VA Health Care: Resource Allocations to Medical Centers in the	 
Mid South Healthcare Network (21-APR-04, GAO-04-444).		 
                                                                 
Since fiscal year 1997, the Department of Veterans Affairs (VA)  
has relied primarily on its 21 health care networks to allocate  
resources to its medical centers. VA headquarters also directly  
allocates some resources to the medical centers. In addition,	 
medical centers collect resources from third-party insurance	 
payments and other sources. VA provides general guidance to\	 
networks for resource allocation to medical centers, but permits 
variation in networks' allocation methodologies. Representatives 
from veterans groups and others have expressed concerns regarding
resource allocations to medical centers in Network 9 (Nashville) 
known as the Mid South Healthcare Network. GAO was asked to	 
report for fiscal year 2002 (1) the amount of resources medical  
centers in the network received and the source of those resources
and (2) the basis on which medical centers in the network	 
received these resources. GAO was also asked to supplement	 
findings for fiscal year 2002 with information for fiscal years  
1997 through 2003.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-444 					        
    ACCNO:   A09825						        
  TITLE:     VA Health Care: Resource Allocations to Medical Centers  
in the Mid South Healthcare Network				 
     DATE:   04/21/2004 
  SUBJECT:   Data collection					 
	     Health care facilities				 
	     Health care planning				 
	     Health care programs				 
	     Health care services				 
	     Health centers					 
	     Health resources utilization			 
	     Medical economic analysis				 
	     Strategic planning 				 
	     Veterans						 
	     Veterans benefits					 
	     Allocation (Government accounting) 		 
	     VA Veterans Equitable Resource			 
	     Allocation System					 
                                                                 

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GAO-04-444

United States General Accounting Office

GAO

                       Report to Congressional Requesters

April 2004

VA HEALTH CARE

  Resource Allocations to Medical Centers in the Mid South Healthcare Network

GAO-04-444

Highlights of GAO-04-444, a report to congressional requesters

Since fiscal year 1997, the Department of Veterans Affairs (VA) has relied
primarily on its 21 health care networks to allocate resources to its
medical centers. VA headquarters also directly allocates some resources to
the medical centers. In addition, medical centers collect resources from
third-party insurance payments and other sources.

VA provides general guidance to networks for resource allocation to
medical centers, but permits variation in networks' allocation
methodologies. Representatives from veterans groups and others have
expressed concerns regarding resource allocations to medical centers in
Network 9 (Nashville) known as the Mid South Healthcare Network.

GAO was asked to report for fiscal year 2002 (1) the amount of resources
medical centers in the network received and the source of those resources
and (2) the basis on which medical centers in the network received these
resources. GAO was also asked to supplement findings for fiscal year 2002
with information for fiscal years 1997 through 2003.

www.gao.gov/cgi-bin/getrpt?GAO-04-444.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Cynthia A. Bascetta at (202)
512-7101.

April 2004

VA HEALTH CARE

Resource Allocations to Medical Centers in the Mid South Healthcare Network

The six medical centers in Network 9 (Nashville), known as the Mid South
Healthcare Network, received a total of about $1 billion in resources in
fiscal year 2002. The network allocated 83 percent of the total, or $825
million, to its medical centers. The medical centers received smaller
amounts from VA headquarters (9 percent of the total or about $93 million)
and resources from collections (7 percent of the total or about $73
million). As in fiscal year 2002, the network allocated more than 80
percent of medical center resources each year from fiscal years 1997
through fiscal year 2003.

Medical centers in Network 9 (Nashville) received about 77 percent of
their resources, or $760 million, in fiscal year 2002 based on
fixed-per-patient amounts, referred to as fixed-capitation amounts, for
patient workload and case mix. Patient workload is the number of patients
treated, and case mix is a classification of patients into categories
based on health care needs and related costs. The largest portion of these
resources allocated on this basis came from the network while a smaller
portion came from VA headquarters. Medical centers in the network received
about 23 percent of their total resources, or $232 million, in fiscal year
2002 based on a variety of other factors such as network managers'
determination of the financial needs of medical centers during the course
of the year. These resources came from the network, VA headquarters, and
collections. Since VA changed its resource allocation system in fiscal
year 1997, the medical centers in the network received about the same
portions of their resources based on fixedcapitation amounts and on a
variety of other factors each year from fiscal years 1997 through 2003.

VA agreed with GAO's findings.

Percentage, Amounts, and Basis of Approximately $1 Billion In Resources
Received by Medical Centers in Network 9 (Nashville), Fiscal Year 2002

Contents

  Letter

Results in Brief
Background
Medical Centers in Network 9 (Nashville) Received About

$1 Billion in Fiscal Year 2002 from the Network and Other Sources

Medical Centers in Network 9 (Nashville) Received Most of Their Resources
Based on Allocations Using Fixed-Capitation Amounts for Patient Workload
and Case Mix

Expenditures Made by the Network 9 (Nashville) Office Increased by
Approximately $22 Million Since Fiscal Year 1997 Agency Comments

                                       1

                                      3 5

                                       7

                                       9

                                     18 21

Appendix I Objectives, Scope, and Methodology

Appendix II 	Staffing Resources Available at the Tennessee Valley
Healthcare System's Nashville and Murfreesboro Locations

Appendix III 	Network 9 (Nashville) Office Staff and Their
Responsibilities, Fiscal Years 1997 through 2002

        Appendix IV Comments from the Department of Veterans Affairs 35

Appendix V GAO Contact and Staff Acknowledgments 36

GAO Contact 36 Acknowledgments 36

Related GAO Products

37

Tables

Table 1: Network 9 (Nashville) Medical Centers, Patients, and Staff,
Fiscal Year 2002

Table 2: Resources Provided to Network 9 (Nashville) Medical Centers in
Fiscal Year 2002, by Source

Table 3: Allocations to Medical Centers from the Network 9 (Nashville)
Reserve Fund, Fiscal Year 2002

Table 4: Expenditures Made by the Network 9 (Nashville) Office, Fiscal
Year 2002

Table 5: Number of Network 9 (Nashville) Office Staff Positions, Fiscal
Years 1997 through 2002

Table 6: Largest Administrative and Medical Center Support Staff Decreases
at Nashville and Murfreesboro, Fiscal Year 2000 to Fiscal Year 2002

Table 7: Largest Changes in Patient Care Staff at Nashville and
Murfreesboro Locations, Fiscal Year 2000 to Fiscal Year 2002

Table 8: Tennessee Valley Healthcare System's Patients and Patient Care
Staff, Fiscal Year 2000 and Fiscal Year 2002

Table 9: Other Staff Located at Murfreesboro, Fiscal Year 2002

Table 10: Position Titles and Responsibilities for Network 9 (Nashville)
Office Positions, Fiscal Years 1997 through 2002 5

8 16 19 20

28

30

30 31

33

Figures

Figure 1: Percentage and Amounts of Approximately $1 Billion in Resources
Medical Centers Received Based on Fixed-Capitation Amounts for Patient
Workload and Case Mix, Fiscal Year 2002

Figure 2: Percentage and Amounts of Approximately $1 Billion in Resources
Medical Centers Received Based on a Variety of Factors Other Than
Fixed-Capitation Amounts for Patient Workload and Case Mix, Fiscal Year
2002

Figure 3: Number of Staff at Nashville and Murfreesboro Locations, Fiscal
Year 2000 and Fiscal Year 2002

Figure 4: Number of Administrative and Medical Center Support Staff at
Nashville and Murfreesboro Locations, Fiscal Year 2000 and Fiscal Year
2002

                                       10

                                     15 27

                                       28

Figure 5: Number of Patient Care Staff at Nashville and Murfreesboro
Locations, Fiscal Year 2000 and Fiscal Year 2002

Abbreviations

CMOP Consolidated Mail Outpatient Pharmacy
DOD Department of Defense
DRG diagnostic related group
DSS Decision Support System
ELC Executive Leadership Council
FTEE full time equivalent employees
MCAC Mid South Customer Accounts Center
PTSD post-traumatic stress disorder
TVHS Tennessee Valley Healthcare System
VA Department of Veterans Affairs
VERA Veterans Equitable Resource Allocation
VHA Veterans Health Administration

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.

United States General Accounting Office Washington, DC 20548

April 21, 2004

The Honorable Bart Gordon House of Representatives The Honorable Jim
Cooper House of Representatives

The Department of Veterans Affairs (VA) has changed the way it allocates
resources to its medical centers1 in recent years. Since fiscal year 1997,
VA has moved from a centralized allocation system-in which VA headquarters
allocated resources directly to VA medical centers-to a more decentralized
system in which VA headquarters allocates most of its resources to VA's 21
health care networks. The networks then allocate these resources to their
respective medical centers. VA headquarters also directly allocates some
additional resources to the medical centers. In addition, medical centers
collect resources from third-party insurance payments and other sources.
While implementing this new resource allocation process, VA increased the
number of patients it treated from 3.1 million to 4.7 million from fiscal
years 1997 through 2002 and received annual appropriations for medical
care programs that increased from $17 billion to $21 billion.

We and others have examined how VA uses the Veterans Equitable Resource
Allocation (VERA) system to allocate resources to the networks.2 VERA is a
national, formula-driven approach that VA uses to allocate most of its
resources to networks based primarily on two factors that experts
generally recognize as key principles of health care resource
allocation-patient workload and case mix. Patient workload is the number
of veterans treated. Case mix is a classification of patients into

1Medical centers typically include one or more hospitals as well as other
types of health care facilities such as outpatient clinics and nursing
homes.

2U.S. General Accounting Office, VA Health Care: Allocation Changes Would
Better Align Resources with Workload, GAO-02-338 (Washington, D.C.: Feb.
28, 2002); U.S. General Accounting Office, VA Health Care: More Veterans
Are Being Served, but Better Oversight Is Needed, GAO/HEHS-98-226
(Washington, D.C.: Aug. 28, 1998); U.S. General Accounting Office, VA
Health Care: Resource Allocation Has Improved, but Better Oversight Is
Needed, GAO/HEHS-97-178 (Washington, D.C.: Sept. 17, 1997); RAND, An
Analysis of Potential Adjustments to the Veterans Equitable Resource
Allocation (VERA) System

(Santa Monica, California: 2003); and Price Waterhouse LLP and The Lewin
Group, Inc., Veterans Equitable Resource Allocation Assessment-Final
Report, Mar. 27, 1998.

categories based on their health care needs and related costs. Using
workload and case-mix data, VERA allocates a fixed amount of resources for
each veteran in a case-mix category. These amounts are often referred to
as capitation. By contrast, VA does not require that networks use a
formula-driven approach, like VERA, to allocate resources to medical
centers. Instead, VA provides general guidance to networks for allocating
resources to medical centers that permits variation in the network
allocation methodologies to take into account varying local conditions.

Representatives from veterans groups and others in Network 9 (Nashville),
also known as the Mid South Healthcare Network, have expressed concerns
about the allocation of resources to the medical centers in Network 9
(Nashville). These concerns have focused on the total amount of resources
allocated to the network's largest medical center, the Tennessee Valley
Healthcare System (TVHS), which is located in Nashville and Murfreesboro;
the basis on which medical centers in the network receive their resources;
and to what extent network office expenditures have increased in recent
years.

You asked us to determine for fiscal year 2002 (1) the amount of resources
medical centers in the network received and the source of those resources,
(2) the basis on which medical centers in the network received these
resources, and (3) the extent to which network office expenditures were
greater than in fiscal year 1997 and the primary reasons accounting for
any increase. To place this information in context, you asked us to
supplement our findings for fiscal year 2002, the most recent year for
which complete data were available at the time of our analysis, with
information for fiscal years 1997 through 2003.

To determine the amount of resources medical centers in the network
received and the sources of those resources in fiscal year 2002, we
categorized information in VA and Network 9 (Nashville) financial reports
on resources available to medical centers by the source of those
resources: Network 9 (Nashville), VA headquarters, and collections.
Because resources for the TVHS medical center and the Network 9
(Nashville) office are combined in the same financial accounts, we used
financial reports maintained by TVHS to separate out financial information
for the TVHS medical center. We developed estimates on similar information
for fiscal years 1997 through 2001 and 2003 based on these and other data.
To determine the basis on which medical centers in the network received
resources in fiscal year 2002, we obtained and analyzed documents that
described the allocation methodology used by the network and VA
headquarters. We relied on VA data, interviews with VA officials,

and on our prior work to calculate the extent of allocations based on
fixed-capitation amounts for patient workload and case mix. We developed
estimates on similar information for fiscal years 1997 through 2001 and
2003 based on these and other data. We limited our review to how resources
were allocated to medical centers and did not analyze how medical centers
in the network spent their allocations to deliver health care. To examine
the extent to which network office expenditures were greater than in
fiscal year 1997, we used financial reports maintained by TVHS to separate
out financial information for the network office from the TVHS medical
center resources and other data we obtained from the network office. We
used these data to analyze changes in network staffing and other network
office functions from fiscal years 1997 through 2002. We also interviewed
network and VA headquarters officials about the roles and responsibilities
of network office staff. To better understand the issues of concern for
all three objectives, we conducted a site visit to interview officials at
the network office located in Nashville and at the TVHS locations in
Nashville and Murfreesboro. In doing our work, we tested the reliability
of the data and determined they were adequate for our purposes. For a
complete description of our scope and methodology, see appendix I. We
conducted our work from March 2003 through April 2004 in accordance with
generally accepted government auditing standards.

The six medical centers in Network 9 (Nashville) received a total of about
$1 billion in resources in fiscal year 2002. These resources came from
three sources: the network, VA headquarters, and resources collected by
the medical centers. The network allocated the largest amount 83
percent of the total or $825 millionto its medical centers. VA
headquarters allocated the next largest amount-9 percent of the total or
approximately $93 milliondirectly to medical centers in Network 9
(Nashville). In addition to these allocations, the medical centers
collected other resources-7 percent of the total or about $73 million-from
thirdparty insurance payments, copayments, and reimbursements for services
provided to non-VA health care providers. The combined resources from the
network, VA headquarters, and resources from collections for each medical
center ranged from about $93 million for the Huntington medical center to
about $291 million for TVHS. Medical centers in the network have relied on
the network to provide most of their resources since VA changed its
resource allocation system in fiscal year 1997. From fiscal year 1997
through fiscal year 2003, Network 9 (Nashville) allocated more than 80
percent of medical center resources each year.

Results in Brief

Medical centers in Network 9 (Nashville) received about 77 percent of
their resources, or $760 million, in fiscal year 2002 based on
fixedcapitation amounts for patient workload and case mix. The network
allocated a large portion of these resources, about $742 million, to its
medical centers on this basis. To allocate these resources, the network
classified its patient workload into three categories based on case mix,
which resulted in medical centers receiving higher fixed-capitation
amounts for patients with greater health care needs. VA headquarters also
allocated about $19 million in resources directly to medical centers based
on fixed-capitation amounts for patient workload and case mix. In addition
to these resources, medical centers received about 23 percent of their
resources, or $232 million, based on a variety of factors other than
fixed-capitation amounts for patient workload and case mix. Of these $232
million in resources, $84 million came from Network 9 (Nashville), $75
million came from VA headquarters, and $73 million came from collections.
For example, the network allocated about $33 million from its network
reserve fund for unexpected contingencies based on network managers'
determination of the financial needs of medical centers during the course
of the year. Since VA changed its resource allocation system in fiscal
year 1997, medical centers in Network 9 (Nashville) received about
three-quarters of their resources based on fixed-capitation amounts and
about one-quarter based on a variety of other factors each year from
fiscal years 1997 through 2003.

Expenditures made by the network office increased from about $1 million to
about $23 million from fiscal years 1997 through 2002, driven largely by
spending for the consolidation of information technology and for staffing
expenditures. Network office expenditures for information technology
increased, in part, because the network assumed the costs of contracts the
medical centers had previously paid for software licenses and information
technology services. These expenditures represented $9.6 million or
approximately 41 percent of total network office expenditures in fiscal
year 2002. Expenditures for network office staff increased primarily
because the network consolidated positions formerly located at the medical
centers to a central location and added positions to handle an increased
volume of insurance collections. The network consolidated its collections
operations at Murfreesboro, Tennessee to increase the efficiency of
collection operations. In addition to collections staff positions, the
network increased the number of other network staff to improve network
operations. Total network office staff expenditures accounted for $8
million of the network office's total expenditures in fiscal year 2002-$5
million for collections staff and $3 million for other network office
staff.

Background

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

Network 9 (Nashville) is composed of a network office in Nashville,
Tennessee; six medical centers located in three states; and 27
communitybased outpatient clinics. In fiscal year 2002, about 1 million
veterans lived in the area served by the network. In that year, the six
medical centers in the network treated about 208,000 patients or 20
percent of the veterans who lived in the area served by the network. (See
table 1.) The largest medical center in the network is TVHS, which has two
main locations- one in Nashville and the other in Murfreesboro, Tennessee.
TVHS served more than twice as many patients and had more than three times
the number of employees as the smallest medical center in the network in
fiscal year 2002. For more detailed information on staff resources at
TVHS's two locations, which were integrated to form TVHS in fiscal year
2001, see appendix II.

Table 1: Network 9 (Nashville) Medical Centers, Patients, and Staff,
Fiscal Year 2002

                                                                        Staff
                                             Inpatients Outpatient (full-time
                         Medical center Patientsa treatedb visitsb employees)

            Tennessee Valley Healthcare                                
                   System (TVHS), Tenn.    61,120    9,490   463,578    2,321 
                         Memphis, Tenn.    35,440    7,559   294,373    1,723 
                        Louisville, Ky.    31,281    4,800   317,863    1,121 
                   Mountain Home, Tenn.    28,187    5,401   247,170    1,288 
                         Lexington, Ky.    26,963    5,391   267,327    1,245 
                     Huntington, W. Va.    25,378    3,570   252,887   
                                  Total  208,369    36,211   1,843,198  8,395 

Source: VA.

aThe number of patients using health care services as counted by unique or
unduplicated social security numbers. Each patient is counted one time,
regardless of how many visits each patient makes.

bThe number of inpatients treated and the number of outpatient visits are
not based on unique or unduplicated social security numbers.

Network 9 (Nashville) has received increased allocations each year under
VERA to provide resources for medical centers to treat their growing
patient workload. From fiscal year 1997 to fiscal year 2002, the number of
patients medical centers in the network treated increased by 27 percent.
To meet patient health care needs, the network received $700 million in
resources from VERA in fiscal year 1997, and by fiscal year 2002 the

network's allocations from VERA had risen to $849 million-a 21 percent
increase. The network has been responsible for developing a method to
allocate these VERA resources to its medical centers. VA headquarters
provides general guidance to networks on the principles they should use
when developing their allocation methodologies, but does not require that
networks use patient workload or case mix in their allocation
methodologies.3

Using fixed-capitation amounts for patient workload and case mix are
guiding principles recognized by experts on the design of health care
payment systems and implemented in practice by major health care programs
such as Medicare and Medicaid.4 Medicare and Medicaid, for example, use
fixed-capitation amounts to provide managed care plans with an incentive
to operate efficiently by placing them at risk if their expenses exceed
the payment amount. Our report on VERA in February 2002 also concluded
that VERA provides a reasonable approach to resource allocation, in part
because VERA allocates resources to the networks based primarily on the
use of fixed-capitation amounts for patient workload and case mix.5 VERA
provides fixed-capitation amounts for each case-mix category that are the
same for each network and are intended to reflect VA's average costs
instead of historical local costs.

In addition to resources that VA allocates to its medical centers from the
network and headquarters, medical centers also collect other resources

3VA policy provides the following 10 guiding principles to which networks
shall adhere when developing network allocation methodologies: 1) be
readily understandable and result in predictable allocations, 2) support
high quality healthcare delivery in the most appropriate setting, 3)
support integrated patient-centered operations, 4) provide incentives to
ensure continued delivery of appropriate special care, 5) support the goal
of improving access to care, 6) provide adequate support for the
department's research and education missions, 7) be consistent with
eligibility requirements and priorities, 8) be consistent with the
network's strategic plans and initiatives, 9) promote managerial
flexibility and innovation, and 10) encourage increases in alternative
revenue collections. Veterans Health Administration (VHA), Department of
Veterans Affairs, Network Resource Allocation Principles, VHA Directive
97-054 (Washington, D.C.: Oct. 30, 1997).

4For a discussion of health care programs that use fixed-capitation
amounts for patient workload and case mix, see John Holahan and Shinobu
Suzuki, "Medicaid Managed Care Payment Methods and Capitation Rates in
2001," Health Affairs, vol. 22, no.1 (2003); Medicare Payment Advisory
Commission, Report to the Congress: Medicare Payment Policy (Washington,
D.C.: 2003); and Nigel Rice and Peter C. Smith, "Capitation and Risk
Adjustment in Health Care Financing: An International Progress Report,"
The Milbank Quarterly, vol. 79, no.1 (2001).

5GAO-02-338.

Medical Centers in Network 9 (Nashville) Received About $1 Billion in
Fiscal Year 2002 from the Network and Other Sources

that they use in providing health care to veterans. VA medical centers
collect third-party insurance payments and copayments from veterans.6 VA
collects insurance payments for treatment of veterans' conditions that are
not a result of injuries or illnesses incurred or aggravated during
military service. In addition, some veterans are charged copayments for
certain health care services and prescription drugs obtained at a VA
pharmacy. VA medical centers also collect resources for a variety of
services VA provides to non-VA health care providers such as hospital
laundry services and outpatient care provided to Department of Defense
active duty military personnel.

The six medical centers in Network 9 (Nashville) received about $1 billion
in fiscal year 2002 from three sources: the network, VA headquarters, and
resources from collections. (See table 2.) The network allocated the
largest share of this total-83 percent or about $825 million of the total
resources received by the six medical centers. VA headquarters allocated
directly to the medical centers the next largest share, which was about 9
percent or $93 million of the total resources the network's medical
centers received. Finally, the six medical centers also collected about 7
percent of the total resources medical centers received or $73 million in
resources from collections of third-party insurance payments, veteran
copayments, and reimbursements primarily for services provided to non-VA
healthcare providers.

6See 38 U.S.C. S:S: 1710(f), (g), 1722A, 1729.

Table 2: Resources Provided to Network 9 (Nashville) Medical Centers in
Fiscal Year 2002, by Source

                           Dollar amounts in millions

                                                                    Resources 
                                          Resources                      from 
                                        provided by     Resources collections 
                                            network   provided by VA (percent 
                                                                           of 
                                        (percent of        headquarters total 
                                      total medical (percent of total medical 
                                       Total center     medical center center 
                Medical center resources resources)     resources) resources) 
              Tennessee Valley                      
             Healthcare System                      
                 (TVHS), Tenn.       $291 $240 (82)          $33 (11) $18 (6) 
                Memphis, Tenn.         185 156 (84)             17 (9) 12 (6) 
               Louisville, Ky.         143 117 (82)            11 (8) 14 (10) 
                Lexington, Ky.         141 116 (82)            15 (11) 10 (7) 
          Mountain Home, Tenn.         139 119 (86)              8 (6) 12 (8) 
            Huntington, W. Va.           93 78 (83)               8 (9) 7 (8) 
           All medical centers       $992 $825 (83)           $93 (9) $73 (7) 

Source: GAO analysis of VA data.

Notes: Includes about $15.6 million from the fiscal year 2001 VERA
allocation that the network allocated to the medical centers in fiscal
year 2002. Dollar amounts and percents may not add due to rounding.

The amount of resources that the network, VA headquarters, and resources
from collections provided, in total, to each medical center in fiscal year
2002 ranged from about $93 million for Huntington to about $291 million
for TVHS. The network provided the largest portion of each medical
center's total resources in fiscal year 2002. Network allocations as a
percentage of total medical center resources ranged from 82 percent at
TVHS and two other medical centers to 86 percent at Mountain Home. TVHS
and Lexington received the highest percentage of resources directly from
VA headquarters (11 percent), and TVHS and Memphis received the lowest
percentage of resources from collections (6 percent).

The percentage of resources that medical centers in the network received
in fiscal year 2002 from the three sources varied because of several
factors. For instance, TVHS received a lower percentage of its resources
from the network than three other medical centers, in part, because it
received a larger percentage of its resources from VA headquarters than
most medical centers in the network. The larger allocation from VA
headquarters was used, in part, for the TVHS transplant program, the only

one of its kind in the network. Louisville also received a lower
percentage of its resources from the network than three other medical
centers, in part, because the medical center received a higher percentage
of its total resources from collections than any other network medical
center. This resulted from agreements the medical center had-and resources
it collected-for the delivery of outpatient and family practice care to
active duty military personnel and their dependents at Ft. Knox, Kentucky.

Medical centers in the network have relied on the network to provide most
of their resources since VA changed its resource allocation system in
fiscal year 1997. From fiscal year 1997 through fiscal year 2003, Network
9 (Nashville) allocated more than 80 percent of medical center resources
each year. We estimate that on average the network provided 87 percent of
the resources medical centers received during this period.

Medical centers in Network 9 (Nashville) received most of their resources
in fiscal year 2002 based on allocations using fixed-capitation amounts
for patient workload and case mix. A large portion of the resources
allocated on the basis of fixed-capitation amounts for patient workload
and case mix came from the network and a smaller portion came from VA
headquarters. The other resources that medical centers received in fiscal
year 2002 were based on a variety of other factors such as network
managers' determination of the financial needs of medical centers during
the course of the year. These resources came from the network, VA
headquarters, and collections. Since VA changed its resource allocation
system in fiscal year 1997, medical centers in Network 9 (Nashville)
received about three-quarters of their resources based on fixed-capitation
amounts and about one-quarter based on other factors each year from fiscal
years 1997 through 2003.

Medical Centers in Network 9 (Nashville) Received Most of Their Resources
Based on Allocations Using Fixed-Capitation Amounts for Patient Workload
and Case Mix

Medical Centers Received About Three-Quarters of Their Resources from
Allocations Based on Fixed-Capitation Amounts for Patient Workload and
Case Mix

Medical centers received about 77 percent of their approximately $1
billion in total resources in fiscal year 2002-or $760 million-based on
allocations using fixed-capitation amounts for patient workload and case

mix. (See fig. 1.) The $760 million allocated on the basis of
fixed-capitation amounts for patient workload and case mix came primarily
from the network. The network allocated $742 million to medical centers on
this basis. VA headquarters allocated the remainder of the resources based
on fixed-capitation amounts for patient workload and case mix- $19
million-directly to medical centers in Network 9 (Nashville). The portion
of medical center resources based on fixed-capitation amounts for patient
workload and case mix was similar in other years. For each of

fiscal years 1997 through 2003, we estimated that medical centers received
about three-quarters of their resources based on fixed-capitation amounts
for patient workload and case mix.

Figure 1: Percentage and Amounts of Approximately $1 Billion in Resources
Medical Centers Received Based on Fixed-Capitation Amounts for Patient
Workload and Case Mix, Fiscal Year 2002

Source: GAO analysis of VA data.

Note: Dollar amounts do not add due to rounding.

The network allocated the largest portion of medical centers' resources-
$742 million-based on fixed-capitation amounts for patient workload and
case mix in fiscal year 2002. To calculate its patient workload, the
network, like VERA, used two methods. The network calculated the number of
patients who received a relatively limited amount of health care during a
previous 3-year period, and calculated the number of patients who received
relatively more care during a previous 5-year period. In its workload
calculation for this 3-year period, the network's resource allocation
methodology, like VERA, excluded a group of veterans, known

Network 9 (Nashville) Allocated Largest Portion of Resources Based on
Fixed-Capitation Amounts for Patient Workload and Case Mix in Fiscal Year
2002

as Priority 7 veterans,7 but included them in its 5-year workload
calculation.8 The network made an exception in the way it calculated
3-year workload for a one-time $5 million allocation, its share of a
supplemental appropriation VA received in fiscal year 2002. For this
allocation the network included all Priority 7 veterans in its workload
calculation.

To calculate case mix in fiscal year 2002, the network classified patient
workload into different categories, depending upon estimates of the
patients' health care needs and associated costs for treating them. The
network, like VERA, used three case-mix categories: basic non-vested,
basic vested, and complex.9 Basic non-vested and basic-vested categories
included patients who have relatively routine health care needs and are
principally cared for in an outpatient setting. Basic non-vested patients
receive only part of their care through VA and are less costly to VA than
basic-vested patients. Basic-vested patients, by contrast, rely primarily
on VA for meeting their health care needs. Patients in the basic
non-vested and basic-vested category represented about 97 percent of the
network's patient workload in that year. The complex category included
patients who generally required significant high-cost inpatient care as an
integral part of their rehabilitation or functional maintenance, and
represented about 3 percent of the network's workload in that year. For
patients in each case-mix category, the network paid medical centers a
capitation rate, which is based on the average cost of care in VA for a
patient in that category. The capitation rates that the network used for
each of these categories were the same as those used in VERA: basic
non-vested ($197), basic vested ($3,121), and complex ($41,667). The
network also allocated

7Priority 7 veterans are veterans with relatively higher incomes compared
to other veterans and most have no service-connected disabilities. VA
classifies veterans according to their eligibility for enrollment for
health benefits, with Priority 1 veterans having the highest priority for
enrollment and prior to fiscal year 2003, Priority 7 veterans having the
lowest priority for enrollment. At the beginning of fiscal year 2003, an
additional category, Priority 8, was established which includes mostly
veterans with no service-connected disabilities whose incomes exceed a
certain regional threshold. Many of the veterans formerly classified as
Priority 7 veterans are now classified as Priority 8. See 38 U.S.C. S:
1705(a)(8).

8VA did not include Priority 7 veterans in VERA's 3-year workload
allocations, in part, because VA's expectation was that collections from
copayments and third-party insurance reimbursements would cover the
majority of the costs of patients who received a relatively limited amount
of health care.

9The basic non-vested and basic-vested workload calculations are based on
a 3-year time period and the complex workload calculations are based on a
5-year period.

about $9 million to medical centers based on other patient case-mix
categories.10

Medical centers in Network 9 (Nashville) with larger patient workloads
generally received more resources than medical centers with smaller
patient workloads. In fiscal year 2002, for example, TVHS had the largest
patient workload and received the most resources. However, if two medical
centers had similar patient workloads but the two had differences in the
case mix of their patients, one may have received more resources than the
other. For example, Mountain Home and Huntington medical centers had
almost identical patient workloads in fiscal year 2002, but Mountain Home
received a larger allocation from the network ($119 million) than
Huntington ($78 million), in part, because of an important difference in
their respective patients' case mix. Mountain Home had more patients whose
health care needs required more expensive care as indicated by the number
of complex care patients. In that year, Mountain Home had almost 1,200
complex patients compared to 400 complex patients in Huntington.

VA headquarters allocated the remainder of resources that medical centers
received based on fixed-capitation amounts for patient workload and case
mix in fiscal year 2002, which was about $19 million. The largest resource
allocation VA headquarters made to medical centers in Network 9
(Nashville) on this basis-$13 million-was to pay a portion of the costs
for veterans receiving care in state veterans' nursing homes, which are
operated in several locations in Network 9 (Nashville), including
Murfreesboro, Tennessee and Hazard, Kentucky.11 VA paid the same amount
for veterans receiving this service, about $53 per day per veteran,
without adjusting for differences in veterans' health care needs. The
second largest resource allocation VA headquarters made to medical centers
in Network 9 (Nashville) based on fixed-capitation amounts for patient
workload and case mix in fiscal year 2002 was about $5 million for its
transplant program.12 VA headquarters allocated these resources based

VA Headquarters Allocated a Small Portion of Resources Based on
Fixed-Capitation Amounts for Patient Workload and Case Mix in Fiscal Year
2002

10The network allocated these resources to medical centers for part of
their equipment allocations.

11State veterans' nursing homes provide nursing home care to veterans in
state-owned and operated veterans' nursing homes, for which VA pays a
portion of daily costs. Other state veterans' homes in the Network 9
(Nashville) area are located in Humboldt, Tennessee; Wilmore, Kentucky;
and Oxford, Mississippi.

12VA headquarters allocated about $6 million directly to TVHS for
transplants based on other factors.

Network 9 (Nashville) Changed Its Patient Workload and Case-Mix Measures
During the Fiscal Year 1997-2003 Period

on the number of patients needing transplants and the type of transplant
needed: kidney, liver, heart, and bone marrow transplants. The capitation
amounts for transplants ranged from $50,000 to $138,000 in fiscal year
2002. TVHS received all the VA headquarters transplant resource allocation
in Network 9 (Nashville) because it is the only medical center in the
network performing transplants. VA also allocated about $1 million to
medical centers through a per diem rate per veteran to support housing
programs for homeless veterans operated by nonprofit community-based
organizations.

Network 9 (Nashville) changed how it determined patient workload in fiscal
year 2003 to allocate resources to its medical centers. For that year, the
network calculated patient workload based on a 1-year period-or the total
number of patients who used network medical centers in fiscal year 2002.
In addition, the network included all veterans, including Priority 7 and 8
veterans, in its patient workload. According to a network official, the
network made these changes in determining patient workload to better
account for the costs involved in treating its patients. By contrast, in
fiscal years 1997 through 2002, the network determined workload based on
the same measures that VERA used by calculating the number of patients who
received a relatively limited amount of health care during a previous
3-year period, and calculating the number of patients who received
relatively more care during a previous 5-year period. And like VERA, the
network also generally excluded Priority 7 veterans from its 3-year
workload calculation but included them in its 5-year calculation from
fiscal years 1997 through 2002.

Network 9 (Nashville) also changed the way it calculated its case mix for
allocating resources to medical centers several times during this period.
In fiscal years 1997 and 1998, the network used the same 2 case-mix
categories that VERA used-basic and special.13 In fiscal year 1999, the
network did not use the 3 case-mix categories that VERA converted to in
that year but instead used the 44 classes that VA used to construct VERA's
3 case-mix categories. In fiscal years 2000 through 2002, the network used
the 3 case-mix categories that VERA used: basic non-vested, basic vested,
and complex care. In fiscal year 2003, the network made a significant
change by increasing the number of case-mix categories from 3 used in
fiscal year 2002 to 644 case-mix categories. The fiscal year 2003 case-mix

13VERA's special case-mix category in fiscal years 1997 and 1998 was
renamed as complex in fiscal year 1999.

approach classified the health care needs of hospital inpatients into the
511 diagnostic related groups (DRGs) used by Medicare to pay hospitals for
inpatient care.14 For outpatient care, the approach used 121 different
categories to classify the type of visit and account for the amount of
resources the visit consumed. Additionally, the network used 12 different
categories to measure the intensity of care in long-term care settings.
According to a network official, these changes were made to better account
for medical centers' cost for treating patients.

The Network 9 (Nashville) decision to use more case-mix categories in
fiscal year 2003 is consistent with a recommendation we made to VA in
February 2002 to improve VERA's allocation of comparable resources for
comparable workloads among networks.15 In that report, we recommended that
VA adopt more case-mix categories to better account for differences in
patient health care needs and that VA make other improvements. We also
pointed out that the literature and experts we consulted suggested that a
large increase in the number of case-mix categories-such as the increase
in the number of Network 9 (Nashville) case-mix categories from 3 to 644
in fiscal year 2003-has advantages and disadvantages. Specifically, using
more case-mix categories can increase the accuracy of health care resource
allocations whether at the network or medical center level, but may also
provide more opportunities to classify patients inappropriately to receive
the highest capitation amounts.

Medical Centers Received About One-Quarter of Their Resources Based on a
Variety of Other Factors

Medical centers in Network 9 (Nashville) received about 23 percent of
their total resources, or $232 million, in fiscal year 2002 based on a
variety of factors other than fixed-capitation amounts for patient
workload and case mix. (See fig. 2.) These resources came from three
sources: Network 9 (Nashville), VA headquarters, and collections in the
amounts of $84 million, $75 million, and $73 million, respectively.

14DRGs are designed to group patients with similar clinical problems that
are expected to require similar amounts of hospital resources. Each DRG
has a national relative weight that reflects the expected relative
costliness of inpatient treatment for a patient in that group compared
with that for the average Medicare patient. Groups expected to require
aboveaverage resources have higher weights and those that require fewer
resources have lower ones.

15In response to our recommendation, VA increased the number of VERA
case-mix categories in fiscal year 2003 from 3 to 10 in an effort to
capture more accurately the health care needs and associated costs of its
patients. See GAO-02-338.

Network 9 (Nashville) Allocated a Portion of Resources Based on a Variety
of Other Factors in Fiscal Year 2002

Figure 2: Percentage and Amounts of Approximately $1 Billion in Resources
Medical Centers Received Based on a Variety of Factors Other Than
Fixed-Capitation Amounts for Patient Workload and Case Mix, Fiscal Year
2002

Source: GAO analysis of VA data.

In fiscal year 2002, Network 9 (Nashville) used a variety of factors to
allocate $84 million to its medical centers. Using these factors, the
network allocated $36 million for education and research support, $33
million for the network reserves, $14 million for equipment and
nonrecurring maintenance, and $1 million for other purposes.

To allocate $36 million in resources for education and research support,
Network 9 (Nashville) used two methods. For education, the network
allocated $22 million in resources to medical centers based on the number
of residents at each medical center in the current academic year, the same
approach that VERA used that year. For research support, the network
allocated $14 million in resources to medical centers based primarily on
the amount of funded research in fiscal year 2000, like VERA.

To allocate the network's reserve fund, network management allocated about
$33 million in fiscal year 2002 based on the financial needs of medical
centers. The network reserve fund was intended to provide resources for
unexpected contingencies and cover unmet expenses that

medical centers have during the course of a year. VA headquarters requires
that all networks have such a fund, which is similar in concept to VERA's
reserve fund.16 Network officials told us while they encourage efficient
operations, some medical centers have higher costs in certain areas and if
these medical centers are unable to lower their costs, the network
allocates funds from the reserve to help medical centers cover unmet
expenses during the year. In fiscal year 2002, the network allocated
reserve funds to medical centers for these purposes and distributed about
half of the reserve fund to the Lexington medical center because of its
higher than average costs in pharmacy, radiology, and laboratory expenses.
Table 3 shows how the network distributed the network reserve to its six
medical centers in fiscal year 2002.

Table 3: Allocations to Medical Centers from the Network 9 (Nashville)
Reserve Fund, Fiscal Year 2002

                                                           Percent of network 
                        Medical center Amount distributed reserve distributed 
                        Lexington, Ky.        $15,595,390                46.9 
           Tennessee Valley Healthcare                    
                  System (TVHS), Tenn.         $7,097,166                21.4 
                  Mountain Home, Tenn.         $5,834,036                17.6 
                       Louisville, Ky.         $4,403,466                13.2 
                        Memphis, Tenn.           $222,870                 0.7 
                    Huntington, W. Va.            $87,738                 0.3 
                                 Total        $33,240,666                 100 

Source: GAO analysis of VA data.

Note: According to Network 9 (Nashville) officials, the network does not
necessarily allocate its entire reserve fund to medical centers each year,
sometimes carrying over some resources into the next year. The amount
carried over each year varies. For example, the network carried over about
$5 million from its fiscal year 2002 reserve fund into fiscal year 2003.

16VERA uses its national reserve fund to cover network requests for
additional allocations over and above the networks' other VERA allocations
and other sources of revenue. Allocations from the reserve fund provide
protection to patients from the risk that a health care network would not
be able to provide services because its expenditures exceeded available
financial resources.

VA Headquarters Allocated a Portion of the Resources Medical Centers
Received Based on a Variety of Other Factors in Fiscal Year 2002

To allocate resources for equipment and nonrecurring maintenance, the
network allocated about $14 million17 for that purpose in fiscal year 2002
based on priorities established by the chief engineers from each medical
center and the network's Executive Leadership Council (ELC).18 These
groups prioritized a list of projects submitted by each medical center and
the network allocated resources for projects according to these
priorities. VERA, by contrast, allocated its equipment and nonrecurring
maintenance resources to all networks that year based primarily on
fixed-capitation amounts for patient workload.

Two other factors accounted for a small portion of resources medical
centers received or approximately $1 million. The network used other
factors to control the amount of change in a medical center's total
network allocation from the prior year and for differences in local costs.
In fiscal year 2002, the network capped net change in medical centers'
resources allocated by the network to a maximum of an 8 percent increase
or decrease from fiscal year 2001 resource allocations. The caps were
designed to prevent year-to-year fluctuations beyond management's ability
to prudently manage services. In addition, the network adjusted the
amounts allocated to some medical centers relative to others to account
for local price differences. These differences resulted primarily from
variations in federal employee pay rates at the various medical centers in
the network.

VA headquarters directly allocated $75 million to medical centers for
special programs such as prosthetics, stipends for medical residents and
other trainees, and other programs based on a variety of other factors. In
fiscal year 2002, VA allocated $34 million for prosthetics directly to
medical centers based largely on medical centers' historical expenditures
for prosthetics, including items such as hearing aids, wheelchairs, and
artificial limbs. VA headquarters also allocated $25 million that year to
medical centers in the network to fund stipends for medical residents and
other trainees based on the type and number of medical residents at each
medical center. VA headquarters allocated about $16 million for other
programs, including readjustment counseling, substance abuse, and
posttraumatic stress disorder (PTSD) based on a variety of other factors.

17In addition, the network allocated about $9 million for equipment using
patient workload and case mix.

18The ELC included all medical center directors and network leadership.

Medical Centers Also Received a Portion of Their Resources from
Collections in Fiscal Year 2002

Expenditures Made by the Network 9 (Nashville) Office Increased by
Approximately $22 Million Since Fiscal Year 1997

Medical centers in Network 9 (Nashville) collected $73 million in
resources from third-party insurance payments, copayments, and
reimbursements for services provided to non-VA health care providers in
fiscal year 2002. Medical centers in the network collected about $67
million of this amount from third-party insurance and copayments paid by
veterans. Medical centers in the network also collected about $6 million
in resources through reimbursements from the provision of health care
services to non-VA entities such as private hospitals, the Department of
Defense (DOD), and DOD's civilian health care contractors in fiscal year
2002. Each medical center retained the resources it collected and had the
flexibility to use these resources for any health care purpose. The
amounts collected varied depending upon the priority status of veterans
treated, whether their treatment was required for a serviceconnected
condition, whether the veteran had health insurance, and other factors.

Expenditures made by the network office increased from $1 million in
fiscal year 1997 to $23 million in fiscal year 2002. The two primary
reasons for the $22 million increase were the consolidation of information
technology and staffing expenditures. Information technology expenditures
accounted for the largest increase in expenditures made by the network
office. This increase occurred, in part, because the network assumed the
cost of contracts for software licenses and information technology
services for which medical centers had once been responsible, according to
network officials. Instead of having each medical center contract for
information technology services individually, the network took
responsibility for these contracts to consolidate and negotiate lower
costs. In fiscal year 2002, computer contracts, software licensing, and
other information technology expenditures represented $9.6 million or
approximately 41 percent of total network office expenditures. (See table
4.)

Table 4: Expenditures Made by the Network 9 (Nashville) Office, Fiscal
Year 2002

                    Network 9 (Nashville) office      Amount Percent of total 
                                    expenditures             
                  Information technology related  $9,583,965 
                                    expenditures             
                              Staff expenditures   8,051,324 
                 Contracts/consultant services a   3,198,000 
                                          Otherb   1,295,579 
                Office of Resolution Managementc   1,119,098 
                                           Total $23,247,966              100 

Source: GAO analysis of VA data.

Note: Percents do not add due to rounding.

aContracts and consultant services include a contract regarding quality
assurance and consultant services for enhancing clinical and operational
improvements for TVHS.

bOther includes after-hours telephone care, awards, and accounting
support.

cOffice of Resolution Management provides Equal Employment Opportunity
complaint processing services to VA employees, applicants for employment,
and former employees.

Staff expenditures accounted for the second largest increase in
expenditures made by the network office and accounted for $8 million by
fiscal year 2002. Most of the increase in network office staff resulted
because of growth in Mid South Customer Accounts Center (MCAC) staffing.
(See table 5.) This growth occurred because the network consolidated staff
positions formerly located at medical centers for medical insurance
collections and claims processing at a central location and also added
additional staff for this purpose. To establish this operation in fiscal
year 1998, the network transferred 57 positions from the medical centers
to MCAC. By fiscal year 2002, the network had added another 30 MCAC staff
positions. MCAC staff expenditures in fiscal year 2002 were about $5
million. The MCAC operation is based at TVHS's Murfreesboro location.
Network officials told us they consolidated this operation to increase
efficiency and improve oversight of collections and claims processing.
From fiscal years 1997 through 2002, collections for third-party insurance
payments and copayments increased from $28 million to about $67 million.

Table 5: Number of Network 9 (Nashville) Office Staff Positions, Fiscal
Years 1997 through 2002

                                  Fiscal year

Network office staff positions

1997 1998 1999 2000 2001 2002

            Staff positions at Mid South Customer                        
                           Accounts Center (MCAC)   0  57   62   66  68    87 
                      Mandated by VA headquarters   4  5    8    7     8 
                    Other network staff positions   4  4    6    8   14    16 
                                            Total   8  66   76   81  90   112 

Source: GAO analysis of VA data.

Note: The MCAC opened in fiscal year 1998.

Staff expenditures by the network office also increased because of growth
in positions mandated by VA headquarters and additional staff positions
that network management said would improve operations. These staff
positions accounted for about $3 million in staff expenditures in fiscal
year 2002. The network office added 5 positions from fiscal years 1997
through 2002 that were mandated by VA headquarters for all network offices
to improve operations VA wide. These staff positions included a patient
safety officer and a compliance officer. In addition, the network created
12 other network staff positions from fiscal years 1997 to 2002 that
management expected to improve operations. For example, the network
created a pharmacy benefits manager position to manage the network's
pharmaceutical budget, which, according to network officials, has brought
down the increase in pharmaceutical costs for the entire network, and a
Decision Support System (DSS) manager to oversee DSS activities.19 For a
detailed description of all network office staff positions and their
responsibilities for the network from fiscal years 1997 to 2002, see
appendix III.

19Network officials estimate that the pharmacy benefits manager reduced
the network's pharmacy cost per unique user to a 4 percent growth in
fiscal year 2002, compared to a 12 percent growth the previous year. DSS
is an executive information system designed to provide VA managers and
clinicians with data on patterns of patient care and outcomes as well as
the capability to analyze resource utilization and the cost of providing
health care services. DSS has been implemented at all VA medical centers.

Agency Comments 	In commenting on a draft of this report, VA agreed with
our findings. VA provided technical comments which we incorporated, as
appropriate. VA's written comments are in appendix IV.

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its
issue date. We will then send copies of this report to the Secretary of
Veterans Affairs, interested congressional committees, and other parties.
We also will make copies available to others upon request. In addition,
the
report will be available at no charge on the GAO Web site at
http://www.gao.gov. If you or your staff have any questions about this
report, please call me at (202) 512-7101. Another contact and key
contributors are listed in appendix V.

Cynthia A. Bascetta
Director, Health Care-Veterans'

Health and Benefits Issues

Appendix I: Objectives, Scope, and Methodology

We reviewed Network 9 (Nashville) allocations to its medical centers for
fiscal year 2002 to determine: (1) the amount of resources medical centers
in the network received and the source of those resources, (2) the basis
on which medical centers in the network received these resources, and (3)
the extent to which network office expenditures were greater than in
fiscal year 1997 and the primary reasons accounting for any increase. To
place this information in context, we supplemented our findings for fiscal
year 2002, the most recent year for which complete data were available at
the time of our analysis, with information for fiscal years 1997 through
2003. We limited our review to how resources were allocated to medical
centers in Network 9 (Nashville) and did not analyze how they spent their
allocations to deliver health care.

The Amount of Resources Medical Centers in Network 9 (Nashville) Received
and the Source of Those Resources

To determine the amount of resources medical centers in Network 9
(Nashville) received in fiscal year 2002 and the source of those resources
we obtained financial data from the Office of the Chief Financial Officer
within the Veterans Health Administration and from the Network 9
(Nashville) office. We categorized transactions in financial reports,
referred to as medical center allotment reports, into the source of the
resources: (1) Network 9 (Nashville), (2) VA headquarters, and (3)
resources from collections. We identified transactions and summed the
amount provided from each of the sources based on analysis of the medical
centers' allotment reports and interviews with VA headquarters and network
officials. As part of resources allocated by the network, we also included
the amount each medical center received in fiscal year 2002 from the
network's share of a supplemental appropriation that VA received, and the
resources allocated for each medical center's costs for Consolidated Mail
Outpatient Pharmacy (CMOP) mail prescription services to veterans. In
fiscal year 2002, medical centers in Network 9 (Nashville) had additional
resources that they carried over from the prior fiscal year, because they
were authorized to use certain resources for longer than 12 months. We did
not include $25 million the medical centers carried over into fiscal year
2002, because the network had allocated these resources in the prior year.

Information was available for resources allocated to all medical centers
in medical center allotment reports except for the Tennessee Valley
Healthcare System (TVHS) because TVHS's allotment report also included
resources allocated to the network office. To determine the amount of
resources allocated to TVHS in fiscal year 2002, therefore, required
additional analysis. Each network medical center was identified in the VA
allocation system with a unique three-digit station number; however, TVHS

Appendix I: Objectives, Scope, and Methodology

and the network office shared the same station number, and as such, the VA
allocation system combined their allotment data. To separate the TVHS and
network office transactions, we obtained the fiscal year 2002 network
office financial transfer report from TVHS. We separated each transaction
on the combined network/TVHS allotment report, which allowed us to
construct an allotment report for TVHS. We also obtained an internal
allotment ledger from TVHS and network officials that documented fund
transfers between the two, which were transacted outside the VA allotment
system. Using our TVHS allotment report and the TVHS/network internal
allotment ledger, we determined the amounts TVHS received through each
funding source by applying similar calculations as with the other medical
centers. This information was not available for TVHS's Nashville and
Murfreesboro locations after fiscal year 2000. However, information on
staffing resources at these two locations was available after that year.
See appendix II for our analysis of staffing information at the two
locations.

We estimated the percent of total medical center resources received from
Network 9 (Nashville) for fiscal years 1997 through 2001 and 2003 to
supplement our findings for fiscal year 2002. To develop these estimates,
we used VA headquarters and network office data. To determine the amount
of resources the medical centers received from the network we used VA
information on the VERA allocations to Network 9 (Nashville) and network
data on network office expenditures for these fiscal years. To estimate
the total amount of resources the medical centers received through VA
direct allocations in fiscal years 1997 through 2001 and in fiscal year
2003, we assumed it was the same percentage as in fiscal year 2002 when
medical centers in the network received 3 percent of all funds VA
headquarters allocated directly to all VA medical centers nationwide. To
determine the amount that medical centers received through revenue
collections in these years we relied on VA data.

The Basis on Which To obtain information on the basis on which the medical
centers received Medical Centers in resources, we interviewed network
officials including the director, the Network 9 (Nashville) chief
financial officer, and TVHS officials. In addition, we obtained and
Received These Resources analyzed documents that described the network's
allocation methodology

and relied on our prior work on VERA.1 To determine the basis on which

VA headquarters allocated resources directly to medical centers in the

1GAO-02-338, GAO/HEHS-98-226, and GAO/HEHS-97-178.

Appendix I: Objectives, Scope, and Methodology

network, we interviewed officials in the Office of the Chief Financial
Officer within the Veterans Health Administration. To determine how
insurance collections and copayments as well as other resources were
incorporated in allocations, we interviewed network officials, including
the director of the Mid South Customer Accounts Center (MCAC). Based on
our analysis of information we obtained from the network and VA
headquarters, first we calculated the percentage of resources allocated on
the basis of fixed-capitation amounts for patient workload and case mix in
fiscal year 2002. We then subtracted this amount from the total resources
medical centers received in fiscal year 2002 to determine the amount they
received based on other factors.

We estimated the percent of total resources received by all medical
centers combined based on fixed-capitation amounts for patient workload
and case mix for fiscal years 1997 through 2001 and 2003. To determine the
total amount of resources allocated to the medical centers by the network
based on fixed-capitation amounts, we used VA headquarters data on the
amount of VERA allocations to Network 9 (Nashville) each year during this
period. We then subtracted out expenditures made by the network office
from data provided by the network. From this total, we subtracted out
resources for allocations made to medical centers that were not based on
patient workload and case mix. We obtained data on these allocations from
VA headquarters, except allocations from the network reserve fund. We
estimated network reserve funds for fiscal years 1997 through 2001 and
2003 by making the assumption that these funds represented 4 percent of
all resources allocated to the network by VERA as in fiscal year 2002. To
estimate the total resources medical centers in the network received
directly from VA headquarters during this period we assumed it was the
same percentage as in fiscal year 2002, when medical centers in the
network received 3 percent of all funds VA headquarters allocated directly
to all VA medical centers nationwide. We estimated the portion of these
direct VA allocations to medical centers in the network that was based on
fixed-capitation amounts for patient workload and case mix by assuming
that during this period the portion was the same as in fiscal year 2002,
when such resources amounted to 20 percent of VA headquarters' direct
allocations to the network. To determine the amount of resources collected
for each medical center in the network during this period, we used
information provided by the network and VA headquarters.

Appendix I: Objectives, Scope, and Methodology

The Extent to Which Network 9 (Nashville) Office Expenditures Were Greater
Than in Fiscal Year 1997 and the Primary Reasons Accounting for Any
Increase

To determine the extent to which network office expenditures were greater
in fiscal year 2002 than in fiscal year 1997 and the primary reasons
accounting for any increase, we analyzed reports on network office
expenditures. Specifically, we analyzed expenditures made by the network
office for fiscal year 2002 that were set aside from resources that the
medical centers received. We also reviewed network office expenditures for
information and technology, staffing, and other functions for fiscal years
1997 through 2002. We interviewed network officials to obtain the number
of staff and their job titles and responsibilities from fiscal years 1997
through 2002. We interviewed the MCAC manager regarding the number of
collections staff since fiscal year 1998, when the MCAC was created. We
also contacted officials at VA headquarters to verify which staff
positions were mandated by headquarters. As part of this analysis, we
categorized staff into staff positions at MCAC and other network office
staff positions, which included positions mandated by VA headquarters for
all VA networks and those positions that Network 9 (Nashville) management
established to improve operations. We included positions at the MCAC as
network office positions because their salaries were paid from the same
account as other network office staff and they were supervised by an
official who reported to the network director.

Overall Data Verification and Methodology

Throughout our review we examined the reliability of VA data and our use
of those data. We discussed these data with VA headquarters and network
officials to validate their accuracy. In addition, we discussed our
methodology with VA headquarters and Network 9 (Nashville) staff who
agreed that our approach and our assumptions were reasonable. Furthermore,
we tested the consistency of VA allocation data by systematically
comparing various types of data we obtained from several VA sources. For
example, we verified the amount and source of transactions on the medical
center allotment reports through interviews with network and VA
headquarters officials and by matching these transactions with other
financial reports obtained from VA. To better understand all of these
issues, we conducted a site visit to interview officials at the network
office located in Nashville and at the TVHS locations in Nashville and
Murfreesboro, Tennessee. We performed our review from March 2003 through
April 2004 in accordance with generally accepted government auditing
standards.

Appendix II: Staffing Resources Available at the Tennessee Valley
Healthcare System's Nashville and Murfreesboro Locations

VA combined the Nashville and Murfreesboro medical centers to create a
single integrated medical center-the Tennessee Valley Healthcare System
(TVHS)-to improve veterans' health care and gain efficiencies. In fiscal
year 2000, the TVHS integration was announced and the first TVHS director
was hired. Separate financial resource information was available for the
Nashville and Murfreesboro locations before fiscal year 2001. The
accounting systems of the two locations were merged in fiscal year 2001
and since then, information has not been available on the financial
resources allocated separately to the Nashville and Murfreesboro
locations. However, information on staffing at each location was available
for fiscal year 2002 and staff salaries and benefits comprised over half
of TVHS's budget in that year. Overall staffing at each location declined
since the integration, but trends varied by type of staff, such as
administrative and medical center support staff and patient care staff.
From fiscal year 2000 to fiscal year 2002, the TVHS patient workload
increased while patient care staff remained about constant. Also, 125
other VA staff worked at the Murfreesboro location in fiscal year 2002, in
addition to the staff at TVHS.1

Information Not Available on Financial Resources Allocated Separately to
Nashville and Murfreesboro After Fiscal Year 2000

Information was not available on financial resources allocated separately
to Nashville and Murfreesboro after fiscal year 2000. Beginning in fiscal
year 2001, Network 9 (Nashville) did not allocate resources to
Murfreesboro and Nashville separately because they were combined as a
single medical center, TVHS. Moreover, TVHS did not allocate resources to
each location. Instead, TVHS allocated resources to the programs it
operated across the two locations. As a result, the accounting systems did
not reflect allocations by location.

1Staff refers to full time equivalent employees (FTEE) and does not
include contract staff.

  Appendix II: Staffing Resources Available at the Tennessee Valley Healthcare
                 System's Nashville and Murfreesboro Locations

Staffing Declined at the Overall, the number of staff declined at
Nashville and Murfreesboro from Nashville and fiscal year 2000 to fiscal
year 2002. However, the amount of change varied Murfreesboro Locations by
the type of staff. The number of staff at Nashville declined by 49, or
from Fiscal Year 2000 to about 4 percent, from fiscal year 2000 to fiscal
year 2002. At Murfreesboro,

the number of staff declined by 77, or about 7 percent, from fiscal
yearFiscal Year 2002 2000 to fiscal year 2002. (See fig. 3.)

Figure 3: Number of Staff at Nashville and Murfreesboro Locations, Fiscal
Year 2000 and Fiscal Year 2002

1400

1,288

1200

1000

800

600

400

200

0 Nashville Murfreesboro

FY 2000 FY 2002

Source: GAO analysis of VA data.

Note: Staff refers to full time equivalent employees (FTEE). Numbers are
rounded to the nearest FTEE.

Staffing trends varied by type of staff at both locations. Administrative
and medical center support staff combined declined at both locations while
patient care staff remained about constant. Administrative and medical
center support staff include administrative, clerical, and wage rate staff
who do not provide patient care-related work, such as secretaries and
maintenance staff. At Nashville, the number of administrative and medical
center support staff combined declined by 52, or 11 percent, from fiscal
year 2000 to fiscal year 2002. At Murfreesboro, the number of
administrative and support staff combined declined by 65, or 14 percent,
from fiscal year 2000 to fiscal year 2002. (See fig. 4.)

Appendix II: Staffing Resources Available at the Tennessee Valley
Healthcare System's Nashville and Murfreesboro Locations

Figure 4: Number of Administrative and Medical Center Support Staff at
Nashville and Murfreesboro Locations, Fiscal Year 2000 and Fiscal Year
2002

500 484 Nashville Murfreesboro

FY 2000 FY 2002 Source: GAO analysis of VA data.

Note: Staff refers to full time equivalent employees (FTEE). Numbers are
rounded to the nearest FTEE.

The largest decreases in administrative and medical center support staff
are shown in table 6. The largest declines were in administrative and
clerical staff. Smaller declines occurred among wage rate employees who
are medical center support staff.

Table 6: Largest Administrative and Medical Center Support Staff Decreases
at Nashville and Murfreesboro, Fiscal Year 2000 to Fiscal Year 2002

                Location Administrative and clerical Wage ratea

                                Nashville -45 -9

                              Murfreesboro -56 -9

Source: GAO analysis of VA data.

Note: Table excludes changes in the number of administrative and medical
center support staff of 1 or 2 positions. Staff refers to full time
equivalent employees (FTEE).

aWage rate employees, such as maintenance staff, are paid at an hourly
rate.

Appendix II: Staffing Resources Available at the Tennessee Valley
Healthcare System's Nashville and Murfreesboro Locations

There was very little change in patient care staff at both Nashville and
Murfreesboro between fiscal year 2000 and fiscal year 2002. Patient care
staff includes those who provide direct hands-on care to patients, such as
doctors and nurses, as well as those staff who provide indirect care, such
as pharmacists and laboratory technicians. The number of patient care
staff at Nashville increased less than 0.5 percent from fiscal year 2000
to fiscal year 2002. The number of patient care staff at Murfreesboro
decreased by almost 2 percent during the same time period. (See fig. 5.)

Figure 5: Number of Patient Care Staff at Nashville and Murfreesboro
Locations, Fiscal Year 2000 and Fiscal Year 2002

900

804 807

800

700

600

500

400

300

200

100

0 Nashville Murfreesboro

FY 2000 FY 2002

Source: GAO analysis of VA data.

Note: Staff refers to full time equivalent employees (FTEE). Numbers are
rounded to the nearest FTEE.

The largest changes in patient care staff from fiscal year 2000 to fiscal
year 2002 can be seen in table 7. The biggest increases were in nursing
staff and the biggest declines were in nursing aides and assistants.

Appendix II: Staffing Resources Available at the Tennessee Valley
Healthcare System's Nashville and Murfreesboro Locations

Table 7: Largest Changes in Patient Care Staff at Nashville and
Murfreesboro Locations, Fiscal Year 2000 to Fiscal Year 2002

                     Location          Increases                    Decreases 
                    Nashville      9 nurses                                   
                                (practical and     3 nursing aides/assistants
                                        licensed              10 other health 
                                     vocational) 
                                 6 part-time     technicians/aides/therapists 
                                  physicians     
                                   5 nurse       
                                practitioners    

Murfreesboro 13 nurses (registered) 	18 nursing aides/assistants 3 other
health technicians/aides/therapists 3 social workers

Source: GAO analysis of VA data.

Note: Table excludes changes in the number of administrative and medical
center support staff of 1 or 2 positions. Staff refers to full time
equivalent employees (FTEE).

Number of TVHS Patients The number of TVHS patients increased while the
number of patient care Increased While Patient staff remained about
constant from fiscal year 2000 to fiscal year 2002. The Care Staff
Remained About number of patients increased at TVHS from fiscal year 2000
to fiscal year Constant 2002 by 7 percent. The number of patient care
staff decreased less than

             1 percent during the same time period. (See table 8.)

Table 8: Tennessee Valley Healthcare System's Patients and Patient Care
Staff, Fiscal Year 2000 and Fiscal Year 2002

Fiscal year Patientsa Patient care staff

2000 57,080 1,477

2002 61,120 1,468

Source: GAO analysis of VA data.

Note: Staff refers to full time equivalent employees (FTEE).

aThe number of patients using health care services as counted by unique or
unduplicated social security numbers. Each patient is counted one time,
regardless of how many visits each patient makes.

125 Other TVHS Staff In addition to TVHS staff, 125 other VA staff worked
at Murfreesboro in Worked at Murfreesboro fiscal year 2002. These staff
consisted of Network 9 (Nashville) staff, staff Location in Fiscal Year
working at the Consolidated Mail Outpatient Pharmacy (CMOP), the Office
2002 of Resolution Management, and the Veterans Benefits Administration.

Table 9 shows the numbers and types of VA staff other than those who

work for TVHS who work at the Murfreesboro location.

  Appendix II: Staffing Resources Available at the Tennessee Valley Healthcare
                 System's Nashville and Murfreesboro Locations

Table 9: Other Staff Located at Murfreesboro, Fiscal Year 2002

                               Description Staff

Network 9 (Nashville) - includes 87 staff at the MCAC and 8 other network
office staff whose offices are located at Murfreesboro.

Consolidated Mail Outpatient Pharmacy (CMOP)

Office of Resolution Management

                      Veterans Benefits Administration <1

Total

Source: GAO analysis of VA data.

Note: Staff refers to full time equivalent employees (FTEE).

The 95 Network 9 (Nashville) staff consisted of 8 office staff whose
offices were located at Murfreesboro and 87 staff of the Mid South
Customer Accounts Center (MCAC), which is responsible for insurance
billing and collections for the network. These 87 staff were formerly
located at medical centers within the network but were consolidated at the
Murfreesboro location to increase the efficiency of collections. The CMOP
had 28 VA staff in fiscal year 2002 (in addition to 155 contract staff)
and provides mail prescription services to veterans. The CMOP at
Murfreesboro is one of seven CMOPs across the country. VA's Office of
Resolution Management had 2 staff located at Murfreesboro in fiscal year
2002 and provided Equal Employment Opportunity (EEO) complaint processing
services to VA employees, applicants for employment, and former employees.
Finally, the Veterans Benefits Administration had a part-time staff person
providing vocational rehabilitation and employment counseling at
Murfreesboro in fiscal year 2002.

                                  Methodology

We obtained information on staffing resources available at VA's Nashville
and Murfreesboro locations in fiscal year 2002 by interviewing Network 9
(Nashville) and TVHS officials. These officials told us that beginning in
fiscal year 2001, information on financial resources allocated to
Nashville and Murfreesboro separately was not available because these
locations were combined as a single medical center, TVHS, in fiscal year
2001. However, information on staffing numbers and costs at each location
was available and staff salaries and benefits constituted over half of
TVHS's fiscal year 2002 budget. Therefore, our scope was limited to a
comparison of staffing numbers at each location in fiscal years 2000 and
2002. We obtained the number of staff positions and descriptions for each
position for each location for fiscal years 2000 and 2002, reported by
each staff member's duty station. The number of staff positions was
reported as the

Appendix II: Staffing Resources Available at the Tennessee Valley
Healthcare System's Nashville and Murfreesboro Locations

number of full time equivalent employees (FTEE). We analyzed the increase
and/or decrease in staff positions between the 2 years by the type of
staff. We obtained workload data for TVHS for fiscal years 2000 and 2002
and compared them with the number of patient care staff during those
years. In addition, we interviewed TVHS officials to determine the number
of other VA staff working at the Murfreesboro location in addition to
those staff working for TVHS.

Appendix III: Network 9 (Nashville) Office Staff and Their
Responsibilities, Fiscal Years 1997 through 2002

Table 10 provides a brief description of the responsibilities for Network
9 (Nashville) office staff and the number of office staff positions filled
from fiscal years 1997 through 2002. The table includes staff positions at
the Mid South Customer Accounts Center (MCAC), positions mandated by VA
headquarters for all networks, and other staff positions Network 9
(Nashville) created.

Table 10: Position Titles and Responsibilities for Network 9 (Nashville) Office
Positions, Fiscal Years 1997 through 2002 Number of positions filled for fiscal
  years Network office staff Network responsibilities 1997 1998 1999 2000 2001
                                      2002

Staff positions at the Mid South Customer Accounts Center (MCAC)

                             Perform billing, collecting,                  
                             and verifying third-                          
                               party insurance activities    0 57 62 66 68 87 
Staff positions mandated                                                
             by VA                                                         
         headquarters                                        4 5  8  7  8  
       Network Director              Chief executive                       
     (mandated in FY 1997)                                   1 1  1  1  1  
    Chief Financial Officer  Advises network director and                  
                             other managers                                
     (mandated in FY1997)         on fiscal management       1 1  1  0  0  
     Chief Medical Officer    Provides clinical leadership                 
     (mandated in FY1997)                                    1 1  1  1  1  
Chief Information Officer Manages the design,                           
                             development, and basic                        
     (mandated in FY1997)       functions of information                   
                                     technology and                        
                                 communications systems      1 1  1  1  1  
     Information Security        Develops and integrates                   
            Officer                infrastructure with                     
     (mandated in FY 2001)    mandated systems and products                
                                        to ensure                          
                             implementation and coordination               
                                           of                              
                              information and data systems   0 0  1  1  1  
                             Manages and implements patient                
    Patient Safety Officer               safety                            
     (mandated in FY 2001)      policies of VA's National                  
                                   Center for Patient                      
                                         Safety              0 0  0  0  1  
                                Manages, plans, develops,                  
      Prosthetics Manager            evaluates, and                        
     (mandated in FY1999)    implements prosthetics program  0 0  1  1  1  

Quality Management Officer (mandated in FY 1997)

Advises network director and others on quality
improvement and performance management 0 1 1 1 1 1

Compliance Officer (mandated in FY 2000)

Plans, organizes, coordinates network
activities, develops compliance program for
internal controls and processes, and oversight
in accordance with VA headquarters
requirements 0 0 1 1 1 1

                  Other network staff positionsa 4 4 6 8 14 16

Acquisition and Materiel Managerb	Manages the acquisition and materiel
management product line 0 0 0 0 0 1

  Appendix III: Network 9 (Nashville) Office Staff and Their Responsibilities,
                         Fiscal Years 1997 through 2002

    Number of positions filled for fiscal years Network office staff Network
                 responsibilities 1997 1998 1999 2000 2001 2002

Ambulatory Care Product Line Advises director and other managers on
Manager ambulatory and primary care 0 0 0 1 1

Auditor/Compliance Officer 	Identifies policies and procedures needed to
prevent and detect noncompliance with VA regulatory, ethical, and legal
requirements 0 0 0 0 1

Budget Analyst	Performs budget analysis, formulation, justification, and
execution 0 0 1 1 1

Capital Assets Manager 	Manages capital assets to ensure adherence to
policies and procedures 0 0 0 1 1

Decision Support System (DSS) Establishes, plans, and directs DSS
activities
Manager 00 111

Deputy Network Director 	Assists network director and acts as director in
his absence 0 0 0 0 1

Health System Specialist 	Serves as program analyst for examining network
activities such as cost effectiveness of operations 0 0 0 0 1

Mid South Customer         Manages and operates the MCAC               
Accounts                                and                            
    Center (MCAC) Manager b   insurance collections program 0 0  0  0   0 
Mental Health Product Line Serves as technical advisor                 
                              to network director                         
            Manager           on the mental health program  0 0  0  0   0 
                                  Manages construction,                   
      Operations Director            equipment, and                       
                                  network office daily      1 1  1  1   1 
                                       operations                         
Patient Administration      Manages patient access and                 
Director                             benefits                          
                                 administration programs    0 0  0  0   0 
                              Manages pharmaceutical                      
Pharmacy Benefits Manager  budget, coordinates                         
                              professional and                            
                              administrative functions at                 
                                     medical centers        0 0  0  0   1 
     Public Affairs Officer     Manages public relations    1 1  1  1   1 
           Secretary           Performs administrative and  2 2  2  2   3 
                                     clerical duties                      
                              Supervises employees of the                 
     Telephone Care Manager   network's 24-                               
                              hour/7 days-a-week telephone                
                                       health care                        
                              advice center and provides                  
                              technical guidance                          
                              to day-shift staff at medical 0 0  0  0   1 
                                         centers                          
          Total staff                                       8 66 76 81 90 112 

Source: GAO analysis of VA data.

aIn fiscal year 2003, VA headquarters announced that some of the staff
positions would become mandated later.

bThe acquisition and materiel manager and the MCAC manager functioned in
these positions since fiscal year 1997, but were charged to the TVHS
payroll until the positions were transferred to the Network 9 (Nashville)
payroll in fiscal year 2002.

Appendix IV: Comments from the Department of Veterans Affairs

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact James C. Musselwhite, 202-512-7259

Acknowledgments 	In addition to the contact named above, Cheryl A. Brand,
Linda C. Diggs, Krister Friday, Donald W. Morrison, and Thomas A. Walke
made key contributions to this report.

Related GAO Products

VA Health Care: Access for Chattanooga-Area Veterans Needs
Improvement. GAO-04-162. Washington, D.C.: January 30, 2004.

VA Health Care: Changes Needed to Improve Resource Allocation. GAO
02-685T. Washington, D.C.: April 30, 2002.

VA Health Care: Changes Needed to Improve Resource Allocation to
Health Care Networks. GAO-02-744T. Washington, D.C.: May 14, 2002.

VA Health Care: Allocation Changes Would Better Align Resources with
Workload. GAO-02-338. Washington, D.C.: February 28, 2002.

VA Health Care: More Veterans Are Being Served, but Better Oversight Is
Needed. GAO/HEHS-98-226. Washington, D.C.: August 28, 1998.

VA Health Care: Resource Allocation Has Improved, but Better Oversight
Is Needed. GAO/HEHS-97-178. Washington, D.C.: September 17, 1997.

Veteran's Health Care: Facilities' Resource Allocations Could Be More
Equitable. GAO/HEHS-96-48. Washington, D.C.: February 7, 1996.

VA Health Care: Resource Allocation Methodology Has Had Little Impact
on Medical Centers' Budgets. GAO/HRD-89-93. Washington, D.C.:
August 18, 1989.

VA Health Care: Resource Allocation Methodology Should Improve VA's
Financial Management. GAO/HRD-87-123BR. Washington, D.C.:
August 31, 1987.

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