Armed Forces Institute of Pathology: Business Plan's
Implementation Is Unlikely to Achieve Expected Financial Benefits
and Could Reduce Civilian Role (30-JUN-05, GAO-05-615).
DOD has raised concerns about certain business practices of the
Armed Forces Institute of Pathology (AFIP), including its role in
civilian medicine. In response, AFIP implemented changes and
drafted a business plan. On May 13, 2005, DOD recommended closing
AFIP as part of the Base Realignment and Closure process. The
Senate Committee on Armed Services, in a report accompanying the
Ronald W. Reagan National Defense Authorization Act for Fiscal
Year 2005, directed that GAO study AFIP's business plan. GAO (1)
described the business plan's key initiatives and projected
financial benefits, (2) evaluated the business plan's potential
to improve internal controls and achieve financial benefits, and
(3) assessed the likely impact of the business plan on the role
of AFIP in military and civilian medicine. GAO reviewed the major
assumptions and analyses for developing the plan and interviewed
AFIP and DOD officials, and members of the civilian medical
community.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-615
ACCNO: A28620
TITLE: Armed Forces Institute of Pathology: Business Plan's
Implementation Is Unlikely to Achieve Expected Financial Benefits
and Could Reduce Civilian Role
DATE: 06/30/2005
SUBJECT: Base closures
Base realignments
Health care services
Internal controls
Strategic planning
Financial analysis
Financial management
Business operations
Business planning
Deceptive business practices
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GAO-05-615
* Results in Brief
* Background
* AFIP's Mission
* Establishment of ARP
* Funding of AFIP and Its Relationship with ARP
* Development of AFIP's Business Plan
* DOD Recommended That AFIP Be Closed
* AFIP's Business Plan Has Four Key Initiatives and Intends to
* AFIP's Business Plan Has Four Key Initiatives
* AFIP Planned to Improve Its Business Practices
* AFIP Planned to Increase the Amount of Services Provided for
* AFIP Planned to Reduce Its Staff
* AFIP Planned to Consolidate Its Facilities
* AFIP Estimated That It Would Save $17.5 Million by Implement
* AFIP Has Improved Some Internal Controls; However, AFIP Is U
* AFIP Has Improved Some Internal Controls but Has Not Impleme
* AFIP Developed Internal Controls to Ensure That All Consulta
* AFIP Developed Internal Controls to Ensure That Consultation
* AFIP Began to Bill Civilian Clients for Consultations
* AFIP Has Not Developed Internal Controls to Determine the Co
* The Business Plan's Projected Financial Benefits Were Based
* Increased Revenue from Improved Business Practices Will More
* Financial Benefits from Staffing Reductions Will More Likely
* AFIP Will Likely Achieve None of the $3.5 Million Annual Fin
* Implementation of the Business Plan Has Increased Services f
* Military Consultations Have Increased While Civilian Consult
* The Amount of Civilian Research at AFIP Has Declined
* The Number of Military Attendees at AFIP's Educational Cours
* Pathologists and Physicians Said That AFIP's Civilian Missio
* Staff Reductions and Recent Changes at AFIP Have Resulted in
* Conclusions
* Recommendation for Executive Action
* Agency Comments
* AFIP Developed a Judgmental Sample from 2002 Civilian Consul
* AFIP's Analysis Included Three Primary Assumptions
* The Three Primary Assumptions Used in AFIP's Analysis Were I
* Results from Our Calculation Using Actual 2004 Data
* Order by Mail or Phone
Report to Congressional Committees
United States Government Accountability Office
GAO
June 2005
ARMED FORCES INSTITUTE OF PATHOLOGY
Business Plan's Implementation Is Unlikely to Achieve Expected Financial
Benefits and Could Reduce Civilian Role
GAO-05-615
Contents
Letter 1
Results in Brief 4
Background 5
AFIP's Business Plan Has Four Key Initiatives and Intends to Achieve $17.5
Million in Annual Financial Benefits 11
AFIP Has Improved Some Internal Controls; However, AFIP Is Unlikely to
Achieve the Annual Financial Benefits Projected in the Business Plan 16
Implementation of the Business Plan Has Increased Services for the
Military and Decreased Services for Civilians 22
Conclusions 28
Recommendation for Executive Action 29
Agency Comments 29
Appendix I Objectives, Scope, and Methodology 31
Appendix II The Armed Forces Institute of Pathology's Missions 34
Appendix III Analysis of the Armed Forces Institute of Pathology's
Consultation Revenue Projections 36
Appendix IV Comments from the Department of Defense 42
Tables
Table 1: ARP's Consultation Revenues, Education Revenues, and Research
Grant Funding 8
Table 2: Summary of Key Initiatives and Projected Financial Benefits in
AFIP's Business Plan 15
Table 3: Number of Staff Working at AFIP, 2000 to 2004 20
Table 4: AFIP's Analysis of 250 Sample Cases from 2002 37
Table 5: AFIP's Projection as Presented in the Business Plan 39
Table 6: Calculation Using Actual Data from 2004 41
Figures
Figure 1: DOD Reviews of AFIP Leading to the Development of AFIP's
Business Plan 9
Figure 2: AFIP's Business Plan Estimates and Actual 2004 Data for Civilian
Consultations 19
Figure 3: GAO's Estimates of Likely Annual Financial Benefits from
Implementing the Business Plan 21
Figure 4: AFIP Consultations by Type of Consultation, 2000 to 2004 23
Figure 5: AFIP Research Protocols, 2000 to 2004 25
Figure 6: Military and Civilian Attendees at AFIP Educational Courses,
2000 to 2004 26
Abbreviations
AFIP Armed Forces Institute of Pathology ARP American Registry of
Pathology BRAC Base Realignment and Closure DNA deoxyribonucleic acid DOD
Department of Defense MID Management Initiative Decision PAE Office of
Program Analysis and Evaluation PDM Program Decision Memorandum PIMS
Pathology Information Management System VA Department of Veterans Affairs
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separately.
United States Government Accountability Office
Washington, DC 20548
June 30, 2005 June 30, 2005
The Honorable John Warner Chairman The Honorable Carl Levin Ranking
Minority Member Committee on Armed Services United States Senate The
Honorable John Warner Chairman The Honorable Carl Levin Ranking Minority
Member Committee on Armed Services United States Senate
The Honorable Duncan L. Hunter Chairman The Honorable Ike Skelton Ranking
Minority Member Committee on Armed Services House of Representatives The
Honorable Duncan L. Hunter Chairman The Honorable Ike Skelton Ranking
Minority Member Committee on Armed Services House of Representatives
The Armed Forces Institute of Pathology (AFIP) supports the Department of
Defense (DOD), other government agencies, and the civilian medical
community by providing pathology consultation, medical education, and
research. Although AFIP is a military agency funded primarily by DOD, the
institute also has a mission to serve the civilian medical community. AFIP
performs consultations-which are based on laboratory analyses of tissue or
other specimens used to diagnosis disease-for all branches of the military
without charge, while offering this service on a reimbursable basis for
its civilian customers. AFIP also provides consultations for the
Department of Veterans Affairs' (VA) healthcare system in exchange for a
specified number of VA staff positions assigned to AFIP. In 2004 AFIP
performed over 50,000 consultations, provided educational instruction for
over 2,000 medical professionals, and conducted 296 research studies. AFIP
has collaborated with the American Registry of Pathology (ARP)-a nonprofit
organization that serves as a fiscal intermediary between AFIP and
civilian medicine-to develop the world's largest collection of rare and
unusual disease specimens and expertise in the field of pathology. The
Armed Forces Institute of Pathology (AFIP) supports the Department of
Defense (DOD), other government agencies, and the civilian medical
community by providing pathology consultation, medical education, and
research. Although AFIP is a military agency funded primarily by DOD, the
institute also has a mission to serve the civilian medical community. AFIP
performs consultations-which are based on laboratory analyses of tissue or
other specimens used to diagnosis disease-for all branches of the military
without charge, while offering this service on a reimbursable basis for
its civilian customers. AFIP also provides consultations for the
Department of Veterans Affairs' (VA) healthcare system in exchange for a
specified number of VA staff positions assigned to AFIP. In 2004 AFIP
performed over 50,000 consultations, provided educational instruction for
over 2,000 medical professionals, and conducted 296 research studies. AFIP
has collaborated with the American Registry of Pathology (ARP)-a nonprofit
organization that serves as a fiscal intermediary between AFIP and
civilian medicine-to develop the world's largest collection of rare and
unusual disease specimens and expertise in the field of pathology.
In the late 1990s, DOD examined AFIP's future role within the military
health system after AFIP requested that DOD build a new facility for AFIP
or repair AFIP's primary facility, which is on the Walter Reed Army
Medical Center campus in Washington D.C., for an estimated cost of $250
million. From 1998 through 2002, DOD conducted a series of reviews that
concluded that AFIP lacked controls over its financial operations and that
it provided services for the civilian medical community without In the
late 1990s, DOD examined AFIP's future role within the military health
system after AFIP requested that DOD build a new facility for AFIP or
repair AFIP's primary facility, which is on the Walter Reed Army Medical
Center campus in Washington D.C., for an estimated cost of $250 million.
From 1998 through 2002, DOD conducted a series of reviews that concluded
that AFIP lacked controls over its financial operations and that it
provided services for the civilian medical community without adequate
reimbursement. These reviews concluded that DOD, in effect, subsidized
AFIP's work for civilian customers. DOD also found it difficult to
estimate the amount of the subsidy because AFIP did not have adequate data
to determine the costs of providing civilian services.
In response to the concerns raised in the reviews, DOD directed AFIP to
develop and implement a business plan. Specifically, DOD directed AFIP to
develop a business plan to improve the institute's internal controls so
that AFIP could better account for the delivery and costs of its civilian
and military work. DOD also required that the business plan outline steps
for increasing AFIP's revenues and lowering its overall costs to reduce
the level of funding provided to AFIP. According to DOD officials, this
would eliminate DOD's subsidy of AFIP's civilian work. AFIP began to make
changes to its operations as early as 2000 in response to findings from
the DOD reviews. In 2002 and 2003, AFIP developed the written business
plan, which included some changes that AFIP had already made in its
operations.1 AFIP planned to complete implementation of the business plan
by October 2004.
DOD is again in the process of evaluating the future role of AFIP and the
services that it provides. On May 13, 2005, DOD recommended the closure of
AFIP as a part of the Base Realignment and Closure (BRAC) process. This
would require that the services currently provided by AFIP be
discontinued, transferred to other parts of DOD, or contracted out to the
civilian medical community.
The Senate Committee on Armed Services, in a report accompanying the
Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005,
directed that we conduct a study of AFIP's business plan.2 In this report,
we (1) describe the business plan's key initiatives and projected
financial benefits, (2) evaluate the business plan's potential to improve
AFIP's internal controls and achieve its projected financial benefits, and
(3) assess the likely impact of the business plan on the role of AFIP in
military and civilian medicine.
1DOD and AFIP staff generally refer to the document describing planned
changes to AFIP's operations as "the business plan." However, its formal
title is The Transformation Plan of the Armed Forces Institute
ofPathology. In this report, we refer to this document as "the business
plan."
2S. Rep. No. 108-260, at 349 (2004).
To describe the business plan's key initiatives and projected financial
benefits, we reviewed the business plan as well as numerous studies of
AFIP that contributed to the plan's development. We interviewed officials
from AFIP; ARP; the Office of the Surgeon General of the Army; the Office
of the Assistant Secretary of Defense for Health Affairs; and the Office
of the Under Secretary of Defense, Comptroller. To evaluate the business
plan's potential to improve AFIP's internal controls and achieve its
projected financial benefits, we interviewed AFIP and ARP officials and
reviewed the assumptions and analyses that led to specific elements of the
business plan. In some cases, we were able to compare projections in the
plan with information collected after specific changes had been
implemented. In other cases, we evaluated the assumptions upon which
specific analyses were based. We also interviewed officials and senior
pathologists from AFIP to understand the effects of the business plan on
the major areas of AFIP's operations. To assess the likely impact of the
business plan on the role of AFIP in military and civilian medicine, we
interviewed the AFIP staff described above, as well as pathologists from
both the civilian and military medical communities, including
representatives from the College of American Pathologists and members of
AFIP's Scientific Advisory Board.3 We also reviewed data on AFIP's
consultation, research, and educational services to see how they have
changed since the development and implementation of the business plan.
We evaluated a written copy of the business plan, dated October 2003,
which was described by AFIP officials as the most current draft of the
business plan at the time we performed our work. AFIP officials said that
there is no "final" version of the plan because it is an evolving
document. While some of the changes described in the plan occurred as
early as 2000, others occurred after that time or had not been implemented
at the time of our work. Therefore, in this report, we generally provide
data from 2000 to 2004.
We interviewed AFIP and ARP staff to determine how data were collected and
maintained, but we did not independently verify the accuracy of the data.
Data reliability has been the subject of critical findings in DOD's
reviews of AFIP. AFIP officials demonstrated the systems they use to
maintain data and described their efforts to ensure the data's accuracy.
In some cases, AFIP provided us with data that differed from those
published in earlier reports and occasionally provided updated data during
the course of this review that differed from the data it had provided
earlier. AFIP officials explained that this was due to ongoing efforts on
their part to improve the quality of their data. We determined that the
AFIP data used in this report were adequate. We performed our work from
August 2004 through June 2005 in accordance with generally accepted
government auditing standards. (See app. I for more details on our
methodology.)
3AFIP's Scientific Advisory Board is made up of pathologists from both the
civilian and military medical communities. The board provides the Director
of AFIP and her staff with scientific and professional advice in matters
pertaining to the operational programs, policies, and procedures of AFIP.
Results in Brief
AFIP's business plan includes four key initiatives that are primarily
intended to improve AFIP's internal controls and reduce the amount of DOD
funds supporting AFIP's civilian work. To do this, the business plan calls
for AFIP to (1) improve its business practices, such as controls over its
consultation services and related finances; (2) increase the amount of
services it provides for the military, such as an increase in
defense-related research and educational services; (3) reduce staff from
820 to 685 positions; and (4) consolidate its facilities. The business
plan describes various efforts in support of each of these four key
initiatives. AFIP estimated that the changes described in its business
plan will result in financial benefits from a combination of increased
revenues and reduced costs that would allow DOD to reduce its annual
funding of AFIP by $17.5 million. To ensure that AFIP reduces the amount
of DOD funds supporting civilian work, DOD plans to reduce AFIP's future
funding by the amount that AFIP estimates it will save.
In implementing its business plan, AFIP has improved some internal
controls over its services and related finances; however, AFIP is unlikely
to achieve the plan's projected financial benefits. The implementation of
the business plan improved a number of internal controls at AFIP,
particularly over AFIP's consultation services and related finances, but
AFIP has not implemented other internal controls described in the business
plan. For example, AFIP has not developed a system to determine the costs
associated with providing civilian services. In addition, even if AFIP
fully implemented its business plan, it would be unlikely to achieve the
projected financial benefits of $17.5 million per year. Because many of
these projections were developed using inaccurate or incomplete data, we
estimate that the financial benefits from implementing the business plan
are likely to be significantly lower-approximately $5 million annually.
For example, AFIP projected that it would increase its revenues by $7.4
million annually by increasing the fees it charges to civilians for
consultation services and improving the collection rate of those fees.
However, AFIP will probably achieve only $1 million in additional revenues
from these changes, which is almost entirely the result of increased fees.
In implementing its business plan, AFIP has changed its balance of
military and civilian work. AFIP and civilian pathologists told us that
these trends are likely to continue as AFIP proceeds with the
implementation of its business plan. DOD and AFIP officials have stated
that they want to preserve AFIP's civilian work but do not want to fund it
with increasingly scarce DOD funds. However, over the last several years,
AFIP has reduced the amount of consultation, research, and education
services it provides for the civilian medical community and increased the
amount of services it provides for the military. Many AFIP pathologists
and civilian physicians told us that civilian work is essential for
fulfilling the institute's mission because civilian cases help maintain
the diagnostic expertise of AFIP's professional staff. AFIP has also lost
expertise within the institute because of staff reductions called for by
the business plan. Half of AFIP's 20 department chairs said that the
business plan would negatively affect AFIP's ability to attract top
pathologists in the future.
In order to better manage changes being instituted at AFIP, we recommend
that the Assistant Secretary of Defense for Health Affairs reevaluate the
financial benefits projected in AFIP's business plan so that DOD will have
a more reliable estimate of AFIP's revenues and expenses. In commenting on
a draft of this report, DOD concurred with the report's findings and
recommendation, noting that DOD continues to monitor the implementation of
AFIP's business plan and the impact of the BRAC process on AFIP. DOD also
said that the U.S. Army Audit Agency will begin an audit of AFIP business
practices to determine if the institute is operating effectively and
efficiently, and possesses the tools to accurately articulate costs,
accomplishments, and contributions to the military mission.
Background
AFIP originated as part of the Army Medical Museum in 1862 as a repository
for disease specimens collected from Civil War soldiers. In 1888 the
educational facilities of the museum were made available to civilian
medical professionals. The Army Institute of Pathology was created as a
part of the museum in 1944, using the museum's extensive collection of
disease specimens to develop expertise in diagnostic pathology. By 1949
the Army Institute of Pathology was renamed the Armed Forces Institute of
Pathology, and the museum had become a unit within AFIP. The Department of
Defense Appropriation Authorization Act, 1977, provided specific statutory
authority for AFIP, establishing it as a joint entity of the Departments
of the Army, Navy, and Air Force, subject to the authority, direction, and
control of the Secretary of Defense.4 The Secretary of Defense has
delegated authority, direction, and control over AFIP to the Assistant
Secretary of Defense for Health Affairs. The Secretary of the Army is the
Executive Agent for AFIP and has delegated Executive Agent authority to
the Army Surgeon General.5
AFIP's Mission
AFIP's primary mission is to provide medical expertise in pathology
consultation, education, and research for civilian and military medicine.
Unlike most pathologists, AFIP pathologists specialize in a particular
type of consultation where they are asked to provide a second opinion for
difficult cases. These consultations typically occur because another
military or civilian pathologist was either unable to make a diagnosis or
unsure of his or her initial diagnosis.6 In 2003, for example, AFIP
pathologists made a major or minor change to the initial diagnosis in
nearly half of the cases they diagnosed. Because AFIP generally receives
tissue specimens in order to make these diagnoses, consultations have also
been instrumental in expanding AFIP's repository of disease specimens.
AFIP has over 3 million disease specimens and their accompanying case
histories dating back over 150 years.
AFIP disseminates the knowledge gained from its consultation cases through
its education and research activities. Each year, AFIP provides
educational instruction for over 2,000 civilian and military medical
professionals. In developing educational courses, AFIP staff query a
database of recent consultations, searching for cases where a physician
has either misdiagnosed a disease or the physician was unable to provide a
diagnosis. AFIP then teaches courses in how to diagnose such diseases,
with particular emphasis on identifying emerging diseases, offering new
insights into known diseases, and giving hands-on experience in diagnosing
difficult cases. AFIP also trains both civilian and military residents and
fellows in the fields of pathology, radiology, and veterinary pathology.
In addition to these educational activities, AFIP conducts research that
results in hundreds of scientific publications per year. For example, AFIP
pathologists recently published new research on the 1918 Spanish influenza
virus using tissue specimens from a World War I soldier who died from the
virus.
4Pub. L. No. 94-361, S: 811, 90 Stat. 923, 933-936 (1976) (codified at 10
U.S.C. S:S: 176, 177 (2000)).
5The DOD Executive Agent for AFIP is responsible for the administration of
resources required to support the missions and functions of AFIP, as well
as reporting on AFIP's activities to the Assistant Secretary of Defense
for Health Affairs.
6For the purpose of this report, unless otherwise noted, "consultations"
refers to second-opinion surgical consultations.
In addition to its mission of providing consultation, education, and
research, AFIP has a number of other missions that have been established
by Congress or DOD. For example, AFIP maintains the National Museum of
Health and Medicine, which serves as a repository of anatomic,
pathological, and historical artifacts. AFIP also houses the Office of the
Armed Forces Medical Examiner, which was established at AFIP in 1988 to
provide DOD and other federal agencies with a variety of services in
forensic medicine. New technological developments in the forensic
sciences-such as the use of deoxyribonucleic acid (DNA)-have been
incorporated into AFIP through additions such as the Armed Forces DNA
Identification Laboratory. AFIP conducts a variety of other activities
that include
o maintaining a DNA registry of all military personnel;
o conducting research on biological agents, such as anthrax;
o identifying the remains of soldiers of past wars;
o collecting data on medical malpractice cases in the military;
and
o performing drug testing for the Armed Forces.
(For a more complete description of AFIP's missions, see app. II.)
In the past, certain DOD officials were critical of AFIP's
interactions with civilian medicine and AFIP's relationship with
ARP. In 1975, for example, the Army Surgeon General suggested that
the relationship of ARP-a civilian organization-and AFIP-a
military organization-was inappropriate and directed that it be
terminated. In the Department of Defense Appropriation
Authorization Act, 1977, Congress specifically authorized ARP to
be established as a nonprofit corporation and further authorized a
cooperative relationship between AFIP and ARP. ARP is responsible
for encouraging and facilitating collaborative work between AFIP
and civilian medicine.
To support its activities, AFIP draws upon several sources of
funding. In fiscal year 2004, AFIP's funding totaled approximately
$100 million, the majority of which (approximately $80 million)
consists of funds from DOD's Defense Health Program appropriation.
An additional $13 million was from other appropriations for DOD
activities, and approximately $7 million was provided by other
federal agencies as reimbursement for AFIP's services. In addition
to these funds, which are provided directly to AFIP, ARP may
collect fees and accept research grants in exchange for certain
services provided for the civilian medical profession by AFIP.
Funds from AFIP's research, education, and consultation services
are collected by ARP and used to support AFIP's civilian mission.
ARP acts as an intermediary between AFIP and the civilian medical
community, performing a variety of tasks on behalf of AFIP. The
costs incurred by ARP in support of AFIP's missions are recouped
from AFIP's consultation, education, and research revenues, and
the remainder of these funds is placed in "registries," or bank
accounts, which are used to support AFIP in a variety of ways at
the request of authorized AFIP officials. In 2004 ARP received
$5.7 million in revenues as payment for consultation and education
services conducted by AFIP and $5.6 million in research grants.
Table 1 shows the funds collected by ARP since 2000.
Table 1: ARP's Consultation Revenues, Education Revenues, and
Research Grant Funding
Source: ARP.
aPrior to October 2004, all consultation revenues were collected
by ARP. After that time, consultation revenues were billed and
collected by both AFIP and ARP, depending on when the consultation
arrived at AFIP. Total consultation revenues reflect collections
by both AFIP and ARP for October, November, and December 2004.
AFIP developed its business plan in response to DOD's reviews of
AFIP's mission and operations. DOD conducted these reviews after
AFIP requested that DOD build a new facility for AFIP or repair
AFIP's primary facility. From 1998 through 2002, AFIP was the
subject of three Program Decision Memoranda (PDM)-documents used
by DOD for planning and managerial oversight-four major DOD
reviews and two DOD Inspector General reviews. These reviews were
critical of AFIP's lack of internal controls and the amount of DOD
funding supporting AFIP's civilian mission.7 In general, these
reviews found that (1) AFIP's civilian services exceeded its
military services; (2) AFIP was not adequately reimbursed for its
civilian services and needed to increase its fees; and (3) AFIP
lacked appropriate internal controls over its operations,
particularly its ability to monitor and track its consultation
services and related finances. Figure 1 shows a timeline of these
reviews.8
Establishment of ARP
Funding of AFIP and Its Relationship with ARP
Year
Funds collected 2000 2001 2002 2003 2004
Consultation
revenues $2,361,000 $2,656,000 $2,546,000 $2,714,000 $3,011,000a
Education 2,272,000 2,480,000 2,149,000 2,392,000 2,691,000
revenues
Research grants 1,049,000 2,551,000 3,166,000 4,495,000 5,564,000
Development of AFIP's Business Plan
Figure 1: DOD Reviews of AFIP Leading to the Development of AFIP's
Business Plan
7An internal control is a component of an organization's management.
Internal controls are a series of actions and activities that occur on an
ongoing basis which help managers achieve key outcomes and minimize
operational problems. For more information on internal controls, see GAO,
Standards for Internal Controls in the Federal Government, GAO/AIMD-00-21
.3.1. (Washington, D.C.: November 1999).
8These reviews are listed in appendix I.
DOD issued its third PDM regarding AFIP in 2001. It directed DOD's Office
of Program Analysis and Evaluation (PAE) to study alternative funding
arrangements for AFIP. AFIP began drafting its business plan in 2002 to
respond to many of DOD's concerns. The business plan reflected changes to
its operations that AFIP had made as early as 2000 in response to
criticisms in the DOD reviews. The 2001 PDM resulted in a draft report,
submitted by PAE to the Assistant Secretary of Defense for Health Affairs
in 2002, which recommended the transfer of most AFIP functions to the
Department of Health and Human Services. The draft report further
recommended that if this were not possible, DOD should end its financial
support for AFIP and transform it into a working capital fund, which, as
the draft stated, would require congressional approval. This would require
AFIP to generate enough revenues to independently finance its operations,
through fees charged for its consultation, education, and research
services.9
The Assistant Secretary of Defense for Health Affairs prepared a written
response in 2003 describing his reasons for not instituting the
recommendations of the draft report. He said that DOD should allow AFIP to
pursue the business and organizational strategies set forth in the
business plan that AFIP was developing. Although AFIP originally planned
to implement the plan over a 6-year period beginning in October 2002, the
Assistant Secretary told AFIP officials that they should complete the
plan's initiatives by October 2004. He also recommended that AFIP
transform its relationship with ARP, noting that it might be more
efficient for AFIP to bill civilians directly for its consultation,
education, and research activities, rather than relying on ARP to provide
this service.
DOD Recommended That AFIP Be Closed
On May 13, 2005, the Secretary of Defense announced DOD's recommendations
to close or realign military facilities in the United States. As a part of
the BRAC process, DOD recommended the closure of AFIP.10 DOD recommended
that the medical examiners' functions and the DNA registry be moved to
Dover Air Force Base, Dover, Delaware; some education services to Fort Sam
Houston, Texas; and the museum to Walter Reed National Military Medical
Center. Other services currently provided by AFIP would be discontinued,
transferred to other parts of DOD, or contracted out to the civilian
medical community. For example, second-opinion pathology consultations for
military personnel and their families would be sent to civilian
laboratories and paid for on an as-needed basis. The department's
recommendations will now be reviewed by the BRAC Commission, which will
seek comments from the potentially affected communities. Once the
commission has completed its review, it will present its recommendations
to the President and Congress. The process is expected to be completed by
the end of 2005.
9The draft report recommended that the medical examiner function and the
DNA registry continue to receive funding through DOD.
10This is a part of a larger initiative to close the Walter Reed
installation in the District of Columbia and to build a new facility for
specialty and subspecialty medical services in Bethesda, Maryland. This
new facility will serve all of the military departments and will be named
the Walter Reed National Military Medical Center.
AFIP's Business Plan Has Four Key Initiatives and Intends to Achieve $17.5
Million in Annual Financial Benefits
AFIP developed its business plan to improve its internal controls and
reduce its need for DOD funding by cutting costs and increasing its
revenues from civilian work. To do this, the business plan has four key
initiatives, which AFIP estimated would save the institute $17.5 million a
year when fully implemented.
AFIP's Business Plan Has Four Key Initiatives
Under the four key initiatives of AFIP's business plan, the institute
planned to (1) improve its business practices, (2) increase the amount of
services it provides for the military, (3) reduce staff, and (4)
consolidate its facilities.
AFIP Planned to Improve Its Business Practices
The business plan's first initiative called for AFIP to improve its
business practices. AFIP's business practices were criticized in DOD
reviews for lacking sufficient internal controls, particularly over
consultation services and related finances. The initiative planned to
address problems in AFIP's business practices. Prior to the development of
the business plan, AFIP had few internal controls governing its services,
and many DOD officials said that the fees that AFIP charged for its
consultation services were too low.
The business plan stated that AFIP would develop internal controls to
ensure that all consultations are properly billed and monitored by AFIP
managers. AFIP would also raise its fees for civilian consultations. The
plan stated that AFIP needed to increase the fees it charged for civilian
consultations so that they would accurately reflect prevailing market
rates. The plan also stated that AFIP managers needed to better monitor
the delivery of consultation services through the expansion of an
electronic system, which would be used to track individual consultation
cases. Prior to the development of the business plan, AFIP had few
internal controls for monitoring its consultation services. AFIP officials
said that they had no way to determine if staff were inappropriately
waiving fees for civilian customers or performing tests that were not
needed to provide a diagnosis.
Next, the business plan stated that AFIP would develop internal controls
to ensure that all consultations are performed in a timely manner. This is
important because over 90 percent of the cases sent to AFIP are tumor
cases, requiring quick diagnoses so that the patient's physician can
determine the most appropriate course of treatment. In DOD reviews, AFIP
was criticized for providing slow diagnoses, which the business plan calls
slow "turnaround time." The plan defines turnaround time as the amount of
time that elapses from the moment a consultation case arrives at the
institute until the pathologist provides a diagnosis to the customer. In
fiscal year 2003, AFIP's average turnaround time for a consultation case
was 15 days. In order to reduce its turnaround time, AFIP established a
new set of guidelines in the business plan for each of its departments and
laboratories and planned to monitor whether staff were following these
guidelines.11 The guidelines established time frames for the completion of
various tasks. For example, the guidelines state that a case should be
delivered to a pathologist within 24 hours of its arrival at the institute
and, depending on the complexity of the case, that most consultations
should result in a diagnosis by the pathologist within 2 to 5 days of the
case's arrival at the institute.
AFIP would also seek legislative authority to collect and retain fees
directly from civilian clients for consultation, education, and research.
The legislation formalizing AFIP's relationship with ARP authorized ARP to
receive grants and fees and authorized ARP and AFIP to collaborate on
medical research, consultation, and education with civilian medicine. In
response to DOD's criticism of AFIP's financial relationship with
ARP-specifically, ARP's lack of transparency and the costs of using
ARP-AFIP planned to seek legislation to change their relationship. The
plan stated that AFIP would increase the amount of revenues it collects
and improve its internal controls if it were allowed to take this function
over from ARP.
11The business plan refers to these guidelines as Standard Operating
Procedures or Practice Guidelines.
Finally, AFIP would develop internal controls that would allow it to
accurately determine the costs of providing services. DOD's reviews
criticized AFIP because it was unable to identify the costs associated
with providing specific procedures or types of services. These reviews
suggested that AFIP institute an accounting system that would allow AFIP
to track the costs associated with providing all of its services.12 DOD
officials concerned with overseeing AFIP also concluded that it would be
difficult to end the DOD subsidy of civilian services if AFIP could not
identify its costs.
AFIP Planned to Increase the Amount of Services Provided for the Military
Under the business plan's second initiative, AFIP planned to increase the
amount of services it provides for the military and decrease the amount of
services it provides for the civilian medical community. Under this
initiative, AFIP would improve the marketing of its pathology services to
military physicians by preparing promotional materials and presentations
to make them aware of the services that AFIP can provide, decrease the
amount of civilian research at AFIP that is funded by DOD, and increase
the number of educational programs offered to the military. A major
concern of DOD and AFIP officials had been that civilian use of AFIP's
services significantly exceeded that of the military. According to the
business plan, AFIP's budget and staff had steadily increased over the
last several decades to meet the demands of its civilian workload.
AFIP Planned to Reduce Its Staff
According to AFIP's business plan, the institute's staffing levels had
steadily increased in order to support its civilian workload; as a result,
the plan's third initiative called for a reduction of staff from 820 to
685 positions. The plan stated that the staff reduction was to be
completed by October 1, 2004. The business plan estimated that AFIP would
be able to absorb these staff cuts because of increased efficiencies that
would come from implementing other initiatives of the business plan. In
addition, the plan predicted that these staff reductions would not reduce
AFIP's productivity or inhibit the institute's ability to fulfill its
mission requirements.
AFIP Planned to Consolidate Its Facilities
The fourth initiative in the business plan called for AFIP to consolidate
its facilities from nine to five and the number of locations from seven to
three. Prior to the development of the business plan, AFIP sought a
solution to the deterioration of its primary facility at the Walter Reed
campus by having DOD build a new facility. In 1998 DOD chose to fund the
continuing renovation of AFIP's primary facility, and as of May 2005,
AFIP's primary facility had undergone extensive renovation. AFIP officials
said that the facility is still not adequate, but they have run out of
funds to continue the renovation.
12The business plan refers to this type of system as an "activity-based
cost accounting system."
The business plan also stated that AFIP would seek to replace its primary
facility on the Walter Reed campus through an alternative funding
mechanism, called an "enhanced use lease." An enhanced use lease is a
leasing agreement that allows a private company to build a building on
government land which is then leased back to the government. This type of
arrangement would not require DOD to fund the entire cost of construction.
According to DOD officials, many government agencies-including DOD-have
favored this type of arrangement in recent years because annual
appropriations need not be used for the full cost of construction, but
only the annual lease payments to the private developer. AFIP officials
have said that, although the business plan mentioned that AFIP hoped to
obtain an enhanced use lease, AFIP's building consolidation could occur
independently from this process.
AFIP Estimated That It Would Save $17.5 Million by Implementing Its Business
Plan
The business plan projected that three of its four initiatives would save
the institute $17.5 million a year when fully implemented. Specifically,
the business plan estimated that some of the planned changes to business
practices would result in additional revenues of $7.4 million annually,
staff reductions would create cost savings of $6.6 million annually, and
consolidations of facilities would save about $3.5 million annually. The
initiative to increase the amount of services provided for the military
was not intended to save money. AFIP projected that this combination of
increased revenues and reduced costs would allow DOD to reduce its funding
of AFIP by $17.5 million a year. Table 2 summarizes the business plan's
key initiatives and projected financial benefits.
Table 2: Summary of Key Initiatives and Projected Financial Benefits in
AFIP's Business Plan
Initiative Description
Initiative one: improve o Develop internal controls to ensure
business practices that all consultations are properly
billed, and increase the fees charged
for civilian consultations.
o Develop internal controls to ensure
that all consultations are performed in
a timely manner.
o Seek legislative authority to
directly collect and retain fees from
civilian clients for consultation,
education, and research services.
o Develop internal controls to allow
AFIP to determine the costs associated
with its civilian work.
o Initiative projected to result in
$7.4 million in increased revenues.
Initiative two: increase the o Improve marketing of AFIP services
amount of services provided for to military physicians.
the military o Decrease the amount of civilian
research that is funded by DOD.
o Increase the amount of educational
programs available to military
attendees.
Initiative three: staffing o Reduce the number of staff from 820
reductions to 685.
o Have no reduction in AFIP
productivity or adverse affect on
mission.
o Initiative projected to result in
$6.6 million annual savings.
Initiative four: facilities o Consolidate locations from seven to
consolidation three.
o Consolidate AFIP facilities from
nine to five.
o Explore the option of an enhanced
use lease.
o Initiative projected to result in
$3.5 million annual savings.
Source: GAO analysis of The Transformation Plan of the Armed Forces
Institute of Pathology.
In 2004 DOD officials began to draft a Management Initiative Decision
(MID), which would mandate cuts in AFIP's budget in anticipation of the
financial benefits described in the business plan.13 According to DOD
officials, decreases in AFIP's funding are intended to be offset by the
increased revenues and cost savings generated by the business plan. They
said that the budget reductions to be included in the MID are similar to
the financial benefits identified in AFIP's business plan. DOD officials
told us that as of May 2005, the final MID was on hold. DOD officials said
that AFIP's failure to achieve its projected financial benefits could
result in a budget shortfall for AFIP.
13A MID is a decision document designed by DOD to institutionalize
management reform decisions.
AFIP Has Improved Some Internal Controls; However, AFIP Is Unlikely to Achieve
the Annual Financial Benefits Projected in the Business Plan
AFIP has implemented some of the changes called for under the first
initiative of its business plan. This has resulted in improved internal
controls, particularly over the delivery of AFIP's consultation services
and related finances. However, AFIP has not made other improvements to
internal controls that were identified in the business plan. In addition,
AFIP is unlikely to achieve the annual financial benefits of $17.5 million
projected by the business plan. We found that the financial benefits from
implementing the business plan are likely to be significantly less. We
estimate that the financial benefits will be approximately $5 million.
This is largely because the plan's estimates were based on inaccurate and
incomplete data.
AFIP Has Improved Some Internal Controls but Has Not Implemented Others
In implementing its business plan, AFIP improved internal controls,
particularly over its consultation services and related finances. These
improvements were described in the first initiative of the business plan,
which called for AFIP to improve its business practices. As a result of
these changes, AFIP has improved its ability to accurately monitor and
bill its consultation cases. In addition, AFIP established new guidelines
to help ensure that the diagnosis of a consultation case is provided in a
timely manner. In contrast, AFIP has not developed other internal controls
described in the business plan. For example, AFIP has not developed the
ability to determine the costs associated with providing services for the
civilian medical community.
AFIP Developed Internal Controls to Ensure That All Consultations Are Properly
Monitored and Billed
AFIP expanded the capabilities of its electronic-consultation-tracking
system in early 2004 to improve the internal controls governing its
consultation services. This system is called the Pathology Information
Management System (PIMS). PIMS is an electronic database used by AFIP
staff to acknowledge the receipt of a consultation case and track case
materials as they move through the institute.14 In addition to improving
AFIP's ability to track its consultation cases, PIMS was expanded to
improve AFIP's billing capability. AFIP officials said that all laboratory
tests are now electronically ordered though this system and invoices are
electronically generated based on the type of tests that were performed.
According to AFIP officials, this electronic system represents a
significant improvement over AFIP's prior method for creating consultation
invoices where all invoices were created by hand. AFIP officials said the
new system makes it impossible to waive a fee without additional scrutiny
and ensures that AFIP's customers are charged only for tests needed to
make a diagnosis.
14Case materials include such items as tissue samples, x-rays, and case
histories.
AFIP Developed Internal Controls to Ensure That Consultations Are Performed in
a Timely Manner
In order to ensure that consultations are performed in a timely manner,
AFIP implemented a strategy to reduce its turnaround time. In 2003 AFIP
established a set of guidelines for each of its departments and
laboratories. Also since early 2003, AFIP managers have used information
from PIMS to track whether AFIP's pathologists and laboratories are
complying with these guidelines. AFIP reduced its average turnaround time
from 15 days in fiscal year 2003 to less than 5 days at the end of 2004.
AFIP Began to Bill Civilian Clients for Consultations
In October 2004, AFIP began billing civilian clients for consultation
services. DOD did not pursue legislation to amend the financial
relationship between AFIP and ARP, but DOD officials determined that AFIP
could collect and retain fees for consultation services. It is too soon to
measure the impact of this change, but AFIP officials said that by taking
over this function, AFIP will increase the amount of revenues that it
collects and improve internal controls. ARP continues to collect and
retain fees for AFIP's educational services and manage research grants.
While AFIP has achieved control over the consultation revenues it
collects, it has also lost much of the flexibility it once had in spending
those revenues. The consultation revenues that had been collected by ARP
were not subject to the restrictions placed on government funds, such as
the need to spend all funds credited to an annual appropriation in the
year for which the appropriation was made. In addition, AFIP officials
said they had been able to spend the funds in ARP registries more quickly
than they could have with other traditional government procurement
methods. For example, when members of the Armed Forces Office of the
Medial Examiner were sent to Iraq in support of Operation Iraqi Freedom,
the staff were able to use ARP registry funds to quickly obtain body armor
for the staff members. AFIP staff said that obtaining supplies through
government procurement methods would have taken more time.
AFIP Has Not Developed Internal Controls to Determine the Costs Associated
with Civilian Services
AFIP did not implement other internal controls called for in the business
plan. Specifically, AFIP has not developed the ability to determine the
costs associated with providing civilian services. Although AFIP did
institute a system in 2004 to begin tracking the time that pathologists
were engaged in broad categories of activity, such as education, research,
and consultation, as of May 2005, the institute did not have more specific
data, such as the time spent working on an individual consultation case.
AFIP officials are still considering developing such a system, but have
not done so. These data would be a necessary component of any system that
monitors the costs of providing AFIP's services.
The Business Plan's Projected Financial Benefits Were Based upon Inaccurate and
Incomplete Data
The business plan stated that changes to AFIP's business practices,
facilities, and staff cuts will result in $17.5 million in annual
financial benefits in the form of increased revenues and lower costs.
Because many of these projections were developed using inaccurate or
incomplete data, we estimate that the financial benefits from implementing
the business plan are likely to be significantly lower-approximately $5
million annually.
Increased Revenue from Improved Business Practices Will More Likely Be $1
Million Instead of $7.4 Million
AFIP's business plan projected that AFIP would increase its revenues from
civilian consultations by $7.4 million annually by increasing the fees
charged to civilians for consultation services and improving the
collection rate of those fees.15 However, we found that AFIP will more
likely increase its revenues by $1 million annually, primarily as a result
of its fee increase. AFIP raised fees for its civilian consultation
services in January 2004 and assumed responsibility from ARP for the
billing and collection of its consultation fees in October 2004.
AFIP based its projection of $7.4 million upon a series of assumptions
that are presented in the business plan. In late 2002, before increasing
fees for civilian consultations and before assuming responsibility for the
billing and collection of fees, AFIP collected a judgmental sample of 250
cases out of the approximately 23,600 civilian cases that AFIP completed
in 2002. Using this sample of cases, AFIP developed a calculation to
predict the amount of additional revenue that it would generate from
raising fees and assuming the billing and collection function from ARP.
(See app. III for a description of AFIP's analysis as presented in the
business plan.)
Although AFIP will probably increase its revenues as a result of raising
fees, AFIP's projection overestimated the likely increase in revenues.
Specifically, AFIP's analysis (1) overestimated the number of consultation
cases that AFIP would receive, (2) overestimated the average revenue AFIP
is likely to earn from each billable case and, (3) underestimated ARP's
collection rate. We found that if actual 2004 data were used in AFIP's
calculation, AFIP would achieve approximately $1 million in increased
revenues over the revenues collected by ARP in 2003. Figure 2 shows the
estimates presented in the business plan compared with actual 2004 data
provided by AFIP.
15A collection rate is the ratio of revenues collected versus revenues
billed.
Figure 2: AFIP's Business Plan Estimates and Actual 2004 Data for Civilian
Consultations
Financial Benefits from Staffing Reductions Will More Likely Be $4 Million
Instead of $6.6 Million
In its business plan, AFIP projected annual financial benefits of $6.6
million as a result of implementing staff cuts; however, as of May 2005,
AFIP stated that it planned to achieve $4 million in annual savings from
these cuts. The business plan also stated that AFIP planned to reduce its
total staff from 820 to 685 by October 2004. However, AFIP officials said
that at the time of the business plan's development, they did not have an
accurate count of the total number of staff working at AFIP. Officials
stated that this was partially due to challenges resulting from a lack of
central management over hiring, particularly with regard to contract staff
hired through ARP.16 Since implementing its business plan, AFIP officials
said that they have improved their ability to track the number of staff
working at the institute. AFIP and DOD officials have agreed on a savings
target of $4 million for reducing AFIP's staff. AFIP has developed lists
of positions to be cut, but as of May 2005 these staff cuts were on hold.
AFIP has primarily relied on attrition to reduce its staff. Table 3 shows
the number of staff working at AFIP and the primary funding source for
their positions.
16ARP assists AFIP in hiring staff in two ways. ARP manages several
DOD-funded personnel contracts which allow ARP to hire and pay for
contractors to work at AFIP. In addition, AFIP department chairs can ask
ARP to hire contract personnel with funds available in their registries.
AFIP officials explained that it was staff from the second category, staff
hired with funds from registries, that they had difficulty identifying at
the time of the business plan's development.
Table 3: Number of Staff Working at AFIP, 2000 to 2004
Year
Source of funding 2000 2001 2002 2003 2004
Army 78 72 66 79 67
Navy 53 45 67 49 50
Air Force 49 53 51 50 53
VA 14 15 14 14 18
General Schedule/civilian employees 309 296 304 286 258
DOD-funded contractors 237 226 318 338 307
Total DOD-funded staff Not available 707 820 816 753
Contractors paid with external, non-DOD
funding (e.g., funded by research grants, Included
ARP registry funds, etc.) above 63 43a 70 84
Total staff 740 770 863 886 837
Source: AFIP.
Note: AFIP officials said they are confident that they have identified all
staff working at AFIP in 2004 regardless of their funding streams. They
said they are less confident about staffing in prior years.
aAt the time of the business plan's development in 2002, AFIP could not
identify these 43 staff members working under ARP contract and paid for
with non-DOD sources of funding. AFIP officials later identified these
staff members but said that additional contractors who were not identified
might have been working at AFIP at this time.
AFIP Will Likely Achieve None of the $3.5 Million Annual Financial Benefits
Projected in the Business Plan from the Consolidation of Its Facilities
Although AFIP's business plan projected an annual financial benefit of
$3.5 million as a result of consolidating facilities, as of May 2005, AFIP
officials said they will not be making the facilities changes described in
the business plan and will therefore not realize the $3.5 million in
annual financial benefits from facilities consolidation.
Since 2002 AFIP has sought to replace its primary facility on the Walter
Reed campus through an alternative funding mechanism, called an "enhanced
use lease." However, several major developments have hindered AFIP's
ability to move forward with the lease and building consolidation.
Communities from adjacent neighborhoods have been opposed to constructing
a new building on the Walter Reed Campus, where AFIP hoped to have the new
building located. In addition, AFIP has reevaluated its plans to
consolidate all of its operations at its Walter Reed location because of
concern about moving the Armed Forces Office of the Medical Examiner into
Washington, D.C. AFIP officials have expressed concern that being located
within Washington, D.C., could hamper the medical examiner's ability to
respond to a crisis that affected the city.
In February 2005, AFIP's Board of Governors decided to place all plans for
facilities on hold while DOD reconsidered AFIP's future mission.17 All
future decisions about AFIP's primary facility and the consolidation of
facilities will be impacted by DOD's recommendation in May 2005 that AFIP
be closed as a part of the BRAC process.
Figure 3 summarizes our findings regarding the annual financial benefits
projected in the business plan.
Figure 3: GAO's Estimates of Likely Annual Financial Benefits from
Implementing the Business Plan
17The Board of Governors meets quarterly and establishes guidelines and
broad administrative and professional policies, consistent with the
objectives of the institute. The members of the Board of Governors are the
Assistant Secretary of Defense for Health Affairs; the Surgeons General of
the Army, Navy, and Air Force; the U.S. Surgeon General; the Under
Secretary for Health, Department of Veterans Affairs; and a former
Director of AFIP.
Implementation of the Business Plan Has Increased Services for the Military and
Decreased Services for Civilians
In implementing its business plan, AFIP increased the amount of services
provided for the military and decreased the amount of services provided
for civilians. Many pathologists we interviewed said that these trends
will likely continue in the future. Over the last several years, AFIP has
increased its military consultations and decreased its civilian
consultations. In addition, AFIP has reduced its civilian research and the
number of educational courses available to civilians. Staff reductions, as
well as other recent changes called for in the business plan, have
resulted in a loss of top pathologists. While AFIP has successfully
increased the amount of services to the military, the pathologists and
physicians we interviewed told us that the continued decline in civilian
services has reduced-and will continue to reduce-AFIP's overall level of
expertise. In addition to these changes at AFIP, DOD recently recommended
the closure of AFIP. If implemented, this would require that all services
currently provided by AFIP be discontinued, transferred to other parts of
DOD, or contracted out to the civilian medical community.
Military Consultations Have Increased While Civilian Consultations Have
Decreased
The number of military consultations sent to AFIP has increased while the
number of civilian consultations has decreased. From 2000 through 2004,
military consultations at AFIP increased by 30 percent while civilian
consultations decreased by 28 percent. Nearly all of the decrease in
civilian consultations occurred in the 2 years after AFIP announced that
it would raise its consultation fees beginning in January 2003.18 The
business plan called for AFIP to increase civilian fees in order to reduce
DOD funds supporting civilian services. At the time of the plan's
development, AFIP officials anticipated a 20 percent drop in civilian
consultations as a result of its increased fees.
Other reasons commonly cited for the decrease in civilian consultations
are not directly attributable to the business plan. AFIP and civilian
pathologists have said that a more competitive marketplace for
consultations, an overall decline in AFIP's reputation, and AFIP's slow
turnaround time in providing diagnoses have also contributed to the
decline. These pathologists also cited the loss of nationally recognized
experts at AFIP as another possible reason for the decline in the number
of civilian consultations being sent to AFIP. The expertise of AFIP's
pathologists is one reason that many civilian customers send consultations
to AFIP. Figure 4 shows trends in consultations since 2000.
18AFIP published an announcement of the fee increase in its newsletter
dated December 2002, and AFIP sent a letter announcing the increase to all
of its civilian customers. These announcements stated that AFIP would
increase its fees on January 1, 2003. AFIP did not raise its fees until a
year later because of delays in developing the necessary accounting
infrastructure to support the fee increases. However, AFIP's civilian
clients were not notified of this delay.
Figure 4: AFIP Consultations by Type of Consultation, 2000 to 2004
Note: AFIP performs consultations for VA in exchange for VA staff that
work at AFIP. AFIP does not charge VA fees for consultations.
The Amount of Civilian Research at AFIP Has Declined
The business plan called for AFIP to decrease the amount of DOD-funded
research that is not directly relevant to military operations. AFIP
officials said that it could continue to do civilian research if AFIP
pathologists were able to increase the amount of funding from outside
agencies or foundations, such as the National Institutes of Health. AFIP
shifted its DOD-funded research toward subjects that were of direct
interest to the military and encouraged pathologists that wished to do
civilian research to seek research grants from external sources. Although
"militarily relevant" research has not been well-defined, AFIP staff said
it generally includes subjects of direct interest to the military, such as
research on military body armor or bioterrorism.19 AFIP staff said that
they began to focus on increasing militarily relevant research and
reducing DOD-funded civilian research as early as 2001. AFIP developed
additional strategies to reduce DOD-funded civilian research in its
business plan, which was issued in 2003.
From 2000 through 2004, the number of research protocols at AFIP declined
from 371 to 296. A research protocol is a detailed proposal, approved by
AFIP's research committee, that describes the research that will be
completed. The decline in AFIP's research protocols has particularly
affected one type of civilian research-clinical-pathological
correlations-traditionally performed by AFIP researchers. In this type of
study, AFIP pathologists generally use the institute's repository of
disease specimens to describe the correlations that exist between the
clinical symptoms or attributes exhibited by a patient and the
pathological abnormalities of a specific disease or type of tumor. The
results of these studies are typically published by AFIP on its Web site,
in books called "fascicles," or in other scientific journals. Although
clinical-pathological correlations have helped to build the reputation of
AFIP, many AFIP pathologists we interviewed said this type of research
will likely decline at the institute in the future. Several department
chairs commented that correlations are effective marketing tools that
contribute to AFIP's reputation. Of the 17 department chairs who responded
to this question, 14 suggested that the reduction of DOD-funded civilian
research would negatively affect the institute.20 Figure 5 shows the
number of active research protocols from 2000 through 2004.
19Although this is generally the way DOD and AFIP officials have discussed
"militarily relevant" research within the context of the business plan,
some AFIP officials believe that if the research is relevant to medicine,
it is relevant to military medicine because military men and women and
their families ultimately benefit from this research.
20We surveyed or conducted interviews with 20 AFIP department chairs;
however, 3 chairs did not respond to this question.
Figure 5: AFIP Research Protocols, 2000 to 2004
The Number of Military Attendees at AFIP's Educational Courses Increased While
the Number of Civilian Attendees Decreased
From 2000 through 2004, the number of military attendees at AFIP's
educational courses increased while the number of civilian attendees
decreased. AFIP officials said that they began making changes to their
educational programs in 2001 in response to DOD's criticism of the amount
of services that AFIP provided for civilians and the low fees charged to
civilian attendees.21 Since 2001, fees for civilian courses were raised
and AFIP has begun to offer more educational courses that attract military
attendees. Furthermore, the business plan established criteria to
determine if an educational course at AFIP should be continued. AFIP
officials said that they generally will eliminate courses if fewer than 25
percent of the attendees are in the military or if revenues do not exceed
costs by at least 33 percent. Over the last several years, AFIP has used
new technology to offer additional courses for military physicians. For
example, in 2004, AFIP used video teleconferencing to teach 24 courses to
physicians at 35 military sites. In addition, AFIP has used Web-based
technology to allow its educational services to reach more physicians and
researchers. At the same time that AFIP increased its course offerings for
the military, it decreased the number of courses available to civilian
attendees. In 2000 AFIP offered 41 courses that were open to civilian
participants, whereas in 2004 AFIP offered 29 educational courses that
were open to civilians. Figure 6 shows the number of military and civilian
attendees at AFIP educational courses from 2000 to 2004.
21Center for Naval Analyses, An Analysis of Organizational and Funding
Alternatives for the Armed Force Insitute o Pathology (Alexandria, Va.:
February 2001).
Figure 6: Military and Civilian Attendees at AFIP Educational Courses,
2000 to 2004
Pathologists and Physicians Said That AFIP's Civilian Mission Is Essential for
Maintaining AFIP's Overall Level of Expertise
AFIP pathologists and civilian physicians said that AFIP's civilian
mission is essential for maintaining the institute's expertise and that
AFIP's civilian services are likely to continue to decline as a result of
implementing the business plan. DOD and AFIP officials have stated that
they want to preserve AFIP's civilian work but do not want to fund it with
increasingly scarce DOD funds. AFIP staff told us that consultations from
civilian patients are critical for maintaining the diagnostic expertise of
AFIP's professional staff primarily because rare and unusual disease
specimens are not commonly found in relatively young, active-duty military
personnel. AFIP pathologists have also provided research and education
services for the civilian medical community, which allows AFIP to maintain
its professional medical contacts and utilize the institute's repository
of disease specimens. AFIP pathologists told us that civilian pathologists
with nationally recognized reputations have come to work at AFIP because
of its international reputation, the type of cases that AFIP receives, and
its repository of disease specimens. AFIP pathologists also said that the
medical expertise gained from their interaction with civilian medicine
benefits the military through the consultations they provide for military
servicemembers and their families and their education and research
services, which cover a variety of topics that are useful to DOD.
Staff Reductions and Recent Changes at AFIP Have Resulted in the Loss of Top
Pathologists
Staff reductions called for by the business plan, as well as other recent
changes at AFIP, have resulted in a loss of top pathologists, diminishing
the institute's overall level of expertise.22 Between 2000 and 2004, the
total number of pathologists at AFIP-as well as the number of AFIP's most
senior physicians and researchers-declined. Although some of the losses of
top pathologists were due to reasons not associated with the business
plan, such as deaths and retirements, AFIP does not intend to replace
those losses because of impending staff reductions called for in the
business plan. The total number of pathologists and scientists at AFIP has
declined from 133 in 2000 to 96 in 2004, and AFIP's top pathologists and
scientists-its Distinguished Scientists and Senior Executive Service
employees-have declined from 19 in 2000 to 9 in 2004. Most of AFIP's
Distinguished Scientists and Senior Executive Service employees are
department chairs and have international reputations in the field of
pathology. According to representatives from the College of American
Pathologists, AFIP has historically had prestigious and well-respected
experts in the field of pathology. They told us that there appears to be
less of an emphasis on this level of expertise at AFIP in recent years.
22The majority of AFIP's staffing cuts have not yet occurred. In
anticipation of AFIP's need to save $4 million annually in personnel
costs, AFIP is not refilling many of its vacant positions. In addition, in
a move unrelated to the business plan, AFIP eliminated 55 positions in
2003 to address that fiscal year's budget shortfall.
Half of the 20 department chairs we interviewed said that the business
plan would negatively affect AFIP's ability to attract top pathologists in
the future and a quarter said they are less likely to remain at AFIP
because of changes called for by the business plan. The department chairs'
most commonly cited complaint with the business plan was that pathologists
must spend most of their time doing consultations rather than pursuing
research or educational activities. The College of American Pathologists
said that AFIP's loss of top pathologists is likely to hurt its ability to
attract civilian consultations in the future.
AFIP officials responsible for implementing the business plan said that
AFIP continues to be staffed by top-level pathologists and that top
pathologists and civilian consultations will continue to be attracted to
AFIP by the reputation of the institute rather than the reputation of
individual pathologists and scientists.
Although the loss of some top pathologists can be directly attributed to
the business plan, other changes in civilian and military medicine have
also affected the level of expertise at AFIP. Throughout the early part of
the 20th century, AFIP was the only institution in the country that
maintained expertise in every major area of anatomical pathology. With a
repository of millions of disease specimens and recognized expertise in
numerous subspecialties of pathology, AFIP drew large numbers of
consultations, research grants, and trainees on the basis of the
institute's unique reputation. According to AFIP's Scientific Advisory
Board, many changes in modern medical practice over the last several
decades have altered the environment in which AFIP operates. For example,
AFIP must now compete with 126 medical schools, many of which have
in-house experts, as well as competitors, such as the Mayo Clinic, that
have expertise in numerous subspecialties of pathology.
Conclusions
AFIP developed a business plan to improve internal controls and reduce
AFIP's need for DOD funding by making its civilian work pay for itself. In
implementing the business plan, AFIP instituted some of the internal
controls described in the plan but has not instituted others. AFIP has
also instituted business practices designed to make its civilian
consultation, education, and research activities less dependent on DOD
funding. These business practices appear to have had the effect of
decreasing AFIP's civilian work in each of those areas.
We estimate that AFIP's financial benefits, in the form of increases in
AFIP's revenues and reductions in AFIP's costs, are likely to be
significantly less than projected by the business plan. We found that this
is the case because the assumptions that AFIP used in its analysis were
inaccurate and because events that AFIP projected would result in savings,
such as staff cuts and facilities consolidation, did not occur.
Although DOD recently recommended the closure of AFIP as a part of the
Base Realignment and Closure process, the process has not been completed.
Until the process is completed, AFIP's inability to achieve its projected
financial benefits could result in a budget shortfall because DOD
officials said they intend to reduce AFIP's funding by the amount of the
financial benefits projected in the business plan.
Recommendation for Executive Action
In order to better manage changes being instituted at AFIP, we recommend
that the Assistant Secretary of Defense for Health Affairs reevaluate the
financial benefits projected in AFIP's business plan so that DOD will have
a more reliable estimate of AFIP's revenues and expenses.
Agency Comments
We requested comments on a draft of this report from DOD. DOD provided
written comments that are reprinted in appendix IV. In its comments, DOD
concurred with the report's findings and recommendation, noting that DOD
continues to monitor the implementation of AFIP's business plan and the
impact of the BRAC process on AFIP. DOD also said that the U.S. Army Audit
Agency will begin an audit of AFIP business practices to determine if the
institute is operating effectively and efficiently, and possesses the
tools to accurately articulate costs, accomplishments, and contributions
to the military mission. We also received technical comments from ARP on
selected sections of this report, which we incorporated as appropriate.
We are sending copies of this report to the Secretary of Defense,
appropriate congressional committees, and other interested parties. Copies
will also be made available to others upon request. In addition, this
report is available at no charge on GAO's Web site at http://www.gao.gov .
If you or your staff have any questions regarding this report, please call
me on (202) 512-7101 or Martin Gahart on (202) 512-3596. Tom Conahan,
Krister Friday, and Meridith Walters also made key contributions to this
report.
Marcia Crosse Director, Health Care
Appendix I: Objectives, Scope, and Methodology Appendix I: Objectives,
Scope, and Methodology
The Senate Committee on Armed Services, in a report accompanying the
Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005,
directed that we conduct a study of the Armed Forces Institute of
Pathology's (AFIP) business plan.1 In this report, we (1) describe the
business plan's key initiatives and projected financial benefits, (2)
evaluate the business plan's potential to improve AFIP's internal controls
and achieve its projected financial benefits, and (3) assess the likely
impact of the business plan on the role of AFIP in military and civilian
medicine. We performed our work from August 2004 through June 2005 in
accordance with generally accepted government auditing standards.
To describe the business plan's key initiatives and projected financial
benefits, we reviewed the business plan-called the The Transormaon Plan
ofhe Armed Forces Instute o Pathology-as well as numerous Department of
Defense (DOD) studies of AFIP that contributed to its development. These
studies included
o a 1999 DOD review entitled ABlueprint for the Future;
o two 1999 DOD Inspector General reports, the first reviewing
AFIP's administration and management, and the second reviewing
AFIP's controls over case-related materials;2
o a 2001 study by the Center for Naval Analysis evaluating AFIP's
business practices and analyzing a range of alternative funding
structures for AFIP;3
o a 2000 Report to Congress on AFIP's facilities issues;
o slides from a 2001 Council of Colonels/Captains study of AFIP's
funding arrangements, business practices, and oversight by DOD,
chartered by DOD's Office of the Secretary of Defense for Health
Affairs; and
o a 2001 draft report from DOD's Office of Program Analysis and
Evaluation, studying alternative funding arrangements for AFIP.
We evaluated a written copy of the business plan, dated October
2003, that was described by AFIP officials as the most current
draft. AFIP officials said that there is no "final" version of the
plan because it is an evolving document. While some of the changes
described in the business plan occurred as early as 2000, others
occurred after that or had not been implemented at the time of our
work. In evaluating the effects of the business plan for this
report, we generally provide data from 2000 to 2004. We
interviewed officials from AFIP; the American Registry of
Pathology (ARP); the Office of the Surgeon General of the Army;
the Office of the Under Secretary of Defense, Comptroller; and the
Office of Assistant Secretary of Defense for Health Affairs.
To evaluate the business plan's potential to improve AFIP's
internal controls and achieve its projected financial benefits, we
interviewed AFIP and ARP officials and reviewed the assumptions
and analyses that led to specific elements of the business plan.
In some cases, we were able to compare the plan's projected
financial benefits with information collected after specific
changes had been implemented. In other cases, we evaluated the
assumptions upon which specific analyses were based, by comparing
the assumptions with data collected in 2004.
We evaluated the analysis presented in the business plan, which
predicted AFIP's future revenues from taking over the billing and
collection activities for civilian consultations from ARP. AFIP
based its analysis upon three primary assumptions: (1) an
assumption of the average invoice per case under the new fee
schedule, (2) an assumption of future civilian consultations, and
(3) an assumption of ARP's collection rate compared with that of
AFIP. We compared the assumptions-which were based on data from
2002-with actual data from 2004 to evaluate their accuracy in
predicting AFIP's future civilian consultation revenues. In
addition, we asked AFIP to provide updates on other projections
presented in the business plan. We present these updated numbers
and compare them with the financial benefits projected in the
business plan.
We observed a demonstration of AFIP's Pathology Information
Management System (PIMS) as an example of the improvements made in
establishing internal controls and improving data management. AFIP
staff demonstrated the types of data that could be retrieved using
the system and provided us with both hard copy and automated
examples of the system's output. However, we did not test the data
in PIMS to verify their accuracy.
AFIP provided us with data on pending and completed staff cuts, as
well as information about staffing levels and their funding
sources over the last 4 years. AFIP officials explained how they
developed lists of positions to be cut as part of the business
plan's staff reductions. We also interviewed AFIP officials
responsible for developing and implementing the business plan and
20 of AFIP's 22 department chairs to understand the effects of the
business plan on the major areas of AFIP's operations.4
To assess the likely impact of the business plan on the services
that AFIP provides for military and civilian medicine, we
interviewed the AFIP staff described above, representatives from
the College of American Pathologists, and members of AFIP's
Scientific Advisory Board. We also reviewed data on AFIP's
consultation, research, and educational efforts to see how they
have changed since the development and implementation of the
business plan.
We interviewed AFIP and ARP staff to determine how data were
collected and maintained, but we did not independently verify the
accuracy of the data. The reliability of the data has been the
subject of critical findings in DOD reviews of AFIP. AFIP
officials demonstrated the systems they use to maintain data and
described their efforts to ensure their accuracy. In some cases,
AFIP provided us with data that differed from data published in
earlier reports and occasionally provided us with updated data
during the course of this review that differed from data that it
had provided us earlier. AFIP officials explained that this was
due to ongoing efforts on their part to improve the quality of
their data. We determined that the AFIP data used in this report
were adequate for our use.
The Armed Forces Institute of Pathology's (AFIP) core mission is
to provide consultation, research, and educational services for
the civilian and military medical communities. In addition to this
core mission, AFIP has a variety of other missions mandated by
Congress and the Department of Defense (DOD). The DOD directive
describing AFIP's missions lists the specific responsibilities and
functions for which AFIP is responsible.1 It states that the
Director, AFIP, as a national and international expert on human
and veterinary pathology, supporting both military and civilian
medicine, is responsible for
o reviewing the diagnosis of pathology tissue for the Armed
Forces;
o conducting diagnostic and consultation services for military
and civilian medicine using histopathology, electron microscopy,
immunohistochemistry, and molecular biological tools with leverage
of the latest technology to ensure innovative pathology;
o conducting experimental, statistical, and morphological
research and investigations to expand pathology and medicine
beyond current levels of knowledge in support of DOD planning,
initiatives, and operations;
o administering an effective Armed Forces Medical Examiner
system;
o contracting with the American Registry of Pathology for
cooperative efforts between the AFIP and the civilian medical
profession;
o maintaining the Armed Forces repository of specimen samples for
the identification of human remains and storing reference samples
suitable for deoxyribonucleic acid (DNA) analysis for identifying
human remains while assuring the protection of privacy;
o supporting DOD medical quality assurance programs and risk
management with the Department of Legal Medicine;
o administering the Military Health System Patient Safety Center;
o staffing the Center for Clinical Laboratory Medicine and
providing oversight for compliance with the Clinical Laboratory
Improvement Amendments of 1988;
o serving as the DOD veterinary pathology resource expert,
providing consultation, education, and research in pathology and
laboratory animal medicine;
o maintaining medical illustration services for important
illustrative material, except original motion picture footage;
o maintaining, facilitating, expanding, and improving the
advancement of the activities of the National Museum of Health and
Medicine pertinent to collecting, preserving, interpreting, and
financial reporting on the national collection of medical
artifacts, pathological and skeletal specimens, research
collections and archival resources, and applicable materials from
other federal medical sources and developing, presenting, and
promoting public programs and exhibitions and participating in
informational activities that improve the understanding and
awareness of military medical history, medical science, disease
prevention, and health education;
o maintaining a mechanism to access and track all case records
and materials given to AFIP for consultation into a permanent,
unified repository system, and central database;
o managing and directing the DOD Automated Tumor Registry and
related activities, and overseeing access to the registry or a
treatment facility's database, consistent with a research protocol
approved through the institutional review board affiliated with
the facility maintaining or giving oversight of the records or
database;
o providing, on a reimbursable basis, education and training
programs in pathology and other related areas of medicine for
military and civilian participants throughout the United States
and foreign countries;
o maintaining a medically current collection of study materials,
which may be made available to military and civilian medicine;
o coordinating and enhancing genetic services in operational and
clinical medicine through AFIP's Center for Medical and Molecular
Genetics;
o providing clinical and investigative studies in experimental
pathology with a focus on military relevancy and the protection of
public safety;
o developing collaborative research protocols to assess current
technologies and their innovative applications, which bring
together government, academia, and private industry; and
o performing other duties as assigned by the Assistant Secretary
of Defense for Health Affairs.
In its business plan, the Armed Forces Institute of Pathology
(AFIP) projected that it would increase its revenues from civilian
consultations by $7.4 million annually as a result of increasing
the fees it charges to civilians for consultation services and
improving the collection rate of those fees. The business plan
contains an analysis of how AFIP developed this projection. AFIP's
analysis was based upon three primary assumptions about its future
operations. It included (1) an assumption of the American Registry
of Pathology's (ARP) collection rate, (2) an assumption of the
number of civilian consultations that AFIP expected to receive in
the future, and (3) an assumption of the average revenue per
invoice under the new fee schedule. Based on 2004 performance
data, we found that the values that AFIP assumed for each of these
were inaccurate. Thus, the business plan's estimate of financial
benefits from changes to its business practices significantly
overstated the actual benefits.
To develop its assumptions, AFIP officials collected data from a
judgmental sample of 250 consultation cases out of the
approximately 23,600 civilian consultation cases that AFIP
completed in 2002. AFIP officials said that they selected the
sample of cases in such a way as to reflect the general
distribution of consultations among AFIP's departments. AFIP
officials said they determined the total amount of revenues that
were invoiced, collected, and written off by ARP for each of the
250 cases.1 AFIP officials then determined what they would have
invoiced for these same 250 cases under their new schedule.2 Table
4 provides the information that AFIP compiled for these 250 cases.
1S. Rep. No. 108-260, at 349 (2004).
2DOD, Office of the Inspector General, Admnistration and Management of the
Armed Forces Insitute of Pathoogy: Report No. 00-010 (Arlington, Va.:
October 1999), and DOD, Office of the Inspector General, Controls Over
Case-Related Materal at the Armed ForcesInstitute of Pathology: Report No.
99-119 (Arlington, Va.: April 1999).
3Center for Naval Analyses, An Analysis of Organizational and Funding
Alternatives for the Armed Force Insitute o Pathology (Alexandria, Va.:
February 2001).
4In December 2004, AFIP officials provided us with a current list of all
AFIP department chairs. Since that time, some departments have been
eliminated or experienced personnel changes.
Appendix II: The Armed Forces Institute of Pathology's Missions Appendix
II: The Armed Forces Institute of Pathology's Missions
1DOD Directive 5154.24, October 3, 2001.
ApAPR Appendix III: Analysis of the Armed Forces Institute of Pathology's
Consultation Revenue Projections
AFIP Developed a Judgmental Sample from 2002 Civilian Consultations
1For a variety of reasons, some consultation cases were written off, or
not charged to the client. In some cases, it was AFIP's policy not to
charge certain types of clients. For example, AFIP did not charge clients
from developing nations. In other cases, AFIP department chairs could
write off consultation fees in instances where they had asked fellow
physicians to send them rare cases for research purposes. However, these
cases were still counted as consultation cases in AFIP's data.
2AFIP officials conducted this analysis in 2002, before they instituted
the new fee schedule. However, they had already developed the fee
schedule, and, therefore knew what the fees would be.
Table 4: AFIP's Analysis of 250 Sample Cases from 2002
New
invoice Total
if number
billed of
under cases
new fee in
Department Invoiced Collected Written-off Uncollected schedule sample
Armed Forces
Medical Examiner $425 $0 $425 $0 $171 1
Department of
Cadiovascular
Pathology 1,220 600 150 470 3,433 7
Department of
Cellular
Pathology 990 240 600 150 2,555 5
Department of
Dermatopathology 5,015 2,880 550 1,585 11,475 27
Department of
Head and Neck
Pathology 3,320 1,940 360 1,020 7,093 19
Department of
Environmental
and Toxicology
Pathology 450 0 0 450 684 3
Department of
Genitourinary
Pathology 4,120 2,770 420 930 5,620 26
Department of
Gynecology and
Breast Pathology 6,435 4,845 270 1,320 14,242 27
Department of
Hematopathology 2,350 1,000 975 375 14,187 8
Department of
Hepatic and
Gastroenterology
Pathology 6,515 2,655 540 3,320 31,221 30
Department of
Infectious and
Parasitic
Disease
Pathology 1,645 1,125 0 520 6,122 8
Department of
Neurological and
Ophthalmic
Pathology 5,330 2,620 1,460 1,250 14,442 18
Department of
Oral and
Maxillofacial
Pathology 1,830 1,340 0 490 3,445 10
Department of
Orthopedic
Pathology 1,690 970 420 300 2,978 10
Department of
Pulmonary and
Mediastinal
Pathology 3,910 2,640 0 1,270 5,728 15
Department of
Radiological
Pathology 0 0 0 0 342 2
Department of
Soft Tissue
Pathology 4,775 1,950 1,875 950 10,852 16
Department of
Forensic
Toxicology 120 0 0 120 513 3
Department of
Telemedicine 275 0 200 75 1,456 2
Department of
Veterinary
Pathology 0 0 0 0 1,882 11
DOD DNA Registry 360 360 0 0 342 2
Total $50,775 $27,935 $8,245 $14,595 $138,785 250
Source: AFIP.
Notes: DNA = deoxyribonucleic acid. DOD = Department of Defense.
AFIP's Analysis Included Three Primary Assumptions
AFIP used the information in table 4 to develop two of its three primary
assumptions. First, AFIP officials used the data collected for these 250
cases to determine that ARP had achieved a collection rate of 55 percent
for those cases. AFIP assumed that by taking over the billing and
collection function from ARP, it would be able to achieve a collection
rate of at least 80 percent.
Second, AFIP determined what the average revenue per case would be if each
of the 250 cases from the sample was invoiced under its new fee schedule.
AFIP estimated that it would bill $138,785 if the 250 cases were invoiced
under the new fee schedule. AFIP divided $138,785 by 250, which resulted
in an average invoice of $555 per case. AFIP assumed that under the new
schedule, $555 would be the average revenue per invoice for all of its
civilian consultation cases.
AFIP's third assumption, that it would receive 30,224 civilian
consultations cases annually, was not derived from table 4. The business
plan stated that this was the amount of civilian consultation cases that
AFIP received in 2002. Total revenues would be calculated from this
baseline estimate of consultation cases. AFIP assumed that the increase in
fees would result in a 20 percent reduction in total consultation
revenues.
After developing these assumptions, AFIP officials developed a calculation
to predict the institute's future revenues by multiplying the number of
civilian consultation cases by the average invoice per case. Next, they
estimated that there would be some reductions in revenues. They estimated
that the implementation of new practice guidelines governing how
consultation cases are handled within the institute would result in a 10
percent reduction in revenues and that higher fees would result in an
additional 20 percent reduction in revenues.3
From their calculation, AFIP officials estimated that they would generate
a total of approximately $9.6 million in annual revenues in future years.
AFIP reported that ARP collected approximately $2.2 million in
consultation revenues in 2002. By subtracting ARP's 2002 revenues from
AFIP's estimated revenues, AFIP projected that it would generate $7.4
million in additional annual revenues. Table 5 shows how AFIP performed
these calculations.
3As a part of AFIP's practice guidelines, AFIP established policies that
were designed to ensure that only the minimum number of tests needed to
provide a diagnosis was performed. AFIP officials assumed that this would
lower the total number of procedures performed per consultation case,
thereby affecting anticipated revenues.
Table 5: AFIP's Projection as Presented in the Business Plan
Calculation Inputs Total
Step 1: AFIP identified 30,224
civilian consultation cases in 2002 30,224
Step 2: AFIP multiplied the number
of cases by the estimated average
invoice that would be generated by
each case 30,224 x $555.14 $16,778,000
Step 3: AFIP assumed that it would
be able to collect 80 percent of
total invoices billed 80 percent of $16,778,000 13,423,000
Step 4: AFIP projected a 10 percent
reduction in revenues due to the 10 percent reduction of
implementation of its new practice $13,423,000 ($13,423,000
guidelines minus $1,342,000) 12,081,000
Step 5: AFIP projected a 20 percent
reduction in revenues due to the 20 percent reduction of
implementation of its new fee $12,081,000 ($12,081,000
schedule minus $2,416,000) 9,600,000
Estimate of the total amount
collected by AFIP after taking over
billing and collection from ARP and
increasing fees: 9,600,000
Step 6: AFIP estimated that ARP
collected $2.2 million in
consultation revenues in 2002 2,200,000
Step 7: AFIP compared its estimated
collections with those of ARP in
2002 $9,600,000 - $2,200,000
Estimate of annual increase in
revenues $7,400,000
Source: GAO analysis of AFIP data.
Note: Numbers may not sum because of rounding.
The Three Primary Assumptions Used in AFIP's Analysis Were Inaccurate
Using actual data from 2004, we determined that the three primary
assumptions that AFIP used in its analysis were inaccurate.
1. AFIP assumed that ARP achieved an annual collection rate of 55
percent. However, according to data provided by AFIP, ARP achieved
a collection rate of 80 percent in 2004. One reason that the
250-case sample showed a significantly lower collection rate is
that ARP collected payments for some of the cases shown in table 4
after November 2002-the time of AFIP's data request to ARP. In the
5 months that followed AFIP's analysis, ARP collected 37
additional payments, which AFIP did not consider when calculating
ARP's collection rate. Including these additional collections
would have increased ARP's collection rate for the 250-case sample
from 55 to 73 percent.4 In addition, ARP stated that the sample
included 30 cases that were not invoiced by ARP. For 17 of the
cases, the pathologist did not provide ARP with documentation of
which medical procedures had been performed. For the other 13, it
was AFIP's policy not to bill for those types of cases.5
2. AFIP officials assumed that they would collect an average of
$555 per case under AFIP's new fee schedule. However, in 2004, the
first year in which the new fee schedule was in effect, the
average revenue per case was $299.83. This is primarily because
AFIP's sample of 250 cases was not a reliable predictor of average
cases over an entire year.
3. In its business plan, AFIP assumed that it would receive 30,224
civilian cases a year. However, AFIP officials reported to us that
the institute had received approximately 23,600 civilian cases in
2002. AFIP officials said they made the larger assumption and used
that number as a baseline for their calculation because at one
time they had identified 30,224 civilian cases for 2002. Since
then, they have engaged in a quality review of their data and
discovered that some of the consultations had been entered
incorrectly. AFIP identified 15,646 civilian consultation cases to
be billed in 2004.
4According to data provided by AFIP, ARP also achieved an 80 percent
collection rate for all consultations revenues generated in 2003.
Results from Our Calculation Using Actual 2004 Data
If the assumptions presented in the business plan are replaced with actual
data collected by AFIP in 2004, AFIP stands to generate $6.4 million less
in annual revenue than originally projected. Table 6 shows how we
developed our calculation of AFIP's likely financial benefits using 2004
data. We estimate that AFIP will achieve approximately $1 million in
additional annual revenues.
5Prior to the expansion of AFIP's electronic Pathology Information
Management System, AFIP pathologists filled out work sheets (called "Green
Sheets") by hand which would indicate what medical procedures were
performed on a consultation. This work sheet was then sent to ARP, where
an invoice was generated and the client was billed.
Table 6: Calculation Using Actual Data from 2004
Calculation Inputs Total
Step 1: AFIP identified 15,646 civilian
consultation cases to be billed in 2004 15,646
Step 2: AFIP reported that the average invoice
per consultation case in 2004 was
approximately $300 under the new fee schedule $299.83 $299.83
Step 3: Multiply average revenue per case by
the number of anticipated cases 15,646 x $299.83 $4,691,000
Step 3: AFIP anticipates that it will achieve
an 80 percent collection rate of invoices 80 percent of
billeda $4,691,000 $3,753,000
Estimate of the total amount collected by AFIP
after taking over billing and collection from
ARP and increasing fees $3,753,000
Step 6: AFIP reported that ARP collected $2.7
million in 2003 $2,713,000
Step 7: AFIP's new projected revenue compared $3,753,000 -
with those of ARP in 2003 $2,713,000
New estimate of increased revenues $1 million
Source: GAO analysis of AFIP data.
Note: Numbers may not sum because of rounding.
aAFIP instituted its new fee schedule in January 2004. Since AFIP took
over billing and collection from ARP in October 2004, it is too early to
accurately assess AFIP's actual collection rate. AFIP assumed in its
previous calculation that it could achieve an 80 percent collection rate;
therefore, we used that estimated percentage in our calculation.
Ap of Appendix IV: Comments from the Department of Defense
(290395)
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Highlights of GAO-05-615 , a report to congressional committees
June 2005
ARMED FORCES INSTITUTE OF PATHOLOGY
Business Plan's Implementation Is Unlikely to Achieve Expected Financial
Benefits and Could Reduce Civilian Role
DOD has raised concerns about certain business practices of the Armed
Forces Institute of Pathology (AFIP), including its role in civilian
medicine. In response, AFIP implemented changes and drafted a business
plan. On May 13, 2005, DOD recommended closing AFIP as part of the Base
Realignment and Closure process. The Senate Committee on Armed Services,
in a report accompanying the Ronald W. Reagan National Defense
Authorization Act for Fiscal Year 2005, directed that GAO study AFIP's
business plan. GAO (1) described the business plan's key initiatives and
projected financial benefits, (2) evaluated the business plan's potential
to improve internal controls and achieve financial benefits, and (3)
assessed the likely impact of the business plan on the role of AFIP in
military and civilian medicine. GAO reviewed the major assumptions and
analyses for developing the plan and interviewed AFIP and DOD officials,
and members of the civilian medical community.
What GAO Recommends
In order to better manage changes being instituted at AFIP, GAO recommends
that the Assistant Secretary of Defense for Health Affairs reevaluate the
financial benefits projected in AFIP's business plan so that DOD will have
a more reliable estimate of AFIP's revenues and expenses. DOD concurred
with GAO's findings and recommendation.
AFIP's business plan has four key initiatives: improving AFIP's business
practices, increasing the amount of services it provides for the military,
reducing staff, and consolidating its facilities. The business plan
describes various efforts in support of each of these initiatives. AFIP
estimated that the changes described in its business plan will result in
$17.5 million in annual financial benefits.
Under the business plan, AFIP improved internal controls over some of its
operations, particularly over AFIP's consultation services and related
finances; however, AFIP has not implemented other internal controls
described in the business plan such as developing a system to determine
AFIP's costs for performing specific activities. In addition, GAO's review
indicated that AFIP is unlikely to achieve all of the financial benefits
projected in the business plan. Financial benefits from the business plan
will likely be approximately $5 million-$12.5 million less than AFIP
projected.
In implementing its business plan, AFIP has changed its balance of
military and civilian work, and AFIP and civilian pathologists said that
these trends are likely to continue. DOD and AFIP officials have stated
that they want to preserve AFIP's civilian work but do not want to fund it
with increasingly scarce DOD funds. Over the last several years, AFIP has
reduced the amount of consultation, research, and education services it
provides for the civilian medical community and increased the amount of
services it provides for the military. AFIP pathologists told GAO that
they expect AFIP's civilian consultation, research, and education to
continue to decline in the future. Half of AFIP's 20 department chairs
believe that the business plan would negatively affect AFIP's ability to
attract top pathologists in the future.
Although DOD recently recommended the closure of AFIP as a part of the
Base Realignment and Closure process, the process has not been completed.
Until the process is completed, AFIP's inability to achieve its projected
financial benefits could result in a budget shortfall because DOD
officials said they intend to reduce AFIP's funding by the amount of the
financial benefits projected in the business plan.
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