VA Health Care: Third-Party Charges Based on Sound Methodology;
Implementation Challenges Remain (Letter Report, 06/11/1999,
GAO/HEHS-99-124).
The Department of Veterans Affairs (VA) used a sound methodology to
replace its cost-based system with a charge-based system that sets
charges at the 80th percentile level and better resembles market prices
for thousands of health procedures and hundreds of diagnosis groups. VA
expects higher revenues from insurers as a result but it lacks adequate
data to estimate the effect of reasonable charges on its revenue and
corresponding insurer cost. However, reasonable charges will not affect
veterans' copayment and per diem obligations. Reasonable charges are
expected to play a key role in VA's plans to expand and improve
veterans' health care without increasing appropriations through fiscal
year 2002, but factors that could limit the contribution that reasonable
charges make to its revenue collections include VA's inability to
collect routinely from health maintenance organizations and Medicare and
its overcoming past collection problems. To the extent that VA's method
will set some reasonable charges below insurers' usual payments, VA will
collect less than other providers. VA does not have standardized
procedures to ensure that insurers' payments are appropriate if less
than reasonable charges. GAO recommends (1) monitoring reasonable
charges and identifying those that should be increased to conform with
local market prices and (2) verifying the appropriateness of insurers'
payments when they are less than VA's reasonable charge.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: HEHS-99-124
TITLE: VA Health Care: Third-Party Charges Based on Sound
Methodology; Implementation Challenges Remain
DATE: 06/11/1999
SUBJECT: Veterans benefits
Health insurance cost control
Health care programs
Claims settlement
Veterans
Insurance companies
Patient care services
Prices and pricing
Health insurance
Medical services rates
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United States General Accounting Office GAO Report
to the Chairmen and Ranking Minority Members, Committees on
Veterans' Affairs, U.S. Senate and House of Representatives June
1999 VA HEALTH CARE Third-Party Charges Based on Sound
Methodology; Implementation Challenges Remain GAO/HEHS-99-124 GAO
United States General Accounting Office Washington, D.C. 20548
Health, Education, and Human Services Division B-281154 June 11,
1999 The Honorable Arlen Specter Chairman The Honorable John D.
Rockefeller Ranking Minority Member Committee on Veterans' Affairs
United States Senate The Honorable Bob Stump Chairman The
Honorable Lane Evans Ranking Minority Member Committee on
Veterans' Affairs House of Representatives The Department of
Veterans Affairs (VA) operates the nation's largest integrated
health care system, providing care for eligible veterans with
service-connected and non-service-connected conditions. For
veterans who have private health insurance, VA was authorized,
under the Veterans Health Care Amendments Act of 1986, to bill
their private insurers on a "reasonable cost" basis for care
provided to veterans for non-service-connected conditions. The
Balanced Budget Act of 1997 (BBA) amended this authority to
specify "reasonable charges" as the basis for billing private
insurers and directed VA to develop a rule to change its basis for
billing. Reasonable cost billing is designed to recover VA's costs
of furnishing care, while reasonable charge billing is designed to
obtain the same payment for VA that insurers make to other
providers. The shift to reasonable charges is intended to enhance
VA collections to the extent that reasonable charges result in
higher payments than reasonable costs. BBA also allowed VA to
retain all collections, whereas before it had to return
collections, minus collection costs, to the U.S. Treasury.
Obtaining revenue from third-party payments is a key element of
VA's strategic plan to expand and improve health care for veterans
without increasing its appropriations. Specifically, VA estimated
it could generate 10 percent of its health care budget from
nonappropriated funds by fiscal year 2002. This, along with its
plan to lower unit costs of providing services by 30 percent, was
expected to allow VA to serve 20 percent more veterans while
operating without a budget increase over the fiscal year 1997-2002
period. In fiscal year 1998, nonappropriated funds totaled Page 1
GAO/HEHS-99-124 VA Reasonable Charges B-281154 $560.1 million from
collections and users' fees, 79 percent of which came from
collections from insurers. On April 27, 1999, VA published the
final rule reflecting the change in its medical billing rates to
private insurers from a reasonable cost to a reasonable charge
basis. The method VA used to develop reasonable charges was
designed to estimate the 80th percentile of local charges so that
its reasonable charges to private insurers would typically equal
or exceed 80 percent of all charges submitted for the services
provided. VA received six comments on its proposed rule (published
on October 13, 1998), which generally did not discuss in detail
the validity of VA's methodology. An association of insurers asked
for additional time to submit comments on VA's methodology and
prepare their claims systems to process VA's new reasonable charge
claims. VA delayed implementation of the final rule until
September 1, 1999. In response to the requirements of 38 U.S.C.
1729(c)(2)(C), this report provides our findings concerning (1)
the soundness of VA's methodology for setting reasonable charges
for inpatient facility, skilled nursing, outpatient facility,
physician, and nonphysician services and (2) potential effects of
the new charge-based system on VA, insurers, and veterans. We
performed our evaluation from September 1998 through May 1999 in
accordance with generally accepted government auditing standards.
For details on our scope and methodology, see appendix I. Results
in Brief We believe VA's methodology provides a sound basis for
setting reasonable charges and optimizing its collection revenues.
Its methodology logically applies available data to set local
market charges for each geographic area where VA provides care. In
cases where VA's charges are higher than the insurers' usual
payments to other providers for the same care, insurers are
permitted by law to pay VA these usual amounts rather than VA's
billed charges. However, if VA submits charges that are less than
the insurers' usual payments, the insurers may pay the lower
amounts. Therefore, if VA sets its charges below market prices, it
will forego some of the revenue it could collect from private
insurers. VA is currently working with a contractor to establish a
way to identify charges that need to be modified to better reflect
market prices. VA expects that the shift to reasonable charges
will increase collections from private insurers, but it cannot
accurately project the amount. The potential revenue gain is
dependent on the difference between the Page 2
GAO/HEHS-99-124 VA Reasonable Charges B-281154 reasonable cost and
reasonable charge payments and the volume of payments received
from third-party payers. However, VA does not have sufficient
reliable data on either. For example, VA databases do not contain
sufficient detail on the type of insurance coverage veterans have
or the specific care provided to insured veterans in order to
project revenue changes. Consequently, we agree that the effect on
VA's collections-and the corresponding effect on insurers' costs-
cannot be accurately determined. Moreover, in cases where insurers
exercise their option to pay their usual amounts instead of VA's
proposed reasonable charge, VA faces the challenge of determining
whether the payments it receives from insurers are in fact the
appropriate amount. VA has not established procedures to make this
determination. We are recommending that VA take the appropriate
steps to ensure it receives payment comparable to other providers.
While the effect of the shift to reasonable charges on VA revenue
and insurers' costs is not precisely predictable, it should not
have an appreciable effect on veterans because it does not change
the copayment and per diem payments set by statute that are
required of some veterans receiving VA care. Background In
proposing its fiscal year 1999 and fiscal year 2000 budgets, VA
assumed that it would be increasing collections from insurers and
user fees (copayments and per diems from certain veterans). VA
projected fiscal year 1999 collections would increase by 14
percent from fiscal year 1998 levels to $637.5 million through
better administrative efficiency and implementation of billing
rates based on reasonable charges. In fiscal year 2000, VA expects
collections to increase about another 19 percent to $761.6
million. However, the Administration's plan to substantially
increase such nonappropriated funds in the long term hinges on the
authorization of reimbursement through Medicare subvention,1 which
was not enacted at the time of the publication of the final rule
on reasonable charges. Under VA's cost-based charge system, VA's
charges to insurers have not been specific to the particular
service VA provided-or the resources that it costs VA to provide a
particular service-because reasonable cost charges are based on
average costs. Reasonable cost charges include relatively few
rates-nine inpatient rates based on the patient's location in the
hospital, one nursing home rate, and one outpatient visit rate.
When proposing a shift to reasonable charges, the House Committee
noted that VA's 1Medicare subvention would authorize VA to bill
Medicare for health care provided to Medicare-eligible, higher-
income veterans who do not have compensable disabilities. Page 3
GAO/HEHS-99-124 VA Reasonable Charges B-281154 cost-based charges
are often below VA's costs but exceed such levels in other
instances. For example, VA currently charges $229-its estimated
average nationwide cost for an outpatient visit-for both a brief
office visit and outpatient surgery. For inpatient stays in the
surgical bed section, VA charges $2,079 per day, regardless of the
treatment.2 VA took guidance from the Conference Report (H.R. 105-
217) that indicated reasonable charges should resemble market
pricing for health care services. VA interpreted this to mean that
reasonable charges should be based on charges to payers in local
markets. Setting reasonable charges according to the market could
allow VA to receive revenues in excess of VA's costs. Such
reasonable charges would not necessarily reflect market payments
because, as VA recognized, charges serve as asking prices in the
marketplace and often exceed final payments. VA Used a Sound
In establishing its reasonable charge rule, VA wanted to directly
reflect Methodology to Set local market charges for all
services in all locations, but these data were not available. VA
instead selected a methodology that used available data Charges
to set local charges indirectly. Specifically, VA estimated the
80th percentile of charges submitted by nonfederal providers to
insurers nationwide, then adjusted these nationwide charges-using
a geographic adjustment factor that it developed-to local market
prices at each VA facility location. Using available data in this
way, VA was able to set charges for hundreds of medical diagnoses
groups and thousands of procedures at many locations. VA used
various data sources as needed to set the charges. Inpatient
facility charges, for example, were estimated nationwide using
1995 charge data from both Medicare and MedStat databases.3 VA's
methodology applied hospital components of the Consumer Price
Index to project these charges forward to a 1998 to 1999 billing
period. VA also used the Medicare and MedStat data to develop its
geographic adjustment factors. (See app. II for a detailed
description of VA's methodology and data sources.) 2In special
cases, such as for care furnished in a medical emergency or to
certain beneficiaries of the Department of Defense or other
federal agencies, VA will continue to use reasonable cost charges
after implementing reasonable charges. 3The Medicare data
represented the amounts Medicare was charged from claims paid for
a 5-percent sample of beneficiaries in 1995. The MedStat data
represented 1995 claims data from over 200 insurance companies for
over 7 million beneficiaries. Page 4
GAO/HEHS-99-124 VA Reasonable Charges B-281154 In our view,
setting charges at the 80th percentile level is a reasonable
strategy for optimizing revenue. By setting charges at this level,
VA can expect to receive insurers' usual payments even when they
are more than average charges, with the exception of those that
exceed the 80th percentile.4 Payers whose usual payments are lower
are protected by a statutory provision (38 U.S.C. 1729(c)(2)(B))
that limits their liability to the amount they would pay to
nonfederal facilities in the same area for the same care or
services provided. Assuming that insurers will pay no more than
their usual payments, this provision essentially reduces VA's
charges to local market prices when the charges exceed those
levels. We anticipate that VA's method generally estimates above-
average local-market charges for services, as was intended. We
confirmed that, at least for inpatient facility charges, the
method generally results in above-average market charges, although
not always at the 80th percentile. We reviewed charges for eight
selected diagnosis related group (DRG) codes in five metropolitan
areas.5 For these 40 charges, we found that 70 percent of VA's
charges fell between the 50th and 80th percentile of charges and
another 12.5 percent of the charges fell above the 80th
percentile. However, the remaining 17.5 percent of charges fell
below the 50th percentile. For example, the 50th percentile charge
for major joint and limb reattachment procedures for the lower
extremity (DRG 209) is about $3,300 per diem in the Baltimore
metropolitan area, while the corresponding VA reasonable charge is
about $2,700. Although the insurer's option to pay usual payments
can reduce higher VA charges to a particular insurer's market
prices, there is no mechanism to raise VA's charges if they fall
below an insurer's usual payments. This is important because our
analysis suggests that some reasonable charges fall well below the
80th percentile and, therefore, are more likely to fall below
insurers' usual payments. VA is seeking assistance from a
contractor on how to measure whether its charges fall below
payers' usual payments. Appropriate monitoring should reveal the
extent to which collections are 4VA considered using Medicare's
payment schedule to set its charges but decided those rates would
be too low to ensure insurers' payments at their usual amounts.
For example, a study by the Physician Payment Review Commission
found that in 1995, Medicare paid physicians roughly 68 percent of
average private payer rates (Annual Report to Congress, 1995, p.
83). 5Confirming the reasonableness of VA's new charges is limited
by insufficient data for all services in all places, which led VA
to abandon a direct measurement of local market charges. To ensure
sufficient data, we limited our selective examination to (1) VA
facilities in five large metropolitan areas (New York, Los
Angeles, Chicago, Baltimore, and San Francisco) and (2) eight DRG
conditions-such as heart failure and shock, coronary bypass, and
rehabilitation-which accounted for about 18 percent of all veteran
admissions in fiscal year 1997. Page 5
GAO/HEHS-99-124 VA Reasonable Charges B-281154 below market
payments and provide a way of identifying where VA charges need to
be modified to better reflect market prices. Effects of New
VA views reasonable charges as an opportunity to increase its
revenue Charges Uncertain, collections. This will occur to the
extent that the total payments to VA under the new reasonable
charge billings are greater than those VA would and Implementation
have received from billing the old reasonable cost charges for the
same Challenges Remain health care. To accurately predict and
compare these two total payments, VA would need data on the volume
of services it would deliver and, for those services, the change
in payment from the cost-based system to the charge-based system.
For example, an outpatient surgery to repair a hernia would result
in a single-visit, all-inclusive charge under reasonable cost
billing, whereas it would create two physician charges and an
outpatient facility charge under reasonable charge billing. In
addition, estimated payment levels resulting from the various
charges would also be needed to compute total payments for each
set of old and new charges. Although VA tentatively estimated that
the shift to reasonable charges would increase its revenue by $44
million in 1999,6 it acknowledged that the amount cannot be
accurately predicted. We agree for several reasons. First, the
data that are critical to an accurate prediction-especially data
on the procedures and diagnoses codes for veterans' care that
would aid predicting the reasonable charges that will be billed-
are not readily available. VA also does not have a history of
payments that would result from reasonable charges. Moreover, VA
lacks data on the types of insurance veterans have. This is
critical data for predicting payments because insurers' liability
is limited to the terms of their coverage. For instance, over half
of VA's billings have apparently gone to Medicare supplemental
insurers, but reasonable charges will not typically affect the
Medicare deductibles and coinsurance received as payments from
these insurers. VA's potential revenue will also be affected by
its ability to overcome past collection problems. Three recent
studies have highlighted several inefficiencies in VA's collection
operations, such as slow billing, inadequate follow-up of
delinquent accounts receivable, significant errors and rework,
6Reasonable charges will actually have only a limited impact on
collections this fiscal year because implementation has been
delayed until Sept. 1, 1999. Page 6
GAO/HEHS-99-124 VA Reasonable Charges B-281154 and ineffective use
of available automation.7 VA revenue will further be affected by
its ability to manage the effects of demographic and health care
trends. The declining number of veterans-from 25.1 million in 1998
to an estimated 23.1 million in 2003-will reduce the pool of
veterans who could be served, and the aging of the veteran
population will likely increase the number of veterans with
Medicare or Medicare supplemental insurance. In addition, if
veteran enrollment in managed care follows the insurance
industry's trend, VA may face a situation where it cannot collect
revenue for a growing number of veterans. (VA is generally not a
participating provider in managed care plans and, therefore, under
typical health maintenance organization and other managed care
insurance contracts, cannot expect to collect from them for
nonemergency services.) VA also faces some challenging new tasks
for administering its new reasonable charges billing system. For
example, VA will have to prepare accurate bills for the specific
services furnished and support these coded charges with
documentation if insurers ask for additional information. Before
implementation, VA plans to test its ability to produce reasonable
charge bills in a format that insurance companies can process. VA
will also examine the adequacy of training provided to intake
clerks, physicians, and collection staff to ensure accurate coding
and documentation. A second challenge will be verifying that it is
receiving appropriate payments from insurers when insurers pay
usual payments rather than billed charges. Neither the law nor
VA's regulations give criteria for determining appropriate payment
when insurers make different payments to different providers in
the same geographic location. VA's decentralized system of
verification is intended to give local employees flexibility in
working with particular insurers and relies on local employees'
determination of what constitutes insurers' usual payments. VA
officials stated that VA plans to have a contractor assist in
developing recommendations for selecting insurers for
verification. Although the effect of the reasonable charge
structure on VA's revenue and insurers' costs is uncertain, it
will not affect the copayments and per diem obligations required
by VA for certain veterans. These payments are set by statute-the
Veterans' Health-Care Amendments Act of 1986 (P.L. 99-272). The
copayment for inpatient hospital and nursing home care is based on
the Medicare deductible, while the copayment for outpatient care
is based on the VA-wide estimated average cost of an outpatient
visit. Similarly, the per diem payments for hospital and nursing
home care added by the 7Office of Inspector General, VA, Audit of
the Medical Care Cost Recovery Program (July 10, 1998); Coopers &
Lybrand, VA MCCR National Study (Jan. 1998); and VA Medical Care:
Increasing Recoveries From Private Health Insurers Will Prove
Difficult (GAO/HEHS-98-4, Oct. 17, 1997). Page 7
GAO/HEHS-99-124 VA Reasonable Charges B-281154 Omnibus
Reconciliation Act of 1990 (P.L. 101-508) are set independently
from reasonable charges. While the obligations for veterans are
independently set from reasonable charges, the amount collected
from insurers under reasonable charges may reduce insured
veterans' actual payments to VA. A recent VA directive states that
insurance recoveries will be used to reduce insured veterans'
copayment obligations, in part or full.8 Thus, when this occurs,
veterans' payments to VA-as well as VA's net collections-will be
reduced. Conclusions and In our opinion, VA used a sound
methodology to replace its cost-based Recommendations system
with a charge-based system that better resembles market prices for
thousands of procedures and hundreds of diagnoses groups. Setting
these charges at the 80th percentile level helps VA ensure that
its reimbursements are not less than the amounts insurers usually
pay other providers. Although VA anticipates increased revenues
from insurers as a result of billing reasonable charges, VA does
not have adequate data to estimate the effect of reasonable
charges on VA revenue and corresponding insurer cost. However,
reasonable charges will not affect veterans' copayment and per
diem obligations. By increasing alternative revenues, reasonable
charges are expected to play a key role in VA's plans to expand
and improve health care for veterans without increasing
appropriations through fiscal year 2002. However, several factors
could limit the contribution that reasonable charges make to VA
revenue collections, such as VA's inability to collect routinely
from certain insurers (for example, health maintenance
organizations and Medicare) and its ability to overcome past
collection problems. In addition, VA's method will likely set some
reasonable charges below market prices, that is, below insurers'
usual payments. To the extent that this may occur, VA will collect
less than other providers. Moreover, VA will be vulnerable in
instances where insurers pay less than their usual payments
because VA currently does not have standardized procedures in
place to ensure that insurers' payments are appropriate if less
than reasonable charges. To help ensure that VA does not forego
some of the amount that insurers usually pay other providers for
the same service in the same locality, we recommend that the
Secretary of Veterans Affairs establish and implement policy and
procedures to (1) monitor reasonable charges and identify those
that should be increased to conform with local market prices and
8Veterans Health Administration, Directive 99-014 (Apr. 1, 1999).
Page 8 GAO/HEHS-
99-124 VA Reasonable Charges B-281154 (2) verify the
appropriateness of insurers' payments when they pay an amount less
than VA's reasonable charges. Agency Comments VA was unable to
provide comments on a draft of this report within the abbreviated
time period available. It said it will provide comments on this
report at a later date. We are sending copies of this report to
the Honorable Togo D. West, Jr., Secretary of Veterans Affairs,
and other interested parties. We will also make copies available
to others upon request. Please contact me at (202) 512-7101 or
Shelia Drake, Assistant Director, at (202) 512-7172 if you or your
staff have any questions concerning this report. Other GAO staff
who made major contributions to this report are Terry Hanford and
Sandra Davis. Stephen P. Backhus Director, Veterans' Affairs and
Military Health Care Issues Page 9
GAO/HEHS-99-124 VA Reasonable Charges Contents Letter
1 Appendix I
12 Scope and Comparison With Local Market Charges
12 Methodology Appendix II
14 VA's Methodology for Methodology for Determining Rates and
Adjustment Factors 15 Formulas for
Facility-Specific Charges
19 Setting Reasonable Charges Tables Table II.1:
VA's Reasonable Charge Categories and Services
15 Covered Table II.2: Estimating Average National Charges by
Categories of 16 Charges Table II.3: Estimating
the 80th Percentile by Categories of 17
Charges Table II.4: Trending Charges Forward by Categories of
Charges 18 Table II.5: Geographic Adjustment
Factors by Categories of 19 Charges
Abbreviations BBA Balanced Budget Act of 1997 CF
conversion factor CMSA consolidated metropolitan
statistical area CPI Consumer Price Index CPT
current procedural terminology DRG diagnosis related
group MSA metropolitan statistical area RVU
relative value unit SNF skilled nursing facility VA
Department of Veterans Affairs Page 10
GAO/HEHS-99-124 VA Reasonable Charges Page 11 GAO/HEHS-99-124
VA Reasonable Charges Appendix I Scope and Methodology To assess
the soundness and potential effects of VA's methodology for
setting reasonable charges, we reviewed documentation on the
methodology and met with VA's contractor, Milliman & Robertson,
Inc., to gain an understanding of the key assumptions and
decisions in its development of the methodology. We also discussed
the methodology with VA officials as well as health care experts
at the Health Care Financing Administration and the Medicare
Payment Advisory Commission. In addition, we reviewed the six
public comments VA received on its proposed rule. Because our
objective was to assess the reasonableness of the methodology, we
did not gather new data on charges, test the reliability of the
contractor's data, or independently verify calculations. The
following sections discuss how we compared reasonable charges with
local market charges as a partial check of the ability of VA's
method to produce charges at above-average levels. Comparison With
We limited our comparison of reasonable and local market charges
to Local Market Charges inpatient facility charges because
we had ready access to Medicare data upon which VA inpatient
facility charges are partially based. Because VA's contractor told
us that inpatient facility per diems calculated on the Medicare
data and calculated on the commercial data were roughly
equivalent, our use of only the one data source should be a minor
source of difference between our results and VA's. Outpatient
facility, physician, and nonphysician charges are based on private
data sources. We also limited our examination to eight diagnosis
related group (DRG) conditions commonly treated at VA and five
large metropolitan areas to ensure that we had sufficient data to
analyze. Because we judgmentally selected both the locations and
DRGs, our analysis is not generalizable to all inpatient facility
charges at all VA facilities. It does serve, however, to
illustrate the extent to which some reasonable charges fall within
a range of above-average local market charges. Because the
available VA data were for all admissions in fiscal year 1997, we
could not assess whether the eight DRGs we examined were also the
most common types of admissions for insured veterans. Selecting
Locations and For this analysis, we selected large VA
facilities in metropolitan areas Charges
because we assumed that areas with high populations would provide
a sufficient volume of local market charges for our analysis. The
facility Page 12 GAO/HEHS-99-
124 VA Reasonable Charges Appendix I Scope and Methodology
locations are New York, West Los Angeles, Chicago, Baltimore, and
San Francisco. We analyzed eight DRGs. Seven of these had been
identified in a previous VA analysis as being frequent conditions
treated in VA hospitals during fiscal year 1997: three in medicine
(DRG 88, chronic obstructive pulmonary disease; DRG 89, simple
pneumonia and pleurisy; and DRG 127, heart failure and shock);
three in surgery (DRG 107, coronary bypass; DRG 112, percutaneous
cardiovascular procedures; and DRG 209, major joint and limb
surgery, lower extremity); as well as DRG 462, rehabilitation. We
added DRG 430, psychoses, to our analysis because we found that
this single condition accounted for almost 7 percent of VA
admissions in fiscal year 1997. Comparison To examine where a
reasonable charge fell in the range of local market charges for a
service, we computed the reasonable charge and the deciles9 of
local market charges. We computed reasonable charges based on VA's
directions in its proposed rule on reasonable charges. We
estimated local market charges based on 1997 Medicare Provider
Analysis and Review data, which include records for 100 percent of
Medicare beneficiaries who used hospital inpatient services,
whereas the VA reasonable charges were based on a 5-percent sample
of 1995 Medicare data and private sector data from over 200
insurers and other sources. We calculated decile distributions for
inpatient-facility per diem charges for each DRG code at each of
the five locations. (Because the Medicare data we analyzed was for
1997, we trended these decile points forward to March 1, 1999, as
VA did for reasonable charges.) Next, we identified where
reasonable charges fell between decile points of local market
charges. If a reasonable charge fell above the fifth decile point
(or 50th percentile) and was not greater than the eighth decile
point, we classified the charge as above average and not exceeding
VA's intended 80th percentile level. We then calculated the
percentages of reasonable charges falling into, above, and below
this range. 9A decile is a percentile of 10, 20, 30, and so forth.
Page 13
GAO/HEHS-99-124 VA Reasonable Charges Appendix II VA's Methodology
for Setting Reasonable Charges VA established reasonable charges
for five categories of charges: (1) inpatient facility, (2)
skilled nursing facility (SNF)/subacute inpatient facility, (3)
outpatient facility, (4) physicians, and (5) nonphysician
providers (see table II.1). Because reasonable charges are
designed to approximate local charges, all categories of charges
vary by VA facility locations. Billings for inpatient facilities
and SNFs are on a per diem basis, and, for inpatient facility
charges, the per diem charges vary by the treated condition as
classified by DRG codes. Billings for outpatient facility and
provider charges vary by procedure performed, as classified by
current procedural terminology (CPT) codes. To establish
reasonable charges for each category of charges, VA estimated
local market charges. VA's methodology develops nationwide rates
and geographic and other adjustment factors to make these
estimations. The method yields tables of data that include
nationwide charges by hundreds of DRGs, nationwide charges and
conversion factors by several thousand CPTs, and various groups of
geographic adjustment factors by VA facility locations. (See 63
Fed. Reg. 54766.) To calculate facility-specific reasonable
charges, various billing formulas will be applied to the data from
the tables. Below we describe, first, VA's method for determining
the rates and adjustment factors for reasonable charges and,
second, the formulas for calculating facility-specific charges
based on these rates and factors. Page 14
GAO/HEHS-99-124 VA Reasonable Charges Appendix II VA's Methodology
for Setting Reasonable Charges Table II.1: VA's Reasonable Charge
Categories and Services Covered Category
Services covered Charge structure Inpatient
facility Hospital room and board Per diem
(daily) charges and ancillary services that vary by
about 500 DRG codesa and VA facility SNF/subacute inpatient
Care, including skilled Per diem charges that vary
facility rehabilitation, and
by VA facility associated ancillary services provided under a
physician's orders in a nursing home or hospital inpatient setting
and performed by or under the general supervision of professional
personnel, such as registered nurses Outpatient facility
Facility and ancillary Charges vary by about procedures
not customarily 3,900 CPT codesb and VA performed in a private
facility clinician's office, such as some ambulatory surgeries and
diagnostic magnetic resonance imaging Physician
Medical procedures Charges vary by about performed
in an inpatient or 7,400 CPT codes and by outpatient setting
VA facility Nonphysician (nurse Procedures
performed in an Charges are a percentage practitioner, clinical
social inpatient or outpatient of physician charges
worker, dietitian, and others) setting aDRG codes classify
patients on the basis of diagnoses groups, such as diabetes or
extensive burns, that are expected to require the same amount of
resources to treat. bCPT codes identify the service or procedure
performed by a physician. Methodology for VA
developed all categories of charges following the same general
model: Determining Rates (1) nationwide rates
were established at the 80th percentile of billed charges of
private providers, and (2) geographic adjustment factors were and
Adjustment estimated to adjust nationwide
rates to VA facility location charges. Factors
However, VA's methodology for determining reasonable charges is
actually various methodologies used to determine rates and
adjustment factors for five categories of charges. The
methodologies use different data sources and calculations to
derive these rates and various adjustment factors. (Charges for
nonphysician providers are not discussed here because the charges
are calculated in the same way as charges for physicians, except
that a percentage adjustment is applied depending on the type of
Page 15 GAO/HEHS-99-
124 VA Reasonable Charges Appendix II VA's Methodology for Setting
Reasonable Charges nonphysician provider.) Additional details
about the methodology may be found in VA's proposed and final rule
for reasonable charges.10 Nationwide Charges
Generally, nationwide charges were developed in three stages.
First, average nationwide charges were estimated. Second, the
nationwide charges were adjusted to an 80th percentile level of
charges. Third, the charges were projected forward to account for
changes in charge levels between the time of the baseline data and
the future billing period. However, the physician charges were
developed differently-rather than estimating an average charge and
then adjusting it to the 80th percentile, the calculation of
physician charges began with 80th percentile charges. Also, the
charges based on CPT codes-outpatient facility and physician
charges-involved additional calculations that aligned charges with
relative value units (RVU) associated with the CPT codes. (RVUs
serve to weight services according to their relative work effort
and other factors.) Average Nationwide Charges VA
first estimated a base national rate by calculating an average
charge. A mean was calculated for inpatient facility and
SNF/subacute inpatient facility charges, and a median was
calculated for outpatient facility charges because the underlying
data were significantly influenced by extreme cases and a median
is less sensitive than a mean to extreme cases. In addition to
these calculations, the inpatient facility charge for each DRG was
split into a room and board component and an ancillary service
component (see table II.2). Table II.2: Estimating Average
National Charges by Categories of Charges Inpatient facility
SNF/subacute inpatient facility Outpatient facility
Physician Calculations Mean per diem charges by DRG, Mean per diem
charge for SNF Median charges by CPT Not
applicable weighted average from two data care
procedure codes sources Data sources 1995 Medicare and 1995
1998 Milliman & Robertson, 1995 MedStat data for billed
Not applicable MedStat data for total charges Inc., Health Cost
Guidelines facility charge and days of stay Data were taken
from public and private sources. The Medicare data are taken from
paid claims for a 5-percent sample of beneficiaries. The MedStat
data reflect claims data from over 7 million employees and
dependents covered by the health benefit programs for large
employers 1063 Fed. Reg. 54756 and 64 Fed. Reg. 22675. Page 16
GAO/HEHS-99-124 VA Reasonable Charges Appendix II VA's Methodology
for Setting Reasonable Charges and collected from over 200
different insurance companies, Blue Cross and Blue Shield plans,
and third-party administrators. The MedStat data do not include
Medicare, Medicaid, or Workers' Compensation data. The Milliman &
Robertson nationwide data on SNF care are derived from the Health
Care Financing Administration's Medicare claims data. 80th
Percentile Adjustment VA's methodology generally
uses ratios to adjust national averages to 80th percentile
charges. Physician charges at the 80th percentile were extracted
from already calculated levels in a nationwide commercial
insurance database (see table II.3). Table II.3: Estimating the
80th Percentile by Categories of Charges Inpatient facility
SNF/subacute inpatient facility Outpatient facility
Physician Calculations (1) Average of consolidated (1)
Average of state ratios: 80th (1) Divide CPT codes into 37
80th percentile charges for metropolitan statistical areas
percentile of SNF provider groups; (2) for each code
representative CPT procedure (CMSA) ratios: 80th percentile
median charges divided by the group, divide the 80th
codes split into 24 medical semiprivate room and board per
average of statewide percentile by the median
service groups diem charge divided by the accommodation
charges; (2) charge; (3) if the ratio exceeds average per
diem for CMSAs; (2) multiply ratio by average 115
percent, then cut excess ratio applied to both room and
national charge percentage by half; (4) for
each board and ancillary services
code group, multiply associated components
ratio by median national charges Data sources 1995 Medicare data
for medical 1995 Medicare data For four code
groups, 1995 Health Insurance Association of and
surgical admissions
MedStat data; for all other code America data on 80th percentile
groups, 1996 MediCode dataa charges, various datesb
aMediCode is a database of outpatient facility charges gathered
from numerous commercial sources. bThe Health Insurance
Association of America compiles a nationwide commercial insurance
database of provider charges based on millions of claims records.
Although not shown in table II.3, the first calculations for
developing physician charges transform 80th percentile charge data
into conversion factors, that is, monetary rates per RVU. VA
constructed a conversion factor for each of 24 physician CPT code
groups, such as inpatient visits, surgery, pathology, and
anesthesia. The conversion factor (a dollar amount per RVU) for a
group was computed by dividing the weighted average charge (at the
80th percentile level) by the weighted average RVU for the
selected CPT codes.11 Departing from Medicare practice, VA's
method removes 11RVU data came from St. Anthony's Complete RBRVS
(resource-based relative value scale) and other sources. Page 17
GAO/HEHS-99-124 VA Reasonable Charges Appendix II VA's Methodology
for Setting Reasonable Charges charges for the malpractice
component since the costs associated with malpractice are not the
responsibility of VA. Trending Charges Forward
Because the charge data were gathered at various times in the past
and charges can be anticipated to change over time, VA trended the
data forward to approximate charges during its anticipated first
year of implementing reasonable charges-August 1998 through
September 1999. Its general methodology was to identify indexes of
relevant price trends and then estimate the price changes between
the time of VA's baseline data and the midpoint of the charge
period. As shown in table II.4, various components of the Consumer
Price Index (CPI) were generally the data source for the indexes.
(The CPI-U series covers all urban consumers, whereas the CPI-W
series covers urban wage earners and clerical workers.) Table
II.4: Trending Charges Forward by Categories of Charges Inpatient
facility SNF/subacute inpatient facility
Outpatient facility Physician Calculations
Projected price change from Projected change in Medicare
Projected price change from Projected price change from
1995 to midpoint of VA charge reimbursement for SNF from
1995 to midpoint of VA charge various 1996 to 1997 dates
to period (Aug. 1998 to Sept. 1999) July 1, 1998, to midpoint of
VA period multiplied by 1995 the midpoint of VA
charge multiplied by the adjusted 1995 charge period multiplied
by the adjusted 80th percentile period multiplied
by adjusted 80th percentile charges adjusted July 1,
1998, 80th charges 80th
percentile conversion percentile SNF charge
factors Data sources CPI-W, hospital room and other Annual
Report of the Board of CPI-U, outpatient hospital
CPI-U, physician component hospital components (1995 to
Trustees of the Federal Hospital component Jan. 1997); CPI-U,
inpatient Insurance Trust Fund hospital component (Jan. 1997
and forward)a aIn January 1997, the Bureau of Labor Statistics
revised CPI's hospital components. The outpatient facility
nationwide charges reflect one more adjustment (not indicated in
table II.4). After trending forward, the outpatient charges were
adjusted to make them relative to the RVUs within each of the 37
outpatient facility CPT code groups. Geographic Adjustment
Because the objective of reasonable charges is to bill at rates
Factors commensurate with
local market charges, VA's methodology produces geographic
adjustment factors to transform nationwide rates into VA facility-
specific charges. As shown in table II.5, these adjustment factors
are derived by creating a ratio of local charges to national
charges. These Page 18
GAO/HEHS-99-124 VA Reasonable Charges Appendix II VA's Methodology
for Setting Reasonable Charges ratios differ in the boundaries
placed around VA facility areas (metropolitan statistical area
(MSA), three-digit zip code, or state) and data sources. Table
II.5: Geographic Adjustment Factors by Categories of Charges
Inpatient facility SNF/subacute inpatient
facility Outpatient facility Physician
Calculations Ratio: average per diem charges Ratio: average per
diem for SNF For each VA location, average (1)
Conversion factor (CF) for each VA facility area (MSA) charge
for each state, divided of two outpatient area
adjustment for each VA location divided by the national
by nationwide average per diem adjustment factors: (1) ratio of
(three-digit zip code area) and average-both averages
levels of charges for the VA procedure code group; ratio
of weighted by national average
facility area (MSA) compared to facility-specific CF divided by
length of stays and fiscal year
nationwide and (2) ratio of nationwide average CF; (2)
RVU 1997 VA discharges; four
CPT-weighted average charge adjustments: area adjustments
adjustment ratios: for surgical
level for each VA facility area for work units and practice
units and nonsurgical DRGs and,
(three-digit zip code) divided by within these, for room and board
the nationwide CPT-weighted and ancillary components
average charge Data sources 1995 Medicare data on per diem
Milliman & Robertson, Health Milliman & Robertson,
Health Facility-specific CF calculated charges; fiscal
year 1997 VA Cost Guidelines Cost
Guidelines, and MediCode with same data as nationwide data on its
nationwide discharges data
CF, and Medicare area by DRG; Medicare and MedStat
adjustments for RVU data on average lengths of stay
components Other Adjustments VA
established two other important adjustments to reasonable charges
based on precedence to make them consistent with industry
practices. First, the progressive reductions of outpatient
facility charges for multiple surgeries-that is, charges are 100
percent of the most expensive procedure, 25 percent of the second
most expensive procedure, 15 percent of the third most expensive
procedure, and 0 percent for all other procedures-were derived
from an analysis of MedStat charge data. According to VA's
contractor, these reductions are consistent with the reasonable
and customary charges recommended by MediCode. Second, most
adjustments of charges for nonphysician providers-as a percentage
of physician charges for performing the same services-were based
on Medicare percentages, when available. Formulas for
To determine the amount to bill insurers under reasonable charges,
a VA Facility-Specific facility will
use a formula appropriate to the category of charge. (A single
encounter may involve multiple categories of charges. An
ambulatory Charges surgery,
for instance, could result in an outpatient facility charge as
well as Page 19
GAO/HEHS-99-124 VA Reasonable Charges Appendix II VA's Methodology
for Setting Reasonable Charges physician and nonphysician provider
charges.) The formulas adjust a nationwide charge to a locality
charge for specific VA facility locations by applying data from
tables of national dollar amounts, geographic adjustments, and
other factors. For inpatient facility charges or SNF/subacute
inpatient facility charges that are based on per diem rates,
calculating total charges also requires data on the number of days
in the stay. * Inpatient facility charge: First, a nationwide room
and board per diem charge for a specific DRG is multiplied by the
geographic adjustment factor specific to the VA facility. Second,
the same calculation is done for the ancillary component of the
per diem charge. Third, the two geographically adjusted per diem
components are summed, resulting in a dollar amount which equals
the combined per diem facility charge. Finally, this combined
facility charge is multiplied by the number of days of stay, which
produces the total inpatient facility charge. When more than one
condition is treated during a hospitalization, total charges are
the sum of the charges that are computed for each of the DRG
conditions by allocating the days of stay between the DRGs. *
SNF/subacute inpatient facility charge: A per diem facility rate
is calculated by multiplying a national rate by a geographic
adjustment factor. Then the total charge equals the per diem rate
multiplied by the number of days in the stay. * Outpatient
facility charge: For those outpatient procedures for which VA has
established outpatient facility charges, a facility-specific
outpatient facility charge is computed by multiplying a nationwide
CPT procedure rate by a geographic adjustment factor. If multiple
surgical procedures occur during the same outpatient encounter,
then no more than the three most expensive outpatient facility
charges for surgery will be billed, and the second and third of
these are discounted to 25 percent and 15 percent, respectively. *
Physician charge: Charges are calculated for procedures in one of
three ways. For most CPT codes-which have both work expense and
practice expense RVUs-physician charges are calculated by summing
these RVUs (adjusted for facility location and by a Medicare work
expense adjustment factor), then multiplying this sum of adjusted
RVUs by a facility-adjusted conversion factor (a dollar amount per
RVU). For CPTs with only total RVUs available, charges are equal
to the facility-adjusted RVUs multiplied by the dollar amount of a
facility-adjusted conversion factor. Finally, for pathology and
anesthesia charges, a nationwide charge for a CPT code is
multiplied by a geographic adjustment factor. Page 20
GAO/HEHS-99-124 VA Reasonable Charges Appendix II VA's Methodology
for Setting Reasonable Charges * Nonphysician provider charge:
These charges are a percentage (up to 100 percent) of the charge
for the same procedure performed by a physician, depending on the
type of nonphysician provider. For example, a procedure done by a
nurse practitioner would be billed at 85 percent of the charge for
a physician doing the procedure. (406157) Page 21
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