Veterans' Affairs: Progress and Challenges in Transforming Health Care
(Statement/Record, 04/15/99, GAO/T-HEHS-99-109).

Pursuant to a congressional request, GAO discussed the challenges facing
the Department of Veterans Affairs (VA) in transforming health care,
focusing on: (1) VA's transformation progress to date; (2) challenges
that remain to be confronted; and (3) the implications for VA's fiscal
year (FY) 2000 budget.

GAO noted that: (1) VA's transformation continues to make significant
progress; (2) over the last 3 years, VA has enhanced benefits and served
400,000 additional veterans, while realizing a non-appropriated revenue
surplus of $496 million that remains available for future use; (3) this
was accomplished primarily because VA's management initiatives reduced
operating costs by over $1 billion; (4) the most notable initiatives
involved shifting veterans' care to appropriate settings and
reengineering administrative and clinical processes; (5) this year,
however, GAO's work shows that VA's transformation appears to be losing
momentum; (6) VA, for example, has prolonged decisions concerning much
needed restructuring of aged capital assets, including hospital
closures, which could result in unnecessary expenditures of billions of
dollars over the next several years; (7) VA's transformation cannot be
successfully completed until these and other critical challenges are
adequately addressed; (8) in GAO's view, VA's FY 2000 budget is based on
the unduly optimistic expectation that its ongoing transformation will
generate needed efficiencies of $1.4 billion in savings; (9) VA assumes
that employment reductions in FY 2000 will be more than 3 times greater
than expected FY 1999 reductions; (10) VA has not taken the underlying
management actions--such as aggressively addressing all potential
facility integrations and service consolidations--that appear necessary
to make a three-fold reduction possible; (11) if VA had made such
difficult decisions earlier, it might not need to realize this level of
savings; (12) moreover, VA may ultimately need to use less desirable
management actions, including large-scale employee furloughs, to operate
within its proposed budget; (13) such actions could adversely affect all
veterans' quality of care, especially waiting times; and (14) VA could
avoid such undesirable outcomes for higher priority veterans if, as
Congress intended, VA uses its new enrollment process to manage access
to VA health care services within available resources.

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

 REPORTNUM:  T-HEHS-99-109
     TITLE:  Veterans' Affairs: Progress and Challenges in Transforming
	     Health Care
      DATE:  04/15/99
   SUBJECT:  Veterans benefits
	     Reductions in force
	     Health care cost control
	     Health services administration
	     Veterans hospitals
	     Presidential budgets
	     Federal downsizing
	     Federal agency reorganization
	     Health resources utilization
IDENTIFIER:  VA Medical Care Collections Fund
	     VA Capital Asset Fund
	     VA Medical Education Program
	     Medicare Trust Fund

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Cover
================================================================ COVER

Before the Subcommittee on VA, HUD, and Independent Agencies,
Committee on Appropriations, United States Senate

For Release on Delivery
Expected at 9:30 a.m.
Thursday, April 15, 1999

VETERANS' AFFAIRS - PROGRESS AND
CHALLENGES IN TRANSFORMING HEALTH
CARE

Statement for the Record by Stephen P.  Backhus, Director
Veterans' Affairs and Military Health Care Issues
Health, Education, and Human Services Division

GAO/T-HEHS-99-109

GAO/HEHS-99-109T

(406165)

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

  VA - Department of Veterans Affairs

VETERANS' AFFAIRS:  PROGRESS AND
CHALLENGES IN TRANSFORMING HEALTH
CARE
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to contribute this statement for the record for the
Subcommittee's deliberations on the fiscal year 2000 budget request
for the Department of Veterans Affairs' (VA) health care system.  In
this request, VA is seeking a funding level of $18.4 billion to serve
3.65 million veterans. 

Between its establishment in 1946 and 1995, VA's health care system
grew into our nation's largest direct provider of health care,
serving veterans at over 600 locations nationwide.  These included
181 locations where VA owned over 4,700 buildings and 18,000 acres of
land.  VA's system focused primarily on hospital care, using high
technology and medical specialization. 

VA's system, however, did not keep pace with such societal and
industry changes as: 

  -- a market-based restructuring of American healthcare, including
     the rise of managed care;

  -- a rapid growth in scientific and medical knowledge available to
     treat illnesses and injuries; and

  -- an overall aging of the veteran population, including declining
     numbers of potential system users and evolving medical needs. 

In October 1995, VA began to transform its system from a hospital
operator to a healthcare provider that relies on community-based,
integrated networks of VA and non-VA providers to meet veterans'
needs more efficiently and effectively.  In January 1997, VA proposed
a 5-year plan to operate within a fixed annual appropriation of $17
billion through fiscal year 2002.  To accomplish this, VA planned to
reduce per patient costs by 30 percent, increase patients served by
20 percent, and reduce reliance on appropriations by 10 percent. 

Since VA's transformation began, we have visited over 100 VA medical
facilities and spoken with over 500 officials, as well as many
veterans, including representatives of veteran service organizations. 
We also examined hundreds of documents, including VA's budget
submissions and studies done by VA's Office of Inspector General and
others.  Based on the insights developed during these efforts, our
statement today focuses on (1) VA's transformation progress to date,
(2) challenges that remain to be confronted, and (3) the implications
for VA's fiscal year 2000 budget.\1

In summary, VA's transformation continues to make significant
progress.  Over the last 3 years, VA has enhanced benefits and served
500,000 additional veterans, while realizing a nonappropriated
revenue surplus of $496 million that remains available for future
use.  This was accomplished primarily because VA's management
initiatives reduced operating costs by almost $1 billion.  The most
notable initiatives involved shifting veterans' care to appropriate
settings and reengineering administrative and clinical processes. 

This year, however, our work shows that VA's transformation appears
to be losing momentum.  VA, for example, has prolonged decisions
concerning much needed restructuring of aged capital assets,
including hospital closures, which could result in unnecessary
expenditures of billions of dollars over the next several years. 
VA's transformation cannot be successfully completed until these and
other critical challenges are adequately addressed. 

In our view, VA's fiscal year 2000 budget is based on the unduly
optimistic expectation that its ongoing transformation will generate
needed efficiencies of $1.4 billion in savings.  VA assumes, for
example, that employment reductions in fiscal year 2000 will be more
than 3 times greater than expected fiscal year 1999 reductions.  VA
has not taken the underlying management actionsï¿½such as aggressively
addressing all potential facility integrations and service
consolidationsï¿½that appear necessary to make a threefold reduction
possible.  If VA had made such difficult decisions earlier, it might
not need to realize this level of savings.  Moreover, VA may
ultimately need to use less desirable management actions, including
large-scale employee furloughs, to operate within its proposed
budget.  Such actions could adversely affect all veterans' quality of
care, especially waiting times.  VA could avoid such undesirable
outcomes for higher priority veterans if, as the Congress intended,
VA uses its new enrollment process to manage access to VA health care
services within available resources. 

--------------------
\1 For 1996 and 1997 hearings of this subcommittee, we provided
assessments of VA's transformation progress.  See VA Health Care: 
Opportunities to Increase Efficiency and Reduce Resource Needs
(GAO/T-HEHS-96-99, Mar.  8, 1996) and VA Health Care:  Assessment of
VA's Fiscal Year 1998 Budget Proposal (GAO/T-HEHS-97-121, May 1,
1997). 

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

VA's health care system currently touches the lives of 15 percent of
our nation's 25 million veterans.  The rest rely on private
insurance, other public programs, or their own resources to finance
their health care needs. 

VA uses hundreds of delivery locations to provide services such as
primary care, specialized medical care, mental health, geriatrics,
and extended care.  In addition, VA supports medical education and
research through its affiliation with 107 medical schools, and
provides medical backup to the Department of Defense and other
federal, state, or local agencies during national emergencies. 

VA began its transformation by creating 22 regional offices to make
basic budgetary, planning, and operating decisions for veterans
living within defined geographical areas; VA's headquarters and over
150 large hospitals made such decisions previously.  These offices
oversee between 5 and 11 large hospitals, as well as many clinics or
other delivery locations. 

The primary focus of VA's transformation is to reduce reliance on
large hospitals by developing local or regional networks that provide
a continuum of care grounded in ambulatory settings.  To encourage
this transformation, VA implemented a new resources allocation
process that bases funding decisions on user populations rather than
facilities. 

In addition, the Congress passed the Veterans Health Care Eligibility
Reform Act of 1996, which furnished tools that VA said were key to a
successful transformation and provided VA the means to develop its
5-year financial plan, including

  -- new eligibility rules which allow VA to treat veterans in the
     most appropriate setting;

  -- introduction of managed care principles, such as a uniform
     benefits package, which allows VA to provide a continuum of
     services, including preventive medicine; and

  -- an expanded ability to purchase services from private providers
     and to generate revenue by selling excess services to
     nonveterans. 

At that time, both the Congressional Budget Office and we concluded
that such reforms could generate additional demand for services,
primarily due to increased use of outpatient services.  The
Congressional Budget Office also estimated that rising utilization
would, by extension, produce dramatic cost increases, potentially
billions of dollars. 

To address such concerns, the Eligibility Reform Act also required VA
to implement a veterans' enrollment system to manage access in
relation to available resources.  It established seven priority
categories, with the highest priorities given to veterans with
service-connected disabilities. 

Each year, VA is to enroll veterans in those priority categories for
which there are sufficient resources to provide care that is timely
and acceptable in quality.  The act also requires VA to maintain
capacity for veterans with special disabilities, including treatment
for spinal cord injury, blindness, amputation, and mental illnesses. 

At VA's request, the Congress also authorized VA to retain all
collections from third parties (including recoveries from insurance
companies and certain tort claims), copayments, and per diems,
beginning July 1, 1997.  VA is to deposit these collections in a
Medical Care Collections Fund and use them to supplement
appropriations to meet veterans' health care needs.  VA may spend
these funds in the year collected or any subsequent year. 

   VA HAS TAKEN MAJOR STEPS
   FORWARD IN ITS TRANSFORMATION
---------------------------------------------------------- Chapter 0:2

As part of the transformation, VA's networks have implemented
hundreds of management initiatives that have significantly enhanced
the efficiency and effectiveness of VA's health care system.\2 For
example, during fiscal years 1996 through 1998, VA reduced inpatient
workload by 38 percent and bed days of care per 1,000 veterans by 47
percent.  This allowed over 20,000 hospital beds to be closed and
numerous administrative and clinical services to be consolidated. 

At the same time, VA used savings from its efficiencies to finance
improvements in veterans' access to, and quality of, care.  For
example, VA served an additional 500,000 veterans, in part, by
opening over 183 new community-based clinics, creating about 1,000
primary care teams, and purchasing specialty care from private
providers.  VA's performance indicators suggest that the quality of
care is improving overall.  Veterans' rating of ambulatory care
quality has risen and the reported numbers of problems have fallen. 

VA appears on track toward meeting its goals of reducing per-patient
costs, serving more veterans, and increasing nonappropriated revenue
sources by fiscal year 2002.  Compared with its fiscal year 1997
baseline, VA projected and realized the results shown in table 1 for
fiscal year 1998 (year 1 of VA's 5-year plan). 

                          Table 1
          
                     VA's 5-Year Goals

                                               VA fiscal
                     VA fiscal year 1998       yYear 2002
                  --------------------------  ------------
30-20-10
initiatives            Results          Goal          Goal
----------------  ------------  ------------  ------------
Reducing per               10%            6%           30%
 patient costs
Serving more                9%            5%           20%
 veterans
Increasing                  4%            4%           10%
 nonappropriated
 funding
----------------------------------------------------------
More importantly, VA expects to have more resources available in
fiscal year 1999 than its 5-year plan projected, as shown in table 2. 

                          Table 2
          
           Comparison of VA's Estimates of Its FY
                        1999 Budget

                                VA's 5-year
                                plan's        VA's current
                                projection    FY 1999
                                for FY 1999   estimate (1/
Funding                         (1/97)        99)
------------------------------  ------------  ------------
Appropriated                    $17.0         $17.3
                                billion       billion

Other sources                   $.9 billion   $ 1.1
                                              billion

Total                           $17.9         $18.4
                                billion       billion
----------------------------------------------------------
Because of efficiency savings, VA needed to spend, in fiscal year
1998, only $170 million of its medical care collections.  This
allowed VA to carry forward about $496 million for use in fiscal year
1999. 

VA's management initiatives that contributed to these dramatic
results include

  -- establishing primary care as the dominant delivery model;

  -- shifting medical care from inpatient to outpatient settings;

  -- consolidating administrative and clinical services; and

  -- establishing networks of VA and non-VA providers. 

--------------------
\2 VA Health Care:  Status of Efforts to Improve Efficiency and
Access (GAO/HEHS-98-48, Feb.  6, 1998). 

      ESTABLISHING PRIMARY CARE AS
      DOMINANT DELIVERY MODEL
-------------------------------------------------------- Chapter 0:2.1

VA established primary care case management to help ensure that
patients are served in the most appropriate settings and resources
are coordinated and best organized to address patients' specific
medical conditions. 

Before 1995, primary care providers managed less than 20 percent of
VA's patients.  Since then, VA has successfully oriented veterans to
the principal concept of primary care.  VA, for example, reports that
close to 80 percent of veterans responding to its annual patient
survey are aware that one provider or primary care team has
responsibility for managing their medical care.  This, in effect,
relieves high-cost specialists from day-to-day patient management
responsibilities. 

To enhance primary care access, VA has established over 1,000 primary
care teams at large medical facilities and opened over 183
community-based outpatient clinics.  These clinics provide primary
care closer to veterans' homes, especially those living in
underserved, often remote, areas.  Currently, VA has approved 272
community clinics to open in fiscal years 1999 and 2000 and expects
to open about 200 more by fiscal year 2003. 

      SHIFTING MEDICAL CARE TO
      OUTPATIENT SETTINGS
-------------------------------------------------------- Chapter 0:2.2

Advances in medical technology and practices, for example, have
afforded VA significant opportunities to shift medical care to
outpatient settings.  Because of such new technologies as laser,
endoscopic, and other less invasive surgical techniques, many
surgeries are now performed in a doctor's office or outpatient clinic
or require shorter lengths of stay when performed in hospitals. 

In addition, changes in medical practice and the development of
psychotherapeutic drugs to treat mental illness have led to fewer and
shorter hospital admissions for psychiatric patients and to the
deinstitutionalization of many long-term psychiatric patients. 

VA has implemented management initiatives to identify patients who
can be served more cost-effectively in alternatives to inpatient
settings, including treatment of many chronically and
catastrophically ill patients at home rather than in a hospital. 

Before 1996, VA had no systemwide external preadmission screening
program or other utilization review programs to ensure that patients
are treated in the most appropriate settings.  In that year, we
recommended that VA develop such programs.\3 Subsequently, VA
implemented management initiatives to

  -- review 100 percent of planned admissions to determine patients'
     appropriate level of care and

  -- perform continuing stay reviews to determine the appropriateness
     of each additional day of hospitalization. 

During fiscal years 1996 through 1998, VA's inpatient workload
declined 38 percent and bed days of care per 1,000 patients dropped
by 47 percent.  This allowed VA to close 20,000 hospital beds, a
40-percent reduction. 

This decrease in inpatient usage has been matched by major increases
in VA's outpatient care workload.  During fiscal years 1996 through
1998, VA's outpatient visits increased 19 percent.  Of note, VA
performed over 90 percent of certain surgeries, including
colonoscopies, arthroscopies, cystoscopies, breast biopsies, and
cataract surgeries on an ambulatory basis in fiscal year 1998. 

--------------------
\3 VA Health Care:  Opportunities for Service Delivery Efficiencies
Within Existing Resources (GAO/HEHS-96-121, July 25, 1996). 

      CONSOLIDATING ADMINISTRATIVE
      AND CLINICAL SERVICES
-------------------------------------------------------- Chapter 0:2.3

VA also has implemented a variety of initiatives that consolidated
duplicate or underused services.  VA, for example, integrated the
management teams of two or more large medical facilities in 24
markets; this effort involved a total of 50 facilities.  VA also
consolidated many other administrative and clinical services at these
facilities, which saved millions of dollars in unneeded operating
costs.\4

Based on our work, VA appears to have an opportunity to achieve even
more significant savings by consolidating duplicate or underused
services.  This is because VA still operates 17 large medical
facilities that compete with these newly-integrated facilities in 10
markets, as well as operating 44 large facilities in 19 other markets
that compete with each other to serve veterans. 

Recently, we recommended, and VA agreed, that veterans' needs should
be assessed in these 40 markets and steps taken to integrate,
consolidate, or close unneeded services.  This could result in
billions of dollars in additional savings over the next 5 years that
could be reinvested to improve veterans' access to high-quality
care.\5

--------------------
\4 VA Health Care:  Lessons Learned From Medical Facility
Integrations (GAO/T-HEHS-97-184, July 24, 1997). 

\5 VA Health Care:  Capital Asset Planning and Budgeting Need
Improvement (GAO/T-HEHS-99-83, Mar.  10, 1999). 

      ESTABLISHING NETWORKS OF VA
      AND NON-VA HEALTH CARE
      PROVIDERS
-------------------------------------------------------- Chapter 0:2.4

VA has implemented important initiatives to establish integrated
networks of VA and non-VA providers.  VA has made the most progress
by for in establishing new community-based clinics.  Some notable
progress, however, has been made purchasing inpatient care from
private hospitals or military facilities, as well as developing joint
ventures and sharing agreements with the Department of Defense. 

About half of VA's new community clinics operated through contracts
with non-VA providers during fiscal years 1996 through 1998.  These
clinics helped to reduce VA's costs and improve access because they
are located closer to veterans' homes.  VA expects these clinics
primarily to refer veterans to VA facilities for specialized
diagnostic procedures, treatment, or hospital admissions, although
referrals may also be made to other non-VA providers. 

In addition, some VA hospitals located in rural areas have contracted
to provide inpatient care with non-VA hospitals.  These initiatives,
according to VA, have been successful from a cost-efficiency
perspective and also have received high satisfaction scores from
veterans. 

At the close of fiscal year 1998, VA and the Department of Defense
had negotiated almost 1,000 facility-level sharing agreements
covering more than 10,000 services ranging from laundry, blood, and
laboratory services to major medical and specialty care services. 
There are also four joint ventures under way for the construction and
operation of medical facilities, with four additional agreements near
completion. 

We are currently reviewing these sharing agreements to assess the
benefits for veterans, military members, and beneficiaries, as well
as efficiency savings for VA.  Recently, the Congressional Commission
on Servicemembers and Veterans Transition Assistance reported that
opportunities exist for greater sharing and partnering between VA and
the Department of Defense.  Of note, the Commission made several
recommendations, including the development of a joint, clinically
based formulary and joint procurement of future information
technology. 

   FURTHER TRANSFORMATION PROGRESS
   WILL REQUIRE VA TO CONFRONT
   FORMIDABLE CHALLENGES
---------------------------------------------------------- Chapter 0:3

As VA's transformation proceeds through its fourth year, it now turns
to face the most onerous challenges it has encountered to date. 
These include

  -- closing unneeded hospitals,

  -- restructuring capital assets,

  -- restructuring VA's medical education role,

  -- maintaining capacity to serve special disabilities,

  -- improving resource allocations,

  -- improving revenue collections, and

  -- implementing an enrollment process. 

VA's failure to aggressively confront these challenges could result
in the unnecessary expenditure of billions of dollars over the next
several years. 

      CLOSING UNNEEDED HOSPITALS
-------------------------------------------------------- Chapter 0:3.1

The success of VA's strategies to transform its health care
system--shifting inpatient care to more appropriate settings,
establishing primary care in community clinics, and improving
efficiency through staff reductions, service consolidations, and bed
closures--has produced excess inpatient capacity at most VA
hospitals.  As VA's transformation continues, VA's need for a large
number of full-service hospitals will continue to diminish, thereby
challenging VA to make difficult decisions concerning hospital
closures. 

VA and the private sector have reacted very differently to declining
inpatient workload.  In the private sector, over 500 hospitals were
closed as health care practices were transformed.  As we have
reported, VA, instead has chosen to reduce operating beds at its
hospitals or shift services such as inpatient surgery among
hospitals.\6 This approach often leaves VA operating only a small
part of most hospitals' inpatient capacity. 

VA demonstrated the feasibility of closing underused hospitals when
it closed the Martinez, California, hospital because of earthquake
concerns.  VA replaced it with a modern outpatient clinic
supplemented by existing VA inpatient locations and contract care,
efficiently meeting veterans' needs in that market.  VA reports that
veterans' satisfaction with these changes is high, including
satisfaction with quality of care. 

At a March 1996 hearing before this Subcommittee, VA stated that it
would look to close additional facilities; since then, VA, in essence
has closed four hospitals by shifting inpatient care to other VA
locations or contracting with non-VA providers.  In each location, VA
continues to provide outpatient care as well as nursing home care in
three locations. 

Last year, we reported that VA could save $20 million a year and care
could be improved if veterans were served at one less location in
Chicago.\7 Veterans' benefits, for example, could be enhanced if VA
used the savings to purchase primary care closer to veterans' homes. 
In response to our recommendation, VA agreed to initiate a
market-based assessment of its health care delivery in the Chicago
market.  This market assessment is scheduled for completion soon. 

VA is to be commended for its willingness to study how it could
improve its efforts to meet veterans' needs in this market.  The
extent to which VA is committed to taking action on the basis of
study findings remains uncertain, however.  Last month, VA stated
publicly that no additional hospitals will be closed in fiscal years
1999 or 2000.  This decision seriously threatens the continued
progress of VA's health system transformation. 

--------------------
\6 VA Hospitals:  Issues and Challenges for the Future
(GAO/HEHS-98-32, Apr.  30, 1998). 

\7 VA Health Care:  Closing a Chicago Hospital Would Save Millions
and Enhance Access to Services (GAO/HEHS-98-64, Apr.  16, 1998)
reports that asset operations and maintenance costs for four VA
hospitals in Chicago generally represent about 25 to 35 percent of
the hospitals' operating budgets. 

      RESTRUCTURING CAPITAL ASSETS
-------------------------------------------------------- Chapter 0:3.2

VA's massive, aged infrastructure could be the biggest obstacle
confronting VA's ongoing transformation efforts.  VA's challenges in
this arena are twofold:  deciding how its assets should be
restructured, given the dramatic shifts in VA's delivery practices,
and determining how a restructuring can be financed in a timely
manner. 

VA spends a major part of its health care budgetï¿½about 1 out of every
4 health care dollarsï¿½to operate, maintain, and improve its
facilities, generally referred to as the costs of asset ownership. 
Without a major restructuring, billions of dollars will be used in
the operation of hundreds of unneeded VA buildings over the next few
years. 

VA's transformation has largely ignored this capital asset dilemma,
as VA's plans call for assets to continue operating over the next 5
years essentially as they do today.  Given VA's current and proposed
budgets, it seems inevitable that VA's ownership of unneeded assets
will eventually compromise veterans' health care services.  On the
other hand, restructuring its capital assets could reduce budget
pressures or generate revenues that could be used to enhance
veterans' health care benefits. 

Recently, we recommended that VA's capital asset planning should be
based on rigorous market analyses, a business tool that has produced
positive results in the private sector.\8 Such analyses include the
determination of veterans' health care needs in a market, a
comparison of life-cycle costs of asset ownership, and alternatives
analysis to enable VA to evaluate options for meeting needs in the
most cost-effective manner. 

We identified 106 markets in which VA owns 4,700 buildings and 18,000
acres of land, which it uses to operate 181 major delivery locations. 
VA has agreed to conduct market analyses in the 40 markets where
multiple VA facilities compete with each other to serve veterans (VA
operates assets at 115 locations in these markets) as well as 66
markets served by a single VA location. 

Until VA completes these market assessments, it will be challenged to
make capital investment decisions to ensure that scarce resources are
not invested in assets that VA will vacate in a few years.  Recently,
we recommended, and VA agreed, that more of its capital investment
decisionsï¿½specifically minor construction and certain nonrecurring
maintenanceï¿½should be subjected to more rigorous management review. 
Toward that end, VA plans to institute an improved investment
decision-making process that involves top managers' review and
approval, based on newly enhanced guidance and criteria for assessing
the future of the affected asset within VA's ongoing transformation. 

Once VA has developed an asset restructuring plan, it will be
challenged to finance needed investments in a timely manner.  Toward
that end, VA proposes a 5-year demonstration that would allow it to
sell, transfer, or exchange up to 30 excess or underutilized
properties, deposit proceeds into a new Capital Asset Fund, and use
the Fund to invest in more appropriate assets.  This proposal is
compelling because it would provide VA incentives to dispose of
properties no longer needed to meet veterans' needs.  VA asserts, and
we agree, that disposals are currently a cumbersome and lengthy
undertaking with limited benefits to VA, primarily because proceeds'
use is limited to improving nursing homes. 

--------------------
\8 VA Health Care:  Capital Asset Planning and Budgeting Need
Improvement (GAO/T-HEHS-99-83, Mar.  10, 1999). 

      RESTRUCTURING VA'S MEDICAL
      EDUCATION ROLE
-------------------------------------------------------- Chapter 0:3.3

Transforming VA's health care delivery system from an inpatient to an
outpatient focus, increasing reliance on primary care, and
integrating services in fewer hospitals require VA and medical
schools to restructure their affiliation arrangements. 

Since VA's medical education program began in 1946, 132 VA medical
facilities have affiliated with 107 medical schools to provide
training opportunities for medical students and residents.  These
agreements complicate VA's restructuring efforts, particularly
integrating administrative and clinical services across two or more
medical facilities. 

VA assists in the training of health professionals for its own needs
and for those of the nation through its partnerships with affiliated
academic institutions.  Each year, about 91,000 medical and other
students receive some or all of their clinical training in VA
facilities.  In fiscal year 1999, VA expects to spend $750 million
for education and training of health professionals. 

VA also assists in supporting medical research in connection with the
provision of medical care and treatment to veterans.  The affiliated
medical schools are an integral part of VA's research effort.  For
fiscal year 1999, VA expects to spend $682 million for research ($316
million from the medical and prosthetic research appropriation and
$366 million in medical support from the medical care appropriation). 

VA's successful transformation to a predominantly primary care model,
with its consequent deemphasis of inpatient, specialty, care has
direct implications on VA's education role.  As previously discussed,
VA's management initiatives have decreased inpatient usage by 38
percent and increased outpatient workload by 19 percent.  This
underscores a need to train more primary care physicians and fewer
specialty physicians. 

In light of these changes, VA established a Residency Realignment
Review Committee and a Research Realignment Advisory Committee.  In
response to these committees' recommendations, VA set a goal to more
equally divide resident training positions between specialty and
primary care by 2002; previously, about 70 percent of residents were
enrolled in specialty training and 30 percent in primary care.  In
doing this, VA plans to eliminate 250 specialty positions and shift
another 750 to primary care.  To date, VA appears on track toward
meeting its goals. 

As VA's transformation continues, its management initiatives should
increasingly involve consolidating programs to eliminate redundancy
among nearby VA facilities or the potential closing of facilities. 
This will, by necessity, increase the potential for conflict between
medical schools' best interests and veterans' best interests. 

Because VA provides a major source of medical training and research
opportunities, medical schools clearly have a vested interest in VA
hospitals staying open.  As such, it will be difficult to achieve a
proper balance between VA's primary mission--serving veterans' health
care needs--and its secondary missions--supporting education and
research.  VA must take care to prevent stakeholders, such as medical
schools, from unduly influencing the ongoing transformation of its
health care system. 

At present, medical schools have concerns about potential
consolidations of VA medical facilities.  It seems inevitable that
medical schools will need increasingly to share inpatient educational
and research opportunities at a single VA facility.  VA must work
closely with medical schools to ensure that such restructuring is
accomplished without compromising VA's efforts to improve its
efficiency and effectiveness. 

      MAINTAINING CAPACITY TO
      SERVE SPECIAL DISABILITIES
-------------------------------------------------------- Chapter 0:3.4

VA is struggling in its efforts to address congressional concerns
that it is not appropriately maintaining its level of certain
high-cost specialized services as its transformation progresses. 

The Congress required VA to ensure that its capacity to provide
specialized treatment and rehabilitative services for veterans with
certain disabling conditions is not reduced below October 1996 levels
and that veterans with these conditions have reasonable access to
care.  The Congress identified four disabling conditions requiring
specialized care:  spinal cord dysfunction, blindness, amputation,
and mental illness.  For this requirement, VA defined mental illness
to include only veterans with serious mental illness and included two
additional conditions:  traumatic brain injury and post-traumatic
stress disorder. 

VA cites a 2-percent increase in patients served as evidence that it
is maintaining capacity to serve special disabilities.  But this
aggregate measure could mask potential adverse effects experienced by
individual services and delivery locations.  VA plans to develop
outcome measures to reflect the overall capacity of its special
disability services. 

Last year, we noted that unclear service definitions and cumbersome
data systems hindered VA's development of additional outcome
measures.  As a result, it is difficult to establish a baseline for
comparison purposes, assess the accuracy of reporting at the local
level, and reconcile differences among individual facilities',
networks', and headquarters' data.\9

To date, VA has designed functional measures for seriously mentally
ill patients and patients with a primary diagnosis of substance
abuse.  VA, however, has generally not performed the program
evaluations necessary to determine whether these are the most
appropriate or sensitive measures for assessing responses to
treatment and changes in health outcomes. 

Until adequate outcome measures are available, VA continues to use
its traditional process measurements, such as number of veterans
served and resources expended, including dollars, staffing, and beds. 
These measures remain important indicators and should be continually
reviewed. 

--------------------
\9 VA Health Care:  VA's Efforts to Maintain Services for Veterans
With Special Disabilities (GAO/T-HEHS-98-220, July 23, 1998). 

      IMPROVING RESOURCE
      ALLOCATION
-------------------------------------------------------- Chapter 0:3.5

VA's new resource allocation system is improving the equity of
resource allocations among networks.  The system's promise for
achieving equitable access may not be fulfilled, however, because of
VA's inadequate oversight of how resources are allocated within
networks and historical access inequities are addressed. 

To improve equitable access to care, the Congress enacted legislation
in 1996 requiring VA to develop a plan for equitably allocating
resources to ensure that veterans with similar economic status and
eligibility priority have similar access to VA health care,
regardless of the region in which they live.  In response, VA began
implementing a new allocation process. 

Previously, VA allocated resources directly to facilities on the
basis of their budget for the previous year.  VA's new process
allocates funds to the 22 networks based on the number of veterans
each serves.  Networks, in turn, allocate resources to the facilities
in their geographic area. 

As we reported to you in September 1997, this new process is
correcting long-standing regional funding imbalances that have
impeded veterans' equitable access to services.\10 Over the last 2
years, funding has shifted from the Northeast and Midwest to the
southern and western regions where more veterans reside.  Each
network has increased the number of veterans it serves, albeit to
varying degrees, and improved current users' access to care.\11 VA's
management efficiencies were instrumental in achieving this outcome. 

VA, however, maintains that networks should not use its new process
to allocate resources to facilities and that they should, instead,
develop allocation methods appropriate to local circumstances.  Such
resource allocations are the crucial link in VA's allocation strategy
to convert resources to services. 

In spite of this enormous challenge, VA has done little to ensure
that networks achieve equitable allocations.  VA says that it has not
provided criteria for equitable allocation of resources within
networks because developing such criteria would be contrary to its
reengineering philosophy, which decentralizes authority and
accountability for these allocations to the network directors.  In
addition, VA has not adequately reviewed the equity of networks'
allocations or measured improvements in the equity of veterans'
access to care. 

Networks we analyzed have not incorporated criteria in their
allocations to improve equity in spite of historical inequities they
identified.  As a result, in spite of the considerable effort VA has
invested in its new resource allocation process, resources may not be
equitably allocated in many markets. 

Monitoring networks' progress in achieving equitable access to care
represents a significant challenge.  Today, VA does not know what
progress, if any, is being made towards equitable access to care for
our nation's veterans.  This is because VA has neither developed
indicators needed to do so nor included equity of access as a
performance goal for network managers. 

Developing and implementing such indicators will be a major challenge
both technically and in obtaining stakeholders' agreement.  Without
establishing such indicators and monitoring them, however, VA can
neither assure stakeholders that equity of veterans' access is
improving nor take corrective actions, if needed, to improve resource
allocations. 

--------------------
\10 VA Health Care:  Resource Allocation Has Improved, but Better
Oversight Is Needed (GAO/HEHS-97-178, Sept.  17, 1997). 

\11 VA Health Care:  More Veterans Are Being Served, but Better
Oversight Is Needed (GAO/HEHS-98-226, Aug.  28, 1998). 

      IMPROVING REVENUE
      COLLECTIONS
-------------------------------------------------------- Chapter 0:3.6

VA faces a major challenge increasing its medical care collections
from third parties and veterans, as well as reimbursement from
sharing agreements with the Department of Defense. 

VA's collections grew slightly between fiscal years 1997 ($520
million) and 1998 ($560 million).  VA's 1998 collections were about
94 percent of its stated goal.  For fiscal year 1999, VA set a goal
of $637.5 million.  As of March 1999, collections are averaging about
$46 million a month, which appears sufficient to meet VA's goal,
given that collections were historically higher during the last
quarters of fiscal years 1997 and 1998.  VA's fiscal year 2000 budget
sets a goal of about $762 million and VA expects collections to grow
to more than $1.2 billion by fiscal year 2004. 

VA expects such growth for three reasons.  First, VA assumes that
changing its medical care billing rates to reasonable charges for
inpatient and outpatient procedures will increase revenues.  VA,
however, has neither historical data nor experience to estimate the
effect of reasonable charges on revenues. 

Second, VA assumes that it will increase its revenues by identifying
more insured patients.  However, VA finds it very difficult to keep
this information current because veterans are not required to tell VA
if they have insurance or when changes occur in their insured status. 

Third, VA plans to improve its debt collection improvement efforts to
boost revenues.  In 1998, VA's Inspector General cited uncollected
debt as one of VA's significant management problems.  To improve
medical care debt collection, VA has efforts under way to more
aggressively pursue insurance claims, including timely appeals of
denied claims.  For example, VA is using a centralized approach to
monitor claims and is exploring ways to recover debts as an offset to
veterans' federal income tax refunds. 

Despite a large number of sharing agreements for services between VA
and the Department of Defense, several barriers are likely to inhibit
effective sharing or prevent new agreements from being reached. 
These barriers include conflicting agency guidelines, beneficiary
perceptions about sharing, and incompatible or unreliable information
systems.  VA and Defense have recently embarked on a joint initiative
to revitalize sharing efforts at the national level for certain
critical services. 

In its fiscal year 2000 budget, VA again asks the Congress to
authorize VA's reimbursement from the Medicare Trust Fund for medical
services it provides to Medicare-eligible veterans.  VA seeks this
authorization anticipating that Medicare reimbursement will become an
important source of revenue. 

If authorized, VA's efforts to realize such revenues, without
adversely affecting veterans, could pose a daunting challenge.  Since
VA initially proposed receiving Medicare reimbursements, it
implemented a new veterans' enrollment process that has significantly
increased workload.  As such, VA faces considerable uncertainty about
its capacity to target another patient population.  Doing so could
place veterans' access to care at risk if this increased workload
forces VA to choose between serving veterans who do and do not have
Medicare. 

      IMPLEMENTING AN ENROLLMENT
      PROCESS
-------------------------------------------------------- Chapter 0:3.7

VA faces a significant challenge determining how many veterans to
enroll, given the uncertainties surrounding new enrollees' medical
needs and VA's available resources. 

The Eligibility Reform Act of 1996 required VA to establish and
operate a system of annual patient enrollment to manage access to VA
health care services within available resources.  VA began testing an
enrollment process on October 1, 1997, prior to the mandated
enrollment date of October 1, 1998.  At that time, VA announced its
decision to enroll all veterans that apply during fiscal year 1999,
that is, for enrollment priorities 1 through 7.  As of December 1998,
VA enrolled about 3.9 million veterans, according to VA's budget
office. 

VA is also challenged to assess the impact of its fiscal year 1999
enrollment decision on veterans' health care delivery.  VA, for
example, lacks the baseline data needed to assess the impact of its
fiscal year 1999 enrollment decision on the timeliness of veterans'
medical care. 

During the course of our ongoing review of VA's enrollment process,
almost all of VA's network directors reported that enrollment has
increased demand for services.  About half cited a slight increase in
the waiting times to schedule both primary and specialty care
appointments.  Over one-third noted that access to care for higher
priority veterans (priority groups 1 to 4) has been adversely
affected to some extent. 

Finally, several directors commented that they are experiencing
increased demand by veterans whose primary care is provided elsewhere
but who obtain from VA the specialty care and services not covered by
their private insurance or Medicare, such as pharmaceuticals,
eyeglasses, and hearing aids. 

VA is assessing the cost implications of its fiscal year 1999
enrollment decision.  VA's data shows that, after the first 3 months
of fiscal year 1999, about $3.6 billion was spent meeting veterans'
health care needs.  Of this, about half was spent serving veterans in
priority categories 1 to 4, and half was spent serving categories 5
to 7.  Of note, veterans in category 5 accounted for about 46 percent
of the $3.6 billion. 

VA plans to announce its fiscal year 2000 enrollment decision by
August 1, 1999.  VA, however, publicly stated last month a desire to
enroll all veterans who apply and to serve all enrollees in fiscal
year 2000.  VA's current projections show that about 4.4 million
veterans could be enrolled by the end of fiscal year 1999. 

VA could find this to be quite challenging because, as the following
section discusses, VA's fiscal year 2000 budget does not contain
sufficient funding to maintain current service levels (3.6 million
veterans), unless VA's transformation produces required savings. 

   VA FACES A BUDGET DILEMMA IN
   FISCAL YEAR 2000
---------------------------------------------------------- Chapter 0:4

VA will be severely challenged to serve all veterans seeking to
enroll and maintain quality of care in fiscal year 2000 with an $18.4
billion budget.  This is primarily because VA's budget is based on an
unduly optimistic assumption that VA's transformation will save $1.4
billion in fiscal year 2000.  VA's cost estimates also may be
significantly understated, given the increased enrollments over the
last 6 months and considerable uncertainties surrounding veterans'
medical needs. 

VA estimates that $19.23 billion would be needed to maintain current
service levels (3.6 million veterans) in fiscal year 2000 if no
management efficiencies are realized.  By contrast, VA estimates its
fiscal year 1999 spending level to be $18.36 billion.  This $870
million difference involves primarily payroll increases for existing
employees, inflation, and other mandatory rate changes. 

VA plans to use another $525 million of its efficiency savings to
enhance services.  Of this, $281 million will be used to:  treat
veterans with hepatitis C ($135 million); enhance extended care
services ($106 million); and expand services for homeless veterans
($40 million).  In addition, VA proposes that $244 million be used to
expand its benefit package for certain veterans.  VA requests
congressional authorization to finance emergency care at non-VA
facilities for veterans enrolled in priority categories 1 to 3. 
Currently, only certain veterans with special eligibility have such
benefits. 

To allow VA to operate within a proposed budget of $18.4 billion, VA
needs to achieve management efficiencies of $1.4 billion.  In
general, VA estimates that initiatives could yield about $514 million
in personal services savings, essentially by reducing its employment
level by 8,529 full-time equivalents. 

This presents a formidable challenge, given that an employment
reduction goal of 8,529 is significantly higher than the reduction of
3,606 that VA achieved in 1998 or the 2,518 that VA expects to
achieve in 1999.  Interestingly, VA had initially set goals of 3,978
and 2,607 in its budget requests for fiscal years 1998 and 1999,
respectively. 

To achieve a personal services savings goal of $514 million in fiscal
year 2000, VA needs to achieve the 8,529 employment reduction before
fiscal year 2000 starts, only 5 months from now.  The longer VA needs
to reach this goal during fiscal year 2000, the greater the number of
employees that ultimately must be reduced (to meet its goal) because
VA will have to spend some projected savings to pay salaries and
benefits in fiscal year 2000. 

VA estimates that the remaining $876 million will be achieved through
nonpersonal services savings.  If VA is unable to meet its employment
reduction goal, it will have to increase nonpersonal services savings
beyond this target level.  This, too, could prove challenging, given
the rapid increases in nonpersonal costs, especially medications and
prosthetics. 

VA's budget did not specify the nature of the management initiatives. 
VA's networks, however, have identified over the past year a variety
of efficiency initiatives, including additional facility
integrations, bed closures, and service consolidations, which reflect
necessary shifts in patient care delivery practices.  In most cases,
these changes will require reductions in force, as well as staffing
adjustments through normal attrition, in order to better configure
VA's workforce to meet VA's transformation objectives. 

VA's networks are currently revising their plans to develop
alternative ways to realize savings of $1.4 billion in fiscal year
2000.  At a recent congressional hearing, officials from three
networks expressed concerns about their abilities to achieve required
efficiency savings.  They testified that their plans would likely
include significant furloughs of workers, as well as curtailment of
proposed service enhancements and delay of services when medically
appropriate. 

In addition, VA may need to save more than $1.4 billion because
veterans' demand for medical care, as well as the numbers of veterans
demanding care, may be significantly higher than VA estimated at the
time its fiscal year 2000 budget was developed. 

VA's budget, for example, included $135 million to expand treatment
of veterans who have hepatitis C, based on an assumed prevalence rate
of 5.5 percent among its veteran user population.  VA data, based on
a small, unscientific sample, suggests that this rate, and hence
treatment costs, could be much higher.  To better estimate costs, VA
recently conducted a nationwide sample of veterans using VA
facilities and expects results to be available shortly. 

VA's budget also assumes that an additional 54,000 veterans will be
served in fiscal year 2000, bringing the total served to 3.65
million.  To date, 3.9 million veterans have enrolled, and VA
currently estimates that 4.4 million could enroll by the end of
fiscal year 1999. 

VA's rapidly rising fiscal year 1999 enrollments could also increase
VA's fiscal year 2000 efficiency savings requirements by $200 million
or more.  This is because VA plans to carry forward $216 million of
fiscal year 1999 revenue collections to finance fiscal year 2000
health care costs.  VA could be required to spend this potential
surplus in fiscal year 1999 if newly enrolled veterans require
greater-than-expected health care expenditures in fiscal year 1999. 

   CONCLUDING OBSERVATIONS
---------------------------------------------------------- Chapter 0:5

VA has made significant progress transforming its health care system
but appears to have a long way to go before achieving its goal of
operating integrated networks of VA and non-VA providers that
efficiently and effectively serve veterans.  VA needs to aggressively
confront its pending challenges, especially capital asset and medical
education restructuring, in order to maintain the impressive momentum
generated during its transformation's initial years.  Absent this, VA
could waste billions of dollars to meet veterans' needs over the next
several years. 

Meeting veterans' medical needs within VA's proposed spending level
will be problematic.  To do so, VA needs to achieve significant
management efficiencies, but has no clear sense of the true magnitude
of its resource needs.  To remedy this, VA needs answers to such
critical questions as: 

  -- How many veterans will enroll for VA health care in fiscal year
     2000? 

  -- How prevalent are enrolled veterans' high-cost medical needs,
     especially for hepatitis C? 

  -- How many management efficiency savings will be realized in
     fiscal years 1999 and 2000? 

  -- What will the Congress decide to do concerning VA's proposed
     benefit expansions? 

VA's budget dilemma forces it to confront difficult choices
concerning its fiscal year 2000 enrollment decision--namely, how many
priority categories can be prudently enrolled, given the uncertainty
of estimates of potential costs and available resources.  VA's
current data suggest that sufficient resources may not be available
to serve veterans enrolling in all seven priority enrollment
categories.  VA's uncertainties become more manageable if VA enrolls
veterans in the manner the Congress intendedï¿½namely, veterans in
those priority categories for which there are sufficient resources to
provide timely access to high-quality care. 

We remain concerned about VA's ability to deal with such
uncertainties, primarily because of VA's publicly stated desire to
serve all veterans who apply for enrollment.  If VA experiences
significantly higher costs than it currently estimates or
significantly lower efficiency savings, enrolling all veterans who
apply could require VA to take actions, such as large-scale employee
furloughs, that could adversely affect the quality of care for all
veterans. 

*** End of document. ***