VA Medical Care: Increasing Recoveries From Private Health Insurers Will
Prove Difficult (Letter Report, 10/17/97, GAO/HEHS-98-4).

Pursuant to a congressional request, GAO reviewed the Department of
Veterans Affairs' (VA) efforts to recover from private health insurers
the costs it incurs to provide health care services to veterans with no
service-connected disabilities, focusing on: (1) those factors that
limit VA's ability to recover more of its billed charges; (2) VA's
ability to achieve its revenue targets by identifying factors that could
decrease future recoveries and assessing the potential for VA
initiatives to increase medical care cost recoveries; and (3) the way VA
applies insurance payments to veterans' copayment liability for veterans
in the discretionary care category.

GAO noted that: (1) attaining VA's goal to increase recoveries from
private health insurance from $495 million in fiscal year 1996 to $826
million in FY 2002 will be difficult; (2) for GAO's sample, most of the
charges VA was unable to recover for bills submitted to private health
insurers were appropriately denied or reduced by the insurers; (3)
recoveries from private health insurance dropped for the first time in
FY 1996 and have continued to drop during FY 1997; (4) several factors
help explain the decreases and suggest that further decreases are
likely, including: (a) the declining and aging of the veteran
population, meaning that VA must serve a greater proportion of veterans
to maintain its current workload and that more VA users will have
secondary, rather than primary, health insurance coverage in the future;
(b) veterans' increased enrollment in HMOs and other managed care plans,
and decreased enrollment in fee-for-service plans, which reduces the
number of veterans covered by insurance from which VA can reasonably
expect to recover; (c) changes in how insurers process VA claims that
could result in refunds to insurers of overpayments that VA estimates
exceeded $600 million and could reduce future recoveries by over 20
percent; and (d) shifts in care from inpatient to outpatient settings
that, while both needed and appropriate, could reduce private insurance
recoveries and increase recovery costs; (5) VA has a number of
initiatives to address some of these problems and to help it attain its
recovery goals; (6) these include legislation to: (a) allow VA to retain
recoveries from private health insurance and veteran copayments as an
incentive to improve the identification and pursuit of recoveries; and
(b) extend lapsing authority to recover the costs of services provided
to veterans for conditions unrelated to their service-connected
disabilities; (7) VA's initiatives would address some, but not all, of
the factors affecting future recoveries; (8) however, considerable
uncertainty remains about VA's ability to achieve its revenue goal; (9)
VA was unable to provide an analytical basis for its recovery
projections; (10) projected increases in VA's future recoveries were not
supported by or attributed to improvements related to its planned
initiatives; and (11) VA's General Counsel interprets the relationship
between recoveries from private health insurance and veterans'
copayments as requiring that a portion of insurance recoveries to be
used to reduce veterans' copayment obligations.

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

 REPORTNUM:  HEHS-98-4
     TITLE:  VA Medical Care: Increasing Recoveries From Private Health 
             Insurers Will Prove Difficult
      DATE:  10/17/97
   SUBJECT:  Veterans benefits
             Cost sharing (finance)
             Health care cost control
             Health care programs
             Patient care services
             Managed health care
             Claims processing
             Government collections
             Veterans
             Insurance companies
IDENTIFIER:  Medicare Program
             Medigap
             VA Medical Care Cost Recovery Program
             Federal Employees Health Benefits Program
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Oversight and Investigations,
Committee on Veterans' Affairs, House of Representatives

October 1997

VA MEDICAL CARE - INCREASING
RECOVERIES FROM PRIVATE HEALTH
INSURERS WILL PROVE DIFFICULT

GAO/HEHS-98-4

VA Medical Care Cost Recovery

(406124)


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

  AARP - American Association of Retired People
  DRG - diagnosis-related group
  EKG - electrocardiogram
  ERISA - Employee Retirement Income Security Act of 1974
  FEHBP - Federal Employees Health Benefits Program
  HCFA - Health Care Financing Administration
  HIPAA - Health Insurance Portability and Accountability Act of 1996
  HMO - health maintenance organization
  OPM - Office of Personnel Management
  MCCR - Medical Care Cost Recovery
  PBM - pharmacy benefit manager
  PPO - preferred provider organization
  POS - point of service
  VA - Department of Veterans Affairs
  VERA - Veterans Equitable Resource Allocation

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


B-271726

October 17, 1997

The Honorable Terry Everett
Chairman, Subcommittee on Oversight
 and Investigations
Committee on Veterans' Affairs
House of Representatives

Dear Mr.  Chairman: 

Since 1986, the Department of Veterans Affairs (VA) has been
authorized to recover a portion of the costs VA incurs to provide
health care services to veterans with no service-connected
disabilities from veterans' private health insurers.  This includes
individual and group insurance plans, Medicare supplemental insurance
plans,\1 and self-insured plans under the Employee Retirement Income
Security Act of 1974 (ERISA).  VA's recovery authority was expanded
in 1990 to include recoveries for care provided to veterans with
service-connected disabilities, as long as that care was for
treatment of conditions unrelated to the veterans' service-connected
disabilities. 

In fiscal year 1996, VA sought recovery of about $1.6 billion of its
costs but only recovered 31 percent of the billed amount, or $495
million, a 5-percent decline from fiscal year 1995 recoveries.  In
its fiscal year 1998 budget submission, however, VA estimated that it
will be able to increase its recoveries from private health
insurance, reaching $826 million in fiscal year 2002.  This is
important because VA sought and was recently given authority to
retain the funds it recovers and to use them to supplement future
appropriations. 

This report responds to your request that we

  -- identify those factors that limit VA's ability to recover more
     of its billed charges,

  -- evaluate VA's ability to achieve its revenue targets by (1)
     identifying factors that could decrease future recoveries and
     (2) assessing the potential for VA initiatives to increase
     medical care cost recoveries, and

  -- evaluate the way VA applies insurance payments to veterans'
     copayment liability for veterans in the discretionary care
     category. 


--------------------
\1 Medicare beneficiaries may be covered under individually purchased
Medicare supplemental policies ("Medigap" insurance) or under
employer-sponsored health insurance.  According to a 1994 survey of
large employers by Foster Higgins, a health care consulting firm, 40
percent of employers offer retirees "carve-out coverage," a type of
coverage that pays the difference between a plan's allowed charge for
the service and the amount that Medicare pays for the same service. 


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

To identify whether factors limit VA's ability to recover more of its
billed charges, we studied the recovery programs at VA's Martinsburg,
West Virginia, and Washington, D.C., medical centers.  We selected
the two medical centers in consultation with officials working in
VA's Medical Care Cost Recovery (MCCR) program.  The Martinsburg
medical center was selected because it was (1) viewed by VA officials
as operating an efficient recovery program and (2) 1 of 10 medical
centers participating in MCCR's reengineering pilot project.\2 The
recovery program at the Washington DC's medical center was chosen for
contrast.  Although Martinsburg's medical center is much smaller than
Washington's, it was recovering roughly the same amount from private
health insurance. 

At the two medical centers, we examined a random sample of the bills
VA had submitted to insurers during May 1994.\3 We focused our
statistical analyses on bills for which VA had completed recovery
actions (closed bills).  For each bill, we examined the insurers'
explanation of benefits, VA's patient insurance information, and VA's
financial tracking reports to determine (1) why insurers denied or
partially paid VA bills and (2) what actions VA had taken to
determine whether additional funds could be recovered.  We discussed
bills denied or partially paid for administrative or other
nonclinical reasons with VA staff at the medical centers to find out
which factors had affected recoveries.  To the extent possible, we
reviewed, with the assistance of a registered nurse, the discharge
summaries for those inpatient claims denied for clinical reasons to
determine whether insurers' denials were appropriate.  We used
appropriateness-of-care criteria developed by InterQual, a
utilization review firm, in our assessments.\4 We confirmed the
prevalence of these findings with MCCR staff at other facilities and
in VA's headquarters. 

To evaluate VA's ability to achieve its revenue targets, we reviewed
(1) VA's fiscal year 1998 budget submission, the MCCR program's 1996
business plan, and other documents detailing VA's health care
restructuring plans, such as VA's Prescription for Change, new budget
allocation system, and its use of performance measures; (2)
interviewed MCCR and health care staff from VA facilities and VA's
headquarters; and (3) interviewed staff and reviewed documents from
VA's General Counsel and Regional Counsels. 

To assess the application of discretionary veterans' copayments to
their third-party liability, we reviewed VA's General Counsel
decisions and discussed the implementation of these decisions with
VA's General Counsel as well as MCCR staff from central office and VA
facilities. 

We did our work between May 1995 and July 1997 in accordance with
generally accepted government auditing standards. 


--------------------
\2 In 1994, VA selected 10 facilities to participate in an effort to
improve and automate the information necessary to bill health
insurers effectively.  Components of the project included outpatient
preregistration to improve the collection of data on insurance
coverage and automated capture of data on outpatient services
provided. 

\3 We chose bills submitted to insurers in May 1994 to be reasonably
sure that bills this old would be resolved by the time we did our
work.  We sampled about 56 percent of inpatient and 36 percent of
outpatient closed bills submitted by the Washington, D.C., medical
center.  For the Martinsburg medical center, we sampled about 39
percent of inpatient and 11 percent of outpatient closed bills. 

\4 InterQual, a utilization review firm, has developed level-of-care
criteria to evaluate the appropriateness of acute and critical
medical care, based on an assessment of the patient's clinical
status.  The criteria encompass objective clinical findings to
establish the severity of illness upon admission, associated medical
or other professional interventions to establish the intensity of
service to use during concurrent reviews, and clinical indicators to
use as discharge screens. 


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

Attaining VA's goal to increase recoveries from private health
insurance from $495 million in fiscal year 1996 to $826 million in
fiscal year 2002 will be difficult.  First, for our sample, most of
the charges VA was unable to recover for bills submitted to private
health insurers were appropriately denied or reduced by the insurers. 
Insurers can deny or reduce payments when (1) VA care is medically
inappropriate, (2) VA bills Medicare supplemental insurance for the
full cost of VA services when such insurance generally pays only
Medicare deductibles and copayments, (3) VA bills health maintenance
organizations (HMO) and other managed care plans that restrict
payment for nonemergency care to participating providers, and (4)
policy provisions require policyholders to pay a portion of covered
charges. 

Second, recoveries from private health insurance dropped for the
first time in fiscal year 1996 and have continued to drop during
fiscal year 1997.  Several factors help explain the decreases and
suggest that further decreases are likely.  These include (1) the
declining and aging of the veteran population, meaning that VA must
serve a greater proportion of veterans to maintain its current
workload and that more VA users will have secondary, rather than
primary, health insurance coverage in the future; (2) veterans'
increased enrollment in HMOs and other managed care plans--and
decreased enrollment in fee-for-service plans--which reduces the
number of veterans covered by insurance from which VA can reasonably
expect to recover; (3) changes in how insurers process VA claims that
could result in refunds to insurers that VA estimates exceed $600
million and could reduce future recoveries by over 20 percent; and
(4) shifts in care from inpatient to outpatient settings that, while
both needed and appropriate, could reduce private insurance
recoveries and increase recovery costs.\5

VA has a number of initiatives to address some of these problems and
to help it attain its recovery goals.  These include legislation to
(1) allow VA to retain recoveries from private health insurance and
veteran copayments as an incentive to improve the identification and
pursuit of recoveries and (2) extend lapsing authority to recover the
costs of services provided to veterans for conditions unrelated to
their service-connected disabilities.  In addition, VA plans
administrative actions to, among other things, improve the
identification of veterans' insurance coverage, improve the process
for submitting claims to Medicare supplemental insurers, and develop
new billing rates and itemized bills.  Finally, VA plans to increase
the number of veterans using the VA system by 20 percent, and expects
many of the new users to be higher-income, Medicare-eligible
veterans, likely to also have private insurance. 

VA's initiatives would address some, but not all, of the factors
affecting future recoveries.  However, considerable uncertainty
remains about VA's ability to achieve its revenue goal.  VA was
unable to provide an analytical basis for its recovery projections. 
Projected increases in VA's future recoveries were not supported by
or not attributed to improvements related to its planned initiatives. 
Finally, VA's General Counsel interprets the relationship between
recoveries from private health insurance and veterans' copayments as
requiring that a portion of insurance recoveries be used to reduce
veterans' copayment obligations.  This will make it more difficult
for VA to attain its overall recovery goals under the MCCR program
and significantly increase administrative costs, particularly for
pharmacy bills. 

We have identified a number of actions the Congress and VA could take
to improve operation of the MCCR program, increase recoveries, and
prevent recovery efforts from adversely affecting veterans. 


--------------------
\5 In a draft of this report, we noted that a portion of VA's
recovery authority was scheduled to lapse on September 30, 1998,
potentially precluding future recoveries for treatments of
nonservice-related conditions provided to veterans with
service-connected disabilities.  The Balanced Budget Act of 1997
extended the recovery authority until September 30, 2002. 


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

VA collects money from third-party insurers and directly from some
veterans to offset the cost of providing health care services for
veterans' nonservice-connected conditions.  Until recently, these
moneys, other than amounts needed to operate the recovery program,
have been returned to the U.S.  Treasury.  In fiscal year 1996, the
MCCR program retained almost $119 million to offset the costs of
operating the recovery program and deposited $455 million in the
Treasury.  With passage of the Balanced Budget Act of 1997 (P.L. 
105-33), VA will retain amounts collected after June 30, 1997, to
supplement its annual appropriations and finance the cost of serving
additional veterans. 

While the law prevents insurers from arbitrarily denying payment to
VA for services that would be covered in private sector facilities,
VA, like other health care providers, must generally comply with the
terms and conditions set out in veterans' health insurance policies. 
Insurance policies typically contain a number of provisions that
limit the amount of billed charges that the insurer is responsible
for paying.  In addition to requiring that care be medically
necessary and provided in an appropriate setting, policies may

  -- require the policyholder to pay a specified amount (such as
     $500), referred to as a deductible or out-of-pocket payment, for
     covered health care services before the insurance begins paying;

  -- require policyholders to pay a certain percentage of covered
     charges, known as a copayment or coinsurance;

  -- specify what services are covered and any limits on the days of
     coverage or frequency of services;

  -- require, as a condition for payment, that providers or
     policyholders obtain prior approval from the insurer before
     admission to a hospital;

  -- preclude or reduce payment (other than for emergency care) to
     providers that are not members of HMOs, preferred provider
     organizations (PPO), or point-of-service (POS) plans;\6

and

  -- "wrap around" other insurance coverage and pay only that portion
     of approved charges not paid by the primary insurance, such as
     Medicare. 

Unlike most providers, however, VA does not bill health plans for the
individual tests and procedures it provides to its policyholders. 
Instead, VA prepares bills based on its average costs for providing a
day of hospital care and an outpatient visit.  In fiscal year 1997,
VA billed insurers $1,046 per day for inpatient care provided in
medical bed sections, $1,923 per day for care provided in surgical
bed sections, $194 for each outpatient visit, and $20 for each
prescription refill.  In other words, the amount VA bills insurers
for a 5-day surgical stay is the same regardless of the type of
surgery performed.  Similarly, it bills the same amount for an
outpatient visit regardless of the types or number of services
provided during that visit. 

In fiscal year 1995, VA recovered $522.8 million from third parties,
including private health insurers, workers' compensation programs,
and no-fault insurance.  Recoveries declined to $495.2 million in
fiscal year 1996 and to $213.4 million during the first two quarters
of fiscal year 1997. 

VA's 1998 budget proposal requested medical care funding of $17.6
billion, consisting of an appropriation of almost $17 billion and a
legislative proposal to retain insurance payments, veterans'
copayments, and other third-party reimbursements estimated to total
about $600 million in fiscal year 1998.  VA proposed to freeze its
appropriation at about $17 billion over the next 5 years and rely
instead on increased efficiency and increases in third-party
reimbursements to offset the effects of inflation.  VA estimated that
the third-party recovery authority would enable it to generate $1.7
billion in additional revenues in 2002, including $826 million from
private health insurance.  The Balanced Budget Act of 1997 authorized
VA to retain recoveries and collections after June 30, 1997.  The act
provides that if the amounts recovered in fiscal years 1998, 1999, or
2000 fall short of projections by at least $25 million, VA will
receive an additional appropriation.\7


--------------------
\6 A preferred provider organization (PPO) is a managed care plan
that provides enrollees with a financial incentive to receive care
from a network of providers that are normally reimbursed at a
discounted fee-for-service rate.  A point-of-service (POS) plan is a
hybrid that combines features of both managed care and indemnity
insurance.  Under POS plans, an enrollee decides whether to use a
network or nonnetwork provider at the time care is needed and usually
is charged a sizable copayment for selecting a nonnetwork provider. 
For additional information, see Health Insurance:  Management
Strategies Used by Large Employers to Control Costs (GAO/HEHS-97-71,
May 6, 1997). 

\7 VA also sought, but was not granted, authority to recover a
portion of its costs from the Medicare program for providing care to
additional higher-income veterans with Medicare coverage. 


   MOST CHARGES DENIED BY INSURERS
   ARE NOT RECOVERABLE
------------------------------------------------------------ Letter :4

Most VA bills in our sample prepared by the Martinsburg and
Washington, D.C., medical centers that were denied or reduced by
private health insurers were appropriately closed by MCCR staff with
little additional recovery possible.  Additional amounts were
generally not recoverable because

  -- insurers deemed VA's inpatient care to be medically
     inappropriate;

  -- VA billed Medicare supplemental insurance for the full cost of
     VA services, even though such insurance generally pays only the
     Medicare inpatient deductible and about 20 percent of the costs
     of outpatient care;

  -- VA billed HMOs and other managed care plans for nonemergency
     care when the VA facility was not a participating provider; and

  -- insurers reduced payments to VA on the basis of the insurance
     plans' cost-sharing requirements. 

In addition, VA's pursuit of additional recoveries is hindered
because (1) VA has limited knowledge of veterans' insurance policies
and terms of coverage and (2) many insurers continue to use
exclusionary clauses denying payment for care given in VA facilities,
although such clauses have no legal effect. 


      MUCH OF VA INPATIENT CARE
      DENIED AS MEDICALLY
      INAPPROPRIATE
---------------------------------------------------------- Letter :4.1

Nearly 30 percent of the unpaid charges for inpatient care at the
Martinsburg and Washington, D.C., medical centers resulted from
insurers' determinations that the care was medically inappropriate.\8
Medically inappropriate care includes care deemed to be medically
unnecessary, excessive lengths of stay, and care that should have
been provided on an outpatient basis.  For example, insurers denied
or reduced claims at the Martinsburg medical center for cataract
surgeries that were unnecessarily performed on an inpatient basis. 
Similarly, insurers denied or reduced claims when the medical center
allowed veterans who traveled considerable distances for care to be
admitted early, to be discharged later, or to receive inpatient
treatment instead of outpatient services. 

When such claims were reduced or denied, the Martinsburg medical
center often negotiated payment for ancillary and professional
services associated with inpatient care that should have been
provided on an outpatient basis.  In addition, the medical center was
sometimes able to obtain payment for clinic visits and ancillary
services provided to veterans in the medical center's nursing home
and domiciliary beds.  Such payments, however, accounted for
significantly less than half of billed charges. 

Unlike Martinsburg, the Washington, D.C., medical center generally
did not vigorously pursue claims denied as medically inappropriate
and seldom pursued payment of ancillary or professional services. 
Since the period covered by our claims review, however, the
Washington medical center has brought in a new manager for the
recovery program and has reorganized its functions to strengthen the
billing, collection, and appeals processes.  Billing and collections
staff are no longer in separate units but are paired together in
teams to expedite recovery actions.  An August 1996 review of the
Washington, D.C., program by MCCR staff from headquarters and other
VA facilities, however, identified the need for further improvements. 
For example, the reviewers suggested that the facility (1) develop a
mechanism to consistently track patients' inpatient and outpatient
treatments, (2) identify a physician adviser and establish a
multidisciplinary utilization review committee to assist with
appeals, and (3) develop procedures to identify and bill for
professional fees where appropriate. 


--------------------
\8 At the 95-percent confidence level, we estimate that 27.1 percent
(plus or minus 13.2 percent) of the charges at the Martinsburg
medical center were unpaid because insurers considered the inpatient
care to be medically inappropriate; 29.7 percent (plus or minus 14.6
percent) of the charges at the Washington, D.C., medical center were
unpaid because insurers deemed the inpatient care to be medically
inappropriate. 


      MEDICARE SUPPLEMENTAL
      INSURERS LIMIT PAYMENT AS
      SECONDARY INSURANCE
---------------------------------------------------------- Letter :4.2

VA bills Medicare supplemental insurers for the full cost of VA
services, even though such policies provide coverage that is
secondary to Medicare.  And because it does not have the authority to
bill Medicare, VA does not receive a determination of
benefits--either a "remittance advice" or an "explanation of
benefits." Medicare supplemental insurers typically use such
determinations to calculate their liability. 

In the absence of a Medicare determination of benefits, supplemental
insurers use different methods to determine their liability as
secondary payers.  For inpatient care, these insurers typically pay
the Medicare inpatient deductible ($760 in 1997) or the inpatient
deductible plus 20 percent of the professional services component of
the VA per diem rate.  As a result, VA recovers only a small
percentage of its billed charges.  For example, VA can expect to
recover only $760 to $835 for a 3-day VA hospital stay for which it
billed $3,138.  Similarly, for an outpatient visit, Medicare
supplemental insurers typically pay no more than 20 percent of the
billed charges. 

The largest Medigap insurer, the American Association of Retired
People (AARP), however, no longer pays VA 20 percent of billed
charges for most of its veteran policyholders.  In September 1995,
AARP began paying VA 20 percent of what it estimates Medicare would
have paid for the service in a physician's office for veterans in the
mandatory care category (primarily those with service-connected
disabilities or low incomes).  AARP continues to pay 20 percent of
VA's billed charges for veterans in the discretionary care category
(those with no service-connected disabilities and incomes above the
"means-test" level, which is about $21,000 for a single veteran) who
are subject to copayments to cover their out-of-pocket costs. 

The effect of this change on VA recoveries is unclear.  For veterans
in the mandatory care category who are not subject to VA's
copayments, recoveries are likely to decrease for outpatient bills
involving routine office visits.  For example, because Medicare pays
about $54 for a routine office visit, AARP would pay VA less than $11
for such care under the new policy rather than almost $39 (20 percent
of VA's $194 outpatient rate) it would have paid under the old
policy.  On the other hand, to the extent that VA provides these
veterans high-cost services or procedures, such as cataract surgery,
as outpatient services, AARP's payments to VA should increase under
the new policy.  (See fig.  1.)

   Figure 1:  Change in AARP
   Payment Policy for Medicare
   Supplemental Insurance, Given a
   $194 Outpatient Charge

   (See figure in printed
   edition.)

VA's right to collect from Medigap insurers was upheld in earlier
court decisions.\9 However, some insurers still contend that they are
not liable for the amounts sought by VA until they receive an
adjudicated claim indicating what portion of VA's bill is covered by
Medicare.  The insurers claim that calculating the amount owed to VA
is unduly burdensome because VA does not give them a Medicare
remittance advice or explanation of benefits explaining
Medicare-approved charges.\10 When the matter is resolved, VA expects
to recover on the backlog of claims submitted to insurers involved in
the case.  Like other Medicare supplemental policies, however, these
plans would pay secondary rather than primary benefits, and therefore
most of VA's billed charges would not be collectable. 

Because the Martinsburg medical center was billing Medicare
supplemental insurance more often than the Washington medical center,
a larger percentage of unpaid charges resulted from denials and
reduced payments by such insurers.  About a third of Martinsburg's
unpaid charges for inpatient care are attributable to billing
Medicare supplemental insurers.\11 By contrast, only about 13 percent
of the Washington, D.C., medical center's unpaid inpatient charges
are attributable to billing Medicare supplemental insurance.\12
Similarly, about 40 percent of the unpaid outpatient charges for the
Martinsburg medical center resulted from billing Medicare
supplemental insurance for the full cost of outpatient care.\13
Because the Washington, D.C., medical center did not bill Medicare
supplemental insurance as extensively, only 11 percent of its unpaid
charges resulted from billing the full cost of outpatient care.\14


--------------------
\9 See, for example, United States v.  Blue Cross Blue Shield of
Maryland, Inc., 989 F.2d 718 (4th Cir.  1993), cert.  denied, 510
U.S.  914, and United States v.  Blue Cross/Blue Shield of Alabama,
999 F.2d 1542 (11th Cir.  1993), cert.  denied, 510 U.S.  1112, 1994. 

\10 United Servs.  Auto.  Ass'n v.  Jesse Brown, No.  SA-94-CA-0379
(D.  Tex.  filed May 12, 1994).  Other plaintiffs include USAA Life
Insurance, the Health Insurance Association of America, Hartford Life
Insurance Company, the Retired Officers' Association, and several
individuals. 

\11 At the 95-percent confidence level, 32.4 percent (plus or minus
19.6 percent) of the Martinsburg medical center's inpatient unpaid
charges were attributed to Medicare supplemental insurers. 

\12 At the 95-percent confidence level, 12.7 percent (plus or minus
10 percent) of the Washington D.C., medical center's inpatient unpaid
charges were attributed to Medicare supplemental insurers. 

\13 At the 95-percent confidence level, 41 percent (plus or minus 5.4
percent) of the Martinsburg medical center's outpatient unpaid
charges were attributed to Medicare supplemental insurers. 

\14 At the 95-percent confidence level, 11.3 percent (plus or minus
5.4 percent) of the Washington, D.C., medical center's outpatient
unpaid charges were attributed to Medicare supplemental insurance. 


      HMOS DENY OR REDUCE PAYMENTS
      BECAUSE VA FACILITIES ARE
      NOT PARTICIPATING PROVIDERS
---------------------------------------------------------- Letter :4.3

HMOs and certain other managed care plans generally will not pay a
nonparticipating provider for services rendered to their
policyholders, except for emergency care.  Neither the Washington,
D.C., nor the Martinsburg medical center has been able to negotiate
provider agreements with any HMOs (see pp.  27-31.).  About 19
percent of the claims denied by insurers for inpatient care provided
by the Washington, D.C., medical center, representing over 20 percent
of the center's unpaid inpatient charges, were billed to HMOs and
other managed care plans that limit payments for nonemergency care to
participating providers.\15 About 19 percent of the bills insurers
denied for outpatient care provided by the Washington, D.C., medical
center, representing about 35 percent of unpaid charges, were billed
to HMOs and other managed care plans that limit payments for
nonemergency care to participating providers.\16 Because VA could not
provide support that the care was for a medical emergency, the
medical center had no basis for pursuing collection. 

Denials by HMOs and certain other managed care plans did not account
for as much of the unpaid care at the Martinsburg medical center
because that facility generally did not bill managed care plans
unless it was fairly certain that the plan would pay for VA care.  In
addition, HMOs appear to have a significantly lower market
penetration in the Martinsburg area than they do in the Washington,
D.C., area.  About 4 percent of Martinsburg's inpatient bills
(representing about 3 percent of the unpaid charges) were billed to
managed care plans.\17 About 3 percent of outpatient bills
(representing about 6 percent of unpaid charges) were billed to
managed care plans.\18


--------------------
\15 At the 95-percent confidence level, 18.8 percent (plus or minus 6
percent) of the Washington, D.C., medical center's inpatient bills
were reduced and 22.3 percent (plus or minus 11.4 percent) of the
inpatient charges were unpaid because HMOs were billed for care that
was neither emergency nor preauthorized. 

\16 At the 95-percent confidence level, 18.7 percent (plus or minus
2.8 percent) of the Washington, D.C., medical center's outpatient
bills were reduced and 34.6 percent (plus or minus 6.6 percent) of
the outpatient charges were unpaid because HMOs were billed for care
that was neither emergency nor preauthorized. 

\17 At the 95-percent confidence level, 3.7 percent (plus or minus
2.6 percent) of the Martinsburg medical center's inpatient bills were
reduced and 2.8 percent (plus or minus 2.6 percent) of the inpatient
charges were unpaid because HMOs were billed for care that was
neither emergency nor preauthorized. 

\18 At the 95-percent confidence level, 3 percent (plus or minus 1.8
percent) of the Martinsburg medical center's outpatient bills were
reduced and 5.6 percent (plus or minus 3.4 percent) of the outpatient
charges were unpaid because HMOs were billed for care that was
neither emergency nor preauthorized. 


      INSURERS REDUCE PAYMENTS ON
      THE BASIS OF COST-SHARING
      PROVISIONS
---------------------------------------------------------- Letter :4.4

For both the Washington, D.C., and Martinsburg medical centers,
insurers often reduced their payments to VA on the basis of the
policies' cost-sharing provisions.  Insurance policies typically
require policyholders to pay a certain amount for health care
services out of pocket before coverage begins.  Such deductibles can
either be a yearly amount or apply to a specific episode of care such
as a hospital stay.  In addition, policies frequently require
policyholders to pay a certain percentage of charges (a copayment or
coinsurance).  These provisions limit the insurers' liability to that
portion of covered charges that is not the responsibility of the
policyholder. 

Insurers reduced payments to the Washington, D.C., medical center on
the basis of cost sharing provisions for over half of the inpatient
bills and over 70 percent of the outpatient bills we examined.\19
Similarly, insurers reduced payments for about 31 percent of the
inpatient bills and about 56 percent of the outpatient bills we
examined at the Martinsburg medical center for the same reason.\20

Reductions because of cost-sharing provisions had a greater impact on
recoveries from outpatient bills, accounting for about a third of the
unpaid outpatient charges at Martinsburg medical center and about 43
percent of unpaid charges at Washington.\21 By contrast, reductions
on the basis of cost-sharing requirements accounted for less than 10
percent of unpaid inpatient charges at each facility.\22

Since our study period, the percentage of outpatient charges that are
unpaid because of cost-sharing requirements has probably increased
because of the trend in fee-for-service health plans toward higher
copayments.  For example, the Blue Cross and Blue Shield standard
option plan under the Federal Employees Health Benefits Program
(FEHBP) increased the copayment on a $194 outpatient bill from
approximately $49 to $100 between 1994 and 1996.\23


--------------------
\19 At the 95-percent confidence level, 51.6 percent (plus or minus 7
percent) of the Washington, D.C., medical center's inpatient bills
were reduced because of veterans' cost-sharing requirements; 71.1
percent (plus or minus 4 percent) of outpatient bills were reduced. 

\20 At the 95-percent confidence level, 31 percent (plus or minus 10
percent) of the Martinsburg medical center's inpatient bills were
reduced because of veterans' cost-sharing requirements; 56 percent
(plus or minus 4.4 percent) of outpatient bills were reduced. 

\21 At the 95-percent confidence level, we estimate that 34.4 percent
(plus or minus 5.4 percent) of the unpaid outpatient charges at the
Martinsburg medical center and 42.9 percent (plus or minus 7 percent)
of the unpaid outpatient charges at the Washington, D.C., medical
center were attributable to veterans' cost-sharing requirements. 

\22 At the 95-percent confidence level, we estimate that 9.5 percent
(plus or minus 6.4 percent) of the unpaid inpatient charges at the
Martinsburg medical center and 5.7 percent (plus or minus 3.2
percent) of the unpaid inpatient charges at the Washington, D.C.,
medical center were attributable to veterans' cost-sharing
requirements. 

\23 In 1994, Blue Cross standard option coverage paid member
facilities 75 percent of the outpatient facility charge.  In 1996,
this coverage paid member facilities 100 percent of the outpatient
facility charge after deducting a copayment of $100 payable by the
covered person. 


      LIMITED KNOWLEDGE OF PLAN
      PROVISIONS HINDERS RECOVERY
---------------------------------------------------------- Letter :4.5

VA's efforts to pursue recoveries from private health insurers are
hindered by VA's limited access to the terms and conditions of
veterans' insurance policies.  Neither the insurer nor the veteran is
required to supply a copy of the health benefit plan to VA.  As a
result, VA generally relies on telephone calls to insurers to obtain
information on the specific provisions of veterans' policies. 

MCCR field staff indicated that insurers frequently refuse to give
them copies of veterans' policies, benefit summaries, or booklets
when requested, citing privacy concerns.  Although VA's General
Counsel indicates that insurers can be compelled to provide contracts
and policy information during litigation, such extreme actions have
seldom been used.  However, VA's General Counsel has been able to
obtain more than 300 policies from health insurers that are seeking
refunds for what they claim are overpayments. 

MCCR staff at the Martinsburg and Washington, D.C., medical centers
generally billed insurers to identify what services were covered,
what policy restrictions existed, and where the veteran stood in
relation to annual deductibles or lifetime limits on benefits. 
Depending on the information contained in the insurers' remittance
advice, MCCR staff made follow-up telephone calls to see why payments
were denied or reduced.  For example, after repeated telephone
conversations with an employer-sponsored health benefit plan, MCCR
staff at the Martinsburg medical center discovered that outpatient
bills that had been denied for apparent coverage limitations were in
fact payable if billed on a different form.  On the basis of that
information, the facility was able to obtain additional recoveries by
resubmitting previously denied outpatient claims for other veterans. 

VA's other potential source of policy information--the veteran
policyholder--has little incentive to give VA detailed information
about insurance coverage.  If a private sector provider has trouble
obtaining payment from an insurer, the policyholder is generally
liable for any unpaid charges and thus has a financial incentive to
see that insurance pays the maximum benefit in accordance with the
plan provisions.  Because most veteran policyholders obtaining
services from VA facilities do not have any financial liability for
their care, they have little incentive to intercede on VA's behalf in
obtaining detailed policy information. 

On the other hand, veterans in the discretionary care category have
some financial incentive to help VA obtain information about their
insurance coverage because a portion of insurers' payments is used to
reduce their copayments.  For example, the Washington, D.C., medical
center was able to obtain payment from one employer-sponsored managed
care plan after a veteran in the discretionary care category gave VA
information on policy provisions indicating that his insurance would
pay nonparticipating providers. 


      EXCLUSIONARY CLAUSES HINDER
      RECOVERIES AND INCREASE
      COSTS
---------------------------------------------------------- Letter :4.6

Before VA's recovery authority was established, most health insurance
plans and contracts contained exclusionary clauses indicating that
the plans would not pay for care (1) provided in VA hospitals or (2)
provided at no cost to the policyholder.  Such exclusionary clauses
were eliminated as a legal basis for denying payment of VA claims as
part of the Comprehensive Omnibus Budget Reconciliation Act of 1986
(P.L.  99-272).  Ten years later, however, exclusionary clauses that
prohibit payment to federal facilities appear to be fairly common. 
Although such clauses no longer have any legal effect on VA
recoveries, they can delay recoveries and increase the cost of
recovery actions.  Follow-up actions by VA staff, including VA's
regional and general counsels, may be necessary to challenge the
clauses and enable VA to recover from the health plans. 

The regulation of insurance is primarily a state function.  Insurance
policies, but not ERISA plans, must generally be reviewed and
approved by a state insurance commissioner before they can be offered
for sale in the state.\24 For example, the Maryland Insurance
Commission reviews all policies approved for sale in Maryland.  An
official from the Maryland Insurance Commission confirmed that the
Commission continues to approve policies containing clauses excluding
payment for services provided in VA facilities.  Commission staff
told us that such clauses are common in health insurance policies
sold in the state, and they expressed a willingness to work with VA
officials to help eliminate the clauses.  VA MCCR officials indicated
that they rely on federal enforcement to require insurers to pay and
have not attempted to work with state insurance commissions to remove
exclusionary clauses. 

Officials from one of the largest health plans in Maryland--Blue
Cross--confirmed that their plans still contain exclusionary clauses. 
They told us that the language in the exclusionary clauses will be
revised in future policies to make it clear that the insurer will pay
for care VA provides for nonservice-related conditions. 


--------------------
\24 ERISA plans fall under the purview of the Department of Labor. 


   MANY FACTORS COULD LEAD TO
   DECREASE IN FUTURE RECOVERIES
------------------------------------------------------------ Letter :5

Many factors help explain the decline in VA recoveries from private
health insurance since fiscal year 1995 and make it likely that,
without significant changes in the recovery program and/or an
increase in the number of VA users with fee-for-service insurance
coverage, declines will continue over the next 5 years.  These
factors include

  -- the declining and aging of the veteran population,

  -- increased enrollment in HMOs and other managed care plans,

  -- changes in how insurers process VA claims,

  -- shifts in care from inpatient to outpatient settings, and

  -- difficulty identifying care provided to veterans with
     service-connected disabilities for treatment of
     nonservice-connected conditions. 


      DECLINING AND AGING OF THE
      VETERAN POPULATION
---------------------------------------------------------- Letter :5.1

The veteran population is projected to decline from 26.2 million to
23.6 million between 1995 and 2002.  This means that VA would have to
increase the percentage of veterans using VA services just to
maintain current workload.  In 1995, VA facilities provided services
to about 2.6 million veterans, or roughly 1 out of 10 veterans.  With
fewer veterans, VA will need to attract roughly 1 of every 9 veterans
in 2002 to maintain its current workload.  To attain its goal of
increasing by 20 percent the number of veterans using VA services by
2002, VA will have to attract more than one out of every eight
veterans in 2002.  (See fig.  2.)

   Figure 2:  Declining Veteran
   Population May Affect VA's
   Ability to Increase Number of
   Veterans Served

   (See figure in printed
   edition.)

Calculation of workload projection assumes a constant proportion of
nonveteran users. 

Just as the declining numbers of veterans will make it more difficult
to maintain recoveries, so too will the aging of the veteran
population.  As an increasing proportion of veterans become eligible
for Medicare, potential recoveries decrease.  Between 1995 and 2002,
the percentage of veterans aged 65 and older is expected to increase
from 34 to 39.  This is important because at age 65, most veterans'
private health insurance becomes secondary to Medicare.  Currently,
about 60 percent of veterans who have health insurance and who are
treated by VA are over 65 years of age.  Typically, Medicare
supplemental plans cover only the $760 deductible for the first 60
days of inpatient care and 20 percent of the outpatient charge.  An
increase in the percentage of insured veterans covered only by
Medicare supplemental policies is thus likely to decrease future
recoveries. 


      CONTINUED INCREASE IN
      MANAGED CARE PLAN ENROLLMENT
      COULD REDUCE FUTURE
      RECOVERIES
---------------------------------------------------------- Letter :5.2

Continued increases in enrollment in HMOs, PPOs, and POS plans are
likely to reduce future VA recoveries from private health insurance. 
VA has had limited success in negotiating to become a participating
provider under HMOs (see pp.  27-31) and therefore is generally
unable to recover any of its costs of providing routine care to HMO
members.  Between 1982 and 1994, enrollment in HMOs increased from 9
million to over 50 million.  Similarly, because VA is not a preferred
provider under any PPOs, its potential recoveries are reduced. 
Although it may be able to recover from PPOs by becoming a
participating rather than preferred provider, it receives lower
reimbursement.  Finally, POS plans allow their policyholders to
obtain care from any willing provider but typically require their
members to pay a larger portion of the cost of services they obtain
from providers outside of the plan, such as VA facilities.  In other
words, POS plans pay less of the billed charges when care is provided
by an out-of-plan provider, expecting the member to pay the
remainder. 

Nearly three-fourths of workers with employer-provided health
insurance are now covered under a managed care plan, most by an HMO
or PPO.  In 1993, 49 percent of American workers with health
insurance were covered by a conventional fee-for-service plan, but by
1995 that percentage had dropped to 27.  By contrast, during the same
time period, the percentage of workers covered under HMOs or PPOs
increased from 42 percent to 53 percent; workers covered under POS
plans increased from 9 to 20 percent.\25

Even recoveries from Medicare supplemental policies may decrease
because of the increased enrollment of Medicare beneficiaries in
risk-contract HMOs.  Between 1987 and 1996, enrollment in Medicare
risk-contract HMOs increased from 2.6 percent to 10 percent of total
Medicare beneficiaries, and by 2002 enrollment is projected to be
22.9 percent of total beneficiaries.\26

Even now, 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.  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.\27,28 Data from the West Los
Angeles medical center suggest that its elderly veteran users are
opting to enroll in Medicare HMOs rather than purchase Medigap
insurance.\29 For all VA facilities, approximately 1.5 percent of
VA's inpatient discharges and almost 2.5 percent of VA's outpatient
visits in fiscal year 1995 were provided to veterans enrolled in
Medicare risk contracts. 

The growth in Medicare HMO enrollment is likely to affect VA
recoveries for two primary reasons.  First, VA is generally unable to
recover any of its costs for providing care to veterans enrolled in
Medicare HMOs.  Second, increased enrollment in HMOs is accompanied
by corresponding decreases in the number of beneficiaries covered
under Medicare supplemental insurance, from which VA can attempt to
recover. 

FEHBP enrollment is also shifting away from fee-for-service insurance
toward managed care arrangements.  In 1990, 26 percent of federal
employees and annuitants chose to enroll in HMOs.  By 1997, 29
percent of the FEHBP enrollees selected HMOs.  In 1990, four
fee-for-service plans offered significant preferred provider options
within the structures of their plans.\30 Under the plans, enrollees
retain the freedom to choose providers but have lower out-of-pocket
payments if they use preferred providers.  By 1997, all
fee-for-service plans within FEHBP identified themselves as "managed
fee-for-service plans." Most plans offered enrollees services through
PPOs, and several offered significant POS products.  The number of
enrollees who use only the preferred providers in these hybrid plans
is not measured. 

As veterans continue to shift from conventional fee-for-service
health plans to HMOs, PPOs, and POS plans, VA recoveries will likely
continue to decline unless VA facilities become preferred or
participating providers.  VA efforts to this end have, however,
generally been unsuccessful, as discussed in the next section. 


--------------------
\25 Gail A.  Jensen and others, "The New Dominance of Managed Care: 
Insurance Trends in the 1990s," Health Affairs, Vol.  16, No.  1
(Jan./Feb.  1997). 

\26 Jo Ann Lamphere and others, "The Surge in Medicare Managed Care: 
An Update," Health Affairs, Vol.  16, No.  3 (May/June 1997). 

\27 E.  Yano and others, Survey of Health and Medical Care for
Veterans in Ambulatory Care (Sepulveda, Calif.:  VA Medical Center,
Evaluation and Decision Support Service, 1994).

\28 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). 

\29 L.  Passman and others, "Elderly Veterans Receiving Care at a
Veterans Affairs Medical Center While Enrolled in Medicare-Financed
HMOs:  Is the Taxpayer Paying Twice?" Journal of General Internal
Medicine, 12 (4) (Apr.  1997), pp.  247-9. 

\30 Francis Walton, "The Political Economy of the Federal Employees
Health Benefits Program," Health Policy Reform, Competition and
Controls (Washington, D.C.:  American Enterprise Institute Press,
1993). 


      CHANGES IN HOW INSURERS
      PROCESS VA CLAIMS COULD LEAD
      TO REFUNDS AND REDUCED
      RECOVERIES
---------------------------------------------------------- Letter :5.3

Changes in how insurers process VA claims could result in refunds of
over $600 million in overpayments and reduce VA's future recoveries
by over 20 percent.  Specifically, some insurers

  -- claim they overpaid VA under Medicare carve-out policies and are
     seeking refunds,

  -- are increasingly reluctant to pay any portion of billed charges
     when the care was provided in a hospital unnecessarily, and

  -- increasingly use pharmacy benefit managers (PBM) to administer
     prescription benefits. 


      POSSIBLE OVERPAYMENTS UNDER
      CARVE-OUT POLICIES
---------------------------------------------------------- Letter :5.4

A number of insurers maintain that they have overpaid VA claims under
Medicare carve-out policies.  Such policies differ from Medigap
policies in that they offer the same health care benefits to both
active employees and retirees but contain provisions making their
coverage secondary to Medicare as the retirees become eligible for
Medicare.  Some insurers offering such carve-out policies have paid
VA for services provided to their Medicare-eligible policyholders as
the primary, rather than secondary, insurer.  As a result, they are
seeking refunds of millions of dollars in prior payments and are
reducing current payments. 

VA's position is that it is entitled to recover from a health plan to
the same extent that the insurer would have been liable for the care
if it was provided in the private sector.  If VA determines,
following a review of an insurer's policy provisions, that the
insurer overpaid VA under the terms of its policy by paying primary
when the insurer would have had a secondary liability in the private
sector, VA will refund timely and well-grounded claims.\31

On the basis of a review of fiscal year 1995 data on potential
overpayments, MCCR staff estimate that about 40 percent of the paid
claims for veterans aged 65 and older were paid at an amount greater
than the Medicare deductible and coinsurance.  The MCCR staff
estimated that overpayments to all VA medical centers in fiscal year
1995 were $110 million (+/- $35 million).  Over the 6-year period of
liability, refunds could amount to as much as $600 million. 

Other issues related to carve-out policies could also affect future
VA recoveries.  VA's General Counsel determined that refunds for
overpayments made during the current year must be charged against
that year's recoveries but that refunds of overpayments from prior
years should come out of the Treasury.  This approach does, however,
involve certain risks: 

  -- Insurers could offset overpayments from prior years against
     payments for current-year bills.  One plan in Indiana has begun
     offsetting overpayments, although other plans appear willing to
     wait for refunds to be paid out of the Treasury. 

  -- Allowing VA to authorize refunds from the Treasury gives the
     agency little incentive to protect the government's interests in
     determining the appropriateness of refund requests. 

  -- Aggressively reviewing refund requests could adversely affect
     current-year recoveries because staff would be diverted from
     billing for current services to verifying refund requests. 

Like some private sector carve-out policies, FEHBP plans have been
paying VA as primary insurance for Medicare-eligible federal
retirees.  Officials in the Office of Personnel Management (OPM) have
indicated that federal retirees' health coverage will become
secondary to Medicare when care is provided to veterans covered by
Medicare in VA facilities, as of the 1998 benefit year.  OPM
officials have indicated that existing policy will be modified to
implement this change prospectively and that FEHBP plans will not
seek refunds from VA.  Since VA included FEHBP payments for
Medicare-eligible veterans in its estimate of amounts to be refunded,
that estimate is overstated.  VA could not indicate the extent that
payment amounts from FEHBP plans were included in its refund
estimate.  This benefit change will cause VA's future recoveries from
FEHBP plans to decline. 


--------------------
\31 The Department of the Army, which also bills insurers for care
provided in its facilities, has a different interpretation of how its
facilities should be reimbursed under carve-out policies:  It
believes the policies should pay its facilities as the primary
insurer because its facilities, like VA facilities, are not Medicare
providers.  See Third Party Collection Program, Report No.  96-113
(Washington, D.C.:  Department of Defense, Office of the Inspector
General, May 7, 1996). 


      INSURERS ARE BECOMING MORE
      RELUCTANT TO PROVIDE PARTIAL
      PAYMENT
---------------------------------------------------------- Letter :5.5

VA's ability to obtain partial payment for care unnecessarily
provided in an inpatient hospital is declining.  As discussed
earlier, the Martinsburg medical center and, to an increasing extent,
the Washington, D.C., medical center, have been successful in
obtaining partial payment from insurers for inpatient care that
should have been provided in an outpatient clinic.  At both medical
centers, however, several major insurers have changed their policies
and will no longer make such partial payments. 


      CHANGES IN PROCESSING OF
      PRESCRIPTION BENEFITS
---------------------------------------------------------- Letter :5.6

VA's ability to recover for prescription refills may be declining as
plans' benefit designs change and use of pharmacy benefit managers
(PBM) increases.  PBMs are companies that administer the prescription
drug coverage of health insurance plans on behalf of plan sponsors,
such as FEHBP plans, insurance companies, self-insured employers, and
HMOs.  Many PBMs offer a range of services to plan sponsors, such as
processing prescription claims, operating mail order pharmacies, and
developing networks of retail pharmacies to serve plan enrollees.\32
The PBMs' mail order and retail services provide enrollees
prescription drugs at discounted prices.  To take advantage of these
discounts, the plans offer enrollees financial incentives to fill
their prescriptions only through the PBMs' mail order programs or
participating network retail pharmacies. 

In 1989, PBMs managed prescription drug benefits for about 60 million
people.  Four years later, they were managing prescription drugs for
about 100 million people, almost 40 percent of the U.S.  population. 
By the end of 1995, about 58 percent of FEHBP enrollees were covered
by a PBM. 

Because no VA medical centers or mail service pharmacies are
participating providers under PBMs, VA is generally unable to obtain
payment for prescription refills when veterans' insurance plans
contract with PBMs.  In such cases, VA facilities may submit their
bills to the health insurers for processing as outpatient claims. 
Changes in insurers' copayment requirements for outpatient services,
however, could further reduce VA recoveries.  For example, the FEHBP
Blue Cross and Blue Shield high-option plan will not pay the first
$50 of outpatient charges submitted by nonpreferred providers such as
VA facilities.  As a result, VA, which bills $20 for a prescription
refill regardless of type or amount of the drug provided, can no
longer recover any of its costs of providing prescription refills
from the Blue Cross plan unless it combines three or more refills
into a single bill. 

Even though VA is not a participating provider, one PBM has been
authorized by 30 of its 2,000 plan sponsors to process and pay VA's
bills for prescription refills.  However, we also identified
instances in which PBMs paid the insured veteran directly rather than
the VA medical center, since VA is not a participating provider in
the network.  In such cases, VA has difficulty in getting veterans to
forward the payments. 


--------------------
\32 For more information on services offered by PBMs, see Pharmacy
Benefit Managers:  FEHBP Plans Satisfied With Savings and Services,
but Retail Pharmacies Have Concerns (GAO/HEHS-97-47, Feb.  21, 1997)
and Pharmacy Benefit Managers:  Early Results on Ventures With Drug
Manufacturers (GAO/HEHS-96-45, Nov.  9, 1995). 


      SHIFTS FROM INPATIENT TO
      AMBULATORY CARE REDUCE
      RECOVERIES AND INCREASE
      RECOVERY COSTS
---------------------------------------------------------- Letter :5.7

As VA shifts more of its care from inpatient to outpatient settings,
insurance recoveries decrease and the cost of recovery increases. 

VA has set goals to significantly reduce the amount of care provided
in inpatient settings.  For example, it has set goals to reduce the
hospital bed-days of care provided per 1,000 unique users by 20
percent from the 1996 level, enroll 80 percent of users in primary
care, and shift a large portion of surgeries to ambulatory care
settings.  VA has also implemented a new system for allocating
resources to its networks--the Veterans Equitable Resource Allocation
system--that is intended to eliminate the financial incentives
previous allocation methods gave facilities to unnecessarily admit
patients to hospitals and to encourage facilities to provide care in
the most cost-effective setting.  To the extent facilities respond to
such performance measures and financial incentives, reimbursable
inpatient care will decline and reimbursable outpatient care will
increase. 

Under its current rate schedules, VA must generate approximately 20
outpatient bills to produce recoveries equivalent to one inpatient
bill.  In addition, because MCCR staff have had to review medical
records to generate outpatient bills, it frequently costs more to
generate an outpatient bill for about $200 than it does to generate
an inpatient bill for thousands of dollars. 


      BILLABLE CARE RENDERED TO
      VETERANS WITH
      SERVICE-CONNECTED CONDITIONS
      IS DIFFICULT TO IDENTIFY
---------------------------------------------------------- Letter :5.8

Almost 40 percent of the funds VA recovers from private health
insurance is for services provided to veterans with service-connected
conditions.  VA loses opportunities for additional recoveries,
however, because of the nature of decisions as to what services are
billable.  Identifying and billing the cost of care provided to
veterans with service-connected disabilities for treatment of their
nonservice-related conditions is administratively cumbersome and
often subjective. 

Because data on veterans' service-connected disabilities are not
always precise, it is often difficult for MCCR staff to determine
whether the care provided was related to the service-connected
disability.  For instance, knee surgery provided to a veteran with a
service-connected disability was found to be billable when the MCCR
staff discovered that his service-connected condition was associated
with injuries to his other leg. 

In addition, the ability of MCCR staff to differentiate between
treatments for service- and nonservice-connected conditions depends
on the quality of the documentation in the medical record and the
cooperation of the physician and other clinical personnel involved in
providing the care.  For example, billable medical services provided
to a veteran who has a service-connected condition relating to
hypertension can be difficult to identify.  Depending upon the
documentation, MCCR staff may view an EKG provided to this veteran as
billable and view a routine physical (which requires that the
veteran's blood pressure be checked) as unbillable. 

Recent legislation minimized insurers' ability to exclude coverage
for preexisting conditions.  The Health Insurance Portability and
Accountability Act of 1996 (P.L.  104-191) (HIPAA) prevents private
health insurers from excluding payment for policyholders' preexisting
conditions for more than 12 months for conditions diagnosed or
treated within 6 months before becoming insured.\33

Although service-connected disabilities are preexisting conditions,
the VA recovery program will not benefit from this change, because
VA's recovery authority does not allow it to bill health insurers for
treatment related to a service-connected disability. 

Changing the statutory language in title 38 of the U.S.  Code to
authorize VA to recover its costs from private health insurance for
treating service-connected conditions, consistent with the provisions
of HIPAA, could, however, be viewed as shifting to the private sector
the government's obligation to provide care for veterans disabled
during or as a result of their military service.  On the other hand,
authorizing such recoveries could generate significant additional
revenues to be retained by VA for improving health care services for
veterans.  In addition, it could offset the incentives created by the
Balanced Budget Act for VA facilities to target their services toward
privately insured veterans with no service-connected disabilities. 


--------------------
\33 Nonpayment for preexisting conditions may extend to 18 months in
the case of a late enrollee in a group plan. 


   VA INITIATIVES SEEK TO REVERSE
   DECLINE AND INCREASE RECOVERIES
------------------------------------------------------------ Letter :6

VA officials identified a number of legislative and management
initiatives intended to address the previously mentioned factors and
help it achieve its recovery goals.  VA sought and was given
legislative authority to (1) allow it to retain copayment and
third-party recoveries and (2) extend the lapsing recovery
provisions.  Planned administrative actions include

  -- improving the process for identifying veterans' insurance
     coverage;

  -- improving the process for submitting claims to Medicare
     supplemental insurers;

  -- developing new rate schedules that allow itemized billing;

  -- strengthening follow-up on claims denied or partially paid;

  -- negotiating provider agreements with HMOs and other managed care
     plans;

  -- strengthening efforts to ensure the medical appropriateness of
     VA care; and

  -- automating the capture of data on patient diagnoses, procedures,
     and providers. 

In addition, VA's goal of increasing the number of veterans using the
VA health care system by 20 percent should bring additional insured
veterans into the system.  It is not clear, however, whether these
actions will allow VA to counteract the factors contributing to
declining recoveries, let alone allow it to significantly increase
future recoveries. 


      SEEK NEW LEGISLATIVE
      AUTHORITY
---------------------------------------------------------- Letter :6.1

Historically, facility directors have had little incentive to
aggressively identify and pursue insurance recoveries because the
funds, less the costs of operating the recovery program, were
returned to the Treasury.  Under the legislative proposal contained
in its fiscal year 1998 budget submission, VA sought authority to
keep all funds recovered from private health insurance.  VA expects
such authority to give VA facilities stronger incentives to identify
veterans' insurance coverage and aggressively pursue recoveries. 
They will also have stronger incentives to market their services
toward such revenue-generating veterans rather than
nonrevenue-generating veterans such as veterans without private
health insurance.  The Balanced Budget Act of 1997 authorized VA to
retain recoveries from private health insurance and collections for
veterans' copayments after June 30, 1997. 

The second problem VA sought to address through legislation was the
lapsing of its authority to recover its costs for providing health
care services to veterans with service-connected disabilities for
conditions unrelated to their service-connected disabilities.  The
Balanced Budget Act of 1997 subsequently extended the authority until
September 30, 2002. 

With this legislation, VA expects to significantly increase
recoveries for services provided to veterans with service-connected
disabilities.  By the year 2002, VA estimates that recoveries from
private health insurance for services provided to veterans with
service-connected conditions will increase to $253 million.  Allowing
VA to retain all insurance recoveries creates a strong incentive for
VA facilities to classify more of the care provided to veterans with
service-connected disabilities as unrelated to treatment of those
disabilities. 


      IMPROVE METHODS FOR
      IDENTIFYING INSURANCE
      COVERAGE
---------------------------------------------------------- Letter :6.2

VA has identified three approaches for improving identification of
veterans with private health insurance and estimates that these
initiatives could lead to increased recoveries totaling nearly $200
million per year.  However, VA appears to have overestimated the
additional recoveries that are likely to be generated by the
initiatives.  Moreover, a fourth option for improving the
identification of insurance coverage would be to include such
information in the enrollment database being created as part of the
implementation of eligibility expansions. 

The first approach is to obtain, through a Medicare contractor,
information on Medicare-eligible veterans who have private health
insurance coverage that is primary.  MCCR is particularly interested
in identifying Medicare-eligible veterans whose private health
insurance is primary.  MCCR estimated that 5.9 percent of the over-65
population treated by VA could be expected to have primary health
insurance other than Medicare.  The MCCR program further estimated
that if its assumption is correct, potential recoveries from such
veterans may total about $97 million. 

VA appears to overestimate the potential for additional recoveries
under this initiative.  There are two basic groups of Medicare
beneficiaries for whom private health insurance is primary.  The
first group is beneficiaries who are over 65 and still working or
have a spouse who is still working.  Those Medicare beneficiaries
still working are likely to be healthier and thus likely to use fewer
health care services, including services from VA.  The second large
group of Medicare beneficiaries likely to have other primary health
insurance consists of individuals who retired from state and local
governments before April 1, 1986, or from the federal government
before January 1983. 

In addition, VA does not know how many such veterans have already
been identified.  As discussed earlier, 60 percent of the veterans VA
currently identifies as having private health insurance are over age
65.  Accordingly, even if the estimate of the percentage of
Medicare-eligible veterans with private health insurance that is
primary is correct, the estimate of potential recoveries is
overstated because it does not back out current recoveries. 

On the other hand, VA may understate the potential for additional
recoveries resulting from matching VA and Medicare records because
such a match could also be used to identify Medicare beneficiaries
under 65 years of age who have private health insurance that is
primary.  VA's 1992 National Survey of Veterans estimates that 23
percent of VA users under the age of 65 are covered by Medicare, and
about a third of these veterans have private health insurance.  MCCR,
however, does not currently plan to use these data to identify
private health insurance coverage for such veterans under the age of
65. 

The second approach MCCR tested for improving identification of
insurance coverage was the use of a contractor to identify insurance
coverage.  In August 1995, VA provided Health Management Systems,
Inc., the names and identifiers of 38,748 patients for whom VA
facilities had no insurance information.  The contractor, however,
was able to identify only 649 matches with its insurance records.  VA
further determined that only 236, or 0.6 percent, of the records
reviewed had billable insurance coverage.  However, even with the
limited identification of insurance coverage, the contract proved to
be cost effective. 

The final approach was the institution of a preregistration process
under which patients scheduled for outpatient visits within the next
10 days were contacted to remind them of their appointment and to
request updated personal information, including employment and
insurance data.  On the basis of results of the pilot test, VA
estimated that nationwide implementation of a preregistration process
could result in an additional $100 million in recoveries annually
from newly identified insured patients. 

It is not clear, however, whether the billable cases identified
through the preregistration process would not otherwise have been
identified.  In other words, was preregistration a substitute for
data-gathering efforts that would have taken place at the time of the
visit?  In addition, the preregistration process would also identify
some insurance coverage that also would be identified under the first
two methods, so the additional collections from the three approaches
overlap and should not be fully added together. 

Implementation of VA's health care enrollment process gives VA
another option for capturing and updating veterans' health insurance
data.  Public Law 104-262 expanded veterans' eligibility for VA
health care services and required VA to establish a system of
enrollment.  After September 30, 1998, veterans, other than those
with service-connected disabilities rated at 50 percent or higher or
seeking treatment for a service-connected disability, will not be
able to obtain care from the VA health care system unless they have
enrolled.  Capturing insurance information during the enrollment
process and including such data in the enrollment database could
facilitate billing efforts.  Information obtained at the time of
enrollment and subsequent reenrollment could include the policy
number and, upon request, a copy of the policy.  By including other
information, such as income and detailed information on adjudicated
service-connected disabilities, MCCR staff could more readily
identify billable insurance and prepare and process bills. 

The effectiveness of such a process would, however, continue to be
dependent on (1) the willingness of veterans to give VA complete and
accurate information on their insurance coverage, employers, and
incomes and (2) the thoroughness of VA efforts to obtain and verify
the information provided.  VA data show that much of the information
VA currently gathers is inaccurate--veterans fail to reveal their
insurance coverage or underestimate their incomes in applying for VA
health care.  For example, the VA initiatives described indicate that
VA is not currently obtaining complete and accurate information on
insurance coverage.  Similarly, only about 3 percent of veterans with
no service-connected disabilities are identified through VA's
admission process as having incomes that place them in the
discretionary care category.  About 15 percent of veterans identified
during the admission process as having incomes that place them in the
mandatory care category, however, are subsequently identified through
matches with income tax data as having incomes that might place them
in the discretionary care category. 

Currently, VA's only recourse when it determines that veterans
knowingly provided false information in order to avoid copayments is
to retroactively seek recovery of those copayments.  A VA official
told us that VA medical centers frequently waive such copayments.  VA
does not, however, maintain data on the extent to which such
copayments are actually billed retroactively and recovered. 


      NEGOTIATE PROVIDER
      AGREEMENTS
---------------------------------------------------------- Letter :6.3

The MCCR program is attempting to negotiate with HMOs and other
managed care plans to enable VA facilities to become participating
providers.  HMOs, however, have little incentive to accept VA as a
participating provider because, to the extent their enrollees obtain
care from nonparticipating providers, HMOs' costs are reduced and
profits increased.  The MCCR Business Plan proposes that VA consider
a legislative proposal that would require HMOs to recognize VA as a
preferred provider. 

VA currently has a contract with only one HMO--Dakota Care--in South
Dakota.  VA does not, however, view this contract as a model easily
transferrable to other HMOs because the VA medical center is in a
small state with limited health care options.  VA has been
negotiating with at least two other HMOs--U.S Healthcare in
Philadelphia and HMO Illinois, a subsidiary of Blue Cross of
Illinois--but, to date, discussions have not resulted in provider
agreements. 

VA is having more success in negotiating provider agreements with POS
plans.  Unlike HMOs and PPOs that may be able to avoid all payments
to VA (other than for emergency care) by excluding VA from their list
of participating providers, POS plans have less to gain by refusing
to accept VA as a participating provider.  This is because a POS plan
has an obligation to pay any willing provider for nonemergency care,
including those without a provider agreement. 

Since February 1995, VA's Office of General Counsel has reviewed and
approved 32 provider agreements between VA facilities and managed
care plans submitted by regional counsels and medical centers. 
Twelve of those agreements were signed; 5 agreements were closed with
no further action, and 15 agreements remain open.  Neither VA's
General Counsel nor the Veterans Health Administration maintained
readily accessible information on the number and status of contracts
submitted for headquarters review prior to February 1995.  As a
result, we could not determine how many provider agreements are in
effect or whether they are for preferred or participating provider
status. 

However, even in instances in which managed care plans are willing to
accept VA as a participating provider, they may be unwilling to
accept VA as a preferred provider.  This distinction is particularly
important to VA because being a participating provider essentially
lowers VA recoveries.  For example, the Washington, D.C., VA medical
center has an agreement with Blue Cross of the National Capital Area
as a participating, rather than preferred, provider.  This means that
veteran policyholders who use the Washington, D.C., medical center
rather than a preferred provider are subject to higher copayments. 
These higher copayments essentially mean that the insurer pays less
of the billed charges; thus VA recoveries are lower than they would
be if VA was a preferred provider. 

Although the Washington, D.C., medical center is trying to become a
preferred provider, Blue Cross of the National Capital Area has
little incentive to allow VA to join its preferred provider network. 
For one thing, the VA medical center is surrounded by preferred
providers in the Blue Cross network; as the following map indicates,
4 of the 12 hospitals that are preferred providers in Washington,
D.C., are within a mile of the VA hospital.  Moreover, because the
Washington, D.C., medical center's billing process differs from those
of other hospitals, VA bills are perceived as more difficult and
costly for the insurer to process. 

   Figure 3:  Location of
   Participating Providers in Blue
   Cross Network Relative to
   Washington, D.C., VA Medical
   Center

   (See figure in printed
   edition.)

A number of other factors also affect VA's ability to negotiate
preferred provider status.  First, 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.\34 Second, VA may be unwilling or unable to comply with the
utilization management policies and standards insurers often impose
as requirements for preferred provider status. 

The 1996 business plan for the MCCR program identified plans to
address VA's inability to recover from HMOs by seeking legislation
requiring HMOs to include VA as a preferred provider.  VA has taken
no official position on the proposal contained in the MCCR business
plan and has not estimated potential revenues from this initiative,
but revenues could be substantial given the rapid increase in HMO
enrollments.  Such legislation, however, would essentially require
HMOs to treat VA providers differently than they would other
providers, raising questions of equity and fairness. 

A number of alternative approaches could be taken to ensure that
government funds are not used to subsidize health plans unless the
plan includes VA as a participating provider.  For example,
legislation could be enacted authorizing VA to (1) deny enrollment in
the VA health care system to any veteran enrolled in a managed care
plan unless that plan includes VA as a provider and (2) refuse to
provide drugs to any veteran covered by PBMs unless the sponsoring
health plan reimburses VA, or the plan's PBM includes VA as a
participating provider in the PBM's pharmacy network. 

Similarly, in instances in which health plans send their payments to
veterans rather than to VA and the veterans refuse to return the
payments, VA could be authorized to deny veterans enrollment in the
VA health care system or to recover the funds through an offset
against other government benefits.  Because they are directed at
veterans rather than at health plans, such solutions would likely be
viewed as reducing veterans' benefits. 


--------------------
\34 Under the Balanced Budget Act, VA can recover the reasonable
charge for care or services starting October 1, 1997. 


      PROVIDE MEDICALLY
      APPROPRIATE CARE
---------------------------------------------------------- Letter :6.4

VA actions aimed at providing care in the most cost-effective setting
consistent with good patient care should increase the percentage of
billed charges recovered, but would not necessarily increase overall
recoveries.  At the two facilities included in our review, however,
preliminary results from the utilization reviews showed that most of
the hospital admissions continue to be medically unnecessary. 
Nevertheless, further actions could be taken to strengthen
utilization reviews or give physicians incentives to provide services
in the most cost-effective setting. 

The Under Secretary for Health directed VA facilities to implement an
inpatient utilization review program no later than September 30,
1996, to assess, monitor, and evaluate the appropriateness of
hospital care provided.  As part of that program, all scheduled acute
admissions are to be assessed prospectively for the appropriateness
of the level of care provided.  Following admission, nurse-reviewers
are to monitor the appropriateness of care through continuing stay
reviews, that is, though periodic reviews of a patient's care during
the hospital stay. 

VA's action addresses a long-standing problem with overutilization of
acute-care beds and inpatient services identified by the VA Inspector
General, VA researchers, and us.  For example, a January 1996 study
by VA researchers reported that about 40 percent of the admissions to
acute medical and surgical services were assessed as nonacute; more
than 30 percent of the days of care in the acute medical and surgical
services of the VA hospitals reviewed were nonacute.\35 VA's action
responded to our recommendation last year that it establish an
independent, external preadmission certification program.\36

Systemwide data on the effectiveness of the new utilization review
program are not yet available.  Data from the Martinsburg and
Washington, D.C., VA medical centers, however, indicate that about 45
percent of the acute inpatient admissions and about 60 percent of the
acute days of care reviewed in both facilities since the
implementation of the utilization review program did not meet
InterQual standards for acuity or intensity of care. 

In addition to implementing the utilization review program, the
Martinsburg medical center established (1) a subacute pilot program
that allows patients no longer needing acute care to be transferred
to a special unit offering care that is less intensive, (2) a 23-hour
observation unit to allow patients to be monitored without being
admitted to the hospital, (3) a "hoptel" to provide temporary lodging
for patients with transportation problems, and (4) a Preadmission
Surgical Screening program through which preoperative tests are
performed on an outpatient basis so that patients can be admitted the
morning of surgery.  In addition, daily reports on all nonacute
admissions are given to the bed service chiefs, and a weekly
utilization review activity report is provided to bed service chiefs
and the chief of staff. 

These initiatives enabled Martinsburg medical center to decrease
nonacute admissions to medical wards from 72 to 59 percent and
nonacute admissions for surgical wards from 78 to 70 percent.  The
data from continuing stay reviews showed that nonacute days of care
provided in medical wards decreased from 92 to 79 percent, and
nonacute days of care provided in surgical wards decreased from 82 to
69 percent.  Although these are important improvements, with well
over half of admissions and days of care continuing to be nonacute,
further actions appear warranted.  For example, under the current
utilization review program, neither the medical center nor the
admitting physician suffer any financial consequences from ignoring
the findings of the reviewer and admitting patients who could be
cared for on an outpatient basis. 

Managed care plans also control the use of hospital care through
physician incentives.  These include profiling of physicians,
preferred provider arrangements, and specific financial incentives. 
Through profiling, physicians are given specific data that compare
their practice and admission patterns with those of other physicians. 
Profiling largely relies on peer pressure to achieve changes in
practice patterns. 

VA's MCCR program developed one form of profiling--a report
indicating how many days of care were denied by health insurers for
each attending physician.  The report also shows the reasons for the
insurer denials.  It is not clear, however, how many facilities have
implemented the report or whether the information is shared with the
attending physicians.  For example, the Martinsburg medical center
produces the report and distributes it to the chief of Clinical
Support, while the Washington, D.C., medical center does not produce
the report. 

A second method managed care plans use to create physician incentives
is through preferred provider arrangements.  PPOs use physician
profiling to identify cost-effective providers.  Those whose practice
patterns vary significantly from the norm are not accepted or not
retained as preferred providers. 

Finally, many HMOs use specific financial incentives to encourage
physicians to reduce hospital use.  These incentives can range from
financial arrangements, in which physicians are placed at risk for a
portion of hospital costs, to bonuses if hospital use is kept below a
certain level.  Such financial incentives, however, carry with them
an increased risk that physicians will overreact to the financial
incentives and fail to admit patients in need of hospital care.  VA
has limited legislative authority to establish incentive pay
provisions for physicians. 

Actions to reduce claim denials because of inappropriate medical care
are largely beyond the control of the MCCR program.  The MCCR program
can continue to (1) observe insurers' certification procedures and
(2) negotiate for partial payments to the extent feasible, but it
cannot resolve the core issue. 


--------------------
\35 C.  Smith and others, "Overutilization of Acute-Care Beds in
Veterans Affairs Hospitals," Medical Care, 34 (1) (Jan., 1996), pp. 
85-96.  In the study, reviewers from 24 randomly selected VA
hospitals applied the InterQual criteria to assess the
appropriateness of 2,432 fiscal year 1992 admissions and days of care
in acute medical, surgical, and psychiatry services.  The study found
similar rates of nonacute admissions and days of care in all 24
hospitals.  The nonacute admissions and days were attributed to
several factors, including lack of an ambulatory care alternative,
conservative physician practices, delays in discharge planning, and
social factors such as homelessness and long travel distances to the
hospitals. 

\36 VA Health Care:  Opportunities for Service Delivery Efficiencies
Within Existing Resources (GAO/HEHS-96-121, July 25, 1996). 


      OBTAIN MEDICARE REMITTANCE
      ADVICE
---------------------------------------------------------- Letter :6.5

VA also expects to increase recoveries by improving its process for
submitting claims to Medicare supplemental insurers.  As discussed
earlier, VA has considerable and increasing difficulty in collecting
from Medicare supplemental insurance, in part, because of VA's
inability to submit claims to insurers similar to the claims of
Medicare providers that have accompanying remittance advice and
explanation of benefits payment vouchers.  The MCCR program is
exploring the feasibility and costs associated with having a Medicare
contractor prepare such documentation for veterans covered by
Medicare who use VA facilities.  VA has not estimated the potential
increased recoveries from the initiative, but notes that the
initiative is important to prevent further decreases in recoveries
from Medicare supplemental policies. 


      DEVELOP ITEMIZED BILLS
---------------------------------------------------------- Letter :6.6

VA also expects to increase recoveries by developing new rate
schedules that allow itemized billing.  In the past, Veterans Health
Administration has been limited to use of per diem and per-visit
rates because of the lack of detailed cost and workload data from its
accounting and information systems.  As VA completes implementation
of the Decision Support System and other improvements to its
information and accounting systems, it proposes to implement new rate
schedules to optimize third-party recoveries. 

As VA shifts from inpatient to outpatient care, the importance of
developing a more detailed outpatient charge structure increases. 
Although many high-cost services, such as cataract surgery, are
increasingly performed on an outpatient basis, under its current rate
structure, VA can bill only $194 for an outpatient visit, regardless
of the type and amount of services provided during the visit. 

To resolve this problem, the MCCR program is developing a
procedure-specific rate schedule for outpatient physician services. 
These rates will be billed along with a facility charge.  VA plans to
implement the new rate structure in October 1997.  Implementation of
the new rates should help compensate for the decline in recoveries
likely to accompany the shifting of care from inpatient to outpatient
settings. 

The 1996 MCCR business plan also estimated that VA should see between
a 15- and 25-percent increase in collections if it uses a
diagnosis-related group (DRG) rate schedule for inpatient billing. 
Although the DRG rates are still being developed, VA no longer
intends to implement DRG billings in fiscal year 1997.  Rather, its
efforts have turned to developing a rate schedule for inpatient
physician services.  Other proposed changes in billing rates are
targeted for succeeding years, leading to implementation of locally
developed itemized rates in fiscal year 2000. 


      STRENGTHEN FOLLOW-UP
---------------------------------------------------------- Letter :6.7

VA believes it can increase recoveries from currently billable
insurance by strengthening follow-up on claims denied or partially
paid.  The business plan notes that some medical centers do not have
utilization review coordinators adequately trained in third-party
recoveries to facilitate requests for reconsideration of claims.  The
plan notes that some utilization review coordinators have
successfully negotiated payments from insurers; it estimates that
approximately 10 percent of denied claims could be overturned and
recovery achieved through strong utilization review coordinators. 

Our work at the Martinsburg and Washington, D.C., medical centers
confirmed that there is some potential to achieve additional
recoveries through follow-up action.  It is unclear, however, whether
such actions would result in 10 percent of denied claims being
overturned and recovery achieved through follow-up actions.  As
discussed earlier, for most denied claims, there is little, if any,
recovery potential. 

The utilization review coordinator at Martinsburg was able to
negotiate partial payments for many claims denied because of medical
necessity, but such recoveries accounted for only a small portion of
billed charges.  While the Washington, D.C., medical center did not
actively pursue partial payment during the time of our review, its
ability to achieve the same success in obtaining partial payment from
insurers depends on a number of factors, including the willingness of
insurers to make partial payments.  As discussed earlier, insurers
are increasingly denying all payment for services unnecessarily
provided in hospitals. 


      AUTOMATE CAPTURE OF
      ENCOUNTER DATA
---------------------------------------------------------- Letter :6.8

VA also expects its efforts to automate the capture of data on
patient diagnoses, procedures, and providers to increase collections
and reduce recovery costs.  Prior to April 1995, VA did not require
its facilities to include such data for outpatient visits in any of
its computer databases.  As a result, the MCCR program had to
manually review outpatient medical records in order to prepare
insurance billings. 

In April 1995, the Under Secretary for Health changed Veterans Health
Administration policy to require the capture of diagnosis, procedure,
and provider data for all ambulatory care encounters and services. 
When fully implemented, the MCCR program estimates that the automated
capture of encounter data will enable it to (1) utilize the automatic
billing features of its integrated billing system and (2) eliminate
staff positions comparable to 572 full-time-equivalent employees
currently used to manually review and code data from patient medical
records. 

Among the benefits from the data capture initiative identified by a
VA contractor were improved identification of billable visits and
increased reimbursement because of improved capture and reporting of
procedures.  These benefits would result from shifting the staff
positions saved by eliminating manual review to improving
identification of insurance coverage and follow-up on denied claims. 
The contractor estimated that using the positions to strengthen
identification and follow-up would enable VA to generate about $100
million a year in additional outpatient recoveries.  In its fiscal
year 1998 budget submission, VA indicates that the automated capture
of encounter data will also result in additional recoveries of $23
million in fiscal year 1997, increasing to $116 million in fiscal
year 2002. 


      ATTRACT NEW USERS
---------------------------------------------------------- Letter :6.9

Another of VA's goals is to increase the number of VA users by 20
percent over the next 5 years.  One way to meet its recovery
projections would be to focus its marketing efforts on attracting
veterans with fee-for-service private health insurance. 

VA officials told us that they do not know how many veterans in their
2.9 million patient base have insurance or how many insured veterans
receive billable care.  This lack of information on key elements
affecting its projections creates considerable uncertainty about the
number of new insured users it would need to attract or identify in
order to generate its target revenues. 


   USE OF INSURANCE PAYMENTS TO
   PAY VETERANS' COPAYMENTS
   REDUCES OVERALL RECOVERIES
------------------------------------------------------------ Letter :7

VA's General Counsel has determined that a portion of any payments
received from a veteran's private health insurance should be applied
toward any copayments owed by the veteran, including both means test,
per diem, and pharmacy copayments.  While VA's interpretation is
understandable as it applies to Medicare supplemental insurance
policies, it is more questionable to apply recoveries from primary
insurance toward veterans' copayments.  In addition, as interpreted
by VA's General Counsel, the application of insurance recoveries to
offset veteran copayments creates a significant administrative burden
for MCCR staff and reduces overall third-party recoveries. 

Under Public Law 99-272, certain veterans, in order to become
eligible for VA medical care, must agree to pay the lesser of the
cost of that care or the so-called "means test" copayment.  The
copayment for inpatient hospital and nursing home care is based on
the Medicare deductible, while the copayment for outpatient care is
equal to 20 percent of the average cost of an outpatient visit.  The
means test copayments apply to veterans with no service-connected
disabilities who have incomes above the means test threshold--$21,611
for a veteran with no dependents in 1997. 

Public Law 101-508, effective November 5, 1990, added additional
cost-sharing requirements.  First, it added per diem payments--$5 a
day for nursing home care and $10 a day for hospital care--to the
means test copayment.  In addition, it created a new cost-sharing
requirement for prescription drugs.  All veterans--other than those
receiving treatment for a service-connected condition, those with
service-connected disabilities rated at 50 percent or higher, and
those with incomes below the maximum VA pension level--are required
to pay $2 for each 30-day supply of an outpatient prescription. 

The VA law is silent about the relationship between insurance
recoveries and veteran copayments, and VA's General Counsel provided
guidance in 1990 on how the two recovery programs should interact. 
Specifically, the General Counsel opinion, as expanded through a 1996
reevaluation, provides that

  -- recoveries from Medicare supplemental insurance policies should
     be used first to satisfy veterans' means test payments, per diem
     payments, and prescription copayments; and

  -- for non-Medicare supplemental insurance, recoveries are to be
     divided in equal proportions between VA and the veteran; in
     other words, if the insurer pays 80 percent of allowable
     charges, then insurance proceeds will be used to pay 80 percent
     of the veteran's copayment after the veteran has satisfied any
     deductible imposed by the insurer. 

VA's interpretation of recovery provisions as they apply to
supplemental insurance follows from an assessment that Medicare
supplemental insurance is specifically intended to pay policyholders'
deductibles and copayments and is purchased or provided expressly for
that purpose.  However, using funds insurers provide to VA to pay for
veterans' financial obligation when these insurance policies have
established deductibles and copayments to discourage unnecessary use
of health services is harder to defend.  One of the primary arguments
insurers made against the enactment of the law authorizing VA
recovery from private health insurance was the lack of VA
cost-sharing provisions to discourage inappropriate use of health
care services. 

VA argues that it should be treated by insurance companies the same
way any private sector hospital is treated.  But private sector
hospitals do not give a portion of the payment they receive from a
patient's health insurance to the patient.  Although VA may not
collect more than the cost of its services, insurers typically pay VA
less than VA's billed charges because the insurers reduce the payment
in accordance with their cost-sharing provisions.  Only in instances
in which the combined insurance recoveries and copayments would
exceed the cost of VA services would VA be compelled to apply
insurance recoveries toward veterans' copayments. 

The administrative burden of applying insurance recoveries toward
veteran copayments, particularly for $2 prescription copayments, may
be an issue as well.  In 1994, VA estimated that it cost it $.38 for
each $1 it collected under the pharmacy copayment program.  With the
added burden of offsetting insurance recoveries against prescription
copayments, the administrative costs are likely to exceed recoveries
for veterans with health insurance.  This is because VA would
typically be able to bill only $.40 of a $2 copayment after the
offset. 


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

Although VA currently recovers less than a third of the amounts it
bills to private health insurers, opportunities to recover more of
its billed charges appear to be limited.  The amounts that insurers
deduct from their payments to VA generally reflect application of
insurance policy provisions restricting payments for medically
inappropriate care and setting policyholder cost-sharing
requirements.  In addition, some Medicare supplemental insurers
contend that they have overpaid VA claims for years.  They are
reducing payments and seeking refunds for past overpayments. 

VA has set goals for its medical care cost recovery program that
would require it to almost double recoveries from private health
insurance over the next 5 years when VA's estimates of past
overpayments are considered.  Because there is little potential to
increase recoveries through current billings, the success of VA's
efforts depends largely on its ability to attract new users with
private health insurance or improve its efforts to identify current
users' insurance coverage. 

VA's ability to achieve its goals is uncertain considering the many
factors likely to decrease future recoveries.  Although VA has a
number of initiatives planned and under way to address some of these
factors and increase recoveries, it is not addressing other problems. 
For example, VA has not

  -- contacted state insurance commissions to obtain their help in
     removing exclusionary clauses in insurance policies that appear
     to preclude payment to VA;

  -- developed procedures to ensure that the time-consuming tasks
     associated with identifying, confirming, and returning
     overpayments are not performed at the expense of current billing
     activities;

  -- established mechanisms to provide its physicians with incentives
     to make appropriate use of VA hospitals; or

  -- developed adequate mechanisms for gathering complete and
     accurate information on veterans' health insurance policies. 

Now that the Congress has authorized VA to retain health insurance
recoveries, VA needs to develop procedures to ensure that such
authority does not detract from services available to low-income
veterans and veterans with service-connected conditions who have no
health insurance.  Allowing VA to retain insurance recoveries creates
strong financial incentives for VA facilities to place a higher
priority on serving insured rather than uninsured veterans. 


   MATTERS FOR CONSIDERATION BY
   THE CONGRESS
------------------------------------------------------------ Letter :9

The statutes governing VA recoveries from private health insurance
and veteran copayments do not clearly specify the relationship
between the two provisions.  In the absence of definitive guidance in
the law, VA's General Counsel has determined that insurance
recoveries should be used to offset veterans' copayment
responsibilities.  The effect of its interpretation is a reduction in
overall cost recoveries, increased administrative expense, and
reduced incentive for veterans to manage their use of health care
services. 

The Congress may wish to consider clarifying the cost recovery
provisions of title 38 of the U.S.  Code to direct VA to collect
means test copayments, per diem charges, and pharmacy copayments from
patients regardless of any amounts recovered from private health
insurance except in instances where the insurer pays the full cost of
VA care. 

The identification of billable care provided to veterans with
service-connected conditions is administratively cumbersome. 
Moreover, HIPAA prevents private health insurance from excluding
payment for preexisting conditions for more than 12 months after the
enrollment.  The Congress may wish to take advantage of the
provisions of HIPAA to authorize VA to recover the costs of
service-connected treatments from private health insurance after the
specified exclusionary period. 

A change in the statutory language in title 38 of the U.S.  Code to
authorize VA to recover from private health insurance its costs for
providing treatment for service-connected conditions, consistent with
the provisions of HIPAA, could, however, be viewed as shifting to the
private sector the government's obligation to care for veterans
disabled during or as a result of their military service.  On the
other hand, now that VA retains recoveries from third-party insurers,
this change could generate significant additional revenues for
improving health care services for veterans.  Moreover, it could
offset the incentives created by the Balanced Budget Act for VA
facilities to target their services toward privately insured veterans
with no service-connected conditions. 

Finally, VA's ability to increase recoveries is often hindered by
incomplete and inaccurate information on veterans' employers,
incomes, and insurance coverage.  Veterans, however, have little
direct or indirect incentive to cooperate with VA recovery efforts. 
The Congress may wish to consider giving VA the authority to
disenroll veterans from the VA health care system who knowingly
provide VA incomplete or inaccurate data about their incomes,
employers, or insurance coverage. 


   RECOMMENDATIONS
----------------------------------------------------------- Letter :10

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

  -- Establish procedures to work with state insurance commissions to
     ensure that exclusionary clauses inconsistent with VA's recovery
     authority are removed from private health insurance policies. 

  -- Work with the Director, OPM, to identify options for including
     VA facilities as preferred or participating providers under
     FEHBP plans, including HMOs and preferred provider plans. 

  -- Design physician incentives to encourage appropriate use of
     hospital care.  Such incentives should not, however, be so
     strong that they would result in denial of needed hospital care. 

  -- In designing the enrollment process for the veterans' health
     care program, develop procedures for gathering and updating
     detailed information on veterans' employment, insurance, and
     service-connected disabilities. 

  -- Assign adequate resources to MCCR activities to protect the
     government's interest in resolving insurers' requests for
     refunds of claimed overpayments. 

  -- Develop procedures to ensure that authority to retain health
     insurance recoveries would not detract from services to veterans
     who lack private health insurance. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :11

We obtained comments on a draft of this report from the Acting
Director of Medical Care Cost Recovery (MCCR) and other VA officials. 
The officials generally concurred with all but one of our
recommendations.  However, according to a Senior Management Analyst,
Management Review and Administration, VA does not agree with our
recommendation that it design physician incentives to encourage
appropriate use of hospital care.  She said that VA believes adequate
incentives have already been established through the new Veterans
Equitable Resource Allocation system and performance measures. 

Although the new allocation procedure and performance measures will
give veterans integrated service networks and VA facilities greater
incentives to provide appropriate care, we do not think that these
initiatives will provide sufficient inducement for individual
physicians to modify their practice patterns significantly.  Existing
efforts to reduce inappropriate inpatient care, such as VA's recently
implemented utilization review program, constitute a solid first step
to addressing VA's traditional reliance on institutional care. 
However, as indicated by the extent of the nonacute care that
continues to be provided at the Martinsburg and Washington, D.C.,
facilities since the program's inception, this effort may not be
sufficient to address physicians' lack of accountability for their
treatment decisions.  In our view, VA needs to develop incentives
such as physician profiling or financial risk-sharing to encourage
appropriate use of hospital care. 

The Acting Director emphasized that limited opportunities exist for
VA to collect more of its billed charges and that the key to
increased recoveries is improved identification of insurance
coverage.  He said that VA is pursuing a match with Medicare records
that should help to identify private health insurance coverage of
Medicare-eligible veterans. 

In a draft of the report, we recommended that the Secretary of
Veterans Affairs work with the Director, OPM, to (1) determine the
extent to which FEHBP plans overpaid VA for care provided to veterans
who were covered by Medicare and the extent that overpayments should
be refunded and (2) develop mutually beneficial changes in how FEHBP
plans will reimburse VA for services provided to veterans covered by
Medicare.  In commenting on the report, VA officials indicated that
they had relied on the Department of Justice to handle negotiations
with OPM to discuss mutually beneficial changes.  After follow-up
discussions with OPM, we revised the report to indicate that FEHBP
plans will pay VA facilities as secondary to Medicare for those
veterans who are covered by Medicare, that this benefit change will
occur prospectively, and that past payments will not be refunded.  We
have also deleted the associated recommendations. 

VA also provided several technical comments, which have been
incorporated in the report as appropriate. 


--------------------------------------------------------- Letter :11.1

We are sending copies of this report to appropriate congressional
committees; the Secretary of Veterans Affairs; the Director, Office
of Management and Budget; and other interested parties.  We will also
make copies available to others upon request. 

This report was prepared under the direction of Stephen P.  Backhus,
Director, Veterans' Affairs and Military Health Issues.  Please call
Mr.  Backhus at (202) 512-7101 if you or your staff have any
questions.  Other contributors to this report included Jim Linz,
Sibyl Tilson, Mary Ann Curran, Lesia Mandzia, and Greg Whitney. 

Sincerely yours,

Richard L.  Hembra
Assistant Comptroller General


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