VA Health Care: Opportunities for Service Delivery Efficiencies Within
Existing Resources (Letter Report, 07/25/96, GAO/HEHS-96-121).

Pursuant to a congressional request, GAO provided information on the
Department of Veterans Affairs' (VA) health care system, focusing on
ways that VA could: (1) operate more efficiently; (2) reduce the
resources needed to meet veterans' health care needs; and (3) reorganize
its health care system and create efficiency incentives.

GAO found that: (1) the VA health care system should be able to respond
to deficit reduction within the next 7 years; (2) VA has overstated the
level of resources that it would need to satisfy veterans health care
requirements in the next 7 to 10 years; (3) VA did not adequately
consider the impact of the declining veteran population on the future
demand for inpatient hospital care; (4) a significant portion of VA
resources is used to provide services to veterans in the discretionary
care category; (5) VA could reduce its operating costs by billions of
dollars in the next 7 years by completing actions on a wide range of
efficiency improvements; (6) the success of these efforts depends on how
VA health care facilities spend appropriated funds; (7) VA managers
often find ways to operate more efficiently when they need resources to
implement new services or expand existing services; (8) VA is holding
network directors accountable for the Veterans Integrated Service
Network's (VISN) performance; (9) the Under Secretary for Health
distributed criteria to help VISN directors develop efficiency
initiatives and gave VISN and facility directors authority to realign VA
medical centers to achieve efficiencies; (10) VA plans to develop a
capitation funding process that provides greater efficiency incentives
for VA facilities; and (11) VA must implement clear mechanisms and
verify management data to achieve its workload, efficiency, and other
performance targets.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-96-121
     TITLE:  VA Health Care: Opportunities for Service Delivery 
             Efficiencies Within Existing Resources
      DATE:  07/25/96
   SUBJECT:  Health care cost control
             Cost effectiveness analysis
             Federal agency reorganization
             Veterans hospitals
             Future budget projections
             Health services administration
             Hospital care services
             Health resources utilization
             Veterans benefits
             Patient care services
IDENTIFIER:  VA Veterans Integrated Service Network
             Medicare Program
             VA Resource Planning and Management System
             Federal Employees Health Benefits Program
             VA Decision Support System
             VA Income Verification Program
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to the Chairman, Subcommittee on VA, HUD, and Independent
Agencies, Committee on Appropriations,
U.S.  Senate

July 1996

VA HEALTH CARE - OPPORTUNITIES FOR
SERVICE DELIVERY EFFICIENCIES
WITHIN EXISTING RESOURCES

GAO/HEHS-96-121

VA Health Care Resource Needs

(406123)


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  DSS - Decentralized Support System
  FTE - full-time equivalent
  HIV/AIDS - human immunodeficiency virus/acquired immunodeficiency
  syndrome
  IG - Office of Inspector General
  NCCC - National Cost Containment Center
  PBM - Pharmacy Benefit Management
  RPM - Resource Planning and Management System
  UM - utilization management
  UR - utilization review
  VA - Department of Veterans Affairs
  VHA - Veterans Health Administration
  VISN - Veterans Integrated Service Network

Letter
=============================================================== LETTER


B-271637

July 25, 1996

The Honorable Christopher S.  (Kit) Bond
Chairman, Subcommittee on VA, HUD,
and Independent Agencies
Committee on Appropriations
United States Senate

Dear Mr.  Chairman: 

The Department of Veterans Affairs (VA) operates one of the nation's
largest health care systems with 173 hospitals, 376 outpatient
clinics, 136 nursing homes, and 39 domiciliaries.  With a fiscal year
1995 appropriation of $16.2 billion and budget requests of about $17
billion for fiscal years 1996 and 1997, VA's system faces increasing
pressures to contain or reduce spending as part of governmentwide
efforts to balance the budget.\1

This report responds to your request for information on ways VA could
operate more efficiently, reducing the resources needed to meet the
health care needs of veterans in what is commonly referred to as the
mandatory care category.  Specifically, it addresses (1) VA's
forecasts of future resource needs, (2) opportunities to operate VA's
system more efficiently, (3) differences between VA and the private
sector in efficiency incentives, and (4) recent VA efforts to
reorganize its health care system and create efficiency incentives. 


--------------------
\1 VA received a medical care appropriation of about $16.6 billion
for fiscal year 1996. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :1

During the past several years, we have visited over 75 VA hospitals
and outpatient clinics to assess operating policies, procedures, and
practices.  These efforts have resulted in a wide range of
recommended actions to improve the efficiency and effectiveness of
the VA system.  Some of these actions involve ways to restructure
existing delivery processes to lower costs; others identify ways to
recover more of the costs of health care provided to veterans and
others.  This report is based primarily on the results of these
efforts as well as studies by the Veterans Health Administration
(VHA), VA's Office of Inspector General (IG), and others.  We
initially presented the results of this work in testimony before your
Subcommittee on March 8, 1996.\2


--------------------
\2 VA Health Care:  Opportunities to Increase Efficiency and Reduce
Resource Needs (GAO/T-HEHS-96-99, Mar.  8, 1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

VA's health care system should be able to significantly contribute to
deficit reduction in the next 7 years.  First, the system may not
need to expend the level of resources that VA had previously
estimated to meet the health care needs of veterans in the mandatory
care category.  These resources were overstated because (1) VA did
not adequately reflect the declining demand for VA hospital care in
estimating its resource needs and (2) much of the care VA provides is
discretionary (that is, VA is required to provide the services only
to the extent that space and resources permit).  Second, VA could
reduce operating costs by billions of dollars in the next 7 years by
completing actions on a wide range of efficiency improvements. 
Actions are already under way or planned on many of the improvements. 

The success of these efforts, however, depends on the extent to which
VA and its health care facilities are held accountable for how they
spend appropriated funds.  Unlike private health care providers, VA's
system bears few of the risks associated with inefficient operating
practices and, as such, has scant economic incentive to reduce costs. 
VA managers frequently blame inefficiencies on the law, but this
appears to us to be unfair.  Historically, VA's central office
provided few incentives for facilities to improve efficiency.  The
central office put little pressure on facilities to treat patients in
the most cost-effective manner and shifted few resources among
facilities to promote efficiency.  At the facility level, however, VA
managers often can find ways to operate more efficiently when they
need resources to implement new services or expand existing ones. 

Recent changes at VA are starting to create efficiency incentives
that have long existed in the private sector.  For example, VA's
reorganization of its health care facilities into 22 Veterans
Integrated Service Networks (VISN) includes several elements that
show promise for providing the management framework needed to realize
the system's full savings potential.  First, VA plans to hold network
directors accountable for VISNs' performance by using, among other
things, cost-effectiveness goals and measures that establish
accountability for operating efficiently to contain or reduce costs. 
Second, the Under Secretary for Health (1) distributed criteria to
guide VISN directors in developing efficiency initiatives capable of
yielding large savings and (2) gave VISN and facility directors
authority to realign medical centers to achieve efficiencies. 
Finally, VHA's plans to develop a capitation funding process could
provide greater efficiency incentives, provided data problems are
resolved. 


   BACKGROUND
------------------------------------------------------------ Letter :3

The VA health care system was established in 1930, primarily to
provide for the rehabilitation and continuing care of veterans
injured during wartime service.  VA developed its health care system
as a direct delivery system in which the government owned and
operated its own health care facilities.  It grew into the nation's
largest direct delivery system. 

Veterans' health care benefits include medically necessary hospital
and nursing home care and some outpatient care.  Certain veterans,
however, have a higher priority for receiving care and are eligible
for a wider range of services.  Such veterans are generally referred
to as Category A, or mandatory care category, veterans. 

More specifically, VA must provide hospital care, and, if space and
resources are available, may provide nursing home care to certain
veterans with injuries related to their service or whose incomes are
below specified levels.  These mandatory care veterans include those
who

  -- have service-connected disabilities,

  -- were discharged from the military for disabilities that were
     incurred or aggravated in the line of duty,

  -- are former prisoners of war,

  -- were exposed to certain toxic substances or ionizing radiation,

  -- served during the Mexican Border Period or World War I,

  -- receive disability compensation,

  -- receive nonservice-connected disability pension benefits, and

  -- have incomes below the means test threshold (as of January 1995,
     $20,469 for a single veteran or $24,565 for a veteran with one
     dependent, plus $1,368 for each additional dependent). 

For veterans with higher incomes who do not qualify under these
conditions--called discretionary care category veterans--VA may
provide hospital care if space and resources are available.  These
veterans, however, must pay a part of the cost of the care they
receive. 

VA also provides three basic levels of outpatient care benefits: 

  -- comprehensive care, which includes all services needed to treat
     any medical condition;

  -- service-connected care, which is limited to treating conditions
     related to a service-connected disability; and

  -- hospital-related care, which provides only the outpatient
     services needed to (1) prepare for a hospital admission, (2)
     obviate the need for a hospital admission, or (3) complete
     treatment begun during a hospital stay. 

Separate mandatory and discretionary care categories apply to
outpatient care.  Only veterans with service-connected disabilities
rated at 50 percent or higher (about 465,000 veterans) are in the
mandatory care category for comprehensive outpatient care.  All
veterans with service-connected disabilities are in the mandatory
care category for treatments related to their disabilities; they are
also eligible for hospital-related care of nonservice-connected
conditions, but, with the exception of veterans with disabilities
rated at 30 or 40 percent, they are in the discretionary care
category.  Most veterans with no service-connected disabilities are
eligible only for hospital-related outpatient care and, with few
exceptions, are in the discretionary care category. 

From its roots as a system to treat war injuries, VA health care has
increasingly shifted toward a system focused on treating low-income
veterans with medical conditions unrelated to military service.  In
fiscal year 1995, only about 12 percent of the patients treated in VA
hospitals received treatment for service-connected disabilities.  By
contrast, about 59 percent of the patients treated had no
service-connected disabilities.  About 28 percent of VA hospital
patients had service-connected disabilities but were treated for
conditions not related to those disabilities.  (See
fig.  1.)

   Figure 1:  VA Hospital Users by
   Purpose of Treatment, FY 1995

   (See figure in printed
   edition.)

Notes:  Data are based on the fiscal year 1995 VA patient treatment
file. 

SC = service connected; NSC = nonservice connected. 

Between fiscal years 1980 and 1995, VA facilities underwent some
fundamental changes in workload.  The days of hospital care provided
fell from 26 million in 1980 to 14.7 million in 1995, the number of
outpatient visits increased from 15.8 million to 26.5 million, and
the average number of veterans receiving nursing home care in
VA-owned facilities increased from 7,933 to 13,569.  (See fig.  2.)

   Figure 2:  Changes in VA
   Facilities' Workload, FY
   1980-95

   (See figure in printed
   edition.)

During this same time period, VA's medical care budget authority grew
from about $5.8 billion to $16.2 billion.  (See fig.  3.)

   Figure 3:  VA Medical Care
   Budget Authority, FY 1980-95

   (See figure in printed
   edition.)

Note:  Numbers have not been adjusted for inflation. 

For fiscal year 1996, VA sought medical care budget authority of
about $17.0 billion, an increase of $747 million over its fiscal year
1995 authority.  VA expects its facilities to provide (1) about 14.1
million days of hospital care, (2) nursing home care to an average of
14,885 patients, and (3) about 25.3 million outpatient visits.  VA is
also seeking budget authority of about $17.0 billion for fiscal year
1997. 

On July 29, 1995, the Congress adopted a budget resolution providing
VA medical care budget authority of $16.2 billion annually for 7
years (fiscal years 1996-2002).  The budget resolution would
essentially freeze VA spending at the fiscal year 1995 level. 

VA estimated that such a freeze would result in a cumulative
shortfall of almost $24 billion in the funds it would need to
maintain current services to the veteran population through 2002.\3

As used by VA, current services encompass maintaining the currently
funded workload, including services to veterans in both the mandatory
and discretionary care categories and services to nonveterans. 


--------------------
\3 In September 1995, we reported that VA overestimated the potential
budget shortfall because it assumed that (1) the VA facility workload
would increase in fiscal year 1996 and that it would be sustained
during the entire 7-year period; (2) limited savings would be
achieved through improvements in the efficiency with which services
are provided by VA facilities; and (3) costs, workload, and staffing
would steadily increase due to opening or expanding facilities. 
(Medical Care Budget Alternatives (GAO/HEHS-95-247R, Sept.  12,
1995.)


   RESOURCES NEEDED TO MEET NEEDS
   OF VETERANS IN MANDATORY CARE
   CATEGORY ARE OVERSTATED
------------------------------------------------------------ Letter :4

The resources VA facilities will need in the next 7 to 10 years to
provide hospital and certain outpatient care to veterans in the
mandatory care categories for hospital and outpatient care are
overstated for the following reasons: 

  -- VA did not adequately consider the impact of the declining
     veteran population on future demand for inpatient hospital care. 

  -- A significant portion of VA resources is used to provide
     services to veterans in the discretionary care category who are
     eligible for care only to the extent that space and resources
     are available. 

  -- Considerable resources are spent on services not covered under
     veterans' VA benefits. 

  -- Medical centers tend to overstate their workloads and therefore
     their resource needs. 

  -- VA included resources for facility and program activations in
     estimating the resources it would need to maintain current
     services even though such activations would expand current
     services.\4

  -- Services provided to nonveterans through sharing agreements are
     included in VA's justifications of future resource needs even
     though the provision of services through sharing agreements is
     to be limited to sales of excess capacity. 


--------------------
\4 Activations include opening new facilities and expanding existing
facilities and programs through modernization and new construction. 


      DECLINING VETERAN POPULATION
      WILL REDUCE FUTURE RESOURCE
      NEEDS
---------------------------------------------------------- Letter :4.1

In estimating the resources it will need to maintain current services
over the next 7 fiscal years, VA assumed that the number of hospital
patients it treats will remain constant.  The number of hospital
patients VA treats, however, actually dropped by 56 percent over the
past 25 years and should continue to decline.  In addition, because
of the declining demand for inpatient care in the past 25 years, the
number of operating beds in the VA health care system declined by
about 50 percent between 1969 and 1994.  About 50,000 VA hospital
beds were closed or converted to other uses.  The decline in
psychiatric beds was most pronounced:  from about 50,000 beds in 1969
to 17,300 beds in 1994.  (See fig.  4.)

   Figure 4:  Operating Beds in VA
   Hospitals, FY 1969-94

   (See figure in printed
   edition.)

Further declines in operating beds are likely in the next 7 to 10
years as the veteran population continues to decline.  If veterans
continue to use VA hospital care at the same rate that they did in
1994--that is, if VA continues services at current levels--days of
care provided in VA hospitals should decline from 15.4 million in
1994 to about 13.7 million by 2010.  (See fig.  5.) Our projections
are adjusted to reflect older veterans' higher usage of hospital
care.\5

   Figure 5:  Projected
   Age-Adjusted Days of VA
   Hospital Care, 1994-2010

   (See figure in printed
   edition.)

Source:  Based on VA annual reports, fiscal years 1980-94, and VA
projections of the veteran population by age through 2010. 


--------------------
\5 The declining veteran population will lead to significant declines
in VA acute hospitalization even though the acute care needs of
surviving veterans may increase.  The veteran population is estimated
to decline from about 26.3 million in 1995 to just over 20 million in
2010.  Although the health care needs of veterans increase as they
age, the overall decline in the number of veterans will more than
offset the increase and should further reduce the number of days of
VA hospital care.  In addition, many veterans reduce their use of the
VA system when they become eligible for Medicare. 


      MUCH VA CARE IS
      DISCRETIONARY
---------------------------------------------------------- Letter :4.2

VA has underestimated the extent to which its health care resources
are spent on services for veterans in the discretionary care
categories.  Specifically, about 15 percent of the veterans with no
service-connected disabilities who use VA medical centers have
incomes that place them in the discretionary care category (that is,
care may be provided to the extent that space and resources permit)
for both inpatient and outpatient care by inpatient eligibility
standards.  In addition, VA incorrectly reported outpatient workload
using inpatient eligibility categories, overestimating the amount of
outpatient care subject to the availability of space and resources. 
VA does not, however, differentiate between services provided to
veterans in the mandatory and discretionary care categories in
justifying its budget request.  As a result, the Congress has little
basis for determining which portion of VA's discretionary workload to
fund. 

A portion of VA's workload involves treating higher income veterans
with no service-connected disabilities.  In fiscal year 1991, about
10.7 percent of the 555,000 veterans receiving hospital care in VA
facilities were veterans with no service-connected disabilities with
incomes of $20,000 or more.\6 Of those using VA medical centers in
1991 for both inpatient and outpatient care, about 11 percent
(91,520) of the single veterans with no service-connected
disabilities (832,000) and 57 percent (227,430) of the married
veterans with no service-connected disabilities (399,000) had incomes
of $20,000 or more.  Among married veterans with no service-connected
disabilities who used VA medical centers, 15 percent (59,850) had
incomes of $40,000 or more.\7

In March 1992, VA's IG estimated, on the basis of work at one typical
VA outpatient clinic, that about half of the patients and about
one-third of the visits veterans made to VA outpatient clinics should
have been categorized as discretionary rather than mandatory care. 
This occurred because VA was reporting its outpatient workload using
inpatient eligibility categories.  While VA must provide needed
hospital treatment to the 9 million to 11 million veterans in the
mandatory care category, over 90 percent of those veterans are in the
discretionary care category for outpatient care for services other
than those related to treating a service-connected disability. 


--------------------
\6 VA Health Care:  A Profile of Veterans Using VA Medical Centers in
1991 (GAO/HEHS-94-113FS, Mar.  29, 1994). 

\7 In 1991, veterans without dependents were in the mandatory care
category for inpatient hospital care and hospital-related outpatient
care if they had incomes below $18,171; the income threshold
increased by $3,634 for one dependent and $1,213 for each additional
dependent. 


      EXTENSIVE RESOURCES SPENT ON
      NONCOVERED SERVICES
---------------------------------------------------------- Letter :4.3

The VA IG further reported that about 56 percent of discretionary
care outpatient visits provided services that were not covered under
the veterans' VA benefits.  Most veterans' outpatient benefits are
limited to hospital-related care.  An estimated $321 million to $831
million of the approximately $3.7 billion VA spent on outpatient care
in fiscal year 1992 may have been for treatments provided to veterans
in the discretionary care category that were not covered under VA
health care benefits.\8


--------------------
\8 Audit of the Outpatient Provisions of Public Law 100-322, Report
No.  2AB-A02-059, VA Office of Inspector General (Washington, D.C.: 
Mar.  31, 1992). 


      MEDICAL CENTERS TEND TO
      OVERSTATE WORKLOAD
---------------------------------------------------------- Letter :4.4

VA medical centers frequently overstate the number of inpatients and
outpatients treated and therefore the centers' resource needs.  VA
has long had a problem with veterans failing to keep scheduled
appointments.  Once an outpatient visit is scheduled, however,
medical center staff enter it into VA's computerized records, and it
is counted as an actual visit unless staff delete the record. 

VA's IG identified problems in the reporting of both inpatient care
and outpatient visits at several medical centers.  For example, the
IG found that 9 percent of the visits at the Milwaukee VA medical
center and 7 percent of the visits at the Murfreesboro medical center
were not countable in the workload because the appointments were not
kept.\9 Similarly, a 1994 VA IG report found that actual surgical
workload at the Sepulveda VA medical center was 37 percent lower than
reported.\10

According to VHA, it acted in October 1992 to eliminate false
workload credits.  Facilities must now physically "check in" each
patient to receive workload credit. 

A September 1995 VA IG report, however, found that VA outpatient
workload data are still overstated.  In a nationwide review, the IG
found that one out of three reported visits represented overreporting
of workload data.  Specifically,

  -- 6 percent of the reported visits either did not or appeared not
     to have occurred,

  -- 15 percent of the reported visits represented one or more clinic
     stops that either did not or appeared not to have occurred, and

  -- 14 percent of reported visits had inconsistencies in reporting
     of clinic stops. 


--------------------
\9 Audit of Clement J.  Zablocki VA Medical Center, Milwaukee,
Wisconsin, Report No.  2R4-F03-112, VA Office of Inspector General
(Washington, D.C.:  Mar.  25, 1992) and Audit of Alvin C.  York VA
Medical Center, Murfreesboro, Tennessee, Report No.  2R3-F03-029, VA
Office of Inspector General (Washington, D.C.:  Dec.  16, 1991). 

\10 Special Inquiry of Veterans Health Administration Medical Centers
Sepulveda and West Los Angeles, California, Report No.  4R4-A01-111,
VA Office of Inspector General (Washington, D.C.:  Sept.  21, 1994). 


      RESOURCE NEEDS FOR
      ACTIVATIONS APPEAR
      OVERSTATED
---------------------------------------------------------- Letter :4.5

The resources VA believes it needs to maintain current services
include resources to support new workload generated through
activation of programs and facilities.  Almost 25 percent of the
budget shortfall VA estimated to occur in the next 7 fiscal years
under the congressional budget resolution would result from the lack
of funds for facility activations and planned workload expansions. 
Delaying or stopping activations is, however, a difficult political
decision, particularly for those projects already under way. 

In its analysis of the resources needed to maintain current services
in the next 7 fiscal years, VA assumed that it will continue to incur
additional costs, add staff, and attract new users through facility
activations.  For example, VA's estimate that it will need $20.9
billion in the year 2000 to maintain current services includes
increases of over $993 million and 10,000 full-time equivalent (FTE)
employees for activations.  In other words, the inclusion of
activation costs overstates the resources VA will need in the year
2000 to maintain current services by almost $1 billion. 

In addition, the funds VA seeks for activations may be overstated
because the activations planning process is not integrated with the
resource planning and management (RPM) system workload forecasting
process.  VA sought about $108 million and 1,509 FTEs in its fiscal
year 1996 budget submission to support a projected increase in the
number of veterans seeking care.  These estimates, based on workload
forecasts developed through RPM, reflect historical trend data that
could include workload increases resulting from prior years' facility
and program activations.  In other words, the resources requested for
workload increases projected using RPM likely include resources for
some of the estimated workload to be generated through fiscal year
1996 activations.  VA sought an additional $208 million for facility
activations on the basis of the separate activations planning
process.  VA officials agree that some double counting may have
occurred because of the separate planning processes but believe that
the duplication is minimal. 

In commenting on a draft of this report, VHA said that it modified
budgeting for activations requirements in 1997.  The medical care
request no longer includes "line item" requests for the activation of
specific projects.  The networks will activate projects from within
the level of resources provided in their total 1997 medical care
budget allocations. 


      VA INCLUDES SHARING
      AGREEMENT WORKLOAD IN BUDGET
      JUSTIFICATION
---------------------------------------------------------- Letter :4.6

VA counts services provided to nonveterans through sharing agreements
with military and private-sector hospitals and clinics in justifying
the resources needed during the next fiscal year.  In other words, VA
essentially builds in excess resources to sell to the Department of
Defense (DOD) and the private sector.  VA also bills, and is allowed
to retain, the costs of services provided through sharing agreements. 

Health resources sharing, which involves the buying, selling, or
bartering of health care services, benefits both parties in the
agreement and helps contain health care costs by better utilizing
medical resources.  For example, a hospital's buying an infrequently
used diagnostic test from another hospital is often cheaper than
buying the needed equipment and providing the service directly. 
Similarly, a hospital that uses an expensive piece of equipment only
4 hours a day but has staff to operate the equipment for 8 hours can
generate additional revenues by selling its excess capacity to other
providers. 

To use federal agencies' resources to maximum capacity and avoid
unnecessary duplication and overlap of activities, VA is authorized
to sell excess health care services to DOD.  In addition, VA can
share specialized medical resources with nonfederal hospitals,
clinics, and medical schools.  VA may sell medical resources to DOD
and the private sector only if the sale does not adversely affect
health care services to veterans.  As an incentive to share excess
health care resources, VA facilities providing services through
sharing agreements may recover and retain the cost of the services
from DOD or private-sector facilities. 

In fiscal year 1995, VA sold about $25.3 million in specialized
medical resources to private-sector hospitals and about $33.0 million
in health care services to the military health care system.  Although
VA facilities received separate reimbursement for the workload
generated through these sharing agreements, the workload was
nevertheless included in VA's justification of its budget request. 

In commenting on a draft of this report, VHA said that VA provided
care to about 45,000 unique sharing agreement patients in 1994.  VHA
said that even though its base workload counts do include sharing,
the levels are small and its inclusion of sharing makes no material
difference in VA's workload presentations.  VHA said that no
appropriated funds are requested for the sharing workload because it
is supported by reimbursements from DOD and other sharing partners. 

VHA also said that RPM excludes data for sharing patients in
developing changes in both unique patients and cost per unique
patient.  The actual patient counts for the last year are
straightlined in all RPM projections. 


   VA'S RESOURCE NEEDS SHOULD BE
   FURTHER REDUCED THROUGH
   INCREASED EFFICIENCY
------------------------------------------------------------ Letter :5

In VA's assessment of the possible budget shortfall it would face if
its budget were frozen at fiscal year 1995 levels for 7 years, VA
assumed that--beyond the unspecified savings of $335 million expected
to occur in fiscal year 1996--no changes would occur in the
efficiency with which it delivers health care services.  VA should be
able to further reduce its resource needs by billions of dollars over
the 7-year period through improved efficiency and resource
enhancements. 

In the past 5 to 10 years, VA's IG, VHA, the Vice President's
National Performance Review, we, and others have identified many
opportunities to

  -- use lower cost methods to deliver veterans' health care
     services,

  -- consolidate underused or duplicate processes to increase
     efficiency,

  -- reduce nonacute admissions and days of care in VA hospitals,

  -- close underused VA hospitals, and

  -- enhance VA revenues from services sold to nonveterans and care
     provided to veterans. 

VA has actions planned or under way to take advantage of many of
these opportunities.  Such actions should reduce VA's resource needs
in the next 7 to 10 years by several billion dollars. 


      USE LOWER COST METHODS FOR
      DELIVERING HEALTH CARE
      SERVICES
---------------------------------------------------------- Letter :5.1

Following are among the many opportunities to achieve savings through
changes in the way VA delivers health care services to veterans,
allowing VA facilities to provide services of equal or higher quality
at a lower cost. 

  -- Providing 90-day rather than 30-day supplies of low-cost
     maintenance prescriptions enabled VA pharmacies to save about
     $45 million in fiscal year 1995.  The savings resulted because
     VA pharmacies handled over 15 million fewer prescriptions. 
     Although VA encouraged its medical centers to implement
     multimonth dispensing in response to our January 1992 report,
     not all potential savings have occurred because medical centers
     have been slow to adopt multimonth dispensing.\11

  -- Purchasing services from community providers when they can
     provide the care at a lower cost could also produce savings.  VA
     has encouraged its medical centers to establish "access points"
     to improve accessibility for veterans and encourage the shift to
     primary care.  Access points can be established as VA-operated
     outpatient clinics as well as through contractual or sharing
     agreements.  To date, only a few medical centers have
     established such access points, but many others are developing
     plans.  Early indications are that access points established
     through contracts with community providers can often provide
     services at lower cost than VA outpatient clinics.  The ultimate
     effect of access points on overall VA spending depends, however,
     on such issues as the extent to which the access points attract
     new users and to which current users increase their use of VA
     services in response to improved accessibility. 

  -- VA should save over $225 million in 7 years by adopting Medicare
     fee schedules.  VA's IG compared the amount paid by VA under its
     fee-basis program with Medicare fee schedules and found that VA
     paid more than the Medicare rate in over half of the cases
     reviewed.  VA plans to adopt Medicare fee schedules for both its
     outpatient fee-basis payments and for payment of inpatient
     physician and ancillary services at non-VA
     hospitals.\12 \13 VA expects to begin using Medicare fee
     schedules by July 1996. 

  -- By establishing primary care teams, VA hospitals should be able
     to reduce veterans' inappropriate use of more costly specialty
     clinics and achieve significant savings in staff costs.  As we
     reported in October 1993, VA hospitals allow many veterans to
     receive general medical care in specialty care clinics after
     their conditions are stabilized.  Transferring such veterans to
     primary care clinics in a timely manner would allow lower cost
     primary care staff to meet their medical needs rather than
     higher cost specialists.\14

  -- By purchasing specialized medical care services, such as
     positron-emission tomography scans and lithotripsy, from
     community providers rather than buying expensive, but seldom
     used, equipment, VA could reduce its cost of providing such
     services while it improves accessibility of such care for
     veterans.  For example, although the Albuquerque VA medical
     center treated only 24 veterans for kidney stone removal in
     fiscal years 1990 through 1992, the hospital purchased a
     lithotripter, equipment that breaks up kidney stones so that
     they can be eliminated without surgery, at a cost of almost $1.2
     million.  During its first year of operation, 34 veterans
     received treatment.  A private provider in the same city offered
     lithotripsy services for $2,920 a procedure.  Thus, the hospital
     could have met the 34 veterans' needs at a cost of about
     $100,000 compared with its expenditure of $1.2 million plus
     operating costs.  Although the hospital sold lithotripsy
     services to more nonveterans than it provided to veterans, the
     hospital has used the equipment at less than one-fifth of its
     normal operating capacity.\15

  -- VA also expects to save costs by establishing a national drug
     formulary.  Historically, each VA facility has established its
     own formulary--that is, a list of medications approved for use
     for treating patients.  VA noted that establishing a national
     formulary should increase standardization, decrease inventory
     costs, heighten efficiency, and lower pharmaceutical costs
     through enhanced competition.  VA has not estimated the possible
     savings, but it could save $100 million if using the national
     formulary could reduce the cost of purchasing medications by 10
     percent.  In commenting on a draft of this report, VHA said that
     $100 million probably overstates the possible savings.  Savings
     realized through volume-committed contracting would, in VHA's
     opinion, be offset by the costs of new therapies.  (See VHA's
     comment 17 in app.  II.) VHA also identified several additional
     actions it has taken to improve the management of
     pharmaceuticals over the last 6 years.  These include
     establishing a pharmacy benefit management function to reduce
     overall health care costs through appropriate use of
     pharmaceuticals.  (See VHA's comment 19 in app.  II.)

  -- VA expects to save $168 million in 6 years by phasing out and
     closing its supply depots and establishing a just-in-time
     delivery system for medical care supplies and drugs as
     recommended by the Vice President's National Performance Review. 
     The depots were closed at the end of fiscal year 1994, and
     contracts for just-in-time delivery of drugs are in place. 
     Actions to award just-in-time contracts for medical supplies and
     subsistence items are expected to be completed by July 1996. 


--------------------
\11 VA Health Care:  Modernizing VA's Mail-Service Pharmacies Should
Save Millions of Dollars (GAO/HRD-92-30, Jan.  22, 1992). 

\12 Audit of Fee-Basis Payments for Inpatient Medical Care, Report
No.  5R3-A05-108, VA Office of Inspector General (Washington, D.C.: 
Sept.  29, 1995). 

\13 Audit of Fee-Basis Payments for Outpatient Medical Care, Report
No.  5R3-A02-063, VA Office of Inspector General (Washington, D.C.: 
May 25, 1995). 

\14 VA Health Care:  Restructuring Ambulatory Care System Would
Improve Services to Veterans (GAO/HRD-94-4, Oct.  15, 1993). 

\15 VA Health Care:  Albuquerque Medical Center Not Recovering Full
Costs of Lithotripsy Services (GAO/HEHS-95-19, Dec.  28, 1994). 


      CONSOLIDATE UNDERUSED OR
      DUPLICATE PROCESSES
---------------------------------------------------------- Letter :5.2

Following are examples of several nationwide initiatives that VA has
under way to integrate, consolidate, or merge duplicate or underused
services.  Such actions should save additional costs over the next 7
years. 

  -- By creating several bulk processing facilities to fill mail
     order prescriptions, VA will reduce its handling costs by
     two-thirds, saving about $26 million in fiscal year 1996.  As we
     reported in January 1992, VA was mailing prescriptions to
     veterans from over 200 locations, resulting in uneconomically
     small workloads and labor-intensive processes.  As of March
     1996, VA had four operating bulk processing facilities using
     newly designed automated equipment and processes; another three
     facilities were not yet operational.  Prescription workload is
     being transferred systematically from VA hospitals to the new
     bulk processing centers.\16 When fully operational, these
     facilities could save about $74 million a year. 

  -- By consolidating 14 laundry facilities over a 3-year period, VA
     expects to achieve one-time equipment and renovation savings of
     about $38 million as well as recurring savings of about $600,000
     per year.  Under a management improvement initiative, VA
     identified facilities for integration that were scheduled for or
     had requested funding for new equipment or renovation.  Five of
     the 14 consolidations were completed in 1995; the remaining 9
     are scheduled to be completed in the next 2 years. 

  -- An internal VA Management Improvement Task Force predicted in
     1994 that VA could save up to $73 million in recurring personnel
     costs by integrating management of VA facilities.  Among other
     things, the task force recommended that the administrative and
     clinical management of 60 facilities be integrated into 29
     partnerships.  The task force expected that these facility
     integrations could reduce service and staffing duplication,
     integrate clinical programs, achieve economies of scale, and
     free resources to invest in new services.  As of March 1996,
     about one-third of the recommended integrations had been
     approved.  VA allows the facilities, however, to reinvest the
     savings into providing more clinical programs.  Examples of
     reinvestment include buying equipment, building expansions or
     renovations, opening access points, and increasing specialty and
     subspecialty clinics.  Our ongoing work for this Subcommittee
     will assess the extent to which these and other management
     improvement initiatives recommended by the task force have been
     implemented and are saving measurable costs. 


--------------------
\16 GAO/HRD-92-30, Jan.  22, 1992. 


      REDUCE NONACUTE ADMISSIONS
      AND DAYS OF CARE
---------------------------------------------------------- Letter :5.3

Establishing preadmission certification procedures for admissions and
days of care similar to those used by private health insurers could
save VA hundreds of millions of dollars by reducing nonacute
admissions and days of care in VA hospitals. 

VA hospitals too often serve patients whose care could be more
efficiently provided in alternative settings, such as outpatient
clinics or nursing homes.  In 1985, we reported that about 43 percent
of the days of care that VA medical and surgical patients spent in
the VA hospitals reviewed could have been avoided.\17 Since then,
several studies by VA researchers and the IG have found similar
inefficiencies. 

For example, a 1991 VA-funded study of admissions to VA acute medical
and surgical bed sections estimated that 43 percent (ï¿½3 percent) of
admissions were nonacute.  Nonacute admissions to the 50 randomly
selected VA hospitals studied ranged from 25 to 72 percent.  The
study suggested several reasons for the higher rate of nonacute
admissions to VA hospitals than to private-sector hospitals,
including the following: 

  -- VA facilities do not have financial incentives to make the
     transition to outpatient care;

  -- the VA system, unlike private-sector health care, does not have
     formal mechanisms to control nonacute admissions, such as
     mandatory preadmission review; and

  -- the VA system, unlike private-sector health care, has a
     significantly expanded social mission that may influence the use
     of resources for patients.\18

A 1993 study by VA researchers reported similar findings.  At the 24
VA hospitals studied, 47 percent of admissions and 45 percent of days
of care in acute medical wards were nonacute; 64 percent of
admissions and 34 percent of days of care in surgical wards were
nonacute.  Reasons cited for nonacute admissions and days of care
included nonavailability of outpatient care, conservative physician
practices, delays in discharge planning, and social factors. 
Although the study cited VA eligibility as contributing to some
inappropriate admissions and days of care, the study recommended only
minor changes in VA eligibility provisions.  Rather, it suggested
that VA establish a systemwide utilization review program.  VA,
however, has neither established an internal utilization review
program nor contracted for external reviews focusing on medical
necessity.\19

By contrast, all fee-for-service health plans participating in the
Federal Employees Health Benefits Program are required to operate a
preadmission certification program to help limit nonacute admissions
and days of care. 

In commenting on a draft of this report, VA's Under Secretary for
Health said that VA is currently assessing the use of preadmission
reviews systemwide as a way to encourage the most cost-effective,
therapeutically appropriate care setting.  He said that several
facilities have adopted some form of preadmission review already and
their programs are being reviewed. 

The Under Secretary also said that VHA is implementing a performance
measurement and monitoring system that contains several measures for
which all network directors and other leaders will be held
accountable.  Several of these measures, such as the percentage of
surgeries done on an ambulatory basis at each facility and
implementation of network-based utilization review policies and
programs, will, he said, move the VA system toward efficient
allocation and utilization of resources. 


--------------------
\17 Better Patient Management Practices Could Reduce Length of Stay
in VA Hospitals (GAO/HRD-85-92, Aug.  8, 1985). 

\18 For example, VA facilities may admit patients who travel long
distances for care or keep veterans in the hospital longer than
medically necessary because the veterans lack a social support system
to assist them after discharge. 

\19 VA established a systemwide utilization review program in October
1993.  The program, however, focuses primarily on quality of care
reviews. 


      CLOSE OR CONVERT UNDERUSED
      HOSPITALS
---------------------------------------------------------- Letter :5.4

If the actions discussed so far are taken to reduce the number of
nonacute admissions and days of care provided by VA hospitals, the
demand for care in some hospitals could fall to the point where
keeping such hospitals open is no longer economically feasible.  VA
has taken over 50,000 beds out of service in the past 25 years but
has not closed any hospitals because of declining utilization.\20

Although closing wards clearly saves money by reducing staffing
costs, the cost per patient treated rises because the fixed costs of
facility operation are disbursed to fewer patients.  At some point,
closing a hospital and providing care either through another VA
hospital or through contracts with community hospitals may become
less costly.  Closing hospitals and contracting for care, however,
entail some risk.  Allowing veterans to get free hospital care in
community hospitals closer to their homes could result in increased
demand for VA-supported hospital care, offsetting any savings
achieved through contracting. 

The feasibility of closing underused hospitals was demonstrated when
VA recently closed the Sepulveda VA medical center, which was damaged
in an earthquake, and transferred the workload to the West Los
Angeles medical center.  VA's IG found that the reported numbers of
inpatients treated at both Sepulveda and West Los Angeles had
declined significantly over the prior 4-year period and that the
declining workload may have been even greater than VA reported
because the facilities' workload reports were overstated.  VA does
not plan to rebuild the Sepulveda hospital but plans to establish an
expanded outpatient clinic at the site. 

The IG concluded that West Los Angeles had sufficient resources to
care for the hospital needs of veterans formerly using the Sepulveda
hospital.  Savings from the closure have been limited, however,
because Sepulveda staff were temporarily reassigned to the West Los
Angeles medical center. 

The only other hospital VA has closed in the last 25 years is the
Martinez VA medical center.  Like Sepulveda, it was closed because of
seismic deficiencies, and its workload was transferred to other VA
medical centers.  Although VA did not rebuild Sepulveda, it plans to
build a replacement hospital for Martinez as a joint venture with the
Air Force at Travis Air Force Base.  Funds for the construction,
however, have not been appropriated. 


--------------------
\20 Two VA hospitals, in Martinez and Sepulveda, California, were
closed because of structural problems.  VA plans to replace the
former hospital but not the latter. 


      ACTIONS TO ENHANCE REVENUES
---------------------------------------------------------- Letter :5.5

In addition to actions to improve operational efficiency, VA should
generate millions in additional revenues by (1) setting more
appropriate prices for services sold to private-sector providers and
(2) determining whether to require veterans to contribute to the cost
of their care. 

By establishing appropriate prices for services sold to nonveterans
through sharing agreements, VA can generate revenues used to serve
veterans.  In response to our December 1994 report on recovering the
full costs of lithotripsy services at the Albuquerque VA medical
center, VA recently encouraged its facilities to ensure that they
price services provided to nonveterans to fully recover all costs and
to include a profit when appropriate.\21 For example, the Albuquerque
medical center increased its price for basic lithotripsy services to
nonveterans by over 125 percent.  The new price could generate over
$300,000 a year in additional revenues for the hospital. 

By verifying veterans' reported income, VA expects to generate about
$46 million in copayment revenues between January 1, 1996, and June
30, 1997.  In a September 1992 report, we found that VA had not taken
advantage of the opportunity to verify veterans' incomes through the
use of tax records.  Through our own review of tax records, we
identified over 100,000 veterans who may have owed copayments.  In
1994, VA began routinely using such data to determine veterans'
copayment status.\22


--------------------
\21 GAO/HEHS-95-19, Dec.  28, 1994. 

\22 VA Health Care:  Verifying Veterans' Reported Income Could
Generate Millions in Copayment Revenues (GAO/HRD-92-159, Sept.  15,
1992). 


   LACK OF INCENTIVES CAN HINDER
   FURTHER SYSTEM EFFICIENCIES
------------------------------------------------------------ Letter :6

Although costs can and are being saved, the VA health care system
lacks overall incentives to further increase efficiency.  Unlike
private-sector hospitals and providers, VA facilities and providers
bear little financial risk if they provide (1) medically
inappropriate care or (2) services not covered under a veteran's VA
benefits.  Unlike in the private health care system in which the
insurance company bears most of the risk, in VA's system, the
veteran, not VA, bears most of the financial risk for health
benefits.  However, when VA facilities have an incentive, such as the
desire to fund new programs, they appear to be able to identify
opportunities to save costs through efficiency improvements. 


      VA FACILITIES BEAR LITTLE
      RISK FROM PROVIDING
      INAPPROPRIATE CARE
---------------------------------------------------------- Letter :6.1

Private insurers increasingly require their policyholders to obtain
prior authorization from an independent utilization review firm
before the insurers will accept liability for hospital care. 
Frequently, this authorization also limits the number of days of care
the insurer will cover without further authorization of the medical
necessity of continued hospitalization.  Because compliance with
these requirements directly affects their revenues, private-sector
hospitals pay close attention to them. 

Similarly, the Medicare program has, since 1982, paid hospitals a
fixed fee based on a patient's diagnosis.  The fixed fee is based on
the national average cost of treating the patient's condition.  If
the hospital provides the care for less than the Medicare payment, it
makes a profit.  But if the hospital keeps the patient too long, is
inefficient, or provides unnecessary treatments, then it will lose
money.  This creates a strong incentive in the private sector to
discharge Medicare patients as soon as possible. 

These financial incentives to increase efficiency and provide care in
the most cost-effective setting are largely absent in the VA system. 
Even in those cases in which a private health insurer's preadmission
certification requirement applies, the hospital's revenues are not
affected by failure to obtain such certification.  A VA hospital that
admits a patient who does not need a hospital level of care incurs no
penalty.  In fact, facility directors often indicated to us that VA's
methods of allocating resources to its medical centers favored
inpatient care. 

VA's current RPM system is attempting to remove the incentive to
provide care in a hospital rather than an outpatient clinic and
create incentives to provide care in the most cost-effective setting. 
As used during the last two budget cycles, however, the system has
done little to create such incentives.  Because VA chose to shift few
funds between the highest and lowest cost facilities, facility
efficiency incentives were minimal.  For fiscal year 1995, VA
reallocated $20 million from 32 high-cost to 27 low-cost facilities. 
VA officials told us that they plan to use RPM to reallocate more
money in fiscal year 1996 and to provide VISN directors a "risk pool"
of contingency funds to help facilities unable to work within their
budgets.  It is yet unclear how VISN directors plan on using these
funds. 

Finally, unlike private-sector health care providers, VA has no
external preadmission screening program or other utilization review
program to provide incentives to ensure that only patients who need a
hospital level of care are admitted and that patients are discharged
as soon as medically possible.  VA gives private-sector hospitals
providing care to veterans under its contract hospitalization program
incentives to limit patients' lengths of stay by basing reimbursement
on Medicare prospective payment rates.  VA does not, however, give
its own hospitals the same incentives by basing their payments on the
Medicare rates. 


      VETERAN, RATHER THAN VA,
      BEARS FINANCIAL RISK
---------------------------------------------------------- Letter :6.2

Unlike under private health insurance and Medicare, in the VA system,
the veteran is at risk of being denied care, rather than VA being at
risk of losing funds, if a VA facility runs out of resources. 
Because it bears little risk, the VA system lacks a strong incentive
to operate efficiently. 

A private insurer or managed care plan guarantees payment for covered
services in exchange for a fixed premium.  The insurer or managed
care plan thus has a strong financial incentive to ensure that only
medically necessary care is provided in the most cost-effective
setting.  Otherwise, the insurer may suffer a financial loss. 

Unlike private health providers, however, the VA system does not
guarantee the availability of covered services.  As a result, the
ability of veterans to get covered services depends on resource
availability.  If a VA facility is inefficient and the resources
allocated to the facility are not sufficient to meet anticipated
workload, the VA facility is allowed to deny (that is, ration)
services to eligible veterans.  In 1993, we reported that 118 VA
medical centers reported rationing some types of care to eligible
veterans when the centers lacked enough resources.\23


--------------------
\23 VA Health Care:  Variabilities in Outpatient Care Eligibility and
Rationing Decisions (GAO/HRD-93-106, July 16, 1993). 


      VA FACILITIES FIND
      EFFICIENCIES WHEN THEY NEED
      FUNDS FOR NEW PROGRAMS
---------------------------------------------------------- Letter :6.3

The ability of facilities to find ways to become more efficient when
they want to fund a new program, such as establishing an access point
clinic, indicates that when they are given an incentive to become
more efficient, they do so. 

For example, VA's Under Secretary for Health encouraged hospitals to
take all steps within their means to improve the geographic
accessibility of VA care.  But he told the hospitals that they would
have to use their own resources to do this.  Over half of VA's
hospitals quickly developed plans to establish so-called access
points.  For example, the Amarillo VA medical center identified ways
to save over $850,000 to pay for the establishment of access points: 

  -- The medical center saved an estimated $250,000 a year by
     consolidating inpatient medical wards and reducing the number of
     surgical beds it staffed.  Because of these consolidations, the
     center eliminated nine nursing positions, saving salaries and
     related benefits.  Officials said that the consolidations
     coincided with declining workloads, attributable to lower
     admissions and lengths of stay, and as such would not affect the
     availability or quality of care the center provides. 

  -- The medical center expects to save up to $150,000 by reviewing
     patients' use of prescription medications.  These reviews have
     led to a reduction in medications provided, saving the cost of
     procuring, storing, and dispensing the drugs. 

  -- It expects to reduce future pharmacy costs by $250,000 by trying
     to change patients' lifestyles to reduce their cholesterol. 
     Center officials estimate that this has reduced the use of
     lipid-lowering drugs by half.  The medical center established
     health education classes, which teach correct eating and
     exercise techniques.  Before this, physicians had routinely
     prescribed lipid-reducing drugs to lower cholesterol levels. 
     Officials are planning to establish similar health clinics for
     patients with high blood pressure and other common conditions
     that may be effectively treated without prescription drugs. 

  -- The medical center expects to save $200,000 or more by using a
     managed care contract to purchase radiation therapy services. 
     Radiation therapy involves a series of treatments, which the
     center has historically paid for on a fee-for-service basis. 
     The hospital recently signed a contract with a private-sector
     hospital to provide each series of radiation treatments at a
     capitated rate based on Medicare's reimbursement schedule. 
     Officials are currently negotiating similar contracts for other
     medical services. 


   ESTABLISHMENT OF SERVICE
   NETWORKS SHOULD LEAD TO
   INCREASED EMPHASIS ON
   EFFICIENCY
------------------------------------------------------------ Letter :7

In 1995, the Under Secretary for Health proposed criteria for
potential service realignment that would facilitate the types of
changes needed to achieve efficiency comparable with private-sector
hospitals and clinics.  For example, he encouraged VHA directors to
identify opportunities to

  -- buy services from the private sector at lower costs,

  -- consolidate duplicate services, and

  -- reduce their fixed and variable costs of services directly
     provided to veterans. 

VA's assessment of its resource needs over the next 7 to 10 years did
not include any projected savings from the increased efficiencies
that should result from establishing VISNs, which assess needs on a
network rather than facility basis, improving facility planning. 
This will allow hospitals serving veterans in the same geographic
area to pool their resources and reduce duplication. 

A planned move to capitation funding should create incentives for
facilities to provide care in the most cost-effective setting. 
However, VA has much to do before it can set appropriate capitation
rates.  For example, while VA's RPM data show a wide variation in
operating costs among facilities VA considers comparable, VA has done
little to determine the reasons for these variations.  Without such
an understanding, no assurance exists that capitation rates can be
set at the level that promotes the most efficient operation. 

Understanding facility or VISN cost variations necessitates improving
the information VA has on its hospitals' operating costs.  Although
the automated Decision Support System (DSS) that VA is implementing
has potential to be an effective management tool for improving the
quality and cost-effectiveness of VHA operations, VA has not
developed a way to verify the accuracy of the cost and utilization
data going into DSS.  Some of the data provided to DSS from other VA
information systems are incomplete and inaccurate, limiting VA's
ability to rely on DSS-generated information to make sound business
decisions.\24 VA has recognized the need for accurate cost and
utilization data for DSS and has a special project team developing
ways to improve the system's input data. 


--------------------
\24 VA Health Care Delivery:  Top Management and Leadership Critical
to Success of Decision Support System (GAO/AIMD-95-182, Sept.  29,
1995). 


   CONCLUSIONS
------------------------------------------------------------ Letter :8

Given VA's overstatement of future resource needs, the system does
not need to spend as many resources as previously expected. 
Moreover, because the possible magnitude of future efficiency savings
was not factored into VA's assessments of future resource needs, VA's
system may have more discretionary resources available than expected. 
This suggests that an operating goal of $16.2 billion a year may be
achievable.  In any event, it seems likely that the impact of such
funding levels would not, by necessity, result in the budget
shortfalls that VA estimated. 

Although actions to improve VA's efficiency are planned or under way
that could yield enough savings to enable VA to contribute billions
of dollars toward deficit reduction in the next 7 years without
affecting current services, VA provides little information to the
Congress on those savings and how they are reinvested.  Essentially,
VA reinvests these savings in new programs and expanded services
without giving the Congress the chance to use all or a part of the
savings to apply to the deficit. 

Billions of dollars could be saved by establishing an independent
external preadmission certification program similar to those used by
most private health insurers.  Similarly, by creating financial
incentives for VA medical centers to discharge patients as soon as
their medical conditions allow, VA could significantly reduce
unnecessary days of hospital care. 

Although VA has changes under way that should help create financial
incentives to provide care in the most cost-efficient setting, it
will take time for the new VISN directors to achieve significant
savings.  The directors have been in their positions for only a few
months so it is too early to tell how successful they will be in
increasing efficiency.  It is important that VA complete its
implementation of clear mechanisms and useful management data by
which to hold VISN directors accountable for workload, efficiency,
and other performance targets.  Without such mechanisms and improved
data, the VISN structure holds some risk for further decentralizing
VHA authority and responsibility for achieving efficiencies. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :9

We recommend that the Secretary of Veterans Affairs do the following: 

  -- Establish an independent, external preadmission certification
     program for VA hospitals. 

  -- Provide the Congress, through future budget submissions, data on
     the extent to which VA services were provided to veterans in the
     mandatory and discretionary care categories for both inpatient
     and outpatient care. 

  -- Include in future budget submissions (1) information on costs
     saved through improved efficiency and (2) plans to either
     reinvest savings in new services or programs or use the savings
     to reduce the budget request. 


   AGENCY COMMENTS
----------------------------------------------------------- Letter :10

By letter dated May 10, 1996 (see app.  I), the Under Secretary for
Health said that VA appreciates our positive acknowledgment of its
efforts to restructure the VA health care system but disagrees with
many of our findings, conclusions, and recommendations.  In VHA's
opinion, the report presents outdated information that does not
accurately reflect the current direction of VA health care. 


      OVERALL COMMENTS
--------------------------------------------------------- Letter :10.1

VHA said that our analysis is particularly inadequate as a basis for
projecting future resource requirements for VA medical care. 
Specifically, VHA said that our report

  -- does not adequately consider all factors that affect VA's future
     resource needs,

  -- incorrectly states that VA does not adequately consider the
     declining veteran population in forecasting future resource
     needs, and

  -- unfairly bases comments about the extent to which VA resources
     are spent on discretionary care on work done by the VA IG at one
     facility. 

As discussed in the following paragraphs, we do not find VHA's
comments convincing. 


         ALL FACTORS NOT
         CONSIDERED
------------------------------------------------------- Letter :10.1.1

Our analysis, VHA said, places too much significance on the findings
of our September 1995 review of VA's response to a congressional
request (a static assessment of different funding proposals and their
effect over future years) in concluding that VHA's forecasting of
future resource needs is overstated.  Our September 1995 analysis
was, VHA said, a fragmented discussion of efficiencies that did not
consider other factors.  Resource needs are projected on the basis of
assessment of inflation, current workload, new efficiencies, health
care technology, and VA health care system deficiencies. 

Our analyses were, by necessity, limited to review of the estimates
of future resource needs developed by VA.  We tried to obtain the
basis for the 5-year projections of resource needs in VA's fiscal
year 1996 budget submission, but VA officials, including the Under
Secretary for Health, said that they had no part in developing the
estimates.  VHA offered no estimates of its future resource needs
beyond those included, either during our review or in its comments on
this report. 

VHA said that it recognizes that further management efficiencies can
and must be achieved in future budget years to continue to provide
quality health care.  Our report, VHA said, does not recognize the
efficiencies included in VA's fiscal year 1996 budget request.  In
this request, VA assumed that management efficiencies would save $335
million.  The Congress increased this savings amount by an additional
$397 million in administrative savings that have no impact on patient
care.  This results in $732 million in permanent administrative
savings in fiscal year 1996. 

Our report does recognize that VA planned to achieve unspecified
savings of $335 million in fiscal year 1996.  In addition, we have
added a discussion to reflect the final appropriation action approved
after this report was sent to VA for comment.  The reductions,
however, will not necessarily be achieved without impacting patient
care.  Because VA does not have a plan to achieve the needed savings,
VA facilities may achieve these savings by reducing patient care. 


         VA DOES CONSIDER IMPACT
         OF DECLINING POPULATION
------------------------------------------------------- Letter :10.1.2

VHA said that VA's model for projecting hospital workload explicitly
considers not only the change in the size and age of the veteran
population, but also changes in observed hospital use rates over
time.  VHA said that one of the more misunderstood variables relates
to the change in the veteran population versus the number of veterans
who use VA for their health care services.  According to VHA,
although the veteran population is declining, the number of veteran
users is expected to increase.  VHA said that although the number of
hospital admissions declined by 19 percent between 1980 and 1995, the
number of outpatient visits increased by 53 percent in the same
period. 

Figure 2 shows the increases in demand for outpatient care from 1980
to 1995.  Such data do not, however, adequately reflect changing
resource needs.  The savings from the decreased demand for inpatient
hospital care should more than offset the costs of meeting the
increased demand for outpatient care.  Between fiscal years 1980 and
1995, the number of days of hospital care provided in VA facilities
declined from 26.1 million to 14.7 million, a decrease of over 11
million days of care.  During the same period, outpatient visits to
VA clinics increased from 15.8 million to 26.5 million, an increase
of 10.7 million visits.  Because an outpatient visit is 2-1/2 to
3-1/2 times cheaper than a day of inpatient hospital care, savings
from the declining inpatient workload should have more than offset
the costs of the increased outpatient workload VA experienced over
the 16-year period. 

The increase in demand for outpatient care is also consistent with
what we have been saying about VA's efforts to (1) improve
accessibility of VA health care through access points and (2) expand
outpatient eligibility.  Expanding eligibility, as was done in 1973
with outpatient eligibility to include services that would obviate
the need for hospital care, has historically resulted in increased
demand for outpatient services.  For example, in its fiscal year 1975
annual report, VA includes a figure showing the "relationship of
workload to the progressive extension of legislation expanding the
availability of outpatient services." Similarly, in its comments, VA
noted that the number of VA outpatient clinics grew by 72 percent
between 1980 and 1995.  In other words, the number of clinics was
growing faster than the number of visits, which VA says grew by 53
percent in the same time period. 


         REPORT INAPPROPRIATELY
         RELIES ON WORK AT ONE
         LOCATION
------------------------------------------------------- Letter :10.1.3

VHA said that our conclusions that a significant portion of VA
resources go to discretionary care and that services provided are not
covered under veterans' VA benefits are based on two IG reports that
reviewed the work of one satellite outpatient clinic and one VA
medical center. 

Our conclusions are based both on our own work and on a series of IG
studies.  The IG's report discussed problems at two facilities--the
Allen Park VA medical center and the Columbus, Ohio, outpatient
clinic.  The Allen Park facility was, the IG report notes, ".  .  . 
selected as the review site in consultation with VHA program
officials because it was considered to be a typical outpatient
environment in an urban tertiary care facility." Although our report
cited only one IG report, the IG has found lax enforcement of
eligibility provisions at many other medical centers. 

One of the recommendations in the IG's report was that VHA conduct
reviews of each facility's outpatient workload to identify the
proportion of visits properly classified as mandatory, discretionary,
and ineligible using the definitions relevant to current law.  VHA,
however, as of May 1996, has not conducted the recommended reviews. 

VHA also said that our estimate of the percentage of VA users in the
discretionary care category was inaccurate.  According to VHA, only 3
percent of VA inpatients and less than 5 percent of both inpatient
and outpatient users were discretionary in fiscal year 1995. 

Our estimate better reflects the extent to which care is provided to
veterans in the discretionary care category.  VA's estimate is
apparently based on unverified data provided by veterans when they
apply for care; such data underestimate veterans' incomes.  We
compared VA's fiscal year 1990 treatment records with federal income
tax records and found that about 15 percent of the veterans with no
service-connected disabilities who used VA medical centers had
incomes that placed them in the discretionary care category for both
inpatient and outpatient care.\25

Our review showed that VA may have incorrectly placed as many as
109,230 veterans in the mandatory care category in 1990.  Tax records
for these veterans showed they had incomes that should have placed
them in the discretionary care category.  We estimated that VA could
have billed as much as $27 million for care provided to these
veterans. 

Although data from our study are now 6 years old, data from VA's own
tax record reviews are yielding similar results.  VA has now
established its own income verification program.  Its initial review
found that about 18 percent of veterans with no service-connected
conditions underreported their income.  VA's matching agreement with
the Internal Revenue Service indicates that VA expects its comparison
of fiscal year 1996 treatment records with tax data to generate about
$30.5 million in copayment collections for care provided to veterans
who were incorrectly classified as mandatory care category veterans. 
Accordingly, we believe our estimate--and VA's own data--show that
about 15 percent of veterans with no service-connected disabilities
who use VA medical centers are in the discretionary care category for
both inpatient and outpatient care. 

VHA also said that they do not believe that extrapolating data from a
single facility to the VA system nationwide is appropriate. 
According to VHA, our report states that "systemwide, 56% of
discretionary care outpatient visits did not meet eligibility
criteria in 1992, and may have resulted in $321 million to $831
million being potentially used to provide outpatient care to veterans
in the discretionary care category who may not have been entitled to
that care."

What our report actually says is that the VA IG further reported that
about 56 percent of discretionary care outpatient visits provided
services that were not covered under the veterans' VA benefits .  . 
.  .  We state that an estimated $321 million to $831 million of the
approximately $3.7 billion VA spent on outpatient care in fiscal year
1992 may have been for treatments provided to veterans in the
discretionary care category that were not covered under VA health
care benefits. 

Nowhere in the report do we suggest that the problem is one of
"entitlement." No veteran, whether in the mandatory or discretionary
care category, is entitled to care from VA.  The issue is one of
eligibility.  The IG report found that veterans in the discretionary
care category for outpatient care received treatments that they were
not eligible for regardless of whether VA had the space and resources
to provide the services.  In other words, these veterans received
services that were not needed to prepare for, to follow up after, or
to obviate the need for hospital care. 

According to VHA, this report and the IG reports demonstrate the need
for eligibility reform.  In VHA's opinion, the law needs to be
amended to enable VA to provide care so that veterans are treated in
the most appropriate, most efficient, and most cost-effective
setting.  VHA said that this is an instance where, despite statements
to the contrary in this report, the law contributes to the system's
inefficiencies by perpetuating complicated outpatient eligibility
criteria.  VA needs the outpatient eligibility reform tool to achieve
the best patient and system outcomes. 

Although we agree with VHA that eligibility reforms are needed, VA's
efforts to expand eligibility are not effectively targeted toward
meeting the health care needs of veterans within available resources. 
Our concerns about current proposals to expand eligibility were
expressed in our recent testimony before the Senate Committee on
Veterans' Affairs and will be explored more fully in a forthcoming
report. 

VHA said that our report's statement that medical centers frequently
overstate the number of inpatients and outpatients treated is no
longer true.  VHA said that it improved its information systems and
eliminated false workload credits in response to the IG reports.\26

Before this, facilities could obtain automatic workload credit for
all scheduled visits unless action was taken to indicate that a
patient failed to appear.  We revised the discussion in our report to
reflect the actions taken in response to the IG's reports.  We also
added a discussion of a September 1995 VA IG report showing continued
problems in VA facilities' reporting of outpatient workload. 


--------------------
\25 GAO/HRD-92-159, Sept.  15, 1992. 

\26 Since October 1, 1992, no automatic workload credit has been
granted for scheduled outpatient visits, and facilities must
physically check in each patient to receive such credit. 


      ACTIONS WILL BE TAKEN TO
      ESTABLISH A PREADMISSION
      CERTIFICATION PROGRAM
--------------------------------------------------------- Letter :10.2

VHA agreed with our recommendation that it establish an independent,
external preadmission certification program for VA hospitals.  VHA
said that policies and processes for preadmission review are being
developed by a task force charged with reviewing and revising VHA's
existing utilization review policy.  The preadmission review will,
according to VHA, identify the appropriate level of care for both
inpatient and outpatient care, appropriate alternatives to care, and
a system of referral and arrangement of alternative care. 

Although we found VHA's agreement to pursue establishment of an
external preadmission certification program encouraging, we do not
believe VHA's action fully responds to our recommendation because it
provides no time frames for completing development and implementation
of the program.  In addition, it does not indicate how compliance
with the findings of the external reviews will be enforced.  Because
VA facilities currently incur no financial risk from providing
inappropriate care, external preadmission certification requirements
may not be effective unless coupled with a financial penalty for
noncompliance with the review findings. 

Recommendations and VA promises to establish effective utilization
review mechanisms to help prevent inappropriate days of hospital care
date back over 10 years.  Because of the hundreds of millions of
dollars wasted from VA's past failure to address this problem, we
believe VA needs to develop and follow a specific timetable to
implement an external preadmission certification program and develop
plans to place VA facilities at financial risk if they admit patients
not requiring a hospital level of care. 


      VHA DOES NOT PLAN TO PROVIDE
      THE CONGRESS INFORMATION ON
      SAVINGS
--------------------------------------------------------- Letter :10.3

VHA did not agree with our recommendation that it include (1)
information on savings achieved through improved efficiency and (2)
plans to either reinvest savings in new services or programs or use
the savings to reduce the budget request.  The recommendation is, VHA
said, unrealistic.  Although VHA is moving rapidly to implement
several management initiatives, such as those discussed in this
report, VHA said it cannot predict the extent of possible savings or
accurately predict future costs.  VHA said that VA will be better
able to predict savings when the VISNs are fully operational but
probably not to the level of detail that our recommendation seems to
require. 

Providing the Congress information on factors, such as inflation and
creation of new programs, that increase resource needs without
providing information on changes that could reduce or offset those
needs leaves the Congress with little basis for determining
appropriate funding levels.  Because VA facilities are essentially
allowed to keep any funds they generate through efficiency
improvements and seek additional funds to compensate for the effects
of inflation, the true rate of increase in VA's medical care
appropriations is understated. 


      VA DOES NOT PLAN TO GIVE THE
      CONGRESS DETAILED
      INFORMATION ON WORKLOAD
--------------------------------------------------------- Letter :10.4

Finally, VHA did not agree with our recommendation that it provide
data to the Congress on the extent to which VA services are provided
to veterans in the mandatory and discretionary care categories for
both inpatient and outpatient care.  According to VHA, VA does not
have accounting systems that would allow VA to differentiate between
mandatory and discretionary care.  Developing accounting systems
capable of such differentiation would, VHA said, be extremely
difficult and may not be cost-effective given the complexities of
outpatient eligibility.  For example, one outpatient visit may
comprise several clinic stops, across which outpatient eligibility
may vary.  These complexities, according to VHA, make it very
difficult to efficiently and meaningfully track mandatory and
discretionary care.  Future data systems, such as the DSS and
resource allocation systems, may, VHA said, improve the
identification of patient care costs.  The difficulties in
identifying mandatory versus discretionary care categories will,
according to VHA, remain until eligibility laws are amended. 

Without information on the extent to which VA resources are used to
provide services to veterans in the priority categories established
under VA law, the Congress lacks the basic information needed to
guide decisions about what portion of VA's discretionary care
workload to fund.  In addition, it lacks the basic information it
needs to ensure that resources are equitably allocated to VISNs to
ensure that veterans have reasonably equal access to VA benefits
regardless of where they live. 

If VHA is applying the eligibility rules established under Public Law
100-322--as VHA maintained in its comments it has instructed its
facilities to do--it should be relatively easy to develop a reporting
system to capture the results of those decisions.  VA has, for years,
indicated that it may include data on mandatory and discretionary
care in its resource allocation system in DSS and in other data
systems but has never detailed any plans to accomplish this task.  VA
needs to promptly decide how to gather such data and set realistic
milestones for implementing the changes needed to provide the
Congress and VA managers the data they need to effectively assess VA
medical care budget needs.  By not developing such data, VA makes it
exceedingly difficult for the Congress to consider reductions in its
budget request because the Congress does not know whether its
reduction would affect provision of services to veterans in the
mandatory care category for inpatient care. 

According to VHA, in fiscal year 1995, less than 3 percent of VA
inpatients and less than 5 percent of both inpatient and outpatient
users were discretionary by inpatient eligibility standards.  VHA
said that any savings available from no longer treating any
discretionary care category veterans defined by inpatient eligibility
would be relatively very small. 

The data VA cites are apparently based on unverified information
provided by veterans at the time of application.  As discussed in
this report, many veterans underreport their income to VA to qualify
for free care.  VA expects to recover about $30.5 million in
copayments in fiscal year 1996 through its recently established
income verification program. 

VHA provided additional comments in an attachment to its May 10,
1996, letter.  Those comments are addressed in appendix II and
changes have been made in the body of the report as appropriate in
response to the additional comments. 


--------------------------------------------------------- Letter :10.5

We are sending copies of this report to the Chairmen and Ranking
Minority Members, Subcommittee on VA, HUD, and Independent Agencies,
House Committee on Appropriations; the House and Senate Committees on
Veterans' Affairs; the Secretary of Veterans Affairs; the Director,
Office of Management and Budget; and other interested parties. 
Copies will also be made available to others upon request. 

This report was prepared under the direction of Jim Linz and Paul
Reynolds, Assistant Directors, Health Care Delivery and Quality
Issues.  Please call Mr.  Linz at (202) 512-7110 or Mr.  Reynolds at
(202) 512-7109 if you or your staff have any questions.  Other
evaluators who made contributions to this report include Katherine
Iritani, Linda Bade, and Walt Gembacz. 

Sincerely yours,

David P.  Baine
Director, Health Care Delivery
 and Quality Issues




(See figure in printed edition.)APPENDIX I
COMMENTS FROM THE VETERANS HEALTH
ADMINISTRATION
============================================================== Letter 



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


EVALUATION OF ADDITIONAL VETERANS
HEALTH ADMINISTRATION COMMENTS
========================================================== Appendix II

VHA's additional comments noted on the following pages are copied
from the enclosure that accompanied VHA's May 10, 1996, letter to us. 
References to page numbers in our draft report have been changed to
refer to the appropriate page numbers in our final report.  Each VHA
comment is followed by our evaluation. 

VHA COMMENT 1

[This comment responds to GAO's reporting on page 2 that facilities
receive scant pressure to effect efficiencies but do so when they
want to implement new services or expand existing ones.]

Headquarters normally makes a commitment to support a facility's
budget before the beginning of the fiscal year starts.  However, 1996
is an exception in that the initial allocation of resources are
delayed due to the uncertainty as to the outcome of the Congressional
action for the fiscal year.  This budget provides incentives for the
facility to figure out how to operate during the year at a lower
per-unit-of-service cost.  Any savings that the facility can make
during the year after meeting savings targets can be put back into
either enhancing the level of service in specific areas or into
expanding services.  In addition to a prospective budget, the Central
Office, for the past three years, established facility budgets using
per-capita prices for five different risk groups.  While some of
these groups include bed-service care; e.g., the extended care group,
the largest risk group, basic care, has no inpatient/outpatient
designation.  In this risk group, a facility receives budget credit
based solely on the number of patients that they will care for times
a single average price.  A significant amount of information is
provided facilities and VISNs on their relative cost, casemix [sic]
and productivity.  This peer comparison is structured to promote the
treatment of patients with the most appropriate care in the most
cost-effective manner.  In developing the 1997 allocation prices, VHA
will be developing incentives for shifting to ambulatory care. 

The Resource Allocation Methodology (RAM), which was used to make
adjustments to medical centers' budgets during fiscal years
1985-1990, provided more workload credit for inpatient care.  Over
the years, VHA has tried to remedy the situation.  In 1995, under the
Resource Planning and Management (RPM) system, VHA changed the
structure of the workload classification system to promote primary
and ambulatory care.  As VHA is preparing for the FY 1997 budget
allocation, the Capitation Advisory Panel will be making
recommendations to provide incentives in the resource allocation
system for ambulatory surgery.  As VHA develops a capitation-based
resource allocation system for FY 1998, it will continue its ongoing
efforts to promote incentives for ambulatory care. 

GAO EVALUATION

We believe VHA has taken these remarks out of context.  We reported
that, historically, VA's central office provided few incentives for
facilities to become more efficient.  Furthermore, the report goes to
say that recent changes at VA are starting to create the types of
efficiency incentives that have long existed in the private sector. 
The remainder of this section of the report discusses the kinds of
changes, such as capitation funding and establishment of performance
measures, VA is making to create efficiency incentives. 

VHA COMMENT 2

[This comment responds to GAO's reporting on page 10 that many
veterans leave the VA system when they become eligible for Medicare.]

This is misleading, because while a VA study of inpatients only
(Feitz) reveals some VA inpatients do leave VA upon reaching age 65,
many do return in the following years, especially as outpatients
(Hisnanick).  A large proportion (46 percent) of VA unique patients
across both inpatient and outpatient care are Medicare eligible. 

GAO EVALUATION

We did not mean to imply that all veterans leave the VA system or
even that those who leave the system discontinue all use of VA
services.  We have revised the wording in the final report to state
that many veterans reduce their use of the VA system when they become
eligible for Medicare. 

When veterans have both Medicare and VA coverage, they overwhelmingly
use Medicare.  In 1990, for example, almost 62 percent of
Medicare-eligible veterans used Medicare but no VA services during
the year; 7 percent used VA but no Medicare services; and 8 percent
used a combination of both Medicare and VA services.  About 24
percent did not use services under either program. 

While most Medicare-eligible veterans rely primarily on
private-sector providers participating in Medicare for their health
care needs, Medicare-eligible veterans do, as VHA points out, and as
we have pointed out in previous reports, account for about half of
VA's workload.\27

VHA COMMENT 3

Throughout the report, you continually shift your statements from
inpatient care to outpatient care without adequately differentiating
them.  This is at times confusing or misleading. 

GAO EVALUATION

Changes have been made in the final report to clarify discussions of
inpatient and outpatient care as appropriate. 

VHA COMMENT 4

Pages 10 & 11.  Your discussion seems to hinge on comments made in a
VA Inspector General report (report no.  2AB-A02-059, dated March 31,
1992), regarding outpatient provisions of Public Law 100-322.  VHA
finds it inappropriate to base these specific findings and
conclusions upon findings in the Inspector General report, which were
based on one tertiary care facility.  This certainly cannot be deemed
to represent the system as a whole, nor can it be assumed that the
same concerns identified at this location, and a satellite outpatient
clinic also cited in the Inspector General report, would necessarily
be found at all other VA health care facilities. 

GAO EVALUATION

The IG's report discussed problems at two facilities--the Allen Park
VA medical center and the Columbus, Ohio, outpatient clinic.  The
Allen Park facility was, the IG report notes, "...selected as the
review site in consultation with VHA program officials because it was
considered to be a typical outpatient environment in an urban
tertiary care facility." It was selected as a typical tertiary care
facility because VHA had previously expressed concern that the
findings at the Columbus outpatient clinic did not represent
conditions at a typical tertiary care outpatient clinic. 

One of the recommendations in the IG's report was that VHA conduct
reviews of each facility's outpatient workload to identify the
proportion of visits properly classified as mandatory, discretionary,
and ineligible using the definitions relevant to current law.  VHA,
however, was unwilling to conduct such reviews, which might possibly
have disproved the IG's findings or shown the problems to be isolated
to a few facilities.  As of May 1996, VHA still has not conducted the
recommended reviews. 

Although we focused on a single IG report in our testimony, the IG
found lax enforcement of eligibility provisions at many other medical
centers.\28 In addition, our recent work on VA access points found no
indication that VA requires access point contractors to establish
veterans' eligibility or priority for care or that contractors were
making such determinations for each new condition. 

Perhaps the strongest evidence to suggest that the IG's work and our
work on access points represent the system as a whole is VHA's recent
comments to the Ranking Minority Member of the Senate Committee on
Veterans' Affairs on our March 20, 1996, testimony on eligibility
reform.\29 According to VHA,

     "...VA physicians generally practice with little real regard for
     the illogical eligibility rules.  Indeed, it appears to me as if
     these rules are more of a hassle factor than anything
     else--bureaucratic barriers to be circumvented in one way or
     another in the interest of taking care of patients.  In fact,
     over the last 7 years VHA has provided approximately 200 million
     outpatient visits and about 7 million hospital admissions, but
     there has not been one instance where an administrator or
     practitioner has been reprimanded for violating the eligibility
     rules, despite several GAO and IG reports finding `varying
     interpretations of the statutory outpatient eligibility
     criteria,' incorrect coding of mandatory visits, physicians `not
     consistently involved in required clinical examination to
     determine eligibility status,' and other such things."

VHA COMMENT 5

Nowhere in the Inspector General audit does it state that "VA
incorrectly applied inpatient eligibility categories to its
outpatients," which insinuates that administratively, VHA field
facilities used inpatient eligibility criteria to determine a
veteran's eligibility for outpatient care.  It is repeatedly implied
that veterans were provided outpatient care under the auspices of the
"obviate-the-need for hospital care" criterion.  In the Inspector
General's opinion, some of these veterans did not medically fit their
definition of "obviate-the-need for hospital care," because many of
these individuals were treated for chronic conditions. 

GAO EVALUATION

VA is mixing up the IG's two distinct findings, one of which concerns
an administrative determination of the veterans' priority for care
and the other of which deals with the medical determination of
whether outpatient care was needed in preparation for, as a follow-up
to, or to obviate the need for hospital care.  With respect to the
administrative determination of veterans' priorities for care, the IG
found that VA was not reporting outpatient workload according to the
mandatory and discretionary care categories established under the
Public Law 100-322 and was instead reporting workload on the basis of
the mandatory and discretionary care categories set in 1986 by Public
Law 99-272 and still applicable to hospital care.  We have, however,
clarified the wording in the final report to indicate that VA was
incorrectly reporting workload. 

VHA COMMENT 6

The Inspector General report implies that VHA may be providing
outpatient care to veterans who are otherwise eligible for
discretionary care, but not to the outpatient care they are
receiving.  However, there is disagreement as to whether or not this
statement is true, in that in some cases VA provides care that
clinical staff deem to be mandatory under the "obviate-the-need"
criterion, but which some do not see as clearly meeting the
administrative definition of mandatory as defined in Public Law
100-322.  This appears to be what you are referring to when stating
that VA is incorrectly applying inpatient eligibility categories,
although one has nothing to do with the other. 

GAO EVALUATION

We were careful in our report to distinguish between the IG's two
major findings.  First, the IG reported that VHA's budget plans do
not accurately reflect statutory definitions for outpatient
eligibility according to the mandatory and discretionary care
categories defined in Public Law 100-322.  Second, the IG reported
that VA has not adequately defined the conditions and circumstances
under which outpatient treatment may be provided to obviate the need
for hospitalization.  When we discuss veterans obtaining care for
which they were not eligible, we are not discussing differences
between being in the mandatory and discretionary care category. 
These categories define priorities for care, not eligibility for
care.  What we are referring to is providing veterans eligible for
only hospital-related care services that are not needed in
preparation for, as a follow-up to, or to obviate the need for
hospital care. 

VHA COMMENT 7

Policy directives are in place to guide administrative staff on the
eligibility provisions of Public Law 100-322.  These directives spell
out mandatory versus discretionary outpatient medical care from an
administrative perspective.  The Inspector General, and by extension
GAO, through its use of the Inspector General report, are concerned
with the fact that "obviate-the-need for hospital care" is not
clearly defined.  This leads, in their opinion, to providing
inappropriate care to veterans, who are determined eligible, based on
their need for care to obviate the need for hospital care. 
Eligibility under this criterion is a medical decision and not an
administrative decision. 

GAO EVALUATION

We agree that interpreting the obviate-the-need criterion is a
medical decision.  That fact does not, in our opinion, preclude
issuance of guidelines intended to bring greater consistency to those
medical decisions or independent reviews to determine compliance with
those guidelines. 

Medical decisions are questioned every day.  For example, a primary
purpose of utilization review is to examine the reasonableness of a
physician's medical decisions.  Similarly, a preadmission
certification program uses an independent party to evaluate the
reasonableness of the medical decisions physicians make to admit
their patients to hospitals. 

Similarly, practice guidelines are frequently issued setting
expectations for how physicians will practice.  For example, at our
urging, VA issued guidelines defining what constitutes a complete
physical examination for women veterans.  Those guidelines set
expectations that VA physicians will provide women veterans complete
cancer screening examinations at recommended intervals.  Similarly,
as noted elsewhere in its comments, VA recently required its Veterans
Integrated Service Network (VISN) directors to establish formularies
of medications to guide VA physicians toward prescribing certain
drugs. 

VHA COMMENT 8

Page 13.  You indicate that because of separate planning processes,
there might be double counting, in that the projected new workload
may well be associated with the activations.  Budgeting for
activations requirements in 1997 is modified as the medical care
request does not include "line item" requests for the activation of
specific projects.  The networks will activate projects from within
the level of resources provided in their total Medical Care 1997
budget allocations. 

GAO EVALUATION

We included the updated information in the final report. 

VHA COMMENT 9

Page 13.  Although VA facilities received separate reimbursement for
the workload generated through those sharing agreements, the workload
was nevertheless included in VA's justification of its budget
request.  In 1994, VA provided care to about 45,000 unique sharing
agreement patients.  No appropriated funds are requested for this
workload since it is supported by reimbursements from DOD and other
sharing partners.  Even though our base workload counts do include
sharing, the levels are small and the inclusion of sharing makes no
material difference in our workload presentations.  The Resource
Planning and Management (RPM) model excludes data for sharing
patients in developing changes in both unique patients and cost per
unique patient.  The actual patient counts for the last actual year
are straightlined in all RPM projections.  In addition, some of the
DOD sharing agreement earnings are for non-patient workload such as
pounds of laundry processed, etc. 

GAO EVALUATION

We have expanded the discussion in our final report to include the
information VA provided.  Because the workload data VA reported to
the Congress included services provided under sharing agreements, VA
was, in the past, receiving appropriated funds to pay for services
paid for through sharing agreements. 

VHA COMMENT 10

Page 15.  VA agrees that there are potential opportunities for
savings which will allow VA to operate more effectively and
efficiently.  We are actively pursuing these opportunities, including
most of those initiatives cited in the report.  However, it is
important to qualify your estimate of billions in savings.  It is
impossible to project savings for some of the cited initiatives.  To
do so establishes peg points for reducing VA resources without any
real justification. 

GAO EVALUATION

We agree that estimating precise savings from all of the initiatives
included in this report is impossible.  That is why we conservatively
estimated that VA could save billions through management improvements
over a 7-year period.  To the extent possible, we have cited
estimates developed by VA program officials and the VA IG. 

We do not agree, however, that VA should not establish "peg points"
for reducing VA's budget request on the basis of planned savings and
then monitor management initiatives to determine whether the savings
were realized.  Effectively determining future resource needs is
impossible without tracking savings.  In its fiscal year 1997 budget
request, VA seeks an increase over the fiscal year 1996 appropriation
to offset inflation.  The actual increase, however, is really much
higher because no offsetting decrease exists in the request to
compensate for any management savings likely to occur during the
year, such as efficiency improvements expected to occur through full
implementation of VISNs. 

VHA COMMENT 11

Assuming a 5 percent compound annual inflation requirement, VA
medical care would need to be 40 percent more efficient in order to
operate at Congress' straightlined 1995 level of $16.2 billion
through 2002.  It is highly unlikely that VA could reach these
dramatic savings without severely impacting the level of health care
currently provided to veterans.  These additional savings would be
over and above the $10.5 billion in savings that have resulted from
the VA medical care budget increasing at a rate less than the Medical
Consumer Price Index over the period from 1980 through 1995. 

GAO EVALUATION

VHA's comparison of increases in its budget with increases in the
medical consumer price index are inappropriate.  VA's inpatient
hospital workload--which accounts for over one-half of VA's medical
care budget--declined dramatically between 1980 and 1995, while less
costly outpatient workload increased just as dramatically.  Comparing
the increase in the overall budget with the consumer price index is
inappropriate without considering changes in workload over the time
period.  A more appropriate comparison would be to compare the
increase in VA's average cost of hospital, nursing home, and
outpatient care with growth in the consumer price index.  For
example, while VA's medical care budget increased by about 170
percent between 1980 and 1995 (from $6.0 billion to $16.1 billion)
the cost of a day of care in a VA hospital increased by over 305
percent (from $154 to $625). 

VHA COMMENT 12

Page 15.  You often point out savings expected from reduced acute
inpatient care, but seem to ignore large increases needed in
outpatient and other non-institutional care programs for current
levels of eligible veterans and the greater use of VA services by
veterans despite their population reductions. 

GAO EVALUATION

We agree that savings from shifting nonacute inpatient care to other
settings will be partially offset by increased costs under other
programs.  We do not agree, however, that shifting nonacute care to
outpatient settings will result in large increases in outpatient
demand.  Veterans who use VA for inpatient care already receive
significant amounts of their care as outpatients.  For example, in
fiscal year 1995, veterans with no service-connected conditions who
were hospitalized in a VA facility during the year received, on
average, over 15 outpatient visits from VA clinics. 

We discuss the increased demand for outpatient care on page 5 of the
report. 

VHA COMMENT 13

Page 15.  Since 1979, VA medical facilities have had the option to
dispense multi-month quantities of locally determined medications to
eligible veteran patients.  Due to a number of reasons, including
budgetary limitations, lack of automation to facilitate
implementation, and patient care concerns, only a small number of VA
medical facilities implemented such programs in the 1980's. 
Subsequent to an expressed interest in this program by the Congress
and GAO in the early 1990's, additional guidance was distributed to
all facilities regarding implementation of the program.  Again, due
to budgetary and patient care concerns; e.g., psychiatric patients,
some facilities have been slow to adopt the program.  Despite slow
implementation by some facilities, there has been a dramatic increase
in the use of this program in recent years.  For example, in FY 1994,
9 million fewer prescriptions were dispensed by VA pharmacies due to
multi-month dispensing.  In FY 1995, this figure increased to 15
million fewer prescriptions, and VHA anticipates further efficiencies
in FY 1996.  We believe we have implemented this program in a prudent
manner, balancing quality of care issues and budgeting issues.  In
addition, VHA issued analysis and guidance to medical facilities in
FYs 1994 through 1996, and will continue to monitor the impact and
implementation of the program. 

GAO EVALUATION

Our report, in reflecting the estimated savings in fiscal year 1995,
recognizes the progress VA has made since issuance of our 1992
report.  It seems to us, however, that budgetary concerns, rather
than slowing implementation of more cost-effective drug-dispensing
methods, would encourage quicker implementation.  This is
particularly true because essentially no start-up costs are involved
in going from a 30-day prescription to a 90-day prescription. 

VHA COMMENT 14

Access points are not alternatives to VA outpatient clinics.  They
include VA operated outpatient clinics as well as contractual or
sharing agreements.  The term "access points" was used to reorient
managers' attitudes toward outpatient care; i.e., not as pre- or
post-hospital care but as a veteran's principal contact with the
system. 

The cost of outpatient treatment would generally be lower than the
cost of inappropriate hospital days.  The cost of privately provided
outpatient care is not necessarily lower than the cost of VA-provided
outpatient care.  One would expect a facility to arrange for private
provision of only those services which can be obtained at less cost. 

GAO EVALUATION

We have clarified the wording of this part of the final report.  Our
recent review of access points suggests that VA medical centers that
have established access points have generally found that contracting
for services is less expensive when an access point serves a
relatively small number of veterans.  As the number of veterans
served by an access point increases, the decision on whether to
contract for services or provide them directly becomes more
difficult. 

VHA COMMENT 15

The issue of new users attracted to VA by the opening of new clinics
is exaggerated.  The purpose in establishing access points is to
improve access to VA services by veterans, not to expand the system. 
We acknowledge that establishing access points may result in new
users to the system.  The net effect does not appear substantial in
that between 20 and 30 percent of individuals treated by VA in each
year are new to the VA system. 

GAO EVALUATION

We believe the suggestion that making health care services more
accessible does not substantially affect veterans' use of VA services
is naive.  Elsewhere in its comments, VHA presented data showing that
as the number of VA outpatient clinics increased 72 percent between
1980 and 1995, the number of outpatient visits increased by 53
percent. 

Although VA may be correct in stating that 20 to 30 percent of the
veterans who use VA services each year did not use VA services the
year before, we used a more conservative approach in estimating new
users.  In our analyses, we considered veterans to be "new" users
only if they had not used VA services within the preceding 3
consecutive years.  Veterans who had used VA within the 3-year
period--about 4 to 5 million veterans nationwide--were considered
current users.  In other words, we considered only those veterans
attracted to the access points who had not sought VA care for over 3
years new users. 

VHA COMMENT 16

Page 17.  Your comment that VA could realize potentially $100 million
in savings through use of a national formulary is most likely
overstated.  If the intention is that overall pharmaceutical
expenditures be reduced by $100 million through implementation of a
national formulary, this is misleading.  In all probability, savings
realized through volume committed contracts will be offset by new
therapies.  For example, this year new agents for the treatment of
HIV/AIDS have been granted accelerated approval by the Food and Drug
Administration.  It is estimated that VA expenditures will increase
by over $50 million annually for the new HIV/AIDS therapies.  It is
also very difficult to predict how much lower VA can drive drug
prices, keeping in mind that Public Law 102-585 established drug
pricing for VA that is much more favorable than for other managed
care organizations. 

GAO EVALUATION

Because VHA could not provide an estimate of potential savings from
establishing a national formulary, we included a "ballpark" estimate
of what potential savings could be if the formulary allowed VA to
save 10 percent of its pharmaceutical costs.  We recognize that the
estimate has no precision but note that VHA's directive on
establishing VISN formularies notes that the advantages of such
formularies are decreased inventory, increased efficiency, and lower
pharmaceutical prices. 

Although savings from establishing VISN formularies or a national
formulary may be used to offset increased costs for new therapies or
for other uses, we nevertheless believe that the savings, and how
they are used, should be accounted for in VA budget submissions. 

VHA COMMENT 17

VA has taken a number of additional actions to improve management of
pharmaceuticals in the last six years.  VISN network formularies have
been established which will evolve into a national formulary, by
approximately April 1997.  More important is the approval by the
Under Secretary for Health of the Pharmacy Benefit Management (PBM)
function as part of the restructured VHA.  Basically, the PBM will
address (1) contracting for pharmaceuticals to ensure the most
efficient and effective contract processes; (2) the most efficient
and effective distribution systems for pharmaceuticals (e.g.,
consolidated mail outpatient pharmacies); and, (3) the appropriate
utilization of pharmaceuticals through the issuance of evidence-based
disease management protocols, treatment protocols and drug use
protocols.  VHA is also testing commercial software to compare
pharmaceutical utilization against these established protocols and to
measure outcomes achieved from drug therapy.  In short, the goal of
the PBM is to reduce overall health care costs through appropriate
use of pharmaceuticals, not reduce the cost of individual
pharmaceuticals. 

GAO EVALUATION

The final report has been revised to indicate that VHA has taken
other actions to improve management of pharmaceuticals. 

VHA COMMENT 18

Page 17.  VHA had strategically planned to consolidate mail
prescription processing through automated technology well before
1992.  In fact, through research and development at the VA Medical
Center Nashville, TN beginning in 1990, VHA essentially developed the
automated prescription dispensing technology that is on the
commercial market today.  GAO's 1992 report was not the determining
factor prompting VA's decision to implement consolidated mail
outpatient pharmacies or the timing of their implementation.  Timing
of the implementation was actually influenced by the development of
suitable technology associated with efficient human resources
management.  Due to the fact that none of the existing mail
prescription facilities is operating at full capacity, it is too
early for either VA or GAO to estimate annual cost avoidance. 
Experience to date suggests that substantial savings will accrue. 
How much savings is also very difficult to estimate due to the fact
that technology is continually evolving. 

GAO EVALUATION

Our report does not indicate that VA's decision to establish
consolidated mail service pharmacies was in response to our January
1992 report.  Our report, did, however, recommend that VA require
pharmacies to maximize the use of 90-day supplies when dispensing
maintenance drugs.  It also contained recommendations on the location
and operation of the bulk processing centers. 

We got our estimate of savings from VA pharmacy officials. 

VHA COMMENT 19

Page 19.  The 1991 study is based on FY 1986, or ten year old data. 
The 1993 study is based on 1989 data.  In both studies, trained
reviewers were instructed to assume all levels of care were available
at each VA medical center in the determination of the appropriateness
of inpatient services.  In the 1991 study, social factors were only
considered if documented in the patient's chart.  In the 1993 study,
reviewers were explicitly instructed not to consider social factors
in the determination of the appropriateness of inpatient care.  This
would, of course, have bearing on the conclusions drawn in the
current GAO report. 

GAO EVALUATION

We reviewed the two studies because VA, the National Performance
Review, and the Independent Budget cite them as support for their
views that eligibility reform would allow VA to shift 20 to 43
percent of nonacute admissions to outpatient settings.  We agree with
VA that the assessments of the "appropriateness of inpatient care"
under both studies were based on application of medical necessity
criteria, not on whether extenuating circumstances, such as
nonavailability of an ambulatory surgery program, long travel
distance, and eligibility restrictions, might lead to nonacute
admissions.  A secondary goal of the studies, however, was to provide
some insights into the reasons for nonacute care.  Our comments are
based on the reasons for nonacute admissions identified by the
researchers.  For example, the 1993 study notes that "hospital
reviewers were asked to prioritize up to three reasons for each
nonacute admission and day of care." The reviewers, in identifying
reasons for nonacute admissions, looked both at the availability of
other care settings and social factors.  For example, the study notes
that "[l]ack of an ambulatory care alternative was the most important
reason for nonacute admissions to surgery."

VHA COMMENT 20

You fault VA for nonacute inpatient admissions.  Yet in order to
shift much of this nonacute care of mandatory VA inpatients to
cost-effective outpatient alternatives when outpatient eligibility is
discretionary or limited, VA needs the outpatient eligibility reform
tool.  VA gets blamed for both the problem and the solution when much
of the problem stems from the complexity of or lack of outpatient
eligibility in order to achieve the best patient and system outcomes. 

GAO EVALUATION

As discussed in our March 20, 1996, testimony before the Senate
Committee on Veterans' Affairs, we see little basis for linking
nonacute admissions to VA hospitals to eligibility restrictions. 
Rather, nonacute admissions are most often caused by the VA system's
inefficiencies, VA's resource allocation systems that have
historically rewarded VA medical centers for choosing inpatient over
outpatient care, and the system's slowness in developing ambulatory
care facilities.  VA continues to emphasize expanding hospital
capacity over outpatient capacity in its fiscal year 1997 budget
submission.  VA proposes to spend over $383 million, including about
$75 million in fiscal year 1997, to build major hospital capacity in
two markets that already have a surplus of private-sector beds. 

VHA COMMENT 21

Your report minimizes the role of outpatient eligibility as a reason
for nonacute admissions.  The Smith study notes: 

     "Practitioner reasons such as conservative practice for
     admissions and delays in discharge planning for nonacute days of
     care accounted for 32% of nonacute admissions and 43% of
     nonacute days of care for medical service.  Lack of availability
     of an ambulatory program for surgery and invasive medical
     procedures explained 36% of nonacute admissions to surgery and
     18% to medicine.  Other important reasons for nonacute
     admissions included social and environmental reasons such as
     homelessness, and long travel distances to the hospital. 
     Administrative reasons included admissions to permit placement
     in nursing homes, payment for travel or for disability
     evaluations. 

GAO EVALUATION

For the following reasons, we believe the above quotation supports
our position that the study did not attribute most nonacute
admissions to eligibility problems. 

  -- "Conservative practice was," the study notes, "generally
     interpreted by reviewers to mean both that no other social, VA
     system, or regulation [emphasis added] reason was identifiable,
     and the decision of the practitioner to admit the patient to the
     acute hospital service was an example of conservative medical
     practice."

  -- "Delays in discharge planning" would contribute to nonacute days
     of care, not to nonacute admissions.  Nor were those nonacute
     days of care the result of eligibility restrictions.  Under
     current law, all veterans are eligible for posthospital
     outpatient treatment. 

  -- The quotation cites the lack of an ambulatory "program" for
     surgery and invasive medical procedures, not the lack of patient
     eligibility for such services as the cause of nonacute
     admissions. 

  -- Social and environmental reasons such as homelessness and travel
     distance are unrelated to eligibility restrictions. 

  -- Two of the three administrative reasons cited (admissions to pay
     travel reimbursement and admissions to perform disability
     examinations) are not related to eligibility for health care
     services.  The requirement that veterans with no
     service-connected disabilities be admitted to VA hospitals
     before they can be placed in community nursing homes is an
     eligibility-related limitation.  The study found that this
     limitation accounted for 2.5 percent of the nonacute admissions
     to acute medical wards. 

VHA COMMENT 22

[This comment responds to GAO's reporting that the Smith study
recommended only minor changes in VA eligibility provisions,
specifically, that VA establish a systemwide utilization program and
that VA has not established such a review function.]

The final report of the Smith study, 1993, did not make "minor"
recommendations related to outpatient eligibility as you suggest.  Of
the three recommendations, which follow, two are related to limited
outpatient eligibility and its impact upon the development and
availability of such care: 

A.  VA should establish a system-wide program for using the ISD
criteria for utilization review with emphasis on identifying the
local and systemic reasons for nonacute admissions and days of care
and for monitoring the effectiveness of changes in policy. 

B.  VA physicians need to be encouraged to make greater use of
ambulatory care alternatives and to be more effective and timely in
planning for patient discharges. 

C.  VA needs to facilitate the shift of care from the inpatient to
the outpatient setting.  This should include incentives in the
reimbursement methodology for providing ambulatory care, changes in
eligibility regulations that promote rather than prohibit ambulatory
care, prioritization of construction funds and seed funds for new
programs to support the shift to ambulatory care. 

GAO EVALUATION

VA does not need eligibility reform to implement either of the first
two recommendations.  VHA agreed with the recommendation made in our
report that it establish an independent preadmission certification
program to reduce inappropriate admissions to VA hospitals.  In
addition, VA has, through its emphasis on primary care, encouraged
the shift to ambulatory care.  Nor does VA need eligibility reform to
change its reimbursement methodology to promote ambulatory care (such
a change is under way through RPM) or to prioritize construction
funds to facilitate the shift toward ambulatory care (VA continues to
seek construction funds primarily for hospital construction rather
than ambulatory care programs). 

Concerning the recommendation to change eligibility "regulations,"
the detailed section of the Smith report recommended that legislation
be enacted to (1) allow veterans with nonservice-connected
disabilities to be placed in VA-supported community nursing homes
without first being admitted to a VA hospital and (2) remove
limitations on eligibility for outpatient compared with inpatient
services such as dental services and provision of needed prosthetic
devices.  The eligibility reform proposal developed by VA would allow
direct admission of nonservice-connected veterans to community
nursing homes and the provision of prosthetic devices on an
outpatient basis for treating nonservice-connected conditions.  The
VA proposal would not remove the limitations on provision of dental
services on an outpatient basis. 

Trying to link the studies discussed here to broader VA eligibility
reform is inappropriate because the studies did not contain the types
of data needed to make such a link.  In other words, the studies did
not determine whether the patients inappropriately admitted to VA
hospitals had service-connected or nonservice-connected disabilities,
the degree of any service-connected disability, whether they were in
the mandatory or discretionary care category for outpatient care, or
whether they would have been eligible to receive the services they
needed on an outpatient basis.  Had such information been included in
the studies, it would be possible to determine whether a higher
incidence of nonacute admissions occurred for veterans eligible for
only hospital-related outpatient services than for those eligible for
comprehensive outpatient services.\30

VHA COMMENT 23

In a more detailed section, the Smith report notes: 

     "The most important reason for nonacute admissions to surgical
     services in previous VA studies and in this study was the lack
     of an available ambulatory care alternative.  This was also an
     important reason for nonacute admissions to medical services. 
     These findings support the need to facilitate the shift of care
     from an inpatient to an outpatient setting."

GAO EVALUATION

Elsewhere in its comments, VHA maintains that the reviewers
conducting the study were expressly told to assume that all care
settings were available.  It seems to us to be inconsistent to now
cite the study's finding that the most important reason for nonacute
admissions to surgical services was the lack of an ambulatory care
alternative. 

We agree, however, that VA's slowness in developing ambulatory care
capabilities is a primary reason for nonacute admissions to VA
hospitals.  We applaud VHA's recent efforts to expand such
capabilities. 

VHA COMMENT 24

One of the four specific detailed recommendations of the Smith study
was: 

     "The eligibility regulations need to be adjusted to encourage
     outpatient rather than inpatient care.  Legislation will be
     needed to allow contract nursing homes to be reimbursed by VA
     for patients admitted directly from outpatient status to nursing
     home care.  Limitations need to be removed on eligibility for
     outpatient as compared to inpatient services such as dental
     services and provision of needed prosthetic devices."

GAO EVALUATION

We cited this recommendation in our report, and we believe we
correctly characterize it as suggesting only minor changes in VA
eligibility provisions.  Rather than recommending a significant
expansion of VA eligibility, it recommends three specific changes
affecting a relatively small portion of VA benefits--nursing home
care, dental care, and prosthetics. 

VHA COMMENT 25

Contrary to the statement in the report, VHA has had a systemwide
utilization review (UR) program since October 1993.  In planning for
this program, VHA's Office of Quality Management initiated a
utilization management (UM) pilot study in 1992.  The UM pilot study
had a two-fold purpose.  One, to provide guidance for development of
a national policy and data base to assist managers at all levels in
VHA to assess the appropriateness and efficiency of resource
utilization.  Second, to determine the reliability and validity of an
appropriateness measure that facilities could use to determine the
extent and causes of these allegedly inappropriate admissions and
days of care.  The UM pilot study concluded in November 1992.  A UR
national training program was conducted in the summer of 1993, prior
to implementation in October 1993.  In addition to the internal UR
program, VHA has also actively pursued the potential of external
utilization review for national data collection to address system
issues. 

GAO EVALUATION

We have clarified the wording in the final report to indicate that VA
does not have a utilization review program focusing on medical
necessity.  VA's current utilization review program focuses almost
exclusively on quality of care. 

VHA COMMENT 26

VHA is currently assessing the use of pre-admission reviews
systemwide as a method to encourage the most cost-effective,
therapeutically appropriate care setting.  A number of facilities
have adopted some form of pre-admission reviews already and their
models are being reviewed.  In addition, VHA is implementing a
performance measurement and monitoring system which contains a number
of measures for which all network directors and other leaders will be
held accountable.  Several of these measures, such as percent of
ambulatory surgery done at each facility, and implementation of
network-based utilization review policies and programs will move the
VA system towards efficient allocation and utilization of resources. 

GAO EVALUATION

We have added a discussion of VHA's current efforts to the final
report. 

VHA COMMENT 27

Page 25.  With VHA restructuring, resources are allocated to the
network director.  VISN directors now have both the responsibility
and incentive to examine cost variations among facilities within
their network.  Network directors are at the cutting edge, assessing
the current configuration of VA health services and costs in order to
make decisions on redirecting resources to achieve a more efficient
and patient centered health care system. 

GAO EVALUATION

We agree that the VISN restructuring and the planned move to
capitation funding should lead to an increased emphasis on
efficiency, as discussed in the final report. 

VHA COMMENT 28

The National Cost Containment Center (NCCC) was premised on the goal
of analyzing costs across the system to identify opportunities for
improvement.  They have published numerous analyses.  In addition,
VHA clinical technical advisory groups; e.g., the Chronic Mental
Illness group, also analyze costs on a programmatic level. 

GAO EVALUATION

We recognize that VA has taken some steps, through the NCCC and
Technical Advisory Groups, to analyze particular cost variations
across the system to identify potential efficiencies.  These efforts
are a step in the right direction, but VA needs more comprehensive
evaluations of unit cost variations, their link to facility
performance, and the need for changes to supporting data systems to
improve comparisons.  Such evaluations and improved data systems will
be necessary to ensure a successful transition to a capitation system
and provide for the needed accountability in the system for workload,
efficiency, and other performance targets. 




--------------------
\27 See, for example, Veterans Health Care:  Most Care Provided
Through Non-VA Programs (GAO/HEHS-94-104BR, Apr.  25.  1994) and
Veterans' Health Care:  Use of VA Services by Medicare-Eligible
Veterans (GAO/HEHS-95-13, Oct.  24, 1994). 

\28 See, for example, Audit of Selected Activities Department of
Veterans Affairs Medical Center Muskogee, Oklahoma, Report No. 
3R6-A99-053, VA Office of Inspector General (Washington, D.C.:  Feb. 
19, 1993); Audit of Medical Center Fort Lyon, Colorado, Report No. 
1R5-F03-026, VA Office of Inspector General (Washington, D.C.:  Jan. 
23, 1991); and Audit of VA Medical Center Denver, Colorado, Report
No.  1R5-F03-050, VA Office of Inspector General (Washington, D.C.: 
Apr.  5, 1991). 

\29 The comments were provided in a May 10, 1996, letter from the
Under Secretary for Health to the Ranking Minority Member of the
Senate Committee on Veterans' Affairs. 

\30 This is a limitation in how the studies can be used, not a
deficiency in how the studies were conducted. 


RELATED GAO PRODUCTS
=========================================================== Appendix 0

VA Health Care:  Approaches for Developing Budget-Neutral Eligibility
Reform (GAO/T-HEHS-96-107, Mar.  20, 1996). 

VA Health Care:  Opportunities to Increase Efficiency and Reduce
Resource Needs (GAO/T-HEHS-96-99, Mar.  8, 1996). 

VA Health Care:  Issues Affecting Eligibility Reform
(GAO/T-HEHS-95-213, July 19, 1995). 

VA Health Care:  Challenges and Options for the Future
(GAO/T-HEHS-95-147, May 9, 1995). 

VA Health Care:  Retargeting Needed to Better Meet Veterans' Changing
Needs (GAO/HEHS-95-39, Apr.  21, 1995). 

VA Health Care:  Barriers to VA Managed Care (GAO/HEHS-95-84R, Apr. 
20, 1995). 

Veterans' Health Care:  Veterans' Perceptions of VA Services and VA's
Role in Health Reform (GAO/HEHS-95-14, Dec.  23, 1994). 

Veterans' Health Care:  Use of VA Services by Medicare-Eligible
Veterans (GAO/HEHS-95-13, Oct.  24, 1994). 

Veterans' Health Care:  Implications of Other Countries' Reforms for
the United States (GAO/HEHS-94-210BR, Sept.  27, 1994). 

Veterans' Health Care:  Efforts to Make VA Competitive May Create
Significant Risks (GAO/T-HEHS-94-197, June 29, 1994). 

Veterans' Health Care:  Most Care Provided Through Non-VA Programs
(GAO/HEHS-94-104BR, Apr.  25, 1994). 

VA Health Care:  A Profile of Veterans Using VA Medical Centers in
1991 (GAO/HEHS-94-113FS, Mar.  29, 1994). 

VA Health Care:  Restructuring Ambulatory Care System Would Improve
Service to Veterans (GAO/HRD-94-4, Oct.  15, 1993). 

VA Health Care:  Comparison of VA Benefits With Other Public and
Private Programs (GAO/HRD-93-94, July 29, 1993). 


*** End of document. ***