Veterans' Health Care: Challenges Facing VA's Evolving Role in Serving
Veterans (Testimony, 06/17/98, GAO/T-HEHS-98-194).

Pursuant to a congressional request, GAO discussed the future health
care role of the Department of Veterans Affairs (VA), focusing on: (1)
how VA's system transformation is progressing and what challenges VA
faces as its role evolves; and (2) the relationship between VA's health
care role and that of other public and private health benefits programs,
including the effects changes in those programs could have on VA health
care.

GAO noted that: (1) VA has made progress in transforming its health care
system to compete more effectively with health care providers in order
to become veterans' provider of choice; (2) these initiatives have
enabled VA to avoid over $1 billion in unnecessary expenses--savings
that have provided critical financing needed to further improve the
system's overall accessibility and quality of care; (3) in addition, the
networks are planning to develop and implement additional efficiency
initiatives over the next 5 years; (4) but VA faces several challenges
before completing its transformation; (5) of these, VA's decisions
concerning existing infrastructure may be the most significant and
contentious; (6) VA continues to serve veterans in other locations,
using aged and deteriorating buildings that will require billions of
additional dollars to renovate or replace; (7) VA's decisions to
consolidate inpatient medical care at fewer locations are complicated by
such challenges as VA's longstanding relationships with universities'
medical schools for education and research, and with the Department of
Defense for contingency medical support; (8) in GAO's view, VA's future
success in fulfilling its health care role, as envisioned by recent
eligibility reforms, depends in large part on its ability to transform
its current delivery infrastructure into an integrated system of VA and
private sector providers, which may be more attractive to new users,
especially those already insured, who could provide VA with an
additional source of revenue; (9) VA's strategy also suggests that it
will ultimately purchase much more health care from private sector
providers than it does now and deliver care using its existing
infrastructure only in those geographic areas where a private sector
alternative is not reasonably available or where VA is the acknowledged
leader; (10) VA's success also will depend on its ability to overcome
several management and implementation challenges; (11) if, as some have
suggested, VA's competitive role is expanded to include not only the
current veteran population but also veterans' spouses and dependents,
the challenges facing VA will be even greater; (12) it is essential that
VA address these infrastructure and other management challenges; (13) if
VA is ultimately unable to overcome these challenges, it is conceivable
that VA could have to limit enrollment among lower-income veterans; and
(14) this could include those with the greatest need, because they have
no other health care alternatives.

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

 REPORTNUM:  T-HEHS-98-194
     TITLE:  Veterans' Health Care: Challenges Facing VA's Evolving Role 
             in Serving Veterans
      DATE:  06/17/98
   SUBJECT:  Health care cost control
             Eligibility criteria
             Health care programs
             Health care planning
             Health care services
             Federal agency reorganization
             Veterans hospitals
             Veterans benefits
             Health services administration
IDENTIFIER:  National Disaster Medical System
             DOD TRICARE Program
             
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Cover
================================================================ COVER


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

For Release on Delivery
Expected at 10:00 a.m.
Wednesday, June 17, 1998

VETERANS' HEALTH CARE - CHALLENGES
FACING VA'S EVOLVING ROLE IN
SERVING VETERANS

Statement of Stephen P.  Backhus, Director
Veterans' Affairs and Military Health Care Issues
Health, Education, and Human Services Division

GAO/T-HEHS-98-194

GAO/HEHS-98-194T


(406154)


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

  DOD - Department of Defense
  VA - Department of Veterans Affairs

VETERANS' HEALTH CARE:  CHALLENGES
FACING VA'S EVOLVING ROLE IN
SERVING VETERANS
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss the future health care
role of the Department of Veterans Affairs (VA).  VA operates one of
our nation's largest health care systems, including 400 service
delivery locations and 183,000 employees.  This year, VA will serve
about 2.9 million of the nation's 26 million veterans, at a cost of
$19 billion. 

The United States has a long tradition of providing health care to
veterans injured in military service.  Over the last 75 years,
however, this health care role has evolved from rehabilitating
disabled wartime veterans to also providing a health care safety net
for peacetime veterans.  Today VA is positioning itself as a
competitive health care alternative for all veterans.  More
specifically, 3 years ago, VA began to transform its health care
system, in response to market changes and budgetary pressures, to
make it more competitive with other health care providers.  To aid
this transformation, the Congress provided new revenue sources and
reformed veterans' eligibility for care and VA's ability to purchase
services from other providers. 

My comments this morning will focus on how VA's system transformation
is progressing and what challenges VA faces as its role evolves.  The
information we are providing is based on a series of studies we
conducted over the past several years to identify ways to improve the
efficiency and effectiveness of VA's health care system.  We have
also examined the relationships between VA's health care role and
that of other public and private health benefits programs, including
the effects changes in those programs could have on VA health care. 
During the course of our work, we visited dozens of VA medical
facilities, spoke with hundreds of administrative and medical staff,
and spoke with many veterans and veterans service organizations. 
(See Related GAO Products listed at the end of this statement.)

In summary, VA has made progress in transforming its health care
system to compete more effectively with other health care providers
in order to become veterans' provider of choice.  For example, VA has
created 22 service delivery networks, which have made hundreds of
restructuring decisions, including consolidating administrative and
clinical services, shifting care from inpatient to outpatient or
residential settings, and purchasing care from other providers. 
These initiatives have enabled VA to avoid over $1 billion in
unnecessary expenses--savings that have provided critical financing
needed to further improve the system's overall accessibility and
quality of care.  In addition, the networks are planning to develop
and implement additional efficiency initiatives over the next 5
years. 

But VA faces several challenges before completing its transformation. 
Of these, VA's decisions concerning existing infrastructure may be
the most significant and contentious.  For example, VA has spent
hundreds of millions of dollars over the last decade constructing and
renovating inpatient capacity.  Some of this capacity is no longer
needed because of its decreasing reliance on inpatient services. 
Meanwhile, VA continues to serve veterans in other locations, using
aged and deteriorating buildings that will require billions of
additional dollars to renovate or replace.  VA's decisions to
consolidate inpatient medical care at fewer locations are complicated
by such challenges as VA's long-standing relationships with
universities' medical schools for education and research, and with
the Department of Defense (DOD) for contingency medical support. 

In our view, VA's future success in fulfilling its health care role,
as envisioned by recent eligibility reforms, depends in large part on
its ability to transform its current delivery infrastructure into an
integrated system of VA and private sector providers, which may be
more attractive to new users, especially those already insured, who
could provide VA with an additional source of revenue.  VA's strategy
also suggests that it will ultimately purchase much more health care
from private sector providers than it does now and deliver care using
its existing infrastructure only in those geographic areas where a
private sector alternative is not reasonably available or where VA is
the acknowledged leader. 

VA's success also will depend on its ability to overcome several
management and implementation challenges.  These challenges include
designing an enrollment system, establishing new provider networks,
developing and awarding potentially complex health care service
contracts, improving collections from other health insurance that
veterans and others have, and developing systems sufficient to
capture critical cost, access, and quality information for managing
and evaluating system performance.  If, as some have suggested, VA's
competitive role is expanded to include not only the current veteran
population but also veterans' spouses and dependents, the challenges
facing VA will be even greater.  For example, VA would have to either
provide or arrange care for populations and medical conditions that
it has little experience dealing with, such as pediatric or maternity
care. 

It is essential that VA address these infrastructure and other
management challenges.  If VA is ultimately unable to overcome these
challenges, it is conceivable that VA could have to limit enrollment
among lower-income veterans.\1 This could include those with the
greatest need, because they have no other health care alternatives. 


--------------------
\1 Lower-income veterans are those whose incomes fall below a
statutory threshold, for example, a veteran with no dependents with
an income less than $21,611.  Income thresholds are higher for
veterans with dependents. 


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

At end of the first world war, the federal role of providing health
care to veterans was to treat war-related injuries and help
rehabilitate veterans with service-connected disabilities.  Over
time, VA became a national leader in rehabilitative medicine,
including treatment of the lingering effects of war-related injuries. 
Today, of the 2.2 million veterans who have service-connected
disabilities, less than half--about 1 million--use VA's health care
system. 

VA's federal role was expanded in 1924 to include a safety net
function partly because of declining use by veterans with
service-connected disabilities and limited public and private
insurance coverage available to veterans with lower incomes.  VA
provided hospital care for the nonservice-connected conditions of
wartime veterans who lacked the resources to pay for their care.  In
1973, this safety net function was expanded to include hospital care
for peacetime veterans unable to defray the cost of care.  Today, an
estimated 7 million veterans have lower incomes, including about 1.4
million who use VA's system. 

In 1986, the federal role expanded once again to offer a competitive
health care alternative for higher-income veterans.  These veterans,
however, are required to make copayments for their health care, which
over time has come to include a comprehensive array of inpatient and
outpatient services to address veterans' overall health care needs. 
VA currently serves approximately 140,000 of approximately 16 million
higher-income veterans. 

Overall, VA serves 10 percent of the total veteran population of 26
million, with the other 90 percent receiving their health care
through private or employer health plans or other public programs. 
The nation's veteran population is expected to decline significantly
in the future.  VA estimates that the veteran population will drop to
16 million in 2020. 

VA's health care system has grown from 54 locations to about 400
locations as its role evolved.  By 1990, VA operated over 150 medical
centers that may have included one or more hospitals, nursing homes,
domiciliaries, and outpatient clinics.  VA also operated numerous
freestanding outpatient facilities, including some that provide
primary and specialty care and others that provide primary care only. 

In the early 1990s, VA recognized that its system was not adequately
responding to a changing health care market, which was implementing
managed care principles to avoid unnecessary inpatient services and
emphasizing primary care.  VA began to shift its focus from primarily
inpatient hospital care to outpatient care in order to provide a more
flexible, accessible, and efficient delivery of health care to
veterans.  In 1995, VA accelerated this transformation by realigning
its facilities into 22 service delivery networks and empowering these
networks to restructure the delivery of services of its medical
centers. 

This year, VA expects to receive over $19 billion from several
sources to operate its health care system.  About $18 billion
represents appropriated funds for medical care, construction,
administration, education, and research.  VA also estimates that it
will receive over $680 million from third-party insurance and earn
over $100 million from the sale of excess services such as
lithotripsy or CT scans to beneficiaries of DOD, medical school
hospitals, or other providers. 


   VA'S ONGOING SYSTEMWIDE
   TRANSFORMATION
---------------------------------------------------------- Chapter 0:2

VA has made progress in transforming its health care delivery system
away from its previous focus on inpatient care to an emphasis on
outpatient care.  VA's networks have implemented hundreds of
restructuring initiatives involving acute-care medicine.  For
example, networks have integrated the management of 46 facilities in
22 locations, consolidating clinical and administrative services
within or among hospitals.  As a result of these and other changes,
over a 4-year span VA reduced its hospital admissions by 23 percent,
eliminated almost 18,000 operating beds, and reduced staffing by over
16,000 employees systemwide. 

At the same time, VA has used savings from its efficiencies to
finance improvements in veterans' access to and quality of care.  For
example, VA served an additional 80,000 veterans last year, opened or
plans to open nearly 200 new community-based clinics, and created
about 1,000 primary care teams.  In addition, VA's indicators suggest
that quality of care is improving overall, as indicated by a rise in
the quality rating of ambulatory services and a drop in the number of
problems reported by veterans. 

VA's service delivery networks have also significantly transformed
the delivery of long-term care, including nursing home and
psychiatric care.  For example, VA evaluates and stabilizes nursing
home patients and, when appropriate, transitions them to community
environments, including their own homes.  Similarly, VA is shifting
much of its psychiatric care from inpatient to residential settings. 
As a result, some VA facilities have significantly reduced the
average length of stay of long-term-care patients. 


   CHALLENGES VA FACES AS ITS ROLE
   EVOLVES
---------------------------------------------------------- Chapter 0:3

With its transformation to a more competitive health care system, VA
faces difficult decisions concerning its existing infrastructure, as
well as other management and implementation challenges.  How well VA
deals with these challenges will in large part determine how
successful it will be in maintaining or increasing the number of
veterans served. 


      VA'S INFRASTRUCTURE DILEMMA
      AND OPTIONS
-------------------------------------------------------- Chapter 0:3.1

Of primary importance is VA's decision about its medical centers that
encompass the largest number of buildings in its system.  The
condition of these buildings varies greatly.  Some buildings have
been recently constructed or renovated, some require major
renovation, and others are no longer needed.  Ironically, some of the
hospitals, which VA has recently spent millions of dollars to
construct or renovate, are underutilized, while many other hospitals
need expensive renovations in order to serve veterans in a manner
comparable to private sector providers.  In deciding what to do with
its infrastructure, VA faces a fundamental question:  Are the
interests of veterans better served by repairing and maintaining the
infrastructure through which care is provided or by spending these
resources directly on patient care? 

VA has several options for addressing this dilemma:  These include
but are not limited to (1) continuing to renovate hospitals if they
will be used for another 20 years or more, (2) replacing hospitals
with more efficient outpatient clinics, (3) consolidating facilities,
(4) negotiating enhanced-use leases, or (5) disposing of or selling
unneeded facilities. 

VA has implemented such options in a limited number of locations. 
For example, VA closed hospitals in Sepulveda and Martinez,
California, and replaced them with modern, full-service outpatient
clinics that perform ambulatory surgeries as well as provide primary
and specialty care.  Despite initial misgivings, veterans now seem
satisfied with this change.  In Long Beach, VA has proposed to
renovate excess inpatient space in one building in order to transfer
clinical and administrative services from an older, deteriorated
building and then demolish that building, thereby saving maintenance
and future renovation costs. 

At most locations, however, VA appears reluctant to aggressively
address this infrastructure dilemma--to the detriment of veterans. 
For example, in Chicago, where VA has four major hospitals, we
recommended that VA close one and meet veterans' needs using the
other three.  VA has chosen instead to have a consultant study the
issue further.  As a result, VA is forgoing (1) savings of about $20
million per year in maintenance and operating costs and (2) better
services for veterans by not closing one of the four hospitals.  VA
appears to be experiencing a similar situation with hospitals in
several other locations, such as Boston. 


      CHALLENGES COMPLICATING
      INFRASTRUCTURE DECISIONS
-------------------------------------------------------- Chapter 0:3.2

VA's decisions regarding its infrastructure are complicated by
several other challenges, including ongoing transformations of VA's
affiliations with medical schools, medical research activities, and
DOD medical contingency activities. 

Since 1946, 130 VA facilities have affiliated with 105 medical
schools to provide educational opportunities for 55,000 individuals
and research or employment opportunities for over 3,000 faculty and
others.  Currently, most VA facilities are affiliated with a single
nearby medical school, making it easy for residents, students,
faculty, and researchers to fulfill their obligations at both
locations.  VA's inpatient population provides an important focus for
educational and research activities. 

VA's transformation of its care from an inpatient to an outpatient
focus along with its consolidation of such services in fewer
hospitals is causing VA and medical schools to rethink their
affiliation arrangements.  It seems inevitable that a medical school
will need to share inpatient educational and research opportunities
with other schools at a single VA facility.  Medical schools,
however, seem reluctant to share at this time, which constrains VA's
ability to effectively address its infrastructure dilemma. 

Since 1982, VA has served as the primary medical system backup to DOD
during war and to other federal organizations such as the Federal
Emergency Management Agency and the National Disaster Medical System
during national emergencies.  During this time, however, DOD and
others have made limited use of VA facilities.  Currently, VA has
agreed to make about 28 percent of its operating beds available to
DOD within 72 hours of notification.  As with the medical school
affiliations, VA's transformation is also causing VA and DOD to
rethink their medical contingency arrangements, which they plan to do
in earnest in the near future.  Continuing a predominately bed-based
(as opposed to a specialty-based) approach to fulfilling the
contingency requirement may contribute to VA's infrastructure
dilemma. 


      MANY MANAGEMENT CHALLENGES
      LIE AHEAD
-------------------------------------------------------- Chapter 0:3.3

While VA has made progress to date in transforming its health care
system, it still faces a number of difficult management challenges
critical to its success in competing for increased market share. 
These include (1) designing a strategy, including marketing
materials, for informing veterans of VA's newly transformed system,
(2) establishing a system for enrolling new users, and (3) creating
integrated networks of VA and non-VA providers to serve veterans. 

Of these, VA's efforts to create integrated networks on a large scale
appear especially challenging.  These challenges include (1) deciding
when, where, and what health care services to purchase; (2)
developing contract specifications for health care purchases that
include not only the types of care to be provided but also
administrative requirements such as periodic reporting, utilization
management, eligibility verification, and care coordination with VA's
direct care providers; and (3) administering contracts and monitoring
contractor performance. 

In addition, our past work has also highlighted significant
shortfalls in other areas, which VA is currently addressing.  These
include improving its system to recover from veterans' other health
insurance plans and developing systems sufficient to capture critical
cost, access, and quality information for managing and evaluating
system performance. 

It remains to be seen whether VA has the resident technical expertise
necessary to design, build, and manage such sweeping reforms.  Our
evaluations and observations of DOD's experience in implementing its
nationwide managed health care program, TRICARE, suggest that a
significant amount of the planning, implementation, management, and
evaluation tasks that VA still faces will need to be contracted out. 
In many respects, VA's management and oversight role will be
transformed just as its provision of health care is being
transformed. 

As difficult as VA's currently envisioned transformation will be, the
challenges will be even greater if, as some have suggested, VA's
patient base is expanded to further enhance its competitiveness by
including veterans' spouses and dependents and active duty military
members and their spouses and dependents.  Not only would the
challenges associated with VA's current efforts be compounded by
potentially doubling the number of eligible beneficiaries, but
additional challenges would be created, such as having to either
provide or arrange for care for populations and services that VA has
little or no experience serving, like pediatric or maternity care. 

Expanding VA's competitive role may also pose significant risks to
veterans and other health care providers.  For example, veterans'
access may be adversely affected if VA cannot provide care to
nonveteran enrollees within the revenues earned or if VA must shift
appropriated funds from patient care to renovating or maintaining
infrastructure needed to serve a significantly expanded patient
workload.  Other providers, including DOD, could also be adversely
affected if VA continues to deliver care directly because new
customers for VA mean fewer customers for other providers, resulting
in lost revenues that could jeopardize their financial viability. 


   CONCLUDING OBSERVATIONS
---------------------------------------------------------- Chapter 0:4

In conclusion, Mr.  Chairman, while we are encouraged by VA's
progress to date and support its efforts, we realize that many
uncertainties remain as to how successful VA will ultimately be in
addressing its infrastructure and other management challenges.  It
seems certain, however, that veterans and others will be best served
by resolving these challenges sooner rather than later. 


-------------------------------------------------------- Chapter 0:4.1

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


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

VA Hospitals:  Issues and Challenges for the Future (GAO/HEHS-98-32,
Apr.  30, 1998). 

VA Health Care:  Closing a Chicago Hospital Would Save Millions and
Enhance Access to Services (GAO/HEHS-98-64, Apr.  16, 1998). 

VA Health Care:  Status of Efforts to Improve Efficiency and Access
(GAO/HEHS-98-48, Feb.  6, 1998). 

VA Medical Care:  Increasing Recoveries From Private Health Insurers
Will Prove Difficult (GAO/HEHS-98-4, Oct.  17, 1997). 

Department of Veterans Affairs:  Programmatic and Management
Challenges Facing the Department (GAO/T-HEHS-97-97, Mar.  18, 1997). 

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

VA Health Care:  Issues Affecting Eligibility Reform Efforts
(GAO/HEHS-96-160, Sept.  11, 1996). 

Veterans' Health Care:  Challenges for the Future (GAO/T-HEHS-96-172,
June 27, 1996). 

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

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

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

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

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


*** End of document. ***