The Department of Veterans Affairs (VA), through the Veterans Health Administration (VHA), operates the nation's largest integrated direct health care delivery system. While Medicare, Medicaid, and the Children's Health Insurance Program (CHIP) are also publicly funded, most health care services under these programs are delivered by private providers in private facilities. In contrast, the VA health care system is a truly public health care system in that the federal government owns the medical facilities and employs the health care providers. The VA's health care system is organized into 21 geographically defined Veterans Integrated Service Networks (VISNs) (see Appendix ). Although policies and guidelines are developed at VA headquarters, to be applied throughout the system, management authority for basic decision making and budgetary responsibilities are delegated to the VISNs. VHA's health care delivery network includes 153 hospitals (medical centers), 135 nursing homes, 803 community-based outpatient clinics (CBOCs), 6 independent outpatient clinics, and 271 Readjustment Counseling Centers (Vet Centers), which are supported by more than 242,000 employees. In general, eligibility for VA health care is based on veteran status, service-connected disabilities or exposures, income, and other factors such as former prisoner of war (POW) status or receipt of the Purple Heart. As required by the Veterans Health Care Eligibility Reform Act of 1996 ( P.L. 104-262 ), most veterans are required to enroll in the VA health care system to receive care. Once enrolled, veterans are assigned into one of the eight priority groups based on various criteria. For instance, veterans who are rated 50% or more service-connected disabled or who are unemployable due to service-connected disabilities are enrolled in Priority Group 1. According to VA, there are approximately 23.1 million living veterans in the U.S. Of these, approximately 8.3 million (36%) were enrolled in the VA health care system, and over 5.0 million unique veteran patients received care from the VA in FY2009. Generally, veterans have a choice of where they receive their care. While some veterans rely more heavily on care through the VA health care system, the majority of veterans not enrolled in the VA health care system receive care through the private sector which is financed by Medicare, private health insurance, or the military health care system. VHA is a direct health care provider, but it is not generally a third-party payer of care. For veterans who are eligible to receive care through the VA health care system, the decision on whether to receive care from the VA may depend on a variety of factors, such as out-of-pocket costs, distance, and waiting times for appointments, among other things. In general, VHA provides a majority of medical services to enrolled veterans within its health care system. However, in some instances, such as when a clinical service cannot be provided by a VA medical center, and the patient cannot be transferred to another VA medical facility; or when VA cannot recruit a needed clinician; or when a veteran is unable to access VA health care facilities due to geographic inaccessibility; or in emergencies when delays could lead to life threatening situations; VA is authorized to send the veteran outside of its health care system to seek care. VHA uses two major mechanisms to provide care outside its health care system. These include contracts to purchase care, or non-contracted medical care purchased on a fee for service basis from providers in the community. See the box below for a brief description of these methods. In 2006, Congress directed VHA to implement a contracting pilot program, which was later named Project Healthcare Effectiveness through Resource Optimization (Project HERO ) to better manage the fee basis care program (discussed later in this report). Policymakers and other stakeholders hold a variety of views regarding the appropriate role of the private sector in meeting the health care needs of eligible veterans. Some believe that the best course for veterans is to provide all needed care in facilities under the direct jurisdiction of the VA. On the other hand, some see the use of private sector providers as important in assuring veterans' access to a comprehensive slate of services (in particular, to specialty services that are needed infrequently), or in addressing geographic or other access barriers. In addition, those who believe that all needed care should be provided by VA providers in VA-owned facilities are concerned that private sector options for providing care to veterans will lead to a dilution of quality of care in the VA health care system, and could fail to leverage key strengths of the VHA network, such as its system of electronic medical records. However, some propose that over the long term, having private sector options could improve the quality of services within the VHA network through competition. Reaching the correct balance between providing care through VA's health care network and through non-VA providers is an issue for policymakers, as well as for the VHA and other stakeholders. In addition to these broad concerns, Congress has been interested in specific aspects of VHA's use of private health care services. First, expenditures for contract and fee basis care services are increasing. In FY2008, VHA spent approximately $3.0 billion for contract and fee basis care. By FY2009, that amount had increased by 27% to approximately $3.8 billion. These expenditures now comprise an estimated 9% of VHA's $41.9 billion total appropriations. Second, specific concerns have been raised about the fee basis care program. The program is complex, highly decentralized, and lacks a standardized implementation process across the VA health care system. Specifically, VA's Office of Inspector General (OIG) has reported that VHA has made a significant number of improper payments for fee basis care, and in some instances has not properly justified and authorized care. Congress established the Project HERO demonstration to determine if it could provide better management of non-VA provided care. At least two policy questions about Project HERO may be of interest to Congress: 1. Has Project HERO enhanced the existing fee basis care program? 2. Are there findings from Project HERO that could be applied to standardize the fee basis care program throughout the VA health care system? To provide some context to the discussion of these questions, this report first provides an overview of Project HERO. Second, it discusses the current fee basis care process, as well as the implementation of Project HERO. The report concludes with a discussion of observations on the implementation of Project HERO based on VHA and Humana Veterans Healthcare Services Inc. (HVHS) perspectives. This report is based on information received during visits to three of the four Project HERO demonstration sites as well as discussions with officials from HVHS. Although the provision of dental care through Delta Dental Federal Services is part of Project HERO, this report does not discuss this aspect of the program. As stated earlier, in 2006, Congress directed VHA to implement a contracting pilot program, to better manage the fee basis care program. The conference report ( H.Rept. 109-305 ) to accompany the Military Quality of Life and Veterans Affairs Appropriations Act, 2006 ( P.L. 109-114 ), directed the VA to implement a cost-effective purchased care management program and to develop at least three objectives-oriented demonstrations (pilot programs) to encourage collaboration with industry and academia. According to the conference report: The conferees support expeditious action by the Department to implement care management strategies that have proven valuable in the broader public and private sectors. It is essential that care purchased for enrollees from private sector providers be secured in a cost effective manner, in a way that complements the larger Veterans Health Administration system of care, and preserves an important agency interest, such as sustaining a partnership with university affiliates. In that interest, the VHA shall establish, through competitive award by the end of calendar year 2006, at least three managed care demonstration programs designed to satisfy a set of health system objectives related to arranging and managing care. The VA began developing plans based on this requirement. However, although the conference report language directed VA to implement a managed care demonstration, after meetings with various stakeholders VHA developed a set of objectives that led to a demonstration program to enhance the existing fee basis care program. Its goals were to provide as much care for veterans within the VHA system as possible; when necessary, efficiently refer veterans to high-quality community-based care; improve exchange of information between VA and community providers; increase veteran patient satisfaction; foster high-quality care and patient safety; sustain partnership with university affiliates; and secure an accountable evaluation of demonstration results. To implement this demonstration VHA selected four Veterans Integrated Service Networks (VISNs), based on data that showed that these four networks had the highest expenditures for community-based care relative to the number of veterans enrolled for care. In addition, these areas included some of VHA's largest networks representing 25% of VHA's total enrollment. A contract for medical services was awarded on October 1, 2007, to Humana Veterans Healthcare Services Inc. (HVHS). Medical, surgical, mental health, diagnostic, and dialysis services became available through a network of providers recruited by HVHS. The demonstration program became operational on January 1, 2008. Services provided in non-VA health care facilities and by non-VA providers fall into two broad categories: contract care and fee basis care. Since Project HERO is a pilot to enhance fee basis care, this part of the report will first provide an overview of the current fee basis care process in the VHA. Under this system VA health care facilities are authorized to pay for health care services acquired from non-VA health care providers. VA manages the authorization, claims processing and reimbursement for services acquired from non-VA health care providers through the fee basis care program. The fee basis care program is used predominantly to provide outpatient care. Outpatient fee care involves two major phases: (1) pre-authorization of care and (2) claims processing. Figure 1 provides a generalized depiction of the pre-authorization phase.