VA Health Care: Preliminary Findings on the Department of	 
Veterans Affairs Health Care Budget Formulation for Fiscal Years 
2005 and 2006 (06-FEB-06, GAO-06-430R). 			 
                                                                 
This report documents the information we provided to Congress in 
a briefing on February 2, 2006, in response to a request	 
concerning the Department of Veterans Affairs (VA) internal	 
budget formulation process. This includes information that VA	 
develops for its budget submission to the Office of Management	 
and Budget (OMB), but it does not include information on	 
subsequent interactions that occur between VA and OMB. We will do
additional work to incorporate information from OMB and complete 
our analysis in a report to be issued at a later date. Congress  
requested information on VA's budget formulation process because 
of its interest in ensuring that VA's budget forecasts are	 
accurate and based on valid patient estimates. In response to the
request for information on VA's internal budget formulation	 
process, this report provides the following for fiscal years 2005
and 2006: (1) a description of VA's process for developing its	 
budget submission to OMB for its medical programs, and the role  
of VA's actuarial model; (2) a description of the medical program
activities cited by VA as needing additional funding, and how VA 
identified these activities; and (3) key factors in VA's budget  
formulation process that contributed to the requests for	 
additional funding.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-430R					        
    ACCNO:   A46437						        
  TITLE:     VA Health Care: Preliminary Findings on the Department of
Veterans Affairs Health Care Budget Formulation for Fiscal Years 
2005 and 2006							 
     DATE:   02/06/2006 
  SUBJECT:   Appropriated funds 				 
	     Budget functions					 
	     Budget outlays					 
	     Cost analysis					 
	     Fiscal policies					 
	     Health care programs				 
	     Policy evaluation					 
	     Presidential budgets				 
	     Veterans benefits					 
	     Budget requests					 

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GAO-06-430R

     

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February 6, 2006

The Honorable Steve Buyer

Chairman

Committee on Veterans' Affairs

House of Representatives

The Honorable Daniel K. Akaka

Ranking Minority Member

Committee on Veterans' Affairs

United States Senate

The Honorable Richard J. Durbin

The Honorable Patty Murray

The Honorable Ken Salazar

United States Senate

Subject: VA Health Care: Preliminary Findings on the Department of
Veterans Affairs Health Care Budget Formulation for Fiscal Years 2005 and
2006

This report documents the information we provided to you in a briefing on
February 2, 2006, in response to your request concerning the Department of
Veterans Affairs (VA) internal budget formulation process. (See
enclosure.) This includes information that VA develops for its budget
submission to the Office of Management and Budget (OMB), but it does not
include information on subsequent interactions that occur between VA and
OMB. We will do additional work to incorporate information from OMB and
complete our analysis in a report to be issued at a later date. You
requested information on VA's budget formulation process because of your
interest in ensuring that VA's budget forecasts are accurate and based on
valid patient estimates.

As you know, VA provides a uniform set of medical benefits to eligible
veterans. If sufficient resources are not available to provide care that
is timely and acceptable in quality, VA is required to restrict medical
benefits based on veterans' eligibility priorities.1 VA also provides
other services, such as nursing home care, to certain veterans. VA's
provision of medical care is dependent upon the availability of
appropriations. For fiscal year 2005, Congress appropriated $31.5 billion
for all of VA's medical programs, and VA provided medical care to about 5
million veterans. During fiscal year 2005, the President requested a $975
million supplemental request for that fiscal year and a $1.977 billion
amendment to the President's budget request for fiscal year 2006. In
congressional testimonies in the summer of 2005, VA stated that its
actuarial model understated growth in patient workload and services and
the resources required to provide these services.2

1Priority categories are generally determined on the basis of
service-connected disability and income. There are currently eight
priority categories. VA used this system to restrict enrollment in January
2003 to no longer allow Priority 8 veterans, those in the lowest priority
category who generally do not have service-connected disabilities or low
income, to enroll. This policy remains in effect.

In response to your request for information on VA's internal budget
formulation process, this report provides the following for fiscal years
2005 and 2006:

           o  A description of VA's process for developing its budget
           submission to OMB for its medical programs, and the role of VA's
           actuarial model.

           o  A description of the medical program activities cited by VA as
           needing additional funding, and how VA identified these
           activities.

           o  Key factors in VA's budget formulation process that contributed
           to the requests for additional funding.

To conduct our work, we interviewed VA officials, including those in the
Veterans Health Administration's Office of the Chief Financial Officer and
Office of the Assistant Deputy Under Secretary for Health for Policy and
Planning. We also interviewed officials in VA's Office of the Deputy
Assistant Secretary for Budget. We also analyzed documents concerning VA's
actuarial model, budgetary data, and workload and expenditure data and
reviewed our past work. We tested the reliability of the data and
determined they were adequate for our purposes. We have not yet met with
OMB officials to discuss the budget formulation process for fiscal years
2005 and 2006 and the President's subsequent request for additional
appropriations. We conducted our review from October 2005 through January
2006 in accordance with generally accepted government auditing standards.

Results in Brief

VA's internal process for formulating the medical programs funding
requests was informed by, but not driven by, projected demand. VA
projected costs based on projected demand for medical care under current
policy. Throughout the process, VA compared projected costs to its
anticipated request level for the OMB submission and made adjustments to
address the difference. VA officials stated that this was done in two
ways: through cost-saving policy proposals, such as assessing an annual
health care enrollment fee, and management efficiencies.3 After making
adjustments to address the difference between projected costs and its
anticipated request level, VA developed its budget submission for OMB.

2Senate Committee on Veterans' Affairs, Statement of the Secretary,
Department of Veterans Affairs, Emergency Hearing to Examine the Shortfall
in VA's Medical Care Budget, 109th Congress, June 28, 2005; House
Committee on Veterans' Affairs, Statement of the Secretary, Department of
Veterans Affairs, Full Committee Hearing on the Department of Veterans
Affairs Health Care Budget, 109th Congress, June 30, 2005; and House
Committee on Veterans' Affairs, Statement of the Under Secretary for
Health, Department of Veterans Affairs, Full Committee Hearing on the
Department of Veterans Affairs Proposed Health Care Budget Amendment for
Fiscal Year 2006, 109th Congress, July 21, 2005.

3See GAO, Veterans Affairs: Limited Support for Reported Health Care
Management Efficiency Savings, GAO-06-359R (Washington, D.C.: Feb. 1,
2006).

VA later cited a number of activities as needing additional funding based
on programmatic priorities and an analysis of expenditure data. Among the
activities that were cited for fiscal year 2005 was $273 million for
veterans returning from Iraq and Afghanistan; $226 million for long-term
care; and almost $400 million for increases in the number of patients, as
well as increases in both utilization and intensity of care. For the
fiscal year 2006 budget, VA cited $677 million to cover a 2 percent
increase in the number of patients, $600 million to correct VA's estimate
for long-term care costs, $400 million for an unexpected 1.2 percent
increase in average cost per patient, and $300 million to replace funds VA
planned to carry over from fiscal year 2005 to fiscal year 2006. VA
officials said that they chose to highlight activities that were of high
programmatic priority and could be supported by workload and expenditure
data (e.g. veterans returning from Iraq and Afghanistan). They also
reviewed spending and workload trends to determine whether spending trends
were on target or whether adjustments were needed.

An unrealistic assumption, errors in estimation, and insufficient data
were key factors in VA's budget formulation process that contributed to
the requests for additional funding. According to VA, an unrealistic
assumption about the speed with which VA could implement a policy to
reduce nursing home patient workload in VA-operated nursing homes for
fiscal year 2005 led to a need for additional funds. VA officials told us
that errors in estimating the effect of a nursing home policy to reduce
workload in all three of its nursing home settings-VA-operated nursing
homes, community nursing homes, and state veterans' nursing
homes-accounted for a request for additional funding for fiscal year 2006.
VA officials said that the error resulted from calculations being made in
haste during the OMB appeal process. Finally, VA officials told us that
insufficient data on certain activities contributed to the requests for
additional funds for both years. For example, inadequate data on veterans
returning from Iraq and Afghanistan resulted in an underestimate in the
initial funding request.

Agency Comments

We requested comments on a draft of the enclosed briefing slides from VA.
VA provided us with technical comments on the briefing slides, which have
been incorporated as appropriate.

                                   - - - - -

We are sending copies of this report to the Secretary of Veterans Affairs,
the Director of the Office of Management and Budget, and appropriate
congressional committees. We will also provide copies to others upon
request. In addition, the report is available at no charge on GAO's home
page at http://www:gao.gov . Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report.

If you and your staff have any questions or need additional information,
please contact me at (202) 512-7101, or [email protected] . Major
contributors to this letter were James Musselwhite, Assistant Director;
Denise Fantone; Michael Kendix; Dean Koulouris; Tiffany Tanner; Thomas
Walke; and Greg Whitney.

Laurie E. Ekstrand

Director, Health Care

Enclosure

(290527)

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