VA Health Care: Budget Formulation and Reporting on Budget	 
Execution Need Improvement (20-SEP-06, GAO-06-958).		 
                                                                 
The Department of Veterans Affairs (VA) estimates it will serve  
5.4 million patients in fiscal year 2006. Medical services for	 
these patients are funded with appropriations, after		 
consideration by Congress of the President's budget request. VA  
formulates the medical programs portion of that request. VA is	 
also responsible for budget execution--using appropriations and  
monitoring their use for providing care. For fiscal years 2005	 
and 2006, the President requested additional funding for VA	 
medical programs, beyond what had been originally requested. GAO 
was asked to examine for fiscal years 2005 and 2006 (1) how the  
President's budget requests for VA medical programs were	 
formulated, (2) how VA monitored and reported to Congress on its 
budget execution, and (3) which key factors in the budget	 
formulation process contributed to requests for additional	 
funding. To do this, GAO analyzed budget documents and		 
interviewed VA and Office of Management and Budget (OMB)	 
officials.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-958 					        
    ACCNO:   A61190						        
  TITLE:     VA Health Care: Budget Formulation and Reporting on      
Budget Execution Need Improvement				 
     DATE:   09/20/2006 
  SUBJECT:   Appropriated funds 				 
	     Budget administration				 
	     Budgeting						 
	     Congressional oversight				 
	     Financial analysis 				 
	     Monitoring 					 
	     Presidential budgets				 
	     Reporting requirements				 
	     Strategic planning 				 
	     Veterans						 
	     Veterans' medical care				 
	     Financial reporting				 
	     Timeliness 					 

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GAO-06-958

     

     * Results in Brief
     * Background
     * Formulation of President's Budget Request for VA Medical Pro
          * VA Estimated Costs of Medical Programs Based on Projected De
          * VA Anticipated Resources Based on Prior Appropriation Levels
          * Adjustments Were Made to Address the Difference Between Proj
     * VA Closely Monitored Budget Execution and Identified Problem
          * VA Monitored Budget Execution Early, Anticipating Challenges
          * VA's Reporting of Budget Execution Progress and Problems to
     * Unrealistic Assumptions, Estimation Errors, and Insufficient
          * Unrealistic Assumptions and Errors in Estimating the Effect
          * Insufficient Data on Certain Activities Contributed to the R
     * Conclusions
     * Recommendations for Executive Action
     * Agency Comments
     * GAO Contact
     * Acknowledgments
     * 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

September 2006

VA HEALTH CARE

Budget Formulation and Reporting on Budget Execution Need Improvement

GAO-06-958

Contents

Letter 1

Results in Brief 4
Background 6
Formulation of President's Budget Request for VA Medical Programs Informed
by Comparing Cost of Projected Demand and Anticipated Resources 8
VA Closely Monitored Budget Execution and Identified Problems, but Did Not
Report Them in a Timely and Sufficiently Informative Manner 13
Unrealistic Assumptions, Estimation Errors, and Insufficient Data
Contributed to VA's Requests for Additional Funding 19
Conclusions 22
Recommendations for Executive Action 23
Agency Comments 24
Appendix I Objectives, Scope, and Methodology 25
Appendix II Comments from the Department of Veterans Affairs 28
Appendix III GAO Contact and Staff Acknowledgments 31
Related GAO Products 32

Table

Table 1: VA Cost-saving Policies Proposed in the President's Budget
Requests for Fiscal Years 2005 and 2006 (Dollars in Millions) 12

Figures

Figure 1: Percentage of Projected Costs for VA's Medical Programs Using
Various Estimation Approaches 9
Figure 2: VA's March 2006 Monthly Report to VA Senior Management
Indicating Number of New Patients Waiting for First Appointment to be
Scheduled 18
Abbreviations

CHAMPVA Civilian Health and Medical Program of the Department of Veterans
Affairs DOD Department of Defense NCA National Cemetery Administration OEF
Operation Enduring Freedom OIF Operation Iraqi Freedom OMB Office of
Management and Budget VA Department of Veterans Affairs VBA Veterans
Benefits Administration VHA Veterans Health Administration

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separately.

United States Government Accountability Office

Washington, DC 20548

September 20, 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

The Department of Veterans Affairs (VA) operates one of the largest health
care delivery systems in the nation. For fiscal year 2006, VA estimates it
will treat 5.4 million patients with appropriations of $31.5 billion.1
During the past decade the number of patients served by VA has increased
rapidly, due in part to an expansion of the number of veterans eligible to
receive care. The Veterans' Health Care Eligibility Reform Act of 1996
simplified eligibility standards for veterans in need of hospital and
outpatient care and made available services that previously had not been
made available to veterans without service-connected disabilities or low
incomes.2 The act required VA to provide a uniform set of medical
benefits, including hospital and outpatient care, to veterans who are
eligible and who enroll in its health care system. In addition to the
uniform set of medical benefits, VA is required to provide certain other
services-such as nursing home care-to some veterans, but not to others.3
If sufficient resources are not available to provide hospital and
outpatient care that is timely and acceptable in quality, VA is required
to restrict enrollment based on veterans' eligibility priorities.4

1Total includes medical care collections, but does not include certain
other amounts, such as appropriations for construction.

2Pub. L. No. 104-262, S:S: 101, 104, 110 Stat. 3177, 3178-81 and 3182-84.
Veterans with low incomes are those veterans with annual incomes below a
certain threshold. In 2006, the income threshold was $26,902 for veterans
without dependents.

For VA, like other agencies, formulation of a budget request begins
approximately 18 months before the start of the fiscal year to which the
request relates and about 10 months before transmission of the President's
budget request, which usually occurs in early February. For this purpose,
the Veterans Health Administration (VHA),5 within VA, develops estimates
of its medical program budget for agency review and approval. In preparing
budget estimates, VA and its component organizations-such as VHA-use
policy and technical guidance from the Office of Management and Budget
(OMB), while preparing a budget submission to OMB that reflects VA
priorities. OMB is the office responsible for assisting the President in
overseeing the preparation of the federal budget and supervising its
administration. OMB reviews VA's and other agencies' budget requests from
their submission in September through November and then notifies agencies
at the end of November on the level of funding and policy proposals that
will be included in the President's budget request. Agencies have very
limited time to appeal these decisions to OMB before they start preparing
a congressional budget justification-a more detailed presentation of the
President's budget request-for their appropriations subcommittees'
consideration. Congressional budget justifications are submitted to
appropriations subcommittees following transmission of the President's
budget request.

3The Veterans Millennium Health Care and Benefits Act required VA to
provide nursing home care to veterans requiring such care with a
service-connected disability rated at 70 percent or greater, those
requiring nursing home care because of a condition related to their
military service who do not have a service-connected disability rating of
70 percent or greater, and those who were receiving care in VA nursing
homes on the enactment date of the act and continue to need that care.
Pub. L. No. 106-117, S: 101, 113 Stat. 1545, 1547-51 (codified at 38
U.S.C. S: 1710A). The Veterans' Health Care, Capital Asset, and Business
Improvement Act of 2003 extended this requirement through 2008. Pub. L.
No. 108-170, S: 106(b), 117 Stat. 2042, 2046. VA provides most of its
nursing home care to veterans who receive it on a discretionary basis
rather than as required by these acts.

4Veterans' eligibility priority categories are generally determined on the
basis of service-connected disability and/or income. There are currently
eight priority categories.

5The VA also provides a comprehensive benefits program, administered by
the Veterans Benefits Administration (VBA), and maintains national
cemeteries, administered by the National Cemetery Administration (NCA).

After the President submits his budget request, he may request further
changes in one of two ways, depending on the timing of the additional
request. If Congress has not completed action on an appropriations act,
the President can transmit a budget amendment. If an appropriations act
has already been enacted, the President can request a supplemental
appropriation; this is typically done in cases where the need for funds is
too urgent to postpone until enactment of the following year's
appropriations bill.

Once an appropriations bill becomes law, OMB apportions the funds,
allowing an agency to obligate and expend the funds as authorized. Each
agency is responsible for obligating and expending funds efficiently and
effectively to carry out the programs and activities for which funds were
appropriated. Carrying out this responsibility is referred to as budget
execution and requires monitoring throughout the fiscal year to ensure
that funds are being used as authorized for agency program objectives-in
the case of VA medical programs to provide quality care to veterans-and to
ensure compliance with provisions of fiscal law. For example, the
Antideficiency Act prohibits VA and other agencies from making or
authorizing obligations6 or expenditures in excess of the available
appropriations.7

Congress provided additional funds beyond those initially requested by the
President for VA medical programs for both fiscal years 2005 and 2006. In
June 2005, the President requested a $975 million supplemental
appropriation for fiscal year 2005, and in July 2005, the President
submitted a $1.977 billion budget amendment for fiscal year 2006. These
additional requests raised concerns in Congress and among stakeholders
regarding the reasons for the additional requests for funding. At your
request, we examined for fiscal years 2005 and 2006 (1) how the
President's budget requests for VA medical programs were formulated, (2)
how VA monitored and reported to Congress on its budget execution, and (3)
which key factors in the budget formulation process contributed to the
requests for additional funding.

6An obligation is generally a definite commitment that creates a legal
liability of the government for a payment immediately or in the future.
Agencies incur obligations when they place orders, award contracts,
receive services, and carry out similar transactions during a given period
that will require payments by an agency during the same or future periods.

7See 31 U.S.C. S: 1341(a)(1)(A).

To perform this work, we interviewed VA officials responsible for the
agency's medical programs budget issues, and for developing budget
projections. We also interviewed OMB officials. We analyzed and reviewed
budget documents including VA's budget justifications for medical programs
for fiscal years 2005 and 2006. We also reviewed VA budget estimates and
other information VA reported that it used either to formulate its
submissions to OMB for fiscal years 2005 and 2006 or to monitor the use of
appropriated funds for those fiscal years. Our review of how VA monitored
its use of funds in the fiscal year 2006 budget includes the first 11
months of the fiscal year.8 This work expands upon the preliminary
findings that we reported in February 2006.9 We conducted our review from
October 2005 through September 2006 in accordance with generally accepted
government auditing standards. For additional details of our scope and
methodology, see appendix I.

                                Results in Brief

The formulation of the President's budget requests for VA medical programs
for fiscal years 2005 and 2006 was informed by VA's comparison of its
estimation of the cost of projected demand for its medical services to its
anticipated resources. VA projected about 86 percent of its costs using an
actuarial model that estimated veterans' demand for health care. In
addition, VA projected the costs of long-term care, which accounts for
about 10 percent of the funds requested for VA medical programs in each of
these fiscal years, and remaining costs for other medical care, about 4
percent, using separate estimation approaches that did not rely upon an
actuarial model. VA anticipated its resources to provide medical programs
for fiscal years 2005 and 2006 based on its prior year appropriations,
guidance published by OMB that outlined the President's budget priorities,
and other factors. For both fiscal years, VA officials told us that
projected costs-calculated from the actuarial model and other
approaches-exceeded anticipated resources. VA officials told us they
addressed the difference in budget requests for those years with
cost-saving policy proposals and management efficiency savings, which were
included in the President's budget requests for fiscal years 2005 and
2006.

8Fiscal year 2006 will not be complete until September 30, 2006.

9See GAO, VA Health Care: Preliminary Findings on the Department of
Veterans Affairs Health Care Budget Formulation for Fiscal Years 2005 and
2006, GAO-06-430R (Washington, D.C.: Feb. 6, 2006). See Related GAO
Products at the end of this report.

Although VA staff closely monitored budget execution and identified
problems for fiscal years 2005 and 2006, VA did not report this
information to Congress in a timely and sufficiently informative manner.
VA closely monitored the fiscal year 2005 budget as early as October 2004,
because the agency anticipated significant challenges to providing care to
veterans with its appropriations. However, Congress did not learn of these
challenges until April 2005. VA initially planned to manage within its
budget for fiscal year 2005 by delaying some spending on equipment and
nonrecurring maintenance and drawing on funds it had planned to carry over
into 2006. Instead, in June 2005, with 3 months remaining in the fiscal
year, the President requested a $975 million supplemental appropriation
from Congress for VA medical programs for that fiscal year. In July 2005,
the President requested $1.977 billion for fiscal year 2006 through the
budget amendment process. The appropriations act for fiscal year 2006
included a requirement that VA submit quarterly reports on VHA's financial
status. However, VA's reports have not included some of the measures that
would assist Congress in its oversight, such as measures of patient
workload that would capture the costliness of patient care, and the time
required for new patients to be scheduled for their first health care
appointment. Moreover, while VA has 12 months to execute its budget, it
did not submit its first two quarterly reports to Congress until nearly 2
months after the end of each quarter, using patient workload data that
were as much as 3 months old at the time of submission. These data
included a combination of actual and estimated number of patients seen.
However, VA submitted its third quarterly report about 1 month after the
end of the quarter, using estimated data for the number of patients seen.

Unrealistic assumptions, errors in estimation, and insufficient data were
key factors in VA's budget formulation process that contributed to the
requests for additional funding in fiscal years 2005 and 2006. One factor
that contributed to these requests was a set of unrealistic assumptions
about the expected time frame in which cost savings could be realized from
proposed nursing home policy changes. Computational errors in measuring
the estimated effect of one of these changes also contributed to the
additional funding request. Furthermore, insufficient data in VA's initial
budget projections contributed to the additional funding requests. For
example, VA underestimated the cost of serving veterans returning from
Iraq and Afghanistan, in part because estimates for fiscal year 2005 were
based on data that largely predated the Iraq conflict and because,
according to VA, the agency did not have sufficient data for fiscal year
2006 due to challenges obtaining data needed to identify these veterans
from the Department of Defense (DOD).

To help improve VA's formulation of its medical programs budget and
facilitate congressional oversight, we recommend that the Secretary of
Veterans Affairs take several actions. We recommend that VA improve its
budget formulation processes by explaining the relationship between
implementation of proposed policy changes and the expected timing of cost
savings to be achieved and by strengthening its internal controls to
better ensure the accuracy of calculations it uses in preparing budget
requests. We also recommend that VA improve its reporting of budget
execution progress to Congress by incorporating measures of patient
workload to capture the costliness of care and a measure of waiting times
to schedule veterans' first primary care appointment for new patients.

VA stated that it substantially agreed with our findings and conclusions,
and concurred with our recommendations. VA also described steps it has
taken and plans to take to respond to our recommendations.

                                   Background

VA, as part of its mission to provide benefits and services to America's
veterans, administers one of the nation's largest health care systems
through the VHA. As part of a uniform set of medical benefits provided to
eligible veterans who enroll, VA provides a range of services including
preventive and primary health care, a full range of outpatient and
inpatient services, and prescription drugs. VA also 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. One of the
largest of these programs is VA's nursing home care program, which
provides care in three settings. VA operates its own nursing homes in 134
locations; it pays for care under contract in non-VA nursing homes,
referred to as community nursing homes; and it pays about one-third of the
costs per day for veterans in state veterans' nursing homes.10 In its
three settings, nursing home services are provided to veterans, ranging
from short-stay post-acute care for patients recovering from a condition
such as a stroke to long-stay care for patients who cannot be cared for at
home because of severe, chronic physical or mental limitations.11

10VA also supports state veterans' nursing homes through grants for
construction, acquisition, or renovation of existing structures. See GAO,
VA Long-Term Care: Data Gaps Impede Strategic Planning for and Oversight
of State Veterans' Nursing Homes, GAO-06-264 (Washington, D.C.: Mar. 31,
2006) and GAO, VA Long-Term Care: Oversight of Nursing Home Program
Impeded by Data Gaps, GAO-05-65 (Washington, D.C.: Nov. 10, 2004).

To manage access to hospital and outpatient care in relation to available
resources, VA established an enrollment system with priority categories,
as required by the Veterans' Health Care Eligibility Reform Act of 1996.12
The act called for seven priority categories; subsequent legislation
provided for eight categories.13 Priority categories are generally
determined by a veteran's degree of service-connected or other disability
or on financial need. VA gives veterans in Priority category 1 (with 50
percent or more service-connected disability) the highest preference for
services and gives lowest preference to those in Priority category 8 (no
disability, with income exceeding certain thresholds, and who were
enrolled as of January 16, 2003).

The act also required VA to restrict enrollment consistent with its
priority categories if sufficient resources are not available to provide
care that is timely and acceptable in quality.14 In January 2003, VA
restricted enrollment by no longer allowing Priority 8 veterans, those in
the lowest priority category, to enroll.15 However, Priority 8 veterans
who were already enrolled as of January 16, 2003, would continue to
receive service. This policy remained in effect as of August 2006.

In the mid-1990s, VA began to change the way it delivered 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 deemphasizing its reliance on inpatient care.
Over the 10-year period from 1995 through 2004, for example, the ratio of
outpatient visits to inpatient hospital stays at VA increased from 29 to
1, to 92 to 1, reflecting the change in how VA delivers medical 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 health care
networks. These networks have budget and management responsibilities that
include allocating resources to facilities, clinics, and programs within
their networks and ensuring access to appropriate health care services.

11VA nursing home care is part of a continuum of long-term care services
that VA provides, including services to veterans in the community and in
veterans' own homes.

12Pub. L. No. 104-262, S: 104(a)(1) 110 Stat. 3177, 3182-83 (codified at
38 U.S.C. S: 1705). Enrollment is not required to receive nursing home
care in any of VA's three nursing home settings.

13Department of Veterans Affairs Health Care Programs Enhancement Act of
2001, Pub. L. No. 107-135, S: 202(a), 115 Stat. 2446, 2457.

14See 38 U.S.C. S: 1705(b)(1).

15VA announced this change through the publication of an interim final
rule in the Federal Register. See 68 Fed. Reg. 2670-73 (Jan. 17, 2003).

 Formulation of President's Budget Request for VA Medical Programs Informed by
          Comparing Cost of Projected Demand and Anticipated Resources

The formulation of the President's budget requests for VA medical programs
for fiscal years 2005 and 2006 was informed by VA's comparison of its
estimation of the cost of projected demand and anticipated resources.
Estimated costs for medical care exceeded anticipated resources in both
fiscal years 2005 and 2006, and, in formulating the budget, VA addressed
the difference with cost-saving policy proposals and estimated savings
from management efficiencies.

VA Estimated Costs of Medical Programs Based on Projected Demand for Medical
Care

VA used an actuarial model16 to project demand and costs for about 86
percent of its medical programs budget estimate for fiscal years 2005 and
2006. (See fig. 1.) For this part of the medical programs budget estimate,
the model was used to project enrollment in the VA health care system and
then to estimate VA's total health care services utilization by estimating
the proportion of enrollees' total health care that was expected to come
from VA. The actuarial model used cost estimates associated with
particular health care services in conjunction with the enrollment and
utilization projections to project VA health care costs. The actuarial
model provided utilization projections for 55 health care services
including inpatient acute surgery, outpatient care, prescription drugs,
and prosthetics. The model used private sector benchmarks but made
allowances for the special characteristics of the VA enrollee population,
adjusting for age, sex, morbidity of enrollee population, and veterans'
use of other health care providers reimbursed by payers such as Medicare
and Medicaid.

16VA's actuarial model was developed under contract by Milliman USA, Inc.

Figure 1: Percentage of Projected Costs for VA's Medical Programs Using
Various Estimation Approaches

VA used a separate estimation approach, rather than an actuarial model, to
project long-term care demand and costs,17 which accounted for about 10
percent of the funds requested for medical programs for each of the fiscal
years 2005 and 2006. The long-term care estimation approach projected
demand by using historical expenditures to calculate the costs of treating
veterans and multiplying these estimates by projected workload, which was
calculated based on historical trends and policy proposals. VA officials
told us that they are working on incorporating the projection of long-term
care demand and costs into the actuarial model, but could not provide a
date when this would be completed. Similarly, VA used other approaches,
rather than an actuarial model, to project demand and costs for the
remaining 4 percent of the medical programs budget request for fiscal
years 2005 and 2006. These other methodologies included adding inflation
to actual expenditures and projecting trends based on workload,
expenditure, and other data provided by program officials. The majority of
these expenditure projections were for Civilian Health and Medical Program
of the Department of Veterans Affairs (CHAMPVA)18 and dental care.

17VA long-term care includes nursing home care provided in VA-operated,
state, and community nursing homes, and home and community-based care such
as in-home care services and adult day health care centers.

The actuarial model projections and the other estimation approaches for
the fiscal year 2005 budget were developed in March 2003. To estimate
costs for VA's medical programs for fiscal year 2005, VA used fiscal year
2002 data, which were the most current fiscal year data available in the
spring of 2003. Similarly, VA used fiscal year 2003 data, in the spring of
2004, to project costs for fiscal year 2006.

VA Anticipated Resources Based on Prior Appropriation Levels, OMB Guidance,
Collections, Reimbursements, and Projected Carryover of Unobligated Funds

VA anticipated its resources for fiscal years 2005 and 2006 based on its
prior year appropriations, guidance published by OMB that outlined the
President's budget priorities, and other factors. For example, OMB's
annual planning guidance for fiscal year 2005, published in April 2003,
directed executive agencies, including VA, to develop a budget for fiscal
year 2005 that was within the levels included in the fiscal year 2004
budget. The guidance noted, for example, that any increases or amounts for
new initiatives should be offset by reductions in lower priority or
ineffective programs.

In addition, VA anticipated its funding based on resources it expected
from collections, reimbursements,19 and the projected carryover of
unobligated funds into the next fiscal year. VA may carry over from one
fiscal year to the next unobligated balances of funds made available
without fiscal year limitation and other funds appropriated for multiple
fiscal years. In fiscal year 2004, for example, VA collected $1.7 billion
from veterans and third-party insurers,20 which was available without
fiscal year limitation. VA carried over about $600 million from fiscal
year 2004 into fiscal year 2005; this amount consisted of collections from
prior years and multiyear funds that had not been obligated during fiscal
year 2004.

18CHAMPVA provides medical care for dependents and survivors of veterans
who are permanently and totally disabled from a service-connected
disability.

19VA receives reimbursements from services it provides to other government
entities, such as DOD, or other private or nonprofit entities. For
example, VA laundries receive reimbursements from other entities by
selling laundry services.

20VA has the authority to collect payments for treatment of veterans'
nonservice-connected conditions, that is, injuries or illnesses that were
not incurred or aggravated during military service. VA collects
first-party payments from veterans, such as copayments for outpatient
medications and third-party payments from veterans' private health
insurers, including those companies that self-insure.

Adjustments Were Made to Address the Difference Between Projected Costs for VA
Medical Programs and Anticipated Resources

According to VA officials, for both fiscal years 2005 and 2006, projected
costs exceeded anticipated resources. VA officials stated that differences
between projected costs and anticipated resources in budget requests for
those years were addressed in two ways: (1) cost-saving policy proposals
and (2) management efficiency savings.

To develop a budget request consistent with anticipated resources, VA
officials told us they addressed the difference with cost-saving policy
proposals which were included in the President's budget requests for
fiscal years 2005 and 2006. These cost-saving policy proposals totaled
$494 million and $734 million in fiscal years 2005 and 2006, respectively,
and were proposed to reduce the total appropriation requested. (See table
1.) More specifically, a proposed long-term care policy was designed to
reduce costs by reducing patient workload, while a proposed $250
enrollment fee and an increase in pharmacy copayments for Priority 7 and 8
veterans-primarily, those veterans with incomes or net worths above
applicable thresholds and no service-connected disability-would have
generated additional resources. The projected savings from these policy
proposals, which were designed to enhance revenue as a means of protecting
resources, were used to adjust projected costs. VA used the actuarial
model and long-term care estimates to project savings from these
proposals.

Table 1: VA Cost-saving Policies Proposed in the President's Budget
Requests for Fiscal Years 2005 and 2006 (Dollars in Millions)

Policy proposals                         Fiscal year 2005 Fiscal year 2006 
Long-term care policy proposals to                                         
reduce average daily censusa                         $270             $502
Assess $250 annual enrollment fee for                                      
Priority 7 and 8 veteransb                            141              206
Increase pharmacy copayment from $7 to                                     
$15 for Priority 7 and 8 veteransb                     83               26
Total cost-saving policy proposals                   $494             $734 

Source: GAO analysis of VA data.

aAverage daily census is a patient workload measure, which represents the
total number of days of nursing home care provided in a year divided by
the number of days in the year.

bPriority 7 and 8 veterans are veterans who have either incomes or net
worths above applicable thresholds, no service-connected disability that
results in monetary benefits from VA, and no other recognized statuses,
such as former prisoners of war.

In addition to cost-saving policy proposals, VA developed estimates of
management efficiency savings of $340 million and $590 million in fiscal
years 2005 and 2006, respectively, which were included in the President's
budget request. According to VA, these management efficiency savings were
initiatives designed to reduce costs without reducing quality. In a
February 2006 report,21 we reported that VA's total projected management
efficiency savings in the President's budget request for fiscal years 2003
through 2006 were used to fill the gap between the costs associated with
VA's projected demand for health care services and anticipated resources.
In addition, we reported that VA lacked a methodology for measuring the
dollar effect of the health care management efficiency savings it had
detailed for fiscal years 2003 through 2006.

OMB and VA officials told us they did not include management efficiency
savings in the fiscal year 2007 budget request and do not have plans for
doing so in the future. However, they will continue to include other
efficiency savings, which VA calls clinical efficiencies, projected by its
actuarial model. Each year, a workgroup of VA officials and staff from the
developer of the actuarial model review VA and health care industry trends
and evaluate specific VA practices expected to affect health care service
utilization and cost and incorporate these expectations into the actuarial
model. For example, VA's Advanced Clinical Access initiative is intended
to reduce the need for veterans to visit clinics to receive care by
implementing certain health care practices such as using follow-up
telephone calls by practitioners to reduce the number of in-person office
visits. VA officials told us that to calculate the savings from such an
initiative, the assumptions of reducing patient utilization are built into
the actuarial model. The actuarial model then produces estimates of the
effect of these efficiencies on the cost of health care services,
according to VA officials.

21See GAO, Veterans Affairs: Limited Support for Reported Health Care
Management Efficiency Savings, GAO-06-359R (Washington, D.C.: Feb. 1,
2006).

VA Closely Monitored Budget Execution and Identified Problems, but Did Not
          Report Them in a Timely and Sufficiently Informative Manner

Anticipating challenges in managing its medical care programs within
available resources, VA closely monitored its medical programs budget
execution from the beginning of fiscal year 2005. Similarly, in early
fiscal year 2006, the agency tracked how well it was managing to provide
care to veterans with available resources during the 12-month time period.
However, in fiscal years 2005 and 2006, VA reporting of budget execution
to Congress could have been more timely and informative.

VA Monitored Budget Execution Early, Anticipating Challenges in Providing
Medical Care with Available Resources

Recognizing that fiscal year 2005 would be a tight budget year, VA closely
monitored budget execution from the beginning of the fiscal year. In early
fiscal year 2005, VA formed a workgroup, the Budgetary Challenges
workgroup, to develop a strategy the agency could take to manage within
its budget. This six-member workgroup was comprised of selected network
directors and an official from VA headquarters. In December 2004, in
internal briefings to VA's National Leadership Board, the Deputy Under
Secretary for Health for Operations and Management, and the Deputy
Secretary, the workgroup recommended that the agency consider a number of
budget options to manage within its fiscal year 2005 budget, including
limiting the implementation of new initiatives and shifting resources from
equipment and nonrecurring maintenance into direct patient care.

VA officials told us that in the middle of fiscal year 2005, it became
clear that demand for health care services was increasing
rapidly-confirming what they had anticipated at the beginning of the
fiscal year-and that spending would have to be carefully controlled to
manage within its fiscal year 2005 budget for the remainder of the year.
VA staff identified these trends by analyzing the monthly reports they
generate for VA senior management. In its March 2005 report to senior
management, VA found that through January 2005 unique patient workload22
was about 4.1 million, 5.2 percent above what VA had expected by that time
of the fiscal year, suggesting a potential challenge to managing care with
available resources.

On the basis of this close monitoring which began as early as October
2004, VA took actions to shift resources it had originally allocated for
equipment and nonrecurring maintenance into direct patient care. VA
initially planned to manage within its budget for fiscal year 2005 by
deferring $600 million for equipment and nonrecurring maintenance and
reducing the fiscal year 2006 carryover balance by $375 million. However,
with a few months remaining in the fiscal year, in June and July 2005, the
President requested additional VA medical programs funds for fiscal years
2005 and 2006, asking for $975 million and $1.977 billion, respectively.

In June 2005, the President submitted a request for supplemental funding
for fiscal year 2005 that totaled $975 million. VA reported to Congress23
that the following activities contributed to the request:

           o  $273 million for medical care services provided to veterans
           returning from Operation Iraqi Freedom (OIF) and Operation
           Enduring Freedom (OEF),24 
           o  $226 million for long-term care,
           o  $200 million for an increase in the number of Priority 1 though
           6 veterans using VA medical care,
           o  $179 million for a greater-than-expected increase in the
           utilization of medical services and intensity of patient workload,
           o  $58 million to reduce the number of veterans on waiting lists
           to receive medical care, and
           o  $39 million to provide medical care for the health care needs
           of dependents of veterans who are rated as having 100 percent
           service-connected disability.

           In July 2005, the President submitted a budget amendment adding
           $1.977 billion to his fiscal year 2006 request for VA Medical
           Services appropriations. VA testified before the House Committee
           on Veterans Affairs, in July 2005,25 that the following activities
           contributed to the requests for additional funding:

           o  $677 million for a 2 percent increase in the number of veterans
           using VA medical care,
           o  $600 million to correct an error in VA's estimate of long-term
           care costs included in the President's budget,
           o  $400 million to cover an unexpected 1.2 percent increase in the
           average cost per patient, and
           o  $300 million to replace funds VA planned to carry over from
           fiscal year 2005 to fiscal year 2006.

           To support these requests for additional funding for VA medical
           programs, VA officials told us that they chose to highlight
           activities for fiscal years 2005 and 2006 that were of high
           programmatic priority to the administration and Congress and could
           be supported by workload and expenditure data (e.g., veterans
           returning from Iraq and Afghanistan). They told us that there were
           a number of other ways the agency could have presented the data in
           the President's request for additional funding. For example,
           additional funding requested by the President could have been
           categorized by budget object code, which would have listed
           expenditures by broad cost categories including personnel and
           travel. However, VA officials believed that presenting the
           information primarily by programmatic activity would be the most
           useful for Congress.

           VAï¿½s Reporting of Budget Execution Progress and Problems to Congress
			  Could Have Been More Timely and Informative
			  
			  Despite VA's identification of potential fiscal year 2005 budget
           challenges as early as October 2004, Congress did not learn of
           these challenges until April 2005, when VA reported to Congress
           that it intended to use funds allocated for equipment and
           nonrecurring maintenance to fund patient care. It was not until
           June 2005, with 3 months remaining in the fiscal year, that VA
           reported in congressional testimonies26 that it had
           greater-than-anticipated workload levels, likely to result in
           greater-than-anticipated costs. It notified Congress at that time
           that it would not be able to manage by using nonrecurring
           maintenance funds as planned, but rather that the President
           planned to request additional funds from Congress.

           OMB officials told us that they have taken a more active role in
           monitoring VA's execution of its fiscal year 2006 budget than they
           did in fiscal year 2005. VA and OMB officials now meet monthly to
           discuss the budget situation. Further, in fiscal year 2006, VA
           began preparing a special monthly report for OMB. The data in VA's
           monthly status reports have enabled OMB to help monitor VA's
           budget execution during the fiscal year. VA's monthly status
           reports to OMB provide measures of financial and workload data.
           For example, the report includes information on obligations and
           patient workload such as patients by priority category, outpatient
           visits, and nursing home average daily census.

           Following the supplemental appropriation requested in fiscal year
           2005 and the budget amendment requested for fiscal year 2006,
           Congress included a provision in the fiscal year 2006 Military
           Quality of Life and Veterans Affairs Appropriations Act requiring
           the Secretary of Veterans Affairs to submit to the Committees on
           Appropriations of the U.S. Senate and U.S. House of
           Representatives a quarterly report on the financial status of the
           Veterans Health Administration.27 In addition, the conference
           report accompanying the appropriations act directed VA to include
           waiting list performance measures and whether equipment or
           nonrecurring maintenance funds have been used to pay for operating
           expenses, among other things.28

           VA has provided three congressional quarterly reports beginning
           with a report on the first quarter of fiscal year 2006. While VA
           has 12 months to execute its budget, it did not submit its first
           two quarterly reports to Congress until nearly 2 months after the
           end of each quarter, using patient workload data that were as much
           as 3 months old at the time of submission. These data included a
           combination of actual and estimated number of patients seen. The
           third quarterly report was submitted in August, about 1 month
           after the end of the quarter, which was 1 month faster than VA
           provided the first two quarterly reports. The third quarterly
           report used estimated data for the number of unique patients seen.

           We also found that these three quarterly reports did not include
           information identified in the conference report that would be
           useful for congressional oversight. Among measures identified in
           the conference report and not provided by VA in the quarterly
           report was a particular access measure-the time required for new
           patients to get their first appointment. Although not the same
           measure, a similar measure produced in one of VA's monthly reports
           to its own senior management for use in internal budget
           formulation showed the number of new patients waiting for their
           first appointment to be scheduled almost doubled over 11 months,
           from April 2005 to March 2006, indicating a potential problem in
           the first quarter of fiscal year 2006.29 (See fig. 2.) However,
           the quarterly report for that period shows only the more favorable
           access measures for existing patients-percent of primary care and
           percent of specialty care appointments scheduled within 30 days of
           desired date-where VA is actually exceeding its performance goals.
           VA did not provide other measures requested, such as the status of
           equipment or nonrecurring maintenance funds and whether these
           funds have been used to pay for operating expenses.

22Unique patient workload is a measure that represents an unduplicated
count of the number of patients that used VA within the fiscal year.
Therefore, patients are counted only once regardless of the number of
times they use VA medical services within a fiscal year.

23Emergency Hearing to Examine the Shortfall in VA's Medical Care Budget
Before the Senate Comm. on Veterans' Affairs, 109th Cong. (June 28, 2005)
(statement of R. James Nicholson, Secretary, Department of Veterans
Affairs); Hearing on the Department of Veterans Affairs Health Care Budget
Before the House Comm. on Veterans' Affairs, 109th Cong. (June 30, 2005)
(statement of R. James Nicholson, Secretary, Department of Veterans
Affairs).

24Those who have served, or are now serving, in Operation Iraqi Freedom
and Operation Enduring Freedom may receive care from VA for conditions
that are or may be related to their combat services for a 2-year period
following the date of their separation from active duty without copayment
requirements. See 38 U.S.C. S: 1710(e)(1)(C) and (e)(3)(C).

25Hearing on the Department of Veterans Affairs Proposed Health Care
Budget Amendment for Fiscal Year 2006 Before the House Comm. On Veterans'
Affairs, 109th Cong. (July 21, 2005) (statement of Jonathan B. Perlin,
Under Secretary for Health, Department of Veterans Affairs).

26Emergency Hearing to Examine the Shortfall in VA's Medical Care Budget
Before the Senate Comm. on Veterans' Affairs, 109th Cong. (June 28, 2005)
(statement of R. James Nicholson, Secretary, Department of Veterans
Affairs); Hearing on the Department of Veterans Affairs Health Care Budget
Before the House Comm. on Veterans' Affairs, 109th Cong. (June 30, 2005)
(statement of R. James Nicholson, Secretary, Department of Veterans
Affairs).

27Pub. L. No. 109-114, S: 222, 119 Stat. 2372, 2391 (2005). A provision
contained in an annual appropriation act is not considered permanent
legislation unless the language or the nature of the provision makes it
clear that Congress intended it to be permanent. Because this provision
does not use any language indicating future application, it is not
permanent and applies only to fiscal year 2006. The bill providing for the
fiscal year 2007 Department of Veterans Affairs appropriations, H.R. 5385,
would continue the quarterly report for that fiscal year. As of August 1,
2006, the bill had been reported out of the House and Senate appropriation
committees, and had been passed by the House.

28See H.R. Conf. Rep. No. 109-305, at 50 (2005).

29VA provided us with more recent data through July 1, 2006, that showed
that the number of new patients waiting for first appointments had
returned to about 15,000 or the same level as in April 2005. However, VA
has not included these data in its first three quarterly reports.

Figure 2: VA's March 2006 Monthly Report to VA Senior Management
Indicating Number of New Patients Waiting for First Appointment to be
Scheduled

Note: New patients are those who have enrolled in the past 12 months and
have not been seen in VA during the past 24 months. VA officials told us
the report reflects 50 outpatient clinics that account for about 95
percent of VA's outpatient visits. Data from 2004 are reported from the
middle of the month (the 15th) and data for 2005 and 2006 are reported
from first day of the month.

Additionally, we found that information VA provides on patient workload in
its quarterly reports to congressional committees contrasted with the more
detailed program and clinical information VA uses to inform the
President's budget request for VA medical programs-such as the patient
workload measures used to estimate costs in the actuarial model. The
information in the quarterly congressional reports also contrasts with the
more detailed patient workload information that VA provides in its monthly
reports to OMB. In its quarterly reports, VA uses a patient workload
measure, "unique patients," that counts patients only once no matter how
many times they use VA services within the fiscal year. (For example, a
patient who used VA health care services in October would not be counted
again in the patient workload totals for November, December, or January,
even if that patient used VA medical services again during each of those
months.) However, the unique patient measure does not capture the
difference between patients predominately using low-cost services, such as
primary care outpatient visits, at an average $245 each, and patients
using more high-cost services, such as acute inpatient hospital care,
which costs about $1,500 a day, on average. In contrast, VA now provides
in its monthly reports to OMB other patient workload measures-in addition
to the number of unique patients-that provide a more complete picture of
whether new patients are receiving low- or high-cost services. Some of the
patient workload measures VA provides to OMB include nursing home patient
workload, as measured by average daily census, number of outpatient
visits, and patient workload by priority category.30

Unrealistic Assumptions, Estimation Errors, and Insufficient Data Contributed to
                      VA's Requests for Additional Funding

The requests for additional funding for VA medical programs in fiscal
years 2005 and 2006 were caused, in part, by unrealistic assumptions,
errors in estimation, and insufficient data in its budget formulation
process. Unrealistic assumptions about the expected time frame in which
the cost savings could be realized from proposed nursing home cost-saving
policies contributed to the subsequent request for additional funding.
Further, computational errors in measuring the estimated effect of one of
these cost-saving policies led VA to underestimate resources needed in
fiscal year 2006. Moreover, insufficient data in VA's initial budget
projections contributed to the additional funding requests. For example,
VA underestimated the cost of serving veterans returning from Iraq and
Afghanistan, in part because estimates for fiscal year 2005 were based on
data that largely predated the Iraq conflict and because VA did not have
sufficient data for fiscal year 2006 due to challenges in obtaining data
needed to identify these veterans from DOD, according to VA officials.

Unrealistic Assumptions and Errors in Estimating the Effect of Nursing Home
Policies Contributed to Requests for Additional Funding

An unrealistic assumption about the expected time frame in which VA could
implement a fiscal year 2005 proposed nursing home cost-saving policy
contained in the President's budget request-a reduction in nursing home
patient workload in VA-operated nursing homes-contributed to $226 million
of the request for supplemental funding for that fiscal year, VA officials
said. The President's fiscal year 2005 budget request for VA medical
programs included a proposal to reduce patient workload on a daily basis-
average daily census-from about 12,000 to 8,500 in VA-operated nursing
homes. In retrospect, agency officials told us this assumption was
particularly unrealistic because of its accelerated time frame. VA
projected the savings from this reduction in workload would be realized on
the first day of the fiscal year, a change which would have required
transferring or discharging, in an extremely compressed time frame,
potentially thousands of veterans, many of whom had severe, chronic,
physical or mental impairments. These veterans would have had to seek
financing from other sources, such as Medicaid or private health
insurance, or paid for their care out of pocket. Moreover, achievement of
substantial savings from this policy would have also likely required
reducing the number of VA employees. However, VA included no discussion in
its budget formulation on how this cost-saving policy was to be
implemented. Furthermore, VA officials told us that because VA had
established a precedent for providing care to veterans who receive nursing
home care on a discretionary basis, changing the policy on short notice
would be difficult.

30Senior-level managers at managed care organizations typically use a
number of measures to monitor on a recurring basis changes in patient
workload. See Peter R. Kongstvedt, ed., The Managed Health Care Handbook
(Aspen Publishers, Inc., Gaithersburg, Maryland, Fourth ed. 2001), pp.
298-299.

Similarly, the fiscal year 2006 President's budget request for VA medical
programs included unrealistic assumptions and computational errors in
estimating savings of a proposed nursing home policy. The assumption and
estimation errors contributed to $600 million of the budget amendment
requesting additional funding in fiscal year 2006. The President's fiscal
year 2006 budget request for VA medical programs included a policy
proposal to reduce patient workload and costs by prioritizing the
veterans31 who would receive long-stay nursing home care in its
VA-operated nursing homes, community nursing homes, and state veterans'
nursing homes. Long-stay care includes nursing home care needed by
veterans who cannot be cared for at home because of severe, chronic
physical or mental impairments such as the inability to independently eat
or the need for supervision because of dementia. Under the proposed
policy, many veterans receiving VA nursing home care would no longer
qualify for long-stay care.

An unrealistic assumption about the expected time frame in which VA could
implement the proposed policy contributed to $152 million of the $600
million request for additional funding for nursing home care in that
fiscal year, according to VA officials. While VA had originally assumed
the savings could be realized in April 2005, before the start of the 2006
fiscal year, VA staff said they later recognized with OMB that this date
had been unrealistic. In addition, VA said that the policy assumed a 90
percent reduction in patient workload in state veterans' nursing home
workload for patients requiring long-stay nursing home care but that the
correct estimate was a 20 percent reduction in workload per year. For
VA-operated nursing homes, the policy assumed an 80 percent reduction in
patient workload over 1 1/2 years; however, VA later stated the correct
estimate was closer to 30 percent.

31VA planned to limit long-stay nursing home care to those veterans with
higher priority status-i.e., those veterans who had a priority status of 1
through 3 and those priority 4 veterans who were catastrophically
disabled.

Computation errors in estimating the effect of this proposed fiscal year
2006 policy contributed to about $445 million of the $600 million request
for additional funding for nursing home care in that fiscal year,
according to VA officials. In particular, VA underestimated patient
workload-average daily census-and costs in all three nursing home
settings. Specifically, VA incorrectly estimated that the average daily
census in VA-operated nursing homes was 9,795, when the correct estimated
patient count was 11,151. Similarly, while VA estimated that the per diem
rate for its homes was $471.16, it was actually $567.52. VA officials said
that the errors in estimating the effect of the proposed nursing home
policy resulted from calculations being made in haste during the OMB
appeal process,32 and that a more standardized approach to long-term care
calculations could provide stronger quality assurance to help prevent
future mistakes.

Insufficient Data on Certain Activities Contributed to the Requests for
Additional Funding in Fiscal Years 2005 and 2006

Insufficient data on veterans returning from Iraq and Afghanistan-OIF and
OEF-accounted for $273 million of the request for supplemental funding in
fiscal year 2005. According to VA officials, the original cost projections
for providing care to OIF and OEF veterans were understated for fiscal
year 2005 in part because they were based on data from fiscal year 2002
that predated the Iraq conflict, which began in March 2003. While VA
originally projected, in its fiscal year 2005 budget formulation, that it
would need to provide care to about 23,500 returnees from Iraq and
Afghanistan, revised projections indicated that it would serve about four
times that number of OIF and OEF veterans, nearly 100,000 returnees for
fiscal year 2005.

32In late November, OMB "passes back" budget decisions to the agencies on
the President's budget requests for their programs, a process known as
passback. These decisions may involve, among other things, funding levels,
program policy changes, and personnel ceilings. The agencies may appeal
decisions with which they disagree.

Insufficient data on returning OIF and OEF veterans continued to be a
problem in fiscal year 2006 budget formulation, accounting for $276
million of the budget amendment requesting additional funding for that
year, according to VA officials. VA officials told us they did not have
sufficient data for fiscal year 2006 due to challenges obtaining data
needed to identify these veterans from DOD. VA later determined in late
fiscal year 2005, after the President submitted the fiscal year 2006
budget request, that it expected to provide care to approximately 87,000
patients beyond what it had initially projected. According to VA
officials, VA now receives the DOD data it requires to identify OIF/OEF
veterans on a monthly basis rather than the quarterly reports it used to
receive. However, VA has a 2-month lag in projecting costs associated with
treating these veterans at VA.

Insufficient data on whether VA achieved management efficiency savings may
have also contributed to the requests for additional funding. However,
VA's calculations of management efficiencies obtained in fiscal year 2005
were based on the same approach we found to be inadequate in our earlier
work and therefore are not reliable. Data on whether management efficiency
savings were achieved for fiscal year 2006 were not available during our
work because the fiscal year was not complete. Because we could not
determine if the efficiency savings were achieved, we could not conclude
whether the estimation of savings was incorrect and therefore may have
contributed to the request for additional funding.

                                  Conclusions

VA, like other federal agencies, faces fiscal challenges as demand for its
services increases while federal resources are constrained. Until
recently, VA had more options to meet this challenge because it could
redirect resources from more expensive inpatient care to less expensive
outpatient care to serve more veteran patients as it modernized the
delivery of its health care services. However, VA's success in
transforming its system to emphasize outpatient care means that it will
have fewer such options to meet future fiscal challenges. In this context,
sound budget formulation, anticipatory monitoring of budget execution, and
the reporting of informative and timely information to Congress for
oversight will become increasingly important in order to provide
high-quality, accessible, and cost-efficient health care to veterans. Even
with these actions, the challenge of balancing veterans' access to health
care and the availability of federal resources is likely to be more
difficult in the future.

The lessons of the last few years show what can happen when budget
formulation is affected by calculation errors, unrealistic assumptions,
and insufficient data. Whether due to errors in calculating long-term care
patient workloads and costs, unrealistic assumptions about the expected
time frame in which long-term care policies can be changed and lack of
discussion in budget formulation on how such policies would be
implemented, or insufficient data on the number of people who will need
health care, such problems can result in mismatches in projecting service
provision and available resources. Although budget formulation is, by its
nature, based on assumptions and imperfect information, these assumptions
and information can be improved based on experience, and complemented by
reasonable projections for known events that will affect the agency.
Additional measures in VA's quarterly reports, such as the time new
patients waited for their first health care appointments and measures of
patient workload in addition to unique patients, might help alert Congress
to potential problems VA may face in managing within its budget in future
years. VA's budget execution and monitoring in fiscal years 2005 and 2006
were perhaps more vigilant than in prior years because VA expected, from
the beginning of fiscal year 2005, that it might experience difficulties
in managing its medical program within available resources. When, as a
result of this monitoring, VA found potential problems in providing
medical care programs within its appropriations, its reporting of the
information to Congress was not sufficiently timely or informative. More
recently, however, VA improved the timeliness of its reporting. VA
submitted its third quarterly report for fiscal year 2006 more quickly
after the end of the quarter than it had the first two quarterly reports.

                      Recommendations for Executive Action

To help improve VA's budget formulation of its medical programs budget and
facilitate congressional oversight, we recommend that the Secretary of
Veterans Affairs take three actions:

           o  Explain the relationship between implementation of proposed
           policy changes and the expected timing of when cost savings would
           be achieved.
           o  Improve its internal controls to provide stronger assurance
           that calculations used to formulate policy projections in the
           President's budget submissions are accurate.
           o  Incorporate into VA's reporting to Congress (1) measures of
           patient workload, in addition to unique patients, that would
           capture the costliness of patient care; and (2) a measure of
           waiting times to schedule veterans' first primary care appointment
           for new patients.

           Agency Comments
			  
			  We received comments on a draft of this report from VA (reproduced
           in app. II). In commenting on the draft, VA stated that it
           substantially agreed with our findings and conclusions and
           concurred with our recommendations. VA also described steps it has
           taken and plans to take to respond to our recommendations,
           including steps it took in developing information for the
           President's fiscal year 2007 budget request and in monitoring the
           execution of its fiscal year 2006 resources.

           We are sending copies of this report to the Secretary of Veterans
           Affairs and the Director of the Office of Management and Budget,
           appropriate congressional committees, and other interested
           parties. We will also make copies available to others upon
           request. In addition, this report will be available at no charge
           on GAO's Web site at http://www.gao.gov . If you or your staff
           have any questions about this report, please contact me at (202)
           512-7101 or at [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 who made major contributions
           to this report are listed in appendix III.

           Laurie E. Ekstrand Director, Health Care

           Appendix I: Objectives, Scope, and Methodology
			  
			  For fiscal years 2005 and 2006, we examined: (1) how the
           President's budget requests for the Department of Veterans Affairs
           (VA) medical programs were formulated, (2) how VA monitored and
           reported to Congress on its budget execution, and (3) which key
           factors in the budget formulation process contributed to the
           requests for additional funding. Our review of how VA monitored
           its fiscal year 2006 budget includes the first 11 months of the
           fiscal year because the fiscal year was not over when we completed
           our work.

           For each of our reporting objectives, we interviewed senior
           officials in VA and the Office of Management and Budget (OMB) to
           determine how the President's budget request for VA medical
           programs for fiscal years 2005 and 2006 was formulated, and how VA
           monitored and reported on its budget execution. We interviewed VA
           officials in Washington, D.C. from three primary offices
           responsible for budget issues related to VA's medical programs:
           (1) VA's Office of the Deputy Assistant Secretary for Budget, (2)
           Veterans Health Administration's (VHA) Office of the Chief
           Financial Officer, and (3) VHA's Office of the Assistant Deputy
           Under Secretary for Health for Policy and Planning. We also
           interviewed senior officials from OMB responsible for VA budget
           issues to obtain their perspective on the President's budget
           request for VA's medical programs and the subsequent requests for
           additional funding for fiscal years 2005 and 2006.

           For the purposes of our analysis, the President's budget request
           for VA medical programs primarily concerned four appropriation
           accounts: (1) medical services, for direct patient care; (2)
           medical administration, for administrative oversight and all
           information technology; (3) medical facilities, for the
           maintenance and operation of hospitals and other structures; and
           (4) medical research. VA funded nonrecurring maintenance, for
           items such as roof repair, through the appropriations for VA
           medical programs, and funds for these activities are included in
           our analysis. However, we did not include more general
           construction funding-i.e., for major construction and minor
           construction-in our analysis, as these funds are provided in
           separate appropriations.

           We obtained and analyzed documents and interviewed VA officials
           about how each of the three primary projection methods was used in
           formulating the budget: (1) an actuarial model; (2) a long-term
           care approach; and (3) other methodologies, including adding
           inflation to actual expenditures. For each method, we verified
           information VA officials told us in interviews by analyzing the
           documents VA provided. For example, we confirmed that the
           actuarial model accounted for about 86 percent of the President's
           budget request for VA medical programs for fiscal year 2005
           through our analysis of documents VA provided.

           To determine how VA monitored and reported to Congress on its
           budget execution, we conducted interviews and reviewed copies of
           monthly reports prepared internally for VA senior managers,
           monthly reports prepared for OMB, and quarterly reports prepared
           for the House and Senate Appropriations Committees. For monthly
           reports prepared for VA senior managers, we reviewed both the
           March 2005 and the March 2006 monthly reports. We reviewed a
           monthly report VA prepared for OMB for the month of April 2006.
           For the quarterly reports, we reviewed the first, second, and
           third quarterly reports VA prepared on the fiscal year 2006
           budgets. We analyzed these documents to assess the
           comprehensiveness of the reporting information included in these
           reports.

           To identify key factors in the budget formulation process that
           contributed to the requests for additional funding, we obtained
           and analyzed a number of documents detailing estimated savings
           from various policy proposals, calculation errors, and data gaps
           in the budget formulation process for fiscal years 2005 and 2006.
           For example, we analyzed documents obtained from VA showing
           calculation errors made in estimating the impact of a proposed
           long-term care policy in fiscal year 2006. We also obtained and
           analyzed revised estimates of veterans returning from Iraq and
           Afghanistan and compared these to data available during the fiscal
           years 2005 and 2006 budget formulation process. In addition, we
           reviewed publicly available documents such as transcripts of VA
           testimony to the Senate and House Veterans' Affairs Committees,
           the VA's Medical Programs Budget Submissions for fiscal years 2005
           and 2006, and the President's formal requests to Congress for
           additional funding for VA medical programs for fiscal years 2005
           and 2006.

           We assessed the reliability of the information we obtained about
           how VA formulated, monitored, and reported on the President's
           budget request for medical programs in several ways. First, we
           checked the internal consistency of documents VA provided
           detailing various budget estimates for fiscal years 2005 and 2006
           and information contained in the President's budget request in
           those years. Second, we interviewed agency officials knowledgeable
           about the data used to formulate, monitor, and report on the
           budget. We determined that the actuarial model appeared reasonable
           for formulating the budget but we did not conduct a separate,
           detailed audit of all data inputs into the actuarial model. Third,
           we relied on our prior work to identify potential issues about
           data reliability. For example, we determined that the assumptions
           used to project management efficiencies were inaccurate, based on
           a report we had previously issued.1 We determined that the data we
           used in our analyses were sufficiently reliable for the purposes
           of this report.

           We performed our review from October 2005 through September 2006
           in accordance with generally accepted government auditing
           standards.

           Appendix II: Comments from the Department of Veterans Affairs
			  
			  Appendix III: GAO Contact and Staff Acknowledgments
			  
			  GAO Contact
			  
			  Laurie E. Ekstrand, (202) 512-7101 or [email protected].

           Acknowledgments
			  
           James Musselwhite, Assistant Director; Jennie Apter; Denise
           Fantone; Michael Kendix; Dean Koulouris; Tiffany Tanner; Thomas
           Walke; and Greg Whitney made key contributions to this report.

                      Related GAO Products 
							 
           VA Long-Term Care: Data Gaps Impede Strategic Planning for and
           Oversight of State Veterans' Nursing Homes. GAO-06-264 .
           Washington, D.C.: March 31, 2006.

           VA Health Care: Preliminary Findings on the Department of Veterans
           Affairs Health Care Budget Formulation for Fiscal Years 2005 and
           2006. GAO-06-430R . Washington, D.C.: February 6, 2006.

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

           VA Long-Term Care: Oversight of Nursing Home Program Impeded by
           Data Gaps. GAO-05-65 . Washington, D.C.: November 10, 2004.

           VA Health Care: Resource Allocations to Medical Centers in the Mid
           South Healthcare Network. GAO-04-444 . Washington, D.C.: April 21,
           2004.

           VA Long-Term Care: Service Gaps and Facility Restrictions Limit
           Veterans' Access to Noninstitutional Care. GAO-03-487 .
           Washington, D.C.: May 9, 2003.

           Managing for Results: Efforts to Strengthen the Link Between
           Resources and Results at the Veterans Health Administration.
           GAO-03-10 . Washington, D.C.: December 10, 2002.

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

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1See GAO-06-359R .

(290530)

www.gao.gov/cgi-bin/getrpt? GAO-06-958 .

To view the full product, including the scope 
and methodology, click on the link above.

For more information, contact Laurie E. Ekstrand at (202) 512-7101 or
[email protected].

Highlights of GAO-06-958 , a report to congressional requesters

September 2006

VA HEALTH CARE

Budget Formulation and Reporting on Budget Execution Need Improvement

The Department of Veterans Affairs (VA) estimates it will serve 5.4
million patients in fiscal year 2006. Medical services for these patients
are funded with appropriations, after consideration by Congress of the
President's budget request. VA formulates the medical programs portion of
that request. VA is also responsible for budget execution-using
appropriations and monitoring their use for providing care. For fiscal
years 2005 and 2006, the President requested additional funding for VA
medical programs, beyond what had been originally requested.

GAO was asked to examine for fiscal years 2005 and 2006 (1) how the
President's budget requests for VA medical programs were formulated, (2)
how VA monitored and reported to Congress on its budget execution, and (3)
which key factors in the budget formulation process contributed to
requests for additional funding. To do this, GAO analyzed budget documents
and interviewed VA and Office of Management and Budget (OMB) officials.

What GAO Recommends

GAO recommends that VA better explain cost savings from proposed policy
changes in budget formulation and provide more comprehensive reporting on
budget execution to Congress. VA stated that it substantially agreed with
GAO's findings and concurred with the recommendations.

The formulation of the President's budget requests for VA medical programs
for fiscal years 2005 and 2006 was informed by VA's comparison of its cost
estimate of projected demand for medical services to its anticipated
resources. VA projected about 86 percent of its costs using an actuarial
model that estimated veterans' demand for health care. To project the
costs of long-term care (about 10 percent of the funds for VA medical
programs in each of these years) and the remaining medical care costs
(about 4 percent), separate estimation approaches were used that did not
rely upon an actuarial model but used other methods instead. The agency
anticipated resources based on prior year appropriations, guidance from
OMB, and other factors. For both fiscal years, VA officials told GAO that
projected costs-calculated from the actuarial model and other
approaches-exceeded anticipated resources and that they addressed the
difference in budget requests for those years with cost-saving policy
proposals and management efficiencies.

Although VA staff closely monitored budget execution and identified
problems for fiscal years 2005 and 2006, VA did not report this
information to Congress in a sufficiently informative manner. VA closely
monitored the fiscal year 2005 budget as early as October 2004,
anticipating challenges managing within its resources. However, Congress
did not learn of these challenges until April 2005. VA initially planned
to manage within its budget for fiscal year 2005 by delaying some spending
on equipment and nonrecurring maintenance and drawing on funds it had
planned to carry over into 2006. Instead, the President requested
additional funds from Congress for both fiscal years 2005 (a $975 million
supplemental appropriation in June 2005) and 2006 (a budget amendment of
$1.977 billion in July 2005). Congress included in the 2006 appropriations
act a requirement for VA to submit quarterly reports regarding the medical
programs budget status during this fiscal year. These reports have not
included some of the measures that would be useful for congressional
oversight, such as patient workload measures to capture costs and the time
required for new patients to be scheduled for their first primary care
appointment.

Unrealistic assumptions, errors in estimation, and insufficient data were
key factors in VA's budget formulation process that contributed to the
requests for additional funding for fiscal years 2005 and 2006.
Unrealistic assumptions about how quickly cost savings could be realized
from proposed nursing home policy changes contributed to the additional
requests, as did computation errors measuring the estimated effect of one
of these changes. Insufficient data in VA's initial budget projections
also contributed to the additional funding requests. For example, VA
underestimated the cost of serving veterans returning from Iraq and
Afghanistan, in part because estimates for fiscal year 2005 were based on
data that largely predated the Iraq conflict and because according to VA,
the agency had challenges for fiscal year 2006 in obtaining data from the
Department of Defense.
*** End of document. ***