Department of Veterans Affairs: Programmatic and Management Challenges
Facing the Department (Testimony, 03/18/97, GAO/T-HEHS-97-97).

GAO discussed some of the major challenges facing the Department of
Veterans Affairs (VA) and some of the options for deficit reduction
through changes in VA benefits and programs.

GAO noted that: (1) significant improvements have occurred in the
efficiency of the VA health care system; (2) VA's new management and
Veterans Integrated Service Network (VISN) structure clearly values
efficiency and customer service; (3) in addition, legislation was
enacted: (a) expanding eligibility for VA health care; (b) making it
easier for VA to contract for and sell services to the private sector;
and (c) requiring VA to develop a plan for more equitably allocating
resources to its VISNs; (4) these decisions bring with them both
solutions to old problems and significant new challenges, such as
developing an enrollment process consistent with the priorities
established under the eligibility reform legislation and determining
when to buy services from the private sector rather than provide them in
VA facilities; (5) the Veterans Benefits Administration also faces major
challenges; for example: (a) the disability rating schedule has not been
updated for over 45 years; (b) VA faces the prospect of late or
inaccurate compensation and pension payments to millions of veterans if
it is unable to resolve the "year 2000" computer problem; (c) veterans
often wait over 2 years for resolution of compensation and pension
claims by the time the appeals process has been completed; and (d) VA
could avoid millions of dollars in overpayments of compensation and
pension benefits by strengthening its ability to prevent such payments;
(6) recent legislation, including the Government Performance and Results
Act, the Chief Financial Officers (CFO) Act, and the Paperwork Reduction
Act, provides a basis for addressing long-standing management
challenges; (7) VA has begun to use the legislation to improve its
mission performance and results, its financial reporting, and its
information resources management; (8) for example, VA included strategic
plans for its health and benefits programs in its fiscal year 1998
budget submission, and it has been preparing audited financial
statements since 1986, well in advance of the requirements imposed by
the CFO Act; (9) multiple options exist for supporting deficit reduction
through changes in VA benefits and programs; (10) although some of the
changes could be achieved through administrative action, others would
require legislation; and (11) the options include: (a) redefining
compensation benefits to eliminate compensation for diseases that are n*

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

 REPORTNUM:  T-HEHS-97-97
     TITLE:  Department of Veterans Affairs: Programmatic and Management 
             Challenges Facing the Department
      DATE:  03/18/97
   SUBJECT:  Strategic planning
             Veterans benefits
             Veterans hospitals
             Health care programs
             Health care cost control
             Deficit reduction
             Information resources management
             Eligibility criteria
             Privatization
             Veterans disability compensation
IDENTIFIER:  VA Veterans Equitable Resource Allocation System
             VA Veterans Integrated Service Network
             Medicare Program
             VA Decision Support System
             VA Northern California Health Care System
             VA 1992 National Survey of Veterans
             VA Income Eligibility Verification System
             GAO High Risk Program
             Medicaid Program
             VA Financial Management System
             VA Housing Credit Assistance Program
             VA Disability Rating Schedule
             
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Cover
================================================================ COVER


Before the Subcommittee on Human Resources, Committee on Government
Reform and Oversight, House of Representatives

For Release on Delivery
Expected at 10:00 a.m.
Tuesday, March 18, 1997

DEPARTMENT OF VETERANS AFFAIRS -
PROGRAMMATIC AND MANAGEMENT
CHALLENGES FACING THE DEPARTMENT

Statement of David P.  Baine
Director, Planning and Reporting
Health, Education, and Human Services Division

GAO/T-HEHS-97-97

GAO/HEHS-97-97T


(406138)


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

  CBO - Congressional Budget Office
  CBOC - community-based outpatient clinics
  CFO - Chief Financial Officers
  DSS - Decision Support System
  GPRA - Government Performance and Results Act
  OMB - Office of Management and Budget
  OTC - over-the-counter
  PHS - Public Health Service
  VA - Department of Veterans Affairs
  VBA - Veterans Benefits Administration
  VERA - Veterans Equitable Resource Allocation
  VHA - Veterans Health Administration
  VISN - Veterans Integrated Service Network
  RPM - Resource Planning and Management

DEPARTMENT OF VETERANS AFFAIRS: 
PROGRAMMATIC AND MANAGEMENT
CHALLENGES FACING THE DEPARTMENT
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss some of the major
challenges facing the Department of Veterans Affairs (VA) and some of
the options for deficit reduction through changes in VA benefits and
programs. 

VA has a profound effect on the welfare of our nation's 26 million
veterans.  In fiscal year 1996, VA's approximately 222,000
workers--nearly 1 for every 120 veterans--delivered a wide array of
medical, disability compensation, pension, housing, insurance,
education, and burial services in more than 1,000 facilities at a
cost of over $38.1 billion. 

Two years ago, we testified before this Subcommittee that VA was at a
crossroad in the evolution of its health care system.\1 The average
daily workload in its hospitals had dropped almost 56 percent during
the preceding 25 years, and further declines appeared likely.  At the
same time, demand for outpatient care, nursing home care, and certain
specialized services was expanding, taxing VA's ability to meet
veterans' needs in those areas.  We noted at that time that decisions
made over the next few years about VA's role in health care would
have significant implications for veterans, taxpayers, and private
health care providers. 

Today, I would like to discuss some of actions taken to increase the
efficiency of the VA health care system and VA's progress in
addressing the challenges discussed 2 years ago.  In addition, I will
discuss

  -- challenges facing the Veterans Benefits Administration (VBA) in
     administering compensation and pension benefits,

  -- VA's efforts to implement the Government Performance and Results
     Act (GPRA) and other recent legislation designed to improve the
     management of government programs, and

  -- changes that could be made in veterans' benefits and in the
     operation of VA programs to help reduce the budget deficit. 

My comments are based primarily on the results of reviews conducted
during the past several years by this and other divisions of the
General Accounting Office.\2

In summary, significant improvements have occurred in the efficiency
of the VA health care system since we last appeared before this
Subcommittee.  VA's new management and Veterans Integrated Service
Network (VISN) structure clearly values efficiency and customer
service.  In addition, legislation was enacted (1) expanding
eligibility for VA health care (P.L.  104-262), (2) making it easier
for VA to contract for and sell services to the private sector (P.L. 
104-262), and (3) requiring VA to develop a plan for more equitably
allocating resources to its VISNs (P.L.  104-204).  These decisions
bring with them both solutions to old problems and significant new
challenges, such as developing an enrollment process consistent with
the priorities established under the eligibility reform legislation
and determining when to buy services from the private sector rather
than provide them in VA facilities. 

VBA also faces multiple challenges.  For example,

  -- the disability rating schedule has not been updated for over 45
     years, meaning that ratings may no longer accurately reflect the
     loss in earning capacity resulting from service-connected
     disabilities;

  -- VA faces the prospect of late or inaccurate compensation and
     pension payments to millions of veterans if it is unable to
     resolve the "year 2000" computer problem;

  -- veterans often wait over 2 years for resolution of compensation
     and pension claims by the time the appeals process has been
     completed; and

  -- VA could avoid millions of dollars in overpayments of
     compensation and pension benefits by strengthening its ability
     to prevent such payments. 

Recent legislation, including GPRA, the Chief Financial Officers
(CFO) Act, and the Paperwork Reduction Act, provides a basis for
addressing long-standing management challenges.  VA has begun to use
the legislation to improve its mission performance and results, its
financial reporting, and its information resources management.  For
example, it included strategic plans for its health and benefits
programs in its fiscal year 1998 budget submission.  VA has been
preparing audited financial statements since 1986, well in advance of
the requirements imposed by the CFO Act. 

Finally, multiple options exist for supporting deficit reduction
through changes in VA benefits and programs.  Although some of the
changes could be achieved through administrative action, others would
require legislation.  The options include (1) redefining compensation
benefits to eliminate compensation for diseases that are not related
to military service, (2) imposing higher cost sharing for nursing
home and other long-term care services, (3) limiting enrollment in
the VA health care system, and (4) closing underused hospitals. 


--------------------
\1 VA Health Care:  Challenges and Options for the Future
(GAO/T-HEHS/95-147, May 9, 1995). 

\2 A list of related GAO testimonies and reports appears at the end
of this testimony. 


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

The United States has a long tradition of providing benefits to those
injured in military service, but the role of the federal government
in providing for the health care needs of other veterans has evolved
and expanded over time. 

In the nation's early years, the federal role was limited to direct
financial payments to veterans injured during combat; direct medical
and hospital care was provided by the individual colonies, states,
and communities.  The Continental Congress, seeking to encourage
enlistments during the Revolutionary War, provided federal
compensation for veterans injured during the war and their
dependents.  Similarly, the first U.S.  Congress passed a veterans'
compensation law. 

The federal role in veterans' health care significantly expanded
during and following the Civil War.  During the war, the government
operated temporary hospitals and domiciliaries in various parts of
the country for disabled soldiers until they were physically able to
return to their homes.  Following the war, the number of disabled
veterans unable to cope with the economic struggle of civilian life
became so great that the government built a number of "homes" to
provide domiciliary care.  Incidental medical and hospital care was
provided to residents for all diseases and injuries. 

The modern era of veterans' benefits began with the onset of World
War I.  During World War I, a series of new veterans' benefits was
added:  voluntary life insurance, allotments to take care of the
family during military service, reeducation of those disabled,
disability compensation, and medical and hospital care for those
suffering from wounds or diseases incurred in the service. 

During World War I, Public Health Service (PHS) hospitals treated
returning veterans, and, at the end of the war, several military
hospitals were transferred to PHS to enable it to continue serving
the growing veteran population.  In 1921, those PHS hospitals
primarily serving veterans were transferred to the then newly formed
Veterans' Bureau. 

During the 1920s, three federal agencies--the Veterans' Bureau, the
Bureau of Pensions in the Interior Department, and the National Home
for Disabled Volunteer Soldiers--administered various benefits for
veterans.  With the establishment of the Veterans Administration in
1930, previously fragmented services for veterans were consolidated
under one agency. 

The responsibilities and programs of the Veterans Administration grew
significantly during the ensuing decades.  For example,

  -- the VA health care system grew from 54 hospitals in 1930 to
     include 173 hospitals, more than 375 outpatient clinics, 130
     nursing homes, and 39 domiciliaries in 1996;

  -- the World War II GI Bill is said to have affected the American
     way of life more than any other law since the Homestead Act
     almost a century before, and further educational assistance acts
     were passed for the benefit of veterans of the Korean conflict,
     the Vietnam era, the Persian Gulf War, and the current
     all-volunteer force; and

  -- in 1973, the Veterans Administration assumed responsibility for
     the National Cemetery System, and VA is now charged with the
     operation of all national cemeteries, except for Arlington
     National Cemetery. 

In 1989, the Department of Veterans Affairs was established as a
cabinet-level agency.  VA's major benefits programs are divided among

  -- the Veterans Health Administration (VHA), headed by the Under
     Secretary for Health;

  -- the Veterans Benefits Administration, headed by the Under
     Secretary for Benefits, which administers compensation for
     service-connected disabilities, pensions for low-income war
     veterans, education loans, life insurance, and home loans; and

  -- the National Cemetery System, headed by a Director. 

Figure 1 shows the organizational structure of VA. 

   Figure 1:  VA Organization
   Chart

   (See figure in printed
   edition.)

For fiscal year 1998, VA is seeking an appropriation of about $40.1
billion.  Of this amount, about 54 percent is for benefit programs,
primarily for compensation and pension payments, and 43 percent for
medical programs.  (See fig.  2.)

   Figure 2:  VA's Fiscal Year
   1998 Appropriation Request

   (See figure in printed
   edition.)

VA's budget authority is split between mandatory programs ($22.4
billion) and discretionary programs ($18.7 billion).  Mandatory
programs include compensation and pension payments, certain
readjustment benefits, housing benefits, and life insurance programs. 
Discretionary programs include medical care, construction, the
National Cemetery System, and departmental administration. 

VA's fiscal year 1998 budget request includes two major proposals
affecting its health care program.  First, VA proposes legislation to
allow it to retain recoveries from private health insurance and
veteran copayments.  Currently, most such recoveries are returned to
the Treasury; VA is allowed to retain enough funds to offset the
costs of its recovery program.  Second, VA proposes to test the
feasibility of billing Medicare for health care services provided to
higher-income veterans who have Medicare eligibility, commonly
referred to as Medicare subvention.  These initiatives would, VA
believes, allow it to support a 30-percent lower unit cost for its
health care services, serve 20 percent more veterans, and obtain 10
percent of the VA health care budget from nonappropriated sources by
fiscal year 2002. 


   VHA HAS MADE SIGNIFICANT
   PROGRESS IN IMPROVING THE
   EFFICIENCY OF ITS HEALTH CARE
   SYSTEM
---------------------------------------------------------- Chapter 0:2

In our testimony 2 years ago, we pointed out that VA lagged far
behind the private sector in improving the efficiency of its health
care system.  Specifically, we said that the VA system lacked

  -- oversight procedures to effectively assess the operations of its
     medical centers,

  -- systems to shift significant resources among medical centers to
     provide consistent access to VA care,

  -- information systems capable of effectively coordinating patient
     care among VA facilities, and

  -- a corporate culture that valued economy and efficiency. 

VA has made significant progress in improving the efficiency of its
health care system.  For example, it has consolidated management of
nearby hospitals to reduce administrative costs, increased the use of
ambulatory surgery, and reduced average lengths of stay.  Under the
leadership of the Under Secretary for Health, VA has a new emphasis
on both economy and efficiency and customer service. 


      PERFORMANCE MEASURES
      DEVELOPED TO HOLD MANAGERS
      ACCOUNTABLE
-------------------------------------------------------- Chapter 0:2.1

Two years ago, we told you that VA's central office lacked much of
the systemwide information it needed to effectively (1) monitor the
performance of its medical centers, (2) ensure that corrective
actions are taken when problems are identified, and (3) identify and
disseminate information on innovative programs.  Since then, VA has
established a new decentralized management structure and established
performance measures to hold managers accountable for improving
efficiency and ensuring the quality of services. 

VA reorganized its health care facilities into 22 VISNs.  This
reorganization contains several elements that hold promise for
providing the management framework needed to realize the system's
full potential for efficiency improvements.  First, VA plans to hold
network directors accountable for VISNs' 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 developed a new method for allocating
funds to its VISNs with the intent of creating additional incentives
to improve efficiency. 

Consistent with the requirements of GPRA, VHA established five basic
goals for its health care system.  These goals are to

  -- provide excellence in health care value,

  -- provide excellence in service as defined by customers,

  -- provide excellence in education and research,

  -- be an organization that is characterized by exceptional
     accountability, and

  -- be an employer of choice. 

Under each goal, VHA established objectives and performance measures
for gauging progress toward meeting both the specific objectives and
overall program goals.  For example, VHA's performance measures
include goals to

  -- decrease the number of bed-days of care provided per 1,000
     unique users by 20 percent from the 1996 level,

  -- increase the percentage of patients reporting their care as
     "very good to excellent" by 5 percent annually,

  -- enroll 80 percent of patients in primary care, and

  -- increase the number of medical care residents trained in primary
     care. 

Contracts with individual VISN directors reflect these goals and
performance measures.  In addition, each VISN has developed a
business/strategic plan.  The plans are generally organized around
the five broad goals. 


      VA PLANS TO IMPLEMENT A NEW
      METHOD FOR ALLOCATING
      RESOURCES
-------------------------------------------------------- Chapter 0:2.2

Two years ago, we testified that VA could reduce inconsistencies in
veterans' access to care by better matching medical centers'
resources to the volume and demographic makeup of eligible veterans
requesting services at each medical center.  Although VA had
developed a new resource allocation system, the Resource Planning and
Management (RPM) system, we pointed out that the system had shifted
few resources among medical centers and allocated resources on the
basis of prior workload without any consideration of the incomes or
service-connected status of veterans who make up that workload. 

Last year, Public Law 104-204 directed VA to prepare a resource
allocation plan that would ensure similar access to VA care for
veterans who have similar economic status and eligibility priority,
taking into account expected workload and promoting the efficient use
of resources to the extent feasible.  VA developed the Veterans
Equitable Resource Allocation (VERA) system in response to the
congressional requirement.  Next month, VA plans to begin shifting
resources among VISNs using the new system.  The system is based on
calculations of the cost per veteran-user in each VISN.  VISNs that
have the highest costs per veteran-user will lose funds, while VISNs
with the lowest costs per veteran-user will get additional funds. 
Adjustments are included for the higher labor costs in some VISNs and
for differences in the costs of medical education, research,
equipment, and nonrecurring maintenance. 

We applaud VA's efforts to develop a simple, straightforward method
for allocating resources.  However, we have the same basic concern
about VERA that we had about RPM.  That is, VA has not determined the
"right" amount of dollars that need to be shifted to ensure equity of
access.  Our concern is based on the fact that VA has not adequately
determined the reasons for differences between VISNs in costs per
veteran-user.  Without a better understanding of why the costs vary,
VA cannot, with any certainty, determine the appropriate amount of
resources to shift among VISNs. 

VA data can give starkly different pictures of the comparability of
veterans' access to VA care depending on the basis used for the
comparison.  For example, basing a comparison of equity of access on
the percentage of the total veteran population in a VISN that is
provided VA services would suggest that veterans in the Sunbelt
generally have better access to VA care than do veterans from the
Midwest and Northeast.  Over 17 percent of veterans in VISN 18
(Phoenix) received VA services in fiscal year 1995, compared with
about 8 percent of veterans in VISN 4 (Pittsburgh).  Similarly, about
14 percent of veterans in VISN 9 (Nashville) received VA health care
services in fiscal year 1995, compared with about 8 percent of those
in VISN 11 (Ann Arbor).  Such data could suggest the need to shift
resources from VISNs where VA has a high market share of the veteran
population to VISNs where VA has lower market shares. 

On the other hand, the higher market shares might be justified
because of differences in the demographics of the veteran
populations.  For example, there may be more low-income, uninsured
veterans in the Sunbelt states who rely on VA for their health care. 
Similarly, differences in health status of users or a decision to
provide a higher intensity of services to a smaller population might
justify differences in market share.  For example, to the extent that
a higher proportion of the total veteran population is composed of
Category A veterans (primarily veterans with service-connected
disabilities or low incomes), a higher market share of the total
veteran population might not reflect an inequity.  We are attempting
to develop data on the demographics of the veteran population by VISN
to better understand the basis for differing market shares. 

Other VA data suggest that VISNs in the Northeast and Midwest may
receive more than their fair share of VA resources.  For example,
VISN 18 received $3,197 per veteran served in fiscal year 1996,
compared with $4,829 per veteran served in VISN 4.  Similarly, VISN 9
received $4,071, compared with $4,360 in VISN 11. 

Both VERA data and data from prior allocation models suggest that
differences in efficiency are a major factor in the variation in
spending per veteran-user.  Veteran-users in VISN 3 (the Bronx) are
hospitalized over three times as often as are veterans in VISN 18. 
In addition, VA found that VISNs that have higher costs per
veteran-user also tend to have more doctors and nurses per patient,
and provide more bed-days of care per patient than the VISNs with
lower costs per veteran-user. 

While differences in efficiency may help explain the wide variation
in spending per veteran-user and justify some shifts in resources to
increase equity, VA has not adequately explored other factors that
might justify a portion of the higher costs or explain why certain
VISNs have lower costs per veteran-user.  In developing VERA, VA
determined that differences in the age of veteran-users were not a
significant factor explaining cost differences between VISNs.  It did
not, however, explore the role other factors, such as the following,
may have played in the cost variations. 

  -- Differences in the percentage of veteran-users receiving
     compensation for service-connected disabilities or low-income
     pensions for nonservice-connected disabilities could affect a
     VISN's cost per veteran-user.  These costs could be affected
     because veterans with (1) service-connected disabilities rated
     at 50 percent or higher or (2) nonservice-connected pensions use
     a higher volume of services than higher-income veterans with
     nonservice-connected disabilities.  For example, we found that
     among veteran-users living within 5 miles of a VA outpatient
     clinic, nonservice-connected veterans receiving low-income VA
     pensions used an average of 17 visits per user, compared with an
     average of 11 visits for other nonservice-connected users.\3

  -- Differences in veteran-users' health insurance coverage could
     also affect a VISN's cost per veteran-user because veterans with
     public or private health insurance may use VA care to supplement
     services they obtain from private sector providers rather than
     rely on VA for comprehensive care.  For example, we found that
     only about half of the Medicare-eligible veterans using VA
     health care relied on VA for all of their care.  As a result,
     VISNs serving higher percentages of Medicare-eligible and
     privately insured veterans could expect to have lower costs per
     veteran.\4

  -- Finally, differences in the extent of incidental use of VA
     services could affect cost per veteran-user.  Incidental use
     could artificially decrease the VISN's average cost of care for
     veterans who regularly use VA and overstate the VISN market
     share of the veteran population. 

VA also has not developed data showing that the VISNs with lower than
average expenditures per veteran-user need additional funds.  In
other words, it has not determined how much an efficient and
well-managed VISN should be spending on each veteran-user.  VISNs'
draft business/strategic plans generally discuss how they will use
the additional funds.  Those plans have not, however, been reviewed
and approved by central office. 

Some VISN plans indicate that the additional funds will be used to
reduce waiting times or increase the number of staff per patient. 
Others, however, indicate that the funds will be used to attract
additional users.  Giving additional funds to a VISN with no strings
attached appears to enable VISNs with the largest market shares of
the veteran population to further expand their market share.  This
does not appear to be consistent with the efficient use of resources
that was one of the objectives of Public Law 104-204. 

The simplicity of VERA and the variety of health care needs and
coverages of veterans also create the potential for VISNs to focus
their marketing efforts on those individuals least likely to use
extensive health care services.  In fact, VERA gives VISNs financial
incentives to focus their marketing efforts on attracting veterans
with limited health care needs.  VA officials told us that they are
aware of the potential for gaming and have performance indicators in
place that will allow them to detect any unusual activity that might
suggest gaming.  For example, VHA said that it will be monitoring to
identify

  -- unexpected increases in basic care workload,

  -- significant changes in the special care workload,

  -- inappropriate movement of special care services from inpatient
     to outpatient settings,

  -- fluctuations in numbers of high-cost procedures,

  -- increases in waiting times, and

  -- changes in customer satisfaction. 

One way to develop a resource allocation system that would be
consistent with the provisions of Public Law 104-204, easy to
administer, and less subject to gaming would be to base the
allocation on the veteran population in each VISN, with adjustments
based on the numbers of veterans in each of the priority categories
for enrollment in the VA health care system.  To lessen the incentive
for VISNs to target enrollment toward younger, healthier veterans
with private insurance, separate rates could be established for
various categories of veterans, on the basis of VA's historical cost
and utilization data.  We are currently developing data to more fully
explore this option. 

VA recognizes that VERA is not a perfect system and is continuing to
explore options for improving its resource allocation methods.  For
example, VA, like GAO, is developing data to more fully explore the
potential effects of population-based allocations.  It plans,
however, to go forward with allocations using VERA through fiscal
year 1998 in order to provide needed financial incentives for certain
VISNs to focus on efficiency improvements.  Otherwise, allocations
tied to historic budgets might delay needed efficiency improvements
until another allocation method could be developed. 


--------------------
\3 VA Health Care:  How Distance From VA Facilities Affects Veterans'
Use of VA Services (GAO/HEHS-96-31, Dec.  20, 1995). 

\4 Veterans' Health Care:  Use of VA Services by Medicare-Eligible
Veterans (GAO/HEHS-95-13, Oct.  24, 1994). 


      VA CONTINUES TO IMPLEMENT
      ITS DECISION SUPPORT SYSTEM
      BUT CONCERNS CONTINUE
-------------------------------------------------------- Chapter 0:2.3

Without accurate and complete cost and utilization data, VA managers
cannot effectively decide when to contract for services rather than
provide them directly, how to set prices for services it sells to
other providers, or how to bill insurers for care provided to
privately insured veterans.  Accurate utilization data are also
essential to help ensure quality and to prevent abuse. 

Since February 1994, VA has been phasing in at its facilities a new
Decision Support System (DSS) that uses commercially available
software to help provide managers data on patterns of care and
patient outcomes as well as their resource and cost implications. 
While DSS has the potential to significantly improve VA's ability to
manage its health care operations, the ultimate usefulness of the
system will depend not on the software but on the completeness and
accuracy of the data going into the system.  If DSS is not able to
provide reliable information, VA facilities and VISNs will either
continue to make decisions on the basis of unreliable information or
spend valuable time and resources developing their own data systems. 

Two years ago, we recommended that VA identify data that are needed
to support decision-making and ensure that these data are complete,
accurate, consistent, and reconciled monthly.\5 VA plans to begin
implementing DSS at the final group of VA facilities this month.  VA
still, however, has not adequately focused on improving the
completeness and reliability of data entered into the feeder systems. 
It has, however, started to reconcile DSS data on a monthly basis. 

Although the draft business/strategic plans developed by the 22 VISNs
generally discuss goals and timetables for implementing DSS
throughout the network, they identify no plans for improving the
completeness and accuracy of the data feeding into DSS. 


--------------------
\5 VA Health Care Delivery:  Top Management Leadership Critical to
Success of Decision Support System (GAO/AIMD-95-182, Sept.  29,
1995). 


   THE VA HEALTH CARE SYSTEM
   CONTINUES TO FACE MAJOR
   CHALLENGES
---------------------------------------------------------- Chapter 0:3

In our testimony 2 years ago, we focused on four major challenges
facing VA because of a rapidly changing health care marketplace. 
Specifically, VA was faced with

  -- unequal access to health care services because of complex VA
     eligibility requirements, limited outpatient facilities, and
     uneven distribution of resources;

  -- a continuing decline in the number of hospital patients that
     threatened the economic viability of its hospitals;

  -- unmet needs, including the acute care needs of uninsured
     veterans not living close to a VA hospital, and the needs of
     special care populations such as those who are blind, paralyzed,
     or suffering from post traumatic stress disorder; and

  -- the growing long-term care needs of an aging veteran population. 

Significant progress has been made in addressing the first
challenge--improving veterans' access to VA outpatient care.  The
remaining challenges, however, remain largely unchanged.  In fact,
VA's progress in improving the efficiency of its hospitals has
accelerated the decline in hospital workload, heightening the need to
address the future of VA hospitals.  In addition, VA's plans to
attract new users focus primarily on attracting insured and
higher-income veterans with other health care options rather than on
addressing the unmet needs of veterans with service-connected
conditions and low-income veterans. 


      PROGRESS HAS BEEN MADE IN
      IMPROVING ACCESS TO
      OUTPATIENT CARE
-------------------------------------------------------- Chapter 0:3.1

The first major challenge facing VA health care 2 years ago was the
uneven access to health care caused by complex VA eligibility
requirements, limited outpatient facilities, and uneven distribution
of resources.  We noted at the time that veterans' ability to obtain
needed health care services from VA frequently depended on where they
lived and the VA facility that served them. 

During the past 2 years, much progress has been made in improving
veterans' access to care. 

  -- Eligibility for VA health care was expanded, eliminating the
     hard-to-administer "obviate the need for hospitalization"
     provision that limited most veterans' access to routine
     outpatient care.  All veterans are now eligible for
     comprehensive inpatient and outpatient care subject to the
     availability of resources. 

  -- VA established community-based outpatient clinics (CBOC) to
     improve veterans' access to outpatient care.  Until 1995, VA
     required its hospitals to meet rigid criteria to establish
     outpatient clinics apart from the hospitals.  These criteria
     included a minimum number of veterans to be served in a clinic
     and a minimum distance that clinics had to be from the VA
     hospitals.  In encouraging its hospitals to consider
     establishing CBOCs, previously known as "access points," VA
     eliminated many of its restrictions concerning the workload and
     location of proposed clinics.  In addition, VA policy now
     encourages hospitals to provide care not only in VA-operated
     facilities, but also by contracting with other providers. 
     Although only 12 CBOCs were operational by September 1996, plans
     had been developed to establish hundreds of additional clinics. 

  -- VA's contracting authority was revised to make it easier for VA
     to buy services from private providers and to sell services to
     the private sector.  Previously, VA's authority was restricted
     primarily to purchasing services from and selling services to
     other government health care facilities and VA's medical school
     affiliates.  Using its expanded contracting authority, VA is
     moving quickly to establish additional CBOCs. 


      EFFICIENCY IMPROVEMENTS
      ACCELERATE DECLINE IN
      HOSPITAL USE
-------------------------------------------------------- Chapter 0:3.2

The second major challenge facing VA health care 2 years ago was the
declining use of VA hospitals.  Between 1969 and 1994, the average
daily workload in VA hospitals declined by about 56 percent.  VA
reduced its operating beds by about 50 percent, closing or converting
to other uses about 50,000 hospital beds. 

VA now finds itself increasingly a victim of its own success and
faced with what to do with so much unused inpatient infrastructure. 
As VA's efforts to increase the efficiency of its health care system
gained momentum during the past 2 years, the decline in VA hospital
use accelerated.  Between fiscal years 1994 and 1996, the average
daily workload in VA hospitals dropped over 20 percent (from 39,953
patients in 1994 to 31,679 in 1996).  Operating beds dropped from
53,093 in 1994 to 45,798 in 1996. 

Hospital use in the VA system varies dramatically.  Last year, we
reported that the Northern California Health Care System, a part of
VISN 21, was supporting the hospital care needs of its users with
about 2 beds per 1,000 users.\6 Some VISNs, however, have over 20
hospital beds per 1,000 veteran-users.  As a result, further
significant declines in operating beds are likely as the variation in
hospital use is reduced.  For example, VISN 5 (Baltimore) estimates
that its acute hospital beds will have decreased by 58 percent by
fiscal year 2002 (from 1,087 in fiscal year 1995 to 460 in 2002). 

Recent VA actions to establish preadmission reviews for all scheduled
hospital admissions and continuing stay reviews for those
admitted--actions we have advocated for over 10 years--should further
reduce hospital use.  VA may not realize the full potential from
these reviews, however, unless physicians' incentives to minimize
inappropriate inpatient care are increased.  VISN 5 (Baltimore), for
example, uses its reviews primarily for data collection, evaluation,
and monitoring.  The program does not act as a gatekeeper, and
inpatient care is not denied on the basis of results of the
preadmission reviews.  Reviews at the VISN 5 hospitals in
Martinsburg, West Virginia, and Washington, D.C., show that over 50
percent of patients admitted since the program was initiated did not
need acute hospital care. 

As workload continues to decline at VA hospitals, VA's investment in
its hospital infrastructure increasingly detracts from its ability to
shift resources to other needs, such as expanding access for veterans
living long distances from VA facilities. 


--------------------
\6 VA Health Care:  Travis Construction Project Is Not Justified
(GAO/HEHS-96-198, Sept.  3, 1996). 


      VETERANS MORE LIKELY TO HAVE
      UNMET NEEDS FOR SPECIALIZED
      CARE SERVICES THAN ACUTE
      CARE SERVICES
-------------------------------------------------------- Chapter 0:3.3

The third major challenge that faced VA health care 2 years ago was
identifying and addressing the unmet health care needs of veterans. 
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
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 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. 

While the cost of care may have prevented 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 9 to 11 million are eligible
for free 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.  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 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. 

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 cases. 

  -- 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 3,000 homeless veterans. 

  -- Public and private insurance do not provide extensive coverage
     of long-term psychiatric care.  Veterans needing such services
     must either 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. 

Legislation enacted last year that expanded VA's ability to contract
with private sector facilities and providers gives VA an opportunity
to better meet the health care needs of low-income veterans and those
with service-connected conditions who previously were unable to
obtain needed care because VA facilities were geographically
inaccessible. 

Two years ago, we suggested that the VA health care system retarget
resources used to provide care for higher-income veterans with
nonservice-connected conditions toward lower-income veterans and
those with service-connected conditions whose health care needs were
not being met.\7 VA, however, through its current legislative
proposals, appears to be focusing its marketing efforts on attracting
higher-income veterans with other health care options rather than
using its expanded contracting authority to target its available
resources toward meeting the needs of service-connected and uninsured
veterans who lack other health care options. 

Data from VA's Income Eligibility Verification System show that about
15 percent of the veterans using VA facilities who have no
service-connected disabilities have incomes of $20,000 or more.  VA
could use the resources spent to provide services to such
higher-income nonservice-connected veterans to strengthen its ability
to fulfill its safety net mission.  For example, the resources could
be used to

  -- expand outreach to medically underserved populations, such as
     homeless veterans;

  -- expand programs that address special care needs; or

  -- contract for hospital and other service for lower-income,
     uninsured veterans who do not live near VA facilities. 

Our review of the draft strategic plans developed by the 22 VISNs,
however, found little mention of plans to conduct outreach to
veterans with limited health care options or special care needs.  Nor
did these plans specifically address expanding services for
low-income uninsured veterans. 

The establishment of additional community-based outpatient clinics
will address the unmet needs of some uninsured veterans.  Most of the
resources spent on CBOCs, however, will likely be spent on veterans
who have other health care options.  This reduces the resources
available to provide services to uninsured veterans. 

The legislative proposals contained in VA's fiscal year 1998 budget
request would target veterans with other health care options.  VA
claims that it will be able to cut its per-user costs by 30 percent
only if it is given funds to expand the number of veterans it serves
by 20 percent and allowed to keep all of the funds it recovers from
private health insurance and Medicare.  The new users VA anticipates
attracting either have private health insurance or are higher-income
Medicare beneficiaries.  The proposal to allow VA to keep all medical
care cost recoveries could create strong financial incentives for VA
to market its services to veterans who have no service-connected
disabilities as well as private insurance. 

Similarly, VA is seeking authority to bill and retain recoveries from
Medicare for services provided to higher-income Medicare-eligible
veterans.  Like recoveries from private health insurance, such
Medicare subvention would create incentives for VA to market services
to higher-income veterans with both Medicare and Medigap coverage
rather than to lower-income Medicare-eligible veterans. 

VA's proposals create the potential for its receiving duplicate
payments for services provided to privately insured and
Medicare-eligible veterans.  In other words, unless changes are made
in how VA develops its budget request, it would receive both an
appropriation to cover its costs of providing services to privately
insured and higher-income Medicare-eligible veterans and payments
from insurers and Medicare to cover those same costs. 

Although the 22 VISNs' draft strategic plans discuss efforts to
increase market share and attract new users, few plans contain any
mention of targeting marketing efforts to veterans potentially having
the greatest need for VA services--veterans with service-connected
disabilities and those with low incomes and no health insurance. 


--------------------
\7 VA Health Care:  Retargeting Needed to Better Meet Veterans'
Changing Needs (GAO/HEHS-95-39, Apr.  21, 1995). 


      LONG-TERM CARE NEEDS OF AN
      AGING POPULATION
-------------------------------------------------------- Chapter 0:3.4

As the nation's large World War II and Korean War veteran populations
age, their health care needs are increasingly shifting from acute
hospital care toward nursing home and other long-term care services. 
But 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 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. 

About a third of veterans are 65 years old or older, with the fastest
growing group of veterans being those 85 years old or older.  This
older group raises particular concerns because the need for nursing
home and other long-term care services increases with the age of the
beneficiary population.  Over 50 percent of those over 85 years of
age are in need of nursing home care, compared with about 13 percent
of those 65 to 69 years old. 


   VBA FACES MULTIPLE CHALLENGES
---------------------------------------------------------- Chapter 0:4

VBA also faces several important challenges in administering VA
compensation and pension programs.  Specifically,

  -- the disability rating schedule has not been updated for over 45
     years and no longer reflects the lost earning potential
     resulting from some disabilities;

  -- VA, like other federal agencies, could be unable to issue
     compensation and pension checks at the beginning of the year
     2000 unless it is able to reprogram its computers to recognize
     the next century;

  -- veterans frequently wait over 2 years for resolution of
     disability compensation and pension claims; and

  -- hundreds of millions of dollars in overpayments of compensation
     and pension benefits are made because VBA does not focus on
     prevention. 


      UPDATING THE DISABILITY
      RATING SCHEDULE
-------------------------------------------------------- Chapter 0:4.1

VA's disability program is required by law to compensate veterans for
the average loss in earning capacity in civilian occupations that
results from injuries or conditions incurred or aggravated during
military service.  These injuries or conditions are referred to as
"service-connected" disabilities.  Veterans with such disabilities
are entitled to monthly cash benefits under this program even if they
are working and regardless of the amount they earn. 

In fiscal year 1995, VA paid about $11.3 billion to approximately 2.2
million veterans who were on VA's disability rolls at that time. 
Over the past 50 years, the number of veterans on the disability
rolls has remained fairly constant. 

The amount of compensation veterans with service-connected conditions
receive is based on the "percentage evaluation," commonly called the
disability rating, that VA assigns to these conditions.  VA uses its
"Schedule for Rating Disabilities" to determine which rating to
assign to a veteran's particular condition.  VA is required by law to
readjust the schedule periodically on the basis of "experience."

Since the 1945 version of the schedule was developed, questions have
been raised on a number of occasions about the basis for these
disability ratings and whether they reflect veterans' current loss in
earning capacity.  Although the ratings in the schedule have not
changed substantially since 1945, dramatic changes have occurred in
the labor market and in society.  VA has done little since 1945 to
help ensure that disability ratings correspond to disabled veterans'
average loss in earning capacity.  Basing disability ratings at least
in part on judgments of loss in functional capacity would help to
ensure that veterans are compensated to an extent commensurate with
their economic losses and that compensation funds are distributed
equitably. 


      ADDRESSING THE YEAR 2000
      COMPUTER PROBLEM
-------------------------------------------------------- Chapter 0:4.2

VA, like other federal agencies, faces serious problems with its
computer systems that will occur in the year 2000.  This year, we
added the "year 2000 computer problem" to our list of "high-risk"
federal management areas.\8 Unless agency computers are reprogrammed,
the year 2000 will be interpreted as 1900.  This could create a major
problem for VA, beginning in January 2000, with its monthly
processing of over 3 million disability compensation and pension
checks, totaling about $1.5 billion, to veterans and their survivors. 
Unless the "year 2000" problem is corrected, VA's computer system for
processing these checks will either produce inaccurate checks, or
produce no checks at all.  VA would then have to process the checks
manually, causing severe delays to veterans and survivors in
receiving their benefits. 

VA needs to move quickly to (1) inventory its mission-critical
systems; (2) develop conversion strategies and plans; and (3)
dedicate sufficient resources to conversion, and adequate testing, of
computer systems before January 1, 2000.  We recently published draft
guidance for agencies to use in planning, managing, and evaluating
their efforts to deal with this problem.\9 We are currently reviewing
VBA's efforts to deal with the "year 2000" problem and plan to report
to the Chairman, Subcommittee on Oversight and Investigations, House
Committee on Veterans' Affairs, this spring. 


--------------------
\8 1997 High-Risk Series:  Information Management and Technology
(GAO/HR-97-9, Feb.  1997). 

\9 Year 2000 Computing Crisis:  An Assessment Guide
(GAO/AIMD-10.1.14, Exposure Draft, Feb.  1997). 


      IMPROVING CLAIMS PROCESSING
      FOR COMPENSATION AND PENSION
      BENEFITS
-------------------------------------------------------- Chapter 0:4.3

Slow claims processing and poor service to customers have long been
recognized as critical concerns for VA.  As early as 1990, VA began
encouraging regional offices to develop and implement improvements in
their claims processing systems; but instead of decreasing,
processing times and backlogs increased.  At the end of fiscal year
1994, almost 500,000 claims were waiting for a VA decision.  About
65,000 of these claims were initial disability compensation claims. 
On average, veterans waited over 7 months for their initial
disability claims to be decided; if veterans appealed these
decisions, they could wait well over 2 years for a final decision. 

In 1995, we reported that VA needed better assessments to guide its
claims processing improvements.\10 We stated that VA had not
developed adequate evaluation plans to allow it to judge the relative
merit of its various initiatives.  Without such information, VA will
not have a sound basis for determining what additional changes, if
any, should be made and for guiding future improvement efforts.  In
addition, VA did not have a formal mechanism to disseminate
information about the content and effectiveness of various regional
office initiatives to allow other regional offices to learn from the
experiences. 

VA is proposing a redesign of its claims processing system that would
incorporate several initiatives.  VA has conducted a business process
reengineering effort on its compensation and pension claims
processing system.  VA has also established claims processing goals
that include completing original compensation claims within 53 days
by eliminating unnecessary tasks, reducing the number of hand-offs
involved in the process, making information technology changes, and
providing additional training for rating specialists.  However, it is
unclear at this time how successful these initiatives will be, how
they will be evaluated, and how regional offices' experiences will be
shared.  VBA officials told us that the claims backlog has been
reduced from 500,000 to about 326,000 as a result of VBA's actions. 


--------------------
\10 Veterans' Benefits:  Better Assessments Needed to Guide Claims
Processing Improvements (GAO/HEHS-95-25, Jan.  13, 1995). 


      PREVENTING OVERPAYMENTS
-------------------------------------------------------- Chapter 0:4.4

Despite its responsibility to ensure accurate benefit payments, VA
continues to overpay veterans and their survivors hundreds of
millions of dollars in compensation and pension benefits each year. 
For example, at the end of 1996, VA's outstanding overpayments
exceeded $500 million. 

VA has the capability to prevent millions of dollars in overpayments
but has not done so because it has not focused on prevention.  For
example, we reported in April 1995 that VA did not use available
information, such as when beneficiaries will become eligible for
Social Security benefits, to prevent related overpayments from
occurring.\11 Furthermore, VA did not systematically collect,
analyze, and use information on the specific causes of overpayments
that would help it target preventive efforts. 

VA has taken actions in response to our 1995 report, but some actions
have not been completed.  For example, VA has installed programming
changes that will identify beneficiaries who will soon become
eligible for Social Security benefits.  However, it has not completed
its analysis of other causes of overpayments nor developed strategies
for targeting additional preventive efforts. 


--------------------
\11 Veterans' Benefits:  VA Can Prevent Millions in Compensation and
Pension Overpayments (GAO/HEHS-95-88, Apr.  28, 1995). 


   VA IS RESPONDING TO RECENT
   LEGISLATIVE MANAGEMENT REFORM
   REQUIREMENTS
---------------------------------------------------------- Chapter 0:5

The Congress, through recent legislation, established a framework to
help federal agencies (1) improve their ability to address
long-standing management challenges and (2) meet the need for
accurate and reliable information for executive branch and
congressional decision-making.  This framework includes

  -- GPRA, which is designed to improve federal agencies' performance
     by requiring them to focus on their missions and goals, and on
     the results they provide to their customers--for veterans and
     their families;

  -- the CFO Act of 1990, as amended by the Government Management
     Reform Act, designed to improve the timeliness, reliability,
     usefulness, and consistency of financial information in federal
     agencies; and

  -- the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act of
     1996, which are intended to improve agencies' ability to use
     information technology to support their missions and improve
     performance. 

VA has begun to implement these acts, which can help it (1) develop
fully integrated information about its mission and strategic
priorities, (2) develop and maintain performance data to evaluate
achievement of its goals, (3) develop accurate and audited financial
information about the costs of achieving VA's results-oriented
mission, and (4) improve the relationship of information technology
to the achievement of performance goals. 


      IMPROVING MISSION
      PERFORMANCE AND RESULTS
-------------------------------------------------------- Chapter 0:5.1

GPRA requires that agencies consult with the Congress and other
stakeholders to clearly define their missions.  It also requires that
they establish long-term strategic goals, as well as annual goals
linked to them.  They must then measure their performance against the
goals they have set and report publicly on how well they are doing. 
In addition to ongoing performance monitoring, agencies are expected
to identify performance gaps in their programs, and to use
information obtained from these analyses to improve the programs.\12
Under GPRA, VA and other federal agencies must complete strategic
plans by September 30, 1997. 

While VA has not yet completed its GPRA strategic plan, its fiscal
year 1998 budget submission to the Congress includes some of the
elements of the GPRA planning process.  The budget submissions for
both of VA's largest components--VHA and VBA--included strategic
planning documents.  Both the VHA and VBA plans included overall
mission statements; identification of customers and stakeholders;
program goals and objectives; and performance measures related to the
goals and objectives. 

VHA's strategic plan, as stated in its fiscal year 1998 budget
submission, is based on five goals developed in March 1996 by the
Under Secretary for Health.\13

VHA then attached objectives and performance measures to each goal. 
For the first goal--"Provide Excellence in Healthcare Value"--VHA
stated three objectives:  (1) deliver the best health care outcomes
at the lowest cost to the largest number of eligible veterans, (2)
change VHA from a hospital-based to an ambulatory-based system, and
(3) establish primary care as the central focus of patient treatment. 
To measure progress toward achieving VHA's goals, it proposed eight
performance measures.  For the second objective, for example, VHA
plans to increase the percentage of appropriate surgical and invasive
diagnostic procedures performed on an ambulatory basis from 52
percent in fiscal year 1996 to 65 percent in fiscal year 1998. 

VBA's strategic planning process began in July 1995, with definitions
of its mission, goals, and core performance measures.  As stated in
the fiscal year 1998 budget submission, VBA's mission is to "provide
benefits and services to veterans and their families in a responsive,
timely and compassionate manner in recognition of their service to
the nation." To accomplish this mission, VBA has set out four goals: 
(1) improve responsiveness to customer needs and expectations, (2)
improve service delivery and benefit claims processing, (3) ensure
the best value for the available taxpayers' dollar, and (4) ensure a
satisfying and rewarding work environment.  The plan is then broken
down by VBA's major program areas.  For example, the Compensation and
Pension program area has performance indicators to measure progress
in meeting VBA's goal of improving service delivery and benefit
claims processing by

  -- reducing the processing time for original compensation and
     pension claims from 144 days in fiscal year 1996 to 53 days in
     fiscal year 2002 and

  -- raising the accuracy rate for original compensation claims from
     90 percent in fiscal year 1996 to 97 percent in fiscal year
     2002. 

We are currently reviewing VA and other agencies' initial
implementation of GPRA.  As required under the legislation, we will
report by June 1, 1997, on GPRA implementation and the prospects for
governmentwide compliance. 

We would be happy to assist the Congress in reviewing draft and final
VA submissions under GPRA, including strategic plans, performance
plans, performance reports, evaluations, and related VA performance
information. 


--------------------
\12 Executive Guide:  Effectively Implementing the Government
Performance and Results Act (GAO/GGD-96-118, June 1996) and Managing
for Results:  Using GPRA to Assist Congressional and Executive Branch
Decisionmaking (GAO/T-GGD-97-43, Feb.  12, 1997). 

\13 Under Secretary for Health, VA, Prescription for Change
(Washington, D.C.:  VA, Mar.  1996). 


      IMPROVING FINANCIAL
      MANAGEMENT AND
      ACCOUNTABILITY
-------------------------------------------------------- Chapter 0:5.2

The CFO Act was designed to remedy decades of serious neglect in
federal financial management and accountability by establishing a
financial management leadership structure and requirements for
long-range planning, audited financial statements, and strengthened
accountability reporting.  The act created CFO positions and a
financial management structure at each of the major agencies.  The
CFO Act, as expanded in 1994, requires VA, as well as other major
agencies, to prepare annual financial statements, beginning with
those for fiscal year 1996. 

VA has established a sound financial management structure; in
addition to the Assistant Secretary for Management, who serves as
CFO, VHA and VBA each has a CFO.  Also, VHA plans to have a CFO
position in each of its 22 VISNs.  VA met the requirement to prepare,
and have audited, annual financial statements beginning with those
for fiscal year 1986. 

VA's response to the CFO Act has led to a number of financial
management improvements, including

  -- the installation of VA's Financial Management System, which
     gives VA, for the first time, an integrated financial management
     system;

  -- improvements in reporting of receivables and property
     management, due to the implementation of the financial
     management system, that resulted in the first issuance by a VA
     Inspector General of an unqualified opinion on VA's Statement of
     Financial Position on September 30, 1996;\14 and

  -- the consolidation of debt collection activities at VBA's Debt
     Management Center in St.  Paul, Minnesota, to take full
     advantage of debt management tools. 

The Inspector General's audit of VA's fiscal year 1996 financial
statement disclosed six internal control weaknesses that expose VA to
significant financial risks: 

  -- errors in accounting for property, plant, and equipment, which
     could result in a future qualification of opinion if not
     corrected;

  -- errors by medical facilities in recording estimated amounts of
     unbilled services and in estimating uncollectible amounts;

  -- failure to cancel approximately $69 million in open obligations
     that should have been cancelled before the end of the fiscal
     year--funds that could have been reprogrammed and used for other
     valid needs if they had been identified before the
     appropriations expired;

  -- an outdated data processing system for VA's life insurance
     programs that has the potential to adversely affect the complete
     and accurate processing of insurance transactions and the
     integrity of the financial information generated by the system;

  -- insufficient VA management emphasis on, and oversight of, VA
     data processing facilities to ensure that data processing
     systems are protected from unauthorized access and modification
     of data; and

  -- lack of an integrated financial accounting system for VA's
     Housing Credit Assistance Program which, when coupled with the
     complexities of accounting requirements under credit reform,
     increases the risk of financial reporting error. 


--------------------
\14 Office of Inspector General, VA, Audit of Department of Veterans
Affairs Consolidated Financial Statements for Fiscal Years 1996 and
1995, 7AF-G10-051 (Washington, D.C.:  VA, Feb.  25, 1997). 


      IMPROVING INFORMATION
      MANAGEMENT AND THE USE OF
      INFORMATION TECHNOLOGY
-------------------------------------------------------- Chapter 0:5.3

The Paperwork Reduction Act of 1995 provides basic guidance to
federal agencies on acquiring and managing information resources.  It
is based on the concept that information resources should support
agency missions and performance.  It requires that information
resources management plans delineate the resources that are needed
and explain how the agency plans to minimize the paperwork burden on
the public and the cost to the government of collecting information. 
The Clinger-Cohen Act of 1996 reinforces this guidance, and adds
requirements designed to promote the use of information technology to
better support agencies' missions and performance.  It is primarily
concerned with the need to ensure that agencies have systems to
prioritize information technology investments.  Clinger-Cohen also
requires that a qualified senior-level chief information officer be
appointed to guide all major information resource management
activities.  Both acts require agencies to set goals, measure
performance, and report on progress in improving the efficiency and
effectiveness of information management in general, and the
acquisition and use of information technology in particular. 

VA has made efforts to improve its information management systems,
including the appointment of the Assistant Secretary for Management
as VA's Chief Information Officer.  The Clinger-Cohen Act requires,
however, that information resources management be the primary
function of an agency's chief information officer.  This is not the
case in VA, because the Assistant Secretary for Management is not
only VA's Chief Information Officer, but is also responsible for its
Offices of Financial Management, Budget and Acquisition, and Materiel
Management.  The Office of Management and Budget (OMB) has questioned
whether information management is the "primary function" of the
Assistant Secretary for Management, and whether VA is in compliance
with the Clinger-Cohen Act.  In August 1996, OMB asked VA to
reevaluate the placement of its chief information officer function
and report within a year on how it will come into compliance with the
Clinger-Cohen requirement. 

VBA's information technology efforts have yielded some improvements
in its hardware and software capabilities.  However, our reviews of
information management in VBA have identified problems that need to
be addressed.  One is the need for VBA to develop credible strategic
business and information resources management plans.\15

VBA has undertaken several initiatives to improve claims processing
efficiency and reduce its large backlog of unprocessed claims.  But
it has done so without an overall business strategy clearly setting
forth how it would achieve its goals.  Instead, VBA has used stopgap
measures to deal with its claims processing problems.  While these
measures have improved processing times and reduced the claims
backlog, VA needs to find other solutions. 

Another challenge for VBA is to do a better job of managing its
information technology development projects as investments.  Our
reviews of VBA's information technology initiatives show that VBA
lacks the critical cost, benefit, and risk information to determine
whether investments it is considering are worthwhile.\16 The next
step would be to determine what it needs to meet its information
resource management priorities.  VBA needs to develop the tools
needed to follow a three-phased management approach for selecting,
controlling, and evaluating information technology-related projects. 
It also needs to develop a process to rank and prioritize information
technology investments as a consolidated portfolio. 

A third challenge for VBA is to improve its software development
capability.  Once agencies have identified their top priority
information technology projects, they must be able to determine
whether the project should be developed in-house or contracted out. 
Our review of VBA's software development capabilities found that, on
a scale of software development maturity, VBA was in the "least
mature" category.\17

Thus, VBA cannot reliably develop and maintain high-quality software
within existing cost and schedule constraints.  This, in turn, places
VBA's information technology modernization efforts at significant
risk.  We made several recommendations to address this issue.  These
recommendations and VA's responses follow: 

  -- Obtain expert advice on developing high-quality software.  VBA
     is working with the Air Force, under an interagency agreement,
     to implement this recommendation. 

  -- Develop a plan to achieve a higher level of software development
     maturity.  VBA has developed such a plan and has taken other
     actions to improve software development maturity. 

  -- Require that future software development contracts specify that
     services be obtained from contractors with at least a level 2
     (on a scale of 1 to 5, with 5 being the highest level) rating. 
     According to VBA, it plans to award a general software contract
     with a provision regarding the necessary software development
     skills. 


--------------------
\15 Veterans Benefits Modernization:  Management and Technical
Weaknesses Must Be Overcome if Modernization Is to Succeed
(GAO/T-AIMD-96-103, June 19, 1996). 

\16 VBA Information Technology Investment (GAO/AIMD-97-10R, Oct.  18,
1996). 

\17 Software Capability Evaluation:  VA's Software Development
Process Is Immature (GAO/AIMD-96-90, June 19, 1996). 


   OPTIONS FOR REDUCING THE BUDGET
   DEFICIT THROUGH CHANGES IN VA
   PROGRAMS AND BENEFITS
---------------------------------------------------------- Chapter 0:6

We periodically report to the Congress on options for reducing the
budget deficit.  Our latest report, issued March 14, 1997, identified
a series of potential changes in veterans' benefits and VA programs
that could contribute many billions of dollars toward deficit
reduction over the next 5 years.\18 Some of the options involve
management improvements that could be achieved by the agency. 
Others, however, would require fundamental policy changes in
veterans' benefits, including changes in entitlement programs. 


--------------------
\18 Addressing the Deficit:  Budgetary Implications of Selected GAO
Work for Fiscal Year 1998 (GAO/OCG-97-2, Mar.  14, 1997). 


      ELIMINATE VETERANS'
      DISABILITY COMPENSATION FOR
      NONSERVICE-CONNECTED
      DISEASES
-------------------------------------------------------- Chapter 0:6.1

During 1996, VA paid approximately $1.7 billion in disability
compensation payments to veterans with diseases neither caused nor
aggravated by military service.  In 1996, the Congressional Budget
Office (CBO) reported that about 230,000 veterans were receiving
about $1.1 billion annually in VA compensation for these diseases. 
Other countries we contacted do not compensate veterans under such
circumstances.  If disability compensation payments to veterans with
nonservice-connected, disease-related disabilities were eliminated in
future cases, 5-year savings could, CBO estimated, exceed $400
million. 


      ELIMINATE CERTAIN VA
      CONTRACTS WITH STATE
      APPROVING AGENCIES
-------------------------------------------------------- Chapter 0:6.2

In fiscal year 1994, VA spent more than $1 billion in educational
assistance benefits to more than 450,000 beneficiaries.  In addition,
it spent over $12 million on contracts with state approving agencies
to assess whether schools and training programs offer education of
sufficient quality for veterans to receive VA education assistance
benefits when attending them.  An estimated $10.5 million of the $12
million paid to state approving agencies was spent to conduct
assessments that overlapped assessments performed by the Department
of Education.  CBO estimated that at least $50 million could be saved
over the next 5 years if the Congress directed VA to discontinue
contracting with state approving agencies to review and approve
educational programs at schools that have already been reviewed and
certified by Education. 


      IMPOSE COST SHARING FOR
      VETERANS' LONG-TERM CARE
      SERVICES
-------------------------------------------------------- Chapter 0:6.3

State veterans' homes recover as much as 50 percent of the costs of
operating their facilities through charges to veterans receiving
services.  Similarly, Oregon recovers about 14 percent of the costs
of nursing home care provided under its Medicaid program through
estate recoveries.  In fiscal year 1990, VA recovered less than
one-tenth of 1 percent of its costs for providing nursing home care
through beneficiary copayments. 

Potential recoveries appear to be greater within the VA system than
under Medicaid.  Home ownership is significantly higher among VA
hospital users than among Medicaid recipients, and veterans living in
VA nursing homes generally contribute less toward the cost of their
care than do Medicaid recipients, allowing veterans to build larger
estates. 

If the Congress authorized VA to increase cost sharing for VA nursing
home care by adopting cost sharing requirements similar to those
imposed by most state veterans' homes and implementing an estate
recovery program similar to those operated by many states under their
Medicaid programs, billions of dollars could be saved through the
increased revenues.  For example, if VA recovered 25 percent of its
costs of providing nursing home care through a combination of cost
sharing and estate recoveries, it would save about $3.4 billion over
the next 5 years. 


      ESTABLISH INDEPENDENT
      PREADMISSION CERTIFICATION
-------------------------------------------------------- Chapter 0:6.4

VA hospitals too often admit patients whose care could be more
efficiently provided in alternative settings, such as outpatient
clinics or nursing homes.  Our studies and those of VA researchers
and the VA Inspector General have found that over 40 percent of VA
hospital admissions and days of care were not medically necessary. 

Private health insurers generally require their policyholders (or
their physicians) to obtain authorization from them or their agent
prior to admission to a hospital.  Failure to obtain such
preadmission certification can result in denial of insurance coverage
or a reduction in payment. 

We have recommended that VA establish an independent preadmission
certification program.\19 Although VA, in September 1996, required
its VISNs to establish a preadmission review program, the review
programs are run by the hospitals rather than by external reviewers
and do not provide any direct financial incentive for facilities to
adhere to the decisions of their reviewers.  While the preadmission
reviews are likely to have some effect on inappropriate admissions,
they may not be effective unless coupled with a financial penalty for
noncompliance with review findings. 

CBO estimated that if VA were to establish precertification
procedures similar to those used by private health insurers which,
result in a 40-percent reduction in admissions and days of care, VA's
medical care spending could be reduced by $8.4 billion over 5 years. 


--------------------
\19 VA Health Care:  Opportunities for Service Delivery Efficiencies
Within Existing Resources (GAO/HEHS-96-121, July 25, 1996). 


      DELAY FUNDING OF VETERANS'
      MEDICAL FACILITIES
-------------------------------------------------------- Chapter 0:6.5

Historically, VA has submitted a budget request for hundreds of
millions of dollars in major health care construction projects.  The
requests have typically included construction or renovation of one or
more hospitals. 

Long-term commitments for any major construction or renovation of
predominantly inpatient facilities in today's rapidly changing health
care environment are accompanied by high levels of financial risk. 
VA's recent commitment to a major realignment of its health care
system magnifies such risk by creating additional uncertainty.  In
addition, we believe that analyzing alternatives to major
construction projects is entirely consistent with VA's suggested
realignment criteria.  Delaying funding for major construction
projects until the alternatives can be fully analyzed may result in
more prudent and economical use of already scarce federal resources. 

The potential savings of delaying funding for VA hospital
construction are uncertain in the absence of an assessment of VA's
needs based on its own realignment criteria.  CBO estimates that if
the Congress did not approve funding of any major construction
projects until after VA has completed its realignment, savings
totaling more than $1.2 billion could be achieved over 5 years. 

VA's fiscal year 1998 budget submission and its recent decision not
to pursue construction of a new VA hospital in East Central Florida
are consistent with this option.  VA is seeking only $48 million for
major medical construction for fiscal year 1998. 


      CLOSE UNDERUSED HOSPITALS
-------------------------------------------------------- Chapter 0:6.6

Although VA took over 50,000 hospital beds out of service between
1970 and 1995, it did not close any hospitals on the basis of
declining utilization.  With the declining veteran population, new
technologies, and VA's efforts to improve the efficiency of its
health care system, significant further declines in demand for VA
hospital care are likely. 

While closing wards saves some money by reducing staffing costs, the
cost per patient treated rises because the fixed costs of facility
operation are distributed among fewer patients.  At some point,
closing a hospital and providing care either through another VA
hospital or through contracts with community hospitals may become
less costly than simply taking beds out of service. 

Potential savings from hospital closures are difficult to estimate
because of uncertainties about which facilities would be closed, the
increased costs that would be incurred in providing care through
other VA hospitals or contracts with community hospitals, and the
disposition of the closed facilities. 


      LIMIT GROWTH OF VA MEDICAL
      CARE ACCOUNT
-------------------------------------------------------- Chapter 0:6.7

As discussed earlier, the VA health care system should be able to
significantly contribute to deficit reduction during the next 5
years.  First, the system does not need to expend the level of
resources that VA has previously estimated to meet the health care
needs of veterans.  These resources are overstated because VA did not
adequately consider the declining demand for VA hospital care in
estimating its resource needs and because eligibility for VA care has
been reformed--which, according to VA, will allow it to divert 20
percent of its hospital admissions to less costly outpatient
settings.  Second, VA could reduce its operating costs by billions of
dollars over the next 5 years by completing a wide range of
efficiency actions.  VA recognizes that it can reduce its costs per
user by 30 percent over the next 5 years but plans to use the savings
to expand its market share by 20 percent. 

We recently recommended that VA provide the Congress information on
the savings achieved through improved efficiency in support of its
budget request.  We noted that providing the Congress with
information on factors, such as inflation and creation of new
programs, which increase resource needs, without providing
information on changes that could reduce or offset those needs leaves
the Congress with little basis for determining appropriate funding
levels.  VA, however, has been unwilling to provide such information
to the Congress. 

One way for the Congress to respond to VA's unwillingness to provide
information on savings from improved efficiency would be to limit the
VA medical care appropriation at the fiscal year 1997 level for the
next 5 years.  CBO estimates that this would result in almost $9
billion in savings. 


      LIMIT ENROLLMENT IN VA
      HEALTH CARE SYSTEM
-------------------------------------------------------- Chapter 0:6.8

Recently enacted legislation expands eligibility for VA health
benefits to make all veterans eligible for comprehensive inpatient
and outpatient services, subject to the availability of resources. 
The legislation also requires VA to establish a system of enrollment
for VA health care benefits and establishes enrollment priorities to
be applied, within appropriated resources.  The lowest priority for
enrollment is veterans with no service-connected disabilities and
high enough incomes to place them in the discretionary care category. 

VA, however, does not currently provide the Congress enough
information on the types of veterans it serves to enable the Congress
to make informed judgments about which portion of VA's proposed
workload to fund.  We found that about 15 percent of veterans with no
service-connected disabilities who use VA medical centers have
sufficiently high incomes to place them in the lowest priority
category under the new patient enrollment system.  If the Congress
funded the VA health care system to cover only the expected
enrollment of veterans in higher priority enrollment categories, such
as veterans with service-connected disabilities and veterans without
the means to obtain public or private insurance to meet their basic
health care needs, CBO estimates that $1.7 billion in budget
authority, adjusted for inflation, could be saved over 5 years. 


      REDUCE OUTPATIENT PHARMACY
      COSTS
-------------------------------------------------------- Chapter 0:6.9

VA pharmacies dispense to veterans over 2,000 types of medications
and medical supplies that are available over-the-counter (OTC)
through local retail outlets.  Such products were dispensed more than
15 million times in 1995 at an estimated cost of $165 million.  The
most frequently dispensed items include aspirin, dietary supplements,
and alcohol prep pads. 

Unlike VA, other public and private health programs cover few, if
any, OTC products for their beneficiaries.  Our assessment of VA's
operating practices suggests several ways that budget savings could
be achieved.  First, VA could more narrowly define when to provide
OTC products, reducing the number of OTC products available to
veterans on an outpatient basis.  Second, VA could collect copayments
for all OTC products.  CBO estimated that these steps could save over
$350 million over the next 5 years. 


      EXTEND EXPIRING AUTHORITIES
------------------------------------------------------- Chapter 0:6.10

Legislation initially enacted in 1990 gave VA access to Internal
Revenue Service tax data and Social Security Administration earnings
records to help VA verify incomes reported by beneficiaries.  Since
then, millions of dollars in savings have been achieved in VA's
health and pension programs as a result of VA's income verification
program. 

Authority for the program will, however, expire on September 30,
1998.  Extending the authority could generate over $115 million in
savings between fiscal years 1999 and 2002. 


   CONCLUSION
---------------------------------------------------------- Chapter 0:7

VA is using the management framework created by recent legislation in
major restructuring of its health and benefits programs.  Both VHA
and VBA have developed strategic plans.  Those plans, and progress
toward meeting the goals contained in them, are included in VA's
fiscal year 1998 budget submission.  Similarly, VA is a leader in
attempting to develop sound financial management, having prepared
audited financial statements for over 10 years.  However, VA has not
fully complied with recent legislation in the area of information
management, and it is working with OMB to resolve differences with
respect to its compliance with the Paperwork Reduction Act and the
Clinger-Cohen Act. 

VA's progress in strengthening its management should help it address
the multiple challenges facing its health and benefits programs. 
Under the leadership of the Under Secretary for Health, the VA health
care system has made significant progress during the past 2 years in
improving both its efficiency and its image.  In addition, actions to
expand eligibility, make it easier for VA to buy services from and
sell services to the private sector, improve access, and reduce
waiting times place VA in a better position to compete with private
sector providers for declining numbers of veterans. 

VA and the Congress, however, are faced with difficult choices. 

  -- Should VA hospitals be opened to veterans' dependents or other
     nonveterans as a way of increasing efficiency and preserving the
     system?  What effect would such decisions have on private sector
     hospitals? 

  -- To what extent should the government attempt to capture market
     share from private sector providers?  Should the government
     subsidize its facilities in order to capture market share? 

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

  -- Should VA remain primarily a direct provider of veterans' health
     care or become a virtual health care system in which it
     contracts with private sector providers rather than operating
     its own facilities? 

  -- To what extent should the VA system address the unmet needs of
     uninsured veterans and those with service-connected
     disabilities? 

Decisions regarding these and other questions will have far-reaching
effects on veterans, taxpayers, veterans facilities and the VA
employees working in them, and private providers. 

Because of the historic inefficiency of the VA system, the changes
currently taking place provide many opportunities for the VA health
care system to contribute toward deficit reduction while still
improving services to current users.  Limiting the system to current
users, however, could facilitate declines in hospital use and lead
ultimately to closure of VA hospitals. 

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 hospitals open.  VA's fiscal year 1998 budget
submission outlines its strategy for preserving its hospitals:  it
wants to increase its users by 20 percent in order to make more
efficient use of existing VA facilities.  The new users VA is
targeting generally have other health care options available to them. 

The cost of maintaining VA's direct delivery infrastructure limits
VA's ability to ensure similarly situated veterans equal access to VA
health care.  VA's interest in providing services to veterans in the
discretionary care category at VA hospitals and outpatient clinics is
likely to limit its ability to provide services to low-income and
service-connected veterans through the use of contract care. 


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

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

CONTRIBUTORS

For more information on this testimony, call Jim Linz, Assistant
Director, at (202) 512-7110.  Greg Whitney also contributed to this
statement. 


RELATED GAO PRODUCTS
=========================================================== Appendix 1

VETERANS' HEALTH CARE ISSUES

VA Health Care:  Improving Veterans' Access Poses Financial and
Mission-Related Challenges (GAO/HEHS-97-7, Oct.  25, 1996). 

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

VA Health Care:  Challenges for the Future (GAO/T-HEHS-96-172, June
27, 1996). 

Veterans' Health Care:  Facilities' Resource Allocations Could Be
More Equitable (GAO/HEHS-96-48, Feb.  7, 1996). 

VETERANS' BENEFITS ISSUES

Vocational Rehabilitation:  VA Continues to Place Few Disabled
Veterans in Jobs (GAO/HEHS-96-155, Sept.  3, 1996). 

Veterans' Benefits:  Effective Interaction Needed Within VA to
Address Appeals Backlog (GAO/HEHS-95-190, Sept.  27, 1995). 

Veterans' Benefits:  VA Can Prevent Millions in Compensation and
Pension Overpayments (GAO/HEHS-95-88, Apr.  28, 1995). 

Veterans' Benefits:  Better Assessments Needed to Guide Claims
Processing Improvements (GAO/HEHS-95-25, Jan.  13, 1995). 

MANAGEMENT ISSUES

Managing for Results:  Using GPRA to Assist Congressional and
Executive Branch Decisionmaking (GAO/T-GGD-97-43, Feb.  12, 1997). 

1997 High-Risk Series:  Information Management and Technology
(GAO/HR-97-9, Feb.  1997). 

Information Technology Management:  Agencies Can Improve Performance,
Reduce Costs, and Minimize Risks (GAO/AIMD-96-64, Sept.  30, 1996). 

Executive Guide:  Effectively Implementing the Government Performance
and Results Act (GAO/GGD-96-118, June 1996). 


*** End of document. ***