Veterans' Benefits: Veterans Have Mixed Views on a Lump Sum Disability
Payment Option (Letter Report, 12/18/2000, GAO/GAO-01-172).

Currently, veterans who are disabled while serving their country are
compensated for average reduction in earning capacity. Monthly
compensation is based on the severity of a veteran's disability. After
an initial rating for compensation has been determined, veterans who
believe their condition has worsened may file a claim with the
Department of Veterans' Affairs (VA) to reevaluate their disability
rating. These repeat claims outnumbered initial disability applications
by nearly three to one in fiscal year 1999, dominating VA's workload. To
help reduce the volume of repeat claims, the Veterans' Claims
Adjudication Commission asked Congress to consider paying less severely
disabled veterans compensation in a lump sum. GAO surveyed veterans who
are now being compensated on their reaction to a lump sum option.
Veterans had mixed views. Many veterans and military personnel could see
advantages and disadvantages to this new option. They also suggested
some strategies that they believed could minimize the financial risks a
lump sum payment option might introduce.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-172
     TITLE:  Veterans' Benefits: Veterans Have Mixed Views on a Lump
	     Sum Disability Payment Option
      DATE:  12/18/2000
   SUBJECT:  Claims processing
	     Veterans benefits
	     Claims settlement
	     Disability benefits
IDENTIFIER:  VA Disability Compensation Program

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GAO-01-172

Report to the Chairman, Committee on Veterans' Affairs, House of
Representatives

December 2000 VETERANS' BENEFITS

Veterans Have Mixed Views on a Lump Sum Disability Payment Option

GAO- 01- 172

Letter 3 Appendixes Appendix I: Scope and Methodology 20

Appendix II: Comments from the Department of Veterans Affairs 27 Appendix
III: GAO Contacts and Staff Acknowledgments 28

Tables Table 1: Perceived Advantages and Disadvantages of a One- Time Lump
Sum Disability Payment Identified

by Veterans and Military Personnel 12 Table 2: Stratification Levels of
Sample by Characteristic 21 Table 3: Sample Size and Response Rate 22

Figures Figure 1: Veterans' Views on Whether VA Should Offer a Choice
Between Monthly Payments and a Lump Sum Payment 8

Figure 2: Percentage of Veterans Who Probably or Definitely Would Have Been
Interested in Taking a Lump Sum When First Compensated, by Selected
Characteristics 10

Abbreviations

DOD Department of Defense VA Department of Veterans Affairs VBA Veterans
Benefits Administration

Lett er

December 18, 2000 The Honorable Bob Stump Chairman Committee on Veterans'
Affairs House of Representatives

Dear Mr. Chairman: For more than two centuries, veterans of the U. S. Armed
Forces have been compensated for disabilities sustained while serving their
country. The current program is designed to compensate veterans for average
reduction in earning capacity. Compensation is based on the severity of a
veteran's disability and paid on a monthly basis. After an initial rating
for compensation has been determined, veterans who believe their condition
has worsened may file a claim with the Department of Veterans Affairs (VA)
to reevaluate their disability rating and potentially increase their monthly
payments. In fiscal year 1999, these repeat claims outnumbered initial
disability applications by nearly three to one, dominating VA's workload.

VA's claims processing performance has caused concern for a number of years
because of growing backlogs of pending initial and repeat claims, which have
delayed disability decisions and veterans' receipt of compensation. To help
reduce the volume of repeat claims, the Veterans' Claims Adjudication
Commission, in its 1996 report, asked Congress to consider paying less
severely disabled veterans compensation in a lump sum. 1 According to the
Commission, this change could have a number of benefits for VA as well as
veterans. Specifically, the lump sum option could reduce the number of
claims submitted and allow VA to process claims more quickly- especially
those of more seriously disabled veterans. Moreover, a lump sum option could
be more useful to some veterans as they make the transition from military to
civilian life.

To learn how future veterans who become eligible for compensation might
respond to a lump sum option, you asked us to survey veterans who are
currently compensated. We are also providing information on (1) the

1 Veterans' Claims Adjudication Commission , Report to Congress( Dec. 1996).
Consideration of a lump sum payment dates back to at least the 1950s, when a
presidential commission raised the possibility. See Findings and
Recommendations of the President's Commission on Veterans' Pensions (Bradley
Commission)( Washington, D. C.: Government Printing Office,

1956).

advantages and disadvantages for veterans that veterans and military
personnel believe would be associated with a one- time lump sum payment, (2)
strategies veterans and military personnel have suggested for mitigating
perceived disadvantages, and (3) other lump sum programs that may have
relevance for VA disability compensation. For example, we reviewed the
Department of Defense's (DOD) provisions for a lump sum severance payment to
disabled military personnel.

To conduct our work, we surveyed through a mail questionnaire a
representative sample of compensated veterans and held focus groups with
selected compensated veterans and active- duty military personnel. Our
survey and focus groups captured views on a broadly defined hypothetical
program that would give veterans the option of taking a one- time lump sum
payment but would not allow them to reapply if the disability for which they
were compensated worsened. We also discussed such a lump sum option with
representatives from veteran service organizations; military service
organizations; and the Veterans Benefits Administration (VBA), which
administers VA disability compensation. In addition, we reviewed relevant
studies on lump sum payments and obtained information about lump sums in
other federal programs and six foreign countries. We did not assess the
potential effects a lump sum option might have on either the disability
claims workload or government cost. We performed our evaluation from August
1999 through November 2000 in accordance with generally accepted government
auditing standards. (See app. I for more detail on our methodology.)

Results in Brief Veterans had mixed views about a hypothetical option to
offer newly compensated veterans the choice between monthly disability
payments

and a lump sum payment. Support for offering the choice of a lump sum
payment was nearly equally split: 49 percent supported the idea, and 43
percent were against it; the remaining 8 percent were unsure. About onethird
of veterans responded that they would have been interested in a lump sum
payment had this option been available when they were first compensated- a
gauge of the level of interest new recipients may have. In addition, younger
and less severely disabled veterans- who may more closely match the overall
demographics of future recipients- were most likely to report interest in a
lump sum option, at 46 percent and 39 percent, respectively. However,
program details could substantially affect veterans' views about the lump
sum option. For example, in discussions with veterans and military
personnel, we found that uncertainty about the dollar value of the lump sum
amounts that would be available made them less

sure of whether they supported the option or would be interested in taking a
lump sum. Moreover, some were skeptical and suggested that such an option
would be designed primarily to cut the government's costs rather than to
benefit veterans.

The veterans and military personnel we spoke with perceived advantages and
disadvantages for veterans if a lump sum option were available. These
perceptions may, in part, explain the degree to which they supported or
would have been interested in such an option. The advantages they cited for
choosing a lump sum payment included having more capital to make a down
payment on a house, start a business, or invest in education. The
disadvantages primarily focused on risks to long- term financial welfare.
Veterans were particularly concerned about what would happen if the
disability for which they were compensated worsened and they were not
allowed to apply in the future for a higher disability rating and additional
compensation.

Veterans and military personnel suggested some strategies that they believed
could minimize the financial risks a lump sum payment option might
introduce. For example, to reduce the likelihood of veterans' making an
unwise choice, some thought VA should fully inform and educate veterans
about the two options- receiving the traditional monthly disability payments
or taking a lump sum- and the effects each might have on other veterans'
benefits, such as priority for health care and survivor benefits. To limit
the risk of mismanaging or prematurely exhausting a lump sum payment, some
suggested that financial counseling be made available or even required
before veterans receive the one- time payment. Some suggested that VA limit
the lump sum option to certain veterans, such as those with other income
sources or with less severe disabilities and a low risk of significant
disability progression. However, others questioned the fairness of these
suggestions. There were also concerns that some suggestions- such as fully
informing the veterans of the potential effects- may not be feasible or
effective. If a lump sum payment program were to be developed, the
advantages and disadvantages that veterans and military personnel identified
and the strategies to mitigate perceived risks could help policymakers shape
the program's design and better ensure veterans' support. In its written
comments, VA highlighted our points that veterans had mixed views about
offering a hypothetical lump sum program and that further development of
program details could affect veterans' views.

Background VA provides tax- free compensation to veterans who have
serviceconnected disabilities. 2 The payment amount is based on a disability
rating

scale that begins at 0 for the lowest severity and increases in 10- percent
increments to 100 percent for the highest severity. More than half of
initial applicants claim multiple disabilities, and veterans who believe
their disabilities have worsened can reapply for higher ratings and more
compensation. For veterans who claim more than one disability, VA rates each
claim separately and then combines them into a single rating. About two-
thirds of compensated veterans receive payments based on a rating of 30
percent or less. At the base compensation level, these payments range from
$98 per month at 10- percent disability to $288 per month at 30- percent
disability. 3 Base compensation for veterans with a 100- percent disability
rating is significantly higher-$ 2,036 per month in 2000. Disability ratings
are also used to determine eligibility for certain other VA benefits. For
example, veterans with a 30- percent disability rating are entitled to an
additional allowance for dependents, and those with higher ratings can
become eligible for free VA nursing home care and grants to adapt housing
for their needs. In addition, priority for care for VA health care is partly
tied to disability ratings. 4

VA has had long- standing difficulties in keeping up with its claims
processing workload, resulting in increasing backlogs of pending claims. 5
In fiscal year 1999, VA received approximately 468, 000 compensation claims-
about 345,000 of which were repeat claims. More than 207,000 claims were
still pending at the end of fiscal year 1999- an increase of nearly 50
percent from the end of fiscal year 1996- and the average processing time
was 205 days. Of the 207,000 pending claims, about 69,000 were initial
claims, and about 138,000 were repeat claims.

2 Although VA compensation is not paid in addition to retirement pay,
military retirees can waive an amount of their retirement pay to receive an
equal amount of VA compensation, which would be tax- free.

3 Base compensation can be supplemented with additional payments, such as
dependent allowances. 4 All veterans are eligible for free VA health care to
treat service- connected disabilities.

5 See Veterans Benefits Administration: Problems and Challenges Facing
Disability Claims Processing( GAO/ T- HEHS/ AIMD- 00- 146, May 18, 2000).

In its 1996 report, the Veterans' Claims Adjudication Commission observed
that 56 percent of veterans with pending repeat claims were rated as 30-
percent or less disabled. Questioning whether VA should expend a significant
share of its resources processing claims for veterans who are already
compensated and have relatively minor disabilities, the Commission raised
the possibility of offering lump sum payments to veterans with minimal
disabilities. Other federal agencies have established this type of payment
program. For example, under DOD's disability program, mandatory lump sum
payments are given to separating military personnel with less than 20 years
of service and a disability rating of less than 30 percent, and the
Department of Labor allows injured civilian federal employees to request
lump sum payments for bodily loss or impairment instead of the scheduled
duration of weekly payments.

Six countries- Australia, Canada, Germany, Great Britain, Israel, and Japan-
provide lump sum payments to at least some of their disabled veterans.
Britain, Canada, Israel, and Japan make these payments to veterans with
minor disabilities, while Germany supplements veterans' pensions with a lump
sum payment for those whose ability to work has been severely restricted.
For peacetime service, Australia pays lump sum compensation for noneconomic
losses from permanent impairments; it also provides a lump sum payment for a
reduced capacity to work, if the incapacity is likely to be stable and would
otherwise entitle the veteran to only a relatively small weekly pension.

Reactions to a Lump Veterans' views captured through our survey and focus
groups were based

Sum Option Are Mixed on the following features of both the lump sum and
monthly payment

options: Both types of payment- monthly and lump sum- would be tax- free.
Under both types of payment, veterans would continue to be entitled to

VA medical and other current benefits. Under the monthly payment system,
veterans could reapply for

increased payments for a worsening disability; under the lump sum system,
veterans could not reapply for additional payments for a worsening
disability for which a lump sum had been received. When the lump sum
recipient dies, the surviving family would not have

to repay any portion of the lump sum. Reactions to this hypothetical
framework yielded no clear consensus among compensated veterans about
whether a choice between monthly

payments and a lump sum should be offered to newly compensated veterans.
Among compensated veterans, 49 percent said they would definitely or
probably support a lump sum option for newly compensated veterans, 43
percent said they would definitely or probably not support it, and 8 percent
were unsure. Respondents whose views were “definite” were also
about equally split- about 24 percent definitely supported offering a
choice, and about 28 percent definitely opposed it (see fig. 1).

Figure 1: Veterans' Views on Whether VA Should Offer a Choice Between
Monthly Payments and a Lump Sum Payment

Percentage

30

28

25

25 24

20 15

15

10

8

5 0

Definitely Yes Probably Yes Unsure Probably No Definitely No Source: GAO
survey.

Veterans' responses indicate that experience could influence interest in
taking a lump sum payment. Among all veterans, 32 percent reported they
would have been interested in taking a lump sum payment when first

compensated had such an option been available. 6 Half as many- 16 percent-
reported that, knowing what they know today, it would have been a good
choice for them. This ratio was borne out among supporters of offering a
lump sum choice- 56 percent indicated they would have been interested in a
lump sum payment, and 28 percent said it would have been a good choice for
them.

Age and severity of disability also seemed to influence the degree of
interest in taking a lump sum payment. For example, among veterans aged 43
or younger, 46 percent reported they definitely or probably would have been
interested in taking a lump sum payment, compared to 21 percent of veterans
aged 61 or older. 7 Similarly, among veterans whose current disability
rating is 10 percent or less, 39 percent reported definite or probable
interest in a lump sum, compared to 22 percent with disability ratings of 40
percent or more (see fig. 2). Younger, more recently rated, and less
severely disabled veterans- groups that expressed greater interest- could be
a better gauge of newly compensated veterans' interest in taking a lump sum
payment because they may be more similar to potential recipients than are
other veterans. Thus, if future newly compensated veterans are offered a
lump sum option, the actual percentage of those interested in it could
exceed the 32 percent found among current veterans.

6 Thirteen percent reported definite interest, and 19 percent reported
probable interest. 7 The age breaks at 43 years and 61 years were proxies
for period of service. The age break at 43 years was used to roughly
identify veterans whose service began after the Vietnam era, and the age
break at 61 was to roughly identify veterans who first served prior to that
era.

Figure 2: Percentage of Veterans Who Probably or Definitely Would Have Been
Interested in Taking a Lump Sum When First Compensated, by Selected
Characteristics

Percentage

50

46 41

40

39 39 32

33

30

24 22 21

20 10

0 43 or

44 to 60 61 or 1990- 99

1970- 89 Before

0- 10% 20- 30% 40 or Younger

Older 1970

More %

Age Year of First Disability Rating Current Disability Rating

Percentage of All Compensated Veterans Across All Characteristics

Source: GAO survey.

Although our results indicate some receptivity to a lump sum option,
interest and support would likely depend on the specific design of the
payment program. For example, among military retirees with 20 years of
service- whose compensation is now a tax- free portion of their retirement
pay- interest in a lump sum payment increased from 29 percent to 66 percent
after they learned in the survey that the lump sum might be offered in
addition to their full retirement pay. 8

Veterans and military personnel in our focus groups expressed considerable
interest in knowing additional details about the proposed lump sum option-
particularly about the lump sum payment amount. Others asked for
clarifications about the program, such as whether there could be
circumstances under which lump sum recipients could reapply for additional
compensation. In reacting to the option, some indicated that they had made
assumptions about the amount. Others felt they could not give an informed
opinion or make a decision without more information- or the “fine
print,” as one individual put it. Some were skeptical and suggested
that the lump sum option was a way for the government to cut VA benefits and
reduce its obligations to those whose disabilities may get worse.

Veterans and Military Through our focus group sessions and discussions with
veteran and

Personnel Perceive military organizations, we found that veterans and
military personnel

perceive advantages and disadvantages of offering a lump sum option.
Flexibility as a Key

However, information on the actual effects of lump sum payments on Advantage
and

veterans' financial well- being is limited. While some studies have examined
Financial Risk as a

how recipients use lump sum payments, they do not address how likely lump
sum recipients are to be financially advantaged or disadvantaged as a

Major Disadvantage result of receiving a lump sum payment rather than
monthly payments.

Advantages and Veterans and military personnel identified several advantages
and

Disadvantages Identified by disadvantages associated with a lump sum payment
option (see table 1).

Veterans and Military These advantages and disadvantages generally weigh the
benefit of

Personnel financial flexibility against the risk of financial loss.

8 If the lump sum is provided in addition to full retirement pay, the
government would have to make an additional contribution to replace the VA
offset amount to the military retirement trust fund because DOD would be
responsible for the full retirement amount.

Table 1: Perceived Advantages and Disadvantages of a One- Time Lump Sum
Disability Payment Identified by Veterans and Military Personnel

Perceived advantages Perceived disadvantages

Offers more financial flexibility and Enables veterans to make bad
investments or

opportunities than monthly payments. mismanage the lump sum and become

financially worse off. Reduces the need for future dealings with VA or the
government.

Could result in veterans' becoming eligible for other federal or state
income support if the Allows a terminally ill veteran to leave

one- time payment was mismanaged or poorly some money to his or her family
or to

invested, burdening other veterans and other enjoy his or her final days.

taxpayers. Provides additional income to military

Is a less dependable income source than retirees if the lump sum does not
require

monthly payments, which increase with retirement pay to be offset.

inflation, number of dependents, and increased severity of disability.

Inadequately protects veterans whose disabilities worsen, since they would
not be eligible for future benefits that are tied to higher disability
ratings.

Could be inaccurate, unfair, or inadequate compensation.

Source: GAO focus groups.

Veterans and military personnel who said the lump sum payment would put
recipients at risk of being less well off or unable to pay for basic
necessities such as food and housing provided several reasons to support
their perception. Some reported that most lump sum recipients- particularly
younger veterans and those already in financial need- would not have
adequate money management skills. For example, some said that recipients may
squander the one- time payment before reaching old age. They also said that
more lump sum recipients would spend rather than invest the money, and those
who did invest would be at risk of making poor investments. These veterans
and military personnel also expressed concern that the lump sum amounts
would be inadequate to protect recipients from financial setbacks that could
result from a progressive disability and the inability to reapply for a
higher disability rating. Some were similarly concerned that the initial
rating could be inaccurate or unfairly low or that the average life span on
which the lump sum was calculated would be insufficient to support
recipients who outlived this average. Finally, veterans and military
personnel said that choice creates risk because information may be
incomplete or biased, individual judgment

may be poor, or both. Some said a lump sum option would actually lead to
more poor judgments because people would find a large sum of money so
immediately attractive that they would not adequately consider the longterm
financial consequences of taking it.

On the other hand, others said that there would be benefits to a lump sum
payment option. For example, some said lump sums could be used to make
investments or large purchases, such as a house or an education; settle
debts; or start a business. In addition, veterans and military personnel
said that the benefit of providing a choice outweighed any risks. This high
value placed on choice seems to underlie much of the option's support, since
our survey indicated that, among veterans who supported the lump sum option,
28 percent thought in hindsight that a lump sum would have been the better
choice for them. As one veteran said, “I don't believe that the lump
sum option is a good idea, but it's America and veterans should have a
choice.” Another supporter of choice argued that, while a lump sum
payment invested in stocks could be substantially reduced if the market
falls, monthly payments could be routinely squandered. It was also pointed
out that while a veteran who opted for a lump sum could outlive the average
age used to calculate the payment, a veteran who chose monthly payments
could die relatively young and therefore receive less total compensation.
Moreover, focus group participants also said that veterans who were fully
informed about their options, would have to take responsibility for the
consequences of their choice.

Information Limited on the Little definitive information is available to
validate perceptions about the

Financial Effects of Lump potential financial effects on veterans taking a
lump sum payment. Our

Sum Payments review of the literature and inquiries about lump sum
provisions for

disabled veterans in several countries yielded very few studies on veterans
receiving lump sum payments, and none addressing the long- term financial
effects of such payments. We did find two qualitative accounts, provided to
us by British and Australian officials, which told of financial difficulties
among foreign disabled veterans who received lump sum compensation before
World War II. In 1939, the British Ministry of Pensions stopped allowing
veterans to convert their disability pensions into lump sum payments because
it found that some recipients had sustained serious financial losses,
particularly through business ventures. Allowing conversions of pensions to
a lump sum has never been reinstated under the British War Pensions Scheme,
but lump sums are paid for lower- rated disabilities. In Australia, a lump
sum provision was discontinued when some impoverished World War I veterans
returned for pension benefits

after exhausting their lump sum payments. While Australia's act covering
service during armed conflicts still does not provide for lump sum
disability compensation, a separate act directs lump sum compensation for
certain disabilities incurred during peacetime service, on essentially the
same basis as for other government employees.

Although not addressing long- term financial effects or disabled veterans,
certain studies examine recipients' use of lump sum payments from other
sources, indicating different ways recipients would typically manage a lump
sum. 9 In general, studies of retirement distributions suggest that many
factors affect how individuals use lump sum payments. For example, one
recent study of lump sum retirement distributions reported that recipients
under age 25 spent almost half of their money on everyday expenses and
consumer items, compared to older age groups who spent 22 percent or less.
10 Another study reported that the recipient's age, education and income
level, and the payment amount are influential factors, but together these
factors explain less than 20 percent of the variation in saving behavior
among lump sum recipients. 11 However, findings from these studies depend on
the definitions of savings, investment, and spending used, and may have less
relevance for different populations and lump sum programs.

Potential Strategies Some veterans and active duty personnel we spoke with
suggested certain

Veterans and Military strategies- some of which have been used in other lump
sum payment

programs- to minimize the potential risks associated with receiving a
onetime Personnel Believe

payment. However, others had concerns about whether they would be Could
Lessen Risks

effective, feasible, or fair. 9 See, for example, Michael Landsberger,
“Windfall Income and Consumption: Comment,” and Ronald Bodkin,
“Windfall Income and Consumption: Reply,” The American Economic
Review, Vol. 56( June 1966), pp. 534- 45. Observing wide variation in
average tendencies to

spend lump sum payments found between World War Veterans receiving insurance
dividends and Israeli recipients of German restitution payments, the authors
debate which factors would best explain the differences.

10 Leonard E. Burman, Norma B. Coe, and William G. Gale, What Happens When
You Show Them the Money?( Washington, D. C.: The Urban Institute, Nov.
1999). 11 James Poterba, Steven Venti, and David Wise, “Lump- Sum
Distributions from Retirement Saving Plans: Receipt and Utilization,”
Inquiries into the Economics of Aging( Chicago: University of Chicago Press,
1998), pp. 101- 2.

To help ensure that beneficiaries make a wise choice, some veterans and
military personnel suggested that VA develop an information and education
plan- one that would fully inform beneficiaries of the benefits and risks of
the two payment types and project for individual beneficiaries the likely
effects of each. They further suggested that such information and education
be provided well before the time the choice would be made to allow
beneficiaries sufficient time to consider their options. To ensure unbiased
information, it was also suggested that independent counseling on the
payment choices be encouraged, as well as a second medical opinion on the
disability. However, some expressed concern about VA's ability to develop an
effective information and education strategy. This skepticism was based on
their perceptions that the government's past efforts to inform and educate
veterans about benefits were inadequate and a lump sum decision would
involve complex assessments of future disability, individual financial
situations, and investment risks.

Veterans and military personnel also suggested strategies that they believe
would limit the risk of forgone compensation or other benefits if a
veteran's disability were to progress. For example, one strategy would be to
delay veterans' choice of a lump sum until they are comfortable with the
stability of their condition. Others said that the progression- or
stability- of an individual's disability could not be predicted accurately
enough to allow fully informed choice. According to VA and medical experts
in disability evaluation, definitive medical knowledge is often insufficient
to fully inform veterans of whether their disabling condition would progress
or remain the same. 12 The course of disability is highly individualized and
can be complicated by multiple impairments. The limited historical data from
our survey suggest that while some veterans get higher ratings over time for
worsening disabilities, others get lower ratings for improved disabilities.
13 For example, among veterans who received their first ratings

12 Some disability programs have provisions for determining some
disabilities as unlikely to change based on current medical knowledge. For
instance, the DOD program allows for service members to be removed from the
Temporary Disability Retired List if the preponderance of medical evidence
indicates that the severity of the condition will probably not change within
the next 5 years to the point of requiring a higher or lower disability
rating.

13 These data are limited measures of the risks in either direction because
they do not (1) establish whether this group is historically typical, (2)
include deceased persons who were first rated during the same period, or (3)
consider rating changes between initial and current ratings.

before 1970, about 21 percent reported higher current ratings than initial
ratings, and almost 17 percent had lower current ratings.

Another strategy veterans and military personnel suggested would be to
estimate veterans' lifetime disabilities and use these estimates in
calculating their lump sum payments. The VA Inspector General has similarly
proposed that VA revise its disability rating criteria to reflect expected
lifetime impairment. 14 While projecting the progression of an individual's
disability over his or her lifetime would prove difficult, determining
average progression factors using VA historical data may be possible.
Another suggested strategy would be to allow reevaluations of lump sum
recipients' disability ratings- not for the purpose of providing additional
payment but to determine their eligibility, and that of their dependents,
for other VA benefits that are tied to disability ratings, such as medical
care or survivor benefits. 15 Some participants suggested, however, that
disabled veterans should also be able to seek reevaluation for additional
compensation payments if their disability progresses. 16

Other strategies for reducing the financial risk associated with a lump sum
payment were aimed at encouraging responsible financial management. For
example, focus group respondents recommended financial counseling and
education; investment options, such as in the federal government's Thrift
Savings Plan; or payment allocations, such as paying lump sums in allotments
or initially putting the money into a trustee account. It was also suggested
that returns on investments could be tax- free. However, concerns were also
raised about these strategies, including perceptions that the government
would not be able to successfully instruct people on how to manage their
money and that these strategies would increase government bureaucracy.

14 Office of Inspector General, Department of Veterans Affairs, Report of
Audit: Timeliness of Benefits Claims Processing Can Be Improved( Mar. 25,
1994). 15 VA partially pays for dependent and survivor medical care if a
veteran is rated 100 percent disabled or dies at this rating, and it
provides survivor payments if the veteran had a certain duration of being
rated at 100 percent.

16 We found such a feature in Canada's compensatory payment system. After
receiving a mandatory lump sum compensation for minor service- connected
disabilities, Canadian veterans become eligible for monthly payments if
their disability worsens.

Some of the suggested strategies were aimed at protecting vulnerable
populations from financial risk. Specifically, some suggested that a lump
sum payment option not be offered to those who would be least able to manage
the money well- such as those who have been declared incompetent or have a
history of significant psychological disabilities- or that the lump sum
payment be assigned to someone who could manage the money for the payee. 17
One concern that was raised with this type of strategy was that there would
not be enough time to declare a newly compensated veteran incompetent or in
need of a representative before the veteran was offered a choice.

A similar strategy suggested by veterans and military personnel was to limit
the lump sum option to the least financially vulnerable- that is, veterans
who would not be likely to suffer great economic hardship if they were to
lose the lump sum payment. These veterans would include those who would
receive small monthly compensation payments, have stable or less severe
disabilities, or have alternative income sources. 18 However, respondents
raised concerns that any safeguard restricting who would be offered the lump
sum option could be viewed as unfair.

Agency Comments In its written comments, VA highlighted our points that
veterans had mixed views about offering this hypothetical lump sum program
and that further

development of program details could affect veterans' views. (The full text
of VA's comments is presented in app. II.)

We are sending copies of this report to the Honorable Hershel W. Gober,
Acting Secretary of Veterans Affairs, appropriate congressional committees,
and other interested parties. We will also make copies available to others
upon request.

17 VA currently has a fiduciary program to ensure that incompetent
beneficiaries and their estates are protected from fraud, waste, and abuse.
Also, according to the Social Security Administration, it assigns a
representative to about 25 percent of Supplemental Security Income
disability beneficiaries.

18 According to a British official, recent consideration has been given to
splitting disability compensation into a lump sum and pension. This
arrangement would give veterans an income source even if they completely
spend the lump sum.

If you or your staff have any questions concerning this report, please
contact me at (202) 512- 7101 or one of the GAO contacts listed in appendix
III. Other key contributors to this report are also listed in this appendix.

Sincerely yours, Cynthia Bascetta Director, Health Care- Veterans' Health

and Benefits Issues

Appendi Appendi xes xI

Scope and Methodology To gain an understanding of support for and interest
in lump sum disability payments as a potential option for veterans, we
surveyed and met with a variety of interested parties, including veterans
currently receiving VA disability payments, active- duty service members,
and military and veteran service organizations. For our survey, we mailed a
questionnaire asking for views about a possible lump sum option to a
representative sample of 2,481 veterans who currently receive disability
compensation and reside at a domestic address. During pretests of the survey
questionnaire with over 30 veterans, we discussed the perceived advantages
and disadvantages of a lump sum option and what might be done to mitigate
the disadvantages. We also discussed reactions to the option in focus groups
of veterans and active- duty service members in the Air Force, Army,
Marines, and Navy. To determine what is known about the impact on recipients
of receiving a lump sum, we reviewed relevant literature on lump sum
payments and communicated with representatives from other federal agencies
and foreign countries that provide some form of lump sum payment to civilian
and military beneficiaries.

We performed our evaluation from August 1999 through November 2000 in
accordance with generally accepted government auditing standards.

Survey Methodology The objective of our survey was to learn about views
veterans with serviceconnected disabilities have about lump sum payments as
a compensation

option. To elicit their views, we asked veterans to react to a hypothetical
program- offering newly compensated veterans a choice between monthly
payments and a lump sum payment- with the following features: (1) Monthly
payments and the lump sum payment would both be tax- free. (2) Regardless of
the type of payment chosen, veterans would continue to be entitled to VA
medical and other current benefits. (3) Under the monthly payment system,
veterans could reapply for increased payments for a worsening disability,
but under the lump sum system, veterans could not reapply for additional
payments for a worsening disability for which a lump sum had been received.
(4) When the lump sum recipient dies, the surviving family would not have to
repay any portion of the lump sum.

The survey questions asked veterans whether VA should offer veterans a
choice between monthly payments and a lump sum when they are first granted
compensation and whether they would have been personally interested in a
lump sum had it been available at that time. They were also asked, with the
advantage of hindsight, which option would have been better for them. We
pretested questions in group and individual discussions

with veterans in Denver and Littleton, Colorado; Baltimore, Maryland;
Washington, D. C.; and Fairfax and Fredricksburg, Virginia. These sites were
chosen because of their proximity to our staff.

Sampling Strategy A sample of 2, 484 veterans was drawn from VA's
Compensation and Pension file as of October 23, 1999. Our population of
interest was veterans currently receiving compensation for a service-
connected disability who resided at domestic addresses. 1 To minimize the
probability of sending the questionnaire to veterans unable or incompetent
to participate in the survey, we excluded veterans from the population with
two or more psychological disabilities or a single psychological disability
rated 60 percent or more, those whose records indicated incompetence, and
those residing in nursing homes. After these exclusions, and also excluding
those with nondomestic addresses, our sampled population covered about 94
percent of all compensated veterans in VA's file.

In addition to determining the level of support among compensated veterans
for a lump sum option, we also wanted to learn from our survey something
about what the interest in a lump sum might be if such a choice were
offered. We wanted to be able to estimate the level of interest for specific
categories of veterans. Therefore, we oversampled various groups to ensure
that we could construct these estimates of interest within an acceptable
margin of error. The population was stratified by the characteristics in
table 2.

Table 2: Stratification Levels of Sample by Characteristic Characteristic
Stratification levels

Disability rating 0 to 10 percent, 20 to 30 percent, 40 percent or more Age
43 or younger, 44 to 60, 61 or older Military retirement Retiree or not
Recently compensated Those since Nov. 6, 1998, and those before Nov. 6, 1998

1 In addition to U. S. addresses, domestic addresses include those for U. S.
overseas military mail and those in Wake Island, Puerto Rico, Virgin
Islands, Guam, and Samoa.

Before surveying, we checked our sample file against VA records 2 to
identify veterans who had been terminated from the compensation rolls
subsequent to our sample draw. We also visually inspected the addresses and
dropped from the sample three veterans whose mailing address indicated that
they should have been excluded- that is, the address suggested the
likelihood that the veteran was incapable of responding. A total of 2, 481
questionnaires were mailed for our survey.

Survey Response Our survey response rate is based on the proportion of
questionnaires that were returned with usable information. We mailed our
questionnaire in January 2000. A second mailing to nonrespondents occurred
approximately a month later. We accepted returned questionnaires through
April 26, 2000. Of the sample, 1,921 usable questionnaires were returned,
for an overall response rate of 78 percent. For 16 of the sampled veterans,
we received notification that the veteran had died or was ineligible for the
survey. These cases were removed from the sample. Table 3 details the final
disposition of the questionnaires mailed.

Table 3: Sample Size and Response Rate Sample Number

Total questionnaires initially mailed 2,481 Deceased 7 Ineligible recipients
a 9 Adjusted sample size 2, 465

Postal nondeliverables 45 Refusals 19 Questionnaires not returned 480 Total
usable questionnaires returned 1, 921 Final response rate 78% a Veterans
were designated ineligible if we received information that they were
institutionalized, incapacitated, or no longer receiving compensation.

2 The sample file was checked against the December 21, 1999, version of VA's
Compensation and Pension file, the most current version at that time.

Response rates were above 65 percent for each stratification level in the
sample. To produce our estimates of responses in the population from which
we sampled, we weighted each respondent's answers based on our
stratification scheme.

Sampling Errors All sample surveys are subject to sampling error, that is,
the extent to which the survey results differ from what would have been
obtained if the whole population had received and returned the
questionnaire. Measures of sampling error are defined by two elements, the
width of the confidence interval around the estimate (sometimes called
precision of the estimate) and the confidence level at which the interval is
computed. The confidence interval refers to the fact that estimates actually
encompass a range of possible values, not just a single point. This interval
is often expressed as a point, plus or minus some value (the precision
level). For example, an estimate of 75 percent plus or minus 2 percentage
points means that the true population value is estimated to lie between 73
percent and 77 percent, at some specified level of confidence.

The confidence level of the estimate is a measure of the certainty that the
true value lies within the range of the confidence interval. We calculated
the sampling error for each statistical estimate in this report at the 95-
percent confidence level. This means, for example, that if we repeatedly
sampled veterans from the same population and performed the analyses again,
95 percent of the samples would yield values that fall within the confidence
intervals of our estimates. Sampling errors in this report range from 1 to 7
(plus or minus) percentage points, with most being less than 5 percentage
points.

Nonsampling Errors In addition to sampling errors, surveys can also be
subject to other types of nonsystematic (noise) or systematic (bias) error
that can affect results, such as differences in interpretation of the
question or respondents' inability or unwillingness to provide correct
information. Unlike sampling errors, the magnitude of the effect of
nonsampling errors is not normally known; however, steps can be taken to
minimize their impact.

One potential source of nonsampling error that may be especially important
in this survey is questionnaire construction. Our early pretests revealed
that compensation benefits can be an emotion- laden subject for veterans.
Some veterans had strong, unanticipated reactions to language used to phrase
the question about offering a choice of payments. To ensure

that the question was as clear and unbiased as possible, we did extensive
pretesting of the questionnaire, making modifications based on veterans'
comments. We also consulted with an outside expert in questionnaire design,
who reviewed our survey instrument and provided recommendations.

In addition, veterans found it difficult to respond to questions about a
lump sum choice without details about what that choice might entail,
especially the amount of the lump sum payment. It may be that given a more
detailed and specific lump sum option, a larger or smaller proportion of
veterans would support VA's offering veterans a choice. The magnitude of the
effect of these potential biases, if any, on survey results is unknown.

Focus Groups To more fully understand why surveyed veterans supported or
opposed a lump sum option, we conducted focus groups with veterans receiving

disability compensation at VA Medical Centers in Cheyenne, Wyoming, and
Grand Junction, Colorado. To gauge the opinions of people who could be
affected by such a change in policy, we also conducted focus groups with
active- duty military members in all four services. We spoke with members of
the Air Force at Buckley Air National Guard Base, Colorado; Army at Fort
Carson, Colorado; Marine Corps at Quantico, Virginia; and Navy at Norfolk,
Virginia. Since compensated veterans in our survey pretests had also
discussed their reasons for support or opposition, we considered their input
in our analysis.

The sites for veterans' focus groups were in smaller cities, in part because
we had already gathered reactions of veterans in some large metropolitan
areas during our pretests. Regardless, findings from focus groups and
pretest respondents cannot be generalized to larger populations.

Experiences of Other To obtain information on the experiences of other
government agencies

Agencies and Foreign offering lump sum payments to the disabled, we
contacted officials

administering the Department of Labor's Federal Employees Countries

Compensation, State Employment Compensation, Black Lung, and Longshore and
Harbor Worker's programs. We also obtained information from the Social
Security Administration about its Disability Insurance program and from DOD
about its disability separation and retirement benefits.

To capture the experiences of foreign governments with this type of payment,
we reviewed the compensation programs for disabled veterans in Australia,
Canada, Israel, Germany, Great Britain, and Japan. We selected these
countries because they were the focus of lump sum discussions in the 1999
Report of the Congressional Commission on Servicemembers and Veterans
Transition Assistance. We contacted officials from these countries directly
or through the Department of State. Both Germany and Japan provided
information about their programs in their native languages. We used
translators from the Department of State to translate their responses into
English.

Comments from the Department of Veterans

Appendi xII Affairs

Appendi xI II

GAO Contacts and Staff Acknowledgments GAO Contacts Shelia Drake, (202) 512-
7172 Terry Hanford, (303) 572- 7379 Staff

In addition to those named above, the following staff made key
Acknowledgments

contributions to this report: Sandra Davis, Linda Diggs, Deborah Edwards,
Susan Lawes, Karen Sloan, Vanessa Taylor, Joan Vogel, and Greg Whitney.

(105776) Lett er

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Appendix I

Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix II

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Appendix III

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