Veterans' Disability Benefits: VA Should Improve Its Management  
of Individual Unemployability Benefits by Strengthening Criteria,
Guidance, and Procedures (30-MAY-06, GAO-06-309).		 
                                                                 
As part of its Disability Compensation program, the Department of
Veterans Affairs (VA) provides Individual Unemployability (IU)	 
benefits to veterans of any age who are unemployable because of  
service-connected disabilities. Over the last decade, the number 
of IU beneficiaries and benefit costs have more than tripled. In 
2005, about 220,000 veterans received an estimated $3.1 billion  
in IU benefits. In response to a congressional request, GAO	 
assessed VA's management of IU benefits. This report (1) examines
the added value of IU benefits for veterans of selected ages and 
disability ratings, (2) assesses the criteria, guidance, and	 
procedures used for initial decision making, (3) assesses VA's	 
ongoing eligibility enforcement procedures, and (4) compares VA's
decision-making and enforcement procedures with those used by	 
other disability programs.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-309 					        
    ACCNO:   A54839						        
  TITLE:     Veterans' Disability Benefits: VA Should Improve Its     
Management of Individual Unemployability Benefits by		 
Strengthening Criteria, Guidance, and Procedures		 
     DATE:   05/30/2006 
  SUBJECT:   Disability benefits				 
	     Eligibility criteria				 
	     Eligibility determinations 			 
	     Unemployment compensation programs 		 
	     Veterans						 
	     Veterans benefits					 
	     Veterans disability compensation			 
	     VA Disability Compensation Program 		 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-06-309ERRAT

     

     * Results in Brief
     * Background
          * VA's Process for Making IU Decisions and Enforcing Complianc
          * Studies and Proposals for Strengthening VA's Provision of IU
     * The Added Value of IU Benefits Over A Lifetime Depends on th
     * VA's Decision-making Criteria, Guidance, and Procedures Do N
          * VA Lacks Key Criteria and Guidance Needed to Determine Unemp
          * VA Guidelines Lack Procedures for Obtaining Necessary Eviden
               * VA Does Not Have Sufficient Procedures to Obtain Complete an
          * VA Lacks Procedures for Obtaining Vocational Assessments of
          * VA Staff Express Concerns that They May Have Awarded IU Bene
     * VA's Earnings Enforcement Process is Inefficient and Ineffec
          * VA Uses a Multi-Step Process to Evaluate Beneficiaries' Ongo
          * VA's Process to Evaluate Beneficiaries' Ongoing IU Eligibili
          * VA Has Insufficient Guidance to Evaluate Beneficiaries' Earn
          * VA Has Weak Criteria to Evaluate Beneficiaries' Ongoing Elig
          * VA Management Does Not Track and Review the Outcome of Its E
     * VA's Practices to Manage Its Disability Benefits Lag Behind
          * Private Insurers' Eligibility Assessment Processes Focus on
          * VA Lacks Some of SSA's Eligibility Assessment and Return-to-
          * SSA Has Implemented Practices to Help Ensure the Financial I
     * Conclusions
     * Recommendations for Executive Action
     * Agency Comments
     * GAO Contacts
     * Acknowledgements
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Report to Congressional Requesters

United States Government Accountability Office

GAO

May 2006

VETERANS'DISABILITY BENEFITS

VA Should Improve Its Management of Individual Unemployability Benefits by
Strengthening Criteria, Guidance, and Procedures

GAO-06-309

This report was revised on October 23, 2006, to correct two pie charts and
accompanying text dealing with the ages of (1) all IU beneficiaries as of
October 2005 and (2) new IU beneficiaries from October 2004 to October
2005. See pages iv and v for a list of data changes.

Contents

Letter 1

Results in Brief 5
Background 7
The Added Value of IU Benefits Over A Lifetime Depends on the Veteran's
Individual Circumstances 13
VA's Decision-making Criteria, Guidance, and Procedures Do Not Ensure That
IU Decisions Are Well Supported 16
VA's Earnings Enforcement Process is Inefficient and Ineffective 23
VA's Practices to Manage Its Disability Benefits Lag Behind Other
Disability Programs 27
Conclusions 36
Recommendations for Executive Action 37
Agency Comments 38
Appendix I IU Beneficiaries and Estimated Expenditures 40
Appendix II Lifetime Present Value Analysis of IU Benefits 42
Appendix III Examples from VA's Rating Schedule for Selected Medical
Conditions 45
Appendix IV Example of Procedures to Calculate Combined Disability Ratings
46
Appendix V Comments from the Department of Veterans Affairs 47
Appendix VI GAO Contacts and Staff Acknowledgements 50

Tables

Table 1: VA Basic Monthly Disability Compensation Rates in 2005 7
Table 2: SSA's Debt Collection Tools for Benefit Overpayments 35
Table 3: Lifetime Present Value of Increased Benefits for Veterans
Receiving IU by Selected Ages and Schedular Ratings 43
Table 4: VA's Rating Schedule for Selected Medical Conditions 45

Figures

Figure 1: Types of Service-Connected Impairments of IU Beneficiaries as of
October 2005 9
Figure 2: Ages of IU Beneficiaries as of October 2005 11
Figure 3: Estimated Lifetime Present Values of the Added Benefits for
Veterans Awarded IU Benefits in 2005 at Selected Ages and Schedular
Ratings 14
Figure 4: Ages of New IU Beneficiaries from October 2004 to October 2005
15
Figure 5: Number of IU Beneficiaries for 1996 to 2005 40
Figure 6: Estimated IU Expenditures for 1996 to 2005 41
Figure 7: Procedures to Calculate Combined Disability Rating 46

Abbreviations

DI Disability Insurance

HHS Department of Health and Human Services

IRS Internal Revenue Service

ITC Information Technology Center

IU Individual Unemployability

NDNH National Directory of New Hires

PMC Pension Maintenance Center

SSA Social Security Administration

SSI Supplemental Security Income

VA Department of Veterans Affairs

VHA Veterans Health Administration

VR&E Vocational Rehabilitation & Employment Service

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

This report was revised to correct two pie charts and accompanying text
dealing with the ages of (1) all IU beneficiaries as of October 2005 and
(2) new IU beneficiaries from October 2004 to October 2005. The report's
conclusions and recommendations were not changed.

In the Highlights Page, under "What GAO Found," second paragraph,

           o  On line 1, we replaced "the vast majority (79 percent)" with
           "just under half (46 percent)."

In the Results in Brief, page 5, first paragraph,

           o  On line 13, we replaced "the vast majority" with "just under
           half;" and
           o  On line 14, we replaced "79" with "46."

In the Background, page 10, second paragraph,

           o  On line 2, we deleted "vast;" and
           o  On line 5, we replaced "77" with "51."

The corrected percentages in "Figure 2: Ages of IU Beneficiaries as of
October 2005," page 11, are as follows:

Age Category Percentage 
20 - 49      13         
50 - 59      36         
60 - 64      13         
65+          38         

In the section on "The Added Value of IU Benefits Over A Lifetime Depends
on the Veteran's Individual Circumstances," page 14, second paragraph,

           o  On line 2, we replaced "the vast majority" with "just under
           half."

And page 15, first paragraph,

           o  On line 1, we replaced "79" with "46."

The corrected percentages in "Figure 4: Ages of New IU Beneficiaries from
October 2004 to October 2005," page 15, are as follows:

Age Category Percentage 
20 - 49      15         
50 - 59      39         
60 - 64      14         
65 - 69      5          
70 - 74      6          
75+          19         

United States Government Accountability Office

Washington, DC 20548

May 30, 2006

The Honorable Jeff Miller Chairman Subcommittee on Disability Assistance
and Memorial Affairs Committee on Veterans' Affairs House of
Representatives

The Honorable Larry E. Craig Chairman Committee on Veterans' Affairs
United States Senate

The Honorable Henry E. Brown, Jr.

Chairman

Subcommittee on Health

Committee on Veterans' Affairs House of Representatives

The Department of Veterans Affairs (VA) manages a range of benefit
programs that, among other things, compensate veterans for disabilities
incurred or aggravated during active military service. Military personnel
in combat are now surviving injuries that would have been fatal in past
conflicts, but along with this survival has come an increased rate of
disabilities.1 With the continuing deployment of our military forces to
armed conflicts in Iraq and Afghanistan and the use of military personnel
in other efforts involving fighting terrorism and national preparedness,
the effective and efficient management of VA's disability programs is of
paramount importance.2 The largest of these programs is the Disability
Compensation program, which as of September 2005, paid an estimated $29
billion in benefits to 2.6 million veterans in compensation for lost
earning capacity due to service-connected disabilities. Through this
program, VA provides benefits to veterans in accordance with a Schedule
for Rating Disabilities that categorizes disabilities on a scale ranging
from 0 percent to 100 percent (in increments of 10 percentage points),
which is intended to equate to the average loss in earning capacity
resulting from the service-connected disability. Under VA's regulations
governing Individual Unemployability (IU), VA can grant total disability
compensation benefits at the 100-percent level to veterans of any age
whose service-connected disabilities are rated at 60 percent or higher and
have caused them to be unemployable. Although disability compensation
benefits are provided to veterans regardless of their income, VA places an
earnings limit on the continued receipt of IU benefits. This limit applies
only to the veteran's earnings, and not to the veteran's unearned income
or household income. Managing IU benefits involves not only assessing
initial eligibility for benefits, but also ensuring beneficiaries' ongoing
eligibility by identifying those who are not in compliance with the
earnings limit.

1 GAO, VA Disability Benefits and Health Care: Providing Certain Services
to the Seriously Injured Poses Problems, GAO-05-444T (Washington, D.C.:
Mar. 17, 2005).

2 GAO, Military Personnel: Preliminary Observations on Recruiting and
Retention Issues within the U.S. Armed Forces, GAO-05-419T (Washington,
D.C.: Mar. 16, 2005); and GAO, National Preparedness: Integration of
Federal, State, and Local Efforts Is Critical to an Effective National
Strategy for Homeland Security, GAO-02-621T (Washington, D.C.: Apr. 11,
2002).

VA has experienced a marked increase in IU beneficiaries and expenditures
at a time when advances in medicine and technology, along with labor
market changes, have provided greater opportunity for people with
disabilities to seek and maintain employment.3 This trend has caused
concern among Members of Congress about VA's management of IU benefits.
Our analysis of VA data shows that the number of IU beneficiaries and
payments has more than tripled since the mid-1990s. From September 1996 to
September 2005, the number of veterans receiving IU benefits has increased
from about 71,000 to about 220,000. Moreover, we estimated that IU benefit
payments from 1996 to 2005 have grown from about $857 million to $3.1
billion. In September 2005, nearly half of all veterans receiving
disability compensation who were rated between 60 percent and 90 percent
received IU benefits. (See app. I for a discussion of our estimation
methods and figures showing IU beneficiaries and expenditures over the
last decade.)

This report continues GAO's long-standing reviews of VA and other federal
disability programs. In January 2003, GAO determined that federal
disability programs, including those of VA, were in urgent need of
attention and transformation, and placed the modernization of federal
disability programs on its high-risk list.4 With regard to VA, we have
reported that the agency's Disability Compensation program has struggled
to make timely and accurate decisions and that the program does not
reflect the current state of science, technology, medicine, and the labor
market. Over the last 2 decades, GAO, the VA Inspector General, and the
United States Court of Appeals for Veterans Claims,5 have raised a number
of concerns about VA's management of IU benefits, including problems with
both the decision-making process and enforcement procedures. Many of these
problems remain to be addressed. You asked us to examine the criteria VA
uses in determining initial eligibility for IU benefits and VA's efforts
to enforce ongoing eligibility. In response to your request, this report
(1) examines the potential added value of IU benefits over a lifetime for
veterans of selected ages and disability ratings, (2) assesses the extent
to which VA has the decision-making criteria, guidance, and procedures to
ensure its IU decisions are well supported, (3) assesses the extent to
which VA has efficient and effective enforcement procedures, and (4)
compares decision-making and enforcement procedures used by other
disability programs with VA's procedures.

3 For more information on how the relationship between impairments and
work has been redefined, see GAO, SSA Disability: Return-to-Work
Strategies From Other Systems May Improve Federal Programs,
GAO/HEHS-96-133 (Washington, D.C.: July 11, 1996); and GAO, SSA
Disability: Other Programs May Provide Lessons for Improving
Return-to-Work Efforts, GAO-01-153 (Washington, D.C.: Jan. 12, 2001).

To examine the potential added value of IU benefits, we estimated lifetime
present value of IU benefits for veterans of various ages with disability
ratings between 60 percent and 90 percent. (See app. II for more
information on our methods.)6 To assess VA's IU decision-making criteria
and processes, we reviewed agency regulations and guidance, GAO reports,
Court of Appeals for Veterans Claims decisions, VA Inspector General
reports, and VA's 2001 proposal to revise the regulations governing IU
decision making. Additionally, we interviewed officials from VA's
Compensation and Pension Service central office, Vocational Rehabilitation
and Employment (VR&E) Service, and Veterans Health Administration (VHA).
We visited four VA regional offices,7 where we interviewed officials and
reviewed a small number of case files for veterans who had been awarded IU
benefits to improve our understanding of the IU decision-making process.
We also discussed the provision of IU benefits with officials of several
veterans service organizations.8 To assess VA's procedures for the
enforcement of the IU earnings limit, we reviewed VA regulations and
policies, and other agency documents. We also performed work at the
agency's Compensation and Pension Service central office, Hines
Information Technology Center, Pension Maintenance Centers,9 and the four
regional offices we visited. In addition, we interviewed information
technology staff from the Social Security Administration (SSA) who were
responsible for conducting the computer match of VA records and SSA
earnings data. To compare VA's procedures with those of other disability
programs, we reviewed disability programs administered by SSA and
private-sector long-term disability insurers.10 For information on
decision making in other programs, we relied primarily on prior GAO
reports, but also supplemented this information with interviews with
relevant officials to ensure our information was current. We also
interviewed SSA officials to gain more information about SSA's own
enforcement activities. In addition, because several agencies use the
National Directory of New Hires (NDNH) to enforce earnings limits in their
programs, we interviewed officials in the Department of Health and Human
Services (HHS) regarding access to and the reliability of NDNH data, which
contains information on quarterly wages, new hires, and unemployment
insurance compensation.11 We conducted our work between January 2005, and
March 2006, in accordance with generally accepted government auditing
standards.

4 GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: January
2003).

5 Previously known as the U.S. Court of Veterans Appeals.

6 For consistency purposes, we have used 2005 data throughout the report.

7 We visited the VA regional offices in Milwaukee, Wisconsin; Oakland,
California; Philadelphia, Pennsylvania; and St. Petersburg, Florida; which
we chose because of their differing workloads and location in different
regions of the United States.

8 The American Legion, Disabled American Veterans, and Paralyzed Veterans
of America.

9 VA's three Pension Maintenance Centers are located in Milwaukee,
Wisconsin; Philadelphia, Pennsylvania; and St. Paul, Minnesota.

10 We reviewed and reported upon the practices of the three U.S. private
insurers in our 2001 report entitled SSA Disability: Other Programs May
Provide Lessons for Improving Return-to-Work Efforts, GAO-01-153
(Washington, D.C.: Jan. 12, 2001). To update our information, we contacted
the insurers in 2005 and two of the three insurers told us they still used
similar practices. The other insurer would not comment on its current
practices.

11 The data on quarterly wages is reported by states and federal agencies
within 1 to 4 months after each reporting quarter. Data on new hires is
reported within 30 days from the date of hire and unemployment insurance
compensation is reported within 1 month of the end of a quarter.

                                Results in Brief

The added value of IU benefits over a veteran's lifetime depends upon the
veteran's schedular rating at the time he or she begins receiving IU
benefits and the length of time these benefits are received. To illustrate
the potential amount of IU benefits that could be received, GAO estimated
the lifetime present value of the increase in disability compensation
benefits for veterans with schedular disability ratings between 60 and 90
percent who began receipt of IU benefits in 2005 at different ages. For
example, for younger veterans, those at age 20 in 2005, the estimated
lifetime present value of these benefits can range from almost $300,000 to
over $460,000. For veterans awarded IU benefits at age 75 in 2005, the
lifetime present value of these benefits can range from about $89,000 to
about $142,000. In addition, GAO's analysis of the age at which veterans
begin to receive IU benefits shows that just under half of new IU
beneficiaries were awarded IU benefits at the age of 60 or older. For
example, GAO found that 46 percent of veterans awarded IU benefits from
October 2004 to October 2005 were age 60 or older, and 19 percent were age
75 or older.

VA's regulations and guidelines for awarding IU benefits do not ensure
that its decisions are well supported. VA regulations and guidelines lack
key criteria and guidance that are needed to determine unemployability. VA
rating specialists making IU decisions are required to determine whether
the claimant is capable of obtaining or retaining substantially gainful
employment. VA guidelines, however, do not specify the criteria for
determining whether someone has the ability to obtain or retain
substantially gainful employment. Instead, rating specialists rely on the
concept of marginal employment when making IU decisions. The guidelines
generally define marginal employment as annual earnings at or below the
poverty threshold for one person, which was $10,160 for 2005. However, the
guidelines do not state how rating specialists are to determine whether a
veteran who is not working or is engaged in only marginal employment has
the ability to obtain or retain substantially gainful employment. In
addition, VA guidelines do not give rating specialists the procedures to
obtain the employment and earnings history and vocational assessments
needed to support IU decisions. As a result, VA ratings specialists and
some vocational rehabilitation staff told us that unemployability benefits
have sometimes been granted to veterans who may have employment potential.

In addition, VA has an inefficient and ineffective process to enforce the
earnings limit for ongoing eligibility for IU benefits. VA's main
enforcement mechanism is its computerized match that identifies
beneficiaries with earnings, which is supplemented with a manual review to
assess whether those IU beneficiary are in compliance with ongoing
eligibility criteria. While effective enforcement relies on quickly
identifying veterans who are no longer qualified, VA's process relies on
1.5-year old earnings data when more current data is available. VA also
manually transmits information, which further slows down the process. In
addition, the agency's written guidelines do not require staff to
thoroughly evaluate all available earnings information to identify those
who are not qualified. Furthermore, other earnings related criteria may
allow veterans with high earnings to retain their benefits. Finally, the
agency does not track and review its enforcement activities to ensure
their effectiveness.

VA's practices for its IU benefits lag behind the practices used by other
disability programs. VA lacks several features used by the private-sector
disability programs we reviewed and by SSA to provide a more thorough
assessment of a claimant's ability to work as well as supports and
incentives to encourage them to return to work. Private insurers have
developed assessment processes that focus on return to work, using a
variety of assessment tools and expertise to evaluate claimants' ongoing
eligibility and assist those with work potential to return to the labor
force. They also offer various financial and other incentives to encourage
claimants to return to work. Like insurers, SSA also has access to medical
and vocational specialists to evaluate a claimant's ability to work, and
provides assistance and incentives to help its beneficiaries' return to
work. Furthermore, SSA has taken advantage of federal opportunities to
evaluate beneficiaries' ongoing eligibility and to detect and recover
benefit overpayments, such as federal databases with recent employment and
earnings information to detect unreported beneficiary earnings and federal
debt collection methods.

To help VA ensure the integrity of its processes for determining the
initial and ongoing eligibility for IU benefits, we recommend that the
Secretary of Veterans Affairs (1) clarify and strengthen its eligibility
criteria, guidance, and procedures for determining unemployability and (2)
update procedures and strengthen criteria for the enforcement of the IU
earnings limit. Moreover, to help VA modernize its disability program to
enable veterans to realize their full productive potential without
jeopardizing the availability of benefits for veterans who cannot work, we
also recommend that the Secretary develop a strategy to ensure that IU
claimants with work potential receive encouragement and assistance to
return to work, while protecting benefits for those unable to work.

We provided a draft of this report to VA, SSA, and HHS for comment. VA
agreed with our conclusions and concurred with our recommendations, and
stated that it has implemented and plans to implement program changes in
areas that we identified as needing attention. The actions described by VA
should strengthen its management of IU benefits; however, we believe that
further steps are needed to fundamentally transform IU benefits into a
meaningful and timely way of supporting unemployed veterans with
service-connected disabilities. VA's comments appear in app. V. In
addition, VA, SSA, and HHS provided technical comments, which are
reflected in the report as appropriate.

                                   Background

Under VA's Disability Compensation program, the agency can award total
(100 percent) disability compensation to veterans who cannot work because
of service-connected disabilities, even though their schedular rating is
less than 100 percent.12 Specifically, VA will consider a veteran for IU
benefits if the veteran has a single disability rated at least 60 percent
or multiple disabilities rated at least 70 percent (with at least one
disability rated at 40 percent or more) and there is some evidence that
the veteran cannot work. In some instances, veterans with lower ratings
may also be evaluated for and granted IU eligibility.

As shown on table 1, veterans receiving an IU total disability
compensation rate may receive substantially greater benefits than they
would have received based on their schedular rating. IU benefits, like
other VA disability compensation benefits, are exempt from federal
taxation.

Table 1: VA Basic Monthly Disability Compensation Rates in 2005

Disability rating             Monthly     Disability rating        Monthly 
(percent)                     payment             (percent)        payment 
10                               $108                    60           $839 
20                                210                    70          1,056 
30                                324                    80          1,227 
40                                466                    90          1,380 
50                                663                   100          2,299 

Source: VA, Fact Sheet: Disability Compensation - 2005 Rates (Washington,
D.C.: December 2004).

12 For VA's regulations governing the adjudication of IU benefits, see
Title 38, U.S. Code of Federal Regulation, Chapter 1, Part 3 and Part 4.

VA created IU benefits in 1934. By statute, VA is required to adopt and
apply a schedule of ratings to compensate veterans for reductions in
average earning capacities resulting from service-connected medical
conditions.13 This statute calls for compensation benefits to be tied to a
schedule of ratings that is to be based, "as far as practicable," upon the
average impairments of earning capacity resulting from such injuries in
civil occupations.14 The statute does not mention individual
unemployability as a basis for granting benefits. However, VA regulations
allow the agency to grant total (100 percent) disability compensation to a
veteran who is unemployable due to his or her service-connected
disabilities, but does not meet the requirements for a total disability
using the rating schedule. Veterans can receive IU benefits when their
service-connected disabilities result in their inability to obtain or
retain "substantially gainful employment," which VA defines as employment
that is "ordinarily followed by [individuals without disabilities] to earn
their livelihood with earnings common to the particular occupation in the
community where the veteran resides."

VA's Process for Making IU Decisions and Enforcing Compliance with Its Earnings
Limit

Staff at VA's 57 regional offices make virtually all eligibility decisions
for VA disability compensation benefits, including IU benefits. These
regional offices employ non-medical rating specialists to evaluate
veterans' eligibility for these benefits. Upon receipt of an application
for compensation benefits, the rating specialist would typically refer the
veteran to a VA medical center or clinic for an examination. Based on the
medical examination and other available information, the rating specialist
must first determine which of the veteran's conditions are (or are not)
service-connected. For service-connected conditions, the rating specialist
compares the diagnosis with the rating schedule to assign a disability
rating. (App. III provides examples of selected impairments from VA's
disability rating schedule.) As figure 1 shows, the service-connected
impairments of IU beneficiaries include a wide range of medical
conditions. Multiple disabilities will result in a combined degree of
disability, which is expressed as a percentage and represents the overall
effect on a veteran of all his or her service-connected disabilities.
(App. IV explains VA's process for compiling combined ratings.) VA's IU
determinations are subject to appeal to the Board of Veterans' Appeals and
subsequently the U.S. Court of Appeals for Veterans Claims.

13 See 38 U.S.C. S:1155 for the statute giving VA broad authority to
create a rating schedule and compensate veterans for the average loss in
earnings resulting from service-connected medical conditions.

14 For VA's Schedule of Disability Ratings, see Title 38, U.S. Code of
Federal Regulations, Chapter 1, Part 4.

Figure 1: Types of Service-Connected Impairments of IU Beneficiaries as of
October 2005

Note: VA's database lists up to six impairments for each beneficiary. This
figure reflects all impairments listed in the VA database for IU
beneficiaries.

VA rating specialists initiate IU evaluations when a veteran submits an
application for IU benefits or his or her application for compensation
benefits contains evidence of unemployability.15 In all cases, before
granting benefits, rating specialists must evaluate the impact that the
veteran's service-connected disability has had on his or her ability to
perform substantially gainful employment, which for decision-making
purposes is generally interpreted as employment that is more than
"marginal employment." VA generally defines marginal employment as
employment for which the worker's annual earned income is at or below the
poverty threshold for one person established by the U.S. Census
Bureau-$10,160 for 2005.16 However, marginal employment may also be held
to exist, on a case by case basis, when a veteran maintaining employment
at a sheltered workshop17 or family business receives annual earnings
above the poverty threshold. VA rating specialists are to rely on various
sources of information for the evidence needed to support such a
determination, including an employment and earnings history furnished by
the claimant, basic employment information from the claimant's employers
(if any), and a medical exam report from VHA.18 If the claimant had
received vocational rehabilitation assistance from VA or disability
benefits from SSA, the rating specialist might also seek information on
these services or benefit decisions.19 Finally, under its regulations, VA
rating specialists are not to consider age as a factor in determining
eligibility for IU benefits; thus, veterans of any age may be determined
eligible for IU benefits.

15 In accordance with the decision of the U.S. Court of Appeals for
Veterans Claims in Norris v. West, 12 Vet. App. 413 (1999), VA rating
specialists must infer that claimants for disability compensation are also
seeking IU benefits if they meet the schedular requirements and their
files contain evidence that they are not gainfully employed.

When we analyzed VA data to determine the ages of all veterans receiving
IU benefits as of October 2005, we found that the majority of veterans
receiving IU benefits were age 60 or older. Our analysis of VA data shows
that 219,725 veterans were receiving IU benefits in October 2005. As shown
in figure 2, 51 percent of IU beneficiaries were age 60 or older and 38
percent were age 65 or older.

16 The 2005 poverty threshold is $10,160 for an individual without a
family who is under 65 years of age and is $9,367 for an individual
without a family who is 65 years of age or older.

17 A sheltered workshop is a workplace that provides a supportive
environment where individuals with disabilities can acquire job skills and
vocational training.

18 Employers report such information as the claimant's rate of pay, duties
and responsibilities, and reason for leaving.

19 If available evidence is insufficient to award IU benefits and the
record shows that the claimant is receiving Social Security disability
benefits, complete copies of the SSA records must be obtained and
considered.

Figure 2: Ages of IU Beneficiaries as of October 2005

Studies and Proposals for Strengthening VA's Provision of IU Benefits

In 1987, we issued a report that identified several problems with VA's
administration of IU benefits and made several recommendations for
improvement.20 We found that VA did not require sufficient medical and
vocational evaluation of IU claimants to support award decisions. To
address this weakness, we recommended that, in cases involving IU
benefits, VA ensure that its (1) examining physicians provide observations
on how the service-connected medical condition impairs the veteran's
functional capabilities and (2) vocational counselors provide vocational
information, including an assessment of how the veteran's
service-connected condition affects job skills and employment potential.
Furthermore, we identified potential overpayments to IU beneficiaries and
suggested that the Congress provide VA with access to Internal Revenue
Service (IRS) earnings information to monitor IU eligibility and help
detect and prevent overpayments. Since we made the recommendations, the
Congress provided the agency with access to IRS earnings data, which the
agency is using to monitor compliance with the ongoing earnings limit.
However, to date, VA has not implemented our recommendation that its
vocational counselors assess the veteran's job skills and employment
potential so that this information could be used in the IU decision-making
process.

20 See GAO, Veterans' Benefits: Improving the Integrity of VA's
Unemployability Compensation Program, GAO/HRD-87-62 (Washington, D.C.:
Sept. 21, 1987).

More recently, two studies highlighted the need for fundamental changes to
VA's disability decision making. In 2004, the VA Vocational Rehabilitation
and Employment Task Force study recommended that vocational professionals
from VA's VR&E should provide more complete vocational assessments to
assist in disability and vocational decisions.21 More specifically, the
task force recommended that VR&E perform a functional capacity evaluation
that would identify what work a veteran could do in the paid economy
despite his or her disabilities. Also, a 2005 VA Inspector General study
pointed to the need for improved IU initial and ongoing eligibility
determinations.22 The VA Inspector General found that some veterans
receiving IU benefits may not have been entitled because VA had not
aggressively used IRS and SSA records and developed proper controls to
monitor their income through the verification process.

In addition, the Veterans' Disability Benefits Commission was created by
the National Defense Authorization Act of 2004 (Pub. L. No. 108-136) to
independently evaluate compensation to veterans and their survivors for
disabilities and deaths attributable to military service. Among other
things, the Commission plans to include IU benefits in its review. The law
requires the Commission to provide a report to the Congress, with
recommendations as needed, which addresses the appropriateness of benefits
and the standards for granting benefits.

21 VA Vocational Rehabilitation and Employment Task Force, Report to the
Secretary of Veterans Affairs: The Vocational Rehabilitation and
Employment Program for the 21st Century Veteran (Washington, D.C.: March
2004).

22 The Department of Veterans Affairs, Office of the Inspector General,
Review of State Variances in VA Disability Compensation Payments, Report
No. 05-00765-137 (Washington, D.C.: May 19, 2005).

    The Added Value of IU Benefits Over A Lifetime Depends on the Veteran's
                            Individual Circumstances

In a recently issued report, we noted that additional benefits are
available to veterans with total disabilities.23 In particular, awarding
IU benefits increases a veteran's monthly disability compensation. The
increase in the monthly compensation for IU beneficiaries is the
difference between the compensation at the veteran's schedular rate and
the compensation at the 100-percent rate. For example, a schedular rating
of 60 percent would entitle a veteran to $839 per month in 2005. The
veteran, however, would be entitled to $2,299 per month if granted IU
benefits-a difference of $1,460 per month or $17,520 per year.24 The lower
the veteran's schedular rating, the higher his or her increase in monthly
disability compensation when awarded IU benefits.

When the present value of IU benefits is considered over a veteran's
lifetime, the value of these added benefits depends upon the veteran's
schedular rating at the time he or she begins receiving IU benefits and
the length of time these benefits are received. To illustrate the
potential amount of added benefits that could be received due to IU, we
estimated the lifetime present value of the increase in disability
compensation benefits for veterans with schedular disability ratings
between 60 and 90 percent who began receipt of IU benefits in 2005 at
different ages. To calculate these lifetime present values, we used the
SSA general population mortality tables for males to estimate the lifespan
of IU beneficiaries.25 Because benefits awarded to younger veterans would
be expected to be received for a longer length of time in comparison with
older veterans, younger veterans are estimated to receive more in benefits
than older veterans who have the same schedular rating. Also, because the
lower the veteran's schedular rating, the greater the increase in monthly
disability compensation benefits when awarded IU benefits, veterans with
lower ratings were estimated to receive more in added IU benefits than
those of the same age with higher schedular ratings. For example, for
younger veterans, those at age 20 in 2005, the estimated lifetime present
value of these benefits can range from almost $300,000 to over $460,000.
Even for older veterans, the value of these benefits can be substantial.
For veterans awarded IU benefits at age 75 in 2005, the lifetime present
value of these benefits can range from about $89,000 to about $142,000.
The estimated lifetime present values of the added benefits for veterans
awarded IU benefits in 2005 at selected ages and schedular ratings is
shown in figure 3.

23 See GAO, Disability Benefits: Benefit Amounts for Military Personnel
and Civilian Public Safety Officers Vary by Program Provisions and
Individual Circumstances, GAO-06-4 (Washington, D.C.: Apr. 7, 2006).

24 Dependents and other circumstances can increase a veteran's monthly
compensation. Veterans with a 30 percent schedular rating or higher can
receive additional monthly compensation for each dependent, ranging from
$39 to $130 for a spouse and $26 to $88 for a child in 2005, depending
upon the veteran's schedular rating. Other special circumstances that
increase monthly compensation include, for example, the loss of use of a
limb or sensory organ, required attendant care, a spouse with a
disability, or a child age 18 or older attending school.

25 See appendix II for more information on the assumptions we made and the
methods we used.

Figure 3: Estimated Lifetime Present Values of the Added Benefits for
Veterans Awarded IU Benefits in 2005 at Selected Ages and Schedular
Ratings

When we analyzed VA data to determine the age at which veterans begin
receiving IU benefits, we found that just under half of new IU
beneficiaries were awarded IU benefits at the age of 60 or older. For
example, we found that 46 percent of veterans awarded IU benefits from
October 2004 to October 2005 were age 60 or older, and 19 percent were age
75 or older.26 See figure 4 for the age distribution of new IU
beneficiaries from October 2004 to October 2005. Data for the 2 prior year
periods show a similar pattern in the age distribution of new IU
beneficiaries.

Figure 4: Ages of New IU Beneficiaries from October 2004 to October 2005

Note: Percentages do not sum to 100 because of rounding.

In addition to disability compensation benefits, some IU beneficiaries are
also entitled to military disability retirement benefits or normal
retirement benefits based on years of military service.27 In general,
however, an offset provision restricts most veterans from receiving the
full value of both benefits, unless they have 20 or more years of service.
Recent legislation allows veterans with combat-related disabilities and 20
or more years of service to receive the full value of both benefits.28
Also, recent legislation is phasing out the offset for veterans who have
20 or more years of military service and disability ratings of 50 percent
or more. The phase out is taking place between January 1, 2004, and
December 31, 2013, but IU beneficiaries with 20 or more years of service
will be eligible for full concurrent receipt with no offset beginning
October 1, 2009.29 However, the recent legislation to eliminate the
benefit offset is likely to affect relatively few IU beneficiaries, as our
review of IU beneficiary data as of October 2005 shows that only about 8
percent of all IU beneficiaries have 20 years or more of service.

26 We calculated the number of new beneficiaries because VA's beneficiary
database does not include the date that each veteran began receiving IU
benefits. We used VA beneficiary database information for the month of
October for 4 years from 2002 to 2005. For annual estimates we compared
consecutive years. For example, all IU beneficiaries on the 2005 database,
but not on the 2004 database, were identified as new IU beneficiaries for
October 2004 to October 2005.

 VA's Decision-making Criteria, Guidance, and Procedures Do Not Ensure That IU
                          Decisions Are Well Supported

VA's regulations and guidelines for awarding IU benefits do not ensure
that its decisions are well supported. VA regulations and guidelines lack
key criteria and guidance that are needed to determine unemployability. In
addition, VA guidelines do not give rating specialists the procedures to
obtain the employment and earnings history, and vocational assessments
needed to support IU decisions. As a result, VA rating specialists and
some vocational rehabilitation staff told us that unemployability benefits
have sometimes been granted to veterans who have employment potential.

27 Military disability retirement benefits and normal retirement benefits
based on years of military service are provided by the Department of
Defense. Entitlement to these benefits is determined at the time a person
leaves military service. To qualify for disability retirement, a person
must be found unfit for duty due to a disability incurred or aggravated
during active service, and have either (1) a disability rating of 30
percent or more, or (2) a disability rating less than 30 percent and 20 or
more years of service. A person who is found fit for duty and has 20 or
more years of military service generally would qualify for normal
retirement.

28 Beginning in May 2003, these veterans can receive a special benefit
under the Combat-Related Special Compensation Payment program equal to the
amount of the offset.

29 In 2003, the Congress authorized Concurrent Retirement and Disability
Payments to phase in the concurrent receipt of retirement and disability
compensation benefits for eligible veterans from January 1, 2004 to
December 31, 2013. The National Defense Authorization Act for Fiscal Year
2006, however, reduces the phase-in time for IU beneficiaries so that IU
beneficiaries with 20 or more years of military service will receive the
full value of both benefits starting in October 2009.

VA Lacks Key Criteria and Guidance Needed to Determine Unemployability

VA rating specialists making IU decisions are required to determine
whether the claimant is capable of obtaining or retaining substantially
gainful employment, which agency guidelines define as "that which is
ordinarily followed by [persons without disabilities] to earn their
livelihood with earnings common to the particular occupation in the
community where the veteran resides." However, VA regulations and
guidelines do not provide the criteria and guidance that are needed to
determine whether a claimant has the ability to obtain or retain
substantially gainful employment or is unemployable because of his or her
service-connected disabilities.

VA guidelines also define substantially gainful employment as any
employment greater than marginal employment. Marginal employment generally
exists when a veteran's annual earned income does not exceed the poverty
threshold for one person.30 In addition, the guidelines recognize that the
terms "unemployability" and "unemployable" are not synonymous for
compensation purposes because a veteran may be unemployed or unemployable
for a variety of reasons. As noted in the guidelines, rating specialists
are to determine whether the severity of the service-connected conditions
preclude the veteran from obtaining or retaining substantially gainful
employment. In doing so, the rating specialists are to identify and
isolate the effects of extraneous factors such as age,31
nonservice-connected conditions, availability of work, or voluntary
withdrawal from the labor market when determining whether a veteran is
unemployable solely by reason of service-connected disabilities.

However, the guidelines do not state how rating specialists are to isolate
these factors from the veteran's service-connected disabilities or how
these factors should be considered in making IU decisions. For example,
the guidelines do not specify how rating specialists are to determine
whether a veteran's lack of work or marginal employment is the result of
the veteran's service-connected disabilities or extraneous factors such as
local labor market conditions or the veteran's "voluntary withdrawal" from
the labor force. In particular, the guidelines do not specify the criteria
rating specialists should use in determining whether a veteran, who is not
working or has only marginal employment, has the ability to obtain or
retain substantially gainful employment. For instance, the guidelines do
not mention how factors such as education, skills, or prior work history
should be used to assess a veteran's ability to work.

30 Marginal employment may also be held to exist, on a case by case basis,
when a veteran who receives annual earnings above the poverty threshold is
employed at a sheltered workshop or family business. Depending on the
circumstances, a veteran so employed may be determined eligible to receive
IU benefits.

31 As noted earlier, VA rating specialists are not to consider age when
making IU determinations.

Recognizing the deficiencies in VA's regulations and guidelines, the Court
of Appeals for Veterans Claims urged VA to "undertake a broad-based review
and revision" of unemployability regulations.32 In 2001, the agency
proposed regulatory changes to address this and other problems with its IU
decision making.33 The proposal included changes intended to define key
terms, such as substantially gainful employment. During the public comment
period, however, VA received numerous comments from veterans groups that
were strongly opposed to the proposed regulations. In December 2005, VA
withdrew this regulatory proposal and initiated a new effort to develop a
proposal for revising IU regulations. As of March 2006, VA was still in
the process of drafting this new regulatory proposal.

VA Guidelines Lack Procedures for Obtaining Necessary Evidence for Determining
Unemployability

VA also lacks adequate procedures for obtaining necessary evidence to
support IU decisions. In particular, VA does not have procedures for
rating specialists to obtain (1) complete and corroborated employment
information from IU claimants and their employers, and (2) vocational
assessments of IU claimants that could supplement medical information,
even though the agency has an in-house vocational rehabilitation service.

  VA Does Not Have Sufficient Procedures to Obtain Complete and Corroborated
  Employment Information

VA guidelines state that, when making an IU determination, rating
specialists are to ensure that the "evidence is sufficient to evaluate . .
. the veteran's current . . . employment status." Such evidence generally
comes from two sources. First, the IU application form requires veterans
to furnish employment and earnings history (e.g., jobs held, number of
hours worked, type of work performed, and accommodations) for the 5-year
period preceding the date the veteran claims to have become too disabled
to work and for the entire time after that date. Second, the guidelines
instruct the rating specialist to request related information from each of
the claimant's employers for the 12-month period prior to the date the
veteran last worked.

32 See Halestad v. Derwinski, 3 Vet. App. 213, 216 (1992).

33 For VA's former proposed rules for its IU benefits decision making, see
66 Fed. Reg. 49886 (Oct. 1, 2001).

At the VA regional offices we visited, several rating specialists stated
that the employment information submitted by claimants and employers is
sometimes incomplete. VA guidelines state that it is essential that the
form contain the claimant's complete work history34 but does not specify
what is acceptable for decision making when the work history is less than
complete. According to an analysis conducted at a VA regional office,
failure of the veteran to submit the requested employment information did
not serve as a basis for denying an IU claim.

Also, when assessing the eligibility of claimants who report recent prior
work experience, rating specialists told us that they sometimes have
difficulty obtaining corroborating information from employers. VA regional
office officials stated that it is often difficult to obtain relevant
information from employers because, among other reasons, they have moved,
gone out of business, maintained poor records, or had such turnover that
no one remembers the claimant. One VA regional office official stated that
he has instructed his staff not to "hold a benefit hostage to the employer
information." We reviewed 29 case files in which IU benefits were awarded
at three of the VA regional offices we visited.35 We found that 23 case
files contained employment history information submitted by the claimant
but only eight of these contained evidence from employers. Three case
files did not contain claimant or employer employment forms. In the
remaining three case files, the veterans claimed to have not worked or to
have been self-employed.

When a veteran claims not to have worked or to have been marginally
self-employed during the past 5 years, agency guidelines for IU decision
making do not give rating specialists the procedures to obtain
corroborating evidence in the form of earned income information from other
federal databases. As a result, rating specialists are unable to confirm
(or refute) the veteran's claim. Specifically, rating specialists are
unable to obtain earnings information from SSA and the IRS. In addition,
VA does not have access to earnings information from the NDNH database,
which contains quarterly information on earnings. Some rating specialists
stated that, if available, they sometimes considered information in the
medical exam report or hospital records showing that the claimant had been
out of work as evidence of unemployability.

34 Employment history for the 5-year period preceding the date on which
the veteran claims to have become too disabled to work and for the entire
time after that date.

35 At the Milwaukee, Wis.; Oakland, Calif.; and St. Petersburg, Fla.;
regional offices, we reviewed 29 case files with the assistance of a
rating specialist or decision review officer.

VA Lacks Procedures for Obtaining Vocational Assessments of IU Claimants That
Could Supplement Medical Information

VA regulations on IU decision making do not contain procedures for rating
specialists to request vocational assessments of IU claimants that could
supplement claimants' medical information. VA guidelines require rating
specialists to consider medical information when granting IU benefits.
Specifically, the medical evidence must support a current evaluation of
the extent of all the veteran's disabilities and reflect the veteran's
condition in the past 12 months. At the regional offices we visited,
managers stated that their rating specialists rely heavily on medical
examinations conducted by VHA clinicians to make IU determinations.36
Rating specialists at one of these regional offices stated that these
medical reports were often the only information they have upon which to
base a decision that is not self-reported.

Some rating specialists we interviewed, however, expressed concern that
they were awarding IU benefits based on medical reports that provided
insufficient support for determining unemployability. VA regional office
officials and rating specialists told us that the current medical reports
may have limited applicability to IU decision making. Medical reports may
have limited applicability because, as we have noted in a prior report,
while most medical impairments may influence the extent to which an
individual is capable of engaging in gainful activity, vocational and
other factors are often considered to be more important determinants of
work capacity.37 It is these other factors, along with the person's
medical condition, that are considered in a vocational assessment of work
potential.

Vocational assessments can supplement the results of medical examinations
by taking into consideration factors such as the veteran's education,
training, prior work experience, skills, and abilities, to identify the
extent to which the veteran is employable. Yet, when making IU
determinations, rating specialists do not have procedures to obtain
vocational assessments from VR&E counselors. Rating specialists have
access to vocational assessments only when they already exist prior to the
request for IU benefits.38 According to VA officials we spoke with, rating
specialists generally make employability determinations without the
benefit of a vocational assessment.39 At 3 of the VA regional offices we
visited, our review of 29 case files in which IU benefits were awarded
found that 25 lacked any vocational assessment.40

36 In addition to VHA, QTC Management, Inc., conducts disability
examinations for 10 VA regional offices on an as needed basis.

37 GAO, SSA Disability: Program Redesign Necessary to Encourage Return to
Work, GAO/HEHS-96-62 (Washington, D.C.: Apr. 24, 1996).

Lacking vocational assessments for most IU claims, officials at some
regional offices we visited told us that they sometimes asked VHA
clinicians to assess and make a determination on a claimant's
employability. Of the 29 case files we reviewed, 7 contained medical
reports that gave opinions on the veterans' employability. These opinions
ranged from a comment that the claimant is not a good candidate for
working with the public to comments that one veteran is "unemployable in
any function" and another is simply "unemployable." Two cases contained
employability decisions that were based on examinations of the claimant's
functional capabilities. One official in a regional office indicated that
medical reports containing opinions on employability often dictate their
IU decisions. A senior VHA management official explained that these
medical reports should not be the only source used to render an opinion
regarding a claimant's unemployability because the agency's clinicians are
currently not trained to conduct medical examinations that support
decisions on employability.

Rating specialists at some of the VA regional offices we visited stated
that, when available, the assessments in VR&E case files were very
relevant to IU decision making. VR&E managers and counselors suggested
that permitting rating specialists to obtain VR&E assessments of IU
claimants could address the need for vocational information. VR&E
officials stated that their counselors are qualified to conduct such
assessments and, where appropriate, VR&E counselors could also use this
opportunity to use incentives to encourage return to work, develop
return-to-work plans in collaboration with the claimant, and identify and
provide needed accommodations or services for those who can work. By
incorporating vocational assessments into its IU decision-making process,
VA can modernize its disability programs by enabling veterans to realize
their full productive potential without jeopardizing the availability of
benefits for veterans who cannot work.

38 Generally, rating specialists have access to vocational assessments
only when the claimant sought (1) assistance from VA's VR&E Service, which
prepared an assessment as part of its normal service; (2) assistance from
a Vet Center, which sent the veteran to a private firm for a vocational
assessment as part of a treatment plan; or (3) disability benefits from
SSA, which conducted a vocational assessment and included the results in
the claimant's records.

39 Only veterans receiving disability compensation benefits are eligible
for VA vocational rehabilitation benefits. Of the 2.6 million veterans
currently receiving disability benefits, about 95,000 (or less than 4
percent) are receiving vocational rehabilitation services.

40 The remaining 4 case files contained assessments conducted by SSA and
private vocational counselors for Vet Centers, which provide services to
veterans and their families, such as readjustment counseling, community
education, and providing access to other VA and community services.

VA Staff Express Concerns that They May Have Awarded IU Benefits to Veterans
with Employment Potential

We discussed IU decision-making criteria and evidence requirements with
managers and rating specialists at the regional offices we visited. During
these discussions, some rating specialists expressed concerns that they
may have awarded IU benefits to some veterans who appeared to be
employable. These rating specialists told us that they awarded IU benefits
in these cases with the expectation that VA would identify these
beneficiaries in the income matching process as having earnings above the
IU threshold and discontinue their IU benefits. Another rating specialist
stated that he felt compelled by the workload at his regional office to
make IU determinations based on existing evidence, even when necessary
information was lacking.

VR&E managers and counselors at the regional offices we visited stated
that VA has awarded IU benefits to veterans making good progress in their
VR&E-sponsored vocational rehabilitation. Our analysis of VA's electronic
case files identified 683 veterans who received both IU benefits and a
stipend from VR&E, which is generally provided only to veterans who are
attending college and who are expected to seek employment at the
conclusion of their vocational rehabilitation.41 VR&E officials and rating
staff at three of the VA regional offices we visited brought to our
attention veterans who had received VR&E assistance and were making good
progress in their rehabilitation plans, only to drop out of the program
when they were awarded IU benefits.

41 Using VA's Compensation and Pension Master File, we identified all
disability compensation beneficiaries who received both IU benefits and
stipends from VR&E. Using VR&E's case management database, we obtained
information on financial and other support provided to a number of these
veterans selected through a randomization process.

        VA's Earnings Enforcement Process is Inefficient and Ineffective

VA has an inefficient and ineffective process to enforce the earnings
limit for ongoing eligibility for IU benefits. VA's main enforcement
mechanism is its computerized match that identifies beneficiaries with
earnings, which is supplemented with a manual review to assess whether
these earnings are within the limit and meet other ongoing eligibility
criteria. However, this process relies on old data, outdated and
time-consuming procedures, insufficient guidance, and weak eligibility
criteria. Moreover, the agency does not track and review its enforcement
activities to better ensure their effectiveness.

VA Uses a Multi-Step Process to Evaluate Beneficiaries' Ongoing Eligibility

VA utilizes a multi-step annual computer match and manual process,
referred to as its Income Verification Match, to evaluate both the ongoing
eligibility of its IU and pension beneficiaries.42 During 2004 and 2005,
VA's income match, in coordination with SSA and IRS, assessed
beneficiaries' income for 2002. VA provided SSA and IRS with data on VA's
2004 beneficiaries that the agencies matched to their 2002 income data.
SSA matched VA beneficiaries to its wage and self-employment earnings to
provide VA with 2002 earned income data for IU and pension beneficiaries.
To provide VA with data on unearned income for its pension beneficiaries,
IRS matched the beneficiaries with its 2002 unearned income data. VA's
Hines Information Technology Center (ITC) used SSA's match results to
identify IU beneficiaries with earned income above $6,000 in 2002 for
further review.43 Hines ITC combined the results of the computer matches
for IU and other beneficiaries to produce and mail documents to employers
and to the Pension Maintenance Centers (PMC) for further review.

Hines ITC identified 8,563 IU beneficiaries with earnings over $6,000 in
2002 for review by VA's three PMCs. For each identified beneficiary, Hines
ITC produced and mailed a letter to the employer requesting earnings data
to verify SSA-reported earnings. It also produced and mailed to the PMCs
several documents for follow-up on each beneficiary, such as a letter for
the veteran and a tracking sheet. The three PMCs manually reviewed the
information provided by Hines ITC and employers and may have also
contacted the veterans, as needed, to determine whether they continued to
meet ongoing IU eligibility criteria. In general, IU beneficiaries who
have exceeded the annual IU earnings threshold (set in 2002 at $9,039),
have worked 12 consecutive months or more, and have not been employed in a
sheltered workshop or family business should have their IU benefits
discontinued.44 PMCs close the cases when they find beneficiaries meet the
eligibility criteria and forward cases that needed additional information
for a decision to VA regional offices for further review. The VA regional
offices should obtain whatever additional information is needed to
determine whether benefits should be discontinued and inform the veteran
if VA decides to do so.

42 VA also uses the match to assess the incomes of the surviving spouses
and children of certain deceased veterans who receive death pension
benefits.

43 The IVM threshold was established by VA at the inception of its
computer matching effort in 1991.

VA's Process to Evaluate Beneficiaries' Ongoing IU Eligibility Is Inefficient

In its computer matching process to evaluate ongoing IU benefit
eligibility, VA used SSA earnings data that is about 1.5 years old,
despite the fact that the data is available earlier and more recent
earnings data is available from another federal database. Using old
earnings data, along with other processing delays in its review, means
that IU beneficiaries with earnings above the IU threshold can continue to
receive benefits for up to 2.5 years before VA can determine that their IU
benefits should be discontinued. Quick identification of IU beneficiaries
who are no longer entitled to benefits is important because VA typically
will only discontinue their benefits and will not collect any
overpayments.45 Although SSA earnings data could be available as early as
September following the end of a tax year,46 VA postpones the match of IU
benefits and waits for unearned income from IRS so that it can evaluate
both IU eligibility and pension payments at the same time. Also, HHS' NDNH
can provide more current earnings data than SSA, but VA does not have the
statutory authority to access this database. The NDNH database includes
quarterly wage data for up to 8 quarters, which can be compiled into
annual data for matching purposes.47 Although VA currently lacks access to
the NDNH database, other agencies-such as SSA, IRS, and the Department of
Housing and Urban Development-have sought and gained statutory authority
to access the NDNH to improve their enforcement efforts.48 In addition to
gaining statutory authority, to obtain access to the NDNH, VA would need
to meet data security and privacy safeguarding requirements HHS has
established to ensure the security and confidentiality of NDNH data.

44 VA has a few exceptions to its IU earnings threshold. For example,
beneficiaries who work in protected environments, such as a sheltered
workshop or family business, may be considered to be marginally employed
and still eligible for IU benefits, even when their earnings exceed the IU
threshold. In addition, beneficiaries who have been receiving IU benefits
for 20 years or more cannot have their benefits terminated, regardless of
their earnings and employment.

45 VA can collect IU benefit overpayments only in certain situations, such
as when it determines benefits were obtained fraudulently or makes a
mistaken overpayment.

46 The earnings data available in September is nearly 100 percent
complete, according to an SSA official responsible for maintaining the
data.

VA's enforcement process is also inefficient because VA has not updated
its computer matching program to reflect annual changes in its IU earnings
threshold. The program identified those who earned more than $6,000 rather
than the annual IU threshold, which was $9,093 for 2002. As a result, the
PMC staff told us that they manually reviewed many more cases than
necessary. VA's Hines ITC officials told us that they are prohibited from
making any changes in the matching program until the agency has replaced
its current compensation and pension payment system, which may take place
in 2007.

VA's enforcement process experiences additional delays because the
computer matching information is transmitted manually to VA's enforcement
staff rather than electronically. VA's ITC mails thousands of paper
documents to employers and VA's three PMCs. It mails letters to veterans'
employers to provide verification of veterans' earnings to the PMCs. ITC
also mails a tracking sheet and a letter for each veteran earning over
$6,000 to the PMCs, where the information is manually collated and
reviewed. The center officials told us that they use information from the
computer match, employers, and veterans to assess whether beneficiaries
meet ongoing IU eligibility criteria and they close the case for those who
meet the criteria. If a center did not have sufficient information to
determine eligibility, it mailed the case file to a VA regional office for
further review. Although VA currently mails paper documents generated from
the match to its PMCs and regional offices, software exists to transfer
the confidential information electronically, and VA officials acknowledged
that doing so would make the process more timely.

47 NDNH data has some limitations. For example, NDNH does not contain
complete information on some types of workers, such as independent
contractors, subcontractors, and self-employed individuals, and persons
who perform services such as child care for private homes.

48 To obtain access to the NDNH database, an agency must seek authority
from the Congress through enactment of legislation, which the Congress
must pass and the President must sign. Moreover, the agencies may use the
NDNH data only for those purposes authorized by law.

One action VA has recently taken to enhance enforcement is to reinstate a
procedure that requires IU beneficiaries to annually complete a form to
provide their earnings and employment status. VA had discontinued use of
the form about 6 years ago to reduce the paperwork burden for
beneficiaries and instead was annually sending a letter to IU
beneficiaries to remind them of their responsibility to notify VA of their
employment and earnings. However, VA officials believed that the annual
reminder had not resulted in sufficient compliance and in September 2005,
reinstituted the requirement to complete the VA form. Because the agency
has very recently implemented this change, we cannot assess its
effectiveness. Although the agency believes that this information will
improve its ability to monitor veterans' ongoing eligibility, it still
plans to continue the income verification match.

VA Has Insufficient Guidance to Evaluate Beneficiaries' Earnings

VA's written guidance for evaluating beneficiaries' earnings also hinders
enforcement by failing to clarify that PMC staff should use all the
available earnings information from the match and other sources, such as
employers, to assess beneficiaries' initial and continuing eligibility.
Lacking this written guidance, VA staff focus on whether beneficiaries'
earnings and employment qualified them for benefits for the match year.
For example, when PMC staff receive earnings data for veterans who were
granted benefits during the match year, the staff disregard the earnings,
regardless of the amount, and close the case. Staff do so because they
only consider earnings subsequent to granting benefits and know that the
new beneficiaries could not have worked for 12 consecutive months in the
match year. The match data and the beneficiaries' application information,
however, could show that veterans may not have fully disclosed their
earnings during the application process and may have exceeded the IU
threshold. Staff also disregard some of the earnings information provided
by employers that could have had a bearing on eligibility. Although VA's
letters to employers request earnings information for the match year and 2
subsequent years, management's verbal guidance at one center was to
disregard the earnings from the subsequent years and only consider the
earnings of the match year.

VA Has Weak Criteria to Evaluate Beneficiaries' Ongoing Eligibility

VA has weak criteria to determine whether veterans should continue to
receive IU benefits. In evaluating IU beneficiary eligibility, PMCs allow
beneficiaries to continue to receive IU benefits if their earnings at the
time of the review did not exceed the IU threshold. However, some IU
beneficiaries can have earnings far above the IU threshold because VA,
under current law, continues to provide them benefits until they have
maintained employment for 12 consecutive months.49 In effect, this law
allows beneficiaries to retain their benefits despite unlimited earnings,
so long as they do not work for 12 consecutive months. For example, a
beneficiary could earn $50,000 from January to September, choose to stop
working for reasons other than his or her service-connected disability,
and still be allowed to retain his or her IU benefits.

VA Management Does Not Track and Review the Outcome of Its Enforcement
Activities

VA does not effectively track and review the results of its enforcement
activities. VA does not track the results of cases reviewed by PMCs or
those sent to regional offices. As a result, the agency does not know the
results of these reviews or the reasons for continuing or discontinuing IU
benefits. For example, the agency does not know how many beneficiaries
were identified by its computerized match with earnings below the IU
threshold or had higher earnings and continued to receive benefits. Also,
without sufficient information to monitor enforcement, the agency cannot
ensure that beneficiary cases are being fully reviewed or that appropriate
actions are taken to discontinue benefits.

  VA's Practices to Manage Its Disability Benefits Lag Behind Other Disability
                                    Programs

Private-sector and SSA disability programs provide important features that
VA's IU benefits lack. Unlike VA, private insurers have developed
assessment processes that focus on return to work and use a wide variety
of assessment tools, expertise, and incentives to evaluate claimants'
ability to work and encourage and enable those with work potential to
return to the labor force. Likewise, SSA requires applicants to provide
substantial information for assessment purposes and, in recent years, has
implemented a new program to provide return-to-work services and is
conducting pilots to test new methods to return applicants and
beneficiaries to work. In addition, SSA has implemented critical
management practices to help ensure the financial integrity of its
disability programs.

49 See 38 U.S.C. S:1163.

Private Insurers' Eligibility Assessment Processes Focus on Return-to-Work

The eligibility assessment processes of three U.S. private insurers we
reviewed focused on returning people with disabilities to work.50 The
private insurers' assessment processes we reviewed both evaluated a
person's potential to work and assisted those with work potential to
return to the labor force. Insurers provided assessment and other services
shortly after disability onset and throughout the duration of the claim,
as needed. Their ongoing assessment process is closely linked to their
definition of disability that shifts over time from less to more
restrictive-that is, from an inability to perform one's own occupation to
an inability to perform any occupation. Both the definitional shift and
the ongoing assessment process recognize the possibility for improvement
in an individual's work capacity by providing supports and services, such
as workplace adaptations or training as well as financial and other
incentives to encourage claimants to return to work.

Throughout the duration of the claim, private insurers use a wide variety
of tools and expertise to assess the claimant's work potential and develop
and implement an individualized return-to-work plan for those with work
potential. As part of the process of assessing whether a claimant can
perform his or her own occupation, insurers directly contact the claimant,
the treating physician, and the employer to collect medical and vocational
information and initiate return-to-work efforts, as needed. For example,
insurers consult medical staff and use other resources, such as medical
guidelines, which describe disabilities and their treatment and duration,
to evaluate whether the treating physician's diagnosis and the expected
duration of the disability are in line with the claimant's reported
symptoms and test results. Insurers' contacts with treating physicians may
also be aimed at ensuring that the claimant has an appropriate treatment
plan focused on timely recovery and return to work. Insurers may also use
an independent medical examination or tests of basic skills, interests,
and aptitudes to clarify the medical or vocational limitations and
capabilities of a claimant. In addition, they may use medical or
vocational specialists to identify possible accommodations for the
claimant and may also contact employers to encourage them to provide
workplace accommodations for a claimant who has the capacity to work. To
determine whether a claimant can go back to his current job, or if not,
engage in other work, insurers will identify a claimant's remaining skills
and abilities (i.e., transferable skills) by comparing the claimant's
capabilities and limitations with the demands of the claimant's own
occupation. Included in these assessment tools and methods are services to
help the claimant return to work, such as job placement, job modification,
and retraining.

50 For more information on the medical and vocational tasks, tools,
methods and expertise used by private insurers to assess disability claims
and provide return-to-work assistance, see VA Benefits: Other Programs May
Provide Lessons for Improving Individual Unemployability Assessments,
GAO-06-207T (Washington, D.C.: Oct. 27, 2005) and SSA Disability: Other
Programs May Provide Lessons for Improving Return-to-Work Efforts,
GAO-01-153 (Washington, D.C.: Jan. 12, 2001). The 2001 report also
examined social insurance disability programs in Germany, Sweden, and The
Netherlands, which have also invested in return-to-work efforts and have
implemented practices similar to those in the U.S. private sector.
Although these countries' disability programs operate in a somewhat
different social and political context than U.S. federal programs, the
experiences of these countries show that return-to-work strategies can
apply to a broad population with a wide range of skills and disabilities.

The definition of disability shifts after 2 years from being unable to
perform one's own occupation to being unable to perform any occupation.
This period provides an opportunity for claimants who have the potential
to work to recover medically and develop skills to return to work. During
this period, insurers may provide financial and other assistance to help
claimants with work potential make a successful transition. Insurers try
to develop the best strategies for managing each claim, which can include,
for example, helping to plan medical care or providing vocational services
to help claimants acquire new skills, adapt to assistive devices, or find
new positions. For those requiring vocational intervention to return to
work, the insurers develop an individualized return-to-work plan, as
needed.

Work incentives are an important feature of the private insurers' programs
to encourage and facilitate a claimant's return to work. These incentives
require the claimant to obtain appropriate medical treatment and can
result in a possible loss of benefits if the claimant does not participate
in a return-to-work program, if such a program would benefit the
individual. To support these requirements, these disability systems help
the individual obtain the appropriate medical care and provide financial
incentives to promote participation in rehabilitation, such as
reimbursement for family care costs. Insurers may provide additional
financial benefits to those who participate in a return-to-work plan. For
example, one insurer told us that claimants may receive an additional
benefit equal to 10 percent of their disability payment for participating
in rehabilitation. To further encourage rehabilitation and return to work,
insurers may allow claimants who work to supplement their disability
benefit payments with earned income. Conversely, insurers may reduce or
terminate benefits for claimants who could work, but do not. Claimants'
benefits may also be terminated if they refuse to accept a reasonable
accommodation that would enable them to work.

If the insurer initially determines that the claimant has no work
potential, it monitors the claimant's condition for changes that could
increase the potential to work. After 2 years, it reassesses the
claimant's eligibility under the more restrictive definition of
disability. The insurer continues to look for opportunities that may
enable these claimants to return to work. For example, opportunities may
occur for claimants when there are improvements in medical treatments and
technology, such as new treatments for cancer or AIDS.

VA Lacks Some of SSA's Eligibility Assessment and Return-to-Work Efforts

Both VA and SSA disability programs are on our high-risk list, in part,
because they do not reflect the current state of science, technology,
medicine, or labor market conditions. Nevertheless, SSA's disability
programs have efforts to assess eligibility and encourage return-to-work
that VA's disability compensation program lacks. For example, SSA requires
applicants to provide substantial information for assessment purposes and
in recent years has implemented a new program to provide return-to-work
services and is conducting pilots to test new methods to return applicants
and beneficiaries to work. Moreover, in 2003, SSA's Commissioner announced
in a testimony to the Congress that a key operational goal for the
agency's disability programs is to foster return-to-work efforts at all
stages of decision making.

As with VA's definition of individual unemployability, SSA's definition of
disability for its two disability programs includes both medical and
employment criteria. For the agency's Disability Insurance (DI) and
Supplemental Security Income (SSI) programs, the Social Security Act51
defines disability as the inability to engage in any substantial gainful
activity52 by reason of any medically determinable physical or mental
impairment(s) that is expected to result in death or has lasted or can be
expected to last for a continuous period of not less than 12 months. In
addition to SSA's medical criteria, an applicant must also meet
non-medical program criteria for both of its disability programs. For DI
benefits, an individual must have contributed earnings to the DI program,
have sufficient annual earnings to receive one credit per year, and
generally have at least 20 credits for the last 40 quarters ending with
the onset of a disability.53 To receive SSI benefits, individuals must
have limited assets and income.

51 42 U.S.C. S:S: 423(d) and 1382c(a)(3).

52 SSA has established earnings criteria as an indication of whether
applicants are able to engage in substantial gainful activity. In 2005,
the substantial gainful activity level for individuals who have
impairments other than blindness was $830 in earnings per month. For blind
individuals, the level was $1,380 in earnings per month. In addition, SSA
has established a substantial gainful activity level for self-employed
individuals that is not based solely on earnings but includes such factors
as the significance of the individual's contribution to the business. (See
20 C.F.R. S:S: 404.1575 and 416.975.)

To collect key decision-making information, SSA requires a DI or SSI
applicant to provide the agency with extensive medical and vocational
information, including the illness, injuries, or conditions and how they
affect the applicant's ability to work; 15 years of prior work history;
the requirements of the applicant's longest lasting job; medications taken
and medical history; education and training; and any vocational
rehabilitation. If needed, SSA may also collect additional information
from the applicant about his or her pain, fatigue, and ability to perform
common daily and other specific activities, like meal preparation or
ability to stand and sit, as well as the use of accommodations.

To assess claims for eligibility, SSA generally uses both a disability
examiner and a medical consultant.54 If needed, the medical consultant
will use the collected information to determine what an applicant can
still do, despite physical or mental limitations, referred to as the
applicant's residual functional capacity.55 The residual functional
capacity will be used by the decision makers, along with other vocational
information in the applicant's file, to determine if the applicant can
perform his or her prior job. If not, the decision makers will use this
information to determine if the applicant can perform another job in the
national economy. Although these vocational decisions can be complex, SSA
may include, but does not require, that vocational specialists provide
input to decision making. SSA, however, has acknowledged the need to
strengthen its decision making and has proposed, along with other changes,
to establish a national network of medical, psychological, and vocational
experts to assist SSA decision makers throughout the country.56

53 Younger workers may qualify with fewer credits. Credits are based on an
individual's total annual earnings and a maximum of four credits can be
earned each year. For 2005, annual wages or net earnings from
self-employment income to obtain one credit was $920.

54 If the applicant is not satisfied with the initial decision, he or she
may request reconsideration of the decision and also has an opportunity
thereafter to request a hearing before an Administrative Law Judge and for
an additional review by SSA's Appeals Council. For additional information
on SSA's current disability decision making process, see GAO, Social
Security Disability Insurance: SSA Actions Could Enhance Assistance to
Claimants with Inflammatory Bowel Disease and Other Impairments,
GAO-05-495 (Washington, D.C.: May 31, 2005).

55 SSA does not evaluate the residual functional capacity of all
applicants. Instead, SSA uses a sequential assessment process to more
quickly identify individuals who the agency believes are clearly eligible
or ineligible for benefits. For example, SSA denies benefits to
individuals who are working and earning more than the agency's threshold
amount or do not have a severe impairment. SSA grants benefits to
applicants whose earnings are below the threshold level and whose
impairments meet or equal the agency's pre-established list of medical
criteria for impairments considered severe enough to prevent an individual
from earning wages above the established threshold.

The SSA Commissioner's recent commitment to fostering return-to-work
efforts is illustrated by some of the agency's ongoing programs and pilot
tests.57 In September 2004, SSA completed implementation of its Ticket to
Work and Self-Sufficiency Program.58 The program is intended to provide
beneficiaries with greater choice in vocational rehabilitation and
employment services so that they can work and become self-sufficient.
While we reported in March 2005 that the program was having limited
success,59 the agency has proposed steps to strengthen the program, such
as expanding eligibility and improving incentives to encourage
participation by service providers and beneficiaries. Furthermore, SSA has
developed a Work Opportunity Initiative, with several demonstration
projects, to provide both applicants and beneficiaries with medical
coverage or cash incentives to support their ability to work.

56 For more information about this change and others proposed by SSA's
Commissioner to improve disability decision making, see the agency's
notice of final rulemaking for its administrative review process for
adjudicating initial disability claims. 71 Fed. Reg. 16424 (Mar. 31,
2006).

57 For many years, SSA has had work incentives incorporated into its
disability programs to protect the cash and medical benefits of
beneficiaries who try to work. GAO, however, has reported that the
incentives were ineffective in motivating beneficiaries to work. For
related GAO testimony, see Social Security Disability: Multiple Factors
Affect Return to Work, GAO/T-HEHS-99-82 (Washington, D.C.: Mar. 11, 1999).

58 SSA also implemented two supporting programs. The Benefits Planning,
Assistance, and Outreach program enables community groups to provide
outreach and information to SSA beneficiaries with disabilities to help
them make informed choices about using a ticket and returning to work. The
Protection and Advocacy for Beneficiaries of Social Security projects
provide a broad range of advocacy related services to beneficiaries with
disabilities that may be needed by beneficiaries to secure employment.

59 For the GAO report on SSA's Ticket Program, see Social Security
Administration: Better Planning Could Make the Ticket Program More
Effective, GAO-05-248 (Washington, D.C.: Mar. 2, 2005).

SSA Has Implemented Practices to Help Ensure the Financial Integrity of Its
Disability Programs

While supporting people with disabilities is an essential function of
SSA's disability programs, the agency is also responsible for ensuring the
programs' financial integrity. In 1997, we designated SSI a high-risk
program after several years of reporting on specific instances of abuse
and mismanagement, increasing overpayments, and poor recovery of
outstanding SSI overpayments. SSA's actions since then included developing
a major SSI legislative proposal with numerous overpayment deterrence and
recovery provisions. The ensuing enacted legislation directly addressed a
number of our prior recommendations and warranted removal of the SSI
program from our high-risk list in 2003.60 We have, however, continued to
monitor the program to ensure that improvements have been sustained.

To help ensure that applicants' and beneficiaries' earnings do not exceed
allowed levels, SSA has incorporated several procedures into its
eligibility assessments. In assessing eligibility, SSA must determine
whether an applicant is working and earning an amount that exceeds its
established thresholds. As part of this process, DI and SSI applicants
must provide SSA with information on their past work and any current work.
If applicants indicate that they are currently working or receiving
earnings, or SSA obtains other information that suggests that they may
have earnings, SSA requires additional information on their work and
earnings. SSA field staff generally must then verify the applicants'
reported earnings using another reliable source of information. SSA also
uses its online query system to access the NDNH database, which has recent
earnings, new hire, and unemployment information, to verify the earnings
for DI and SSI applicants it has designated as high risk, such as those
whose stated income does not appear to cover their expenses. SSA has found
that online access to NDNH data to verify earnings for the SSI program has
a high return on investment. For example, using a pilot evaluation, SSA
estimated that if it verified earnings online prior to benefit payment, it
could annually reduce overpayments by $30.8 million and have a 3.6 to 1
return-on-investment ratio.61

60 For GAO's report, see High-Risk Series: An Update, GAO-03-119
(Washington, D.C.: January 2003).

61 This estimate is based on a judgmental selection of field offices for
the study and does not represent a statistical estimate for the nation,
according to an SSA Office of Inspector General report entitled, Review of
the Social Security Administration's Office of Child Support Enforcements
Pilot Evaluation, A-01-00-20006 (Baltimore, Md.: May 30, 2001).

After benefits are granted, SSA performs frequent computer matches that
are intended to assess earnings for all its beneficiaries. These matches
compare earnings information from its beneficiary databases with two
federal earnings databases to detect and prevent overpayments. For its
computer matches, SSA uses both its own master earnings file with earnings
information from employers and the self-employed and the NDNH database.62
SSA uses both databases because the SSA database has more complete
earnings information than the NDNH database, whereas the NDNH database has
more current earnings information in its quarterly wage database, as well
as other important employment data, according to SSA officials. SSA
performs periodic matches using its master earnings file to detect and
prevent beneficiary overpayments for all its SSI and DI beneficiaries. In
addition, SSA performs quarterly matches using NDNH quarterly earnings to
detect and prevent overpayments to all SSI beneficiaries. SSA has also
found that using NDNH data for the matches can be very cost-effective. In
evaluating fiscal year 2002 computer matches using NDNH data, SSA
estimated that it could annually realize $199 million in benefits from
collecting and preventing overpayments and expend $23 million for
matching, following up on matches, and overpayment collection, yielding an
estimated 8.7-to-1 benefit-to-cost ratio. SSA also plans to expand its use
of the NDNH database to perform matches to evaluate all DI beneficiary
earnings.

SSA has automated many features of its matching process and follow-up
verification and collection activities to help improve the efficiency and
effectiveness of its disability programs. SSA's computerized matching
process can not only detect potential unreported or underreported
earnings, but can also electronically forward matches to the field office
responsible for follow-up and provide workload statistics to each level of
management to help monitor the process. Field office staff can also use
SSA computer systems to view specific information on the match (including
the amount of earnings detected), document their follow-up, and initiate
collection activities, as needed. For example, the system will send a
letter to a current beneficiary who has received a benefit overpayment
with information about this debt, such as the amount owed, and options for
repayment. Through automation, the agency has increased its ability to
ensure that matches are followed up and more efficiently initiate efforts
to collect overpayments. SSA's systems also have built in security
features to help ensure that SSA meets legal requirements to manage the
privacy of the earnings and employment data.

62 SSA also has access to earnings data from 18 states to help monitor and
prevent overpayments, according to an SSA official.

SSA uses various collection methods and other tools to manage the debt
owed by current and past beneficiaries who received disability benefit
overpayments. SSA will withhold monthly disability benefits to collect
overpayments from beneficiaries who are still on its rolls. In fiscal year
2005, SSA collected $2 billion in overpayments using this method. When the
person is no longer on SSA's benefit rolls, the agency uses its own
billing and follow-up system to collect overpayments. That system enables
SSA to send a series of progressively stronger notices requesting
repayment and to make telephone calls to negotiate repayment. The agency
collects several hundred million dollars a year using this approach. In
addition, SSA uses other more aggressive debt collection tools, such as
tax refund offsets and administrative wage garnishment, to collect debt
from prior benefit recipients who are no longer on its benefit rolls. When
unable to collect debts from current or prior beneficiaries, SSA will
write off the debts. In 2005, SSA reported debt collection of $2.4
billion, writing off debt of $842 million, which left outstanding debt of
$13.1 billion at year end. Table 2 provides a list of the tools used by
the agency to manage overpayment debt.

Table 2: SSA's Debt Collection Tools for Benefit Overpayments

Debt collection tool      Description                                      
SSA billing and follow-up Collection of debt using a series of             
                             progressively stronger notices requesting        
                             repayment and telephone calls to negotiate       
                             repayment                                        
Benefit withholding       Collection of overpayments from monthly          
                             disability benefits for individuals still on the 
                             disability rolls                                 
Mandatory cross-program   Collection of a former SSI recipient's debt from 
recovery                  any DI benefits due to that person               
Tax refund offset         Collection of a former beneficiary's delinquent  
                             debt from a federal tax refund                   
Administrative offset     Collection of a former beneficiary's delinquent  
                             debt from a federal payment other than a tax     
                             refund                                           
Administrative wage       Collection of a former beneficiary's delinquent  
garnishment               debt from their current wages from their         
                             employer                                         
Credit bureau reporting   Reporting delinquent debt to a credit bureau to  
                             encourage repayment                              

Source: GAO analysis of SSA information.

To help monitor its debt collection efforts and their effectiveness, SSA
also tracks and reports key debt management activities and performance
indicators. For example, SSA's annual performance and accountability
reports provide data on the quarterly cumulative totals for the debt
outstanding, collected, and written off, and the varying age of delinquent
debt.63 SSA also provides 5 years of trend data on the results and
effectiveness of its activities, such as the percentage of outstanding
debt that is delinquent or not expected to be collected and the average
cost to collect a dollar of debt, which was $0.09 for fiscal year 2005.
Furthermore, to help monitor its achievement of its strategic goals to
improve debt management, SSA measures and sets a goal for the percentage
of debt in collection for its Old-Age, Survivors, and Disability
Insurance; and SSI programs. The indicators compare debt that is scheduled
for collection through benefit withholding or installment payment with
total outstanding debt. For fiscal year 2005, SSA reported that it met its
collection goals, with 53 percent of SSI debt and 42 percent of Old-Age,
Survivors and Disability Insurance debt in collection arrangements.

                                  Conclusions

VA's management of IU benefits lacks the strong controls needed for
ensuring the integrity of the process for determining the initial and
ongoing eligibility for these benefits. In particular, VA lacks the
criteria, guidance, and procedures to ensure that its IU decisions are
well supported. For example, the guidelines do not mention how factors
such as education, skills, or prior work history should be used to assess
a veteran's ability to obtain or retain substantially gainful employment
in cases when the veteran is not working or is only marginally employed.
As a result, the agency cannot assure that it is providing IU benefits
only to those who are unemployable due to their service-related
disabilities. In addition, due to limitations in the procedures to obtain
evidence, VA rating specialists may not have sufficient information for
determining whether claimants are unemployable. Without the procedures
needed to collect complete and corroborated employment and earnings
histories, rating specialists lack access to important indicators of
future employability. Moreover, without having the procedures needed to
obtain vocational assessments from VA's own vocational counselors, rating
specialists lack important information that is needed to determine whether
a claimant may be able to obtain or retain substantially gainful
employment.

63 For additional information on SSA's debt management activities and
results, see SSA's Annual Performance and Accountability Report for fiscal
year 2005.

Further, VA's income verification process lacks access to timely data,
uses an outdated earnings threshold, and relies on a manual process for
follow-up on earnings matches, which results in the agency's inability to
effectively identify overpayments. In addition, VA's methods for
determining ongoing eligibility may allow veterans who do not meet the
ongoing eligibility criteria to continue to receive IU benefits. Moreover,
VA's limited ability to detect and stop IU payments to beneficiaries no
longer eligible to receive them not only increases the cost of IU
benefits, it can create an opportunity for program misuse. Finally,
because VA does not track the results of its enforcement efforts, the
agency cannot determine whether its efforts are cost-effective and cannot
hold itself accountable to veterans or other taxpayers.

Finally, the continuing deployment of our military forces to armed
conflict has focused national attention on ensuring that those who incur
disabilities while serving their country are provided the services needed
to help them reach their full potential. Yet, VA is among the federal
disability programs we have identified as high-risk, in part, because it
is poorly positioned to provide meaningful and timely support to help
veterans with disabilities return to work. VA's management of IU benefits
exemplifies these problems. Approaches from other disability programs
demonstrate the importance of providing return-to-work services and using
vocational expertise to assess the claimant's condition and provide the
appropriate services. Incorporating return-to-work practices in IU
decision making could help VA modernize its disability program to enable
veterans to realize their full productive potential without jeopardizing
the availability of benefits for veterans who cannot work.

                      Recommendations for Executive Action

We recommend that the Secretary of Veterans Affairs take the following
steps to improve management of IU benefits:

1. To help ensure that IU decisions are well-supported and IU benefits are
provided only to veterans whose service-connected disabilities prevent
them from obtaining or retaining substantially gainful employment, VA
should clarify and strengthen its eligibility criteria, guidance, and
procedures for determining unemployability. For example, VA could:

           o  clarify in its regulations and guidelines how vocational
           factors, such as education, skills, or prior work history, should
           be used to assess a claimant's eligibility;
           o  establish procedures for rating specialists to request VR&E to
           conduct vocational assessments of IU claimants as appropriate; and
           o  seek legislative authority to use earnings data from the
           National Directory of New Hires.

2. To improve the efficiency and effectiveness of VA's enforcement efforts
to monitor ongoing eligibility, VA should update procedures and strengthen
criteria for the enforcement of the IU earnings limit. For example, VA
could:

           o  update and automate its enforcement process, including using
           more current earnings data and threshold amounts in its income
           verification match;
           o  clarify guidance on the review of IU beneficiary earnings
           following the match; and
           o  annually track and report on the results of matching process
           and related enforcement activities.

3. To help modernize its IU decision-making process, VA should develop a
strategy to ensure that IU claimants with work potential receive
encouragement and assistance to return to work, while protecting benefits
for those unable to work. For example, VA could encourage claimants to
return to work by having vocational counselors from VR&E develop
return-to-work plans and provide assistance to claimants with work
potential.

                                Agency Comments

We provided a draft of this report to VA, SSA, and HHS for comment. VA
agreed with our conclusions and concurred with our recommendations, and
stated that it has implemented and plans to implement program changes in
areas that we identified as needing attention. The actions described by VA
should strengthen its management of IU benefits; however, we believe that
further steps are needed to fundamentally transform IU benefits into a
meaningful and timely way of supporting unemployed veterans with
service-connected disabilities. For example, VA seeks to improve decision
making on initial and ongoing eligibility by increasing its collection of
employment and earnings data. While these are positive developments, our
recommendations envision a more comprehensive effort to restore the
integrity of IU decision making through a series of reforms that would
seek to strengthen IU criteria, guidance, and procedures for determining
initial eligibility and enforcing the earnings limit.

VA also proposes to encourage IU claimants to consider employment by
including a motivational letter with the notice informing them that they
have been approved for IU benefits. While we recognize VA's intent is
positive, providing such letters after veterans have been determined to be
unemployable does not provide them with the timely support needed to
return to work. Our recommendation envisions that VA implement a number of
fundamental reforms that transform IU benefits from simply providing
compensation for unemployed veterans with service-connected disabilities
to incorporating a broad range of vocational rehabilitation services and
assistance that encourage and support such veterans to realize their full
productive capacity, while protecting benefits for veterans unable to
work. VA will need to expand upon the initiatives outlined in its comments
to take full advantage of IU benefit decision making, not only as a means
to restore the lost incomes of veterans with service-connected
disabilities but, when appropriate, to restore their ability to pursue a
livelihood and take their place as fully productive members of society.

VA's comments appear in app. V. In addition, VA, SSA, and HHS provided
technical comments, which are reflected in the report as appropriate.

We will send copies of this report to the Secretary of Veterans Affairs,
Secretary of Health and Human Services, Commissioner of the Social
Security Administration, relevant congressional committees, and other
interested parties. We will also make copies available to others upon
request. In addition, the report will be available at no charge on GAO's
Web site at http://www.gao.gov . Please contact me at (202) 512-7215 if
you or your staff have any questions about this report. Contact points for
our offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Other major contributors to this report are
listed in appendix VI.

Cristina T. Chaplain Acting
Director, Education, Workforce, and Income
Security Issues

Appendix I: IU Beneficiaries and Estimated Expenditures

We estimated the number of Individual Unemployability (IU) beneficiaries
for 1996 to 2005 from monthly internal Department of Veterans Affairs (VA)
reports on activity under the Disability Compensation program. For each
year, we identified the number of IU beneficiaries from the "end of month"
total in the September report for that year. Figure 5 shows the growth in
number of IU beneficiaries from 1996 to 2005.

Figure 5: Number of IU Beneficiaries for 1996 to 2005

At the time of our study, VA did not report or maintain separate data on
IU expenditures. We estimated VA's annual added expenditures due to IU
benefits for 1996 to 2005 from monthly internal VA reports showing
expenditures on the Disability Compensation program. Using data in the
September report for each year, we computed average monthly payments due
to IU benefits for 1996 to 2005, annualized this amount, and factored in
the number of beneficiaries to estimate total expenditures on IU benefits
for each year. Figure 6 shows the growth in IU expenditures from 1996 to
2005.

Figure 6: Estimated IU Expenditures for 1996 to 2005

Appendix II: Lifetime Present Value Analysis of IU Benefits

To illustrate the value of IU benefits, we calculated the present value of
the added benefits due to IU that would be available over a lifetime to
veterans who begin to receive IU benefits at different ages and with
schedular disability ratings of 60-, 70-, 80-, and 90-percent. We chose
the ages of 20, 25, 35, 45, 55, 65, and 75 to illustrate the added value
of IU benefits over a wide range of ages at which veterans could begin to
receive such benefits.

For each age and disability rating combination, we calculated the present
value of the added increment due to IU that would be received over a
lifetime. Our present value analysis uses annuity factors that are based
on two key assumptions: the length of time benefits will be received, and
the rate at which future payments will be discounted (on the basis that a
dollar today is worth more than a dollar received a year from today). For
the first assumption about life span, we used Social Security
Administration general population mortality tables for males.1 For the
second assumption about the discount rate, we assumed that the rate of
interest absent inflation (the real interest rate) is 3 percent, and that
inflation is constant at 3 percent annually, resulting in an assumed
nominal interest rate (which is the sum of the real interest rate and
inflation) of 6 percent. Because the yearly cost-of-living adjustment of
VA compensation rates is linked to the consumer price index,2 we assumed
that this adjustment is equal to the rate of inflation, resulting in a net
discount rate for our calculations of 3 percent a year. The present value
of the additional amount of disability compensation provided to veterans
granted IU benefits for selected ages and schedular ratings is provided in
table 3.

1 We used estimates for males because 2001 data from the Bureau of Labor
Statistics show that over 93 percent of veterans are male.

2 A cost of living adjustment is not guaranteed, but the Congress has
historically passed annual adjustments based on a percentage equal to the
increase in Social Security benefits.

Table 3: Lifetime Present Value of Increased Benefits for Veterans
Receiving IU by Selected Ages and Schedular Ratings

                                                Lifetime                     
                                           present value                     
                                                      of                     
                       2005 annual          compensation                     
Age     Schedular     amount of          based on the    Lifetime present 
awarded    Rating     schedular Annuity     schedular  value of the added 
IU      (percent) compensationa  factor       ratingb benefits due to IUc 
20             60       $10,068 26.4768      $266,568            $463,874 
                  70        12,672 26.4768       335,514              394,928
                  80        14,724 26.4768       389,844              340,598
                  90        16,560 26.4768       438,456              291,986
                 100        27,588 26.4768       730,442                  NAd
25             60        10,068 25.4894       256,627             446,574 
                  70        12,672 25.4894       323,002              380,200
                  80        14,724 25.4894       375,306              327,896
                  90        16,560 25.4894       422,104              281,097
                 100        27,588 25.4894       703,202                  NAd
35             60        10,068 22.9946       231,510             402,865 
                  70        12,672 22.9946       291,388              342,987
                  80        14,724 22.9946       338,572              295,803
                  90        16,560 22.9946       380,791              253,584
                 100        27,588 22.9946       634,375                  NAd
45             60        10,068 19.8757       200,109             348,222 
                  70        12,672 19.8757       251,865              296,466
                  80        14,724 19.8757       292,650              255,681
                  90        16,560 19.8757       329,142              219,189
                 100        27,588 19.8757       548,331                  NAd
55             60        10,068 16.1821       162,921             283,511 
                  70        12,672 16.1821       205,060              241,372
                  80        14,724 16.1821       238,265              208,167
                  90        16,560 16.1821       267,976              178,456
                 100        27,588 16.1821       446,432                  NAd
65             60        10,068 12.1007       121,830             212,004 
                  70        12,672 12.1007       153,340              180,494
                  80        14,724 12.1007       178,171              155,663
                  90        16,560 12.1007       200,388              133,447
                 100        27,588 12.1007       333,834                  NAd
75             60        10,068  8.1091        81,642             142,071 
                  70        12,672  8.1091       102,759              120,955

                                                Lifetime                     
                                           present value                     
                                                      of                     
                       2005 annual          compensation                     
Age     Schedular     amount of          based on the    Lifetime present 
awarded    Rating     schedular Annuity     schedular  value of the added 
IU      (percent) compensationa  factor       ratingb benefits due to IUc 
                  80        14,724  8.1091       119,398             104,315 
                  90        16,560  8.1091       134,287              $89,427
                 100        27,588  8.1091       223,714                  NAd

Source: GAO analysis using VA 2005 schedular disability compensation rates
and annuity factors described above.

aDisability compensation is paid monthly. The monthly compensation has
been multiplied by 12 to provide annual compensation figures.

bTo calculate the lifetime present values of disability compensation
associated with a veteran's schedular rating, we multiplied the annual
schedular compensation by the annuity factor.

cThe lifetime present value of the increase in disability compensation for
veterans granted IU benefits is the difference in the lifetime present
value of compensation at the 100-percent rate and the lifetime present
value of compensation at the schedular rate. Due to rounding, the sum of
the compensation based on the schedular rating and the added compensation
due to the receipt of IU benefits may not exactly equal the compensation
amount at the 100-percent rate.

dVeterans with a 100-percent schedular rating would receive the maximum
basic disability compensation and would not be awarded IU benefits.

Appendix III: Examples from VA's Rating Schedule for Selected Medical
Conditions

Table 4: VA's Rating Schedule for Selected Medical Conditions

                                          Physical                            
                                          injury:                             
Percent  Mental impairments: major     removal of     Illness: migraine
rating   depressive disorder           ribs           headaches
0        Symptoms do not interfere                    Incapacitating       
            with occupational or social                  attacks occurring    
            functioning or require                       less than once every 
            continuous medication.                       two months on        
                                                         average over the     
                                                         last several months  
10       Mild or transient symptoms    Removal of one Incapacitating       
            decrease work efficiency and  rib, or the    attacks occurring    
            ability to perform            partial        once in two months   
            occupational tasks only       removal of two on average over the  
            during periods of significant or more ribs   last several months  
            stress, or symptoms           without        
            controlled by continuous      potential for  
            medication.                   regrowth       
20                                     Removal of two 
                                          ribs           
30       Symptoms such as depressed    Removal of     Incapacitating       
            mood and anxiety cause        three or four  attacks occurring    
            occasional decrease in work   ribs           once a month on      
            efficiency and intermittent                  average over last    
            periods of inability to                      several months       
            perform occupational tasks,                  
            although generally                           
            functioning satisfactorily.                  
40                                     Removal of     
                                          five or six    
                                          ribs           
50       Symptoms such as flattened    Removal of     Very frequent,       
            affect, panic attacks more    more than six  completely           
            than once a week, and         ribs           incapacitating and   
            impairment of short-and                      prolonged attacks,   
            long-term memory cause                       producing severe     
            reduced reliability and                      economic             
            productivity.                                inadaptability       
60                                                    
70       Symptoms such as suicidal                    
            ideation and obsessional                     
            rituals cause deficiencies in                
            most areas, such as work,                    
            school, family, judgment,                    
            thinking, or mood.                           
80                                                    
90                                                    
100      Symptoms such as persistent                  
            delusions or hallucinations                  
            and grossly inappropriate                    
            behavior cause total                         
            occupational and social                      
            impairment.                                  

Source: GAO analysis of VA regulations.

Appendix IV: Example of Procedures to Calculate Combined Disability Ratings

Figure 7: Procedures to Calculate Combined Disability Rating

Note: In order to obtain a 50 percent rating, migraine headaches must be
characterized by very frequent, completely prostrating and prolonged
attacks productive of severe economic inadaptability.

Appendix V: Comments from the Department of Veterans Affairs

Appendix VI: GAO Contacts and Staff Acknowledgements

GAO Contacts

Cristina T. Chaplain, Acting Director, (202) 512-7215, [email protected]

Cynthia A. Bascetta, Director, (202) 512-7215, [email protected]

Acknowledgements

Carol Dawn Petersen, Assistant Director; Joseph J. Natalicchio,
Analyst-in-Charge; and Julie M. DeVault, Senior Analyst; made significant
contributions to all aspects of this report. Crystal Bernard, Margie K.
Shields, and Jonathan Elkin also made significant contributions. Joan
Vogel, Walter Vance, Vanessa Taylor, Roger Thomas, and Joseph Applebaum
provided technical assistance.

(130443)

GAO's Mission

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( www.gao.gov ). Each weekday, GAO posts newly
released reports, testimony, and correspondence on its Web site. To have
GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

To Report Fraud, Waste, and Abuse in Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: [email protected]
Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional Relations

Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Washington,
D.C. 20548

Public Affairs

Paul Anderson, Managing Director, [email protected] (202) 512-4800 U.S.
Government Accountability Office, 441 G Street NW, Room 7149 Washington,
D.C. 20548

www.gao.gov/cgi-bin/getrpt? GAO-06-309 .

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact Cristina Chaplain at (202) 512-7215 or
[email protected].

Highlights of GAO-06-309 , a report to congressional requesters

May 2006

VETERANS'DISABILITY BENEFITS

VA Should Improve Its Management of Individual Unemployability Benefits by
Strengthening Criteria, Guidance, and Procedures

As part of its Disability Compensation program, the Department of Veterans
Affairs (VA) provides Individual Unemployability (IU) benefits to veterans
of any age who are unemployable because of service-connected disabilities.
Over the last decade, the number of IU beneficiaries and benefit costs
have more than tripled. In 2005, about 220,000 veterans received an
estimated $3.1 billion in IU benefits. In response to a congressional
request, GAO assessed VA's management of IU benefits. This report (1)
examines the added value of IU benefits for veterans of selected ages and
disability ratings, (2) assesses the criteria, guidance, and procedures
used for initial decision making, (3) assesses VA's ongoing eligibility
enforcement procedures, and (4) compares VA's decision-making and
enforcement procedures with those used by other disability programs.

What GAO Recommends

GAO recommends that VA should clarify and strengthen its IU eligibility
criteria, guidance, and procedures for initial and ongoing eligibility
decisions; and develop a return-to-work strategy for IU claimants. VA
agreed with our conclusions and concurred with our recommendations, and
stated that it has implemented and plans to implement program changes in
areas that we identified as needing attention.

Under VA's disability compensation program, VA can award IU benefits (that
is, total disability compensation) to veterans of any age who cannot work
because of service-connected disabilities even though VA did not rate
their impairments at the total disability level. The added value of IU
benefits over a veteran's lifetime depends upon the veteran's level of
impairment at the time he or she begins receiving IU benefits and the
length of time these benefits are received. To illustrate the potential
amount of IU benefits that could be received, GAO estimated the lifetime
present value of the added benefits in disability compensation for
veterans with different impairment levels who began receipt of IU benefits
in 2005 at different ages. GAO found that the lifetime present value of
these benefits can range from:

           o  about $300,000 to over $460,000 for veterans age 20 in 2005,
           and
           o  about $89,000 to about $142,000 for veterans age 75 in 2005.

GAO also found that just under half (46 percent) of new IU beneficiaries
was awarded IU benefits at the age of 60 or older, and 19 percent were age
75 or older.

VA's criteria, guidance, and procedures for awarding IU benefits do not
ensure that its IU decisions are well supported. VA regulations and
guidelines lack key criteria and guidance that are needed to determine
unemployability.VA guidelines also do not give rating specialists the
procedures to obtain the employment history and vocational assessments
needed to support IU decisions. As a result, some VA staff told us that IU
benefits have been granted to some veterans with employment potential.

In addition, VA's process for ensuring the ongoing eligibility of IU
beneficiaries is inefficient and ineffective. This enforcement process
relies on old data, outdated, time-consuming manual procedures,
insufficient guidance, and weak eligibility criteria. Moreover, the agency
does not track and review its enforcement activities to better ensure
their effectiveness.

VA is among the federal disability programs GAO has identified as high
risk and in need of modernization, in part, because it is poorly
positioned to provide meaningful and timely support to help veterans with
disabilities return to work. Specifically, VA's compensation program does
not reflect the current state of science, technology, medicine, and the
labor market. VA's management of IU benefits exemplifies these problems
because its practices lag behind those of other disability programs.
Approaches from other disability programs demonstrate the importance of
providing return-to-work services and using vocational expertise to assess
the claimant's condition and provide the appropriate services.
Incorporating return-to-work practices in IU decision making could help VA
modernize its disability program to enable veterans to realize their full
potential without jeopardizing the availability of benefits for veterans
who cannot work.
*** End of document. ***