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Report to Congressional Requesters: 

United States Government Accountability Office: 

GAO: 

September 2006: 

VA Health Care: 

Budget Formulation and Reporting on Budget Execution Need Improvement: 

VA Budget Formulation and Reporting: 

GAO-06-958: 

GAO Highlights: 

Highlights of GAO-06-958, a report to congressional requesters 

Why GAO Did This Study: 

The Department of Veterans Affairs (VA) estimates it will serve 5.4 
million patients in fiscal year 2006. Medical services for these 
patients are funded with appropriations, after consideration by 
Congress of the President’s budget request. VA formulates the medical 
programs portion of that request. VA is also responsible for budget 
execution—using appropriations and monitoring their use for providing 
care. For fiscal years 2005 and 2006, the President requested 
additional funding for VA medical programs, beyond what had been 
originally requested. 

GAO was asked to examine for fiscal years 2005 and 2006 (1) how the 
President’s budget requests for VA medical programs were formulated, 
(2) how VA monitored and reported to Congress on its budget execution, 
and (3) which key factors in the budget formulation process contributed 
to requests for additional funding. To do this, GAO analyzed budget 
documents and interviewed VA and Office of Management and Budget (OMB) 
officials. 

What GAO Found: 

The formulation of the President’s budget requests for VA medical 
programs for fiscal years 2005 and 2006 was informed by VA’s comparison 
of its cost estimate of projected demand for medical services to its 
anticipated resources. VA projected about 86 percent of its costs using 
an actuarial model that estimated veterans’ demand for health care. To 
project the costs of long-term care (about 10 percent of the funds for 
VA medical programs in each of these years) and the remaining medical 
care costs (about 4 percent), separate estimation approaches were used 
that did not rely upon an actuarial model but used other methods 
instead. The agency anticipated resources based on prior year 
appropriations, guidance from OMB, and other factors. For both fiscal 
years, VA officials told GAO that projected costs—calculated from the 
actuarial model and other approaches—exceeded anticipated resources and 
that they addressed the difference in budget requests for those years 
with cost-saving policy proposals and management efficiencies. 

Although VA staff closely monitored budget execution and identified 
problems for fiscal years 2005 and 2006, VA did not report this 
information to Congress in a sufficiently informative manner. VA 
closely monitored the fiscal year 2005 budget as early as October 2004, 
anticipating challenges managing within its resources. However, 
Congress did not learn of these challenges until April 2005. VA 
initially planned to manage within its budget for fiscal year 2005 by 
delaying some spending on equipment and nonrecurring maintenance and 
drawing on funds it had planned to carry over into 2006. Instead, the 
President requested additional funds from Congress for both fiscal 
years 2005 (a $975 million supplemental appropriation in June 2005) and 
2006 (a budget amendment of $1.977 billion in July 2005). Congress 
included in the 2006 appropriations act a requirement for VA to submit 
quarterly reports regarding the medical programs budget status during 
this fiscal year. These reports have not included some of the measures 
that would be useful for congressional oversight, such as patient 
workload measures to capture costs and the time required for new 
patients to be scheduled for their first primary care appointment. 

Unrealistic assumptions, errors in estimation, and insufficient data 
were key factors in VA’s budget formulation process that contributed to 
the requests for additional funding for fiscal years 2005 and 2006. 
Unrealistic assumptions about how quickly cost savings could be 
realized from proposed nursing home policy changes contributed to the 
additional requests, as did computation errors measuring the estimated 
effect of one of these changes. Insufficient data in VA’s initial 
budget projections also contributed to the additional funding requests. 
For example, VA underestimated the cost of serving veterans returning 
from Iraq and Afghanistan, in part because estimates for fiscal year 
2005 were based on data that largely predated the Iraq conflict and 
because according to VA, the agency had challenges for fiscal year 2006 
in obtaining data from the Department of Defense. 

What GAO Recommends: 

GAO recommends that VA better explain cost savings from proposed policy 
changes in budget formulation and provide more comprehensive reporting 
on budget execution to Congress. VA stated that it substantially agreed 
with GAO’s findings and concurred with the recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-958]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Laurie E. Ekstrand at 
(202) 512-7101 or ekstrandl@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Formulation of President's Budget Request for VA Medical Programs 
Informed by Comparing Cost of Projected Demand and Anticipated 
Resources: 

VA Closely Monitored Budget Execution and Identified Problems, but Did 
Not Report Them in a Timely and Sufficiently Informative Manner: 

Unrealistic Assumptions, Estimation Errors, and Insufficient Data 
Contributed to VA's Requests for Additional Funding: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Department of Veterans Affairs: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Table: 

Table 1: VA Cost-saving Policies Proposed in the President's Budget 
Requests for Fiscal Years 2005 and 2006 (Dollars in Millions): 

Figures: 

Figure 1: Percentage of Projected Costs for VA's Medical Programs Using 
Various Estimation Approaches: 

Figure 2: VA's March 2006 Monthly Report to VA Senior Management 
Indicating Number of New Patients Waiting for First Appointment to be 
Scheduled: 

Abbreviations: 

CHAMPVA: Civilian Health and Medical Program of the Department of 
Veterans Affairs: 
DOD: Department of Defense: 
NCA: National Cemetery Administration: 
OEF: Operation Enduring Freedom: 
OIF: Operation Iraqi Freedom: 
OMB: Office of Management and Budget: 
VA: Department of Veterans Affairs: 
VBA: Veterans Benefits Administration: 
VHA: Veterans Health Administration: 

United States Government Accountability Office:
Washington, DC 20548: 

September 20, 2006: 

The Honorable Steve Buyer: 
Chairman: 
Committee on Veterans' Affairs: 
House of Representatives: 

The Honorable Daniel K. Akaka: 
Ranking Minority Member: 
Committee on Veterans' Affairs: 
United States Senate: 

The Honorable Richard J. Durbin: 
The Honorable Patty Murray: 
The Honorable Ken Salazar: 
United States Senate: 

The Department of Veterans Affairs (VA) operates one of the largest 
health care delivery systems in the nation. For fiscal year 2006, VA 
estimates it will treat 5.4 million patients with appropriations of 
$31.5 billion.[Footnote 1] During the past decade the number of 
patients served by VA has increased rapidly, due in part to an 
expansion of the number of veterans eligible to receive care. The 
Veterans' Health Care Eligibility Reform Act of 1996 simplified 
eligibility standards for veterans in need of hospital and outpatient 
care and made available services that previously had not been made 
available to veterans without service-connected disabilities or low 
incomes.[Footnote 2] The act required VA to provide a uniform set of 
medical benefits, including hospital and outpatient care, to veterans 
who are eligible and who enroll in its health care system. In addition 
to the uniform set of medical benefits, VA is required to provide 
certain other services--such as nursing home care--to some veterans, 
but not to others.[Footnote 3] If sufficient resources are not 
available to provide hospital and outpatient care that is timely and 
acceptable in quality, VA is required to restrict enrollment based on 
veterans' eligibility priorities.[Footnote 4] 

For VA, like other agencies, formulation of a budget request begins 
approximately 18 months before the start of the fiscal year to which 
the request relates and about 10 months before transmission of the 
President's budget request, which usually occurs in early February. For 
this purpose, the Veterans Health Administration (VHA),[Footnote 5] 
within VA, develops estimates of its medical program budget for agency 
review and approval. In preparing budget estimates, VA and its 
component organizations--such as VHA--use policy and technical guidance 
from the Office of Management and Budget (OMB), while preparing a 
budget submission to OMB that reflects VA priorities. OMB is the office 
responsible for assisting the President in overseeing the preparation 
of the federal budget and supervising its administration. OMB reviews 
VA's and other agencies' budget requests from their submission in 
September through November and then notifies agencies at the end of 
November on the level of funding and policy proposals that will be 
included in the President's budget request. Agencies have very limited 
time to appeal these decisions to OMB before they start preparing a 
congressional budget justification--a more detailed presentation of the 
President's budget request--for their appropriations subcommittees' 
consideration. Congressional budget justifications are submitted to 
appropriations subcommittees following transmission of the President's 
budget request. 

After the President submits his budget request, he may request further 
changes in one of two ways, depending on the timing of the additional 
request. If Congress has not completed action on an appropriations act, 
the President can transmit a budget amendment. If an appropriations act 
has already been enacted, the President can request a supplemental 
appropriation; this is typically done in cases where the need for funds 
is too urgent to postpone until enactment of the following year's 
appropriations bill. 

Once an appropriations bill becomes law, OMB apportions the funds, 
allowing an agency to obligate and expend the funds as authorized. Each 
agency is responsible for obligating and expending funds efficiently 
and effectively to carry out the programs and activities for which 
funds were appropriated. Carrying out this responsibility is referred 
to as budget execution and requires monitoring throughout the fiscal 
year to ensure that funds are being used as authorized for agency 
program objectives--in the case of VA medical programs to provide 
quality care to veterans--and to ensure compliance with provisions of 
fiscal law. For example, the Antideficiency Act prohibits VA and other 
agencies from making or authorizing obligations[Footnote 6] or 
expenditures in excess of the available appropriations.[Footnote 7] 

Congress provided additional funds beyond those initially requested by 
the President for VA medical programs for both fiscal years 2005 and 
2006. In June 2005, the President requested a $975 million supplemental 
appropriation for fiscal year 2005, and in July 2005, the President 
submitted a $1.977 billion budget amendment for fiscal year 2006. These 
additional requests raised concerns in Congress and among stakeholders 
regarding the reasons for the additional requests for funding. At your 
request, we examined for fiscal years 2005 and 2006 (1) how the 
President's budget requests for VA medical programs were formulated, 
(2) how VA monitored and reported to Congress on its budget execution, 
and (3) which key factors in the budget formulation process contributed 
to the requests for additional funding. 

To perform this work, we interviewed VA officials responsible for the 
agency's medical programs budget issues, and for developing budget 
projections. We also interviewed OMB officials. We analyzed and 
reviewed budget documents including VA's budget justifications for 
medical programs for fiscal years 2005 and 2006. We also reviewed VA 
budget estimates and other information VA reported that it used either 
to formulate its submissions to OMB for fiscal years 2005 and 2006 or 
to monitor the use of appropriated funds for those fiscal years. Our 
review of how VA monitored its use of funds in the fiscal year 2006 
budget includes the first 11 months of the fiscal year.[Footnote 8] 
This work expands upon the preliminary findings that we reported in 
February 2006.[Footnote 9] We conducted our review from October 2005 
through September 2006 in accordance with generally accepted government 
auditing standards. For additional details of our scope and 
methodology, see appendix I. 

Results in Brief: 

The formulation of the President's budget requests for VA medical 
programs for fiscal years 2005 and 2006 was informed by VA's comparison 
of its estimation of the cost of projected demand for its medical 
services to its anticipated resources. VA projected about 86 percent of 
its costs using an actuarial model that estimated veterans' demand for 
health care. In addition, VA projected the costs of long-term care, 
which accounts for about 10 percent of the funds requested for VA 
medical programs in each of these fiscal years, and remaining costs for 
other medical care, about 4 percent, using separate estimation 
approaches that did not rely upon an actuarial model. VA anticipated 
its resources to provide medical programs for fiscal years 2005 and 
2006 based on its prior year appropriations, guidance published by OMB 
that outlined the President's budget priorities, and other factors. For 
both fiscal years, VA officials told us that projected costs-- 
calculated from the actuarial model and other approaches--exceeded 
anticipated resources. VA officials told us they addressed the 
difference in budget requests for those years with cost-saving policy 
proposals and management efficiency savings, which were included in the 
President's budget requests for fiscal years 2005 and 2006. 

Although VA staff closely monitored budget execution and identified 
problems for fiscal years 2005 and 2006, VA did not report this 
information to Congress in a timely and sufficiently informative 
manner. VA closely monitored the fiscal year 2005 budget as early as 
October 2004, because the agency anticipated significant challenges to 
providing care to veterans with its appropriations. However, Congress 
did not learn of these challenges until April 2005. VA initially 
planned to manage within its budget for fiscal year 2005 by delaying 
some spending on equipment and nonrecurring maintenance and drawing on 
funds it had planned to carry over into 2006. Instead, in June 2005, 
with 3 months remaining in the fiscal year, the President requested a 
$975 million supplemental appropriation from Congress for VA medical 
programs for that fiscal year. In July 2005, the President requested 
$1.977 billion for fiscal year 2006 through the budget amendment 
process. The appropriations act for fiscal year 2006 included a 
requirement that VA submit quarterly reports on VHA's financial status. 
However, VA's reports have not included some of the measures that would 
assist Congress in its oversight, such as measures of patient workload 
that would capture the costliness of patient care, and the time 
required for new patients to be scheduled for their first health care 
appointment. Moreover, while VA has 12 months to execute its budget, it 
did not submit its first two quarterly reports to Congress until nearly 
2 months after the end of each quarter, using patient workload data 
that were as much as 3 months old at the time of submission. These data 
included a combination of actual and estimated number of patients seen. 
However, VA submitted its third quarterly report about 1 month after 
the end of the quarter, using estimated data for the number of patients 
seen. 

Unrealistic assumptions, errors in estimation, and insufficient data 
were key factors in VA's budget formulation process that contributed to 
the requests for additional funding in fiscal years 2005 and 2006. One 
factor that contributed to these requests was a set of unrealistic 
assumptions about the expected time frame in which cost savings could 
be realized from proposed nursing home policy changes. Computational 
errors in measuring the estimated effect of one of these changes also 
contributed to the additional funding request. Furthermore, 
insufficient data in VA's initial budget projections contributed to the 
additional funding requests. For example, VA underestimated the cost of 
serving veterans returning from Iraq and Afghanistan, in part because 
estimates for fiscal year 2005 were based on data that largely predated 
the Iraq conflict and because, according to VA, the agency did not have 
sufficient data for fiscal year 2006 due to challenges obtaining data 
needed to identify these veterans from the Department of Defense (DOD). 

To help improve VA's formulation of its medical programs budget and 
facilitate congressional oversight, we recommend that the Secretary of 
Veterans Affairs take several actions. We recommend that VA improve its 
budget formulation processes by explaining the relationship between 
implementation of proposed policy changes and the expected timing of 
cost savings to be achieved and by strengthening its internal controls 
to better ensure the accuracy of calculations it uses in preparing 
budget requests. We also recommend that VA improve its reporting of 
budget execution progress to Congress by incorporating measures of 
patient workload to capture the costliness of care and a measure of 
waiting times to schedule veterans' first primary care appointment for 
new patients. 

VA stated that it substantially agreed with our findings and 
conclusions, and concurred with our recommendations. VA also described 
steps it has taken and plans to take to respond to our recommendations. 

Background: 

VA, as part of its mission to provide benefits and services to 
America's veterans, administers one of the nation's largest health care 
systems through the VHA. As part of a uniform set of medical benefits 
provided to eligible veterans who enroll, VA provides a range of 
services including preventive and primary health care, a full range of 
outpatient and inpatient services, and prescription drugs. VA also 
provides additional services, such as nursing home and dental care and 
other services, as required by law, for some veterans and makes these 
services available to other veterans on a discretionary basis as 
resources permit. One of the largest of these programs is VA's nursing 
home care program, which provides care in three settings. VA operates 
its own nursing homes in 134 locations; it pays for care under contract 
in non-VA nursing homes, referred to as community nursing homes; and it 
pays about one-third of the costs per day for veterans in state 
veterans' nursing home[Footnote 10]s. In its three settings, nursing 
home services are provided to veterans, ranging from short-stay post- 
acute care for patients recovering from a condition such as a stroke to 
long-stay care for patients who cannot be cared for at home because of 
severe, chronic physical or mental limitations.[Footnote 11] 

To manage access to hospital and outpatient care in relation to 
available resources, VA established an enrollment system with priority 
categories, as required by the Veterans' Health Care Eligibility Reform 
Act of 1996.[Footnote 12] The act called for seven priority categories; 
subsequent legislation provided for eight categories.[Footnote 13] 
Priority categories are generally determined by a veteran's degree of 
service-connected or other disability or on financial need. VA gives 
veterans in Priority category 1 (with 50 percent or more service- 
connected disability) the highest preference for services and gives 
lowest preference to those in Priority category 8 (no disability, with 
income exceeding certain thresholds, and who were enrolled as of 
January 16, 2003). 

The act also required VA to restrict enrollment consistent with its 
priority categories if sufficient resources are not available to 
provide care that is timely and acceptable in quality.[Footnote 14] In 
January 2003, VA restricted enrollment by no longer allowing Priority 8 
veterans, those in the lowest priority category, to enroll.[Footnote 
15] However, Priority 8 veterans who were already enrolled as of 
January 16, 2003, would continue to receive service. This policy 
remained in effect as of August 2006. 

In the mid-1990s, VA began to change the way it delivered health care 
to veterans to increase the efficiency of its health care system and to 
improve access to medical services. Applying lessons learned from the 
private sector's experiences with managed health care, VA began 
emphasizing certain managed care practices, such as primary, 
outpatient, and preventive care, and deemphasizing its reliance on 
inpatient care. Over the 10-year period from 1995 through 2004, for 
example, the ratio of outpatient visits to inpatient hospital stays at 
VA increased from 29 to 1, to 92 to 1, reflecting the change in how VA 
delivers medical care. To support its health care reform efforts, VA 
decentralized the management structure of the agency to coordinate the 
organization of hospitals, outpatient clinics, and other facilities 
into 21 regional health care networks. These networks have budget and 
management responsibilities that include allocating resources to 
facilities, clinics, and programs within their networks and ensuring 
access to appropriate health care services. 

Formulation of President's Budget Request for VA Medical Programs 
Informed by Comparing Cost of Projected Demand and Anticipated 
Resources: 

The formulation of the President's budget requests for VA medical 
programs for fiscal years 2005 and 2006 was informed by VA's comparison 
of its estimation of the cost of projected demand and anticipated 
resources. Estimated costs for medical care exceeded anticipated 
resources in both fiscal years 2005 and 2006, and, in formulating the 
budget, VA addressed the difference with cost-saving policy proposals 
and estimated savings from management efficiencies. 

VA Estimated Costs of Medical Programs Based on Projected Demand for 
Medical Care: 

VA used an actuarial model[Footnote 16] to project demand and costs for 
about 86 percent of its medical programs budget estimate for fiscal 
years 2005 and 2006. (See fig. 1.) For this part of the medical 
programs budget estimate, the model was used to project enrollment in 
the VA health care system and then to estimate VA's total health care 
services utilization by estimating the proportion of enrollees' total 
health care that was expected to come from VA. The actuarial model used 
cost estimates associated with particular health care services in 
conjunction with the enrollment and utilization projections to project 
VA health care costs. The actuarial model provided utilization 
projections for 55 health care services including inpatient acute 
surgery, outpatient care, prescription drugs, and prosthetics. The 
model used private sector benchmarks but made allowances for the 
special characteristics of the VA enrollee population, adjusting for 
age, sex, morbidity of enrollee population, and veterans' use of other 
health care providers reimbursed by payers such as Medicare and 
Medicaid. 

Figure 1: Percentage of Projected Costs for VA's Medical Programs Using 
Various Estimation Approaches: 

[See PDF for image] 

Source: VA. 

[End of figure] 

VA used a separate estimation approach, rather than an actuarial model, 
to project long-term care demand and costs,[Footnote 17] which 
accounted for about 10 percent of the funds requested for medical 
programs for each of the fiscal years 2005 and 2006. The long-term care 
estimation approach projected demand by using historical expenditures 
to calculate the costs of treating veterans and multiplying these 
estimates by projected workload, which was calculated based on 
historical trends and policy proposals. VA officials told us that they 
are working on incorporating the projection of long-term care demand 
and costs into the actuarial model, but could not provide a date when 
this would be completed. Similarly, VA used other approaches, rather 
than an actuarial model, to project demand and costs for the remaining 
4 percent of the medical programs budget request for fiscal years 2005 
and 2006. These other methodologies included adding inflation to actual 
expenditures and projecting trends based on workload, expenditure, and 
other data provided by program officials. The majority of these 
expenditure projections were for Civilian Health and Medical Program of 
the Department of Veterans Affairs (CHAMPVA)[Footnote 18] and dental 
care. 

The actuarial model projections and the other estimation approaches for 
the fiscal year 2005 budget were developed in March 2003. To estimate 
costs for VA's medical programs for fiscal year 2005, VA used fiscal 
year 2002 data, which were the most current fiscal year data available 
in the spring of 2003. Similarly, VA used fiscal year 2003 data, in the 
spring of 2004, to project costs for fiscal year 2006. 

VA Anticipated Resources Based on Prior Appropriation Levels, OMB 
Guidance, Collections, Reimbursements, and Projected Carryover of 
Unobligated Funds: 

VA anticipated its resources for fiscal years 2005 and 2006 based on 
its prior year appropriations, guidance published by OMB that outlined 
the President's budget priorities, and other factors. For example, 
OMB's annual planning guidance for fiscal year 2005, published in April 
2003, directed executive agencies, including VA, to develop a budget 
for fiscal year 2005 that was within the levels included in the fiscal 
year 2004 budget. The guidance noted, for example, that any increases 
or amounts for new initiatives should be offset by reductions in lower 
priority or ineffective programs. 

In addition, VA anticipated its funding based on resources it expected 
from collections, reimbursements,[Footnote 19] and the projected 
carryover of unobligated funds into the next fiscal year. VA may carry 
over from one fiscal year to the next unobligated balances of funds 
made available without fiscal year limitation and other funds 
appropriated for multiple fiscal years. In fiscal year 2004, for 
example, VA collected $1.7 billion from veterans and third-party 
insurers,[Footnote 20] which was available without fiscal year 
limitation. VA carried over about $600 million from fiscal year 2004 
into fiscal year 2005; this amount consisted of collections from prior 
years and multiyear funds that had not been obligated during fiscal 
year 2004. 

Adjustments Were Made to Address the Difference Between Projected Costs 
for VA Medical Programs and Anticipated Resources: 

According to VA officials, for both fiscal years 2005 and 2006, 
projected costs exceeded anticipated resources. VA officials stated 
that differences between projected costs and anticipated resources in 
budget requests for those years were addressed in two ways: (1) cost- 
saving policy proposals and (2) management efficiency savings. 

To develop a budget request consistent with anticipated resources, VA 
officials told us they addressed the difference with cost-saving policy 
proposals which were included in the President's budget requests for 
fiscal years 2005 and 2006. These cost-saving policy proposals totaled 
$494 million and $734 million in fiscal years 2005 and 2006, 
respectively, and were proposed to reduce the total appropriation 
requested. (See table 1.) More specifically, a proposed long-term care 
policy was designed to reduce costs by reducing patient workload, while 
a proposed $250 enrollment fee and an increase in pharmacy copayments 
for Priority 7 and 8 veterans--primarily, those veterans with incomes 
or net worths above applicable thresholds and no service-connected 
disability--would have generated additional resources. The projected 
savings from these policy proposals, which were designed to enhance 
revenue as a means of protecting resources, were used to adjust 
projected costs. VA used the actuarial model and long-term care 
estimates to project savings from these proposals. 

Table 1: VA Cost-saving Policies Proposed in the President's Budget 
Requests for Fiscal Years 2005 and 2006 (Dollars in Millions): 

Policy proposals: Long-term care policy proposals to reduce average 
daily census[A]; 
Fiscal year 2005: $270; 
Fiscal year 2006: $502. 

Policy proposals: Assess $250 annual enrollment fee for Priority 7 and 
8 veterans[B]; 
Fiscal year 2005: 141; 
Fiscal year 2006: 206. 

Policy proposals: Increase pharmacy copayment from $7 to $15 for 
Priority 7 and 8 veterans[B]; 
Fiscal year 2005: 83; 
Fiscal year 2006: 26. 

Policy proposals: Total cost-saving policy proposals; 
Fiscal year 2005: $494; 
Fiscal year 2006: $734. 

Source: GAO analysis of VA data. 

[A] Average daily census is a patient workload measure, which 
represents the total number of days of nursing home care provided in a 
year divided by the number of days in the year. 

[B] Priority 7 and 8 veterans are veterans who have either incomes or 
net worths above applicable thresholds, no service-connected disability 
that results in monetary benefits from VA, and no other recognized 
statuses, such as former prisoners of war. 

[End of table] 

In addition to cost-saving policy proposals, VA developed estimates of 
management efficiency savings of $340 million and $590 million in 
fiscal years 2005 and 2006, respectively, which were included in the 
President's budget request. According to VA, these management 
efficiency savings were initiatives designed to reduce costs without 
reducing quality. In a February 2006 report,[Footnote 21] we reported 
that VA's total projected management efficiency savings in the 
President's budget request for fiscal years 2003 through 2006 were used 
to fill the gap between the costs associated with VA's projected demand 
for health care services and anticipated resources. In addition, we 
reported that VA lacked a methodology for measuring the dollar effect 
of the health care management efficiency savings it had detailed for 
fiscal years 2003 through 2006. 

OMB and VA officials told us they did not include management efficiency 
savings in the fiscal year 2007 budget request and do not have plans 
for doing so in the future. However, they will continue to include 
other efficiency savings, which VA calls clinical efficiencies, 
projected by its actuarial model. Each year, a workgroup of VA 
officials and staff from the developer of the actuarial model review VA 
and health care industry trends and evaluate specific VA practices 
expected to affect health care service utilization and cost and 
incorporate these expectations into the actuarial model. For example, 
VA's Advanced Clinical Access initiative is intended to reduce the need 
for veterans to visit clinics to receive care by implementing certain 
health care practices such as using follow-up telephone calls by 
practitioners to reduce the number of in-person office visits. VA 
officials told us that to calculate the savings from such an 
initiative, the assumptions of reducing patient utilization are built 
into the actuarial model. The actuarial model then produces estimates 
of the effect of these efficiencies on the cost of health care 
services, according to VA officials. 

VA Closely Monitored Budget Execution and Identified Problems, but Did 
Not Report Them in a Timely and Sufficiently Informative Manner: 

Anticipating challenges in managing its medical care programs within 
available resources, VA closely monitored its medical programs budget 
execution from the beginning of fiscal year 2005. Similarly, in early 
fiscal year 2006, the agency tracked how well it was managing to 
provide care to veterans with available resources during the 12-month 
time period. However, in fiscal years 2005 and 2006, VA reporting of 
budget execution to Congress could have been more timely and 
informative. 

VA Monitored Budget Execution Early, Anticipating Challenges in 
Providing Medical Care with Available Resources: 

Recognizing that fiscal year 2005 would be a tight budget year, VA 
closely monitored budget execution from the beginning of the fiscal 
year. In early fiscal year 2005, VA formed a workgroup, the Budgetary 
Challenges workgroup, to develop a strategy the agency could take to 
manage within its budget. This six-member workgroup was comprised of 
selected network directors and an official from VA headquarters. In 
December 2004, in internal briefings to VA's National Leadership Board, 
the Deputy Under Secretary for Health for Operations and Management, 
and the Deputy Secretary, the workgroup recommended that the agency 
consider a number of budget options to manage within its fiscal year 
2005 budget, including limiting the implementation of new initiatives 
and shifting resources from equipment and nonrecurring maintenance into 
direct patient care. 

VA officials told us that in the middle of fiscal year 2005, it became 
clear that demand for health care services was increasing rapidly-- 
confirming what they had anticipated at the beginning of the fiscal 
year--and that spending would have to be carefully controlled to manage 
within its fiscal year 2005 budget for the remainder of the year. VA 
staff identified these trends by analyzing the monthly reports they 
generate for VA senior management. In its March 2005 report to senior 
management, VA found that through January 2005 unique patient 
workload[Footnote 22] was about 4.1 million, 5.2 percent above what VA 
had expected by that time of the fiscal year, suggesting a potential 
challenge to managing care with available resources. 

On the basis of this close monitoring which began as early as October 
2004, VA took actions to shift resources it had originally allocated 
for equipment and nonrecurring maintenance into direct patient care. VA 
initially planned to manage within its budget for fiscal year 2005 by 
deferring $600 million for equipment and nonrecurring maintenance and 
reducing the fiscal year 2006 carryover balance by $375 million. 
However, with a few months remaining in the fiscal year, in June and 
July 2005, the President requested additional VA medical programs funds 
for fiscal years 2005 and 2006, asking for $975 million and $1.977 
billion, respectively. 

In June 2005, the President submitted a request for supplemental 
funding for fiscal year 2005 that totaled $975 million. VA reported to 
Congress[Footnote 23] that the following activities contributed to the 
request: 

* $273 million for medical care services provided to veterans returning 
from Operation Iraqi Freedom (OIF) and Operation Enduring Freedom 
(OEF),[Footnote 24] 

* $226 million for long-term care, 

* $200 million for an increase in the number of Priority 1 though 6 
veterans using VA medical care, 

* $179 million for a greater-than-expected increase in the utilization 
of medical services and intensity of patient workload, 

* $58 million to reduce the number of veterans on waiting lists to 
receive medical care, and: 

* $39 million to provide medical care for the health care needs of 
dependents of veterans who are rated as having 100 percent service- 
connected disability. 

In July 2005, the President submitted a budget amendment adding $1.977 
billion to his fiscal year 2006 request for VA Medical Services 
appropriations. VA testified before the House Committee on Veterans 
Affairs, in July 2005,[Footnote 25] that the following activities 
contributed to the requests for additional funding: 

* $677 million for a 2 percent increase in the number of veterans using 
VA medical care, 

* $600 million to correct an error in VA's estimate of long-term care 
costs included in the President's budget, 

* $400 million to cover an unexpected 1.2 percent increase in the 
average cost per patient, and: 

* $300 million to replace funds VA planned to carry over from fiscal 
year 2005 to fiscal year 2006. 

To support these requests for additional funding for VA medical 
programs, VA officials told us that they chose to highlight activities 
for fiscal years 2005 and 2006 that were of high programmatic priority 
to the administration and Congress and could be supported by workload 
and expenditure data (e.g., veterans returning from Iraq and 
Afghanistan). They told us that there were a number of other ways the 
agency could have presented the data in the President's request for 
additional funding. For example, additional funding requested by the 
President could have been categorized by budget object code, which 
would have listed expenditures by broad cost categories including 
personnel and travel. However, VA officials believed that presenting 
the information primarily by programmatic activity would be the most 
useful for Congress. 

VA's Reporting of Budget Execution Progress and Problems to Congress 
Could Have Been More Timely and Informative: 

Despite VA's identification of potential fiscal year 2005 budget 
challenges as early as October 2004, Congress did not learn of these 
challenges until April 2005, when VA reported to Congress that it 
intended to use funds allocated for equipment and nonrecurring 
maintenance to fund patient care. It was not until June 2005, with 3 
months remaining in the fiscal year, that VA reported in congressional 
testimonies[Footnote 26] that it had greater-than-anticipated workload 
levels, likely to result in greater-than-anticipated costs. It notified 
Congress at that time that it would not be able to manage by using 
nonrecurring maintenance funds as planned, but rather that the 
President planned to request additional funds from Congress. 

OMB officials told us that they have taken a more active role in 
monitoring VA's execution of its fiscal year 2006 budget than they did 
in fiscal year 2005. VA and OMB officials now meet monthly to discuss 
the budget situation. Further, in fiscal year 2006, VA began preparing 
a special monthly report for OMB. The data in VA's monthly status 
reports have enabled OMB to help monitor VA's budget execution during 
the fiscal year. VA's monthly status reports to OMB provide measures of 
financial and workload data. For example, the report includes 
information on obligations and patient workload such as patients by 
priority category, outpatient visits, and nursing home average daily 
census. 

Following the supplemental appropriation requested in fiscal year 2005 
and the budget amendment requested for fiscal year 2006, Congress 
included a provision in the fiscal year 2006 Military Quality of Life 
and Veterans Affairs Appropriations Act requiring the Secretary of 
Veterans Affairs to submit to the Committees on Appropriations of the 
U.S. Senate and U.S. House of Representatives a quarterly report on the 
financial status of the Veterans Health Administration.[Footnote 27] In 
addition, the conference report accompanying the appropriations act 
directed VA to include waiting list performance measures and whether 
equipment or nonrecurring maintenance funds have been used to pay for 
operating expenses, among other things.[Footnote 28] 

VA has provided three congressional quarterly reports beginning with a 
report on the first quarter of fiscal year 2006. While VA has 12 months 
to execute its budget, it did not submit its first two quarterly 
reports to Congress until nearly 2 months after the end of each 
quarter, using patient workload data that were as much as 3 months old 
at the time of submission. These data included a combination of actual 
and estimated number of patients seen. The third quarterly report was 
submitted in August, about 1 month after the end of the quarter, which 
was 1 month faster than VA provided the first two quarterly reports. 
The third quarterly report used estimated data for the number of unique 
patients seen. 

We also found that these three quarterly reports did not include 
information identified in the conference report that would be useful 
for congressional oversight. Among measures identified in the 
conference report and not provided by VA in the quarterly report was a 
particular access measure--the time required for new patients to get 
their first appointment. Although not the same measure, a similar 
measure produced in one of VA's monthly reports to its own senior 
management for use in internal budget formulation showed the number of 
new patients waiting for their first appointment to be scheduled almost 
doubled over 11 months, from April 2005 to March 2006, indicating a 
potential problem in the first quarter of fiscal year 2006.[Footnote 
29] (See fig. 2.) However, the quarterly report for that period shows 
only the more favorable access measures for existing patients--percent 
of primary care and percent of specialty care appointments scheduled 
within 30 days of desired date--where VA is actually exceeding its 
performance goals. VA did not provide other measures requested, such as 
the status of equipment or nonrecurring maintenance funds and whether 
these funds have been used to pay for operating expenses. 

Figure 2: VA's March 2006 Monthly Report to VA Senior Management 
Indicating Number of New Patients Waiting for First Appointment to be 
Scheduled: 

[See PDF for image] 

Source: Adapted from VA's March 2006 report presented to senior 
management on April 3, 2006. 

Note: New patients are those who have enrolled in the past 12 months 
and have not been seen in VA during the past 24 months. VA officials 
told us the report reflects 50 outpatient clinics that account for 
about 95 percent of VA's outpatient visits. Data from 2004 are reported 
from the middle of the month (the 15th) and data for 2005 and 2006 are 
reported from first day of the month. 

[End of figure] 

Additionally, we found that information VA provides on patient workload 
in its quarterly reports to congressional committees contrasted with 
the more detailed program and clinical information VA uses to inform 
the President's budget request for VA medical programs--such as the 
patient workload measures used to estimate costs in the actuarial 
model. The information in the quarterly congressional reports also 
contrasts with the more detailed patient workload information that VA 
provides in its monthly reports to OMB. In its quarterly reports, VA 
uses a patient workload measure, "unique patients," that counts 
patients only once no matter how many times they use VA services within 
the fiscal year. (For example, a patient who used VA health care 
services in October would not be counted again in the patient workload 
totals for November, December, or January, even if that patient used VA 
medical services again during each of those months.) However, the 
unique patient measure does not capture the difference between patients 
predominately using low-cost services, such as primary care outpatient 
visits, at an average $245 each, and patients using more high-cost 
services, such as acute inpatient hospital care, which costs about 
$1,500 a day, on average. In contrast, VA now provides in its monthly 
reports to OMB other patient workload measures--in addition to the 
number of unique patients--that provide a more complete picture of 
whether new patients are receiving low-or high-cost services. Some of 
the patient workload measures VA provides to OMB include nursing home 
patient workload, as measured by average daily census, number of 
outpatient visits, and patient workload by priority category.[Footnote 
30] 

Unrealistic Assumptions, Estimation Errors, and Insufficient Data 
Contributed to VA's Requests for Additional Funding: 

The requests for additional funding for VA medical programs in fiscal 
years 2005 and 2006 were caused, in part, by unrealistic assumptions, 
errors in estimation, and insufficient data in its budget formulation 
process. Unrealistic assumptions about the expected time frame in which 
the cost savings could be realized from proposed nursing home cost- 
saving policies contributed to the subsequent request for additional 
funding. Further, computational errors in measuring the estimated 
effect of one of these cost-saving policies led VA to underestimate 
resources needed in fiscal year 2006. Moreover, insufficient data in 
VA's initial budget projections contributed to the additional funding 
requests. For example, VA underestimated the cost of serving veterans 
returning from Iraq and Afghanistan, in part because estimates for 
fiscal year 2005 were based on data that largely predated the Iraq 
conflict and because VA did not have sufficient data for fiscal year 
2006 due to challenges in obtaining data needed to identify these 
veterans from DOD, according to VA officials. 

Unrealistic Assumptions and Errors in Estimating the Effect of Nursing 
Home Policies Contributed to Requests for Additional Funding: 

An unrealistic assumption about the expected time frame in which VA 
could implement a fiscal year 2005 proposed nursing home cost-saving 
policy contained in the President's budget request--a reduction in 
nursing home patient workload in VA-operated nursing homes--contributed 
to $226 million of the request for supplemental funding for that fiscal 
year, VA officials said. The President's fiscal year 2005 budget 
request for VA medical programs included a proposal to reduce patient 
workload on a daily basis--average daily census--from about 12,000 to 
8,500 in VA-operated nursing homes. In retrospect, agency officials 
told us this assumption was particularly unrealistic because of its 
accelerated time frame. VA projected the savings from this reduction in 
workload would be realized on the first day of the fiscal year, a 
change which would have required transferring or discharging, in an 
extremely compressed time frame, potentially thousands of veterans, 
many of whom had severe, chronic, physical or mental impairments. These 
veterans would have had to seek financing from other sources, such as 
Medicaid or private health insurance, or paid for their care out of 
pocket. Moreover, achievement of substantial savings from this policy 
would have also likely required reducing the number of VA employees. 
However, VA included no discussion in its budget formulation on how 
this cost-saving policy was to be implemented. Furthermore, VA 
officials told us that because VA had established a precedent for 
providing care to veterans who receive nursing home care on a 
discretionary basis, changing the policy on short notice would be 
difficult. 

Similarly, the fiscal year 2006 President's budget request for VA 
medical programs included unrealistic assumptions and computational 
errors in estimating savings of a proposed nursing home policy. The 
assumption and estimation errors contributed to $600 million of the 
budget amendment requesting additional funding in fiscal year 2006. The 
President's fiscal year 2006 budget request for VA medical programs 
included a policy proposal to reduce patient workload and costs by 
prioritizing the veterans[Footnote 31] who would receive long-stay 
nursing home care in its VA-operated nursing homes, community nursing 
homes, and state veterans' nursing homes. Long-stay care includes 
nursing home care needed by veterans who cannot be cared for at home 
because of severe, chronic physical or mental impairments such as the 
inability to independently eat or the need for supervision because of 
dementia. Under the proposed policy, many veterans receiving VA nursing 
home care would no longer qualify for long-stay care. 

An unrealistic assumption about the expected time frame in which VA 
could implement the proposed policy contributed to $152 million of the 
$600 million request for additional funding for nursing home care in 
that fiscal year, according to VA officials. While VA had originally 
assumed the savings could be realized in April 2005, before the start 
of the 2006 fiscal year, VA staff said they later recognized with OMB 
that this date had been unrealistic. In addition, VA said that the 
policy assumed a 90 percent reduction in patient workload in state 
veterans' nursing home workload for patients requiring long-stay 
nursing home care but that the correct estimate was a 20 percent 
reduction in workload per year. For VA-operated nursing homes, the 
policy assumed an 80 percent reduction in patient workload over 1½ 
years; however, VA later stated the correct estimate was closer to 30 
percent. 

Computation errors in estimating the effect of this proposed fiscal 
year 2006 policy contributed to about $445 million of the $600 million 
request for additional funding for nursing home care in that fiscal 
year, according to VA officials. In particular, VA underestimated 
patient workload--average daily census--and costs in all three nursing 
home settings. Specifically, VA incorrectly estimated that the average 
daily census in VA-operated nursing homes was 9,795, when the correct 
estimated patient count was 11,151. Similarly, while VA estimated that 
the per diem rate for its homes was $471.16, it was actually $567.52. 
VA officials said that the errors in estimating the effect of the 
proposed nursing home policy resulted from calculations being made in 
haste during the OMB appeal process,[Footnote 32] and that a more 
standardized approach to long-term care calculations could provide 
stronger quality assurance to help prevent future mistakes. 

Insufficient Data on Certain Activities Contributed to the Requests for 
Additional Funding in Fiscal Years 2005 and 2006: 

Insufficient data on veterans returning from Iraq and Afghanistan--OIF 
and OEF--accounted for $273 million of the request for supplemental 
funding in fiscal year 2005. According to VA officials, the original 
cost projections for providing care to OIF and OEF veterans were 
understated for fiscal year 2005 in part because they were based on 
data from fiscal year 2002 that predated the Iraq conflict, which began 
in March 2003. While VA originally projected, in its fiscal year 2005 
budget formulation, that it would need to provide care to about 23,500 
returnees from Iraq and Afghanistan, revised projections indicated that 
it would serve about four times that number of OIF and OEF veterans, 
nearly 100,000 returnees for fiscal year 2005. 

Insufficient data on returning OIF and OEF veterans continued to be a 
problem in fiscal year 2006 budget formulation, accounting for $276 
million of the budget amendment requesting additional funding for that 
year, according to VA officials. VA officials told us they did not have 
sufficient data for fiscal year 2006 due to challenges obtaining data 
needed to identify these veterans from DOD. VA later determined in late 
fiscal year 2005, after the President submitted the fiscal year 2006 
budget request, that it expected to provide care to approximately 
87,000 patients beyond what it had initially projected. According to VA 
officials, VA now receives the DOD data it requires to identify OIF/OEF 
veterans on a monthly basis rather than the quarterly reports it used 
to receive. However, VA has a 2-month lag in projecting costs 
associated with treating these veterans at VA. 

Insufficient data on whether VA achieved management efficiency savings 
may have also contributed to the requests for additional funding. 
However, VA's calculations of management efficiencies obtained in 
fiscal year 2005 were based on the same approach we found to be 
inadequate in our earlier work and therefore are not reliable. Data on 
whether management efficiency savings were achieved for fiscal year 
2006 were not available during our work because the fiscal year was not 
complete. Because we could not determine if the efficiency savings were 
achieved, we could not conclude whether the estimation of savings was 
incorrect and therefore may have contributed to the request for 
additional funding. 

Conclusions: 

VA, like other federal agencies, faces fiscal challenges as demand for 
its services increases while federal resources are constrained. Until 
recently, VA had more options to meet this challenge because it could 
redirect resources from more expensive inpatient care to less expensive 
outpatient care to serve more veteran patients as it modernized the 
delivery of its health care services. However, VA's success in 
transforming its system to emphasize outpatient care means that it will 
have fewer such options to meet future fiscal challenges. In this 
context, sound budget formulation, anticipatory monitoring of budget 
execution, and the reporting of informative and timely information to 
Congress for oversight will become increasingly important in order to 
provide high-quality, accessible, and cost-efficient health care to 
veterans. Even with these actions, the challenge of balancing veterans' 
access to health care and the availability of federal resources is 
likely to be more difficult in the future. 

The lessons of the last few years show what can happen when budget 
formulation is affected by calculation errors, unrealistic assumptions, 
and insufficient data. Whether due to errors in calculating long-term 
care patient workloads and costs, unrealistic assumptions about the 
expected time frame in which long-term care policies can be changed and 
lack of discussion in budget formulation on how such policies would be 
implemented, or insufficient data on the number of people who will need 
health care, such problems can result in mismatches in projecting 
service provision and available resources. Although budget formulation 
is, by its nature, based on assumptions and imperfect information, 
these assumptions and information can be improved based on experience, 
and complemented by reasonable projections for known events that will 
affect the agency. Additional measures in VA's quarterly reports, such 
as the time new patients waited for their first health care 
appointments and measures of patient workload in addition to unique 
patients, might help alert Congress to potential problems VA may face 
in managing within its budget in future years. VA's budget execution 
and monitoring in fiscal years 2005 and 2006 were perhaps more vigilant 
than in prior years because VA expected, from the beginning of fiscal 
year 2005, that it might experience difficulties in managing its 
medical program within available resources. When, as a result of this 
monitoring, VA found potential problems in providing medical care 
programs within its appropriations, its reporting of the information to 
Congress was not sufficiently timely or informative. More recently, 
however, VA improved the timeliness of its reporting. VA submitted its 
third quarterly report for fiscal year 2006 more quickly after the end 
of the quarter than it had the first two quarterly reports. 

Recommendations for Executive Action: 

To help improve VA's budget formulation of its medical programs budget 
and facilitate congressional oversight, we recommend that the Secretary 
of Veterans Affairs take three actions: 

* Explain the relationship between implementation of proposed policy 
changes and the expected timing of when cost savings would be achieved. 

* Improve its internal controls to provide stronger assurance that 
calculations used to formulate policy projections in the President's 
budget submissions are accurate. 

* Incorporate into VA's reporting to Congress (1) measures of patient 
workload, in addition to unique patients, that would capture the 
costliness of patient care; and (2) a measure of waiting times to 
schedule veterans' first primary care appointment for new patients. 

Agency Comments: 

We received comments on a draft of this report from VA (reproduced in 
app. II). In commenting on the draft, VA stated that it substantially 
agreed with our findings and conclusions and concurred with our 
recommendations. VA also described steps it has taken and plans to take 
to respond to our recommendations, including steps it took in 
developing information for the President's fiscal year 2007 budget 
request and in monitoring the execution of its fiscal year 2006 
resources. 

We are sending copies of this report to the Secretary of Veterans 
Affairs and the Director of the Office of Management and Budget, 
appropriate congressional committees, and other interested parties. We 
will also make copies available to others upon request. In addition, 
this report will be available at no charge on GAO's Web site at 
[hyperlink, http://www.gao.gov]. If you or your staff have any 
questions about this report, please contact me at (202) 512-7101 or at 
ekstrandl@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff who made major contributions to this report are 
listed in appendix III. 

Signed by: 

Laurie E. Ekstrand: 
Director, Health Care: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

For fiscal years 2005 and 2006, we examined: (1) how the President's 
budget requests for the Department of Veterans Affairs (VA) medical 
programs were formulated, (2) how VA monitored and reported to Congress 
on its budget execution, and (3) which key factors in the budget 
formulation process contributed to the requests for additional funding. 
Our review of how VA monitored its fiscal year 2006 budget includes the 
first 11 months of the fiscal year because the fiscal year was not over 
when we completed our work. 

For each of our reporting objectives, we interviewed senior officials 
in VA and the Office of Management and Budget (OMB) to determine how 
the President's budget request for VA medical programs for fiscal years 
2005 and 2006 was formulated, and how VA monitored and reported on its 
budget execution. We interviewed VA officials in Washington, D.C. from 
three primary offices responsible for budget issues related to VA's 
medical programs: (1) VA's Office of the Deputy Assistant Secretary for 
Budget, (2) Veterans Health Administration's (VHA) Office of the Chief 
Financial Officer, and (3) VHA's Office of the Assistant Deputy Under 
Secretary for Health for Policy and Planning. We also interviewed 
senior officials from OMB responsible for VA budget issues to obtain 
their perspective on the President's budget request for VA's medical 
programs and the subsequent requests for additional funding for fiscal 
years 2005 and 2006. 

For the purposes of our analysis, the President's budget request for VA 
medical programs primarily concerned four appropriation accounts: (1) 
medical services, for direct patient care; (2) medical administration, 
for administrative oversight and all information technology; (3) 
medical facilities, for the maintenance and operation of hospitals and 
other structures; and (4) medical research. VA funded nonrecurring 
maintenance, for items such as roof repair, through the appropriations 
for VA medical programs, and funds for these activities are included in 
our analysis. However, we did not include more general construction 
funding--i.e., for major construction and minor construction--in our 
analysis, as these funds are provided in separate appropriations. 

We obtained and analyzed documents and interviewed VA officials about 
how each of the three primary projection methods was used in 
formulating the budget: (1) an actuarial model; (2) a long-term care 
approach; and (3) other methodologies, including adding inflation to 
actual expenditures. For each method, we verified information VA 
officials told us in interviews by analyzing the documents VA provided. 
For example, we confirmed that the actuarial model accounted for about 
86 percent of the President's budget request for VA medical programs 
for fiscal year 2005 through our analysis of documents VA provided. 

To determine how VA monitored and reported to Congress on its budget 
execution, we conducted interviews and reviewed copies of monthly 
reports prepared internally for VA senior managers, monthly reports 
prepared for OMB, and quarterly reports prepared for the House and 
Senate Appropriations Committees. For monthly reports prepared for VA 
senior managers, we reviewed both the March 2005 and the March 2006 
monthly reports. We reviewed a monthly report VA prepared for OMB for 
the month of April 2006. For the quarterly reports, we reviewed the 
first, second, and third quarterly reports VA prepared on the fiscal 
year 2006 budgets. We analyzed these documents to assess the 
comprehensiveness of the reporting information included in these 
reports. 

To identify key factors in the budget formulation process that 
contributed to the requests for additional funding, we obtained and 
analyzed a number of documents detailing estimated savings from various 
policy proposals, calculation errors, and data gaps in the budget 
formulation process for fiscal years 2005 and 2006. For example, we 
analyzed documents obtained from VA showing calculation errors made in 
estimating the impact of a proposed long-term care policy in fiscal 
year 2006. We also obtained and analyzed revised estimates of veterans 
returning from Iraq and Afghanistan and compared these to data 
available during the fiscal years 2005 and 2006 budget formulation 
process. In addition, we reviewed publicly available documents such as 
transcripts of VA testimony to the Senate and House Veterans' Affairs 
Committees, the VA's Medical Programs Budget Submissions for fiscal 
years 2005 and 2006, and the President's formal requests to Congress 
for additional funding for VA medical programs for fiscal years 2005 
and 2006. 

We assessed the reliability of the information we obtained about how VA 
formulated, monitored, and reported on the President's budget request 
for medical programs in several ways. First, we checked the internal 
consistency of documents VA provided detailing various budget estimates 
for fiscal years 2005 and 2006 and information contained in the 
President's budget request in those years. Second, we interviewed 
agency officials knowledgeable about the data used to formulate, 
monitor, and report on the budget. We determined that the actuarial 
model appeared reasonable for formulating the budget but we did not 
conduct a separate, detailed audit of all data inputs into the 
actuarial model. Third, we relied on our prior work to identify 
potential issues about data reliability. For example, we determined 
that the assumptions used to project management efficiencies were 
inaccurate, based on a report we had previously issued.[Footnote 33] We 
determined that the data we used in our analyses were sufficiently 
reliable for the purposes of this report. 

We performed our review from October 2005 through September 2006 in 
accordance with generally accepted government auditing standards. 

[End of section] 

Appendix II: Comments from the Department of Veterans Affairs: 

The Deputy Secretary Of Veterans Affairs: 
Washington: 

September 5, 2006: 


Ms. Laurie E. Ekstrand: 
Director: 
Health Care Team: 
U. S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Ms. Ekstrand: 

The Department of Veterans Affairs (VA) has reviewed the Government 
Accountability Office's (GAO) draft report, VA Health Care, Budget 
Formulation and Reporting on Budget Execution Need Improvement (GAO-06- 
958). VA substantially agrees with your findings and conclusions as 
they pertain to the formulation of the fiscal year (FY) 2005 and FY 
2006 budgets. VA has also taken steps to incorporate these improvements 
into the FY 2007 budget and will continue to do so in future budget 
requests. 

VA is committed to ensuring that budget estimates accurately reflect 
mission requirements and are based on valid assumptions in providing 
timely, high-quality health care to veterans. 

The enclosure details actions taken and planned to implement GAO's 
recommendations. VA appreciates the opportunity to comment on your 
draft report. 

Sincerely yours, 

Signed by: 

Gordon H. Mansfield: 

Enclosure: 

The Department Of Veterans Affairs' (VA) Comments To The Government 
Accountability Office (GAO) Draft Report: 

VA Health Care; Budget Formulation and Reporting on Budget Execution 
Need Improvement (GAO-06-958): 

* To help improve VA's budget formulation of its medical programs 
budget and facilitate congressional oversight. GAO recommends that the 
Secretary of Veterans Affairs take three actions: 

Explain the relationship between implementation of proposed policy 
changes and the expected timing of when cost savings would be achieved. 

Concur-VA employed the approach of critically evaluating policy changes 
and assumptions, realistic implementation timelines, and resulting 
savings In the development of the FY 2007 budget request and will 
continue to do so in future budgets. The relationship between the 
implementation of the policy and the expected timing of the budgetary 
impact will be determined and explained in the budget by VA. All 
changes in health care policy were appropriately identified in the FY 
2007 budget and will continue to be clearly identified in future 
budgets. This will enable all stakeholders to clearly recognize any 
policy changes that are proposed, along with the rationale to support 
them and their financial impact. This includes the date of expected 
approval of the policy, the timing of the implementation in the field, 
and the initial and future cost impacts. VA will provide more 
comprehensive explanations regarding the timing of the complex 
relationship between respective policy changes and realization of cost, 
or cost savings, in future budget requests to Congress. 

Improve its internal controls to provide stronger assurance that 
calculations used to formulate policy projections in the President's 
budget submissions are accurate. 

Concur-VA has taken steps to improve its overall quality control and 
made technical changes to strengthen the accuracy of its formulation 
methodologies and assessments of cost savings in the FY 2007 and future 
budgets. Assumptions and calculations have been verified independently 
to assure the fundamental quality of estimates. Additionally, VA has 
contracted with the RAND Corporation to independently evaluate its 
actuarial projection model for the purpose of identifying potential 
improvements. During the execution year, VA is also monitoring budget 
performance with monthly reports to VA senior leaders and to OMB, and 
with quarterly reports to the four congressional committees. 

Incorporate into VA's reporting to Congress (1) measures of patient 
workload, in addition to unique patients, that would capture the 
costliness of patient care, and (2) a measure of waiting times to 
schedule veterans' first primary care appointment for new patients. 

Concur - The Secretary personally briefed the first FY 2006 quarterly 
report to the congressional committees as requested and has provided 
quarterly reports for the two subsequent quarters. The Secretary and VA 
have responded to all requests from the committees for performance 
information and will continue to provide workload data as well as 
financial and program performance information to Congress as requested. 
VA will provide Congress with a measure of waiting times to schedule 
veterans' first primary care appointments for new patients In its 
quarterly reports to Congress. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Laurie E. Ekstrand, (202) 512-7101 or ekstrandl@gao.gov. 

Acknowledgments: 

James Musselwhite, Assistant Director; Jennie Apter; Denise Fantone; 
Michael Kendix; Dean Koulouris; Tiffany Tanner; Thomas Walke; and Greg 
Whitney made key contributions to this report. 

[End of section] 

Related GAO Products: 

VA Long-Term Care: Data Gaps Impede Strategic Planning for and 
Oversight of State Veterans' Nursing Homes. GAO-06-264. Washington, 
D.C.: March 31, 2006. 

VA Health Care: Preliminary Findings on the Department of Veterans 
Affairs Health Care Budget Formulation for Fiscal Years 2005 and 2006. 
GAO-06-430R. Washington, D.C.: February 6, 2006. 

Veterans Affairs: Limited Support for Reported Health Care Management 
Efficiency Savings. GAO-06-359R. Washington, D.C.: February 1, 2006. 

VA Long-Term Care: Oversight of Nursing Home Program Impeded by Data 
Gaps. GAO-05-65. Washington, D.C.: November 10, 2004. 

VA Health Care: Resource Allocations to Medical Centers in the Mid 
South Healthcare Network. GAO-04-444. Washington, D.C.: April 21, 2004. 

VA Long-Term Care: Service Gaps and Facility Restrictions Limit 
Veterans' Access to Noninstitutional Care. GAO-03-487. Washington, 
D.C.: May 9, 2003. 

Managing for Results: Efforts to Strengthen the Link Between Resources 
and Results at the Veterans Health Administration. GAO-03-10. 
Washington, D.C.: December 10, 2002. 

VA Health Care: Allocation Changes Would Better Align Resources With 
Workload. GAO-02-338. Washington, D.C.: February 28, 2002. 

FOOTNOTES 

[1] Total includes medical care collections, but does not include 
certain other amounts, such as appropriations for construction. 

[2] Pub. L. No. 104-262, §§ 101, 104, 110 Stat. 3177, 3178-81 and 3182- 
84. Veterans with low incomes are those veterans with annual incomes 
below a certain threshold. In 2006, the income threshold was $26,902 
for veterans without dependents. 

[3] The Veterans Millennium Health Care and Benefits Act required VA to 
provide nursing home care to veterans requiring such care with a 
service-connected disability rated at 70 percent or greater, those 
requiring nursing home care because of a condition related to their 
military service who do not have a service-connected disability rating 
of 70 percent or greater, and those who were receiving care in VA 
nursing homes on the enactment date of the act and continue to need 
that care. Pub. L. No. 106-117, § 101, 113 Stat. 1545, 1547-51 
(codified at 38 U.S.C. § 1710A). The Veterans' Health Care, Capital 
Asset, and Business Improvement Act of 2003 extended this requirement 
through 2008. Pub. L. No. 108-170, § 106(b), 117 Stat. 2042, 2046. VA 
provides most of its nursing home care to veterans who receive it on a 
discretionary basis rather than as required by these acts. 

[4] Veterans' eligibility priority categories are generally determined 
on the basis of service-connected disability and/or income. There are 
currently eight priority categories. 

[5] The VA also provides a comprehensive benefits program, administered 
by the Veterans Benefits Administration (VBA), and maintains national 
cemeteries, administered by the National Cemetery Administration (NCA). 

[6] An obligation is generally a definite commitment that creates a 
legal liability of the government for a payment immediately or in the 
future. Agencies incur obligations when they place orders, award 
contracts, receive services, and carry out similar transactions during 
a given period that will require payments by an agency during the same 
or future periods. 

[7] See 31 U.S.C. § 1341(a)(1)(A). 

[8] Fiscal year 2006 will not be complete until September 30, 2006. 

[9] See GAO, VA Health Care: Preliminary Findings on the Department of 
Veterans Affairs Health Care Budget Formulation for Fiscal Years 2005 
and 2006, GAO-06-430R (Washington, D.C.: Feb. 6, 2006). See Related GAO 
Products at the end of this report. 

[10] VA also supports state veterans' nursing homes through grants for 
construction, acquisition, or renovation of existing structures. See 
GAO, VA Long-Term Care: Data Gaps Impede Strategic Planning for and 
Oversight of State Veterans' Nursing Homes, GAO-06-264 (Washington, 
D.C.: Mar. 31, 2006) and GAO, VA Long-Term Care: Oversight of Nursing 
Home Program Impeded by Data Gaps, GAO-05-65 (Washington, D.C.: Nov. 
10, 2004). 

[11] VA nursing home care is part of a continuum of long-term care 
services that VA provides, including services to veterans in the 
community and in veterans' own homes. 

[12] Pub. L. No. 104-262, § 104(a)(1) 110 Stat. 3177, 3182-83 (codified 
at 38 U.S.C. § 1705). Enrollment is not required to receive nursing 
home care in any of VA's three nursing home settings. 

[13] Department of Veterans Affairs Health Care Programs Enhancement 
Act of 2001, Pub. L. No. 107-135, § 202(a), 115 Stat. 2446, 2457. 

[14] See 38 U.S.C. § 1705(b)(1). 

[15] VA announced this change through the publication of an interim 
final rule in the Federal Register. See 68 Fed. Reg. 2670-73 (Jan. 17, 
2003). 

[16] VA's actuarial model was developed under contract by Milliman USA, 
Inc. 

[17] VA long-term care includes nursing home care provided in VA- 
operated, state, and community nursing homes, and home and community- 
based care such as in-home care services and adult day health care 
centers. 

[18] CHAMPVA provides medical care for dependents and survivors of 
veterans who are permanently and totally disabled from a service- 
connected disability. 

[19] VA receives reimbursements from services it provides to other 
government entities, such as DOD, or other private or nonprofit 
entities. For example, VA laundries receive reimbursements from other 
entities by selling laundry services. 

[20] VA has the authority to collect payments for treatment of 
veterans' nonservice-connected conditions, that is, injuries or 
illnesses that were not incurred or aggravated during military service. 
VA collects first-party payments from veterans, such as copayments for 
outpatient medications and third-party payments from veterans' private 
health insurers, including those companies that self-insure. 

[21] See GAO, Veterans Affairs: Limited Support for Reported Health 
Care Management Efficiency Savings, GAO-06-359R (Washington, D.C.: Feb. 
1, 2006). 

[22] Unique patient workload is a measure that represents an 
unduplicated count of the number of patients that used VA within the 
fiscal year. Therefore, patients are counted only once regardless of 
the number of times they use VA medical services within a fiscal year. 

[23] Emergency Hearing to Examine the Shortfall in VA's Medical Care 
Budget Before the Senate Comm. on Veterans' Affairs, 109th Cong. (June 
28, 2005) (statement of R. James Nicholson, Secretary, Department of 
Veterans Affairs); Hearing on the Department of Veterans Affairs Health 
Care Budget Before the House Comm. on Veterans' Affairs, 109th Cong. 
(June 30, 2005) (statement of R. James Nicholson, Secretary, Department 
of Veterans Affairs). 

[24] Those who have served, or are now serving, in Operation Iraqi 
Freedom and Operation Enduring Freedom may receive care from VA for 
conditions that are or may be related to their combat services for a 2- 
year period following the date of their separation from active duty 
without copayment requirements. See 38 U.S.C. § 1710(e)(1)(C) and 
(e)(3)(C). 

[25] Hearing on the Department of Veterans Affairs Proposed Health Care 
Budget Amendment for Fiscal Year 2006 Before the House Comm. On 
Veterans' Affairs, 109th Cong. (July 21, 2005) (statement of Jonathan 
B. Perlin, Under Secretary for Health, Department of Veterans Affairs). 

[26] Emergency Hearing to Examine the Shortfall in VA's Medical Care 
Budget Before the Senate Comm. on Veterans' Affairs, 109th Cong. (June 
28, 2005) (statement of R. James Nicholson, Secretary, Department of 
Veterans Affairs); Hearing on the Department of Veterans Affairs Health 
Care Budget Before the House Comm. on Veterans' Affairs, 109th Cong. 
(June 30, 2005) (statement of R. James Nicholson, Secretary, Department 
of Veterans Affairs). 

[27] Pub. L. No. 109-114, § 222, 119 Stat. 2372, 2391 (2005). A 
provision contained in an annual appropriation act is not considered 
permanent legislation unless the language or the nature of the 
provision makes it clear that Congress intended it to be permanent. 
Because this provision does not use any language indicating future 
application, it is not permanent and applies only to fiscal year 2006. 
The bill providing for the fiscal year 2007 Department of Veterans 
Affairs appropriations, H.R. 5385, would continue the quarterly report 
for that fiscal year. As of August 1, 2006, the bill had been reported 
out of the House and Senate appropriation committees, and had been 
passed by the House. 

[28] See H.R. Conf. Rep. No. 109-305, at 50 (2005). 

[29] VA provided us with more recent data through July 1, 2006, that 
showed that the number of new patients waiting for first appointments 
had returned to about 15,000 or the same level as in April 2005. 
However, VA has not included these data in its first three quarterly 
reports. 

[30] Senior-level managers at managed care organizations typically use 
a number of measures to monitor on a recurring basis changes in patient 
workload. See Peter R. Kongstvedt, ed., The Managed Health Care 
Handbook (Aspen Publishers, Inc., Gaithersburg, Maryland, Fourth ed. 
2001), pp. 298-299. 

[31] VA planned to limit long-stay nursing home care to those veterans 
with higher priority status--i.e., those veterans who had a priority 
status of 1 through 3 and those priority 4 veterans who were 
catastrophically disabled. 

[32] In late November, OMB "passes back" budget decisions to the 
agencies on the President's budget requests for their programs, a 
process known as passback. These decisions may involve, among other 
things, funding levels, program policy changes, and personnel ceilings. 
The agencies may appeal decisions with which they disagree. 

[33] See GAO-06-359R. 

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