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. ***