching weaknesses for managing and improving revenue operations and collections nationally. Based on monthly collections for the first 10 months of fiscal year 2001, we project that VA will receive over $500 million from third-party collections this year. This amount is a significant increase over last fiscal year—and the largest amount collected since fiscal year 1995, when $523 million was collected. (See fig. 1.) VA expected its collections to increase as a result of its reasonable charges billing system, which was implemented in September 1999. Under this system, VA began using itemized billing for the services provided—rather than charging flat fees, as it had done prior to 1999. According to a VA analysis, in the first 8 months of fiscal year 2001, VA treated about the same number of patients but collected 34 percent more dollars than the comparable period in fiscal year 1999 before reasonable charges were implemented. Although the implementation of the reasonable charges billing system has increased VA’s collections over the past year, VA faces a number of long- standing problems in managing its revenue operations. In addition, VA’s collections performance falls short of private sector benchmarks. Inadequate intake procedures, lack of sufficient physician documentation, shortage of qualified coders, and insufficient automation diminish VA’s collections. Patient intake: To determine which veterans have insurance, VA must rely on voluntary disclosure of insurance by veterans. Nationally, VA bills insurers for only 16 percent of patients treated but reports that substantial numbers of veterans have probably not disclosed their insurance. Medical documentation: About 74 percent of surveyed facilities reported that weaknesses in physicians’ documentation of care for billing purposes limits collections. One official was concerned that his facility could not meet its timeliness goal unless clinical staff provided more timely documentation for billing. He also noted that not all billable care could be charged to insurers because of incomplete or insufficient documentation. A VA contractor this year estimated that VA could collect $459 million more nationally if physicians’ oversight of resident physicians was properly documented. However, the contractor also found that some physicians were concerned that spending more time on documenting care for billing purposes would take away from the time spent with patients. Coding: VA has acknowledged its difficulty maintaining sufficient staff who can correctly code medical procedures and services for billing. A 2000 study also found these problems and attributed them to competition from other employers for coders, low VA entry-level wages, and VA’s frequent problems with retaining and promoting qualified and proficient staff. At three sites we visited, for example, revenue officials noted that they had difficulties hiring experienced coders at VA salaries. Billing: A VA-sponsored 2001 study of the possible uses of commercial software found limitations in VA’s current billing software that led to manual processes. As a result, there is an increased probability of errors, slower production, and lower collections. A contractor who provided services to both VA and private sector hospitals also told us that VA’s process for creating bills and identifying errors is less automated than the private sector. Accounts receivable: The majority of VA’s accounts receivables exceed 90 days and VA is concerned that insufficient follow-up is given to collections. According to a contractor that services both VA and private sector hospitals, VA staff at one facility were not following standard business practices of contacting insurers to resolve problems with bills but instead were just sending additional copies of bills. At another site we visited, two accounts-receivable staff were having difficulties reducing a backlog of about 3,000 to 4,000 unpaid claims because each day they were only able to make a total of 60 follow-up calls to insurers. Private sector hospitals appear to manage these processes more efficiently. VA’s average lag times from the date of discharge or care to the date of billing are 74 days for inpatient care and 143 days for outpatient care. In comparison, private sector benchmarks indicate that 5 and 6 days, respectively, are more typical in the private sector hospitals. The majority of VA’s accounts receivables are over 90 days old from date of discharge or care, compared to a private sector benchmark of 29 percent of uncollected dollars exceeding 90 days. A VA-sponsored 1998 study estimated that VA’s full cost to collect one dollar of third-party revenue was 7 cents for inpatient bills and 48 cents for outpatient bills, compared to a benchmark of slightly over 2 cents in the private sector. Comparisons between VA and private sector hospitals, however, are not perfect because their operations and payer mix differ. For example, VA bills both for facility and provider charges, whereas the two private sector hospitals we visited only billed for facility charges; medical groups bill separately for physician fees. In addition, VA can only collect on the Medicare supplemental portion of the payment, whereas the private hospital can collect both Medicare and supplemental payments. VA reports that about 70 percent of its bills are sent to Medicare supplemental insurers, and for these, it can only expect to collect abut 20 percent of the billed amount. Consequently, VA would have a higher cost-to-collect ratio even if it were as efficient as its private sector counterparts. Although these differences make comparisons with private sector average performance imperfect, the disparity of performance suggests that the average VA operation is not very efficient. By replacing a billing system that used a limited number of flat fees for broadly defined types of care with one based more on individual charges for the services actually given, the new reasonable charges system made accurate coding and documentation more critical for billing and increased workload because multiple claims could result from a single episode of care. Before implementing its reasonable charges billing system, VA used nine inpatient rates, based on a particular hospital unit, such as a surgical bed section, and one outpatient visit rate. Under the reasonable charges billing system, VA assigns hundreds of diagnoses codes and thousands of procedure codes based on the documentation of the services provided to veterans. Therefore, before reasonable charges, an outpatient surgery, such as one to repair a hernia, would result in one all-inclusive charge. Under reasonable charges, VA must now create separate bills for physician charges and for outpatient facility charges for the same outpatient surgery. Although estimates varied at the sites we visited, one official estimated that using reasonable charges increased the number of bills by about 5 times. Officials at all sites we visited reported acquiring more staff—both in- house and through contracts—to process bills under reasonable charges. For example, since reasonable charges was implemented, one site’s total number of coders and billers more than doubled, from 7 to 19. Based on the 133 facilities reporting to our survey, increases of VA staff continued into this fiscal year. Full-time equivalent positions for revenue operations have increased from 2,284 in fiscal year 2000 to 2,411 by the middle of fiscal year 2001. VA is also challenged to successfully direct and manage a highly decentralized program with practices and performances that vary widely by facility. VA has noted that although its national policies address key components of revenue operations, they are not followed in a standard and consistent manner. For example, VA has encouraged physicians to enter their notes electronically; however, physicians at one location we visited were dictating their notes for transcription, which were then transferred to the electronic system. At another site, an official told us that while other facilities were able to create an electronic interface with an intermediary to transmit bills to insurance companies, his facility had not.