GN Nugent, Cincinnati VAMC; AM Hendricks, CHQOER, Bedford VAMC; ML Render, Cincinnati VAMC; LN Nugent, Dayton VAMC; EJ Franchi, Milwaukee VAMC

Objectives: Critics of VA as a direct provider of healthcare frequently recommend privatization (vouchering) to reduce national health expenditures and improve quality and access. In prior evaluations, VA costs compared favorably to the private sector, but limitations in study design and subsequent transformations in the healthcare industry make it impossible to use those results to predict the long-term consequences of privatization. Increased competition in the marketplace could intensify political pressure to privatize without any objective evidence to evaluate the financial implications. Debates concerning privatization of veteran health services require realistic cost projections. The objective of this project was to provide these cost estimates using both research and operational expertise.

Methods: Using VA workload data, all FY 1999 patient care services and products provided at six VHA medical centers were priced and compared to aggregate CDR costs. Payments were estimated according to: 1) Medicare’s prospective payment system (acute inpatient and nursing home), 2) TEFRA (rehabilitation, domiciliary, residential programs, day hospital), 3) Medicare fee schedules and cost to charge ratios (professional fees and facility fees) or 4) peer-reviewed methods. Pharmacy, prosthetic and dental payments were developed using National Drug Codes and HCPCS codes. Coding accuracy, utilization review, and severity of illness were incorporated into the study design. The 6-site estimates were extrapolated to the national level.

Results: Results from the 6 sites are currently under review. They indicate that the cost of VHA provided health services were 20 to 40% less than those same services under Medicare payment criteria, but costs varied greatly. Costs for acute inpatient, professional fees, and nursing home are closest to the private sector estimates (by 9–23%) and rehabilitation, pharmacy, and prosthetics services are farthest (by 80-100%). Differentials for select sub components (e.g. oxygen) exceeded 10 to 1. The estimates are conservative because significant VA workload is not being recorded for billing or considered in cost comparisons. These include inpatient consultations, discharges to sub-acute and rehabilitation, discharges between psychiatry and medicine or surgery, and contracts for physicians and diagnostic services. Conventional wisdom that VA coding, utilization, and patient severity were significantly different from the private sector was not supported.

Conclusions: Conservatively, privatizing VHA would increase national expenditures by at least 30% of VA’s budget unless veterans’ benefits were substantially changed. National liabilities for voucher payments would undoubtedly be even higher because inadequate VA billing systems and lack of billing sophistication leave much of the current workload undocumented. Increased access for eligible veterans not currently using VA and co-pays and deductibles would also increase vouchers significantly. Additionally, the VERA allocation model ignores many elements included in private sector hospital reimbursement.

Impact: Overall results will provide important information to policy makers that may shape the future of VA healthcare. The financial impact of cost shifting to Medicare, financially beneficial to VA hospitals, may not be in the national best interest. Pharmacy calculations will be useful to policymakers trying to determine the cost of adding pharmacy benefits to Medicare.