VA Health Care: Contract Labor Cost Analysis in RAND Study	 
(30-JUN-03, GAO-03-579R).					 
                                                                 
The Department of Veterans Affairs (VA) spent about $23 billion  
to provide health care to over 4 million veterans in fiscal year 
2002. To provide this care, VA relied primarily on its own	 
employees, totaling about 190,000. VA also used contract	 
employees, sometimes referred to as contract labor, to provide	 
these services. In response to the requirements of the Federal	 
Activities Inventory Reform Act of 1998 (the FAIR Act), VA	 
compiled an inventory of more than 180,000 full-time equivalent  
(FTE) positions that it determined to be "health care commercial"
in nature. This means that the work carried out in these	 
positions is also done in the private sector and could		 
potentially be done by contract labor. As part of its management 
initiatives, the Office of Management and Budget (OMB) has	 
emphasized that competition should be used to determine the most 
effective and efficient way to provide commercial services. The  
process used to make this determination--referred to as 	 
competitive sourcing--is established in OMB Circular A-76. This  
process generally provides for competition between the government
and the private sector on the basis of costs or costs and other  
factors. OMB has established competitive sourcing FTE targets for
federal agencies to achieve as part of OMB's management 	 
initiatives. In response to OMB's FTE target for VA, VA 	 
established a plan to complete studies of competitive sourcing of
55,000 positions by 2008. RAND addressed limited aspects of the  
use of VA contract labor in a report that examined another	 
subject. In that report, RAND found that increased use of	 
contract labor appeared to decrease the overall costs at VA	 
health care facilities. However, the report's finding differed	 
from the interim finding that RAND briefed Congressional staff on
earlier. In that briefing, RAND stated that contracting for labor
could result in higher, rather than lower, VA health care	 
facility costs. Because of this difference in RAND's findings and
ongoing concerns about the impact of using contract labor at VA, 
Congress asked us to (1) determine what data RAND used in its	 
contract labor analysis, (2) explain why RAND's final and interim
findings differed regarding the effect of using contract labor on
facility costs, and (3) assess whether RAND's report finding	 
provides an adequate basis for making competitive sourcing	 
decisions.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-579R					        
    ACCNO:   A07434						        
  TITLE:     VA Health Care: Contract Labor Cost Analysis in RAND     
Study								 
     DATE:   06/30/2003 
  SUBJECT:   Health care costs					 
	     Health care services				 
	     Health care cost control				 
	     Health care facilities				 
	     Competitive procurement				 
	     Comparative analysis				 

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GAO-03-579R

GAO- 03- 579R VA Contract Labor United States General Accounting Office

Washington, DC 20548

June 30, 2003 The Honorable Lane Evans Ranking Democratic Member Committee
on Veterans* Affairs House of Representatives

Subject: VA Health Care: Contract Labor Cost Analysis in RAND Study

Dear Mr. Evans: The Department of Veterans Affairs (VA) spent about $23
billion to provide health care to over 4 million veterans in fiscal year
2002. To provide this care, VA relied primarily on its own employees,
totaling about 190,000. VA also used contract employees, sometimes
referred to as contract labor, to provide these services. In response to
the requirements of the Federal Activities Inventory Reform Act of 1998
(the FAIR Act), 1 VA compiled an inventory of more than 180,000 full- time
equivalent (FTE) positions that it determined to be *health care
commercial* in nature. This means that the work carried out in these
positions is also done in the private sector and could potentially be done
by contract labor.

As part of its management initiatives, the Office of Management and Budget
(OMB) has emphasized that competition should be used to determine the most
effective and efficient way to provide commercial services. The process
used to make this determination* referred to as competitive sourcing* is
established in OMB Circular A- 76. This process generally provides for
competition between the government and the private sector on the basis of
costs or costs and other factors. OMB has established competitive sourcing
FTE targets for federal agencies to achieve as part of OMB*s management
initiatives. In response to OMB*s FTE target for VA, VA established a plan
to complete studies of competitive sourcing of 55,000 positions by 2008.

1 Pub. L. No. 105- 270, 112 Stat. 2382. The FAIR Act requires federal
agencies to submit an annual inventory to the Office of Management and
Budget of all their activities performed by federal employees that are not
inherently governmental functions, that is, they are commercial in nature.
OMB has defined a commercial activity as one that *is a recurring service
that could be performed by the private sector and is resourced, performed,
and controlled by the agency through performance by government personnel,
a contract, or a fee- for- service agreement.* OMB Circular A- 76, p. A-
3, May 29, 2003.

GAO- 03- 579R VA Contract Labor 2

RAND addressed limited aspects of the use of VA contract labor in a report
that examined another subject. 2 In that report, RAND found that increased
use of contract labor appeared to decrease the overall costs at VA health
care facilities. However, the report*s finding differed from the interim
finding that RAND briefed your staff on earlier. In that briefing, RAND
stated that contracting for labor could result in higher, rather than
lower, VA health care facility costs. Because of this difference in RAND*s
findings and your ongoing concerns about the impact of using contract
labor at VA, you asked us to (1) determine what data RAND used in its
contract labor analysis, (2) explain why RAND*s final and interim findings
differed regarding the effect of using contract labor on facility costs,
and (3) assess whether RAND*s report finding provides an adequate basis
for making competitive sourcing decisions.

To perform our work, we reviewed the RAND study; interviewed officials in
VA*s Resource Allocation and Analysis Office, which managed the RAND
contract; and interviewed authors of the RAND study. We also reviewed VA
data analyzed by RAND on contract labor costs to verify data in its report
and to determine how contract labor was defined. In addition, we relied on
our prior work on VA competitive sourcing. 3 We conducted our work from
March 2003 through June 2003 in accordance with generally accepted
government auditing standards.

Results in Brief

RAND used contract labor data provided by VA from its financial accounting
system. These data were for contract labor costs, such as for laundry and
dry cleaning, for each VA health care facility in fiscal year 2000.
According to VA officials, the costs in these accounts are predominately
for contract labor costs. However, an undetermined proportion of these
costs could also be for costs other than contract labor.

Data refinements that RAND made explain most of the difference between
RAND*s report finding and interim finding on the effect of contract labor
on VA facility costs, according to the study authors. In its report, RAND
found that increasing contract labor was associated with decreasing VA
health care facility costs. In its interim finding, RAND reported the
opposite, namely that contract labor was associated with higher, not
lower, VA health care facility costs. RAND study authors told us that the
difference between their interim finding and their report finding resulted
from certain

2 RAND, An Analysis of Potential Adjustments to the Veterans Equitable
Resource Allocation (VERA) System (Santa Monica: California, 2003). The
purpose of the study was to evaluate ways to improve the health care
allocation formula-- the Veterans Equitable Resource Allocation system--
that VA uses to allocate resources to its 21 health care networks.
Networks in turn allocate resources to their health

care facilities. In this work, RAND examined factors that were associated
with increased costs at the facility level. 3 See Related GAO Products.

GAO- 03- 579R VA Contract Labor 3

data and analytical refinements that they made during the course of their
research and data validation work after the briefing. The most important
refinement was to exclude the costs of medical resident stipends and
benefits from the contract labor analysis in the report. RAND excluded
these costs for the report because they are not funded through the VA
health care resource allocation system that RAND was examining.

RAND*s finding on contract labor does not provide an adequate basis for
making competitive sourcing decisions. First, RAND*s purpose was not to
address this issue but instead to evaluate ways to improve VA*s health
care resource allocation system, according to the RAND study authors. For
example, RAND did not examine the effect of using contract labor for each
contract service even though the association with facility costs may vary
by type of service. Second, VA contract labor data have limitations that
may affect their usefulness for analysis of the relationship between use
of contract labor and facility health care costs. One of these is that the
data may include some nonlabor costs. In addition, the small proportion of
VA labor costs that are for contract labor and the small variation across
VA in the use of contract labor limit the usefulness of these data for
examining the relationship between contract labor and facility costs,
according to the RAND study authors.

In commenting on a draft of this report VA and RAND agreed with our
findings.

Rand Used Contract Labor Data from VA*s Financial Accounting System

RAND used contract labor data provided by VA from its financial accounting
system. These data were for contract labor costs for each VA facility in
fiscal year 2000. In this system, VA has a number of budget accounts for
contracted services such as laundry and dry cleaning and professional
charges for contract hospital and outpatient treatment. (See table 1.)
RAND used these budget accounts to determine contract costs for fiscal
year 2000. According to VA officials, the costs are predominately for
contract labor costs. However, an undetermined proportion of these costs
could also be for costs other than contract labor.

GAO- 03- 579R VA Contract Labor 4

Table 1: VA Budget Accounts for Contract Labor Used by RAND Budget account
Name of account

2513 Automated Data Processing (ADP) Maintenance Support 2514 Systems
Programming 2520 Repair of Furniture and Equipment 2530 Storage of
Household Goods 2535 Interior Decorating Services 2540 Laundry and Dry
Cleaning Services 2542 Operating Services (elevator inspection, garbage
disposal, pest control) 2543 Maintenance and Repair (roads, utility
systems) 2544 ADP Equipment and Computer Maintenance Contracts 2553
Miscellaneous Contractual Services for Indigent Veterans 2560 Medical Care
Contracts and Agreements with Institutions 2561 Fee Medical and Nursing,
on station 2562 Fee Medical and Nursing, off station 2569 Emergency
Treatment of Veterans 2570 Fee Dental, off station 2571 Fee Dental, on
station 2575 Other Contract Hospitalization (non- VA, non- Sharing) 2576
Consultants and Attendings 2579 Scarce Medical Specialist Contracts 2580
Non- Medical Contracts and Agreements with Institutions 2581 Non- Medical
Contracts and Agreements with Individuals 2586 Sharing Medical Resources
2590 VA/ Department of Defense (DOD) Sharing Agreements 2598 Contract
Hospital and Outpatient Treatment (physician and professional charges)

Source: VA.

Data Refinements Explain Most of the Difference Between Rand Report and
Interim Findings Regarding the Effect of Contract Labor on Costs

Data refinements that RAND made explain most of the difference between
RAND*s report and interim findings on the effect of contract labor on VA
facility costs, according to the study authors. In its report, RAND*s
finding regarding contract labor was that an increased use of contract
labor results in lower VA health care facility costs. This finding differs
from RAND*s interim finding that contract labor was associated with
higher, not lower, VA facility costs.

RAND study authors told us that the difference between the interim
briefing and report findings resulted from certain data and analytical
refinements that RAND did after the briefing. The authors stated that the
major data refinement was to eliminate the costs of medical resident
stipends and benefits from the contract labor cost measure in RAND*s final
analysis because these costs are not funded through the VA health care
resource allocation system that RAND was examining. In fiscal year 2002,
VA expenditures for medical resident stipends and benefits were about $383
million. The RAND study authors also told us that they made additional
data edits to improve accuracy for the report and that these edits may
also have contributed to differences in RAND*s contract labor finding. The
study authors told us that a third factor also

GAO- 03- 579R VA Contract Labor 5

contributed to the difference between RAND*s interim and report finding on
contract labor. The authors stated that they analyzed contract labor*s
impact in combination with various measures of patient and health care
facility characteristics. The interim and report findings differed because
RAND used different combinations of these measures in its analysis of
contract labor.

Rand*s Report Finding on Contract Labor Does Not Provide an Adequate Basis
for Making Competitive Sourcing Decisions

RAND*s report finding on contract labor does not provide an adequate basis
for making competitive sourcing decisions for several reasons. First, the
study*s purpose was not to evaluate competitive sourcing but instead to
evaluate ways to improve VA*s health care resource allocation system,
according to the RAND study authors. 4 These authors said RAND did not
intend this finding on contract labor to be used to

determine whether contracting with the private sector is a cost- effective
alternative to using government employees. For example, RAND did not
examine each contract labor account to determine if contract labor for
that service, such as laundry and dry cleaning, resulted in higher or
lower facility costs. This is important because the effect on facility
costs of using contract labor may vary by type of service contracted. RAND
did not examine the effect of each service but instead used the total
dollar amount of all contract labor services at each facility in its
analysis.

In addition, VA contract labor data have limitations that may affect their
usefulness for analysis of the relationship between use of contract labor
and facility health care costs. One limitation is that the data may
include some nonlabor costs and VA does not know the extent to which
nonlabor costs may be included in these accounts. Another limitation is
the relatively small proportion of VA labor costs that are for
contracting, 5.2 percent, and the small variation in contract labor use
across VA. This limits the ability to examine the association of contract
labor with facility health care costs. The RAND authors told us that,
because of the relatively small amount of labor contracted in VA and the
relatively small amount of variation, VA should not make policy decisions
based solely on these data. The proportion of contract labor costs varied
by network ranging from 3.2 percent in Network 3 (Bronx) to 9.2 percent in
Network 5 (Baltimore) in fiscal year 2000. (See table 2.) In fiscal year
2000, the amount of labor contracted totaled $619 million.

4 See RAND 2003 for details on its analysis, including its examination of
contract labor.

GAO- 03- 579R VA Contract Labor 6

Table 2: VA Contract Labor Costs, Fiscal Year 2000 Network a (location)
Contract labor costs Proportion of labor costs contracted

1 (Boston) $32,632,215 5.2% 2 (Albany) 13,091,491 4.1% 3 (Bronx)
23,567,097 3.2% 4 (Pittsburgh) 35,810,445 6.0% 5 (Baltimore) 36,056,219
9.2% 6 (Durham) 22,864,024 4.1% 7 (Atlanta) 32,618,472 5.1% 8 (Bay Pines)
29,936,565 3.5% 9 (Nashville) 18,862,213 3.5% 10 (Cincinnati) 34,084,148
7.6% 11 (Ann Arbor) 19,468,111 3.9% 12 (Chicago) 32,513,913 5.0% 13
(Minneapolis) 15,824,709 4.7% 14 (Lincoln) 10,903,448 5.1% 15 (Kansas
City) 22,413,093 5.1% 16 (Jackson) 43,792,398 4.8% 17 (Dallas) 24,552,854
4.8% 18 (Phoenix) 20,737,333 4.8% 19 (Denver) 23,645,796 7.9% 20
(Portland) 29,245,793 5.8% 21 (San Francisco) 44,718,978 7.5% 22 (Long
Beach) 51,513,721 7.3%

National total $618,853,035 5.2%

Sources: VA and RAND. Note: At our request, RAND calculated the network
proportion of contract labor costs by aggregating totals from VA health
care facilities to the network level and dividing total contract labor
costs by total labor costs. By contrast, the network proportion of
contract labor costs in RAND*s report represented the average of each
facility*s cost in the network. As a result, the numbers in this table
differ somewhat from the numbers in that report. a VA had 22 health care
networks in fiscal year 2000. It combined networks 13 and 14 in fiscal
year 2002 and currently has 21

health care networks.

Agency and Other Comments

We provided a draft of this report to VA and to RAND for comment. In oral
comments, an official in VA*s Office of Congressional and Legislative
Affairs informed us that VA agreed with our findings. The RAND study
authors told us that RAND agreed with our findings and they provided
technical comments that we incorporated as appropriate.

- - - - - We are sending copies of this report to the Secretary of
Veterans Affairs and others who are interested. We will make copies
available to others upon request. In addition, the report is available at
no charge on GAO*s Web site at http:// www. gao. gov.

GAO- 03- 579R VA Contract Labor 7

If you or your staff have questions about this report, please contact me
at (202) 512- 7101 or James C. Musselwhite at (202) 512- 7259. Thomas A.
Walke and Daniel Montinez made key contributions to this report.

Sincerely yours, Cynthia A. Bascetta Director, Health Care* Veterans*

Health and Benefits Issues

GAO- 03- 579R VA Contract Labor 8 Related GAO Products

Department of Veterans Affairs: Key Management Challenges in Health and
Disability Programs. GAO- 03- 756T. Washington, D. C.: May 8, 2003.

Major Management Challenges and Program Risks: Department of Veterans
Affairs. GAO- 03- 110. Washington, D. C.: January 2003.

VA Laundry Service: Consolidations and Competitive Sourcing Could Save
Millions. GAO- 01- 61. Washington, D. C.: November 30, 2000.

Inadequate Oversight of Laundry Facility at the Department of Veterans
Affairs, Albany, New York, Medical Facility. GAO- 01- 207R. Washington, D.
C.: November 30, 2000.

VA Health Care: Expanding Food Service Initiatives Could Save Millions.
GAO- 01- 64. Washington, D. C: November 30, 2000.

(290273)

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