VA Health Care: VA Has Not Sufficiently Explored Alternatives for
Optimizing Third-Party Collections (20-SEP-01, GAO-01-1157T).	 
								 
The Department of Veterans Affairs (VA) has reversed the general 
decline in its third-party collections for the first time since  
fiscal year 1995. However, the fiscal year 2001 increase appears 
to be largely the result of VA's implementation of a new system, 
known as the reasonable charges billing system, which allowed VA 
to move from a flat-rate billing system to one that itemizes	 
charges. However, long-standing problems in VA's revenue	 
operations persist, and VA's collections performance is poor when
compared to that of the private sector. VA's attempts at	 
consolidation using either in-house or contractor staff have	 
provided little basis for selecting the best alternative to VA's 
collections problems. Also, VA's recent 2001 Revenue Cycle	 
Improvement Plan does not call for a comprehensive comparison of 
alternatives, nor does it focus on net revenues--collections	 
minus operations costs. To collect the most funds for veterans'  
medical care at the lowest cost, VA needs to develop a business  
plan and detailed implementation approach that will provide	 
useful data for optimizing net revenues from third-party	 
payments.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-1157T					        
    ACCNO:   A01950						        
  TITLE:     VA Health Care: VA Has Not Sufficiently Explored	      
             Alternatives for Optimizing Third-Party Collections              
     DATE:   09/20/2001 
  SUBJECT:   Billing procedures 				 
	     Health insurance					 
	     Veterans benefits					 
	     Collection procedures				 
	     Health care costs					 
	     VA 2001 Revenue Cycle Improvement Plan		 
	     Medicare Program					 

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GAO-01-1157T
     
Testimony Before the Subcommittee on Oversight and Investigations, Committee
on Veterans' Affairs, House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10: 00 a. m. Thursday, September 20,
2001 VA HEALTH CARE

VA Has Not Sufficiently Explored Alternatives for Optimizing Third- Party
Collections

Statement of Stephen P. Backhus Director, Health Care- Veterans'

and Military Health Care Issues

GAO- 01- 1157T

Page 1 GAO- 01- 1157T

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today
to discuss the Department of Veterans Affairs? (VA) continuing efforts to
increase its collections from veterans? private health insurers. VA has the
authority to bill and retain all collections from these third- party
insurers for any health care it provides to veterans for non- service-
connected conditions. Collections from thirdparty insurers are VA?s largest
source of revenue and are used to supplement its medical care
appropriations.

Over the past several years, concerns have been raised about VA?s ability to
optimize its third- party revenues. For example, in 1997 we reported that VA
was billing for medical care that it could not expect to collect. 1 In 1998,
a national VA review found process inefficiencies, significant errors
resulting in rework, and ineffective use of available automation. 2 In the
same year, VA?s Office of the Inspector General indicated that VA was not
billing all appropriate episodes of care and not aggressively pursuing
unpaid bills. 3 And in 1999, we testified on our concerns about declining VA
collections and its uneven management improvements across facilities. 4
While these and other assessments recognize a number of largely
uncontrollable factors that limit VA?s potential revenue- such as the
declining number of veterans and smaller bills associated with VA?s shift
from inpatient to outpatient care- they all found that VA?s process for
collecting payments from third- party payers has limited the amount of
revenue it has generated.

In 1999, VA submitted a business plan to the Congress that called for an
evaluation of two major alternatives for improving revenue operations and
collections. Both alternatives called for each network to consolidate
portions of the revenue operations, but one alternative called for using in

1 VA Medical Care: Increasing Recoveries From Private Health Insurers Will
Prove Difficult (GAO/ HEHS- 98- 4, Oct. 17, 1997). 2 VA MCCR National Study:
Cost Assessment and Best Practices, Coopers and Lybrand (Apr. 21, 1998). 3
Audit of the Medical Care Cost Recovery Program, VA Office of Inspector
General (July 10, 1998). 4 VA Health Care: Collections Fall Short of
Expectations (GAO/ T- HEHS- 99- 196, Sept. 23, 1999).

Page 2 GAO- 01- 1157T

house staff while the other would have used contractor staff. 5 My testimony
today will focus on the status of VA?s collections this past year and VA?s
progress in pursuing its business plan. To assess VA?s efforts, we visited
revenue operations at four facilities 6 and one network; 7 surveyed all
facilities and networks and interviewed headquarters officials; obtained and
analyzed private sector benchmarks; 8 and reviewed relevant VA studies and
plans, including its September 2001 Revenue Cycle Improvement Plan.

In summary, this fiscal year, for the first time since fiscal year 1995, VA
has reversed the general decline in its third- party collections. However,
the fiscal year 2001 increase appears to be largely the result of VA?s
implementation of a new system, known as the reasonable charges billing
system, which allowed VA to move from a flat- rate billing system to one
that itemizes charges for the care it provides to veterans. However,
longstanding problems in VA?s revenue operations appear to persist, and when
compared to private sector standards, VA?s collections performance is poor.
For example, VA takes 14 times longer to bill, on average, than a benchmark
for private sector hospitals. Moreover, VA?s various attempts to try
consolidation using either in- house or contractor staff have provided
little basis for selecting the best alternative to address VA?s collections
problems. For example, VA initiated a pilot to test the relative
costeffectiveness of contracting out or using in- house staff, but as a
result of changes in the pilot?s design for contracting, this test is
unlikely to yield data needed to compare the two alternatives and determine
which option is best. In addition, VA?s recent 2001 Revenue Cycle
Improvement Plan does not call for a comprehensive comparison of
alternatives nor does it focus on net revenues- collections minus operations
costs. To collect the

5 VA could competitively determine whether it would be more cost- effective
to retain the work in- house or contract it out through the use of Office of
Management and Budget?s (OMB) Circular A- 76 process. In the A- 76 process,
the government identifies the work to be performed- described in the
performance work statement- and prepares an in- house cost estimate, based
on its most efficient organization, to compare with the winning offer from
the private sector.

6 For this report, facilities will only refer to VA medical centers that
have revenue operations. 7 The management of VA?s hospitals and other health
care facilities is decentralized to 22 regional networks, known as Veterans
Integrated Service Networks. 8 Based on a national quarterly survey of
private sector hospitals, the Hospital Accounts Receivable Analysis report
provides averages for various billing and collections activities

that can serve as benchmarks of performance.

Page 3 GAO- 01- 1157T

most funds for veterans? medical care at the lowest cost, VA needs to
develop a business plan and detailed implementation approach that will
provide useful data for choosing the best alternative for optimizing net
revenues from third- party payments.

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, 9 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.)

9 Medicare supplemental insurance is private insurance to cover expenses not
covered by Medicare, such as deductibles, copayments, coinsurance, and
prescription drugs. Background

Page 4 GAO- 01- 1157T

Table 1: VA?s Revenue Operations Processes Revenue operations process
Description

Patient intake Includes registration of patient information, verification of
insurance, and other medical administrative services. Medical documentation
Involves properly documenting the health care provided to patients

by physicians and other health care providers, and determining whether or
not the care is for a service- connected condition. Coding Involves
assigning correct codes for diagnoses and medical

procedures based on the documentation. Billing Involves creating and sending
bills to insurance carriers based on

insurance and coding information. Accounts receivable Includes payment
processing and follow- up with insurers on

outstanding or denied bills.

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. 10 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. 11

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

10 Medical Care Cost Recovery Cost of Collections Study, Birch and Davis
Associates, Inc. (Oct. 17, 1995). 11 VA MCCF National Study: Cost Assessment
and Best Practices, Coopers and Lybrand. Collections Have

Increased in the Past Year, but Underlying Problems Continue

Page 5 GAO- 01- 1157T

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.)

Figure 1: Third- Party Collections Since Fiscal Year 1995

Note: 2001 projection calculated by GAO based on VA Revenue Office data.

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 VA
Collections Have

Increased Since the Implementation of Reasonable Charges

0 100

200 300

400 500

600 1995 1996 1997 1998 1999 2000 2001

Page 6 GAO- 01- 1157T

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. 12

Although the implementation of the reasonable charges billing system has
increased VA?s collections over the past year, VA faces a number of
longstanding 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. 13 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

12 In fiscal year 2000, as facilities adjusted to the new requirements to
bill under reasonable charges, national collections initially decreased. 13
According to a VA official, no other reliable source exists. In addition,
unlike beneficiaries with private insurance, veterans are not responsible
for paying the remainder of their VA bills, and thus do not have the same
financial incentive to disclose insurance to VA. Long- Standing Problems in

VA?s Revenue Operations Limit VA?s Collections Performance

Page 7 GAO- 01- 1157T

staff. 14 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. 15

14 Gary Nugent et al., ?Third Party Billing in the VHA: A Look at Cost and
Policy,? Federal Practitioner (Nov. 2000). 15 The large difference between
VA?s inpatient and outpatient costs to collect resulted, in part, because VA
had to generate approximately 20 outpatient bills to produce recoveries
equivalent to 1 inpatient bill.

Page 8 GAO- 01- 1157T

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
inhouse 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
Implementing Reasonable

Charges Created New Process Challenges and Exacerbated Existing Ones

Page 9 GAO- 01- 1157T

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. Therefore,
bills were keyed in and printed, then re- keyed in by data entry staff to
allow electronic transmission to the intermediary.

Collections performance also varies widely from facility to facility. For
example, one facility takes an average of 16 days to send an inpatient bill,
while another averages 342 days. Facilities? performance in cost to collect
were similarly diverse. According to data reported to us by facilities for
the first half of fiscal year 2001, VA?s average personnel cost to collect a
dollar was 24 cents across both inpatient and outpatient bills, 16 with
facilities in the top 25 percent of performance reporting personnel costs to
collect a dollar ranging from 5 to 15 cents and facilities in the bottom 25
percent of performance reporting personnel costs to collect a dollar ranging
from 31 to 64 cents.

In addition, the data accumulated from the various facility systems are not
adequate to nationally manage performance. VA notes that the lack of
software and data standardization across facilities impairs its ability to
consistently measure performance and set performance goals. Moreover,
because VA?s accounting system does not break out third- party collections
or operations costs, net revenues (that is, gross revenue collections minus
operations costs) cannot be monitored at a national level. According to an
official at VA?s national headquarters, data on facility performance are
also unreliable because they are not verified. For example, some facilities

16 VA?s full cost to collect would be even higher if nonpersonnel and other
overhead costs (such as supplies, equipment, and senior management) were
added. For example, according to Birch and Davis? 1995 study of VA?s costs,
travel, postage, and other indirect costs accounted for about 10 percent of
total costs. Decentralized

Responsibilities Also Present Challenges

Page 10 GAO- 01- 1157T

reported high and unreasonable numbers- such as thousands of days to bill-
which the facilities could not explain. It is not clear then, whether
variations in facility performance reflect better or worse performance or
unreliable data.

The various efforts VA has undertaken to improve its revenue operations fall
short of providing a basis to select among the two major alternatives-
contracting out or using VA staff. VA?s 1999 business plan to the Congress
indicates that contracting could improve operations by incorporating the
private sector?s best billing and collection practices and efficient
automation. While some networks and facilities have contracted out portions
of their revenue operations, these efforts do not provide VA the data needed
to compare contracting with using in- house staff. Moreover, VA?s efforts
have not sufficiently considered the importance of net revenues- collections
minus operations costs- a key criterion for choosing among alternatives. VA
also initiated a pilot to test the relative cost- effectiveness of
contracting and using in house staff, but as a result of changes in the
pilot?s design, it is unlikely to yield data that allow comparisons of each
alternative?s net revenues.

At the Secretary?s initiative, VA developed its 2001 Revenue Cycle
Improvement Plan. Our preliminary assessment of the plan is that it also
will not provide VA a sufficient rationale to choose wisely among
alternatives for optimizing net revenues.

VA?s 1999 business plan indicates that once networks consolidated their
revenue operations, contracting might improve operations because competitive
bids for the contract should reflect the cost of an efficient operation. The
business plan also indicates that contract incentives and the desire to keep
the contract could encourage contractors to keep costs down and profitably
collect every billed dollar. The 1999 business plan further suggested
consolidating some network operations with a highperforming VA unit within
the network as a comparison to contracting. Both approaches could increase
standardization of processes and introduce best practices.

Some networks have consolidated some revenue operations. Networks and
facilities have also used contracting, but these contracting efforts have
primarily been small- scale and aimed at addressing immediate problems. Few
facilities have contracted out an entire process of revenue operations. (See
table 2.) Efforts to Improve

Collections Provide Little Basis to Select the Best Alternative for
Optimizing Net Revenue

Some Networks and Facilities Are Using Contracting

Page 11 GAO- 01- 1157T

Table 2: Consolidation and Contracting of Revenue Operations Processes
Network contracts

(22 networks) Facility contracts (133 reporting facilities) a Process of
revenue operations

Network consolidation (22 networks) All of

process Some of process All of

process Some of process

Patient intake b 27% (6) 0% 5% (1) 0% 17% (23) Medical documentation c NA NA
NA NA NA Coding 0% 14% (3) d 27% (6) 4% (5) d 35% (47) Billing 14% (3) 0%
32% (7) 1% (1) e 42% (56) Accounts receivable 18% (4) 0% 41% (9) 0% 69% (92)

a Six facilities, including five in one network with consolidated
operations, did not report to us. b Counted as ?all of process? if
contractors did all of the intake tasks of pre- registration, insurance
identification, and insurance verification. c Medical documentation must be
done by VA clinical staff at facilities.

d Counted as ?all of process? if contractor coded either all inpatient or
all outpatient cases. e Counted as ?all of process? if contractor billed
either all inpatient or all outpatient cases.

VA facilities and networks reported to us that most of their contracts are
viewed as temporary to meet immediate needs, such as supplementing their
staffs to reduce backlogs of claims. Revenue operations managers also voiced
a number of concerns that indicated that they would be unlikely to pursue
extensive contracting. Our survey showed that less than 1 percent of either
network or facility revenue- operations managers reported that contracting
out the majority of revenue operations would be the most effective
alternative. In addition, they noted various implementation barriers that
would have to be resolved. For example, contractors would need to be trained
about VA?s rules and regulations, an interface between VA?s and the
contractor?s computer systems would need to be developed, and union issues
that would arise around the loss of VA jobs would need to be addressed.

A recent VA- sponsored survey of eight health care revenue collection firms
and a VA- hosted vendor conference indicated that contractors have an
interest in performing most revenue processes- from intake through accounts
receivable- and they had anticipated some of the barriers facilities and
networks identified. For example, contractors identified the need to
establish an interface with VA?s data systems. Without such an interface,
the contractor might only be able to provide contract workers to use VA?s
data systems rather than to bring the full capacity of the

Page 12 GAO- 01- 1157T

contractor?s own data systems to improve operations. The contractors also
believed that if the contractor were only engaged in the latter parts of
revenue operations- billing and accounts receivable- the effect on
increasing collections would be limited because generating additional
revenue is critically affected by front- end activities such as insurance
identification, documentation, and coding.

While there were similar concerns about consolidation, it appears to have
more acceptance among VA revenue managers than extensive contracting. In our
survey, 36 percent of network respondents and 11 percent of facility
respondents indicated that network- level consolidation would be the most
effective alternative for managing third- party collections. For
consolidation, respondents cited union and morale issues regarding the
movement or loss of jobs and sharing information between facilities as
implementation challenges.

VA has initiated a pilot that was intended to test the contracting
alternative and to use the data from this test to evaluate whether
consolidation using in- house staff or contractors would improve net
revenues and other key outcomes. However, it fails to meet this key
objective. While the pilot may provide some information on whether
consolidation of some processes at a network- level could improve net
revenues and other outcomes, it will not provide useful data for choosing
between the in- house and contract options because a pilot site for
gathering similar information on contracting was not established.

According to a VA headquarters official, the networks were reluctant to
volunteer for the pilot because of concerns that if the contract did not
work out, they would have lost the expertise of the in- house employees who
had worked on revenue operations. Two networks have agreed to pilot the
consolidation using in- house staff alternative, and a third network will
pilot consolidation with limited contracting out. A fourth network has
contracted out one task of patient intake- insurance verification.

This fourth network had also planned to use another contract for coding,
billing, and accounts receivable, although retaining VA employees to process
backlogs in these same areas. This pilot could have yielded useful data for
comparing the two alternatives. However, after a number of delays and plans
to limit the contract to 3 months at a single facility, VA has not found an
acceptable contractor and even this abbreviated test of contracting out is
unlikely to occur. Pilot to Test Contracting

Out Will Not Provide Needed Data

Page 13 GAO- 01- 1157T

VA?s Revenue Cycle Improvement Plan, finalized in September 2001, does not
position the Department to choose between the two major alternatives for
optimizing its third- party collections because the plan does not call for a
comprehensive comparison of these two options nor does it focus on net
revenues- collections minus operations costs. Instead, the plan seems to
present a decision to improve in- house operations in the short term, and
later consider the alternatives.

In the short term, the plan calls for 24 actions to address problems
throughout VA?s revenue operations- such as training coders and tracking
documentation- over a 2- year period. However, the plan does not establish a
way to gather data on the alternatives because nearly all of the efforts to
improve revenue processes are to be undertaken at the facility level with VA
staff. The only planned consolidation would be establishing, for a 3- month
period this year, a single in- house group at headquarters or using a
contractor to handle accounts receivable older than 90 days.

VA also plans to implement in the near term three national contracts for
electronic services. However, these contracts will primarily supplement
facilities? billing and collection efforts rather than replace VA
operations. One nationwide contract will establish an electronic data
interchange for the electronic submission of bills to insurers to help
ensure faster turnaround of payments and reduce errors due to automated
edits during the transmission process. A second contract- a Medicare
Remittance Advice contract- will provide an explanation of what Medicare
would have paid for VA?s medical services, thereby clarifying the remaining
amount for the supplemental insurer to pay. The third contract- a lockbox
contract- will replace the current manual, paper- based process of receiving
and posting payments with an automated process.

The plan?s vision for considering both consolidating and contracting is for
the longer term. For example, the plan calls for considering the viability
of contracting out billing and accounts receivable as well as the supporting
software system after the 24 actions have been taken.

Moreover, although the September 2001 plan calls for cost- benefit analyses
for specific proposed actions with major investments, the plan is unclear as
to how VA will decide which, if any, investments it will make prior to
deciding whether it will choose the contracting alternative. For example,
the plan indicates the need to acquire a new computerized billing and
collections system- which according to a 2001 VA- sponsored study of
commercial software could be a major investment, likely from $75 million to
$125 million. However, in a discussion of future contracting, the plan
Current Improvement Plan

Focuses on Enhancing InHouse Operations, Not Net Revenues

Page 14 GAO- 01- 1157T

states that VA could avoid large capital expenditures and gain a faster
deployment if it used a contractor that provided the billing and accounts
receivable software.

Finally, the plan does not consider net revenue. Without such a
consideration, VA will not be able to measure the extent to which funds are
actually generated to supplement appropriated funds for veterans? health
care.

VA?s efforts to date have not provided it the data needed to compare program
expenditures and collections and to choose among the major alternatives of
contracting or using in- house staff for its revenue operations. Nor does VA
establish net revenue as a criterion in its recent improvement plan to
address weaknesses in facility managed operations and later consider the in-
house staffing and contractor alternatives. Without a credible business case
for increasing expenditures that result in more net revenue, VA?s budget
officials will be at odds regarding how to spend sizeable portions of VA?s
resources- on revenue operations or on medical care.

While VA has used competitive sourcing to a limited extent, it could realize
additional savings by competing, through the use of OMB?s Circular A- 76,
the costs of government providing these services in- house versus the costs
of buying them from the private- sector. Our work at the Department of
Defense shows that, by competitive sourcing under OMB Circular A- 76, costs
decline through increased efficiencies whether the government or the private
sector wins the competition to provide services. 17 This work indicates that
savings are probable for VA, but we cannot estimate potential savings from
competitive sourcing because of uncertainty regarding the availability of
interested contractors, the price of contractor services, and the extent to
which VA is able to decrease its operating costs in a competitive process.
18

17 See DOD Competitive Sourcing: Some Progress but Continuing Challenges
Remain in Meeting Program Goals ( GAO/ NSIAD- 00- 106, Aug. 8, 2000) for a
discussion of the benefits of competing various efficiency options using the
OMB Circular A- 76 process. 18 See DOD Competitive Sourcing: Savings Are
Occurring, but Actions Are Needed to Improve Accuracy of Savings Estimates
(GAO/ NSIAD- 00- 107, Aug. 8, 2000) for a

discussion of calculating savings under the OMB Circular A- 76 process.
Concluding

Observations

Page 15 GAO- 01- 1157T

A recent House Committee on Appropriations? report accompanying the fiscal
year 2002 appropriations bill includes funding for VA to create a
demonstration of a contractor- installed and operated financial system for
revenue operations. Such a demonstration might provide an opportunity to
test the contracting alternative relative to in- house alternatives. The
contractor?s financial system, which would supplement VA?s system, would be
a prototype under the demonstration. It is intended to provide functions to
overcome current deficiencies in such areas as verifying insurance,
accumulating all charges for care, ensuring proper coding, producing bills,
and managing the collections process.

VA?s current pilot has consolidated operations at some networks, and its
recent improvement plan is designed to improve in- house operations over
about a 2- year period. If VA then gathered appropriate information on net
revenues and other key outcomes for these alternatives, it would be better
positioned to make a fact- based decision among them in a manner envisioned
by OMB A- 76.

Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions you or other Members of the Subcommittee may have.

For further information, please contact Stephen P. Backhus at (202) 5127101.
Ron Guthrie, Terry Hanford, Jean Harker, Mike Gorin, and Karen Sloan also
made key contributions to this testimony.

(290016) Contact and

Acknowledgments
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