Veterans Affairs: Limited Support for Reported Health Care	 
Management Efficiency Savings (01-FEB-06, GAO-06-359R). 	 
                                                                 
The Department of Veterans Affairs (VA) provides a uniform set of
health care services to eligible veterans who enroll to receive  
such care and seek it from VA. These services include preventive 
and primary health care, a full range of outpatient and inpatient
services, and prescription drugs. VA provides additional	 
services, such as nursing home and dental care and other	 
services, as required by law for some veterans and makes these	 
services available to other veterans on a discretionary basis as 
resources permit. Most of the nation's 24 million veterans are	 
eligible for some aspect of VA's health care services if they	 
choose to enroll. In fiscal year 2005, about 7 million veterans  
were enrolled to receive VA health care services. In that year,  
VA planned to provide health care services to about 5 million	 
veterans based on its initial budget request of $ 30.2 billion.  
Funding for VA's health care program has increased substantially 
in recent years. Congress appropriates funds annually for VA to  
provide health care services to eligible veterans. Congressional 
budget deliberations start when the President submits his annual 
budget request to Congress as the Budget of the United States	 
Government. This is soon followed by VA providing the Congress	 
with a more detailed budget justification of the President's	 
policy and funding proposals for its programs. In each of the	 
President's budget requests for fiscal years 2003 through 2006,  
the proposals assumed implementation of management efficiency	 
initiatives that would save money without reducing the quality of
service. Indeed, over these 4 fiscal years, the President's	 
budget proposals assumed that these initiatives reduced funding  
requests by billions of dollars. Since savings from management	 
efficiencies were expected to help reduce the level of annual	 
appropriations, Congress asked us to examine (1) VA's methodology
for projecting the health care management efficiency savings that
were assumed in the President's budget requests for fiscal years 
2003 through 2006 and (2) VA's support for reported actual	 
savings achieved through management efficiency initiatives during
fiscal years 2003 and 2004--including the methodology and	 
documentation used to track and report achieved savings. We also 
summarized prior GAO and VA Office of the Inspector General (OIG)
reports that have identified management inefficiencies at VA.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-359R					        
    ACCNO:   A46278						        
  TITLE:     Veterans Affairs: Limited Support for Reported Health    
Care Management Efficiency Savings				 
     DATE:   02/01/2006 
  SUBJECT:   Budget controllability				 
	     Health care services				 
	     Presidential budgets				 
	     Veterans benefits					 
	     Financial analysis 				 
	     Financial management				 
	     Budget requests					 

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GAO-06-359R

     

     * VA Lacks a Methodology for Projecting Savings
     * PDF6-Ordering Information.pdf
          * Order by Mail or Phone

February 1, 2006

The Honorable Daniel K. Akaka

Ranking Member

Committee on Veterans' Affairs

United States Senate

The Honorable Lane Evans

Ranking Member

Committee on Veterans' Affairs

House of Representatives

Subject: Veterans Affairs: Limited Support for Reported Health Care
Management Efficiency Savings

The Department of Veterans Affairs (VA) provides a uniform set of health
care services to eligible veterans who enroll to receive such care and
seek it from VA. These services include preventive and primary health
care, a full range of outpatient and inpatient services, and prescription
drugs. VA provides additional services, such as nursing home and dental
care and other services, as required by law for some veterans and makes
these services available to other veterans on a discretionary basis as
resources permit. Most of the nation's 24 million veterans are eligible
for some aspect of VA's health care services if they choose to enroll. In
fiscal year 2005, about 7 million veterans were enrolled to receive VA
health care services. In that year, VA planned to provide health care
services to about 5 million veterans based on its initial budget request
of $ 30.2 billion.1 Funding for VA's health care program has increased
substantially in recent years.

Congress appropriates funds annually for VA to provide health care
services to eligible veterans. Congressional budget deliberations start
when the President submits his annual budget request to Congress as the
Budget of the United States Government. This is soon followed by VA
providing the Congress with a more detailed budget justification of the
President's policy and funding proposals for its programs.2 In each of the
President's budget requests for fiscal years 2003 through 2006, the
proposals assumed implementation of management efficiency initiatives that
would save money without reducing the quality of service. Indeed, over
these 4 fiscal years, the President's budget proposals assumed that these
initiatives reduced funding requests by billions of dollars.

1For fiscal year 2005, the President requested $27.8 billion in
appropriations and $2.4 billion in estimated collections, together
amounting to a request for $30.2 billion in discretionary budget authority
to the Veterans Health Administration (VHA) for providing health care. See
Budget of the United States Government-Appendix, Fiscal Year 2005, at
869-70, 873. In the Departments of Veterans Affairs and Housing and Urban
Development, and Independent Agencies Appropriations Act, 2005, Pub. L.
No. 108-447, div. I, 118 Stat. 3285, 3287-89 (Dec. 8, 2004), Congress
ultimately appropriated $28.3 billion for health care. Later in fiscal
year 2005, in response to the President's request for $975 million in
supplemental appropriations, Congress provided an additional $1.5 billion
in supplemental appropriations for veterans' health care to be available
through fiscal year 2006. See the Department of the Interior, Environment,
and Related Agencies Appropriations Act, 2006, Pub. L. No. 109-54, title
VI, 119 Stat. 499, 563-64 (Aug. 2, 2005). Finally, in the Budget of the
United States Government-Appendix, Fiscal Year 2006, the President
reported that VA's estimated collections for fiscal year 2005 would be
$1.95 billion. Id.  at 893.

Since savings from management efficiencies were expected to help reduce
the level of annual appropriations, you asked us to examine (1) VA's
methodology for projecting the health care management efficiency savings
that were assumed in the President's budget requests for fiscal years 2003
through 2006 and (2) VA's support for reported actual savings achieved
through management efficiency initiatives during fiscal years 2003 and
2004-including the methodology and documentation used to track and report
achieved savings. As agreed with your staff, we also summarized prior GAO
and VA Office of the Inspector General (OIG) reports that have identified
management inefficiencies at VA.

To examine VA's health care management efficiency initiatives, we
interviewed officials with VHA's Office of the Chief Financial Officer
(CFO). We also interviewed officials from VA's Procurement Reform Task
Force, the Pharmacy Benefits Management Strategic Health Care Group, the
Office of Prosthetic and Clinical Logistics Group, and the Office of
Information Technology, all of which VA reported as the primary sources of
the agency's management efficiency savings. We requested documentation for
the assumed savings amount from each source. We also interviewed officials
responsible for reporting actual savings achieved from management
efficiency initiatives at all 21 of VA's regional health care networks. In
addition, we obtained and analyzed documentation provided by VA in support
of its projected savings and reported actual savings achieved from
management efficiencies-including guidance provided to each of the
regional health care networks on reporting actual savings achieved as well
as documents and spreadsheets used to collect and report efficiency
savings. We could only evaluate VA's achieved savings for fiscal years
2003 and 2004 because as of the end of our fieldwork, VA had not yet
compiled its fiscal year 2005 achieved savings figures. We also reviewed
prior GAO and VA OIG reports to identify management inefficiencies at VA.
We conducted our work from September 2005 through January 2006 in
accordance with U.S. generally accepted government auditing standards. We
requested and received written comments on a draft of this report from VA
and have reprinted VA's comments in enclosure II. Enclosure I contains
further details on our scope and methodology.

2An agency provides budget justification materials - referred to as the
congressional budget justification - to its appropriations subcommittees
after the Office of Management and Budget has reviewed the information for
consistency with the President's budget request. Although the
congressional budget justification is transmitted after the President's
budget, the format and timing is determined by the needs of the relevant
appropriations subcommittee.

Results in Brief

VA lacked a methodology for making the health care management efficiency
savings assumptions reflected in the President's budget requests for
fiscal years 2003 through 2006 and, therefore, was unable to provide us
with any support for those estimates. VA officials told us that the
management efficiency savings assumed in these requests were savings goals
used to reduce requests for a higher level of annual appropriations in
order to fill the gap between the cost associated with VA's projected
demand for health care services and the amount the President was willing
to request.

Further, VA lacks adequate support for the $1.3 billion it reported as
actual management efficiency savings achieved for fiscal years 2003 and
2004 because it lacked a sound methodology and adequate documentation for
calculating and reporting management efficiency savings. Specifically,
there was little consistency with respect to what VA's regional networks
reported as management efficiency savings, how savings were calculated,
and what type of documentation was available to support the savings
figures reported. In addition, VA's regional networks sometimes reported
savings resulting from cost-cutting measures as management efficiency
savings. Although both can achieve savings, cost-cutting measures, unlike
management efficiency initiatives, are not consistent with VA's objective
of providing the same or higher quality and quantity of service at a lower
cost. Finally, VA does not have a reliable basis for determining whether
it has realized the management efficiency savings that were reflected in
the President's budget requests for fiscal years 2003 and 2004.
Specifically, VA's use of its savings calculation for its national
procurement initiatives is misleading because VA calculates actual savings
for these initiatives on a cumulative basis and compares these savings
figures with savings goals that are reflected on an incremental basis.

In recent years, the VA OIG and we identified management inefficiencies
that, if unaddressed, could contribute to requests for higher amounts of
appropriations that could otherwise have been avoided. For example,
although VA has instituted a number of procurement reform initiatives
aimed at leveraging its purchasing power and improving the overall
effectiveness of its procurement actions, the VA OIG and we continue to
identify problems with VA's procurement processes. Moreover, the VA OIG
identified deficiencies in VA's procurement practices as one of the
agency's most serious management challenges. For instance, recent GAO and
VA OIG reports disclosed significant problems with VA's acquisitions
involving Federal Supply Schedule (FSS) contracts; procurement of health
care services; VA construction; acquisition support weaknesses; and
inadequate management and oversight of major system initiatives. In
addition, recent GAO and VA OIG reports have identified both serious
control weaknesses in the agency's inventory management and shortfalls in
the agency's efforts to provide reliable cost data to accurately assess
the efficiency and effectiveness of VA's programs and initiatives.

VA concurred with our recommendations but disagreed that it had used its
management efficiency savings goals to fill the gap between the cost
associated with VA's projected demand for health care services and the
amount the President was willing to request. However, VA officials
uniformly described VA's process for determining its management efficiency
savings goals in this manner and it did not provide us any other
explanation. Further, VA did not provide us with any support for the
methodology used to develop its management efficiency savings goals.
Accordingly, we continue to believe that this characterization is
appropriate.

Background

In the mid-1990s, VA began to change fundamentally the way it delivers
health care to veterans to increase the efficiency of its health care
system and to improve access to medical services. Applying lessons learned
from the private sector's experiences with managed health care, VA began
emphasizing certain managed care practices, such as primary, outpatient,
and preventive care, and de-emphasizing practices such as inpatient care.
To support its health care reform efforts, VA decentralized the management
structure of the agency to coordinate the organization of hospitals,
outpatient clinics, and other facilities into 21 regional networks or
Veterans Integrated Service Networks (VISN). One aspect of VA's health
care reorganization was to establish organizationwide goals for improving
efficiency and access and to create performance measures to hold network
directors accountable for achieving these goals.

To maximize the health care provided to veterans with available
resources-although not required as part of the budget process-the
President's budget request has included expected savings achieved through
various management efficiency initiatives. We have previously reported on
the likelihood of VA achieving the management efficiency savings included
in the President's budget request. In September 1999, we reported that VA
had identified management efficiency initiatives that it expected would
result in savings totaling $1.2 billion.3 Our 1999 report concluded that
it seemed unlikely that VA's savings goal would be achieved through
management efficiency initiatives because many of VA's initiatives were
not consistent with VA's objective to provide the same or higher-quality
services at lower costs. Instead, anticipated savings could possibly cause
service delays or diminished service quality. Initiatives that appeared
not to affect service quality negatively accounted for only $600 million.

Then, in March 2005, as part of a review of VA's congressional budget
justification, we prepared an issue paper on the likelihood of VA
achieving significant management efficiency savings in fiscal year 2006.
We reported that VA's fiscal year 2006 estimate of $590 million in
management savings appeared to be achievable based on prior work by GAO
and the VA OIG. In conducting the budget justification work, as stated in
our issue paper, we did not test the reliability and validity of the data
used to calculate the projected savings. With respect to our current
engagement, for which you asked us to validate the data used to calculate
projected and achieved savings, our work included tests of the reliability
and validity of the data used.

VA Lacks a Methodology for Projecting Savings

Resulting from Management Efficiency Initiatives

3GAO, Veterans' Health Care: Fiscal Year 2000 Budget, GAO/HEHS-99-189R
(Washington D.C.: Sept. 14, 1999).

VA lacked a methodology for making the health care management efficiency
savings assumptions reflected in the President's budget requests for
fiscal years 2003 through 2006 and, therefore, was unable to provide us
with any support for the savings. VA officials told us that the management
efficiency savings assumed in these requests were savings goals used to
reduce requests for a higher level of annual appropriations in order to
fill the gap between the cost associated with VA's projected demand for
health care services and the amount the President was willing to request.

In its congressional budget justifications, VA has provided additional
details on the management efficiency savings reflected in the President's
budget request for fiscal years 2003 through 2006. As shown in table 1, VA
presented these savings goals on both an annual and a cumulative basis.
However, the level and type of detail provided in the justifications
varied from year to year. For example, in fiscal year 2004, the detailed
savings amounts presented in VA's budget justification sum to the
cumulative amount of $950 million-whereas, in fiscal year 2006, the
detailed savings sum to the annual amount of $590 million. In fiscal years
2003 and 2005, VA did not provide information linking savings goals to
specific management efficiency initiatives-making it difficult to
determine how much savings was expected from each initiative and whether
VA's budget justification detail was intended to support its annual or
cumulative savings assumptions.

Table 1: VA's Health Care Management Efficiency Savings Goals, Fiscal
Years 2003-2006

Dollars in millions

Fiscal year       Reported   Reported VA reported justification for        
               annual savings cumulative savings goals                        
                                 savings 
2003                  $316       $316 Standardization of procurement       
                                         activities, evaluation of            
                                         operational community-based          
                                         outpatient clinics, evaluation of    
                                         centrally managed programs           
2004                   634        950 $150 million - implement competitive 
                                         sourcing plan                        
                                                                              
                                         $250 million - procurement           
                                         standardization                      
                                                                              
                                         $300 million - maintain              
                                         administrative costs at 2003 level   
                                                                              
                                         $100 million - improve employee      
                                         productivity                         
                                                                              
                                         $150 million - shift from inpatient  
                                         to outpatient care                   
2005                   340      1,290 Improve standardization policies in  
                                         procurement of supplies,             
                                         pharmaceuticals, and other capital   
                                         purchases                            
2006                   590      1,790 $431 million - operational           
                                         efficiencies                         
                                                                              
                                         $159 million - competitive sourcing; 
                                         improved standardization policies in 
                                         procurement of supplies,             
                                         pharmaceuticals, and other           
                                         operational efficiencies             

Source: GAO analysis of VA's annual budget justifications for fiscal years
2003 through 2006.

The Senate Appropriations Committee also found problems with VA's fiscal
year 2006 budget justification details-concluding that VA's estimated
management efficiencies are not supported by adequate details in its
congressional budget justification.4 Consequently, the Senate
Appropriations Committee and its House and Senate conferees-in their
reports related to VA appropriations for fiscal year 2006-directed VA to
provide more detail on its justification for management efficiencies in
future congressional budget justifications on the premise that savings
projections that are well-grounded and supported in the budget request are
more likely to be achievable.5

4See Military Construction and Veterans Affairs and Related Agencies
Appropriation Bill, 2006, S. Rep. No. 109-105, at 42-43, 55 (July 21,
2005).

VA Lacks Adequate Support for Actual Management Efficiency Savings
Achieved

VA also does not have adequate support for the $1.3 billion it reported as
actual management efficiency savings achieved for fiscal years 2003 and
2004 because it lacked a sound methodology and adequate documentation for
calculating and reporting actual management efficiency savings.
Specifically, there was little consistency with respect to what VA's VISNs
reported as management efficiency savings, how savings were calculated,
and what type of documentation was available to support reported savings
figures. In addition, VA does not have a consistent basis for reporting
actual savings achieved-reporting savings for some initiatives on a
cumulative basis and others on an incremental basis-which can be
misleading given the context of an annual budget. By reporting some
savings on a cumulative basis, VA does not have a reliable way to
determine whether it has realized the planned management efficiency
savings that are reflected in VA's budget justifications for fiscal years
2003 and 2004. As shown in table 2, VA reported realized management
efficiency savings in two broad areas-savings resulting from local or
VISN-level initiatives and savings from national or VA-wide initiatives.

Table 2: Reported Actual Savings Achieved from Management Efficiency
Initiatives for Fiscal Years 2003 through 2004

Dollars in Millions

Fiscal year VISN inventory management,         National procurement Total  
               administrative consolidations,     standardization      
               VA/Department of Defense resource  initiatives          
               sharing, competitive sourcing, and                      
               other initiatives                                       
2003                                      $231                 $396   $627 
2004                                       235                  414   $649 
Total for                                 $466                $810a $1,276 
2-year                                                              
period                                                              

Source: VHA Office of the CFO.

aOf the $810 million, according to VA officials, $756 million was related
to pharmaceutical procurements and $54 million was related to other
equipment procurements.

Because VA had not yet compiled the savings information for fiscal year
2005 as of the end of our fieldwork, we could not evaluate VA's achieved
savings figures for that fiscal year. However, according to VA officials,
they planned to use the same process as was used in prior years to arrive
at VA's fiscal year 2005 achieved savings.

VA Lacks a Clear, Consistent Methodology for Tracking and Reporting

Achieved Savings Resulting from VISN Initiatives

VA's methodology for tracking, reporting, and documenting actual savings
achieved through VISN-level initiatives lacked consistency with respect to
what was reported as management efficiency savings, how savings were
calculated, and type of documentation available to support the savings
figures reported. Consequently, VA did not have a consistent basis for
reporting actual savings achieved-reporting savings for some initiatives
on a cumulative basis and others on an incremental basis. In other cases,
based on the information provided by VISN officials, VISNs appeared to
include cost-cutting measures that, unlike management efficiency
initiatives, are not consistent with VA's objective of providing the same
or higher quality and quantity of service at a lower cost.

5Id.;  H.R. Conf. Rep. No. 109-305, at 44 (Nov. 17, 2005).

Each year, VHA's Office of the CFO requests information on savings
achieved through local, or VISN-level, management efficiency initiatives.
To obtain this information, the Office of the CFO provides a template to
each of VHA's 21 VISNs that outlines general savings categories-which
include standardization of pharmaceuticals, supplies, and material
procurement; inventory management; administrative overhead reductions;
Department of Defense (DOD) and VA resource sharing activities;
productivity improvements; and other initiatives. Using this template,
each VISN requests savings figures from the medical centers, clinics, and
other organizations within the regional health care network. Beyond a
limited description of each of the savings categories, VA provided no
other written guidance to the VISNs on what their roles were in providing
oversight to the process, what constitutes management efficiency savings,
how savings should be calculated, and what type of documentation should be
maintained in support of the reported savings figures.

Based on our interviews and documents provided by VISN officials, the type
of documentation available in support of the management efficiency savings
reported varied widely across the VISNs. According to the 21 VISN
officials we interviewed, some received only a completed template, or the
summary-level information, from medical centers, clinics, and other
organizations within their region and performed only a cursory review of
the savings figures before forwarding the information on to the VHA Office
of the CFO. Others obtained more detailed information on savings and were
involved in calculating the savings figures.

In addition, the VISNs were not consistently defining what constituted a
management efficiency. For example, several of the VISNs reported
management efficiency savings for actions such as temporary and permanent
reductions in full-time equivalent (FTE) workers from one year to the
next, delays in hiring, reductions in overtime, and reductions in
available resources due to budget cuts-which may not represent management
efficiency savings because they are not consistent with VA's objective of
providing the same or higher quality and quantity of service at a lower
cost. For example, for fiscal year 2003, one network reported more than
$2.8 million of savings resulting from controlled hiring-or delayed hiring
of authorized staff. For that same fiscal year period, another network
reported savings of $131,000 for reductions in overtime and $264,000 for
staffing reductions-without any explanation of whether and, if so, how
these savings were achieved without a reduction in the level or quality of
service.

Finally, there was little consistency with respect to how savings were
calculated. Some VISNs calculated productivity savings based on reductions
in the unit cost of providing health care services, while others
calculated it based on the decreased cost associated with a reduction in
the number of FTEs on board. In some instances, VA reported actual savings
achieved on a cumulative basis, instead of an incremental basis. For
example, according to one VISN, it reported the savings in fiscal year
2003 resulting from closing one of its hospitals in that year and claimed
the same savings again in fiscal year 2004. However, due to
inconsistencies in the type of documentation available to support
management efficiency savings, we were unable to determine the extent to
which VA reported savings on an incremental versus a cumulative basis.

Methodology for Calculating Achieved Savings Resulting from National

Procurement Standardization Initiatives Is Not Appropriate

VA does not have a reliable basis for determining whether it has realized
the management efficiency savings that were reflected in the President's
budget requests for fiscal years 2003 and 2004. Specifically, VA's use of
its savings calculation for its national procurement initiatives is
misleading because VA calculates actual savings for these initiatives on a
cumulative basis and compares these savings figures with savings goals
that are reflected on an incremental basis.

Annually, VHA's Office of the CFO requests information on the agency's
national procurement standardization initiatives, which accounted for most
of the agency's reported actual management efficiency savings. Using
spreadsheets, the Office of the CFO accumulates summary-level efficiency
savings data from the Pharmacy Benefits Management Strategic Healthcare
Group, the Office of Prosthetics and Clinical Logistic Group, and the
Office of Information Technology. According to VA officials, these actual
savings figures provide the basis for VA to determine whether it has
realized previously reported savings goals.

VA officials told us that the achieved savings for VA's national
procurement standardization initiatives were based on data obtained from
its pharmaceutical and medical and surgical supplies prime vendor6
databases. VA officials said that the achieved savings amount represents
costs that were avoided by utilizing national contracts in lieu of other
available sources. To compute this amount, VA compares the actual cost of
each item purchased on contract with the estimated cost of that same item
had the contract not been awarded. VA estimated what the cost would be
without the contract by multiplying the weighted average price per unit
that existed during the 3-month period before the contract took effect by
the quantity purchased in the current fiscal year. For example, VA
determined that a contract for rabeprazole (used to treat ulcers of the
stomach and gastro esophageal reflux disease) awarded in May 2001 resulted
in fiscal year 2003 cost avoidance of $134 million (54 percent of the
actual cost) because the cost of the drug purchased on contract in fiscal
year 2003 was $115 million, and the estimated cost of the drug without the
contract was $249 million.

VA's national procurement contract initiatives are not new. The agency has
been awarding national contracts to take advantage of larger discounts
based on volume purchasing since 1993. However, VA calculates achieved
savings each year as if it were the first year of the contract and the
savings were occurring for the first time. As a result, VA's methodology
for calculating actual savings achieved from its national contract
initiatives does not clearly distinguish recurring savings from
incremental savings-which precludes VA from calculating actual savings
figures on an incremental basis.

6Prime vendors are contractors that buy inventory from a variety of
suppliers, store the inventory in commercial warehouses, and ship it to
customers when ordered. VA's medical and surgical prime vendor
distribution contract has been in effect since fiscal year 2002. The
contract provides that the prime vendor reimburse VA about 3 percent of
sales to VA medical centers.

Using hypothetical figures, table 3 illustrates VA's savings calculation
approach. As noted, actual figures were not available because VA's savings
calculation methodology does not clearly distinguish recurring savings
from incremental savings. Table 3 shows that during the first year of a
contract, VA would calculate savings by comparing the actual cost of an
item purchased on contract with the estimated cost of the same number of
items using precontract prices. Based on this calculation, VA would report
savings in year one of $100. Because it is the first year of the contract,
the $100 savings figure reflects an incremental amount. In the second
year, assuming utilization increases to 150 units and the contract price
remains the same, VA again would calculate savings by comparing the cost
of the item purchased on contract with the estimated cost of the item
using precontract prices.

Table 3: Comparison of Cumulative and Incremental Savings Computations

                         VA's savings computation  Incremental     
                                methodology        savings         
                                                   computation     
                         1st year      2nd year                    
                                                   2nd year        
Actual cost when      $1.5 x 100 units =   $1.5 x 150 units =    $1.5 x 50 
purchased on          $150                 $225                  units =   
standardized contract                                            $75       
Estimated cost using  $2.5 x 100 units =   $2.5 x 150 units =    $2.5 x 50 
weighted average      $250                 $375                  units =   
historical price                                                 $125      
Savings               $100                 $150                  $50       
                                                                    
(actual - estimated)                                             

Source: GAO.

Based on this calculation, VA would conclude that it had achieved savings
of $150 million. However, $100 of the $150 reported in year two represents
recurring savings from year one-only $50 would be incremental savings
associated with year two. The same principle would also hold for year
three and subsequent years. That is, VA would calculate savings as if each
year being considered was the first year of the contract and thereby,
report savings on a cumulative rather than incremental basis. If, as
reflected in table 3, VA used the incremental savings computation, for
year two, $50 would be reported in incremental savings-capturing only the
additional costs avoided associated with increased utilization. Taking
this logic a step further, any additional reductions in contract unit
costs also should be captured as incremental savings in the first year in
which they occur.

Presenting actual savings achieved on a cumulative basis can be misleading
because VA compared these savings with the original savings goals, which
were reported on an incremental basis. In determining whether VA met its
savings goals, VA compared its total achieved savings amount for both its
national procurement initiatives and VISN-level initiatives with the
assumed savings included VA's budget justification. However, as shown in
table 4, VA reports its achieved savings from its national procurement
standardization initiatives on a cumulative basis and, as discussed
previously, reports its VISN-level initiatives using a combination of
cumulative and annual reporting. In table 4, VA compares these figures
with the assumed savings reflected in VA's budget justifications for
fiscal years 2003 and 2004-which are calculated on an incremental basis.

Table 4: VA's Reported Actual Cost Savings Compared with Savings Assumed
in VA's Budget Justifications for Fiscal Years 2003 and 2004

Dollars in Millions

Reported management efficiency  Basis of reporting Fiscal year Fiscal year 
initiatives                                               2003        2004 
National procurement            Cumulative                $396        $414 
standardization initiatives                                    
VISN-level initiatives          Cumulative and            $231        $235 
                                   annual                         
Total reported by VA as         Cumulative and            $627        $649 
realized or achieved            annual                         
Savings assumed in VA's budget  Annual                    $316        $634 
justifications                                                 

Source: VHA Office of the CFO.

Although VA does not have a reliable basis for determining whether it has
achieved its savings goals, this does not mean that new savings have not
occurred or that new savings are not achievable in the future. GAO and the
VA OIG have reported7 that VA's procurement standardization initiatives
have saved hundreds of millions of dollars and concluded that additional
savings could be achieved through increased resource sharing-especially in
the areas of medical services and joint procurement of medical and
surgical supplies. Nonetheless, without a sound methodology for tracking
and reporting achieved savings, the true extent of VA's actual management
efficiency savings cannot be determined.

Inefficiencies in VA's Processes Remain

In recent years, the VA OIG and we identified management inefficiencies
that, if unaddressed, could contribute to requests for higher levels of
annual appropriations that could otherwise have been avoided. Although VA
has instituted a number of procurement reform initiatives aimed at
leveraging its purchasing power and improving the overall effectiveness of
procurement actions, the VA OIG and we continue to identify problems with
VA's procurement processes as well as VA's ability to provide timely and
reliable cost data needed to measure program efficiency. Further, the VA
OIG has identified deficiencies in VA's procurement practices as one of
the agency's most serious management challenges.

As shown in table 5, recent GAO and VA OIG reports disclosed significant
problems with VA's acquisitions involving FSS contracts; procurement of
health care services; VA construction; acquisition support weaknesses; and
inadequate management and oversight of major system initiatives-including
the implementation of VA's Core Financial and Logistics System (CoreFLS)
and E-Travel service. In addition, recent reviews continue to identify
serious control weaknesses in the agency's inventory management, and
shortfalls in the agency's efforts to provide reliable cost data to
accurately assess the efficiency and effectiveness of VA's health care
initiatives and programs.

7GAO, Contract Management: Further Efforts Needed to Sustain VA's Progress
in Purchasing Medical Products and Services, GAO-04-718 (Washington, D.C.:
June 22, 2004) and Department of Veterans Affairs, Office of Inspector
General, Audit of VA Medical Center Procurement of Medical, Prosthetic,
and Miscellaneous Operating Supplies, Report No. 02-01481-118 (Washington,
D.C.: Mar. 31, 2004).

Table 5: Summary of Recent Reports That Cite Management Inefficiencies at
VA

Reporting issues/findings              Report number                       
VA is at risk of paying excessive      VA OIG, Review of Federal Supply    
prices for goods and services due to   Schedule Proposal Submitted by      
weaknesses identified in VA's preaward Sandoz, Inc., Under Solicitation    
and postaward reviews of FSS proposals Number M5-Q50A-03, Report No.       
and contacts.                          04-01682-132 (Washington, D.C.:     
                                          Apr. 28, 2005).                     
Based on the results of preaward                                           
reviews, VA could negotiate reduced    VA OIG, Review of Federal Supply    
prices totaling over $1 billion.       Schedule Proposal Submitted by      
                                          Eastman Kodak Company Under         
Based on the results of postaward      Solicitation Number M5-Q50A-03,     
reviews, $2.3 million in contractor    Report No. 04-01763-138             
overcharges were identified, which VA  (Washington, D.C.: May 18, 2005).   
subsequently recovered.                                                    
                                          VA OIG, Review of Proposal          
                                          Submitted by New York University,   
                                          School of Medicine, Under           
                                          Solicitation Number RFP 10N3-102-05 
                                          for Cardiothoracic Surgery Services 
                                          at Department of Veterans Affairs,  
                                          New York Harbor Healthcare System,  
                                          Report No. 05-01215-146             
                                          (Washington, D.C.: May 24, 2005).   
                                                                              
                                          VA OIG, Review of Federal Supply    
                                          Schedule Proposal Submitted by      
                                          BioMerieux Inc., Under Solicitation 
                                          Number RFP-797-FSS-03-0001, Report  
                                          No. 05-00452-150 (Washington, D.C.: 
                                          June 7, 2005).                      
Recent reports cite weaknesses in VA's VA  OIG, Evaluation of VHA          
acquisition management processes       Sole-Source Contracts with Medical  
including poor acquisition planning,   Schools and Other Affiliated        
inadequate risk management and senior  Institutions, Report No.            
management oversight, conflict of      05-01318-85 (Washington, D.C.:      
interest violations, poorly written    February 2005).                     
solicitations, excessive prices, and                                       
inadequate contract negotiations.      VA  OIG, Audit of VA Medical Center 
                                          Procurement of Medical, Prosthetic, 
VA's acquisition management processes  and Miscellaneous Operating         
do not adequately protect the interest Supplies, Report No. 02-01481-118   
of VA or veteran patients and may      (Washington, D.C.: Mar. 31, 2005).  
result in VA paying excessive prices   
for goods and services.                
Weaknesses were identified in VA's     GAO, Contract Management: Further   
contract management, construction      Action Needed to Improve Veterans   
contract award, and administration     Affairs Acquisition Function,       
processes.                             GAO-06-144 (Washington, D.C.: Oct.  
                                          19, 2005).                          
Based on a review of over 30 major                                         
construction contracts, the VA OIG     GAO, Contract Management: Further   
determined that several projects       Efforts Needed to Sustain VA's      
valued at $133.6 million were at risk  Progress in Purchasing Medical      
of being excessively priced.           Products and Services, GAO-04-718   
                                          (Washington, D.C.: June 22, 2004).  
                                                                              
                                          VA OIG, Department of Veterans      
                                          Affairs, Office of Inspector        
                                          General, Audit of VHA Major         
                                          Construction Contract Award and     
                                          Administration Process, Report No.  
                                          02-02181-79 (Washington, D.C.:      
                                          February 2005).                     
Weaknesses were identified in VA's     VA OIG, Issues at VA Medical Center 
contracting, acquisition support, and  Bay Pines, Florida and Procurement  
program management for major system    and Deployment of the Core          
development initiatives-including the  Financial and Logistics System      
deployment of VA's CoreFLS and         (CoreFLS), Report No. 04-01371-177  
implementation of E-Travel service.    (Washington, D.C.: Aug. 11, 2004).  
                                                                              
After spending roughly $249 million on VA OIG, Review of VA Implementation 
its development of CoreFLS, VA         of the Zegato E-Travel Service,     
discontinued implementation of the     Report No. 04-00904-124             
system in September 2004.              (Washington, D.C.: Mar. 31, 2005).  
                                          
VA's E-Travel initiative duplicated    
the General Services Administration's  
(GSA) efforts to provide E-Travel      
service options that all federal       
agencies must use. The VA OIG reported 
that the agency could save $7.4        
million over the next 10 years by      
using one of GSA's approved E-Travel   
service options.                       
VA's medical centers did not           VA OIG, Summary of Combined         
adequately manage their inventories    Assessment Program Reviews at       
for medical, prosthetic, engineering,  Veterans Health Administration      
and operating supply                   Medical Facilities October 2003     
requirements-often keeping more than   through September 2004, Report No.  
the maximum 30-day standard supply     04-03310-94 (Washington, D.C.: Mar. 
level on hand.                         7, 2005).                           
                                          
VA could potentially reduce excess     
inventories and save hundreds of       
millions of dollars in funds that are  
tied up in maintaining excess          
inventories.                           

Source: Summary of GAO and VA OIG reports.

Finally, in our recent report and testimony8 on VA's managerial cost
accounting practices, we raised concerns about the completeness and
accuracy of nonfinancial data VA routinely uses to generate cost
information to support decisions relating to internal budgeting; resource
allocation; performance measurement; and cost finding for programs,
activities, and outputs. We found that VA was unable to readily produce
documentation that describes the mechanism used to assign costs to cost
objects. We concluded that such inaccurate nonfinancial data could skew
cost calculations and any resulting managerial decisions, and limit the
reliability of data used by management to analyze and properly assign
costs.

Conclusion

As with most federal agencies, VA is under increasing pressure to find
ways to do more with less. To reduce amounts requested for annual
appropriations, VA has relied, in part, on anticipated savings resulting
from management efficiency initiatives. However, without a sound
methodology for projecting management efficiency savings VA runs the risk
of falling short of its management efficiency savings goals, which may
ultimately require VA to take actions-including revisiting the
assumptions, priorities, and levels of service assumed in the budget-to
stay within its level of available resources. If VA continues to rely on
management efficiencies as a means of savings, a sound and well-documented
methodology for consistently and accurately reporting both projected and
achieved savings related to management efficiency initiatives will be an
important factor in providing reliable information for congressional
decision makers.

8GAO, Managerial Cost Accounting Practices: Leadership and Internal
Controls Are Key to Successful Implementation, GAO-05-1013R (Washington,
D.C.: Sept. 2, 2005) and Managerial Cost Accounting Practices: Departments
of Labor and Veterans Affairs, GAO-05-1031T (Washington, D.C.: Sept. 21,
2005).

Recommendations for Executive Action

If VA continues to plan and budget for management efficiency savings, we
recommend that the Secretary of Veterans Affairs should direct the
Assistant Secretary for Management to

           develop a methodology to project savings for management efficiency
           initiatives that provides key data and assumptions used to
           estimate the savings.

To better determine whether management efficiency savings are being
achieved as planned, we recommend that the Secretary of Veterans Affairs
should direct the Assistant Secretary for Management to establish
methodologies for tracking and reporting actual savings achieved through
implementation of proposed management efficiencies, including

           clear criteria for what constitutes savings resulting from
           management efficiencies,

           controls to ensure that actual savings are reported on the same
           basis as projected savings in the budget request, and

           documentation of such savings.

Agency Comments and Our Evaluation

In its written comments, which are reprinted in enclosure II, VA concurred
with our recommendations and said that VA's Assistant Secretary for
Management will establish processes and procedures to ensure proper
documentation of savings and a methodology on how realized savings should
be tracked and reported. However, VA disagreed that it used its management
efficiency savings goals to fill the gap between the cost associated with
VA's projected demand for health care services and the amount the
President was willing to request. It said that identifying goals, setting
challenging targets, and forecasting management efficiency savings are
entirely appropriate for a large health care organization like VA.

We agree that VA and other federal agencies have a basic responsibility to
identify goals, set challenging targets, and forecast management
efficiency savings. However, VA management officials, in three separate
interviews, uniformly described VA's process for determining its
management efficiency savings goals in terms of filling the gap between
the cost associated with VA's projected demand for health care services
and the amount the president was willing to request. At the time of our
review, VA did not provide another explanation and was unable to provide
us with any support for the methodology used to develop its management
efficiency savings goals. Therefore, we continue to believe that this
characterization is appropriate. VA also provided technical comments for
which we have revised our report, as appropriate, as shown in enclosure
II.

We are sending copies of this report to the Secretary of Veterans Affairs,
interested congressional committees, and other interested parties. We will
make copies of the report available to others upon request. This report is
also available at no charge on GAO's home page at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-9095 or [email protected] . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff making major contributions to this
report are listed in enclosure III.

McCoy Williams

Director, Financial Management and Assurance

Enclosures - 3

Enclosure I

Objective, Scope, and Methodology

To examine the Department of Veterans Affairs' (VA) methodology for
determining the projected management efficiency savings assumed in the
President's budget requests for fiscal years 2003 through 2006 and VA's
support for reported actual management efficiency savings
achieved-including methodology and documentation used to track and report
achieved savings, we interviewed various VA officials from the Veterans
Health Administration (VHA) Office of the Chief Financial Officer,
including the Deputy Chief Financial Officer, Budget Office Director, and
chief financial officers for all 21 Veterans Integrated Service Networks
(VISN), who were responsible for documenting and reporting projected and
realized management efficiency savings at VA. We also interviewed
officials responsible for implementing VA's National
Pharmaceutical/Pharmacy and Medical Supplies and Equipment Procurement
Initiatives-which accounted for over half of VA's reported management
efficiency savings during fiscal years 2003 through 2006, including the
Chair of the former VA Procurement Reform Task Force, Chief and Deputy
Chief Consultants for the Pharmacy Benefits Management Strategic
Healthcare Group, Chief of the Prosthetics and Clinical Logistics Office,
Deputy Chief of the Clinical Logistics Office, and Chief for the Office of
Information Technology.

In addition, we obtained and analyzed VA's congressional budget
justifications; documentation provided by VA officials in support of its
projected and achieved in savings, including guidance provided to each of
the VISNs on reporting management efficiency savings; documents and
spreadsheets used to collect and report efficiency savings for fiscal
years 2003 through 2006; and documentation of VA's approach for
calculating efficiency savings amounts. To obtain a broader view of the
VA's national procurement initiatives, we reviewed VA's Procurement Reform
Task Force report (May 2002) and other documents relating to the
Procurement Reform Task Force initiatives.

To summarize prior GAO and VA Office of the Inspector General (OIG)
reports that have identified management inefficiencies at VA, we reviewed
GAO and VA OIG reports issued during fiscal years 2003 through 2006 that
addressed management challenges and inefficiencies in VA's health care
programs, processes, and related health care activities.

We conducted our work from September 2005 to January 2006 in accordance
with U.S. generally accepted government auditing standards. We requested
comments on a draft of this report from the Secretary of Veterans Affairs
or his designee. We received written comments from the Deputy Secretary of
Veterans Affairs and have reprinted VA's comments in enclosure II.

Enclosure II

Comments from the Department of Veterans Affairs

See comment 1.

Enclosure II

See comment 1.

Enclosure II

See comment 2.

See comment 3.

See comment 4.

See comment 5.

See comment 6.

The following are GAO's comments on VA's letter dated January 30, 2006.

GAO Comments

           1. See the Agency Comments and Our Evaluation section of this
           report.
           2. Although our footnote is intended to provide an overview of the
           budget process followed by executive branch agencies-not VA's
           specific process-we have removed the reference to OMB's role in
           transmitting agencies' budget justifications to the Congress.
           3. Our report now references the VHA Office of the CFO.
           4. Based on the documentation provided by VA officials, VA
           reported actual management efficiency savings achieved of $1.3
           billion for fiscal years 2003 and 2004. Management efficiency
           savings amounts assumed in the President's budget requests for
           fiscal years 2003 and 2004 totaled $950 million.
           5. We recognize that VA's budget justifications include both an
           incremental and a recurring component. However, we continue to
           believe that VA's use of its savings calculation for its national
           procurement initiatives is misleading because VA calculates actual
           savings for these initiatives on a cumulative basis and compares
           these savings figures with savings goals that are reflected on an
           incremental basis.
           6. We reaffirm our view that reductions in workforce, delays in
           hiring, and reductions in overtime and available resources due to
           budget cuts are cost-cutting measures-not management
           efficiencies-and therefore are not consistent with VA's objective
           of providing the same or higher quality and quantity of service at
           a lower cost.

Enclosure III

GAO Contact and Staff Acknowledgments

McCoy Williams, (202) 512-9095

Acknowledgments

In addition to the contact named above, Diane Handley, Assistant Director;
Fannie Bivins, Francine DelVecchio, Denise Fantone, Carmen Harris, James
Musselwhite, Tiffany Tanner, and Michael Tropauer made key contributions
to this report.

(195070)

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