Veterans' Health Care: Challenges for the Future (Testimony, 06/27/96,
GAO/T-HEHS-96-172).

GAO discussed the future of the Department of Veterans Affairs' (VA)
health care system. GAO noted that: (1) VA hospitals' workload has
decreased 56 percent during the last 25 years and will probably decrease
further as more veterans die and delivery settings and health care plans
change; (2) the demand for nursing home care has increased for veterans
85 years of age and older; (3) the VA and other public and private
health benefit programs cannot meet all veterans' health care needs,
notably for specialized and long-term care; (4) to meet such needs, VA
could reduce services to certain veterans and use those funds to
purchase private-sector health care services for other eligible veterans
or increase the availability of specialized care; (5) VA could increase
veterans' access to care by improving its facility resource allocations
and the consistency of its coverage decisions; (6) other countries have
closed veteran hospitals and integrated veterans' health care into their
general health care systems; (7) VA could increase hospital workloads by
attracting more veterans or extending coverage to veterans' dependents
or nonveterans on a reimbursable basis; (8) converting VA hospitals to
long-term care facilities is feasible, but operating costs would be
higher than the cost of purchasing private-sector nursing home care
unless cost-sharing arrangements are included; and (9) alternatives to
the VA direct delivery system include purchasing more services directly
from the private sector, issuing vouchers for private insurance, and
covering veterans under other existing federal health benefit programs.

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

 REPORTNUM:  T-HEHS-96-172
     TITLE:  Veterans' Health Care: Challenges for the Future
      DATE:  06/27/96
   SUBJECT:  Veterans benefits
             Health care services
             Hospital care services
             Health care programs
             Health resources utilization
             Veterans hospitals
             Nursing homes
             Eligibility criteria
             Health services administration
             Long-term care
IDENTIFIER:  Australia
             Canada
             United Kingdom
             Medicare Program
             Federal Employees Health Benefits Program
             DOD TRICARE Extra Program
             DOD TRICARE Prime Program
             DOD TRICARE Standard Program
             VA Veterans Integrated Service Network
             Civilian Health and Medical Program of the Uniformed 
             Services
             CHAMPUS
             
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Cover
================================================================ COVER


Before the Subcommittee on Hospitals and Health Care, Committee on
Veterans' Affairs, House of Representatives

For Release on Delivery
Expected at 10:00 a.m.,
Thursday,
June 27, 1996

VETERANS' HEALTH CARE - CHALLENGES
FOR THE FUTURE

Statement of David P.  Baine, Director
Health Care Delivery and Quality Issues
Health, Education, and Human Services Division

GAO/T-HEHS-96-172

GAO/HEHS-96-172T


(406128)


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

  VA - Department of Veterans Affairs
  VISN - Veterans Integrated Service Networks
  HMO - health maintenance organizations
  CHAMPVA - Civilian Health and Medical Programs of the Department of
     Veterans Affairs
  DOD - Department of Defense

VETERANS' HEALTH CARE:  CHALLENGES
FOR THE FUTURE
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss the future direction of
the Department of Veterans Affairs (VA) health care system.  The VA
health care system, with a $16.6 billion budget, includes both (1) a
health benefits program for over 26 million veterans and (2) a health
care delivery and financing program including 173 hospitals, 376
outpatient clinics, 136 nursing homes, and 39 domiciliaries. 

VA has a number of fundamental changes under way in how it operates
its health care delivery and financing systems.  In addition, it is
seeking authority to (1) significantly expand eligibility for health
care benefits and (2) both buy health care services from and sell
health care services to the private sector. 

In exploring the future direction of the veterans' health care
system, we will focus on

  -- changes in the veteran population and demand for VA health care
     services;

  -- how well the current VA health care system, and other public and
     private health benefits programs, meet the health care needs of
     veterans;

  -- actions that could be taken using existing resources and
     legislative authority to address veterans' unmet health care
     needs and increase equity of access;

  -- how other countries have addressed the needs of an aging and
     declining veteran population; and

  -- approaches for preserving VA's direct delivery system,
     alternatives to preserving the direct delivery system, and
     combinations of both. 

During the past several years, we have conducted a series of reviews
focusing on the relationships between the VA health care system and
other public and private health benefits programs and the effects
changes in those programs could have on the future of the VA health
care system.  We have also conducted a series of reviews to identify
ways to improve the efficiency and effectiveness of current VA
programs.  My comments this morning are based primarily on the
results of these reviews.\1

In summary, significant changes are occurring in the types and volume
of services provided under the VA health care system.  The average
daily workload in VA hospitals dropped about 56 percent during the
last 25 years, and further decreases are likely, thereby threatening
the continued viability of VA hospitals.  In contrast, demand for
both outpatient and nursing home care increased steadily over the
25-year period. 

Nine out of 10 veterans now have public or private health insurance
that meets most of their basic acute care needs.  Still, about 10
percent of the veteran population has neither public nor private
insurance to help pay for basic health care services.  Such veterans
tend to rely on public hospitals and clinics, and on VA health care
facilities, to meet their health care needs.  These programs,
however, are unable to meet the basic health care needs of all
veterans who need them.  A small group of veterans report that they
have been unable to obtain needed hospital and outpatient services. 
Most of these veterans do not live near a VA hospital or outpatient
clinic. 

While the acute care needs of most veterans are met through public
and private health care programs, veterans needing specialized
services, such as treatment for spinal cord injuries, blindness, and
war-related stress, are more likely to find private-sector providers
unable to meet their needs.  In addition, neither public nor
private-sector programs provide extensive coverage of nursing home
and other long-term care services needed by an increasingly aging
veteran population. 

There are a number of ways that VA could address the unmet needs of
veterans using existing resources and legislative authority.  For
example, it could reduce the resources spent in providing care to
higher-income veterans with no service-connected disabilities
(discretionary care category veterans) in VA facilities and use those
resources instead to purchase more care from private providers under
the fee-basis program for veterans with service-connected
disabilities who do not live near a VA facility.  Such resources
could also be retargeted into expanding the availability of
specialized services.  Similarly, VA could increase the equity of
veterans' access to VA care by improving the way it allocates
resources to facilities and the consistency of its coverage
decisions. 

While such actions would enable VA to more effectively meet veterans'
health care needs in the short term, the declining hospital workload
makes it imperative that more fundamental policy decisions about the
future of the direct delivery system be considered.  Australia,
Canada, and the United Kingdom reacted to similar declining
utilization of their veterans' hospitals by closing those hospitals
and integrating veterans' health care into their overall health care
systems.  These countries were able to preserve and enhance veterans'
health care benefits without preserving the direct delivery system. 
In contrast, Finland continues to operate a direct delivery system
but has essentially converted its hospitals into long-term care
facilities. 

Two approaches could be pursued to increase the workload of VA
hospitals and prevent or delay their closure.  First, actions could
be taken to attract a larger market share of the veteran population
to the VA system--only about 20 percent of veterans have ever used VA
care.  Attracting enough new users to maintain the workload of VA
hospitals could, however, add significantly to the government's cost
of operating the VA system unless new sources of revenues are
identified.  A second approach for maintaining VA hospital workload
would be to authorize VA hospitals to treat dependents or other
nonveterans on a reimbursable basis.  Such an approach might also
strengthen VA's medical education and research missions by bringing a
wider range of patients into the VA system.  On the down side, it
might raise questions about the extent to which the government should
compete with private-sector hospitals. 

Converting VA hospitals to provide nursing home and other long-term
care services might also help preserve the direct delivery system. 
With the expected eight-fold increase in the number of veterans 85
years of age and older, demand for VA-supported nursing home care is
expected to increase dramatically over the next 15 years.  While the
cost of converting hospital beds to nursing home care is generally
less expensive than building new nursing homes, the cost of operating
VA nursing homes is higher than the cost of purchasing nursing home
care from private-sector nursing homes.  Establishing cost-sharing
requirements patterned after those used by states in their veterans'
homes could enable VA to serve more veterans within available
resources. 

Several approaches could also be considered that would reduce or
eliminate VA's direct delivery system.  These approaches include (1)
creating or expanding an existing VA-operated health financing
program to purchase care from private providers; (2) issuing vouchers
to allow veterans to purchase private health insurance; and (3)
including veterans under an existing health benefits program, such as
Medicare, the Federal Employees Health Benefits Program, or TRICARE. 
Under VA's current restructuring efforts, facilities are being
increasingly encouraged to contract with private providers to improve
access to care and reduce health care costs. 

Because these approaches would address the primary reasons many
veterans give for not using VA care--limited accessibility and
perceptions of poor quality and customer service--they would be
likely to generate significant new demand.  They could, however, be
structured to supplement, rather than duplicate, veterans' coverage
under other health programs. 


--------------------
\1 A list of related GAO testimonies and reports appears at the end
of this testimony. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

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

Over the last 65 years, VA has seen a significant evolution in its
missions.  In the 1940s, a medical education mission was added to
strengthen the quality of care in VA facilities and help train the
nation's health care professionals.  In the 1960s, VA's health care
mission was expanded with the addition of a nursing home benefit. 
And, in the early 1980s, a military back-up mission was added. 

The types of veterans served have also evolved.  VA has gradually
shifted from primarily providing treatment for service-connected
disabilities incurred in wartime to increasingly focusing on the
treatment of low-income veterans with medical conditions unrelated to
military service.  Similarly, the growth of private and public health
benefits programs has given veterans additional health care options,
placing VA facilities in direct competition with private-sector
providers. 

VA is in the midst of a major reorganization of its health care
system.  It has replaced its four large regions with 22 Veterans
Integrated Service Networks (VISN), intended to shift the focus of
the health care system from independent medical facilities to groups
of facilities working together to provide efficient, accessible care
to veterans in their service areas.  The reorganization also includes
plans to downsize the central office, strengthen accountability, and
emphasize customer service.  Under the reorganization, VA facilities
are being encouraged to contract with private-sector providers when
they can provide services of comparable or higher quality at a lower
cost.  VA sees the reorganization as creating "the model of a
flagship health-care system for the future."


   AS THE VETERAN POPULATION
   DECLINES AND AGES, DEMAND FOR
   VA SERVICES IS SHIFTING
---------------------------------------------------------- Chapter 0:2

The veteran population, which totaled about 26.4 million in 1995, is
both declining and aging.  VA has estimated that between 1990 and
2010, the total veteran population will decline 26 percent.  The
decline will be most notable among veterans under 65 years of
age--from about 20 million to 11.5 million.  In contrast, over the
same period, the number of veterans aged 85 and older is expected to
increase from 0.2 million to 1.3 million and will make up about 6
percent of the veteran population. 

Coinciding with the declining and aging of the veteran population are
shifts in the demand for VA health care services from inpatient
hospital care to outpatient care.  From 1980 to 1995, the days of
hospital care provided fell from 26 million to 14.7 million, and the
number of outpatient visits increased from 15.8 million to 26.5
million.  (See fig.  1.)

   Figure 1:  Changes in VA
   Facilities' Workload, Fiscal
   Year 1980-95

   (See figure in printed
   edition.)

Over the same period, the average number of veterans receiving
nursing home care in VA-owned facilities increased from 7,933 to
13,569, and VA's medical care budget authority grew from about $5.8
billion to $16.2 billion.\2

Between 1969 and 1994, VA reduced its operating hospital beds by
about 50 percent, closing or converting about 50,000 to other uses. 
The decline in psychiatric beds was most pronounced, from about
50,000 in 1969 to about 17,300 in 1994.  (See fig.  2.) In fiscal
year 1995, VA closed another 2,300 beds. 

   Figure 2:  Operating Beds in VA
   Hospitals, 1969-94

   (See figure in printed
   edition.)


--------------------
\2 Not adjusted for inflation. 


      FURTHER DECLINE IN HOSPITAL
      WORKLOAD LIKELY
-------------------------------------------------------- Chapter 0:2.1

Several factors, such as the following, could lead to a continued
decline in VA hospital workload. 

  -- Veterans who have health insurance are much less likely to use
     VA hospitals than veterans without public or private insurance,
     and the number of veterans with health insurance is expected to
     increase even without further national or state health reforms. 
     This increase is expected because almost all veterans become
     eligible for Medicare when they turn 65 years of age, including
     those unemployed or employed in jobs that do not provide health
     insurance at the time they turn 65.  Health reforms, such as
     those that have been debated in the past year, that would
     increase the portability of insurance and place limits on
     coverage exclusions for preexisting conditions would also
     increase the number of veterans with health insurance. 

  -- The nature of insurance coverage is changing.  For example,
     increased enrollment in health maintenance organizations
     (HMO)--from 9 million in 1982 to 50 million in 1994--is likely
     to reduce the use of VA hospitals.  Veterans with
     fee-for-service public or private health insurance often face
     significant out-of-pocket expenses for hospital care and have a
     financial incentive to use VA hospitals because VA requires
     little or no cost-sharing.  Veterans' financial incentives to
     seek hospital care from VA are largely eliminated when they join
     HMOs or other managed care plans because such plans require
     little or no cost-sharing.  Proposals to expand Medicare
     beneficiaries' enrollment in managed care plans could thus
     further decrease the use of VA hospitals.  On the other hand,
     health reforms that would create medical savings accounts could
     increase demand for VA hospital care because veterans might seek
     free care from VA rather than spend money out of their medical
     savings account to pay for needed services.  Finally, increased
     cost-sharing under fee-for-service programs could encourage
     veterans to use the VA system. 

  -- The declining veteran population will likely lead to significant
     reductions in use of VA hospitals even as the acute care needs
     of the surviving veterans increase.  If veterans continue to use
     VA hospital care at the same rate that they did in 1994--that
     is, if VA continues services at current levels--days of care
     provided in VA hospitals should decline from 15.4 million in
     1994 to about 13.7 million by 2010.  (See fig.  3.) Our
     projections are adjusted to reflect the higher use of hospital
     care by older veterans.\3

   Figure 3:  Projected
   Age-Adjusted Days of VA
   Hospital Care, 1994-2010

   (See figure in printed
   edition.)

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

  -- Establishing preadmission certification requirements for
     admissions and days of care similar to those used by private
     health insurers could significantly reduce admissions to and
     days of care in VA hospitals.  Currently, VA hospitals too often
     serve patients whose care could be more efficiently provided in
     alternative settings, such as outpatient clinics or nursing
     homes.  Estimates of nonacute admissions to and days of care
     provided by VA hospitals often exceed 40 percent.  Preadmission
     certification would likely reduce these admissions.  VA is
     currently assessing the use of preadmission reviews systemwide
     as a method to encourage the most cost-effective,
     therapeutically appropriate care.  The Veterans Health
     Administration is also implementing a performance measurement
     and monitoring system containing a number of measures that
     should reduce inappropriate hospital admissions.  Several of
     these measures, such as setting expectations for the percentage
     of surgery done on an ambulatory basis at each facility and
     implementing network-based utilization review policies and
     programs, are intended to move the VA system towards efficient
     allocation and utilization of resources. 


--------------------
\3 The declining veteran population will lead to significant declines
in VA acute hospitalization even as the acute care needs of the
surviving veterans increase.  The veteran population is estimated to
decline from about 26.3 million in 1995 to just over 20 million in
2010.  Although the health care needs of veterans increase as they
age, the overall decline in the number of veterans will more than
offset the increase and should lead to a further reduction in the
number of days of VA hospital care.  In addition, many veterans
reduce their use of the VA system when they become Medicare-eligible. 


      ELIGIBILITY AND CLINIC
      EXPANSIONS CONTRIBUTE TO
      INCREASE IN OUTPATIENT
      WORKLOAD
-------------------------------------------------------- Chapter 0:2.2

Between 1960, when outpatient treatment of nonservice-connected
conditions was first authorized, and 1995, the number of outpatient
visits provided by VA outpatient clinics increased from about 2
million to over 26 million.  The increase in outpatient workload, due
in part to changes in medical technology and practice that allow care
previously provided only in an inpatient setting to be provided on an
ambulatory basis, corresponds to expansions in VA eligibility and
opening of new VA clinics. 

In its fiscal year 1975 annual report, VA noted the relationship
between "progressive extension of legislation expanding the
availability of outpatient services" and increased outpatient
workload.\4 Among the eligibility expansions occurring between 1960
and 1975 were actions to authorize (1) pre- and posthospital care for
treatment of nonservice-connected conditions (1960) and (2)
outpatient treatment to obviate the need for hospitalization (1973). 
Workload at VA outpatient clinics increased from about 2 million to
12 million visits during the 15-year period. 

Even with the expansions of outpatient eligibility that have occurred
since 1960, most veterans are currently eligible only for
hospital-related outpatient care.  That is, they are eligible for
those outpatient services needed to prepare them for, obviate the
need for, or follow up on a hospital admission.  Only about 500,000
veterans are eligible for comprehensive outpatient services.  VA and
others have proposed further expansions of VA outpatient eligibility
that would make all veterans eligible for comprehensive outpatient
services, subject to the availability of resources. 

Just as eligibility expansions increased outpatient workload, VA
efforts to improve the accessibility of VA care resulted in increased
demand.  Between 1980 and 1995, the number of VA outpatient clinics
increased from 222 to 565, including numerous mobile clinics that
bring outpatient care closer to veterans in rural areas.  Between
1980 and 1995, outpatient visits provided by VA clinics increased
from 15.8 million to 26.5 million. 

VA has developed plans to further improve veterans' access to VA
outpatient care through creation of access points.\5 VA would like to
establish additional access points by the end of 1996. 


--------------------
\4 Veterans Administration, Annual Report of the Veterans
Administration, Fiscal Year 1975 (Washington, D.C.:  Veterans
Administration, 1975). 

\5 VA defines an access point as a VA-operated, -funded, or
-reimbursed private clinic, group practice, or single practitioner
that is geographically separate from the parent facility.  In
general, access points provide primary care to all veterans and refer
those needing specialized services or inpatient stays to VA
hospitals.  To date, nine hospitals have opened 12 new access points. 
Of the 12 new access points, VA staff operate 4 and contract with
county or private clinics to operate the remaining 8. 


      AGING POPULATION RESULTS IN
      INCREASED DEMAND FOR NURSING
      HOME CARE
-------------------------------------------------------- Chapter 0:2.3

As the nation's large World War II and Korean War veteran populations
age, their needs for nursing home and other long-term care services
are increasing.  Old age is often accompanied by the development of
chronic health problems, such as heart disease, arthritis, and other
ailments.  These problems, important causes of disability among the
elderly population, often result in the need for nursing home care or
other long-term care services. 

Between 1969 and 1994, the average daily workload of VA-supported
nursing homes more than tripled (from 9,030 patients to 33,405). 
With the veteran population continuing to age rapidly, VA faces a
significant challenge in trying to meet increasing demand for nursing
home care.  The number of veterans 85 years of age and older is
expected to increase more than eight-fold between 1990 and 2010. 
Over 50 percent of those over 85 years old are expected to need
nursing home care, compared with about 13 percent of those 65 to 69
years old. 


   VETERANS MORE LIKELY TO HAVE
   UNMET NEEDS FOR SPECIALIZED AND
   LONG-TERM CARE SERVICES THAN
   FOR ACUTE CARE SERVICES
---------------------------------------------------------- Chapter 0:3

Veterans are more likely to have unmet needs for specialized and
long-term care services than they are for acute hospital and
outpatient care.  With the aging of the veteran population and
prospects for insurance reform, veterans' unmet needs for acute care
services are likely to decline in the future. 


      MOST VETERANS' NEEDS FOR
      HOSPITAL AND OUTPATIENT CARE
      ARE MET
-------------------------------------------------------- Chapter 0:3.1

With the growth of public and private health benefits programs, more
than 9 out of 10 veterans now have alternate health insurance
coverage.  Still, about 2.6 million veterans had neither public nor
private health insurance in 1990 to help pay for needed health care
items and services.  Without a demonstrated ability to pay for care,
individuals' access to health care is restricted, increasing their
vulnerability to the consequences of poor health.  Lacking insurance,
people often postpone obtaining care until their conditions become
more serious and require more costly medical services. 

Most veterans who lack insurance coverage, however, are able to
obtain needed hospital and outpatient care through public programs
and VA.  Still, VA's 1992 National Survey of Veterans estimated that
about 159,000 veterans were unable to get needed hospital care in
1992 and about 288,000 were unable to obtain needed outpatient
services.  By far the most common reason veterans cited for not
obtaining needed care was that they could not afford to pay for it.\6

While the cost of care may have prevented the veterans from obtaining
care from private-sector hospitals, it appears to be an unlikely
reason for not seeking care from VA.  All veterans are currently
eligible for hospital care, and about 11 million are in the mandatory
care category for free hospital care.  Other veterans are required to
make only nominal copayments. 

Many of the problems veterans face in obtaining health care services
appear to relate to distance from a VA facility rather than their
eligibility to receive those services from VA.  For example, our
analysis of 1992 National Survey of Veterans data estimates that
fewer than half of the 159,000 veterans who did not obtain needed
hospital care lived within 25 miles of a VA hospital.  By comparison,
we estimate that over 90 percent lived within 25 miles of a
private-sector hospital. 

Of the estimated 288,000 veterans unable to obtain needed outpatient
care during 1992, almost 70 percent lived within 5 miles of a non-VA
doctor's office or outpatient facility.  As was the case with
veterans unable to obtain needed hospital care, those unable to
obtain needed outpatient care generally indicated that they could not
afford to obtain the needed care from private providers.  Only 13
percent of the veterans unable to obtain needed outpatient services
reported that they lived within 5 miles of a VA facility, where they
could generally have received free care. 

Distance from VA health care facilities plays a role both in the
likelihood of using VA health care services and in the volume of
services used.  The likelihood of using both VA hospital and
outpatient care declines significantly for veterans living more than
5 miles from a VA facility.  For example, among veterans living
within 5 miles of a VA outpatient clinic, there were 131 users for
every 1,000 veterans compared with fewer than 80 users per 1,000
veterans living at distances of over 5 miles from a VA outpatient
clinic.  Similarly, veteran users living within 5 miles of a VA
outpatient clinic made over twice as many visits to VA outpatient
clinics as veterans living over 25 miles from a VA clinic.\7


--------------------
\6 About 55 percent cited inability to pay for care as the reason for
not obtaining needed hospital care.  Veterans cited a variety of
other reasons, but none was cited by more than 10 percent of the
veterans unable to obtain needed hospital care. 

\7 Veterans living greater distances from VA clinics may have a
tendency to visit multiple clinics during their outpatient visits, at
least partially offsetting the lower number of visits. 


      VETERANS HAVE UNEVEN ACCESS
      TO VA SERVICES
-------------------------------------------------------- Chapter 0:3.2

Even those veterans living near VA facilities, however, can have
unmet needs because of unequal access to care.  Veterans' ability to
obtain needed health care services from VA frequently depends on
where they live and which VA facility they go to.  VA spends
resources providing services to high-income, insured veterans with no
service-connected disabilities at some facilities, while low-income,
uninsured veterans have needs that are not being met at other
facilities. 

Although considerable numbers of veterans have migrated to the
western states, VA resources and facilities have shifted little.  As
a result, facilities in the eastern states are more likely to have
adequate resources to treat all veterans seeking care than are
facilities in western states, which frequently are forced to ration
care to some or all higher-income veterans as well as to many
veterans with lower incomes. 

Medical centers' varying rationing practices also result in
significant inconsistencies in veterans' access to care both among
and within the centers.  For example, as we reported in 1993,
higher-income veterans without service-connected disabilities could
receive care at 40 medical centers that did not ration care, while 22
other medical centers rationed care even to veterans with
service-connected disabilities.  Some centers that rationed care by
either medical service or medical condition turned away lower-income
veterans who needed certain types of services while caring for
higher-income veterans who needed other types of services.\8


--------------------
\8 VA Health Care:  Variabilities in Outpatient Care Eligibility and
Rationing Decisions (GAO/HRD-93-106, July 16, 1993). 


      SPECIALIZED SERVICES NOT
      ALWAYS AVAILABLE
-------------------------------------------------------- Chapter 0:3.3

Veterans' needs for specialized services cannot always be met through
other public or private-sector programs.  Frequently, such services
are either unavailable in the private sector or are not extensively
covered under other public and private insurance.  Space and resource
limits in VA specialized treatment programs can result in unmet
needs, as in the following examples: 

  -- Specialized VA post-traumatic stress disorder programs are
     operating at or beyond capacity, and waiting lists exist,
     particularly for inpatient treatment.  Although private
     insurance generally includes mental health benefits, private-
     sector providers generally lack the expertise in treating
     war-related stress that exists in the VA system. 

  -- Inadequate numbers of beds are available in the VA system to
     care for homeless veterans.  For example, VA had only 11 beds
     available in the San Francisco area to meet the needs of an
     estimated 2,000 to 3,300 homeless veterans. 

  -- Public and private health insurance do not include extensive
     coverage of long-term psychiatric care.  Veterans needing such
     services must therefore rely on state programs or the VA system
     to meet their needs. 

  -- VA is a national leader both in research on and treatment and
     rehabilitation of people with spinal cord injuries.  Similarly,
     it is a leader in programs to treat and rehabilitate the blind. 
     Although such services are available in the private sector, the
     costs of such services can be catastrophic. 


      VETERANS HAVE UNMET NEEDS
      FOR LONG-TERM CARE SERVICES
-------------------------------------------------------- Chapter 0:3.4

Finally, veterans frequently have unmet needs for nursing home and
other long-term care services.  Medicare and most private health
insurance cover only short-term, post-acute nursing home and home
health care.  Although private long-term care insurance is a growing
market, the high cost of policies places such coverage out of the
reach of many veterans.  As a result, most veterans must pay for
long-term nursing home and home care services out of pocket until
they spend down most of their income and assets and qualify for
Medicaid assistance.  After qualifying for Medicaid, they are
required to apply almost all of their income toward the cost of their
care. 

Veterans able to obtain nursing home care through VA programs can
avoid the spend-down and most of the cost-sharing required to obtain
service through Medicaid.  VA has long had a goal of meeting the
nursing home needs of 16 percent of veterans needing such care.  In
fiscal year 1995, VA served an estimated 9 percent of veterans
needing nursing home care. 


   OPTIONS FOR RETARGETING
   RESOURCES TOWARD VETERANS'
   HEALTH CARE NEEDS
---------------------------------------------------------- Chapter 0:4

VA could use a number of approaches, within existing resources and
legal authorities, to better target resources toward addressing the
unmet health care needs of veterans.  With limited resources, one
approach would be to shift resources from providing services to one
group of veterans to paying for expanded services for a different
group of veterans.  For example, resources spent in providing care
for higher-income veterans without service-connected disabilities
could be shifted toward improving services for veterans with
service-connected disabilities and lower-income veterans whose health
care needs are not being met.  About 15 percent of the veterans with
no service-connected disabilities who use VA medical centers have
incomes that place them in the discretionary care category for both
inpatient and outpatient care.  Another approach could be to narrow
the types of services provided--such as the provision of
over-the-counter drugs--and use the resources spent on those services
to pay for other higher-priority services. 

Veterans' equity of access to VA health care services could be
improved within existing legislative authority in the following ways: 

  -- VA could better define the conditions under which the provision
     of outpatient care would obviate the need for hospitalization. 
     Such action would help promote consistent application of
     eligibility restrictions, but VA physicians would still be
     placed in the difficult position of having to deny needed health
     care services to veterans when treatment of their conditions
     would not obviate the need for hospitalization.  This problem
     can be addressed only through legislation to (1) make veterans
     eligible for the full range of outpatient services or (2)
     authorize VA to sell noncovered services to veterans. 

  -- VA could reduce inconsistencies in veterans' access to care by
     better matching the resources of VISNs and individual medical
     centers with the volume and demographic makeup of eligible
     veterans requesting services at each center.  In effect, VA
     would be shifting some resources from medical centers that have
     sufficient resources, and therefore, do not ration care.  Such
     resource shifts could mean, for example, that some higher-income
     veterans at those medical centers might not obtain care in the
     future.  But the shift would also mean that some veterans with
     lower incomes who had not received care at the other medical
     centers might receive care in the future. 

  -- VA could place greater emphasis on use of the fee-basis program
     to equalize access for those veterans who do not live near a VA
     facility or who live near a facility offering limited services. 
     VA has specific statutory authority to contract for medical care
     when its facilities cannot provide necessary services because
     they are geographically inaccessible.  While this approach would
     help some veterans, current law severely restricts the use of
     fee-basis care by veterans with no service-connected
     disabilities.  Such veterans are eligible only for limited
     diagnostic services and follow-up care after hospitalization. 
     VA's recent efforts to establish access points will improve
     accessibility for some veterans, but VA has not applied the
     outpatient priorities for care or the eligibility requirements
     for fee-basis care in enrolling patients and providing services. 
     As a result, access points could divert funds that could be used
     to provide access to VA-supported care for high-priority
     veterans to pay for services for discretionary-care veterans. 
     The concept of access points appears sound--to increase
     competition and therefore reduce costs of contract care.  To be
     equitable, however, care provided through access points could be
     made subject to the same limitations that apply to fee-basis
     care for other veterans.  Increased use of fee-basis care,
     either through fee-for-service contracting or capitation
     payments, is not, however, without risks.  The capacity of VA's
     direct delivery system serves as a control over growth in VA
     appropriations.  Without changes in the methods used to set VA
     appropriations, removing the restrictions on use of fee-basis
     care could create significant pressure to increase VA
     appropriations.  In other words, the result might be expanding
     priorities for care covered under the fee-basis program to match
     the priorities currently covered at VA facilities rather than
     reordering priorities within available resources.  This
     expansion of priorities could occur because VA's budget request
     does not provide information on the priority categories of
     veterans receiving care from VA. 

  -- Finally, VA could ensure that its facilities use consistent
     methods to ration care when demand exceeds capacity. 


   OTHER COUNTRIES INTEGRATED
   THEIR VETERANS' HOSPITALS INTO
   THEIR HEALTH CARE SYSTEMS OR
   SHIFTED THE FOCUS OF THEIR
   FACILITIES
---------------------------------------------------------- Chapter 0:5

Faced with aging and declining veteran populations, Australia,
Canada, and the United Kingdom closed or converted their veterans'
hospitals to other uses.  They preserved and enhanced veterans'
health benefits without maintaining their direct delivery systems. 
For example, they supplemented services covered under other health
programs or gave veterans higher priorities for care or better
accommodations under those programs.  Veterans' service
organizations, originally skeptical about the changes, now generally
support them. 

In all three countries, falling utilization rates, coupled with (1)
the need to treat the effects of an injury rather than the injury
itself and (2) the increased chronic care needs of an aging
population made maintaining medical expertise increasingly difficult. 
For example, Australia's veterans' hospitals had trouble retaining
skilled staff and maintaining affiliation with medical schools as
their patient mix became increasingly geriatric. 

The United Kingdom decided in 1953 that transferring its veterans'
hospitals to the country's universal care system would both increase
utilization of the former veterans' hospitals and allow them to
preserve and further develop their specialized medical expertise by
expanding their patient mix.  Canada, in 1963, and Australia, in
1988, made similar decisions on the basis of continuing decline in
acute care use of their veterans' hospitals and the ability and
desire of veterans to obtain care in their communities. 

What we learned from our examination of these countries' veterans'
health care programs was that health reforms, either nationally or
within the veterans' system, that allow veterans to choose between
care in VA facilities or community facilities decrease demand for
care in VA facilities.  In other words, any change in our veterans'
health care system--such as the establishment of access points or
other contract providers--that gives veterans greater access to
community providers will likely decrease demand for that type of care
in existing VA facilities. 

In contrast to Australia, Canada, and the United Kingdom, Finland
continues to operate a direct delivery system.  It, like Canada,
however, shifted the emphasis of its veterans' health care system
from acute to long-term care services to meet the changing needs of
an aging veteran population.  By 1993, it had converted almost half
of the beds in its primary hospital to nursing home care.  Both
Canada and Finland also developed home care programs to help veterans
maintain their independence as long as possible. 


   APPROACHES FOR PRESERVING AND
   ALTERNATIVES TO PRESERVING THE
   DIRECT DELIVERY SYSTEM
---------------------------------------------------------- Chapter 0:6

Most of VA's $16.6 billion health care budget goes to maintain its
direct delivery infrastructure.  It is invested in buildings, staff,
land, and equipment.  As the Congress deliberates the future of
veterans' health care, it will inevitably face the question of
whether to act to preserve health care benefits or the direct
delivery system or both, as envisioned under VA's planned
reorganization. 


      PRESERVING DIRECT DELIVERY
-------------------------------------------------------- Chapter 0:6.1

Three basic approaches might be used, individually or in combination,
to preserve the direct delivery system:  build demand for hospital
care by increasing VA's market share of the veteran population; allow
VA to use its excess hospital capacity to serve veterans' dependents
and other nonveterans; and convert VA hospitals to other uses, such
as meeting the increasing demands for VA-supported nursing home care. 


         INCREASE VA'S MARKET
         SHARE OF VETERANS
------------------------------------------------------ Chapter 0:6.1.1

One approach for preserving the direct delivery system would be for
the VA system to increase its market share of the veteran population. 
About 80 percent of the veteran population has never used VA health
care services.  Bringing more of those veterans into the VA system
could increase demand for VA hospital care. 

Decreasing veterans' out-of-pocket costs does not appear to be a
viable strategy for attracting new veteran users.  All veterans are
currently eligible for medically necessary VA hospital care without
limits, about 9 to 11 million with no out-of-pocket costs.  The
remaining veterans would incur some cost-sharing if they sought care
from VA facilities, but generally much less than they would incur in
seeking care from private hospitals using their Medicare or private
insurance. 

Strategies that could be successful in attracting new users include
the following: 

  -- Improving customer service.  Many veterans have negative
     perceptions of both VA customer service and quality of care. 
     VA, as part of its response to the Vice President's National
     Performance Review, has developed plans to improve customer
     service, including establishing standards for such things as
     waiting times.  Similarly, VA has improved its accreditation
     scores from the Joint Commission on Accreditation of Healthcare
     Organizations; its average score is now higher than that of
     private-sector hospitals.  Finally, VA is improving the privacy
     and amenities in many of its hospitals.  For example, bedside
     telephones are being installed in all hospitals, and the number
     of private and semiprivate rooms is being increased.  As
     veterans' perceptions change, demand for care is likely to
     increase. 

  -- Improving access to outpatient care.  Improved access, either
     through establishment of additional direct delivery clinics or
     through contract care, could have the secondary effect of
     increasing demand for hospital care.  VA hospitals could, over
     the next several years, open hundreds of access points and
     greatly expand market share.  There are over 26 million
     veterans, and 550,000 private physicians could contract to
     provide care at VA expense.  VA's growth potential appears to be
     limited only by the availability of resources and statutory
     authority, new veteran users' willingness to be referred to VA
     hospitals for specialty and inpatient care, and other health
     care providers' willingness to contract with VA hospitals.  This
     approach to filling VA hospital beds, however, would require
     significant budget increases if new access points modestly
     increase VA's market share of hospital and outpatient users. 
     For example, VA currently serves about 2.6 million of our
     nation's 26 million veterans in a given year and 4 to 5 million
     veterans over a 3-year period.  About 40 percent of the 5,000
     veterans enrolled at VA's 12 new access points had not received
     VA care in the 3 years before they enrolled.  Most of the new
     users we interviewed had learned about the access points through
     conversations with other veterans, friends, and relatives or
     from television, newspapers, and radio. 

  -- Expanding eligibility.  Expanding eligibility for outpatient
     care could also attract new users to the VA system.  Although
     such users would be brought into the system through expanded
     outpatient eligibility, many of the new users would likely use
     VA hospitals for inpatient care.  A 1992 VA eligibility reform
     task force estimated that making all veterans eligible for
     comprehensive VA health care services could triple demand for VA
     hospital care. 


         EXPAND CARE FOR
         NONVETERANS
------------------------------------------------------ Chapter 0:6.1.2

A second approach for increasing the workload of VA hospitals would
be to expand VA's authority to provide care to veterans' dependents
or other nonveterans.  Currently, VA has limited authority to treat
nonveterans, primarily providing such services through sharing
agreements with military facilities and VA's medical school
affiliates. 

Allowing VA facilities to treat more nonveterans could increase use
of VA hospitals and broaden VA's patient mix, strengthening VA's
medical education and research missions.  Without better systems for
determining the cost of care, however, such an approach could result
in funds appropriated for veterans' health care being used to pay for
care for nonveterans. 

In addition, VA would be expanding the areas in which it is in direct
competition with private-sector hospitals in the surrounding
communities.  Essentially, every nonveteran brought into a VA
hospital is a patient taken away from a private-sector hospital. 
Thus, expanding the government's role in providing care to
nonveterans could further jeopardize the fiscal viability of
private-sector hospitals.  In rural communities without a public or
private hospital, however, opening VA hospitals to nonveterans might
improve the availability of health care services for the entire
community and, at the same time, help preserve the direct delivery
system. 


         CONVERT VA HOSPITALS TO
         NURSING HOMES OR OTHER
         USES
------------------------------------------------------ Chapter 0:6.1.3

A third approach to preserving the direct delivery system would be to
convert VA hospitals to provide nursing home or other types of care. 
Although converting existing space to provide nursing home care is
often cheaper than building a new facility, converting hospital beds
to other uses would increase costs.  Construction funds would be
needed to pay for the conversions, and medical care funds would be
needed to pay for the new nursing home users treated in what had been
empty beds. 

VA could, however, serve more veterans with available funds if it
were authorized to (1) adopt the copayment practices used by state
veterans' homes or (2) establish an estate recovery program patterned
after those operated by increasing numbers of state Medicaid
programs.  Unlike Medicaid and most state veterans' homes, the VA
nursing home program has no spend-down requirements and minimal
cost-sharing.  Only higher-income veterans with nonservice-connected
disabilities contribute toward the cost of their care, making
copayments that average $12 a day. 


      ALTERNATIVES TO PRESERVING
      THE ACUTE CARE HOSPITALS
-------------------------------------------------------- Chapter 0:6.2

Actions taken by Australia, Canada, and the United Kingdom suggest
that veterans' benefits can be preserved and even enhanced without
preserving the system's acute care hospitals.  Alternatives to
maintaining the current direct delivery system include (1)
establishing a VA-operated health financing system to purchase care
from other public and private providers (or expanding an existing
program); (2) including veterans under an existing health benefits
program, such as Medicare, the Federal Employees Health Benefits
Program, or TRICARE; and (3) issuing vouchers to enable veterans to
purchase private health insurance.  Under any of these approaches,
many existing VA facilities might be closed, converted to other uses,
or transferred to the community. 


         PURCHASE CARE FROM PUBLIC
         AND PRIVATE PROVIDERS
------------------------------------------------------ Chapter 0:6.2.1

VA already purchases health care services from public and
private-sector providers in many ways.  For example, it purchases
services from its medical school affiliates and other government
facilities through sharing agreements; it purchases care for eligible
veterans geographically remote from VA facilities directly from
private physicians through the fee-basis program; it contracts with
groups of public or private-sector providers on a capitation basis to
provide primary care services to veterans; and it operates a health
financing program, the Civilian Health and Medical Program of the
Department of Veterans Affairs (CHAMPVA), to purchase care for
survivors and dependents of certain veterans. 

Expanding or combining these programs into a single health financing
program could increase VA's purchasing power in the health care
marketplace, allowing it to purchase health care services at lower
prices.  For example, expansion of capitation funding could shift
risks for controlling veterans' health care costs from the government
to private providers contracting with VA.  And increasing the use of
private-sector providers within the VA health care system could
retain the focus on veterans' health care needs that might be lost by
merging veterans' health care with another program. 


         INCLUDE VETERANS UNDER AN
         EXISTING PROGRAM
------------------------------------------------------ Chapter 0:6.2.2

On the other hand, additional economies would be likely to be
achieved by merging the veterans' health program with one or more of
the existing federal health programs.  For example, Medicare has many
years of experience in negotiating and monitoring contracts with
managed care plans and fee-for-service providers to ensure that the
interests of both beneficiaries and the government are protected. 
Although the Health Care Financing Administration continues to face
problems in identifying and eliminating fraud and abuse, it
nonetheless has more experience than VA in wide-scale contracting. 

Similarly, the Department of Defense (DOD) is in the midst of
implementing its TRICARE system nationwide.  TRICARE, a managed
health care program, offers military beneficiaries alternatives to
the Civilian Health and Medical Program of the Uniformed Services
(CHAMPUS), a fee-for-service program.  TRICARE offers beneficiaries
eligible for CHAMPUS two new options for health care in addition to
the CHAMPUS program.  The options vary in the amount of choice
beneficiaries have in selecting their physicians and the amount
beneficiaries are required to contribute toward the cost of their
care received from civilian providers. 

  -- TRICARE Standard, or the current fee-for-service CHAMPUS
     program, gives beneficiaries the greatest freedom in selecting
     civilian providers but requires the highest beneficiary cost-
     sharing. 

  -- TRICARE Extra is a preferred provider option through which
     beneficiaries receive a 5-percent discount on the TRICARE
     Standard cost of care when they choose a medical provider from
     the contractor's network. 

  -- TRICARE Prime is an HMO-like alternative that provides
     comprehensive medical care to beneficiaries through an
     integrated network of military and contracted civilian
     providers.  Beneficiaries selecting this option must enroll
     annually in the program, agreeing to go through an assigned
     military or civilian primary care physician for all care.  Low
     enrollment fees and copayment features provide financial
     incentives for beneficiaries to select this option, the most
     highly managed of the three options. 

Under an agreement between VA and DOD, VA facilities can apply to
become providers under TRICARE Prime.  To date, no VA facilities are
participating in TRICARE other than as fee-for-service providers.  In
many respects, VA's restructuring efforts parallel DOD's efforts in
establishing TRICARE.  Expanding TRICARE to include veterans' health
benefits and VA facilities and physicians might further expand health
care accessibility and options for beneficiaries of both programs. 

Finally, veterans could be allowed to enroll in the Federal Employees
Health Benefits program, which provides federal employees and
annuitants and their dependents a choice of private health insurance
programs, including traditional fee-for-service plans, preferred
provider plans, and HMOs.  Enrollment costs and cost- sharing vary
widely, depending on the plan selected. 


         ISSUE VOUCHERS TO BUY
         PRIVATE INSURANCE
------------------------------------------------------ Chapter 0:6.2.3

Of the various health care options, offering veterans vouchers to use
in purchasing health care services would give veterans the maximum
choice.  Acting individually to purchase care or insurance, veterans
would probably be unable to obtain the same prices on health care
services and policies that they could obtain through the volume
purchasing advantages of the federal health care programs.  For
example, individual health insurance policies are generally much more
expensive than comparable coverage obtained through a group policy
such as those available under the Federal Employees Health Benefits
Program. 

Any of the options for increasing the use of private-sector providers
would address the primary reasons many veterans give for not using VA
care:  perceptions of poor quality and customer service and limited
accessibility.  As a result, these options would be likely to
generate new demand.  Such new demand could be expected to create
upward pressure on VA appropriations unless actions were taken under
current budget rules to offset new costs.  The new options could,
however, be structured to supplement, rather than duplicate,
veterans' coverage under other health programs.  For example,
eligibility for veterans with nonservice-connected disabilities might
be limited to those without other public or private insurance. 
Benefits for other veterans might be limited to services not
typically well covered under other public and private insurance, such
as dental and vision care and long-term care services. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 0:7

The VA health care system is at a crossroads--particularly in view of
the dramatic changes occurring throughout the nation's health care
system.  These changes raise many important questions concerning the
system. 

  -- Should VA hospitals be opened to veterans' dependents or other
     nonveterans as a way of preserving the system? 

  -- Should veterans be given additional incentives to use VA
     facilities? 

  -- Should some of VA's acute care hospitals be closed, converted to
     other uses, or transferred to states or local communities? 

  -- Should additional VA hospitals be constructed when use of
     existing inpatient hospital capacity is declining both in VA and
     in the private sector? 

  -- Should VA remain primarily a direct provider of veterans' health
     care? 

  -- Should VA become primarily a purchaser of health care from other
     providers for veterans? 

Decisions regarding these and other questions will have far-reaching
effects on veterans, taxpayers, and private providers.  We believe
that attention is needed to position VA to ensure that veterans
receive high-quality health care in the most cost- efficient manner,
regardless of whether that care is provided through VA facilities or
through arrangements with private-sector providers. 

The declining veteran population in the United States, in concert
with the increased availability of community-based care, makes
preserving the current acute care workload of existing VA health care
facilities exceedingly difficult.  VA will have to attract an
ever-increasing proportion of the veteran population if it is to keep
its acute care facilities open.  Other countries have successfully
made the transition from direct providers to financiers of veterans'
health care without losing the special status of veterans. 

The cost of maintaining VA's direct delivery infrastructure limits
VA's ability to ensure similarly situated veterans equal access to VA
health care, and funds that could be used to expand the use of
fee-basis care are used instead to pay for care provided to veterans
in the discretionary care category at VA hospitals and outpatient
clinics. 


-------------------------------------------------------- Chapter 0:7.1

Mr.  Chairman, this concludes my prepared statement.  We will be
happy to answer any questions that you or other Members of the
Subcommittee may have. 


   CONTRIBUTORS
---------------------------------------------------------- Chapter 0:8

For more information on this testimony, please call Jim Linz,
Assistant Director, at (202) 512-7110 or Paul Reynolds, Assistant
Director, at (202) 512-7109. 


RELATED GAO PRODUCTS
============================================================ Chapter 1

VA Health Care:  Efforts to Improve Veterans' Access to Primary Care
Services (GAO/T-HEHS-96-134, Apr.  24, 1996). 

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

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

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

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

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

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

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

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

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

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

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

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

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


*** End of document. ***