VA Health Care: Opportunities to Increase Efficiency and Reduce Resource
Needs (Testimony, 03/08/96, GAO/T-HEHS-96-99).

GAO discussed ways in which the Department of Veterans Affairs (VA)
could operate more efficiently and reduce resources needed to meet its
mandatory care obligations. GAO noted that: (1) VA has overstated its
resource needs to meet its mandatory care obligations because its
projections do not reflect the expected decline in the veteran
population or the amount of discretionary care it provides, overstate
workloads, and include uncovered services, service expansions, and
services to nonveterans; (2) VA could save billions of dollars by
completing its planned efficiency improvements, which include using
lower-cost methods, consolidation of underused or duplicate processes,
reducing VA hospitals' nonacute admissions and days of care, closing or
converting underused hospitals, and enhancing VA revenues from veteran
and nonveteran care; (3) traditionally, VA has not given managers
incentives to improve operating efficiency; (4) veterans may be denied
care because VA facilities bear little risk when they provide
inappropriate care and do not guarantee the availability of covered
services; and (5) VA is implementing efficiency incentives, such as
performance accountability, authority to realign services, and
capitation funding, and its reorganization of its health care facilities
into service networks could reduce overall costs.

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

 REPORTNUM:  T-HEHS-96-99
     TITLE:  VA Health Care: Opportunities to Increase Efficiency and 
             Reduce Resource Needs
      DATE:  03/08/96
   SUBJECT:  Veterans benefits
             Veterans hospitals
             Health care cost control
             Federal downsizing
             Projections
             Hospital care services
             Accountability
             Health care programs
             Health services administration
IDENTIFIER:  VA Veterans Integrated Service Network
             Medicare Program
             VA Resource Planning and Management System
             VA Decision Support System
             
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Cover
================================================================ COVER


Before the Subcommittee on VA, HUD, and Independent
Agencies, Committee on Appropriations, U.S.  Senate

For Release on Delivery
Expected at 9:00 a.m.
Friday, March 8, 1996

VA HEALTH CARE - OPPORTUNITIES TO
INCREASE EFFICIENCY AND REDUCE
RESOURCE NEEDS

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

GAO/T-HEHS-96-99

GAO/HEHS-96-99T


(406120)


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

  DOD - Department of Defense
  DSS - Decision Support System
  FTE - full-time-equivalent
  VA - Department of Veterans Affairs
  VHA - Veterans Health Administration
  IG - Inspector General
  RPM - resource planning and management
  VISN - Veterans Integrated Service Networks

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss ways in which the
Department of Veterans Affairs (VA) could operate more efficiently
and thereby reduce the resources needed to meet the health care needs
of veterans in what is commonly referred to as the mandatory care
category.  With a fiscal year 1995 appropriation of $16.2 billion,
VA's system faces increasing pressures to contain or reduce spending
as part of governmentwide efforts to achieve a balanced budget. 

Our comments today will focus on (1) VA's forecasts of future
resource needs, (2) opportunities to operate VA's system more
efficiently, (3) differences between VA and the private sector in
terms of incentives to become more efficient, and (4) recent VA
efforts to reorganize its health care system and create incentives to
operate more efficiently. 

During the past several years, we have visited over 75 VA hospitals
and outpatient clinics to assess operating policies, procedures, and
practices.  These efforts have resulted in a wide range of
recommended actions to improve the efficiency and effectiveness of
the VA system.  Some involve ways to restructure existing delivery
processes to lower costs, while others identify ways to increase the
recovery of the costs of health care provided to veterans and others. 
Our comments are based primarily on the results of these efforts as
well as studies done by the Veterans Health Administration (VHA),
VA's Office of Inspector General (IG), and others. 

In summary, VA's health care system should be able to make a
significant contribution toward deficit reduction over the next 7
years.  First, the system may not need to expend the level of
resources it previously estimated to meet the health care needs of
veterans in the mandatory care category.  These resources are
overstated because (1) VA does not adequately reflect the declining
demand for VA hospital care in estimating its resource needs and (2)
much of the care VA provides is discretionary (that is, VA is
required to provide the services only to the extent that space and
resources permit).  Second, VA could reduce operating costs by
billions of dollars over the next 7 years by completing actions on a
wide range of efficiency improvements.  Actions are already under way
or planned on many of the improvements. 

The success of these efforts, however, depends on the extent to which
VA and its health care facilities are held accountable for how they
spend appropriated funds.  Unlike private health care providers, VA's
system bears few of the risks associated with inefficient operating
practices and, as such, has little economic incentive to reduce
costs.  VA managers frequently blame inefficiencies on the law, but
this appears to us to be unfair.  Historically, VA's central office
provided few incentives for facilities to become more efficient.  The
central office put little pressure on facilities to treat patients in
the most cost- effective manner and shifted few resources among
facilities to promote efficiency.  At the facility level, however, VA
managers are often able to find ways to operate more efficiently when
they need resources to implement new services or expand existing
ones. 

Recent changes at VA are starting to create the types of efficiency
incentives that have long existed in the private sector.  For
example, VA's reorganization of its health care facilities into 22
Veterans Integrated Service Networks (VISN) includes several
encouraging elements that show promise for providing the management
framework needed to realize the system's full savings potential. 
First, VA plans to hold network directors accountable for VISN's
performance by using, among other things, cost-effectiveness goals
and measures that establish accountability for operating efficiently
to contain or reduce costs.  Second, the Under Secretary for Health
(1) distributed criteria that could guide VISN directors in
developing the types of efficiency initiatives capable of yielding
large savings and (2) gave VISN and facility directors authority to
realign medical centers to achieve efficiencies.  Finally, VHA's
plans to develop a capitation funding process could provide greater
incentives to improve efficiency, provided data problems are
resolved. 


   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 in which the government owned and
operated its own health care facilities.  It grew into the nation's
largest direct delivery system. 

Veterans' health care benefits include medically necessary hospital
and nursing home care and some outpatient care.  Certain veterans,
however, have a higher priority for receiving care and are eligible
for a wider range of services.  Such veterans are generally referred
to as Category A, or mandatory care category, veterans. 

More specifically, VA must provide hospital care, and, if space and
resources are available, may provide nursing home care to certain
veterans with injuries related to their service or whose incomes are
below specified levels.  These mandatory care veterans include those
who

  have service-connected disabilities,

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

  are former prisoners of war,

  were exposed to certain toxic substances or ionizing radiation,

  served during the Mexican Border Period or World War I,

  receive disability compensation,

  receive nonservice-connected disability pension benefits, and

  have incomes below the means test threshold (as of January 1995,
     $20,469 for a single veteran or $24,565 for a veteran with one
     dependent, plus $1,368 for each additional dependent). 

For veterans with higher incomes who do not qualify under these
conditions, VA may provide hospital care if space and resources are
available.  These discretionary care category veterans, however, must
pay a part of the cost of the care they receive. 

VA also provides three basic levels of outpatient care benefits: 

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

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

  hospital-related care, which provides only the outpatient services
     needed to (1) prepare for a hospital admission, (2) obviate the
     need for a hospital admission, or (3) complete treatment begun
     during a hospital stay. 

Separate mandatory and discretionary care categories apply to
outpatient care.  Only veterans with service-connected disabilities
rated at 50 percent or higher (about 465,000 veterans) are in the
mandatory care category for comprehensive outpatient care.  All
veterans with service-connected disabilities are in the mandatory
care category for treatments related to their disabilities; they are
also eligible for hospital-related care of nonservice-connected
conditions, but, with the exception of veterans with disabilities
rated at 30 or 40 percent, they are in the discretionary care
category.  Most veterans with no service-connected disabilities are
eligible only for hospital-related outpatient care and, with few
exceptions, are in the discretionary care category. 

From its roots as a system to treat war injuries, VA health care has
increasingly shifted toward a system focused on the treatment of
low-income veterans with medical conditions unrelated to military
service.  In fiscal year 1995, only about 12 percent of the patients
treated in VA hospitals received treatment for service-connected
disabilities.  By contrast, about 59 percent of the patients treated
had no service-connected disabilities.  About 28 percent of VA
hospital patients had service-connected disabilities but were treated
for conditions not related to those disabilities.  (See fig.  1.)

   Figure 1:  VA Hospital Users by
   Purpose of Treatment, FY 1995

   (See figure in printed
   edition.)

Notes:  Data are based on the fiscal year 1995 VA patient treatment
file. 

SC = service connected; NSC = nonservice connected. 

Between fiscal years 1980 and 1995, VA facilities underwent some
fundamental changes in workload.  The days of hospital care provided
fell from 26 million in 1980 to 14.7 million in 1995; number of
outpatient visits increased from 15.8 million to 26.5 million; and
the average number of veterans receiving nursing home care in
VA-owned facilities increased from 7,933 to 13,569.  (See fig.  2.)

   Figure 2:  Changes in VA
   Facilities' Workload, FY
   1980-95

   (See figure in printed
   edition.)

During this same time period, VA's medical care budget authority grew
from about $5.8 billion to $16.2 billion.  (See fig.  3.)

   Figure 3:  VA Medical Care
   Budget Authority, FY 1980-95

   (See figure in printed
   edition.)

Note:  Numbers have not been adjusted for inflation. 

For fiscal year 1996, VA sought medical care budget authority of
about $17.0 billion, an increase of $747 million over its fiscal year
1995 authority, to maintain and operate 173 hospitals, 376 outpatient
clinics, 136 nursing homes, and 39 domiciliaries.  VA expects its
facilities to provide (1) about 14.1 million days of hospital care,
(2) nursing home care to an average of 14,885 patients, and (3) about
25.3 million outpatient visits. 

On July 29, 1995, the Congress adopted a budget resolution providing
VA medical care budget authority of $16.2 billion annually for 7
years (fiscal years 1996-2002).  The budget resolution would
essentially freeze VA spending at the fiscal year 1995 level. 

VA estimated that such a freeze would result in a cumulative
shortfall of almost $24 billion in the funds it would need to
maintain current services to the veteran population through 2002.\1
As used by VA, current services encompasses maintaining the currently
funded workload, including services to veterans in both the mandatory
and discretionary care categories and services to nonveterans. 


--------------------
\1 In September 1995, we reported that VA overestimated the potential
budget shortfall because it assumed that there would be (1) an
increase in the VA facility workload in fiscal year 1996 and that it
would be sustained during the entire 7-year period, (2) limited
savings achieved through improvements in the efficiency with which
services are provided by VA facilities, and (3) steadily increasing
costs, workload, and staffing due to opening or expanding facilities. 
(Medical Care Budget Alternatives (GAO/HEHS-95-247R, Sept.  12,
1995.)


   RESOURCES NEEDED TO MEET NEEDS
   OF VETERANS IN MANDATORY CARE
   CATEGORY ARE OVERSTATED
---------------------------------------------------------- Chapter 0:2

The resources VA facilities will need over the next 7 to 10 years to
provide hospital and certain outpatient care to veterans in the
mandatory care category are, in our view, overstated for the
following reasons: 

  VA did not adequately consider the impact of the declining veteran
     population on future demand for inpatient hospital care. 

  A significant portion of VA resources is used to provide services
     to veterans in the discretionary care category who are eligible
     for care only to the extent space and resources are available. 

  Considerable resources are expended on services that are not
     covered under veterans' VA benefits. 

  Medical centers tend to overstate their workloads and therefore
     their resource needs. 

  VA included resources for facility and program activations in
     estimating the resources it would need to maintain current
     services even though such activations represent an expansion
     over current services.\2

  Services provided to nonveterans through sharing agreements are
     included in VA's justifications of future resource needs even
     though the provision of services through sharing agreements is
     to be limited to sales of excess capacity. 


--------------------
\2 Activations include opening new facilities and expanding existing
facilities and programs through modernization and new construction. 


      DECLINING VETERAN POPULATION
      WILL REDUCE FUTURE RESOURCE
      NEEDS
-------------------------------------------------------- Chapter 0:2.1

In estimating the resources it will need to maintain current services
over the next 7 fiscal years, VA assumed that the number of hospital
patients it treats will remain constant.  The number of hospital
patients VA treats, however, actually dropped by 56 percent over the
past 25 years and should continue to decline in the future.  In
addition, because of the declining demand for inpatient care over the
past 25 years, the number of operating beds in the VA health care
system declined by about 50 percent between 1969 and 1994.  About
50,000 VA hospital beds were closed or converted to other uses.  The
decline in psychiatric beds was most pronounced from about 50,000
beds in 1969 to 17,300 beds in 1994.  (See fig.  4.)

   Figure 4:  Operating Beds in VA
   Hospitals, FY 1969-94

   (See figure in printed
   edition.)

Further declines in operating beds are likely in the next 7 to 10
years as the veteran population continues to decline.  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.  5.) Our projections
are adjusted to reflect the higher usage of hospital care by older
veterans.\3

   Figure 5:  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. 


--------------------
\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 leave
the VA system when they become Medicare-eligible. 


      MUCH VA CARE IS
      DISCRETIONARY
-------------------------------------------------------- Chapter 0:2.2

VA has underestimated the extent to which its health care resources
are spent on services for veterans in the discretionary care
categories.  Specifically, about 15 percent of veterans using VA
medical centers have no service-connected disabilities and have
incomes that place them in the discretionary care (that is, care may
be provided to the extent that space and resources permit) category
for both inpatient and outpatient care.  In addition, VA incorrectly
applied inpatient eligibility categories to its outpatients, thus
overestimating the amount of outpatient care that is subject to the
availability of space and resources.  VA does not, however,
differentiate between services provided to veterans in the mandatory
and discretionary care categories in justifying its budget request. 
As a result, the Congress has little basis for determining which
portion of VA's discretionary workload to fund. 

A portion of VA's workload is composed of higher-income veterans with
no service-connected disabilities.  In fiscal year 1991, about 10.7
percent of the 555,000 veterans receiving hospital care in VA
facilities were veterans with no service-connected disabilities with
incomes of $20,000 or more.\4

Including both inpatient and outpatient care, about 11 percent
(91,520) of the single veterans with no service-connected
disabilities (832,000) and 57 percent (227,430) of the married
veterans with no service-connected disabilities (399,000) using VA
medical centers in 1991 had incomes of $20,000 or more.  Among
married veterans with no service-connected disabilities who used VA
medical centers, 15 percent (59,850) had incomes of $40,000 or
more.\5

In March 1992, VA's Inspector General estimated, on the basis of work
at one typical VA outpatient clinic, that about half of the patients
and about one-third of the visits veterans made to VA outpatient
clinics should have been classified as discretionary rather than
mandatory care.  This occurred because VA was applying inpatient
eligibility provisions to its outpatients.  While VA is required to
provide needed hospital treatment to the 9 million to 11 million
veterans in the mandatory care category, over 90 percent of those
veterans are in the discretionary care category for outpatient care
other than for services related to treatment of a service-connected
disability. 


--------------------
\4 VA Health Care:  A Profile of Veterans Using VA Medical Centers in
1991 (GAO/HEHS-94-113FS, Mar.  29, 1994). 

\5 In 1991, a veteran without dependents was in the mandatory care
category for inpatient hospital care and hospital-related outpatient
care if he or she had income below $18,171; the income threshold
increased by $3,634 for one dependent and $1,213 for each additional
dependent. 


      EXTENSIVE RESOURCES SPENT ON
      NONCOVERED SERVICES
-------------------------------------------------------- Chapter 0:2.3

The VA Inspector General further reported that about 56 percent of
discretionary care outpatient visits were to provide services that
were not covered under the veterans' VA benefits.  Most veterans'
outpatient benefits are limited to hospital-related care.  An
estimated $321 million to $831 million of the approximately $3.7
billion VA expended on outpatient care in fiscal year 1992 may have
been for treatments provided to veterans in the discretionary care
category that were not covered under VA health care benefits.\6


--------------------
\6 VA Office of Inspector General, Audit of the Outpatient Provisions
of Public Law 100-322, Report No.  2AB-A02-059 (Washington, D.C.: 
Mar.  31, 1992). 


      MEDICAL CENTERS TEND TO
      OVERSTATE WORKLOAD
-------------------------------------------------------- Chapter 0:2.4

VA medical centers frequently overstate the number of inpatients and
outpatients treated and therefore their resource needs.  VA has long
had a problem with veterans failing to keep scheduled appointments. 
But once an outpatient visit is scheduled, it is entered into VA's
computerized records and counted as an actual visit unless action is
taken at the medical center to delete the record. 

VA's IG identified problems in the reporting of both inpatient care
and outpatient visits at several medical centers.  For example, the
IG found that 9 percent of the visits at the Milwaukee VA medical
center and 7 percent of the visits at the Murfreesboro medical center
were not countable workload because they represented "no shows."\7
Similarly, a 1994 IG report found that actual surgical workload at
the Sepulveda VA medical center was 37 percent lower than reported.\8


--------------------
\7 VA Office of Inspector General, Audit of Clement J.  Zablocki VA
Medical Center, Milwaukee, Wisconsin, Report No.  2R4-F03-112
(Washington, D.C.:  Mar.  25, 1992) and Audit of Alvin C.  York VA
Medical Center, Murfreesboro, Tennessee, Report No.  2R3-F03-029
(Washington, D.C.:  Dec.  16, 1991). 

\8 VA Office of Inspector General, Special Inquiry of Veterans Health
Administration Medical Centers Sepulveda and West Los Angeles, CA,
Report No.  4R4-A01-111 (Washington, D.C.:  Sept.  21, 1994). 


      RESOURCE NEEDS FOR
      ACTIVATIONS APPEAR
      OVERSTATED
-------------------------------------------------------- Chapter 0:2.5

The resources VA believes it needs to maintain current services
include resources needed to support new workload generated through
activation of programs and facilities.  Almost 25 percent of the
budget shortfall VA estimated to occur over the next 7 fiscal years
under the congressional budget resolution would result from the lack
of funds for facility activations and planned workload expansions. 
Delaying or stopping activations is, however, a difficult political
decision, particularly for those projects already under way. 

In its analysis of the resources it will need to maintain current
services over the next 7 fiscal years, VA assumed that it will
continue to incur additional costs, add staff, and attract new users
through facility activations.  For example, VA's estimate that it
will need $20.9 billion dollars in the year 2000 to maintain current
services includes increases of over $993 million and 10,000
full-time-equivalent (FTE) employees for activations.  In other
words, the inclusion of activation costs overstates the resources VA
will need in the year 2000 in order to maintain current services by
almost $1 billion. 

In addition, the funds VA seeks for activations may be overstated
because the activations planning process is not integrated with the
resource planning and management (RPM) system workload forecasting
process.  VA sought about $108 million and 1,509 FTEs in its fiscal
year 1996 budget submission to support a projected increase in the
number of veterans seeking care.  These estimates, based on workload
forecasts developed through RPM, reflect historical trend data that
could include workload increases resulting from prior years' facility
and program activations.  In other words, the resources requested for
workload increases projected using RPM likely include resources for
some of the estimated workload to be generated through fiscal year
1996 activations.  VA sought an additional $208 million for facility
activations based on the separate activations planning process.  VA
officials agree that some double counting may be occurring because of
the separate planning processes, but believe that the amount of
duplication is minimal.  We are currently exploring the extent of
such duplication for this Subcommittee. 


      VA INCLUDES SHARING
      AGREEMENT WORKLOAD IN BUDGET
      JUSTIFICATION
-------------------------------------------------------- Chapter 0:2.6

VA counts services provided to nonveterans through sharing agreements
with military and private sector hospitals and clinics in justifying
the resources it will need during the next fiscal year.  In other
words, VA essentially builds in "excess" resources to sell to the
Department of Defense (DOD) and the private sector.  VA also bills,
and is allowed to retain, the costs of services provided through
sharing agreements. 

Health resources sharing, which involves the buying, selling, or
bartering of health care services, can be beneficial to both parties
in the agreement and helps contain health care costs by making better
use of medical resources.  For example, it is often cheaper for a
hospital to buy an infrequently used diagnostic test from another
hospital than it is to purchase the needed equipment and provide the
service directly.  Similarly, a hospital that is using an expensive
piece of equipment only 4 hours a day but is staffed to operate the
equipment for 8 hours could generate additional revenues by selling
its excess capacity to other providers. 

To allow federal agencies' resources to be used to maximum capacity
and avoid unnecessary duplication and overlap of activities, VA is
authorized to sell excess health care services to DOD.  In addition,
VA can share specialized medical resources with nonfederal hospitals,
clinics, and medical schools.  Medical resources can be sold to DOD
and the private sector only if the sale does not adversely affect
health care services available to veterans.  As an incentive to share
excess health care resources, the VA facilities providing services
through sharing agreements are allowed to recover and retain the cost
of the services from DOD or the private sector facility. 

In fiscal year 1995, VA sold about $25.3 million in specialized
medical resources to private sector hospitals and about $33.0 million
in health care services to the military health care system.  Although
VA facilities received separate reimbursement for the workload
generated through these sharing agreements, the workload was
nevertheless included in VA's justification of its budget request. 


   VA'S RESOURCE NEEDS SHOULD BE
   FURTHER REDUCED THROUGH
   INCREASED EFFICIENCY
---------------------------------------------------------- Chapter 0:3

In its assessment of the potential budget shortfall VA would face if
its budget were frozen at fiscal year 1995 levels for 7 years, VA
assumed that there would be no change in the efficiency with which it
delivers health care services beyond the unspecified savings of $335
million expected to occur in fiscal year 1996.  VA should be able to
further reduce its resource needs by billions of dollars over the
7-year period through improved efficiency and resource enhancements. 

During the past 5 to 10 years, GAO, VA's IG, VHA, the Vice
President's National Performance Review, and others identified
numerous opportunities to

  use lower-cost methods to deliver veterans' health care services,

  consolidate underused or duplicate processes to increase
     efficiency,

  reduce nonacute admissions and days of care in VA hospitals,

  close underused VA hospitals, and

  enhance VA revenues from services sold to nonveterans and care
     provided to veterans. 

VA has actions planned or under way to take advantage of many of
these opportunities.  Such actions should reduce VA's resource needs
over the next 7 to 10 years by several billion dollars. 


      USE LOWER-COST METHODS FOR
      DELIVERING HEALTH CARE
      SERVICES
-------------------------------------------------------- Chapter 0:3.1

Numerous opportunities to achieve savings through changes in the way
VA delivers health care services to veterans should allow VA
facilities to provide services of equal or higher quality at a lower
cost.  For example: 

  Providing 90-day rather than 30-day supplies of low-cost
     maintenance prescriptions enabled VA pharmacies to save about
     $45 million in fiscal year 1995.  The savings resulted because
     VA pharmacies handled over 15 million fewer prescriptions. 
     Although VA encouraged its medical centers to implement
     multi-month dispensing in response to our January 1992 report,
     the full potential has not been achieved because medical centers
     have been slow to adopt multi-month dispensing.\9

  Purchasing services from community providers when they can provide
     the care at a lower cost could also potentially result in
     savings.  VA has encouraged its medical centers to establish
     "access points" that can provide services at lower cost than at
     VA outpatient clinics and, at the same time, improve
     accessibility for veterans.  To date, only a few medical centers
     have established such access points, but many others are
     developing plans to shift care to lower-cost community settings. 
     Although it appears that community providers can often provide
     services at lower cost than VA, the ultimate effect of access
     points on overall VA spending depends on such issues as the
     extent to which the access points attract new users and the
     extent to which current users increase their use of in response
     to improved accessibility. 

  VA should save in excess of $225 million over a 7-year period by
     adopting Medicare fee schedules.  VA's IG compared the amount
     paid by VA under its fee-basis program with Medicare fee
     schedules and found that VA paid more than the Medicare rate in
     over half of the cases reviewed.  VA plans to adopt Medicare fee
     schedules for both its outpatient fee-basis payments and for
     payment of inpatient physician and ancillary services at non-VA
     hospitals.\10 \11 VA expects to begin using Medicare fee
     schedules by July 1996. 

  Through the establishment of primary care teams, VA hospitals
     should be able to reduce veterans' inappropriate use of more
     costly specialty clinics and achieve significant savings in
     staff costs.  As we reported in October 1993, VA hospitals allow
     many veterans to receive general medical care in specialty care
     clinics after their conditions are stabilized.  Transferring
     such veterans to primary care clinics in a timely manner will
     allow lower-cost primary care staff to meet their medical needs
     rather than higher-cost specialists.\12

  By purchasing specialized medical care services, such as PET scans
     and lithotripsy, from community providers rather than buying
     expensive, but seldom used, equipment, VA could reduce its costs
     of providing such services and at the same time improve
     accessibility of such care for veterans.  For example, although
     the Albuquerque VA medical center treated a total of only 24
     veterans for kidney stone removal in fiscal years 1990 through
     1992, the hospital purchased a lithotripter, a machine that
     breaks up kidney stones so that they can be eliminated without
     surgery, at a cost of almost $1.2 million.  During its first
     year of operation, 34 veterans received treatment.  A private
     provider in the same city provided lithotripsy services for
     $2,920 a procedure.  Thus, the hospital could have met the 34
     veterans' needs at a cost of about $100,000 compared with its
     expenditure of $1.2 million plus operating costs.  Although the
     hospital sold lithotripsy services to more nonveterans than it
     provided to veterans, the hospital has used the equipment at
     less than one-fifth of its normal operating
     capacity.\13

  VA expects to also achieve savings by establishing a national drug
     formulary.  Historically, each VA facility has established its
     own formulary--that is, a list of medications that are approved
     for use for treating patients.  VA noted that establishing a
     national formulary should increase standardization, decrease
     inventory costs, heighten efficiency, and lower pharmaceutical
     costs through enhanced competition.  VA has not estimated the
     potential savings, but could realize a $100 million savings if
     using the national formulary can achieve a 10-percent reduction
     in the cost of purchasing medications. 

  VA expects to save $168 million over a 6-year period by phasing out
     and closing its supply depots and establishing a just-in-time
     delivery system for medical care supplies and drugs, as
     recommended by the Vice President's National Performance Review. 
     The depots were closed at the end of fiscal year 1994, and
     contracts for just-in-time delivery of drugs are in place. 
     Actions to award just-in-time contracts for medical supplies and
     subsistence items are expected to be completed within the next 4
     months. 


--------------------
\9 VA Health Care:  Modernizing VA's Mail-Service Pharmacies Should
Save Millions of Dollars (GAO/HRD-92-30, Jan.  22, 1992). 

\10 VA Office of Inspector General, Audit of Fee-Basis Payments for
Inpatient Medical Care, Report No.  5R3-A05-108 (Washington, D.C.: 
Sept.  29, 1995). 

\11 VA Office of Inspector General, Audit of Fee-Basis Payments for
Outpatient Medical Care, Report No.  5R3-A02-063 (Washington, D.C.: 
May 25, 1995). 

\12 VA Health Care:  Restructuring Ambulatory Care System Would
Improve Services to Veterans (GAO/HRD-94-4, Oct.  14, 1993). 

\13 VA Health Care:  Albuquerque Medical Center Not Recovering Full
Costs of Lithotripsy Services (GAO/HEHS-95-19, Dec.  28, 1994). 


      CONSOLIDATE UNDERUSED OR
      DUPLICATE PROCESSES
-------------------------------------------------------- Chapter 0:3.2

VA also has several nationwide initiatives under way to integrate,
consolidate, or merge duplicate or underused services.  Such actions
should result in additional savings over the next 7 years.  For
example: 

  By creating several bulk processing facilities to fill mail- order
     prescriptions, VA will reduce its handling costs by two-thirds,
     providing a savings of about $26 million in fiscal year 1996. 
     As we reported in January 1992, VA was mailing prescriptions to
     veterans from over 200 locations resulting in uneconomically
     small workloads and labor-intensive processes.  To date, VA has
     four operating bulk processing facilities using newly designed
     automated equipment and processes; another three facilities are
     not yet operational.  Prescription workload is being transferred
     systematically from VA hospitals to the new bulk processing
     centers.\14 When they are fully operational, these facilities
     could save about $74 million a year. 

  By consolidating 14 laundry facilities over a 3-year period, VA
     expects to achieve one-time equipment and renovation savings of
     about $38 million as well as recurring savings of about $600,000
     per year from operational efficiencies.  Under a management
     improvement initiative, VA identified facilities for integration
     that were scheduled for or had requested funding for new
     equipment or renovation.  Five of the 14 consolidations were
     completed in 1995; the remaining 9 are scheduled to be completed
     within the next 2 years. 

  An internal VA Management Improvement Task Force predicted in 1994
     that VA could save up to $73 million in recurring personnel
     costs by integrating management of VA facilities.  Among other
     things, the task force recommended that the administrative and
     clinical management of 60 facilities be integrated into 29
     partnerships.  The task force expected that these facility
     integrations could reduce service and staffing duplication,
     integrate clinical programs, achieve economies of scale, and
     free resources to invest in new services.  To date, about
     one-third of the recommended integrations have been approved. 
     To the extent that measurable savings occur, however, VA allows
     the facilities to reinvest the savings into providing more
     clinical programs.  Examples of reinvestment include equipment,
     construction projects, opening of access points, and increasing
     specialty and subspecialty clinics.  Our ongoing work for this
     Subcommittee will assess the extent that these and other
     management improvement initiatives recommended by the task force
     have been implemented and are achieving measurable savings. 


--------------------
\14 GAO/HRD-92-30, Jan.  22, 1992. 


      REDUCE NONACUTE ADMISSIONS
      AND DAYS OF CARE
-------------------------------------------------------- Chapter 0:3.3

Establishing preadmission certification procedures for admissions and
days of care similar to those used by private health insurers could
save VA hundreds of millions of dollars by reducing nonacute
admissions and days of care in VA hospitals. 

VA hospitals too often serve patients whose care could be more
efficiently provided in alternative settings, such as an outpatient
clinic or nursing home.  In 1985, we reported that about 43 percent
of the days of care that VA medical and surgical patients spent in
the VA hospitals reviewed could have been avoided.\15 Since then, a
number of studies by VA researchers and the IG have found similar
problems. 

For example, a 1991 VA-funded study of admissions to VA acute medical
and surgical bed sections estimated that 43 percent (+/- 3 percent)
of admissions were nonacute.  Nonacute admissions in the 50 randomly
selected VA hospitals studied ranged from 25 to 72 percent.  The
study suggested several reasons for the higher rate of nonacute
admissions to VA hospitals than to private sector hospitals,
including the following: 

  VA facilities do not have the necessary financial incentives to
     make the transition to outpatient care;

  VA, unlike the private sector, does not have formal mechanisms to
     control nonacute admissions, such as mandatory preadmission
     review; and

  VA, unlike the private sector, has a significantly expanded social
     mission that may influence the use of resources for patients.\16

A 1993 study by VA researchers reported similar findings.  At the 24
VA hospitals studied, 47 percent of admissions and 45 percent of days
of care in acute medical wards were nonacute; 64 percent of
admissions and 34 percent of days of care in surgical wards were
nonacute.  Reasons cited for nonacute admissions and days of care
included nonavailability of outpatient care, conservative physician
practices, delays in discharge planning, and social factors. 
Although the study cited VA eligibility as contributing to some
inappropriate admissions and days of care, the study recommended only
minor changes in VA eligibility provisions.  Rather, it suggested
that VA establish a systemwide utilization review program.  VA,
however, has not established an internal utilization review
requirement nor contracted for external reviews. 

By contrast, all fee-for-service health plans participating in the
Federal Employees Health Benefits Program are required to operate a
preadmission certification program to help limit nonacute admissions
and days of care. 


--------------------
\15 Better Patient Management Practices Could Reduce Length of Stay
in VA Hospitals (GAO/HRD-85-92, Aug.  8, 1985). 

\16 For example, VA facilities may admit patients who travel long
distances for care or keep veterans in the hospital longer than
medically necessary because they lack a social support system to
assist them after discharge. 


      CLOSE OR CONVERT UNDERUSED
      HOSPITALS
-------------------------------------------------------- Chapter 0:3.4

If the actions discussed above are taken to reduce the number of
nonacute admissions and days of care provided by VA hospitals, the
demand for care in some hospitals could fall to the point where it is
no longer economically feasible to keep the hospital open.  VA has
taken over 50,000 beds out of service over the past 25 years but has
not closed any hospitals because of declining utilization.\17

Closing wards clearly results in some savings through reduced
staffing costs.  But, with fewer patients over whom to spread the
fixed costs of operating the facility, the cost per patient treated
rises.  At some point, it may become less expensive to close the
hospital and provide care either through another VA hospital or
through contracts with community hospitals.  Closing hospitals and
contracting for care, however, entails some risk.  Allowing veterans
to obtain free hospital care in community hospitals closer to their
homes could result in increased demand for VA-supported hospital
care, offsetting any savings achieved through contracting. 

The feasibility of closing underused hospitals was demonstrated when
VA recently closed the Sepulveda VA medical center after it was
damaged in an earthquake and transferred the workload to the West Los
Angeles medical center.  VA's IG found that the reported numbers of
inpatients treated at both Sepulveda and West Los Angeles had
declined significantly over the prior 4-year period and that the
declining workload may have been even greater than VA reported
because the facilities' workload reports were overstated.  VA does
not plan to rebuild the Sepulveda hospital but plans to establish an
expanded outpatient clinic at the site. 

The IG concluded that West Los Angeles had sufficient existing
resources to care for the hospital needs of veterans formerly using
the Sepulveda hospital.  Savings from the closure have been limited,
however, because Sepulveda staff were temporarily reassigned to the
West Los Angeles medical center. 

The only other hospital VA has closed in the last 25 years was the
Martinez VA medical center.  Like Sepulveda, it was closed because of
seismic deficiencies and its workload transferred to other VA medical
centers.  Unlike Sepulveda, however, VA plans to build a replacement
hospital.  Funds for the construction have not yet been appropriated. 


--------------------
\17 Two VA hospitals, in Martinez and Sepulveda, California, were
closed because of structural problems.  VA plans to replace the
Martinez hospital but not the Sepulveda hospital. 


      ACTIONS TO ENHANCE REVENUES
-------------------------------------------------------- Chapter 0:3.5

In addition to actions to improve the efficiency of its operations,
VA should generate millions in additional revenues by (1) setting
more appropriate prices for services sold to private sector providers
and (2) determining whether veterans should be required to contribute
toward the cost of their care. 

By establishing appropriate prices for services sold to nonveterans
through sharing agreements, VA can generate revenues that can be used
to serve veterans.  In response to our December 1994 report on
recovering the full costs of lithotripsy services at the Albuquerque
VA medical center, VA recently encouraged its facilities to ensure
that they price services provided to nonveterans so as to fully
recover all costs, and to include a profit where appropriate.\18 For
example, the Albuquerque medical center increased its price for basic
lithotripsy services to nonveterans by over 125 percent.  The new
price could generate over $300,000 a year in additional revenues for
the hospital. 

By verifying veterans' reported income, VA expects to generate about
$46 million in copayment revenues between January 1, 1996, and June
30, 1997.  In a September 1992 report, we found that VA had not taken
advantage of the opportunity to verify veterans' incomes through the
use of tax records.  Through our own match against tax records, we
identified over 100,000 veterans who may have owed copayments.  In
1994, VA began routinely using such data to determine veterans'
copayment status.\19


--------------------
\18 GAO/HEHS-95-19, Dec.  28, 1994. 

\19 VA Health Care:  Verifying Veterans' Reported Income Could
Generate Millions in Copayment Revenues (GAO/HRD-92-159, Sept.  15,
1992). 


   LACK OF INCENTIVES CAN HINDER
   FURTHER SYSTEM EFFICIENCIES
---------------------------------------------------------- Chapter 0:4

Although cost savings can and are being realized, the VA health care
system lacks overall incentives to further increase efficiency. 
Unlike private sector hospitals and providers, VA facilities and
providers bear little financial risk if they provide (1) expensive
medically inappropriate care or (2) services not covered under a
veteran's VA benefits.  Unlike private health insurance, where the
insurance company bears most of the risk, the veteran, rather than
VA, bears most of the financial risk for veterans' health benefits. 
However, when VA facilities are given an incentive, such as the
desire to fund new programs, they appear to be able to identify
opportunities to achieve savings through efficiency improvements. 


      VA FACILITIES BEAR LITTLE
      RISK FROM PROVIDING
      INAPPROPRIATE CARE
-------------------------------------------------------- Chapter 0:4.1

Private insurers increasingly require their policyholders to obtain
prior authorization from an independent utilization review firm
before the insurers will accept liability for the hospital care. 
Frequently, this authorization also sets a limit on the number of
days of care the insurer will cover without further authorization
regarding the medical necessity of continued hospitalization. 
Because compliance with these requirements directly affects their
revenues, private sector hospitals pay close attention to them. 

Similarly, the Medicare program has, since 1982, paid hospitals a
fixed fee based on the patient's diagnosis.  The fixed fee is based
on the national average cost of treating the patient's condition.  If
the hospital provides the care for less than the Medicare payment, it
makes a profit.  But if the hospital keeps the patient too long, is
inefficient, or provides unnecessary treatments, then it will suffer
a loss.  This creates a strong incentive in the private sector to
discharge Medicare patients as soon as possible. 

Those same financial incentives to increase efficiency and provide
care in the most cost-effective setting are largely absent in the VA
system.  Even in those cases in which a private health insurer's
preadmission certification requirement applies, the hospital's
revenues are not affected by failure to obtain such certification.  A
VA hospital that admits a patient who does not need a hospital level
of care incurs no penalty.  In fact, facility directors often
indicated that VA's methods of allocating resources to its medical
centers favored inpatient care. 

VA's current RPM system is attempting to remove the prior incentive
to provide care in the hospital rather than an outpatient clinic and
create incentives to provide care in the most cost-effective setting. 
As used during the last two budget cycles, however, the system has
done little to create such incentives.  Because VA chose to shift few
funds between the highest- and lowest-cost facilities, facility
incentives to become more efficient were minimal.  For fiscal year
1995, VA reallocated $20 million from 32 high-cost to 27 low-cost
facilities.  VA officials told us that they plan to use RPM to
reallocate more money in fiscal year 1996 and to provide VISN
directors a "risk pool" of contingency funds to help facilities
unable to work within their budgets.  It is yet unclear how VISN
directors plan on using these funds. 

And unlike private sector health care providers, VA has no external
preadmission screening program or other utilization review program to
provide incentives to ensure that only patients who need a hospital
level of care are admitted and that patients are discharged as soon
as medically possible.  VA gives private sector hospitals providing
care to veterans under its contract hospitalization program
incentives to limit patients' lengths of stay by basing reimbursement
on Medicare prospective payment rates.  VA does not, however, give
its own hospitals the same incentives by basing their payments on the
Medicare rates. 


      VETERAN, RATHER THAN VA,
      BEARS FINANCIAL RISK
-------------------------------------------------------- Chapter 0:4.2

Unlike private health insurance and Medicare, the veteran is at risk
of being denied care, rather than VA being at risk of losing funds,
if a VA facility runs out of resources.  Because it is at little
risk, the VA system does not have a strong incentive to operate
efficiently. 

A private insurer or managed care plan guarantees payment for covered
services in exchange for a fixed premium.  The insurer or managed
care plan thus has a strong financial incentive to make certain that
only medically necessary care is provided and that care is provided
in the most cost-effective setting.  Otherwise, the insurer may
suffer a financial loss. 

Unlike private health insurance, however, the VA system does not
guarantee the availability of covered services.  As a result, the
ability of veterans to obtain covered services depends on resource
availability.  If a VA facility is inefficient and the resources
allocated to the facility are not sufficient to meet anticipated
workload, the VA facility is allowed to deny (that is, ration)
services to eligible veterans.  In 1993, we reported that 118 VA
medical centers reported rationing some types of care to eligible
veterans when the centers ran short of resources.\20


--------------------
\20 VA Health Care:  Variabilities in Outpatient Care Eligibility and
Rationing Decisions (GAO/HRD-93-106, July 16, 1993). 


      VA FACILITIES FIND
      EFFICIENCIES WHEN THEY NEED
      FUNDS FOR NEW PROGRAMS
-------------------------------------------------------- Chapter 0:4.3

The ability of facilities to find ways to become more efficient when
they want to fund a new program, such as establishing an access point
clinic, indicates that when they are given an incentive to become
more efficient, they do so. 

For example, VA's Under Secretary for Health encouraged hospitals to
take all steps within their means to improve the geographic
accessibility of VA care.  But he told the hospitals that they would
have to use their own resources to do this.  Over half of VA's
hospitals quickly developed plans to establish so-called access
points.  For example, the Amarillo VA medical center identified ways
to save over $850,000 to pay for the establishment of access points: 

  The medical center saved an estimated $250,000 a year by
     consolidating inpatient medical wards and reducing the number of
     surgical beds it staffed.  As a result of these consolidations,
     the center eliminated nine nursing positions, achieving a
     savings in salaries and related benefits.  Officials said that
     the consolidations coincided with declining workloads,
     attributable to lower admissions and lengths of stay, and as
     such would not affect the availability or quality of care the
     center provides. 

  The medical center expects to save up to $150,000 by reviewing
     patients' use of prescription medications.  These reviews have
     led to a reduction in the number of medications provided,
     resulting in a savings in the cost of procuring, storing, and
     dispensing the drugs. 

  It expects to reduce future pharmacy costs by $250,000 by trying to
     change patients' lifestyles as a means of reducing cholesterol. 
     Center officials estimate that this approach has reduced the use
     of lipid-lowering drugs by half.  The medical center established
     health education classes, which teach correct eating and
     exercise techniques.  Before this, physicians had routinely
     prescribed lipid-reducing drugs to lower cholesterol levels. 
     Officials are planning to establish similar health clinics for
     patients with high blood pressure and other common conditions
     that may be effectively treated without prescription drugs. 

  The medical center expects to save $200,000 or more by using a
     managed care contract to purchase radiation therapy services. 
     Radiation therapy involves a series of treatments, which the
     center has historically paid for on a fee-for-service basis. 
     The hospital recently signed a contract with a private sector
     hospital to provide each series of radiation treatments at a
     capitated rate based on Medicare's reimbursement schedule. 
     Officials are currently negotiating similar contracts for other
     medical services. 


   ESTABLISHMENT OF SERVICE
   NETWORKS SHOULD LEAD TO
   INCREASED EMPHASIS ON
   EFFICIENCY
---------------------------------------------------------- Chapter 0:5

Last year, the Under Secretary for Health proposed criteria for
potential service realignment that would facilitate the types of
changes needed to achieve efficiency comparable to private sector
hospitals and clinics.  For example, he encouraged VHA directors to
identify opportunities to

  buy services from the private sector at lower costs,

  consolidate duplicate services, and

  reduce their fixed and variable costs of services directly provided
     to veterans. 

VA's assessment of its resource needs over the next 7 to 10 years did
not include any projected savings from the increased efficiencies
that should result from establishment of VISNs.  VISNs should improve
facility planning by assessing needs on a network rather than
facility basis.  This will allow hospitals serving veterans in the
same geographic area to pool their resources and reduce duplication. 

A planned move to capitation funding should create incentives for
facilities to provide care in the most cost-effective setting. 
However, VA has much to do before it can set appropriate capitation
rates.  For example, while VA's RPM data show a wide variation in
operating costs among facilities VA considers comparable, VA has done
little to determine the reasons for these variations.  Without such
an understanding, there is no assurance that capitation rates can be
set at the level that promotes the most efficient operation. 

Part of gaining a better understanding of facility or VISN cost
variations must involve improving the information VA has on the
operating costs of its hospitals.  While the automated Decision
Support System (DSS) that VA is implementing has potential to be an
effective management tool for improving the quality and cost
effectiveness of VHA operations, VA has not developed a way to verify
the accuracy of the cost and utilization data going into DSS.  Some
of the data provided to DSS from other VA information systems are
incomplete and inaccurate, limiting VA's ability to relay on
DSS-generated information to make sound business decisions.\21

It will take time for the new VISN directors to achieve significant
savings.  They have been in place for only a few months, so it is too
early to tell how successful they will be in achieving increased
efficiency.  It will be important that VA implement clear mechanisms
and useful management data by which to hold VISN directors
accountable for workload, efficiency, and other performance targets. 
Without such mechanisms and improved data, the VISN structure holds
some risk in further decentralizing VHA authority and responsibility
for achieving efficiencies. 


--------------------
\21 VA Health Care Delivery:  Top Management and Leadership Critical
to Success of Decision Support System (GAO/AIMD-95-182, Sept.  29,
1995). 


   CONCLUDING OBSERVATIONS
---------------------------------------------------------- Chapter 0:6

Given VA's overstatement of future resource needs, the system does
not need to spend as many resources as previously expected. 
Moreover, the potential magnitude of future efficiency savings not
factored into VA's assessments of future resource needs indicates
that VA's system may have more discretionary resources available than
was previously expected.  This suggests that an operating goal of
$16.2 billion a year may be achievable.  In any event, it seems
likely that the impact of such funding levels would not, by
necessity, result in the extent of budget shortfalls that VA
estimated. 


-------------------------------------------------------- Chapter 0:6.1

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


   CONTRIBUTORS
---------------------------------------------------------- Chapter 0:7

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.  Katherine Iritani, Linda Bade, Walt
Gembacz, and Frank Pasquier also contributed to the preparation of
the statement. 


*** End of document. ***