    VA Hospitals: Issues and Challenges for the Future (Chapter Report,
    04/30/98, GAO/HEHS-98-32).

    Pursuant to a congressional request, GAO reviewed major issues and
    challenges that Congress and the administration will face in the next
    few years concerning Department of Veterans Affairs (VA) hospitals,
    focusing on: (1) how VA and community hospitals' care evolved during the
    twentieth century, including changes in supply and demand; (2) factors
    contributing to the declining demand; (3) the extent of excess capacity;
    (4) actions taken to increase efficiency and compete for patients; and
    (5) changes in hospitals involved in training the nation's physicians
    and conducting medical research.

    GAO noted that: (1) both community and VA hospitals are struggling to
    survive; (2) demand for hospital care abruptly reversed and has steadily
    declined since the 1980s in community hospitals and since the 1960s in
    VA hospitals; (3) although many factors contributed to the reversal,
    medical advances and changes in health insurance mainly drove changes to
    community hospitals; (4) VA hospitals, however, were mainly affected by
    declining numbers of veterans and the improving health care options
    available to veterans through Medicare and other insurance; (5) GAO's
    work, and studies by others, suggest that if trends continue, 60 percent
    or more of community hospital beds and over 80 percent of VA hospital
    beds may not be needed in the next 15 years; (6) if such reductions
    occur, many hospitals will cease operation; (7) VA's current strategy
    for attracting new users may not generate the demand needed to preserve
    VA hospitals; (8) new users have indicated they are more likely to
    choose their local hospitals rather than a distant VA facility; (9) if
    VA decides to directly compete with community hospitals for market
    share, then it will have to subsequently decide whether to adopt
    private-sector marketing techniques; (10) both VA and community
    hospitals are fundamentally changing the ways they operate; (11) such
    changes include the hospitals' basic structure and management;
    reinvention of basic work, procurement, and supply processes;
    development of new marketing strategies; and methods and procedures of
    monitoring and delivering patient care; (12) teaching hospitals' use of
    medical residents as a lower cost labor source is often seen as
    contributing to the oversupply of physicians; (13) Congress, through the
    Balanced Budget Act of 1997, gave non-VA teaching hospitals financial
    incentives through the Medicare program to reduce residency positions;
    (14) both VA's strategic goals and the incentives it is creating through
    some of its restructuring efforts suggest that VA, like many community
    hospitals, is focusing its marketing efforts on attracting
    revenue-generating patients; (15) decisions on the future of VA
    hospitals, whether they mean closing hospitals or opening them to
    nonveterans, have significant implications for veterans, VA employees,
    affiliated medical schools, community hospitals, and taxpayers; and (16)
    therefore, Congress and the administration must have sufficient
    information for properly assessing the potential effects of VA's health
    care system changes on all stakeholders.

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

     REPORTNUM:  HEHS-98-32
         TITLE:  VA Hospitals: Issues and Challenges for the Future
          DATE:  04/30/98
       SUBJECT:  Comparative analysis
                 Veterans hospitals
                 Community hospitals
                 Health care programs
                 Hospital care services
                 Cost effectiveness analysis
                 Physicians
                 Medical education
                 Health resources utilization
                 Hospital bed count
    IDENTIFIER:  Civilian Health and Medical Program of the Department of
                 Veterans Affairs
                 Civilian Health and Medical Program of the Uniformed
                 Services
                 CHAMPUS
                 Medicare Program
                 Medicaid Program
                 DOD TRICARE Program
                 VA Veterans Integrated Service Network
                 Federal Employees Health Benefits Program
                 VA Northern California Health Care System
                 VA Veterans Equitable Resource Allocation System

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

    Report to the Chairman, Committee on Veterans' Affairs, U.S.  Senate

    April 1998

    VA HOSPITALS - ISSUES AND
    CHALLENGES FOR THE FUTURE

    GAO/HEHS-98-32

    VA Hospital Issues

    (406117)

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

      ADC - average daily census
      AHA - American Hospital Association
      AHCPR - Agency for Health Care Policy and Research
      AIDS - acquired immunodeficiency syndrome
      AMA - American Medical Association
      BDOC - bed-days of care
      BPA - blanket purchase agreement
      CBOC - community-based outpatient clinic
      CEO - chief executive officer
      CHAMPUS - Civilian Health and Medical Program of the Uniformed
         Services
      CHAMPVA - Civilian Health and Medical Program for the Department of
         Veterans Affairs
      CPR - Criteria for Potential Realignment
      CPT - cost per test
      CT - computerized tomographic
      DEAPP - decentralized equipment assessment and planning program
      DOD - Department of Defense
      DRG - diagnosis-related group
      DSS - decision support system
      FACCT - Foundation for Accountability
      FDA - Food and Drug Administration
      FEHBP - Federal Employees Health Benefits Program
      FMS - Financial Management System
      FSS - federal supply schedule
      FTE - full-time equivalent
      GME - graduate medical education
      GSA - General Services Administration
      HCA - Hospital Corporation of America
      HCFA - Health Care Financing Administration
      HBHC - Hospital-Based Home Care
      HEDIS - Health Plan Employer Data and Information Set
      HHS - Department of Health and Human Services
      HIAA - Health Insurance Association of America
      HMO - health maintenance organization
      ICU - intensive care unit
      IHO - integrated health organization
      IOM - Institute of Medicine
      IRS - Internal Revenue Service
      MRI - magnetic resonance imagers
      MSA - medical savings account
      MSO - management service organization
      NAS - National Academy of Sciences
      NAC - National Acquisition Center
      NCHCS - Northern California Health Care System
      NCQA - National Committee for Quality Assurance
      NIH - National Institutes of Health
      OBRA - Omnibus Budget Reconciliation Act
      OIG - Office of Inspector General
      PBM - pharmacy benefit management
      PET - positron-emission tomography
      PHO - physician hospital organization
      PHS - Public Health Service
      POS - point of service
      PPO - preferred provider organization
      PPS - prospective payment system
      PRIME - Primary Care Education
      PTSD - post-traumatic stress disorder
      RAM - Resource Allocation Method
      RPM - Resource Planning and Management
      RUG - Resource Utilization Group
      SSI - Supplemental Security Income
      VA - Department of Veterans Affairs
      VHA - Veterans Health Administration
      VERA - Veterans Equitable Resource Allocation
      VISN - Veterans Integrated Service Network

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

    B-277634

    April 30, 1998

    The Honorable Arlen Specter
    Chairman
    Committee on Veterans' Affairs
    United States Senate

    Dear Mr.  Chairman:

    In response to a request by the former Chairman, this report, VA
    Hospitals:  Issues and Challenges for the Future (GAO/HEHS-98-32,
    Apr.  30, 1998), discusses major issues and challenges that the
    Congress and the administration will face in the next few years
    regarding VA (Department of Veterans Affairs) hospitals.  The report
    examines how VA and community hospitals' care evolved during the 20th
    century, including changes in supply and demand, factors contributing
    to the declining demand, the extent of excess capacity, and actions
    taken to increase efficiency and compete for patients.

    We are sending copies of the report to appropriate congressional
    committees, the Secretary of Veterans Affairs, and other interested
    parties.  We will also make copies available upon request.

    If you have any questions concerning the report, please call me at
    (202) 512-7101.  Other major contributors are listed in appendix XI.

    Sincerely yours,

    Stephen P.  Backhus
    Director, Veterans' Affairs and
     Military Health Care Issues

    EXECUTIVE SUMMARY
    ============================================================ Chapter 0

       PURPOSE
    ---------------------------------------------------------- Chapter 0:1

    Hospitals, which account for over 40 percent of U.S.  health care
    expenditures are changing rapidly and dramatically.  Cost-containment
    efforts, the effects of advancing technology, and the changing health
    care needs of an aging population are driving these changes.  More
    specifically, use of community hospitals has declined since 1980,
    with the average number of patients in community hospitals declining
    by almost 27 percent.  Likewise, use of the 173 hospitals operated by
    the Department of Veterans Affairs (VA) has steadily declined since
    the 1960s.  The average daily workload of VA hospitals has declined
    about 66 percent from 1963 through 1995.

    The Chairman, Senate Committee on Veterans' Affairs, asked GAO to
    identify major issues and challenges that the Congress and the
    administration will face in the next few years concerning VA
    hospitals.  In doing so, GAO compared VA and community hospitals
    regarding

      -- how hospital care evolved during the 20th century, including
         changes in supply and demand;

      -- factors contributing to the declining demand;

      -- the extent of excess capacity; and

      -- actions taken to increase efficiency and compete for patients.

    GAO also studied changes in teaching hospitals, that is, hospitals
    involved in training the nation's physicians and conducting medical
    research.  Nearly three-fourths of VA hospitals are involved in
    medical education or research.

       BACKGROUND
    ---------------------------------------------------------- Chapter 0:2

    About 6,300 hospitals were registered with the American Hospital
    Association in 1995--about 5,200 community hospitals and 1,100
    noncommunity hospitals.  Community hospitals include nonfederal,
    short-term general hospitals such as (1) nonprofit; (2)
    investor-owned, for-profit; and (3) state- and local government-owned
    hospitals.  Noncommunity hospitals include federal hospitals,
    long-term care hospitals, psychiatric hospitals, institutions for the
    mentally retarded, and hospitals providing inpatient treatment for
    substance abuse.

    VA hospitals constitute a large single group of noncommunity
    hospitals.  In fiscal year 1996, VA's system operated an average of
    45,798 hospital beds, including both acute medical and psychiatric
    care beds, and admitted about 802,996 patients.  In addition to
    hospitals, the VA health care system includes 375 outpatient clinics,
    130 nursing homes, and 39 domiciliaries.  For fiscal year 1997, VA
    obligated about $17 billion to maintain and operate these facilities,
    and, on a limited basis, contract for care from non-VA providers.

    VA is in the midst of a major reorganization of its health care
    system.  It has replaced its four large health care regions with 22
    Veterans Integrated Service Networks (VISN), intended to shift the
    focus of the health care system from independent medical facilities
    to groups of facilities collaborating to provide efficient,
    accessible care to veterans in their service areas.

       RESULTS IN BRIEF
    ---------------------------------------------------------- Chapter 0:3

    Both community and VA hospitals are struggling to survive.  After
    years in which hospital beds were filled as fast as they became
    available, demand for hospital care abruptly reversed and has
    steadily declined since the 1980s in community hospitals and since
    the 1960s in VA hospitals.

    Although many factors contributed to the reversal, medical advances
    and changes in health insurance mainly drove changes to community
    hospitals.  VA hospitals, however, were mainly affected by declining
    numbers of veterans and the improving health care options available
    to veterans through Medicare and other insurance.  VA hospitals have
    been less affected by payment and other reforms than have community
    hospitals.  As a result, further reductions in use of VA hospitals
    will likely occur as VA strives to shift more of its care to
    outpatient and other more cost-effective settings.

    Because of the wide variation in both VA and community hospital use
    in different parts of the country, it is difficult to predict, with
    any certainty, how many hospital beds will be needed in the future.
    GAO's work, and studies by others, suggest, however, that if trends
    continue, 60 percent or more of community hospital beds and over 80
    percent of VA hospital beds may not be needed in the next 15 years.
    If such reductions occur, many hospitals--some say over half--will
    cease operation.

    VA's current strategy for attracting new users--establishing
    community-
    based outpatient clinics mainly at sites remote from VA
    hospitals--may not generate the demand needed to preserve VA
    hospitals.  New users have indicated they are more likely to choose
    their local hospital rather than a distant VA facility.  Other
    countries, such as Australia, have opened their veterans hospitals to
    nonveterans to build workload.  Allowing VA hospitals to treat more
    nonveterans could increase use of VA hospitals and broaden VA's
    patient base, strengthening VA's medical education mission.  Such
    action could, however, jeopardize the future of nearby community
    hospitals.  Essentially, every new patient entering a VA hospital is
    a patient not served by a community hospital.  If VA decides to
    directly compete with community hospitals for market share, then it
    will have to subsequently decide whether to adopt private-sector
    marketing techniques such as advertising and improving amenities and
    offering discount prices to managed care plans.

    The declining use of community hospitals and VA's vast purchasing
    power could allow VA, like managed care plans, to negotiate
    significant discounts from community hospitals.  Such contracts could
    also help improve some community hospitals' financial viability by
    increasing patient workload.

    Although many hospitals will most likely close, others are changing
    their operations and their relationships with other hospitals and
    health care providers.  Both VA and community hospitals are
    fundamentally changing the way they operate.  Such changes include
    the hospitals' basic structure and management; reinvention of basic
    work, procurement, and supply processes; development of new marketing
    strategies; and methods and procedures for monitoring and delivering
    patient care.  VA has focused attention on such areas as materials
    management and development of clinical guidelines and outcome
    measures.  VA has not focused attention on other areas such as
    transforming basic work processes, contracting for patient and
    nonpatient care services, and marketing.

    Teaching hospitals face additional challenges.  Such hospitals' use
    of medical residents as a lower cost labor source is often seen as
    contributing to the oversupply of physicians.  The Congress, through
    the Balanced Budget Act of 1997, gave non-VA teaching hospitals
    financial incentives through the Medicare program to reduce residency
    positions.  VA is also reducing its number of residents.  Both VA and
    community hospitals are also increasing efforts to train primary care
    physicians in response to the increased demand for them.  Finally,
    such hospitals are developing new sources of support for medical
    research as the availability of funds from their traditional sources
    becomes more uncertain.

    As nonprofit and for-profit hospitals try to reduce costs for paying
    patients by decreasing the amount of uncompensated care (defined as
    the sum of charity care and bad debt) furnished, public hospitals,
    particularly public teaching hospitals, are spending more of their
    resources on such care.  Community hospitals' efforts to reduce the
    amount of charity care they provide could increase demand for VA
    hospital care by veterans who lack health insurance or the resources
    to pay for care.  Both VA's strategic goals and the incentives it is
    creating through some of its restructuring efforts suggest that VA,
    like many community hospitals, is focusing its marketing efforts on
    attracting revenue-generating patients.

    Decisions on the future of VA hospitals, whether they mean closing
    hospitals or opening them to nonveterans, have significant
    implications for veterans, VA employees, affiliated medical schools,
    community hospitals, and taxpayers.  Therefore, the Congress and the
    administration must have sufficient information for properly
    assessing the potential effects of VA's health care system changes on
    all stakeholders.

       PRINCIPAL FINDINGS
    ---------------------------------------------------------- Chapter 0:4

          ROLE OF VA AND COMMUNITY
          HOSPITALS HAS EVOLVED
    -------------------------------------------------------- Chapter 0:4.1

    The role of America's hospitals has profoundly changed in this
    century.  In the first three-quarters of the century, advances in
    medical technology and the development of private and public
    insurance led to rapid growth in demand for hospital care.  Other
    factors, most notably two world wars and the subsequent expansion of
    VA's role in treating low-income veterans during the Great
    Depression, significantly increased demand for VA hospital care
    during the 1930s and 1940s.

    With an apparently insatiable demand for hospital care, federal
    programs encouraged construction of additional private-sector and VA
    hospital beds.  But, by the 1960s and 1970s, health care spending was
    growing rapidly, consuming an increasing portion of the gross
    domestic product.  Hospitals accounted for the largest and a growing
    portion of the increases.  In the 15 years after the 1965 creation of
    the Medicare and Medicaid programs, hospital spending increased from
    28 to 44 percent of overall health care spending.

    As concern about rising health care costs grew, the role and fortune
    of America's hospitals again began to change in the early 1980s.  The
    steadily increasing supply of and demand for hospital beds during the
    first three-
    quarters of the century turned to steady decreases.  By 1995, the
    number of community hospital beds had fallen to 873,000 after peaking
    at slightly over 1 million.  Community hospitals began to close in
    increasing numbers; between 1975 and 1995, the number of community
    hospitals decreased by about 12 percent.  During the same 20-year
    period, VA did not close any VA hospitals because of declining
    utilization.

          VA WAS SLOW TO TAKE FULL
          ADVANTAGE OF CHANGES IN
          MEDICAL TECHNOLOGY
    -------------------------------------------------------- Chapter 0:4.2

    In the first three-quarters of the century, advancing technology
    increased demand for hospital care; however, recent innovations have
    had the opposite effect.  Advances, such as laser and other less
    invasive surgical techniques, allow much care previously provided in
    hospitals to be provided at home, on an outpatient basis, or in a
    nursing home.  For example, cataract removal, which is performed over
    1.3 million times a year, is now done on an outpatient basis.
    Similarly, developments in psychotherapeutic drugs allow people with
    mental illnesses who in the past would have had lengthy
    institutionalizations to obtain treatment on an outpatient basis.

    Until the last few years, demand for VA inpatient medical and
    surgical care was not affected by such medical advances as much as
    was demand for care in community hospitals.  Because its methods for
    allocating resources to its facilities favored inpatient hospital
    care, VA was slow in developing outpatient surgery and other such
    services.

    VA has implemented a new resource allocation method that encourages
    care in outpatient and other cost-effective settings, and VA
    facilities are now aggressively shifting patients from inpatient to
    outpatient care.  All VA hospitals now have outpatient surgery
    capability, and the percentage of surgeries performed on an
    outpatient basis increased from 35 percent in fiscal year 1994 to 52
    percent in fiscal year 1996.  This, in turn, has dramatically
    decreased inpatient surgeries:  56 of the 129 VA hospitals that
    performed inpatient surgeries in fiscal year 1996 had, on average,
    fewer than 25 beds occupied on any given day.

    VA's success in decreasing the number of inpatient surgeries is
    reducing the financial viability of many of VA's inpatient surgery
    programs and could threaten their ability to provide quality care.
    In addition, some of the programs may have become too small to
    continue to support medical residents.

          DEMAND FOR VA CARE LARGELY
          UNAFFECTED BY CHANGES IN
          INSURANCE
    -------------------------------------------------------- Chapter 0:4.3

    The establishment of prospective payment, capitation, and other
    payment reforms under Medicare, Medicaid, and private health
    insurance provided community hospitals strong financial incentives to
    reduce hospital admissions and lengths of stay.  Similarly, insurers'
    increased focus on medical necessity through such programs as
    preadmission certification reduced both admissions to, and lengths of
    stay in, community hospitals.

    These payment and utilization control methods, however, had a limited
    effect on demand for care in VA hospitals because VA hospitals do not
    financially depend on insurance payments.  Studies by GAO, the VA
    Inspector General, and VA researchers found as recently as 1992 that
    over 40 percent of the admissions and days of care provided in VA
    acute medical and surgical beds were non-acute.

    VA is implementing several changes in allocating funds to its
    hospitals and managing patient care to imitate changes in public and
    private insurance.  Although some of the changes hold promise for
    creating financial incentives at the hospital network level for
    reducing unnecessary hospital use, we have testified that VA has not
    adequately studied the reasons for cost variations among hospital
    networks.  Absent the risk of nonpayment for non-acute admissions
    that exists in the private sector, VA physicians may not change their
    admission practices.  For example, data from both the Washington,
    D.C., and Martinsburg, West Virginia, VA medical centers indicate
    that about 45 percent of acute inpatient admissions and about 60
    percent of acute days of care in both facilities did not meet
    standards for acuity or intensity of care.

          SEVERAL FACTORS HAVE REDUCED
          DEMAND FOR VA HOSPITAL CARE
    -------------------------------------------------------- Chapter 0:4.4

    Several factors help explain the reduced use of VA hospitals that
    started in the 1960s and suggest that the trend will continue.
    First, the veteran population has been declining since 1980 and, by
    2010, is expected to total about 20 million, roughly one-third less
    than in 1980.

    Second, the introduction of Medicare has led to older veterans using
    VA hospitals less.  Even as the veteran population declines, an
    increasing proportion is reaching age 65 and becoming Medicare
    eligible.  This is important because almost all veterans become
    eligible for Medicare when they turn 65, even if they were previously
    employed in jobs that did not provide health insurance.  Elderly
    veterans' use of VA hospitals dropped by 50 percent between 1975 and
    1996.

    Finally, increased enrollment in health maintenance organizations and
    other managed care plans affected demand for VA hospital care by
    reducing the financial incentive of their policyholders who are
    veterans to use VA hospitals.  Managed care plans generally have no
    or minimal cost sharing for inpatient hospital services.

    Recent and proposed changes in the VA system and other health care
    programs could affect future demand for VA hospital care.  For
    example, the creation of medical savings accounts under the Medicare
    program might increase demand for VA hospital care by
    Medicare-eligible veterans.  On the other hand, recent changes to
    make it easier for people to maintain insurance coverage when they
    change jobs could decrease demand for VA hospital care.

          DECLINING DEMAND FOR
          HOSPITAL CARE COULD LEAD TO
          EXTENSIVE CLOSURES OF VA AND
          COMMUNITY HOSPITALS
    -------------------------------------------------------- Chapter 0:4.5

    Because of the declining demand for inpatient hospital care,
    community hospitals have hundreds of thousands of unused hospital
    beds.  Overall, about 228,000 community hospital beds (about 26
    percent) could have been closed in 1995, leaving hospitals to operate
    at the 85-percent occupancy level (generally considered the optimum).
    At the other extreme, as many as 572,000 community hospital beds
    (about 66 percent) may not be needed in the next 15 years.

    Occupancy rates for VA hospitals were generally higher than those for
    community hospitals in 1995, meaning that fewer of VA's operating
    beds (about 14 percent) exceeded demand.  But actions to improve the
    efficiency of the VA health care system, coupled with other changes
    in the health care marketplace, are reducing the demand for VA
    hospital care.  As a result, more than 80 percent of VA hospital beds
    might not be needed in the future if, as a system, VA can achieve the
    rate of hospital use already achieved by its Northern California
    Health Care System.

    Considerable uncertainty exists, however, about the ability of both
    VA and community hospitals to achieve such uniformity.  Many factors,
    such as differences in age, health status, medical practice, and
    insurance coverage, affect the rate of hospital use.

    The number and use of both VA and community hospital beds vary widely
    nationwide.  Use of community hospital beds ranged from 1.1 beds per
    1,000 population in three states (Alaska, Utah, and Washington) to
    over 4 beds per 1,000 population in North and South Dakota and the
    District of Columbia.  Similarly, use of VA hospital beds ranged from
    6 per 1,000 system users in VISN 18 (Phoenix) to 21 beds per 1,000
    users in VISN 3 (Bronx).

    Variation in the use of VA hospitals tends to mirror the variation in
    use of community hospital beds.  For example, the census division
    with the highest community hospital utilization also had the three
    VISNs with the highest rate of VA hospital use.  The generally lower
    rates of hospital use in states with higher concentrations of managed
    care plans suggest that with the right incentives, variation due to
    differences in medical practice can be reduced.

    VA and the private sector have reacted differently to declining
    inpatient workload.  The private sector has closed hundreds of
    hospitals in the past 20 years.  VA, however, has not closed any
    hospitals because of declining utilization, choosing instead to
    reduce the number of operating beds or close particular services,
    such as inpatient surgery.  This has frequently left VA operating
    only a small part of a hospital's physical capacity.

    Closing beds clearly saves money by reducing staffing costs.  But,
    with fewer patients to absorb the fixed costs of operating a
    facility, the cost per patient treated rises.  At some point, it
    becomes more cost-effective to close the hospital and provide care
    through either another VA hospital or contracts with community
    hospitals.

    With the likelihood that most VA and private-sector hospital beds
    will exceed needs within the next 15 years, the administration and
    the Congress face difficult challenges and policy decisions about the
    future of VA hospitals.  Among the challenges VA faces concerning
    closure of VA hospitals is determining the process to be followed.
    Where hospital closures are warranted, VA will face additional
    challenges to ensure that veterans' hospital care needs are met
    through either community hospitals or other VA hospitals and that the
    effects on VA employees, VA's academic affiliates, and the community
    are lessened.

          HOSPITAL STRUCTURE AND
          MANAGEMENT ARE CHANGING
    -------------------------------------------------------- Chapter 0:4.6

    As they struggle to survive, community hospitals are increasingly
    forming alliances and networks with other hospitals and adding other
    types of health care services, such as nursing home and home health
    care; hiring outside management; and improving accounting and
    information systems to enable managers to better identify and
    eliminate inefficiencies.

    With the exception of hiring outside management, VA is similarly
    changing its health care system, and it faces many challenges.  For
    example, VA must decide to what extent its networks should include
    community hospitals to improve the accessibility of VA-supported
    hospital care.  VA also faces difficult challenges in ensuring that
    the information and financial management systems it is developing and
    implementing provide complete and accurate information that VISNs and
    individual hospitals need for decision-making.

          VA HAS FOCUSED LESS ON
          TRANSFORMING WORK PROCESSES
          THAN COMMUNITY HOSPITALS
          HAVE
    -------------------------------------------------------- Chapter 0:4.7

    VA has focused less attention on transforming its work processes than
    have community hospitals.  Community hospitals are trying to contain
    labor costs, which typically account for over 40 percent of hospital
    expenditures, by

      -- contracting for both patient care and nonpatient care services
         when it is less expensive than providing the care directly,

      -- using more part-time and temporary nurses and other health care
         professionals to increase flexibility in meeting changing
         workloads and patient mix,

      -- cross-training personnel to perform many jobs to more
         efficiently use available staff,

      -- developing nurse extender and other new auxiliary positions to
         allow nurses to devote more time to direct patient care, and

      -- restructuring the delivery of care to emphasize patient-centered
         care to increase efficiency and patient satisfaction.

    Until recently, VA's legislative authority did not allow it to
    contract for patient care services.  With this barrier now removed,
    VA is increasingly exploring options for contracting for both patient
    and nonpatient care services.

    One area in which VA appears to be moving in the opposite direction
    as the private sector is in use of part-time and intermittent
    employees.  Views on the effectiveness of using such employees vary,
    however, and VA will have to decide the extent to which it should
    follow community hospitals' lead.  Similarly, because views on the
    effectiveness of patient-centered care vary in the private sector, VA
    will have to decide the extent to which such initiatives should be
    implemented in VA hospitals.

          VA IS A LEADER IN MATERIALS
          MANAGEMENT
    -------------------------------------------------------- Chapter 0:4.8

    Materials management--the systems, functions, and tasks involved in
    obtaining supplies and moving them to the point of use--affects from
    25 to 45 percent of hospitals' operating budgets.  Effective
    materials management can allow nursing staff to spend more time with
    patients and reduce the staff, inventory, space, and other resources
    needed to ensure that supplies are available when needed.

    The VA health care system is a leader in materials management.  For
    example, VA has operated one of the country's largest purchasing
    cooperatives, the National Acquisition Center, since 1951.  The
    Center has over $10 billion in multiyear contracts in place for
    procuring pharmaceuticals, medical supplies, and medical equipment.
    By administering federal supply schedules and negotiating national
    contracts, the Center allows federal hospitals to buy drugs and
    medical supplies at discount prices.  An important issue facing the
    Congress is determining the extent to which nonfederal hospitals and
    health care facilities should be allowed to use federal supply
    schedules.

    VA is also pursuing opportunities to increase resource sharing with
    both government and nongovernment health care providers.  GAO
    previously identified barriers to effective sharing between VA and
    other federal agencies.  Subsequently, the Congress and VA removed
    most of the barriers.

    Another reason VA could not share resources with the private sector
    was because of limited legislative authority.  VA was limited to sale
    of specialized medical resources to nonfederal hospitals, clinics,
    and medical schools.  The Congress, through the Veterans' Health Care
    Eligibility Reform Act of 1996, removed most restrictions on VA's
    ability to buy services from and sell services to the private sector.
    The strategic plans developed by VA's health care networks discuss
    efforts to expand sharing among facilities and with other government
    facilities, the Department of Defense (DOD), and community providers.

          VA FOCUSES LESS ATTENTION ON
          MARKETING THAN COMMUNITY
          HOSPITALS DO
    -------------------------------------------------------- Chapter 0:4.9

    As excess capacity grows, community hospitals are increasingly
    seeking ways to keep current users and attract new ones.  Among the
    actions they are taking to build market share are improving hospital
    amenities, conducting market research and patient satisfaction
    surveys, advertising, contracting with HMOs and preferred provider
    organizations, and establishing service-delivery arrangements with
    physicians.

    VA has generally done less to market its hospital services than the
    private sector.  One reason for this is because VA facilities
    generally lack the privacy and amenities found in community
    hospitals.  In addition, VA does not use paid advertising to attract
    new users or enter risk-sharing agreements with either managed care
    plans or physicians to increase workload.  VA is, however, increasing
    the use of market research and patient satisfaction surveys and
    expanding efforts to sell its excess resources to DOD and others.

    If a decision were made to preserve VA hospitals by having them
    compete with private-sector hospitals, VA would need to target
    marketing efforts toward veterans and nonveterans living close to VA
    hospitals.  One approach for increasing demand would be for VA to
    grant admission privileges to privately practicing physicians.  This
    might increase referrals of veterans who normally obtain health care
    services from private practitioners.

    The potential effectiveness of this and other approaches to
    increasing market share, however, are questionable.  The widely held
    perception that VA hospitals are outdated, lack the patient amenities
    of community hospitals, and provide poor customer service will
    probably affect the decisions of both veterans and nonveterans.
    Targeting VA services toward patients with limited health care
    options might help increase VA's market share.

          BOTH VA AND COMMUNITY
          HOSPITALS ARE CHANGING THE
          WAY PATIENT CARE IS
          MONITORED AND DELIVERED
    ------------------------------------------------------- Chapter 0:4.10

    Both VA and community hospitals are more closely monitoring and
    managing the treatment of individual patients to ensure that they
    receive cost-effective care.  Specifically, hospitals are

      -- implementing clinical guidelines to help physicians and other
         caregivers follow cost-effective courses of treatment;

      -- developing outcome measures that would allow evaluating the
         hospital's and individual physicians' performance;

      -- performing outpatient tests and other procedures before or as an
         alternative to admitting patients; and

      -- discharging patients sooner to alternative settings, such as
         nursing home, home health, and hospice care.

    Considerable uncertainty exists in the private sector about the
    extent to which hospitals are following clinical guidelines.  Both VA
    and the private sector are developing and using outcome measures.
    Thus, the ultimate effect of changes in monitoring and delivering
    patient care on hospital efficiency remains largely unknown.

          HOSPITALS SHIFT FOCUS FROM
          UNCOMPENSATED CARE
    ------------------------------------------------------- Chapter 0:4.11

    Some believe that the burden of providing care to the uninsured has
    increasingly shifted to public, and particularly public teaching,
    hospitals.  Some public hospitals, however, have been changing to
    nonprofit or for-profit ownership.  How these changes will affect the
    future availability of charity care is unclear.  Many community
    hospitals seek to reduce the amount of uncompensated and charity care
    they provide and focus on attracting paying customers.

    On average, VA hospitals serve a higher proportion of uninsured
    people than any type of community hospital, including public
    hospitals.  Many of VA's restructuring efforts, however, have created
    incentives for VISNs and VA hospitals to reduce their focus on
    serving veterans who lack public or private insurance.  In addition,
    VA, like many community hospitals, has created strategic goals that
    focus on increasing market share rather than meeting the health care
    needs of uninsured veterans.

       RECOMMENDATIONS
    ---------------------------------------------------------- Chapter 0:5

    GAO is not making recommendations in this report.

       AGENCY COMMENTS
    ---------------------------------------------------------- Chapter 0:6

    In a letter dated March 5, 1998, the Assistant Secretary for Policy
    and Planning said that this report provides an extensive assessment
    of the VA health care system from its inception to the present and
    accurately depicts the dynamic reengineering of the Veterans Health
    Administration (VHA) into the type of organization needed to ensure
    that VA patients receive needed care.  The letter states that VA
    considers the report a valuable tool for helping the Department as it
    develops strategic initiatives to provide seamless health care
    service to veterans.

    Although VA agrees with the issues and challenges raised in this
    report, the letter stated, the Department does not necessarily agree
    with GAO's conclusions on VA's approach to the issues, the effect of
    continued reengineering on veterans, and the direction of its health
    care system.  The report is intended to identify and analyze the
    implications of different approaches to restructuring the veterans
    health program, not to draw conclusions or recommend a direction for
    the program.  In addition, VA contends that issues GAO cites as not
    being addressed in VISN plans are addressed in VHA's guidance for the
    plans submitted in October 1997 and that future versions of the
    guidance will address these issues and others.  GAO recognizes that
    the plans it reviewed were the networks' first attempt at developing
    strategic plans, and GAO does not intend this as a criticism of VA's
    efforts to develop such plans or their contents.  GAO agrees that VA
    guidance on the plans now being submitted has many of the items GAO
    identified as not being addressed by the initial plans.

    In addition, VA wrote that it disagrees with the report's contention
    that eligibility reform and changes in contracting and resource
    allocation will cause the Department to focus less on serving
    service-connected veterans and on its safety net role regarding
    low-income or uninsured veterans.  The Department stated that 95
    percent of VA patients are veterans who meet congressional mandates
    for care and that the Veterans Equitable Resource Allocation (VERA)
    system focuses not simply on dollars per user but on dollars per
    mandatory user.  Moreover, VA commented that its strategic goals and
    performance measures focus on increasing VA's market share of
    mandatory veterans--not on increasing its share of all veterans or
    high-income veterans, as GAO's report implies.

    The report does not contend that VA will focus less on serving
    service-
    connected veterans or its safety net role regarding low-income or
    uninsured veterans.  GAO recognizes that VA's strategic goals and
    performance measures call for increasing VA's market share of
    mandatory veterans.  VA plans to help do this by increasing
    collections from third-party insurers for services provided to
    insured veterans and using those recoveries to enhance services to
    mandatory veterans.  GAO is concerned, however, that VERA and the new
    medical care cost recovery provisions could inadvertently provide
    financial incentives for individual facility managers to, at least in
    the short term, focus on serving revenue-
    generating veterans.  GAO is also concerned about the extent to which
    VA can recover its costs from treating nonmandatory veterans to
    permit it to maintain or increase services to mandatory veterans.

    INTRODUCTION
    ============================================================ Chapter 1

    Hospitals, which account for over 40 percent of U.S.  health care
    expenditures, are changing rapidly and dramatically.  Growing costs,
    advancing technology, and an aging population are driving these
    changes.  As health care costs have increased, both public health
    financing programs, such as Medicare and Medicaid, and private health
    insurers have fundamentally reformed their methods for paying for and
    managing hospital-provided health care.  Such reforms have not
    generally been implemented, however, in hospitals operated directly
    by the federal government, including those operated by VA.

       HOSPITAL CARE IS THE LARGEST
       COMPONENT OF HEALTH CARE
       EXPENDITURES
    ---------------------------------------------------------- Chapter 1:1

    Hospital care accounts for the largest component of national health
    care expenditures.  In 1995, hospitals accounted for 40 percent or
    about $441 billion of the nation's estimated $1.1 trillion in health
    care expenditures.  The next largest component of health care
    expenditures, physician services, accounted for just about 19
    percent.  (See fig.  1.1.)

       Figure 1.1:  Components of
       National Health Care
       Expenditures, 1995

       (See figure in printed
       edition.)

    Source:  Health Insurance Association of America (HIAA), Source Book
    of Health Insurance Data, 1995.  Data for 1995 are estimated.

       CATEGORIES OF HOSPITALS
    ---------------------------------------------------------- Chapter 1:2

    The American Hospital Association (AHA) groups hospitals into two
    primary categories--community and noncommunity.  Community hospitals
    include all nonfederal, short-term general, and other special
    hospitals whose facilities and services are available to the
    public.\1 Noncommunity hospitals include federal hospitals, long-term
    hospitals, hospital units of institutions, psychiatric hospitals,
    hospitals for tuberculosis and other respiratory diseases, chronic
    disease hospitals, institutions for the mentally retarded, and
    alcoholism and chemical dependency hospitals.

    For 1995, AHA reported that it had 6,291 hospitals registered in the
    United States, including 5,194 community and 1,097 noncommunity
    hospitals.  The community hospitals included

      -- 3,092 nongovernment not-for-profit,

      -- 752 investor-owned for-profit, and

      -- 1,350 state- and local government-owned hospitals.

    This report focuses primarily on community hospitals when discussing
    non-VA hospitals.  Such hospitals accounted for 873,000 of the
    nation's 1,081,000 beds and almost 31 million of the approximately 33
    million hospital admissions in 1995.

    --------------------
    \1 Hospitals are classified as either short-term or long-term,
    according to the average length of stay.  AHA defines a short-term
    hospital as one in which the average length of stay is less than 30
    days.

       VA HOSPITALS ARE A LARGE GROUP
       OF NONCOMMUNITY HOSPITALS
    ---------------------------------------------------------- Chapter 1:3

    VA hospitals account for 16 percent of all noncommunity hospitals.
    In fiscal year 1995, VA operated 173 of the 1,097 noncommunity
    hospitals, with an average of 50,787 hospital beds and admission of
    844,626 patients.

    In addition to hospitals, the VA health care system included 375
    outpatient clinics, 130 nursing homes, and 39 domiciliaries in 1995.
    For fiscal year 1995, VA obligated about $16.5 billion to maintain
    and operate its facilities and, on a limited basis, contract for care
    from non-VA providers.  Over $8.4 billion (51 percent) of its
    obligations were for operating VA hospitals (see fig.  1.2).

       Figure 1.2:  Components of VA
       Medical Care Obligations,
       Fiscal Year 1995

       (See figure in printed
       edition.)

    Notes:  Other includes VA's Civilian Health and Medical Program,
    health professions scholarships, medical and prosthetic research,
    grants for construction, and grants to the Republic of the
    Philippines.

    Source:  Annual Report of the Secretary of Veterans Affairs, Fiscal
    Year 1995.

       COMMUNITY AND VA HOSPITALS
       DIFFER
    ---------------------------------------------------------- Chapter 1:4

    VA hospitals differ from community hospitals in the following ways:

      -- Whom they can and do serve.  Community hospitals generally have
         no restrictions on whom they can serve.  A hospital's target
         population is limited primarily by the facility's capabilities
         and business decisions.  In contrast, VA hospitals have
         historically been limited to treating mainly veterans--adult
         males.  Recent eligibility and contracting reform legislation,
         as discussed below, has broadened the types of patients VA
         hospitals may treat.

      -- Whom they can buy care from and sell care to.  Community
         hospitals have few restrictions on their ability to contract to
         buy or sell patient care or nonpatient care services.
         Historically, VA facilities have been limited primarily to
         sharing health care services with other federal hospitals and
         with their medical school affiliates.  Recent legislation has
         removed most restrictions on VA contracting.

      -- Who pays for the care provided.  Most community hospital revenue
         comes from payments for patients sponsored by public payers
         (primarily Medicare and Medicaid) and private health insurers.
         Small portions also come directly from patients and state and
         local governments as operating subsidies.  VA hospitals receive
         funding through an annual appropriation process.  VA receives
         virtually no funding through Medicare and Medicaid and before
         August 1997 returned recoveries from private health insurance
         (other than a portion needed to cover the cost of operating the
         recovery program) to the general fund in the Department of the
         Treasury.\2 Although VA facilities relied almost entirely on
         appropriated funds, they were allowed to retain certain payments
         resulting from sale of health care resources to the Department
         of Defense (DOD), other federal facilities, and certain other
         providers.

    In addition, although most VA hospitals, like their community
    counterparts, focus on short-term acute care services, other VA
    hospitals focus more on psychiatric and long-term care services.
    Under the AHA definitions, hospitals that primarily focus on
    psychiatric care, long-term care, or specialty services, even if they
    also provide some short-term care, are considered noncommunity
    hospitals.  Systemwide, over 50 percent of VA's 50,787 operating beds
    in fiscal year 1995 were devoted to long-term care (intermediate
    medicine), specialized services (rehabilitation of the blind,
    treatment of spinal cord injuries, and rehabilitation medicine), or
    psychiatric care (see fig.  1.3).  About 18 percent of VA hospitals
    provide mainly psychiatric care.

       Figure 1.3:  Types of Hospital
       Beds Operated by VA, Fiscal
       Year 1995

       (See figure in printed
       edition.)

    Note:  Other specialized services include blind rehabilitation,
    spinal cord injury, and rehabilitative medicine.

    Source:  Annual Report of the Secretary of Veterans Affairs, Fiscal
    Year 1995.

    In administering the veterans' health benefits program authorized
    under title 38 of the U.S.  Code, some of VA's responsibilities are
    like those of the Health Care Financing Administration (HCFA) in
    administering Medicare benefits and like those of private health
    insurance companies in administering health insurance policies.  For
    example, VA is responsible for determining under the statute (1)
    which benefits veterans are eligible to receive, (2) whether and how
    much veterans must contribute toward the cost of their care, and (3)
    where veterans may obtain covered services (in other words, whether
    they must use VA-operated facilities or may obtain needed services
    from other providers at VA expense).  Similarly, VA, like HCFA and
    private insurers, is responsible for ensuring that the health care
    benefits provided to its beneficiaries--veterans--are (1) medically
    necessary and (2) provided in the most appropriate care setting
    whether that is a hospital, nursing home, or outpatient clinic.

    In operating a health care delivery program, VA's role is like that
    of the major private-sector health care delivery networks as operated
    by Kaiser Permanente.  For example, VA strives to ensure that its
    facilities (1) provide high-quality care, (2) are used to optimum
    capacity, (3) are located where they are accessible to their target
    population, (4) provide good customer service, (5) offer potential
    patients services and amenities comparable with those of competing
    facilities, and (6) operate effective billing and collection systems.

    --------------------
    \2 The Balanced Budget Act of 1997, enacted on Aug.  5, 1997,
    authorizes VA to use funds recovered or collected after June 30,
    1997, from private health insurance, veteran copayments, and certain
    other functions for furnishing medical care and services and
    defraying the expenses incurred in collecting the funds.  The funds,
    which are to be deposited in a VA Medical Care Collections Fund in
    the Treasury, are available to VA without fiscal year limitation.

       ELIGIBILITY FOR VETERANS'
       HEALTH BENEFITS HISTORICALLY
       FOCUSED ON HOSPITAL CARE
    ---------------------------------------------------------- Chapter 1:5

    Historically, VA health benefits were focused on hospital care;
    outpatient care for most veterans was limited to coverage of services
    that would prepare the veterans for hospitalization, obviate the need
    for hospitalization, or provide treatments needed following a
    hospitalization.  The Veterans' Health Care Eligibility Reform Act of
    1996, enacted in October 1996 (P.L.  104-262), eliminated the
    obviate-the-need provision and made all veterans eligible for
    comprehensive outpatient care.

          GENERAL REQUIREMENTS FOR
          RECEIVING VA HEALTH CARE
    -------------------------------------------------------- Chapter 1:5.1

    Any person who served on active duty in the uniformed services for
    the minimum amount of time specified by law and who was discharged,
    released, or retired under other than dishonorable conditions is
    eligible for some VA health care benefits.  The amount of required
    active-duty service varies depending on when the person entered the
    military and an eligible veteran's health care benefits depend on
    factors such as the presence and extent of a service-connected
    disability, income, and period or conditions of military service.\3

    --------------------
    \3 A service-connected disability is one that results from an injury
    or disease or other physical or mental impairment incurred or
    aggravated during active military service.  VA determines whether
    veterans have service-connected disabilities and, for those with such
    disabilities, assigns ratings of from 0 to 100 on the basis of the
    severity of the disability.  These ratings form the basis for
    determining both the amount of compensation paid to the veterans and
    the types of health care services for which they are eligible.

          OLD ELIGIBILITY RULES
    -------------------------------------------------------- Chapter 1:5.2

    Although all veterans meeting the above basic requirements were
    eligible for hospital, nursing home, and at least some outpatient
    care, before October 1996, 38 U.S.C.  1710 established a complex
    priority system--
    based on factors such as the presence and extent of any
    service-connected disability, the incomes of veterans with
    nonservice-connected disabilities, and the purpose of care needed--to
    determine which services were covered and which veterans received
    care within available resources.

    All veterans' health care benefits included medically necessary
    hospital and nursing home care, but certain veterans, referred to as
    category A or mandatory-care category veterans, had the highest
    priority for receiving care.  More specifically, the old law required
    VA to provide hospital care, and, if space and resources were
    available, allowed VA to provide nursing home care to veterans who

      -- had service-connected disabilities,

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

      -- were former prisoners of war,

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

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

      -- received disability compensation,

      -- received nonservice-connected disability pension benefit, or

      -- had incomes below the means test threshold (as of January 1996,
         $21,001 for a single veteran or $25,204 for a veteran with one
         dependent plus $1,404 for each additional dependent).

    For higher income veterans who did not qualify under these
    conditions, VA could provide hospital and nursing home care if space
    and resources were available.  These veterans, however, known as
    category C or discretionary care category veterans, had to pay a part
    of the cost of the care they received.

    Under the old law, VA provided three basic levels of outpatient care
    benefits:

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

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

      -- hospital-related care, which provided 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 applied to
    outpatient care.  Figure 1.4 summarizes mandatory and discretionary
    VA health benefits under the old law.

       Figure 1.4:  Mandatory and
       Discretionary VA Health Care
       Benefits Before Eligibility
       Reform

       (See figure in printed
       edition.)

          NEW ELIGIBILITY RULES
    -------------------------------------------------------- Chapter 1:5.3

    The Veterans' Health Care Eligibility Reform Act of 1996 (P.L.
    104-262) eliminated the criterion to obviate the need for hospital
    care and expanded eligibility for comprehensive outpatient services
    to all veterans.  In addition, the act provides the following:

      -- Expressly states that the availability of health care services
         for veterans in the mandatory care category is limited by the
         amounts appropriated in advance by the Congress.  The act has
         authorized appropriations of $17.25 billion for fiscal year 1997
         and $17.9 billion for fiscal year 1998.

      -- Removes about 1.2 million veterans with noncompensable service-
         connected disabilities from the mandatory care category.

      -- Requires VA to establish an enrollment process for managing
         demand within available resources.  The priorities for
         enrollment are (1) veterans with service-connected disabilities
         rated at 50 percent or higher; (2) veterans with
         service-connected disabilities rated at 30 or 40 percent; (3)
         former prisoners of war and veterans with service-connected
         disabilities rated at 10 or 20 percent; (4) catastrophically
         disabled veterans and veterans receiving increased
         nonservice-connected disability pensions because they are
         housebound or need the aid and attendance of another person to
         accomplish the activities of daily life; (5) veterans unable to
         defray the cost of medical care; (6) all other veterans in the
         so-called "core" group, including veterans of World War I and
         veterans with a priority for care based on presumed
         environmental exposure; and (7) all other veterans.  VA may
         create additional subdivisions within the enrollment groups.

    The enrollment process will be implemented over a 2-year period
    during which VA facilities may continue to treat veterans regardless
    of their enrollment status.  After September 30, 1998, however,
    veterans generally will need to be enrolled to receive VA care.
    Enrollment will be limited to the number of veterans VA can take care
    of within its available resources.

       ELIGIBILITY REFORM ACT GAVE VA
       MORE AUTHORITY TO CONTRACT FOR
       AND SELL HEALTH CARE SERVICES
    ---------------------------------------------------------- Chapter 1:6

    One of the most significant differences between the VA health care
    system and the private sector has been the limited ability of VA to
    purchase health care services from and sell such services to the
    private sector.  The Veterans' Health Care Eligibility Reform Act of
    1996, however, largely eliminated these differences.

          OLD CONTRACTING PROVISIONS
    -------------------------------------------------------- Chapter 1:6.1

    Before October 1996, veterans were generally limited to obtaining
    health care services from VA-operated facilities, with the following
    three main exceptions:

      -- VA-operated nursing home and domiciliary care was augmented by
         contracts with community nursing homes and by per diem payments
         for veterans in state-operated veterans' homes.

      -- VA paid private-sector physicians and other health care
         providers to extend care to certain veterans when the services
         needed were unavailable in the VA system or when the veterans
         lived too far from a VA facility (commonly referred to as
         fee-basis care).  VA limited use of fee-basis care mainly to
         veterans with service-connected disabilities.

      -- Veterans could obtain emergency hospitalization from any
         hospital and then be transferred to a VA hospital when their
         conditions stabilized.

    In addition, veterans being treated in VA facilities could be
    provided specific, scarce medical resources from other public and
    private providers through sharing agreements and contracts between VA
    and non-VA providers.

    Similarly, VA was generally not permitted to sell hospital and other
    health care services but could enter sharing agreements to obtain or
    provide

      -- health care services to DOD and other federal hospitals and

      -- specialized medical resources to federal and nonfederal
         hospitals, clinics, and medical schools.

    VA could not, however, sell health care services directly to veterans
    or others.

          NEW CONTRACTING PROVISIONS
    -------------------------------------------------------- Chapter 1:6.2

    The Veterans' Health Care Eligibility Reform Act of 1996 expanded the
    types of providers as well as the types of services for which VA may
    contract.  In addition, it simplified the procedures for complying
    with federal procurement processes when contracting with commercial
    providers.  Finally, the act eliminated the ban on VA contracting for
    patient care (which had been suspended through 1999).

    Following are the contracting provisions under the new law:

      -- VA may sell services to nonveterans but only if veterans will
         receive priority for care under such an arrangement and the
         arrangement is needed to maintain an acceptable level and
         quality of service or will result in improved services for
         veterans.

      -- VA may acquire--without regard to laws or regulations requiring
         use of competitive procedures--resources in instances when such
         resources are to be obtained from a VA-affiliated institution,
         including medical practice groups, blood banks, organ banks, or
         research centers.  When the health care resource is to be
         obtained from commercial sources, it is to be obtained in
         accordance with simplified VA-developed procurement procedures
         that would permit all responsible sources to compete for the
         resource being obtained.

      -- VA may contract with outside entities for converting VA
         activities to private activities.  Previously, Section 8110(c)
         of title 38 of the U.S.  Code prohibited contracting out of
         direct patient care activities or activities "incident to"
         direct care and permitted contracting out other activities, such
         as laundry and cleaning services, only on the basis of a
         VA-conducted cost-comparison study.  This section was repealed
         but the VA must still report annually on performance by
         contractor personnel of work previously performed by VA
         employees.

       UNLIKE PRIVATE-SECTOR
       HOSPITALS, VA HOSPITALS DO NOT
       DEPEND ON THIRD-PARTY PAYMENTS
    ---------------------------------------------------------- Chapter 1:7

    Unlike private-sector hospitals, VA hospitals do not depend
    financially on public and private health insurance.  As a result, VA
    hospitals are not at financial risk for inappropriate admissions,
    unnecessary days of care, and treatment of ineligible beneficiaries.

    Private-sector hospitals generally depend on payments from public and
    private insurance programs and their patients for their income.
    Private-sector hospitals are facing increased pressures from both
    private insurers and public health benefits programs, such as
    Medicare and Medicaid, to eliminate inappropriate admissions and
    reduce hospital lengths of stay.  For example, private health
    insurers increasingly use preadmission screening to ensure the
    medical necessity of hospital admissions and set limits on approved
    lengths of stay.  Although nothing prevents private-sector hospitals
    from admitting patients without an insurer's authorization, the
    hospital and the patient, rather than the insurer, become financially
    responsible for the care.

    Similarly, the Medicare prospective payment system and utilization
    reviews provide financial incentives for hospitals to provide
    services in the most appropriate setting and to discharge patients as
    soon as their medical conditions allow.  The financial incentive is
    particularly strong for hospital care financed under Medicare because
    the hospital is, in general, not allowed to charge beneficiaries for
    services determined to be medically unnecessary or inappropriate.

    Historically, VA hospitals and veteran patients have not faced these
    same risks.  VA hospitals do not face the same payment limitations
    and external utilization reviews that private-sector hospitals face.
    And, although VA hospitals can recover funds from veterans' private
    health insurance, failure to comply with private health insurers'
    preadmission screening and length-of-stay requirements has little
    direct financial effect on VA hospitals.  This is because (1) before
    1994 VA facilities were funded primarily on the basis of their
    inpatient workload and (2) before last year medical care cost
    recoveries were returned to the Department of the Treasury.\4

    --------------------
    \4 As of June 30, 1997, VA may use the funds to furnish medical care
    and services and defray expenses incurred in collecting the funds.
    With the passage of the Balanced Budget Act, VA must make available
    to each designated health care region an amount proportional to that
    collected by the region.  VA has not yet determined the extent to
    which the funds will be returned to the facility that provided the
    care.

       OBJECTIVES, SCOPE, AND
       METHODOLOGY
    ---------------------------------------------------------- Chapter 1:8

    During the past 5 years, we completed a series of reviews focusing on
    the many challenges facing the VA health care system and the
    potential role of VA in health care reforms.  This report, prepared
    at the request of the Chairman, Senate Committee on Veterans'
    Affairs, summarizes and expands on that body of work to identify
    major issues concerning the future of VA hospitals.\5 Specifically,
    it discusses

      -- the evolution of hospital care during the 20th century,

      -- factors contributing to the declining demand for hospital care
         in community and VA hospitals,

      -- the extent to which excess capacity exists in community and VA
         hospitals, and

      -- actions taken by community and VA hospitals to increase
         efficiency and compete for patients.

    In developing information on the evolution of hospital care, we
    relied on the legislative history of the veterans' health care
    provisions of title 38 of the U.S.  Code and articles and reports
    prepared by or for the Brookings Institution (1934);\6 House
    Committee on Veterans' Affairs (1967);\7 National Academy of Sciences
    (1977);\8 VA's Commission on the Future Structure of Veterans Health
    Care;\9 Congressional Research Service;\10 Twentieth Century Fund;\11
    and VA.\12 Information on the evolution of community hospitals came
    primarily from our 1985 report, Constraining National Health Care
    Expenditures:  Achieving Quality Care at an Affordable Cost
    (GAO/HRD-85-105, Sept.  30, 1985); the Source Book of Health
    Insurance Data, 1995;\13 AHA's Hospital Statistics; and HCFA's Data
    Compendiums.

    To identify factors contributing to the declining demand for care in
    community and VA hospitals, we

      -- interviewed policy analysts from associations and think tanks,
         including the American Medical Association (AMA), AHA, and the
         CATO Institute;

      -- obtained the views of representatives from the major veterans
         service organizations;

      -- reviewed many studies and reports on hospitals, including those
         prepared by the Pew Health Professions Commission, Prospective
         Payment Assessment Commission, Physician Payment Review
         Commission, HIAA, Hay Group, National Committee for Quality
         Health Care, Congressional Research Service, the former Office
         of Technology Assessment, HCFA, and VA;

      -- reviewed our prior reports and testimonies on VA health care,
         Medicare, and health care cost containment; and

      -- reviewed reports and studies on VA health care prepared by the
         VA Office of Inspector General and others.

    To estimate the amount of excess bed capacity in community and VA
    hospitals, we developed three approaches by adapting methods used in
    prior studies reviewed by the National Academy of Science's Institute
    of Medicine.  First, we developed a conservative measure of excess
    capacity based on the number of unused beds, assuming an 85-percent
    occupancy rate was appropriate.  Next, we developed estimates of
    additional excess capacity under differing assumptions about the
    amount of medically unnecessary care being provided.  Third, we
    developed estimates of longer term goals for reducing hospital beds
    based on selected targets of beds per 1,000 population (beds per
    1,000 users for VA).  Additional details on how we selected our
    approaches appear in chapter 6.

    To identify actions of community hospitals to increase efficiency and
    compete for patients, we used a three-tiered approach.  First, we
    identified, on the basis of our initial review of health care
    literature and discussions with health policy analysts, several
    specific actions taken by community hospitals.  Second, we refined
    and expanded this list through discussions with AHA, AMA, VA, and
    others.  Third, we conducted an extensive literature search using
    Healthstar, Econlit, and other search engines to identify pertinent
    literature on the list of specific actions.  We focused on studies
    that described the actions being taken, showed how extensively
    community hospitals were implementing the actions, described the
    intended benefits of the actions, and evaluated their effectiveness.

    We used a similar multitiered approach to determine VA actions.
    First, we provided the Veterans Health Administration a list of the
    community hospital actions and asked for information on the extent to
    which VA had taken or planned to take similar actions.  After
    receiving written responses from VA central office officials, we
    followed up to obtain additional details.  Second, we reviewed VA
    planning documents and reports, including the Under Secretary for
    Health's 1995 Vision for Change, 1996 Prescription for Change, and
    1997 Journey of Change, which contain the primary action plans for
    restructuring the VA health care system.  In addition, we reviewed
    the 1996 and 1997 network directors' performance measures; status
    reports on directors' meeting their performance goals; VA budget
    submissions for fiscal years 1996, 1997, and 1998; and VA's draft
    strategic plan prepared under the Government Performance and Results
    Act.  Third, we reviewed each of the 22 Veterans Integrated Service
    Networks' strategic plans, looking specifically for references to the
    types of actions being taken by community hospitals.  Finally, we
    obtained additional information on VA actions through interviews with
    VA officials from VHA, the National Acquisition Center, and the
    Office of General Counsel.

    Our work was conducted between January 1996 and January 1998 in
    accordance with generally accepted government auditing standards.

    --------------------
    \5 A list of related GAO products appears at the end of this report.

    \6 Gustavus A.  Weber and Laurence F.  Schmeckebier, The Veterans'
    Administration:  Its History, Activities and Organization
    (Washington, D.C.:  The Brookings Institution, 1934).

    \7 Medical Care of Veterans, House Committee Print No.  4, 90th
    Congress, 1st Session (Washington, D.C.:  Apr.  17, 1967).

    \8 Study of Health Care for American Veterans, pursuant to Section
    201(c) of Public Law 93-82, National Academy of Sciences, National
    Research Council (Washington, D.C.:  June 7, 1977).

    \9 Report of the Commission on the Future Structure of Veterans
    Health Care, VA (Washington, D.C.:  Nov.  1991).

    \10 Memorandum dated July 18, 1995, from Dennis W.  Snook, specialist
    in the Social Legislation, Education and Public Welfare Division,
    House Committee on Veterans' Affairs.

    \11 Michael K.  Taussig, Those Who Served:  Report of the Twentieth
    Century Fund Task Force on Policies Toward Veterans (Millwood, N.Y.:
    Draus Reprint Co., 1975).

    \12 VA History in Brief:  What It Is, Was, and Does, VA undated
    pamphlet (Washington, D.C.:  approximately 1986).

    \13 HIAA, 1995.

    EVOLUTION OF HOSPITAL CARE
    ============================================================ Chapter 2

    The role of America's hospitals has profoundly changed during this
    century.  During the first three-quarters of the century, advances in
    medical technology and the development of private and public health
    insurance led to unprecedented growth in the role of hospitals in the
    U.S.  health care system.  Other factors, most notably two world wars
    and the creation and subsequent expansion of VA's safety net mission
    during the Great Depression, significantly increased demand for VA
    hospital care during the 1930s and 1940s.  Both private-sector and VA
    hospitals were transformed from charitable institutions providing
    mainly custodial care into the preeminent providers of life-saving
    and -sustaining technologies.

    Because the demand for hospital care seemed insatiable, federal
    programs encouraged construction of additional private-sector and VA
    hospital beds.  But, by the 1960s and 1970s, health care spending was
    rising rapidly, consuming a growing portion of the gross domestic
    product.  Hospitals accounted for the largest and a growing portion
    of the increased spending.

    As concern about rising health care costs grew in the early 1980s,
    the role and fortunes of America's hospitals again began to change.
    The steadily increasing supply of and demand for hospital beds in the
    first three-
    quarters of the century began to decline.  More and more hospitals
    began to close.  In addition, the role of hospitals in overall health
    care spending stabilized, and, in the VA system, declined as hospital
    admissions declined and lengths of stay shortened.

       FIRST HALF OF THE 20TH CENTURY
       MARKED BY INCREASED DEMAND
    ---------------------------------------------------------- Chapter 2:1

    In the 19th century, hospitals mainly provided a place for people to
    die; little medical treatment was offered.  In addition, hospitals
    were basically charitable institutions; neither patients nor the
    government provided extensive financial support.  The late 19th
    century and first half of the 20th century saw the following changes
    both in the role of hospitals and in the financing of hospital care:

      -- Scientific developments increased the amount of medical and
         surgical care provided in hospitals.

      -- Private health insurance became an important source of payment
         for hospital care.

      -- World wars strained the ability of the private sector to treat
         returning casualties, leading to expanded veterans' facilities.

      -- Declining use of VA hospitals by veterans with service-connected
         disabilities following World War I and increased use during the
         Great Depression led to the creation and expansion of VA's
         safety net mission.

    The increased demand for hospital care prompted by these developments
    led to a perceived shortage of hospital beds and to federal programs
    to promote hospital construction.

          SCIENTIFIC DEVELOPMENTS
          INCREASED DEMAND FOR
          HOSPITAL CARE
    -------------------------------------------------------- Chapter 2:1.1

    Late 19th-century scientific developments increasingly shifted the
    focus of medical care from physicians' offices and patients' homes to
    hospitals.  For example, the use of antiseptics and other methods to
    fight disease-causing microorganisms reduced the spread of infection,
    making surgery safer.

    Furthermore, breakthroughs in disease diagnosis and therapeutic
    intervention expanded the science and art of medicine.  As a result,
    physicians began to depend more on hospital-based equipment and
    services to provide medical care to their patients.

    In addition to the development of antisepsis, the discovery of
    antibiotics and the introduction of modern surgical techniques and
    equipment made surgery safer for the patient.  Moreover, surgeons'
    increasing knowledge and the availability of sophisticated medical
    and surgical equipment made possible surgical procedures not
    previously considered.

          PRIVATE HEALTH INSURANCE
          BEGAN COVERING PATIENTS'
          COSTS
    -------------------------------------------------------- Chapter 2:1.2

    Private health insurance emerged with the creation of the first Blue
    Cross and Blue Shield plans in the 1930s.  Traditional health
    insurance in which providers are paid for each covered service
    delivered (known as fee-for-
    service coverage) tends to increase demand for hospital care by
    insulating both the patient and the provider from medical care costs.

    Fee-for-service health insurance encourages patients to demand more
    and better health care because it reduces the patient's cost for care
    and forces changes in consumer and provider behavior through

      -- increased use of insured services and

      -- reduced concern about the relative cost of providers.

    Moreover, as fee-for-service health insurance became more
    comprehensive, physicians had fewer incentives to question the
    cost-effectiveness of alternative treatments or the prices charged by
    hospitals.  Also, physicians had financial incentives to provide more
    services to patients because this increased their earnings.

    Increased health insurance coverage, while increasing demand for care
    in community hospitals, tends to decrease demand for care in VA
    hospitals.  This is because the number of veterans with health
    insurance is expected to increase, and veterans with health insurance
    are more likely to seek care from community hospitals than VA
    hospitals.

          WAR CASUALTIES INCREASED
          DEMAND FOR VA CARE
    -------------------------------------------------------- Chapter 2:1.3

    Before World War I, the government built a number of homes to provide
    domiciliary care to war veterans.  These homes provided only
    incidental medical and hospital care.

    During World War I, veterans received a series of new benefits,
    including medical and hospital care for those suffering from wounds
    or diseases incurred in the service.  Public Health Service (PHS)
    hospitals treated returning veterans, and, at the end of the war,
    several military hospitals were transferred to PHS to enable it to
    continue serving the growing veteran population.  In 1921, PHS
    hospitals primarily serving veterans were transferred to the newly
    established Veterans' Bureau.

    Casualties from World War I soon overwhelmed the capacity of
    veterans' hospitals to treat injured soldiers.  The Congress
    responded by increasing the number of veterans' hospitals with an
    emphasis on treating veterans' disabling conditions.

          VA'S SAFETY NET MISSION
          CREATED
    -------------------------------------------------------- Chapter 2:1.4

    After veterans' immediate, postwar, service-connected medical
    problems were met, VA hospitals began to have excess beds instead of
    a shortage of beds.  The Congress, in 1924, responded by giving
    wartime veterans with nonservice-connected conditions access to
    veterans' hospitals when space was available and the veterans signed
    an oath indicating that they could not pay for their care.

    The Great Depression saw an unprecedented demand for VA hospital
    care.  In 1937, President Roosevelt authorized construction of
    additional VA hospital beds to (1) meet the increased demand for
    neuropsychiatric care and treatment of tuberculosis and other
    respiratory illnesses and (2) provide more equitable geographic
    access to care.

          WORLD WAR II CASUALTIES LED
          TO FURTHER VA EXPANSION
    -------------------------------------------------------- Chapter 2:1.5

    Rapidly rising demand for hospital care prompted by U.S.  involvement
    in World War II led to further construction and expansion of VA
    hospitals.  Demand for care was so great that in March 1946 VA had a
    waiting list of over 26,000 veterans seeking care for
    nonservice-connected conditions.

    As had occurred after World War I, however, the initial high demand
    for medical services for returning casualties soon subsided and VA
    once again had excess hospital capacity.

          HILL-BURTON ACT ENCOURAGED
          HOSPITAL CONSTRUCTION
    -------------------------------------------------------- Chapter 2:1.6

    Although VA began to have excess hospital beds after World War II,
    the supply of community hospital beds was generally considered
    inadequate to meet increasing demand.  To address this problem, the
    Congress, in 1946, passed the Hill-Burton Act (P.L.  79-725).  The
    act provided federal funds to match those raised by local communities
    for building new hospitals and modernizing and replacing existing
    facilities.

       HOSPITAL CARE CONSUMED
       INCREASING PORTION OF HEALTH
       CARE EXPENDITURES BETWEEN 1950
       AND 1980
    ---------------------------------------------------------- Chapter 2:2

    Between 1950 and 1980, hospital care consumed a steadily increasing
    percentage of overall health care spending.  (See fig.  2.1.)
    Initially, the increase was slight, from 24 to 28 percent of health
    care expenditures between 1950 and 1965.  In the 15 years following
    the 1965 creation of the Medicare and Medicaid programs, however, the
    growth in hospital spending rapidly outpaced growth in other health
    care spending.  By 1980, hospital care accounted for 44 percent of
    the nation's health care expenditures.

       Figure 2.1:  Hospital Care as a
       Percentage of National Health
       Care Expenditures, Fiscal Years
       1950-80

       (See figure in printed
       edition.)

    Source:  Health Insurance Association of America (HIAA), Source Book
    of Health Insurance Data, 1995.  HIAA derived the data from U.S.
    Department of Commerce Survey of Current Business.

    Two primary factors contributing to rising hospital expenditures were
    (1) federal programs and tax policies that encouraged hospital
    construction and (2) growing demand for hospital care.  Both the
    supply of community hospital beds and demand for hospital care
    increased dramatically between 1950 and 1980.  Community hospital
    beds increased from about 505,000 to about 988,000.  (See fig.  2.2.)
    During this same time period, community hospital admissions per 1,000
    population increased from about 111 to about 162.

       Figure 2.2:  Changes in Supply
       of and Demand for Community
       Hospital Beds, Fiscal Years
       1950-80

       (See figure in printed
       edition.)

    Sources:  American Hospital Association (AHA), Hospital Statistics.
    Data for 1950 through 1970 are for total nonfederal short-term and
    other special hospitals.  See also Constraining National Health Care
    Expenditures:  Achieving Quality Care at an Affordable Cost
    (GAO/HRD-85-105, Sept.  30, 1985).

    While the supply of and demand for hospital beds had been increasing
    in the private sector, demand for VA hospital beds has been steadily
    decreasing since 1963.  VA operating beds declined by about 33,000
    between 1963 and 1979; the average daily census declined by about
    40,000.  (See fig.  2.3.)

       Figure 2.3:  Changes in Supply
       of and Demand for VA Hospital
       Beds, Fiscal Years 1963-79

       (See figure in printed
       edition.)

    Source:  VA, National Center for Veteran Analysis and Statistics,
    Trend Data:  Fiscal Years 1963-1987.

    Although the average daily census in VA hospitals declined during the
    period, demand for hospital care, as measured by admissions per 1,000
    veterans, increased.  (See fig.  2.4.)

       Figure 2.4:  Admissions to VA
       Hospitals per 1,000 Veterans,
       Fiscal Years 1963-79

       (See figure in printed
       edition.)

    Source:  VA, National Center for Veteran Analysis and Statistics,
    Trend Data:  Fiscal Years 1963-1987.

          FEDERAL PROGRAMS AND
          POLICIES ENCOURAGED HOSPITAL
          CONSTRUCTION
    -------------------------------------------------------- Chapter 2:2.1

    As previously discussed, the Congress enacted the Hill-Burton Act in
    1946 to encourage the construction of community hospital beds.
    According to an AHA estimate, the Hill-Burton Act played a role in
    the construction of about 43 percent of the not-for-profit community
    hospital beds in operation in 1974.\14

    Another federal subsidy that contributed to the increased number of
    community hospital beds was the use of tax-exempt bonds to finance
    construction projects.  Hospitals, particularly tax-exempt, nonprofit
    hospitals, obtained low-interest loans for capital projects through
    the issuance of tax-exempt bonds.

    --------------------
    \14 For-profit hospitals were not eligible for Hill-Burton funds.

          MANY FACTORS CONTRIBUTED TO
          CHANGING DEMAND FOR HOSPITAL
          CARE
    -------------------------------------------------------- Chapter 2:2.2

    Many factors contributed to the increased demand for hospital care:
    (1) population growth, (2) advances in medical technology often
    requiring elaborate equipment available only in a hospital, (3) a
    growing elderly population with increasing health care needs, (4)
    improved insurance coverage of hospital expenses with the advent of
    Medicare and other federal health benefits programs, and (5)
    expansion of VA hospital benefits.

             GROWTH IN HOSPITAL
             ADMISSIONS OUTPACED
             POPULATION INCREASE
    ------------------------------------------------------ Chapter 2:2.2.1

    Although increased hospital admissions between 1950 and 1980 are
    partly explained by increases in both the general and veteran
    populations, the growth in hospital admissions generally outpaced
    population increases.  The general population increased from 152
    million in 1950 to 228 million in 1980, a 50-percent increase.
    During this same period, community hospital admissions more than
    doubled, from 16.7 million to 36.2 million.  In other words, hospital
    admissions per 1,000 population increased from about 111 in 1950 to
    about 162 in 1980.

    The Korean Conflict increased the number of new veterans by about 6
    million during the early and mid-1950s.  By 1965, the total veteran
    population dropped to just under 22 million.  As the nation geared up
    for and entered the Vietnam War, the veteran population once again
    began to grow.  It increased steadily for the next 15 years, reaching
    28.6 million by 1980.  As demands for treatment of returning
    casualties increased, admissions to VA hospitals more than doubled
    from 1963 through 1980, from 585,000 to 1,183,000.  As was the case
    with private-sector hospitals, admissions increased at a faster pace
    than did the number of veterans.  Admissions to VA hospitals per
    1,000 veterans grew steadily from 1967 through 1980, from 24 to 41.

             ADVANCES IN MEDICAL
             TECHNOLOGY LED TO
             INCREASED HOSPITAL DEMAND
    ------------------------------------------------------ Chapter 2:2.2.2

    The second factor contributing to increased demand for hospital care
    between 1950 and 1980 was continuing advances in medical technology.
    The development of intensive care units (ICU) and other technologies,
    such as computed tomographic scanners, open-heart surgery, and life-
    sustaining procedures for critically ill patients, for example, renal
    dialysis, exemplify what hospitals can provide and what the public
    grew to expect.  In addition to increasing demand, these advances
    contributed to higher hospital care costs in the following ways:

      -- An ICU is an area of the hospital set aside for the most
         seriously ill.  ICUs have an array of electronic monitoring
         devices and life-support machinery, such as mechanical
         ventilators and defibrillators.  In addition, ICUs have a high
         concentration of nursing and support personnel.  Although the
         United States had fewer than 1,000 ICU beds in 1958, by 1976
         nearly all community hospitals with 200 or more beds had an ICU,
         about 90 percent with 100 to 199 beds had such units, and almost
         50 percent of hospitals with fewer than 100 beds had an ICU.  By
         1983, over 80,800 ICU beds were available.

      -- Renal dialysis filters waste material from the blood through an
         artificial kidney.  The first long-term renal dialysis programs
         began in the early 1960s.  Although about 1,000 patients
         received renal dialysis in 1967, another estimated 6,000
         patients died because of the lack of resources to treat them.
         The Social Security Amendments of 1972 (42 U.S.C.  426-1)
         authorized Medicare to pay for dialysis and kidney transplants
         for patients with end-stage renal disease.  By 1980, 50,000
         patients were on dialysis and about 4,700 transplants were
         performed.  In 1996, 200,000 patients received dialysis.

      -- Transplantation is a surgical procedure involving the
         implantation of healthy organs or tissues obtained from either
         living donors or cadavers.  Kidney transplantation costs less
         than renal dialysis for treating kidney disease and is preferred
         for treating end-stage renal disease.  Transplantation frees
         patients from the inconvenience of continuous dialysis
         treatments, imparts a sense of good health, and improves overall
         quality of life.  The first successful kidney transplant was
         performed in 1954.  Transplantation now includes such organs as
         the heart, liver, lungs, and pancreas.  In 1994, U.S.  surgeons
         performed over 18,000 organ transplants.\15

      -- Resuscitation techniques (including reversal of cardiac arrest),
         the development of respirators, and intravenous feeding enable
         medicine to do more for critically ill patients than ever
         before.  The nation's health care delivery system can now delay
         the moment of death for almost any life-threatening condition.
         For patients suffering a permanent loss of consciousness,
         doctors can use intensive and aggressive therapies to reverse
         unconsciousness and overcome other medical conditions.

    --------------------
    \15 Source Book of Health Insurance Data, 1995, HIAA (Washington,
    D.C.:  1996).

             ESTABLISHMENT OF HEALTH
             FINANCING PROGRAMS
             FURTHER INSULATED PUBLIC
             FROM HOSPITAL COSTS
    ------------------------------------------------------ Chapter 2:2.2.3

    The third factor contributing to increased demand for community
    hospital care was the creation and subsequent expansion of public
    health benefits programs to help selected groups pay for health care
    services.  In 1965, the Congress enacted legislation establishing the
    two largest public health insurance programs--Medicare, which covers
    most people aged 65 or older and certain disabled persons under age
    65, and Medicaid, which covers many low-income people.\16 The
    following year, the Congress established the Civilian Health and
    Medical Program of the Uniformed Services (CHAMPUS) to enable
    military retirees and dependents to obtain health care in the private
    sector when services are not available or accessible in DOD
    facilities.\17

    As the percentage of health expenses paid by third parties increased,
    the proportion paid directly by consumers dropped.  In 1965, when the
    Medicare and Medicaid programs were established, consumers' out-of-
    pocket payments accounted for about 53 percent of total personal
    health care expenditures.  By 1970--just 5 years after these
    programs' implementation--consumers' out-of-pocket payments dropped
    to about 39 percent of expenditures.  Out-of-pocket payments have
    continued falling, accounting for only about one-fifth of personal
    health care expenditures in 1994.  (See fig.  2.5.)

       Figure 2.5:  Personal Health
       Care Expenditures by Source of
       Payment, 1965-94

       (See figure in printed
       edition.)

    Note:  Private health insurance includes all private funds other than
    out-of-pocket payments.  Other private funds accounted for from 2.0
    (1965) to 3.7 (1985) percent of personal health care expenditures.

    Source:  HCFA, 1996 Data Compendium.

    More significant is the growth of third-party payments for hospital
    care.  In 1965, third parties accounted for about 83 percent of total
    expenditures for hospital care, growing to about 92 percent by 1975.
    In 1995, third parties accounted for an estimated 95 percent or more
    of total expenditures for hospital care.  (See fig.  2.6.)

       Figure 2.6:  Percentage of
       Hospital Expenses Paid by
       Third-Party Insurance, 1965-95

       (See figure in printed
       edition.)

    Source:  HHS, Health United States, 1988 and HIAA, Source Book of
    Health Insurance Data, 1995.

    While these programs tended to increase the demand for care in
    community hospitals, they decreased the demand for VA hospital care.
    For example, studies have shown that many VA hospital users increase
    their use of community hospitals and decrease their use of VA
    hospitals when they become Medicare eligible.  This is because
    veterans' financial incentive to use VA hospitals is largely
    eliminated when they become Medicare eligible and community hospitals
    are usually closer to their homes.

    --------------------
    \16 The Health Care Financing Administration (HCFA) in the Department
    of Health and Human Services (HHS) operates Medicare and Medicaid.
    Medicaid programs are primarily state administered, and benefits
    covered vary considerably.

    \17 The Dependents' Medical Care Act, effective Dec.  7, 1956,
    previously authorized care from civilian sources for spouses and
    children of active-duty military members.  Coverage was extended to
    retired members and their dependents and to dependents of deceased
    service members through the Military Medical Benefits Amendments of
    1966, the year in which the program became known as CHAMPUS.

             HEALTH CARE NEEDS OF AN
             AGING POPULATION
             INCREASED DEMAND
    ------------------------------------------------------ Chapter 2:2.2.4

    A fourth factor contributing to increased demand for hospital care
    between 1950 and 1980 was the health care needs of an aging
    population.  Older people use medical personnel and facilities more
    than younger people.  For example, older people are hospitalized
    approximately twice as often as younger people, have lengths of stay
    50 percent longer than younger people, and use twice as many
    prescription drugs.\18

    From 1950 through 1980, the proportion of the U.S.  population 65
    years of age or older increased from 8.0 to 11.3 percent, continuing
    the trend from the first half of the century; in 1900, only 4 percent
    of the population was 65 years of age or older.

    A 1977 study of the health care needs of the aging veteran population
    anticipated this increase.\19 VA predicted that after 1985, veterans'
    demand for VA hospital care would accelerate rapidly.  VA estimated
    that it would need to operate about 91,000 beds in 1985, about
    115,000 beds by 1995, and about 120,000 beds by the year 2000.  VA
    based its estimates on utilization rates and eligibility provisions
    in effect in 1977 but factored in assumptions that (1) the need for
    psychiatric beds would continue decreasing and (2) hospital lengths
    of stay would continue declining despite the patients' advancing
    ages.

    --------------------
    \18 Aging America:  Trends and Projections, 1987-88 Edition, U.S.
    Senate Special Committee on Aging in conjunction with the American
    Association of Retired Persons, the Federal Council on the Aging, and
    the U.S.  Administration on Aging (Washington, D.C.:  1988), p.  111.

    \19 The Aging Veteran:  Present and Future Medical Needs, Veterans
    Administration (Washington, D.C.:  Oct.  1977).

             ELIGIBILITY FOR VA
             HOSPITAL CARE EXPANDED
    ------------------------------------------------------ Chapter 2:2.2.5

    Eligibility expansions also affected demand for VA hospital care.  In
    1962, the Congress passed legislation that defined as a
    service-connected disability any condition traceable to a period of
    military service, regardless of the cause or circumstances of its
    occurrence.  Previously, care for service-connected conditions was
    not ensured unless such conditions were incurred or aggravated during
    wartime service.

    VA expanded its safety net mission near the end of the Vietnam War.
    In 1973, VA expanded eligibility for hospital care to treatment of
    nonservice-
    connected disabilities of peacetime veterans unable to defray the
    cost of care.  Treatment of nonservice-connected disabilities had
    previously been limited to wartime veterans.

          RESEARCHERS BEGAN TO
          QUESTION NEED FOR HOSPITAL
          BEDS
    -------------------------------------------------------- Chapter 2:2.3

    By the mid-1970s, researchers began to question whether the nation
    had too many hospital beds and whether the excess beds were
    contributing to higher health care costs.  For example, the National
    Academy of Sciences' Institute of Medicine (IOM) recommended in 1976
    that the bed-to-
    population ratio, which by 1975 had reached 4.4 community hospital
    beds per 1,000 population, be reduced by at least 10 percent.\20

    Specifically, IOM called for reducing the number of community
    hospital beds per 1,000 population from 4.4 to approximately 4.0.
    IOM called for further sizeable reductions to follow after the
    initial goal had been met.

    --------------------
    \20 Controlling the Supply of Hospital Beds, IOM, National Academy of
    Sciences (Washington, D.C.:  Oct.  1976).

       SUPPLY OF AND DEMAND FOR
       HOSPITAL CARE HAVE DECLINED
       SINCE 1980
    ---------------------------------------------------------- Chapter 2:3

    As scientific developments continue and employers and the government
    focus on ways to contain health care costs, the role of hospitals is
    once again changing.  Just as scientific advances spawned increased
    demand for hospital care in the first seven decades of this century,
    technological advances are enabling much of the care previously
    provided in hospitals to be shifted to outpatient settings (see ch.
    3).  Similarly, changes in the insurance market--principally the
    development of prospective payment systems and managed care--have
    helped decrease hospital use (see ch.  4).  Demand for hospital care
    began to decline in community hospitals and continued to decline in
    VA hospitals during the 1980s.

    As shown in figure 2.7, demand for care in community hospitals
    declined more rapidly than the supply of hospital beds from 1980
    through 1993.

       Figure 2.7:  Changes in Supply
       of and Demand for Community
       Hospital Beds, Fiscal Years
       1980-93

       (See figure in printed
       edition.)

    Source:  American Hospital Association, Hospital Statistics, the AHA
    Profile of United States Hospitals 1996/97.

    The number of community hospital beds increased slightly between 1980
    and 1984 but has steadily declined since then.  By 1995, community
    hospital beds had dropped to 873,000 after peaking at slightly over 1
    million.  More importantly, the average daily census in community
    hospitals dropped from 747,000 in 1980 to 548,000 in 1995.

    Demand for VA hospital care continued the decline that began in the
    early 1960s.  From fiscal year 1981 through fiscal year 1995, the
    average daily census in VA hospitals dropped from about 66,000 to
    about 37,000.  During the same period, the number of VA operating
    beds dropped from about 82,000 to about 51,000.  (See fig.  2.8.)

       Figure 2.8:  Changes in Demand
       for and Supply of VA Hospital
       Beds, Fiscal Years 1981-95

       (See figure in printed
       edition.)

    Source:  VA, National Center for Veteran Analysis and Statistics,
    Trend Data:  Fiscal Years 1970-1995.

    From 1980 through 1986, VA hospital admissions continued to increase
    despite a gradual decline in the number of veterans.\21 Since 1987,
    however, VA hospital admissions have declined more quickly than the
    veteran population.  Hospital admissions dropped about 18.6 percent
    from 1988 through 1995, from about 1,038,000 to about 845,000.
    During approximately the same period, the veteran population declined
    about 5 percent, from 27.5 million to 26.2 million.  As a result, the
    number of VA hospital admissions per 1,000 veterans dropped from 38
    in 1988 to 32 in 1995.

    Admissions to community hospitals are also declining.  Despite
    continuing population growth, community hospital admissions, after
    increasing steadily from 1950 through 1980, dropped by 15 percent
    from 1981 through 1995.  Adjusting for population growth, admissions
    per 1,000 population dropped from 158 to 118.

    --------------------
    \21 Beginning in 1987, VA counted 1-day dialysis as an outpatient
    visit.

       CLOSURES REDUCED NUMBER OF
       COMMUNITY BUT NOT VA HOSPITALS
    ---------------------------------------------------------- Chapter 2:4

    From 1975 through 1995, more community hospitals have closed than new
    hospitals have opened, while VA has opened more hospitals than it has
    closed.  Although the U.S.  population increased by about 47 million
    between 1975 and 1995, the number of community hospitals decreased by
    about 12 percent (from 5,875 to 5,194).  During the same period, the
    number of VA hospitals increased from 171 to 173.

    These community hospital statistics understate the actual extent of
    hospital closures because new hospitals continue to open as other
    hospitals close.  For example, in 1993, 62 hospitals (including 34
    community hospitals) closed but 40 new hospitals opened.  Of the 40,
    5 were psychiatric or substance abuse hospitals, 15 were
    rehabilitation hospitals, 3 were specialty hospitals, and 17 were
    general medical and surgical facilities.

    Similarly, although the number of VA hospitals saw a net increase
    over the 20-year period, two VA hospitals--in Martinez and Sepulveda,
    California--were closed because of actual or potential earthquake
    damage.

    CHANGES IN MEDICAL TECHNOLOGY AND
    PRACTICE HAVE DECREASED DEMAND FOR
    BOTH COMMUNITY AND VA HOSPITAL
    CARE
    ============================================================ Chapter 3

    Changes in medical technology and practice have contributed to the
    decreasing demand for both VA and community hospital care since 1980.
    Advances in medical technology, such as laser and other less invasive
    surgical techniques, allow much care previously provided in hospitals
    to be provided at home, on an outpatient basis, or in a nursing home.
    Such advances also shorten the length of stay for many procedures
    still performed in the hospital.  Similarly, changes in medical
    practice and the development of psychotherapeutic drugs to treat
    mental illness have led to fewer and shorter hospital admissions for
    psychiatric patients and to the deinstitutionalization of many
    long-term psychiatric patients.

    While changes in technology and medical practice contributed to
    declining demand for both community and VA hospitals, for many years
    VA lagged behind the private sector in effectively using such
    changes.  VA, however, is now aggressively shifting patients from
    inpatient to outpatient and other less costly settings.  As a result,
    many issues remain unresolved concerning the future effects of
    changes in medical technology and practice on demand for VA hospital
    care.  For example, VA's success in reducing inpatient surgeries is
    diminishing the economic viability of, and threatening the quality of
    care provided by, many VA hospitals' inpatient programs.  Limited
    data are available on efforts to ensure that vulnerable populations,
    such as the homeless, do not lose access to VA services through
    efforts to shift care to outpatient settings.

       ADVANCES IN MEDICAL TECHNOLOGY
       HAVE REDUCED ADMISSIONS AND
       SHORTENED HOSPITAL STAYS
    ---------------------------------------------------------- Chapter 3:1

    Advances in medical technology continue to be a major force driving
    change in the health care system.  But, unlike the first
    three-quarters of the century when medical advances fostered
    increased demand for hospital care, recent advances have reduced this
    demand.  Technology advancements now permit (1) many surgeries to be
    performed in a doctor's office or hospital outpatient department, (2)
    shorter lengths of stay following inpatient surgeries, and (3)
    treatments for many chronically and catastrophically ill patients to
    be provided at home rather than in a hospital.

    Although VA, through its affiliations with medical schools and
    research programs, played an important role in developing and testing
    many of these technologies, it lagged behind the private sector for
    many years in using new technology to shift care from inpatient to
    outpatient settings.  As a result, the full effect of technology on
    demand for VA hospital care has yet to be felt.  During the past few
    years, VA has aggressively shifted care to outpatient settings.

          MANY SURGICAL AND OTHER
          PROCEDURES NOW DONE ON AN
          OUTPATIENT BASIS
    -------------------------------------------------------- Chapter 3:1.1

    Technological changes and medical innovations are shifting many
    surgeries and medical treatments from inpatient to less intensive,
    outpatient settings.  The following treatments for ulcers, kidney
    stones, and cataracts are examples:

      -- H2 antagonists are drugs with brand names such as Tagamet and
         Pepcid-AC used to reduce the production of gastric acids.  In
         1977, before the introduction of H2 antagonists, about 155,000
         people had surgery for ulcers.  By 1993, surgeries for ulcers
         had dropped to about 16,000.\22 The recent discovery that most
         ulcers are caused by bacteria and can be treated with
         antibiotics will probably result in fewer such surgeries.

      -- Lithotripsy (in Greek, "stone crusher") is a process that uses
         shock waves to fracture kidney stones into pieces small enough
         to pass through a patient's urinary tract.  Although patients
         may be able to pass smaller stones on their own, many stones are
         too large to pass through the ureter, a gradually narrowing tube
         in the urinary tract.  In the past, when patients could not pass
         a kidney stone, the primary treatment was surgery to remove the
         stones.\23 Now, however, a specialized piece of equipment--an
         extracorporeal shock-wave lithotripter--produces shock waves to
         fracture the kidney stone, allowing the patient to pass the
         stone without surgery.  Lithotripsy requires no lengthy hospital
         stay, no incision or surgery, and no lengthy recovery period.
         Up to 95 percent of the approximately 400,000 Americans treated
         for kidney stones each year can now be treated through
         lithotripsy rather than surgery.  Lithotripsy can generally be
         performed as an outpatient procedure.

      -- Phacoemulsification is a method of treating cataracts in which
         an ultrasonic device disintegrates the cataract, which is then
         suctioned out.  This procedure, which involves only a tiny
         incision, can be done on an outpatient basis with the patient
         typically returning home within hours after the cataract is
         removed and a plastic lens implanted in the eye.  In the past,
         cataract removal generally required an inpatient hospital stay
         of several days.  Cataract surgery is the most often performed
         therapeutic surgical procedure in the United States on people 65
         years of age and older.  Medicare pays over $3.4 billion a year
         for cataract surgery, paying for about 1 million of the 1.3
         million cataract procedures performed annually.\24

    The percentage of surgeries performed on an inpatient basis has
    declined steadily in the private sector since 1989.\25 In 1993, over
    55 percent of surgical operations in community hospitals were
    performed on an outpatient basis.\26

    Until recently, VA was much less successful in shifting care to
    outpatient settings than were community hospitals.  For example,
    audits by VA's Office of Inspector General (OIG) in 1991 and 1992
    identified the unavailability of outpatient surgery or other
    capabilities as the primary cause of unnecessary admissions and days
    of care in VA surgical wards.  Specifically, the OIG estimated the
    following:

      -- The New Orleans VA medical center could have avoided about 32
         percent (931 of the 2,921 days) of surgical care had the center
         established an outpatient surgery program.\27

      -- About 32 percent of the Denver VA medical center's 1- to 4-day
         surgical admissions were for medical care that could have been
         provided on an outpatient basis without jeopardizing patients'
         welfare.\28

      -- About 45 percent of the 2-day surgical admissions at the Togus,
         Maine, VA medical center could have been avoided by treating the
         patients on an outpatient basis.  The medical center agreed with
         the finding and attributed the inappropriate admissions to the
         perception that VA's resource allocation method did not cover
         the cost of outpatient surgery.\29

      -- The Dallas VA medical center incurred about $766,000 in
         unnecessary expenses because physicians admitted patients who
         did not require hospital care and hospitalized patients longer
         than medically necessary.  The lack of facilities dedicated to
         outpatient surgery was the sole reason cited for the
         inappropriate admissions.\30

      -- About 72 percent of inpatient cataract surgeries and 29 percent
         of other short-term surgical admissions reviewed at the West Los
         Angeles VA medical center could have been done on an outpatient
         basis.\31

    The Veterans Health Administration's (VHA) recently established
    performance measures for Veterans Integrated Service Network (VISN)
    directors set expectations for what portion of surgeries should be
    done on an outpatient basis.  For example, under one fiscal year 1996
    performance measure, VISN directors were judged to be fully
    successful if from 50 to 64 percent of surgeries and invasive
    procedures were done in an outpatient setting; 65 percent or more was
    considered exceptional performance.

    All VA medical centers now have outpatient surgery programs.  All but
    eight VISN directors exceeded the 50-percent minimum for fully
    successful performance in fiscal year 1996; one VISN director--in
    VISN 11 (Ann Arbor)--was exceptional.  Seven of the eight VISN
    directors not meeting the minimum made statistically significant
    improvements in the percentage of outpatient procedures performed.
    Systemwide improvement has been impressive, from 35 percent in fiscal
    year 1994 to 52 percent in fiscal year 1996.  VHA's goal is to reach
    at least 65 percent of surgeries and other invasive procedures
    performed on an outpatient basis in fiscal year 1998; 75 percent or
    more is considered exceptional performance.

    --------------------
    \22 Rita Shoor, "Anticipating Health Care Reform and Seeking a
    Marketing Edge Over Competitors, Hospitals Are Forming Alliances With
    Other Providers," Business and Health, Special Issue:  "The State of
    Health Care in America, 1994," Vol.  12 (1994).

    \23 Only a few kidney stones can be dissolved with medication.

    \24 This cataract surgery information was prepared by the American
    Academy of Ophthalmology.

    \25 Shoor, "Anticipating Health Care Reform," Business and Health.

    \26 Source Book of Health Insurance Data, 1995, Health Insurance
    Association of America (Washington, D.C.:  1996).

    \27 Audit of the VA Medical Center, New Orleans, Louisiana, VA OIG,
    Report No.  2R6-F03-121 (Washington, D.C.:  Apr.  17, 1992).

    \28 Audit of the VA Medical Center, Denver, Colorado, VA OIG, Report
    No.  1R5-F03-050 (Washington, D.C.:  Apr.  5, 1991).

    \29 Audit of Medical Center Operations at Department of Veterans
    Affairs Medical and Regional Office Center, Togus, Maine, VA OIG,
    Report No.  1R1-F03-027 (Washington, D.C.:  Jan.  25, 1991).

    \30 Audit of VA Medical Center, Dallas, Texas, VA OIG, Report No.
    2R6-F03-151 (Washington, D.C.:  June 11, 1992).

    \31 Audit of VA Medical Center, West Los Angeles, California, VA OIG,
    Report No.  2R7-F02-022 (Washington, D.C.:  Oct.  30, 1991).

          ADVANCES ALSO SHORTEN
          HOSPITAL STAYS
    -------------------------------------------------------- Chapter 3:1.2

    Advances in medical technology have also reduced the length of stay
    following inpatient procedures.  For example, the development of the
    endoscope allows many procedures to be done through a natural body
    opening, such as the mouth, or through a small incision.  An
    endoscope is an instrument with an optical system for observing the
    inside of a hollow organ or cavity.  Another comparable instrument,
    the laparoscope, permits the removal of the gall bladder through
    surgery involving only minimal incisions.  As a result, the length of
    stay following gall bladder surgery has often been reduced from a 3-
    to 7-day recuperative period to a 1- to 2-day period.  In some cases,
    gall bladder surgery is now done as an outpatient procedure.

    Similarly, the use of balloon angioplasty to open narrowed coronary
    arteries reduces the need for more invasive bypass surgery.  To
    perform angioplasty, surgeons insert a catheter with a deflated
    balloon on its tip into an artery narrowed by plaque.  Plaque is the
    fatty material that accumulates inside the walls of the arteries and
    blocks blood flow.  The balloon is inflated to widen the clogged
    artery.  Angioplasty is clearly less invasive than bypass surgery.

          MUCH CARE CAN NOW BE
          PROVIDED IN THE HOME
    -------------------------------------------------------- Chapter 3:1.3

    Advances in medical technology also make it possible for many
    chronically and catastrophically ill patients to receive medical
    treatment at home.  For example, people with chronic respiratory
    problems who require a ventilator and nursing assistance can often
    return home if they are provided with a ventilator, visits by a
    nurse, and associated supplies.  Similarly, sophisticated medical
    care previously available only in a hospital or nursing home can now
    be provided at home because of the development of medical technology
    such as ventilator therapy and infusion pumps.

       NEW APPROACHES TO TREATING
       PSYCHIATRIC PATIENTS HAVE
       REDUCED INSTITUTIONALIZATION
    ---------------------------------------------------------- Chapter 3:2

    The development of new drug therapies and mental illness treatment
    and care practices has helped reduce acute psychiatric admissions to
    both community and VA hospitals.  Efforts to deinstitutionalize the
    chronically mentally ill have also helped reduce hospital admissions.
    Because the chronically mentally ill were typically in state and
    county hospitals for the mentally ill rather than in community-based
    facilities, VA hospitals treating veterans for mental illness were
    more affected by efforts to deinstitutionalize the chronically
    mentally ill than were community facilities.

          ADVANCES IN
          PSYCHOTHERAPEUTIC DRUGS
    -------------------------------------------------------- Chapter 3:2.1

    Psychotherapeutic drugs are those that lessen the primary symptoms
    afflicting mentally disturbed people such as anxiety, depression, and
    psychosis.  Among the psychotherapeutic drugs are

      -- antianxiety agents such as Librium, Valium, Xanax, and Ativan,
         all of which are forms of benzodiazepine;

      -- antidepressants such as Nardil (phenelzine sulfate), Adapin
         (doxepin HCL), and Etrafon (perphenazine and amitriptyline
         hydrochloride);

      -- antipsychotic products such as Clozaril (clozapine), Haldol
         (haloperidol), and Thorazine (chlorpromazine); and

      -- psychostimulants such as Ritalin (methylphenidate hydrochloride)
         and Cylert (pemoline).

    Such drugs often allow people with mental illnesses that in the past
    would have required lengthy periods of institutionalization to obtain
    outpatient treatment.

          DEINSTITUTIONALIZATION OF
          THE CHRONICALLY MENTALLY ILL
    -------------------------------------------------------- Chapter 3:2.2

    In the past, many mentally disabled people were institutionalized,
    typically in state and county mental hospitals.  Because of concern
    over the deplorable conditions in many of these facilities, new
    treatment methods and philosophies, and the potential for cost
    savings, however, efforts were made to place institutionalized
    mentally disabled patients in the community.  The Mental Retardation
    Facilities and Community Mental Health Centers Construction Act of
    1963, which was repealed by the Omnibus Budget Reconciliation Act of
    1981, became the basis for a major part of the federal government's
    involvement in "deinstitutionalizing" the mentally disabled.

    The Congress later amended the Social Security Act to enable more
    mentally disabled people to return to the community.
    Deinstitutionalization was intended to allow mentally disabled people
    to be as independent and self-supporting as possible by (1)
    preventing unnecessary admission to and retention in institutions;
    (2) finding and developing appropriate care alternatives in the
    community, such as day care and foster homes; and (3) improving
    conditions, care, and treatment for those needing some institutional
    care.

    In a 1977 report, we noted that deinstitutionalization had returned
    many mentally disabled people to communities.\32 For example, the
    resident population in public mental hospitals steadily declined
    nationwide from 505,000 in 1963 to 120,000 in 1983.  In 1967, about
    193,000 people were in public institutions for the mentally retarded.
    By 1982, the number had declined to about 118,000.

    Although the use of VA psychiatric beds declined significantly, the
    decline in use of state mental hospitals declined even more.  In its
    1977 report, The Aging Veteran:  Present and Future Needs, VA noted
    that the number of VA psychiatric beds dropped from 54,345 in 1967 to
    28,173 in 1977, despite an increase in annual admissions from 71,076
    to 161,969.  During the same time period, outpatient psychiatric
    visits to VA mental hygiene clinics, day treatment centers, and day
    hospital programs increased from about 750,000 to over 1.6 million.
    VA identified the following important developments that modified its
    approach to psychiatric care:

      -- improvements in psychiatric therapy,

      -- development of a wide variety of psychotropic drugs that made it
         possible for many psychiatric patients to function
         independently,

      -- recognition that geographically isolated institutions may not
         provide the best environment for rehabilitation,

      -- recognition that psychiatric care is more effectively delivered
         as a service of a general medical and surgical teaching
         hospital,

      -- a change in philosophy that has encouraged returning many
         psychiatric patients to the community, and

      -- expansion of outpatient resources and treatment modalities.

    Unlike acute medical and surgical hospital use, the need for which
    increases as people age, VA found that the frequency of major
    psychiatric hospitalization decreases as people age.  In its report,
    Aging Veteran, VA said that the decline in psychiatric
    hospitalization would probably continue as the veteran population
    aged.  Specifically, VA noted that the hospitalization rates for
    schizophrenia, psychoneuroses, personality and behavior disorders,
    and alcoholism decrease as people age.  It concluded in 1977 that "it
    seems reasonable to assume that the aging veteran population will not
    create new pressures for psychiatric beds."

    Demand for psychiatric hospital care did, as VA predicted, continue
    to decline, although admissions over the last 20 years continued to
    increase slowly.  In fiscal year 1996, VA operated 15,690 psychiatric
    beds, a decline of over 70 percent during the past 30 years.

    --------------------
    \32 Returning the Mentally Disabled to the Community:  Government
    Needs to Do More (GAO/HRD-76-152, Jan.  7, 1977).

       ISSUES CONCERNING THE EFFECTS
       OF CHANGING MEDICAL TECHNOLOGY
       AND PRACTICE ON FUTURE HOSPITAL
       DEMAND
    ---------------------------------------------------------- Chapter 3:3

    VA was slow to take advantage of new technologies and medical
    practices and shift patients from hospital beds to outpatient clinics
    and other care settings.  As a result, estimates of nonacute days of
    medical and surgical care in individual VA hospitals ran as high as
    72 percent only 6 years ago.  VA has begun addressing these problems
    during the past several years, and early results are encouraging.
    For example, VA increased the percentage of surgeries and other
    invasive procedures performed on an outpatient basis from 35 percent
    in 1994 to 52 percent in 1996.

    VA's success in reducing inpatient surgeries, however, could further
    diminish the economic viability of the inpatient surgery programs at
    many VA hospitals and threaten their ability to provide quality care.
    In fiscal year 1996, 56 of the 129 VA hospitals with inpatient
    surgery programs had an average of fewer than 25 surgery beds
    occupied on any given day (average daily census (ADC)); 28 had an ADC
    of less than 10, including 6 with an average workload of only one or
    two patients.  In addition to the high cost of maintaining inpatient
    surgery programs for so few patients, such programs raise concerns
    about quality of care because surgeons may not perform enough
    operations to remain proficient.

    The VA OIG initially raised questions about continuing to operate
    surgical programs with limited workload in a 1991 review of 33 VA
    surgical programs.  The OIG recommended that VA consider closing
    inpatient surgical services at the 33 locations and (1) realign
    services with other medical centers or (2) provide the services
    through community hospitals.  The OIG estimated that such a
    realignment would provide opportunities to better use staff resources
    and avoid the need for some replacement equipment and construction,
    saving over $100 million.  In addition, the OIG's audit expressed
    concerns about the quality of care provided at smaller hospitals with
    minimal workloads that are unaffiliated or minimally affiliated with
    a medical school.\33

    Five years after the OIG report was issued, however, 4 of the 33
    medical centers reviewed by the OIG discontinued their surgical
    programs.  Workloads at the remaining medical centers and others have
    continued to decline.  With such a limited inpatient surgical
    workload, VA could discontinue the inpatient programs and either
    refer veterans to other VA facilities or use its new contracting
    authority to purchase care from community hospitals closer to the
    veterans' homes.  Referring veterans to other VA hospitals could help
    build workload at those facilities but would probably make health
    care less accessible for veterans (except in those places where two
    or more VA medical centers were in close proximity such as in
    Chicago, Boston, and Pittsburgh).  In addition, the cost of
    transporting veterans to a distant VA medical center would add to the
    cost of providing the care through another VA facility.  Transferring
    veterans to distant medical centers could also deprive them of the
    emotional support of family and friends unable to make the trip.
    Such travel could be particularly difficult for elderly spouses.

    Uncertainties also exist about the extent to which VA should shift
    additional mental health services to outpatient settings.  For
    example, many VISNs plan to discontinue their inpatient substance
    abuse programs and provide outpatient services instead.  Other VISN
    planning documents do not specifically address this.  In 1972, more
    than 95 percent of veterans discharged from the substance abuse
    program were classified as poor; in 1995, about 50 percent of
    veterans in inpatient substance abuse programs were homeless at the
    time of admission, and 35 percent had both substance abuse and one or
    more psychiatric disorders.

    VA recognized this problem and is developing clinical guidelines and
    an addiction severity index to evaluate substance abuse patients.  In
    a July 1997 report, the VA OIG reported that substance abuse
    treatment program officials in the 12 medical centers reviewed had
    established in-house residential care beds and identified community
    housing and social support resources for homeless patients before
    they converted their substance abuse treatment programs to outpatient
    programs.\34 The OIG also found, however, that the wide variation in
    reporting of the number of patients treated in substance abuse
    treatment programs in the VA databases prevents VHA officials from
    really knowing the impact of these conversions to outpatient
    treatment on access to care for homeless and other economically
    disadvantaged veterans.

    The OIG also identified needed improvements in (1) methods for
    identifying homeless veterans seeking treatment in both VA and
    community-based substance abuse treatment programs; (2) efforts to
    ensure that halfway house beds are available for veterans needing
    such aftercare; and (3) medical record documentation to show that VA
    employees discussed the ability of veterans, particularly homeless or
    economically disadvantaged veterans, to arrange transportation to
    outpatient substance abuse treatment.

    The OIG found transportation to be a major barrier to outpatient
    substance abuse treatment, particularly in small urban areas.  A
    third of the patients from small urban areas interviewed by the OIG
    indicated that inadequate transportation systems limited patients'
    access to outpatient care.  The OIG reviewed the medical records of
    71 homeless patients discharged from inpatient substance abuse
    treatment programs and found that 50 records had no information to
    show that program officials had discussed transportation issues with
    the veterans.

    In response to the OIG report, VHA identified actions to strengthen
    the substance abuse program, including establishing a committee to
    discuss possible solutions to the transportation problem.  Because
    these actions are in the planning stage, it is not clear what their
    effect will be on lessening the impact of VA's shift of substance
    abuse treatment to outpatient settings on access to care for homeless
    veterans.

    Although the OIG has evaluated VA's efforts to shift substance abuse
    treatment from inpatient to outpatient settings and corrective
    actions are planned or under way, less is known about the effects of
    other efforts to shift care to outpatient settings.  For example, a
    large percentage of homeless veterans suffer from serious mental
    illness, including post-traumatic stress disorder (PTSD).  As a
    result, such veterans may face the same transportation barriers as
    veterans with substance abuse problems in accessing outpatient mental
    health care, for example, PTSD treatment.  Little is known about the
    extent to which veterans discharged from VA psychiatric hospitals
    receive needed outpatient mental health services as well as the full
    range of other VA benefits to which they may be entitled to enable
    them to function independently.

    --------------------
    \33 Audit of Veterans Health Administration Surgical Program
    Realignments, VA OIG, Report No.  1R4-A01-066 (Washington, D.C.:
    June 19, 1991).

    \34 The Impact of Downsizing Inpatient Substance Abuse Rehabilitation
    Programs on Homeless Veterans and Other Frequent Users, VA OIG,
    Office of Healthcare Inspections, Report No.  7HI-A28-108
    (Washington, D.C.:  July 8, 1997).

    CHANGES IN THE STRUCTURE OF HEALTH
    INSURANCE HAVE DECREASED DEMAND
    FOR CARE IN COMMUNITY MORE THAN IN
    VA HOSPITALS
    ============================================================ Chapter 4

    Fundamental changes in the structure of public and private health
    insurance have significantly reduced community hospital use but
    affected VA hospitals less.  The establishment of prospective
    payment, capitation, and other payment methods under public and
    private health insurance has provided community hospitals strong
    financial incentives to reduce hospital admissions and lengths of
    stay or both.  Similarly, insurers' increased focus on medical
    necessity through such programs as preadmission certification has
    reduced both admissions to and lengths of stay in community
    hospitals.  Finally, increased third-party coverage of home health
    and hospice care has made it possible to (1) discharge patients from
    hospitals sooner and (2) reduce the use of hospital care by the
    terminally ill.

    These changes, however, have had limited effect on demand for care in
    VA hospitals because these hospitals do not financially depend on
    insurance payments.  VA is implementing changes in allocating funds
    to its hospitals and managing patient care that seek to simulate
    changes in public and private insurance.  Because these changes are
    recent and because of differences between VA and private-sector
    actions, such changes' effect on future demand for VA hospital care
    is uncertain.  For example, it is not clear to what extent VA's new
    preadmission screening program will change physicians' admitting
    practices without the financial incentives used in the private
    sector.  Similarly, it is unclear how Veterans Integrated Service
    Networks (VISN) and individual VA facilities will react to the
    financial incentives created by VA's new capitation-based resource
    allocation system without the contractual obligations to provide
    covered services that private-sector managed care plans have.

       CHANGES IN PAYMENT METHODS HAVE
       PROVIDED INCENTIVES TO REDUCE
       HOSPITAL ADMISSIONS AND LENGTHS
       OF STAY
    ---------------------------------------------------------- Chapter 4:1

    Prospective payment and other payment reforms initiated by Medicare
    and other third-party payers have significantly reduced demand for
    hospital care in community hospitals.  These payment reforms were
    designed to provide community hospitals financial incentives to
    reduce hospital admissions and lengths of stay or both.  Third-party
    payment reforms, however, have not played a major role in reduced
    demand for VA hospital care; VA hospitals, unlike community
    hospitals, do not depend on third-
    party payments.  VA is changing its funding of health care facilities
    to create financial incentives like those in the private sector.

          ORIGINAL REIMBURSEMENT
          METHODS PROVIDED INCENTIVES
          FOR OVERUSE
    -------------------------------------------------------- Chapter 4:1.1

    The methods--fee-for-service and cost-based reimbursement--originally
    used by both public and private health insurers to pay for hospital
    and other health care services created incentives for physicians and
    hospitals to provide unnecessary services.  Under fee-for-service
    reimbursement, physicians receive an amount for every service
    provided.  As a result, physician income depends largely on the
    volume of services provided.  Fee-for-service payments thus create
    financial incentives to provide unnecessary services.

    Similarly, under cost-based reimbursement, hospitals were typically
    reimbursed retrospectively on the basis of costs incurred.  Hospitals
    were paid their actual costs as long as they were reasonable, related
    to patient care, and not in excess of maximum allowable amounts
    established by the program.  This method encouraged hospitals to
    spend more and keep patients in the hospital longer because the more
    they spent for services, the larger their reimbursement would be.
    Although the 1970s saw several attempts, particularly under federal
    programs, to set limits on reimbursement rates, these efforts did not
    succeed in controlling cost growth.

          TRANSITIONING FROM
          COST-BASED TO PROSPECTIVE
          PAYMENT SYSTEMS (PPS)
    -------------------------------------------------------- Chapter 4:1.2

    For hospitals, the most significant change in payment methods came
    with the 1983 enactment of PPS for acute care hospitals treating
    Medicare beneficiaries.  Unlike the cost-based system preceding it,
    PPS has incentives for hospitals to shorten lengths of stay and
    provide care more efficiently.  Hospitals are paid a predetermined
    amount for each Medicare discharge.  Acute care patients are placed
    in 1 of over 400 diagnosis-related groups, or DRGs, on the basis of
    their principal diagnoses, the presence of complicating conditions,
    whether certain procedures were performed, and their age.  In
    determining the payment amount, HHS basically calculates the average
    cost of treating Medicare patients in each DRG using historical
    hospital cost data and then adjusts the PPS rates for factors such as
    differences in area wages, teaching activity, and care to the poor.

    Hospitals whose average costs are lower than the PPS rates may keep
    all of the difference; hospitals whose costs are above these rates
    must absorb the loss.  To reduce the risk to hospitals of costly
    cases, Medicare pays hospitals additional amounts for high-cost
    "outliers."

    PPS drastically changed hospitals' financial incentives.  Under the
    cost-
    reimbursement system, hospitals had an incentive to keep patients
    longer and provide more ancillary services because each day of care
    and service provided was reimbursed separately.  Under PPS, hospitals
    have a financial incentive to limit lengths of stay and the number of
    ancillary services provided because payment is fixed without regard
    to these factors.  Both the average length of hospital stay and the
    number of admissions to community hospitals declined after PPS was
    introduced.\35

    Although PPS was initially limited to payment for services provided
    to Medicare beneficiaries, many other health care programs adopted
    similar payment methods.  For example, the Civilian Health and
    Medical Program for the Uniformed Services (CHAMPUS) implemented a
    DRG-based PPS on October 1, 1987, to reduce government costs and
    provide an incentive for hospitals to reduce operating costs.
    Similarly, in 1991, 20 states reported using a DRG-based PPS under
    their Medicaid programs.\36

    Unlike community hospitals, whose revenues come mainly from third-
    party payments, VA hospitals do not depend on such payments.  VA
    lacks the authority to bill Medicare for services provided to
    Medicare-eligible veterans.\37 Although VA bills private health
    insurers for services it provides to their policyholders, recoveries
    occurring before June 30, 1997, except for the amount spent on the
    recovery effort, were returned to the Treasury.\38

    VA receives an annual appropriation from the Congress to cover the
    costs of services it expects to provide to veterans, including those
    with private health insurance or Medicare coverage.  Until 1984, the
    distribution of appropriated funds to individual VA medical centers
    had been based mainly on their historic expenditures; that is, each
    medical center generally received its prior year's allocation
    adjusted for inflation and certain other factors such as operating
    new facilities and programs.

    VA experimented with a case mix PPS to allocate resources to its
    hospitals in the mid-1980s but abandoned the system in 1990 when
    concerns arose about "gaming" and the equity of resource allocations.
    In 1984, VA introduced a national average cost-based prospective
    budgeting approach, the Resource Allocation Method (RAM) for
    distributing globally budgeted funds to its medical facilities.  Like
    HCFA's PPS, RAM was based on DRGs.  Initially, VA planned to use RAM
    to measure and redistribute acute inpatient care resources, including
    all general medical, surgical, rehabilitation, neurological, and
    psychiatric services.

    In 1985, RAM was expanded to include outpatient and extended care
    services.  Funds for outpatient care were allocated using an
    age-adjusted, capitation method with six price groups determined by
    the type and extent of utilization during a year.  Extended care,
    including intermediate hospital care and nursing home care, was to be
    funded through a Resource Utilization Group (RUG) system.  Similar to
    hospital DRGs, the RUG system classifies long-term care patients
    according to the amount of direct nursing that they require.

    Unlike Medicare's PPS' effects on community hospitals, however, RAM
    had little effect on VA hospitals' budgets.  RAM showed that VA
    hospitals incurred differing costs for treating similar patients and
    provided for shifting significant amounts of resources among
    facilities to encourage more efficient operations.  VA never fully
    implemented RAM, however, shifting few resources (less than 2 percent
    of the total dollars budgeted) among facilities.

    RAM was abandoned in 1990 because of concerns that medical centers
    were gaming the system to maximize resource allocations.  Gaming
    involves medical centers performing work beyond their resources to
    justify additional resources in the future.  Although VA cited gaming
    as the main reason for abandoning RAM, it was not implemented partly
    because stakeholders lacked confidence in the equity of the resource
    allocations.

    After RAM was abandoned, VA moved toward a new patient-based
    allocation system known as the Resource Planning and Management (RPM)
    system.  Even after introducing RPM in 1994, however, VA continued to
    allocate resources mainly on the basis of historical cost.  RPM, like
    RAM, was never fully implemented, and few resources were actually
    shifted among VA facilities.  In April 1997, VA began to implement a
    new resource allocation system--the Veterans Equitable Resource
    Allocation (VERA) system based on the capitation funding principles
    applied by many risk-based managed care plans.

    --------------------
    \35 Although hospitals had financial incentives to increase the
    number of admissions, this did not occur.  Medicare also modified and
    strengthened its utilization review process, and this may have helped
    hold down admissions.

    \36 Medicaid Source Book:  Background Data and Analysis, 1993 Update,
    Congressional Research Service (Washington, D.C.:  Jan.  1993).

    \37 VA has proposed legislation to allow it to recover its costs from
    Medicare for providing Medicare-
    covered services to higher income Medicare-eligible veterans.  Under
    the proposal, VA would keep the recovered funds.  The provision
    authorizing a test of the proposal was removed, however, from the
    final version of the Balanced Budget Act of 1997.

    \38 The Balanced Budget Act of 1997 gave VA the authority to keep
    medical care recoveries and collections after June 30, 1997.

          CAPITATION
    -------------------------------------------------------- Chapter 4:1.3

    Capitation was the second major change in how public and private
    health insurers pay for health care that contributed to declining
    demand for hospital care.  Under capitation, a health maintenance
    organization (HMO) or other risk-basis managed care plan agrees to
    provide comprehensive health services to enrollees in return for a
    prepaid, fixed payment for each enrollee regardless of the quantity
    or types of services provided to any particular enrollee.  The loss
    an HMO suffers from treating enrollees whose health care services
    cost more than the HMO receives in capitation payments is offset by
    the profit the HMO makes from enrollees who use services worth less
    than the capitation amount.

    Capitation reverses the financial incentives existing under the
    traditional fee-for-service reimbursement system.  It gives HMOs and
    other managed care plans incentives to limit the utilization of
    health care services because their profits increase if they provide
    fewer services.  Because revenue is collectively obtained from the
    entire enrolled population of the managed care plan, the effect of an
    individual enrollee's health care use on the HMO's profitability is
    limited.  In other words, capitation tempers the financial incentive
    of an HMO to deny needed services to an individual patient.

    Many HMOs and other managed care plans use capitation or other
    financial incentives to shift some of the risk to individual
    providers or groups of providers.  Depending on their design, such
    capitation payments may encourage primary care physicians to limit
    referrals to specialists and admissions to hospitals and hospitals to
    limit the lengths of stay and admissions.  The financial incentives
    vary by type of HMO.  For example, staff model HMOs provide services
    through salaried primary care physicians; such physicians do not
    directly benefit financially by limiting the services they provide.
    Other types of HMOs and managed care plans, however, provide
    physicians financial incentives through capitation to control (1) use
    of primary care services, (2) referrals to specialists, and (3)
    hospital admissions.\39

    Capitation payment mechanisms require primary care physicians or
    groups of physicians to accept a monthly designated amount as payment
    in full for each assigned enrollee, no matter how often during the
    month the physician or group of physicians provides services or how
    much the services cost.  This shifts a substantial portion of
    financial risk for medical services from the HMO to the primary care
    physician; an individual primary care physician or group of
    physicians can gain or lose profits depending on the amount of
    patient services delivered.

    The amount of financial risk transferred from the HMO or managed care
    plan to the physician or physician group is lowest when the
    capitation covers only primary care services; the risk increases as
    the physician or physician group becomes responsible for a wider
    range of services such as care by specialists and hospital care.

    Although much debate continues on the cost-effectiveness of HMOs and
    their effect on access to and continuity and quality of care, studies
    have found that HMO enrollees have lower hospital utilization
    compared with fee-for-service plans, particularly regarding shorter
    hospital lengths of stay.

    Therefore, the rapid growth of HMOs and other managed care plans has
    significantly contributed to decreasing demand for hospital care.
    Enrollment in HMOs increased from 9 million in 1980 to an estimated
    56 million in 1995 (see fig.  4.1).  HMO enrollment skyrocketed from
    3,356 per 100,000 population in 1978 to 17,526 per 100,000 population
    in 1993, according to a report prepared for the National Committee
    for Quality Health Care.\40

    In addition, many states are enrolling Medicaid recipients in HMOs or
    other managed care plans.

       Figure 4.1:  Growth in HMO
       Enrollment, 1980-95

       (See figure in printed
       edition.)

    Source:  Health Insurance Association of America (HIAA), Source Book
    of Health Insurance Data, 1995.

    Capitation did not, however, contribute significantly to the
    declining demand for VA health care.  Throughout the 15-year period
    during which VA hospital workload steadily declined, VA hospitals
    were funded mainly on the basis of their historical workload,
    creating incentives to increase--not decrease--inpatient workload.

    VA began implementing a capitation-based resource allocation system--
    VERA--in April 1997.  Under VERA, facilities' resource allocations
    are developed on the basis of the number of users rather than on the
    number of services provided.  Users are divided into two
    groups--those with routine health care needs (called Basic Care) and
    those with special, typically chronic, and complex health care needs
    (called Special Care).  For fiscal year 1997, VA allocated $2,596 for
    each Basic Care user and $35,707 for each Special Care user.  VA
    adjusted allocations to reflect differences in labor costs in
    geographic areas.

    Because VISNs receive a fixed allocation for each Basic and Special
    Care user regardless of the types or volume of services provided, the
    allocation system no longer provides a financial incentive to
    unnecessarily hospitalize patients to increase resource allocations.
    VERA should ensure that VISNs have a financial incentive for their
    facilities to treat patients in the most cost-effective setting.
    Although VERA holds promise for creating financial incentives for
    VISNs to reduce unnecessary hospital use, we have testified that VA
    has not adequately studied the reasons for the cost variations among
    VISNs.\41

    --------------------
    \39 Another way to furnish funds for incentives involves risk pools
    composed of funds withheld from payments to physicians.  Risk pools
    may show either a surplus or deficit depending on the use of health
    services authorized by the primary care physicians.  Because
    surpluses are generally paid to the primary care physicians, risk
    pools provide an incentive to reduce referrals for specialty care and
    hospital admissions.

    \40 Tracking the System:  American Health Care 1996, Lewin-VHI, Inc.
    and the National Committee for Quality Health Care (Washington, D.C.:
    1996).

    \41 Department of Veterans Affairs:  Programmatic and Management
    Challenges Facing the Department (GAO/T-HEHS-97-97, Mar.  18, 1997).

          FLAT-RATE PROSPECTIVE
          PAYMENTS
    -------------------------------------------------------- Chapter 4:1.4

    Flat-rate reimbursement was the third major change in payment methods
    that affected demand for hospital care.  States often use flat-rate
    payments under their Medicaid programs and managed care plans in
    negotiating provider agreements.

    States have considerable flexibility in determining how they pay for
    hospital care under their Medicaid programs.  Generally, states'
    methods for reimbursing hospitals may not yield rates that exceed
    amounts paid under the Medicare program.  Before Medicare's PPS
    implementation, most states, like Medicare, reimbursed hospitals on a
    retrospective cost basis.  Due to increased flexibility given states
    through the Omnibus Budget Reconciliation Act of 1981, all but four
    states shifted from retrospective cost-based reimbursement to some
    PPS by 1991.  Fourteen states developed systems that pay a flat rate
    per day or per case regardless of diagnosis.  The rates are generally
    established for each individual facility but may be subject to
    overall limits for classes or "peer groups" of facilities depending
    on number of beds, affiliation with medical schools, and location.

    Under flat-rate PPSs, hospitals receive a fixed payment for each day
    of hospital care provided or each patient treated regardless of the
    volume or cost of services provided.  Hospitals have incentives to
    limit the amount and types of services provided.

    Like the other payment reforms, flat-rate payment methods have not
    contributed to the declining demand for care in VA hospitals.
    Private-sector hospitals have a financial incentive to limit the
    services they provide because their profits depend on the extent to
    which they can provide care for less than the amount they receive
    from Medicaid.  VA's system, however, does not base hospitals'
    funding on their per diem costs.

       CHANGES IN CARE MANAGEMENT HAVE
       REDUCED ADMISSIONS AND LENGTHS
       OF STAY
    ---------------------------------------------------------- Chapter 4:2

    Under a traditional fee-for-service health plan, enrollees obtained
    access to all types of care through an independent physician who was
    reimbursed by the health plan for the specific treatment provided.
    The fee-for-service payment method encouraged physicians and
    hospitals to provide unnecessary services.  However, two major
    changes in how insurers manage their enrollees' access to covered
    health care services--primary care case management and preadmission
    certification--have been used to control admissions to and lengths of
    stay in community hospitals.  Although these changes have
    significantly contributed to the declining use of community
    hospitals, they have had less effect on demand for care in VA
    hospitals because VA hospitals do not depend financially on payments
    from third-party insurance and, until recently, VA hospitals did not
    have comparable programs.

    VA, however, began systemwide implementation of its own primary care
    program in 1994 and established a systemwide preadmission screening
    program in August 1996.  Unlike preadmission screening programs of
    health insurers, however, the VA program does not financially
    penalize a physician or hospital if a patient admitted to a hospital
    is determined to need less care or a patient stays beyond the number
    of days determined appropriate for the condition(s) being treated.

          PRIMARY CARE CASE MANAGEMENT
    -------------------------------------------------------- Chapter 4:2.1

    In addition to providing financial incentives for physicians to limit
    referrals to specialists and admissions to hospitals, HMOs and other
    managed care plans control use of specialists and hospital care
    through primary care case management.  The objective of case
    management is to coordinate and organize health care resources to
    address patients' specific medical problems and to control the cost
    and volume of the health services delivered.  Each insured individual
    selects or is assigned to a case manager through whom all medical
    care (including hospital and specialty care) is provided or approved.

    Primary care case management may take place either in a risk-based
    prepaid health care setting, such as an HMO, or in a nonrisk-based
    fee-for-service system.  For example, 17 states participating in
    Medicaid managed care in 1993 operated primary care case management
    programs.  Under these programs, recipients have a specific primary
    care doctor or provider who oversees their care.  Providers are paid
    on a fee-for-service rather than a risk basis.  Medicaid recipients
    enrolled in primary care case management plans obtain access to care
    through a primary care physician who controls (acts as a gatekeeper)
    and coordinates the delivery of health services in a cost-conscious
    way.

    Primary care case management did not significantly contribute to the
    declining use of VA hospital care.  In the past, VA care was
    episodic, with veterans appearing at the emergency room or outpatient
    clinic when they were sick.  The more traditionally operated general
    medicine clinics do not always pair the veteran with the same
    physician, so no single physician may be responsible for the
    veteran's care.

    One of the objectives set forth by VA's Prescription for Change was
    to establish primary care as the central focus of patient treatment.
    Though 20 percent of VA users perceived that one provider or primary
    care team was in charge of their care in 1994, 72 percent of users in
    1996 were assigned a primary care provider.  VA's goal is to have 80
    percent of users enrolled in primary care during fiscal year 1998.

          HOSPITAL PREADMISSION
          CERTIFICATION
    -------------------------------------------------------- Chapter 4:2.2

    While prospective payment gives hospitals incentives to reduce
    lengths of stay and the number of ancillary services provided, it
    does not give incentives to control hospital admissions.  One way to
    control unnecessary hospital admissions is through preadmission
    certification of the medical necessity of acute, inpatient hospital
    services.  Under preadmission certification, the insurer must review
    and approve of the need for admission (other than in an emergency)
    beforehand.  Hospital preadmission certification can also effectively
    identify potential candidates for more cost-effective alternatives to
    inpatient care such as home health care.

    Such certification has become common in private health insurance
    policies and in HMOs.  About 75 percent of private-sector employers
    now purchasing health insurance for their employees, an official of
    the Health Insurance Association of America (HIAA) estimated, want a
    hospital preadmission certification program included in their overall
    health care package.  Beneficiaries or their physicians typically
    have to contact their insurers at the time of the nonemergency
    admission to the hospital to obtain certification that the insurer
    will pay the hospital.

    Similarly, all fee-for-service health plans participating in the
    Federal Employees Health Benefits Program (FEHBP) must operate
    hospital preadmission certification programs.\42

    For example, the governmentwide Blue Cross and Blue Shield Service
    Benefit Plan requires that the enrollee or enrollee's doctor check
    with the local plan before the enrollee is admitted to a hospital (or
    within 2 business days after the day of a maternity or emergency
    admission).  Precertification allows the plan to evaluate the medical
    necessity of the proposed hospital admission and to determine the
    number of days of hospital care authorized for treating the
    enrollee's condition.

    If a policyholder is admitted to the hospital without
    precertification, the plan reduces benefits by $500, even if the
    admission was medically necessary.  If the plan determines that the
    hospitalization was not necessary, it will not pay inpatient hospital
    benefits.  If the plan determines the admission to be medically
    necessary but part of the stay not to be medically necessary, the
    plan will not pay inpatient hospital benefits for the portion of the
    stay that was not medically necessary.

    Insurers' preadmission certification requirements did not
    significantly contribute to the declining demand for VA hospital care
    between 1980 and 1995.  This is because the VA system hardly had any
    financial incentives to provide care in the most cost-effective
    setting.  Even in those cases in which a private health insurer's
    preadmission certification requirement applied, failure to obtain
    such certification or to admit the patient after certification was
    denied did not affect hospital revenues.  A VA hospital that admits a
    patient who does not need hospital care incurs no penalty.  In fact,
    VA's past resource allocation methods gave medical centers a
    financial incentive to admit patients whose care could have been
    provided more efficiently in an outpatient setting and to keep them
    in the hospital as long as possible.  VERA is intended to overcome
    this problem and provide financial incentives for VISNs to provide
    care in more cost-effective settings.  As noted, however, VERA does
    not provide financial incentives for individual physicians to use
    more efficient practices.

    We reported in July 1996 that VA, unlike private-sector health care
    providers, had no systemwide external preadmission screening program
    or other utilization review program to provide incentives to ensure
    that only patients who need hospital care are admitted and that
    patients are discharged as soon as medically possible.\43 In response
    to our recommendation that it establish an independent external
    preadmission certification program, the Veterans Health
    Administration, in August 1996, issued a directive requiring VISNs to
    establish utilization management programs to assess, monitor, and
    evaluate the appropriateness of the level of care provided by their
    facilities.  By September 30, 1996, facilities had substantially
    implemented

      -- preadmission review of 100 percent of planned admissions to
         determine each patient's most appropriate level of care and

      -- continuing stay reviews to determine the appropriateness of each
         additional day of acute hospitalization.  Each VISN was to
         determine the design and extent of the continuing stay reviews.

    The directive also said that each network was to ensure that
    facilities establish a process for coordinating referrals and arrange
    for the inpatient and outpatient alternatives to acute
    hospitalization for each patient.  The outpatient alternatives
    should, the directive states, include clinic appointments to primary
    care clinics, preferably, or specialty clinics; urgent care
    evaluation units; outpatient care evaluation units; temporary
    lodging; or observation beds.

    --------------------
    \42 FEHBP provides health insurance to about 8.6 million active
    federal civilian employees, federal retirees, and their dependents.

    \43 VA Health Care:  Opportunities for Service-Delivery Efficiencies
    Within Existing Resources (GAO/HEHS-96-121, July 25, 1996).

       EXPANDED HOME HEALTH CARE
       COVERAGE HAS REDUCED LENGTHS OF
       STAY
    ---------------------------------------------------------- Chapter 4:3

    Expanded insurance coverage of home health care has helped reduce
    community hospital admissions and lengths of stay.  Both public
    programs, such as Medicare and CHAMPUS, and private insurance have
    expanded coverage of home health care, particularly when such care is
    considered less expensive than continued hospital care or an
    alternative to hospital care.  Although VA also provided home health
    care during our study period (1980 to 1995), the availability of such
    care was more limited.

    For chronically and catastrophically ill patients, home health care
    may (1) reduce the number or length of rehospitalizations, (2)
    benefit the patient, and (3) cost less than hospital care for many
    patients who would otherwise remain in the hospital if home care were
    not available.\44 The increased demands for home health care also
    reflect many Americans' desire for treatment options that allow
    autonomy, functional independence, quality of life, and dignity,
    while providing needed support.

    --------------------
    \44 DOD Health Care:  Further Testing and Evaluation of Case-Managed
    Home Care Is Needed (GAO/HRD-93-59, May 21, 1993).

          ROLE OF MEDICARE HOME HEALTH
          IN REDUCING HOSPITAL LENGTHS
          OF STAY IS UNCLEAR
    -------------------------------------------------------- Chapter 4:3.1

    With the implementation of the Medicare inpatient PPS in 1983, use of
    the home health benefit was expected to grow as patients were
    discharged from the hospital earlier in their recovery periods.
    Expenditures changed little in the next 5 years, however.  Home
    health expenditures grew significantly after home health coverage was
    broadened and program controls were reduced in the late 1980s.
    Figure 4.2 shows the growth in Medicare home health visits per
    100,000 beneficiaries between 1978 and 1993.

       Figure 4.2:  Changes in Home
       Health Visits per 100,000
       Medicare Beneficiaries, 1978-93

       (See figure in printed
       edition.)

    Source:  Lewin VHI, Inc., Tracking the System:  American Health Care
    1996.

    The extent to which home health care has helped decrease hospital
    lengths of stay has not been quantified.  Nevertheless, the
    availability of home health care has surely enabled decreased lengths
    of stay.

    Although home health care has been a Medicare benefit since the
    program's inception, changes in the legal and regulatory provisions
    governing the home health benefit, together with changes in HCFA's
    policies, have played a major role in increased use of the benefit.
    Initially, Medicare provided a limited posthospital home health care
    benefit of up to 100 visits per year.  Benefits were available only
    following discharge from a hospital and had to be provided within 1
    year after the patient's discharge and for treating the illness that
    caused the hospitalization.  These restrictions were eliminated by
    the Omnibus Reconciliation Act of 1980.

    Other important restrictions, however, remained.  For example, under
    HCFA's interpretation of the law, home health care was available only
    on a part-time and intermittent basis.  After HCFA's interpretation
    of this and other benefit coverage requirements was struck down in a
    1988 lawsuit (Duggan v.  Bowen),\45 Medicare coverage was further
    broadened.  As a result of the lawsuit, HCFA revised its home health
    guidance to cover home health care that is part time or intermittent,
    enabling home health agencies to increase the frequency of visits.
    In addition, patients now qualify for skilled observation by a nurse
    or therapist if a reasonable possibility exists for complications or
    the need to change treatment.  Moreover, the benefit now allows
    maintenance therapy, that is, therapy services required for the
    patient to simply maintain function.  Previously, patients were
    eligible for therapy only if expected to show improvement from such
    services.

    These changes made Medicare home health care available to more
    beneficiaries for less acute conditions and for longer periods of
    time.  For example, in 1992, about one-third of Medicare home health
    beneficiaries entered the program without a prior hospital stay
    during the year and, of those who had been hospitalized, only half
    had been hospitalized within the 30 days before receiving home health
    care.

    Both the number of Medicare beneficiaries receiving home health
    services and the number of services received by each beneficiary have
    increased significantly.  In 1989, 1.7 million Medicare beneficiaries
    received home health services; by 1993, this number had grown to 2.8
    million.  During the same time, the number of visits provided to
    beneficiaries receiving home health care more than doubled, from an
    average of 26 visits per year in 1989 to an average of 57 visits per
    year in 1993.

    Linking these increases to decreased use of hospital care is
    difficult, however.  As discussed, the largest increases in home
    health visits did not occur during the 5 years following
    implementation of the PPS.  During that period, however, the Deficit
    Reduction Act of 1984 reduced the number of intermediaries processing
    home health claims, and HCFA intensified education of the home health
    intermediaries to promote more consistency in claims reviews.  These
    improved controls resulted in an increased claim denial rate of
    between 1985 and 1987.  Thus, reductions in home health use may have
    offset any increased use of home health care to shorten hospital
    lengths of stay.

    Although controls over home health care improved during the mid- and
    late 1980s, they have largely deteriorated since then, contributing
    to the growth in benefit payments.\46

    --------------------
    \45 Duggan v.  Bowen, 691 F.  Supp.  1487 (D.D.C.  1988).

    \46 Medicare:  Home Health Utilization Expands While Program Controls
    Deteriorate (GAO/HEHS-96-16, Mar.  27, 1996).

          CHAMPUS BENEFITS EXPANDED TO
          INCLUDE CASE-MANAGED HOME
          CARE
    -------------------------------------------------------- Chapter 4:3.2

    The Congress, in October 1992, authorized DOD to establish a program
    for individual case-managed home care of military beneficiaries with
    extraordinary medical or psychological disorders.  The program grew
    out of two demonstration projects intended to test whether expanded
    home care benefits, coupled with case management, could reduce
    medical costs and improve services to CHAMPUS beneficiaries.  The
    original program focused on serving patients who, in the absence of
    case-managed home care, would remain hospitalized.

          HOME HEALTH HAS BECOME THE
          FASTEST GROWING BENEFIT
          UNDER PRIVATE HEALTH
          INSURANCE
    -------------------------------------------------------- Chapter 4:3.3

    Although private health insurance plays a comparatively small role in
    financing home health care, it is the fastest growing benefit.
    Between 1989 and 1993, private health insurance payments for home
    health services increased from $0.4 billion to $2.5 billion (see fig.
    4.3).  Home health payments increased 13.6 percent between 1992 and
    1993, compared with an increase of 7.9 percent for payments for
    hospital care, which had the second highest rate of increase.\47

       Figure 4.3:  Growth in Home
       Health Payments Under Private
       Health Insurance

       (See figure in printed
       edition.)

    Source:  HIAA, Source Book of Health Insurance Data, 1995.

    --------------------
    \47 Source Book of Health Insurance Data, 1995, HIAA (Washington,
    D.C.:  1996).

          VA HOME CARE BENEFITS HAVE
          GROWN LESS THAN SUCH
          BENEFITS UNDER PRIVATE
          HEALTH INSURANCE
    -------------------------------------------------------- Chapter 4:3.4

    VA home health care benefits have grown more modestly, though still
    significantly, than such benefits under private health insurance.
    VA's efforts to meet veterans' home health care needs focus on
    providing long-term care services for chronic medical conditions as
    well as shorter term services for acute medical conditions.  VA's
    Hospital-Based Home Care (HBHC) program most often provides care to
    those with chronic conditions.  Veterans requiring short-term skilled
    care often following a hospital stay generally receive services from
    community-based providers.  VA either arranges for Medicare to pay
    for eligible veterans to receive home care from community-based
    providers or, under its fee-basis program, pays community-based
    providers to provide care for those not eligible for Medicare.

    HBHC is an extended-care program designed to meet the long-term care
    needs of veterans who have chronic multiple medical and psychosocial
    problems, a terminal illness, or a need for posthospital
    rehabilitation or monitoring.  The objectives of the program are to
    provide primary care services to homebound patients; create a
    therapeutic and safe home environment; support the caregiver--the
    veteran's spouse, other family member, or friend--in caring for the
    patient; reduce the need for, and provide an alternative to,
    hospitalization or other institutionalization; promote timely
    discharge of patients from hospitals or nursing homes; and provide an
    academic and clinical setting for students of the health professions.
    VA's HBHC program, begun in 1972, had been implemented in VA's 173
    hospitals by fiscal year 1975.  In fiscal year 1994, VA served 9,953
    veterans under the program.

    The fee-basis program, the second method VA uses to provide home
    health services, involved nearly all VA hospitals in fiscal year
    1995.  The hospitals use the program to purchase skilled home health
    services from community-
    based providers.  In fiscal year 1994, VA spent $27.3 million on
    fee-basis home health care services for about 12,800 patients.  Most
    veterans in the program receive short-term home health care services
    for acute medical conditions, such as hip fractures or surgical
    wounds.  Skilled nursing is the predominant service covered under the
    fee-basis program.

    Finally, VA provides homemaker/home health aide services for veterans
    who otherwise would be placed in a nursing home under a pilot program
    implemented in April 1993 in response to Public Law 101-366.
    Although the program was initially limited to services for veterans
    with service-
    connected disabilities, Public Law 103-452 expanded eligibility to
    include all veterans, and the Veterans' Benefits Act of 1997 made the
    program permanent.

    Under the pilot program, a VA facility provides primary health
    services for veterans receiving homemaker/home health aide services.
    Community health nurses and social workers select a licensed home
    health agency to provide the homemaker/home health aide services.
    The continued need for the services is reassessed every 3 months, and
    the cost of homemaker/
    home health aide services on a per patient basis is limited to 65
    percent of the average per diem costs of VA nursing home care units.
    All VA medical centers may participate in the pilot program.  In
    1996, 118 medical centers operated pilot programs, which had an
    average daily census of about 1,457.

    In addition to the veterans receiving hospital- and fee-based care,
    VA facilities referred about 19,000 Medicare-eligible veterans to
    Medicare-
    certified home health agencies in fiscal year 1994.  Medicare, rather
    than VA, paid for the home health services provided to such veterans.

       EXPANSION OF HOSPICE CARE HAS
       REDUCED HOSPITAL USE BY THE
       TERMINALLY ILL
    ---------------------------------------------------------- Chapter 4:4

    The rapid expansion of hospice care benefits from 1978 through 1993
    has reduced hospital use by the terminally ill.  Although VA also
    offers hospice benefits, its benefits were primarily for inpatients
    and limited to selected medical centers until 1993.  As a result,
    these benefits did not significantly affect demand for inpatient
    hospital care between 1980 and 1995.

    Hospice care involves a medically supervised program of home or
    inpatient palliative and supportive care for a terminally ill patient
    and the patient's family.  Specialized care for terminally ill
    patients began in Europe in the 1800s, but in the United States, the
    first hospice was not formally organized until 1974.  Medicare's 1983
    addition of a hospice benefit helped to rapidly expand hospice care:
    The number of hospices increased from 158 in 1985 to 1,459 in 1994.
    The number of Medicare-
    covered hospice days per 100,000 Medicare beneficiaries increased
    from 3,270 days in 1986 to 19,864 days in 1993.\48 (See fig.  4.4.)

       Figure 4.4:  Growth in Hospice
       Days of Care per 100,000
       Medicare Beneficiaries, 1986-93

       (See figure in printed
       edition.)

    Source:  Lewin-VHI, Inc., Tracking the System:  American Health Care
    1996.

    Virtually all terminally ill Medicare beneficiaries are now eligible
    for hospice care.  Until recently, coverage was limited to four
    periods of care--two 90-day periods, one 30-day period, and a final
    period of unlimited duration.\49 The Medicare hospice benefit also
    offers financial incentives for hospices to provide care in the
    patient's home rather than in a facility.

    Other health care programs also initiated or expanded hospice
    benefits.  For example, over 30 states had added hospice benefits
    under their Medicaid programs by 1991 and DOD's direct delivery
    system and CHAMPUS authorized a hospice benefit in 1991.  Similarly,
    many private health insurers covered hospice benefits by the early
    1980s.

    Although hospices mainly serve patients with cancer, a broad range of
    terminally ill patients, such as patients with acquired
    immunodeficiency syndrome, are also served.  Moreover, an estimated
    15 percent of the children who die in the United States could
    potentially benefit from hospice services.\50

    All terminally ill veterans are eligible to receive hospice care from
    VA with no limits on the length of time covered.  VA's Commission on
    the Future Structure of Veterans Health Care reported in November
    1991 that only 45 VA medical centers had hospice programs as of
    October/November 1990.  One year later, however, VA reported that all
    of its medical centers provided hospice care.

    --------------------
    \48 Tracking the System, Lewin-VHI, Inc.  and the National Committee
    for Quality Health Care.

    \49 The Balanced Budget Act of 1997 established new coverage limits.
    The Medicare benefit now allows an unlimited number of 60-day
    extensions of hospice services following the two initial 90-day
    periods.

    \50 I.M.  Martinson, "Hospice Care for Children:  Past, Present, and
    Future," Journal of Pediatric Oncology Nursing, Vol.  10, No.  3
    (1993).

       EFFECTS OF RECENT VA CHANGES ON
       FUTURE DEMAND FOR VA HOSPITAL
       CARE ARE UNCERTAIN
    ---------------------------------------------------------- Chapter 4:5

    VA has developed new methods for allocating resources and monitoring
    the appropriateness of hospital admissions and lengths of stay
    modeled after private-sector actions.  The effects of these changes
    on future demand for VA hospital care are uncertain, however, because
    of important differences between VA and private-sector programs and
    because the changes are recent.

    VERA may help VA reduce hospital admissions as the private sector
    already has through prospective payment and capitation.  The ultimate
    effect of VERA on hospital operations, however, depends on several
    factors.  First, how effective will VERA be in changing practice
    patterns absent the financial risk upon which both prospective
    payment and capitation are based?  Unlike private-sector hospitals
    and health plans, VISNs do not have a contractual obligation to
    provide their users needed health care services.  Theoretically, if a
    VISN runs out of funds, it may deny care to any veteran, including
    those with service-connected disabilities.  By contrast, private
    insurers have a contractual obligation to provide their members the
    full range of health care services covered by the plan.

    Because implementation of VERA did not begin until April 1997 and
    resource shifts are being phased in over several years, little is
    known about

      -- how VISNs and individual facilities are reacting to both
         increased and decreased resource allocations and

      -- the potential effects, both positive and negative, on veterans'
         access to health care services.

    Determining the effect of VERA on VA hospitals' efficiency will be
    difficult because VISNs and individual facilities can and do shift
    costs to other programs such as the Medicare home health and hospice
    programs and the Medicaid nursing home program.  In other words,
    increased costs in other programs may offset reductions in VA costs
    per patient served.

    Another reason why VERA's effects are uncertain relates to VISNs'
    decisions on allocating resources.  If VISNs use VERA to provide
    veterans the same opportunity for VA-supported hospital care
    regardless of veterans' residence, then fewer funds will be available
    to support existing VA hospitals and more funds will be allocated to
    purchase care from community hospitals closer to veterans' homes.
    This is because about 89 percent of veterans live more than 5 miles
    from a VA hospital providing acute medical and surgical care, and
    many veterans--given a choice between care in non-VA facilities close
    to their homes and more distant VA facilities--with no difference in
    out-of-pocket costs, would most likely choose non-VA care.

    Although it is too early to evaluate the effectiveness of VA's new
    preadmission screening and continuing stay review requirements, data
    from both the Washington, D.C., and Martinsburg, West Virginia, VA
    medical centers indicate that about 45 percent of acute inpatient
    admissions and about 60 percent of acute days of care (in both
    centers) did not meet standards for acuity or intensity of care.
    Preliminary data from VISN 5 (Baltimore) suggest that they are having
    a limited effect on reducing unnecessary hospital admissions and
    excessive lengths of stay in that area.  VISN 5 (Baltimore) uses its
    reviews mainly for data collection, evaluation, and monitoring.

    Unlike the preadmission certification and continuing stay review
    programs run by private health insurers, the VA program has no
    similar enforcement mechanism.  Private-sector community hospitals
    generally do not get paid if they admit patients without the
    insurer's prior approval, except in an emergency.  Under VA's
    preadmission certification program, however, neither the hospital nor
    the physician authorizing the admission incurs any direct financial
    penalty for admitting a patient whom the screening program determined
    did not need to be admitted.

    Even without giving hospitals and physicians a direct financial stake
    in admission decisions, preadmission screening and continuing stay
    reviews should somewhat affect nonacute admissions.  Data are not yet
    available for gauging the extent to which individual physicians are
    changing their admitting practices because of the review programs.
    Once such data are available, the need to establish the types of
    financial disincentives to nonacute admissions that exist in the
    private sector can be determined.

    Finally, expanded home health and hospice benefits under public and
    private health insurance could affect demand for VA hospital care.
    The availability of Medicare home health benefits, which require no
    beneficiary cost sharing, may have contributed to decreased use of VA
    as well as community hospitals.  Similarly, VA's focus on home health
    and hospice care, both through direct provision of services and
    referrals to Medicare and other programs, could further reduce VA
    lengths of stay.

    ADDITIONAL FACTORS LIKELY TO
    AFFECT FUTURE DEMAND FOR VA
    HOSPITAL CARE
    ============================================================ Chapter 5

    Although medical advances and changes in the payment and care
    management methods used by public and private health insurers did not
    affect demand for VA hospital care as much as demand for community
    hospitals, several additional factors affected VA but not community
    hospitals.  First, VA hospitals have had a steadily declining target
    population since 1980, while the general population has been
    increasing.  Second, the Medicare and Medicaid programs gave many
    veterans the means to obtain care from community hospitals closer to
    their homes than VA hospitals.  As the veteran population declines,
    an increasing proportion is becoming Medicare eligible and using such
    coverage to obtain all or a portion of their hospital care from more
    convenient community hospitals.  Finally, the growth of HMOs and
    preferred provider organizations (PPO) with their relatively low
    cost-sharing requirements has largely eliminated one of VA's
    competitive advantages over community hospitals--its ability to offer
    veterans free care if they use VA hospitals.

    Recent and proposed changes in the VA system and other health care
    programs create considerable uncertainty about future demand for VA
    hospital care.  For example, how will expansions of veterans'
    eligibility for VA health care services and VA's ability to buy care
    from and sell care to private-sector hospitals and health plans
    affect future use of VA hospitals?  Similarly, proposals to delay
    Medicare eligibility and give Medicare beneficiaries the choice of
    establishing medical savings accounts (MSA) could increase demand for
    VA hospital care.  On the other hand, actions to make it easier for
    people to maintain insurance coverage when they change jobs could
    decrease future demand for VA care.

       VA, UNLIKE COMMUNITY HOSPITALS,
       HAS A DECLINING TARGET
       POPULATION
    ---------------------------------------------------------- Chapter 5:1

    VA hospitals have had a steadily declining target population since
    1980.  The decline is expected to escalate during the next 12 years,
    resulting in an overall one-third reduction in the number of veterans
    between 1980 and 2010.  In contrast, the general population has
    increased steadily since 1980, helping offset the effect on community
    hospital demand of other efforts to decrease demand.

    The veteran population, which numbered slightly more than 30 million
    in 1980, declined to about 26 million in 1995.  In contrast, the
    general population increased from about 228 million in 1980 to more
    than 263 million in 1995.  (See fig.  5.1.)

       Figure 5.1:  Changes in
       Community and VA Hospitals'
       Populations, 1980-95

       (See figure in printed
       edition.)

    Projected changes in the veteran population by 2010 indicate that
    demand for VA hospital care will continue to decline unless VA acts
    to increase the percentage of veterans using VA hospital care.  The
    veteran population is expected to decline another 23 percent (6.1
    million) by 2010.  In contrast, the general population is expected to
    increase by about 13.2 percent (34.7 million) in the same period.
    (See fig.  5.2.)

       Figure 5.2:  Projected Changes
       in Community and VA Hospitals'
       Populations, 1995-2010

       (See figure in printed
       edition.)

    With the downsizing of the military since the end of the Vietnam War
    and with World War II ending over 50 years ago, the aging of the
    veteran population has become more pronounced.  The proportion of the
    veteran population under the age of 45 is projected to decline from
    31 to 16 percent between 1990 and 2010.  In contrast, the proportion
    of the veteran population that is 75 years old or older will increase
    from approximately 5 to about 23 percent in the same 20-year period.

    Although veterans' health care needs increase among older veterans,
    the overall decline in the number of veterans should more than offset
    the increased hospital use by older veterans and should further
    reduce the number of days of VA hospital care.  If veterans continued
    to use VA hospital care at the same rate that they did in 1994, the
    number of days of care provided in VA hospitals should decline about
    11 percent, from 15.4 million in 1994 to about 13.7 million by 2010.
    In other words, even if VA made no other changes in its health care
    system to reduce the amount of care unnecessarily provided in its
    hospitals, the declining numbers of veterans would reduce demand
    despite the aging of the veteran population.

    These estimates may, in fact, overstate demand for VA inpatient
    hospital care.  Between fiscal years 1994 and 1996, VA hospital days
    of care declined from 576 to 542 per 1,000 veterans.  More
    importantly, days of care per 1,000 veterans aged 85 and older
    declined 30 percent in the 2-year period.  Despite a 26-percent
    increase in the number of veterans 85 and older, days of care
    provided to veterans in the age group declined 11 percent.

       MEDICARE GAVE OLDER VETERANS
       IMPROVED HEALTH CARE OPTIONS
    ---------------------------------------------------------- Chapter 5:2

    One of the main reasons for the declining use of VA services by older
    veterans is the introduction of Medicare and Medicaid.  The rate at
    which elderly veterans used VA hospitals dropped by 50 percent
    between 1975 and 1996.  The introduction of Medicare and Medicaid in
    1965 gave many veterans new health care options.  This is important
    because veterans who have health insurance are much less likely to
    use VA hospitals than veterans without public or private insurance.

    Medicare, which provides hospital insurance to almost all Americans
    aged 65 and older and some under 65 who are disabled, gave many
    veterans new or improved access to health insurance.  Similarly, the
    enactment of Medicaid improved access to health care services for
    some low-income veterans.

    Almost immediately after the enactment of the two programs, demand
    for VA hospital care began to steadily decline as the Medicare and
    Medicaid programs were increasing demand in community hospitals.
    Medicare increasingly affected demand for VA hospital care between
    1975 and 1996 as the veteran population aged.  This is because most
    veterans become eligible for Medicare when they turn 65 years of age
    even if they were previously employed in jobs that did not provide
    health insurance.  VA research has confirmed that a significant
    portion of VA's elderly users leave VA's inpatient care system or
    reduce their use of VA hospital care as they become Medicare
    eligible.\51

    VA hospital discharges per 1,000 veterans aged 65 or older declined
    from 78 in fiscal year 1975 to 39 in fiscal year 1996.  Hospital
    discharges among veterans between the ages of 45 and 64 decreased,
    but to a lesser extent, in the 21-year period, from 33 to 29 per
    1,000 veterans.  Hospital discharges increased from 19 to 25 per
    1,000 veterans under age 45.  (See fig.  5.3.)

       Figure 5.3:  Changes in
       Hospital Discharges per 1,000
       Veterans by Age Group, Fiscal
       Years 1975-96

       (See figure in printed
       edition.)

    Source:  Based on VA Annual Reports for fiscal years 1975, 1980,
    1985, 1995, and 1996.

    The data show that the peaks in use by veterans in the two younger
    age groups roughly correspond to the aging of the large numbers of
    Vietnam-era and Korean Conflict veterans.  For example, the 1985 peak
    in hospital use by veterans aged 45 to 64 corresponds to the period
    in which most Korean Conflict veterans were in this age group.
    Hospital use by this group of veterans subsequently began to decline
    as more Korean Conflict veterans reached 65 years of age.  Similarly,
    VA hospital discharges per 1,000 veterans under age 35 have declined
    steadily since 1985 as most Vietnam-era veterans continue aging;
    discharges per 1,000 veterans aged 35 to 44 generally increased
    during the same time period.

    --------------------
    \51 John J.  Hisnanick, The Impact of Medicare on the Hospital Usage
    Patterns of Elderly and Disabled Veterans:  Findings From Linking the
    HCFA and VA Administrative Databases, National Center for Veteran
    Analysis and Statistics, VA, SR-008-94-2 (Washington, D.C.:  July
    1994).

       INCREASING HMO AND PPO
       ENROLLMENT REDUCED VETERANS'
       FINANCIAL INCENTIVES TO USE VA
       HOSPITALS
    ---------------------------------------------------------- Chapter 5:3

    Increasing enrollment in HMOs, PPOs, and point of service (POS) plans
    also affected demand for VA hospital care by reducing or eliminating
    the financial incentive for veterans to use VA hospitals.  Unlike
    traditional fee-for-service health insurance that typically requires
    policyholders to pay a significant portion of their hospital costs
    through deductibles and copayments, HMOs, PPOs, and POS plans
    generally require no or small cost sharing when policyholders obtain
    care from designated hospitals.

    In 1985, both public and private health insurance plans were still
    predominantly fee for service and had significant out-of-pocket
    costs.  Although most fee-for-service insurance provided first-dollar
    coverage of hospital room and board, patients often paid sizable
    deductibles and coinsurance for physician and ancillary services.
    Specifically, about 66 percent of private health insurance policies
    provided first-dollar coverage of hospital room and board, but 95
    percent required policyholders to pay from 10 to 20 percent of
    hospital charges for physician and ancillary services; the remaining
    5 percent required policyholders to pay 25 percent of charges.  In
    addition, fee-for-service insurance often required policyholders to
    pay a specified amount of covered charges before insurance paid any
    benefits.  Such deductibles were generally applied annually.  In
    1985, between 80 and 90 percent of fee-for-service health plans had
    deductibles for major medical benefits.

    The significant cost sharing associated with fee-for-service health
    insurance costs veterans with such insurance out-of-pocket expenses
    when they obtain care from community hospitals.  Although veterans
    with higher incomes are less likely to use VA facilities, it provides
    a financial incentive for veterans with limited incomes to use VA
    rather than community hospitals.  This is because VA does not require
    these veterans to pay applicable copayments and deductibles under
    their public or private insurance.

    Fee-for-service payment methods have declined in both public and
    private insurance as enrollment in HMOs and other managed care plans
    has increased.  Enrollment in HMOs increased from 9 million in 1982
    to 50 million in 1994.  In 1993, however, 49 percent of American
    workers with health insurance still had a conventional
    fee-for-service plan.  By 1995 that percentage had dropped to 27.\52

    The nearly three-fourths of workers with employer-provided health
    insurance now covered under a managed care plan have largely
    eliminated the financial incentive for employed veterans to use VA
    hospitals.  A slower shift is occurring among Medicare enrollees.
    Between 1987 and 1996, enrollment in Medicare risk-contract HMOs
    increased from 2.6 percent of beneficiaries to 10 percent of
    beneficiaries.  By 2002, however, enrollment is projected to be 22.9
    percent of total beneficiaries.\53 Like enrollees under other HMOs,
    Medicare beneficiaries enrolled in risk-based HMOs usually have
    minimal out-of-pocket expenses.  In addition, HMOs often add
    additional benefits, such as prescription drugs, not otherwise
    covered under Medicare.

    --------------------
    \52 Gail A.  Jensen and others, "The New Dominance of Managed Care:
    Insurance Trends in the 1990s," Health Affairs, Vol.  16, No.  1
    (1997), pp.  125-36.

    \53 Jo Ann Lamphere and others, "The Surge in Medicare Managed Care:
    An Update," Health Affairs, Vol.  16, No.  3 (1997), pp.  127-33.

       MANY FACTORS MAKE FUTURE DEMAND
       FOR VA HOSPITAL CARE UNCERTAIN
    ---------------------------------------------------------- Chapter 5:4

    Recent and proposed changes in the VA system and other health care
    programs create considerable uncertainty about future demand for VA
    hospital care.  First, VA expects last year's expansion of
    eligibility for VA health care to enable it to increase VA system
    users by 20 percent.  It is not clear, however, to what extent new
    users attracted to VA outpatient care through community-based
    outpatient clinics (CBOC) will use VA for hospital care.

    VA's 1998 budget proposed reinvesting all efficiency savings and
    using additional resources to expand its system users by 20 percent.
    VA expected to add a total of $5.8 billion in new resources in the
    next 5 years (from public and private insurers and others), starting
    with $737 million in 1998 and increasing to $1.7 billion in 2002.\54
    VA expected these additional resources to allow it to increase the
    number of veterans served by 587,000, which would increase its
    patient base from 2.9 million to 3.5 million in 2002.

    If VA attains the targeted resource levels, it could attract 587,000
    new users by 2002.  The recent expansions of VA's contracting
    authority and veterans' eligibility for care should facilitate
    creation of new CBOCs, which, along with VA's efforts to improve
    accessibility of hospital-based clinics, will probably attract new
    users.

    It is unclear, however, whether the new users will use VA for
    hospital care.  To the extent that CBOCs are far from their
    sponsoring VA hospitals, the likelihood of veterans using a VA
    hospital drops off rather significantly at distances of more than 5
    miles from the VA hospital.\55

    The second factor that could affect future demand for VA hospital
    care is VA's expanded authority to buy hospital care from and sell
    hospital care to the private sector.  This authority could increase
    the use of VA hospitals if VA uses it to serve more nonveterans or
    decrease the use of VA hospitals if VA uses it to allow veterans,
    such as the new users attracted to the system through CBOCs, to use
    community hospitals closer to their homes.

    A third factor that could affect future demand for VA hospital care
    is delaying Medicare eligibility.  As discussed, veterans tend to
    stop using or reduce their use of VA hospitals after they become
    eligible for Medicare.  Thus, delaying eligibility for Medicare
    benefits could delay veterans' leaving the VA system.  More
    importantly, VA could serve as an increasingly important source of
    health care coverage for veterans retiring before they qualified for
    Medicare.  Many such veterans might not be able to continue coverage
    under their employer-provided health insurance, or such coverage
    might be prohibitively expensive.

    MSAs, authorized under the Balanced Budget Act of 1997, are the
    fourth factor that could increase future demand for VA hospital care.
    Medicare-
    eligible veterans may have financial incentives to establish such
    accounts, enroll in the VA health care system, obtain essentially
    free care from VA, and then pocket the excess funds in the account.
    MSAs could, however, be structured to prevent people with such
    accounts from using other federal health benefits.  The Balanced
    Budget Act permits the Secretary of HHS to apply rules that will
    ensure that such dual enrollment will not result in increased
    expenditures for the federal government.  Veterans enrolling in MSAs
    would no longer be able to use both VA and Medicare services.  About
    half of the Medicare-eligible veterans using VA services use both VA
    and Medicare services.\56

    Further changes in the private health insurance market could also
    affect future demand for VA hospital care.  First, recently enacted
    legislation could make it easier for people to maintain their private
    health insurance when they lose or change jobs.  The Health Insurance
    Portability and Accountability Act of 1996 (P.L.  104-191) limits to
    12 months plans' ability to restrict coverage of employees'
    preexisting health care conditions.  Before this law, plans could
    permanently exclude coverage of preexisting conditions.  The law also
    made it easier for veterans to change jobs without losing health
    insurance coverage; this, in turn, could reduce some veterans'
    incentives to use VA facilities.  For example, in 1994 we reported
    that veterans participating in focus groups told us that they use VA
    health care when they lack health insurance.\57

    Although, as discussed, a continued growth in managed care plan
    enrollment could further reduce use of VA health care, growing
    dissatisfaction with HMOs and other managed care plans could result
    in increased use of VA hospitals.  For example, physicians from VA
    medical centers in California, Florida, New Mexico, and other states
    have noted an increase in the number of elderly veteran patients who
    seek care at VA facilities while enrolled in HMOs.\58 Two studies at
    individual VA facilities found that HMO enrollment ranged from 10
    percent among veterans of all ages to about 25 percent among elderly
    veterans.\59

    Finally, the recent trend toward increased beneficiary cost sharing
    in managed care plans could provide financial incentives for veterans
    to obtain care from VA hospitals.  One found that copayments for
    hospital stays rose from $4.50 a day in 1987 to $24.90 a day in 1993;
    for inpatient mental health care services, copayments increased from
    $3.39 to $14.51 per day.  The study also found that the higher
    copayments decreased demand for services from the HMOs.  For example,
    researchers in Washington found that adding a $5 copayment reduced
    visits to primary care physicians by 5 percent.  It is unclear,
    however, to what extent increased use of VA-provided services would
    offset reduced use of HMO-provided services.\60

    --------------------
    \54 The Balanced Budget Act of 1997 authorized VA to retain
    recoveries from private health insurance and collections resulting
    from veteran copayments.  It did not, however, authorize VA
    recoveries from Medicare.

    \55 VA Health Care:  How Distance From VA Facilities Affects
    Veterans' Use of VA Services (GAO/HEHS-96-31, Dec.  20, 1995).

    \56 Veterans' Health Care:  Use of VA Services by Medicare-Eligible
    Veterans (GAO/HEHS-95-13, Oct.  24, 1994).

    \57 Veterans' Health Care:  Veterans' Perceptions of VA Services and
    VA's Role in Health Care Reform (GAO/HEHS-95-14, Dec.  23, 1994).

    \58 E.  Yano and others, Survey of Health and Medical Care for
    Veterans in Ambulatory Care, VA Medical Center, Evaluation and Design
    Support Service (VA-S#94301), (Sepulveda, Ca.:  1994).

    \59 R.  Morgan, B.  Virnig, and C.  Devito, Medicare HMO Membership
    and Use of VAMC Medical Care, poster presentation at the 14th annual
    meeting, VA Health Services Research and Development Service
    (Washington, D.C.:  Feb.  28-Mar.  1, 1996).

    \60 Jon Gabel, "Ten Ways HMOs Have Changed During the 1990s," Health
    Affairs, Vol.  16, No.  3 (1997), pp.  134-45.

    SUPPLY OF HOSPITAL BEDS
    SIGNIFICANTLY EXCEEDS DEMAND IN
    BOTH THE PRIVATE SECTOR AND VA
    ============================================================ Chapter 6

    Because of the declining demand for inpatient hospital care,
    community hospitals have hundreds of thousands of unused hospital
    beds.  Overall, about 26 percent of community hospital beds exceeded
    demand in 1995, and over 65 percent may exceed demand within the next
    15 years.  Although fewer--about 14 percent--of VA's operating beds
    exceeded demand in 1995, actions to improve the VA health care
    system's efficiency, coupled with other changes in the health care
    marketplace, could result in 80 percent of VA's hospital beds
    exceeding demand within the next 5 to 10 years.

    With the likelihood that most hospital beds in both VA and the
    private sector will exceed demand within the next 5 to 15 years, the
    administration and the Congress will face difficult challenges and
    policy decisions about the future of VA hospitals.  Among the
    challenges VA faces concerning the closure of VA hospitals are
    determining the number of hospital beds it needs, their locations,
    and the extent to which VA should buy rather than provide hospital
    care.  Where hospital closures are warranted, VA will face added
    challenges to ensure that community hospitals or other VA hospitals
    meet veterans' hospital care needs and to minimize the effect of the
    closures on VA employees and the community.

    With the expanded authority to sell VA's excess capacity to
    private-sector health plans, facilities, and providers, the
    administration also faces difficult decisions about the extent to
    which VA should increase demand for care as an alternative to closing
    hospitals.  Because decisions to either increase demand to preserve
    VA hospitals or close underused hospitals would significantly affect
    veterans, VA employees, community hospitals, medical schools, and
    individual communities, the administration and the Congress face
    difficult challenges in determining the future of VA hospitals.

       USE OF VA AND COMMUNITY
       HOSPITALS VARIES WIDELY BY
       REGION AND STATE
    ---------------------------------------------------------- Chapter 6:1

    Use of both community and VA hospitals varies widely in different
    parts of the country.  Among the possible causes of such variation
    are differences in health status, demographics of the veteran and
    general population, market penetration of managed care plans, and
    differences in efficiency.

          USE OF COMMUNITY HOSPITAL
          BEDS VARIES SIGNIFICANTLY
    -------------------------------------------------------- Chapter 6:1.1

    The number and use of community hospital beds vary significantly by
    census division and, even within census division, by state.
    Nationally, community hospital beds numbered about 3.3 per 1,000
    population in 1995, ranging from 2.3 in the Pacific states to 4.3 in
    the West North Central states.  Other census divisions with
    significantly higher-than-average operating beds and average daily
    censuses (ADC) were the East South Central and Middle Atlantic
    states; the Mountain division was well below the national averages.
    (See figs.  6.1 and 6.2.)

       Figure 6.1:  Community Hospital
       Beds per 1,000 Population by
       Census Division, 1995

       (See figure in printed
       edition.)

       Figure 6.2:  Average Daily
       Census in Community Hospitals
       by Census Division, 1995

       (See figure in printed
       edition.)

    Within some census divisions, hospital use also varied significantly.
    For example, among South Atlantic states, Maryland and Virginia had
    an ADC of 1.7 per 1,000 population; the District of Columbia and West
    Virginia had 4.9 and 2.7, respectively.  Similarly, among Mountain
    states, Utah's ADC was 1.1 per 1,000 population but Montana's was
    3.2.  Appendix I contains additional information on the number of
    operating beds and ADCs per 1,000 population by census division and
    state.

    Many factors, such as differences in age, health status, and
    insurance coverage, could affect hospital use.  For example, states
    with more elderly people may have greater hospital use.  Similarly,
    regional variation in the incidence of certain diseases could result
    in higher use of hospital care in some areas.  For example, the
    higher incidence of cancer in the Middle Atlantic states could cause
    greater hospital use there than in other areas.

    Medical practice in different parts of the country may also account
    for variation in hospital use.  For example, patients in the
    Northeast tend to have longer lengths of stay than similar patients
    in the western states.  (See table 6.1.)

                             Table 6.1

              Regional Variation in Average Length of
               Stay for Short-Term Hospitalizations,
                                1991

                                      Age group
                        --------------------------------------
                                                        65 and
    Region              Under 15     15-44     45-64     older
    ------------------  --------  --------  --------  --------
    Northeast                5.0       5.2       7.2      10.1
    Midwest                  4.8       4.9       6.5       8.4
    South                    4.5       4.5       6.4       8.3
    West                     5.0       4.0       5.8       7.3
    ==========================================================
    Total                    4.8       4.6       6.5       8.6
    ----------------------------------------------------------
    Source:  HIAA, Source Book of Health Insurance Data, 1995.

    Finally, the market penetration of managed care may affect hospital
    use.  States in which HMOs and preferred provider organizations have
    significantly penetrated the market tend to have less hospital use.
    Of the nine states with hospital usage of 1.5 beds per 1,000
    population or less, managed care accounted for 40 percent or more of
    the insurance market; in only two states (Alaska and New Mexico) did
    managed care account for less than 20 percent of the insurance
    market.  In contrast, of the 10 states with hospital usage of 2.7
    beds per 1,000 population or higher, in only 1 state (Nebraska) did
    managed care account for 40 percent of the market; in 4 states,
    managed care had captured 5 percent or less of the insurance market.
    Appendix II contains additional information on managed care's market
    penetration by state and census division.  (See fig.  6.3.)

       Figure 6.3:  Managed Care
       Market Penetration by Census
       Division, 1994

       (See figure in printed
       edition.)

          USE OF VA HOSPITALS VARIES
          BY VETERANS INTEGRATED
          SERVICE NETWORK (VISN)
    -------------------------------------------------------- Chapter 6:1.2

    The number and use of VA hospital beds also vary widely by VISN.
    Differences in the rate of use of VA hospitals correlate to regional
    differences in use of community hospitals, suggesting that
    differences in health status or medical practice may at least
    partially explain the variation.  VA data, however, provide
    conflicting views of the reasons for the variation.

    In fiscal year 1995, the VA system operated an average of 50,785 beds
    and had an ADC of 37,003.  With about 2.9 million unduplicated
    users,\61 the VA system operated about 18 beds per 1,000 users and
    had an ADC of 13 per 1,000 users.  The number of operating beds per
    1,000 users ranged from 10 per 1,000 users in VISN 18 (Phoenix) to 26
    in VISN 3 (Bronx).  Similarly, the ADC ranged from 6 per 1,000 users
    in VISN 18 (Phoenix) to 21 per 1,000 users in VISN 3 (Bronx).  (See
    figs.  6.4 and 6.5.)

       Figure 6.4:  VA Hospital Beds
       per 1,000 Veteran Users by
       VISN, 1995

       (See figure in printed
       edition.)

       Figure 6.5:  VA Hospital ADC
       per 1,000 Veterans by VISN,
       1995

       (See figure in printed
       edition.)

    Although the use of surgical beds varied somewhat by VISN, the use of
    medicine and psychiatric beds varied most.  The ADC in medicine beds
    ranged from 3 to 11 per 1,000 users; the ADC in psychiatric beds
    ranged from 3 to 8 per 1,000 users.  Appendix VI provides additional
    details.

    Variation in the use of VA hospitals tends to mirror the variation in
    use of community hospital beds.  The two census divisions with the
    lowest community hospital use per 1,000 population--Mountain and
    Pacific--
    contained four of the five VISNs with the lowest VA hospital use.
    Similarly, the census division with the highest community hospital
    use--Middle Atlantic--contained the three VISNs with the highest rate
    of VA hospital use.  Appendix VII compares operating beds and ADCs
    for VISNs with their corresponding census divisions.

    Several possible reasons explain veterans' varying use of VA
    hospitals.  First, the variation may reflect differences in
    efficiency among VISNs and individual facilities.  VA's resource
    allocation models have consistently attributed much of the variation
    in VA costs to inefficiency.  The Resource Allocation Method,
    Resource Planning and Management system, and new Veterans Equitable
    Resource Allocation (VERA) method all found that VA's costs varied
    widely by facility and VISN for treating similar patients and
    concluded that inefficiency caused most of the variation.

    Differences in health status could also help explain the variation in
    hospital use.  To the extent that veteran users in some VISNs have
    poorer health than those in other VISNs, then higher hospital use can
    be expected, and it may not be reasonable to expect such VISNs to
    decrease utilization rates.  Similarly, differences in the age of the
    veteran population can affect hospital use.  Hospital use generally
    increases with population age; therefore, VISNs serving elderly
    veterans could be expected to have higher rates of hospital use.  VA,
    however, in developing VERA, concluded that the higher hospital use
    in some VISNs could not be explained by differences in veterans'
    ages.

    Insurance use could also affect the extent of VA hospital use.
    Veterans with public or private insurance are much less likely to use
    VA hospital care than are the uninsured.  Thus, variation in the rate
    of insurance coverage among VISNs could help explain variation in
    hospital usage.  Similarly, the market penetration of managed care
    plans could help explain the lower hospital use in some VISNs.  This
    is because veterans enrolled in managed care plans can generally
    obtain hospital care closer to their homes with low cost sharing
    through managed care plans.

    Finally, differences in medical practice may explain variation in
    hospital use.  As previously discussed, hospital lengths of stay for
    short-term hospitalizations are generally longer in the Northeast
    than in the West.  This could help explain the higher rate of
    hospital use in VISNs in the Middle Atlantic states.

    VERA and the Veterans Health Administration's 1997 performance
    measures for VISN directors, however, give conflicting views of the
    extent to which such variation is due to differences in efficiency
    rather than medical practice or health status.  Under the performance
    measures, VA compared the VA acute bed-days of care per 1,000 users
    in each VISN with Medicare beds-days of care per 1,000 beneficiaries
    in the comparable census division.  VA defined as fully successful
    performance reduced VA bed-days of care that matched local Medicare
    performance.

    Of the seven VISNs required to reduce acute bed-days of care by 20
    percent or more to achieve fully successful performance, VERA
    designated four to receive additional resources.  The VISN required
    to reduce acute bed-days of care the most--37 percent--was VISN 19
    (Denver), which VERA identified as needing a 6.6-percent increase in
    funding.  Similarly, VISN 2 (Albany) and VISN 4 (Pittsburgh)--whose
    acute care rates were already below the Medicare rate--were found
    under VERA to be among the less efficient VISNs.  Under VERA, VISN 2
    (Albany) would absorb the second largest decrease in funding.  Under
    the performance measures, however, it would be expected to absorb the
    funding decrease without reducing acute bed-days of care.

    Another performance measure that provides a conflicting view of VISN
    efficiency is reduced operating beds.  Under this performance goal,
    fully successful performance is judged to be reduced operating beds
    to match the assigned targets.  As was the case with days of care,
    however, the VISNs with the largest targeted reductions in operating
    beds are among those qualifying for the largest resource increases
    under VERA.  Ten of the 11 VISNs expected to close 300 or more
    operating beds in fiscal year 1997 should, under VERA, receive
    increased resource allocations of up to 15 percent.  In contrast, of
    the 11 VISNs expected to close fewer than 300 beds, 6 should, under
    VERA, receive fewer resources.  For example, VISN 2 (Albany) is not
    expected to close any operating beds but should receive a 7.5-percent
    decrease in funding.

    Table 6.2 compares the change in resource allocation under VERA with
    the 1997 network directors' hospital performance measures.  Because
    VA is phasing in VERA's implementation, the actual shifts in resource
    allocations are less than the projected shifts had VERA been fully
    implemented in 1997.

                             Table 6.2

              Comparison of Projected Changes in VERA
                 Resource Allocations With Hospital
               Performance Goals by VISN, Fiscal Year
                                1997

                                       Performance measure
                                    --------------------------
                              VERA
                        percentage       Percent  Reduction in
                         increase/  reduction in     number of
                       decrease in    acute bed-     operating
    VISN                 resources  days of care          beds
    ----------------  ------------  ------------  ------------
    1 (Boston)               -6.36            21           502
    2 (Albany)               -7.51             0             0
    3 (Bronx)               -14.94            11           185
    4 (Pittsburgh)           -1.99             0           246
    5 (Baltimore)             4.10            21           330
    6 (Durham)                4.36            25           333
    7 (Atlanta)              11.13            11           749
    8 (Bay Pines)            10.03             0           489
    9 (Nashville)             0.60            14           497
    10 (Cincinnati)           4.51            18           156
    11 (Ann Arbor)           -2.51             9            32
    12 (Chicago)             -7.12            32           251
    13 (Minneapolis)          0.01            16           170
    14 (Omaha)               -4.07            30            54
    15 (Kansas City)          7.76            28           679
    16 (Jackson)             11.95             7           706
    17 (Dallas)              11.99             8            62
    18 (Phoenix)             16.02             1           216
    19 (Denver)               6.60            37           287
    20 (Portland)            15.01             3           362
    21 (San                   6.21             0           469
     Francisco)
    22 (Long Beach)           1.28             0           591
    ----------------------------------------------------------

    --------------------
    \61 Veterans accounted for about 2.6 million of the 2.9 million
    users.

       SELECTING APPROACHES FOR
       ESTIMATING EXCESS BEDS
    ---------------------------------------------------------- Chapter 6:2

    The health care literature identifies many different approaches for
    estimating excess hospital beds.  Each approach has certain
    limitations.  For example, some approaches estimate current excess
    capacity; others focus on future needs.  To provide a range of
    estimates of current and future excess capacity, we developed
    estimates using three approaches:

      -- Target occupancy rates.  Under this approach, excess capacity is
         defined as the number of beds that would need to be eliminated
         to raise actual occupancy rates up to a prescribed efficient
         level.  For example, if average occupancy were 60 percent and
         the target rate were 85 percent, 25 percent of beds would be
         excess.  In fact, an 85-percent occupancy level is generally
         considered optimum.  In other words, a hospital is not
         considered to have excess capacity until its average occupancy
         drops below 85 percent.

      -- Estimates of medically unnecessary days of care.  Under this
         approach, a percentage of the days of care provided is assumed,
         on the basis of studies, to be medically unnecessary.  A 1970s
         study used this approach and estimated that 264,000 community
         hospital beds were in excess.  The study assumed that one-third
         of the days of care provided by community hospitals were
         medically unnecessary.\62 Between 1980 and 1995, community
         hospital beds declined by about 115,000 beds mainly in response
         to actions taken to reduce medically unnecessary days of care.
         Estimates derived from this approach are often added to
         estimates of excess capacity derived through the first approach.

      -- Target beds per 1,000 population.  Under this approach, excess
         capacity is the difference between operating beds and some
         target number of beds per 1,000 population.  For example, the
         Institute of Medicine set a target to reduce the beds per 1,000
         population from 4.4 to 4.0 beds in a 1976 report.\63 Unlike the
         target occupancy rate approach, this approach can be used to
         predict future bed needs by basing the estimates on projected
         population.

    The use of target occupancy rates is the most conservative approach
    for estimating excess beds because it basically counts empty beds at
    the time of the study.  It does not consider changes that could
    affect either the future supply of or demand for hospital beds.  In
    addition, it assumes that current hospital utilization rates are
    appropriate, that is, that all admissions and lengths of stay are
    appropriate.

    Just as the use of target occupancy rates may understate the extent
    of excess beds, the other two approaches may overstate realistic
    reductions in excess beds.  This is because reaching such targets
    would necessitate a level of uniformity in medical practice that has
    so far been out of reach.

    --------------------
    \62 Task Force Report on the Department of Health and Human Services,
    Public Health Service, Health Care Financing Administration,
    President's Private Sector Survey on Cost Control (Washington, D.C.:
    May 2, 1983).

    \63 Controlling the Supply of Hospital Beds, Institute of Medicine,
    National Academy of Sciences (Washington, D.C.:  Oct.  1976).

       NUMBER OF COMMUNITY HOSPITAL
       BEDS GREATLY EXCEEDS DEMAND
    ---------------------------------------------------------- Chapter 6:3

    Community hospitals have far too many beds than needed.  Overall,
    community hospitals had 873,000 beds, and 228,000 (26 percent) of
    these were unused in 1995 and could have been closed without
    increasing hospital occupancy rates above the 85-percent rate
    generally considered optimal.  Although the number of hospital beds
    per 1,000 population varies significantly by state and census
    division, all areas of the country have far too many hospital beds.
    To the extent such variation is reduced or eliminated, excess beds
    will probably increase in the next 10 to 15 years.  For example, if
    hospitals nationwide reduce usage to the levels already reached in
    California and several other western states, as many as 610,000 (65
    percent) community hospital beds could become excess even with
    projected population growth.  The Pew Health Professions Commission
    estimated in 1996 that over 60 percent of hospital beds may be excess
    and that as many as half of the nation's hospitals may close.\64

    --------------------
    \64 Critical Challenges:  Revitalizing the Health Professions for the
    Twenty-First Century, Pew Health Foundations Commission, University
    of California at San Francisco Center for the Health Professions (San
    Francisco:  Dec.  1995).

          TARGET OCCUPANCY RATE
    -------------------------------------------------------- Chapter 6:3.1

    Defining excess capacity as the difference between operating beds and
    the number of beds that would be needed to meet demand at the
    85-percent occupancy level indicates that 26 percent (228,000) of the
    approximately 873,000 community hospital beds were excess in 1995.
    This is nearly double the excess capacity estimated in 1975 using
    this method.  During the 20-year period, the number of operating beds
    in community hospitals dropped by 69,000, but the ADC dropped by
    158,000.  By 1995, community hospitals' occupancy rate had declined
    to under 63 percent.  All but three states (Delaware, New York, and
    Hawaii) in 1995 had more than 10 percent of excess beds.  Seven
    states (Alaska, Kansas, Oklahoma, Oregon, Texas, Utah, and Wyoming)
    had more than 35 percent of excess beds.

    On the basis of an 85-percent target occupancy rate, excess capacity
    ranged from 12 percent in the Middle Atlantic states to about 35
    percent in the West South Central states and 32 percent in the
    Mountain states.  As previously discussed, people in the Middle
    Atlantic states use roughly twice as much hospital care as do those
    in the Mountain states.  Appendix III contains additional information
    on excess capacity by census division and state under the target
    occupancy rate approach.

    Estimating excess capacity using the target occupancy rate approach
    has become increasingly problematic because of inconsistencies in
    hospitals reporting a number of beds they have.  Specifically, some
    hospitals report how many beds they are licensed to operate; others
    report staffed and operating beds.  This can significantly affect
    estimates of excess capacity.  Consider the following illustration:
    Hospital A is licensed to operate 100 beds but is normally staffed to
    operate only 50 beds.  The hospital has an ADC of 45 patients.  If it
    provides American Hospital Association (AHA) data on the number of
    licensed beds it has, then it has an occupancy rate of 45 percent and
    40 excess beds.  If, however, the hospital reports the average number
    of staffed and operating beds, then it has an occupancy rate of 90
    percent and no excess capacity.  Because of inconsistencies in
    hospitals' reporting the number of beds, AHA discontinued reporting
    occupancy rates in 1995.

          ADJUSTMENT FOR MEDICALLY
          UNNECESSARY DAYS OF CARE
    -------------------------------------------------------- Chapter 6:3.2

    Implementation of prospective payment systems, use of preadmission
    certification requirements, and expansion of HMOs and other managed
    care organizations have reduced the amount of medically unnecessary
    care provided by community hospitals.  On the other hand, as
    previously discussed, states in which HMOs and PPOs have
    significantly penetrated the market tend to have lower rates of
    hospital use, suggesting that further reductions are possible.
    Assuming that 10 percent of the days of care provided by community
    hospitals nationally are medically unnecessary, an additional 65,000
    beds beyond the 228,000 excess beds estimated using the target
    occupancy rate approach would be considered excess.  Moreover,
    assuming that 20 percent of community hospital days of care are
    medically unnecessary, 357,000 hospital beds would be estimated to be
    excess.

          TARGET BEDS PER 1,000
          POPULATION
    -------------------------------------------------------- Chapter 6:3.3

    By 1990, the Institute of Medicine's 1976 goal for reducing the
    number of community hospital beds to four beds per 1,000 population
    had been met, and, by 1995, the number of community beds had fallen
    to 3.3 per 1,000 population.  Hospital demand, however, averaged only
    about 2.1 beds per 1,000 population that same year.

    As occupancy rates continue to fall, researchers are once again
    considering what the appropriate target should be.  For example, one
    market forecaster from California indicated that hospital use in
    California is below 45 percent of licensed capacity and that hospital
    demand currently averages only 1.1 beds per 1,000 population.  The
    forecaster estimated that, in California, demand for hospital beds
    will drop to 0.8 bed per 1,000 population from 2000 to 2005.\65

    Recognizing the continued shift of care from hospitals to outpatient
    and other more cost-effective settings and the development of new
    technologies and medical practices that preclude or shorten hospital
    stays, we chose two targets--two beds per 1,000 population and one
    bed per 1,000 population--to estimate future bed needs.  The two beds
    per 1,000 population target assumes that further reductions in
    hospital admissions and lengths of stay will be minimal--current
    hospital demand averages 2.1 beds per 1,000 population.  The one bed
    per 1,000 population target assumes more significant reductions in
    future demand such that demand nationally would be slightly lower
    than current demand in Alaska, Utah, and Washington--1.1 beds per
    1,000 population--but higher than the projected future demand in
    California mentioned above--0.8 bed per 1,000 population.

    At a target of two beds per 1,000 population, about 347,000 community
    hospital beds could be considered in excess of need using 1995
    population data.  Because the number of operating beds as well as
    hospital usage differ widely by state, to reduce excess beds to the
    target of two beds per 1,000 population (using 1995 population data)
    would necessitate closing about half the hospital beds in the Middle
    Atlantic, East South Central, and West South Central states.  In
    contrast, Pacific states could reach this target by closing only
    about 14 percent of their community hospital beds.

    Hospital use in 18 states, primarily in the Mountain and Pacific
    census divisions, is already below the level needed to support two
    hospital beds per 1,000 population.  Assuming that hospital use in
    those states does not increase to the national average, we
    substituted the estimate of current excess capacity derived from the
    target occupancy rate approach for the lower estimate of excess
    capacity derived from applying the two beds per 1,000 population
    target.  This adjustment increases the overall estimate of excess
    beds to about 370,000 or about 42 percent of the operating beds in
    1995.

    Population growth--assuming no new hospital beds are added--will
    reduce the excess capacity from 370,000 beds to about 272,000 beds by
    2010.  Adding projected population growth lowers the estimates of
    excess capacity in all census divisions but most affects the South
    Atlantic, Mountain, and Pacific states.  In other areas, such as the
    Middle Atlantic and New England states, population growth is not
    expected to significantly reduce excess capacity.

    We estimated that at a target of one bed per 1,000 population (using
    1995 population data), about 610,000 community hospital beds would be
    excess.  Population growth--again assuming no added capacity--would
    reduce excess beds to about 572,000 by 2010.  Appendix IV contains
    detailed estimates by census division and state based on 1995
    population; appendix V contains estimates based on projected 2010
    population.

    --------------------
    \65 Testimony of Russell C.  Coile, Jr., President, Health
    Forecasting Group, before the U.S.  House of Representatives,
    Committee on Veterans' Affairs, Washington, D.C., June 2, 1996.

          STUDIES HAVE PREDICTED RAPID
          DECLINE IN PRIVATE-SECTOR
          HOSPITAL BEDS
    -------------------------------------------------------- Chapter 6:3.4

    A number of previous studies have also predicted dramatic declines in
    community hospital beds in the next 5 to 10 years.  For example, a
    1995 survey of hospital executives suggested that the number of
    community hospital beds will probably decline in the next decade at
    an average rate of 5 percent per year.\66 Similarly, the Pew Health
    Professions Commission, in a 1995 study, predicted that health care
    will continue to shift from a supply orientation to a demand-driven
    system, resulting in as many as half of the nation's hospitals
    closing and the loss of perhaps 60 percent of hospital beds.
    Finally, the health research organization, Interstudy, predicted that
    40 percent of all U.S.  hospitals could be closed, merged, or
    converted to other uses by the year 2000.\67

    --------------------
    \66 On the Critical List:  Hospital Strategies for Survival and
    Change, A Survey of Executives at 508 U.S.  Hospitals 1995, Watson
    Wyatt Worldwide (Denver:  1995).  Eighty-nine percent of the 508
    hospital executives surveyed predicted that hospital supply would
    decline by 5 percent per year in the next decade.

    \67 Rita Shoor, "Anticipating Health Care Reform and Seeking a
    Marketing Edge Over Competitors, Hospitals Are Forming Alliances With
    other Providers," Business and Health, Vol.  12, Special Issue:  The
    State of Health Care in America, 1994.

       MORE THAN 80 PERCENT OF VA
       HOSPITAL BEDS COULD BECOME
       EXCESS
    ---------------------------------------------------------- Chapter 6:4

    As in the private sector, VA hospitals also have excess beds.  About
    14 percent of VA hospital beds exceeded demand in fiscal year 1995,
    but more than 80 percent could exceed demand if VA can reduce
    hospital use systemwide to the level already achieved by its Northern
    California Health Care System (NCHCS).  This system closed over 5,000
    beds in fiscal year 1996, bringing the total beds closed to over
    38,000 since 1980.  Veterans' use of VA hospitals varies
    significantly by VISN just as use of community hospitals varies by
    census division and state.

          TARGET OCCUPANCY RATE
    -------------------------------------------------------- Chapter 6:4.1

    Defining excess capacity as the difference between operating beds and
    the number of beds that would be needed to serve the ADC at an
    85-percent occupancy level indicates that VA had only about 7,300
    excess hospital beds in fiscal year 1995, half as many excess beds as
    it had 5 years earlier.  (See table 6.3.)

                             Table 6.3

              Estimates of Excess Beds in VA Hospitals
              Using the Target Occupancy Rate Approach

                                              Beds
                                         needed at
                 Operating   Occupancy         85%      Excess
    Year              beds        rate   occupancy        beds
    ----------  ----------  ----------  ----------  ----------
    1975            94,081        84.4      94,085         716
    1980            84,145        80.9      80,128       4,017
    1985            78,357        75.7      69,776       8,581
    1990            69,746        67.0      54,974      14,772
    1995            50,785        72.9      43,533       7,252
    ----------------------------------------------------------
    Applying this approach to VISNs suggests that among those VISNs with
    the most excess beds are many that already operate the fewest
    hospital beds per 1,000 users in the VA system.  For example, VISN 18
    (Phoenix) and VISN 4 (Pittsburgh) have the same number of excess
    beds--304--although VISN 18 (Phoenix) operated fewer than half as
    many beds per 1,000 users.  Under this approach, the VISN with the
    most excess beds is VISN 16 (Jackson) with 844 excess beds; the VISN
    with the least excess beds is VISN 10 (Cincinnati) with only 105
    excess beds.  (See app.  VIII.)

          ADJUSTMENTS FOR MEDICALLY
          UNNECESSARY DAYS OF CARE
    -------------------------------------------------------- Chapter 6:4.2

    Unlike community hospitals that have felt the effects of prospective
    payments, preadmission screening, and managed care on the extent of
    medically unnecessary care for over 10 years, the VA system has only
    recently focused on reducing medically unnecessary days of care (see
    ch.  4).  As a result, estimates of excess VA hospital beds need to
    consider the likely effect of efficiency improvements on future bed
    needs.  In 1985, we reported that 43 percent of the medical and
    surgical days of care in VA hospitals could have been avoided.\68
    Since then, a number of studies by VA researchers and VA's Office of
    Inspector General (OIG) have found similar problems.  For example, a
    January 1996 VA study reported that about 40 percent of the
    admissions to acute medical and surgical services were nonacute.  The
    study also reported that about 30 percent of the days of care in the
    acute medical and surgical services of the VA hospitals reviewed were
    nonacute.\69

    In the study, reviewers from 24 randomly selected VA hospitals
    assessed the appropriateness of 2,432 fiscal year 1992 admissions to
    acute medical, surgical, and psychiatry services.  The study found
    similar rates of nonacute admissions and days of care in all 24
    hospitals.  Many factors accounted for the nonacute admissions,
    including lack of outpatient care alternatives, conservative
    physician practices, delays in discharge planning, and social factors
    such as homelessness and long travel distances.

    Conservatively assuming that 10 percent of the days of care provided
    by VA hospitals in fiscal year 1995 were medically unnecessary, 4,353
    beds in addition to the 7,252 estimated using the target occupancy
    rate approach would be considered excess.  If, as suggested by VA
    studies, 40 percent of the days of care were assumed to be medically
    unnecessary, total excess beds would increase to 24,667, roughly half
    of VA's operating beds.  (See table 6.4.)

                             Table 6.4

                   Potential Effect of Efficiency
                 Improvements on Excess Beds in VA
                          Hospitals, 1995

    Percenta
    ge                                          Beds
    reductio    Number            Reductio    needed
    n in            of   Average      n in    at 85%
    days of   operatin  occupied  occupied  occupanc    Excess
    care        g beds      beds      beds         y      beds
    --------  --------  --------  --------  --------  --------
    10          50,785    37,003     3,700    39,175    11,610
    20          50,785    37,003     7,401    34,825    15,960
    30          50,785    37,003    11,101    30,472    20,313
    40          50,785    37,003    14,801    26,118    24,667
    ----------------------------------------------------------
    Because hospital use varies significantly by hospital and VISN, the
    same level of medically inappropriate care may not apply in each
    hospital and VISN.  The studies, however, have generally found
    significant levels of medically unnecessary care at every VA hospital
    reviewed.  Appendix VIII has estimates by VISN of excess beds based
    on different assumptions about the level of medically unnecessary
    care.

    --------------------
    \68 Better Patient Care Management Practices Could Reduce Length of
    Stay in VA Hospitals (GAO/HRD-85-92, Aug.  8, 1995).

    \69 Charles B.  Smith, Ronald L.  Goldman, Donald C.  Martin, and
    others, "Overutilization of Acute Care Beds in Veterans Affairs
    Hospitals," Medical Care, Vol.  34, No.  1 (1996), pp.  85-96.

          TARGET BEDS PER 1,000
          POPULATION
    -------------------------------------------------------- Chapter 6:4.3

    Because the veteran population differs from the general population,
    the target beds per 1,000 population used to estimate community
    hospitals' bed needs does not apply to VA hospitals.  For example,

      -- private-sector hospitals have cribs and bassinets that VA
         hospitals do not have;

      -- the veteran population excludes children and is predominantly
         male;

      -- VA hospitals include long-term medical and psychiatric beds not
         generally found in community hospitals; and

      -- estimates of community hospital beds already include veterans'
         hospital care needs, and most veterans rely on community
         hospitals for care.

    As a result, we developed three alternative population-based targets:

      -- actual hospital usage generated in VA's NCHCS,

      -- actual hospital usage in VA's VISN 18 (Phoenix, including
         Arizona, New Mexico, and parts of Texas), and

      -- VA's national average hospital usage.

             NCHCS PROVIDES A MODEL
             FOR THE FUTURE OF VA
    ------------------------------------------------------ Chapter 6:4.3.1

    NCHCS most closely resembles the outpatient-based health care system
    envisioned for VA's future.  When VA closed its hospital in Martinez,
    California, in 1991 because of concerns about its safety during a
    possible earthquake, veterans in NCHCS' catchment area were left with
    limited access to hospital and outpatient care.  Before its closing,
    the Martinez hospital had an ADC of 235 patients.

    A replacement outpatient clinic--which became a prototype for the VA
    system--opened in November 1992.  The clinic included modern
    outpatient surgery capabilities, sophisticated imaging technology,
    and attractive surroundings.  As a result, much of the care that
    previously required a hospital admission could now be done on an
    outpatient basis.

    VA also reached an agreement with the Air Force that allowed VA to
    operate 55 beds at the David Grant Air Force Medical Center at Travis
    Air Force Base, with another 18 "swing" beds available when needed.
    In addition to the hospital beds at Travis, NCHCS clinics place
    veterans needing hospital care at other VA hospitals--primarily those
    at Palo Alto and San Francisco--and, in the case of medical
    emergencies, in community hospitals.

    In 1995, the four NCHCS clinics served over 33,000 veterans,
    providing a total of 338,000 outpatient visits.  Veterans served by
    the four clinics were admitted to hospitals about 2,800 times,
    primarily for general medicine services but also for surgical,
    neurological, and psychiatric services.  This admission rate, about
    85 admissions per 1,000 veterans served, supported an ADC of about 75
    beds or about 2 beds per 1,000 veterans served.  Assuming an
    80-percent occupancy rate, NCHCS needed to operate about 2.5 beds per
    1,000 users.  This is a conservative estimate of the number of beds
    VA needed to operate because it (1) assumes an 80-percent rather than
    an 85-percent occupancy rate and (2) includes use of community
    hospital beds for emergency care in estimating the need for VA beds.

    Applying the target of 2.5 beds per 1,000 users to the VA system
    yields a systemwide need for only about 7,230 hospital beds.  Even if
    VA's users increase by 20 percent as VA predicts and they generate
    hospital demand at the same rate as current users, VA would need only
    8,676 hospital beds.  However, new users attracted through
    community-based clinics are unlikely to generate as much hospital
    demand as current users because new users have indicated they are
    more likely to choose their local hospital rather than a distant VA
    facility.  Reaching this target would require closing about 85
    percent of VA's current operating beds.

             VISN 18 (PHOENIX) HAS THE
             LEAST HOSPITAL USE IN THE
             VA SYSTEM
    ------------------------------------------------------ Chapter 6:4.3.2

    VA's VISN 18 (Phoenix) has the least VISN-wide hospital use in the VA
    system, supporting an ADC of 6 per 1,000 unduplicated veteran users
    in fiscal year 1995.  Assuming an 85-percent occupancy rate, VISN 18
    (Phoenix) needs to maintain about seven beds per 1,000 users to
    support its hospital demand.  Applying a target of seven beds per
    1,000 users nationally yields a systemwide need for only 20,230
    hospital beds to support VA's 1995 user population.

             BRINGING HIGH-USE VISNS
             DOWN TO THE NATIONAL
             AVERAGE
    ------------------------------------------------------ Chapter 6:4.3.3

    Systemwide, VA had an ADC of 13 beds per 1,000 veteran users in
    fiscal year 1995.  At an average occupancy rate of 85 percent, VA
    would need to maintain 15 beds per 1,000 veteran users to support
    this workload.  If the VISNs that operated more than 15 beds per
    1,000 users reduced their usage to the national average, then 9,445
    beds would be considered excess in those VISNs, but no excess beds
    would be assumed in other VISNs.  This is a very conservative
    approach; each of the VISNs with usage below the national average
    closed additional hospital beds in fiscal year 1996.  In fact, the 11
    VISNs with an ADC below the national average closed almost 2,000 beds
    in fiscal year 1996, about 40 percent of the beds closed in the VA
    system.

    VA's Under Secretary for Health has noted that the traditional
    general acute care hospital, as an institution, will eventually
    become a large intensive care unit, taking care of only the sickest
    and most complicated patients.  The Under Secretary has stated that
    all other medical care will be provided in outpatient care settings,
    at home, in hospices, or at various types of extended-care
    facilities.

       MULTIPLE CHALLENGES FACE VA
       CONCERNING HOSPITAL CLOSURES
    ---------------------------------------------------------- Chapter 6:5

    Most of the hospital beds in both VA and the private sector will
    likely exceed demand within the next 15 years, leading to more
    closing of both VA and community hospitals.  Among the challenges VA
    faces concerning closing VA hospitals are

      -- determining the number of hospital beds it needs and their
         locations,

      -- determining when closing hospitals would be more cost-efficient
         rather than reducing operating beds,

      -- ensuring that community hospitals or other VA hospitals meet
         veterans' hospital care needs following closures,

      -- minimizing the impact of such decisions on VA employees and the
         community, and

      -- identifying alternative uses for closed facilities.

    With its expanded authority to sell excess capacity to private-sector
    health plans, facilities, and providers, the administration also
    faces difficult decisions about the extent to which demand for care
    should be expanded before closing a facility.  Just as decisions to
    close VA hospitals affect multiple stakeholders, so too would
    decisions to more directly compete with community hospitals.  Whether
    the administration proposes to close a VA hospital or expand its
    market share, developing a process for making changes that adequately
    considers the needs and concerns of all major stakeholders, including
    veterans, VA employees, community hospitals, affiliated medical
    schools, and the community will be a major challenge.

          DETERMINING THE NUMBER OF
          HOSPITAL BEDS NEEDED AND
          THEIR LOCATIONS POSES MANY
          CHALLENGES
    -------------------------------------------------------- Chapter 6:5.1

    To meet current and future demand, VA faces many challenges in
    determining the number of hospital beds it needs and their locations.
    VA's past methods for estimating its bed needs, however, tended not
    only to build in but expand excess beds by using national rather than
    local hospital usage.  As previously discussed, VA data provide
    conflicting explanations for the widely varying hospital use among
    VISNs.  Baseline data on the amount of medically necessary hospital
    care provided by each of its hospitals could enable VA to more
    effectively plan for the future.

             VA OVERESTIMATES BED
             NEEDS
    ------------------------------------------------------ Chapter 6:5.1.1

    Historically, VA has overestimated its hospital bed needs.  For
    example, in its 1984 report, Caring for the Older Veteran, VA
    developed estimates of what it termed "real need." In criticizing a
    more conservative estimate of bed needs developed by the
    Congressional Budget Office, VA suggested that real need should be
    measured by applying the use rates from areas of the country with the
    highest VA hospital use rates to rates in other parts of the country.
    Using this approach, VA recommended construction of 85,000 additional
    hospital beds by 1990, even while use of hospital beds was declining.
    VA estimated that it would need between 134,000 and 246,000 hospital
    beds by the year 2000.

    VA used similar approaches in planning specific construction
    projects, often adding to the number of beds determined through its
    hospital sizing model.  For example, VA tried to add 117 beds to a
    construction project at the Atlanta medical center on the basis of
    anticipated workload increases.  The Office of Management and Budget,
    however, determined that the VA hospital sizing model had already
    accounted for the factors VA was using to justify the additional beds
    and directed that the project be scaled back.\70

    VA used the concept of "suppressed demand" to justify hospital
    projects in Hawaii, Northern California, and East Central Florida
    that would have exceeded demand.  For example, VA decided that it
    needed to build a new hospital in East Central Florida largely on the
    basis of an analysis that showed that the number of VA hospital beds
    available for Florida veterans was below the national average--about
    1.40 beds per 1,000 Florida veterans compared with 2.02 beds per
    1,000 veterans nationwide.  Our analysis, however, suggested that
    Florida veterans' lower use of VA hospitals was likely caused, at
    least in part, by differences in Florida veterans' health and
    economic status and insurance coverage and those of veterans
    nationwide.\71 VA has subsequently developed plans to meet central
    Florida veterans' needs without building a new hospital.

    VA also added beds to a proposed joint venture construction project
    at Tripler Army Medical Center in Hawaii on the basis of perceived
    suppressed demand.  VA compared Hawaii veterans' rate of VA hospital
    use with that of mainland veterans and found that veterans were
    hospitalized in Hawaii at only 43 percent of the national rate.  VA
    added 27 beds to the proposed 105-bed facility on the basis of
    suppressed demand.  As in Florida, VA did not adequately evaluate
    other possible explanations for the lower-than-average use of VA
    health care services by Hawaii veterans.  For example, it did not
    consider the extent to which military retirees dually eligible for VA
    and DOD benefits were using their DOD benefits.  More importantly, it
    did not consider the extent to which veterans in Hawaii had other
    health care options and therefore did not seek VA care.  Hawaii has
    one of the highest percentages of residents in the country with
    health insurance.  Veterans without health insurance are eight times
    more likely to use VA hospitals than are veterans with insurance.\72
    VA subsequently determined that the Tripler Army Medical Center would
    not need the additional 27 beds to meet demand for beds.

    --------------------
    \70 VA Health Care:  Actions Needed to Control Major Construction
    Costs (GAO/HRD-93-75, Feb.  26, 1993).

    \71 VA Health Care:  Need for Brevard Hospital Not Justified
    (GAO/HEHS-95-192, Aug.  29, 1995).

    \72 VA Health Care:  VA Plans Will Delay Establishment of Hawaii
    Medical Center (GAO/HRD-92-41, Feb.  25, 1992).

             VA USES MOST CONSERVATIVE
             APPROACH FOR MEASURING
             EXCESS BEDS
    ------------------------------------------------------ Chapter 6:5.1.2

    VA's performance measures for fiscal year 1997 essentially take the
    most conservative approach for measuring excess VA hospital
    beds--target occupancy rates.  VISNs are expected to close only beds
    that exceed the need for meeting current demand at an 85-percent
    occupancy level.  In other words, they do not assess the medical
    appropriateness of the care provided in occupied beds to determine
    the number of additional beds to be closed and patients shifted to
    other care settings.

    Because VA's performance measures and VERA data give conflicting
    views of the role such factors as health status, medical practice,
    and HMO market penetration play in the varying use of VA hospital
    beds, an assessment of the medically necessary care provided by each
    facility could serve as a baseline for decision-making.

    Although researchers have studied the nonacute admissions and days of
    care at selected VA hospitals, their studies have not reported
    results for individual hospitals or reviewed all of the hospital beds
    at a facility.  The studies, however, reported wide variation in the
    numbers of nonacute admissions and days of care provided by the
    hospitals reviewed.  For example, one study reported nonacute
    admissions in 50 randomly selected VA hospitals ranging from 25 to 72
    percent.

    Basing decisions on current utilization data without determining the
    appropriateness of the data overstates the beds VA needs to operate
    an efficient health care system.  Baseline data on the numbers of
    medically necessary admissions and days of care are important because
    they both establish targets for efficiency improvements and provide
    the essential workload data for decisions about hospital closures and
    service consolidations.  Similarly, assessments of the potential to
    deinstitutionalize psychiatric patients could provide baseline data
    for determining the future need for psychiatric beds.  Such baseline
    data would essentially determine the extent to which differences in
    health status or medical practice contribute to higher hospital use
    rates in some VISNs.

    The apparent correlation between the rates of VA and community
    hospital use by census division/VISN suggests that factors other than
    differences in efficiency contribute to varying hospital use rates.
    The extent to which variation caused by factors such as differences
    in medical practice can be reduced is not clear, but the wide
    variation that still exists in hospital use rates in the private
    sector suggests that conforming medical practice will be difficult.
    On the other hand, the generally lower rates of hospital use in areas
    with high concentrations of managed care enrollment suggest that,
    given the right incentives, physicians will change their practice
    patterns.

          CHOOSING BETWEEN CLOSING
          WARDS AND CLOSING HOSPITALS
          WILL CHALLENGE VA
    -------------------------------------------------------- Chapter 6:5.2

    VA and the private sector have reacted very differently to declining
    inpatient workload.  In the private sector, hundreds of hospitals
    have been closed in the last 10 years.  VA, however, has not closed
    any hospitals because of declining use, choosing instead to reduce
    the number of operating beds or close particular services such as
    inpatient surgery.  This process, however, often leaves VA operating
    only a small part of a hospital's capacity.

    Closing beds clearly results in some savings by reducing staffing
    costs.  But, with fewer patients over whom to distribute the fixed
    costs of operating a facility, the cost per patient treated rises.
    At some point, it becomes more cost-effective to close a hospital and
    provide care either through another VA hospital or through contracts
    with community hospitals.

    VA demonstrated the feasibility of closing underused hospitals when
    it closed the Sepulveda, California, VA medical center in 1995 after
    it suffered earthquake damage.  The workload from the Sepulveda
    hospital was transferred to the West Los Angeles medical center.
    VA's OIG had found that the reported numbers of inpatients treated at
    both Sepulveda and West Los Angeles had declined significantly in the
    prior 4-year period and that the workload may have been even less
    than VA reported because VA had overstated it.  VA does not plan to
    rebuild the Sepulveda hospital but plans to establish an expanded
    outpatient clinic there.  The OIG concluded that the West Los Angeles
    medical center had sufficient resources to care for the hospital
    needs of veterans formerly using the Sepulveda hospital.

    The only other hospital VA has closed in the last 25 years is the
    Martinez, California, medical center.  Like Sepulveda, it was closed
    because of seismic deficiencies and its workload transferred to other
    VA medical centers.  Before closing, the Martinez hospital had an ADC
    of about 240 patients.  VA developed plans to replace the hospital as
    a joint venture with DOD at the David Grant Medical Center at Travis
    Air Force Base.  VA planned to operate 243 beds in the new hospital.

    Last year, we reported that this construction project was not needed
    because existing VA and community hospitals could meet VA's current
    and future need for hospital beds.  A congressionally mandated
    evaluation of veterans' health care in northern California reached
    the same conclusion.  As a result, VA ceased plans to construct new
    beds at Travis and instead developed plans to use existing VA and
    community beds and has 55 beds at a former DOD medical facility in
    Sacramento.

    Nonetheless, closing hospitals and contracting for care entail some
    risk.  Allowing veterans to obtain free hospital care in community
    hospitals closer to their homes could increase demand for
    VA-supported hospital care, offsetting any savings from contracting.
    To the extent that new demand is generated by veterans who lack other
    health care options, contracting could improve the health status of
    veterans.  On the other hand, if the demand is generated mainly by
    insured veterans seeking a health care option with lower
    out-of-pocket payments, contracting could increase costs without
    significantly improving veterans' health status.

          ALTERNATIVE ARRANGEMENTS FOR
          HOSPITAL CARE WOULD NEED TO
          BE MADE
    -------------------------------------------------------- Chapter 6:5.3

    VA wants to ensure that closing a VA hospital does not result in
    veterans losing accessibility to care either through other VA
    facilities or through community hospitals.  Studies performed at VA
    and public hospitals indicate, however, that when facilities are
    closed or access is restricted, patients do not always seek
    alternative sources of care.  Researchers have reported that reduced
    access to care adversely affects some patients' health.  For example,
    one study found that patients previously served by a public hospital
    "had difficulty finding new health care providers, waited longer for
    routine medical care, and felt that the availability of hospital
    services had decreased."\73 A second study reported that among the
    veterans examined, "the general health perceptions and functional
    status of discharged patients had worsened when compared with
    non-discharged patients .  .  .  .  Among previously hypertensive
    patients who were discharged [the study] found statistically and
    clinically significant elevations in blood pressure."\74 A third
    study found that, "[a]mong those who stop using the VA [because they
    were found ineligible for VA outpatient care], many do not receive
    any medical care or obtain a regular provider within the first 9
    months after their release from the VA system."\75

    In addition, our 1992 study of the closure of the Martinez VA medical
    center found that VA had not developed plans or procedures for
    referring VA patients to other VA hospitals before it announced the
    emergency closing of the center.\76 The problems VA encountered after
    the Martinez hospital closure--while understandable because the
    hospital closed due to an emergency--highlight the need for planning
    to ensure that patients affected by future hospital closures can
    obtain needed hospital services through community or VA hospitals.

    In some rural communities, VA may need to maintain a small VA
    hospital because no community hospitals are nearby.  In such cases,
    VA might improve health care services not only to veterans but to the
    general community by opening its doors to nonveterans.  The expanded
    workload might lower per patient costs by better using excess
    capacity and improve quality of care by broadening the type of
    patients served.

    --------------------
    \73 A.B.  Bindman, D.  Keane, and N.  Lurie, "A Public Hospital
    Closes," Journal of the American Medical Association, Vol.  264
    (1990), pp.  2899-2904.

    \74 S.D.  Fihn and J.B.  Wicher, "Withholding Routine Outpatient
    Medical Services:  Effects on Access and Health," Journal of General
    Internal Medicine, Vol.  3 (1998), pp.  356-62.

    \75 J.  Meuleman and M.  Mounts, "Health Status of Veterans Found
    Ineligible for Ongoing Outpatient Care," Journal of Community Health,
    Vol.  2 (1985), pp.  108-14.

    \76 VA Hospital Care:  Closure and Replacement of the Medical Center
    in Martinez, California (GAO/HRD-93-15, Dec.  1, 1992).

          IDENTIFYING OPTIONS FOR
          FUTURE USE OF CLOSED
          FACILITIES
    -------------------------------------------------------- Chapter 6:5.4

    The administration and the Congress will also have to decide what to
    do with any hospitals that are closed.  One option is to convert VA
    hospitals to provide nursing home or other types of care.  Although
    converting space to provide nursing home care is often cheaper than
    building a new facility, converting hospital beds to other uses would
    increase costs.  Construction funds would be needed for the
    conversions, and medical care funds would be needed for the new
    nursing home residents in formerly empty beds.  Nursing home care is
    a discretionary benefit for all veterans, including those with
    service-connected disabilities.  Such care is, however, one of the
    main health care needs of the growing elderly population.

    Another option would be to convert part of a hospital to another use
    while leaving the rest of the building as a hospital.  Such
    use--whether patient care or nonpatient care related--would reduce
    the costs for providing hospital care by distributing the building's
    fixed costs over a larger user base.  In addition to converting
    unused wards to provide nursing home care, space could be leased to
    public or private health care organizations, veterans service
    organizations, or others to generate revenues to help offset the high
    costs of maintaining a small inpatient unit in a large building.

    A third option would be to sell or otherwise dispose of the property.
    Some properties have strong potential for commercial development.
    Sale of such properties might raise enough revenue to make it
    profitable for VA to relocate nonhospital services.  Other
    properties, particularly those in rural areas, may not be
    commercially valuable, and it might be cost-effective to retain such
    properties for outpatient clinics and other nonhospital services.
    Still other properties might be made available to state and local
    governments for use as nursing homes, homeless shelters, or other
    purposes.

          DETERMINING THE EXTENT TO
          WHICH VA SHOULD INCREASE
          DEMAND FOR HOSPITAL CARE
    -------------------------------------------------------- Chapter 6:5.5

    One way to avoid closing VA hospitals would be to increase demand for
    VA hospital care, which involves two basic approaches.  First, VA
    could compete to increase its market share of the veteran population.
    Second, VA could use its excess hospital capacity to serve veterans'
    dependents or other nonveterans.  Either approach has significant
    implications for the communities in which VA hospitals operate.  For
    example, increasing demand for VA hospital care would probably
    decrease demand for community hospital care unless VA targeted only
    those users with unmet hospital care needs.  By competing with nearby
    community hospitals for a larger market share, VA could cause the
    closure of community hospitals.  The effect on community hospitals
    would be greatest if VA would increase workload by competing to treat
    nonveterans.

    On the other hand, treating nonveterans in VA hospitals could
    strengthen VA's teaching and research missions by broadening the type
    of patients treated.  This was one of the main reasons Australia
    opened its veterans hospitals to nonveterans.\77

    --------------------
    \77 Veterans' Health Care:  Implications of Other Countries' Reforms
    for the United States (GAO/HEHS-94-210BR, Sept.  27, 1994).

          VA NEEDS TO DEVELOP A
          CLOSURE PROCESS
    -------------------------------------------------------- Chapter 6:5.6

    Because decisions either to close VA hospitals or directly compete
    with private-sector hospitals for a larger market share of the
    declining inpatient demand would significantly affect veterans, VA
    employees, community hospitals, and the community in general, it is
    important to involve all affected parties in the decision-making.
    Neither VA's Prescription for Change nor individual VISN strategic
    plans establish a process to be followed for closing a VA hospital or
    the extent to which VA should involve the community.  Nor do they
    establish a process for assessing the possible effects of decisions
    to compete for increased market share.

    VA hospitals are often one of the main employers in the communities
    in which they operate.  Consequently, closing a VA hospital could
    significantly affect the community's economic health and employment
    rate.  For example, an underused community hospital might be able to
    handle the VA workload if a nearby VA hospital closed.  In this case,
    closing the VA hospital would reduce VA's costs, provide continued
    care for veterans in the community, and improve the financial
    viability of the community hospital.  Unfortunately, VISN strategic
    plans have little or no information on the availability or financial
    status of the community hospitals located near VA hospitals that
    could illuminate decisions about closing VA hospitals.

    The Congress established a process that was used for closing military
    bases in 1991, 1993, and 1994.  An eight-person commission was
    established to review closure recommendations that were to be made,
    in part, on the basis of published criteria.  Some of these criteria
    addressed cost implications to the government, economic and
    environmental impacts on communities, and the ability of communities'
    infrastructure to support the proposed changes.

    Members of the Congress from districts affected by base closures and
    realignments had an opportunity to play an active part in the
    commission's fact-finding and public hearing process.  Ultimately,
    however, the Congress committed to accepting all of the
    recommendations as a package.

    Just as decisions to either close a VA hospital or compete with
    community hospitals for patients would affect nearby community
    hospitals, so too could changes in community hospitals affect the
    future of VA hospitals.  For example, closure of a community hospital
    could increase demand for VA hospital care.  The effect on VA would
    be greatest if the hospital had a large charity care workload, were
    the only other hospital in the community, or were located near the VA
    hospital.  Conversely, opening a new community hospital near a VA
    hospital could decrease demand for VA hospital care.  Similarly, new
    programs or the procurement of new high-tech equipment by community
    hospitals could lure patients from VA hospitals.  VISN strategic
    plans have little information about the status and plans of community
    hospitals located near VA hospitals and the possible effects of their
    actions on VA.

    CHANGES IN HOW HOSPITALS ARE
    MANAGED AND IN THEIR RELATIONSHIPS
    WITH OTHER HEALTH CARE PROVIDERS
    ============================================================ Chapter 7

    Among the most important changes in response to payment reforms and
    declining demand for hospital care are changes in how hospitals are
    managed and in their relationships with other hospitals, other types
    of health care providers, and health care systems.  Specifically,
    community hospitals are increasingly

      -- joining forces with other hospitals to form alliances and
         networks (horizontally integrating) either locally or
         nationally;

      -- expanding their product lines to include other types of health
         care services, such as nursing home and home health care, to
         help generate hospital demand (vertically integrating);

      -- hiring outside management to evaluate hospital efficiency and
         effect needed changes; and

      -- improving accounting and information systems to enable managers
         to identify and eliminate inefficiencies and unprofitable lines
         of business.

    Except for hiring outside management, VA is making the same types of
    changes as community hospitals.  In fact, the VA system was both
    horizontally and vertically integrated long before the concepts
    gained favor in the private sector.  VA is, however, increasingly
    integrating its hospitals regionally and expanding the range of
    services provided in part by establishing community-based outpatient
    clinics (CBOC).  In addition, VA, like community hospitals, is
    implementing new accounting and information systems.

    VA faces many important issues and challenges in changing the
    management of its hospitals.  For example, in forming alliances as
    networks, VA faces choices between limiting networks to VA hospitals
    or having VA hospitals network with DOD and community hospitals to
    improve accessibility of VA-supported care.  Similarly, considerable
    uncertainty exists about the effectiveness of VA's strategy for
    increasing demand for hospital care by establishing CBOCs far from VA
    hospitals.  Such actions can improve accessibility of VA outpatient
    care but are unlikely to help increase demand for VA hospital care.
    VA also faces a difficult challenge in ensuring that its management
    information systems can generate the complete and accurate data
    Veterans Integrated Service Network (VISN) and hospital managers need
    both to identify efficiency savings and prevent actions that could
    compromise the quality of or access to VA hospital care.  Finally, VA
    must decide to what extent it should follow the lead of some
    community hospitals and test the possibility of contracting for
    management of one or more of its hospitals.

       HOSPITALS HAVE INCREASINGLY
       JOINED NETWORKS AND ALLIANCES
    ---------------------------------------------------------- Chapter 7:1

    Many community hospitals are forming networks and alliances either
    locally or nationally.  Such horizontal integration includes the
    merger, consolidation, or other informal pooling of resources by two
    or more hospitals to meet common objectives.  Although VA hospitals
    have been horizontally integrated under common central office
    management from the inception of the VA health care system, the
    hospitals have largely functioned independently.  As VA restructures
    its health care system, however, it is increasingly integrating and
    consolidating management and both patient and nonpatient care
    services at nearby hospitals.

          WHAT IS HORIZONTAL
          INTEGRATION?
    -------------------------------------------------------- Chapter 7:1.1

    The term "horizontal integration" includes (1) legal mergers that
    join hospitals under common ownership, (2) hospitals maintaining
    separate ownership but forming networks and alliances to lessen
    duplication of services, and (3) hospitals collaborating to enhance
    their buying power and lower costs by forming a purchasing
    cooperative.  Although alliances and networks are often formed
    locally or regionally, legal mergers often involve the formation of
    national hospital chains such as Columbia/HCA.\78

    Horizontal integration is intended to allow hospitals to

      -- gain control over markets by working with potential competitors;

      -- lessen duplication of services by sharing such services as
         information systems and laboratory facilities with other nearby
         hospitals;

      -- reduce administrative costs;

      -- reduce procurement costs by obtaining volume discounts; and

      -- better market their services to employers, managed care plans,
         and other purchasers.

    Horizontal integration is expected to allow hospitals to contain
    overhead costs, provide more efficient patient care, and increase
    opportunities for managed care contracting.\79

    Networks and alliances may also help hospitals market their services
    by offering employers and insurers "one-stop shopping," minimizing
    purchasers' transaction costs.  In addition, hospital networks offer
    purchasers stability:  they can expect access to the same providers
    each year.  Horizontal integration can help hospitals' marketing
    efforts by reducing purchasers' uncertainties about hospitals'
    quality of care, the accessibility of hospital care for their
    beneficiaries, and the availability of a wide range of medical
    technology.\80

    --------------------
    \78 Howard S.  Zuckerman, Thomas E.  Vaughn, and Thomas A.  D'Aunno,
    "The Strategies and Autonomy of University Hospitals in Competitive
    Environments," Hospital and Health Services Administration, Vol.  35,
    No.  1 (1990), pp.  103-20.

    \79 Paul Kenkel, "The State of Health Care in America," Business and
    Health Magazine, Vol.  13, No.  3, Supplement C (1995), pp.  19-23.

    \80 David Dranove, Amy Durkac, and Mark Shanley, "Are Multihospital
    Systems More Efficient?" Health Affairs, Vol.  15, No.  1 (1996), pp.
    100-04.

          HORIZONTAL INTEGRATION OF
          COMMUNITY HOSPITALS HAS
          INCREASED SINCE 1990
    -------------------------------------------------------- Chapter 7:1.2

    Horizontal integration has increased significantly since 1990, when
    about 45 percent of community hospitals belonged to some kind of
    multihospital system.\81 Between 1990 and 1993, 71 hospital mergers
    took place.  In 1994 alone, however, more than 650 hospitals were
    involved in mergers or acquisitions.\82 This trend continued in 1995,
    when 447 or about 1 out of every 12 (8.5 percent) of the
    approximately 5,200 community hospitals nationwide were involved in
    mergers or acquisitions.  In addition, four large corporate deals
    increased the total number of hospitals involved in mergers to over
    900 or about 1 in 6 community hospitals.\83

    Eighty-one percent of 1,200 acute-care hospital executives surveyed
    by Deloitte & Touche in 1994 predicted that their hospitals would
    join a network within 5 years.  To remain competitive and reduce
    costs, their hospitals would join a network to share such services as
    information systems and laboratory facilities, according to these
    executives.\84

    Horizontal integration has involved hospitals with different
    religious affiliations and profit statuses.  For example, such
    mergers have taken place in Denver.  Similarly, many community
    not-for-profit hospitals nationwide are converting to for-profit
    status as they join or are acquired by chains.

    --------------------
    \81 Zuckerman, Vaughn, and D'Aunno, "The Strategies and Autonomy of
    University Hospitals," Hospital and Health Services Administration,
    pp.  103-20.

    \82 Kenkel, "The State of Health Care in America," Business and
    Health Magazine, pp.  19-23.

    \83 Mary Gabay and Sidney M.  Wolfe, Who Controls the Local Hospital?
    The Current Hospital Merger and Acquisition Craze and the Disturbing
    Trend of Not-for-Profit Hospital Conversions to For-Profit Status,
    Public Citizen's Health Research Group (Washington, D.C.:  June
    1996).

    \84 Kenkel, "The State of Health Care in America," Business and
    Health Magazine, pp.  19-23.

          VA HAS INCREASINGLY
          INTEGRATED AND CONSOLIDATED
          MANAGEMENT AND SERVICES
    -------------------------------------------------------- Chapter 7:1.3

    VA has been a horizontally integrated hospital system from its
    inception.  Most of its hospitals, however, have operated
    independently, often competing with other VA hospitals to add new
    services and equipment, disregarding overall need either within the
    VA system or the community.  By establishing VISNs, however, VA is
    decentralizing system management.  VA is both integrating the
    administrative management and operations of nearby medical centers to
    increase efficiency and consolidating services at fewer locations.
    In addition, some VISNs are beginning to review more closely their
    role in the community.

    In March 1995, VA submitted to the Congress a plan, its Vision for
    Change, to restructure its health care system from a centralized
    system with four regional offices to a decentralized system with 22
    VISNs.  The Congress approved the plan on September 5, 1995.

    According to Vision for Change, a VISN is designed to be the basic
    budgetary and planning unit of the veteran health care system.  It is
    intended to reflect the Veterans Health Administration's (VHA)
    natural patient referral patterns, numbers of beneficiaries and
    facilities needed to support and provide primary, secondary, and
    tertiary care, and, to a lesser extent, political jurisdictional
    boundaries such as state borders.  Under the VISN model, health care
    is intended to be provided through strategic alliances among VA
    medical centers and other government providers and other such
    relationships.

    Facility integrations are a critical part of VA's nationwide strategy
    to restructure field operations.  By mid-1997, VA had approved the
    management integration of VA facilities in 18 geographic areas.  A
    task force VA had established in 1994 to examine ways to achieve
    efficiencies in the VA health care system had identified about 30
    potential management consolidations of geographically close medical
    centers that have complementary missions.

    The Under Secretary for Health's March 1996 Prescription for Change
    identified a series of actions to restructure VA facilities or their
    management to reduce administrative costs and increase resources
    devoted to direct patient care.  In addition to completing the
    ongoing facility integrations, the Prescription outlined actions to

      -- support additional facility management mergers and clinical or
         support service consolidations;

      -- promulgate screening criteria for potentially realigning
         facilities and programs;

      -- seek opportunities to restructure processes to best align
         resources;

      -- change personnel policies to give VISNs the authority to tailor
         their workforce to need;

      -- develop a network business plan, including a 1-year tactical
         plan, a 2- to 3-year strategic plan, and 5-year strategic
         targets; and

      -- develop a systemwide business plan based on input from the VISN
         plans.

    VA has implemented or is implementing many actions outlined in the
    Prescription.  For example, since the 8 initial management
    integrations, central office has approved 11 additional integrations.
    Similarly, in September 1995, VA established the "Criteria for
    Potential Realignment [CPR] of VHA Facilities and Programs," also
    referred to as the "CPR List."

    Other actions VA has completed include delegating to field managers
    authority to conduct (1) reductions-in-force for title 5 personnel
    and (2) staffing adjustments for title 38 personnel.  Finally, VISNs
    submitted their initial strategic plans to VA's central office in
    fall 1996, and they were included in the VHA section of the overall
    strategic plan.

    Many of the VISN strategic plans address consolidating specific
    services:

      -- VISN 3 (Bronx) plans to consolidate many of the laboratory
         services now provided separately by the Lyons and East Orange
         medical centers.  It plans to similarly consolidate services at
         the Bronx and Castle Point medical centers.

      -- VISN 5 (Baltimore) consolidated all cardiac surgery at the
         Washington, D.C., VA medical center and all neurosurgery at the
         Baltimore medical center.

      -- VISN 7 (Atlanta) plans to consolidate surgical services now
         provided at both the Montgomery and Tuskegee medical centers at
         Montgomery.  We are now reviewing VA's efforts to integrate the
         two facilities.

      -- VISN 8 (Bay Pines) contracted for a study of the feasibility of
         integrating clinical programs, support services, and the
         management of its Lake City and Gainesville medical centers.  In
         addition, VISN 8 (Bay Pines) consolidated laundry services for
         the Miami and West Palm Beach medical centers at West Palm Beach
         to provide additional outpatient care space at the Miami medical
         center.  Similarly, the VISN consolidated warehousing for the
         Tampa and Bay Pines medical centers at Bay Pines to make
         additional outpatient care space available at the Tampa medical
         center.  The network may also consolidate food service
         operations for the two medical centers.

      -- VISN 10 (Cincinnati) is considering consolidating five
         laboratories into one or two to attain economies of scale.

      -- VISN 12 (Chicago) plans to integrate and consolidate clinical
         and support services where such actions will yield savings and
         improve patient care.  For example, it has task groups exploring
         the feasibility of consolidating cardiac surgery and
         neurosurgery programs.

    Two VISNs' business plans indicated that they have no plans to
    consolidate facilities because of the distances between their
    facilities.  For example, the VISN 6 (Durham) plan indicated that all
    of its medical centers are separated by distances requiring from 1 to
    5 hours of driving time.  Similarly, the VISN 9 (Nashville) plan
    indicated that the network is considering no facility consolidations
    because of the geographic dispersion and clinical mix of the
    network's facilities.

    In addition to focusing on integrating and consolidating VA
    facilities, VA's Prescription for Change calls for establishing
    strategic partnerships with other government health care providers
    and the private sector through the use of sharing agreements.  Among
    other things, the CPR List provides guidance on contracting for
    services from community hospitals rather than providing them
    directly.  Neither the CPR List nor the Prescription, however,
    specifically addresses the possible integration of VA facilities with
    local networks or alliances with non-VA hospitals.

    Eleven VISN strategic plans mention efforts to integrate VA
    facilities with community providers or contract for community
    hospital care:

      -- Several alliances of community hospitals have approached VISN 3
         (Bronx) about joining them to form a single provider network for
         veterans and their families.  The VISN's plan, however, does not
         indicate whether the network expects to pursue such an alliance.

      -- VISN 13's (Minneapolis) plan indicated that its four Minnesota
         medical centers hope to create a Minnesota VA Health Plan that
         will contract with local community health care providers to
         offer primary and emergency care for eligible enrolled veterans.

      -- VISN 14 (Omaha) is considering closing the inpatient hospital
         medical care and intermediate care units at Grand Island and
         Lincoln and pursuing contracts with community hospitals to
         provide acute inpatient care to VA users requiring such care.

      -- VISN 19's (Denver) Cheyenne medical center plans to close its
         surgical unit because of low utilization and contract for
         surgical care from a community hospital.

      -- VISN 20's (Portland) plan discussed its goal of making the
         network a health care organization providing services either in
         the network's own facilities or in contract facilities.

    Other VISN strategic plans, however, mentioned little or nothing
    about integrating VA facilities with non-VA hospitals in their
    community.  Thirteen VISN plans mentioned sharing agreements with
    other government facilities and medical school affiliates.

          EFFECTS OF HORIZONTAL
          INTEGRATION ON EFFICIENCY
          ARE UNCLEAR
    -------------------------------------------------------- Chapter 7:1.4

    Although horizontal integration is expected to allow hospitals to
    achieve service efficiencies, little systematic evidence exists to
    support this view.  Studies of California's local hospital systems in
    the late 1980s and early 1990s challenged the view that horizontally
    integrated hospitals produce efficiencies.  In a cross-sectional
    analysis examining high-technology services, cost per admission,
    administrative costs, and price and cost margins, researchers
    concluded that hospitals' benefits from integration derive from
    marketing efficiencies rather than from production efficiencies.
    Specifically, researchers found that

      -- multihospital systems do not consistently reduce the number of
         high-tech services offered,

      -- hospitals in multihospital systems do not generally have lower
         patient care costs than their unintegrated counterparts,

      -- integrated systems are more likely than their unintegrated
         counterparts to have unusually high administrative costs, and

      -- hospital systems still may be profitable if they can generate
         marketing benefits.

    Hospitals, these researchers concluded, may also prosper if
    associated with a teaching hospital, religion, or national chain.\85

    --------------------
    \85 Dranove, Durkac, and Shanley, "Are Multihospital Systems More
    Efficient?" Health Affairs, pp.  100-04.

       HOSPITALS ARE EXPANDING PRODUCT
       LINES
    ---------------------------------------------------------- Chapter 7:2

    Many community hospitals are adding product lines by establishing
    home health care and expanding outpatient care to increase hospital
    workload and efficiency and improve marketing.  Although such
    vertical integration is a more recent development in the private
    sector, most VA hospitals have been part of vertically integrated
    medical centers for years.  VA is further expanding, however, the
    availability of some services, such as outpatient care, to improve
    access and increase hospital demand.

          WHAT IS VERTICAL
          INTEGRATION?
    -------------------------------------------------------- Chapter 7:2.1

    Under a vertically integrated system, patients may typically be
    treated as outpatients (prehospital care), admitted to an acute
    inpatient facility for services that cannot be provided on an
    outpatient basis, and then transferred to a nursing home or home
    health care agency (posthospital care).  Operating an outpatient
    clinic allows hospitals to provide services in a lower cost setting
    and respond to potential demand for inpatient services.  Similarly,
    operating a nursing home or home health agency can make it easier for
    hospitals to discharge patients from high-cost acute beds by
    providing them postacute beds that they control.  Such strategies can
    be particularly important under hospital prospective payment systems.
    This is because the hospital may bill separately for outpatient
    services and home health and nursing home care that would have been
    included in the fixed payment if provided in the hospital.\86

    Vertical integration may involve a single hospital setting up an
    outpatient clinic.  It may also involve a single hospital converting
    to a health care system as Detroit's Henry Ford Hospital did.  In
    1971, 210 physicians and one outpatient care clinic were affiliated
    with the Henry Ford Hospital.  Supported by a grant from the Ford
    Foundation, by 1980, the system had grown to include a 350-physician
    group practice, five medical centers, and an education and research
    center.

    After implementing a 10-year strategic plan, the Henry Ford Health
    Care System grew to include

      -- 35 outpatient care centers,

      -- an 800-member multispecialty physician group,

      -- a 450,000-member HMO,

      -- a 903-bed tertiary care hospital,

      -- two community hospitals,

      -- a 100-bed psychiatric facility,

      -- a chemical dependency program,

      -- two nursing homes, and

      -- home health services.\87

    By providing a continuum of care, hospitals expect to increase
    profits, control patient flow, and achieve maximum market
    penetration.  Providing a continuum of care allows hospitals to
    compete for inpatient referrals through the primary sources of
    admissions to community hospitals:  community-based physicians,
    provider networks, and managed care systems.  Moreover, by offering
    more services, hospitals expect to more effectively compete for
    contracts with physician networks and managed care systems.

    A 1995 survey of over 500 hospital executives found that most viewed
    vertical integration as offering the best chance for survival over
    the next decade.  About 63 percent of the executives said that
    expanding external services (such as home health care and community
    outreach programs) offered the most hope for hospital
    survival--compared with just 30 percent of executives in 1990.
    Meanwhile, the executives were less likely to view expanding
    hospital-based outpatient services as important to hospital survival
    (44 percent in 1990 compared with 28 percent in 1995).  Executives'
    views of the benefits of offering specialized services as a survival
    strategy dramatically changed from 1990 to 1995.  Of the hospital
    executives surveyed in 1990, 20 percent viewed such specialization as
    vital to survival.  In 1995, however, only 8 percent viewed offering
    specialized services as an important survival strategy.\88

    --------------------
    \86 Marisue Cody, "Vertical Integration Strategies:  Revenue Effects
    in Hospital and Medicare Markets," Hospital and Health Services
    Administration, Vol.  41, No.  3 (1996), pp.  343-55.

    \87 Critical Challenges:  Revitalizing the Health Professions for the
    Twenty-First Century, Pew Health Professions Commission, University
    of California at San Francisco Center for Health Professions (San
    Francisco:  Dec.  1995).

    \88 On the Critical List:  Hospital Strategies for Survival and
    Change, Watson Wyatt Worldwide (Washington, D.C.:  1995).

          COMMUNITY HOSPITALS HAVE
          INCREASED VERTICAL
          INTEGRATION
    -------------------------------------------------------- Chapter 7:2.2

    Vertical integration has greatly increased since the early 1970s.
    According to the American Hospital Association, between 1972 and
    1990, the percentage of acute care hospitals

      -- offering home health services increased from 6.2 to 35.5
         percent,

      -- operating nursing homes increased from 8.6 to 21.0 percent, and

      -- operating an outpatient clinic increased from 27.5 to 85.2
         percent.\89

       Figure 7.1:  Increasing
       Vertical Integration of
       Hospitals, 1972-90

       (See figure in printed
       edition.)

    Source:  Based on data from "The Changing Boundaries of the American
    Hospital" by James C.  Robinson (Milbank Quarterly, Vol.  72, No.  2,
    1994).

    --------------------
    \89 James C.  Robinson, "The Changing Boundaries of the American
    Hospital," Milbank Quarterly, Vol.  72, No.  2 (1994), pp.  259-75.

          VA HAS STRENGTHENED VERTICAL
          INTEGRATION
    -------------------------------------------------------- Chapter 7:2.3

    As a vertically integrated system, the VA health care system has for
    many years offered, in addition to hospital care, such services as
    outpatient, nursing home, domiciliary, and hospital-based home care.
    In 1996, VA operated, in addition to its 173 hospitals, 398
    outpatient clinics, 133 nursing homes, and 40 domiciliaries.  It also
    operated several special-
    emphasis programs focused on the health care needs of certain
    veterans, such as those who are homeless and those suffering from
    post-traumatic stress disorder (PTSD), substance abuse, blindness,
    acquired immunodeficiency syndrome, or spinal cord injuries.  Through
    these facilities and programs, VA has offered a continuum of care
    that, even today, community hospitals do not adequately offer.

    Among the objectives cited in VA's Prescription for Change is
    increasing the accessibility of VA services.  VA has focused these
    efforts, however, on developing alternatives to hospital
    care--actions that would tend to reduce demand for VA hospital
    care--rather than generate new demand.

    To improve veterans' access to VA health care, VHA, in February 1995,
    encouraged its facilities to establish more "access points," now
    known as CBOCs.  VA has opened, or developed plans to open, 86 CBOCs
    during the past 3 years.  Although VA's Prescription for Change
    indicates that VA was considering opening approximately 275 CBOCs, VA
    has not determined the exact number of CBOCs it will open.  Virtually
    all VISN strategic plans have indicated that networks will establish
    additional CBOCs.

    In addition to establishing CBOCs, VISN strategic plans have
    identified other initiatives to expand and reinforce the continuum of
    care offered by the VA health care system:

      -- VISN 11 (Ann Arbor) includes community support services in its
         continuum of care.  In addition, the VISN has worked with
         neighboring VISNs 10 (Cincinnati) and 12 (Chicago) to develop
         services at state veterans' homes in those VISNs.

      -- VISN 12 (Chicago) plans to expand its continuum of clinical
         service settings so that patients' care can be provided in the
         most cost-effective and clinically appropriate setting.
         Specifically, the VISN is studying (1) establishing CBOCs and
         (2) shifting substance abuse and PTSD care to more
         cost-effective outpatient and residential settings.

          EFFECTIVENESS OF VERTICAL
          INTEGRATION IS UNCERTAIN
    -------------------------------------------------------- Chapter 7:2.4

    Researchers, providers, and analysts give vertical integration mixed
    reviews.  Research shows that community hospitals that have
    established primary care clinics have increased their market share of
    inpatient services.\90 Similarly, a study of California hospitals
    found that offering a continuum of care increased revenues--even
    after inflation.  Adding more community-based physicians to the
    medical staff, providing more outpatient care, and expanding
    outpatient surgery services increased hospital revenues between 1983
    and 1990.  Prehospital strategies, such as adding hospital-based
    outpatient care and surgery, greatly contributed to increasing
    revenue or at least reducing declining Medicare revenues.
    Posthospital strategies, such as setting up home health agencies and
    nursing homes, did not increase revenue as much as the aforementioned
    practices.\91

    In reviewing the vertically integrated Henry Ford Health Care System,
    the Pew Health Professions Commission concluded that integrated
    health care systems have the potential to align health care delivery
    and financing to help improve care, increase patient and customer
    satisfaction, and reduce or hold costs to a minimum.\92

    Others, however, question the benefits of vertical integration.  For
    example, one futurist has warned of the inherent discord in
    vertically integrated systems.  He has noted that hospitals, health
    plans, and doctors continue to have conflicting motives under our
    health care system.  In his view, integrated health care systems do
    not create proper incentives.  Because they tend to pay salaries to
    doctors, they destroy physicians' incentives to share financial risk.
    And, in his opinion, hospitals that vertically integrate are more
    concerned with filling beds and increasing revenue than improving
    care.\93

    Concerns have also been raised about vertical integration at the
    local level.  For example, the merger between a 250-doctor clinic and
    a nearby hospital failed after 4 years.  The clinic expected the
    merger to help it access capital and reduce overhead and enable it to
    tap into managed care contracts.  Instead, according to the clinic's
    vice president, the clinic was in ruin after 2 years; all of its
    midlevel administrators had left, its administrative costs had
    doubled, and the clinic had not benefited from managed care
    contracts.  The vice president questioned whether physicians and
    hospitals can truly align their incentives.\94

    Researchers also question whether vertical integration increases
    rather than decreases health care costs.  For example, Robinson noted
    costs are likely to be higher for hospital-owned outpatient, home
    health, and nursing home services than for comparable nonhospital
    providers.  He noted that hospital-owned facilities tend to have
    higher wage rates for nurses, technicians, clerical workers, and
    other staff than wage rates in independent physician offices, nursing
    homes, and home health agencies.  Finally, he noted that hospitals'
    practices tend to be more intensive than those of independent nursing
    homes and physician offices; hospitals therefore have higher costs,
    even after accounting for wages and other costs.

    In addition, Robinson noted that a vertically integrated system
    allows potential for opportunistic cost and revenue accounting
    because costs may be shifted among inpatient, outpatient, and
    postacute care divisions.\95 In other words, one segment of a
    vertically integrated system may be used to subsidize other segments.

    --------------------
    \90 J.R.C.  Wheeler, T.M.  Wickizer, and S.M.  Shortell, "Vertical
    Integration of Hospital and Physician Care:  The Effects of Primary
    Care Groups on Hospital Utilization," Hospital and Health Services
    Administration, Vol.  31, No.  2 (1996), pp.  67-81.

    \91 Cody, "Vertical Integration Strategies," Hospitals and Health
    Service, pp.  343-55.

    \92 Critical Challenges, Pew Health Professions Commission.

    \93 Anita J.  Slomski, "Maybe Bigger Isn't Better After All," Medical
    Economics (Feb.  27, 1995), pp.  55-60.

    \94 Slomski, "Maybe Bigger Isn't Better After All," Medical
    Economics, pp.  55-60.

    \95 Robinson, "The Changing Boundaries," Milbank Quarterly, pp.
    259-75.

       HOSPITALS FREQUENTLY CONTRACT
       FOR MANAGEMENT EXPERTISE
    ---------------------------------------------------------- Chapter 7:3

    Many community hospitals have used outside management expertise to
    help improve efficiency and profitability.  Although VA has not
    contracted out the management of any of its hospitals, it has used
    outside expertise to manage the VA system.

    Contract management is an arrangement in which a hospital's board of
    trustees retains an outside organization to manage the hospital.  The
    contractor provides an administrator, usually along with an entire
    management team, to oversee daily hospital operations.  This
    arrangement contrasts with that in which a board of trustees hires an
    administrator or chief executive officer directly.\96

    Contract management is intended to improve the financial performance
    of hospitals facing possible closure.  Contract management is
    expected to provide hospitals (1) greater management expertise, (2)
    easier access to capital markets, and (3) lower procurement costs.
    Contract management can produce lower procurement costs because of
    the economies of scale provided by joint purchasing with other
    hospitals managed by the same contractor.\97

    --------------------
    \96 A.  Dor, Are Contract Managed Hospitals More Efficient?  Agency
    for Health Care Policy and Research (AHCPR), Pub.  No.  94-004
    (Rockville, Md.:  1994), pp.  5-20.

    \97 Dor, Are Contract Managed Hospitals More Efficient?  AHCPR, pp.
    5-20.

          HOW EXTENSIVELY IS CONTRACT
          MANAGEMENT USED?
    -------------------------------------------------------- Chapter 7:3.1

    Contractors manage over 10 percent of the nation's community
    hospitals.  Contractors managed 10.4 percent of community hospitals
    in 1982, and by 1987, this had grown to 12.4 percent.  A
    representative from the Agency for Health Care Policy and Research
    (AHCPR), which developed the above estimates, indicated that the
    organization has not developed more recent estimates but believes
    that contract management is growing.

    Contract-managed hospitals tend to be small, rural hospitals with
    fewer technology-intensive services.  Contract-managed and
    noncontract-
    managed hospitals have like case mixes but appear to have greatly
    differing financial performances.  With at least 2 or more
    consecutive years of control, contract managers have been able to
    reduce costs to below those of noncontract hospitals and to
    substantially improve their hospitals' capital structure.  For
    example, the salaries and benefits cost per admission for hospitals
    that had been contract managed for 2 years or more was $2,089
    compared with $2,459 for similar hospitals not contract managed.
    Similarly, the ratio of assets to liabilities for the
    contract-managed hospitals studied improved from 2.391 after 1 year
    to 2.897 after 2 or more years of contract management, slightly
    exceeding the performance of noncontract-managed hospitals.\98

    --------------------
    \98 Dor, Are Contract Managed Hospitals More Efficient?  AHCPR, pp.
    5-20.

          VA HAS NOT USED CONTRACT
          MANAGEMENT
    -------------------------------------------------------- Chapter 7:3.2

    VA has not used contract management for any of its hospitals.  As
    previously discussed, before October 1996 VA was not generally
    authorized to contract for direct patient care services or services
    incident to direct patient care.  VA officials did not know of VA
    considering any use of contract management or whether contracting
    restrictions would have prohibited such contracts.

    Neither VA's Vision for Change nor Prescription for Change discussed
    the hiring of contract management.  Nor do any of the VISN business
    plans directly address the hiring of such management.  The VISN 12
    (Chicago) plan, however, indicates that the VISN will, if the need
    arises, recruit management staff with the skills and expertise needed
    to help accomplish its mission.

    Although VA has not contracted for management of entire hospitals, it
    has used management expertise from the private sector in managing the
    veterans health care system, starting at the top with the Under
    Secretary for Health.  The Under Secretary's prior experience
    included running the California Medicaid program (Medi-Cal), the
    nation's largest.  Similarly, VA selected many VISN directors from
    outside the VA system.

       IMPROVED INFORMATION AND
       ACCOUNTING SYSTEMS HAVE
       DEVELOPED
    ---------------------------------------------------------- Chapter 7:4

    Hospitals and health plans are spending billions of dollars on health
    care information systems.\99 As in the private sector, VA is
    developing and implementing both information and financial management
    systems to provide the data it needs to make sound management
    decisions.

    --------------------
    \99 "Improvements, But No Savings Seen With Fully Integrated
    Systems," Faulkner & Gray's Medicine & Health, Vol.  50, No.  34
    (1996).

          WHAT IS A DECISION SUPPORT
          SYSTEM?
    -------------------------------------------------------- Chapter 7:4.1

    Decision support systems (DSS) provide managers with information on
    business operations to ease decision-making.  In the health care
    industry, these systems provide managers and clinicians with data on
    patterns of patient care and patient health outcomes, which can then
    be used to analyze resource utilization and the cost of providing
    health care services.  Several vendors offer various types of DSSs
    for the health care industry.

          WHY ARE DSSS IMPORTANT?
    -------------------------------------------------------- Chapter 7:4.2

    Administrators and physicians often have limited information to
    support efforts to manage product lines and the process of clinical
    care.  Existing information systems usually support only one portion
    of the health care system such as clinical laboratories and financial
    reporting systems.  No major integration of financial and clinical
    data systems has taken place.  Research on hospital information
    systems indicates that better integrated financial and clinical
    information could provide more efficient and effective decision
    support to both administrators and physicians.\100 For example, the
    clinical data in the system could support the development and
    monitoring of practice guidelines and critical pathways.  Although
    cost savings have eluded those that have invested in integrated
    clinical and financial data systems, such investments have improved
    provider productivity, medical outcomes, and patient satisfaction.

    DSSs can compute the costs of services provided to each patient by
    combining patient-based information on services provided with
    financial information on the costs and revenue associated with those
    services.  For example, a private-sector hospital performing cataract
    surgery collects information on the services provided to each
    patient, including the laboratory tests performed and the medications
    supplied, through its billing system.  The hospital then collects
    revenue and cost information through its accounting systems,
    incorporating the collections from the insurance companies and
    applicable parties, such as Medicare, and expenditures for utilities
    and equipment.

    Using a DSS to combine the clinical and financial information from
    the billing and accounting systems, the hospital can, for example,
    (1) calculate the specific cost of providing cataract surgery to a
    patient; (2) compare revenue received to costs incurred to determine
    profitability of this type of service; (3) compare costs incurred for
    different physicians and for surgery performed at different
    locations; (4) evaluate patient outcomes; and (5) analyze ways to
    increase the quality of service, reduce costs, or increase
    profitability.  DSSs can also help compare patient care with
    predefined health care standards.\101

    DSSs have improved productivity and lowered costs.  Responses to a
    survey published in 1989 also cited service improvement as a major
    benefit of their systems but seldom mentioned improved quality of
    care as an additional benefit.\102 A 1992 survey of health care chief
    executive officers (CEO) found that they viewed DSSs as most critical
    in supporting cost-
    control efforts (82 percent), physician-hospital relations (78
    percent), quality improvement (66 percent), and managed care (65
    percent).  For each of these areas, however, 50 percent or less of
    the CEOs were satisfied with existing DSSs.  The CEOs viewed DSSs'
    financial reporting capabilities most favorably; over 70 percent were
    satisfied with existing systems.\103

    DSSs are viewed as particularly important as the nation moves
    increasingly toward managed care, which requires hospitals to
    integrate their business and clinical operations.  For example, an
    information system for a managed-care system might include the
    capability to (1) analyze capitation rates, (2) process claims, (3)
    determine eligibility, (4) manage health care utilization, and (5)
    credential providers.

    --------------------
    \100 Lawrence F.  McMahon, Jr., "The Integrated Inpatient Management
    Model's Clinical Management Information System," Hospital and Health
    Services Administration, Vol.  39, No.  1 (1994), pp.  81-91.

    \101 VA Health Care Delivery:  Top Management Leadership Critical to
    Success of Decision Support System (GAO/AIMD-95-182, Sept.  29,
    1995).

    \102 "Decision-Support Systems' Downfall:  Management," Hospitals,
    (Mar.  20, 1989), p.  100.

    \103 "CEOs Link IS Visions to Hospital Strategic Plans," Hospitals,
    (Dec.  5, 1992), pp.  42-6.

          GROWTH OF PRIVATE-SECTOR
          DSSS
    -------------------------------------------------------- Chapter 7:4.3

    By 1990, more than 200 vendors were selling DSSs to hospitals.  These
    systems included support for some or all functions of financial
    planning and modeling, diagnosis-related groups, cost accounting,
    facility utilization, and strategic marketing.  A study by Sheldon
    Dorenfest Associates found that health care information system
    spending totaled $8.7 billion in 1995 and would probably reach $11
    billion in 1997.  In 1996, however, the Healthcare Financial
    Management Association said that only one in five integrated delivery
    systems had computerized planning systems that profiled doctors,
    projected demand, measured outcomes, or tracked patients
    electronically.

    In addition, a study by Abt Associates for the Healthcare Financial
    Management Association found that no integrated U.S.  health care
    delivery network had truly integrated its clinical and financial
    systems.  Networks that have invested money in developing systems
    have done so without expecting, or getting, cost savings, according
    to the study.  Although savings are elusive, an Abt senior consultant
    found improvements in provider productivity, medical outcomes, and
    patient satisfaction.  The study cited shorter waiting times
    resulting from automatic scheduling systems as one example of the
    benefits of information systems.\104

    --------------------
    \104 "Improvements, but No Savings Seen With Fully Integrated Data
    Systems," Faulkner & Gray's Medicine & Health, p.  2.

          VA IS IMPLEMENTING DSS AND
          FINANCIAL MANAGEMENT SYSTEM
    -------------------------------------------------------- Chapter 7:4.4

    Like the private sector, VA is working to improve its cost and
    utilization data.  Its information and accounting systems cannot
    provide detailed information on the specific services VA provides or
    the cost of those services.  VA's efforts include (1) implementing a
    DSS, (2) developing a National Patient Care Database, (3) developing
    a computerized patient medical record, and (4) implementing a new
    financial management system.

    Since February 1994, VA has been phasing in at its facilities a new
    DSS that uses commercially available software to help provide
    managers data on patterns of care as well as their resource and cost
    implications.  This DSS fundamentally differs from existing VA
    databases because it organizes each patient's selected resource
    utilization and clinical outcome data in a longitudinal format.
    This, according to VA, allows the Department to evaluate patterns of
    care for a user-defined patient population for an extended time
    period beyond a specific episode or care site.

    The DSS receives input from diverse data systems and consistently
    allocates specific costs, including personnel, supplies, and fixed
    overhead, to each patient service or procedure.  The DSS, by
    combining patterns of patient resource utilization (cost) information
    and patient outcome (quality), reflects the value of patient care
    delivered by VA.

    As of March 1996, 68 VA medical centers were in various stages of
    implementing DSS.  VA's Prescription for Change called for 30
    additional centers to be added to the DSS every 6 months until
    implementation is complete.  Subsequently, VA accelerated DSS
    implementation, and the remaining centers began implementing DSS in
    March 1997.

    Consistent with guidance provided in the Prescription, more than half
    the VISN strategic plans address DSS implementation.  Only VISN 11's
    (Ann Arbor) business plan, however, identifies efforts to ensure the
    integrity and validity of data entered in DSS.  VISN 11's (Ann Arbor)
    and VISN 12's (Chicago) plans also have more detailed information on
    potential uses of DSS data for comparative analyses than other plans.
    Many of the VISNs' plans indicate that networks are developing
    separate information system plans.

    VA's Prescription for Change also called for establishing linkages
    between VA data systems and other public health care programs such as
    Medicare and Medicaid.  It noted that VHA participated in the
    National Committee on Vital and Health Statistics' Core Data Elements
    Project sponsored by the National Center for Health Statistics.

    VA is also developing a National Patient Care Database.  Several
    systems are now used to gather clinical workload data.  For example,
    VA has separate databases with inpatient (patient treatment file) and
    outpatient care (outpatient file) data.  This limits the amount of
    information on services provided to individual patients according to
    the database.  As a result, the current systems do not provide the
    data VA needs to support broader management, medical resource
    management, and policy decisions.

    VA's current outpatient file is inadequate to meet VA's needs for
    clinical and management information.  The outpatient file has
    information on specific clinic stops but not on the diagnoses made,
    services provided, or physicians or other clinicians providing
    services.\105

    In addition, the data VA collects are not compatible with those
    collected by the Health Care Financing Administration (HCFA) or other
    health care programs, making it difficult to compare VA with other
    programs in efficiency or quality.

    To address these problems, the Under Secretary for Health required VA
    facilities to gather, beginning in October 1996, certain information
    to receive workload "credit" for outpatient visits.  VA developed a
    new encounter form to gather data on patient demographics, diagnoses,
    procedures performed, and providers.  In completing these forms, VA
    facilities must use the same coding and terminology typically used by
    HCFA and the private sector, including diagnostic and procedure
    codes.

    The National Patient Care Database is expected to eliminate
    fragmented and overlapping data systems, resolve inconsistencies in
    current data systems, implement standard-based codes and data sets,
    move the focus from the program to the patient, and improve the
    timeliness of data.  VA is developing the National Patient Care
    Database in two phases.  In 1997, it collected outpatient care data;
    in 1998, it began adding inpatient data.

    In addition, according to VA's Prescription, VHA plans to work more
    with the National Library of Medicine's electronic medical record
    system cooperative project to conduct large-scale testing of
    vocabularies for computer-based patient records.  Similarly, many
    VISN strategic plans identify developing computerized patient records
    as a goal.

    Finally, the Prescription called for the design of a management
    information system that would track and link care to individual
    caregivers throughout the VA system.  VA established a National
    Provider Index that identifies caregivers and links them to patient
    care.  The information is being incorporated into the DSS and
    National Patient Care Database.

    VA replaced its former accounting system with the new Financial
    Management System (FMS) using upgraded technology and the
    governmentwide standard general ledger structure.  According to VA
    officials, FMS is a tool to help VA improve its financial management
    and internal controls.

    --------------------
    \105 Ronald F.  Gebbart and Marsha Gant, "No Longer Business as
    Usual:  VA's Data Capture on Fast Track," VA, Veterans Health System
    Journal, Vol.  2, No.  2 (1997), pp.  37-8.

       VA MUST ADDRESS MANY ISSUES
       ABOUT HOW VA HOSPITALS ARE
       MANAGED AND HOW THEY RELATE TO
       OTHER HEALTH CARE PROVIDERS
    ---------------------------------------------------------- Chapter 7:5

    Many issues need to be addressed about VA's efforts to change its
    hospitals' management and their relationships with other providers.
    These issues involve horizontal and vertical integration as well as
    contract management issues.

          HOSPITAL INTEGRATION ISSUES
    -------------------------------------------------------- Chapter 7:5.1

    Traditionally, almost all veterans provided hospital care through the
    VA system have been expected to use VA-operated facilities.  In
    establishing its 22 VISNs, VA horizontally integrated into networks
    with 4 to 11 VA hospitals in broad geographic areas.  VA therefore
    expects veterans to be able to obtain virtually any health care
    service through referral to a network hospital.  VA's hospitals and
    clinics, however, are often located hundreds of miles apart, making
    referrals between them problematic.

    Horizontal integration in the private sector usually involves
    referral networks of hospitals and other nearby facilities.  The
    referral networks established by VISNs, however, often cover vast
    distances.  VISN 5 (Baltimore), one of the smaller VISNs
    geographically, includes hospitals in Washington, D.C.; Martinsburg,
    West Virginia; and Baltimore, Maryland (a total of three hospitals).
    (See fig.  7.2.)

       Figure 7.2:  VA Hospitals in
       VISN 5 (Baltimore)

       (See figure in printed
       edition.)

    The distances between Martinsburg and Washington, D.C., (about 90
    miles) and Martinsburg and Baltimore (about 95 miles) raise questions
    about the extent to which patients needing services not available at
    the Martinsburg hospital are expected to obtain those services from
    VA hospitals in Washington, D.C., or Baltimore.  Such referrals are
    necessary if community hospitals in Martinsburg or nearby cities such
    as Hagerstown, Maryland, cannot provide the services.  But, for
    services available from community hospitals, referral to a distant VA
    medical center may create unnecessary hardships for veterans and
    their families.  VISN strategic plans, however, have little
    information on the community hospital services available and the
    relative cost of providing services through contracts with such
    hospitals compared with the cost of referring a patient to the
    nearest VA hospital that can offer the services (including any
    transportation and lodging costs).

    By integrating its hospitals with non-VA hospitals in their
    communities, VISNs might be able to establish referral patterns
    comparable with those of community hospitals.  For example, the
    Washington, D.C., medical center could form a referral network with
    the four Washington area military hospitals to improve the two
    systems' beneficiaries' access to hospital services.  (See fig.
    7.3.)

       Figure 7.3:  Major VA,
       Military, and Community
       Hospitals in the Washington,
       D.C., Metropolitan Area

       (See figure in printed
       edition.)

    VA hospitals would need to address the following issues before
    joining a local network:

      -- To what extent would the network help increase demand for
         VA-supported hospital care?

      -- Can the VA hospital support additional workload without
         compromising services for veterans?

      -- Would VA be able to generate enough revenues from selling
         services to military and community hospitals in the network to
         offset the increased contracting costs?

      -- To what extent would current VA hospital users shift their use
         to other, more convenient, military or community hospitals in
         the network?

      -- To what extent can VA reach agreements to consolidate
         specialized services in fewer locations to increase efficiency
         and quality?

    Another potential advantage of VA hospitals joining local networks
    would be VA's increased consideration of the health care capacity and
    needs of local communities in its planning.  For example, VA could
    reach agreements with community hospitals about the proliferation of
    high-technology equipment.  Similarly, in placing expensive new
    equipment in the VA system, VA could consider the extent to which the
    equipment could serve the community as well as veterans.  VISN
    strategic plans, however, generally do not address the health care
    capacity and needs of the communities with VA hospitals.

    One approach that might increase veterans' access to more convenient
    community or military hospitals but preserve veterans' incentives to
    use VA hospitals would be to impose higher veteran cost sharing for
    services obtained from non-VA hospitals.  In effect, VA would be
    establishing a point-of-service plan, allowing veterans to obtain
    care from any willing provider but paying for more of the cost of the
    care if it is obtained from a preferred provider (a VA hospital) or
    participating provider (other network hospital).

    As of July 1997, VA had initiated integrations in 18 geographic areas
    with five reported as completed.  VA indicates the integrations are
    having positive results.  VA has, however, had difficulties planning
    and implementing some of the integrations.\106 Our ongoing work has
    revealed areas where improvements could be made.  For example, VA
    generally makes integration decisions incrementally, that is, on a
    service-by-service basis throughout the process instead of on the
    basis of decisions affecting all activities in integrated facilities.
    Also, planning and implementation activities often take place
    simultaneously, which precludes VA's considering the collective
    effect of such changes on the integration.  In addition,
    stakeholders, though involved at varying times in different ways, do
    not always receive sufficient information at key decision points.

    Our work suggests that as VA considers ways to improve its facility
    integration process, several actions might facilitate better results.
    These include

      -- adopting a more comprehensive planning approach,

      -- completing planning before implementing changes,

      -- improving the timeliness and effectiveness of communications
         with stakeholders, and

      -- using a more independent planning approach.

    --------------------
    \106 VA Health Care:  Lessons Learned From Medical Facility
    Integrations (GAO/T-HEHS-97-184, July 24, 1997).

          VERTICAL INTEGRATION ISSUES
    -------------------------------------------------------- Chapter 7:5.2

    Considerable uncertainty surrounds the potential effects of VA's
    vertical integration efforts on future demand for VA hospital care.
    Because VA has been a vertically integrated health care system for
    many years, it may have already reaped many of vertical integration's
    benefits.  For example, community hospitals expect to retain or
    increase demand for hospital care by operating nursing homes and home
    health agencies.  VA, however, has both operated nursing homes and
    contracted for nursing home care in the private sector since the
    1960s.  Transfers between these nursing homes and VA hospitals have
    long generated a portion of VA's hospital demand.

    One way for VA to increase hospital demand would be to expand its
    nursing home program, either by establishing additional VA nursing
    homes or contracts with community nursing homes.  Such actions would,
    however, require significant new VA resources to only slightly
    increase hospital admissions.  Changes need to be made in the
    financing of VA nursing home care.  Veteran cost sharing provides
    less than 1 percent of the cost of providing VA-supported nursing
    home care.  On the other hand, expanding the availability of nursing
    home care would help bridge the gap in health care coverage for
    elderly veterans.

    The second major issue concerning vertical integration is the extent
    to which CBOCs may generate new demand for VA hospital care.  Many
    CBOCs are located far (often over 50 miles) from the nearest VA
    facility.\107 CBOC physicians are expected to refer veterans needing
    specialized services or hospital care to a VA hospital.  Distance
    from a VA hospital, however, significantly affects the likelihood
    that veterans will seek care from a VA facility.  The rate at which
    veterans use VA hospitals declines significantly at distances of over
    5 miles from a VA facility.  Thus, the extent to which CBOCs serve
    veterans who have other health care options through public or private
    health insurance further reduces the likelihood of VA hospital use.

    Because VA's contracting authority did not expand until October 1996,
    it is too soon to determine its effect on demand for VA hospital
    care.  Use of the authority to contract for hospital and specialized
    services from private-sector providers to improve veterans' access to
    hospital care could further reduce demand for VA hospital care.  Our
    work on other countries' veterans health care systems found that use
    of veterans' hospitals declined once veterans gained access to
    community hospitals through national health insurance or changes in
    the veterans' program to authorize contract care.\108 As discussed,
    one option that could limit the effect of giving veterans greater
    access to community hospitals closer to their homes would be to
    require higher veteran cost sharing for care from non-VA hospitals.

    --------------------
    \107 Of the first 12 CBOCs, 3 were located more than 100 miles from
    the nearest VA facility; 6, between 50 and 100 miles from a VA
    facility; and 3, within 50 miles of a VA facility.

    \108 Veterans' Health Care:  Implications of Other Countries' Reforms
    for the United States (GAO/HEHS-94-210BR, Sept.  22, 1994).

          CONTRACT MANAGEMENT ISSUES
    -------------------------------------------------------- Chapter 7:5.3

    One change that community (but not VA) hospitals have tried is
    contracting for outside hospital management to restructure operations
    and improve efficiency.  VA could test contract management under
    several scenarios.  For example, because contract management appears
    to have succeeded most in small, rural community hospitals, VA could
    work with the Congress to develop a pilot program to test contract
    management at one or more of its small rural hospitals.  On the other
    hand, it could try contract management in hospitals facing
    significant management challenges.  Similarly, VA could use outside
    management to plan and implement facility integrations.

    In designing such demonstration projects, however, VA would need to
    establish evaluation plans to determine the effects both on
    efficiency and quality of care.  In other words, it would need to
    ensure that the contractor did not increase efficiency by
    compromising quality of care.

    While the DSS may significantly improve VA's ability to manage its
    health care operations, the ultimate usefulness of the system will
    depend not on the software but on the completeness and accuracy of
    the data entering the system.  If the DSS cannot provide reliable
    information, VA facilities and VISNs will either continue to make
    decisions on the basis of unreliable information or spend valuable
    time developing their own data systems.

    Two years ago, we recommended that VA develop a strategy to identify
    data needed to support decision-making and ensure that these data are
    complete, accurate, consistent, and reconciled monthly.\109 VA's
    Prescription for Change advocated swift implementation of the DSS but
    did not target any actions to ensure that the data and systems
    entering the DSS could provide complete and accurate data.
    Similarly, VISN strategic plans generally do not address plans to
    ensure the completeness and accuracy of data entering the DSS and
    other data systems.  As a result, it is not clear whether the DSS,
    FMS, and other data systems will generate the reliable data VA needs
    to support management decisions.

    VA's facility integrations create additional challenges for VA data
    systems.  For example, decentralized hospital computer programs at VA
    facilities have been largely locally developed and may not be
    compatible with other facilities' systems.  Similarly, VA will have
    to resolve facilities' differences in data coding and entry.

    Both VA and community hospitals face the challenge of reprogramming
    their computers to recognize the next century.  Most computer
    software in use today is limited to a two-digit date field such as
    "97" for 1997.  Thus, this software will not be able to distinguish
    between the years 1900 and 2000 because both will be designated "00."
    VA's draft strategic plan states that VA's objective is to ensure
    that its information systems will provide uninterrupted service to
    support VA medical care in the year 2000.  The plan includes a
    performance goal that full implementation and testing of compliant
    software (that is, software capable of processing dates beyond 1999)
    will be completed by December 1999.

    --------------------
    \109 GAO/AIMD-95-182, Sept.  29, 1995.

    WORK TRANSFORMATION LEADS TO MORE
    EFFICIENT USE OF PERSONNEL
    RESOURCES
    ============================================================ Chapter 8

    Personnel accounts for over 40 percent of community hospital
    expenditures.  Hospitals are the major employers of nursing staff,
    including registered nurses, licensed practical nurses, and nursing
    assistants.  Throughout the 1980s, the use of nursing staff,
    particularly registered nurses, increased steadily, raising costs.
    By 1992, registered nurses accounted for about 25 percent of hospital
    employment.\110 The increased demand for and limited supply of
    registered nurses led to significant wage increases, raising
    operating costs further.

    Because personnel accounts for such a large part of hospital costs,
    any effort to reduce costs must focus on effectively using health
    care workers.  Community hospitals often change their basic work
    processes to more efficiently use personnel resources.  For example,
    community hospitals are

      -- contracting for patient and nonpatient care services when such
         contracting is less costly than providing the services through
         the hospital's staff;

      -- using part-time and temporary nurses and other health care
         professionals to more flexibly meet changing workloads and
         patient mix;

      -- cross-training personnel to perform multiple jobs to more
         efficiently use available staff;

      -- developing nurse extender programs to allow nurses to devote
         more time to direct patient care; and

      -- restructuring care delivery around patient-centered teams to
         increase efficiency and patient satisfaction.

    In the past, VA has not focused as much as the private sector on work
    transformation in part because of limitations on its authority to
    contract for patient care services.  VA's Prescription for Change,
    however, placed increased emphasis on such concepts as cross-training
    and patient-
    centered care.  Veterans Integrated Service Network (VISN) strategic
    plans, however, hardly mention efforts to implement the changes the
    Prescription calls for.  As a result, VA faces many issues concerning
    the extent to which its hospitals should change work processes.

    --------------------
    \110 Barbara H.  Wooton and Laura T.  Ross, "Hospital Staffing
    Patterns in Urban and Nonurban Areas," Monthly Labor Review, (Mar.
    1995), pp.  23-33.

       HOSPITALS ARE INCREASINGLY
       CONTRACTING FOR PATIENT AND
       NONPATIENT CARE SERVICES
    ---------------------------------------------------------- Chapter 8:1

    Community hospitals try to control costs by contracting for a wide
    variety of patient and nonpatient care services.  By doing so,
    hospitals can shift some costs from fixed to variable, allowing them
    to react to changing workloads.  In other words, hospitals using
    contract services pay only for the services they use.  In addition,
    use of contract employees reduces employee benefits costs.  Until
    recently, VA's legislative authority did not permit it to contract
    for patient care services.  VA is now, however, increasingly
    exploring options to contract for both patient and nonpatient care
    services.

          COMMUNITY HOSPITALS' USE OF
          CONTRACT SERVICES IS
          INCREASING
    -------------------------------------------------------- Chapter 8:1.1

    Although we found no studies that identify the number or percentage
    of community hospitals using contract services, annual surveys of
    hospital executives by Modern Healthcare suggest that this is a
    growing trend.  The services hospitals most frequently contract for
    include food service, emergency services, housekeeping, laundry,
    equipment maintenance, and pharmacy services.  Between 1994 and 1995,
    the number of hospitals surveyed that reported using contract
    services increased, particularly services for emergency room,
    financial management, equipment maintenance, and physical and
    rehabilitation therapy.  (See table 8.1.)

                             Table 8.1

                Top 10 Hospital Services Contracted,
                           1994 and 1995

                              Number of hospital
                                   clients
                              ------------------
                                                       Percent
    Type of service               1994      1995        change
    ------------------------  --------  --------  ------------
    Food                         1,550     1,733          11.8
    Hospital-based emergency       981     1,298          32.3
    Housekeeping                   619       718          16.0
    Laundry                        533       557           4.5
    Equipment maintenance          289       445          54.0
    Pharmacy                       370       436          17.8
    Plant operations               310       341          10.0
    Rehabilitation/physical        255       308          20.8
     therapy
    Financial management           342       474          38.6
    Psychiatric                    214       211          -1.4
    ----------------------------------------------------------
    Source:  Modern Healthcare Contract Management Surveys, 1994 and
    1995.

    Controlling costs was the main reason chief executive officers (CEO)
    cited for using contractors to provide support and business services.
    Nearly 60 percent of the executives responding to Hospitals & Health
    Networks' Fifth Annual Contract Management Survey in 1995 cited cost
    as a reason for contracting for support services; 56 percent cited
    the need to obtain specialized expertise; 42 percent cited the
    ability to downsize the workforce.  Similarly, slightly more than
    half of the respondents said that they contract for business services
    to contain costs and take advantage of vendors' specialized
    expertise.  Cost was not as much a factor in hospitals' decisions to
    contract for clinical services.  Respondents most often cited the
    need to obtain specialized expertise (54 percent) and difficulty in
    recruiting staff (52 percent) as reasons for contracting for such
    services.\111

    Lack of capital appears to be a major factor in decisions to contract
    for diagnostic imaging services.  A diagnostic imaging contractor
    provides such services as mobile computed tomography, magnetic
    resonance imaging, single photon emission computed tomography,
    ultrasound, and nuclear medicine.  Hospitals that cannot afford to
    purchase, or justify on the basis of workload, such equipment, which
    may cost $2 million or $3 million, may purchase the service from a
    contractor.\112

    Another reported trend is for contractors to hire hospital employees.
    For example, when Marriott contracts to provide food service
    operations, it may hire hospital employees.  Contracting for food
    service operations can save money because contractors generally pay
    lower wages than hospitals.\113

    Overall, hospital executives appeared satisfied with use of contract
    services.  Over 90 percent of hospital executives participating in
    Hospitals & Health Networks' 1995 survey were very or generally
    satisfied with contracts for clinical, support, and business
    services.\114

    --------------------
    \111 J.  Duncan Moore, Jr., "Outsourcing Firms Ride Changing Tides,"
    Modern Healthcare, (Sept.  2, 1996), pp.  61-76.

    \112 Elizabeth J.  Moran, "Medical Firms Make Clinics Efficient,"
    Hospitals, Vol.  64, No.  8 (1990).

    \113 Moore, "Outsourcing Firms Ride Changing Tides," Modern
    Healthcare, pp.  61-76.

    \114 Cathy Tokarski, "Value Driven:  Fifth Annual Contract Management
    Survey," Hospitals & Health Networks, (June 20, 1995), pp.  42-6.

          MANY COMMUNITY HOSPITALS USE
          TEMPORARY STAFFING AGENCIES
    -------------------------------------------------------- Chapter 8:1.2

    More than one-third of the nation's hospitals regularly use temporary
    staffing agency personnel.  The nursing shortage of the mid-1980s led
    hospitals to rely on temporary contract nursing staff to meet
    staffing requirements.  Some inner-city hospitals reportedly pay $50
    an hour for such personnel.\115

    Temporary staffing agencies (1) help hospitals meet staffing
    shortages and (2) allow nurses flexibility in their work schedules.
    Hospital administrators like using agency personnel because it avoids
    the costs of providing insurance and other benefits to permanent
    employees.  On the other hand, permanent employees often complain
    that use of agency personnel makes it harder to maintain continuity
    of care.  Many also resent the significantly higher hourly wages that
    agency nurses receive without having to assume the same nonclinical
    responsibilities as permanent staff.\116

    The number of nurses working in independent contract positions is
    increasing.\117 Despite the increased use and considerable cost of
    such nurses, we found little information on them.  A 1990 survey of
    registered nurses in Illinois (66,005 out of 117,796 nurses
    responded), however, found that agency nurses received higher hourly
    wages but fewer benefits than permanent hospital staff nurses.
    Hospital staff nurses were more likely than agency nurses to receive
    pension plans, health and dental insurance, reimbursement for
    continuing education, child care services, and parking.\118

    --------------------
    \115 Katherine Kostbade Hughes and Richard J.  Marcantonio,
    "Recruitment, Retention, and Compensation of Agency and Hospital
    Nurses," Journal of Nursing Administration, Vol.  21, No.  10 (1991),
    pp.  46-51.

    \116 Hughes and Marcantonio, "Recruitment, Retention, and
    Compensation," Journal of Nursing Administration, pp.  46-51.

    \117 Karen Leidy, "Effective Screening and Orientation of Independent
    Contract Nurses," The Journal of Continuing Education in Nursing,
    Vol.  23, No.  2 (1992), pp.  64-8.

    \118 Hughes and Marcantonio, "Recruitment, Retention, and
    Compensation," Journal of Nursing Administration, pp.  46-51.

          VA USE OF CONTRACT PERSONNEL
          HAS BEEN LIMITED
    -------------------------------------------------------- Chapter 8:1.3

    Historically, VA hospitals have not been allowed to contract for
    patient and nonpatient care services to the same extent as community
    hospitals.  Now that legislative barriers to such contracting have
    been removed, VA expects its hospitals to increasingly use contract
    services when they are less expensive and of equal or better quality.

    Until fiscal year 1994, VA was, in general, prohibited from
    contracting for direct patient care services, such as nursing
    services, which are currently provided by federal employees.  Section
    8110(c) of title 38 of the U.S.  Code generally precluded VA from
    entering into contracts under which VA direct patient care, or
    activities incident to direct patient care, would be performed by
    non-VA personnel.  VA interpreted activities such as dietary and
    laundry services as incident to direct patient care and therefore
    exempted them from efforts by the Office of Management and Budget to
    have agencies contract out functions previously performed by federal
    employees.

    The Veterans' Benefits Improvements Act of 1994 (P.L.  103-446, title
    XI, section 1103) suspended these requirements for fiscal years 1995
    to 1999.  The Secretary of VA must, however, (1) ensure that
    contractors give priority to former VA employees displaced by
    contract awardees and (2) provide former VA employees all possible
    help in obtaining other federal employment or entering job training
    programs.

    In August 1995, the Under Secretary for Health distributed criteria
    for potentially realigning VA facilities and programs to help field
    managers identify opportunities for improving efficiency.  Several
    criteria focus on contracting for services when the community offers
    the same kind of service of equal or better quality at a lower cost.
    While the criteria present hypothetical examples of situations in
    which a VA facility would purchase a service from another facility
    rather than provide it directly, field managers could also interpret
    the criteria to include situations in which a private contractor
    would be hired to operate services, such as laundry and food
    services, within a VA facility.

    Public Law 104-262, which became law on October 9, 1996, removed
    additional barriers to expanded VA contracting.  Specifically, it (1)
    expanded the types of professionals and services for which VA may
    contract, (2) simplified procedures for complying with federal
    procurement processes when contracting with commercial firms, and (3)
    permanently eliminated the restriction on contracting for patient
    care-related services.

    Several VISN business plans have identified efforts to contract for
    patient and nonpatient care services using this expanded authority:

      -- VISN 7 (Atlanta) plans to purchase laboratory services from more
         cost-effective non-VA providers.

      -- VISN 12 (Chicago) expects to save 40 percent on staffing and 25
         percent on other costs by contracting out selected
         administrative, clinical, and support services.  Among the
         activities the network is considering for contracting are
         grounds maintenance, warehousing, and fire prevention.

      -- VISN 14 (Grand Island) is reevaluating its in-house provision of
         dialysis services to determine whether it would be less
         expensive to contract for the services.  It is also weighing the
         possibility of sharing its other dialysis resources with
         community providers.

       USE OF PART-TIME AND
       INTERMITTENT EMPLOYEES CAN
       OFFER FLEXIBILITY
    ---------------------------------------------------------- Chapter 8:2

    To cope with rapidly changing workloads and help contain staffing and
    benefits costs, community hospitals are using more part-time and
    intermittent nursing employees.\119

    Although VA also uses part-time and intermittent employees, such use
    has declined in the past 5 years.  In addition, some community
    hospitals are developing regional staffing pools to share personnel
    among facilities.  VA officials did not know of any personnel sharing
    among its facilities but believe integration of VA medical centers
    may encourage this practice.

    --------------------
    \119 Federal regulations (5 C.F.R.  340-202) define part-time
    employees as those career employees who work regular schedules of
    from 16 to 32 hours a week.  As used in this report, the term
    "intermittent" includes employees who work intermittently, on a
    temporary, seasonal, or on-call basis or on a time-
    limited appointment.

          USE OF PART-TIME AND
          INTERMITTENT EMPLOYEES HAS
          ADVANTAGES AND DISADVANTAGES
    -------------------------------------------------------- Chapter 8:2.1

    The use of part-time and intermittent employees provides several
    advantages as well as disadvantages to both staff and hospitals.

    First, the use of part-time and intermittent employees can enable
    hospitals to cost-effectively meet staffing needs due to changes in
    patient loads, case mix, and vacancies.  Intermittent employees
    generally receive higher wages instead of benefits and have more
    control in scheduling their work assignments than do part timers.\120
    Second, using part-time and intermittent employees also allows
    hospitals an expanded pool of nurses from which to recruit and the
    ability to retain nurses who might have left the workforce or sought
    other employment if their families' situation changed.

    Nurses often prefer part-time or intermittent work because it gives
    them greater flexibility in scheduling their work hours and more time
    to spend with their families and reduces stress.  By requiring
    intermittent employees to work a minimum number of shifts, weekends,
    and holidays, hospitals also make it easier for full-time staff to
    schedule time off.

    The use of part-time and intermittent employees also has
    disadvantages, however.  Programs that allow lots of movement of such
    staff among work units may have difficulty keeping intermittent
    employees abreast of hospital policies and procedures.  On the other
    hand, programs that allow such employees to work in a limited number
    of units may have difficulty meeting staffing needs without relying
    on outside staffing agencies.  Finally, intermittent employees are
    often viewed as lacking a permanent staff's commitment to an
    organization.

    One hospital, Tampa General Hospital, addressed these problems by
    organizing its intermittent staff, including registered nurses,
    licensed practical nurses, paramedics, certified surgical
    technicians, mental health technicians, and emergency medical
    technicians, into unit-based and divisional pools.  The unit-based
    pool places intermittent employees under the direct supervision of
    the unit nurse manager.  Although assigned to a specific unit, such
    employees receive a pay differential as well as retirement and Social
    Security benefits.\121

    In contrast, Tampa General's divisional nursing pool is intended for
    employees who want greater flexibility in scheduling and assignments.
    Staff in the divisional pool work at least 16 weekend hours every
    month and one 8-hour shift during the Thanksgiving, Christmas, and
    New Year holiday season.

    The nursing pools have allowed the hospital to decrease its use of
    overtime and staffing agencies, according to hospital officials, and
    offered other advantages.  First, the unit-based pool has allowed the
    hospital to meet fluctuating demand or cover vacancies with nurses
    familiar with the unit.  Second, when intermittent employees convert
    to permanent status, orientation costs are typically lower than for
    newly hired nurses.

    --------------------
    \120 Mary Bogos Kutash and Deana Nelson, "Optimizing the Use of
    Nursing Pool Resources," Journal of Nursing Administration, Vol.  23,
    No.  1 (1993), pp.  65-8.

    \121 Kutash and Nelson, "Optimizing the Use of Nursing Pool
    Resources," Journal of Nursing Administration, pp.  65-8.

          USE OF PART-TIME AND
          INTERMITTENT NURSES
          INCREASING
    -------------------------------------------------------- Chapter 8:2.2

    Between 1966 and 1986, the percentage of nurses working part time in
    hospitals ranged from 15 to 20 percent.  The percentage of nurses
    working part time increased to 26 in 1988, according to another
    source.\122 Similarly, in a 1993 study conducted by the Florida
    Hospital Association, 47 percent of the hospitals surveyed indicated
    that they used intermittent contract staff only when needed.  In
    addition, 40 percent of the hospitals reported that they had "float
    pools" to meet staffing needs.  Float pools comprise hospital staff
    who agree to work in different units due to changing patient loads
    and case mix.  The survey did not include data on use of nurses
    obtained from nursing agencies.\123

    Almost half of the more than 7,000 nurses responding to the Patient
    Care Survey of the American Journal of Nursing reported that
    part-time or intermittent registered nurses have been substituted for
    full-time registered nurses at their facilities; two out of five
    reported the substitution of unlicensed auxiliary personnel for
    registered nurses.  Nurses in the Pacific region reported
    significantly higher rates of substitution.  Nurses in the Northeast
    and East North Central regions reported the greatest cutbacks in the
    use of registered nurses.\124

    --------------------
    \122 Susan V.  Owen, "Empowering Part-Time Nurses in the Treatment of
    Depressed Inpatients," Journal of Psychosocial Nursing, Vol.  30, No.
    8 (1992), pp.  17-22.

    \123 Kutash and Nelson, "Optimizing the Use of Nursing Pool
    Resources," Journal of Nursing Administration, pp.  65-8.

    \124 Judith Shindul-Rothschild, Diane Berry, and Ellen
    Long-Middleton, "Where Have All the Nurses Gone?" American Journal of
    Nursing, Vol.  96, No.  11 (1996), pp.  25-39.

          VA USE OF PART-TIME AND
          INTERMITTENT NURSES IS
          DECLINING
    -------------------------------------------------------- Chapter 8:2.3

    Like community hospitals, VA uses part-time and intermittent nurses
    and other health care professionals to increase its flexibility in
    meeting changing workloads and patient mix.  Unlike community
    hospitals, however, VA is decreasing its use of part-time and
    intermittent nurses.

    Overall, the use of part-time and intermittent nurses in the VA
    health care system has declined steadily since 1992, when about 13.3
    percent of VA nurses worked as part-timers or intermittents.  At the
    end of fiscal year 1995, about 11.2 percent of VA nurses and nurse
    anesthetists worked as part-timers or intermittents.  According to
    VA's chief consultant in its Nursing Strategic Health Care Group,
    hospitals that have had to reduce staffing due to budget problems
    have sometimes eliminated part-time and intermittent nurses to
    protect full-time, permanent nurses.  This, she said, can result in
    reducing the hospital's flexibility in responding to changing
    workloads.

    VA statistics on part-time and intermittent employees provide
    systemwide information on physicians, dentists, and nurses but have
    no data on other types of health care workers.  In addition, VA
    officials did not know of any studies or data on the actual extent to
    which part-time and intermittent nurses and other staff are working
    in VA hospitals.

    To date, VA's restructuring efforts have not specifically focused on
    use of part-time and intermittent staff.  Neither VA's Vision for
    Change nor Prescription for Change addresses the use of part-time and
    intermittent employees.  Nor do any of the VISN business plans
    address the issue.  VA officials, however, agreed that use of
    part-time and intermittent employees can increase flexibility and
    reduce costs.  They also said that use of part-time and intermittent
    nurses probably varies within the VA system due to local conditions,
    such as the supply of nurses.

          HOSPITALS ARE POOLING
          RESOURCES
    -------------------------------------------------------- Chapter 8:2.4

    Some community hospitals have developed staffing networks to pool
    hospital personnel geographically.  For example, rural hospitals in
    Vermont have developed an interhospital staff sharing system to
    alleviate staffing shortages.  Under the pooling arrangements, some
    hospitals lend staff more often than they borrow them from the pool,
    while others borrow more than they lend.  All hospitals, however,
    cited advantages.  For example, hospitals borrowing staff from the
    pool reported that it allowed them to (1) keep a department or unit
    in a small institution open and (2) avoid having to transfer patients
    because of short staffing.  Similarly, hospitals lending staff
    through the pool said that it gave them an alternative to sending
    staff nurses home without pay during low demand periods.

    Lending hospitals are responsible for ensuring the competency of pool
    members.  Employee participation is voluntary, but those who
    participate are (1) paid $3 to $5 above their regular hourly salary
    depending on when they work and (2) reimbursed for travel.  Even with
    the salary differential, hospitals paid less than they would have if
    they had obtained staff from a nursing agency.

    Other advantages of the pooled resources cited were

      -- better communication among hospitals in the pool,

      -- avoiding the need to use more costly and less reliable staffing
         agencies, and

      -- sharing innovative approaches and best practices as pool staff
         were exposed to other hospitals' care management practices.

    Hospital administrators plan to expand the pool to include other
    health care providers in smaller, more geographically compact Vermont
    communities.  For example, hospitals and home health agencies might
    share staff.\125

    VA central office officials did not know of any VA hospitals that
    have set up float pools comparable with those in community hospitals
    but said that such programs might be considered in the future,
    particularly by hospitals under common management.

    --------------------
    \125 Jill L.  Sherer, "Personnel Power," Hospitals & Health Networks,
    (Sept.  5, 1994).

       HOSPITALS CROSS-TRAIN EMPLOYEES
       FOR EFFECTIVE STAFF UTILIZATION
    ---------------------------------------------------------- Chapter 8:3

    To maintain patient care, while coping with staff shortages,
    community hospitals increasingly cross-train both clinical and
    support personnel.  VA's Prescription for Change calls for increased
    cross-training and multi-
    skilling of VA personnel; VISN strategic plans, however, generally do
    not discuss plans to accomplish this.

    Initially, community hospitals used cross-training to help cope with
    the shortage of nurses during the 1970s and 1980s.  As the nursing
    shortage eased, the demands for greater efficiency driven by managed
    care and payment reforms became the impetus for cross-training.
    Therefore, cross-training has focused heavily on training to reduce
    the need for or make more effective use of nurses in delivering
    patient care.  Hospitals have developed individual programs to meet
    their needs and labeled both their programs and staff positions
    differently.  Rural hospitals, in particular, have had to develop
    programs to cope with chronic shortages of medical personnel, and
    they have reportedly done so successfully.

    Clinical personnel are usually cross-trained within their general
    area of expertise to allow them to expand the scope of their
    practice.  For example, a registered nurse normally working on
    general surgical cases might be cross-trained to assist with
    orthopedic surgery.  Similarly, licensed practical nurses may be
    trained to assume certain duties traditionally performed by
    registered nurses.

    Cross-training allows hospitals to more efficiently use resources by
    expanding the number of clinical and nonclinical staff trained to
    perform a given task.  For example, if nursing assistants are trained
    to perform nonpatient care duties, such as changing bed linens, they
    can substitute for housekeeping staff.

    The 1996 Patient Care Survey of the American Journal of Nursing, a
    national survey including responses from 7,560 nurses, reported that
    nurses are caring for more patients, have been cross-trained to
    assume more nursing responsibilities, and have substantially less
    time to provide all aspects of nursing care.

    In its December 1995 report, Critical Challenges:  Revitalizing the
    Health Professions for the Twenty-First Century, the Pew Health
    Professions Commission recommended that team training and
    cross-professional education continue and expand.

    VA similarly supports cross-training and multi-skilling and,
    according to a VA official, VA facilities are using physician
    extenders and other allied health professionals.  For example, the
    Acting Director of Surgical Services told us that VA started
    cross-training some technicians in intensive care, respiratory
    therapy, and laboratory services.  Neither he nor other VA officials,
    however, could provide data on the extensiveness of cross-
    training in the VA system.

    In VA's Prescription for Change, the Under Secretary for Health
    described several actions to expand the use of cross-training and
    multi-skilling.  First, under its goal of improving customer service,
    VA plans to establish new positions for multi-skilled caregivers as
    part of efforts to empower staff to plan and execute their work to
    best respond to patient needs.  In addition, to help make VA an
    employer of choice, VA established a work group to examine
    cross-training, employee development, and other workforce issues.
    Finally, in March 1995, VA revised its directives on the scope of
    practice for nurse practitioners, physician assistants, and clinical
    pharmacists to better utilize such personnel.  The revised guidance
    also established prescribing guidelines for these professions.

    VA's Office of Academic Affairs is also supporting cross-training
    through its Primary Care Education program and "firm" system.\126 VA
    officials told us that the programs emphasize team building among
    multidisciplinary staff rather than cross-training of staff to
    perform more than one job.

    VISN strategic plans generally support the need to enhance training
    of hospital personnel but focus more on retraining personnel to work
    in outpatient settings and in providing primary care.  This focus is
    appropriate in the short term, given the significant shift in VA care
    from inpatient to outpatient settings.

    --------------------
    \126 The "firm" system refers to an academic group practice in which
    a designated set of health care providers is responsible for the
    inpatient and outpatient care of a defined set of patients.

       HOSPITALS ARE CREATING NURSE
       EXTENDER AND OTHER AUXILIARY
       POSITIONS
    ---------------------------------------------------------- Chapter 8:4

    Another approach community hospitals sometimes use to reduce
    personnel costs that closely relates to cross-training is expanding
    the roles and responsibilities of nursing assistants and other
    ancillary personnel.  Likewise, VA supports expanded roles for
    nursing assistants and other ancillary personnel, but the extent to
    which VISNs are increasing their use is unclear.

    If money were no object and the supply of nurses endless, hospitals
    would undoubtedly prefer to use only registered nurses to provide
    direct patient care.  But, with the shortage of registered nurses in
    the 1980s and increasing pressures to contain costs, community
    hospitals increasingly sought to develop lower cost alternatives.
    One such alternative is the use of specially trained nursing
    assistants, often referred to as nurse extenders, to assume many
    tasks normally performed by registered nurses.  This reduces the need
    for higher paid nurses and allows registered nurses to use their
    advanced education and experience to enhance all patient care
    activities.

    Registered nurses remain pivotal in coordinating care in hospitals,
    sometimes as case managers.  Nursing assistants' roles, however, have
    been changing.  In some community hospitals, nursing assistants,
    under the direction of a registered nurse, are assuming more
    responsibility for direct care.  Under nurse extender programs,
    nursing assistants or other ancillary personnel are generally trained
    to replace or assist registered nurses in performing relatively
    simple bedside care such as changing dressings and taking vital
    signs.  In addition, they sometimes help nurses in providing total
    bedside care.  Still others are trained to help telemonitor, lift
    patients, administer electrocardiographs, or provide physical
    therapy.\127

    Registered nurses assume additional management and supervisory
    responsibilities to monitor the nurse extenders.  Meanwhile, nurse
    extenders relieve registered nurses of many routine patient
    care-related duties.  Creating nurse extender positions is sometimes
    accompanied by changing the roles of other support personnel such as
    those performing dietary, housekeeping, and transportation services.

    Following are examples of three hospitals' efforts to expand the
    roles of nursing assistants and other ancillary personnel:

      -- A Southern Maryland hospital developed a new patient care
         delivery model to respond to a nursing shortage.  The hospital,
         forced to close 10 percent of its beds because of a staffing
         shortage, could reopen the beds only through the use of agency
         nurses, a temporary and costly option.  To reduce its need for
         registered nurses, the hospital created two new patient care
         positions--nursing technician and patient care assistant--by
         expanding the duties of nursing assistants and housekeepers.  It
         expanded the former nursing assistant job description to include
         more technical duties previously performed by nurses.  It
         reassigned unskilled tasks to personnel in other departments.
         The hospital pairs nursing technicians with the same registered
         nurses to establish strong working relationships.

    The hospital expanded the housekeepers' role to include delivering
    water, mail, and linen directly to patients; accompanying discharged
    patients to the front door; delivering specimens and requisitions to
    other departments; helping nurses with patient turning and
    positioning; applying side rails and assembling traction to
    unoccupied beds; and cleaning equipment.  Before assuming these
    expanded duties, the former housekeepers were trained in infection
    control procedures and body mechanics.  Many of the tasks the patient
    care assistants assumed had been previously done by nursing
    assistants.  Unlike the former housekeepers, who reported to the
    general services department, patient care assistants report directly
    to the care unit.

    The hospital also expanded the roles of other nonpatient care staff.
    For example, dietary aides distribute and collect patient meal trays,
    a task previously performed by nursing assistants.

    The hospital reported that it reduced by 12 percent the number of
    registered nurses needed by shifting non-nursing tasks to nursing
    technicians and patient care assistants.  The hospital also reported
    increased employee satisfaction among nursing technicians and patient
    care assistants resulting from their interaction with patients and
    nurses, improved documentation and care planning, better continuity
    of care from shift to shift, more time for patient teaching, and a
    cleaner unit.\128

      -- Boston's University Hospital developed a patient care technician
         position.\129 Patient care technicians, who must have 4 years of
         education beyond high school, complete a formal 8-week training
         program followed by a 3-month probationary period.  As in the
         Southern Maryland hospital, the patient care technician worked
         closely with a registered nurse.\130 An official from the Boston
         University Medical Center, however, told us that the hospital
         discontinued the program because it was not cost-effective.  She
         said that the positions had high turnover rates because the
         program was limited to individuals with college degrees in
         fields other than nursing and such individuals often returned to
         their original fields or took other jobs.  Another problem the
         program had was inadequate training of nurses in delegating
         duties to the technicians.

      -- Braintree Hospital (in Maine) developed a rehabilitation
         technician position.  In addition to the duties normally
         performed by a nursing assistant, the rehabilitation technician
         (1) prepares narrative documentation; (2) provides special eye
         and skin care, bowel care, simple treatments and dressings, and
         tube feeding; and (3) applies hot and cold compresses.\131

    Just as nurse extenders are reducing community hospitals' demand for
    registered nurses, nurse practitioners, physicians assistants, and
    nurse midwives often substitute for physicians.  Several factors have
    influenced this trend, including the need to lower health care costs
    and improve access to care for the poor and residents of rural areas.
    In 1990, Medicare and Medicaid began reimbursing certain nonphysician
    health professionals for the care they deliver, allowing them to
    expand their roles and perform functions previously performed by
    physicians.\132

    Many nurses frown on the use of nurse extenders and other unlicensed
    assistive personnel.  For example, the Patient Care Survey of the
    American Journal of Nursing revealed that only about 13 percent of
    the nurses surveyed believed the use of such personnel improved
    patient care where they worked.  The responses are somewhat
    misleading, however, because only about 42 percent of the respondents
    reported the hiring of auxiliary personnel to provide direct patient
    care previously provided by registered nurses.\133

    --------------------
    \127 Nursing Staff in Hospitals and Nursing Homes:  Is It Adequate?
    eds.  Gooloo S.  Wunderlick, Frank A.  Sloan, and Carolyne K.  Davis,
    Committee on the Adequacy of Nurse Staffing in Hospitals and Nursing
    Homes, Division of Health Care Services, Institute of Medicine
    (Washington, D.C.:  1996).

    \128 Yvonne M.  O'Brien and Barbara A.  Stepura, "Designing Roles for
    Assistive Personnel in a Rural Hospital," Journal of Nursing
    Administration, Vol.  22, No.  10 (1992), pp.  34-7.

    \129 Karen K.  Kirby and Christine M.  Garfink, "The University
    Hospital Nurse Extender Model," Journal of Nursing Administration,
    Vol.  21, No.  1 (1991), pp.  25-30.

    \130 Kirby and Garfink, "The University Hospital Nurse Extender
    Model," Journal of Nursing Administration, pp.  25-30.

    \131 Mary-Jean Crockett and Jeanne Gibbs, "Use of a Nurse Extender
    Role in the Rehabilitation Setting," Rehabilitation Nursing, Vol.
    18, No.  1 (1993), pp.  37-9.

    \132 Wootton and Ross, "Hospital Staffing Patterns," Monthly Labor
    Review, pp.  23-33.

    \133 Shindul-Rothschild, Berry, and Long-Middleton, "Where Have All
    the Nurses Gone?  Final Results of Our Patient Care Survey," American
    Journal of Nursing, pp.  25-39.

          VA IS EXPANDING SCOPE OF
          PRACTICE FOR AUXILIARY
          PERSONNEL
    -------------------------------------------------------- Chapter 8:4.1

    As in the private sector, VA is expanding the scope of work of
    certain paraprofessionals to enable them to substitute for physicians
    and pharmacists.  Neither central office nor VISN strategic plans,
    however, focus on expanded use of nurse extenders and other personnel
    to substitute for registered nurses.

    In March 1995, VA issued revised policy directives expanding the
    scope of practice for physician assistants and nurse practitioners.
    It similarly revised policy directives covering clinical pharmacists
    in May 1996.  VA revised prescribing guidelines to allow certain
    advanced practice nurses to prescribe medications without a
    physician's review.

    In VA's Prescription for Change, the Under Secretary for Health
    called for better utilization of nurse practitioners, physician
    assistants, and clinical pharmacists.  Subsequently, a VA work group
    was charged with identifying barriers to increased use of nurse
    practitioners, clinical pharmacy and nurse specialists, and physician
    assistants.  The work group submitted its report to the Under
    Secretary for Health in August 1997.  The report identified informal
    barriers to greater use of such personnel.  According to a VA
    official, the primary barrier is VA's culture, which has been
    physician driven and therefore closed to expanded roles for allied
    health professionals.

    Neither the Prescription nor the VISN strategic plans identify
    efforts to expand the use of nurse extenders or other auxiliary
    personnel to substitute for registered nurses.  Several facilities
    have identified efforts to create such positions, however, as they
    develop patient-centered care approaches.

       BOTH VA AND COMMUNITY HOSPITALS
       ARE IMPLEMENTING
       PATIENT-CENTERED CARE
    ---------------------------------------------------------- Chapter 8:5

    Many community hospitals are using the above-mentioned and other
    novel practices to fundamentally reengineer the provision of hospital
    care.  Generally referred to as "patient-centered" care (sometimes
    "patient-
    focused" care), such reengineering typically involves creating care
    teams, including both registered nurses and other specially trained
    nurse extenders and ancillary personnel cross-trained to offer
    maximum flexibility and interchangeability in providing patient and
    nonpatient care services.  Many VA hospitals are similarly developing
    patient-centered care programs for both inpatient and outpatient
    care.

    Although no single definition of patient-centered care exists, such
    programs often involve changing how care is managed using such tools
    as clinical guidelines (see ch.  11); case management; strengthened
    discharge planning; and shared decision-making among physicians,
    nurses, and allied professionals.  Patient-centered care also focuses
    on customer satisfaction by increasing involvement of patients and
    their families in treatment decisions and reducing the number of a
    patient's caregivers during a hospital stay.  Finally,
    patient-centered care often involves decentralizing ancillary
    services, moving many services, such as X rays and pharmacy, to
    wards.

    Patient-centered care involves developing integrated care teams.
    Many hospitals have reorganized the nursing and other patient and
    nonpatient care personnel into care teams.  Under some programs, the
    team includes not only nursing staff, but also pharmacists,
    respiratory therapists, and other caregivers with functional
    expertise and training.

    Team members' work responsibilities typically overlap so that staff
    can better respond to both patients and management.  By allowing team
    members to share responsibilities, hospitals can eliminate the
    inefficiencies associated with rigidly defined job responsibilities.
    Including the task of cleaning and preparing rooms in the work
    responsibilities of all team members, for example, avoids waiting for
    a housekeeping staff member to prepare a room--a common cause of
    delays in admitting patients.

    Although teams are a central feature of patient-centered care, their
    makeup and structure vary.  For example, one approach relies mainly
    on expanded caregiver roles to improve efficiency; other approaches
    feature organizational changes involving staff from other units, such
    as the pharmacy, being supervised by the care team leader, typically
    a registered nurse.\134

    Another feature of patient-centered care involves reducing the number
    of staff interacting with patients.  Patient-centered care generally
    reduces the number of caregivers interacting with a given patient
    during a 3-day stay from up to 55 to fewer than 15.\135

    A third feature of patient-centered care involves redesigning wards
    to bring ancillary services closer to patients.  Hospitals group
    patients with similar care needs together on a single ward rather
    than disperse them to several wards.  This enables redesigning wards
    to bring ancillary services closer to patients.  By grouping like
    patients together, hospitals can move ancillary services for about 90
    percent of the procedures required by these patients to that
    ward.\136 Hospitals can use space previously used for supplies and
    the central nursing station for high-volume ancillary services such
    as pharmacy, laboratory, radiology, and physical therapy.

    With supplies, medical records, and caregivers closer to patients,
    hospitals may also move the traditional nursing station closer to
    patients.  In addition, hospitals may locate work areas for preparing
    patient charts and other functions at smaller units throughout the
    ward.\137

    Placing ancillary services, such as X ray, laboratory, pharmacy, and
    rehabilitation, on the patient floor often greatly reduces travel
    time from patients' rooms to the service area.  In addition, X ray
    technicians, medical technologists, pharmacists, and therapists can
    become more a part of the care team.  Hospitals also report that this
    feature reduces the time needed to obtain test results.  For example,
    one hospital reported that it reduced the time required to obtain X
    ray results from almost 2-1/2 hours to just 28 minutes.\138

    Although we found little data on the extent to which community
    hospitals have implemented patient-centered care, nearly half of the
    hospital CEOs responding to a 1992 survey indicated that they are
    either planning to or are already implementing patient-centered
    care.\139 One health analyst predicts that within 10 years, most
    hospitals will have patient-centered care programs.

    --------------------
    \134 S.B.  Schweikhart and V.  Smith-Daniels, "Reengineering the Work
    of Caregivers:  Role Redefinition, Team Structures, and
    Organizational Redesign," Hospital and Health Services
    Administration, Vol.  41, No.  1 (1996), pp.  19-34.

    \135 James G.  Lee, Robert W.  Clarke, and G.H.  Glassford,
    "Physicians Can Benefit From a Patient-Focused Hospital," Physician
    Executive, Vol.  19, No.  1 (1993), pp.  36-8.

    \136 Lee, Clarke, and Glassford, "Physicians Can Benefit From a
    Patient-Focused Hospital," Physician Executive, pp.  36-8.

    \137 Jill L.  Sherer, "Putting Patients First:  Hospitals Work to
    Define Patient-Centered Care," Hospitals, (Feb.  5, 1993), pp.
    14-24.

    \138 Lee, Clarke, and Glassford, "Physicians Can Benefit From a
    Patient-Focused Hospital," Physician Executive, pp.  36-8.

    \139 Hospitals and ServiceMaster Co.  conducted the survey, to which
    311 hospital executives responded.  The executives were asked about
    the extent to which they had implemented patient-centered care,
    defined as "the redesign of patient care so that hospital resources
    and personnel are organized around patients rather than around
    various specialized departments."

          VA IS STUDYING
          PATIENT-CENTERED CARE
    -------------------------------------------------------- Chapter 8:5.1

    In June 1995, the Veterans Affairs Nursing Board of Directors
    established a task force to study patient-centered care.  The task
    force evaluated over 40 patient-centered care delivery systems in
    both VA and the private sector.

    In April 1997, the task force issued a resource guide, VAlue:
    Patient Centered Health Care, which (1) reviews the models currently
    in use to provide "templates for transforming traditional
    illness-based organizations into transdisciplinary, cost-effective,
    health-focused systems" and (2) provides a self-assessment tool to
    allow facilities to identify their reorganization status.

    The task force analyzed 20 community hospitals and 13 VA medical
    centers adopting patient-centered care models in their outpatient or
    hospital care programs.  The following examples illustrate VA's use
    of patient-centered care in hospital settings:

      -- The Iowa City VA medical center is developing a patient-centered
         care approach that organizes staff and services around patient
         needs.  The medical center is creating four care teams:
         critical/special care, psychiatry, medical/neurology, and
         surgical.  Each team includes a wide range of direct care
         providers such as registered nurses, nursing assistants,
         housekeepers, dieticians, physical and respiratory therapists,
         and social workers.  The program is intended to (1) increase
         staff and patient satisfaction, (2) redirect scarce resources to
         patient care activities, (3) improve patient care processes, (4)
         reengineer medical center systems, and (5) redesign jobs and
         work processes.

      -- The Providence VA medical center has established an integrated
         inpatient/outpatient firm system.\140 As the medical center's
         inpatient workload decreased and its outpatient workload
         increased, nursing staff were shifted from inpatient to
         outpatient care.  In addition to registered nurses, the firm
         includes physician assistants, nurse practitioners, licensed
         practical nurses, clerks, and patient care assistants.  The
         newly created patient care assistant position is one involving
         skills intended to include nursing, medicine, and medical
         administration.  Although the firm is outpatient care-based,
         physicians, nurse practitioners, and social workers make daily
         rounds of firm system patients in the hospital.  This provides
         both continuity of care and helps plan for discharging and
         following up on the patient after discharge.  VA's analysis of
         the program found that (1) access to care greatly improved, (2)
         waiting times decreased, (3) patient and staff satisfaction
         improved, and (4) patient education improved.

      -- The San Diego VA medical center restructured its nursing service
         to create self-directed teams to decentralize management and
         empower staff.  The program decentralized clinical specialists
         to the wards and reduced the number of assistant chiefs of
         nursing service.  The program restructured the role of the head
         nurse into a new position--clinical services director--
         and developed a new staff nurse facilitator role.  VA's analysis
         of the program found that the restructuring energized the
         nursing staff and promoted creativity.

      -- The Louisville VA medical center is developing a
         patient-centered care pilot project based on a program at the
         University of Arizona.  The medical center has developed new
         positions for multi-skilled administrative and clinical workers.
         The administrative position, the patient support associate,
         includes duties from emergency medical services, escort
         services, and food and nutrition services.  The clinical
         multi-skilled position, the patient care associate, adds duties
         relating to respiratory therapy, phlebotomy, rehabilitation
         medicine, and electrocardiograms to the existing duties of
         nursing assistants and licensed practical nurses.  Staffing and
         budget considerations have delayed the pilot's implementation.

    --------------------
    \140 The firm system refers to an academic group practice in which a
    designated set of health care providers is responsible for the
    longitudinal care (inpatient and outpatient) of a defined set of
    patients.  In the context of a teaching institution, this system of
    parallel teams emphasizes not only continuity of patient care, but
    also continuity of faculty-trainee relationships.

          EFFECTIVENESS OF
          PATIENT-CENTERED CARE IS
          UNCERTAIN
    -------------------------------------------------------- Chapter 8:5.2

    Little quantitative data exist on the benefits of patient-centered
    care.\141 Hospitals that have implemented patient-centered care,
    however, have reported improved physician satisfaction.\142

    Many hospital executives also see benefits to patient-centered care.
    Hospital executives responding to a survey conducted jointly by
    Hospitals and ServiceMaster cited the following reasons, among
    others, for establishing or developing patient-centered care
    programs:

      -- They are the best way to provide patient care (88 percent).

      -- They will lower expenses (55 percent).

      -- They grew out of the hospitals' total quality management or
         continuous quality improvement programs (43 percent).

      -- They were part of their survival strategy (37 percent).

      -- They will improve their hospital's reputation (36 percent).

      -- They will improve their hospital's market share (33 percent).

      -- They will help attract and retain physicians (29 percent) and
         allied health professionals (30 percent).

    Not all hospital executives responding to the survey, however, viewed
    patient-centered care as an improvement.  Over half of the
    respondents indicated that they do not plan to adopt patient-centered
    care programs because of uncertainty about their benefits.\143

    Similarly, some VA officials expressed concern that some
    patient-centered care may be a veiled attempt to cut costs by
    reducing nursing staff.

    --------------------
    \141 Nursing Staff in Hospitals and Nursing Homes:  Is it Adequate?
    Institute of Medicine.

    \142 Lee, Clarke, and Glassford, "Physicians Can Benefit From a
    Patient-Focused Hospital," Physician Executive, pp.  36-8.

    \143 Sherer, "Putting Patients First:  Hospitals Work to Define
    Patient-Centered Care," Hospitals, pp.  14-24.

       MANY ISSUES NEED TO BE
       ADDRESSED CONCERNING VA'S WORK
       TRANSFORMATION EFFORTS
    ---------------------------------------------------------- Chapter 8:6

    Because staffing accounts for such a large percentage of hospital
    costs, many challenges remain to be addressed as VA considers
    transforming its hospital staffing.  One major challenge involves
    VA's central office convincing VISNs and individual hospitals to use
    their new contracting authority to seek less costly ways to provide
    services such as laundry, dietetics, and housekeeping.  Although the
    Under Secretary for Health's criteria for potential realignment
    encourage contracting for services when they are cheaper and of equal
    or better quality, VISN strategic plans generally do not address such
    contracting.  Until VA completes improvements in information and
    financial management systems, VA hospitals may not have the type of
    reliable cost and utilization data they need to make informed
    decisions on contracting for services rather than providing them
    directly or obtaining them from another VA facility.  Another factor
    relating to such decisions is their effect on VA employees and the
    community.  For example, contracting to obtain dietary services from
    a local provider might save jobs in the community and provide
    employment opportunities for current employees without relocating
    them.  On the other hand, providing the services through one
    consolidated VA location might save jobs within the VA system and
    improve efficiency at the gaining VA facility through economies of
    scale.  Such action would, however, more adversely affect the
    community standing to lose jobs.

    In addition, VISNs and individual VA hospital directors will have to
    make difficult choices about using part-time and intermittent
    employees.  For example, in an era of downsizing, to what extent
    should VA protect full-time permanent employees by eliminating
    positions for part-time and intermittent employees even if doing so
    decreases staffing flexibility?  Similarly, can VA devise
    alternatives to using, or other ways to use, part-time and
    intermittent employees to make comparable efficiency improvements
    without the disadvantages associated with using such employees?  For
    example, VA facilities might be able to save resources by pooling
    staff with each other or with nearby community hospitals.

    Finally, community hospitals typically pay differentials to part-time
    and intermittent employees, but such differentials are not available
    to VA employees.  Offering pay differentials might encourage some
    full-time staff to shift to part-time or intermittent status.  In
    addition, it might make it easier for VA to compete with community
    hospitals for available staff.  It is not clear, however, to what
    extent VA is having difficulty filling part-time and intermittent
    positions under its current pay system.  Adding pay differentials if
    recruiting part-time and intermittent staff can be easily done but
    could needlessly increase operating costs.

    VA's Prescription for Change addresses the need for increased cross-
    training and developing VA staff's skills and physician extender
    programs.  Similarly, VA issued a resource guide to patient-centered
    care.  Decisions on starting or expanding the use of such programs
    are difficult, however, because the private sector does not uniformly
    support the concepts.  For example, some have expressed concern that
    using nurse extenders and patient-centered care sacrifices quality of
    care to reduce costs.  VISNs and hospital directors thus face
    difficult challenges in planning for the use of such personnel and
    programs to ensure improvement of patient care.

    HOSPITALS REDUCE PROCUREMENT AND
    INVENTORY COSTS THROUGH CHANGES IN
    MATERIALS MANAGEMENT
    ============================================================ Chapter 9

    Materials management refers to the systems, functions, and tasks
    involved in obtaining goods, such as pharmaceuticals, medical
    equipment, and other supplies, and moving them to where they will be
    used.  It involves not only hospitals, but also manufacturers and
    distributors.  Materials management affects from 25 to 45 percent of
    a hospital's operating budget.

    Effective materials management (1) allows nursing staff to spend more
    time with patients and (2) reduces the staff, inventory, space, and
    other resources needed to ensure that supplies are available when
    needed.

    Community hospitals are improving materials management, reducing
    operating costs in several ways.  For example, they may

      -- join purchasing groups and alliances to take advantage of volume
         discounts;

      -- use just-in-time and stockless delivery to manage inventory
         costs;

      -- use the hospital formulary to reduce pharmacy costs;

      -- change the methods used to procure high-technology equipment,
         such as purchasing remanufactured equipment, leasing rather than
         purchasing equipment, and centralizing procurement; and

      -- more effectively use high-technology equipment through sharing
         arrangements and joint purchases.

    The VA system is a leader in materials management and, in some cases,
    such as the use of purchasing alliances, VA actions preceded
    widespread private-sector efforts by many years.

    Changes in materials management, however, create policy issues and
    management challenges.  For example, the Congress faces decisions
    about the extent to which nonfederal health care facilities should be
    allowed to use federal supply schedules (FSS).  Similarly, VA faces
    challenges in encouraging its health care facilities to take full
    advantage of the changes in materials management, such as
    just-in-time delivery, instituted by its National Acquisition Center
    (NAC) and in realizing financial benefits from such changes.

       HOSPITALS INCREASINGLY JOIN
       PURCHASING GROUPS AND ALLIANCES
    ---------------------------------------------------------- Chapter 9:1

    Joining purchasing groups and alliances is one way community
    hospitals strengthen materials management.  By representing multiple
    hospitals in negotiations with manufacturers, purchasing groups can
    obtain volume discounts on pharmaceuticals and medical equipment and
    other supplies.  VA's joint procurement efforts pre-date
    private-sector efforts by about 25 years.

          DEVELOPMENT OF
          PRIVATE-SECTOR PURCHASING
          GROUPS AND ALLIANCES
    -------------------------------------------------------- Chapter 9:1.1

    During the late 1970s, community hospitals formed purchasing groups
    to buy equipment and supplies at discounted prices.  Initially, these
    groups were formed mainly at the local, state, or regional level.
    Subsequently, some of the groups joined together to form large
    regional or national organizations, known as hospital purchasing
    alliances.

    Alliances take advantage of their relatively large membership to
    negotiate larger discounts from manufacturers and suppliers.
    Although some alliances use diverse suppliers, others use sole-source
    procurers (prime vendors) to secure volume discounts.  Some alliances
    also try to provide their members other types of aid and experience
    to help them get more managed care contracts.

    Supplies available through purchasing groups and alliances include
    furniture, medical and surgical supplies, laboratory supplies,
    nonmedical equipment, X ray film, pharmaceuticals, and office and
    medical equipment.

    A 1995 survey by Modern Healthcare of purchasing groups and alliances
    identified over 12,000 hospital memberships as of September 30, 1994,
    a 13-percent increase over prior-year memberships.\144 However, most
    hospitals belonged to two or more purchasing groups and alliances and
    were therefore counted more than once.

    According to Modern Healthcare, in 1994 each of the 10 largest
    purchasing groups/alliances represented more than $1 billion in
    annual purchases of supplies and equipment for their members.  The
    two largest purchasing alliances responding were American Health Care
    Systems/Premier Health Alliance with $6.2 billion in contract
    purchases in 1994 and Voluntary Hospitals of America with contract
    purchases of $5.6 billion in 1994.

    In 1995, two of the largest alliances had contract compliance
    requirements that specified the percentage of eligible goods that
    members must purchase under contract.  This enabled the alliances to
    negotiate significant discounts from vendors.  American Health Care
    Systems required its member hospitals to buy 90 percent of eligible
    goods under its corporate contracts.  Similarly, Voluntary Hospitals
    of America established a committed buying program that intended to
    save members 12 to 14 percent on 13 product categories.  Participants
    must achieve 95-percent compliance on contracts with seven vendors.
    In return, members received quarterly dividends from an incentive
    pool, according to their purchasing volume.\145

    UHC, Inc., a purchasing alliance serving 68 academic medical centers,
    estimates that it saves about $1 million a year for each alliance
    member.  Similarly, American Health Care Systems/Premier Health
    Alliance, which serves 40 multihospital systems with 820 hospitals in
    46 states, estimates that it negotiates savings averaging 20
    percent.\146

    --------------------
    \144 Memberships in purchasing groups and alliances also included
    almost 7,800 nursing home and 19,500 alternate site providers such as
    physician-operated clinics and surgery centers.

    \145 Lisa Scott, "Purchasing Groups Struggle to Keep Pace With
    Members," Modern Healthcare, (Sept.  25, 1995), pp.  49-62.

    \146 Jim Montague, "Can Purchasing Alliances Adapt?" Hospitals &
    Health Networks, (Aug.  20, 1995), pp.  30-3.

          FEDERAL JOINT PROCUREMENT
          EFFORTS PRECEDE
          PRIVATE-SECTOR EFFORTS
    -------------------------------------------------------- Chapter 9:1.2

    VA operates one of the largest purchasing cooperatives in the United
    States, NAC,\147

    which has multiyear contracts valued at over $10 billion.
    Established in 1951, NAC supports VA's health care delivery systems
    and those of other government agencies by providing an acquisition
    program for health care products and, since the late 1970s, managing
    certain FSSs.

    The FSSs are based on a multiple-award contracting system, which
    determines the low cost through negotiations with each offeror.  A
    variety of product choices, including pharmaceuticals, and medical
    and other supplies and equipment, are available from the schedules.

    The FSS for pharmaceuticals catalogs almost 23,000 pharmaceutical
    products and their prices available to federal agencies and
    institutions and several other purchasers, such as the District of
    Columbia, U.S.  territorial governments, and many Indian tribal
    governments.  VA, which received responsibility for administering the
    pharmaceutical schedule from the General Services Administration,
    negotiates prices with drug manufacturers.  VA is also the largest
    purchaser of products from the schedule; in fiscal year 1996, it
    purchased about $922 million worth of products or about 71 percent of
    the government's purchases from the pharmaceutical FSS.\148

    Similarly, VA has received responsibility for administering the FSS
    for medical products and certain nonperishable subsistence items such
    as dietary supplements.  Sales under the FSS medical products
    programs managed by NAC exceeded $529 million in fiscal year 1996.
    Although VA manages and is the largest purchaser of products from the
    FSS for medical products, other government agencies accounted for
    approximately $208 million of the $529 million in sales.

    NAC has three divisions:

      -- The Pharmaceutical Products Division solicits, awards, and
         administers national contracts for pharmaceutical products and
         medical gases and three FSSs.

      -- The Medical Care Products Division administers FSSs of such
         diverse products as medical supplies and equipment; dental
         equipment and supplies; wheelchairs; X ray equipment and
         supplies; and certain food items, including cereals, cookies,
         and crackers.

      -- The Medical Equipment Division administers both FSS and direct
         delivery contracts for highly technical equipment, such as
         computerized axial tomographic scanners, magnetic resonance
         imagers (MRI), positron emission tomography (PET) scanners, and
         systems used in federal medical facilities.

    In addition to the FSS, NAC uses national contract awards to
    negotiate lower prices for certain high-volume products.  FSS is a
    multiple-award type of contract; national contracts, however, are
    competitively bid, single-award contracts for 1 year, typically with
    four 1-year options.  According to NAC, the leveraged national buying
    power results in better prices than can be obtained under the FSS.
    The national contracts are mandatory for use by VA facilities.

    In addition, NAC uses blanket purchase agreements (BPA) and incentive
    agreements to encourage effective procurement.  BPAs are agreements
    with authorized suppliers of pharmaceutical products.  They
    essentially are charge accounts that provide medical centers a simple
    way of obtaining supplies and services for which demand is
    repetitive.  Incentive agreements range from volume rebates and free
    goods based on quantities purchased to special incentive programs
    developed for Veterans Integrated Service Networks (VISN).

    The use of BPAs, NAC reports, has enabled both VA and DOD to save
    significant amounts of money.  It reported that one contractor's BPA
    saved VA $4 million and DOD $5.5 million in 1 year.  NAC noted that
    VISN 8 (Bay Pines) avoided $500,000 in expenditures by using a BPA
    with one contractor.  NAC also reported that a second contractor's
    BPA saved VA and DOD over 35 percent.

    NAC's Medical Equipment Division administers the FSS that negotiates
    contracts with clinical laboratories on a cost per test (CPT) basis.
    Under this newly established program, contractors must provide a
    price for each test they can perform.  The price per test covers
    equipment use, all consumables, reagents, standards, controls, and
    supplies; all necessary service and maintenance; and training for
    government personnel.  Procurement through CPT contracting allows
    hospitals to reduce capital expenditures, while maintaining access to
    state-of-the-art equipment.

    In addition to the economies of scale available through NAC, several
    VISN strategic plans identify further efforts to consolidate
    purchasing:

      -- VISN 19 (Denver) plans to establish a Rocky Mountain Network
         Acquisition Center to consolidate contracting activities and
         determine possible savings through larger scale purchasing
         arrangements and enhanced contracting expertise.  The VISN
         strategic plan indicates that the network acquisition center
         will do essentially the same things NAC does but at a regional
         level.  The VISN plans to use NAC for items that can be obtained
         at a lower price through national procurement.

      -- VISN 17 (Dallas) plans to consolidate network procurement of
         open market items.

      -- VISN 5 (Baltimore) plans to establish a section of its
         Acquisition and Material Management Service to contract at the
         network level for leases, community nursing home services,
         halfway houses, preventive maintenance services, and supply
         contracts that exceed $25,000.

      -- A Contract Service Center, located at the Milwaukee Medical
         Center in VISN 12 (Chicago), has been providing centralized
         consolidated purchasing to the network area since 1992.  The
         center now handles contracting of real property leases,
         equipment leases, architect/engineer services, sharing
         agreements, medical equipment maintenance, transportation, blood
         and blood products, home oxygen and durable medical equipment,
         nursing home and extended care, elevator maintenance and
         inspection, and fire alarm maintenance and inspection.  The VISN
         reports that the Center generates yearly savings of over $1
         million through a variety of methods, including an active BPA
         and economies-of-scale quantity discounts.  The Center received
         one of the Vice President's National Performance Review Hammer
         Awards in 1995.  The network plans to expand the scope of goods
         and services available through the Center.

    --------------------
    \147 NAC is part of VA's Office of Acquisitions and Material
    Management.  All operations of the Office are funded through the
    self-sustaining VA Supply Fund managed by the Office.  NAC recovers
    its operating costs through a variety of mechanisms designed to pass
    the costs of services on to beneficiaries.

    \148 Drug Prices:  Effects of Opening Federal Supply Schedule for
    Pharmaceuticals Are Uncertain (GAO/HEHS-97-60, June 11, 1997).

       IMPLEMENTING JUST-IN-TIME AND
       STOCKLESS DELIVERY SYSTEMS
       REDUCES COSTS
    ---------------------------------------------------------- Chapter 9:2

    Community hospitals have been shifting to just-in-time and stockless
    inventory systems.  VA similarly closed its supply depots in 1994 and
    now offers both VA and other government health care facilities a
    choice of conventional, just-in-time, or stockless delivery.

    The just-in-time delivery technique (developed in Japan) involves
    shipping supplies directly to customers or vendors on an as-needed
    basis, eliminating the need for large inventories.  The
    supplier/vendor, rather than the hospital, maintains the bulk of the
    inventory.  Hospitals implementing just-in-time delivery systems
    typically buy from a limited number of suppliers, share information
    about their operations with their suppliers, and eliminate certain
    hospital-based supply and inventory functions that the supplier now
    performs.  Just-in-time delivery can reduce costs, increase
    productivity, improve utilization of equipment, and reduce the need
    for certain workers such as material handlers.\149

    Other hospitals have taken just-in-time delivery one step further by
    using stockless inventory, in which an outside vendor manages much of
    an organization's supplies.  Stockless inventory allows hospitals to
    eliminate storerooms, significantly reducing savings by lowering
    staffing.  It is not clear, however, whether these savings offset the
    service fees paid to the suppliers.\150 Although stockless inventory
    is gaining popularity, it is far from being accepted as the industry
    standard.\151

    A 1993 study found that just-in-time and stockless material
    management systems can increase hospital efficiency.\152 For example,
    one small specialty hospital reported that it reduced its annual
    inventory value from $2.3 million to an estimated $1.2 million over a
    3-year period by using just-in-time delivery.\153

    --------------------
    \149 R.  Dennison, Y.  Kathawala, and D.  Elmuti, "Just-in-Time:
    Implications for the Hospital Industry," Journal of Hospital
    Marketing, Vol.  8, No.  1 (1993).

    \150 J.C.  Kowalski, "Inventory to Go:  Can Stockless Deliver
    Efficiency?" Healthcare Financial Management, Vol.  45, No.  11
    (1991), pp.  21-34.

    \151 J.  Trinkaus, D.  Dannenbring, and J.  Nathan, "A JIT-Type
    Stocking System for Hospital Pharmacies:  The Stockless Method,"
    Hospital Materiel Management Quarterly, Vol.  17, No.  4 (1996), pp.
    1-13.

    \152 G.C.  Kim and M.J.  Schniederjans, "Empirical Comparison of
    Just-in-Time and Stockless Material Management Systems in the Health
    Care Industry," Hospital Materiel Management Quarterly, Vol.  14, No.
    4 (1993), pp.  65-74.

    \153 B.B.  Friedman, "Controlling Inventory in a Small Specialty
    Hospital," Hospital Materiel Management Quarterly, Vol.  15, No.  3
    (1994), pp.  8-13.

          VA SHIFTS TO JUST-IN-TIME
          AND STOCKLESS DELIVERY
    -------------------------------------------------------- Chapter 9:2.1

    VA, like the private sector, has been shifting to just-in-time and
    stockless delivery systems.  Delivery options available through NAC's
    Pharmaceutical Prime Vendor program include conventional, stockless,
    and just-in-time delivery.

    Historically, VA benefited from the deep discounts it obtained from
    manufacturers through volume procurement.  Manufacturers generally
    delivered the products to VA's three supply depots.  The supply
    depots, in turn, distributed the products to warehouses operated by
    individual VA medical centers.  This distribution system was
    costly--about $138 million in fiscal year 1991--and resulted in
    storing relatively large inventories in both supply depots and at the
    medical centers.

    The Veterans Health Care Act of 1992 established ceiling prices for
    covered drugs, eliminating the pricing advantage of many of the
    products distributed through the depot system.  Under the act, drug
    manufacturers must make their brand-name drugs available through the
    FSS to receive reimbursement for drugs covered by Medicaid.  The act
    also requires drug manufacturers to sell drugs covered by the act to
    VA, DOD, the Public Health Service, and the Coast Guard at no more
    than 76 percent of the nonfederal average manufacturer price,\154 a
    level referred to as the federal ceiling price.  The FSS price may be
    higher or lower than the ceiling, but if it is higher than the
    ceiling, the protected purchasers, including VA facilities, pay no
    more than the ceiling price.

    Meanwhile, VA completed a pilot test of a just-in-time commercial
    delivery system for FSS pharmaceuticals through prime vendor
    arrangements.  Under the prime vendor arrangements, medical centers,
    using centralized contracts, order products from the prime vendor
    with delivery made directly to the medical center, bypassing the VA
    distribution network.

    Subsequently, a VA task force established in January 1993 recommended
    that VA phase out its depot system and move to a commercial
    distribution system.  With the support of the Vice President's
    National Performance Review, the supply depots were closed at the end
    of fiscal year 1994 and contracts for just-in-time delivery of drugs
    instituted.  Both national contract and FSS items are now distributed
    by the Pharmaceutical Prime Vendor program.  This fee-based
    distribution contract allows readily available access to FSS and
    national contract items.  In addition to conventional delivery (72
    hours), the program offers both just-in-time (24 hours) and stockless
    (8 hours) delivery options.

    Just-in-time contracts for medical supplies and subsistence items
    were completed by 1996.  This affords medical facilities the same
    delivery options for medical supplies and equipment as for
    pharmaceuticals.  VA expects closing the supply depots and moving to
    just-in-time delivery to save $168 million over 6 years.

    --------------------
    \154 The nonfederal average manufacturer price is the weighted
    average price of each single form and dosage of a drug paid by U.S.
    wholesalers to a manufacturer, accounting for any cash discounts or
    similar price reductions.  Prices paid by the federal government are
    excluded from this calculation.

       LIMITING PHARMACEUTICALS
       INCLUDED IN FORMULARIES CAN
       REDUCE PHARMACY COSTS, BUT
       EFFECTIVENESS MAY BE LIMITED
    ---------------------------------------------------------- Chapter 9:3

    The pharmacy is estimated to account for 4 to 8 percent of a
    hospital's total expenses, and a higher demand for fewer drugs
    improves hospitals' ability to secure discounts from manufacturers.
    Both VA and community hospitals are limiting the numbers and types of
    pharmaceuticals in their formularies to reduce costs.  The effect of
    such actions on costs, however, may be limited because increases in
    other charges may offset savings in pharmacy charges.

    Although hospital formularies have existed for over 150 years, early
    formularies simply listed all of the drugs carried by the pharmacy.
    Over time, formularies became a mechanism to control costs by
    limiting the number and types of drugs routinely stocked in the
    hospital pharmacy.  By procuring larger quantities of a smaller
    number of pharmaceuticals, hospitals can negotiate volume discounts
    from manufacturers.  Keeping fewer infrequently used drugs in the
    hospital's inventory also reduces costs.  Finally, further savings
    can accrue if a formulary convinces physicians to prescribe less
    expensive, but therapeutically equivalent, drugs.\155 Some practicing
    physicians complain, however, that formularies infringe on their
    ability to select the drugs they feel are most appropriate for their
    patients.

    --------------------
    \155 Frank A.  Sloan, Gilad S.  Gordon, and Douglas L.  Cocks,
    "Hospital Drug Formularies and Use of Hospital Services," Medical
    Care, Vol.  31, No.  10 (1993), pp.  851-67.

          VA ESTABLISHES VISN AND
          NATIONAL FORMULARIES
    -------------------------------------------------------- Chapter 9:3.1

    VA, like the private sector, is establishing formularies to reduce
    costs.  Historically, each VA facility has established its own
    formulary.  VA's Prescription for Change provided for the
    establishment of VISN formularies, with a national formulary to
    follow.  VA noted that establishing a national formulary should
    increase standardization, decrease inventory costs, improve
    efficiency, and lower pharmaceutical costs through enhanced
    competition.  VA officials told us that the VISN formularies were
    established as of April 30, 1996, and the initial version of the
    national formulary was established by June 1, 1997.\156 According to
    another VA official, 22 national pharmaceutical contracts will save
    VA over $150 million annually, and standardized contracts for
    intravenous solutions have saved VA over $100 million.

    The official also told us that with the increased focus on
    standardization, VA will award more national contracts.  He said that
    because some VISN contracting will be done simultaneously with
    national contracting, good communication will be necessary to avoid
    duplicated effort and diluting of VA's buying power.  VA has asked
    medical centers to include "escape" language in their contracts and
    agreements stating that a national contract will take precedence over
    local contracts.

    NAC established a Value Incentive program to save money by using
    standardized commercial products.  For example, its Medical Care
    Products Division recently awarded national contracts or blanket
    purchase agreements for products such as wheelchairs, needles and
    syringes, urinary drainage products, and anti-embolism stockings.
    These contracts are for VA-preferred sources and should be used
    before FSS contracts.

    VISN strategic plans generally do not discuss standardization beyond
    establishing pharmaceutical formularies.  The VISN 8 (Bay Pines)
    plan, however, indicates that the network is considering establishing
    a formulary for prosthetics.  Similarly, VISN 20 (Portland) plans to
    decrease unit costs of medical/surgical supplies through more
    standardization.

    --------------------
    \156 In addition to establishing the VISNs' and national formularies,
    VA has taken several other actions to improve the management of
    pharmaceuticals in the last 6 years.  These include establishing a
    pharmacy benefit management (PBM) function to reduce overall health
    care costs through appropriate use of pharmaceuticals.  Specifically,
    the PBM is to identify (1) efficient and effective contracting
    processes; (2) efficient and effective distribution systems, such as
    the consolidated mail outpatient pharmacies; and (3) appropriate
    utilization of pharmaceuticals through the issuance of evidence-based
    disease management protocols, treatment protocols, and drug use
    protocols.  In addition, VA is testing the use of commercial software
    to compare pharmaceutical utilization with these established
    protocols and to measure outcomes from drug therapy.

          SOME ARGUE THAT FORMULARIES
          INCREASE OVERALL HEALTH
          COSTS
    -------------------------------------------------------- Chapter 9:3.2

    Most studies of formularies, which focus on a narrow range of drugs,
    a single hospital, and effects on pharmacy costs, generally confirm
    that a limited drug inventory reduces pharmacy costs.  A 1993
    study,\157 however, reported that while such limits reduced pharmacy
    charges, increases in other charges tended to offset any savings.
    The effectiveness of hospital formularies, according to this study,
    depends on several other factors, such as the extent of efforts to
    educate physicians about appropriate drug use, the ease with which
    physicians can obtain nonformulary drugs for their patients, and the
    overall emphasis the hospital places on cost containment.

    The study also raised concerns that limiting the number of drugs in a
    hospital formulary could compromise quality because patients may
    react differently to the same drug.  In other words, a drug that
    effectively treats a condition in one patient may not so effectively
    treat the same condition in another patient.  According to the study,
    even small differences in a drug's effectiveness in a therapeutic
    category could be clinically important, both to achieve good outcomes
    and to avoid adverse reactions.  A drug could be less cost-effective
    on average but provide a much more cost-effective therapy in specific
    cases.\158

    --------------------
    \157 Sloan, Gordon, and Cocks, "Hospital Drug Formularies and Use of
    Hospital Services," Medical Care, pp.  851-67.

    \158 Sloan, Gordon, and Cocks, "Hospital Drug Formularies and Use of
    Hospital Services," Medical Care, pp.  851-67.

       HOSPITALS USE ALTERNATIVE
       STRATEGIES FOR PROCURING
       HIGH-TECHNOLOGY EQUIPMENT
    ---------------------------------------------------------- Chapter 9:4

    High-technology equipment generally accounts for the largest share of
    hospitals' capital expenditures, totaling about 7 percent of hospital
    spending in 1989.\159 Although hospitals predominantly buy
    high-technology equipment using internal funds or gifts, many
    community hospitals are limiting their capital expenditures by (1)
    renting or leasing rather than buying such equipment when this is
    cost-effective and (2) buying remanufactured equipment.  VA supports
    both approaches.

    Before the introduction of prospective payment and the growth of
    managed care, hospitals generally did not compete on the basis of
    costs or charges.  As a result, they passed the costs of the latest
    technology on to their patients, or, more often, to their insurers.
    Essentially, hospitals could use newly acquired technologies to
    attract both physicians and patients.

    The average U.S.  hospital spent nearly $2.8 million on medical
    equipment in fiscal year 1990, according to a survey of hospital
    chief executive officers.\160 Hospitals tend to base procurement
    decisions on whether such new equipment will generate profits.  For
    example, because of concerns that the number of lithotripters exceeds
    demand, hospital executives do not generally view such equipment as
    profitable.\161

    --------------------
    \159 Samy Veluchamy and Cynthia L.  Saver, "Clinical Technology
    Assessment, Cost Effective Adoption, and Quality Management by
    Hospitals in the 1990s," Quality Review Bulletin, (June 1990), pp.
    223-8.

    \160 Saul N.  Weingart, "Deciding to Buy Expensive Technology,"
    International Journal of Technology Assessment in Health Care, Vol.
    11, No.  2 (1995), pp.  301-13.

    \161 "Survey Identifies Trends in Equipment Acquisitions," Hospitals,
    (Sept.  20, 1990), pp.  30-5.

          LEASING REDUCES RISKS OF
          OBSOLESCENCE
    -------------------------------------------------------- Chapter 9:4.1

    Executives responding to a 1990 Hospitals survey identified leasing
    as one way to acquire most types of high-technology equipment.  Among
    the equipment the executives identified as being leased were
    ultrasound (15 percent), automated laboratory (34 percent),
    radiography and fluoroscopy rooms (19 percent), cardiac
    catheterization laboratories (18 percent), and MRIs (22 percent).\162

    One significant change in rental/leasing arrangements is the adoption
    of the same type of charge structure as for photo and other copiers
    for obtaining high-technology services.  Under these arrangements,
    hospitals pay a basic rental fee plus a charge for each test
    conducted on the equipment.  Hospitals' costs are essentially based
    on the extent to which they use the equipment.  If their workloads
    decline, so do their expenditures for the rented equipment.  Under
    straight rental/leasing arrangements, however, hospitals pay the same
    amount regardless of workload fluctuations.

    --------------------
    \162 "Survey Identifies Trends in Equipment Acquisitions," Hospitals,
    pp.  30-5.

          REFURBISHED EQUIPMENT CAN
          LOWER PROCUREMENT COSTS
    -------------------------------------------------------- Chapter 9:4.2

    Another option for reducing the cost of high-technology equipment is
    purchasing refurbished equipment.  Sales of refurbished imaging
    equipment were expected to reach $300 to $500 million in 1997, more
    than double 1992 sales.\163

    Refurbished equipment costs from 25 to 65 percent less than new
    equipment depending on its age and the work done.  Hospitals,
    however, generally prefer new imaging equipment because the latest
    technology can produce better images, be more comfortable for
    patients, and require fewer staff to operate.

    Refurbished equipment is an option, however, when the latest
    technology is not clinically necessary, the technology is not
    changing rapidly, or the equipment can be rebuilt to take advantage
    of technological advances.  For example, technology in X
    ray/fluoroscopy rooms is not rapidly advancing, and equipment can
    often be rebuilt to operate like new equipment.  Refurbishing and
    adding digital technology to an 8-year-old X ray machine can bring it
    up to current standards.

    Hospitals, however, often distrust refurbished equipment.  The term
    "refurbished" might mean that the equipment underwent a complete
    retooling or that only cosmetic changes were made, a so-called
    "spray-
    and-pray" job.

    An estimated 500 to 600 firms, including equipment manufacturers such
    as General Electric and Picker International, refurbish equipment,
    but only about 24 firms perform more complex remanufacturing.  The
    Food and Drug Administration (FDA) published regulations in June 1997
    exempting the refurbishing industry from the level of review used for
    equipment manufacturers because refurbishers restore equipment to the
    original manufacturers' specifications.  Refurbishers are, however,
    subject to good manufacturing regulations.  In addition, according to
    an FDA official, in December 1997, FDA published a Federal Register
    notice of its intention to review and, as necessary, revise or amend,
    its compliance policy guides and regulatory requirements for
    remarketing of used medical devices and those who refurbish,
    recondition, rebuild, service, or remarket such devices.  Written
    commens on the notice were due by March 23, 1998.

    In the meantime, individual hospitals and alliances must decide for
    themselves which refurbishers are reputable.  For example,
    Columbia/HCA, in 1995, designated one company a preferred supplier of
    refurbished imaging equipment.\164 A hospital alliance, however,
    reported that its member hospitals showed little interest in
    purchasing refurbished equipment without a good warranty and
    indemnification.

    --------------------
    \163 Lisa Scott, "Used Equipment's Bright Future," Modern Healthcare,
    (Nov.  27, 1995), pp.  45-50.

    \164 Scott, "Used Equipment's Bright Future," Modern Healthcare, pp.
    45-50.

          VA USES METHODS SIMILAR TO
          COMMUNITY HOSPITALS TO LIMIT
          COST OF HIGH-TECH EQUIPMENT
    -------------------------------------------------------- Chapter 9:4.3

    Like community hospitals, VA is seeking to share rather than purchase
    high-technology equipment or to purchase refurbished equipment.  In
    addition, VA is emphasizing central procurement of high-technology
    equipment to obtain better prices.

    VA's Prescription for Change calls for developing and implementing a
    major medical equipment acquisition methodology.  It notes that a
    proposed methodology has to balance the need for facilities and
    networks to make local decisions with the need for VA's central
    office to ensure that federal procurement laws and regulations are
    followed.  Subsequently, VA developed a decentralized equipment
    assessment and planning program (DEAPP), a needs-driven plan similar
    to equipment planning programs used by the private sector.  According
    to VA, DEAPP builds on the strength of existing medical center
    equipment committees and describes a consistent approach to
    identifying equipment needs.  The methodology establishes a
    point-scoring system to assess needs on the basis of three
    categories--
    function, reliability/regulatory compliance, and economy.

    The Veterans Health Administration's (VHA) criteria for potential
    realignment noted in VA's Prescription also has guidance on how VISNs
    and medical centers should determine when to purchase high-tech
    equipment and services or obtain such services from other VA
    facilities or community providers.  For example, it suggests that
    VISNs consider both capital and operating costs for new high-tech or
    automated equipment in cost-
    effectiveness analyses.  Our prior work found that the Albuquerque VA
    medical centers underestimated the cost of providing lithotripsy
    services because it overestimated workload and set excessively long
    equipment depreciation periods.\165

    NAC's Medical Equipment Division solicits, awards, and administers
    FSS and direct delivery contracts for highly technical equipment and
    systems used in VA and other government medical facilities.  The
    Direct Delivery program allows medical facilities to order high-tech
    equipment directly from the manufacturer at prices negotiated by NAC.
    Among the equipment available through the Direct Delivery program are
    computerized tomographic (CT) and MRI scanners, nuclear medicine
    systems, and X ray systems.

    In addition to procuring new equipment, NAC negotiates cost per use
    contracts to provide facilities an alternative to buying
    high-technology equipment when demand may not justify the purchase.
    Under such contracts, medical facilities pay only for the services
    they use.  For example, they might pay for each periodic use of an
    MRI rather than purchase the equipment.

    Another option available through NAC is the purchase of refurbished
    equipment.  NAC has awarded 12 contracts for the purchase of
    refurbished equipment.  Our review of VISN strategic plans identified
    several additional initiatives to improve the procurement of
    high-tech equipment and services:

      -- VISN 8 (Bay Pines) plans to coordinate its needs assessments for
         high-tech equipment with neighboring networks.  The network also
         developed a methodology for rating and ranking medical
         facilities' requests for high-
         tech equipment.

      -- VISN 12 (Chicago) reports that by approaching vendors as a
         network customer, it saved a substantial amount of money when
         recently buying CT scanners.

      -- VISN 18 (Phoenix) is evaluating the feasibility of purchasing
         remanufactured equipment, where appropriate, instead of new
         items.

      -- VISN 20 (Portland) has a shared equipment purchasing program
         under which each facility pays 20 percent of its allocated
         equipment budget for each item funded under the program.  The
         planned equipment purchased under this program in fiscal year
         1997 includes three CT scanners and a cardiac catheterization
         imaging system.

      -- VISN 7 (Atlanta) plans to consolidate the procurement of
         standard radiology and fluoroscopy suites, saving money on the
         purchase price, on expendable supplies, and on service
         contracts.

    --------------------
    \165 VA Health Care:  Albuquerque Medical Center Not Recovering Full
    Costs of Lithotripsy Services (GAO/HEHS-95-19, Dec.  28, 1994).

       HOSPITALS SHARE HIGH-TECH
       EQUIPMENT
    ---------------------------------------------------------- Chapter 9:5

    Another method hospitals use to reduce capital expenditures is
    sharing high-technology equipment.  To allow federal agencies'
    resources to be used to maximum capacity and avoid unnecessary
    duplication and overlap of activities, federal agencies have been
    authorized for over 60 years to obtain goods or services through
    other federal agencies.  In the past 15 to 20 years, we have
    identified and VA and the Congress have addressed barriers to
    sharing.  As these barriers have been addressed, VA sharing both with
    DOD and the private sector has increased.  More recently, VA has
    placed greater emphasis on sharing services and equipment among VA
    facilities.

    Health resources sharing, which involves the buying, selling, or
    trading 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 that buys an infrequently
    used diagnostic test from another hospital often pays less money than
    it would 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 it for 8 hours
    a day may generate additional revenues by selling its excess capacity
    to other providers.

    The following are examples of efforts to share high-technology
    equipment and services:

      -- Two hospitals in Missoula, Montana, agreed to share an MRI when
         neither hospital had sufficient demand to solely support the
         equipment.  A microwave link relays test results between the two
         hospitals.  In addition, the two hospitals established a mobile
         lithotripsy network to serve hospitals in western Montana.\166

      -- A PET scanner at the University of Texas Health Science Center
         in San Antonio was jointly funded by the University of Texas,
         VA, and DOD.  The PET facility, the first in the DOD system,
         will become a national referral center for DOD patients and a
         regional referral center for VA patients.  The PET equipment
         alone cost $5.3 million; the construction of a building to house
         the equipment cost millions more.  Under an access agreement,
         the University of Texas will have 50 percent of the facility's
         workload, with VA and DOD getting 25 percent each.  The PET
         facility will be used for both research and patient care.

      -- The San Antonio VA medical center jointly purchased an MRI with
         the neighboring medical center and a linear accelerator with
         Southwest Texas Methodist Hospital.\167

      -- Ten Rhode Island hospitals formed a network to share the costs
         and services of four MRIs.  The network bought four MRIs for the
         price of three, paying about $10 million for them, including the
         construction of one fixed site and pads for three mobile units.
         The network uses a centralized scheduling system, which also
         saves money.  Because hospitals pay a fixed daily rate for MRI
         use regardless of volume, they have an incentive to image as
         many patients as possible during their allocated periods.\168

      -- Two hospital systems in the Sacramento area, which together
         operated six acute care hospitals and a psychiatric facility,
         joined forces to establish a $5.7 million PET scanner facility.
         A management firm under contract to the two systems will oversee
         the facility's daily operations.  Officials estimated eventual
         demand for PET scans at about eight to nine scans a day in the
         Sacramento area, with initial demand at only four to six.
         Neither system, each of which operated over 800 acute care beds,
         had sufficient demand to justify purchase of a PET scanner.\169

    A 1992 survey of hospital chief executive officers found that 38
    percent reportedly had collaborated with other area health care
    providers to share technology.  Forty-six percent said that they had
    collaborated on service development to avoid duplicating
    services.\170

    The following are examples of collaboration:

      -- Three hospitals and a home health agency in Roanoke, Virginia,
         created a shared, off-site, intravenous admixture center to
         prepare intravenous solutions.\171 Creating the admixture center
         was reported to have saved about $230,000 in personnel costs
         over a 2-year period (October 1992 to September 1994).  In
         addition, about $207,000 was reportedly saved over the 2-year
         period for nonbillable supplies (for example, syringes, needles,
         and diluents).  Other reported benefits included expanding
         availability of intravenous admixture services in several
         service areas, eliminating duplicated services, savings from
         nonbillable supplies, avoiding salary and benefits costs
         associated with hiring new personnel, improved quality control,
         and acquisition of state-of-the-art equipment.\172

      -- Three Boston hospitals combined their cancer programs to avoid
         duplication.  The Dana Farber Cancer Institute combined its
         adult patient care and research operations with those at
         Massachusetts General and Brigham and Women's Hospital.
         Dana-Farber transferred its inpatient beds to Brigham and
         Women's.\173

    --------------------
    \166 "Collaboration:  Hospitals Find That Working Together Is Tough,
    Rewarding--and Vital," Hospitals, (Dec.  5, 1991), pp.  24-31.

    \167 "Collaboration:  Hospitals Find That Working Together Is Tough,
    Rewarding--and Vital," Hospitals, pp.  24-31.

    \168 "Collaboration:  Hospitals Find That Working Together Is Tough,
    Rewarding--and Vital," Hospitals, pp.  24-31.

    \169 "Moving Target:  Hospitals Take Careful Steps in Acquiring PET,"
    Hospitals, (Apr.  5, 1992), pp.  58-62.

    \170 "Survey Outlines Hospital Collaboration Efforts," Hospitals,
    (Feb.  20, 1993), p.  56.

    \171 William S.  Fauber, Sam J.  Cosnotti, and Ron L.  Mady, "Offsite
    Intravenous Admixture Center Shared by Health-System Facilities,"
    American Journal of Health Systems Pharmacology, Vol.  52 (Nov.  15,
    1995), pp.  2550-5.

    \172 Fauber, Cosnotti, and Mady, "Offsite Intravenous Admixture
    Center Shared by Health-System Facilities," American Journal of
    Health Systems Pharmacology, pp.  2550-5.

    \173 John Morrissey, "Three Boston Hospitals Agree to Combine Cancer
    Programs," Modern Healthcare, (Jan.  22, 1996), p.  16.

          VA HAS INCREASED EMPHASIS ON
          SHARING AS A SOURCE OF
          REVENUE
    -------------------------------------------------------- Chapter 9:5.1

    To use federal agencies' excess resources to maximum capacity and
    avoid overlapping of activities, VA has, at our urging, long been
    authorized to share excess health care services with DOD.  In
    addition, VA has, since 1966, been authorized to share specialized
    medical resources with nonfederal hospitals, clinics, and medical
    schools.  Such sharing is permitted only if it 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 1996, VA sold about $20.0 million in specialized
    medical resources to private-sector hospitals and about $29.3 million
    in health care services to the military health care system.  During
    the same year, VA purchased about $23.6 million in health care
    services from DOD and about $60.0 million from private-sector
    hospitals.  Services sold and purchased through sharing agreements
    included organ transplants, open-heart surgery, and specialized
    laboratory and radiology procedures.

    In 1992, enactment of Public Law 102-405 gave VA specific authority
    to jointly acquire advanced technology.  Specifically, it allows the
    joint holding of titles to medical equipment between VA and a sharing
    partner.  In fiscal year 1995, VA spent about $900 million on the
    shared acquisition program.  With the creation of VISNs, VA
    transferred responsibility for funding joint acquisitions to the
    networks.

    The Veterans' Health Care Eligibility Reform Act of 1996 expanded
    both the types of providers VA may contract with and the types of
    services VA may contract for.  In addition, it simplified the
    procedures for complying with federal procurement processes when
    contracting with commercial providers.  (Ch.  1 more fully discusses
    these provisions.)

    VA's Prescription for Change calls for VISNs to increase sharing with
    both government and nongovernment health care providers.  Our review
    of VISN strategic plans identified many efforts to expand sharing
    among VA facilities, VA and other government facilities, VA and
    TRICARE, and VA and community providers:

      -- VISN 13's (Minneapolis) strategic plan indicates that generating
         alternative revenues through sharing agreements with DOD, the
         Indian Health Service, and the Bureau of Prisons and serving as
         a TRICARE provider are key survival strategies.

      -- VISN 17 (Dallas) proposes to diversify its funding base by
         sharing with the Civilian Health and Medical Program for the
         Uniformed Services (CHAMPUS), TRICARE, DOD, other federal
         agencies, and the private sector.  In addition, it proposes a
         pilot project to provide services to Medicare and Medicaid
         recipients.

      -- VISN 3 (Bronx) wants to increase the income generated through
         sharing agreements by $500,000 per year, primarily through
         agreements with DOD and its medical school affiliates.

             SHARING AMONG VA
             FACILITIES
    ------------------------------------------------------ Chapter 9:5.1.1

    Many of the sharing efforts among VA facilities focused on developing
    telemedicine capability.  The following examples illustrate VISN
    efforts to expand sharing among VA facilities:

      -- VISN 18 (Phoenix), in conjunction with DOD and the Texas Tech
         University Health Center, has purchased equipment to provide
         telemedicine capability at three network facilities.

      -- VISN 12 (Chicago) is developing a telemedicine strategic plan.
         The VISN's telepathology initiative between the Milwaukee and
         Iron Mountain medical centers received the Vice President's
         National Performance Review Hammer Award.

      -- VISN 8 (Bay Pines) plans to study the sharing of gamma camera
         capability and other imaging equipment networkwide.

             SHARING WITH THE PRIVATE
             SECTOR
    ------------------------------------------------------ Chapter 9:5.1.2

    VA has also expanded sharing efforts with private-sector providers.
    Following are some of these efforts:

      -- VISN 11 (Ann Arbor) proposes a pilot program under which VA
         facilities would provide specialty services, such as clinical
         laboratory services, to community hospitals in exchange for
         primary care services.

      -- VISN 9 (Nashville) anticipates establishing a network of mental
         health primary care providers through contracting.

      -- VISN 18 (Phoenix) has a sharing initiative for the Phoenix
         medical center to purchase a new MRI in conjunction with a local
         hospital.

      -- The Augusta medical center in VISN 7 (Atlanta) contracted with a
         16-bed community residential care facility to provide care to
         veterans with spinal cord injuries.  The residential care
         facility is used to provide temporary housing for spinal
         cord-injured veterans coming to the medical center for
         outpatient annual evaluations and may, in the future, be used as
         a permanent home for veterans who might otherwise enter nursing
         homes.

             CONTRACTING WITH DOD,
             CHAMPUS, AND TRICARE
    ------------------------------------------------------ Chapter 9:5.1.3

    VISN plans mention sharing agreements with the military health care
    system, including the following planned actions:

      -- VISN 7 (Atlanta) plans to implement a TRICARE contract that can
         be replicated VISN-wide.

      -- VISN 5 (Baltimore) has a sharing agreement with Walter Reed Army
         Medical Center to obtain obstetric/gynecological and urology
         services and with Bethesda Naval Hospital to obtain neurosurgery
         services.

      -- VISN 19's (Denver) Cheyenne medical center has a sharing
         agreement with F.E.  Warren Air Force Base that includes
         inpatient, outpatient, and special medical services.

      -- VISN 18 (Phoenix) shares extensively with DOD, including a joint
         venture at Albuquerque.  VA and Kirtland Air Force Base share
         inpatient and outpatient services at collocated facilities.  In
         addition, VA's El Paso health care center has a joint venture
         with the William Beaumont Army Medical Center.  Finally, VA's
         Tucson medical center and DOD jointly established
         community-based outpatient clinics (CBOC) in Yuma and Sierra
         Vista.

             SHARING WITH OTHER
             GOVERNMENT FACILITIES
    ------------------------------------------------------ Chapter 9:5.1.4

    Some VISN plans also detailed efforts to share with other federal,
    state, and local government facilities:

      -- VISN 19's (Denver) Fort Harrison medical center has a sharing
         agreement with the Indian Health Service's community hospital in
         Browning, Montana.

      -- VISN 18's (Phoenix) Amarillo medical center is collaborating
         with the Pantex plant to establish an outpatient surgery unit to
         serve as a decontamination unit in a nuclear disaster.

      -- VISN 9 (Nashville) plans to contract with the Tennessee and
         Kentucky health departments for establishing CBOCs in rural,
         underserved areas.  It also plans to contract with its medical
         school affiliates (Vanderbilt, East Tennessee State, and
         Kentucky) for establishing CBOCs in rural areas.

      -- VISN 6 (Durham) is developing an enhanced use lease of the
         nursing home at the Salisbury medical center to permit the state
         of North Carolina to operate the nursing home as a state
         veterans' home.  Under the proposal, the state would place $5.2
         million in a trust to be used by VA to benefit veterans in North
         Carolina.  The VISN plan indicates that one use of the trust
         funds would be to establish additional CBOCs.

       CHANGES IN MATERIALS MANAGEMENT
       CREATE MULTIPLE CHALLENGES AND
       POLICY ISSUES
    ---------------------------------------------------------- Chapter 9:6

    The changes in materials management in both the private sector and VA
    create a number of challenges and policy issues for the
    administration and the Congress.  The administration faces challenges
    to ensure that VA (1) facilities use NAC and other purchasing groups
    to the extent practicable; (2) achieves the benefits anticipated
    through closure of supply depots and implementing just-in-time and
    stockless delivery systems; (3) appropriately balances cost
    containment and physician preferences in implementing its
    formularies; (4) facilities use cost-effective strategies to procure
    high-technology equipment; and (5) facilities both buy high-
    technology services from and sell such services to other health care
    providers, including community hospitals and other government
    agencies whenever cost-effective.  An important policy issue relates
    to the extent to which nonfederal facilities should be allowed to use
    FSSs.

          PURCHASING GROUPS
    -------------------------------------------------------- Chapter 9:6.1

    Although NAC offers significant savings compared with local
    procurement, VA faces a challenge in ensuring that its hospitals
    obtain pharmaceuticals and medical supplies through NAC rather than
    through local procurement.  Similarly, VA faces challenges in
    deciding when to establish regional acquisition centers and when to
    allow medical centers to conduct their own acquisition and when they
    should rely on NAC.  For example, procurements by the regional
    acquisition centers should complement rather than duplicate those by
    NAC.  Finally, VA faces challenges in ensuring that the prices it
    pays, whether through NAC, regional acquisition centers, or local
    procurement, are comparable with or better than prices available
    through private-sector purchasing groups and alliances.

          OPENING FSSS
    -------------------------------------------------------- Chapter 9:6.2

    One important policy issue facing the Congress and the administration
    is the extent to which nonfederal hospitals and health care
    facilities should be allowed to use FSSs.\174

    The Federal Acquisition Streamlining Act of 1994 (P.L.  103-355, sec.
    1555) authorized creation of a cooperative purchasing program that
    would allow state, local, and Indian tribal governments and the
    Commonwealth of Puerto Rico to purchase pharmaceuticals and other
    goods and services from FSSs.  Neither the nonfederal agencies nor
    the manufacturers would have to participate.  For example,
    manufacturers could decline to make their products available to
    nonfederal entities.

    VA raised concerns that drug manufacturers would seek to increase
    schedule prices if a larger group of purchasers received access to
    those prices.  As a result, the General Services Administration,
    which has overall responsibility for the FSSs, proposed that the
    pharmaceutical schedule be excluded from the cooperative purchasing
    program because it could otherwise have the unintended effect of
    increasing federal agencies' drug costs.

    Pharmaceutical manufacturers' and public hospitals' representatives'
    views differ on whether the FSS should be open to nonfederal
    providers.  Representatives of several drug manufacturers explained
    that their companies have been willing to give federal purchasers
    such low prices because they consider the FSS to be a special,
    limited category of pricing that affects no more than 2 to 3 percent
    of total dollars in domestic pharmaceutical sales.  Some
    manufacturers, however, have expressed an unwillingness to offer the
    same low prices to an expanded group of government purchasers.  They
    have also expressed an unwillingness to treating similarly different
    types of purchasers that they are used to treating as separate
    markets.

    The Public Hospital Pharmacy Coalition, on the other hand, favors
    opening the schedule to public hospitals.  A Coalition analysis of
    the differences between FSS prices and the prices nine public
    hospitals paid for drugs showed that, on average, FSS prices were
    considerably lower--on average about 17 percent lower--than the
    hospitals' purchase prices for 100 drugs on which the hospitals spent
    the most during fiscal year 1997.  The Coalition contends that any
    adverse effects on FSS or other drug prices would be negligible and
    state and local purchasers would have access to many FSS prices that
    would be lower than the drug prices they currently pay.

    We reported in June 1997 that opening the pharmaceutical schedule to
    state and local purchasers could change the dynamics of negotiating
    FSS prices for both VA and drug manufacturers.  VA has been able to
    obtain significant discounts from drug manufacturers by seeking the
    most favored customer price.  Many FSS prices are more than 50
    percent below nonfederal average manufacturer prices.

    The Congress, through the National Defense Authorization Act of 1996
    (P.L.  104-106, sec.  4309), subsequently delayed opening the
    schedules pending our assessment of the possible impact.  We reported
    in June 1997 that the effect of opening the FSSs for pharmaceuticals
    on schedule prices ultimately depends on the outcome of negotiations
    between VA and drug manufacturers.  It is not possible to predict how
    schedule drug prices would change or what the ultimate effect on
    federal, state, and local purchasers would be.\175 However, several
    factors could cause schedule prices to rise.  In emergency
    supplemental appropriation legislation (P.L.  105-18), the Congress
    further delayed implementation of the cooperative purchasing program
    until adjournment of the first session of the 105th Congress.

    --------------------
    \174 GAO/HEHS-97-60, June 11, 1997.

    \175 GAO/HEHS-97-60, June 11, 1997.

          JUST-IN-TIME DELIVERY
    -------------------------------------------------------- Chapter 9:6.3

    The overall effectiveness of NAC's efforts to implement just-in-time
    and stockless delivery depends largely on individual VA medical
    facilities.  VA, however, to assess the effectiveness of these
    efforts, would need information on the extent to which

      -- VA facilities are using just-in-time and stockless delivery
         systems,

      -- VA facilities have reduced inventories and personnel as they
         implement just-in-time and stockless inventory systems,

      -- VA has achieved the expected savings from closing its supply
         depots,

      -- just-in-time and stockless delivery has reduced local
         procurements, and

      -- facilities are using higher cost stockless or just-in-time
         delivery for items that could be procured through conventional
         72-hour delivery.

          FORMULARIES
    -------------------------------------------------------- Chapter 9:6.4

    VA faces several challenges concerning establishing VISN and national
    formularies.  First, as previously discussed, some believe that
    formularies that limit the number and types of drugs a hospital
    stocks may reduce pharmacy costs but increase overall health care
    costs.  Because VA's national and VISN formularies were recently
    established, no data are available yet to determine the extent to
    which they reduce the number of drugs hospitals stock or their effect
    on drug costs and overall health care costs.

    The effect of VA's formularies on health care costs depends on many
    factors, such as the amount of flexibility they, and individual
    hospital directors, give physicians in prescribing drugs not on the
    formulary.  If a physician can easily prescribe a drug not on the
    formulary and obtain it within 8 hours through stockless delivery or
    local procurement, then VA may limit its savings by limiting the
    number of drugs on its formularies.  On the other hand, placing too
    many restrictions on physicians' ability to prescribe drugs not on
    the formulary might deny them the ability to tailor treatments to
    individual circumstances.  Another uncertainty about the effect of
    VA's formularies on costs is the extent to which the formularies
    would succeed in changing physicians' prescribing habits.  Finally,
    the formularies' effectiveness in reducing procurement costs depends
    on how restrictive the formularies are.

          HIGH-TECH EQUIPMENT
    -------------------------------------------------------- Chapter 9:6.5

    Hospital directors face difficult challenges in choosing the most
    cost-
    effective strategies for procuring high-technology equipment.
    Procuring refurbished equipment offers significant cost savings, but
    little is known about the experiences--either positive or
    negative--with such equipment and individual refurbishers.  Hospital
    directors often hesitate to buy such equipment because of concerns
    about its reliability.  NAC has tried to address such concerns
    through its program to certify remanufacturers.  Still, FDA's limited
    oversight of refurbishers might hinder efforts to expand use of
    refurbished equipment.

    Another alternative to buying new equipment is transferring equipment
    within the VA system.  With the planned integration and consolidation
    of VA hospitals, VA may have excess high-technology equipment.
    Hospital directors, however, may have the same concerns about the
    reliability of used equipment that they have about refurbished
    equipment.

          SHARING
    -------------------------------------------------------- Chapter 9:6.6

    Although the Under Secretary's Criteria for Potential Realignment of
    VHA Facilities and Programs calls for VISNs to purchase services from
    community providers when such services are equal in quality and lower
    in price, VISN plans indicate sharing agreements only between VA and
    the military hospital care system.

    Without assessments of underused capacity in the surrounding
    community, VA hospitals may purchase high-technology equipment that
    increases excess capacity.  Similarly, where VA already has underused
    high-technology equipment, selling the excess capacity both to
    government and private-sector providers could generate additional
    revenues and help other health care facilities avoid procuring
    high-cost equipment that would probably increase excess capacity.
    For example, additional opportunities may exist for VA facilities to
    sell services to the Indian Health Service and Bureau of Prisons.
    Similarly, VA might be able to provide high-technology services to
    support community health centers in exchange for primary care
    services for veterans.  Another approach being pursued by some VA
    hospitals is jointly procuring high-technology equipment with
    teaching affiliates, DOD hospitals, or community hospitals.

    Finally, VA has increased its sharing with both nongovernment and DOD
    health care providers.  The following are among the challenges VA
    faces in implementing such agreements:

      -- VA must ensure that payments cover VA's cost of providing the
         services.  This is important primarily if VA is maintaining
         capacity expressly for selling it to CHAMPUS or TRICARE, in
         which case any deficit detracts from funds available for serving
         veterans.

      -- VA must ensure that sharing agreements do not detract from
         services available to veterans.

    CHANGES IN HOSPITALS' MARKETING OF
    THEIR SERVICES
    =========================================================== Chapter 10

    As excess capacity grows, community hospitals are seeking ways to
    retain current users and attract new ones.  Among the ways they are
    marketing their services and building market share are

      -- redesigning the hospital environment to be more homelike,

      -- conducting market research and patient satisfaction surveys,

      -- advertising their services,

      -- contracting with managed care plans and preferred provider
         organizations (PPO), and

      -- establishing service delivery arrangements with physicians to
         increase referrals.

    In general, VA has not as actively marketed its hospital services as
    the private sector.  Its facilities generally lack the privacy and
    other amenities typical of community hospitals.  In addition, VA does
    not pay for advertising to attract new users or enter into
    risk-sharing agreements with either managed care plans or physicians
    to build workload.  VA is, however, beginning to change the way it
    markets its health care services; it is increasing its use of market
    research and patient satisfaction surveys and expanding efforts to
    sell its excess resources to DOD and others using its recently
    expanded contracting authority.

    If VA decides to try and preserve certain VA hospitals by competing
    with private-sector hospitals, then it will probably have to expand
    its marketing efforts.  Among the decisions that VA would face is
    whether to revise its policy against using paid advertising and--if
    it decides to advertise--
    whether to use comparative or negative advertising.  Similarly, VA
    would also have to decide on the extent to which it should (1) market
    its services to nonveterans, (2) enter risk contracts with managed
    care plans and individual physicians, (3) invest resources in
    improving privacy and amenities in VA hospitals, and (4) grant
    admitting rights to non-VA physicians with practices near a VA
    hospital.

       HOSPITAL ENVIRONMENT REDESIGNED
       TO BE MORE HOMELIKE
    --------------------------------------------------------- Chapter 10:1

    Community hospitals are increasingly marketing their services
    directly to patients.  An important part of such marketing efforts is
    redesigning hospitals to provide a more homelike environment.
    Although VA has made some progress in improving the privacy and
    amenities offered by its hospitals, most VA hospitals cannot compete
    with community hospitals in these areas.

          APPEARANCE AND AMENITIES
          HELP CREATE OVERALL
          IMPRESSION OF HOSPITAL
    ------------------------------------------------------- Chapter 10:1.1

    People often view the comfort and appearance of hospital rooms as a
    reflection of a hospital's attitude and concern toward patients.\176
    Designing the physical environment is important because patients and
    their families tend to judge a hospital by their first impression.
    For example, hospitals that appear old fashioned and run-down are not
    likely to instill confidence in the medical treatment.  Unattractive
    facilities have also been reported to adversely affect patients'
    psychological well-being.  Patients already depressed about their
    health tend to become more depressed in a drab environment, slowing
    their recovery.

    Just as a drab hospital can adversely affect patients' perceptions of
    the quality of care they receive and therefore their psychological
    well-being, a hospital designed to provide a bright, homelike feeling
    can instill patients' confidence in a hospital and the quality of
    care it provides.

    --------------------
    \176 Julie Baker and Charles W.  Lamb, "Physical Environment as a
    Hospital Marketing Tool," Journal of Hospital Marketing, Vol.  6, No.
    2 (1992), pp.  25-35.

          COMMUNITY HOSPITALS IMPROVE
          APPEARANCE AND AMENITIES
    ------------------------------------------------------- Chapter 10:1.2

    Among the approaches community hospitals have used to make their
    facilities more appealing to patients and visitors are color,
    artwork, plants, attractive and comfortable furnishings, and textured
    walls.  Following are examples of such approaches:

      -- Methodist Hospital in Omaha, Nebraska, renovated its hospital
         wards to create a more homelike environment.  It created
         mini-nursing stations between every two to four patient rooms to
         locate nurses closer to the patients.  It changed most of its
         semiprivate rooms to private rooms and added
         handicapped-accessible bathrooms.  It added chairs that fold
         down into beds to patient rooms to accommodate family members.
         In addition, it established family lounges, nourishment stations
         with beverages and microwaves and a deli-style cafeteria to
         accommodate visitors.  The hospital remodeled patient rooms to
         include clocks, plant shelves, and erasable "white" boards for
         leaving messages.  To create a homelike environment, designers
         used light wood with drapes and wall coverings in soothing
         colors.\177

      -- The Samuels Planetree Model Hospital Unit in New York City, a
         945-bed, not-for-profit tertiary care teaching hospital,
         remodeled patient rooms to include (1) patterned curtains, (2)
         soothing wall and hallway colors, (3) furniture that was both
         attractive and comfortable, (4) a special living room setting
         where patients and visitors could spend time together, and (5) a
         sleeper couch in the patient room where family members or
         friends could comfortably stay overnight.  In addition to a
         television, the rooms include magazines and a videocassette
         recorder.  The hospital also added a kitchen for use by
         patients' family and friends.\178

      -- Baptist Hospital in Miami, Florida, redesigned its emergency
         room to create the ambiance of a hotel lobby.  Natural light was
         filtered, artificial lights focused on architectural details,
         and high-tech machines hidden behind panels or camouflaged by
         soft fabrics.  Because the hospital converts about 25 percent of
         its emergency room visits into admissions, it believes the
         calming and attractive design of its emergency room contributed
         to an increase in hospital admissions.\179

    Some community hospitals have focused on changes to attract certain
    types of patients such as the affluent.  For example, Christ Hospital
    in Oak Lawn, Illinois, decorated rooms with 18th century furniture
    and began offering specially prepared meals served on china to
    attract affluent patients.  Similarly, Century City Hospital in Los
    Angeles designed rooms with rich wood patterns, faux marble, and
    plaster moldings.  The hospital's luxury accommodations also include
    imported china, silver flatware, and antique artwork.\180

    Just as giving hospitals a more homelike appearance can influence
    patients' overall perceptions, accommodating patients' disabilities
    can increase patient satisfaction.  For example, by lowering closet
    rods, hospitals can allow patients in wheelchairs to be more
    independent.  Similarly, chairs designed to allow patients to rise
    without help can increase patients' independence and reduce demands
    on nurses.\181

    --------------------
    \177 Robert Holm, Larry Loftus, and James Kucks, "Savvy Service and
    Innovative Design Help Patient Feel Right at Home," Health Facilities
    Management, (Sept.  1996).  pp.  14-5.

    \178 Arthur E.  Blank, Steven Horowitz, and Deborah Matza, "Quality
    With a Human Face?  The Samuels Planetree Model Hospital Unit,"
    Journal of Quality Improvement, Vol.  21, No.  6 (1995), pp.  289-99.

    \179 Holm, Loftus, and Kucks, "Savvy Service and Innovative Design
    Help Patient Feel Right at Home," Health Facilities Management, pp.
    14-5.

    \180 Baker and Lamb, "Physical Environment as a Hospital Marketing
    Tool," Journal of Hospital Marketing, pp.  25-35.

    \181 Baker and Lamb, "Physical Environment as a Hospital Marketing
    Tool," Journal of Hospital Marketing, pp.  25-35.

          VA HOSPITALS LACK THE
          PRIVACY AND AMENITIES
          TYPICAL OF COMMUNITY
          HOSPITALS
    ------------------------------------------------------- Chapter 10:1.3

    VA hospitals have a distinct competitive disadvantage compared with
    community hospitals regarding privacy and hospital amenities.  VA
    hospitals are often outdated and lack amenities comparable with
    private-sector hospitals.  Most VA hospitals are more than 30 years
    old, some more than 50 years old.  Although VA has some hospitals
    that are relatively new or have been updated, many still have four-
    and six-bed rooms and communal toilets and showers.  In addition,
    many VA hospitals lack basic amenities, such as in-room televisions,
    that community hospitals have.

    Beyond amenities, older VA facilities face additional structural
    problems.  For example, they often have inadequate space in clinics
    and nurses' stations, poorly designed intensive care units, and
    inadequate ventilation systems.

    VA has, however, made progress in improving both privacy and
    amenities.  For example, in response to recommendations from us and
    the Vice President's National Performance Review, VA has installed
    bedside telephones in its hospitals.

    The lack of privacy in VA hospitals can create particular problems
    for women veterans.  In 1982 and again in 1992 and 1994, we reported
    on VA facilities' problems in accommodating women veterans.  At the
    time of our 1982 report, women could not be accommodated in 10 of the
    16 domiciliaries and in some inpatient psychiatric programs.  By
    1992, VA had made significant progress in improving the availability
    of services for women veterans; by that time, for example, VA could
    accommodate women in all VA domiciliaries.  Still, VA had problems in
    meeting women's privacy needs.  For example, men and women still
    shared communal showers at many facilities.  At our urging, VA
    surveyed all of its facilities to identify needed construction
    projects to ensure women adequate privacy.  Medical centers
    identified almost $1.5 billion worth of projects.  By October 1993,
    131 of the 336 planned projects had been completed or funded at an
    estimated cost of over $672 million.  VA expected most of the
    remaining projects to be funded by the year 2000.

    In a separate survey conducted in late 1993, VA facilities identified
    over $3.3 billion in construction and renovation projects it viewed
    as necessary to allow VA to effectively compete with the private
    sector.  The Veterans Health Administration's (VHA) Strategic
    Planning and Policy Office compiled a prioritized inventory of
    requested projects ranging from improving patient amenities to new
    bed towers.  The Office requested more than 1,400 of these projects.

    Even this estimate, however, did not accurately portray the capital
    investment that would be needed to make VA competitive with community
    hospitals in the area of amenities.  This is because the amount VA
    planned to spend on construction projects was capped at $3.3 billion.

    VA has not proceeded, however, with most of the projects.  Because of
    the uncertainty about the future missions of and demand for care in
    many VA hospitals, VA, at our urging, has limited its major
    construction projects primarily to expanding outpatient capacity
    rather than building or renovating hospital capacity.  For example,
    in its fiscal year 1998 budget submission, VA sought $79.5 million
    for major construction and renovation of medical facilities, of which
    $35 million is for seismic corrections at the Memphis, Tennessee,
    medical center.

    VA's Prescription for Change does not address improving the
    appearance and amenities of VA hospitals to make them more attractive
    to potential customers.  Nor do Veterans Integrated Service Network
    (VISN) strategic plans generally address improvements to hospital
    privacy and amenities.  The VISN 6 (Durham) plan, however, discusses
    renovations to improve privacy particularly for women veterans and
    identifies planned projects at the Beckley, West Virginia, and
    Salisbury, North Carolina, medical centers.  It notes that the acute
    medical and surgical wards at the Salisbury hospital include one-,
    two-, three-, and four-bed rooms, but less than 10 percent have
    toilets.  The planned renovation would increase privacy and provide
    handicapped-accessible bathing and toilet facilities.  The other VISN
    strategic plan that discusses amenities--VISN 18's (Phoenix)--focuses
    on services rather than renovations.  Specifically, this network
    plans to establish a guest services program that will use hotel-like
    amenities and services for its hospitals.

       HOSPITALS CONDUCT PATIENT
       SATISFACTION SURVEYS AND MARKET
       RESEARCH
    --------------------------------------------------------- Chapter 10:2

    To effectively market their services, hospitals need information on
    both current and potential users.  For example, they need to know who
    is using their services and their motivation (convenience, reputation
    for quality, amenities, services, and the like) for using that
    particular hospital.  Just as important, they need to know who is not
    using their services and why.  They need information on the types of
    outreach efforts (newspaper, television, or direct mail) that will
    most effectively attract new users and retain current ones.\182 Among
    the methods hospitals use to identify potential customers and retain
    current ones are patient satisfaction surveys and market research.
    VA, like community hospitals, is increasingly emphasizing customer
    satisfaction and market research to help keep current users and
    identify potential new ones.

    --------------------
    \182 David P.  Paul and Earl D.  Honeycutt, Jr., "An Analysis of the
    Hospital-Patient Marketing Relationship in the Health Care Industry,"
    Journal of Hospital Marketing, Vol.  10, No.  1 (1995), pp.  35-49.

          BOTH COMMUNITY AND VA
          HOSPITALS USE CUSTOMER
          SATISFACTION SURVEYS
    ------------------------------------------------------- Chapter 10:2.1

    With decreasing demand and increasing competition, hospitals no
    longer assume that users will choose the same hospital in the future.
    Hospitals therefore are increasingly focusing on ways to improve
    customer service.  An important way to identify what patients like
    and dislike about a hospital experience is the patient satisfaction
    survey.  Both community and VA hospitals use such surveys
    extensively.

    Responses to patient satisfaction surveys tend to focus on
    interactions--
    either positive or negative--with hospital staff.  The results can
    thus provide important information on needed changes in staff
    education and training to improve customer service.  Such surveys can
    also identify other changes in the hospital that might attract users.
    For example, surveys that reveal frequent complaints about the food
    service, delays in answering call buttons, or drab decor can be used
    to target needed changes.

    Hospitals can conduct satisfaction surveys in several ways.  For
    example, hospitals can call patients or send them a questionnaire
    after patients are discharged.  Patient satisfaction surveys
    generally show a relationship between patient satisfaction and
    whether the patient will return to the same hospital.

    One approach to improving patient satisfaction, developed by the
    Cleveland Clinic Foundation, is a Patient Callback Program.  The
    hospital calls patients 3 weeks after discharge to identify and
    resolve any clinical or service concerns.  The hospital found that
    the program creates perceptions of higher quality care and
    contributes to more effective clinical care by identifying patients'
    concerns.  Other reported benefits of the program are identifying and
    resolving past and current problems and increased patient
    satisfaction, leading to a greater likelihood of future use by the
    patients as well as their family and friends.  Although the hospital
    initially limited the program to patients discharged from surgical
    services, it subsequently expanded the program to include discharges
    from medical bed sections and outpatient surgery.\183

    Historically, veterans often complained about excessive waiting times
    for VA care and poor customer service.  For example, participants in
    14 focus group discussions we held with veterans nationwide during
    1994 elicited frequent complaints about poor customer service, poor
    staff attitudes, excessive waiting times, and inadequate parking.\184
    Similarly, the Vice President's National Performance Review made a
    series of recommendations in September 1993 intended to improve
    customer service throughout VA programs.  Subsequently, VA
    established the National Customer Feedback Center and began revising
    the standard of care and therefore increasing patient satisfaction.
    In addition, VA published customer service standards for its medical
    facilities in October 1994.

    VA's Prescription for Change identifies several planned actions to
    assess and improve patient satisfaction.  For example, it provides
    that VHA will annually assess compliance with the customer service
    standards through patient surveys.  In addition, it provides for the
    development and implementation of corrective action plans for those
    areas in which customer feedback or other data indicate a need for
    service improvement.

    VA's fiscal year 1998 budget submission identified two performance
    measures based on the customer service standards.  The first
    performance measure is to increase the percentage of patients
    reporting their care as very good to excellent by 5 percent annually,
    starting at 60 percent for both inpatient and outpatient care.  VA
    reported that it met the goal for inpatient care but satisfaction
    with outpatient care increased by only 1 percent.  The second measure
    tracks VISN improvements regarding nine customer service
    standards.\185 VA's goal is for 95 percent of its networks to improve
    performance on two-thirds of the customer service standards.  VA will
    gauge progress on the basis of results of surveys mailed to veterans
    nationwide receiving VA care.  VA reported that in fiscal year 1996,
    86 percent of VISNs showed improvement on two-thirds or more of the
    customer service standards.

    --------------------
    \183 W.R.  Gombeski and others, "Patient Callback Program:  A Quality
    Improvement, Customer Service, and Marketing Tool," Journal of Health
    Care Marketing, (Fall 1993), pp.  60-5.

    \184 Veterans' Health Care:  Veterans' Perceptions of VA Services and
    Its Role in Health Reform (GAO/HEHS-95-14, Dec.  23, 1994).

    \185 The customer service standards relate to courtesy, timeliness of
    care, coordination of care, emotional support, attention to
    preferences, patient education, family participation, continuity of
    care, and transition between care settings.

          MARKET RESEARCH HELPS
          HOSPITALS TARGET POTENTIAL
          USERS
    ------------------------------------------------------- Chapter 10:2.2

    Demographic information on users helps hospitals target marketing
    toward nonusers most likely to be influenced by such efforts.  In
    other words, if a hospital has historically drawn users from a
    particular demographic group, such as the uninsured or elderly, it
    may want to target those demographic groups in its marketing efforts.

    In addition to identifying the demographics of the market area's
    population, a hospital may want to elicit perceptions about it that
    might hinder efforts to attract new users and identify added services
    that might attract users as well as evaluate the competition.  On the
    basis of such research results, hospitals develop marketing
    strategies that target advertising toward certain types of people or
    add services likely to generate new workload.

    One of the actions discussed in VA's Prescription for Change is the
    use of focus groups and customer surveys to evaluate services.
    According to the Prescription, VA conducted focus groups and
    telephone market surveys in the referral networks of over 75 medical
    centers during 1994 and 1995.  The studies targeted current and
    former users as well as nonusers to get a better understanding of
    VA's current and potential customers, their perceptions about VA, and
    their individual needs.

    VISNs appear to be further expanding the use of market research.
    Almost all VISN strategic plans indicate that market surveys have
    been planned or completed, often through contracts with public
    polling firms such as the Gallup Organization.

       HOSPITALS INCREASINGLY
       ADVERTISE AND MARKET THEIR
       SERVICES
    --------------------------------------------------------- Chapter 10:3

    In the past, hospitals did not extensively advertise or otherwise
    market their services, relying instead on physicians to generate
    workload.  As patients and their families have expanded their role in
    selecting hospitals, advertising has become an important marketing
    tool for community hospitals.  Although VA directives do not permit
    the use of paid advertising to market health care services, VISNs and
    individual facilities may use a variety of other methods, such as
    newsletters and public service announcements, to inform veterans of
    their VA benefits.

    Historically, patients typically relied on their family physician to
    determine where they went for hospital care.  Those patients choosing
    their own hospital generally did not have a family physician and
    tended to use the hospital emergency room as a physician's office.
    In other words, their choice of hospitals was more a matter of
    necessity than preference.  In the mid-1980s, an estimated 40 percent
    of patients (or their family members) chose their own hospital.  By
    the 1990s, however, one report estimated that 90 percent of hospital
    inpatients were playing an active role in choosing their own
    hospital, often on the basis of others' opinions.\186 A logical
    outgrowth of this trend has been increased hospital advertising
    directed toward patients and their families.

    Advertising generally promotes the hospital's services without
    criticizing other hospitals.  Hospital advertisements have progressed
    from providing general information to advertising such distinct
    product lines as cardiology, psychiatry, and lithotripsy.  Hospitals
    in major urban areas advertise more than hospitals in rural
    communities, and large hospitals advertise more than small ones.

    To be effective, hospital marketing programs must specifically target
    the correct individuals with appropriate messages to convince them to
    become hospital customers.  Advertising campaigns often target
    specific groups of potential users gleaned from market research.  For
    example, hospitals may target their marketing toward people between
    the ages of 50 and 60 because this age group accounts for nearly 60
    percent of all health care spending.  Others may target the elderly
    because they represent the fastest growing segment of the population
    and are the most intensive users of health care services.  A third
    target of marketing efforts is people interested in the wellness
    movement:  Some hospitals have developed programs targeted to attract
    individuals interested in exercise, diet, and preventive health
    programs.\187

    Unlike the private sector, VA is restricted in its ability to
    advertise its health care services to the general public.  VA may
    prepare informational brochures and public service announcements, but
    it may not advertise in newspapers or on radio or television.  VA
    regulations limit the use of paid advertising to personnel
    recruitment and certain loan guaranty activities; they specifically
    prohibit the purchase of advertising time and space to promote VA
    benefits and services.

    Although it may not generally use paid advertising, VA has express
    authority to conduct a Veterans Outreach Services program to ensure
    that all veterans are "provided timely and appropriate assistance to
    aid and encourage them in applying for and obtaining" VA benefits and
    services.  According to two VA assistant general counsels, this
    authority requires VA to distribute full information to eligible
    beneficiaries on all services for which they might be eligible.
    This, according to VA's Office of General Counsel, permits VA to
    advertise VA medical services using exhibits, photographic displays,
    and other visual educational information and descriptive material.
    In addition, the assistant general counsels concluded that although
    VA's authority to conduct outreach does not specifically authorize VA
    to give information to veterans comparing VA services with those of
    other providers, VA could determine that to give veterans full
    information, it might be necessary to give them comparative
    information.

    The two assistant general counsels, however, concluded that VA may
    not, under its legislative authority, conduct negative advertising
    or, under VA policy, use paid advertising to promote its health care
    services.  The assistant general counsels recommended that the VA
    policy be revised to explicitly authorize use of paid advertising.
    As of August 1997, the policy had not been revised.

    Neither VA's Vision for Change nor its Prescription for Change
    contains specific initiatives about advertising and outreach.  Many
    of the VISN strategic plans, however, discuss outreach efforts,
    including the following examples:

      -- VISN 3 (Bronx) established a network marketing implementation
         group and conducts direct mail outreach to service-connected
         veterans.

      -- VISN 4 (Pittsburgh) plans to mail promotional materials to and
         telephone targeted groups of nonusers.

      -- VISN 16 (Jackson) indicates that its medical centers are
         encouraged to use customer-centered advertising, including
         patient newsletters and promotional videos, health information
         fairs, and good media relations to reach its marketing goals.

      -- VISN 22 (Long Beach) plans to publish a quarterly newsletter and
         use public service announcements to inform veterans of their
         medical benefits.

    --------------------
    \186 John Joby, "Referent Opinion and Health Care Satisfaction,"
    Journal of Health Care Marketing, Vol.  14, No.  2 (1994), pp.
    24-30.

    \187 Paul and Honeycutt, "An Analysis of the Hospital-Patient
    Marketing Relationship in the Health Care Industry," Journal of
    Hospital Marketing, pp.  35-49.

       HOSPITALS SHARE RISKS WITH
       MANAGED CARE PLANS IN RETURN
       FOR A GUARANTEED PATIENT BASE
    --------------------------------------------------------- Chapter 10:4

    Another method community hospitals use to maintain or broaden market
    share is contracts and risk-sharing arrangements with managed care
    plans.  Until recently, VA had no authority to either routinely treat
    nonveterans or contract with managed care plans.  As a result, few
    VISN strategic plans identify efforts to contract with managed care
    plans other than DOD's TRICARE managed care plan.

    Historically, community hospitals were fairly well insulated from
    risk.  During the 1960s, both public and private insurance generally
    paid hospitals' billed charges or actual costs.  Although hospitals
    had a financial risk, they could raise prices to compensate.
    Hospitals assumed greater risk in the 1970s as insurers increasingly
    set limits on allowable charges or costs and developed utilization
    management tools to reduce unnecessary hospital use.  It was not
    until Medicare developed a prospective payment system in 1983,
    however, that most hospitals had to assume direct risk for the cost
    of care provided to individual patients.  That change, however, did
    not force hospitals to directly compete with each other for market
    share.

    The growth of managed care plans, however, has increasingly put
    hospitals in direct competition with each other for dwindling
    inpatient workload.  With about 40 percent of hospital beds empty on
    any given day, managed care plans have strong bargaining power with
    hospitals.\188 If a hospital charges too much, an HMO will merely
    contract with another hospital.  Managed care plans typically pay
    hospitals on a per case or per diem basis to encourage efficient
    delivery of services and discourage the provision of unnecessary
    services.  In return, the HMO typically guarantees a certain
    workload.

    Since the mid-1980s, the number of hospital contracts with HMOs has
    increased significantly.  In 1985, only about one-third of community
    hospitals were providing care to HMO members.  By 1990, the
    percentage of community hospitals contracting with HMOs or PPOs had
    increased to 63 percent.  By 1994, three-fourths of community
    hospitals reported having such contracts.

    Unlike community hospitals, VA hospitals generally do not have formal
    relationships with HMOs or other managed care plans to serve either
    veterans or nonveterans.\189 To become a preferred provider under
    some plans, VA would be required to accept discounted payments.
    Historically, VA has not been allowed to negotiate discounted
    payments.\190

    Before enactment of the Balanced Budget Act of 1997, VA was required
    to recover its full cost of providing care; it was not authorized to
    negotiate on the basis of price.  The Balanced Budget Act shifted
    VA's basis for recovering costs from that of a reasonable cost to a
    reasonable charge, giving VA greater flexibility to negotiate on the
    basis of price.  VA already had such flexibility when seeking to
    participate as a provider of care to nonveterans.  VA may use its
    recently expanded contracting authority, which allows it to negotiate
    payments in the best interest of the government, to sell services to
    managed care plans.

    HMOs and PPOs have little interest in VA's providing services to
    their veteran policyholders.  Because HMOs and PPOs typically pay
    only for care provided by hospitals that have negotiated provider
    agreements, they have no obligation to pay VA for care provided to
    their veteran policyholders as long as they do not accept VA
    facilities as participating providers.  In other words, to the extent
    that managed care plans' veteran policyholders obtain care from
    nonparticipating VA facilities, the plans' profits will be higher.

    VA currently contracts with only one HMO--Dakota Care--in South
    Dakota but has been trying to negotiate with at least two other HMOs
    to become a participating provider.  VA officials attribute their
    ability to obtain a provider agreement in South Dakota to the state's
    rural nature and the limited number of providers.

    VA is succeeding somewhat more in negotiating provider agreements
    under its medical care cost recovery authority with point-of-service
    (POS) plans.  Unlike HMOs and PPOs that may be able to avoid all
    payments to VA (other than for emergency care) by excluding VA as a
    participating provider, POS plans have less to gain by not accepting
    VA as a participating provider.  This is because a POS plan is
    obligated to pay providers for nonemergent care, including those
    without a provider agreement.  Since February 1995, VA's General
    Counsel has reviewed and approved at least 32 provider agreements
    between VA facilities and POS plans.  VA does not have readily
    available information on the number of such contracts.

    In the past, VA was not allowed to sell hospital services to managed
    care plans.  It could sell any health care service to DOD and other
    federal agencies and specialized medical resources to hospitals,
    clinics, and medical schools.  VA's 1996 Prescription for Change
    recognized, however, the need to market specialized VA clinical
    services to other government health care providers and the private
    sector.  It also noted that legislation was pending that would expand
    VA's resource-sharing authority to allow VA to offer any health care
    resource to any public or private entity.

    Because of VA's limited sharing authority, its Prescription focused
    primarily on increasing sharing with DOD and other government health
    care programs.  For example, VA plans to implement contracts with
    regional TRICARE contractors and providers as DOD expands TRICARE
    nationwide.  VA's Prescription notes that a standard provider
    agreement has been negotiated with Foundation Health Corporation for
    medical and surgical care.  Contracts with TRICARE are mentioned in
    the strategic plans of VISNs 5 (Baltimore), 14 (Grand Island), and 16
    (Jackson).

    With the enactment of Public Law 104-262 later in 1996, VA received
    authority to sell hospital and other health care services to managed
    care plans and others.  Because the legislation was passed after VA's
    Prescription for Change was issued and during the development of the
    VISN strategic plans, these plans do not address expanding
    contracting with managed care plans.

    --------------------
    \188 Medicare and the American Health Care System Report to the
    Congress, Prospective Payment Assessment Commission (Washington,
    D.C.:  June 1996).

    \189 An official from VA's Office of General Counsel knew of only one
    agreement between VA and an HMO.

    \190 Under the Balanced Budget Act, VA could recover the reasonable
    charge for care or services starting on Oct.  1, 1997.

       HOSPITALS ENTER RISK-SHARING
       ARRANGEMENTS WITH PHYSICIANS
    --------------------------------------------------------- Chapter 10:5

    Community hospitals are also seeking to maintain or broaden their
    market share by purchasing physician practices and securing a patient
    base through various risk-sharing arrangements with physicians.  VA
    does not have similar risk-sharing arrangements with private practice
    physicians but is establishing community-based outpatient clinics
    (CBOC) to encourage more referrals to VA hospitals.

    Physicians and hospitals see benefits from closer cooperation in an
    environment of higher financial risk.  Hospitals see stronger
    linkages with primary care physicians as an important source of
    hospital admissions, particularly under managed care plans.  They
    also see such linkages as allowing them to shift some financial risk
    to physicians.  Individual and small group (physician) practices
    benefit because such arrangements allow them access to sophisticated
    information systems, medical technology, and personnel familiar with
    managed care contracting, marketing, and management without investing
    significant capital.

    Many community hospitals seek to increase their market share by
    obtaining control of physicians either by buying physician practices
    or providing them substantial subsidies.\191 \192 One study noted
    that the percentage of physicians practicing as employees rose from
    24.2 percent in 1983 to 42.3 percent in 1994.\193 During that period,
    the percentage of self-employed physicians in group practices fell
    from 35.3 percent to 28.4 percent.  The study notes that most such
    change occurred during the last 6 years of the 12-year period and was
    most prominent among young physicians.  Increased earnings of
    employee physicians compared with those of self-employed physicians
    accounts for the shift.

    The Prospective Payment Assessment Commission reported in 1996 that
    hospital-physician arrangements improve hospitals' ability to secure
    managed care contracts, expanding market share and improving
    financial performance.  The Commission noted that such arrangements
    subject both hospitals and physicians to increased financial risk but
    also create opportunities for greater profits.\194

    Concerns have been raised about such hospital-physician arrangements.
    For example, some are concerned that these arrangements may violate
    antitrust laws.  In addition, some believe that an inherent conflict
    exists in hospital-physician arrangements because the two principals
    have different strategic needs.\195 Hospitals and physicians often
    have opposing views on such issues as working environment,
    decision-making goals, and working and management style.\196

    Others have questioned whether the hospitals and other health care
    organizations acquiring physician practices are realizing a positive
    return on investment.\197 One author notes that acquisitions often
    create excess capacity, raise costs, and reduce an organization's
    ability to attract managed care contracts.\198 Finally, concerns have
    been expressed about the methods used to value the physician
    practice\199 and potential violations of the Medicare anti-kickback
    statute when physician practices continue to be affiliated with the
    buyers of those practices.\200

    Unlike community hospitals, which rely primarily on private-practice
    physicians to generate hospital admissions, VA hospital admissions
    come mainly from within the VA system.  Only salaried VA physicians
    may admit and treat patients at VA hospitals.  As of February 1998,
    VA had, however, opened 198 CBOCs since 1994, which have brought new
    users into the system.  A CBOC is either a VA-operated clinic or a
    VA-funded or reimbursed private clinic, group practice, or single
    practitioner that is geographically distinct or separate from the
    parent facility.  CBOCs provide only primary care and are expected to
    refer veterans to VA hospitals for inpatient and more specialized
    care.  Unlike the hospital-physician arrangements emerging in the
    private sector, however, CBOC physicians have no financial incentive
    to refer patients to VA hospitals.

    --------------------
    \191 S.A.  Hepps, "Beware:  Hospital Control or Ownership of Medical
    Groups," Journal of Medical Group Management, Vol.  42, No.  3
    (1995).

    \192 S.  Becker and J.  Callahan, "Physician-Hospital Transactions:
    Developing a Process for Handling Valuation-Related Issues," Journal
    of Health Care Finance, Vol.  23, No.  2 (1996).

    \193 P.R.  Kletke, D.W.  Emmons, and K.D.  Gillis, "Current Trends in
    Physicians' Practice Arrangements:  From Owners to Employees,"
    Journal of the American Medical Association, Vol.  276, No.  7
    (1996).

    \194 Medicare and the American Health Care System Report to the
    Congress, Prospective Payment Assessment Commission.

    \195 Hepps, "Beware:  Hospital Control or Ownership of Medical
    Groups," Journal of Medical Group Management.

    \196 K.M.  Ward and G.E.  Mathews, "Overcoming the Physician
    Group-Hospital Cultural Gap," Healthcare Financial Management, Vol.
    51, No.  3 (1997).

    \197 J.P.  Ortiz, "Ensuring the Profitability of Acquired Physician
    Practices," Healthcare Financial Management, Vol.  51, No.  1 (1997).

    \198 J.E.  Bolinger and D.E.  Hough, "Making Acquired Physician
    Practices Profitable," Healthcare Financial Management, Vol.  51, No.
    2 (1997).

    \199 R.W.  Curry, "IRS Offers Guidance on Physician Practice
    Valuation," Healthcare Financial Management, Vol.  50, No.  7 (1996).

    \200 R.J.  Kurland, "Physician Noncompete Agreements Must Be
    Carefully Tailored," Health Care Law Newsletter, Vol.  10, No.  4
    (1995).

       MARKETING OF VA HOSPITAL CARE
       RAISES MANY ISSUES
    --------------------------------------------------------- Chapter 10:6

    VA has established a goal of increasing the number of VA users by 20
    percent over the next 5 years to use its excess capacity.  VA will
    need to address many issues, however, concerning the likely effect of
    this strategy on the use of its excess hospital capacity.

    Although VA appears capable of attracting new users through its plans
    to establish additional CBOCs, this approach is not likely to
    generate much new demand for VA inpatient hospital care.  This is
    because new users are most likely to choose their local hospital
    rather than a distant VA facility and veterans' use of VA hospital
    care decreases significantly at distances of over 5 miles from the
    hospital.  In addition, to the extent that physicians at CBOCs have
    admitting privileges at nearby community hospitals, they will have
    little financial incentive to refer patients to a distant VA
    hospital.  One option for increasing referrals from CBOC physicians
    would be to use physician incentive arrangements like those used by
    community hospitals.

    If VA decides to try to preserve certain VA hospitals by competing
    with private-sector hospitals, then VA might want to target its
    marketing efforts toward veterans and nonveterans living near its
    hospitals.  One approach might be to grant admitting privileges to
    private practice physicians.  This might increase referrals of
    veterans who routinely obtain needed health care services from
    private practice physicians.  Such physician referrals are an
    important source of admissions to community hospitals.  VA's 1992
    National Survey of Veterans found that most of the veterans surveyed
    (74 percent) indicated that they did not use VA hospitals because
    their private practice physicians would most likely send them to a
    specific hospital.  Another approach for increasing hospital users
    would be for VA hospitals to become preferred providers under managed
    care plans.  This might generate new hospital demand from both
    veterans and nonveterans who normally use other hospitals.

    The success of such efforts, however, would depend on many factors.
    The perceptions, if not the reality, that VA facilities are outdated,
    lack the patient amenities of private-sector hospitals, or provide
    inadequate care and customer service will probably affect the
    decisions of both veterans and nonveterans to use VA hospitals.
    Because most patients have a choice of whether to go to a VA or
    community hospital, considerable uncertainty surrounds VA's ability
    to attract more hospital users.  In addition, managed care plans may
    be unwilling to contract with VA for hospital care because of the
    lack of privacy and amenities comparable with what their members are
    accustomed to.  Spending money to improve privacy and amenities in VA
    hospitals to attract additional hospital users would, however, be
    risky.

    Even if VA hospitals were to provide modern accommodations with
    private and semiprivate rooms, veterans may still have negative
    perceptions of the VA system and its quality of care.  VA attributes
    such perceptions to its inability to use paid advertising to change
    people's perception.  This creates difficult policy choices.  For
    example, should VA change its policy on use of paid advertising to
    attract new users?  If so, what restrictions should be placed on such
    advertising regarding comparative and negative advertising?

    The ability of VA to attract new hospital users will also probably
    depend on the population VA targets.  For veterans with limited
    resources and no health insurance, VA may be their only health care
    option.  But VA wants to serve more higher income, Medicare-eligible
    veterans.  Most such veterans either have Medigap insurance as well
    as their Medicare coverage or are enrolled in Medicare HMOs.  As a
    result, these veterans incur no or minimal cost sharing regardless of
    where they obtain care.  Medicare-eligible veterans have used VA
    hospital care less and less since the mid-1980s.

    Other individuals VA appears to be targeting as new users are those
    with private health insurance.  Veterans with private insurance are,
    however, less likely to use VA hospitals than are those without
    insurance.  Therefore, considerable uncertainty exists about the
    ability of VA to increase use of VA hospitals by targeting marketing
    efforts toward insured and higher income veterans.

    CHANGES IN MONITORING AND
    DELIVERING HOSPITAL PATIENT CARE
    =========================================================== Chapter 11

    Pressures resulting from prospective payment, capitation, and
    utilization review have forced community hospitals to more closely
    monitor and manage the treatment of individual patients to ensure the
    cost-
    effectiveness of their care.  Specifically, hospitals are

      -- implementing clinical guidelines to help physicians and other
         caregivers follow cost-effective courses of treatment;

      -- developing outcome measures to enable hospitals to evaluate
         their performance and that of individual physicians;

      -- performing tests and other procedures on an outpatient basis
         before, or as an alternative to, admitting patients; and

      -- discharging patients sooner to alternative settings such as
         nursing home, home health, and hospice care.

    VA's Prescription for Change outlines ambitious plans for VA to
    expand the development and use of clinical guidelines, develop and
    implement outcome measures, and shift care from inpatient to
    outpatient and other more cost-effective settings.  Veterans
    Integrated Service Network (VISN) strategic plans generally identify
    additional such efforts.

    Neither VA nor the private sector is sure about the extent to which
    clinical guidelines are being followed and to what effect.
    Similarly, both VA and the private sector are in the early stages of
    developing and using outcome measures.  Some of VA's early efforts to
    develop performance measures, however, have focused more on process
    than outcomes and appear to conflict with other VA initiatives such
    as the Veterans Equitable Resource Allocation (VERA) system.
    Finally, VA faces challenges in ensuring that its facilities shift
    care to other treatment settings when cost-effective.

       DEVELOPMENT OF CLINICAL
       GUIDELINES IS INCREASING, BUT
       EFFECTIVENESS IS UNCLEAR
    --------------------------------------------------------- Chapter 11:1

    Both community and VA hospitals are increasing efforts to develop and
    implement clinical guidelines.  Despite the rapid development of
    guidelines, little effort has been devoted to determining whether
    they achieve their intended effect.

    A clinical guideline explicitly states what is known and believed
    about the benefits, risks, and costs of a particular medical
    treatment intended to achieve a meaningful difference in patient
    outcomes.\201 By identifying which services are beneficial (and which
    are not), guidelines can help patients get needed care and help them
    avoid the risks of unnecessary services.  Guidelines can also support
    cost containment efforts by reducing unnecessary care and providing
    information on the benefits, risks, and costs of services.  Such
    information can help patients, physicians, payers, and others make
    appropriate choices in an environment of limited resources.  Without
    guidelines, attempts to contain health care costs may inadvertently
    result in patients being denied needed services.

    The Physician Payment Review Commission classifies clinical
    guidelines as either diagnostic, management, or service.\202
    Diagnostic guidelines establish procedures for evaluating patients
    with particular symptoms (such as chest pain) to effectively identify
    the source of the problem.  Diagnostic guidelines can also be
    developed to guide providers in screening asymptomatic patients for
    early stages of disease.  Management guidelines establish appropriate
    courses of treatment once a diagnosis has been made.  Finally,
    service guidelines identify appropriate and inappropriate uses of
    particular diagnostic and therapeutic procedures (such as a chest X
    ray, colonoscopy, or administration of hepatitis vaccine).  Service
    guidelines help in deciding whether a particular treatment or test
    should be administered.

    A guideline's effectiveness is evaluated by the frequency with which
    it produces the desired patient outcome.  For example, a diabetes
    guideline might be evaluated on the basis of its success in
    regulating patients' hemoglobin levels.  Similarly, a hypertension
    guideline might be evaluated using a longer term (over time) outcome
    measure, such as reduced morbidity and mortality from coronary artery
    and renal disease and stroke.

    --------------------
    \201 Clinical guidelines are sometimes referred to as "practice
    parameters," "clinical policies," or "preferred practice patterns."

    \202 Physician Payment Review Commission Annual Report to Congress,
    Physician Payment Review Commission (Washington, D.C.:  1992).

          PUBLIC- AND PRIVATE-SECTOR
          EFFORTS TO DEVELOP CLINICAL
          GUIDELINES
    ------------------------------------------------------- Chapter 11:1.1

    The Congress created the Agency for Health Care Policy and Research
    (AHCPR) to sponsor clinical guidelines development and conduct
    research on medical outcomes to provide information needed for
    developing future guidelines.  In March 1992, AHCPR issued the first
    of 18 clinical guidelines it developed--on acute pain management and
    urinary incontinence in adults.\203

    Multidisciplinary panels knowledgeable about managing certain
    conditions developed the guidelines.  AHCPR chose these areas for
    guideline development because they permitted consideration of the
    following factors:  the adequacy of scientific-based evidence; the
    number of people whose care the guidelines would affect; the
    likelihood of the guidelines' reducing variation in prevention,
    diagnosis, management, and outcomes of the condition; the specific
    needs of Medicare and Medicaid beneficiaries; and the costs of
    treating the condition to all payers, including patients.

    Many others are also developing clinical guidelines.  For example, in
    a 1991 report, we identified 27 medical specialty societies that had
    or were developing clinical guidelines.\204

    Similarly, a 1992 Physician Payment Review Commission report
    indicated that more than 1,000 guidelines, covering an array of
    topics, had been identified by the American Medical Association
    (AMA).  The Commission reported that more than 50 organizations were
    developing clinical guidelines, including professional groups,
    payers, hospitals, academic medical centers, HMOs, government
    agencies, public and private researchers, and malpractice insurers.

    Hospital executives view guidelines as important in shaping the
    future of health care.  Asked what key factors will influence health
    care delivery in the years ahead, 41 percent of executives in a 1995
    survey cited clinical guidelines and outcome measures compared with
    just 22 percent of executives surveyed in 1990.  Moreover, nearly
    two-thirds of the executives believed that costs can be successfully
    controlled by using monetary physician incentives if effective
    protocols and guidelines are developed.\205

    --------------------
    \203 In Apr.  1997, AHCPR announced a major restructuring of its
    clinical guideline program.  Under the restructuring, AHCPR will no
    longer develop clinical guidelines but will produce the scientific
    foundation for use by private- and public-sector organizations in
    developing guidelines.

    \204 Practice Guidelines:  The Experience of Medical Specialty
    Societies (GAO/PEMD-91-11, Feb.  21, 1991).

    \205 On the Critical List:  Hospital Strategies for Survival and
    Change, Watson Wyatt Worldwide (Washington, D.C.:  1995).

          VA IS ESTABLISHING CLINICAL
          GUIDELINES
    ------------------------------------------------------- Chapter 11:1.2

    VA, like AHCPR, AMA, and the specialty societies, is developing and
    implementing clinical guidelines.  Using AHCPR and other guidelines
    as a starting point, VA developed national guidelines for
    rehabilitation of stroke patients and treatment of amputees in June
    1996.  Other nationally developed guidelines cover major depressive
    disorders, diabetes, psychoses, and ischemic heart disease.  National
    guidelines are under development for anxiety, gout, degenerative
    joint disease, asthma, and prostate disease, among others.

    In addition to these clinical guidelines, the Veterans Health
    Administration (VHA) has developed several pharmacological management
    guidelines.  These guidelines, developed by VA's Pharmacy Benefits
    Management Medical Advisory Panel, cover drug therapy for chronic
    obstructive heart disease, human immunodeficiency virus/acquired
    immunodeficiency syndrome, hyperlipidemia, hypertension, and
    noninsulin- dependent diabetes.  Guidelines are being developed for
    congestive heart failure, depression, peptic ulcers, glaucoma, benign
    prostate hypertrophy, and degenerative joint disease.

    In his 1996 Prescription for Change, the Under Secretary for Health
    called for the increased use of clinical guidelines to both measure
    and improve care in the VA system.  In response to his earlier Vision
    for Change, the Office of Policy, Planning, and Performance and the
    Office of Patient Care Services began distributing existing
    guidelines and efforts to develop a uniform process for developing
    and implementing clinical guidelines.  Under the guidance issued in
    VA's Prescription for Change, VISNs are expected to standardize
    clinical processes by using nationally developed clinical guidelines.

    In addition, the Prescription for Change indicated that VISNs are
    expected to delegate clinical care responsibility to nonphysician
    caregivers, when appropriate, through locally developed clinical
    pathways.\206 VA's Prescription also called for establishing minimal
    criteria for local development of clinical pathways and a mechanism
    for internetwork sharing of pathways.  Subsequently, a clinical
    pathways networking group was established at the Quality Management
    Institute located at the Durham VA medical center.  In 1995, the
    Institute published a directory of clinical pathways.

    Under its 1997 Network Directors' Performance Measures, networks were
    expected to implement, by September 30, 1997, 12 nationally developed
    networkwide clinical guidelines, 2 of which must focus on special-
    emphasis populations.  Our review of VISN strategic plans identified
    a wide range of actions to implement clinical guidelines and
    pathways:

      -- VISN 1 (Boston) indicated that it had developed clinical
         guidelines for eight health conditions, including diabetes,
         pneumonia, and congestive heart failure.

      -- VISNs 3 (Bronx) and 6 (Durham) indicated that they implemented
         five clinical guidelines in fiscal year 1996.

      -- VISN 5 (Baltimore) indicated that it has implemented 34 national
         clinical practice guidelines and plans to develop clinical
         pathways for the network's top five diagnoses during fiscal year
         1997.

      -- VISN 10 (Cincinnati) planned to complete development of 12
         clinical pathways in fiscal year 1997, including pathways for
         stroke, acute and chronic back pain, major depressive disorders,
         and hypertension.

    --------------------
    \206 VA defines clinical pathways as clinical management tools that
    organize, sequence, and specify timing for the major patient care
    activities and interventions of the entire interdisciplinary team for
    a particular diagnosis or procedure.  Clinical pathways define key
    processes and events in the daily management of care.

          EVALUATIONS OF GUIDELINE USE
          AND EFFECTIVENESS ARE
          LIMITED
    ------------------------------------------------------- Chapter 11:1.3

    Despite the intense efforts to develop clinical guidelines, little is
    known about how extensively they are followed and their results.  For
    example, our 1991 study noted that only a few evaluative studies had
    been done on the effects of clinical guidelines.\207

    Similarly, the Physician Payment Review Commission noted in its 1992
    report that little was known about the validity of clinical
    guidelines\208 and that questions existed about how many physicians
    use or even know about the availability of such guidelines.

    A 1993 study of 59 published evaluations of clinical guidelines,
    however, concluded that explicit guidelines improve clinical
    practice.  All but 4 of the 59 evaluations studied found significant
    changes in the care proposed by the guidelines.  All but 2 of the 11
    studies that evaluated patient outcomes found significant
    improvement.\209

    A Canadian researcher noted in 1995 that the ultimate success of
    clinical guidelines depends on routine evaluation.  He also noted,
    however, that compared with efforts to develop guidelines, little
    effort is devoted to their evaluation.\210

    Similarly, neither VA's Prescription for Change nor individual VISN
    strategic plans focus on determining the extent of the use of the
    guidelines being developed and their effect on patient care.  VA
    does, however, assess the extent to which nationally recognized
    clinical guidelines are followed in treating certain
    high-cost/high-volume conditions such as diabetes and hypertension.

    VA's draft strategic plan, developed under the Government Performance
    and Results Act, indicates that VA plans not only to expand the
    development and implementation of clinical guidelines, but also, in
    future years, to analyze how the guidelines are working to improve
    care processes and patient outcomes.  According to the draft plan, by
    the year 2000, VA expects to be able to demonstrate improved
    processes resulting from six of its clinical guidelines.  By the year
    2002, it expects to be able to implement improvements in patient care
    or patient outcomes resulting from clinical guidelines.

    --------------------
    \207 GAO/PEMD-91-11, Feb.  21, 1991.

    \208 Physician Payment Review Commission Annual Report to Congress,
    Physician Payment Review Commission.

    \209 Jeremy M.  Grimshaw and Ian T.  Russel, "Effects of Clinical
    Guidelines on Medical Practice:  A Systematic Review of Rigorous
    Evaluations," Lancet, Vol.  342, No.  1317-1322 (1993), pp.  469-70.

    \210 Ash Basinski, "Evaluation of Clinical Practice Guidelines,"
    Canadian Medical Association Journal, Vol.  153, No.  11 (1995), pp.
    1575-81.

       OUTCOME MEASURES INCREASINGLY
       DEVELOPED TO EVALUATE
       HOSPITALS, PHYSICIANS, AND
       HEALTH PLANS
    --------------------------------------------------------- Chapter 11:2

    The private sector, the Health Care Financing Administration (HCFA),
    and VA are developing outcome measures to compare the performance of
    hospitals, physicians, and health plans.  Outcome measurement is the
    assessment of the results or consequences of a medical
    intervention.\211 Typically, comparative analysis is used to
    determine whether a course of treatment or medical intervention had
    its intended effect.  For example, a patient's condition at the end
    of a course of treatment is compared with his or her condition before
    treatment.  Similarly, mortality rates for a specific surgical
    procedure may be compared with some baseline.

    Whether comparing hospitals, health plans, or physicians, outcome
    measures must compare like procedures and like patients.  For
    example, it is meaningless to compare mortality rates following a
    heart transplant with mortality rates following the setting of a
    broken arm.  It is also important to compare similar hospitals and
    patients.  For example, mortality rates for a teaching hospital that
    accepts the most complex surgery cases should not be compared with
    those of a small rural hospital performing only minor surgery.
    Similarly, mortality rates for 25-year-old males should not be
    compared with those for 75-year-old males to assess effectiveness of
    care.  Severity determinations attempt to group diseases (and
    patients) of similar intensity to make outcome comparisons
    meaningful.  For example, the rate of patient deaths following
    open-heart surgery may be compared with rates in other hospitals or
    with some national average.  Similarly, patient satisfaction can be
    compared over time.

    Attempts to assess hospitals' performance using outcome measures have
    been under way for several decades.  These assessments have been
    performed by federal and state inspectors, private accrediting
    agencies, and health care organizations.  But specific results of
    these activities have been generally kept confidential.  Other than
    informal communication or knowledge of an organization's
    accreditation or license, corporate and individual health care
    purchasers had no method for determining which organization provided
    the best care.

    Outcome measures are intended to (1) provide hospital managers,
    managed care plans, and physicians information on the relative
    effectiveness of their treatment programs, allowing them to focus
    changes on problem areas; (2) provide consumers with meaningful data
    to use in making health care choices on the basis of quality as well
    as price; and (3) allow regulators to identify and sanction
    physicians and hospitals providing substandard care.

    --------------------
    \211 "Outcomes Measurement:  Compliance Tool or Strategic
    Initiative?" Health Care Management Review, Vol.  16, No.  4 (1991),
    pp.  21-33.

          INTEREST IN OUTCOME MEASURES
          IS INCREASING
    ------------------------------------------------------- Chapter 11:2.1

    Employers and consumers are increasingly seeking outcome data to help
    guide their selections of hospitals, health plans, and other
    providers.  As employers negotiate for lower premiums or limit
    employees' access to providers, they want to ensure that their
    employees still receive quality care.  Individual consumers want
    assurance that they have access to quality providers and that they
    make the right health care decisions.  As a result, both employers
    who purchase health care and individual consumers have demanded more
    information about quality.\212

    The first widespread public disclosure of quality assessment using
    outcome measures took place in 1987 when HCFA reported on the
    observed and expected mortality rates in hospitals performing
    coronary artery bypass graft surgery.  Although the data were
    intended to be used only by peer review organizations and hospitals
    for quality assessment purposes, the news media obtained the data
    through a Freedom of Information Act request and ranked hospitals
    from the best to worst.  HCFA officials continued to release the data
    until 1993, when they stopped the practice, citing problems with the
    reliability of their methods for adjusting the data to account for
    the influence of patient characteristics on the outcomes.

    In the mid-1980s, health policy experts advised corporate purchasers
    that health care costs could be contained if purchasers considered
    both cost and quality of care information when they made their health
    care purchases.  Early efforts by corporate purchasers, however,
    progressed slowly as providers and purchasers tried to agree on what
    performance indicators would be useful.

    --------------------
    \212 Health Care:  Employers and Individual Consumers Want Additional
    Information on Quality (GAO/HEHS-95-201, Sept.  29, 1995).

          REPORT CARDS DEVELOPED
    ------------------------------------------------------- Chapter 11:2.2

    Increasingly, state and federal officials advocated publication of
    quality of care results, believing that such data could help contain
    health care expenditures.\213 Both health plans and governmental
    entities have started to inform the public about the quality of care
    hospitals and health plans furnish.  Summaries of hospital and health
    plan performance, often referred to as "report cards," are being
    developed and published.  For example, Pennsylvania, New York, and
    California have published report cards about hospital services
    provided in their states.

    In 1993, the Pennsylvania Health Care Cost Containment Council
    published the Hospital Effectiveness Report on care provided in 175
    Pennsylvania hospitals for each of 53 diagnostic categories during
    1991.  For each of the 175 hospitals, this report provided data about
    the number of patients admitted, average severity of illness of those
    patients when admitted, percentage of patients aged 65 and older,
    actual and expected number of deaths and complications, average
    length of stay, and average charge per patient.

    In addition, health plans, providers, and corporate purchasers
    working under the auspices of the National Committee for Quality
    Assurance (NCQA) have been developing and promoting the use of
    standardized performance measures.  NCQA developed a consensus list
    of performance measures--the Health Plan Employer Data and
    Information Set (HEDIS)--
    that could be used by corporate purchasers to assess health plan
    value.  Released in 1993, HEDIS 2.0 includes over 60 indicators that
    describe performance in five areas--quality, access and patient
    satisfaction, membership and utilization, finance, and health plan
    management activities.  HEDIS 2.0 indicators measure health plans'
    process and structure.  Developers did not include indicators that
    directly measure the longer term results or outcomes of care.  They
    believed that (1) outcomes measurement was not yet an established
    field of study and (2) many outcomes may not have been meaningful
    until a lengthy period had elapsed after an intervention.

    HEDIS developers expect to include outcome measures in future
    revisions.  HEDIS 3.0, released in 1997, features measures that are
    less process oriented.  Working with the developers, HCFA was able to
    add the functional status of enrollees over age 65 as a measure of
    the effectiveness of care.  This will be HEDIS' first outcome measure
    that will track and measure functional status over time.  HCFA now
    requires Medicare managed care plans to use HEDIS to facilitate
    comparison of plan performance and to hold plans accountable for the
    care they provide.

    In addition, HCFA has other efforts under way to develop outcome
    measures.  First, it is working with the Foundation for
    Accountability (FACCT) to develop quality outcome measures for
    depression, breast cancer, and diabetes.\214 Second, HCFA and HHS'
    Assistant Secretary for Planning and Evaluation recently contracted
    with the RAND Corporation, a nonprofit research organization, to
    refine and test three sets of outcome measures to be implemented in
    1998.  Finally, HCFA plans to administer, through an independent
    vendor, a uniform Medicare beneficiary survey--
    the Consumer Assessment of Health Plans Study--to enrollees in
    Medicare managed care plans.

    Although significant efforts to develop and implement outcome
    measures have taken place, a former HCFA Administrator said that
    getting potential users to use outcome measures has been more
    difficult than anticipated.  In her view, however, it is only a
    matter of time before such measures are widely used.\215

    Just as purchasers are slow to adopt outcome measures, so too are
    hospitals slow to use outcome measures to improve quality.  A 1991
    evaluation of 31 hospitals that were using the same outcomes
    measurement system found that the system alone does not create
    hospital accountability.  Specifically, the evaluation found that 14
    (45 percent) of the hospitals were using outcome measures solely to
    maintain the status quo.  The goal of such hospitals was to be within
    the norm and hope that the changing marketplace would not affect
    them.  The evaluation found that another 35 percent of the hospitals
    were using outcome measures to achieve financial success rather than
    financial survival.  Administrators at these hospitals were using
    outcomes information internally to improve resource consumption and
    to ensure that quality remained within the norms.  The evaluation
    found that only 20 percent of the hospitals made quality their top
    priority and presented outcomes information, including both clinical
    and cost data, to physicians for comparison.

    --------------------
    \213 Health Care Reform:  "Report Cards" Are Useful but Significant
    Issues Need to Be Addressed (GAO/HEHS-94-219, Sept.  29, 1994).

    \214 FACCT is an organization with representatives from large
    employers, consumer groups, and government whose primary purpose is
    to promote the use of a common set of patient-oriented outcome
    measures.

    \215 "Promoting Quality:  A Public Policy View," Health Affairs, Vol.
    16, No.  3 (1997), pp.  77-82.

          VA IS AGGRESSIVELY
          DEVELOPING OUTCOME MEASURES
    ------------------------------------------------------- Chapter 11:2.3

    VA, like HCFA and the private sector, is aggressively developing and
    using outcome measures.  VA expects outcome measures to help it
    demonstrate the quality and value of its services, assess new and
    existing technologies, educate patients, improve provider-customer
    relations, and assess the effects of changes under way in the VA
    health care system.

    Many of VA's efforts are outlined in a March 1997 primer, Using
    Outcomes to Improve Health Care Decision Making, prepared by VA's
    Management Decision and Research Center.  The primer identifies
    several ways in which VA is using outcomes measurement.  First, it is
    developing and using outcome measures as part of the performance
    contracts between VA central office and VISN directors.  VA expects
    such performance measures to ultimately allow comparison of medical
    centers within VISNs, among VISNs, and with similar medical centers
    nationwide.  VA also expects to develop performance measures that
    will permit comparisons of VA and non-VA providers.  As part of this
    effort, VA is developing new methodologies to adjust for differences
    among patients to facilitate such comparisons.

    VA also expects to use the results of outcome measures in developing,
    revising, and distributing national clinical guidelines.  The primer
    identifies a number of outcomes research projects being conducted by
    VA facilities that could be used for such purposes.  These efforts
    include

      -- identifying key variables that could be used to assess the
         quality of care for patients with hypertension, diabetes, and
         chronic obstructive pulmonary disease;

      -- studying the appropriateness and necessity of cardiac
         catheterization, coronary angioplasty, and coronary artery
         bypass graft surgery to determine the appropriateness of their
         use;

      -- examining the necessity of surgery for aneurysms that are not
         large or symptomatic;

      -- studying, in collaboration with the National Cancer Institute,
         the effects on patient health status and overall costs of
         alternative treatments for prostate cancer; and

      -- studying how the organization and processes of a cardiac
         services unit are affecting outcomes in open-heart surgery.

    VA also envisions use of outcome measures to establish performance
    monitoring systems and mechanisms for distributing best practices
    systemwide.  Finally, VA plans to explore the use of report cards,
    especially for chronic diseases.  VA is discussing with NCQA, which
    oversees the development and updating of HEDIS, the possibility of
    developing and applying measures that assess processes of care
    similar to those in HEDIS.

    One of the outcome measures VA currently uses is its chronic disease
    index, intended to assess the quality of services provided to
    outpatients in high-volume/high-cost diagnostic categories such as
    diabetes and hypertension.  The individual disease-specific measures
    in the index determine the degree to which VA is following nationally
    recognized clinical guidelines.  VA's first assessment using the
    chronic disease index, completed in 1996, found compliance with the
    guidelines to be 46 percent.  VA established a goal to increase
    compliance to 95 percent in fiscal year 1998.

       HOSPITALS INCREASINGLY PROVIDE
       SERVICES IN OUTPATIENT
       DEPARTMENTS
    --------------------------------------------------------- Chapter 11:3

    Changes in how hospitals are paid have created financial incentives
    for community hospitals to admit a patient later or release a patient
    sooner than medically necessary.  Community hospitals have
    increasingly established separate outpatient departments and shifted
    many diagnostic and other tests to these departments to avoid
    unnecessary days of care for elective admissions.  Similarly,
    hospitals often avoid admitting patients altogether by providing
    services in outpatient departments.

    For many years, VA lagged behind the private sector in shifting care
    to outpatient settings in part because its resource allocation
    methods rewarded hospitals for higher inpatient use.  During the past
    several years, however, VA has aggressively sought to shift more care
    to alternative settings as reflected in the 20-percent decrease in
    bed-days of care (BDOC) in fiscal year 1996.

          WHY COMMUNITY HOSPITALS
          SHIFT SERVICES TO OUTPATIENT
          SETTINGS
    ------------------------------------------------------- Chapter 11:3.1

    The 1986 Annual Report of the Prospective Payment Assessment
    Commission noted that hospitals may shift services previously
    performed on an inpatient basis to alternative settings to maximize
    profits.  It noted that hospitals can generate additional profits by
    providing care in outpatient settings such as outpatient clinics and
    surgery departments, emergi-centers, dialysis centers, and diagnostic
    centers.  It also noted that this strategy is particularly attractive
    for vertically integrated hospitals because it allows them to not
    only reduce the length of inpatient stays, but also capture at least
    some of the revenues from a patient from preadmission through
    postdischarge care.\216

    --------------------
    \216 Medicare Prospective Payment and the American Health Care
    System:  Report to the Congress, Prospective Payment Assessment
    Commission (Washington, D.C.:  Feb.  1986).

          GROWTH IN HOSPITAL
          OUTPATIENT CARE
    ------------------------------------------------------- Chapter 11:3.2

    Outpatient departments in community hospitals have grown
    significantly since the 1983 introduction of Medicare's prospective
    payment system and the growth of managed care during the 1980s and
    1990s.  After increasing slightly from 1975 to 1985, the number of
    visits to hospital outpatient departments nearly doubled between 1985
    and 1995.  During the same period, the number of days of inpatient
    hospital care steadily declined (see fig.  11.1).

       Figure 11.1:  Changes in
       Community Hospital Inpatient
       Days and Outpatient Visits,
       1975-95

       (See figure in printed
       edition.)

    The Prospective Payment Assessment Commission reported that since
    fiscal year 1983, Medicare expenditures for outpatient services,
    excluding those for physician services, have risen an average of 14
    percent annually, reaching $16.3 billion in fiscal year 1995.  An
    estimated 70 percent of those payments were to hospitals for services
    provided in outpatient departments.\217

    The Commission noted that payment for hospital outpatient services
    under Medicare is fragmented and provides little incentive for
    providing care in the most efficient way.  According to the
    Commission, most services are paid on the basis of costs or charges,
    meaning that lower costs or charges would mean correspondingly lower
    payments.

    --------------------
    \217 Report and Recommendations to the Congress, Prospective Payment
    Assessment Commission (Washington, D.C.:  Mar.  1, 1997).

          PREADMISSION TESTING
    ------------------------------------------------------- Chapter 11:3.3

    One reaction of hospitals to Medicare's prospective payment system
    and other limits on hospital payments was to provide as many services
    to patients as possible on an outpatient basis before admission.
    This is because hospitals could obtain separate payment for every
    outpatient test and procedure; if they waited until after admitting
    the patient to perform the tests, they would have to absorb the costs
    of such services.  Services shifted to outpatient settings include
    both testing and laboratory work and patient education.  Medicare
    subsequently changed its rules for inpatient prospective payment to
    include tests and laboratory work performed within 72 hours of
    admission.

    Nevertheless, hospitals still find it more cost-effective to perform
    as many tests and as much patient education on an outpatient basis as
    possible.  Following are programs established by community hospitals
    to increase preadmission testing and education:

      -- The Hospital Center at Orange, New Jersey, developed a
         preadmission testing program that includes laboratory work,
         electrocardiograms, social and rehabilitative service referrals,
         patient education, and a nursing assessment.  The hospital uses
         specially trained registered nurses to conduct the preadmission
         testing.  The testing program has reduced costs, increased
         patient and physician satisfaction, and decreased idle time for
         both patients and staff.\218

      -- Sarasota Memorial Hospital, in Florida, developed a
         pre-anesthesia collaborative care track to address problems in
         preparing patients for surgery.  Under the program, the
         registered nurse anesthesia coordinator ensures that appropriate
         clinical data are available to avoid last-minute delays and
         cancellations of scheduled surgical procedures.  Delays in
         performing surgery resulting from the unavailability of needed
         clinical data are costly to hospitals and distressing to
         patients.\219

    --------------------
    \218 M.E.  Clyne and M.  Forlenza, "Consumer Focused Preadmission
    Testing:  A Paradigm Shift," Journal of Nursing Care Quality, Vol.
    11, No.  3 (1997), pp.  9-15.

    \219 H.L.  Swanson and D.M.  Scheb, "The Role of the Anesthesia
    Coordinator in Preadmission Testing," AORN Journal, Vol.  64, No.  5
    (1996), pp.  776-80.

          TREATMENTS MORE FREQUENTLY
          PROVIDED ON AN OUTPATIENT
          BASIS
    ------------------------------------------------------- Chapter 11:3.4

    Just as prospective payment gave community hospitals incentives to
    perform tests and laboratory work on an outpatient basis before
    scheduled hospital admissions, managed care and preadmission
    certification programs encouraged hospitals to avoid admitting
    patients altogether who could safely be treated as outpatients.
    Community hospitals established outpatient surgery, chemotherapy,
    renal dialysis, and diagnostic testing programs to shift care to
    outpatient settings.

    According to the Health Insurance Association of America (HIAA), by
    1993, 83 percent of community hospitals had outpatient departments
    providing outpatient surgery, examination, diagnosis, and treatment
    for a variety of nonemergency medical conditions.  HIAA notes that
    hospitals now offer more procedures and treatments on an outpatient
    basis than in the past and that occupancy in community hospitals
    continues to decrease in part because of this trend.  In addition to
    traditional medical/surgical care, by 1993 community hospitals were
    offering a variety of other outpatient services, including substance
    abuse treatment, AIDS diagnosis and treatment, psychological
    services, and rehabilitation.  (See fig.  11.2.)

       Figure 11.2:  Percentage of
       Community Hospitals Offering
       Selected Outpatient Services,
       1993

       (See figure in printed
       edition.)

    Source:  HIAA, Source Book of Health Insurance Data, 1995.

          VA INITIALLY SLOW TO SHIFT
          CARE TO OUTPATIENT SETTINGS
          BUT HAS SET AMBITIOUS GOALS
    ------------------------------------------------------- Chapter 11:3.5

    VA, without the financial incentives of community hospitals, was
    initially slow to shift care to outpatient settings.  VA has long had
    authority to (1) conduct preadmission tests and provide postdischarge
    care on an outpatient basis (1960) and (2) provide outpatient care to
    any veteran if doing so would obviate the need for inpatient care
    (1973).  Studies by the VA Inspector General, VA researchers, and us
    have found, however, that VA had not effectively used this authority
    to shift more care to outpatient settings.  During the past several
    years, VA has increasingly focused on providing care in more
    cost-effective outpatient settings.

             INCREASED OUTPATIENT
             DEMAND LINKED TO EXPANDED
             ELIGIBILITY AND NEW
             CLINICS
    ----------------------------------------------------- Chapter 11:3.5.1

    VA hospitals, like community hospitals, have had steadily increasing
    outpatient workloads and correspondingly decreasing inpatient
    hospital-
    days of care.  Much of VA's increase in outpatient demand, however,
    can be attributed to eligibility expansions and opening of new
    clinics rather than shifting care from inpatient to outpatient
    settings.

    In its fiscal year 1975 annual report, VA noted the relationship
    between the "progressive expansion of legislation expanding the
    availability of outpatient services and increased outpatient
    workload." Among the eligibility expansions occurring between 1960
    and 1975 were actions to authorize (1) pre- and posthospital care for
    treating nonservice-connected conditions (1960) and (2) outpatient
    treatment to obviate the need for hospitalization (1973).  Workload
    at VA outpatient clinics increased from about 2 million to 12 million
    visits during the 15-year period.

    Just as these eligibility expansions increased outpatient workload,
    VA efforts to improve the accessibility of VA care resulted in more
    demand for outpatient care.  Between 1980 and 1995, the number of VA
    outpatient clinics increased from 222 to 565, including many mobile
    clinics that bring outpatient care closer to veterans in rural areas.
    Between 1980 and 1995, outpatient visits provided by VA clinics
    increased from 18 million to 27.5 million as inpatient days of care
    were steadily decreasing (see fig.  11.3).

       Figure 11.3:  Changes in VA
       Hospital Inpatient Days of Care
       and Outpatient Visits, 1975-95

       (See figure in printed
       edition.)

             STUDIES FIND MUCH OF VA'S
             INPATIENT HOSPITAL CARE
             TO BE NON-ACUTE
    ----------------------------------------------------- Chapter 11:3.5.2

    As previously discussed, as recently as the early 1990s, the VA
    Inspector General was reporting that much of the surgery performed in
    VA hospitals on an inpatient basis could have been performed on an
    outpatient basis if VA had established outpatient surgery capability
    at its medical centers.  Similarly, studies by VA researchers
    consistently found that over 40 percent of the days of care in VA
    hospitals were non-acute.  For example, a 1991 VA-funded study of
    admissions to VA acute medical and surgical bed sections estimated
    that 43 percent (+ or -3 percent) of admissions were non-acute.\220

    Under the study, non-acute admissions in the 50 randomly selected VA
    hospitals ranged from 25 to 72 percent.  The study found that the
    most common reason for non-acute medical admissions was that care
    could have been performed on an outpatient basis.  All of the
    surgical admissions determined to be non-acute were found to (1) be
    procedures that VA had determined could be done on an outpatient
    basis and (2) lack documented risk factors indicating a need for
    inpatient care.  The study concluded that, on the basis of medical
    necessity, a large proportion of acute medical/
    surgical care in VA medical centers could be shifted to outpatient
    and long-term care settings.

    Among the reasons the study cited for the high rate of non-acute
    admissions were

      -- the absence of financial incentives for VA hospitals to shift
         care to outpatient settings;

      -- the absence of formal mechanisms, such as mandatory preadmission
         review, to control non-acute admissions; and

      -- VA's significant social mission that may influence use of
         inpatient resources.

    In a separate article, the same authors estimated that 48 percent (+
    or -2 percent) of the days of care at the 136 VA medical centers
    providing acute medical and surgical care were non-acute, ranging
    from 38 to 72 percent.\221 Yet another study, this one published in
    1993, found that (1) 47 percent of the admissions and 45 percent of
    the days of care in VA medical wards were non-acute and (2) 64
    percent of surgical admissions and 34 percent of days of care in VA
    surgical wards were non-acute.\222

    --------------------
    \220 Brenda Booth and others, "Nonacute Inpatient Admissions to
    Department of Veterans Affairs Medical Centers," Medical Care, Vol.
    29, No.  8, Supplement (1991), pp.  AS40-50.

    \221 Booth and others, "Nonacute Days of Care Within Department of
    Veterans Affairs Medical Centers," Medical Care, pp.  AS40-50.

    \222 Charles B.  Smith, "Pilot Study of ISD* Measurement of
    Appropriateness of Bed Utilization," Health Services Research and
    Development Project, SDR #91-010 (Washington, D.C.:  June 16, 1993).

             VA INITIATES ACTIONS TO
             SHIFT MORE CARE TO
             OUTPATIENT SITES
    ----------------------------------------------------- Chapter 11:3.5.3

    The Under Secretary for Health's 1996 Prescription for Change
    identified a series of planned actions to shift more of VA's care
    from hospital to outpatient settings.  These actions include

      -- increasing VA's outpatient capacity to accommodate the workload
         shifted from inpatient to outpatient settings;

      -- requiring each network to develop hospital admission,
         utilization, and length of stay criteria;

      -- requiring each network to implement preadmission screening
         programs;

      -- increasing outpatient surgery and diagnostic procedure capacity
         and utilization; and

      -- increasing temporary lodging and residential care capabilities
         to accommodate patients needing housing but not acute hospital
         care while being diagnosed or treated.

    Many of these actions, such as establishing preadmission screening
    programs, temporary lodging, and outpatient surgery programs, address
    the specific problems identified in the above-mentioned studies.

    VA established performance measures to gauge its progress in
    implementing some of the actions identified in its Prescription.  For
    example, its fiscal year 1996 performance measures for VISN directors
    set the expectation that at least 50 percent of surgeries and other
    invasive procedures would be performed on an outpatient basis; to be
    considered exceptional, 65 percent or more of surgeries would have to
    be performed on an outpatient basis.\223 All but eight VISNs met the
    minimum requirement for fully successful performance; VA determined
    that each of the eight had made statistically significant
    improvement.

    Another performance measure required VISNs to reduce their BDOC by 20
    percent during fiscal year 1996.  Although seven VISNs did not meet
    the goal, all had made statistically significant progress.  Three
    VISNs--4 (Pittsburgh), 5 (Baltimore), and 7 (Atlanta)--reported
    29-percent reductions in BDOC.

    Finally, the performance measures required all VISNs to establish, by
    September 30, 1996, (1) temporary lodging capacity to accommodate 10
    patients, (2) a VISN-wide preadmission screening program, (3)
    admission and discharge planning programs, and (4) a telephone
    liaison program.  VA reported that all VISNS have complied with these
    requirements.

    In its 1997 performance measures, VA revised its performance measure
    for the percentage of surgeries and invasive procedures performed in
    an outpatient setting to link the goal to HCFA data.  To be assessed
    as fully successful, a VISN must perform 65 percent of the surgeries
    and diagnostic procedures that HCFA will reimburse in outpatient
    settings in such settings.  In its assessment of mid-year performance
    for 1997, VA reported that 10 VISNs had met or exceeded the goal.
    All VISNs, however, improved from fiscal year 1996.

    --------------------
    \223 In fiscal year 1992, less than 5 percent of VA surgical and
    invasive procedures were performed on an outpatient basis.  VA
    reported that the percentage of such procedures done on an outpatient
    basis had increased to 39 percent by Sept.  1995.

       HOSPITALS ARE INCREASINGLY
       DISCHARGING PATIENTS TO OTHER
       CARE SETTINGS
    --------------------------------------------------------- Chapter 11:4

    Just as prospective payment encouraged hospitals to reduce the length
    of patient stays by performing tests and patient education on an
    outpatient basis before admission, it provided incentives for
    community hospitals to discharge patients sooner to other care
    settings such as home health and nursing home care.

    The 1986 Annual Report of the Prospective Payment Review Commission
    noted that hospitals may shift services previously performed on an
    inpatient basis to alternative settings such as nursing homes, other
    long-term care facilities, and home health care.  The Commission also
    noted that some cases requiring extra days of care may be transferred
    to another acute care hospital.  It noted that such transfers may
    lower the quality of care and lead to higher costs.  VA researchers
    found in a 1990 study that the number of transfers from community
    hospitals to VA hospitals increased substantially following
    implementation of the Medicare prospective payment system.  The study
    suggested that some of the savings attributed to prospective payment
    may simply have been a shifting of costs from Medicare to the VA
    system.\224

    As previously discussed, hospitals are expanding into the post-acute
    care market.  From 1991 to 1995, the number of Medicare-certified,
    hospital-
    based skilled nursing facilities increased 59 percent, hospital-based
    rehabilitation facilities increased 19 percent, and hospital-based
    home health agencies increased 52 percent.  The number of
    free-standing facilities grew similarly (see fig.  11.4).

       Figure 11.4:  Percentage
       Increase in Post-Acute Care
       Facilities, 1991-95

       (See figure in printed
       edition.)

    The Prospective Payment Assessment Commission reported that Medicare
    payments for post-acute care skyrocketed between 1988 and 1994.  In
    1988, post-acute care accounted for only about 8 percent of Medicare
    part A payments; by 1994, they accounted for 25 percent.  Although
    growth of post-acute payments has since slowed, payments to these
    providers are growing twice as fast as total part A spending.\225 The
    Commission noted that many services now provided in outpatient and
    post-acute settings were previously provided in acute hospitals.  It
    also noted, however, that several other factors, including medical
    advances and changing practice patterns, also affect the increased
    demand for post-acute services.  We made similar observations in a
    December 1996 report.\226

    --------------------
    \224 J.  Hurley, D.  Linz, and E.  Swint, "Assessing the Effects of
    the Medicare Prospective Payment System on the Demand for VA
    Inpatient Services:  An Examination of Transfers and Discharges of
    Problem Patients," Health Services Research, Vol.  25, No.  1 (1990),
    pp.  239-55.

    \225 Report and Recommendations to the Congress, Prospective Payment
    Assessment Commission.

    \226 Skilled Nursing Facilities:  Approval Process for Certain
    Services May Result in Higher Medicare Costs (GAO/HEHS-97-18, Dec.
    20, 1996).

          VA IS ALSO DISCHARGING
          PATIENTS TO ALTERNATIVE
          SETTINGS
    ------------------------------------------------------- Chapter 11:4.1

    As discussed, VA hospitals lagged behind community hospitals in
    shifting patients from inpatient to post-acute care settings even
    though such settings have long been a part of the VA health care
    system.  The Under Secretary for Health's Prescription for Change
    identifies a series of planned actions to discharge patients sooner
    to other, more cost-effective settings.  These actions include

      -- requiring each network to develop utilization and length of stay
         criteria;

      -- requiring each network to implement discharge planning programs;

      -- expanding VA's hospital-based home care program to include home
         intravenous therapy, total parenteral nutrition, and other
         services;

      -- expanding VA's continuum of clinical service settings so that
         patient care can be provided in the most cost-effective
         clinically appropriate setting; and

      -- expanding use of noninstitutional long-term care when clinically
         appropriate and financially sound.

    None of VA's fiscal year 1996 or 1997 performance measures, however,
    specifically addressed increased use of post-acute care as an
    alternative to inpatient hospital care.  Nor did VISN plans address
    the subject.

       ISSUES VA NEEDS TO ADDRESS
       CONCERNING CHANGES IN ITS
       PATIENT CARE MONITORING AND
       DELIVERY
    --------------------------------------------------------- Chapter 11:5

    Our work identified several issues and challenges concerning VA's
    efforts to monitor patient care and shift care to alternative
    settings.  First, regarding efforts to develop and implement clinical
    guidelines, little information is available either in VA or the
    private sector on the extent to which physicians and other caregivers
    are following clinical guidelines and to what effect.  In addition,
    VA's development and evaluation of clinical guidelines rely heavily
    on successful completion of efforts to improve its management
    information and financial management systems.  Thus, VA, like the
    private sector, faces significant challenges, in developing clinical
    guidelines, evaluating their effectiveness, and ensuring their
    appropriate use.

    The second major challenge is in developing and using outcome
    measures.  For example, outcome measures will probably have little
    effect on hospital operations and individual provider performance
    without VA's effectively distributing the results of assessments and
    monitoring corrective actions.  Similarly, the effectiveness of
    outcome measures will depend heavily on VA's ability to identify and
    develop meaningful ways to compare VA and other health care providers
    and programs as well as VA facilities and providers.  VA must take
    care, however, to ensure that the results portrayed by outcome
    measures reflect differences in performance rather than differences
    in the populations studied.  Effective case mix comparisons are,
    however, difficult to develop.

    One of VA's initial efforts to develop outcome measures is its
    performance measures for VISN directors.  These measures are process
    oriented, however, such as the number of surgeries shifted to
    outpatient settings and the reduction of BDOC, rather than outcome
    oriented.  As discussed in chapter 6, VA's 1997 performance measures
    present a view of VISN efficiency that conflicts with that portrayed
    by VERA.  For example, VA began setting its goals for reducing BDOC
    on the basis of Medicare days of care per 1,000 beneficiaries by
    census division.  Under this performance measure, VERA identified
    four of the seven VISNs required to reduce BDOC by 20 percent or more
    as comparatively more efficient VISNs.  The VISN required to reduce
    BDOC by the greatest percentage--39 percent--was determined under
    VERA to qualify for one of the larger increases in funding on the
    basis of its perceived efficiency.

    Similarly, another performance measure set VISN-specific goals for
    increasing the number of mandatory care category users.  Generally,
    however, the VISNs needing the smallest increases in new users to
    meet their goals were those receiving the largest increases in
    funding under VERA.

    Because of the apparent inconsistencies between the performance
    measures and VERA analyses, VA faces a significant challenge in
    determining (1) the underlying causes of variation in the rates of
    hospital use and (2) to what extent the variation can be reduced
    without jeopardizing patient care.  An important part of such an
    assessment is developing baseline data on each VA facility.  VA
    studies show that although all VA hospitals studied had significant
    amounts of non-acute care, the percentages varied from about 25
    percent to over 70 percent.  Baseline data on VA's surgery programs
    showing the percentages of surgeries needed to be done on an
    inpatient basis would provide a sound basis for establishing goals
    for reducing inpatient surgeries.  Setting performance measures
    without such baseline data could require some facilities to
    jeopardize patient care to meet the goals, while other facilities
    could meet the goals and still provide extensive non-acute care.  VA
    is gathering the types of baseline data that could be used to
    establish facility-specific performance measures through its
    preadmission screening program.

    A third challenge VA faces is in evaluating the effectiveness of VA
    initiatives, such as establishing temporary lodging in VA hospitals,
    in reducing costs.  For example, little is known about how much it
    costs VA to provide temporary lodging because such initiatives are
    recent.  VISNs and individual hospitals face significant challenges
    in determining when it would be less expensive to purchase care from
    a hospital or outpatient clinic closer to a veteran's home rather
    than pay for additional nights of lodging to provide care at a VA
    facility.

    Although the temporary lodging program should be less expensive than
    admitting a patient earlier or keeping a patient in a hospital longer
    than medically necessary, providing lodging in a hospital using VA
    hospital staff may not always be the lowest cost alternative.  In
    arranging for temporary lodging, VA could explore many other
    alternatives, including using nearby commercial lodging and hiring an
    outside contractor to operate a temporary lodging unit.

    The use of temporary lodging also raises several policy issues.  For
    example, to what extent should veterans, rather than the government,
    be expected to pay for temporary lodging incident to direct patient
    care?  To the extent that providing free lodging encourages longer
    and more frequent stays, it could offset the savings achieved by
    using fewer hospital beds.  Similarly, to what extent should
    temporary lodging be made available to family members?  Finally,
    should temporary lodging be provided to veterans traveling
    significant distances for outpatient services?

    Neither performance measures nor VISN strategic plans focus on
    efforts to shift care to post-acute settings when medically
    appropriate.  The effectiveness of such actions depends on many
    factors such as

      -- the adequacy of discharge planning efforts,

      -- efforts to ensure that patients are not discharged before
         medically appropriate,

      -- the extent to which patients receive appropriate follow-on care,
         and

      -- the extent to which the cost of home health or other post-acute
         care services exceed the cost that would have been incurred
         through continued institutional care.

    The overall effect of VA efforts depends as well on the extent to
    which VA facilities shift the costs of post-acute care to other
    payers such as the Medicare home health program.  To the extent that
    such shifts occur, higher costs under Medicare and Medicaid will
    offset any savings VA achieves through efficiencies.

    CHANGES IN TEACHING HOSPITALS'
    MEDICAL EDUCATION MISSION
    =========================================================== Chapter 12

    Teaching hospitals' medical education missions have changed
    significantly.\227 Until recently, both nonfederal and VA teaching
    hospitals had steadily increased their use of medical residents
    partly because residents were a lower cost labor source.  Because of
    increasing concern that the growing number of medical residents
    contributes to the oversupply of physicians and increased health care
    costs, the Congress has provided financial incentives to hospitals to
    reduce the number of residency positions.  Both nonfederal and VA
    teaching hospitals are also changing the focus of their residency
    programs to increase the number of primary care residencies in
    response to the growth of managed care.  Finally, nonfederal teaching
    hospitals are offering significant discounts to managed care plans;
    VA hospitals, however, are not.

    Several issues and challenges surround VA's future role in medical
    education.  For example, should financial incentives similar to those
    provided to non-VA teaching hospitals through the Balanced Budget Act
    of 1997 be provided to VA to encourage reductions in residency
    positions?  Furthermore, how does the declining demand for VA
    hospital care affect the viability of the medical education program?
    Finally, VA is likely to find it increasingly difficult to assert its
    independence from its affiliated medical schools as tough decisions
    about the future of hospitals and residency programs are debated.

    --------------------
    \227 Teaching hospitals have one or more graduate medical education
    (GME) programs approved by the Accreditation Council on Graduate
    Medical Education or the American Osteopathic Association.

       WHAT IS GRADUATE MEDICAL
       EDUCATION?
    --------------------------------------------------------- Chapter 12:1

    Graduate medical education (GME) refers to the period following the
    completion of medical school in which physicians, as residents,
    receive further training in fields such as family practice, general
    surgery, or anesthesiology.  GME takes place in federal (including
    VA) and nonfederal teaching hospitals.  Although over 1,000 U.S.
    hospitals had at least one teaching program in 1996,\228 about 80
    percent of residents train in large tertiary care hospitals belonging
    to the Council of Teaching Hospitals.\229 In 1996, the Council had
    about 400 member hospitals.

    --------------------
    \228 Medicare and the American Health Care System Report to the
    Congress, Prospective Payment Assessment Commission (Washington,
    D.C.:  June 1996).

    \229 Physician Payment Review Commission Annual Report to the
    Congress, Physician Payment Review Commission (Washington, D.C.:
    1992).

       MEDICARE IS THE LARGEST SOURCE
       OF GME FINANCING
    --------------------------------------------------------- Chapter 12:2

    Nonfederal teaching hospitals pay for GME through a combination of
    inpatient revenues (both hospital payments and faculty physician
    fees) and a complex mix of federal and state government funds.  The
    federal government is the largest single source of financing for GME
    through the Medicare program and through its support of residencies
    in VA and DOD hospitals.\230

    From its inception in 1965, the Medicare program has reimbursed
    teaching hospitals for its share of the costs of training interns and
    residents.  When Medicare adopted its prospective payment system in
    1983, it developed new policies.  Medicare now recognizes the costs
    of GME under two mechanisms:  direct medical education payments and
    an indirect medical education adjustment to prospective payment
    rates.

    GME's direct costs include residents' stipends, supervising faculty
    salaries, administrative expenses, and institutional overhead
    allocated to residency programs.  Hospitals receive additional
    payments to cover Medicare's share of these direct costs.

    In addition to payments for direct costs, teaching hospitals receive
    an indirect hospital-specific percentage adjustment (based on the
    ratio of interns and residents per bed) to their total
    diagnosis-related group payments to compensate them for their
    relatively higher costs.  The adjustment has been a critical source
    of revenue for teaching hospitals, particularly those serving large
    low-income and uninsured populations.

    In fiscal year 1991, Medicare paid approximately $1.5 billion in
    direct GME payments and $2.9 billion in indirect adjustments to
    prospective payment rates.\231 In fiscal year 1997, it is estimated
    that Medicare paid approximately $2.5 billion in direct GME payments
    and $4.6 billion in indirect adjustments to prospective payment
    rates.

    --------------------
    \230 Private insurers also contribute toward the cost of GME, though
    not through direct payments.  Teaching hospitals' charges to Blue
    Cross and commercial insurers often reflect GME's direct costs (for
    example, residents' stipends).

    \231 Physician Payment Review Commission Annual Report to the
    Congress, Physician Payment Review Commission.

       VA PLAYS A SIGNIFICANT ROLE IN
       MEDICAL EDUCATION
    --------------------------------------------------------- Chapter 12:3

    Medical education is one of VA's four core missions.  Since 1946, VA
    facilities have been authorized to enter into agreements with medical
    schools and their teaching hospitals.  Under these agreements, VA
    hospitals provide training for medical residents and students and
    appoint medical school faculty as VA staff physicians to supervise
    resident education and patient care.  Over half of the nation's
    physicians received some of their training through VA programs.

    In 1997, 130 VA facilities had affiliation agreements with one or
    more medical schools; 105 medical schools had affiliation agreements
    with the Veterans Health Administration (VHA).  More than 34,000
    medical residents and 21,000 medical students receive some of their
    training in VA facilities every year.  VHA supports about 8,900
    residency positions, about 8.7 percent of those in the United States.
    Almost one-third of U.S.  residents rotate through VA in any given
    year.

    In addition to training medical residents, VA is affiliated with
    schools of dentistry, optometry, podiatry, nursing, and other
    associated health professions.  All told, VA was affiliated with over
    1,000 educational institutions and provided all or some of the
    training provided to about 107,000 medical and other students in
    fiscal year 1996.  About 95 percent of the associated health students
    being trained in VA facilities receive no compensation.  Table 12.1
    shows the number of residents and students rotating through VA and
    the number of paid VA positions in fiscal year 1996.

                             Table 12.1

                  Number of Residents and Students
               Rotating Through VA Facilities, Fiscal
                             Year 1996

                                          Number     Number of
                                        rotating       paid VA
    Health profession                 through VA     positions
    ------------------------------  ------------  ------------
    Physician residents and               32,612         9,063
     fellows
    Medical students                      20,011             0
    Nursing students                      27,194             0
    Associated health residents           27,096         2,901
     and students
    ==========================================================
    Total                                106,913        11,964
    ----------------------------------------------------------

       TEACHING HOSPITALS HAD
       INCREASED BUT ARE NOW
       DECREASING THE NUMBER OF
       MEDICAL RESIDENTS
    --------------------------------------------------------- Chapter 12:4

    Teaching hospitals, including those operated by VA, save money by
    using medical residents and other students as a lower cost supply of
    physicians, physician assistants, and nurse practitioners.  For many
    years, both Medicare's hospital reimbursement policies and VA's
    stipends encouraged hospitals to expand the use of medical residents.
    Some health policy experts believe, however, that teaching hospitals'
    demands for medical residents are contributing to an oversupply of
    physicians and to higher health care costs.  As a result, both
    Medicare and the VA health care system have acted to reduce the
    number of residency positions.  Reducing the number of medical
    residents by substituting other health care personnel, however, is
    estimated to increase teaching hospitals' operating costs
    significantly.

          MEDICAL RESIDENTS PROVIDE A
          LOW-COST SOURCE OF LABOR
    ------------------------------------------------------- Chapter 12:4.1

    Medical residents long represented a low-cost source of labor for
    teaching hospitals because (1) residents work long hours in exchange
    for relatively small stipends to offset their living costs and (2)
    Medicare and other programs' reimbursement methods provide financial
    incentives to use residents to perform functions that could be done
    by physician assistants or nurse practitioners.

    Medicare financing for direct GME creates an incentive for nonfederal
    hospitals to employ residents instead of highly skilled nonphysician
    practitioners or fully trained salaried physicians.  Residents are
    expected to work long hours in exchange for a stipend that can
    largely be passed on to Medicare through direct GME payments.  A
    nurse practitioner or physician assistant, in contrast, may be able
    to provide comparable service on a medical ward or in the operating
    room but commands a higher salary, works fewer hours, and does not
    generate additional Medicare payments.

    Medicare makes both direct and indirect payments to hospitals on the
    basis of the number of residents they employ, making Medicare GME, in
    effect, an uncapped entitlement.  In other words, Medicare pays
    hospitals for as many residents as they employ.\232

    The Congressional Budget Office estimated that Medicare paid teaching
    hospitals an average of $88,000 per resident in 1993.\233 By
    increasing residents, hospitals may raise their total Medicare
    teaching payments by substantially more than the direct salary and
    benefit costs they incur.  Residents also provide patient care
    services to hospitals; therefore, hospitals have a strong incentive
    to hire more of them.

    Like the private sector, VA benefits financially because its
    residents represent a low-cost source of labor.  For example, VA
    estimates that it pays residents stipends of $34,000 a year compared
    with $100,000 for a physician and $60,000 for a nonphysician
    provider.  The difference in cost per hour, however, is even greater
    because residents typically work 60 hours weekly compared with 40
    hours for physicians and other providers.  Unlike community
    hospitals, however, VA hospitals do not receive additional payments
    from Medicare to support their GME programs.  VA does, however,
    through the Veterans Equitable Resource Allocation (VERA) system,
    allocate additional funds to its Veterans Integrated Service Networks
    (VISN) to compensate them for the higher costs of their medical
    education missions.

    --------------------
    \232 Fitzhugh Mullan, "Powerful Hands:  Making the Most of Graduate
    Medical Education," Health Affairs, Vol.  15, No.  2 (1996), pp.
    249-53.

    \233 Medicare and Graduate Medical Education, Congressional Budget
    Office (Washington, D.C.:  Sept.  1995).

          MEDICAL RESIDENTS MORE THAN
          DOUBLED IN 25 YEARS
    ------------------------------------------------------- Chapter 12:4.2

    Due in part to Medicare's funding of the costs of GME programs, the
    total number of medical residents more than doubled between 1965 and
    1990, from 31,898 to 82,902.\234

    That growth has continued in the 1990s.  The American Association of
    Medical Colleges reported 103,640 residents in the 1994-95 academic
    year.\235 (See fig.  12.1.)

       Figure 12.1:  Growth in the
       Number of Medical Residents,
       1965-95

       (See figure in printed
       edition.)

    Source:  Based on data from the Physician Payment Review Commission
    Annual Report to Congress, 1992 and the American Association of
    Medical Colleges.

    VA hospitals also increased their use of medical residents.  Between
    1975 and 1995, the number of VA part-time residents increased 366
    percent, from 5,329 to 19,872.\236 (See fig.  12.2.)

       Figure 12.2:  Increased Use of
       Part-Time Medical Residents in
       VA Medical Centers, 1975-95

       (See figure in printed
       edition.)

    Source:  VA, Trend Data:  Fiscal Years 1963-1987 and Trend Data:
    Fiscal Years 1970-1995.

    Although the number of part-time residents rotating through VA has
    increased nearly 80 percent since 1987, VA's Residency Realignment
    Review Committee reported that the number of VA resident positions
    increased only 2.9 percent between 1987 and 1995.  An official from
    VA's Office of Academic Affairs did not know the reason for the
    differences between the number of part-time VA residents at the end
    of the fiscal year and the number of paid residency positions.  He
    suggested that some residents may not have been removed from the
    rolls at the end of their VA tour of duty.

    --------------------
    \234 Physician Payment Review Commission Annual Report to the
    Congress, Physicians Payment Review Commission.

    \235 Medicare and the American Health Care System Report to the
    Congress, Prospective Payment Assessment Commission.

    \236 Trend Data:  Fiscal Years 1970-1995, National Center for Veteran
    Analysis and Statistics (Washington, D.C.).

          DEMANDS FOR MEDICAL
          RESIDENTS VIEWED AS
          CONTRIBUTING TO OVERSUPPLY
          OF PHYSICIANS
    ------------------------------------------------------- Chapter 12:4.3

    Teaching hospitals' demands for medical residents, according to some
    health policy experts, may have contributed to an oversupply of
    physicians.  This oversupply is, in their view, a major factor in
    rising health care costs.

    The number of active U.S.  physicians more than doubled between 1970
    and 1993.  (See fig.  12.3.) Active physicians per 10,000 population
    increased from 15.7 to 25.1 during that period.\237

       Figure 12.3:  Active Physicians
       in the United States, 1970-93

       (See figure in printed
       edition.)

    Source:  HCFA, 1996 Data Compendium.

    The Pew Health Professions Commission recommended dramatic reductions
    in the training of new doctors, including a reduction of 20 to 25
    percent in the number of students entering U.S.  medical schools.\238
    Eliminating residency positions, however, would result in losing not
    only the direct medical education payment, but also the indirect
    medical education payment, creating a major financial loss for
    teaching hospitals.

    Similarly, the Council on Graduate Medical Education recommended an
    overall reduction in the nation's physician supply and the number of
    physicians in training.  Reducing the number of medical residents
    would, however, force teaching hospitals to seek alternative
    professionals to substitute for providing the care that resident
    physicians now provide.

    --------------------
    \237 1996 Data Compendium, Health Care Financing Administration
    (HCFA), Bureau of Data Management and Strategy (Baltimore, Md.:  Mar.
    1996), p.  99.

    \238 Critical Challenges:  Revitalizing the Health Professions for
    the Twenty-First Century:  The Third Report of the Pew Health
    Professions Commission, Pew Health Professions Commission (San
    Francisco:  Dec.  1995).

          REPLACING MEDICAL RESIDENTS
          WITH OTHER MEDICAL PERSONNEL
          ENTAILS COSTS
    ------------------------------------------------------- Chapter 12:4.4

    Although some substitution is occurring now, teaching hospitals are
    concerned about the potential cost of increased substitution as the
    number of residents declines.  Using nonphysician providers would
    mean employing a variety of providers at a higher cost than teaching
    hospitals have had to incur in the past by using medical residents.

    An analysis of the potential cost of replacing residents with
    midlevel practitioners in New York City has highlighted the
    significant amount of money teaching hospitals have been able to save
    by using residents in the past.  In New York state, residents'
    salaries were fully covered by federal and state direct medical
    education payments.  Teaching hospitals in the state received $2.9
    billion in GME payments in 1995--roughly $188,000 per resident.\239

    Hospitals losing residency positions would thus not only lose those
    payments, but would also incur new costs to hire additional
    physicians, nurse practitioners, and physician assistants to perform
    their duties.  The analysis estimated that, on average, hospitals
    would need to hire three midlevel practitioners to replace each
    resident.  The salary costs of replacing all residents with midlevel
    practitioners were estimated to range from $242 million to $600
    million.\240

    In a survey of teaching hospitals, 178 (62 percent) of the responding
    medical directors reported that they already used substitution
    involving physician assistants and nurse practitioners to some extent
    at their hospitals.  They reported that they used substitution in a
    wide range of services, including surgery, primary care, and medical
    specialties.  Almost all survey respondents expressed satisfaction
    with the substitution, including physicians, nurses, residents, and
    patients.\241

    --------------------
    \239 Stephen S.  Mick and Shoou-Yih Daniel Lee, "The Safety-Net Role
    of International Medical Graduates," Health Affairs, Vol.  16, No.  4
    (1997), pp.  144-9.

    \240 Barbara A.  Green and Tim Johnson, "Replacing Residents With
    Midlevel Practitioners:  A New York City-Area Analysis," Health
    Affairs Datawatch, (Summer 1995), pp.  192-8.

    \241 Roberta Riportella-Muller, Donald Libby, and David Kindig, "The
    Substitution of Physician Assistants and Nurse Practitioners for
    Physician Residents in Teaching Hospitals," Health Affairs, (Summer
    1995), pp.  181-91.

          THE CONGRESS, HCFA, AND VA
          ACT TO REDUCE RESIDENCY
          POSITIONS
    ------------------------------------------------------- Chapter 12:4.5

    Recent actions by the Congress, HCFA, and VA indicate that the number
    of residents will probably decline in the future.  For example, the
    Balanced Budget Act of 1997 froze the number of residency positions
    Medicare will fund at a hospital at the number of full-time
    equivalent (FTE) interns and residents in the hospital in 1996.

    New York hospitals sought and received from HCFA a program that
    rewards them for reducing residency positions.  In February 1997,
    HCFA approved a demonstration project proposed by the Greater New
    York Hospital Association.  Under the project, HCFA will provide
    incentive payments totaling $400 million over the next 5 years to 42
    New York teaching hospitals.  The goal of the project is to reduce
    the number of residents trained by the 42 hospitals by up to 25
    percent over the 5-year period.

    The Balanced Budget Act of 1997 authorized similar incentive payments
    to hospitals in other states that participate in plans for
    voluntarily reducing the number of resident positions.  Essentially,
    participating hospitals may receive "hold harmless" payments if they
    agree to reduce the number of residents by specified amounts.  For
    example, a hospital with more than 750 residents would qualify for
    the incentive payments if it submitted to HCFA an acceptable plan to
    reduce the number of residents by 20 percent over a 5-year period.
    The hold harmless payments would decline over the 5-year period.

    In late 1995, VA established a Residency Realignment Review Committee
    to make recommendations for possibly realigning VA's residency
    programs to ensure that VA's GME program meets VA's current and
    future needs.  In its May 1996 report, the Committee recommended
    eliminating 250 residency positions in disciplines other than primary
    care and reallocating 750 positions from specialties to primary care.
    The Committee estimated that it would cost VA almost three times as
    much to replace a resident with a physician or nonphysician provider.
    The VISN strategic plans, however, contain little information on
    implementing the Committee's recommendations.

       INCREASED HIRING OF FOREIGN
       MEDICAL SCHOOL GRADUATES
    --------------------------------------------------------- Chapter 12:5

    The growth in the number of medical residents between 1989 and 1995
    can be attributed to increasing numbers of residency positions
    established for graduates of foreign medical schools.  Residency
    positions for graduates of U.S.  medical schools have actually
    declined since 1989.  By 1996, graduates of foreign medical schools
    accounted for over one-fourth of residency positions.  VA, like
    community hospitals, uses foreign medical school graduates
    extensively.

    Between 1989 and 1995, the number of foreign medical school graduates
    in U.S.  residency training programs more than doubled, from 12,259
    to 24,982.  During the same period, the number of U.S.  medical
    school graduates in residency training declined slightly, from 73,071
    to 71,053.\242

    To reduce the number of physicians, some policymakers are calling for
    using fewer foreign-trained physicians and for restrictions on their
    training.  Efforts to restrict the arrival and impede the permanent
    residence of foreign-trained physicians are under way.  For example,
    the Pew Health Professions Commission and the Institute of Medicine
    issued high-profile statements about reshaping the physician
    workforce by using fewer foreign-trained physicians.  More recently,
    the Association of American Medical Colleges, the American Medical
    Association (AMA), and other national professional associations
    issued a consensus statement calling for restrictions on
    training.\243

    Others, however, caution that limiting the number of foreign medical
    school residency positions could reduce services in medically
    underserved areas.  Although the nation has a surplus of physicians,
    some communities have had a chronic physician shortage.  Hospitals in
    such communities have used residency programs and the associated
    Medicare GME funds to attract and pay resident physicians for
    essentially providing clinical care.\244

    In some cases, hospitals in poor communities do not have teaching
    programs attractive enough to U.S.  medical students.  Therefore, the
    communities have hired foreign medical graduates willing to provide
    care to uninsured individuals.  In such instances, Medicare GME
    payments have helped communities address significant physician
    shortages.  Some have expressed concern that limiting Medicare GME
    payments or the use of foreign medical residents might adversely
    affect the ability of such communities to meet their health care
    needs.\245

    VA officials estimate that 18 to 20 percent of its residents graduate
    from foreign medical schools.  According to VA officials, VA does not
    have a specific policy on using foreign medical school graduates; it
    tries to recruit the best candidates regardless of where they
    attended school.  VA officials also indicated, however, that VA hires
    foreign medical graduates because the supply of U.S.  medical school
    graduates does not meet its demand for first-year resident positions.
    U.S.  medical schools supply only about 100 graduates for every 140
    jobs VA has available.

    --------------------
    \242 Mick and Lee, "The Safety-Net Role of International Medical
    Graduates," Health Affairs, pp.  141-49.

    \243 Mick and Lee, "The Safety-Net Role of International Medical
    Graduates," Health Affairs, pp.  141-49.

    \244 Fitzhugh Mullan, "Powerful Hands:  Making the Most of Graduate
    Medical Education," Health Affairs, pp.  249-53.

    \245 Mick and Lee, "The Safety-Net Role of International Medical
    Graduates," Health Affairs, pp.  141-49.

       TEACHING HOSPITALS SHIFT TOWARD
       PRIMARY CARE RESIDENCIES
    --------------------------------------------------------- Chapter 12:6

    The increased emphasis on managed care has fostered an increased
    demand for primary care physicians.  Meanwhile, as more of the
    diagnosis and care are provided in outpatient settings, teaching
    hospitals have increasingly recognized that physicians need to obtain
    some of their training in outpatient care settings rather than
    hospitals.  Recent changes in Medicare payment policies have
    encouraged increased training of primary care residents and
    authorized training in outpatient settings.  VA is both increasing
    the percentage of its residency positions in primary care and
    providing more of its training in outpatient care sites.

          GROWTH OF MANAGED CARE
          INCREASES DEMAND FOR PRIMARY
          CARE PHYSICIANS
    ------------------------------------------------------- Chapter 12:6.1

    The growth of HMOs and other managed care plans has generated
    increased demand for physicians trained in primary care.  As in
    private-
    sector managed care plans, VA's efforts to restructure its health
    care system are increasing demand for primary care physicians.  Like
    the private sector, VA has too many specialists and too few primary
    care physicians.  The director of one VA medical center told us that
    VA needs a ratio of 60 percent generalists to 40 percent specialists
    but has a ratio of about 20 percent generalists to 80 percent
    specialists.

    Consistent with the increased demand for primary care physicians, one
    recent study reported that the number of jobs advertised for
    physician specialists has declined considerably over the past 5 years
    with the exception of pediatric specialists.  The number of jobs
    advertised for internal medicine specialists declined most
    dramatically--by 75 percent since 1990.  The study found that four
    times as many jobs were advertised for specialists in 1990 as for
    generalists.  Only 5 years later, however, the ratio of advertised
    positions for specialists compared with those for generalists dropped
    to 1 to 8.\246

    --------------------
    \246 Sarena D.  Seifer, Barbara Troupin, and Gordon D.  Rubenfeld,
    "Changes in Marketplace Demand for Physicians:  A Study of Medical
    Journal Recruitment Advertisements," JAMA, Vol.  276, No.  9 (1996),
    pp.  695-9.

          ACTIONS TAKEN BY THE
          CONGRESS AND VA TO PRODUCE
          MORE PRIMARY CARE PHYSICIANS
    ------------------------------------------------------- Chapter 12:6.2

    Both the Congress and VA have acted to increase the number of
    physicians trained in primary care.  After the Physician Payment
    Review Commission reported in 1992 that the share of residents in
    generalist fields was dropping while medical specialties were
    constituting a larger proportion of residents,\247 the Congress made
    changes in Medicare payments for GME that discouraged excessive
    specialty residencies.  Specifically, the Omnibus Budget
    Reconciliation Act (OBRA) of 1993 created separate hospital-specific
    payment rates for primary care and nonprimary care residents.  The
    law permitted rates for primary care (and obstetrics and gynecology)
    residents to be adjusted on the basis of the consumer price index,
    while freezing rates for other residents in fiscal years 1994 and
    1995.\248

    Similarly, VA's Office of Academic Affairs started a program to
    increase training in primary care.  As a result, the number of VA
    residency positions in primary care increased from 2,920 in 1992 to
    3,306 in 1995.  In addition, the Residency Realignment Review
    Committee, in recommending a 250-position decrease in the number of
    VA-funded residency positions, indicated that the reductions should
    come from disciplines other than primary care.  The Committee also
    recommended that 750 residency positions be shifted from specialties
    to primary care.  It estimated that implementing the recommendations
    would increase the percentage of VA residency positions in primary
    care from 34 percent in 1987 to 49 percent upon completion of the
    phased implementation in 2001.

    Among the approaches VA is using to increase training in primary care
    is the Primary Care Education (PRIME) program.  Created in 1993 by
    the Office of Academic Affairs, PRIME funds trainee awards to VA
    facilities providing primary and managed care to veterans using a
    multidisciplinary team approach.  In academic year 1996-97, PRIME
    included 445 medical resident positions at 80 sites and almost 1,000
    associated health trainee positions.  Most of the residency positions
    were in internal medicine.

    VISN strategic plans have generally contained no substantive
    discussion of plans to increase training of primary care physicians.

    --------------------
    \247 Physician Payment Review Commission Annual Report to the
    Congress, Physician Payment Review Commission.

    \248 OBRA 1993 also reduced payments for specialty residents by
    counting all residents beyond their initial residency period as half
    of an FTE.  The special treatment of geriatric residencies was
    retained and extended to preventive care residencies.  Under the new
    weighing, specialty residents in fields such as cardiology are
    counted as half an FTE throughout their training.

       INPATIENT TRAINING DECLINING IN
       IMPORTANCE
    --------------------------------------------------------- Chapter 12:7

    As the focus of health care shifts from hospitals to physicians'
    offices and outpatient clinics, some of the training provided to
    medical residents needs to be shifted to such settings.  Before the
    enactment of the Balanced Budget Act of 1997, however, Medicare
    payment policies discouraged teaching hospitals from supporting such
    shifts.  In contrast, VA has long provided medical education through
    its outpatient clinics.

    The importance of training medical residents in an outpatient setting
    is increasing for several reasons.  First, diagnosis and
    treatment--critical components of medical education--are increasingly
    provided in outpatient settings.  As a result, patients now admitted
    to hospitals tend to have more complex and acute needs than in the
    past, and more patients are admitted to hospitals just for
    specialized procedures.  Second, because lengths of stay are shorter,
    residents have less time to think through a clinical plan and
    establish rapport with their patients.\249

    Although inpatient training remains a critical part of medical
    education, the Physician Payment Review Commission has expressed
    concern that residents have too few opportunities to learn about
    outpatient care, such as how to (1) provide a continuum of care that
    includes health promotion and preventive medicine, (2) manage chronic
    disease, (3) decide when hospitalization is necessary, (4) care for
    patients after discharge, and (5) develop personal relationships with
    patients and their families.  The Commission noted that the technical
    skill, judgment, and processes of medical decision-making required to
    provide these services are important to physicians both in primary
    care and specialty care practices.

    The Commission also noted that the financing of GME primarily through
    inpatient sites has obstructed changing training sites.  Considerably
    less financing has been available for training in outpatient sites,
    and compensation for outpatient faculty is recognized only if the
    hospital incurs all or substantially all of the costs of training.
    This discouraged expansion of training to group practices, nursing
    homes, and other nontraditional sites.  Furthermore, even residency
    programs that sought to expand outpatient training programs in
    hospital-owned sites faced financial barriers because direct costs
    were based on 1984 costs rather than current costs.  Finally,
    Medicare would not pay for indirect costs in nonhospital sites.

    The Balanced Budget Act of 1997 authorized the Secretary of Health
    and Human Services to establish rules for payment to qualified
    nonhospital providers for their direct costs of medical
    education.\250 Nonhospital providers include federally qualified
    health centers, rural health clinics, and other providers the
    Secretary determines appropriate.

    --------------------
    \249 Physician Payment Review Commission Annual Report to the
    Congress, Physician Payment Review Commission.

    \250 The costs must be incurred in operating an approved medical
    residency training program.

       TEACHING HOSPITALS OFFER DEEP
       DISCOUNTS TO MANAGED CARE PLANS
    --------------------------------------------------------- Chapter 12:8

    Non-VA teaching hospitals, which typically have higher costs than
    other community hospitals, increasingly offer deep discounts to
    managed care plans.  Before enactment of the Balanced Budget Act of
    1997, however, teaching hospitals had no assurance that they would
    receive Medicare GME payments for care provided to managed care
    enrollees.  This presents no problem for VA teaching hospitals,
    however, because VA receives a direct appropriation to cover the
    costs of its medical education program and has no contracts with
    managed care plans.

    The trend toward managed care could effect significant changes in
    non-VA teaching hospitals' ability to fund their medical education
    missions.  First, managed care organizations do not usually want to
    pay the higher costs associated with teaching hospitals.  They
    typically negotiate deep discounts from teaching hospitals because
    the market has far more capacity than needed, and nonteaching
    hospitals can provide services at lower costs because they lack
    teaching and research missions.  Second, as Medicare recipients
    increasingly enroll in HMOs, teaching hospitals may lose the direct
    Medicare GME payments.  Although Medicare factors such payments into
    the capitation rates it pays HMOs, the HMOs have no obligation to
    pass those payments on to the teaching hospitals or, for that matter,
    to contract with the higher cost teaching hospitals.\251

    The Balanced Budget Act of 1997, however, requires HCFA to provide
    additional payments to hospitals for the direct costs of GME related
    to Medicare risk-contract managed care enrollees.  The provision
    applies to services provided after December 31, 1997.

    Unlike private-sector hospitals, VA hospitals have, until recently,
    been unable to sell services or negotiate prices with HMOs and other
    managed care plans.  Historically, VA facilities have been permitted
    to sell hospital and other services in only a few situations.  Other
    than sharing agreements with DOD and other federal hospitals, VA has
    been limited to the sale of specialized medical resources to health
    care facilities, such as hospitals or clinics, medical schools, and
    certain research centers.  The Veterans' Health Care Eligibility
    Reform Act of 1996, however, expanded the types of providers and
    services with whom VA may contract for care services.  VA may sell
    patient care services to both public and private entities, including
    managed care plans.  In addition, VA may now negotiate prices for
    services sold to HMOs and other managed care plans.  These provisions
    apply mainly to sales of services to be provided to nonveterans
    because services provided to veterans with private health insurers
    are still governed by separate medical care cost-recovery provisions
    of the law.

    --------------------
    \251 John K.  Iglehart, "Academic Medical Centers Enter the Market:
    The Case of Philadelphia," The New England Journal of Medicine, Vol.
    333, No.  15 (1995), pp.  1019-24.

       VA FACES ISSUES CONCERNING THE
       DIRECTION OF ITS MEDICAL
       EDUCATION MISSION
    --------------------------------------------------------- Chapter 12:9

    Medical education has played a vital role in improving the quality of
    care in VA hospitals for over 50 years.  Similarly, VA has played an
    important part in training a large proportion of the nation's
    physicians.  With a growing number of physicians, however, and a
    steadily declining veteran population, the Congress and the
    administration face difficult decisions about the future of
    affiliation agreements.  For example, should VA hospitals receive the
    same kinds of incentives to reduce the number of residency positions
    that the Congress provided non-VA hospitals through the Balanced
    Budget Act of 1997?

          OVERSUPPLY OF PHYSICIANS
          PROMPTS ACTION
    ------------------------------------------------------- Chapter 12:9.1

    Actions taken through the Balanced Budget Act of 1997 to reduce
    residency positions in teaching hospitals have significant
    implications for VA and its medical education mission.  To the extent
    that teaching hospitals respond to incentives to significantly reduce
    their residency positions, VA and rural hospitals should be better
    able to compete for graduates of U.S.  schools.

    One way to lessen the effect of reducing residency positions on U.S.
    medical schools would be for teaching hospitals to target the
    reductions toward foreign medical school graduates.  With fewer
    residency positions in non-VA teaching hospitals, VA might decide to
    use more of its available residency positions for graduates of U.S.
    medical schools.

    Although VA's Residency Realignment Review Committee recommended
    reducing the number of residency positions in VA hospitals, the
    planned reduction is much smaller than that sought from non-VA
    teaching hospitals.  While non-VA hospitals are being encouraged to
    reduce residency positions by 20 to 25 percent by the year 2005, VA
    is planning a reduction of less than 3 percent in its residency
    positions.

          CHANGES IN VA POPULATION
          RAISE ISSUES
    ------------------------------------------------------- Chapter 12:9.2

    Changes in the veteran population also affect VA's ability to support
    its medical education mission.  Because the veteran population is
    both declining and aging, VA may no longer provide enough of a
    variety of patients to support its medical education mission.  This
    same problem prompted Australia to open its veterans hospitals to
    nonveterans to broaden the patient mix and ultimately close or
    transfer hospitals over to the states or the private sector.

    Of particular concern is the ability of VA hospitals to support
    surgical residencies.  As previously discussed, surgical workloads
    have declined more than 50 percent.  VA hospitals with inpatient
    surgery programs had an average of less than 25 beds occupied on any
    given day; many had fewer than 10 beds occupied.  An important
    challenge facing VA and its affiliated medical schools is determining
    when to end a residency program.  VA's Residency Realignment Review
    Committee began this process by recommending that 750 residency
    positions in specialties be converted to primary care residencies.

          VA'S AFFILIATIONS WITH
          MEDICAL SCHOOLS RAISE ISSUES
    ------------------------------------------------------- Chapter 12:9.3

    Another important challenge facing VA is maintaining its independence
    from the affiliated medical schools for making decisions about the
    future of VA hospitals and their residency programs that are best for
    all stakeholders.  Maintaining this independence is difficult because
    many medical school faculty and managers play decision-making roles
    at VA medical centers.  Medical schools faced with decreasing
    residency positions in non-VA teaching hospitals could seek to
    increase such positions in VA hospitals rather than reduce the size
    of their teaching programs.  VA Chiefs of Staff with dual
    appointments could find themselves in the difficult position of
    trying to support two opposite goals:  the medical schools' goal to
    increase residency positions in VA to compensate for decreased
    positions in other hospitals and VA's own goal to reduce residency
    positions.

    The potential for conflict increases when decisions involve potential
    hospital closings.  Because VA hospitals serve as major sources of
    support for residency positions for medical schools, the schools
    clearly have an interest in VA hospitals staying open.  Although
    those interests must be considered, achieving the proper balance
    between VA's primary mission--
    serving the health care needs of veterans--and one of three other
    missions--support for medical education--will be difficult.  VA must
    take care to prevent medical schools from overly influencing the
    future direction of its health care system.

    TEACHING HOSPITALS DIVERSIFY
    FUNDING OF MEDICAL RESEARCH
    =========================================================== Chapter 13

    Historically, both VA and non-VA teaching hospitals relied mainly on
    federal funds to support their medical research programs--VA on a
    separate research appropriation and non-VA hospitals on grants from
    the National Institutes of Health (NIH).  As competition for these
    limited funds increases, however, teaching hospitals are diversifying
    their funding sources.  Both VA and non-VA teaching hospitals are
    increasing efforts to obtain research funding from pharmaceutical and
    biomedical companies.  Non-VA hospitals are also increasing the
    amount of research they conduct in areas of interest to managed care
    plans to attract contracts from those plans.  VA already conducts
    such research but obtains funding from foundations and other federal
    agencies rather than from managed care plans.

    The development of alternative funding streams for medical research
    raises several issues and challenges.  For example, if academic
    medical centers reduce the amount of basic research they conduct to
    obtain additional funding from managed care plans and pharmaceutical
    companies, should VA do the same or fill the void by increasing its
    support for basic research?  In addition, policy decisions will have
    to be made about (1) the extent to which the government shares in any
    profits resulting from collaborative research and (2) what agreement
    should be reached about delaying distribution of research findings.
    As VA develops multiple funding sources for its research programs, it
    will need strong internal control systems to prevent program abuse.

       NIH IS THE MAIN FUNDING SOURCE
       FOR RESEARCH
    --------------------------------------------------------- Chapter 13:1

    Historically, the federal government, through NIH, has supplied the
    most direct funding for both basic and applied research.  NIH, the
    clearinghouse for federal medical research funding, in addition to
    conducting its own research, provides about 85 percent of its funds
    to teaching hospitals through research grants.  In fiscal year 1996,
    NIH awarded about $8.9 billion in research grants to both VA and
    non-VA teaching hospitals.

    NIH research grants convey prestige because they are more competitive
    and the research proposals are reviewed by peers.  NIH grants fund
    basic as well as applied research and place few restrictions on
    distributing research findings.\252

    Non-VA teaching hospitals receive research funding from NIH; however,
    they have several other research funding sources.  These include
    industry- and foundation-sponsored research grants, internal
    cross-subsidies (such as use of surplus patient treatment income,
    tuition, and endowments), and third-party insurance payments to
    reimburse the cost of health care provided to patients participating
    in research protocols.\253

    --------------------
    \252 Marilyn Werber Serafini, "Research for Hire," National Journal,
    (Mar.  30, 1996), pp.  704-8.

    \253 Robert E.  Mechanic and Allen Dobson, "The Impact of Managed
    Care on Clinical Research:  A Preliminary Investigation," Health
    Affairs, Vol.  15, No.  3 (1996).

       VA RESEARCH FUNDED MAINLY
       THROUGH VA APPROPRIATIONS
    --------------------------------------------------------- Chapter 13:2

    Medical research--both basic and applied--is one of VA's four core
    missions.  The current research program was established shortly after
    the end of World War II and has been included in VA's authorizing
    legislation since the late 1950s.

    Although VA hospitals, like other teaching hospitals, obtain NIH
    research grants, VA research is funded mainly by VA appropriations.
    Of the approximately $923 million in budgetary resources VA had
    available for medical and prosthetic research in fiscal year 1996,
    $591.4 million came from VA appropriations ($256.7 million from the
    medical and prosthetic research appropriation and $334.7 million in
    medical care support from the medical care appropriation).  The
    remainder of VA research funds in fiscal year 1996 came from federal
    grants (mainly from NIH) totaling $209.5 million, other grants
    (mainly from voluntary agencies) totaling $105.9 million, and DOD
    reimbursements of $16 million.

       TEACHING HOSPITALS FIND IT
       DIFFICULT TO MAINTAIN HISTORIC
       FUNDING SOURCES
    --------------------------------------------------------- Chapter 13:3

    Teaching hospitals are finding it increasingly difficult to maintain
    their historic funding sources for several reasons.  First, they can
    no longer count on increases in federal research funds.  Such funding
    grew at the rate of 8 to 10 percent annually during the late 1970s
    and early 1980s, while inflation in biomedical costs ranged between 4
    and 5 percent.  In fiscal year 1996, however, NIH funding grew by
    only 5.7 percent, and the Congress considered cutting NIH's budget.
    In addition, some concern exists over future federal funding amid
    debate about the proper role of the federal government in funding
    medical research.

    Second, managed care has made it more difficult for teaching
    hospitals to use profits from patient care to pay for medical
    research.  According to the Association of American Medical Colleges,
    teaching hospitals are losing about $1 billion a year due to managed
    care's shift to use of lower cost community hospitals.  To help
    prevent such losses, many teaching hospitals have cut the prices they
    charge HMOs and preferred provider organizations (PPO) and adopted
    intensive cost-reduction efforts.  Obviously, lowered prices mean
    fewer resources for subsidizing research projects.

    Third, teaching hospitals face increasing competition from contract
    research organizations.\254 Industry-sponsored medical research,
    which was mainly conducted by academic medical centers before 1980,
    is increasingly being conducted by for-profit contract research
    firms.  The use of academic investigators to conduct
    industry-sponsored research trials dropped from 82 percent in 1989 to
    68 percent in 1993.\255

    Fourth, the managed care industry has increasingly established its
    own research centers, drawing both public and private research
    dollars away from teaching hospitals.  HMOs, which provide
    comprehensive services to a defined population in a real-life
    environment, can test the results of trials that were conducted in
    more controlled environments.

    --------------------
    \254 Mechanic and Dobson, "The Impact of Managed Care on Clinical
    Research:  A Preliminary Investigation," Health Affairs, pp.  72-89.

    \255 David A.  Burnett, "Evolving Market Will Change Clinical
    Research," Health Affairs, Vol.  15, No.  3 (1996), pp.  90-2.

       TEACHING HOSPITALS SEEK FUNDING
       FROM PHARMACEUTICAL AND
       BIOMEDICAL COMPANIES
    --------------------------------------------------------- Chapter 13:4

    Teaching hospitals have increasingly turned to pharmaceutical and
    biomedical companies for funds for two reasons.  First, the
    availability of federal research funds is becoming more uncertain.
    Second, in 1988 pharmaceutical companies spent an amount on research
    and development that exceeded that of the entire NIH budget.\256

    Private industry supports a growing portion of teaching hospitals'
    research.  Private industry (39 percent) and NIH (38 percent)
    supported roughly the same percentage of medical research in 1984,
    according to the Association of American Medical Colleges.  Ten years
    later, however, private industry supported over half ($17 billion) of
    the $33 billion spent on research, while NIH contributed 31 percent
    ($10.2 billion).\257 \258

    Some teaching hospitals are actively seeking to expand their use of
    private industry funds.  For example, George Washington University
    now gets more than half of its funds for medical research from
    private industry.  Similarly, Columbia University actively markets
    its research capabilities to corporations,\259 and the University of
    California, San Francisco, created a special center to attract
    industry-supported research.\260

    One concern raised about involving pharmaceutical and biomedical
    companies in funding research at teaching hospitals is the potential
    delay in sharing research findings.  Companies sometimes ask
    researchers to agree not to disclose the results of their research
    for as long as 10 years.\261 This allows them to develop and market
    their products for longer periods before their patents expire.

    A second concern about relying on private-sector funding is
    pharmaceutical and biomedical companies' focus on clinical trials and
    applied research that can quickly lead to marketable new drugs and
    devices.  This focus could, many researchers fear, reduce the amount
    of basic or fundamental research.\262

    --------------------
    \256 Burnett, "Evolving Market Will Change Clinical Research," Health
    Affairs, pp.  90-2.

    \257 Other federal agencies, including VA, contributed about 6
    percent ($1.98 billion), and private foundations and state and local
    governments contributed the balance.

    \258 Serafini, "Research for Hire," National Journal, pp.  704-8.

    \259 Serafini, "Research for Hire," National Journal, pp.  704-8.

    \260 Mechanic and Dobson, "The Impact of Managed Care on Clinical
    Research:  A Preliminary Investigation," Health Affairs, pp.  72-89.

    \261 Serafini, "Research for Hire," National Journal, pp.  704-8.

    \262 Serafini, "Research for Hire," National Journal, pp.  704-8.

       VA IS ALSO SEEKING ALTERNATIVE
       RESEARCH FUNDING SOURCES
    --------------------------------------------------------- Chapter 13:5

    Like other teaching hospitals, VA is concerned about the future
    availability of federal funding for its research activities and is
    increasingly seeking alternative sources for funding research.  In
    addition to obtaining more NIH funds, it is establishing nonprofit
    corporations to raise funds for research.

    Like NIH funding, the growth in VA's medical and prosthetic research
    appropriation funding has slowed in the 1990s, growing at a rate of 2
    to 5 percent per year, meaning little growth in funding after
    inflation.  VA reports that research funding declined as a percentage
    of the overall medical care appropriation from 2.0 percent in 1980 to
    1.2 percent in 1996.  These figures do not, however, include funds VA
    obtained from other sources.  Between 1990 and 1996, nonfederal
    research funding increased from about $176 million to over $315
    million.  (See fig.  13.1.)

       Figure 13.1:  Changes in Major
       Sources of VA Research Funding,
       Fiscal Years 1990-96

       (See figure in printed
       edition.)

    Note:  Excludes DOD reimbursements, which were less than $30 million
    each year.

    In May 1988, the Congress authorized VA to establish nonprofit
    research corporations for a limited time period to provide an
    additional funding mechanism for VA-approved research (P.L.
    100-322).  Public Law 104-262 reauthorized the corporations through
    2000.  A March 1997 VA Office of Inspector General report identified
    83 nonprofit research corporations.

    VA reported to the Congress that contributions to the nonprofit
    research corporations were $38 million in 1994 and $63 million in
    1996.  An advantage provided by its nonprofit corporations is that
    they generally have low indirect costs, which ensures more resources
    for research.  According to VA officials, the administrative overhead
    rates for VA's nonprofit corporations averaged 12.5 percent in 1995
    compared with university and private foundation rates averaging 50
    percent.  Therefore, a greater percentage of VA research funds may be
    available to actually support research and related activities.\263

    Several of the Veterans Integrated Service Network (VISN) strategic
    plans discuss efforts to establish additional nonprofit research
    corporations:

      -- VISN 8 (Bay Pines) has set a goal of increasing the total non-VA
         research funds by 10 percent by establishing nonprofit
         corporations.  It currently has such corporations at its Bay
         Pines, Miami, and San Juan medical centers.

      -- VISN 17 (Dallas) established its third nonprofit research
         corporation in March 1996 to increase non-VA funding.

      -- VISN 4 (Pittsburgh) is exploring the possibility of establishing
         a nonprofit research corporation.

      -- VISN 6 (Durham) expects its main research effort to be
         overseeing and coordinating the operations of nonprofit research
         corporations.

    --------------------
    \263 Barbara F.  West and Jeffrey Green, "Federal Law Current Issues
    in Mediolegal Practice," Federal Practitioner (Nov.  1996), pp.
    111-2.

       COLLABORATIVE RESEARCH WITH
       MANAGED CARE PLANS AND OTHERS
    --------------------------------------------------------- Chapter 13:6

    Both university-based academic medical centers and VA are conducting
    collaborative research efforts with others.  Academic medical centers
    are focusing on collaborative efforts with managed care plans, while
    VA is focusing on collaborative efforts with other government
    agencies and manufacturers of high-cost/high-tech equipment.

          ACADEMIC MEDICAL CENTERS
          FOCUS ON COLLABORATING WITH
          HMOS
    ------------------------------------------------------- Chapter 13:6.1

    Academic medical centers are beginning to align their research agenda
    with that of the managed care industry.  In the past, academic
    medical centers favored basic research and research on relatively
    rare diseases and therapies.  HMOs, on the other hand, were more
    interested in applied research that identified the most
    cost-effective way to treat common, expensive, or high-risk
    conditions.\264 Because HMOs and other managed care plans have
    financial risk for their patients' care, they want to know which
    medical treatments are most cost-effective.\265

    To gain support for their research programs from managed care plans,
    academic medical centers are emphasizing cost-effectiveness and
    outcomes research and strengthening their ties with schools of public
    health.\266 Consequently, managed care plans' health research centers
    are conducting collaborative projects with teaching hospitals.  For
    example, Group Health Cooperative of Puget Sound collaborated with
    the University of Washington.  Similarly, Prudential's Center for
    Health Care Research collaborated with the Harvard Medical
    School.\267

    According to some researchers, the full potential for collaborative
    efforts has not been realized because of mutual distrust.  In their
    view, academic medical centers often see managed care plans as overly
    concerned with cost cutting, while managed care plans complain of
    teaching hospitals' academic arrogance.\268

    Researchers note that academic medical centers could benefit from
    access to managed care plans' enrolled populations and their
    information systems that identify and track patients with specific
    conditions for conducting research on outcomes of specific
    treatments.  Similarly, academic medical centers could, they believe,
    offer managed care plans an unbiased research environment, access to
    trained investigators, and well- equipped research infrastructures.
    Finally, an affiliation with an academic medical center could give
    HMOs a marketing advantage for managed care plans by making it easier
    to attract enrollees.

    --------------------
    \264 Charles M.  Cutler, "Research Needs for Managed Care," Health
    Affairs, Vol.  15, No.  3 (1996), pp.  93-4.

    \265 Cutler, "Research Needs for Managed Care," Health Affairs, pp.
    93-4.

    \266 Mechanic and Dobson, "The Impact of Managed Care on Clinical
    Research:  A Preliminary Investigation," Health Affairs, pp.  72-89.

    \267 Cutler, "Research Needs for Managed Care," Health Affairs, pp.
    93-4.

    \268 Mechanic and Dobson, "The Impact of Managed Care on Clinical
    Research:  A Preliminary Investigation," Health Affairs, pp.  72-89.

          VA EXPANDING COLLABORATIVE
          EFFORTS WITH BOTH GOVERNMENT
          AND NONGOVERNMENT ENTITIES
    ------------------------------------------------------- Chapter 13:6.2

    One of the key objectives in VA's Prescription for Change is
    expanding collaborative investigative efforts with both government
    and nongovernment entities.  An official from VA's Office of Research
    told us he did not know of any such collaborative research efforts
    with managed care plans but that such efforts might be pursued by
    individual facilities or VISNs.

    As a nationwide system, VA has the capability to design and implement
    large-scale cooperative trials.  For example, in the 1950s, VA
    developed cooperative studies to investigate the effectiveness of
    therapies for treating tuberculosis.  Similarly, it completed
    cooperative studies documenting the benefits of hypertension
    treatment and coronary artery bypass surgery.  The Cooperative
    Studies program now has designated coordinating centers (comprising
    epidemiologists, biostatisticians, and data analysts) whose sole
    mission is to help investigators design and implement multicenter
    studies of clinical and health services interventions.  Some examples
    of this research are studies of angina, symptomatic human
    immunodeficiency virus infection, and clinically localized prostate
    cancer.\269

    VA's ability to do nationwide studies helps it develop collaborative
    efforts.  For example, VA established a Diabetes Research Initiative
    with the Juvenile Diabetes Foundation:  For a 5-year period, VA and
    the Foundation will each contribute $7.5 million to fund VA diabetes
    research centers of excellence.

    In addition, VA signed a memorandum of understanding to plan future
    collaborative research efforts with the Agency for Health Care Policy
    and Research and the University Health Systems Consortium.  Finally,
    VA's Prescription for Change indicates that it plans to actively
    pursue collaborative research efforts with manufacturers of
    high-cost/
    high-technology equipment.

    None of the VISN plans has identified plans to conduct collaborative
    efforts with managed care plans.  Three VISN strategic plans did,
    however, identify planned actions that might make VA research
    programs more attractive to managed care plans:

      -- VISN 1 (Boston) has a Research Advisory Council responsible for
         building stronger linkages between research efforts and clinical
         practice.  The Council is also responsible for identifying
         additional revenue streams to support research.

      -- VISN 17 (Dallas) will emphasize research consistent with
         national trends toward primary care, systems analysis, outcomes
         research, and development of clinical guidelines.  The network
         convened a Research and Development Subcommittee to, among other
         things, promote collaborative research.

      -- VISN 18 (Phoenix) has a major collaborative research project to
         search for a breast cancer vaccine involving the Amarillo,
         Texas, VA medical center, Pantex plant (Department of Energy),
         and Duke University.

    --------------------
    \269 Elliott S.  Fisher and H.  Gilbert Welch, "The Future of the
    Department of Veterans Affairs Health Care System," JAMA, Vol.  273,
    No.  8 (1995), pp.  651-5.

       VA FACES MANY ISSUES IN
       DEVELOPING ALTERNATIVE RESEARCH
       FUNDING STREAMS
    --------------------------------------------------------- Chapter 13:7

    VA faces many challenges and policy decisions as it seeks to develop
    alternative funding streams for medical research.  For example, as a
    matter of policy, to what extent should the government share in the
    financial benefits resulting from new products or treatments
    developed through collaborative research efforts with drug and
    biomedical companies?  Similarly, VA will have to make policy
    decisions about how research results are distributed and when they
    are publicized.  Finally, VA will need to decide to what extent it
    should follow the lead of academic medical centers and seek
    collaborative research efforts with HMOs and other managed care
    plans.

    VA has successfully developed alternative revenue streams to
    supplement its research appropriation.  The proliferation of VA
    nonprofit research corporations and other sources of nonappropriated
    research funds, however, creates new challenges.  For example, VA
    will need accounting systems and internal controls to track the many
    revenue streams supporting individual projects.  Without such systems
    and controls, researchers might receive funding exceeding the
    project's cost.  For example, accounting systems need to be able to
    determine whether a researcher receives a grant funding more than 100
    percent of the researcher's time.  Similarly, the systems and
    controls need to be able to ensure that teaching physicians do not
    inappropriately collect research funds from both VA and the medical
    school.

    In addition to the direct appropriation for medical and prosthetic
    research, VA's research efforts also received funds from the medical
    care appropriation.  VA reported receiving $335 million from this
    additional appropriation in fiscal year 1996.  Under the Veterans
    Equitable Resource Allocation (VERA) model, VA allocated $399 million
    among VISNs for medical research support on the basis of the
    proportional amount of funded research reported by each VISN in
    fiscal year 1995.  It is not clear, however, how the $399 million
    will be allocated within the VISNs or the extent to which the higher
    patient care costs associated with VA's research mission will affect
    its ability to sell its excess capacity to managed care plans or
    others without offering discounts like those offered by some academic
    medical centers.

    Another challenge facing VA and its hospitals is balancing the longer
    lengths of stay frequently associated with medical research with
    performance measures that call for significantly reducing bed-days of
    care.  For example, should performance measures, like VERA, have
    adjustments to allow for the more frequent admissions and longer
    lengths of stay for patients in research protocols?

    Finally, the changing focus of academic medical centers' research
    efforts has important policy implications for VA research.  If
    academic medical centers increasingly shift from supporting basic to
    applied research to attract additional research funds, should VA do
    the same?  Or should VA fill the void created and increase its
    support for basic research?

    OWNERSHIP AND OTHER CHANGES SHIFT
    HOSPITALS' FOCUS FROM
    UNCOMPENSATED CARE
    =========================================================== Chapter 14

    One action community hospitals reportedly take to improve
    profitability is reducing the amount of uncompensated care (defined
    as the sum of charity care and bad debt) they provide.  Despite
    growing numbers of uninsured people, the amount of uncompensated care
    provided by community hospitals has reportedly declined in the 1990s.
    Many nonprofit hospitals are acting more like their for-profit
    competitors by seeking to reduce the amount of uncompensated and
    charity care they provide and focusing on attracting paying
    customers.  Others are converting to for-profit status or selling out
    to for-profit chains.  As a result, some believe that the burden of
    providing uncompensated care has increasingly shifted to public, and
    particularly public teaching, hospitals.  As increasing numbers of
    public hospitals convert to nonprofit or for-profit ownership, will
    the health care safety net shrink even more?

    On average, VA serves a larger proportion of uninsured people than
    even public teaching hospitals.  Many of VA's restructuring efforts,
    however, create incentives for Veterans Integrated Service Networks
    (VISN) and individual VA facilities to model for-profit health plans
    and hospitals and focus less on VA's traditional safety net mission.
    In addition, VA, like many nonprofit hospitals, has established
    strategic goals that focus on increasing market share rather than
    meeting the health care needs of uninsured veterans.  The apparent
    changes in focus of both community and VA hospitals raise significant
    issues about the future direction of the VA health care system.  For
    example, to what extent should VA use its excess capacity to target
    the market segment--low-income and uninsured people--that many
    for-profit and nonprofit hospitals are apparently abandoning?  Who
    should pay for such services?  Similarly, to what extent should VA's
    strategic goals focus specifically on its safety net mission and
    improving the health status of uninsured veterans?

       PUBLIC TEACHING HOSPITALS
       PROVIDE DISPROPORTIONATE SHARE
       OF CARE FOR THE UNINSURED
    --------------------------------------------------------- Chapter 14:1

    The burden of serving patients with no health insurance falls
    disproportionately on VA and public teaching hospitals.  About 21
    percent of veterans using the VA health care system have no public or
    private health insurance compared with about 5 percent of patients
    using nonteaching hospitals.  Similarly, public teaching hospitals
    serve a percentage of hospital patients who have no insurance that is
    three to four times higher than that served by private academic
    medical centers.  (See fig.  14.1.)

       Figure 14.1:  Percentage of
       Patient Population Without
       Public or Private Health
       Insurance, by Type of Hospital,
       1994

       (See figure in printed
       edition.)

    Note:  VA data are from 1992 and reflect system users rather than
    hospital users.

    Sources:  James Reuter and Darrell Gaskin, "Academic Health Centers
    in Competitive Markets," Health Affairs, Vol.  16, No.  4 (1997).
    Based on data from the Institute for Health Care Research and Policy,
    Georgetown University Medical Center.

    Nancy J.  Wilson and Kenneth W.  Kizer, "The VA Health Care System:
    An Unrecognized National Safety Net," Health Affairs, Vol.  16, No.
    4 (1997).

       PUBLIC HOSPITALS PROVIDE
       DISPROPORTIONATE SHARE OF
       UNCOMPENSATED CARE
    --------------------------------------------------------- Chapter 14:2

    Public and particularly public teaching hospitals provide
    disproportionate and increasing amounts of uncompensated care,
    according to many studies.  For example, urban public hospitals are
    reported to provide one-third of the nation's uncompensated care,
    even though they only have about one-sixth of the hospital market.
    Between 1990 and 1994, their burden of uncompensated care increased.
    First, their percentage of total costs devoted to uncompensated care
    increased from 11.8 to 12.8 percent.  Second, public hospitals
    accounted for 36.8 percent of total hospital uncompensated care in
    1994, up from 33.4 percent in 1990.\270

    Among public hospitals, major teaching hospitals' share of
    uncompensated care is reportedly three times larger than their share
    of the hospital market.  In 1994, almost 20 percent of their expenses
    were reportedly devoted to providing uncompensated care.\271

    Although public hospitals provide a disproportionate share of
    uncompensated care, private-sector hospitals still provide most
    uncompensated care.  Private hospitals, however, vary widely in the
    amount of uncompensated care they reportedly provide.  For example,
    about 240 private hospitals reported uncompensated care burdens
    averaging 15 percent of total operating expenses in 1994.  The
    remaining approximately 3,600 private hospitals reported
    uncompensated care burdens averaging 8 percent or less of operating
    expenses.

    These findings are consistent with our 1990 analysis of the role of
    nonprofit hospitals in providing uncompensated care.\272 \273
    Government-owned hospitals provided a disproportionate amount of the
    uncompensated care in each of the five states in our review.  Both
    nonprofit and for-profit hospitals provided a smaller share of the
    state's uncompensated care than they provided of general hospital
    services.  Moreover, the burden of uncompensated care was not
    distributed equally among the nonprofit hospitals in the five states.
    Large urban teaching hospitals had a greater share of the
    uncompensated care expense than did other nonprofit hospitals.

    Generally, the nonprofit hospitals with the lowest rates of
    uncompensated care also served fewer Medicaid patients and had higher
    profit margins than did the large urban teaching hospitals providing
    most of the uncompensated care.  In other words, the nonprofit
    hospitals with the most resources for financing uncompensated care
    were often those providing the least amount of such care.

    About 15 percent of the nonprofit hospitals we studied reported
    providing uncompensated care valued at less than the benefits of
    their federal and state income tax exemption.  Excluding bad debt and
    examining only the provision of charity care, however, revealed that
    57 percent of the nonprofit hospitals in our study provided charity
    care valued at less than the benefits of their tax liability.\274

    Another study reported an apparent correlation between market
    penetration of managed care plans and decreased levels of
    uncompensated care.\275 Hospitals in metropolitan statistical areas
    where managed care plans had captured large shares of the health care
    market tended to provide less uncompensated care.

    --------------------
    \270 Peter J.  Cunningham and Ha T.  Tu, "A Changing Picture of
    Uncompensated Care," Health Affairs, Vol.  16, No.  4 (1997), 167-75.

    \271 Joyce M.  Mann and others, "A Profile of Uncompensated Hospital
    Care, 1983-1995," Health Affairs, Vol.  16, No.  4 (1997), pp.
    223-32.

    \272 Nonprofit Hospitals:  Better Standards Needed for Tax Exemption
    (GAO/HRD-90-84, May 30, 1990).

    \273 According to the American Hospital Association's 1996/1997
    Hospital Statistics, private nonprofit hospitals constitute almost 60
    percent of community hospitals.  In contrast, investor-owned,
    for-profit hospitals account for less than 15 percent of community
    hospitals.

    \274 For a hospital to qualify for tax-exempt status under section
    501(c)(3) of the Internal Revenue Code, it must be organized and
    operated for charitable purposes.  For hospitals, the Internal
    Revenue Service (IRS) has defined "charitable purposes" as providing
    a benefit to the community.  Nonprofit hospitals need not provide a
    specified amount of uncompensated or charity care to qualify for
    exempt status.  However, IRS considers various factors, such as
    whether the hospital provides medical care to Medicaid and charity
    patients, in determining whether a hospital provides a benefit to the
    community.

    \275 Mann and others, "A Profile of Uncompensated Hospital Care,
    1983-1995," Health Affairs, pp.  223-32.

       STRATEGIC GOALS OF MANY
       NONPROFIT HOSPITALS EXCLUDE
       SERVING THE MEDICALLY INDIGENT
    --------------------------------------------------------- Chapter 14:3

    A hospital's goals and policies influence the amount of uncompensated
    care it provides.  In the five communities we visited during our 1990
    study, the strategic goals of some nonprofit hospitals excluded the
    health needs of the poor or underserved in their communities.
    Instead, the goals most often focused on increasing the hospitals'
    share of patients in their market area, resembling the goals of
    investor-owned institutions.  Other goals concerned maintaining the
    hospitals' financial viability, improving their competitive
    positions, expanding services and facilities, or developing employee
    skills and personnel practices.  Furthermore, physician staffing and
    charity admission policies discouraged admission of those unable to
    pay, except in emergency cases.

          NONPROFIT HOSPITALS IN SOME
          COMMUNITIES DISCOURAGE
          INDIGENT CARE
    ------------------------------------------------------- Chapter 14:3.1

    In communities without a government-owned or major teaching hospital,
    uncompensated care costs present problems in providing services to
    the indigent and could eventually cause service gaps for entire
    communities.  In two of the communities we visited for our 1990
    study, the uncompensated care costs were relatively high, and the
    nonprofit hospitals providing most of this care were seeking ways to
    reduce these costs.  For example, hospitals in San Diego were trying
    to restrict their indigent care expenses.  One nonprofit hospital
    that traditionally treated indigent patients was investing in a new
    facility in a suburb to increase its market share of patients able to
    pay.  Another nonprofit hospital planned to downgrade its emergency
    room, closing it to ambulance traffic to reduce its indigent care
    workload.

       HOSPITALS' CHANGING OWNERSHIP
       COULD AFFECT FUTURE PROVISION
       OF INDIGENT CARE
    --------------------------------------------------------- Chapter 14:4

    Of the 5,768 hospitals operating in 1990, about 9 percent (532) had
    changed ownership during the preceding decade.  Ownership changes
    continued in the 1990s; 3 percent of the hospitals operating in 1993
    had changed ownership since 1990.  Over half of the ownership changes
    between 1980 and 1990 involved converting public hospitals to
    nonprofit or for-profit status (see fig.  14.2).  Because public
    hospitals serve a higher proportion of uninsured patients than either
    private nonprofit or for-profit hospitals, this raises concerns about
    the future availability of charity care in the affected communities.

       Figure 14.2:  Hospital
       Ownership Conversions, 1980-90

       (See figure in printed
       edition.)

    Note:  Excludes hospitals converted between 1980 and 1990 but no
    longer operating in 1990.

    Source:  Jack Needleman, Deborah J.  Chollet, and Jo Ann Lamphere,
    "Hospital Conversion Trends," Health Affairs, Vol.  16, No.  2
    (1997).

          PUBLIC HOSPITALS ARE
          CONVERTING TO NONPROFIT OR
          FOR-PROFIT OWNERSHIP
    ------------------------------------------------------- Chapter 14:4.1

    Public hospitals have been converting to nonprofit or for-profit
    ownership.  Between 1980 and 1990, more than 15 percent of public
    hospitals changed control, most often (75 percent) to nonprofit
    status.  Another 3 percent of public hospitals changed control
    between 1990 and 1993 and 88 percent, to nonprofit status.\276
    Conversions of nonprofit and for-profit hospitals to public hospitals
    partially offset conversions of public hospitals to nonprofit status.

    The unwillingness of local governments and communities to provide
    continued tax support for public hospitals reportedly played a major
    role in the conversions.  Conversions were also seen as a way to free
    the hospitals from government procurement and hiring rules.\277

    --------------------
    \276 Jack Needleman, Deborah J.  Chollet, and Jo Ann Lamphere,
    "Hospital Conversion Trends," Health Affairs, Vol.  16, No.  2
    (1997), pp.  187-95.

    \277 Needleman, Chollet, and Lamphere, "Hospital Conversion Trends,"
    Health Affairs, pp.  187-95.

          NONPROFIT AND FOR-PROFIT
          HOSPITALS ARE CHANGING
          OWNERSHIP
    ------------------------------------------------------- Chapter 14:4.2

    In addition, nonprofit hospitals have had many ownership changes, but
    the overall number of nonprofit hospitals increased between 1990 and
    1993 mainly because of the conversion of public hospitals to
    nonprofit hospitals.  Between 1980 and 1990, 175 nonprofit hospitals
    converted to either for-profit (110) or public (65) ownership.  The
    rate of conversion of nonprofit hospitals increased between 1990 and
    1993.

    Hospitals are converting to for-profit status because of concerns
    about their future.  Policy analysts have identified several reasons
    for hospital ownership conversions:

      -- Conversions can provide nonprofit hospitals access to the
         capital they need to restructure operations.

      -- Nonprofit hospitals may seek to improve efficiency through
         merger or acquisition.

      -- Weaker hospitals, faced with closure, may see sale of their
         assets to or a joint venture with a for-profit firm as the best
         option for survival.

      -- Nonprofit hospitals may convert to for-profit status to avoid
         regulatory constraints placed on nonprofits limiting their
         flexibility in compensating executives, staff, and partners.

      -- Personal financial gain may motivate the decisions of the
         insiders of some nonprofit hospitals to sell or convert to
         for-profit status.\278

    In addition, some for-profit hospitals are also changing ownership.
    Conversions of for-profit hospitals to nonprofit or public ownership
    accounted for only 11 percent of conversions between 1980 and 1990
    but 31 percent of conversions between 1990 and 1993.  Some believe
    such conversions may reflect increased concern about the long-term
    commitment of for-profit owners to the health care needs of the
    community.\279

    --------------------
    \278 Gary Clayton, Judith Feder, David Shactman, and Stuart Altman,
    "Public Policy Issues in Nonprofit Conversions:  An Overview," Health
    Affairs, Vol.  16, No.  2 (1997).

    \279 Needleman, Chollet, and Lamphere, "Hospital Conversion Trends,"
    Health Affairs, pp.  187-95.

       VA RESTRUCTURING EFFORTS CREATE
       INCENTIVES FOR VA FACILITIES
       SIMILAR TO THOSE OF FOR-PROFIT
       PROVIDERS
    --------------------------------------------------------- Chapter 14:5

    VA's restructuring efforts create many of the same types of
    incentives for VISNs and individual hospitals to reduce services to
    veterans with no health insurance that have resulted in less charity
    and uncompensated care in nonprofit and for-profit hospitals.  And,
    like many nonprofit hospitals, VA has established strategic goals
    focused more on increasing market share than on fulfilling its safety
    net mission.

          VA HAS INCENTIVES TO REDUCE
          SERVICES TO SOME VETERANS
    ------------------------------------------------------- Chapter 14:5.1

    This year, VA sought and obtained approval to retain nonappropriated
    revenues generated through recoveries from private health insurance
    and collection of veteran copayments.\280

    VA essentially sought to divide the veteran population into two
    distinct groups:  nonrevenue-generating veterans and
    revenue-generating veterans.  This latter group has several potential
    target populations for VA:  lower income veterans with private health
    insurance; higher income veterans subject to copayments but with no
    health insurance; and higher income, privately insured veterans
    subject to copayments.  The last group has the least need for VA
    services but represents the greatest revenue-generating potential
    because VA can generate revenues from both insurance and copayments.

    Allowing VA to retain recoveries from private health insurance and
    copayments creates an incentive for VA to market its services to
    attract revenue-generating rather than nonrevenue-generating
    veterans.  This incentive could affect several aspects of VA
    services, including where VA decides to locate new community-based
    outpatient clinics (CBOC).  For example, VA recently proposed
    locating a CBOC in a homeless shelter that it expects could attract
    2,040 new users in need of VA's safety net and therefore not likely
    to generate revenue.  In contrast, VA has also proposed opening a
    clinic in one of the country's more affluent counties.  Although the
    clinic is intended to improve access for current users, VA also
    expects it to attract patients who could ultimately generate revenue.

    Similarly, VA's new resource allocation method, the Veterans
    Equitable Resource Allocation System (VERA), could lead VISNs and
    individual facilities to act more like for-profit HMOs.  VA developed
    VERA in response to Public Law 104-204, which directed VA to prepare
    a resource allocation system that would ensure similar access to VA
    care for veterans who have similar economic status and eligibility
    priority.  The system, which VA began implementing in April 1997, is
    based on calculations of the cost per veteran user in each VISN.
    VISNs that have the highest costs per veteran user will lose funds;
    VISNs with the lowest costs per veteran user will get additional
    funds.\281

    VERA creates both positive and negative incentives.  On the positive
    side, it moves toward creating the kinds of incentives needed to
    increase efficiency that HMOs have long had.  On the negative side,
    it creates the kinds of incentives HMOs have to (1) focus marketing
    efforts on attracting the types of users who use fewer health care
    services, such as younger veterans, and, conversely, (2) make
    continued use of VA services unattractive or unavailable to veterans
    with extensive health care needs.  HMOs are often criticized for
    their efforts to attract and retain users with minimal health care
    needs.

    These negative incentives could be heightened in the VA system
    because, unlike HMOs, the VISNs have no contractual obligation to
    provide comprehensive care to any veteran, making it easier for VA
    facilities to artificially increase efficiency by providing less
    intensive services or attracting healthier users.  On the other hand,
    also unlike most for-profit HMOs, VA physicians have no financial
    stake in the care they provide.  Because VA physicians receive a
    salary, they would not personally gain by reducing the amount of
    services they provide.  Nevertheless, VERA and the retention of
    third-party recoveries could provide VISNs and individual facilities
    financial incentives to focus marketing efforts on veterans most
    likely to use fewer services and those not likely to generate
    additional payments.

    --------------------
    \280 It also sought, but did not receive, authority to bill and
    retain recoveries from Medicare for services provided to higher
    income Medicare-eligible veterans.

    \281 Adjustments are included for the higher labor costs in some
    VISNs and for differences in the costs of medical education,
    research, equipment, and nonrecurring maintenance.

          VA'S STRATEGIC GOALS FOCUS
          ON INCREASING MARKET SHARE
    ------------------------------------------------------- Chapter 14:5.2

    VA's strategic goals for its health care system, like those of many
    nonprofit and for-profit hospitals, focus on increasing market share
    rather than on improving the health status of service-connected or
    uninsured veterans.  Specifically, under the broad goal to "improve
    the overall health care of veterans," VA's plan sets an objective to
    increase its number of users by 20 percent by 2003.  It also sets a
    performance goal of increasing the number of Category A veterans
    (primarily veterans with service-connected disabilities or low
    incomes) by 500,000 and Category C veterans (primarily veterans with
    no service-connected disabilities and higher incomes) by 125,000 by
    2003.  The stated purpose of the increase in users is to "preserve
    the viability of the health care system" rather than to meet the
    health care needs of service-connected or uninsured veterans.  Beyond
    setting a goal to serve more Category A veterans, VA does not
    differentiate between serving a service-connected veteran with no
    health insurance and a low-income veteran with health insurance.
    Although the Congress established specific priorities for enrolling
    veterans in the VA health care system, VA's strategic goals do not
    reflect those priorities.

    VA also linked its strategic goal to enactment of the proposed
    legislation to allow it to retain recoveries from private health
    insurance and Medicare.  It noted that it could treat a significantly
    larger number of veterans--up to 20 percent more--only if its medical
    care cost recovery and Medicare reimbursement proposals were enacted.
    Our review of VA's 1998 budget submission, however, found that to
    meet its revenue projections, VA would probably have to focus its
    marketing efforts on attracting veterans with fee-for-service private
    health insurance.  In addition, VA proposes to collect about $557
    million from Medicare in 2002 for services provided to about 106,000
    additional higher income veterans covered by Medicare.  As stated,
    the Congress authorized VA to retain recoveries and collections from
    private health insurance and veterans' copayments but did not
    authorize VA to obtain recoveries from Medicare.

       ISSUES VA WILL NEED TO ADDRESS
       CONCERNING ITS SAFETY NET
       MISSION
    --------------------------------------------------------- Chapter 14:6

    The Administration and the Congress face difficult decisions
    concerning the future direction of VA's safety net mission and the
    role VA's hospitals should play in meeting the hospital care needs of
    the uninsured.

    For example, one important decision facing VA is determining the
    extent to which it should use its expanded contracting authority to
    purchase hospital care for veterans, particularly those with
    service-connected disabilities or no health insurance who cannot get
    care from a VA hospital because of geographic inaccessibility.

    Many veterans cannot get needed health care because of the distance
    from their homes to a VA facility.  Our analysis of 1992 National
    Survey of Veterans data estimated that fewer than half of the 159,000
    veterans who did not obtain needed hospital care lived within 25
    miles of a VA hospital.  By comparison, we estimated that over 90
    percent lived within 25 miles of a private-sector hospital.  One
    option for improving the health status of such veterans would be for
    VA to use its expanded contracting authority to purchase hospital and
    other services for uninsured veterans that live far from a VA
    hospital.

          SERVING UNINSURED VETERANS
    ------------------------------------------------------- Chapter 14:6.1

    On average, the VA health care system provides a higher proportion of
    care to patients with no health insurance than any category of
    community hospital, including public teaching hospitals.  Still, many
    veterans without health insurance have reported that they have not
    used VA health care services and that they have unmet health care
    needs.

    In 1990, 9 out of 10 veterans reported having public or private
    health insurance.  That meant, however, that about 2.6 million
    veterans had neither public nor private health insurance.  Without a
    demonstrated ability to pay for care, individuals' access to health
    care is much more limited in the private sector, decreasing their
    ability to receive needed care.  Lacking insurance, people often
    postpone obtaining care until their conditions become more serious
    and require more costly medical services.

    In the past, most veterans who lacked insurance coverage could get
    needed hospital care through public programs and VA.  Still, VA's
    1992 National Survey of Veterans estimated that about 159,000
    veterans could not get needed hospital care in 1992, and about
    228,000 could not get needed outpatient services.  By far, the most
    common reason veterans cited for not obtaining needed care was that
    they could not afford to pay for it.

    So, if VA is to fulfill its safety net mission, it will have to
    ensure that VISNs and individual facilities do not react to
    incentives to generate revenue by reducing services to uninsured
    veterans and those with service-connected disabilities.  Similarly,
    monitoring will be needed to ensure that facilities do not
    inappropriately bill insurers for services provided to
    service-connected veterans to generate additional revenues.
    Moreover, the incentive to target programs toward revenue-generating
    veterans is greatest if the facility providing the care retains the
    funds.  Such an arrangement, however, would also provide the greatest
    incentive for operating an effective program.  VA faces the challenge
    of identifying and applying the appropriate balance.

    In addition, ownership conversions of public and nonprofit hospitals
    could affect the ability of low-income or uninsured veterans to
    obtain services from such hospitals.  With community hospitals'
    support for the medically indigent apparently decreasing, should VA
    follow their lead?  Or, should VA try to fill the void left by those
    providers?  For example, veterans without health insurance often have
    families without health insurance.  Should VA hospitals use their
    excess capacity to serve veterans' uninsured dependents?  If so, how
    should such care be financed?  For example, should recoveries from
    private health insurance be earmarked for use in providing services
    to the families of uninsured veterans?

    CONCLUSIONS, AGENCY COMMENTS, AND
    OUR EVALUATION
    =========================================================== Chapter 15

       CONCLUSIONS
    --------------------------------------------------------- Chapter 15:1

    Both VA and community hospitals are struggling to survive.  Demand
    for hospital care, which increased for much of the century, has
    steadily declined since the 1980s in community hospitals and since
    the 1960s in VA hospitals.  Although many factors have contributed to
    the declining demand, VA has been less affected by the effects of
    payment and other reforms than have community hospitals.  Therefore,
    further reductions in use of VA hospitals are likely as VA tries to
    shift more of its care to outpatient and other more cost-effective
    settings.  In addition, VA, unlike community hospitals, has a
    declining target population.

    One of the most crucial decisions facing the Congress and the
    administration as they plan for the future of the veterans' health
    care system is the extent of effort that should be spent to preserve
    VA's direct delivery infrastructure and the process that should be
    followed to effect change.

    VA, amid a massive restructuring of its health care system, has made
    efficiency improvements to the system.  These actions have focused
    heavily on shifting patients from inpatient hospitals to outpatient
    and other more appropriate care settings--actions taken by community
    hospitals during the 1980s.  The efforts' success, however, has
    further reduced the workload of VA hospitals, increasing the cost of
    serving the remaining patients and heightening the need to address
    the future of the hospitals.  Because fixed costs are dispersed over
    fewer patients, the declining use of VA hospitals increases the cost
    of providing hospital care to remaining patients.

    Community hospitals, also faced with declining workloads, have tried
    many approaches to reducing their costs, including increased use of
    part-time and intermittent employees and use of nurse extenders and
    other unlicensed assistive personnel.  With the exception of efforts
    to integrate and consolidate patient care services and administrative
    functions of VA hospitals in close proximity, VA has not emphasized
    improving the efficiency of some hospital operations as much as
    community hospitals have.  For example, VA could not pursue
    contracting for patient and nonpatient care services to the same
    extent as community hospitals.

    Not everyone accepts all of the changes taking place in community
    hospitals, however.  For example, some view the use of some patient-
    centered care with skepticism because they are concerned about
    hospitals' cutting costs by reducing nursing staff.  Decisions will
    have to be made about which community hospital initiatives VA should
    pursue and to what extent.

    In fact, many of VA's actions to improve the efficiency of its health
    care system, such as the Veterans Equitable Resource Allocation
    (VERA) system and preadmission screening, come from private-sector
    initiatives.  These actions differ, however, from their
    private-sector counterparts because they lack the same financial
    incentives and risks.  Nonetheless, individuals differ about the
    appropriate risk that is assumed by individual providers.  A
    provider's assuming too much risk or having too strong a financial
    incentive could adversely affect patient care.  Too little risk, in
    contrast, could limit the effectiveness of the initiative.  VA thus
    faces difficult decisions about the extent to which it should use
    financial incentives and risks to change practice patterns.

    The reduced use of VA hospitals associated with efficiency
    improvements, coupled with the declining veteran population and
    continued enrollment growth in managed care plans, makes preserving
    VA hospitals exceedingly difficult.  About 46 percent of the beds in
    VA hospitals have been closed, and over 80 percent of the remaining
    beds might become excess within the next 5 to 10 years if VA's
    efficiency improvement efforts succeed.  This gives VA two basic
    options:  attract significant numbers of new users or close
    hospitals.

    VA's current efforts to attract new users, however, are unlikely to
    generate significant demand for hospital care.  Its efforts
    legitimately focus more on improving the accessibility of outpatient
    care for veterans who live far from a VA clinic than on generating
    demand for VA hospital care.  If VA hospitals are to remain
    exclusively for veterans, VA will have to attract a much larger and
    ever-increasing proportion of the veteran population.

    Other countries, such as Australia, have opened their veterans
    hospitals to nonveterans to build workload.  Allowing VA hospitals to
    treat more nonveterans could increase VA hospital use and broaden
    VA's patient mix, strengthening VA's medical education mission.
    Without better systems for determining the cost of care, however,
    such action could result in funds appropriated for veterans' health
    care being used to pay for care for nonveterans.  In addition, if VA
    opened its hospitals to nonveterans, it would be expanding the areas
    in which it directly competes with private-sector hospitals in nearby
    communities.  Essentially, every nonveteran coming into a VA hospital
    would be one fewer patient for a private-sector hospital.  Thus,
    expanding VA's role in providing care to nonveterans could further
    jeopardize the fiscal viability of private-sector hospitals.

    If VA decides to compete directly with community hospitals for both
    veteran and nonveteran patients, then it will subsequently have to
    decide the extent to which it should adopt private-sector practices
    on advertising and adding amenities, areas on which VA, up to now,
    has not focused.  Similarly, decisions would have to be made about
    whether to market services to managed care plans and, if so, how to
    price them to compete with community hospitals.  Several factors,
    including its medical education and research missions, currently
    limit VA's ability to compete with community hospitals on the basis
    of price.

    Closing some VA hospitals, on the other hand, could make more funds
    available for expanding the use of contract hospitals for providing
    services to veterans who have service-connected disabilities or lack
    public or private insurance and do not live near a VA hospital.  Now,
    the cost of maintaining its hospitals limits VA's ability to meet the
    hospital care needs of some veterans with no public or private health
    insurance.  This is because VA hospitals have more than enough
    capacity to serve all veterans seeking care, regardless of their
    finances.  In other words, insured veterans living close to a VA
    hospital have better access to VA-supported care than do uninsured
    veterans who live far from a VA hospital.  Maintaining VA hospitals
    in markets with declining demand could result in funds being used to
    pay for hospital care provided to veterans in the discretionary care
    category, while the hospital care needs of uninsured veterans in
    other areas are unmet.  Other countries have successfully closed
    veterans hospitals, while improving veterans' access to hospital care
    by contracting with community hospitals.

    The declining use of community hospitals and VA's vast purchasing
    power could allow VA, like HMOs and other managed care plans, to
    negotiate significant discounts from community hospitals.  This could
    improve the accessibility of VA-supported hospital care for uninsured
    veterans and veterans with service-connected disabilities.
    Contracting could help improve the financial status of some community
    hospitals by increasing patient workload.

    Because they serve a large proportion of uninsured and low-income
    patients, VA hospitals are more like public hospitals than either
    nonprofit or for-profit community hospitals.  Many of the actions VA
    is taking, however, threaten to divert it from its traditional safety
    net mission to more directly competing with community hospitals for
    revenue-generating patients.  Therefore, the Congress and VA have
    important decisions to make about the extent to which VA should focus
    its strategic goals on its safety net role.

    Finally, medical education has played a vital role in improving the
    quality of care in VA hospitals for over 50 years.  Similarly, VA has
    played an important part in training a large proportion of the
    nation's physicians.  With a growing surplus of physicians, however,
    and a steadily declining veteran population, the Congress and VA face
    difficult decisions about the future of affiliation agreements.  For
    example, should VA hospitals receive the same kinds of incentives to
    reduce the number of residency positions they support that the
    Congress provided non-VA hospitals through the Balanced Budget Act?

    Decisions about the future of VA hospitals, whether it be to close
    hospitals or open them to nonveterans, have significant implications
    for veterans, VA employees, affiliated medical schools, community
    hospitals, and taxpayers.  It is therefore important that the
    Congress and the administration have available sufficient information
    to properly weigh the potential effects of VA health care system
    infrastructure changes on all affected stakeholders.

       VA COMMENTS AND OUR EVALUATION
    --------------------------------------------------------- Chapter 15:2

    In a letter dated March 5, 1998, VA's Assistant Secretary for Policy
    and Planning said that this report extensively assesses the VA health
    care system from its inception to the present and accurately depicts
    the dynamic reengineering of the Veterans Health Administration (VHA)
    into the type of organization necessary to ensure that VA patients
    receive the care they need.  The letter states that VA considers the
    report a valuable tool for helping the Department as it develops
    strategic initiatives to provide seamless health care services to
    veterans.

    VA stated that although it may agree with the issues and challenges
    identified in the report, it does not necessarily agree with the
    report's conclusions on VA's approach to the issues, the effect of
    continued reengineering on veterans, and the direction of VA's health
    care system.  Our report, VA stated, often focuses on issues from
    past reports that VA believes are either no longer relevant, have
    been resolved, or are already being addressed in conjunction with its
    reengineering program.  This, in VA's opinion, leads the report to
    conclusions about the future that are not certain and that the
    Department is not prepared to acknowledge as the only or most
    probable ones.  Our report is intended to identify and analyze the
    implications of different approaches to restructuring the veterans
    health care program, not to draw conclusions about the direction of
    the program.  We believe our focus on issues raised in past reports
    is appropriate both for documenting the progress VA has made in its
    restructuring efforts and the lessons learned along the way.

    VA also contends that many of the issues we cite as not being
    addressed in the first submission of Veterans Integrated Service
    Network (VISN) plans are addressed in VHA's guidance for the plans
    submitted in October 1997 and that future versions of the guidance
    will continue to address these issues and others.

    We recognize that the VISN plans we reviewed were the networks' first
    attempt at developing strategic/business plans.  We reviewed the
    plans in detail, however, because efforts to obtain information from
    VA's central office yielded few specifics on the extent to which VA
    was implementing initiatives like those of many community hospitals.
    Our review of the plans was linked to VA's guidance on preparing the
    plans and to the Under Secretary's Prescription for Change.  Our
    review, however, was not intended to criticize VA's efforts to
    develop strategic plans.  Nor are we suggesting that VA should
    necessarily adopt all of the community hospital initiatives.  VA
    stated that the current national health care climate, as our report
    acknowledges, remains unsettled, and VA's vision of future health
    care delivery scenarios is based on trends that continue to emerge.
    This report, VA stated, clarifies that VA is at a watershed and that
    among the issues pertinent to the future of both VA and non-VA health
    care are (1) how VA can best provide services to an aging population
    with multiple health care needs and function as a safety net
    provider, (2) whether VA should continue to provide services
    directly, and (3) how new technologies will affect VA health care.

    In addition, VA indicated that it agrees that recent and proposed
    changes in VA and other programs make the future demand for both VA
    and non-VA hospital care uncertain.  It noted that outpatient care,
    coupled with intensive care services, is a probable future model of
    U.S.  health care.  According to VA, it is therefore logical that in
    the future both VA and non-VA hospitals will change and some may
    close.  VA agreed with our observation that decisions about whether
    to close or consolidate hospitals or services, change missions, sell
    excess capacity, or identify enhanced uses of excess space will
    require that the effect on all stakeholders (veterans, VA employees,
    community hospitals, medical schools, and individual communities) be
    fully considered without undue political influence.

    VA also stated that because VHA is in the midst of reengineering the
    health care system, significant uncertainty and ultimately no clear
    answers exist to the many questions this report raises.  According to
    VA, improving its information and financial systems will be critical
    to answering these questions and will enable VA to demonstrate good
    value not only in cost, but also in quality, service, patients'
    functional status, accessibility, and satisfaction.  VA stated that
    by (1) following through with the transformation already occurring in
    its infrastructure and processes; (2) continuing to improve its
    strategic planning and resource allocation; and (3) implementing and
    monitoring clinical guidelines, performance measures, and outcomes,
    it will be able to successfully address these questions and other
    stakeholders' needs.

    Regarding its safety net mission, VA said that it disagrees with our
    contention that eligibility reform and changes in contracting and
    resource allocation will cause VA to focus less on serving
    service-connected veterans and on its safety net role regarding
    low-income or uninsured veterans and enhance marketing to
    high-income, insured veterans.  VA stated that contrary to the
    impression left by this report, approximately 95 percent of VA
    patients are veterans who meet congressional mandates for care,
    including veterans with service-connected disabilities and those with
    no service-connected disabilities who have the lowest incomes and
    poorest insurance coverage.  According to VA, VERA focuses not simply
    on dollars per user but on dollars per mandatory user.  The report
    does not contend that VA will focus less on serving service-connected
    veterans or its safety net role regarding low-income or uninsured
    veterans.  We recognize that VA's strategic goals and performance
    measures call for increasing VA's market share of mandatory veterans.
    Even some veterans within the mandatory care group, however, have a
    greater need for or more right to care than others.  First, veterans
    seeking care for service-connected disabilities should have the
    highest priority for care.  Similarly, lower income veterans who lack
    other health care options, such as public or private health
    insurance, have a greater need for VA health care services than other
    veterans.  We are concerned that VERA and the new medical care cost
    recovery provisions could at least in the short term provide
    financial incentives for individual facility managers to focus on
    serving revenue-
    generating veterans--those with higher incomes or private health
    insurance--rather than veterans with service-connected disabilities
    or no health insurance.  We are also concerned about the extent to
    which VA can recover its costs for treating nonmandatory veterans to
    permit it to maintain or increase services to mandatory veterans.

    In addition, unless VA improves its medical facilities' determination
    of which care category--mandatory or discretionary--a veteran is
    placed in, it will be difficult to accurately determine whom VA is
    serving.  A discrepancy continues to exist between the care
    categories assigned by VA medical facilities, which, according to VA,
    report that less than 5 percent of both inpatient and outpatient
    users were discretionary in fiscal year 1995 and our prior work,
    which found that about 15 percent of the veterans using VA facilities
    who have no service-connected disabilities have sufficiently high
    incomes that would place them in the lowest priority category under
    the new patient enrollment system.

    Additional VA comments and technical corrections have been
    incorporated in this report as appropriate.  See appendix X for a
    copy of VA's comments.

    POPULATION, COMMUNITY HOSPITAL
    BEDS, AND AVERAGE DAILY CENSUS BY
    STATE AND CENSUS DIVISION
    =========================================================== Appendix I

    This appendix contains information on the number of community
    hospital beds and average daily census (ADC) of community hospital
    patients per 1,000 population for each state and census division.  It
    is based on information in the American Hospital Association's 1996
    Hospital Statistics and the Bureau of the Census' Statistical
    Abstract of the United States, 1996.  Some totals may not add due to
    rounding.

                             Table I.1

                  Summary of Population, Community
                  Hospital Beds, and ADC by Census
                           Division, 1995

                    Population            Beds             ADC
    Census                 (in             per             per
    division        thousands)    Beds   1,000     ADC   1,000
    --------------  ----------  ------  ------  ------  ------
    New England         13,313  38,293     2.9  26,250     2.0
    Middle              38,153  152,30     4.0  114,31     3.0
     Atlantic                        5               0
    South Atlantic      46,994  154,82     3.3  97,382     2.1
                                     8
    East North          43,456  145,73     3.4  88,132     2.0
     Central                         7
    East South          16,066  66,882     4.2  39,907     2.5
     Central
    West North          18,348  79,249     4.3  46,943     2.6
     Central
    West South          28,828  97,930     3.4  53,974     1.9
     Central
    Mountain            15,644  40,215     2.6  23,429     1.5
    Pacific             41,952  97,297     2.3  57,976     1.4
    ==========================================================
    U.S. total         262,754  872,73     3.3  548,30     2.1
                                     6               3
    ----------------------------------------------------------

                             Table I.2

              Population, Community Hospital Beds, and
                  ADC in New England States, 1995

                Population
                       (in          Beds per           ADC per
    State       thousands)    Beds     1,000     ADC     1,000
    ----------  ----------  ------  --------  ------  --------
    Connecticu       3,275   7,518       2.3   5,461       1.7
     t
    Maine            1,241   4,011       3.2   2,590       2.1
    Massachuse       6,074  18,860       3.1  13,027       2.1
     tts
    New              1,148   3,375       2.9   2,065       1.8
     Hampshire
    Rhode              990   2,718       2.8   1,844       1.9
     Island
    Vermont            585   1,811       3.1   1,263       2.2
    ==========================================================
    Total           13,313  38,293       Not  26,250       Not
                                    applicab          applicab
                                          le                le
    ----------------------------------------------------------

                             Table I.3

              Population, Community Hospital Beds, and
                ADC in Middle Atlantic States, 1995

                Population
                       (in          Beds per           ADC per
    State       thousands)    Beds     1,000     ADC     1,000
    ----------  ----------  ------  --------  ------  --------
    New Jersey       7,945  29,863       3.8  21,407       2.7
    New York        18,136  73,908       4.1  59,078       3.3
    Pennsylvan      12,072  48,534       4.0  33,825       2.8
     ia
    ==========================================================
    Total           38,153  152,30       Not  114,31       Not
                                 5  applicab       0  applicab
                                          le                le
    ----------------------------------------------------------

                             Table I.4

              Population, Community Hospital Beds, and
                 ADC in South Atlantic States, 1995

                Population
                       (in          Beds per           ADC per
    State       thousands)    Beds     1,000     ADC     1,000
    ----------  ----------  ------  --------  ------  --------
    Delaware           717   1,865       2.6   1,511       2.1
    District           554   3,806       6.9   2,720       4.9
     of
     Columbia
    Florida         14,166  49,690       3.5  29,416       2.1
    Georgia          7,201  26,124       3.7  15,785       2.2
    Maryland         5,042  12,607       2.5   8,794       1.7
    North            7,195  22,729       3.2  15,483       2.2
     Carolina
    South            3,673  11,307       3.1   7,250       2.0
     Carolina
    Virginia         6,618  18,579       2.8  11,540       1.7
    West             1,828   8,121       4.4   4,883       2.7
     Virginia
    ==========================================================
    Total           46,994  154,82       Not  97,382       Not
                                 8  applicab          applicab
                                          le                le
    ----------------------------------------------------------

                             Table I.5

              Population, Community Hospital Beds, and
               ADC in East North Central States, 1995

                Population
                       (in          Beds per           ADC per
    State       thousands)    Beds     1,000     ADC     1,000
    ----------  ----------  ------  --------  ------  --------
    Illinois        11,830  41,964       3.5  25,056       2.1
    Indiana          5,803  19,362       3.3  11,265       1.9
    Michigan         9,549  29,636       3.1  19,300       2.0
    Ohio            11,151  37,766       3.4  22,188       2.0
    Wisconsin        5,123  17,009       3.3  10,323       2.0
    ==========================================================
    Total           43,456  145,73       Not  88,132       Not
                                 7  applicab          applicab
                                          le                le
    ----------------------------------------------------------

                             Table I.6

              Population, Community Hospital Beds, and
               ADC in East South Central States, 1995

                Population
                       (in          Beds per           ADC per
    State       thousands)    Beds     1,000     ADC     1,000
    ----------  ----------  ------  --------  ------  --------
    Alabama          4,253  18,252       4.3  10,753       2.5
    Kentucky         3,860  15,131       3.9   8,968       2.3
    Mississipp       2,697  12,590       4.7   7,673       2.8
     i
    Tennessee        5,256  20,909       4.0  12,513       2.4
    ==========================================================
    Total           16,066  66,882       Not  39,907       Not
                                    applicab          applicab
                                          le                le
    ----------------------------------------------------------

                             Table I.7

              Population, Community Hospital Beds, and
               ADC in West North Central States, 1995

                Population
                       (in          Beds per           ADC per
    State       thousands)    Beds     1,000     ADC     1,000
    ----------  ----------  ------  --------  ------  --------
    Iowa             2,842  12,615       4.4   7,075       2.5
    Kansas           2,565  10,761       4.2   5,733       2.3
    Minnesota        4,610  17,367       3.8  11,338       2.5
    Missouri         5,324  21,851       4.1  12,612       2.4
    Nebraska         1,637   7,851       4.8   4,478       2.7
    North              641   4,168       6.5   2,744       4.3
     Dakota
    South              729   4,636       6.4   2,963       4.1
     Dakota
    ==========================================================
    Total           18,348  79,249       Not  46,943       Not
                                    applicab          applicab
                                          le                le
    ----------------------------------------------------------

                             Table I.8

              Population, Community Hospital Beds, and
               ADC in West South Central States, 1995

                Population
                       (in          Beds per           ADC per
    State       thousands)    Beds     1,000     ADC     1,000
    ----------  ----------  ------  --------  ------  --------
    Arkansas         2,484  10,144       4.1   6,017       2.4
    Louisiana        4,342  19,146       4.4  10,698       2.5
    Oklahoma         3,278  11,462       3.5   6,068       1.9
    Texas           18,724  57,178       3.1  31,191       1.7
    ==========================================================
    Total           28,828  97,930       Not  53,974       Not
                                    applicab          applicab
                                          le                le
    ----------------------------------------------------------

                             Table I.9

              Population, Community Hospital Beds, and
                    ADC in Mountain States, 1995

                Population
                       (in          Beds per           ADC per
    State       thousands)    Beds     1,000     ADC     1,000
    ----------  ----------  ------  --------  ------  --------
    Arizona          4,218   9,852       2.3   5,558       1.3
    Colorado         3,747   9,258       2.5   5,426       1.4
    Idaho            1,163   3,383       2.9   2,095       1.8
    Montana            870   4,225       4.9   2,734       3.2
    Nevada           1,530   3,600       2.4   2,237       1.5
    New Mexico       1,685   3,675       2.2   2,128       1.3
    Utah             1,951   4,184       2.1   2,192       1.1
    Wyoming            480   2,038       4.2   1,059       2.2
    ==========================================================
    Total           15,644  40,215       Not  23,429       Not
                                    applicab          applicab
                                          le                le
    ----------------------------------------------------------

                             Table I.10

              Population, Community Hospital Beds, and
                    ADC in Pacific States, 1995

                Population
                       (in          Beds per           ADC per
    State       thousands)    Beds     1,000     ADC     1,000
    ----------  ----------  ------  --------  ------  --------
    Alaska             604   1,270       2.1     667       1.1
    California      31,589  75,016       2.4  45,060       1.4
    Hawaii           1,187   3,030       2.6   2,414       2.0
    Oregon           3,141   7,161       2.3   3,783       1.2
    Washington       5,431  10,820       2.0   6,052       1.1
    ==========================================================
    Total           41,952  97,297       Not  57,976       Not
                                    applicab          applicab
                                          le                le
    ----------------------------------------------------------

    MARKET PENETRATION OF HEALTH
    MAINTENANCE AND PREFERRED PROVIDER
    ORGANIZATIONS
    ========================================================== Appendix II

    This appendix contains information on the market penetration of HMOs
    and preferred provider organizations (PPO) by census division and
    state.

                              Table II.1

                 HMO and PPO Market Shares by Census
                            Division, 1994

                            1994
                       populatio                        Total HMO
                           n (in        HMO        PPO    and PPO
                       thousands     market     market     market
    Census division            )      share      share      share
    -----------------  ---------  ---------  ---------  ---------
    New England           13,264       27.6        5.7       33.3
    Middle Atlantic       38,118       21.9        9.0       30.9
    South Atlantic        46,379       14.8       14.8       29.6
    East North            43,193       18.0       16.8       34.8
     Central
    West North            18,215       14.2       21.1       35.3
     Central
    East South            15,894       10.9       22.5       33.4
     Central
    West South            28,439        8.6       22.3       30.9
     Central
    Mountain              15,233       21.6       19.2       40.8
    Pacific               41,614       34.6       23.0       57.6
    =============================================================
    Total                260,349        Not        Not        Not
                                  applicabl  applicabl  applicabl
                                          e          e          e
    -------------------------------------------------------------
    Source:  Health Insurance Association of America (HIAA), Source Book
    of Health Insurance Data, 1996.

                             Table II.2

              HMO and PPO Market Shares in New England
                            States, 1994

                                                         Total
                                                       HMO and
                   HMO       HMO                 PPO       PPO
                member    market       PPO    market    market
    State            s     share   members     share     share
    ----------  ------  --------  --------  --------  --------
    Connecticu  897,01      27.4   151,790       4.6      32.0
     t               3
    Maine       76,453       6.2     9,374       0.8       7.0
    Massachuse  2,130,      35.2   458,712       7.6      42.8
     tts           655
    New         194,77      17.0    36,899       3.3      20.3
     Hampshire       9
    Rhode       288,85      28.8    96,269       9.6      38.4
     Island          3
    Vermont     73,349      12.6     1,832       0.3      12.9
    ==========================================================
    Total       3,661,       Not   754,876       Not       Not
                   102  applicab            applicab  applicab
                              le                  le        le
    ----------------------------------------------------------
    Source:  HIAA, Source Book of Health Insurance Data, 1996.

                             Table II.3

                HMO and PPO Market Shares in Middle
                       Atlantic States, 1994

                                                      Total HMO
                   HMO       HMO                 PPO    and PPO
                member    market       PPO    market     market
    State            s     share   members     share      share
    ----------  ------  --------  --------  --------  ---------
    New Jersey  1,343,      16.9  1,033,62      13.1       30.0
                   407                   5
    New York    4,418,      24.3   707,893       3.8       28.1
                   550
    Pennsylvan  2,590,      21.5  1,671,56      13.8       35.3
     ia            938                   2
    ===========================================================
    Total       8,352,       Not  3,413,08       Not        Not
                   895  applicab         0  applicab  applicabl
                              le                  le          e
    -----------------------------------------------------------
    Source:  HIAA, Source Book of Health Insurance Data, 1996.

                             Table II.4

                 HMO and PPO Market Shares in South
                       Atlantic States, 1994

                                                      Total HMO
                   HMO       HMO                 PPO    and PPO
                member    market       PPO    market     market
    State            s     share   members     share      share
    ----------  ------  --------  --------  --------  ---------
    Delaware    145,82      20.5     8,754       1.2       21.7
                     2
    District    144,72      25.6    57,771      12.6       38.2
     of              3
     Columbia
    Florida     2,828,      20.1  3,039,13      22.2       42.3
                   854                   7
    Georgia     624,75       8.8   923,543      13.3       22.1
                     0
    Maryland    1,818,      36.2  1,043,79      21.1       57.3
                   824                   3
    North       594,17       8.3   784,023      11.2       19.5
     Carolina        3
    South       155,43       4.2   422,353      11.6       15.8
     Carolina        7
    Virginia    554,83       8.4   514,958       7.9       16.3
                     4
    West             0       0.0    78,011       4.2        4.2
     Virginia
    ===========================================================
    Total       6,867,       Not  6,872,34       Not        Not
                   477  applicab         3  applicab  applicabl
                              le                  le          e
    -----------------------------------------------------------
    Source:  HIAA, Source Book of Health Insurance Data, 1996.

                             Table II.5

              HMO and PPO Market Shares in East North
                        Central States, 1994

                                                      Total HMO
                   HMO       HMO                 PPO    and PPO
                member    market       PPO    market     market
    State            s     share   members     share      share
    ----------  ------  --------  --------  --------  ---------
    Illinois    1,996,      16.9  2,852,98      24.4       41.3
                   750                   5
    Indiana     424,75       7.4   911,003      15.9       23.3
                     3
    Michigan    1,925,      20.2   735,796       7.7       27.9
                   811
    Ohio        2,139,      19.2  2,190,13      19.7       38.9
                   094                   2
    Wisconsin   1,285,      24.2   566,195      11.2       35.4
                   252
    ===========================================================
    Total       7,771,       Not  7,256,11       Not        Not
                   660  applicab         1  applicab  applicabl
                              le                  le          e
    -----------------------------------------------------------
    Source:  HIAA, Source Book of Health Insurance Data, 1996.

                             Table II.6

              HMO and PPO Market Shares in East South
                        Central States, 1994

                                                      Total HMO
                   HMO       HMO                 PPO    and PPO
                member    market       PPO    market     market
    State            s     share   members     share      share
    ----------  ------  --------  --------  --------  ---------
    Alabama     418,12      10.0  1,447,38      34.5       44.5
                     8                   2
    Kentucky    465,65      12.1   441,403      11.6       23.7
                     8
    Mississipp   7,283       0.3    60,407      22.8       23.1
     i
    Tennessee   844,59      16.2  1,625,07      31.8       48.0
                     9                   2
    ===========================================================
    Total       1,735,       Not  3,574,26       Not        Not
                   668  applicab         4  applicab  applicabl
                              le                  le          e
    -----------------------------------------------------------
    Source:  HIAA, Source Book of Health Insurance Data, 1996.

                             Table II.7

              HMO and PPO Market Shares in West North
                        Central States, 1994

                                                      Total HMO
                   HMO       HMO                 PPO    and PPO
                member    market       PPO    market     market
    State            s     share   members     share      share
    ----------  ------  --------  --------  --------  ---------
    Iowa        117,30       4.1   251,762       8.9       13.0
                     7
    Kansas      278,70      10.9   381,090      15.1       26.0
                     3
    Minnesota   1,221,      26.6  1,490,39      32.9       59.5
                   896                   8
    Missouri    778,62      14.7  1,177,76      22.5       37.2
                     5                   4
    Nebraska    155,17       9.5   533,509      33.2       42.7
                     3
    North        7,263       1.1         0       0.0        1.1
     Dakota
    South       20,968       2.9    11,281       1.6        4.5
     Dakota
    ===========================================================
    Total       2,579,       Not  3,845,80       Not        Not
                   935  applicab         4  applicab  applicabl
                              le                  le          e
    -----------------------------------------------------------
    Source:  HIAA, Source Book of Health Insurance Data, 1996.

                             Table II.8

              HMO and PPO Market Shares in West South
                        Central States, 1994

                                                      Total HMO
                   HMO       HMO                 PPO    and PPO
                member    market       PPO    market     market
    State            s     share   members     share      share
    ----------  ------  --------  --------  --------  ---------
    Arkansas    92,929       3.8    62,082       2.5        6.3
    Louisiana   304,20       7.0   685,860      15.5       22.5
                     3
    Oklahoma    238,26       7.3   416,815      12.9       20.2
                     6
    Texas       1,796,       9.7  5,180,48      28.7       38.4
                   610                   3
    ===========================================================
    Total       2,432,       Not  6,345,24       Not        Not
                   008  applicab         0  applicab  applicabl
                              le                  le          e
    -----------------------------------------------------------
    Source:  HIAA, Source Book of Health Insurance Data, 1996.

                             Table II.9

               HMO and PPO Market Shares in Mountain
                            States, 1994

                                                      Total HMO
                   HMO       HMO                 PPO    and PPO
                member    market       PPO    market     market
    State            s     share   members     share      share
    ----------  ------  --------  --------  --------  ---------
    Arizona     1,483,      35.8   650,372      16.5       52.3
                   481
    Colorado    904,74      24.4  1,816,60      50.9       75.3
                     0                   5
    Idaho       13,283       1.2     2,735       0.2        1.4
    Montana     13,364       1.5     1,776       0.2        1.7
    Nevada      219,89      14.7   256,919      18.5       33.2
                     0
    New Mexico  290,45      17.4    38,436       2.4       19.8
                     1
    Utah        370,97      19.2   160,948       8.6       27.8
                     5
    Wyoming          0       0.0         0       0.0        0.0
    ===========================================================
    Total       3,296,       Not  2,927,79       Not        Not
                   184  applicab         1  applicab  applicabl
                              le                  le          e
    -----------------------------------------------------------
    Source:  HIAA, Source Book of Health Insurance Data, 1996.

                            Table II.10

                HMO and PPO Market Shares in Pacific
                            States, 1994

                                                      Total HMO
                   HMO       HMO                 PPO    and PPO
                member    market       PPO    market     market
    State            s     share   members     share      share
    ----------  ------  --------  --------  --------  ---------
    Alaska           0       0.0    17,977       3.1        3.1
    California  12,093      38.3  7,309,84      23.4       61.7
                  ,270                   7
    Hawaii      274,70      23.2   476,921      40.7       63.9
                     2
    Oregon      1,165,      37.5   474,455      15.6       53.1
                   658
    Washington  884,38      16.4  1,283,93      24.1       40.5
                     8                   6
    ===========================================================
    Total       14,418       Not  9,563,13       Not        Not
                  ,018  applicab         6  applicab  applicabl
                              le                  le          e
    -----------------------------------------------------------
    Source:  HIAA, Source Book of Health Insurance Data, 1996.

    ESTIMATES OF CURRENT COMMUNITY
    HOSPITAL EXCESS CAPACITY UNDER THE
    TARGET OCCUPANCY RATE APPROACH
    ========================================================= Appendix III

    This appendix contains estimates of the amount of excess community
    hospital capacity using the target occupancy rate approach, with a
    target occupancy of 85 percent.  It is based on information in the
    American Hospital Association's (AHA) 1996 Hospital Statistics.

    To determine excess capacity, we followed a two-step process.  First,
    we determined how many beds would be needed to support the average
    daily census (ADC) with an 85-percent occupancy rate (ADC/.85).  We
    then subtracted the resulting estimate of beds needed from the
    AHA-reported number of beds.\282 Some numbers may not add due to
    rounding.

                            Table III.1

               Estimates of Excess Community Hospital
                Capacity at 85-Percent Occupancy by
                       Census Division, 1995

                                             Excess capacity
                                            ------------------
    Census division         Beds       ADC      Beds   Percent
    ------------------  --------  --------  --------  --------
    New England           38,293    26,250     7,411      19.4
    Middle Atlantic      152,305   114,310    17,822      11.7
    South Atlantic       154,828    97,382    40,262      26.0
    East North Central   145,737    88,132    42,052      28.9
    East South Central    66,882    39,907    19,933      29.8
    West North Central    79,249    46,943    24,021      30.3
    West South Central    97,930    53,974    34,433      35.2
    Mountain              40,215    23,429    12,651      31.5
    Pacific               97,297    57,976    29,089      29.9
    ==========================================================
    U.S. total           872,736   548,303   227,674      26.1
    ----------------------------------------------------------

                            Table III.2

               Estimates of Excess Community Hospital
              Capacity at 85-Percent Occupancy in New
                        England States, 1995

                                             Excess capacity
                                            ------------------
    State                   Beds       ADC    Beds     Percent
    ------------------  --------  --------  ------  ----------
    Connecticut            7,518     5,461   1,093        14.5
    Maine                  4,011     2,590     964        24.0
    Massachusetts         18,860    13,027   3,534        18.7
    New Hampshire          3,375     2,065     946        28.0
    Rhode Island           2,718     1,844     549        20.2
    Vermont                1,811     1,263     325        17.9
    ==========================================================
    Total                 38,293    26,250   7,411         Not
                                                    applicable
    ----------------------------------------------------------

                            Table III.3

               Estimates of Excess Community Hospital
                Capacity at 85-Percent Occupancy in
                    Middle Atlantic States, 1995

                                             Excess capacity
                                            ------------------
    State                   Beds       ADC    Beds     Percent
    ------------------  --------  --------  ------  ----------
    New Jersey            29,863    21,407   4,678        15.7
    New York              73,908    59,078   4,404         6.0
    Pennsylvania          48,534    33,825   8,740        18.0
    ==========================================================
    Total                152,305   114,310  17,822         Not
                                                    applicable
    ----------------------------------------------------------

                            Table III.4

               Estimates of Excess Community Hospital
                Capacity at 85-Percent Occupancy in
                    South Atlantic States, 1995

                                             Excess capacity
                                            ------------------
    State                   Beds       ADC    Beds     Percent
    ------------------  --------  --------  ------  ----------
    Delaware               1,865     1,511      87         4.7
    District of            3,806     2,720     606        15.9
     Columbia
    Florida               49,690    29,416  15,083        30.4
    Georgia               26,124    15,785   7,553        28.9
    Maryland              12,607     8,794   2,261        17.9
    North Carolina        22,729    15,483   4,514        19.9
    South Carolina        11,307     7,250   2,778        24.6
    Virginia              18,579    11,540   5,003        26.9
    West Virginia          8,121     4,883   2,377        29.3
    ==========================================================
    Total                154,828    97,382  40,262         Not
                                                    applicable
    ----------------------------------------------------------

                            Table III.5

               Estimates of Excess Community Hospital
              Capacity at 85-Percent Occupancy in East
                     North Central States, 1995

                                             Excess capacity
                                            ------------------
    State                   Beds       ADC    Beds     Percent
    ------------------  --------  --------  ------  ----------
    Illinois              41,964    25,056  12,486        29.8
    Indiana               19,362    11,265   6,109        31.6
    Michigan              29,636    19,300   6,930        23.4
    Ohio                  37,766    22,188  11,662        30.9
    Wisconsin             17,009    10,323   4,864        28.6
    ==========================================================
    Total                145,737    88,132  42,051         Not
                                                    applicable
    ----------------------------------------------------------

                            Table III.6

               Estimates of Excess Community Hospital
              Capacity at 85-Percent Occupancy in East
                     South Central States, 1995

                                             Excess capacity
                                            ------------------
    State                   Beds       ADC    Beds     Percent
    ------------------  --------  --------  ------  ----------
    Alabama               18,252    10,753   5,602        30.7
    Kentucky              15,131     8,968   4,580        30.3
    Mississippi           12,590     7,673   3,563        28.3
    Tennessee             20,909    12,513   6,188        30.0
    ==========================================================
    Total                 66,882    39,907  19,933         Not
                                                    applicable
    ----------------------------------------------------------

                            Table III.7

               Estimates of Excess Community Hospital
              Capacity at 85-Percent Occupancy in West
                     North Central States, 1995

                                             Excess capacity
                                            ------------------
    State                   Beds       ADC    Beds     Percent
    ------------------  --------  --------  ------  ----------
    Iowa                  12,615     7,075   4,291        34.0
    Kansas                10,761     5,733   4,016        37.3
    Minnesota             17,367    11,338   4,028        23.2
    Missouri              21,851    12,612   7,013        32.1
    Nebraska               7,851     4,478   2,583        32.9
    North Dakota           4,168     2,744     940        22.6
    South Dakota           4,636     2,963   1,150        24.8
    ==========================================================
    Total                 79,249    46,943  24,021         Not
                                                    applicable
    ----------------------------------------------------------

                            Table III.8

               Estimates of Excess Community Hospital
              Capacity at 85-Percent Occupancy in West
                     South Central States, 1995

                                             Excess capacity
                                            ------------------
    State                   Beds       ADC    Beds     Percent
    ------------------  --------  --------  ------  ----------
    Arkansas              10,144     6,017   3,065        30.2
    Louisiana             19,146    10,698   6,561        34.3
    Oklahoma              11,462     6,068   4,324        37.7
    Texas                 57,178    31,191  20,483        35.8
    ==========================================================
    Total                 97,930    53,974  34,433         Not
                                                    applicable
    ----------------------------------------------------------

                            Table III.9

               Estimates of Excess Community Hospital
                Capacity at 85-Percent Occupancy in
                       Mountain States, 1995

                                             Excess capacity
                                            ------------------
    State                   Beds       ADC    Beds     Percent
    ------------------  --------  --------  ------  ----------
    Arizona                9,852     5,558   3,313        33.6
    Colorado               9,258     5,426   2,875        31.0
    Idaho                  3,383     2,095     918        27.1
    Montana                4,225     2,734   1,009        23.9
    Nevada                 3,600     2,237     968        26.9
    New Mexico             3,675     2,128   1,171        31.9
    Utah                   4,184     2,192   1,605        38.4
    Wyoming                2,038     1,059     792        38.9
    ==========================================================
    Total                 40,215    23,429  12,651         Not
                                                    applicable
    ----------------------------------------------------------

                            Table III.10

               Estimates of Excess Community Hospital
                Capacity at 85-Percent Occupancy in
                        Pacific States, 1995

                                             Excess capacity
                                            ------------------
    State                   Beds       ADC    Beds     Percent
    ------------------  --------  --------  ------  ----------
    Alaska                 1,270       667     485        38.1
    California            75,016    45,060  22,004        29.3
    Hawaii                 3,030     2,414     190         6.3
    Oregon                 7,161     3,783   2,710        37.8
    Washington            10,820     6,052   3,700        34.2
    ==========================================================
    Total                 97,297    57,976  29,089         Not
                                                    applicable
    ----------------------------------------------------------

    --------------------
    \282 We assumed that the AHA-reported beds represent operating rather
    than licensed beds.

    ESTIMATES OF EXCESS COMMUNITY
    HOSPITAL BEDS BASED ON SELECTED
    TARGET OF BEDS PER 1,000
    POPULATION BASED ON 1995
    POPULATION
    ========================================================== Appendix IV

    This appendix contains estimates of excess community hospital beds by
    state and census division using targets of one and two beds per 1,000
    population.  To develop the estimates, we determined the number of
    beds needed at the selected target (either the population divided by
    1,000 or 500) and subtracted the result from the American Hospital
    Association's (AHA) reported beds.\283

    Current demand for community hospital care in some states is already
    below the level needed to support two beds per 1,000 population (an
    average daily census (ADC) of about 1.7 per 1,000 population).  For
    the 11 states where current demand is below 1.7 beds per 1,000
    population (see app.  I),\284 we developed an adjusted estimate of
    excess capacity.  Instead of using the two beds per 1,000 estimate,
    we substituted the estimate of current excess capacity derived under
    the target occupancy rate approach (see app.  III).  Numbers in the
    appendix may not add due to rounding.

                             Table IV.1

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
                Population by Census Division, 1995

                                      Excess beds at a target
                                                 of
                                      ------------------------
                                                        2 beds
                    Populati                               per
                      on (in           1 bed  2 beds  1,000 w/
    Census          thousand             per     per  adjustme
    division              s)    Beds   1,000   1,000        nt
    --------------  --------  ------  ------  ------  --------
    New England       13,313  38,293  24,980  11,667    11,792
    Middle            38,153  152,30  114,15  75,999    75,999
     Atlantic                      5       2
    South Atlantic    46,994  154,82  107,83  60,840    60,840
                                   8       4
    East North        43,456  145,73  102,28  58,825    58,825
     Central                       7       1
    East South        16,066  66,882  50,816  34,750    34,750
     Central
    West North        18,348  79,249  60,901  42,553    42,553
     Central
    West South        28,828  97,930  69,102  40,274    41,026
     Central
    Mountain          15,644  40,215  24,571   8,927    14,551
    Pacific           41,952  97,297  55,345  13,393    29,555
    ==========================================================
    U.S. total       262,754  872,73  609,98  347,22   369,891
                                   6       2       8
    ----------------------------------------------------------

                             Table IV.2

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
               Population in New England States, 1995

                                      Excess beds at a target
                                                 of
                                      ------------------------
                                                        2 beds
                    Populati                               per
                      on (in           1 bed  2 beds  1,000 w/
                    thousand             per     per  adjustme
    State                 s)    Beds   1,000   1,000        nt
    --------------  --------  ------  ------  ------  --------
    Connecticut        3,275   7,518   4,243     968     1,093
    Maine              1,241   4,011   2,770   1,529     1,529
    Massachusetts      6,074  18,860  12,786   6,712     6,712
    New Hampshire      1,148   3,375   2,227   1,079     1,079
    Rhode Island         990   2,718   1,728     738       738
    Vermont              585   1,811   1,226     641       641
    ==========================================================
    Total             13,313  38,293  24,980  11,667    11,792
    ----------------------------------------------------------

                             Table IV.3

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
               Population in Middle Atlantic States,
                                1995

                                      Excess beds at a target
                                                 of
                                      ------------------------
                                                        2 beds
                    Populati                               per
                      on (in           1 bed  2 beds  1,000 w/
                    thousand             per     per  adjustme
    State                 s)    Beds   1,000   1,000        nt
    --------------  --------  ------  ------  ------  --------
    New Jersey         7,945  29,863  21,918  13,973    13,973
    New York          18,136  73,908  55,772  37,636    37,636
    Pennsylvania      12,072  48,534  36,462  24,390    24,390
    ==========================================================
    Total             38,153  152,30  114,15  75,999    75,999
                                   5       2
    ----------------------------------------------------------

                             Table IV.4

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
                Population in South Atlantic States,
                                1995

                                      Excess beds at a target
                                                 of
                                      ------------------------
                                                        2 beds
                    Populati                               per
                      on (in           1 bed  2 beds  1,000 w/
                    thousand             per     per  adjustme
    State                 s)    Beds   1,000   1,000        nt
    --------------  --------  ------  ------  ------  --------
    Delaware             717   1,865   1,148     431       431
    District of          554   3,806   3,252   2,698     2,698
     Columbia
    Florida           14,166  49,690  35,524  21,358    21,358
    Georgia            7,201  26,124  18,923  11,722    11,722
    Maryland           5,042  12,607   7,565   2,523     2,523
    North Carolina     7,195  22,729  15,534   8,339     8,339
    South Carolina     3,673  11,307   7,634   3,961     3,961
    Virginia           6,618  18,579  11,961   5,343     5,343
    West Virginia      1,828   8,121   6,293   4,465     4,465
    ==========================================================
    Total             46,994  154,82  118,83  60,840    60,840
                                   8       4
    ----------------------------------------------------------

                             Table IV.5

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
              Population in East North Central States,
                                1995

                                      Excess beds at a target
                                                 of
                                      ------------------------
                                                        2 beds
                    Populati                               per
                      on (in           1 bed  2 beds  1,000 w/
                    thousand             per     per  adjustme
    State                 s)    Beds   1,000   1,000        nt
    --------------  --------  ------  ------  ------  --------
    Illinois          11,830  41,964  30,134  18,304    18,304
    Indiana            5,803  19,362  13,559   7,756     7,756
    Michigan           9,549  29,636  20,087  10,538    10,538
    Ohio              11,151  37,766  26,615  15,464    15,464
    Wisconsin          5,123  17,009  11,886   6,763     6,763
    ==========================================================
    Total             43,456  145,73  102,28  58,825    58,825
                                   7       1
    ----------------------------------------------------------

                             Table IV.6

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
              Population in East South Central States,
                                1995

                                      Excess beds at a target
                                                 of
                                      ------------------------
                                                        2 beds
                    Populati                               per
                      on (in           1 bed  2 beds  1,000 w/
                    thousand             per     per  adjustme
    State                 s)    Beds   1,000   1,000        nt
    --------------  --------  ------  ------  ------  --------
    Alabama            4,253  18,252  13,999   9,746     9,746
    Kentucky           3,860  15,131  11,271   7,411     7,411
    Mississippi        2,697  12,590   9,893   7,196     7,196
    Tennessee          5,256  20,909  15,653  10,397    10,397
    ==========================================================
    Total             16,066  66,882  50,816  34,750    34,750
    ----------------------------------------------------------

                             Table IV.7

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
              Population in West North Central States,
                                1995

                                      Excess beds at a target
                                                 of
                                      ------------------------
                                                        2 beds
                    Populati                               per
                      on (in           1 bed  2 beds  1,000 w/
                    thousand             per     per  adjustme
    State                 s)    Beds   1,000   1,000        nt
    --------------  --------  ------  ------  ------  --------
    Iowa               2,842  12,615   9,773   6,931     6,931
    Kansas             2,565  10,761   8,196   5,631     5,631
    Minnesota          4,610  17,367  12,757   8,147     8,147
    Missouri           5,324  21,851  16,527  11,203    11,203
    Nebraska           1,637   7,851   6,214   4,577     4,577
    North Dakota         641   4,168   3,527   2,886     2,886
    South Dakota         729   4,636   3,907   3,178     3,178
    ==========================================================
    Total             18,348  79,249  60,901  42,553    42,553
    ----------------------------------------------------------

                             Table IV.8

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
              Population in West South Central States,
                                1995

                                      Excess beds at a target
                                                 of
                                      ------------------------
                                                        2 beds
                    Populati                               per
                      on (in           1 bed  2 beds  1,000 w/
                    thousand             per     per  adjustme
    State                 s)    Beds   1,000   1,000        nt
    --------------  --------  ------  ------  ------  --------
    Arkansas           2,484  10,144   7,660   5,176     5,176
    Louisiana          4,342  19,146  14,804  10,462    10,462
    Oklahoma           3,278  11,462   8,184   4,906     4,906
    Texas             18,724  57,178  38,454  19,730    20,482
    ==========================================================
    Total             28,828  97,930  69,102  40,274    41,026
    ----------------------------------------------------------

                             Table IV.9

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
                Population in Mountain States, 1995

                                      Excess beds at a target
                                                 of
                                      ------------------------
                                                        2 beds
                    Populati                               per
                      on (in           1 bed  2 beds  1,000 w/
                    thousand             per     per  adjustme
    State                 s)    Beds   1,000   1,000        nt
    --------------  --------  ------  ------  ------  --------
    Arizona            4,218   9,852   5,634   1,416     3,313
    Colorado           3,747   9,258   5,511   1,764     2,874
    Idaho              1,163   3,383   2,220   1,057     1,057
    Montana              870   4,225   3,355   2,485     2,485
    Nevada             1,530   3,600   2,070     540       968
    New Mexico         1,685   3,675   1,990     305     1,171
    Utah               1,951   4,184   2,233     282     1,605
    Wyoming              480   2,038   1,558   1,078     1,078
    ==========================================================
    Total             15,644  40,215  24,571   8,927    14,551
    ----------------------------------------------------------

                            Table IV.10

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
                 Population in Pacific States, 1995

                                      Excess beds at a target
                                                 of
                                      ------------------------
                                                        2 beds
                    Populati                               per
                      on (in           1 bed  2 beds  1,000 w/
                    thousand             per     per  adjustme
    State                 s)    Beds   1,000   1,000        nt
    --------------  --------  ------  ------  ------  --------
    Alaska               604   1,270     666      62       485
    California        31,589  75,016  43,427  11,838    22,004
    Hawaii             1,187   3,030   1,843     656       656
    Oregon             3,141   7,161   4,020     879     2,710
    Washington         5,431  10,820   5,389     -42     3,700
    ==========================================================
    Total             41,952  97,297  55,345  13,393    29,555
    ----------------------------------------------------------

    --------------------
    \283 We assumed that the AHA-reported beds represent operating rather
    than licensed beds.

    \284 The 11 states are Alaska, Arizona, California, Colorado,
    Connecticut, Nevada, New Mexico, Oregon, Texas, Utah, and Washington.
    We did not make adjustments for Maryland and Virginia because those
    states have ADCs slightly above 1.7 per 1,000 population.

    ESTIMATES OF EXCESS COMMUNITY
    HOSPITAL BEDS BASED ON SELECTED
    TARGETS OF BEDS PER 1,000
    POPULATION FOR PROJECTED
    POPULATION IN 2010
    =========================================================== Appendix V

    This appendix contains estimates of excess community hospital beds by
    state and census division using targets of one and two beds per 1,000
    projected population in 2010.  To develop the estimates, we
    determined the number of beds needed at the selected target (either
    the projected population divided by 1,000 or 500) and subtracted the
    result from the American Hospital Association's reported community
    hospital beds in 1995.\285

                             Table V.1

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
                Population by Census Division, 2010

                                             Excess beds at a
                                                target of
                                            ------------------
                      Population               1 bed    2 beds
                             (in                 per       per
    Census division   thousands)      Beds     1,000     1,000
    ----------------  ----------  --------  --------  --------
    New England           13,755    38,293    24,538    10,783
    Middle Atlantic       39,546   152,305   112,759    73,213
    South Atlantic        55,321   154,828    99,507    44,186
    East North            46,259   145,737    99,478    53,219
     Central
    East South            17,941    66,882    48,941    31,000
     Central
    West North            20,074    79,249    59,175    39,101
     Central
    West South            34,123    97,930    63,807    29,684
     Central
    Mountain              19,093    40,215    21,122     2,029
    Pacific               54,318    97,297    42,979         0
    ==========================================================
    U.S. total           300,430   872,736   572,306   271,876
    ----------------------------------------------------------

                             Table V.2

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
               Population in New England States, 2010

                                             Excess beds at a
                                                target of
                                            ------------------
                      Population               1 bed    2 beds
                             (in                 per       per
    State             thousands)      Beds     1,000     1,000
    ----------------  ----------  --------  --------  --------
    Connecticut            3,412     7,518     4,106       694
    Maine                  1,309     4,011     2,702     1,393
    Massachusetts          6,097    18,860    12,763     6,666
    New Hampshire          1,280     3,375     2,095       815
    Rhode Island           1,034     2,718     1,684       650
    Vermont                  623     1,811     1,188       565
    ==========================================================
    Total                 13,755    38,293    24,538    10,783
    ----------------------------------------------------------

                             Table V.3

               Estimates of Excess Community Hospital
               Beds at Selected Targets per 1,000
               Population in Middle Atlantic States,
                                2010

                                             Excess beds at a
                                                target of
                                            ------------------
                      Population               1 bed    2 beds
                             (in                 per       per
    State             thousands)      Beds     1,000     1,000
    ----------------  ----------  --------  --------  --------
    New Jersey             8,562    29,863    21,301    12,739
    New York              18,546    73,908    55,362    36,816
    Pennsylvania          12,438    48,534    36,096    23,658
    ==========================================================
    Total                 39,546   152,305   112,759    73,213
    ----------------------------------------------------------

                             Table V.4

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
                Population in South Atlantic States,
                                2010

                                             Excess beds at a
                                                target of
                                            ------------------
                      Population               1 bed    2 beds
                             (in                 per       per
    State             thousands)      Beds     1,000     1,000
    ----------------  ----------  --------  --------  --------
    Delaware                 815     1,865     1,050       235
    District of              577     3,806     3,229     2,652
     Columbia
    Florida               17,372    49,690    32,318    14,946
    Georgia                8,553    26,124    17,571     9,018
    Maryland               5,782    12,607     6,825     1,043
    North Carolina         8,341    22,729    14,388     6,047
    South Carolina         4,311    11,307     6,996     2,685
    Virginia               7,728    18,579    10,851     3,123
    West Virginia          1,842     8,121     6,279     4,437
    ==========================================================
    Total                 55,321   154,828    99,507    44,186
    ----------------------------------------------------------

                             Table V.5

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
              Population in East North Central States,
                                2010

                                             Excess beds at a
                                                target of
                                            ------------------
                      Population               1 bed    2 beds
                             (in                 per       per
    State             thousands)      Beds     1,000     1,000
    ----------------  ----------  --------  --------  --------
    Illinois              12,652    41,964    29,312    16,660
    Indiana                6,286    19,362    13,076     6,790
    Michigan              10,033    29,636    19,603     9,570
    Ohio                  11,659    37,766    26,107    14,448
    Wisconsin              5,629    17,009    11,380     5,751
    ==========================================================
    Total                 46,259   145,737    99,478    53,219
    ----------------------------------------------------------

                             Table V.6

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
              Population in East South Central States,
                                2010

                                             Excess beds at a
                                                target of
                                            ------------------
                      Population               1 bed    2 beds
                             (in                 per       per
    State             thousands)      Beds     1,000     1,000
    ----------------  ----------  --------  --------  --------
    Alabama                4,856    18,252    13,396     8,540
    Kentucky               4,160    15,131    10,971     6,811
    Mississippi            2,918    12,590     9,672     6,754
    Tennessee              6,007    20,909    14,902     8,895
    ==========================================================
    Total                 17,941    66,882    48,941    31,000
    ----------------------------------------------------------

                             Table V.7

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
              Population in West North Central States,
                                2010

                                             Excess beds at a
                                                target of
                                            ------------------
                      Population               1 bed    2 beds
                             (in                 per       per
    State             thousands)      Beds     1,000     1,000
    ----------------  ----------  --------  --------  --------
    Iowa                   2,981    12,615     9,634     6,653
    Kansas                 2,922    10,761     7,839     4,917
    Minnesota              5,127    17,367    12,240     7,113
    Missouri               5,760    21,851    16,091    10,331
    Nebraska               1,793     7,851     6,058     4,265
    North Dakota             676     4,168     3,492     2,816
    South Dakota             815     4,636     3,821     3,006
    ==========================================================
    Total                 20,074    79,249    59,175    39,101
    ----------------------------------------------------------

                             Table V.8

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
              Population in West South Central States,
                                2010

                                             Excess beds at a
                                                target of
                                            ------------------
                      Population               1 bed    2 beds
                             (in                 per       per
    State             thousands)      Beds     1,000     1,000
    ----------------  ----------  --------  --------  --------
    Arkansas               2,782    10,144     7.362     4,580
    Louisiana              4,808    19,146    14,338     9,530
    Oklahoma               3,683    11,462     7,779     4,096
    Texas                 22,850    57,178    34,328    11,478
    ==========================================================
    Total                 34,123    97,930    63,807    29,684
    ----------------------------------------------------------

                             Table V.9

               Estimates of Excess Community Hospital
                 Beds at Selected Targets per 1,000
                Population in Mountain States, 2010

                                             Excess beds at a
                                                target of
                                            ------------------
                      Population               1 bed    2 beds
                             (in                 per       per
    State             thousands)      Beds     1,000     1,000
    ----------------  ----------  --------  --------  --------
    Arizona                5,074     9,852     4,778         0
    Colorado               4,494     9,258     4,764       270
    Idaho                  1,454     3,383     1,929       475
    Montana                  996     4,225     3,229     2,233
    Nevada                 1,935     3,600     1,665         0
    New Mexico             2,082     3,675     1,593         0
    Utah                   2,462     4,184     1,722         0
    Wyoming                  596     2,038     1,442       846
    ==========================================================
    Total                 19,093    40,215    21,122     2,029
    ----------------------------------------------------------

                             Table V.10

               Estimates of Excess Community Hospital
               Beds at Selected Targets per 1,000
                 Population in Pacific States, 2010

                                             Excess beds at a
                                                target of
                                            ------------------
                      Population               1 bed    2 beds
                             (in                 per       per
    State             thousands)      Beds     1,000     1,000
    ----------------  ----------  --------  --------  --------
    Alaska                   781     1,270       489         0
    California            41,085    75,016    33,931         0
    Hawaii                 1,551     3,030     1,479         0
    Oregon                 3,876     7,161     3,285         0
    Washington             7,025    10,820     3,795         0
    ==========================================================
    Total                 54,318    97,297    42,979         0
    ----------------------------------------------------------

    --------------------
    \285 We assumed that the AHA-reported beds represent operating rather
    than licensed beds.

    VETERAN USERS, OPERATING BEDS, AND
    AVERAGE DAILY CENSUS BY VISN IN
    FISCAL YEAR 1995
    ========================================================== Appendix VI

    This appendix contains information on the number of VA hospital beds
    and average daily census (ADC) per 1,000 VA health care system users
    for each Veterans Integrated Service Network (VISN).  Data on
    hospital beds and ADC were obtained from VA's Summary of Medical
    Programs for fiscal year 1995.  Data on unique veteran users were
    supplied by VA officials developing the Veterans Equitable Resource
    Allocation system.  Some totals may not add due to rounding.

                             Table VI.1

               VA Hospital Operating Beds and ADC by
                       VISN, Fiscal Year 1995

                      Unique
                       users            Beds
                         (in  Operat     per           ADC per
                    thousand     ing   1,000             1,000
    VISN                  s)    beds   users     ADC     users
    --------------  --------  ------  ------  ------  --------
    1 (Boston)           147   2,918      20   2,309        16
    2 (Albany)            78   1,880      24   1,454        19
    3 (Bronx)            146   3,789      26   3,055        21
    4 (Pittsburgh)       136   3,215      24   2,474        18
    5 (Baltimore)         81   1,708      21   1,262        16
    6 (Durham)           147   2,622      18   1,985        14
    7 (Atlanta)          163   3,395      21   2,584        16
    8 (Bay Pines)        222   2,970      13   2,079         9
    9 (Nashville)        135   2,729      20   2,023        15
    10                   100   1,512      15   1,196        12
     (Cincinnati)
    11 (Ann Arbor)       124   2,680      22   1,933        16
    12 (Chicago)         137   2,956      22   2,185        16
    13                    82   1,326      16     926        11
     (Minneapolis)
    14 (Omaha)            57     973      17     690        12
    15 (Kansas           120   2,054      17   1,509        13
     City)
    16 (Jackson)         257   3,824      15   2,533        10
    17 (Dallas)          128   2,327      18   1,562        12
    18 (Phoenix)         144   1,371      10     907         6
    19 (Denver)           77   1,231      16     824        11
    20 (Portland)        124   1,456      12     941         8
    21 (San              123   1,601      13   1,115         9
     Francisco)
    22 (Long             162   2,248      14   1,457         9
     Beach)
    ==========================================================
    Total              2,890  50,785      18  37,003        13
    ----------------------------------------------------------

                             Table VI.2

              VA Surgical Beds and ADC by VISN, Fiscal
                             Year 1995

                      Unique
                       users            Beds
                         (in             per           ADC per
                    thousand  Surger   1,000             1,000
    VISN                  s)  y beds   users     ADC     users
    --------------  --------  ------  ------  ------  --------
    1 (Boston)           147     346       2     252         2
    2 (Albany)            78     218       3     129         2
    3 (Bronx)            146     410       3     267         2
    4 (Pittsburgh)       136     430       3     235         2
    5 (Baltimore)         81     209       3     134         2
    6 (Durham)           147     450       3     286         2
    7 (Atlanta)          163     425       3     238         1
    8 (Bay Pines)        222     637       3     381         2
    9 (Nashville)        135     485       4     293         2
    10                   100     192       2     139         1
     (Cincinnati)
    11 (Ann Arbor)       124     306       2     178         1
    12 (Chicago)         137     408       3     249         2
    13                    82     246       3     146         2
     (Minneapolis)
    14 (Omaha)            57     231       4     128         2
    15 (Kansas           120     295       2     206         2
     City)
    16 (Jackson)         257     707       3     453         2
    17 (Dallas)          128     367       3     221         2
    18 (Phoenix)         144     283       2     167         1
    19 (Denver)           77     195       3     113         1
    20 (Portland)        124     287       2     171         1
    21 (San              123     253       2     154         1
     Francisco)
    22 (Long             162     440       3     237         1
     Beach)
    ==========================================================
    Total              2,890   7,820       3   4,777         2
    ----------------------------------------------------------

                             Table VI.3

              VA Medical Beds and ADC by VISN, Fiscal
                             Year 1995

                      Unique
                       users            Beds
                         (in             per           ADC per
                    thousand  Surger   1,000             1,000
    VISN                  s)  y beds   users     ADC     users
    --------------  --------  ------  ------  ------  --------
    1 (Boston)           147   1,296       9   1,006         7
    2 (Albany)            78   1,108      14     896        11
    3 (Bronx)            146   1,984      14   1,561        11
    4 (Pittsburgh)       136   1,738      13   1,368        10
    5 (Baltimore)         81     872      11     645         8
    6 (Durham)           147   1,436      10   1,125         8
    7 (Atlanta)          163   1,715      11   1,343         8
    8 (Bay Pines)        222   1,540       7   1,157         5
    9 (Nashville)        135   1,606      12   1,230         9
    10                   100     743       7     539         5
     (Cincinnati)
    11 (Ann Arbor)       124   1,291      10     906         7
    12 (Chicago)         137   1,384      10     973         7
    13                    82     570       7     401         5
     (Minneapolis)
    14 (Omaha)            57     413       7     320         6
    15 (Kansas           120   1,115       9     808         7
     City)
    16 (Jackson)         257   2,014       8   1,270         5
    17 (Dallas)          128   1,479      12     998         8
    18 (Phoenix)         144     705       5     473         3
    19 (Denver)           77     491       6     303         4
    20 (Portland)        124     688       6     418         3
    21 (San              123     643       5     489         4
     Francisco)
    22 (Long             162   1,124       7     677         4
     Beach)
    ==========================================================
    Total              2,890  25,955       9  18,906         7
    ----------------------------------------------------------

                             Table VI.4

                VA Psychiatric Beds and ADC by VISN,
                          Fiscal Year 1995

                      Unique
                       users            Beds
                         (in             per           ADC per
                    thousand  Surger   1,000             1,000
    VISN                  s)  y beds   users     ADC     users
    --------------  --------  ------  ------  ------  --------
    1 (Boston)           147   1,276       9   1,051         7
    2 (Albany)            78     554       7     429         6
    3 (Bronx)            146   1,395      10   1,227         8
    4 (Pittsburgh)       136   1,047       8     871         6
    5 (Baltimore)         81     627       8     483         6
    6 (Durham)           147     736       5     574         4
    7 (Atlanta)          163   1,255       8   1,003         6
    8 (Bay Pines)        222     793       4     541         2
    9 (Nashville)        135     638       5     500         4
    10                   100     577       6     518         5
     (Cincinnati)
    11 (Ann Arbor)       124   1,083       9     849         7
    12 (Chicago)         137   1,164       8     963         7
    13                    82     510       6     379         5
     (Minneapolis)
    14 (Omaha)            57     329       6     242         4
    15 (Kansas           120     644       5     495         4
     City)
    16 (Jackson)         257   1,103       4     810         3
    17 (Dallas)          128     481       4     343         3
    18 (Phoenix)         144     383       3     267         2
    19 (Denver)           77     545       7     408         5
    20 (Portland)        124     481       4     352         3
    21 (San              123     705       6     472         4
     Francisco)
    22 (Long             162     684       4     543         3
     Beach)
    ==========================================================
    Total              2,890  17,010       6  13,320         5
    ----------------------------------------------------------

    COMPARISON OF VA AND COMMUNITY
    HOSPITAL UTILIZATION BY CENSUS
    DIVISION
    ========================================================= Appendix VII

    This appendix contains comparisons of the rate of use of VA and
    community hospitals by census division.\286 It shows the variation in
    VA beds and average daily census (ADC) per 1,000 veterans by Veterans
    Integrated Service Networks (VISN) compared with community beds and
    ADC per 1,000 population in the corresponding census division.  The
    data are based on appendixes I and VI.

                            Table VII.1

               Comparison of Beds per 1,000 VA Users
              With Community Beds per 1,000 Population
                 in Corresponding Census Divisions

                                                      Beds per
                        Beds per                         1,000
    Census division        1,000  VISN                   users
    ----------------  ----------  ----------------  ----------
    New England              2.9  1 (Boston)                20
    Middle Atlantic          4.0  2 (Albany)                24
                                  3 (Bronx)                 26
                                  4 (Pittsburgh)            24
    South Atlantic           3.3  5 (Baltimore)             21
                                  6 (Durham)                18
                                  7 (Atlanta)               21
                                  8 (Bay Pines)             13
    East North               3.4  10 (Cincinnati)           15
     Central
                                  11 (Ann Arbor)            22
                                  12 (Chicago)              22
    East South               4.2  9 (Nashville)             20
     Central
    West North               4.3  13 (Minneapolis)          16
     Central
                                  14 (Omaha)                17
                                  15 (Kansas City)          17
    West South               3.4  16 (Jackson)              15
     Central
                                  17 (Dallas)               18
    Mountain                 2.6  18 (Phoenix)              10
                                  19 (Denver)               16
    Pacific                  2.3  20 (Portland)             12
                                  21 (San                   13
                                   Francisco)
                                  22 (Long Beach)           14
    Average                  3.3  Average                   18
    ----------------------------------------------------------

                            Table VII.2

              Comparison of ADC per 1,000 VA Users by
               VISN With ADC per 1,000 Population in
               Corresponding Census Divisions for VA
                      and Community Hospitals

                         ADC per                       ADC per
    Census division        1,000  VISN                   1,000
    ----------------  ----------  ----------------  ----------
    New England              2.0  1 (Boston)                16
    Middle Atlantic          3.0  2 (Albany)                19
                                  3 (Bronx)                 21
                                  4 (Pittsburgh)            18
    South Atlantic           2.1  5 (Baltimore)             16
                                  6 (Durham)                14
                                  7 (Atlanta)               16
                                  8 (Bay Pines)              9
    East North               2.0  10 (Cincinnati )          12
     Central
                                  11 (Ann Arbor)            16
                                  12 (Chicago )             16
    East South               2.5  9 (Nashville)             15
     Central
    West North               2.6  13 (Minneapolis)          11
     central
                                  14 (Omaha)                12
                                  15 (Kansas City           13
                                   )
    West South               1.9  16 (Jackson)              10
     Central
                                  17 (Dallas)               12
    Mountain                 1.5  18 (Phoenix)               6
                                  19 (Denver)               11
    Pacific                  1.4  20 (Portland)              8
                                  21 (San                    9
                                   Francisco)
                                  22 (Long Beach)            9
    Average                  2.1  Average                   13
    ----------------------------------------------------------

    --------------------
    \286 Some VISNs are divided between two or more census divisions.  In
    such cases, we assigned the VISN to the census division that
    contained the largest portion of the VISN.

    ESTIMATES OF EXCESS VA HOSPITAL
    BEDS
    ======================================================== Appendix VIII

    This appendix contains estimates of excess VA hospital beds under
    varying assumptions.  To determine excess capacity under the target
    occupancy rate approach, we followed a two-step approach.  First, we
    determined how many beds would be needed to support the average daily
    census (ADC) with an 85-percent occupancy rate (ADC/.85).  We then
    subtracted the resulting estimate of beds needed from the VA-reported
    average number of operating beds in fiscal year 1995.  (See table
    VIII.1.)

                            Table VIII.1

              Estimates of Excess VA Hospital Capacity
              at 85-percent Occupancy by VISN, Fiscal
                             Year 1995

                                                    Excess
                                                   capacity
                                                --------------
                                          Beds
                                        needed
                                        at 85-
                                       percent
                    Operatin          occupanc          Percen
    VISN              g beds     ADC         y    Beds       t
    --------------  --------  ------  --------  ------  ------
    1 (Boston)         2,918   2,309     2,716     202     6.9
    2 (Albany)         1,880   1,454     1,711     169     9.0
    3 (Bronx)          3,789   3,055     3,594     195     5.2
    4 (Pittsburgh)     3,215   2,474     2,911     304     9.5
    5 (Baltimore)      1,708   1,262     1,485     223    13.1
    6 (Durham)         2,622   1,985     2,335     287    11.0
    7 (Atlanta)        3,395   2,584     3,040     355    10.5
    8 (Bay Pines)      2,970   2,079     2,446     524    17.6
    9 (Nashville)      2,729   2,023     2,380     349    12.8
    10                 1,512   1,196     1,407     105     7.0
     (Cincinnati)
    11 (Ann Arbor)     2,680   1,933     2,274     406    15.2
    12 (Chicago)       2,956   2,185     2,571     385    13.0
    13                 1,326     926     1,089     237    17.9
     (Minneapolis)
    14 (Omaha)           973     690       812     161    16.6
    15 (Kansas         2,054   1,509     1,775     279    13.6
     City)
    16 (Jackson)       3,824   2,533     2,980     844    22.1
    17 (Dallas)        2,327   1,562     1,838     489    21.0
    18 (Phoenix)       1,371     907     1,067     304    22.2
    19 (Denver)        1,231     824       969     262    21.3
    20 (Portland)      1,456     941     1,107     349    24.0
    21 (San            1,601   1,115     1,312     289    18.0
     Francisco)
    22 (Long           2,248   1,457     1,714     534    23.8
     Beach)
    ==========================================================
    Total             50,785  37,003    43,533   7,252    14.2
    ----------------------------------------------------------
    To estimate the number of excess VA hospital beds under different
    assumptions of the extent of medically unnecessary care, we (1)
    multiplied the ADC by the percent of care assumed to be medically
    unnecessary, (2) subtracted the result from the ADC, (3) divided by
    .85 to adjust for the optimum occupancy rate, and (4) subtracted the
    result from operating beds.  (See tables VIII.2 and VIII.3.)

                            Table VIII.2

                Estimates of VA Hospital Beds Needed
                   With Adjustment for Medically
                      Unnecessary Days of Care

                                Beds needed by percent of care
                                   assumed to be medically
                                         unnecessary
                                ------------------------------
                  Operat            10      20      30      40
                     ing        percen  percen  percen  percen
    VISN            beds   ADC       t       t       t       t
    ------------  ------  ----  ------  ------  ------  ------
    1 (Boston)     2,918  2,30   2,445   2,173   1,902   1,630
                             9
    2 (Albany)     1,880  1,45   1,540   1,368   1,197   1,026
                             4
    3 (Bronx)      3,789  3,05   3,234   2,875   2,516   2,156
                             5
    4              3,215  2,47   2,620   2,328   2,037   1,746
     (Pittsburgh)            4
    5              1,708  1,26   1,336   1,188   1,039     891
     (Baltimore)             2
    6 (Durham)     2,622  1,98   2,101   1,868   1,634   1,401
                             5
    7 (Atlanta)    3,395  2,58   2,736   2,432   2,128   1,824
                             4
    8 (Bay         2,970  2,07   2,201   1,957   1,712   1,468
     Pines)                  9
    9              2,729  2,02   2,142   1,904   1,666   1,428
     (Nashville)             3
    10             1,512  1,19   1,265   1,126     985     844
     (Cincinnati)            6
    11 (Ann        2,680  1,93   2,047   1,819   1,592   1,364
     Arbor)                  3
    12 (Chicago)   2,956  2,18   2,313   2,056   1,799   1,542
                             5
    13             1,326   926     980     872     763     654
     (Minneapoli
     s)
    14 (Omaha)       973   690     731     649     568     487
    15 (Kansas     2,054  1,50   1,598   1,420   1,243   1,065
     City)                   9
    16 (Jackson)   3,824  2,53   2,682   2,384   2,086   1,788
                             3
    17 (Dallas)    2,327  1,56   1,654   1,470   1,286   1,103
                             2
    18 (Phoenix)   1,371   907     960     854     747     640
    19 (Denver)    1,231   824     872     776     679     582
    20             1,456   941     996     886     775     664
     (Portland)
    21 (San        1,601  1,11   1,180   1,049     918     787
     Francisco)              5
    22 (Long       2,248  1,45   1,542   1,371   1,200   1,028
     Beach)                  7
    ==========================================================
    Total         50,785  37,0  39,175  34,825  30,472  26,118
                            03
    ----------------------------------------------------------

                            Table VIII.3

                Estimates of Excess VA Hospital Beds
                   With Adjustment for Medically
                      Unnecessary Days of Care

                                 Excess beds on the basis of
                                medically unnecessary care of
                                ------------------------------
                        Operat      10      20      30      40
                           ing  percen  percen  percen  percen
    VISN                  beds       t       t       t       t
    ------------------  ------  ------  ------  ------  ------
    1 (Boston)           2,918     473     745   1,016   1,288
    2 (Albany)           1,880     340     512     683     854
    3 (Bronx)            3,789     554     914   1,273   1,633
    4 (Pittsburgh)       3,215     595     887   1,178   1,469
    5 (Baltimore)        1,708     372     520     669     817
    6 (Durham)           2,622     520     754     987   1,221
    7 (Atlanta)          3,395     659     963   1,267   1,571
    8 (Bay Pines)        2,970     769   1,013   1,258   1,502
    9 (Nashville)        2,729     587     825   1,063   1,301
    10 (Cincinnati)      1,512     246     386     527     668
    11 (Ann Arbor)       2,680     633     861   1,088   1,316
    12 (Chicago)         2,956     642     900   1,157   1,414
    13 (Minneapolis)     1,326     346     454     563     672
    14 (Omaha)             973     242     324     405     486
    15 (Kansas City)     2,054     278     634     811     989
    16 (Jackson)         3,824   1,142   1,440   1,738   2,036
    17 (Dallas)          2,327     673     857   1,041   1,224
    18 (Phoenix)         1,371     411     517     624     731
    19 (Denver)          1,231     359     455     552     649
    20 (Portland)        1,456     460     570     681     792
    21 (San Francisco)   1,601     420     552     683     814
    22 (Long Beach)      2,248     705     877   1,048   1,220
    ==========================================================
    Total               50,785  11,426  15,960  20,312  24,667
    ----------------------------------------------------------
    To develop estimates of excess hospital beds under the target beds
    per 1,000 population approach we (1) selected three targets (2.5, 7,
    and 15 beds per 1,000 users) on the basis of actual VA hospital use
    rates, (2) multiplied the veteran users by the targets, and (3)
    subtracted the result from operating beds.  (See table VIII.4.)

                            Table VIII.4

                Estimates of Excess VA Hospital Beds
              Under Selected Targets of Beds per 1,000
                               Users

                                        Excess target beds per
                                            1,000 users at
                                        ----------------------
                      Unique
                       users
                         (in
                    thousand  Operatin
    VISN                  s)    g beds     2.5       7      15
    --------------  --------  --------  ------  ------  ------
    1 (Boston)           147     2,918   2,550   1,889     713
    2 (Albany)            78     1,880   1,685   1,334     710
    3 (Bronx)            146     3,789   3,424   2,767   1,599
    4 (Pittsburgh)       136     3,215   2,875   2,263   1,175
    5 (Baltimore)         81     1,708   1,505   1,141     493
    6 (Durham)           147     2,622   2,254   1,593     417
    7 (Atlanta)          163     3,395   2,987   2,254     950
    8 (Bay Pines)        222     2,970   2,415   1,416       0
    9 (Nashville)        135     2,729   2,391   1,784     704
    10                   100     1,512   1,262     812      12
     (Cincinnati)
    11 (Ann Arbor)       124     2,680   2,370   1,812     820
    12 (Chicago)         137     2,956   2,613   1,997     901
    13                    82     1,326   1,121     752      96
     (Minneapolis)
    14 (Omaha)            57       973     830     574     118
    15 (Kansas           120     2,054   1,754   1,214     254
     City)
    16 (Jackson)         257     3,824   3,181   2,025       0
    17 (Dallas)          128     2,327   2,007   1,431     407
    18 (Phoenix)         144     1,371   1,011     363       0
    19 (Denver)           77     1,231   1,038     692      76
    20 (Portland)        124     1,456   1,146     588       0
    21 (San              123     1,601   1,293     740       0
     Francisco)
    22 (Long             162     2,248   1,843   1,114       0
     Beach)
    ==========================================================
    Total              2,890    50,785  43,555  30,555   9,445
    ----------------------------------------------------------

    CHANGES IN VA OPERATING BEDS
    BETWEEN FISCAL YEARS 1995 AND 1996
    ========================================================== Appendix IX

    This appendix shows the reductions in average VA hospital operating
    beds between fiscal years 1995 and 1996.  It is based on VA's Summary
    of Medical Programs.

                             Table IX.1

               Changes in Operating Beds by Veterans
                 Integrated Service Network (VISN),
                        Fiscal Years 1995-96

                           FY 1995       FY 1996
                         operating     operating
    VISN                      beds          beds    Difference
    ----------------  ------------  ------------  ------------
    1 (Boston)               2,918         2,560           358
    2 (Albany)               1,880         1,713           167
    3 (Bronx)                3,789         3,350           439
    4 (Pittsburgh)           3,215         2,777           438
    5 (Baltimore)            1,708         1,423           285
    6 (Durham)               2,622         2,462           160
    7 (Atlanta)              3,395         2,875           520
    8 (Bay Pines)            2,970         2,735           235
    9 (Nashville)            2,729         2,573           156
    10 (Cincinnati)          1,512         1,453            59
    11 (Ann Arbor)           2,680         2,571           109
    12 (Chicago)             2,956         2,747           209
    13 (Minneapolis)         1,326         1,155           171
    14 (Omaha)                 973           894            79
    15 (Kansas City)         2,054         1,839           215
    16 (Jackson)             3,824         3,278           546
    17 (Dallas)              2,327         2,082           245
    18 (Phoenix)             1,371         1,239           132
    19 (Denver)              1,231         1,197            34
    20 (Portland)            1,456         1,361            95
    21 (San                  1,601         1,428           173
     Francisco)
    22 (Long Beach)          2,248         2,027           221
    ==========================================================
    Total                   50,785        45,739         5,046
    ----------------------------------------------------------

    (See figure in printed edition.)Appendix X
    COMMENTS FROM THE DEPARTMENT OF
    VETERANS AFFAIRS
    ========================================================== Appendix IX

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    GAO CONTACTS AND STAFF
    ACKNOWLEDGMENTS
    ========================================================== Appendix XI

    GAO CONTACTS

    Anthony R.  Padilla, Evaluator-in-Charge, (303) 572-7308
    Maria P.  Vargas, Evaluator, (303) 572-7336

    STAFF ACKNOWLEDGMENTS

    James R.  Linz, Assistant Director, was the primary author of this
    report.  The following staff also made significant contributions to
    the preparation of this report:  Cheryl A.  Brand, James S.  Crigler,
    Sandra P.  Davis, Brian W.  Eddington, Vernal F.  Elliott, John C.
    Furutani, Jean N.  Harker, Carol F.  Johnson, George L.  Lorenzen,
    Ann McDermott, Dawn E.  Shorey, Rosene F.  Vigil, Alan J.  Wernz, and
    Liz Williams.

    RELATED GAO PRODUCTS
    ============================================================ Chapter 1

    VA Health Care:  Status of Efforts to Improve Efficiency and Access
    (GAO/HEHS-98-48, Feb.  6, 1998).

    VA Medical Care:  Increasing Recovering From Private Health Insurers
    Will Prove Difficult (GAO/HEHS-98-4, Oct.  17, 1997).

    The Results Act:  Observations on VA's August 1997 Draft Strategic
    Plan (GAO/T-HEHS-97-215, Sept.  18, 1997).

    VA Health Care:  Resource Allocation Has Improved, but Better
    Oversight Is Needed (GAO/HEHS-97-178, Sept.  17, 1997).

    VA Health Care:  Lessons Learned From Medical Facility Integrations
    (GAO/T-HEHS-97-184, July 24, 1997).

    VA Health Care:  VA Is Adopting Managed Care Practices to Better
    Manage Physician Resources (GAO/HEHS-97-87, July 17, 1997).

    Veterans' Affairs:  Veterans Benefits Administration's Progress and
    Challenges in Implementing GPRA (GAO/T-HEHS-97-131, May 14, 1997).

    VA Health Care:  Assessment of VA's Fiscal Year 1998 Budget Proposal
    (GAO/HEHS-T-97-121, May 1, 1997).

    Department of Veterans Affairs:  Programmatic and Management
    Challenges Facing the Department (GAO/HEHS-T-97-97, Mar.  18, 1997).

    Substance Abuse Treatment:  VA Programs Serve Psychologically and
    Economically Disadvantaged Veterans (GAO/HEHS-97-6, Nov.  5, 1996).

    VA Health Care:  Improving Veterans' Access Poses Financial and
    Mission-Related Challenges (GAO/HEHS-97-7, Oct.  25, 1996).

    VA Health Care:  Issues Affecting Eligibility Reform Efforts
    (GAO/HEHS-96-160, Sept.  11, 1996).

    VA Health Care:  Travis Hospital Construction Project Is Not
    Justified (GAO/HEHS-96-198, Sept.3, 1996).

    VA Health Care:  Opportunities for Service Delivery Efficiencies
    Within Existing Resources (GAO/HEHS-96-121, July 25, 1996).

    *** End of document. ***