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Veterans' Health Care: Facilities' Resource Allocations Could Be More
Equitable (Letter Report, 02/07/96, GAO/HEHS-96-48).

Pursuant to a congressional request, GAO reviewed the Department of
Veterans Affairs' (VA) resource allocation system, focusing on the: (1)
extent to which VA resources are distributed equally among VA
facilities; and (2) causes of unequal resource allocations among VA
health care facilities.

GAO found that: (1) the VA resource allocation system enables VA to
identify potential inequities in resource allocations and forecast
facility workload changes, but VA has made only minimal changes in
facilities' funding levels; (2) there is a significant difference
between comparable health care facilities' operating costs and patient
workloads; (3) VA has not used its resource planning and management
system (RPM) to ensure that resources are allocated to facilities within
the same priority category; (4) VA excluded over $4 billion of its
medical care appropriation from the RPM process during the first 2 years
of RPM because it wanted to give VA facilities more time to adjust to
the reallocation process and large budget changes; (5) the RPM system
does not address veterans' unequal access to outpatient care; and (6) VA
plans to reallocate a larger portion of its fiscal year 1996 facility
budgets based on the RPM process and implement a decision support system
to better compute the costs of specific services provided to each
patient.

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

 REPORTNUM:  HEHS-96-48
     TITLE:  Veterans' Health Care: Facilities' Resource Allocations 
             Could Be More Equitable
      DATE:  02/07/96
   SUBJECT:  Health care facilities
             Veterans hospitals
             Budget administration
             Strategic planning
             Health resources utilization
             Appropriated funds
             Patient care services
             Health services administration
             Demographic data
IDENTIFIER:  VA Resource Planning and Management System
             VA Decision Support System
             
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Cover
================================================================ COVER


Report to the Honorable
John McCain, U.S.  Senate

February 1996

VETERANS' HEALTH CARE -
FACILITIES' RESOURCE ALLOCATIONS
COULD BE MORE EQUITABLE

GAO/HEHS-96-48

VA Medical Resources Allocation System

(101465)


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

  BDC - Boston Development Center
  DSS - Decision Support System
  FY - fiscal year
  HD - Highland Drive [facility]
  HIV - human immunodeficiency virus
  NHCP - National Health Care Plan
  OPC - outpatient clinic
  PROPAC - Prospective Payment Assessment Commission
  RAM - Resource Allocation Methodology
  RPM - Resource Planning and Management
  UD - University Drive [facility]
  VA - Department of Veterans Affairs
  VISN - veterans integrated service network

Letter
=============================================================== LETTER


B-259872

February 7, 1996

The Honorable John McCain
United States Senate

Dear Senator McCain: 

The Department of Veterans Affairs (VA) is faced with the challenge
of equitably allocating more than $16 billion in health care
appropriations across a nationwide network of hospitals, clinics, and
nursing homes.  The challenge is made greater by the shifting
demographics of veterans.  While nationally the veteran population is
declining, veterans have migrated from northeastern and midwestern
states to southeastern and southwestern states in the past decade,
offsetting veteran deaths in these states. 

VA has historically based its allocations to facilities primarily on
their past funding levels--providing incremental increases to
facilities' past budgets.  In an effort to improve its planning,
allocation, and management processes, VA made a considerable
investment in implementing a new system, called the Resource Planning
and Management (RPM) system, for use initially in fiscal year 1994. 
VA considers RPM to be a management decision process to use to
formulate its budget, allocate most of its resources, and compare
facility performance.\1 As the basis for resource allocation, RPM
classifies each patient into a clinical care group, calculates
average facility costs per patient, and forecasts future workload. 
VA envisioned that the system would improve VA's management of
limited medical care resources, better define future resource
requirements, and enable VA to explore opportunities to improve
quality and efficiency in its health care system.  This vision
included improving the equity of its allocations by more closely
linking resources with facility workloads and alleviating
inconsistencies in veterans' access to care across the system. 

Two recent events could have significant implications for VA's
resource allocation system.  First, VA is restructuring its
organization to establish 22 veterans integrated service networks
(VISN) that will replace four regional offices and assume the
individual facilities' role as the basic budgetary and planning unit
for health care delivery.  The new structure will require some change
in how resources are allocated.\2 Second, the Senate passed your
proposed amendment to the VA appropriations bill that would require
VA to develop a plan for the allocation of health care resources
among its health care facilities to ensure that veterans have the
same access to quality health care.\3

Because of your interest in this issue, you asked us to review the
equity of VA's resource allocation system, particularly as it related
to the allocations made to the Carl T.  Hayden Medical Center in
Phoenix, Arizona.  More specifically, you asked us to determine the
following: 

  To what extent does VA's allocation system provide for an equitable
     distribution of resources among VA facilities? 

  What are the causes of any inequity in the distribution of
     resources, and what changes, if any, would help ensure that the
     system more equitably distributes resources? 

In September 1995, we sent you our preliminary observations.\4 This
report presents our final results. 

To accomplish our objectives, we first needed to apply a definition
of the term "equity." We based our evaluation of the equity of the
system's distribution on VA's vision for RPM.\5 We considered the
following two elements to be characteristics of an equitable system: 

  It provides comparable resources for comparable workload. 

  It provides resources so that veterans within the same priority
     categories have the same availability of care, to the extent
     practical, throughout the VA health care system. 

We then reviewed VA documents and analyzed RPM system data to
determine the degree to which these two elements were present.  We
discussed potential reasons for any inequities in allocations with VA
Headquarters, the Boston Development Center, the RPM Committee, and
facility officials in several locations.  To assess potential changes
to address inequities, we discussed such changes with VA officials
and reviewed VA documents on its original plans for RPM and minutes
of several RPM committees and work groups.  Further details of our
scope and methodology are in appendix I.  We performed our review
between December 1994 and October 1995 in accordance with generally
accepted government auditing standards. 


--------------------
\1 VA in 1995 operated 172 hospitals, 375 ambulatory clinics, 133
nursing homes, and 39 domiciliaries.  For resource allocation
purposes, RPM combines certain health care facilities that are
managerially associated.  In total, the RPM system develops
allocations for 167 facilities. 

\2 VA officials indicated that as part of this change, the resource
planning and management processes it used would change and the system
would be renamed.  At the time of our review, the system was known as
RPM. 

\3 On September 26, 1995, the Senate adopted amendment number 2787 to
the VA appropriations bill, which was in conference at the time of
our review.  If it becomes law, the provision would require the
Secretary of VA to develop a plan for the allocation of health care
resources to ensure that veterans having similar economic status,
eligibility priority, and/or similar medical conditions have similar
access to care regardless of the region in which the veterans reside. 
The plan will include, among other things, procedures to identify
reasons for variations in operating costs among similar facilities. 

\4 See VA's Medical Resource Allocation System (GAO/HEHS-95-252R,
Sept.  12, 1995). 

\5 This vision was described in the Secretary's statements to the
Congress on RPM and in other VA publications. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The resource allocation system gives VA the ability to identify
potential inequities in resource distribution and to forecast
workload changes.  Data generated by the system show wide differences
in operating costs among facilities that VA considers comparable,
even after factors such as locality costs and patient mix differences
are considered.  VA's data also show some facilities' overall patient
workloads increasing by as much as 15 percent between 1993 and 1995,
and others' workloads declining by as much as 8 percent.  However, in
the two budget cycles in which RPM has been in effect, VA used it to
make only minimal changes in facilities' funding levels--the maximum
loss to any facility was about 1 percent of its past budget and the
average gain was also about 1 percent.  As such, VA's distribution of
resources has remained almost exclusively related to incremental
changes to the amount that each facility has received in the past. 

To date, VA has chosen not to use the RPM system to help ensure
resources are allocated more equitably.  VA officials indicated that
larger reallocations were not made during the first 2 years of RPM to
allow facilities time to understand the process.  VA officials also
cited several other reasons that significantly larger reallocations
among facilities could not be made.  Although VA is taking some
actions on these issues, it has not fully addressed concerns that (1)
facilities cannot efficiently adjust to large budget changes, (2) VA
needs a better understanding of the reasons for the variations, and
(3) resources allocated to facilities outside the RPM process should
also be considered in judging the equity of distributions.  VA's
reasons for not using RPM to even out differences in veteran access
to care were less clear as there appeared to be confusion within VA
about whether the resource allocation system was intended to achieve
this goal. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The VA health care system, established in 1930, is one of the
nation's largest direct delivery systems.  VA's health care
facilities provide services to veterans both with and without
service-connected disabilities.  Individual facilities vary widely in
the inpatient, outpatient, and long-term care services they provide. 
For example, some facilities provide only basic clinical care;
whereas, others have capabilities to provide special care such as for
organ transplants, spinal cord injuries, or chronic mental illness. 

VA historically allocated funds to its facilities on the basis of the
facilities' past expenditures, with incremental increases for such
factors as inflation and new programs.  Beginning in 1985, VA
modified its allocation system because it recognized the need to more
directly relate funding to the work performed and the cost to perform
it, and to improve the efficiency and productivity with which medical
care is delivered to veterans. 

The Resource Allocation Methodology (RAM) was VA's first attempt to
better link resources to workload.\6 VA ended RAM in 1989 because of
concerns that facilities had inappropriate incentives to perform work
beyond their resources, possibly affecting quality of care and
resulting in a budget crisis at some facilities.  Between 1990 and
1993, VA again based allocations on making incremental changes to
facilities' historical budgets.  But to further its efforts to link
resources and workload and to provide data that it could use to
improve quality and efficiency in the system, VA implemented its
current RPM system for the fiscal year 1994 allocation process. 


--------------------
\6 We reported in 1989 that RAM had little impact on medical center
budgets.  See VA Health Care:  Resource Allocation Methodology Has
Had Little Impact on Medical Centers' Budgets (GAO/HRD-89-93, Aug. 
18, 1989). 


      SYSTEM GOALS AND DESIGN
---------------------------------------------------------- Letter :2.1

The Secretary of VA, in endorsing the new RPM system, stated he hoped
it would improve VA's management of limited medical care resources,
enable VA to explore opportunities to improve quality and efficiency
in its health care system, and better define future resource
requirements.  To those ends, VA's stated goals for RPM are to (1)
improve its resource allocation methodology, (2) move from
retrospective to prospective workload management, and (3) reform
medical care budgeting.\7

VA has established high expectations for how RPM would improve the
equity of its allocations.  VA hoped to better link resources and
facility workload, move to prospective workload management by
forecasting workload changes, and provide for differences in facility
efficiencies in the allocations.  VA also hoped that by forecasting
workload changes, it could better establish and justify its budget
requests.  VA envisioned the system overcoming inconsistencies in
facilities' provision of care to veterans by allowing for a more
equitable distribution of resources to meet veteran needs systemwide. 
Finally, by identifying facility differences, VA intended that the
system would provide managers with useful information, including the
matching of resources to quality of care issues. 

Part of this effort to improve resource allocation involved linking
the budget allocation process to VA's strategic plan.  The strategic
plan was to be the driving force behind RPM, providing it with a set
of goals, performance standards, and workload priorities. 
Furthermore, the system's link to the strategic plan was intended to
allow consideration of service distribution, practice patterns,
geographic factors affecting costs, and access differences. 

RPM was also designed to be a patient-based system.  It differs from
past resource allocation processes in defining workload as patients
served rather than as procedures performed--this is the basis for
VA's characterization of RPM as "capitation-based." For resource
allocation purposes, the RPM database, managed by VA's Boston
Development Center (BDC) in Braintree, Massachusetts, integrates
workload data, case mix, and costs to project facility-specific
resource needs.  With significant input from VA managers in the field
and Headquarters, BDC has developed a complex data analysis process
to estimate facility unit costs.  Generally, this process involves
adjusting for case mix differences by classifying patients into
clinical classes and groups, forecasting changes by class in the
numbers of patients served, and developing average costs per patient
type that are then applied to the number of expected patients in each
group to achieve a preliminary budget estimate.  The facility
estimates are adjusted to reflect inflation, VA regional input, and
facility efficiencies.  A further discussion of the RPM system is in
appendix II. 

Because resource allocation is a sensitive and complex undertaking in
VA's health care system, VA has made a considerable investment in it. 
Significant VA Headquarters and field managers' time and effort is
spent adjusting the RPM methodology from year to year--one reason the
process is continually changing.  In addition to the 26 BDC staff
responsible for data processing and education efforts, VA
Headquarters chief financial officer, quality management, operations,
and clinical staff also provide input to the process through frequent
meetings.  Facility directors sit on the RPM Field Oversight
Committee, a group of about 15 managers (with 10 to 20 support staff
and visitors usually present) who meet regularly to discuss
implementation issues.  Six technical assistance groups comprising
physicians and other clinicians in each clinical area generally
represent the RPM clinical groups and advise on clinical issues such
as the classification of patients.  Other RPM committees include a
Planning Group and a Financial Advisory Group, which assist in
determining forecasting methodologies and advise on the correct
allocation of costs.  While many parties provide input to the RPM
process, the Budget Policy and Review Committee, comprising VA
associate chief medical directors and other senior VA managers, makes
the final recommendation on the resource allocation methodology,
which the Under Secretary for Health approves. 


--------------------
\7 Our review was limited to aspects of how RPM has been used to
allocate and manage resources. 


   SYSTEM'S POTENTIAL TO IMPROVE
   EQUITY MAY NOT BE REALIZED
------------------------------------------------------------ Letter :3

The resource allocation system shows mixed results with regard to the
two aspects of equity that we examined.  The system design produces
data that point to potential inequities so that VA can better link
resources to facility workloads.  However, VA has not yet used the
system for this purpose.  VA has not designed the system to address
the goal of providing greater consistency in veterans' systemwide
access to services. 


      SYSTEM DESIGN PROVIDES DATA
      ON POTENTIAL INEQUITIES
---------------------------------------------------------- Letter :3.1

The resource allocation system provides VA managers with data that
compare facility costs on a standardized workload unit basis and in
this way, provides data that could point to potential inequities in
allocations.\8 Through an outlier process, the system identifies
facility cost differences, a feature that allows VA to reallocate
monies from the budgets of the highest cost facilities to those with
the lowest costs.  VA places facilities into one of nine facility
groups that it considers comparable based on a complex consideration
of factors such as affiliation with teaching facilities and size.\9
Then, to provide a fair comparison, the system "levels the playing
field" by adjusting for differences among facilities such as case
mix, locality costs, salaries, training, and research.  After
adjustments are made, the system considers variations in workload
costs to be more indicative of efficiency differences than facility
characteristics.  Comparative data show that even after adjustments
are made, significant facility cost variations remain.  Variations
typically ranged 30 percent or more within each facility group. 
Appendix III and figure III.3 provide an example of the variations
the RPM data show in adjusted costs per workload for one group of
facilities that VA considered comparable. 

Another important aspect of the RPM system is its ability to forecast
workload changes.  For each patient class, the system forecasts the
number of patients that facilities are likely to see, based on
historical trends.  The forecasting process recognizes that facility
workloads are changing at relatively different rates and that
facilities' clinical workloads or "case mix" are also changing.  For
example, the system forecasts that patient classes for pulmonary
disease patients or ear, nose, and throat patients are generally
expected to decrease in fiscal years 1994 and 1995; whereas, classes
for outpatients or human immunodeficiency virus (HIV) patients are
expected to increase.  System forecasts showed rates of change for
total patients expected to be seen at facilities ranging from an
8-percent decrease to a 15-percent increase between 1993 and 1995.\10


--------------------
\8 The current system design addresses some of the concerns raised
about the RAM system that preceded it by focusing on patients rather
than on programs or procedures.  This redefinition of workload also
changes the incentives in the system and makes it less susceptible to
attempts to gain resources through inappropriate performance or
recording of workload.  For example, under RAM, a facility could get
more workload credit for hospitalizing a patient than if the same
care was provided on an outpatient basis. 

\9 Specifically, the complexity index applied in developing the
groups considered facility size, clinical variety, size of medical
resident teaching mission, variety of medical resident programs, size
of allied health training mission, managerial complexity, and
research. 

\10 We did not review the adequacy of the resource allocation
system's forecasting methodologies because data to compare actual
with forecasted workload and assess the accuracy of the forecasts
over time were unavailable at the time of our review. 


      VA HAS DONE LITTLE TO CHANGE
      PAST FACILITY ALLOCATIONS
---------------------------------------------------------- Letter :3.2

Despite cost variations and differing workload changes among
facilities reflected in RPM data, VA has done little to use the data
to change facility allocations.  We estimate that 1 percent was the
maximum real decrease in allocations that any facility had in 1995
based on RPM budget adjustments.  While one facility gained as much
as 3.4 percent through the process, the average uninflated gain\11
was also about 1 percent.  Facility budget changes for RPM Facility
Group 5 are shown in figure 1.  Appendix IV contains data for
facilities nationwide. 

   Figure 1:  Facility Group 5
   Budget Changes Resulting From
   RPM Process, Fiscal Year 1995

   (See figure in printed
   edition.)

Note:  L.  Side = Lakeside facility; W.  Side = Westside facility. 

Source:  GAO analysis of RPM data. 

VA made two significant decisions that limited the resource
allocation adjustments to facilities' budgets: 

  By limiting the movement of resources between the high- and
     low-cost facilities, VA in effect allowed the wide variations in
     patient costs among facilities to continue.  VA limited the
     amount of dollars moved between high- and low-cost facilities to
     $10 million in fiscal year 1994 and $20 million in fiscal year
     1995. 

  VA did not include enough resources in its RPM allocations to fully
     fund all the facilities' expected needs\12 and distributed the
     shortfall by limiting the amount of resources given to those
     facilities with growing workloads.\13 Furthermore, for those
     facilities with decreasing workloads, VA chose to limit their
     budget decreases.  These decisions led to funding for the
     projected cost of increased workload at approximately 17 cents
     on the dollar.  At the same time, facilities with decreasing
     workloads were given more money than needed to support the
     forecasted workload.  Appendix III discusses the impact of this
     decision in further detail. 

Both of these decisions on VA's part had a greater impact on those
facilities that historically had received less funding for their
workloads--and therefore were shown to have lower workload
costs--than those that had relatively faster growing workloads.  For
example, the Carl T.  Hayden Medical Center adjusted workload costs
were 16.8 percent lower than those of other facilities that VA
considered comparable in mission and size, and its forecasted
workload growth was 4.5 percent--third highest among comparable
facilities between 1993 and 1995.  However, because of VA's decisions
that limited the reallocation of funds, Carl T.  Hayden experienced a
2.2-percent increase in uninflated funding between 1993 and 1995.  By
comparison, the Long Beach Medical Center--the "high outlier" in the
same comparative facility group as Carl T.  Hayden--had adjusted
workload costs that were 13.9 percent higher than other facilities
and a forecasted workload decrease of approximately 1 percent.  Long
Beach's funding decrease was less than 1 percent in 1995 (before the
inflation adjustment).  A further discussion and data related to the
system's provision of funding for workload are in appendixes III and
IV. 


--------------------
\11 All facilities received larger budgets in fiscal year 1995 than
the previous year because of inflation adjustments.  The uninflated
gain represents the budget change before the inflation adjustment. 

\12 As discussed later in this report, VA excluded over $4 billion,
or 25 percent, of its medical care appropriation from the RPM
process. 

\13 While the system data indicated that VA needed $242 million to
fund the forecasted increases in workload for fiscal year 1995, VA
provided $42 million. 


      THE SYSTEM DOES NOT ADDRESS
      VETERANS' UNEQUAL ACCESS TO
      CARE
---------------------------------------------------------- Letter :3.3

Part of VA's original plan for RPM was to use it to help alleviate
inconsistencies in veterans' access to outpatient care--a plan that
has not materialized.  Consequently, inconsistencies that we reported
in the past are likely to remain, as demonstrated by differences in
facilities' ability to provide outpatient care. 

We reported in 1993 that veterans' access to outpatient care at VA
facilities varied widely--veterans within the same priority
categories received outpatient care at some facilities but not at
others.\14 This occurred because VA facilities were given discretion
to determine whether to ration, or limit, discretionary or
nonmandated care when resources are insufficient to care for all
veterans.\15

While considerable numbers of veterans have migrated to southeastern
and southwestern states, there was little shift in VA resources.  As
a result, facilities mainly in the eastern states were more likely to
have adequate resources to treat all veterans seeking care than other
facilities.  VA facilities in other states have adapted by
restricting veterans' access to care. 

Our 1993 report found that 118 facilities indicated they rationed
outpatient care for nonservice-connected conditions, while 40
facilities reported no rationing.  The facilities that did ration
used different methods to determine who got care.  Some rationed on
the basis of economic status, others on the basis of medical service
or medical condition.  Consequently, significant inconsistencies
existed in veterans' access to care both among and within centers. 

In responding to our report and in correspondence to the Congress, VA
indicated that the RPM system would consider and help overcome
inconsistencies among facilities in veterans' access to outpatient
care, allowing for a more equitable distribution of resources to meet
outpatient needs systemwide.  However, this vision remains
unfulfilled.  The system does not distinguish between facilities'
discretionary and mandatory workload in determining past and
forecasting future workload. 

Consequently, the access problems we reported in 1993 are likely to
have continued.  VA management systems, however, still lack reliable
data on facilities' rationing or denial of care, which prevented us
from confirming the extent to which the rationing we reported earlier
still exists.  But available data indicate that the ability of
facilities to provide care to discretionary categories of veterans
still varies.  For example, fiscal year 1994 data indicate that
although up to 13 percent of some facilities' patients were veterans
in a discretionary category because they had nonservice-connected
conditions and higher incomes, other facilities treated none of these
discretionary patients.  Appendix V discusses these differences
further. 


--------------------
\14 VA Health Care:  Variabilities in Outpatient Care Eligibility and
Rationing Decisions (GAO-HRD-93-106, July 16, 1993). 

\15 As we reported in VA Health Care:  Issues Affecting Eligibility
Reform (GAO/T-HEHS-95-213, July 19, 1995), VA uses a complex priority
system--based on such factors as the presence and extent of any
service-connected disability, the incomes of veterans with
nonservice-connected disabilities, and the type and purpose of care
needed--to determine which eligible veterans receive care within
available resources. 


   VA BARRIERS TO EQUITABLE
   ALLOCATIONS CAN BE OVERCOME
------------------------------------------------------------ Letter :4

VA officials offered a number of reasons for not reallocating larger
percentages of dollars in fiscal years 1994 and 1995, thereby
addressing the goal of better linking resources to workload.  These
reasons included the need for a transition period, the difficulty
facilities would have adjusting efficiently to large annual budget
changes, and the need to evaluate the reasons for the cost variations
and whether to include more of VA's resources in the RPM system. 
With regards to the goal of reducing access differences, officials
expressed uncertainty over how the system could be used for this
purpose. 

Although VA is planning to reallocate more funds for the fiscal year
1996 budget cycle, further changes are needed to establish equitable
allocations.  VA's original plans for the system remain valid and in
line with current governmentwide efforts to develop strategic plans
and performance measurement systems.  These efforts, legislated under
the Government Performance and Results Act, provide for performance
measurement as the basis for improving government operations and,
eventually, linking desired outcomes to resource allocation. 
Although we and others have recognized the inherent difficulties of
linking performance measures and budgeting,\16 VA has opportunities
to improve the equitability of its allocations by revisiting its
original plans for RPM and forging long-range plans for working
toward its original visions. 


--------------------
\16 Performance Budgeting:  State Experiences and Implications for
the Federal Government (GAO/AFMD-93-41, Feb.  17, 1993). 


      VA CITED SEVERAL BARRIERS TO
      REALLOCATING MORE MONEY
---------------------------------------------------------- Letter :4.1

The basis for VA's facility allocations remains largely unchanged
because VA officials decided to limit the changes to facilities'
budgets, rather than because the RPM design or process does not allow
them to do so.  Officials cited several reasons for not using the RPM
system data to reallocate larger amounts in fiscal years 1994 and
1995.  Among those reasons were the following: 

  A transition period was needed.  VA officials indicated that time
     was needed to educate facility managers and to obtain facility
     buy-in to the process.  Also, VA made several changes during the
     first years of the process to help address facility concerns
     about the accuracy of data that facilities submit.\17

  Facilities cannot efficiently adjust to large budget changes.  VA
     officials believed that absent plans to phase in resource
     changes over a 3- to 5-year period, facilities could not
     efficiently adjust to large changes in their budgets in any
     single year.  A facility does not know what its allocation for
     the fiscal year will be until shortly before the year
     starts--depending on how soon the VA medical care appropriation
     is determined.  Officials believed it unreasonable to expect
     facility directors to adjust to significant changes given the
     short lead time between when they learn what their budget
     allocations will be and the start of the fiscal year. 
     Furthermore, officials believed that facility directors had few
     management options for reducing operating budgets because 70
     percent or more of facilities' budgets is spent on salaries.\18

  Reasons for variations are unclear.  Officials indicated that they
     lacked a good understanding of what causes the variations, which
     some thought could be attributed to factors, such as quality of
     care, that are not considered in the adjustment process.  For
     example, high-cost facilities may provide higher quality or more
     timely care and may not necessarily have higher costs because of
     operating inefficiencies.  At the same time, low-cost facilities
     may be efficient and may become less so if given more money for
     the same workload.  Because VA does not have a standard for what
     facility unit costs should be, the current process "titrates
     budgets to the mean," that is, only very slowly brings facility
     budgets closer to the mean. 

VA officials further maintained that the RPM allocations alone could
not be used to judge the equity of facility budgets because
facilities get funds that are not distributed through RPM.  About
$4.1 billion, or 25 percent, of the fiscal year 1995 medical budget
was allocated to VA facilities by processes separate from the RPM
system.  About $2.3 billion of the $4.1 billion was allocated to
facilities at the beginning of the year and included funding for
items such as the community nursing home contract program, activation
of newly constructed facilities, outpatient fee-basis care,
prosthetics, and resident training.  The remaining $1.8 billion in
non-RPM-allocated funds paid for leases, travel, and patient care
programs such as dental programs and women veterans health programs. 
In part, these funds also were to pay for contingencies that arose
through the year.\19

An assessment of the equity of these allocations, and their impact on
the relative equity of the RPM system allocations, could not be made
with available data.\20 While VA's financial system accounts for
individual transactions to facilities throughout the year, it does
not summarize for each program the amount received by each
facility.\21 VA officials agreed that some non-RPM resources support
patient care operations, such as those for prosthetics or facility
activations, and indicated that they had conducted special
evaluations of non-RPM accounts to determine whether any of the funds
should be allocated through the RPM system.  As a result of these
evaluations, the percentage of the medical care funds allocated
through RPM increased from 66 percent in fiscal year 1994 to 75
percent in fiscal year 1995.  VA documents indicate that at the time
of our review, VA was considering establishing a formal process to
ensure that non-RPM funds are inventoried, monitored, and considered
for possible inclusion in RPM. 


--------------------
\17 RAM, the system that preceded RPM, was ended in part because of
concerns that facilities' data coding was affecting resource
allocations.  For RPM, VA has established facility education and data
validation efforts to help facilities understand RPM reports and to
give facilities the opportunity to make corrections to the data used
in the process. 

\18 Largely because of this concern, VA managers have made decisions
on RPM methodology in part on the basis of whether resulting budget
changes to individual facility budgets were considered "manageable."
To do this, the VA managers reviewed a number of different budget
scenarios using varied implementation methodologies.  A committee of
senior VA managers then chose the methodology after considering the
potential effects on individual facilities. 

\19 In 1989, we reported that regional directors helped centers cope
with budget shortages beyond the initial resource allocations because
directors could adjust centers' budgets throughout the year.  Budget
adjustments were made through reserves set aside at the start of a
year, supplemental appropriations, or transfers of funds among
centers.  Regional directors and Headquarters managers maintain these
"contingency funds"--amounting to about $90 million in fiscal year
1995--for such purposes. 

\20 For example, VA officials indicated that the Carl T.  Hayden
Medical Center received $11.3 million in non-RPM funding for patient
care in 1994 and 1995.  Because this information was obtained through
a one-time analysis, they could not provide comparable funding-level
data for all other facilities. 

\21 Officials gave various reasons why non-RPM accounts were not
allocated through the RPM system (for example, the associated
workload had not been properly identified).  RPM Field Oversight
Committee meeting minutes indicated that some officials had concerns
about the lack of proper accounting for non-RPM funds (for instance,
that non-RPM funding not initially allocated to facilities is not
well tracked to patient care). 


      VA UNCLEAR ABOUT WHY SYSTEM
      WAS NOT USED TO ADDRESS
      ACCESS DIFFERENCES
---------------------------------------------------------- Letter :4.2

Why VA has not used its resource allocation system to help overcome
inconsistencies in veterans' access to care was not clear because
confusion existed at VA over what needs to occur to meet this goal. 
For example, some officials indicated that legislative reforms to
current eligibility requirements were needed to ensure greater
consistency in eligibility determinations when veterans seek care. 
However, other officials' statements to us and the Congress indicated
that the resource allocation system would be used regardless of
legislative reforms and that the delay was attributable largely to
the absence of useful eligibility data and the difficulty of
incorporating this goal in the RPM model.  While we agree that reform
that simplifies VA's complex eligibility requirements might allow VA
to more easily consider veterans' access differences in allocating
resources, we do not believe such legislation is a prerequisite to
meeting this goal because the Congress has established the priorities
for the provision of veterans' care.  Because this issue has not yet
been resolved within VA, the management support and responsibility
for ensuring the mechanisms are put in place to achieve this goal are
lacking. 


      CHANGES NEEDED TO PROVIDE
      FOR MORE EQUITABLE FACILITY
      ALLOCATIONS
---------------------------------------------------------- Letter :4.3

VA officials indicated they were taking several steps to more
actively use the RPM system data and to improve the resource
allocation process.  First, given that the initial 2 years of the
system's implementation were intended to help facilities adjust to
the new process, the Deputy Under Secretary for Health told us in
September 1995 that VA was planning to reallocate a significantly
larger amount of money for the fiscal year 1996 facility budgets
based on RPM.  Furthermore, officials indicated that they were
implementing a Decision Support System\22 to better coordinate VA's
clinical and financial data systems and allow VA to compute more
accurately the costs of specific services provided to each patient. 
Nonetheless, we believe that several additional changes are needed to
foster facility budget changes and to provide for more equitable
allocations.  In particular, VA should take steps to address other
notable barriers that limit VA's ability to reallocate funds, as
discussed below. 


--------------------
\22 VA is investing a projected $132 million to implement a medical
Decision Support System (DSS).  Such a system has provided hospitals
in the private sector with improved data on patterns of patient care
and the cost of providing health care services.  However, we reported
in September 1995 that VA had not developed the comprehensive
business strategy necessary to achieve the system's potential
benefits or taken critical steps to ensure that data upon which DSS
is based are complete, accurate, and consistent.  It is unknown at
what point implementation concerns will be corrected and the system
will be fully operational.  Although it appears DSS, if implemented
to achieve such a goal, has the potential to greatly improve on or
replace significant parts of the RPM process, such as the process for
patient costing, VA has not clarified how RPM and DSS will interact. 
See VA's Decision Support System:  Top Management Leadership Critical
to Success of Decision Support System (GAO/AIMD-95-182, Sept.  29,
1995). 


         LINKING STRATEGIC PLANS
         TO RESOURCE ALLOCATION
         COULD HELP FACILITIES
         ADJUST TO BUDGET CHANGES
-------------------------------------------------------- Letter :4.3.1

If the provision of comparable resources for comparable workload is a
goal, long-term strategies to help facilities adjust to changing
budgets must be put in place.  VA's resource allocation could be made
more equitable if it is clearly linked to VA's strategic plan goals,
performance standards, and workload priorities.  In particular, VA
could coordinate its future plans for facility missions, services,
and capacity with its facility budgets over time, establishing a plan
for phasing in resource changes and giving facilities and VISN
managers financial objectives with which they can plan more than 1
year in advance. 

Linking resource allocation to VA planning efforts is not a new idea
in VA.  Starting in 1992, VA developed what was known as the National
Health Care Plan (NHCP) to coordinate RPM, VA strategic planning, and
other VA planning efforts.  NHCP was developed by a multidisciplinary
committee charged with looking at facility missions, identifying gaps
and overlaps in services, and developing a planning process. 
However, VA officials told us the draft plan was preempted by the
Clinton administration's push for national health reform in 1994. 
Efforts to determine how VA would be integrated within the
administration's health reform plan superseded other planning efforts
within VA. 

After NHCP was dropped, strategic planning reemerged in early 1995 in
a plan that the Under Secretary for Health set forth to the Congress
to restructure VA to make it a more efficient and patient-centered
health system.  As previously mentioned, the plan would further
decentralize VA operations by establishing 22 VISNs throughout the
country to coordinate and integrate VA's health care delivery assets. 
A key part of the VISN plan is that VISN directors would be held
responsible for strategic planning, with greater systemwide direction
in strategic planning as well.  It is not clear from current VA
planning documents how the VISN and VA systemwide strategic plan
might interact with resource allocation and how resources will be
allocated to VISNs.  It is not evident what VA's plan is for moving
facilities and VISNs toward more comparable funding for comparable
workload and achieving the coordination between planning and resource
management envisioned in NHCP.  As it implements its new VISN
structure, VA will need to link its planning and resource allocation
processes and establish long-range plans for using resource
allocation to help achieve its goals. 


         BETTER UNDERSTANDING OF
         COST VARIATIONS WOULD
         HELP SUPPORT BUDGET
         CHANGES
-------------------------------------------------------- Letter :4.3.2

To better link resources to workload, manage limited resources, and
ensure quality of care, VA could establish a review and evaluation
process as part of the formal RPM system.  Although VA has spent
considerable time and effort determining how the system should use
and develop data to produce facility budgets, few resources have been
devoted to determining why the system shows such significant cost
variations among facilities.  Understanding these variations could
help VA improve its comparisons of facilities' efficiencies by
providing information on how further adjustments might increase the
comparisons' fairness.  These adjustments might include other
locality-specific, mission-related, or data-reporting factors that
may contribute to cost differences.  Finally, VA could identify
potential ways that quality of care or other aspects of facility
performance are affected by resources.  With a better understanding
of the variations, decisionmakers could make more informed decisions
on the RPM system adjustments necessary to compare facilities fairly
and set expectations for how facilities should adjust to changing
resource levels. 

Originally, the RPM system was designed to include a review and
evaluation element that could help provide feedback to VA managers on
how facilities performed compared with their expected workloads and
costs.  Structured site reviews of high- and low-cost facilities were
intended to help determine possible reasons for the cost variations
by identifying efficiencies and allowing a closer assessment of the
potential impact of resources on quality.\23

Furthermore, VA hoped to better link cost data with quality
indicators so an assessment of resources' impact on quality could be
made.  In its 1994 Quality Management Plan, VA set forth how it would
assess progress in delivering quality health care to veterans.  VA
reported that it sought to produce resource profiles for each level
of the organization that could be analyzed for connections between
quality of care and resource availability.  The RPM system was
envisioned as a critical part of this effort.  For example, it was
expected to provide information about facilities with resource
profiles that suggested resources were insufficient and to lead to
reviews that could ensure more consistent care across the VA system. 
VA anticipated that by the end of fiscal year 1994, RPM would match
resources to quality of care issues and improve information for
management at all levels.  None of these original plans for RPM has
yet materialized, apparently because of VA's priorities, time
constraints, data on quality becoming available only recently, and
lack of consensus on how to implement VA's original plans. 

An example of how decisionmakers can be given information on health
care cost variations was illustrated in a report by the Prospective
Payment Assessment Commission (PROPAC), which advises the Congress on
Medicare issues.\24 PROPAC has analyzed state variations in per
capita health care costs in order to understand the implications of
the wide variations in the delivery and financing of health care
nationwide.  It has identified factors that contribute to cost
differences across states, such as the mix and volume of services;
mix of physicians, medical specialists, and other health
professionals practicing in a state; and policy-related factors such
as state licensing requirements or regulations that influence the
amount of labor used to provide health services.  PROPAC also
determined that 6 of the 10 states with the best health status were
among the 10 with the lowest standardized resource costs per
enrollee.\25

The limited effort VA has put into understanding possible reasons for
variations has already achieved some change in facility management,
according to the VA official overseeing the technical advisory groups
of physicians and other clinicians who advise RPM on clinical issues. 
The Chronic Mental Illness Technical Advisory Group had assessed
discharge cost, costs per day (possibly reflecting staffing levels),
length of stay, and other data related to high- and low-cost
facilities for chronic mental illness patients and provided facility
management with information on factors potentially contributing to
their facility's high or low cost. 


--------------------
\23 We have previously reported that VA lacks oversight procedures to
effectively assess the operations of its medical centers and that VA
Headquarters should be serving as an information exchange,
identifying and evaluating locally developed programs and methods and
disseminating best practices to other medical centers.  We also
reported that VA has an opportunity to improve the efficiency of its
facility operations, as VA lags far behind the private sector in this
regard.  See VA Health Care:  Challenges and Options for the Future
(GAO/T-HEHS-95-147, May 9, 1995). 

\24 The option of establishing a formal oversight body such as PROPAC
for RPM was suggested by a VA contractor in a review of RPM.  An
advantage is that it would ensure the reviews are conducted by an
objective, outside group rather than by stakeholders to the process. 
As part of its role, the group charged with examining variations
among VA facilities and their expected workloads and costs would need
to advise on adding management incentives for improvements in both
quality of care and cost-effective delivery.  Its overall mission
could be to provide oversight and analysis to the process to ensure
that quality, access, timeliness, and cost-effectiveness are
considered. 

\25 PROPAC, Medicare and the American Health Care System, Report to
Congress (Washington, D.C.:  June 1995). 


         EXPLORE OPTIONS FOR
         TRACKING ALLOCATIONS BY
         PROGRAM AREA
-------------------------------------------------------- Letter :4.3.3

To ensure that the RPM allocations are coordinated with those made
through other allocation processes, VA needs to establish a formal
process for evaluating whether non-RPM-allocated funds should be
incorporated into the RPM system.  In doing so, VA will need to track
by facility the non-RPM allocations, by program, over the course of
the year as well as those made under RPM.  VA officials indicated
that current financial systems would allow a manual tracking of these
allocations.  We believe VA needs to explore options for using
existing financial management systems to capture these management
data.  The availability of these data would allow for better
assessments of the total funding provided to facilities for patient
care and the priorities that the various allocation processes use to
distribute facility funding. 


         EXPLORE OPTIONS FOR
         CONSIDERING FACILITY
         DIFFERENCES IN THE
         PROVISION OF
         DISCRETIONARY CARE
-------------------------------------------------------- Letter :4.3.4

To ensure that veterans within the same priority categories are
afforded more equal access to care, VA needs to explore options for
using the resource allocation system to achieve this goal.  VA would
need to assess the extent that current databases could be used to
distinguish and account for the facility differences in their
rationing practices and abilities to provide discretionary care.  VA
may also need to determine how to collect more specific data on
differences in facilities' provision of care, for example,
differences in the extent facilities are providing services to
veterans in their area (market share) or in the extent veterans are
denied health care services because of a lack of resources. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

VA for years has struggled with implementing an equitable resource
allocation method--one that would link resources to facility
workloads and foster efficiency.  The need for such a system has
become greater in recent years as veterans' demographics shift and as
health care delivery undergoes dramatic changes to adjust to
increasingly limited resources.  The resource allocation system can
help VA achieve this goal by forecasting workload changes and
providing comparative data on facilities' costs.  Nonetheless, though
VA has understandably focused its efforts in the first years of RPM
on improving the system's data and design, VA has not taken steps to
address several barriers that prevent it from acting on the data the
system produces.  If the system is to live up to its potential,
several changes need to be made, including linking resource
allocation to VA's strategic plan, conducting a formal review and
evaluation of facility (or VISN) cost variations, evaluating the
basis for not allocating funds through RPM, and using RPM to overcome
differences in veterans' access to care. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

We recommend that the Secretary of Veterans Affairs direct the Under
Secretary for Health to

  link the resource allocation process to the strategic planning
     process in the VISN structure so that (1) allocations are more
     clearly associated with VA's long-range goals, performance
     standards, and workload priorities; and (2) facility and VISN
     managers are given short- and long-range financial objectives;

  institute a formal review and evaluation process within the
     resource allocation system to examine the reasons for cost
     variations among facilities and VISNs;

  establish a process for evaluating non-RPM patient care funds to
     determine whether they can be included in the RPM allocation
     system, including exploring options for using existing financial
     management systems to capture data on the provision of non-RPM
     allocated funds by facility and program area; and

  explore options for using existing or improved databases to (1)
     understand the extent to which veterans within the same priority
     categories have consistent access to care within the VA health
     care system and (2) include such data in VA's resource
     allocation system to help ensure that veterans have consistent
     access to care throughout the system. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

The Deputy Under Secretary for Health, the Chief Financial Officer,
and other VA officials provided comments on our draft report.  They
stated that the report represents an accurate and balanced analysis
of VA's past efforts.  The Deputy Under Secretary pointed out that VA
has recently taken steps to implement changes to the resource
allocation process that are consistent with the draft report's
overall recommendations.  He also indicated that although equity of
access for veterans is a laudable goal, incorporating this goal in
the allocation of resources is necessarily complex. 

More specifically, VA concurred with our recommendation to link the
resource allocation system with its strategic plan for its VISN
structure and indicated that VISN directors have been charged with
formulating long-range VISN plans.  VA also concurred with our
recommendation to institute a formal review and evaluation process
within the RPM system to examine reasons for cost variations among
facilities and VISNs, and cited some efforts already in place to
begin studying these cost variations.  These efforts, such as the
analyses of the Chronic Mental Illness Technical Advisory Group,
which we describe in the report, represent, in our view, a step in
the right direction.  Our recommendation for a formal review and
evaluation process, however, envisioned a more structured, detailed
process using the RPM database and other performance measure
databases.  Such a process would not only address ways to improve
efficient delivery of quality care but also ways to improve the
estimates and comparisons made by the resource allocation system. 

VA also concurred with our recommendation to establish a process for
evaluating non-RPM patient care funds to determine whether they can
be included in the RPM allocation system.  VA indicated that this
process had already begun in that criteria for determining when
resources should and should not be allocated through the RPM process
had been established.  VA hoped to include 90 to 95 percent of VA's
health care budget in the RPM allocations system by fiscal year 1997. 
Because of the large proportion of resources it plans to include in
the RPM process, VA stated that the second part of this
recommendation--to explore options for capturing data on the non-RPM
funds by facility and program area--would be unnecessary.  In our
view, VA's plans appear to meet the intent of our recommendation. 
Nevertheless, there still may be a need to track non-RPM funds by
facility or VISN if VA falls short of its stated objectives for
including the maximum practical amount of health care funding in RPM. 
As a result, we have not changed our recommendation. 

VA concurred with qualifications with our final recommendation that
VA explore options for (1) using existing or improved databases to
understand the extent to which veterans receive consistent access to
care and (2) including such data in the resource allocation process. 
VA agreed with the need to explore options for improving information
about veterans' access to care.  However, VA also stressed that
before it knows whether it could use that information to allocate
resources, it would first need to define what "consistent access"
really means.  The agency expressed its commitment to developing that
definition, even though it acknowledged that the plan for how it
would do so was not fully developed.  In VA's opinion, consistent
access to care is complex and not easy to implement fairly so that
special populations, such as the homeless and women veterans, are not
adversely affected.  VA stated that improving access is more
fundamental than a database issue. 

We acknowledge the complexity of access issues and agree that this is
more than a database issue.  However, we continue to believe that VA
should--at a minimum--know the extent to which veterans in the
different statutorily determined priority categories are being served
in different medical centers and take those categories into
consideration in its allocation of resources. 


---------------------------------------------------------- Letter :7.1

As arranged with your staff, unless you announce its contents
earlier, we plan no further distribution of this report until 7 days
after its issue date.  At that time, we will send copies to the
Secretary of Veterans Affairs, interested congressional committees,
and other interested parties.  We will also make copies available to
others upon request. 

If you have any questions about this report, please call me or David
P.  Baine, Director, at (202) 512-7101.  Other major contributors to
this report included Frank C.  Pasquier, Assistant Director;
Katherine M.  Iritani, Evaluator-in-Charge; Linda Bade, Senior
Evaluator; Doug Sanner, Evaluator; and Evan Stoll, Technical Analyst. 

Sincerely yours,

Carlotta C.  Joyner
Associate Director
Health Care Delivery
 and Quality Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

To determine the extent to which VA's RPM system provides for an
equitable distribution of resources among VA facilities, we reviewed
two aspects of the system as originally envisioned by VA.  First, we
determined the extent that it provided for comparable resources for
comparable workloads.  Second, we assessed the extent it provided for
resources so that facilities can serve comparable categories of
veterans.  To make these determinations, we documented the system
design and analyzed the system's impact on facility budgets. 

We reviewed documents and discussed the resource allocation system
with the Director and analysts of VA's Boston Development Center. 
Documents reviewed included the RPM Handbook, RPM Primer, BDC Draft
Development Plan, and relevant BDC Newsline newsletters.  We
interviewed the leaders and some members of various RPM committees,
including the RPM Field Oversight Committee, RPM Incentives Subgroup,
the RPM Outlier Group, the Reinventing RPM Subcommittee, and the RPM
Financial Advisory Committee.  We also reviewed committee reports and
meeting minutes. 

We also analyzed various BDC RPM data files to determine the impact
of VA decisions on facility budgets.  The data reviewed included
workload forecasts and allocation amounts related to various
decisions occurring as part of the process.  We relied on VA analyses
of the impact of RAM and RPM on regional allocations over the past
decade.  We also analyzed veteran eligibility data in VA's Outpatient
File and summarized by the National Center for Veteran Analysis and
Statistics in its Summary of Medical Programs to assess the
variations among facilities in the provision of care to discretionary
categories of veterans. 

Finally, we tested the sensitivity of the allocations to the accuracy
of the cost and workload data feeding the RPM system to determine how
coding or other errors in the cost and workload data may affect
allocations under the system's current design. 

To address the causes of any inequities in the distribution of
resources, we interviewed various VA officials, including the Deputy
Under Secretary for Health; Associate Deputy Chief Medical Director;
Associate Chief Medical Director for Quality Management; Deputy
Director, Quality Management Systems Office; Director, Budget Office;
Chief, Medical Formulation Branch; Assistant Director for Budget
Execution; Chief, Allocation and Control Branch; Chief, Health
Resources Management Branch; Acting Director, Strategic Planning and
Policy Office; Director and analysts of the Management Sciences
Group; and Director and analysts of the National Center for Cost
Containment.  To address the changes that could help ensure that the
system more equitably distributes resources, we reviewed various
related studies, including a contractor's study conducted in 1992\26
and a VA Inspector General report on physician staffing, Audit of
Veterans Health Administration Resource Allocation Issues:  Physician
Staffing Levels.\27 Finally, we reviewed VA strategic plans,
including VA's Blueprint for Quality, the unpublished National Health
Care Plan, and the VA Secretary's plan for restructuring VA, entitled
Vision for Change. 

To understand the RPM system's impact on the Carl T.  Hayden Medical
Center in Phoenix, we visited the facility and interviewed key
management officials.  We also reviewed the report of a Western
Region task force looking at the allocations awarded to Carl T. 
Hayden and met with officials of the Western Regional Office. 

Our review was limited to the resource allocation process as it
operated for the fiscal year 1994 and 1995 allocation process.  The
VA appropriation for fiscal year 1996 had not been determined at the
time of our review.  Our review was limited primarily to the process
as it was used to allocate and manage facility budgets and did not
include a review of other goals, such as how the process is used to
formulate VA's budget. 

Our review was conducted between December 1994 and October 1995 in
accordance with generally accepted government auditing standards. 


--------------------
\26 Ann M.  Hendricks and Henry G.  Dove, Review of the Resources
Planning and Management System:  Report to the Management Decision
and Research Center (Boston:  Management Decision and Research
Center, Nov.  1992). 

\27 Report No.  5R8-A19-113 (Washington, D.C.:  Sept.  29, 1995). 


VA'S RESOURCE PLANNING AND
MANAGEMENT SYSTEM
========================================================== Appendix II

The Resource Planning and Management system is the management
decision process VA uses to allocate most of its resources and to
compare VA medical facilities' performance.  The system provides the
information VA uses as a basis for resource allocation by classifying
each patient into a clinical care group, calculating the cost per
patient, and forecasting future patients.  The system also provides
comparative data on facility cost per workload unit so that funds can
be reallocated from the high- to low-cost facilities. 


   VA RESOURCE ALLOCATION HISTORY
-------------------------------------------------------- Appendix II:1

Each year, VA receives an appropriation to operate its health care
system--about $16.2 billion in fiscal year 1995.  To finance its
medical care system, VA uses what is considered a "global budgeting"
system.  VA calls it that because of its fixed budget--resources are
first approved by the Congress, then allocated to individual
facilities for the ensuing fiscal year.  VA facility directors are
charged with managing their assigned workload targets within their
allocated budgets.  Before 1985, VA Headquarters developed facility
budgets by incrementally adjusting the facilities' past budgets
rather than building the budget based on the facilities' expected
workload. 

Beginning in fiscal year 1985, VA attempted to modify its incremental
budgeting process of making adjustments to historical budgets.  This
new system, called the Resource Allocation Methodology, was intended
to provide a more equitable distribution of available funds by
adjusting budgets according to the work produced and its associated
cost.  RAM tried to match resources to facility workloads by linking
allocations to the reported clinical services or procedures performed
in each of three areas--acute care, ambulatory care, and long-term
care.  RAM was suspended in 1990, however, because of concerns about
the unintended impact on clinical practice patterns and
administrative management of VA medical care.  Under RAM, facilities
and regions competed with each other for a fixed resource pool. 
Facilities began acting as if VA had an open-ended reimbursement
system--having incentive to perform work beyond their resources--when
in reality it was a closed, fixed budget system.  This open-ended
expansion of workload led to a budget crisis at a number of VA
facilities and caused concern about the potential impact on quality
of care. 

After RAM was suspended, VA began moving to a new system--RPM--that
would be more prospective and capitation-based--in line with where
the private sector was heading.  RPM was to be prospective in that
the process forecasted workload changes and future facility resource
requirements, enabling VA to use the data to formulate its budget. 
RPM was "capitation like" in that it was designed to consider
workload on a per person basis, rather than as procedures
performed.\28 This new definition of workload was expected to lessen
the incentive to inappropriately provide care.  RPM was used for the
first time to allocate facility resources for fiscal year 1994. 

The RPM system differed from RAM in several ways.  First, VA
envisioned a broad management decision process with RPM that would
integrate planning, budgeting, and operational management.  VA
expected RPM to be used to formulate the Veterans Health
Administration's budget from year to year, to be linked to and driven
by VA's strategic plan, and to be used to review and evaluate
facilities' unit costs. 


--------------------
\28 Generally, capitation means paying providers a flat fee in
advance to take care of members' health care needs during a defined
period according to an agreed-upon benefit package and copayments, as
necessary.  For VA to have such a system, many legislative and other
barriers would have to be addressed.  See Barriers to VA Managed Care
(GAO/HEHS-95-84R, Apr.  20, 1995). 


   RPM COMMITTEE STRUCTURE
-------------------------------------------------------- Appendix II:2

VA's considerable investment in RPM is reflected in the significant
involvement of VA managers, technicians, and physicians from
throughout the country serving on RPM committees.  In total, several
major committees and subcommittees, six technical advisory groups of
clinicians generally representing the RPM clinical patient groups,
and key VA Headquarters managers have been involved in RPM's design
and implementation.  Operationally, the Boston Development Center, a
group of about 26 staff with a fiscal year 1995 budget of $3.3
million, is responsible for RPM data processing and education.  The
RPM development and management structure includes the RPM
Subcommittee and Field Oversight Committee and the technical advisory
groups, which are responsible for, among other things, incorporating
clinical definitions into the RPM system.  In addition, the process
includes input from each of the four VA regions (replaced by VISNs in
fiscal year 1996) and all facilities.  While the various RPM
committees, subcommittees, and advisory groups make recommendations
on how the system should be implemented, the Budget Policy and Review
Committee, comprising VA associate chief medical directors and other
senior VA managers, makes the final recommendation on RPM
methodology, which the Under Secretary for Health approves. 


   SUMMARY OF THE PROCESS
-------------------------------------------------------- Appendix II:3

BDC uses a complex data compilation and analysis process to develop
data that VA Headquarters and other managers use to determine
facility allocations.  Key decisions made by RPM committees and
approved by Headquarters managers have dictated the final outcome of
the facility allocations, as described here and in appendix III. 
Generally, the RPM budget allocations to the facilities have been
driven by the number of (case-mix-adjusted) unique patients expected
to be seen and the facility-specific unit cost of providing care. 
"Unit costs" refer to each facility's average cost for treating a
patient in each of five RPM patient groups.  The key steps in the
process are as follows: 

  Patient classification:  Using clinical information, VA classifies
     each veteran seen in the base year into one of 49 clinical
     classes ranked by resource intensity.\29 The patient classes are
     intended to reflect the kinds of medical care being provided.  A
     patient who qualifies for two or more classes is placed in the
     most resource-intensive class. 

  Patient (workload) counts:  VA counts the unique patients in each
     class at each facility. 

  Workload forecasts:  VA predicts changes to the numbers of patients
     expected to be seen within each class by applying forecasting
     methods to historical trend data.\30

  Patient costing:  Using facility "bed-days of care" provided and
     other clinical information from VA's Patient Treatment File,
     Outpatient File, Patient Assessment File, and other data
     sources, combined with facility cost data from the Cost
     Distribution and other cost reports, VA estimates a total cost
     for each patient. 

  Patient groups:  VA groups the patients within each class into one
     of five major patient groups and calculates an average facility
     cost per patient within each group. 

Using the data developed in these steps, VA establishes the facility
target budget allocation through a series of calculations.  First,
average facility costs per patient group are multiplied by the
expected numbers of patients to be seen at the facility within each
group.  These initial facility numbers are then adjusted to reflect
marginal costs associated with increased and decreased workload, VA
budget constraints, facility efficiencies, inflation, and VA regional
input.  These adjustments are described in detail in the sections
that follow. 


--------------------
\29 Unique patients are classified into one of 49 classes (such as
lung transplants, end stage renal disease, stroke, substance abuse,
and oncology) that are then contained within one of five patient care
groups--transplants, special care, extended care, chronic mental
illness care, and primary care.  For the fiscal year 1996 process, VA
intends to increase the number of patient classes to 51. 

\30 RPM used actual patient data through fiscal year 1993 as the
basis for fiscal year 1995 allocations and future budget projections. 
RPM forecasts patients at the class level using one of five
methodologies (population-based, Bayesian, rate-based, average of
population and Bayesian, and manually set forecasts).  RPM applies
the projection methodology selected by VA management to best
represent national and facility workload trends or national policy
direction. 


      MARGINAL RATE ADJUSTMENT
------------------------------------------------------ Appendix II:3.1

The RPM process has applied "marginal rates" in calculating the
incremental resource needs facilities have given their changing
workloads.  In other words, marginal rates account for the expected
resources needed for seeing one additional or one less patient.  VA
decided to use marginal rates because of the assumptions that, given
the relatively fixed nature of some operating costs such as salaries,
workload increases would not have to be funded at the same rate as
the base budget workload and that facilities with decreasing numbers
of patients could not be expected to reduce their per patient costs
at the same rate as their base budget.  VA has not determined the
true incremental cost per patient, however.  Officials indicated they
judgmentally chose a 75-percent marginal rate for workload increases
and a 50-percent marginal rate for workload decreases to reflect
incremental costs associated with workload changes.\31


--------------------
\31 The VA Budget Director indicated the 75/50 marginal rate
percentages were a result of knowledgeable VA officials' judgment and
consideration of several years' experience.  He also indicated that
the marginal rate for fiscal year 1996 is expected to be 75 percent
for both workload increases and decreases. 


      ADJUSTMENT TO ACCOMMODATE
      BUDGET SHORTFALLS
------------------------------------------------------ Appendix II:3.2

Because VA has not had enough funds to fully cover all of the
expected facility costs, VA officials chose to address the shortfall
in both fiscal years 1994 and 1995 by applying an "implementation
rate" to provide a percentage of the funding that facilities had been
expected to get for workload changes.  The implementation rate in
both fiscal years 1994 and 1995 was 17.36 percent.  The impact of the
implementation rate, and how it was applied, is more fully discussed
in appendix III. 


      COST-EFFICIENCY ADJUSTMENT
------------------------------------------------------ Appendix II:3.3

To measure and provide in the allocations for differences in facility
efficiency, the RPM system uses a complex process for comparing like
facilities' costs.  Through this process, VA removes funds from the
budgets of the "least efficient" facilities (called high outliers) to
provide more funds to the "most efficient." The outlier process
involves grouping comparable facilities, adjusting costs to make
comparisons more equitable, and developing cost- efficiency and
productivity data for facility comparisons and for the outlier
process. 


         VA FACILITY GROUPINGS
---------------------------------------------------- Appendix II:3.3.1

To compare facility costs, the process first groups facilities
considered comparable.  The nine medical center groups used in the
fiscal year 1995 process were created by merging the hospital groups
used for planning purposes and a complexity index.  The complexity
index is based on a number of variables, including facility size,
clinical variety, resident teaching mission, resident programs,
allied health training, managerial complexity, and research. 


         VA COST ADJUSTMENTS FOR
         FACILITY COMPARISONS
---------------------------------------------------- Appendix II:3.3.2

To more fairly compare facility costs per workload, the process
adjusts for case mix differences (that is, differences in the types
of patients treated at each facility) by developing a standardized
workload measure called facility work or facwork.  Facwork is an age-
and case-mix-adjusted workload measure that recognizes that different
classes of patients have different resource intensities.  For
example, a transplant patient is more resource intensive than a
primary care patient.  Facwork is calculated solely on costs,
recognizes that VA patients may visit more than one facility, and
allows workload credit to be shared among facilities. 

In fiscal year 1995, a cost adjustment process was developed to
"level the playing field" by adjusting for facility-specific cost and
workload factors in order to make fairer cost comparisons.  The costs
removed from the facility comparisons included those for resident
training, research, geographic pay, and specialized programs.  In
addition, workload was adjusted for fee and contract programs and for
high-cost programs.  This process ensured that the costs for a
facility that provided extensive resident training, for example, were
not used in comparing that facility with others in its group. 


         VA EFFICIENCY COMPARISONS
         AND ALLOCATION
         ADJUSTMENTS
---------------------------------------------------- Appendix II:3.3.3

Once the cost adjustments were made to provide for fairer
comparisons, VA ranked the facilities within each facility group. 
This ranking and the supporting data were provided to each facility
for data validation before the final allocations were made.  RPM also
produced data showing productivity comparisons, that is, comparisons
for facilities within each facility group of the staff level per
workload. 

VA used the resulting cost comparisons in its outlier process to
adjust the initial allocations.  Through this process, funds from the
initial projected budgets of high-cost facilities were removed and
added to the budgets of low-cost facilities.  The high- and
low-outlier facilities were identified based on their differences
from the group average.  RPM resources were withdrawn for high
outliers using a sliding scale of up to 1 percent and added to low
outliers at a flat rate of 1.25 percent until the amount that VA
officials decided to reallocate was reached.  Approximately $10
million was moved between the high- and low-cost outliers in fiscal
year 1994, and approximately $20 million was moved in fiscal year
1995. 


      INFLATION
------------------------------------------------------ Appendix II:3.4

The inflation adjustment is facility-specific and is based on
locality pay adjustments and specific assumptions included in the
President's medical care budget.  Inflation rates varied from 4.1 to
16.7 percent in fiscal year 1995 and averaged 6.3 percent. 


      REGIONAL DIRECTORS'
      ADJUSTMENTS
------------------------------------------------------ Appendix II:3.5

The four regional directors had the authority to change the initial
allocations that BDC produces through its data analyses process;
however, we identified few instances in which regional directors
actually changed the initial allocation numbers.  Regional input to
the facility allocation process has been mainly through a $5 million
allocation over which each regional director had discretion and for
which facilities "negotiated." The negotiations were considered part
of RPM's management process, which was intended to allow for
facility-specific factors not captured in the RPM data.  Each
regional director developed his or her own criteria for allocating
resources, subject to VA Headquarters approval.  The criteria and
methodologies used by regional directors for their allocation funds
varied.  For example, one region in the fiscal year 1995 process
allocated its $5 million on the basis of facility market share, unit
cost differences, and the impact of workload and outlier adjustments. 
Another region removed allocations for forecasted workload increases
from high outliers to create a regional contingency fund.\32

In the fiscal year 1995 negotiation process, 56 percent of the
facilities had their dollar base adjusted, with 84 facilities gaining
and 10 facilities losing funds.  The gains ranged from $2,798 to $1.5
million, and losses ranged from $83,000 to $712,277.  See appendix IV
for fiscal year 1994 and 1995 RPM adjustments for each facility. 


--------------------
\32 These allocations in some cases acted as a buffer to the outlier
changes because regional directors provided funding to high outliers
that had lost money through the outlier process. 


   RPM DATA SOURCES AND
   SENSITIVITY TO DATA ERRORS
-------------------------------------------------------- Appendix II:4

The RPM system relies on data from many data sources within VA,
including the Cost Distribution Report, Patient Treatment File,
Outpatient File, Patient Assessment File, Fee File, Immunology Case
Registry, and the Home Dialysis Reporting System.  Each facility
director is responsible for ensuring the accuracy of patient care
workload and cost data, and most facilities have data validation
committees responsible for the review of internal controls, data
collection procedures, and adherence to reporting instructions, among
other things.  Once BDC obtains facility data, it merges the basic
patient care data sets into its relational databases and produces RPM
reports known as the facility "tables." These tables are distributed
to facilities for data validation. 

We have previously reported concerns about some aspects of VA's cost
and workload system.  Specifically, we reported in 1987 that one
problem VA had in implementing RAM, RPM's predecessor, was that
unreliable clinical and financial databases limited VA's ability to
establish accurate target allowances for individual facilities.\33

RPM relies less on specific clinical diagnoses coding than RAM
because workload is defined as the whole patient and the patient's
associated costs rather than being based on specific clinical
diagnoses.  Furthermore, RPM includes most facility operating costs
in developing patient cost averages and uses each facility's
historical workload costs in developing allocations, reducing the
chance that facility cost errors would significantly affect
allocations.  For example, costs inappropriately allocated to one
cost center would result in lower than actual costs being reflected
in others.  Because RPM captures most patient care costs in
calculating patient cost averages, these misallocations would show
higher than actual costs for some patient types, but lower than
actual costs for others.  For these reasons, it appears that
potential inaccuracies in the clinical and cost data are less likely
to affect facility allocations under RPM than under RAM. 

Our sensitivity analysis of the RPM facility allocations to workload
and cost errors supports this conclusion.  Our analysis found that
even with potential errors of up to 50 percent in the reported
workload levels or patient group costs, the budget allocation for the
majority of the facilities would change less than 1.2 percent.  The
maximum change for any facility under our analysis was a 2.03-percent
increase in allocation and a 2.27-percent decrease.  We believe that
our tests represent extreme error rates and that these changes are
far greater than those VA is likely to experience. 


--------------------
\33 See VA Health Care:  Resource Allocation Methodology Should
Improve VA's Financial Management (GAO/HRD-87-123BR, Aug.  31, 1987). 


   PROCESS CHANGES
-------------------------------------------------------- Appendix II:5

The RPM process has changed significantly from year to year and
continues to do so.  For example, the fiscal year 1994 facility
budgets were developed using per patient average costs for each of
the 49 patient class levels; whereas, fiscal year 1995 funding was
based on the average patient costs within each of the five patient
groups.  VA hoped that the move to group costs would reward those
facilities that increased the number of low-cost patients.  The move
to group costs was also intended to eliminate the significant
incentive to admit a patient just to obtain funding at the higher
valued RPM class. 

The fiscal year 1996 RPM allocation is expected to shift the funding
mechanism from facility-specific patient costs more toward a
systemwide capitation rate.  For the first time, VA officials told
us, they intend to base RPM allocations on a "blended rate" to
achieve a balance among national, regional, and local cost
considerations.  The blended rate may include facility, medical
center group, VISN/regional, and national components.  The magnitude
of blended rates at the facility level depends heavily on the
relative weights attributed to each component; for example, the
blended rate could be based on 90 percent of each facility's costs,
with the remaining 10 percent based on average national and facility
group costs.  VA officials indicated that blended rates will
eliminate the outlier adjustment process that has been in place for
the last two RPM allocations.  Under a blended rate, all facilities,
rather than only those considered "outlier" facilities, would see
their initial budgets change based on the process.  The farther the
facility lies above or below the mean, the more the facility would
lose or gain under the process. 

Resource allocation within VA could further change with the VISN
implementation.  A significant goal for the agency under the VISN
reorganization is to move to a full capitation system in which a unit
of payment is based on the enrollee--for example, a certain fee would
be paid per member per month or year of enrollment for a defined
package of covered health services.  At issue is how soon, given the
many barriers to implementing full capitation, VA will be in a
position to allocate resources under full capitation. 


PROVISIONS FOR COMPARABLE
RESOURCES FOR COMPARABLE WORKLOADS
========================================================= Appendix III

For the last decade, VA has sought through its resource allocation
systems to better link resources to workload and depart from its
traditional process of basing allocations on historical budgets. 
Part of the need for this better link stems from the shifting
demographics of veterans across the nation.  RPM data show that
facilities' per patient costs vary widely, even after adjustments are
made to ensure cost comparisons fairly exclude costs that facilities
cannot control.  The data also show changing facility workloads.  VA
changes to facility budgets have generally averaged about 1 percent
per year through the process.  Two key VA decisions account for the
limited change:  the funding of workload changes was limited and the
adjustments from high- to low-cost facilities were limited.  This
conservative implementation of RPM continues VA's history of limiting
changes to facility budgets from year to year. 


   CHANGING VETERAN DEMOGRAPHICS
------------------------------------------------------- Appendix III:1

Over the last decade, although the overall veteran population has
decreased, veterans have been migrating from northeastern and
midwestern states to southeastern and southwestern states. 
Nationally and in each of the 50 states and the District of Columbia,
veteran deaths are expected to outnumber separations from the armed
forces.  Therefore, the only states expected to have stable numbers
of veterans in their populations through the year 2000 are those to
which enough veterans migrate to offset deaths of veterans in the
states' existing populations.  For example, 60,000 veterans are
expected to move to Arizona between 1989 and 2000, offsetting the
deaths of veterans already living in that state. 

Figure III.1 shows projected veteran population change by state,
based on Census data, from 1989 to 2000. 

   Figure III.1:  Projected Change
   in Veteran Population by State,
   1989 to 2000

   (See figure in printed
   edition.)

Source:  VA Statistical Service, Research Division. 


   FACILITY VARIATIONS IN RESOURCE
   DISTRIBUTION AND WORKLOAD
   CHANGES
------------------------------------------------------- Appendix III:2

Per patient facility costs vary significantly among facilities,
ranging from less than $800 per patient to over $11,000 per patient. 
While the basis for allocations is each facility's historical average
cost per patient within each of the five RPM patient groups, the
system also provides comparative data to include facilities' cost
efficiency, productivity, and workload changes.  A discussion of some
of the facility comparisons shown by the RPM system follows. 


      COST-EFFICIENCY DATA
----------------------------------------------------- Appendix III:2.1

Much of the difference in facility per patient costs can be explained
by differences in mission, for example, the level of specialized care
facilities may be providing.  An outpatient clinic, for example, is
likely to spend to spend far less per patient than a hospital that
provides specialized services such as organ transplants.  As
discussed in appendix II, to provide for comparative data, the system
places facilities into groups with other facilities VA considers
comparable.  This "grouping" of comparable facilities, along with the
classification of patients by clinical type, lessens the range of
differences in costs, as shown in figure III.2 for Facility
Group 5. 

   Figure III.2:  Facility
   Unadjusted per Patient Cost
   Differences, Facility Group 5

   (See figure in printed
   edition.)

Note:  L.  Side = Lakeside facility; W.  Side = Westside facility. 

Source:  GAO analysis of RPM data. 

Even after adjusting for facility locality pay and other
uncontrollable cost differences, variations among facilities within
each of the RPM groups remain, as shown in figure III.3. 

   Figure III.3:  Facility
   Adjusted Costs per Workload
   Unit, Facility Group 5

   (See figure in printed
   edition.)

Note:  L.  Side = Lakeside facility; W.  Side = Westside facility. 

Source:  VA RPM data. 


      PRODUCTIVITY DATA
----------------------------------------------------- Appendix III:2.2

The system also produces data on productivity differences among
facilities, as shown, for example, by differences in physicians per
standard workload units\34 as well as total staffing per workload
unit.  Figure III.4 shows an example of these data for Facility Group
5. 

   Figure III.4:  Variations in
   Full-Time Employees per 1,000
   Workload Units, Facility Group
   5

   (See figure in printed
   edition.)

Note:  L.  Side = Lakeside facility; W.  Side = Westside facility. 

Source:  VA RPM data. 


--------------------
\34 These standardized workload units, called facility work or
facwork, are described in appendix II. 


      DATA ON WORKLOAD CHANGES
----------------------------------------------------- Appendix III:2.3

As discussed in appendix I, the system estimates workload changes
through its forecasting process.  The differences in expected
workload for Facility Group 5 are shown in figure III.5. 

   Figure III.5:  Variations in
   Forecasted Workload Changes,
   Fiscal Years 1993 to 1995,
   Facility Group 5

   (See figure in printed
   edition.)

Note:  L.  Side = Lakeside facility; W.  Side = Westside facility. 

Source:  VA RPM data. 

The system increases or decreases occur in three areas--forecasted
workload changes, the outlier adjustments, and negotiation
adjustments.  Facility-specific inflation adjustments are also built
into the facility budgets.\35 The extent of these changes nationally
is shown in figure III.6.  Appendix IV contains facility-specific RPM
budget adjustments. 

   Figure III.6:  RPM Adjustments,
   Fiscal Year 1995 Allocations

   (See figure in printed
   edition.)

Source:  GAO analysis of RPM data. 


--------------------
\35 For the purposes of our review, inflation adjustments were not
considered part of the RPM system adjustments.  The adjustments are
discussed further in appendix II. 


   FACILITY BUDGET CHANGES UNDER
   RPM
------------------------------------------------------- Appendix III:3

The actual impact of the RPM system on historical facility budgets
has been small.  RPM-related budget adjustments to the facilities'
fiscal year 1995 budgets generally represented less than 1 percent of
the total dollars budgeted.  The maximum real loss any facility had
because of RPM adjustments was 1 percent.  While one facility gained
as much as 3.4 percent in uninflated funds through the process, the
average gain was also about 1 percent. 


      KEY VA DECISIONS LIMITING
      FACILITY BUDGET CHANGE
----------------------------------------------------- Appendix III:3.1

VA's decisions to limit the budget changes of facilities are
reflected in two key ways:  the manner in which VA decided to fund
workload changes and deal with shortfalls between expected resource
needs and the actual funds available, and the amount of money VA
decided to reallocate among facilities after comparing their workload
costs. 


         FUNDING OF WORKLOAD
         CHANGES WAS LIMITED
--------------------------------------------------- Appendix III:3.1.1

Because the RPM system forecasts showed that facilities would need
more money than was actually available, VA officials decided to
address the shortfall by funding only a proportion of facilities'
expected needs.  The implementation rate, however, was applied in a
manner to reduce only those funds going for expected workload
increases, that is, the costs for workload above and beyond each
facility's historical workload base.  So, although facilities were
funded at 100 percent of their past budgets, the facilities' costs
for forecasted additional patients were funded at 17.36 percent. 
Because VA already reduced expected needs to account for marginal
costs associated with workload changes, in effect, a facility with a
forecasted increase of one patient received a funding increase of 13
percent of its historical per patient costs. 

VA officials also applied the implementation rate to budgeted costs
for workload decreases.  This had the effect of limiting the amount
of resources a facility lost through the process and of giving more
money to facilities with decreasing workloads than they were
projected to need.  Facilities with forecasted decreases received
only a funding reduction of 8.8 percent of their historical patient
costs for each patient they were expected to lose.  One facility that
would have lost over $3 million in fiscal year 1995 because of
forecasted workload decreases at the marginal rate lost only about
$533,000 after the implementation rate was applied. 

For fiscal year 1995, all facilities received workload adjustments to
reflect forecasted patient changes, with 147 facilities receiving
additional funds and 20 facilities receiving less funds.  The gains
ranged from about $700 to $1.4 million, and the losses ranged from
about $80 to $533,000.  For fiscal year 1994, 124 facilities received
additional funds for workload increases, and 43 received funding
reductions for workload decreases.  Gains for fiscal year 1994 ranged
from about $1,200 to $1.6 million, and losses ranged from $2,300 to
$676,300.  See appendix IV for facility-specific RPM budget
adjustments. 

VA's decision to fully fund historical workload and limit workload
changes favors the status quo.  For example, VA could have treated
historical and forecasted workload equally within its fixed budget. 
By applying an implementation rate to workload changes, rather than
the cost of all workload, VA limited the impact of the budget changes
that facilities would have faced if funding were available for all
workload.  The impact of the implementation rate compared with the
impact of taking a pro rata share of each facility's total budget is
shown in figure III.7.\36

   Figure III.7:  Comparison of
   Funding Adjustments: 
   Implementation Rate Versus Pro
   Rata Adjustment

   (See figure in printed
   edition.)

Source:  GAO analysis. 


--------------------
\36 Analysis does not include regional directors' adjustments because
these were considered management decisions apart from the RPM
forecast and outlier analyses and were not included in the RPM
database.  Appendix IV contains all RPM adjustments for each
facility. 


         VA EFFICIENCY ADJUSTMENTS
         LIMITED
--------------------------------------------------- Appendix III:3.1.2

One of VA's original visions for the RPM system was to use it to
lower unit costs or promote efficiency.  Through the adjustment
process, VA moves resources from the "least efficient" or high-cost
facilities to the "most efficient" or low-cost facilities.  Despite
wide variations in the workload costs among facilities, VA has
limited the reallocation of dollars to promote efficiencies among
facilities to a small portion of their overall budgets.  Part of the
reason for this conservatism is that VA does not have a standard
measure for what facilities' unit costs should be.  Furthermore, VA
has not determined how other elements of workload, such as the
timeliness or quality of care, should be considered. 

VA officials have chosen to limit the outlier impact on any facility
to 1 percent of its historical budget and to limit the total outlier
adjustments to $10 million among all facilities in fiscal year 1994
and $20 million in fiscal year 1995.  In the most recent outlier
process (fiscal year 1995), 35 percent of the facilities had their
dollar bases adjusted, with 32 high outliers and 27 low outliers. 
The gains ranged from about $226,000 to $2 million, and losses ranged
from about $100,000 to $1.6 million.  Appendix IV contains
facility-specific RPM budget adjustments. 

VA officials indicated that the reallocation of funds through the
outlier process is difficult in part because of the lack of a
standard within VA for what unit costs should be.  Without such a
standard, it is unknown whether high-cost facilities do not represent
what costs should be or whether low-cost facilities are actually
ideally efficient and should not be made inefficient by providing
them with more funds.  Further complicating the matter is the concern
that workload is also subject to differences in quality of care. 
Facilities may have higher costs because of quality differences
rather than simple inefficiencies, for example. 

VA, as part of its VISN plan, is working to agree upon performance
measures that could be used in assessing VISN managers' performance. 
Many measures that VA is currently capturing are being considered,
such as those measuring patient satisfaction, inpatient and
ambulatory quality of care, and financial management and efficiency. 
However, whether the measures, once agreed upon, will be used in
resource allocation decisions is not specified in VA's VISN plan. 


   RESOURCE SHIFTS OVER THE LAST
   DECADE WITHIN VA
------------------------------------------------------- Appendix III:4

The trend over the last decade within VA--not just the 2 years that
RPM has been used to allocate resources--has been to limit the extent
facilities experienced budget shifts from year to year.  Our 1989
report on VA resource allocation and VA analyses of budget changes
over the last decade indicate that resource shifts among facilities
and regions have been a small percentage of overall budgets since
1985 when VA first implemented RAM. 

In August 1989, we reported that the RAM-related efficiency
adjustments to facilities' budgets generally represented less than 2
percent of the total dollars budgeted.\37 The adjustments were small
in relation to the facilities' budgets because VA established a
maximum amount that a facility's budget would be increased or reduced
to cushion RAM's financial impact.  We also reported that as
facilities incurred expenses during the year, facility directors
could request additional funds from regional directors.  Thus, the
regions served as safety nets to help facilities cope with financial
pressures. 

Had the caps on budget adjustments not been in place, the facilities
would have experienced significantly larger gains or reductions as a
result of the RAM process.  The funds transferred among facilities
would have totaled $153.2 million, or 223 percent more than the $47.4
million transferred. 

VA documentation confirms that the allocations made among VA regions
based on the RAM and RPM system data were relatively small, as shown
in table III.1. 



                              Table III.1
                
                  VA Analysis of Percentage of Budget
                      Reallocations Among Regions



                                                                     8
                                                     6       2   years
                                                 years   years   under
                                                 under   under    RAM/
                                                   RAM     RPM     RPM
----------------------------------------------  ------  ------  ------
Region 1                                            -2       0      -2
Region 2                                             0       1       1
Region 3                                             1       1       2
Region 4                                            -1       1       0
Net change                                          -1       1       0
----------------------------------------------------------------------
Source:  VA RPM Financial Advisory Committee. 


--------------------
\37 GAO/HRD-89-93, Aug.  18, 1989. 


RPM BUDGET CHANGES BY REGION AND
FACILITY, FISCAL YEARS 1994 AND
1995
========================================================== Appendix IV

   Figure IV.1:  Eastern Region,
   Fiscal Year 1995

   (See figure in printed
   edition.)

Notes:  HD = Highland Drive facility; UD = University Drive facility. 

In considering the range of adjustments to facility budgets through
RPM reallocations, we did not include the Fort Howard budget increase
of 13.4 percent.  The Region 1 regional director adjustment for
fiscal year 1995 is stated for administrative purposes to be $3.85
million.  However, VA officials told us that the facility did not
receive the funds for patient care.  Instead, the funds were
considered a reserve for regional office use. 

Data represent RPM adjustments prior to inflation. 

Numbers in parentheses are negative numbers. 

Source:  VA RPM data. 

   Figure IV.2:  Southern Region,
   Fiscal Year 1995

   (See figure in printed
   edition.)

Notes:  OPC = outpatient clinic. 

Data represent RPM adjustments prior to inflation. 

Numbers in parentheses are negative numbers. 

Source:  VA RPM data. 

   Figure IV.3:  Central Region,
   Fiscal Year 1995

   (See figure in printed
   edition.)

Notes:  L.  Side = Lakeside facility; W.  Side = Westside facility;
OPC = outpatient clinic. 

Data represent RPM adjustments prior to inflation. 

Numbers in parentheses are negative numbers. 

Source:  VA RPM data. 

   Figure IV.4:  Western Region,
   Fiscal Year 1995

   (See figure in printed
   edition.)

Notes:  OPC = outpatient clinic. 

Data represent RPM adjustments prior to inflation. 

Numbers in parentheses are negative numbers. 

Source:  VA RPM data. 

   Figure IV.5:  Eastern Region,
   Fiscal Year 1994

   (See figure in printed
   edition.)

Notes:  HD = Highland Drive facility; UD = University Drive facility

Data represent RPM adjustments prior to inflation. 

Numbers in parentheses are negative numbers. 

Source:  VA RPM data. 

   Figure IV.6:  Southern Region,
   Fiscal Year 1994

   (See figure in printed
   edition.)

Notes:  OPC = outpatient clinic. 

Data represent RPM adjustments prior to inflation. 

Numbers in parentheses are negative numbers. 

Source:  VA RPM data. 

   Figure IV.7:  Central Region,
   Fiscal Year 1994

   (See figure in printed
   edition.)

Notes:  L.  Side = Lakeside facility; W.  Side = Westside facility;
OPC = outpatient clinic. 

Data represent RPM adjustments prior to inflation. 

Numbers in parentheses are negative numbers. 

Source:  VA RPM data. 

   Figure IV.8:  Western Region,
   Fiscal Year 1994

   (See figure in printed
   edition.)

Notes:  OPC = outpatient clinic. 

Data represent RPM adjustments prior to inflation. 

Numbers in parentheses are negative numbers. 

Source:  VA RPM data. 

VA RPM data. 


RPM'S PROVISION FOR FACILITY
DIFFERENCES IN VETERANS' ACCESS TO
CARE
=========================================================== Appendix V

One of the ways that VA facilities adjust to resource limitations is
by rationing care to veterans.  As a result, there are differences in
the provision of care to veterans among facilities.  Some facilities
have adequate resources to provide services to all categories of
veterans; whereas, others find they must curtail their services. 
They do so by limiting the categories of veterans served, the types
of services offered, and the conditions for which veterans can
receive care. 

When we reported on these differences in 1993, VA responded that the
RPM system--under development at the time--would help overcome these
differences.\38 Specifically, VA officials indicated that to address
wide variations in veterans' access to health care systemwide, VA was
designing a new resource planning and management process with several
objectives, including the elimination of gaps in service to veterans
systemwide.  The Secretary of VA reiterated in February 1994
correspondence to the Congress that the RPM system would begin to
alleviate some of the inconsistencies in veterans' access to care
noted in our report.  However, this objective has not been
incorporated in the RPM model. 


--------------------
\38 GAO/HRD-93-106, July 16, 1993. 


   AVAILABILITY OF CARE IS UNEVEN
--------------------------------------------------------- Appendix V:1

The Congress established general priorities for VA to use when
providing outpatient care when resources are not available to care
for all veterans.  VA, in turn, has delegated rationing decisions to
its facilities.  Each facility independently chooses when and how to
ration care.  Our 1993 report found that 118 centers reported
rationing care and 40 reported no rationing, as shown in figure V.1. 

   Figure V.1:  Nonrationing VA
   Medical Centers in Fiscal Year
   1991

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

Source:  VA Health Care:  Variabilities in Outpatient Care
Eligibility and Rationing Decisions (GAO/HRD-93-106, July 16, 1993). 

Because of differences in facility rationing practices, veterans'
access to care systemwide is uneven.  We found that higher income
veterans received care at many facilities, while lower income
veterans were turned away at other facilities.  Differences in who
was served occurred even within the same facility because of
rationing.  Some facilities that rationed care by medical service or
condition sometimes turned away lower income veterans who needed
certain types of services and provided care for higher income
veterans who needed other services. 

Complex eligibility categories complicate the determinations of
priorities for care as well as the extent that facilities are
providing care to various categories of veterans.  VA's priority
system considers factors such as the presence and extent of any
service-connected disability, the incomes of veterans with
nonservice-connected disabilities, and the type and purpose of care
needed to determine which eligible veterans receive care within
available resources.  (An eligible veteran is any person who served
on active duty in the uniformed services for the minimum time
specified by law and who was discharged, released, or retired under
other than dishonorable conditions.) While VA's systems do not allow
us to confirm the extent that the rationing we reported in 1993 still
exists, available data indicate that the ability of facilities to
provide care to discretionary categories of veterans still varies. 
VA systems record the numbers of unique patients served by facilities
who have traditionally been considered "discretionary," that is,
nonservice-connected, higher-income veterans.  These data show that
although up to 13 percent of some facilities' patients were from the
discretionary category in fiscal year 1994, other facilities treated
none. 




RELATED GAO PRODUCTS
============================================================ Chapter 0

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

VA's Medical Resource Allocation System (GAO/HEHS-95-252R, Sept.  12,
1995). 

VA Health Care:  Issues Affecting Eligibility Reform
(GAO/T-HEHS-95-213, July 19, 1995). 

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

VA Health Care:  Barriers to VA Managed Care (GAO/HEHS-95-84R, April
20, 1995). 

Veteran Affairs:  Accessibility of Outpatient Care at VA Medical
Centers (GAO/T-HRD-93-29, July 21, 1993). 

VA Health Care:  Variabilities in Outpatient Care Eligibility and
Rationing Decisions (GAO/HRD-93-106, July 16, 1993). 

VA Health Care:  Veterans' Efforts to Obtain Outpatient Care From
Alternative Sources (GAO/HRD-93-123, June 30, 1993). 

VA Health Care:  Resource Allocation Methodology Has Had Little
Impact on Medical Centers' Budgets (GAO/HRD-89-93, Aug.  18, 1989). 

VA Health Care:  Resource Allocation Methodology Should Improve VA's
Financial Management (GAO/HRD-87-123BR, Aug.  31, 1987). 


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