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Could Reduce Civilian Role' which was released on July 1, 2005. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

June 2005: 

Armed Forces Institute of Pathology: 

Business Plan's Implementation Is Unlikely to Achieve Expected 
Financial Benefits and Could Reduce Civilian Role: 

GAO-05-615: 

GAO Highlights: 

Highlights of GAO-05-615, a report to congressional committees: 

Why GAO Did This Study: 

DOD has raised concerns about certain business practices of the Armed 
Forces Institute of Pathology (AFIP), including its role in civilian 
medicine. In response, AFIP implemented changes and drafted a business 
plan. On May 13, 2005, DOD recommended closing AFIP as part of the Base 
Realignment and Closure process. The Senate Committee on Armed 
Services, in a report accompanying the Ronald W. Reagan National 
Defense Authorization Act for Fiscal Year 2005, directed that GAO study 
AFIPís business plan. GAO (1) described the business planís key 
initiatives and projected financial benefits, (2) evaluated the 
business planís potential to improve internal controls and achieve 
financial benefits, and (3) assessed the likely impact of the business 
plan on the role of AFIP in military and civilian medicine. GAO 
reviewed the major assumptions and analyses for developing the plan and 
interviewed AFIP and DOD officials, and members of the civilian medical 
community. 

What GAO Found: 

AFIPís business plan has four key initiatives: improving AFIPís 
business practices, increasing the amount of services it provides for 
the military, reducing staff, and consolidating its facilities. The 
business plan describes various efforts in support of each of these 
initiatives. AFIP estimated that the changes described in its business 
plan will result in $17.5 million in annual financial benefits.

Under the business plan, AFIP improved internal controls over some of 
its operations, particularly over AFIPís consultation services and 
related finances; however, AFIP has not implemented other internal 
controls described in the business plan such as developing a system to 
determine AFIPís costs for performing specific activities. In addition, 
GAOís review indicated that AFIP is unlikely to achieve all of the 
financial benefits projected in the business plan. Financial benefits 
from the business plan will likely be approximately $5 millionó$12.5 
million less than AFIP projected. 

In implementing its business plan, AFIP has changed its balance of 
military and civilian work, and AFIP and civilian pathologists said 
that these trends are likely to continue. DOD and AFIP officials have 
stated that they want to preserve AFIPís civilian work but do not want 
to fund it with increasingly scarce DOD funds. Over the last several 
years, AFIP has reduced the amount of consultation, research, and 
education services it provides for the civilian medical community and 
increased the amount of services it provides for the military. AFIP 
pathologists told GAO that they expect AFIPís civilian consultation, 
research, and education to continue to decline in the future. Half of 
AFIPís 20 department chairs believe that the business plan would 
negatively affect AFIPís ability to attract top pathologists in the 
future. 

Although DOD recently recommended the closure of AFIP as a part of the 
Base Realignment and Closure process, the process has not been 
completed. Until the process is completed, AFIPís inability to achieve 
its projected financial benefits could result in a budget shortfall 
because DOD officials said they intend to reduce AFIPís funding by the 
amount of the financial benefits projected in the business plan. 

What GAO Recommends: 

In order to better manage changes being instituted at AFIP, GAO 
recommends that the Assistant Secretary of Defense for Health Affairs 
reevaluate the financial benefits projected in AFIPís business plan so 
that DOD will have a more reliable estimate of AFIPís revenues and 
expenses. DOD concurred with GAOís findings and recommendation.

www.gao.gov/cgi-bin/getrpt?GAO-05-615.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Marcia Crosse at (202) 
512-7101.

[End of section]

Contents: 

Letter: 

Results in Brief: 

Background: 

AFIP's Business Plan Has Four Key Initiatives and Intends to Achieve 
$17.5 Million in Annual Financial Benefits: 

AFIP Has Improved Some Internal Controls; However, AFIP Is Unlikely to 
Achieve the Annual Financial Benefits Projected in the Business Plan: 

Implementation of the Business Plan Has Increased Services for the 
Military and Decreased Services for Civilians: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: The Armed Forces Institute of Pathology's Missions: 

Appendix III: Analysis of the Armed Forces Institute of Pathology's 
Consultation Revenue Projections: 

Appendix IV: Comments from the Department of Defense: 

Tables: 

Table 1: ARP's Consultation Revenues, Education Revenues, and Research 
Grant Funding: 

Table 2: Summary of Key Initiatives and Projected Financial Benefits in 
AFIP's Business Plan: 

Table 3: Number of Staff Working at AFIP, 2000 to 2004: 

Table 4: AFIP's Analysis of 250 Sample Cases from 2002: 

Table 5: AFIP's Projection as Presented in the Business Plan: 

Table 6: Calculation Using Actual Data from 2004: 

Figures: 

Figure 1: DOD Reviews of AFIP Leading to the Development of AFIP's 
Business Plan: 

Figure 2: AFIP's Business Plan Estimates and Actual 2004 Data for 
Civilian Consultations: 

Figure 3: GAO's Estimates of Likely Annual Financial Benefits from 
Implementing the Business Plan: 

Figure 4: AFIP Consultations by Type of Consultation, 2000 to 2004: 

Figure 5: AFIP Research Protocols, 2000 to 2004: 

Figure 6: Military and Civilian Attendees at AFIP Educational Courses, 
2000 to 2004: 

Abbreviations: 

AFIP: Armed Forces Institute of Pathology: 
ARP: American Registry of Pathology: 
BRAC: Base Realignment and Closure: 
DNA: deoxyribonucleic acid: 
DOD: Department of Defense: 
MID: Management Initiative Decision: 
PAE: Office of Program Analysis and Evaluation: 
PDM: Program Decision Memorandum: 
PIMS: Pathology Information Management System: 
VA: Department of Veterans Affairs: 

United States Government Accountability Office: 

Washington, DC 20548: 

June 30, 2005: 

The Honorable John Warner: 
Chairman: 
The Honorable Carl Levin: 
Ranking Minority Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Duncan L. Hunter: 
Chairman: 
The Honorable Ike Skelton: 
Ranking Minority Member: 
Committee on Armed Services: 
House of Representatives: 

The Armed Forces Institute of Pathology (AFIP) supports the Department 
of Defense (DOD), other government agencies, and the civilian medical 
community by providing pathology consultation, medical education, and 
research. Although AFIP is a military agency funded primarily by DOD, 
the institute also has a mission to serve the civilian medical 
community. AFIP performs consultations--which are based on laboratory 
analyses of tissue or other specimens used to diagnosis disease--for 
all branches of the military without charge, while offering this 
service on a reimbursable basis for its civilian customers. AFIP also 
provides consultations for the Department of Veterans Affairs' (VA) 
healthcare system in exchange for a specified number of VA staff 
positions assigned to AFIP. In 2004 AFIP performed over 50,000 
consultations, provided educational instruction for over 2,000 medical 
professionals, and conducted 296 research studies. AFIP has 
collaborated with the American Registry of Pathology (ARP)--a nonprofit 
organization that serves as a fiscal intermediary between AFIP and 
civilian medicine--to develop the world's largest collection of rare 
and unusual disease specimens and expertise in the field of pathology. 

In the late 1990s, DOD examined AFIP's future role within the military 
health system after AFIP requested that DOD build a new facility for 
AFIP or repair AFIP's primary facility, which is on the Walter Reed 
Army Medical Center campus in Washington D.C., for an estimated cost of 
$250 million. From 1998 through 2002, DOD conducted a series of reviews 
that concluded that AFIP lacked controls over its financial operations 
and that it provided services for the civilian medical community 
without adequate reimbursement. These reviews concluded that DOD, in 
effect, subsidized AFIP's work for civilian customers. DOD also found 
it difficult to estimate the amount of the subsidy because AFIP did not 
have adequate data to determine the costs of providing civilian 
services. 

In response to the concerns raised in the reviews, DOD directed AFIP to 
develop and implement a business plan. Specifically, DOD directed AFIP 
to develop a business plan to improve the institute's internal controls 
so that AFIP could better account for the delivery and costs of its 
civilian and military work. DOD also required that the business plan 
outline steps for increasing AFIP's revenues and lowering its overall 
costs to reduce the level of funding provided to AFIP. According to DOD 
officials, this would eliminate DOD's subsidy of AFIP's civilian work. 
AFIP began to make changes to its operations as early as 2000 in 
response to findings from the DOD reviews. In 2002 and 2003, AFIP 
developed the written business plan, which included some changes that 
AFIP had already made in its operations.[Footnote 1] AFIP planned to 
complete implementation of the business plan by October 2004. 

DOD is again in the process of evaluating the future role of AFIP and 
the services that it provides. On May 13, 2005, DOD recommended the 
closure of AFIP as a part of the Base Realignment and Closure (BRAC) 
process. This would require that the services currently provided by 
AFIP be discontinued, transferred to other parts of DOD, or contracted 
out to the civilian medical community. 

The Senate Committee on Armed Services, in a report accompanying the 
Ronald W. Reagan National Defense Authorization Act for Fiscal Year 
2005, directed that we conduct a study of AFIP's business 
plan.[Footnote 2] In this report, we (1) describe the business plan's 
key initiatives and projected financial benefits, (2) evaluate the 
business plan's potential to improve AFIP's internal controls and 
achieve its projected financial benefits, and (3) assess the likely 
impact of the business plan on the role of AFIP in military and 
civilian medicine. 

To describe the business plan's key initiatives and projected financial 
benefits, we reviewed the business plan as well as numerous studies of 
AFIP that contributed to the plan's development. We interviewed 
officials from AFIP; ARP; the Office of the Surgeon General of the 
Army; the Office of the Assistant Secretary of Defense for Health 
Affairs; and the Office of the Under Secretary of Defense, Comptroller. 
To evaluate the business plan's potential to improve AFIP's internal 
controls and achieve its projected financial benefits, we interviewed 
AFIP and ARP officials and reviewed the assumptions and analyses that 
led to specific elements of the business plan. In some cases, we were 
able to compare projections in the plan with information collected 
after specific changes had been implemented. In other cases, we 
evaluated the assumptions upon which specific analyses were based. We 
also interviewed officials and senior pathologists from AFIP to 
understand the effects of the business plan on the major areas of 
AFIP's operations. To assess the likely impact of the business plan on 
the role of AFIP in military and civilian medicine, we interviewed the 
AFIP staff described above, as well as pathologists from both the 
civilian and military medical communities, including representatives 
from the College of American Pathologists and members of AFIP's 
Scientific Advisory Board.[Footnote 3] We also reviewed data on AFIP's 
consultation, research, and educational services to see how they have 
changed since the development and implementation of the business plan. 

We evaluated a written copy of the business plan, dated October 2003, 
which was described by AFIP officials as the most current draft of the 
business plan at the time we performed our work. AFIP officials said 
that there is no "final" version of the plan because it is an evolving 
document. While some of the changes described in the plan occurred as 
early as 2000, others occurred after that time or had not been 
implemented at the time of our work. Therefore, in this report, we 
generally provide data from 2000 to 2004. 

We interviewed AFIP and ARP staff to determine how data were collected 
and maintained, but we did not independently verify the accuracy of the 
data. Data reliability has been the subject of critical findings in 
DOD's reviews of AFIP. AFIP officials demonstrated the systems they use 
to maintain data and described their efforts to ensure the data's 
accuracy. In some cases, AFIP provided us with data that differed from 
those published in earlier reports and occasionally provided updated 
data during the course of this review that differed from the data it 
had provided earlier. AFIP officials explained that this was due to 
ongoing efforts on their part to improve the quality of their data. We 
determined that the AFIP data used in this report were adequate. We 
performed our work from August 2004 through June 2005 in accordance 
with generally accepted government auditing standards. (See app. I for 
more details on our methodology.)

Results in Brief: 

AFIP's business plan includes four key initiatives that are primarily 
intended to improve AFIP's internal controls and reduce the amount of 
DOD funds supporting AFIP's civilian work. To do this, the business 
plan calls for AFIP to (1) improve its business practices, such as 
controls over its consultation services and related finances; (2) 
increase the amount of services it provides for the military, such as 
an increase in defense-related research and educational services; (3) 
reduce staff from 820 to 685 positions; and (4) consolidate its 
facilities. The business plan describes various efforts in support of 
each of these four key initiatives. AFIP estimated that the changes 
described in its business plan will result in financial benefits from a 
combination of increased revenues and reduced costs that would allow 
DOD to reduce its annual funding of AFIP by $17.5 million. To ensure 
that AFIP reduces the amount of DOD funds supporting civilian work, DOD 
plans to reduce AFIP's future funding by the amount that AFIP estimates 
it will save. 

In implementing its business plan, AFIP has improved some internal 
controls over its services and related finances; however, AFIP is 
unlikely to achieve the plan's projected financial benefits. The 
implementation of the business plan improved a number of internal 
controls at AFIP, particularly over AFIP's consultation services and 
related finances, but AFIP has not implemented other internal controls 
described in the business plan. For example, AFIP has not developed a 
system to determine the costs associated with providing civilian 
services. In addition, even if AFIP fully implemented its business 
plan, it would be unlikely to achieve the projected financial benefits 
of $17.5 million per year. Because many of these projections were 
developed using inaccurate or incomplete data, we estimate that the 
financial benefits from implementing the business plan are likely to be 
significantly lower--approximately $5 million annually. For example, 
AFIP projected that it would increase its revenues by $7.4 million 
annually by increasing the fees it charges to civilians for 
consultation services and improving the collection rate of those fees. 
However, AFIP will probably achieve only $1 million in additional 
revenues from these changes, which is almost entirely the result of 
increased fees. 

In implementing its business plan, AFIP has changed its balance of 
military and civilian work. AFIP and civilian pathologists told us that 
these trends are likely to continue as AFIP proceeds with the 
implementation of its business plan. DOD and AFIP officials have stated 
that they want to preserve AFIP's civilian work but do not want to fund 
it with increasingly scarce DOD funds. However, over the last several 
years, AFIP has reduced the amount of consultation, research, and 
education services it provides for the civilian medical community and 
increased the amount of services it provides for the military. Many 
AFIP pathologists and civilian physicians told us that civilian work is 
essential for fulfilling the institute's mission because civilian cases 
help maintain the diagnostic expertise of AFIP's professional staff. 
AFIP has also lost expertise within the institute because of staff 
reductions called for by the business plan. Half of AFIP's 20 
department chairs said that the business plan would negatively affect 
AFIP's ability to attract top pathologists in the future. 

In order to better manage changes being instituted at AFIP, we 
recommend that the Assistant Secretary of Defense for Health Affairs 
reevaluate the financial benefits projected in AFIP's business plan so 
that DOD will have a more reliable estimate of AFIP's revenues and 
expenses. In commenting on a draft of this report, DOD concurred with 
the report's findings and recommendation, noting that DOD continues to 
monitor the implementation of AFIP's business plan and the impact of 
the BRAC process on AFIP. DOD also said that the U.S. Army Audit Agency 
will begin an audit of AFIP business practices to determine if the 
institute is operating effectively and efficiently, and possesses the 
tools to accurately articulate costs, accomplishments, and 
contributions to the military mission. 

Background: 

AFIP originated as part of the Army Medical Museum in 1862 as a 
repository for disease specimens collected from Civil War soldiers. In 
1888 the educational facilities of the museum were made available to 
civilian medical professionals. The Army Institute of Pathology was 
created as a part of the museum in 1944, using the museum's extensive 
collection of disease specimens to develop expertise in diagnostic 
pathology. By 1949 the Army Institute of Pathology was renamed the 
Armed Forces Institute of Pathology, and the museum had become a unit 
within AFIP. The Department of Defense Appropriation Authorization Act, 
1977, provided specific statutory authority for AFIP, establishing it 
as a joint entity of the Departments of the Army, Navy, and Air Force, 
subject to the authority, direction, and control of the Secretary of 
Defense.[Footnote 4] The Secretary of Defense has delegated authority, 
direction, and control over AFIP to the Assistant Secretary of Defense 
for Health Affairs. The Secretary of the Army is the Executive Agent 
for AFIP and has delegated Executive Agent authority to the Army 
Surgeon General.[Footnote 5]

AFIP's Mission: 

AFIP's primary mission is to provide medical expertise in pathology 
consultation, education, and research for civilian and military 
medicine. Unlike most pathologists, AFIP pathologists specialize in a 
particular type of consultation where they are asked to provide a 
second opinion for difficult cases. These consultations typically occur 
because another military or civilian pathologist was either unable to 
make a diagnosis or unsure of his or her initial diagnosis.[Footnote 6] 
In 2003, for example, AFIP pathologists made a major or minor change to 
the initial diagnosis in nearly half of the cases they diagnosed. 
Because AFIP generally receives tissue specimens in order to make these 
diagnoses, consultations have also been instrumental in expanding 
AFIP's repository of disease specimens. AFIP has over 3 million disease 
specimens and their accompanying case histories dating back over 150 
years. 

AFIP disseminates the knowledge gained from its consultation cases 
through its education and research activities. Each year, AFIP provides 
educational instruction for over 2,000 civilian and military medical 
professionals. In developing educational courses, AFIP staff query a 
database of recent consultations, searching for cases where a physician 
has either misdiagnosed a disease or the physician was unable to 
provide a diagnosis. AFIP then teaches courses in how to diagnose such 
diseases, with particular emphasis on identifying emerging diseases, 
offering new insights into known diseases, and giving hands-on 
experience in diagnosing difficult cases. AFIP also trains both 
civilian and military residents and fellows in the fields of pathology, 
radiology, and veterinary pathology. In addition to these educational 
activities, AFIP conducts research that results in hundreds of 
scientific publications per year. For example, AFIP pathologists 
recently published new research on the 1918 Spanish influenza virus 
using tissue specimens from a World War I soldier who died from the 
virus. 

In addition to its mission of providing consultation, education, and 
research, AFIP has a number of other missions that have been 
established by Congress or DOD. For example, AFIP maintains the 
National Museum of Health and Medicine, which serves as a repository of 
anatomic, pathological, and historical artifacts. AFIP also houses the 
Office of the Armed Forces Medical Examiner, which was established at 
AFIP in 1988 to provide DOD and other federal agencies with a variety 
of services in forensic medicine. New technological developments in the 
forensic sciences--such as the use of deoxyribonucleic acid (DNA)--have 
been incorporated into AFIP through additions such as the Armed Forces 
DNA Identification Laboratory. AFIP conducts a variety of other 
activities that include: 

* maintaining a DNA registry of all military personnel;

* conducting research on biological agents, such as anthrax;

* identifying the remains of soldiers of past wars;

* collecting data on medical malpractice cases in the military; and: 

* performing drug testing for the Armed Forces. 

(For a more complete description of AFIP's missions, see app. II.)

Establishment of ARP: 

In the past, certain DOD officials were critical of AFIP's interactions 
with civilian medicine and AFIP's relationship with ARP. In 1975, for 
example, the Army Surgeon General suggested that the relationship of 
ARP--a civilian organization--and AFIP--a military organization--was 
inappropriate and directed that it be terminated. In the Department of 
Defense Appropriation Authorization Act, 1977, Congress specifically 
authorized ARP to be established as a nonprofit corporation and further 
authorized a cooperative relationship between AFIP and ARP. ARP is 
responsible for encouraging and facilitating collaborative work between 
AFIP and civilian medicine. 

Funding of AFIP and Its Relationship with ARP: 

To support its activities, AFIP draws upon several sources of funding. 
In fiscal year 2004, AFIP's funding totaled approximately $100 million, 
the majority of which (approximately $80 million) consists of funds 
from DOD's Defense Health Program appropriation. An additional $13 
million was from other appropriations for DOD activities, and 
approximately $7 million was provided by other federal agencies as 
reimbursement for AFIP's services. In addition to these funds, which 
are provided directly to AFIP, ARP may collect fees and accept research 
grants in exchange for certain services provided for the civilian 
medical profession by AFIP. Funds from AFIP's research, education, and 
consultation services are collected by ARP and used to support AFIP's 
civilian mission. ARP acts as an intermediary between AFIP and the 
civilian medical community, performing a variety of tasks on behalf of 
AFIP. The costs incurred by ARP in support of AFIP's missions are 
recouped from AFIP's consultation, education, and research revenues, 
and the remainder of these funds is placed in "registries," or bank 
accounts, which are used to support AFIP in a variety of ways at the 
request of authorized AFIP officials. In 2004 ARP received $5.7 million 
in revenues as payment for consultation and education services 
conducted by AFIP and $5.6 million in research grants. Table 1 shows 
the funds collected by ARP since 2000. 

Table 1: ARP's Consultation Revenues, Education Revenues, and Research 
Grant Funding: 

Funds collected: Consultation revenues; 
Year: 2000: $2,361,000; 
Year: 2001: $2,656,000; 
Year: 2002: $2,546,000; 
Year: 2003: $2,714,000; 
Year: 2004: $3,011,000[A]. 

Funds collected: Education revenues; 
Year: 2000: $2,272,000; 
Year: 2001: $2,480,000; 
Year: 2002: $2,149,000; 
Year: 2003: $2,392,000; 
Year: 2004: $2,691,000. 

Funds collected: Research grants; 
Year: 2000: $1,049,000; 
Year: 2001: $2,551,000; 
Year: 2002: $3,166,000; 
Year: 2003: $4,495,000; 
Year: 2004: $5,564,000. 

Source: ARP. 

[A] Prior to October 2004, all consultation revenues were collected by 
ARP. After that time, consultation revenues were billed and collected 
by both AFIP and ARP, depending on when the consultation arrived at 
AFIP. Total consultation revenues reflect collections by both AFIP and 
ARP for October, November, and December 2004. 

[End of table]

Development of AFIP's Business Plan: 

AFIP developed its business plan in response to DOD's reviews of AFIP's 
mission and operations. DOD conducted these reviews after AFIP 
requested that DOD build a new facility for AFIP or repair AFIP's 
primary facility. From 1998 through 2002, AFIP was the subject of three 
Program Decision Memoranda (PDM)--documents used by DOD for planning 
and managerial oversight--four major DOD reviews and two DOD Inspector 
General reviews. These reviews were critical of AFIP's lack of internal 
controls and the amount of DOD funding supporting AFIP's civilian 
mission.[Footnote 7] In general, these reviews found that (1) AFIP's 
civilian services exceeded its military services; (2) AFIP was not 
adequately reimbursed for its civilian services and needed to increase 
its fees; and (3) AFIP lacked appropriate internal controls over its 
operations, particularly its ability to monitor and track its 
consultation services and related finances. Figure 1 shows a timeline 
of these reviews.[Footnote 8]

Figure 1: DOD Reviews of AFIP Leading to the Development of AFIP's 
Business Plan: 

[See PDF for image]

1990s: 

1998:
Program Decision Memorandum issued; resulted in DOD review entitled A 
Blueprint for the Future (issued February 1999); 

1999:
DOD Inspector General issued two reports critical of AFIPís management 
and operations; 

2000s: 

2000:
Program Decision Memorandum issued; resulted in DOD review by the 
Center for Naval Analysis (issued February 2001); 

2000:
DODís Health Affairs chartered the "Council of Colonels/Captains" to 
make recommendations for AFIP (recommendations to be provided 2001); 

2001:
Program Decision Memorandum issued; resulted in DOD review by the 
Office of Program Analysis and Evaluation (submitted draft September 
2002); 

Between 1998 and 2002, AFIP was the subject of three Program Decision
MemorandaĖdocuments used by DOD for planning and managerial oversightĖ
four major DOD reviews, and two DOD Inspector General reviews.

2003:
AFIP issues the current version of the business plan. 

Source: GAO.

[End of figure]

DOD issued its third PDM regarding AFIP in 2001. It directed DOD's 
Office of Program Analysis and Evaluation (PAE) to study alternative 
funding arrangements for AFIP. AFIP began drafting its business plan in 
2002 to respond to many of DOD's concerns. The business plan reflected 
changes to its operations that AFIP had made as early as 2000 in 
response to criticisms in the DOD reviews. The 2001 PDM resulted in a 
draft report, submitted by PAE to the Assistant Secretary of Defense 
for Health Affairs in 2002, which recommended the transfer of most AFIP 
functions to the Department of Health and Human Services. The draft 
report further recommended that if this were not possible, DOD should 
end its financial support for AFIP and transform it into a working 
capital fund, which, as the draft stated, would require congressional 
approval. This would require AFIP to generate enough revenues to 
independently finance its operations, through fees charged for its 
consultation, education, and research services.[Footnote 9]

The Assistant Secretary of Defense for Health Affairs prepared a 
written response in 2003 describing his reasons for not instituting the 
recommendations of the draft report. He said that DOD should allow AFIP 
to pursue the business and organizational strategies set forth in the 
business plan that AFIP was developing. Although AFIP originally 
planned to implement the plan over a 6-year period beginning in October 
2002, the Assistant Secretary told AFIP officials that they should 
complete the plan's initiatives by October 2004. He also recommended 
that AFIP transform its relationship with ARP, noting that it might be 
more efficient for AFIP to bill civilians directly for its 
consultation, education, and research activities, rather than relying 
on ARP to provide this service. 

DOD Recommended That AFIP Be Closed: 

On May 13, 2005, the Secretary of Defense announced DOD's 
recommendations to close or realign military facilities in the United 
States. As a part of the BRAC process, DOD recommended the closure of 
AFIP.[Footnote 10] DOD recommended that the medical examiners' 
functions and the DNA registry be moved to Dover Air Force Base, Dover, 
Delaware; some education services to Fort Sam Houston, Texas; and the 
museum to Walter Reed National Military Medical Center. Other services 
currently provided by AFIP would be discontinued, transferred to other 
parts of DOD, or contracted out to the civilian medical community. For 
example, second-opinion pathology consultations for military personnel 
and their families would be sent to civilian laboratories and paid for 
on an as-needed basis. The department's recommendations will now be 
reviewed by the BRAC Commission, which will seek comments from the 
potentially affected communities. Once the commission has completed its 
review, it will present its recommendations to the President and 
Congress. The process is expected to be completed by the end of 2005. 

AFIP's Business Plan Has Four Key Initiatives and Intends to Achieve 
$17.5 Million in Annual Financial Benefits: 

AFIP developed its business plan to improve its internal controls and 
reduce its need for DOD funding by cutting costs and increasing its 
revenues from civilian work. To do this, the business plan has four key 
initiatives, which AFIP estimated would save the institute $17.5 
million a year when fully implemented. 

AFIP's Business Plan Has Four Key Initiatives: 

Under the four key initiatives of AFIP's business plan, the institute 
planned to (1) improve its business practices, (2) increase the amount 
of services it provides for the military, (3) reduce staff, and (4) 
consolidate its facilities. 

AFIP Planned to Improve Its Business Practices: 

The business plan's first initiative called for AFIP to improve its 
business practices. AFIP's business practices were criticized in DOD 
reviews for lacking sufficient internal controls, particularly over 
consultation services and related finances. The initiative planned to 
address problems in AFIP's business practices. Prior to the development 
of the business plan, AFIP had few internal controls governing its 
services, and many DOD officials said that the fees that AFIP charged 
for its consultation services were too low. 

The business plan stated that AFIP would develop internal controls to 
ensure that all consultations are properly billed and monitored by AFIP 
managers. AFIP would also raise its fees for civilian consultations. 
The plan stated that AFIP needed to increase the fees it charged for 
civilian consultations so that they would accurately reflect prevailing 
market rates. The plan also stated that AFIP managers needed to better 
monitor the delivery of consultation services through the expansion of 
an electronic system, which would be used to track individual 
consultation cases. Prior to the development of the business plan, AFIP 
had few internal controls for monitoring its consultation services. 
AFIP officials said that they had no way to determine if staff were 
inappropriately waiving fees for civilian customers or performing tests 
that were not needed to provide a diagnosis. 

Next, the business plan stated that AFIP would develop internal 
controls to ensure that all consultations are performed in a timely 
manner. This is important because over 90 percent of the cases sent to 
AFIP are tumor cases, requiring quick diagnoses so that the patient's 
physician can determine the most appropriate course of treatment. In 
DOD reviews, AFIP was criticized for providing slow diagnoses, which 
the business plan calls slow "turnaround time." The plan defines 
turnaround time as the amount of time that elapses from the moment a 
consultation case arrives at the institute until the pathologist 
provides a diagnosis to the customer. In fiscal year 2003, AFIP's 
average turnaround time for a consultation case was 15 days. In order 
to reduce its turnaround time, AFIP established a new set of guidelines 
in the business plan for each of its departments and laboratories and 
planned to monitor whether staff were following these 
guidelines[Footnote 11]. The guidelines established time frames for the 
completion of various tasks. For example, the guidelines state that a 
case should be delivered to a pathologist within 24 hours of its 
arrival at the institute and, depending on the complexity of the case, 
that most consultations should result in a diagnosis by the pathologist 
within 2 to 5 days of the case's arrival at the institute. 

AFIP would also seek legislative authority to collect and retain fees 
directly from civilian clients for consultation, education, and 
research. The legislation formalizing AFIP's relationship with ARP 
authorized ARP to receive grants and fees and authorized ARP and AFIP 
to collaborate on medical research, consultation, and education with 
civilian medicine. In response to DOD's criticism of AFIP's financial 
relationship with ARP--specifically, ARP's lack of transparency and the 
costs of using ARP--AFIP planned to seek legislation to change their 
relationship. The plan stated that AFIP would increase the amount of 
revenues it collects and improve its internal controls if it were 
allowed to take this function over from ARP. 

Finally, AFIP would develop internal controls that would allow it to 
accurately determine the costs of providing services. DOD's reviews 
criticized AFIP because it was unable to identify the costs associated 
with providing specific procedures or types of services. These reviews 
suggested that AFIP institute an accounting system that would allow 
AFIP to track the costs associated with providing all of its 
services.[Footnote 12] DOD officials concerned with overseeing AFIP 
also concluded that it would be difficult to end the DOD subsidy of 
civilian services if AFIP could not identify its costs. 

AFIP Planned to Increase the Amount of Services Provided for the 
Military: 

Under the business plan's second initiative, AFIP planned to increase 
the amount of services it provides for the military and decrease the 
amount of services it provides for the civilian medical community. 
Under this initiative, AFIP would improve the marketing of its 
pathology services to military physicians by preparing promotional 
materials and presentations to make them aware of the services that 
AFIP can provide, decrease the amount of civilian research at AFIP that 
is funded by DOD, and increase the number of educational programs 
offered to the military. A major concern of DOD and AFIP officials had 
been that civilian use of AFIP's services significantly exceeded that 
of the military. According to the business plan, AFIP's budget and 
staff had steadily increased over the last several decades to meet the 
demands of its civilian workload. 

AFIP Planned to Reduce Its Staff: 

According to AFIP's business plan, the institute's staffing levels had 
steadily increased in order to support its civilian workload; as a 
result, the plan's third initiative called for a reduction of staff 
from 820 to 685 positions. The plan stated that the staff reduction was 
to be completed by October 1, 2004. The business plan estimated that 
AFIP would be able to absorb these staff cuts because of increased 
efficiencies that would come from implementing other initiatives of the 
business plan. In addition, the plan predicted that these staff 
reductions would not reduce AFIP's productivity or inhibit the 
institute's ability to fulfill its mission requirements. 

AFIP Planned to Consolidate Its Facilities: 

The fourth initiative in the business plan called for AFIP to 
consolidate its facilities from nine to five and the number of 
locations from seven to three. Prior to the development of the business 
plan, AFIP sought a solution to the deterioration of its primary 
facility at the Walter Reed campus by having DOD build a new facility. 
In 1998 DOD chose to fund the continuing renovation of AFIP's primary 
facility, and as of May 2005, AFIP's primary facility had undergone 
extensive renovation. AFIP officials said that the facility is still 
not adequate, but they have run out of funds to continue the 
renovation. 

The business plan also stated that AFIP would seek to replace its 
primary facility on the Walter Reed campus through an alternative 
funding mechanism, called an "enhanced use lease." An enhanced use 
lease is a leasing agreement that allows a private company to build a 
building on government land which is then leased back to the 
government. This type of arrangement would not require DOD to fund the 
entire cost of construction. According to DOD officials, many 
government agencies--including DOD--have favored this type of 
arrangement in recent years because annual appropriations need not be 
used for the full cost of construction, but only the annual lease 
payments to the private developer. AFIP officials have said that, 
although the business plan mentioned that AFIP hoped to obtain an 
enhanced use lease, AFIP's building consolidation could occur 
independently from this process. 

AFIP Estimated That It Would Save $17.5 Million by Implementing Its 
Business Plan: 

The business plan projected that three of its four initiatives would 
save the institute $17.5 million a year when fully implemented. 
Specifically, the business plan estimated that some of the planned 
changes to business practices would result in additional revenues of 
$7.4 million annually, staff reductions would create cost savings of 
$6.6 million annually, and consolidations of facilities would save 
about $3.5 million annually. The initiative to increase the amount of 
services provided for the military was not intended to save money. AFIP 
projected that this combination of increased revenues and reduced costs 
would allow DOD to reduce its funding of AFIP by $17.5 million a year. 
Table 2 summarizes the business plan's key initiatives and projected 
financial benefits. 

Table 2: Summary of Key Initiatives and Projected Financial Benefits in 
AFIP's Business Plan: 

Initiative: Initiative one: improve business practices; 
Description: 
* Develop internal controls to ensure that all consultations are 
properly billed, and increase the fees charged for civilian 
consultations; 
* Develop internal controls to ensure that all consultations are 
performed in a timely manner; 
* Seek legislative authority to directly collect and retain fees from 
civilian clients for consultation, education, and research services; 
* Develop internal controls to allow AFIP to determine the costs 
associated with its civilian work; 
* Initiative projected to result in $7.4 million in increased revenues. 

Initiative: Initiative two: increase the amount of services provided 
for the military; 
Description: 
* Improve marketing of AFIP services to military physicians; 
* Decrease the amount of civilian research that is funded by DOD; 
* Increase the amount of educational programs available to military 
attendees. 

Initiative: Initiative three: staffing reductions; 
Description: 
* Reduce the number of staff from 820 to 685; 
* Have no reduction in AFIP productivity or adverse affect on mission; 
* Initiative projected to result in $6.6 million annual savings. 

Initiative: Initiative four: facilities consolidation; 
Description: 
* Consolidate locations from seven to three; 
* Consolidate AFIP facilities from nine to five; 
* Explore the option of an enhanced use lease; 
* Initiative projected to result in $3.5 million annual savings. 

Source: GAO analysis of The Transformation Plan of the Armed Forces 
Institute of Pathology. 

[End of table]

In 2004 DOD officials began to draft a Management Initiative Decision 
(MID), which would mandate cuts in AFIP's budget in anticipation of the 
financial benefits described in the business plan.[Footnote 13] 
According to DOD officials, decreases in AFIP's funding are intended to 
be offset by the increased revenues and cost savings generated by the 
business plan. They said that the budget reductions to be included in 
the MID are similar to the financial benefits identified in AFIP's 
business plan. DOD officials told us that as of May 2005, the final MID 
was on hold. DOD officials said that AFIP's failure to achieve its 
projected financial benefits could result in a budget shortfall for 
AFIP. 

AFIP Has Improved Some Internal Controls; However, AFIP Is Unlikely to 
Achieve the Annual Financial Benefits Projected in the Business Plan: 

AFIP has implemented some of the changes called for under the first 
initiative of its business plan. This has resulted in improved internal 
controls, particularly over the delivery of AFIP's consultation 
services and related finances. However, AFIP has not made other 
improvements to internal controls that were identified in the business 
plan. In addition, AFIP is unlikely to achieve the annual financial 
benefits of $17.5 million projected by the business plan. We found that 
the financial benefits from implementing the business plan are likely 
to be significantly less. We estimate that the financial benefits will 
be approximately $5 million. This is largely because the plan's 
estimates were based on inaccurate and incomplete data. 

AFIP Has Improved Some Internal Controls but Has Not Implemented 
Others: 

In implementing its business plan, AFIP improved internal controls, 
particularly over its consultation services and related finances. These 
improvements were described in the first initiative of the business 
plan, which called for AFIP to improve its business practices. As a 
result of these changes, AFIP has improved its ability to accurately 
monitor and bill its consultation cases. In addition, AFIP established 
new guidelines to help ensure that the diagnosis of a consultation case 
is provided in a timely manner. In contrast, AFIP has not developed 
other internal controls described in the business plan. For example, 
AFIP has not developed the ability to determine the costs associated 
with providing services for the civilian medical community. 

AFIP Developed Internal Controls to Ensure That All Consultations Are 
Properly Monitored and Billed: 

AFIP expanded the capabilities of its electronic-consultation-tracking 
system in early 2004 to improve the internal controls governing its 
consultation services. This system is called the Pathology Information 
Management System (PIMS). PIMS is an electronic database used by AFIP 
staff to acknowledge the receipt of a consultation case and track case 
materials as they move through the institute.[Footnote 14] In addition 
to improving AFIP's ability to track its consultation cases, PIMS was 
expanded to improve AFIP's billing capability. AFIP officials said that 
all laboratory tests are now electronically ordered though this system 
and invoices are electronically generated based on the type of tests 
that were performed. According to AFIP officials, this electronic 
system represents a significant improvement over AFIP's prior method 
for creating consultation invoices where all invoices were created by 
hand. AFIP officials said the new system makes it impossible to waive a 
fee without additional scrutiny and ensures that AFIP's customers are 
charged only for tests needed to make a diagnosis. 

AFIP Developed Internal Controls to Ensure That Consultations Are 
Performed in a Timely Manner: 

In order to ensure that consultations are performed in a timely manner, 
AFIP implemented a strategy to reduce its turnaround time. In 2003 AFIP 
established a set of guidelines for each of its departments and 
laboratories. Also since early 2003, AFIP managers have used 
information from PIMS to track whether AFIP's pathologists and 
laboratories are complying with these guidelines. AFIP reduced its 
average turnaround time from 15 days in fiscal year 2003 to less than 5 
days at the end of 2004. 

AFIP Began to Bill Civilian Clients for Consultations: 

In October 2004, AFIP began billing civilian clients for consultation 
services. DOD did not pursue legislation to amend the financial 
relationship between AFIP and ARP, but DOD officials determined that 
AFIP could collect and retain fees for consultation services. It is too 
soon to measure the impact of this change, but AFIP officials said that 
by taking over this function, AFIP will increase the amount of revenues 
that it collects and improve internal controls. ARP continues to 
collect and retain fees for AFIP's educational services and manage 
research grants. 

While AFIP has achieved control over the consultation revenues it 
collects, it has also lost much of the flexibility it once had in 
spending those revenues. The consultation revenues that had been 
collected by ARP were not subject to the restrictions placed on 
government funds, such as the need to spend all funds credited to an 
annual appropriation in the year for which the appropriation was made. 
In addition, AFIP officials said they had been able to spend the funds 
in ARP registries more quickly than they could have with other 
traditional government procurement methods. For example, when members 
of the Armed Forces Office of the Medial Examiner were sent to Iraq in 
support of Operation Iraqi Freedom, the staff were able to use ARP 
registry funds to quickly obtain body armor for the staff members. AFIP 
staff said that obtaining supplies through government procurement 
methods would have taken more time. 

AFIP Has Not Developed Internal Controls to Determine the Costs 
Associated with Civilian Services: 

AFIP did not implement other internal controls called for in the 
business plan. Specifically, AFIP has not developed the ability to 
determine the costs associated with providing civilian services. 
Although AFIP did institute a system in 2004 to begin tracking the time 
that pathologists were engaged in broad categories of activity, such as 
education, research, and consultation, as of May 2005, the institute 
did not have more specific data, such as the time spent working on an 
individual consultation case. AFIP officials are still considering 
developing such a system, but have not done so. These data would be a 
necessary component of any system that monitors the costs of providing 
AFIP's services. 

The Business Plan's Projected Financial Benefits Were Based upon 
Inaccurate and Incomplete Data: 

The business plan stated that changes to AFIP's business practices, 
facilities, and staff cuts will result in $17.5 million in annual 
financial benefits in the form of increased revenues and lower costs. 
Because many of these projections were developed using inaccurate or 
incomplete data, we estimate that the financial benefits from 
implementing the business plan are likely to be significantly lower--
approximately $5 million annually. 

Increased Revenue from Improved Business Practices Will More Likely Be 
$1 Million Instead of $7.4 Million: 

AFIP's business plan projected that AFIP would increase its revenues 
from civilian consultations by $7.4 million annually by increasing the 
fees charged to civilians for consultation services and improving the 
collection rate of those fees.[Footnote 15] However, we found that AFIP 
will more likely increase its revenues by $1 million annually, 
primarily as a result of its fee increase. AFIP raised fees for its 
civilian consultation services in January 2004 and assumed 
responsibility from ARP for the billing and collection of its 
consultation fees in October 2004. 

AFIP based its projection of $7.4 million upon a series of assumptions 
that are presented in the business plan. In late 2002, before 
increasing fees for civilian consultations and before assuming 
responsibility for the billing and collection of fees, AFIP collected a 
judgmental sample of 250 cases out of the approximately 23,600 civilian 
cases that AFIP completed in 2002. Using this sample of cases, AFIP 
developed a calculation to predict the amount of additional revenue 
that it would generate from raising fees and assuming the billing and 
collection function from ARP. (See app. III for a description of AFIP's 
analysis as presented in the business plan.)

Although AFIP will probably increase its revenues as a result of 
raising fees, AFIP's projection overestimated the likely increase in 
revenues. Specifically, AFIP's analysis (1) overestimated the number of 
consultation cases that AFIP would receive, (2) overestimated the 
average revenue AFIP is likely to earn from each billable case and, (3) 
underestimated ARP's collection rate. We found that if actual 2004 data 
were used in AFIP's calculation, AFIP would achieve approximately $1 
million in increased revenues over the revenues collected by ARP in 
2003. Figure 2 shows the estimates presented in the business plan 
compared with actual 2004 data provided by AFIP. 

Figure 2: AFIP's Business Plan Estimates and Actual 2004 Data for 
Civilian Consultations: 

[See PDF for image]--graphic text: 

Bar chart with six items.

Number of consultation cases; 
2003 business plan estimates: 30,244; 
2004 actual data: 15,646. 

Revenue per case; 
2003 business plan estimates: $555; 
2004 actual data: $300. 

Collection rate; 
2003 business plan estimates: 55%; 
2004 actual data: 80%. 

[End of figure]

Financial Benefits from Staffing Reductions Will More Likely Be $4 
Million Instead of $6.6 Million: 

In its business plan, AFIP projected annual financial benefits of $6.6 
million as a result of implementing staff cuts; however, as of May 
2005, AFIP stated that it planned to achieve $4 million in annual 
savings from these cuts. The business plan also stated that AFIP 
planned to reduce its total staff from 820 to 685 by October 2004. 
However, AFIP officials said that at the time of the business plan's 
development, they did not have an accurate count of the total number of 
staff working at AFIP. Officials stated that this was partially due to 
challenges resulting from a lack of central management over hiring, 
particularly with regard to contract staff hired through ARP.[Footnote 
16] Since implementing its business plan, AFIP officials said that they 
have improved their ability to track the number of staff working at the 
institute. AFIP and DOD officials have agreed on a savings target of $4 
million for reducing AFIP's staff. AFIP has developed lists of 
positions to be cut, but as of May 2005 these staff cuts were on hold. 
AFIP has primarily relied on attrition to reduce its staff. Table 3 
shows the number of staff working at AFIP and the primary funding 
source for their positions. 

Table 3: Number of Staff Working at AFIP, 2000 to 2004: 

Source of funding: Army; 
Year: 2000: 78; 
Year: 2001: 72; 
Year: 2002: 66; 
Year: 2003: 79; 
Year: 2004: 67. 

Source of funding: Navy; 
Year: 2000: 53; 
Year: 2001: 45; 
Year: 2002: 67; 
Year: 2003: 49; 
Year: 2004: 50. 

Source of funding: Air Force; 
Year: 2000: 49; 
Year: 2001: 53; 
Year: 2002: 51; 
Year: 2003: 50; 
Year: 2004: 53. 

Source of funding: VA; 
Year: 2000: 14; 
Year: 2001: 15; 
Year: 2002: 14; 
Year: 2003: 14; 
Year: 2004: 18. 

Source of funding: General Schedule/civilian employees; 
Year: 2000: 309; 
Year: 2001: 296; 
Year: 2002: 304; 
Year: 2003: 286; 
Year: 2004: 258. 

Source of funding: DOD-funded contractors; 
Year: 2000: 237; 
Year: 2001: 226; 
Year: 2002: 318; 
Year: 2003: 338; 
Year: 2004: 307. 

Source of funding: Total DOD-funded staff; 
Year: 2000: Not available; 
Year: 2001: 707; 
Year: 2002: 820; 
Year: 2003: 816; 
Year: 2004: 753. 

Source of funding: Contractors paid with external, non-DOD funding 
(e.g., funded by research grants, ARP registry funds, etc.); 
Year: 2000: Included above; 
Year: 2001: 63; 
Year: 2002: 43[A]; 
Year: 2003: 70; 
Year: 2004: 84. 

Source of funding: Total staff; 
Year: 2000: 740; 
Year: 2001: 770; 
Year: 2002: 863; 
Year: 2003: 886; 
Year: 2004: 837. 

Source: AFIP. 

Note: AFIP officials said they are confident that they have identified 
all staff working at AFIP in 2004 regardless of their funding streams. 
They said they are less confident about staffing in prior years. 

[A] At the time of the business plan's development in 2002, AFIP could 
not identify these 43 staff members working under ARP contract and paid 
for with non-DOD sources of funding. AFIP officials later identified 
these staff members but said that additional contractors who were not 
identified might have been working at AFIP at this time. 

[End of table]

AFIP Will Likely Achieve None of the $3.5 Million Annual Financial 
Benefits Projected in the Business Plan from the Consolidation of Its 
Facilities: 

Although AFIP's business plan projected an annual financial benefit of 
$3.5 million as a result of consolidating facilities, as of May 2005, 
AFIP officials said they will not be making the facilities changes 
described in the business plan and will therefore not realize the $3.5 
million in annual financial benefits from facilities consolidation. 

Since 2002 AFIP has sought to replace its primary facility on the 
Walter Reed campus through an alternative funding mechanism, called an 
"enhanced use lease." However, several major developments have hindered 
AFIP's ability to move forward with the lease and building 
consolidation. Communities from adjacent neighborhoods have been 
opposed to constructing a new building on the Walter Reed Campus, where 
AFIP hoped to have the new building located. In addition, AFIP has 
reevaluated its plans to consolidate all of its operations at its 
Walter Reed location because of concern about moving the Armed Forces 
Office of the Medical Examiner into Washington, D.C. AFIP officials 
have expressed concern that being located within Washington, D.C., 
could hamper the medical examiner's ability to respond to a crisis that 
affected the city. 

In February 2005, AFIP's Board of Governors decided to place all plans 
for facilities on hold while DOD reconsidered AFIP's future 
mission.[Footnote 17] All future decisions about AFIP's primary 
facility and the consolidation of facilities will be impacted by DOD's 
recommendation in May 2005 that AFIP be closed as a part of the BRAC 
process. 

Figure 3 summarizes our findings regarding the annual financial 
benefits projected in the business plan. 

Figure 3: GAO's Estimates of Likely Annual Financial Benefits from 
Implementing the Business Plan: 

[See PDF for image]--graphic text: 

Bar chart with six items. 

Dollars in millions. 

Improvements in business practices; 
2003 business plan estimates: $7.4; 
2005 updated estimates: $1.0. 

Savings from facilities consolidation; 
2003 business plan estimates: $3.5; 
2005 updated estimates: None. 

Savings from staff reductions; 
2003 business plan estimates: $6.6; 
2005 updated estimates: $4.0. 

Source: GAO analysis of AFIP data. 

[End of figure]

Implementation of the Business Plan Has Increased Services for the 
Military and Decreased Services for Civilians: 

In implementing its business plan, AFIP increased the amount of 
services provided for the military and decreased the amount of services 
provided for civilians. Many pathologists we interviewed said that 
these trends will likely continue in the future. Over the last several 
years, AFIP has increased its military consultations and decreased its 
civilian consultations. In addition, AFIP has reduced its civilian 
research and the number of educational courses available to civilians. 
Staff reductions, as well as other recent changes called for in the 
business plan, have resulted in a loss of top pathologists. While AFIP 
has successfully increased the amount of services to the military, the 
pathologists and physicians we interviewed told us that the continued 
decline in civilian services has reduced--and will continue to reduce-
-AFIP's overall level of expertise. In addition to these changes at 
AFIP, DOD recently recommended the closure of AFIP. If implemented, 
this would require that all services currently provided by AFIP be 
discontinued, transferred to other parts of DOD, or contracted out to 
the civilian medical community. 

Military Consultations Have Increased While Civilian Consultations Have 
Decreased: 

The number of military consultations sent to AFIP has increased while 
the number of civilian consultations has decreased. From 2000 through 
2004, military consultations at AFIP increased by 30 percent while 
civilian consultations decreased by 28 percent. Nearly all of the 
decrease in civilian consultations occurred in the 2 years after AFIP 
announced that it would raise its consultation fees beginning in 
January 2003.[Footnote 18] The business plan called for AFIP to 
increase civilian fees in order to reduce DOD funds supporting civilian 
services. At the time of the plan's development, AFIP officials 
anticipated a 20 percent drop in civilian consultations as a result of 
its increased fees. 

Other reasons commonly cited for the decrease in civilian consultations 
are not directly attributable to the business plan. AFIP and civilian 
pathologists have said that a more competitive marketplace for 
consultations, an overall decline in AFIP's reputation, and AFIP's slow 
turnaround time in providing diagnoses have also contributed to the 
decline. These pathologists also cited the loss of nationally 
recognized experts at AFIP as another possible reason for the decline 
in the number of civilian consultations being sent to AFIP. The 
expertise of AFIP's pathologists is one reason that many civilian 
customers send consultations to AFIP. Figure 4 shows trends in 
consultations since 2000. 

Figure 4: AFIP Consultations by Type of Consultation, 2000 to 2004: 

[See PDF for image]

Note: AFIP performs consultations for VA in exchange for VA staff that 
work at AFIP. AFIP does not charge VA fees for consultations. 

[End of figure]

The Amount of Civilian Research at AFIP Has Declined: 

The business plan called for AFIP to decrease the amount of DOD-funded 
research that is not directly relevant to military operations. AFIP 
officials said that it could continue to do civilian research if AFIP 
pathologists were able to increase the amount of funding from outside 
agencies or foundations, such as the National Institutes of Health. 
AFIP shifted its DOD-funded research toward subjects that were of 
direct interest to the military and encouraged pathologists that wished 
to do civilian research to seek research grants from external sources. 
Although "militarily relevant" research has not been well-defined, AFIP 
staff said it generally includes subjects of direct interest to the 
military, such as research on military body armor or 
bioterrorism.[Footnote 19] AFIP staff said that they began to focus on 
increasing militarily relevant research and reducing DOD-funded 
civilian research as early as 2001. AFIP developed additional 
strategies to reduce DOD-funded civilian research in its business plan, 
which was issued in 2003. 

From 2000 through 2004, the number of research protocols at AFIP 
declined from 371 to 296. A research protocol is a detailed proposal, 
approved by AFIP's research committee, that describes the research that 
will be completed. The decline in AFIP's research protocols has 
particularly affected one type of civilian research--clinical-
pathological correlations--traditionally performed by AFIP researchers. 
In this type of study, AFIP pathologists generally use the institute's 
repository of disease specimens to describe the correlations that exist 
between the clinical symptoms or attributes exhibited by a patient and 
the pathological abnormalities of a specific disease or type of tumor. 
The results of these studies are typically published by AFIP on its Web 
site, in books called "fascicles," or in other scientific journals. 
Although clinical-pathological correlations have helped to build the 
reputation of AFIP, many AFIP pathologists we interviewed said this 
type of research will likely decline at the institute in the future. 
Several department chairs commented that correlations are effective 
marketing tools that contribute to AFIP's reputation. Of the 17 
department chairs who responded to this question, 14 suggested that the 
reduction of DOD-funded civilian research would negatively affect the 
institute.[Footnote 20] Figure 5 shows the number of active research 
protocols from 2000 through 2004. 

Figure 5: AFIP Research Protocols, 2000 to 2004: 

[See PDF for image]

[End of figure]

The Number of Military Attendees at AFIP's Educational Courses 
Increased While the Number of Civilian Attendees Decreased: 

From 2000 through 2004, the number of military attendees at AFIP's 
educational courses increased while the number of civilian attendees 
decreased. AFIP officials said that they began making changes to their 
educational programs in 2001 in response to DOD's criticism of the 
amount of services that AFIP provided for civilians and the low fees 
charged to civilian attendees.[Footnote 21] Since 2001, fees for 
civilian courses were raised and AFIP has begun to offer more 
educational courses that attract military attendees. Furthermore, the 
business plan established criteria to determine if an educational 
course at AFIP should be continued. AFIP officials said that they 
generally will eliminate courses if fewer than 25 percent of the 
attendees are in the military or if revenues do not exceed costs by at 
least 33 percent. Over the last several years, AFIP has used new 
technology to offer additional courses for military physicians. For 
example, in 2004, AFIP used video teleconferencing to teach 24 courses 
to physicians at 35 military sites. In addition, AFIP has used Web-
based technology to allow its educational services to reach more 
physicians and researchers. At the same time that AFIP increased its 
course offerings for the military, it decreased the number of courses 
available to civilian attendees. In 2000 AFIP offered 41 courses that 
were open to civilian participants, whereas in 2004 AFIP offered 29 
educational courses that were open to civilians. Figure 6 shows the 
number of military and civilian attendees at AFIP educational courses 
from 2000 to 2004. 

Figure 6: Military and Civilian Attendees at AFIP Educational Courses, 
2000 to 2004: 

[See PDF for image]

[End of figure]

Pathologists and Physicians Said That AFIP's Civilian Mission Is 
Essential for Maintaining AFIP's Overall Level of Expertise: 

AFIP pathologists and civilian physicians said that AFIP's civilian 
mission is essential for maintaining the institute's expertise and that 
AFIP's civilian services are likely to continue to decline as a result 
of implementing the business plan. DOD and AFIP officials have stated 
that they want to preserve AFIP's civilian work but do not want to fund 
it with increasingly scarce DOD funds. AFIP staff told us that 
consultations from civilian patients are critical for maintaining the 
diagnostic expertise of AFIP's professional staff primarily because 
rare and unusual disease specimens are not commonly found in relatively 
young, active-duty military personnel. AFIP pathologists have also 
provided research and education services for the civilian medical 
community, which allows AFIP to maintain its professional medical 
contacts and utilize the institute's repository of disease specimens. 
AFIP pathologists told us that civilian pathologists with nationally 
recognized reputations have come to work at AFIP because of its 
international reputation, the type of cases that AFIP receives, and its 
repository of disease specimens. AFIP pathologists also said that the 
medical expertise gained from their interaction with civilian medicine 
benefits the military through the consultations they provide for 
military servicemembers and their families and their education and 
research services, which cover a variety of topics that are useful to 
DOD. 

Staff Reductions and Recent Changes at AFIP Have Resulted in the Loss 
of Top Pathologists: 

Staff reductions called for by the business plan, as well as other 
recent changes at AFIP, have resulted in a loss of top pathologists, 
diminishing the institute's overall level of expertise.[Footnote 22] 
Between 2000 and 2004, the total number of pathologists at AFIP--as 
well as the number of AFIP's most senior physicians and researchers--
declined. Although some of the losses of top pathologists were due to 
reasons not associated with the business plan, such as deaths and 
retirements, AFIP does not intend to replace those losses because of 
impending staff reductions called for in the business plan. The total 
number of pathologists and scientists at AFIP has declined from 133 in 
2000 to 96 in 2004, and AFIP's top pathologists and scientists--its 
Distinguished Scientists and Senior Executive Service employees--have 
declined from 19 in 2000 to 9 in 2004. Most of AFIP's Distinguished 
Scientists and Senior Executive Service employees are department chairs 
and have international reputations in the field of pathology. According 
to representatives from the College of American Pathologists, AFIP has 
historically had prestigious and well-respected experts in the field of 
pathology. They told us that there appears to be less of an emphasis on 
this level of expertise at AFIP in recent years. 

Half of the 20 department chairs we interviewed said that the business 
plan would negatively affect AFIP's ability to attract top pathologists 
in the future and a quarter said they are less likely to remain at AFIP 
because of changes called for by the business plan. The department 
chairs' most commonly cited complaint with the business plan was that 
pathologists must spend most of their time doing consultations rather 
than pursuing research or educational activities. The College of 
American Pathologists said that AFIP's loss of top pathologists is 
likely to hurt its ability to attract civilian consultations in the 
future. 

AFIP officials responsible for implementing the business plan said that 
AFIP continues to be staffed by top-level pathologists and that top 
pathologists and civilian consultations will continue to be attracted 
to AFIP by the reputation of the institute rather than the reputation 
of individual pathologists and scientists. 

Although the loss of some top pathologists can be directly attributed 
to the business plan, other changes in civilian and military medicine 
have also affected the level of expertise at AFIP. Throughout the early 
part of the 20th century, AFIP was the only institution in the country 
that maintained expertise in every major area of anatomical pathology. 
With a repository of millions of disease specimens and recognized 
expertise in numerous subspecialties of pathology, AFIP drew large 
numbers of consultations, research grants, and trainees on the basis of 
the institute's unique reputation. According to AFIP's Scientific 
Advisory Board, many changes in modern medical practice over the last 
several decades have altered the environment in which AFIP operates. 
For example, AFIP must now compete with 126 medical schools, many of 
which have in-house experts, as well as competitors, such as the Mayo 
Clinic, that have expertise in numerous subspecialties of pathology. 

Conclusions: 

AFIP developed a business plan to improve internal controls and reduce 
AFIP's need for DOD funding by making its civilian work pay for itself. 
In implementing the business plan, AFIP instituted some of the internal 
controls described in the plan but has not instituted others. AFIP has 
also instituted business practices designed to make its civilian 
consultation, education, and research activities less dependent on DOD 
funding. These business practices appear to have had the effect of 
decreasing AFIP's civilian work in each of those areas. 

We estimate that AFIP's financial benefits, in the form of increases in 
AFIP's revenues and reductions in AFIP's costs, are likely to be 
significantly less than projected by the business plan. We found that 
this is the case because the assumptions that AFIP used in its analysis 
were inaccurate and because events that AFIP projected would result in 
savings, such as staff cuts and facilities consolidation, did not 
occur. 

Although DOD recently recommended the closure of AFIP as a part of the 
Base Realignment and Closure process, the process has not been 
completed. Until the process is completed, AFIP's inability to achieve 
its projected financial benefits could result in a budget shortfall 
because DOD officials said they intend to reduce AFIP's funding by the 
amount of the financial benefits projected in the business plan. 

Recommendation for Executive Action: 

In order to better manage changes being instituted at AFIP, we 
recommend that the Assistant Secretary of Defense for Health Affairs 
reevaluate the financial benefits projected in AFIP's business plan so 
that DOD will have a more reliable estimate of AFIP's revenues and 
expenses. 

Agency Comments: 

We requested comments on a draft of this report from DOD. DOD provided 
written comments that are reprinted in appendix IV. In its comments, 
DOD concurred with the report's findings and recommendation, noting 
that DOD continues to monitor the implementation of AFIP's business 
plan and the impact of the BRAC process on AFIP. DOD also said that the 
U.S. Army Audit Agency will begin an audit of AFIP business practices 
to determine if the institute is operating effectively and efficiently, 
and possesses the tools to accurately articulate costs, 
accomplishments, and contributions to the military mission. We also 
received technical comments from ARP on selected sections of this 
report, which we incorporated as appropriate. 

We are sending copies of this report to the Secretary of Defense, 
appropriate congressional committees, and other interested parties. 
Copies will also be made available to others upon request. In addition, 
this report is available at no charge on GAO's Web site at 
http://www.gao.gov. If you or your staff have any questions regarding 
this report, please call me on (202) 512-7101 or Martin Gahart on (202) 
512-3596. Tom Conahan, Krister Friday, and Meridith Walters also made 
key contributions to this report. 

Signed by: 

Marcia Crosse: 
Director, Health Care: 

[End of section]

Appendix I: Objectives, Scope, and Methodology: 

The Senate Committee on Armed Services, in a report accompanying the 
Ronald W. Reagan National Defense Authorization Act for Fiscal Year 
2005, directed that we conduct a study of the Armed Forces Institute of 
Pathology's (AFIP) business plan.[Footnote 23] In this report, we (1) 
describe the business plan's key initiatives and projected financial 
benefits, (2) evaluate the business plan's potential to improve AFIP's 
internal controls and achieve its projected financial benefits, and (3) 
assess the likely impact of the business plan on the role of AFIP in 
military and civilian medicine. We performed our work from August 2004 
through June 2005 in accordance with generally accepted government 
auditing standards. 

To describe the business plan's key initiatives and projected financial 
benefits, we reviewed the business plan--called the The Transformation 
Plan of the Armed Forces Institute of Pathology--as well as numerous 
Department of Defense (DOD) studies of AFIP that contributed to its 
development. These studies included: 

* a 1999 DOD review entitled A Blueprint for the Future;

* two 1999 DOD Inspector General reports, the first reviewing AFIP's 
administration and management, and the second reviewing AFIP's controls 
over case-related materials;[Footnote 24]

* a 2001 study by the Center for Naval Analysis evaluating AFIP's 
business practices and analyzing a range of alternative funding 
structures for AFIP;[Footnote 25]

* a 2000 Report to Congress on AFIP's facilities issues;

* slides from a 2001 Council of Colonels/Captains study of AFIP's 
funding arrangements, business practices, and oversight by DOD, 
chartered by DOD's Office of the Secretary of Defense for Health 
Affairs; and: 

* a 2001 draft report from DOD's Office of Program Analysis and 
Evaluation, studying alternative funding arrangements for AFIP. 

We evaluated a written copy of the business plan, dated October 2003, 
that was described by AFIP officials as the most current draft. AFIP 
officials said that there is no "final" version of the plan because it 
is an evolving document. While some of the changes described in the 
business plan occurred as early as 2000, others occurred after that or 
had not been implemented at the time of our work. In evaluating the 
effects of the business plan for this report, we generally provide data 
from 2000 to 2004. We interviewed officials from AFIP; the American 
Registry of Pathology (ARP); the Office of the Surgeon General of the 
Army; the Office of the Under Secretary of Defense, Comptroller; and 
the Office of Assistant Secretary of Defense for Health Affairs. 

To evaluate the business plan's potential to improve AFIP's internal 
controls and achieve its projected financial benefits, we interviewed 
AFIP and ARP officials and reviewed the assumptions and analyses that 
led to specific elements of the business plan. In some cases, we were 
able to compare the plan's projected financial benefits with 
information collected after specific changes had been implemented. In 
other cases, we evaluated the assumptions upon which specific analyses 
were based, by comparing the assumptions with data collected in 2004. 

We evaluated the analysis presented in the business plan, which 
predicted AFIP's future revenues from taking over the billing and 
collection activities for civilian consultations from ARP. AFIP based 
its analysis upon three primary assumptions: (1) an assumption of the 
average invoice per case under the new fee schedule, (2) an assumption 
of future civilian consultations, and (3) an assumption of ARP's 
collection rate compared with that of AFIP. We compared the 
assumptions--which were based on data from 2002--with actual data from 
2004 to evaluate their accuracy in predicting AFIP's future civilian 
consultation revenues. In addition, we asked AFIP to provide updates on 
other projections presented in the business plan. We present these 
updated numbers and compare them with the financial benefits projected 
in the business plan. 

We observed a demonstration of AFIP's Pathology Information Management 
System (PIMS) as an example of the improvements made in establishing 
internal controls and improving data management. AFIP staff 
demonstrated the types of data that could be retrieved using the system 
and provided us with both hard copy and automated examples of the 
system's output. However, we did not test the data in PIMS to verify 
their accuracy. 

AFIP provided us with data on pending and completed staff cuts, as well 
as information about staffing levels and their funding sources over the 
last 4 years. AFIP officials explained how they developed lists of 
positions to be cut as part of the business plan's staff reductions. We 
also interviewed AFIP officials responsible for developing and 
implementing the business plan and 20 of AFIP's 22 department chairs to 
understand the effects of the business plan on the major areas of 
AFIP's operations.[Footnote 26]

To assess the likely impact of the business plan on the services that 
AFIP provides for military and civilian medicine, we interviewed the 
AFIP staff described above, representatives from the College of 
American Pathologists, and members of AFIP's Scientific Advisory Board. 
We also reviewed data on AFIP's consultation, research, and educational 
efforts to see how they have changed since the development and 
implementation of the business plan. 

We interviewed AFIP and ARP staff to determine how data were collected 
and maintained, but we did not independently verify the accuracy of the 
data. The reliability of the data has been the subject of critical 
findings in DOD reviews of AFIP. AFIP officials demonstrated the 
systems they use to maintain data and described their efforts to ensure 
their accuracy. In some cases, AFIP provided us with data that differed 
from data published in earlier reports and occasionally provided us 
with updated data during the course of this review that differed from 
data that it had provided us earlier. AFIP officials explained that 
this was due to ongoing efforts on their part to improve the quality of 
their data. We determined that the AFIP data used in this report were 
adequate for our use. 

[End of section]

Appendix II: The Armed Forces Institute of Pathology's Missions: 

The Armed Forces Institute of Pathology's (AFIP) core mission is to 
provide consultation, research, and educational services for the 
civilian and military medical communities. In addition to this core 
mission, AFIP has a variety of other missions mandated by Congress and 
the Department of Defense (DOD). The DOD directive describing AFIP's 
missions lists the specific responsibilities and functions for which 
AFIP is responsible.[Footnote 27] It states that the Director, AFIP, as 
a national and international expert on human and veterinary pathology, 
supporting both military and civilian medicine, is responsible for: 

* reviewing the diagnosis of pathology tissue for the Armed Forces;

* conducting diagnostic and consultation services for military and 
civilian medicine using histopathology, electron microscopy, 
immunohistochemistry, and molecular biological tools with leverage of 
the latest technology to ensure innovative pathology;

* conducting experimental, statistical, and morphological research and 
investigations to expand pathology and medicine beyond current levels 
of knowledge in support of DOD planning, initiatives, and operations;

* administering an effective Armed Forces Medical Examiner system;

* contracting with the American Registry of Pathology for cooperative 
efforts between the AFIP and the civilian medical profession;

* maintaining the Armed Forces repository of specimen samples for the 
identification of human remains and storing reference samples suitable 
for deoxyribonucleic acid (DNA) analysis for identifying human remains 
while assuring the protection of privacy;

* supporting DOD medical quality assurance programs and risk management 
with the Department of Legal Medicine;

* administering the Military Health System Patient Safety Center;

* staffing the Center for Clinical Laboratory Medicine and providing 
oversight for compliance with the Clinical Laboratory Improvement 
Amendments of 1988;

* serving as the DOD veterinary pathology resource expert, providing 
consultation, education, and research in pathology and laboratory 
animal medicine;

* maintaining medical illustration services for important illustrative 
material, except original motion picture footage;

* maintaining, facilitating, expanding, and improving the advancement 
of the activities of the National Museum of Health and Medicine 
pertinent to collecting, preserving, interpreting, and financial 
reporting on the national collection of medical artifacts, pathological 
and skeletal specimens, research collections and archival resources, 
and applicable materials from other federal medical sources and 
developing, presenting, and promoting public programs and exhibitions 
and participating in informational activities that improve the 
understanding and awareness of military medical history, medical 
science, disease prevention, and health education;

* maintaining a mechanism to access and track all case records and 
materials given to AFIP for consultation into a permanent, unified 
repository system, and central database;

* managing and directing the DOD Automated Tumor Registry and related 
activities, and overseeing access to the registry or a treatment 
facility's database, consistent with a research protocol approved 
through the institutional review board affiliated with the facility 
maintaining or giving oversight of the records or database;

* providing, on a reimbursable basis, education and training programs 
in pathology and other related areas of medicine for military and 
civilian participants throughout the United States and foreign 
countries;

* maintaining a medically current collection of study materials, which 
may be made available to military and civilian medicine;

* coordinating and enhancing genetic services in operational and 
clinical medicine through AFIP's Center for Medical and Molecular 
Genetics;

* providing clinical and investigative studies in experimental 
pathology with a focus on military relevancy and the protection of 
public safety;

* developing collaborative research protocols to assess current 
technologies and their innovative applications, which bring together 
government, academia, and private industry; and: 

* performing other duties as assigned by the Assistant Secretary of 
Defense for Health Affairs. 

[End of section]

Appendix III: Analysis of the Armed Forces Institute of Pathology's 
Consultation Revenue Projections: 

In its business plan, the Armed Forces Institute of Pathology (AFIP) 
projected that it would increase its revenues from civilian 
consultations by $7.4 million annually as a result of increasing the 
fees it charges to civilians for consultation services and improving 
the collection rate of those fees. The business plan contains an 
analysis of how AFIP developed this projection. AFIP's analysis was 
based upon three primary assumptions about its future operations. It 
included (1) an assumption of the American Registry of Pathology's 
(ARP) collection rate, (2) an assumption of the number of civilian 
consultations that AFIP expected to receive in the future, and (3) an 
assumption of the average revenue per invoice under the new fee 
schedule. Based on 2004 performance data, we found that the values that 
AFIP assumed for each of these were inaccurate. Thus, the business 
plan's estimate of financial benefits from changes to its business 
practices significantly overstated the actual benefits. 

AFIP Developed a Judgmental Sample from 2002 Civilian Consultations: 

To develop its assumptions, AFIP officials collected data from a 
judgmental sample of 250 consultation cases out of the approximately 
23,600 civilian consultation cases that AFIP completed in 2002. AFIP 
officials said that they selected the sample of cases in such a way as 
to reflect the general distribution of consultations among AFIP's 
departments. AFIP officials said they determined the total amount of 
revenues that were invoiced, collected, and written off by ARP for each 
of the 250 cases.[Footnote 28] AFIP officials then determined what they 
would have invoiced for these same 250 cases under their new 
schedule.[Footnote 29] Table 4 provides the information that AFIP 
compiled for these 250 cases. 

Table 4: AFIP's Analysis of 250 Sample Cases from 2002: 

Department: Armed Forces Medical Examiner; 
Invoiced: $425; 
Collected: $0; 
Written-off: $425; 
Uncollected: $0; 
New invoice if billed under new fee schedule: $171; 
Total number of cases in sample: 1. 

Department: Department of Cardiovascular Pathology; 
Invoiced: $1,220; 
Collected: $600; 
Written-off: $150; 
Uncollected: $470; 
New invoice if billed under new fee schedule: $3,433; 
Total number of cases in sample: 7. 

Department: Department of Cellular Pathology; 
Invoiced: $990; 
Collected: $240; 
Written-off: $600; 
Uncollected: $150; 
New invoice if billed under new fee schedule: $2,555; 
Total number of cases in sample: 5. 

Department: Department of Dermatopathology; 
Invoiced: $5,015; 
Collected: $2,880; 
Written-off: $550; 
Uncollected: $1,585; 
New invoice if billed under new fee schedule: $11,475; 
Total number of cases in sample: 27. 

Department: Department of Head and Neck Pathology; 
Invoiced: $3,320; 
Collected: $1,940; 
Written-off: $360; 
Uncollected: $1,020; 
New invoice if billed under new fee schedule: $7,093; 
Total number of cases in sample: 19. 

Department: Department of Environmental and Toxicology Pathology; 
Invoiced: $450; 
Collected: $0; 
Written-off: $0; 
Uncollected: $450; 
New invoice if billed under new fee schedule: $684; 
Total number of cases in sample: 3. 

Department: Department of Genitourinary Pathology; 
Invoiced: $4,120; 
Collected: $2,770; 
Written-off: $420; 
Uncollected: $930; 
New invoice if billed under new fee schedule: $5,620; 
Total number of cases in sample: 26. 

Department: Department of Gynecology and Breast Pathology; 
Invoiced: $6,435; 
Collected: $4,845; 
Written-off: $270; 
Uncollected: $1,320; 
New invoice if billed under new fee schedule: $14,242; 
Total number of cases in sample: 27. 

Department: Department of Hematopathology; 
Invoiced: $2,350; 
Collected: $1,000; 
Written-off: $975; 
Uncollected: $375; 
New invoice if billed under new fee schedule: $14,187; 
Total number of cases in sample: 8. 

Department: Department of Hepatic and Gastroenterology Pathology; 
Invoiced: $6,515; 
Collected: $2,655; 
Written-off: $540; 
Uncollected: $3,320; 
New invoice if billed under new fee schedule: $31,221; 
Total number of cases in sample: 30. 

Department: Department of Infectious and Parasitic Disease Pathology; 
Invoiced: $1,645; 
Collected: $1,125; 
Written-off: $0; 
Uncollected: $520; 
New invoice if billed under new fee schedule: $6,122; 
Total number of cases in sample: 8. 

Department: Department of Neurological and Ophthalmic Pathology; 
Invoiced: $5,330; 
Collected: $2,620; 
Written-off: $1,460; 
Uncollected: $1,250; 
New invoice if billed under new fee schedule: $14,442; 
Total number of cases in sample: 18. 

Department: Department of Oral and Maxillofacial Pathology; 
Invoiced: $1,830; 
Collected: $1,340; 
Written-off: $0; 
Uncollected: $490; 
New invoice if billed under new fee schedule: $3,445; 
Total number of cases in sample: 10. 

Department: Department of Orthopedic Pathology; 
Invoiced: $1,690; 
Collected: $970; 
Written-off: $420; 
Uncollected: $300; 
New invoice if billed under new fee schedule: $2,978; 
Total number of cases in sample: 10. 

Department: Department of Pulmonary and Mediastinal Pathology; 
Invoiced: $3,910; 
Collected: $2,640; 
Written-off: $0; 
Uncollected: $1,270; 
New invoice if billed under new fee schedule: $5,728; 
Total number of cases in sample: 15. 

Department: Department of Radiological Pathology; 
Invoiced: $0; 
Collected: $0; 
Written-off: $0; 
Uncollected: $0; 
New invoice if billed under new fee schedule: $342; 
Total number of cases in sample: 2. 

Department: Department of Soft Tissue Pathology; 
Invoiced: $4,775; 
Collected: $1,950; 
Written-off: $1,875; 
Uncollected: $950; 
New invoice if billed under new fee schedule: $10,852; 
Total number of cases in sample: 16. 

Department: Department of Forensic Toxicology; 
Invoiced: $120; 
Collected: $0; 
Written-off: $0; 
Uncollected: $120; 
New invoice if billed under new fee schedule: $513; 
Total number of cases in sample: 3. 

Department: Department of Telemedicine; 
Invoiced: $275; 
Collected: $0; 
Written-off: $200; 
Uncollected: $75; 
New invoice if billed under new fee schedule: $1,456; 
Total number of cases in sample: 2. 

Department: Department of Veterinary Pathology; 
Invoiced: $0; 
Collected: $0; 
Written-off: $0; 
Uncollected: $0; 
New invoice if billed under new fee schedule: $1,882; 
Total number of cases in sample: 11. 

Department: DOD DNA Registry; 
Invoiced: $360; 
Collected: $360; 
Written-off: $0; 
Uncollected: $0; 
New invoice if billed under new fee schedule: $342; 
Total number of cases in sample: 2. 

Department: Total; 
Invoiced: $50,775; 
Collected: $27,935; 
Written-off: $8,245; 
Uncollected: $14,595; 
New invoice if billed under new fee schedule: $138,785; 
Total number of cases in sample: 250. 

Source: AFIP. 

Notes: DNA = deoxyribonucleic acid. DOD = Department of Defense. 

[End of table]

AFIP's Analysis Included Three Primary Assumptions: 

AFIP used the information in table 4 to develop two of its three 
primary assumptions. First, AFIP officials used the data collected for 
these 250 cases to determine that ARP had achieved a collection rate of 
55 percent for those cases. AFIP assumed that by taking over the 
billing and collection function from ARP, it would be able to achieve a 
collection rate of at least 80 percent. 

Second, AFIP determined what the average revenue per case would be if 
each of the 250 cases from the sample was invoiced under its new fee 
schedule. AFIP estimated that it would bill $138,785 if the 250 cases 
were invoiced under the new fee schedule. AFIP divided $138,785 by 250, 
which resulted in an average invoice of $555 per case. AFIP assumed 
that under the new schedule, $555 would be the average revenue per 
invoice for all of its civilian consultation cases. 

AFIP's third assumption, that it would receive 30,224 civilian 
consultations cases annually, was not derived from table 4. The 
business plan stated that this was the amount of civilian consultation 
cases that AFIP received in 2002. Total revenues would be calculated 
from this baseline estimate of consultation cases. AFIP assumed that 
the increase in fees would result in a 20 percent reduction in total 
consultation revenues. 

After developing these assumptions, AFIP officials developed a 
calculation to predict the institute's future revenues by multiplying 
the number of civilian consultation cases by the average invoice per 
case. Next, they estimated that there would be some reductions in 
revenues. They estimated that the implementation of new practice 
guidelines governing how consultation cases are handled within the 
institute would result in a 10 percent reduction in revenues and that 
higher fees would result in an additional 20 percent reduction in 
revenues.[Footnote 30]

From their calculation, AFIP officials estimated that they would 
generate a total of approximately $9.6 million in annual revenues in 
future years. AFIP reported that ARP collected approximately $2.2 
million in consultation revenues in 2002. By subtracting ARP's 2002 
revenues from AFIP's estimated revenues, AFIP projected that it would 
generate $7.4 million in additional annual revenues. Table 5 shows how 
AFIP performed these calculations. 

Table 5: AFIP's Projection as Presented in the Business Plan: 

Calculation: Step 1: AFIP identified 30,224 civilian consultation cases 
in 2002; 
Inputs: 30,224. 

Calculation: Step 2: AFIP multiplied the number of cases by the 
estimated average invoice that would be generated by each case; 
Inputs: 30,224 x $555.14; 
Total: $16,778,000. 

Calculation: Step 3: AFIP assumed that it would be able to collect 80 
percent of total invoices billed; 
Inputs: 80 percent of $16,778,000; 
Total: $13,423,000. 

Calculation: Step 4: AFIP projected a 10 percent reduction in revenues 
due to the implementation of its new practice guidelines; 
Inputs: 10 percent reduction of $13,423,000 ($13,423,000 minus 
$1,342,000); 
Total: $12,081,000. 

Calculation: Step 5: AFIP projected a 20 percent reduction in revenues 
due to the implementation of its new fee schedule; 
Inputs: 20 percent reduction of $12,081,000 ($12,081,000 minus 
$2,416,000); 
Total: $9,600,000. 

Estimate of the total amount collected by AFIP after taking over 
billing and collection from ARP and increasing fees: 
Total: $9,600,000. 

Calculation: Step 6: AFIP estimated that ARP collected $2.2 million in 
consultation revenues in 2002; 
Total: $2,200,000. 

Calculation: Step 7: AFIP compared its estimated collections with those 
of ARP in 2002; 
Inputs: $9,600,000 -$2,200,000. 

Calculation: Estimate of annual increase in revenues; 
Total: $7,400,000. 

Source: GAO analysis of AFIP data. 

Note: Numbers may not sum because of rounding. 

[End of table]

The Three Primary Assumptions Used in AFIP's Analysis Were Inaccurate: 

Using actual data from 2004, we determined that the three primary 
assumptions that AFIP used in its analysis were inaccurate. 

1. AFIP assumed that ARP achieved an annual collection rate of 55 
percent. However, according to data provided by AFIP, ARP achieved a 
collection rate of 80 percent in 2004. One reason that the 250-case 
sample showed a significantly lower collection rate is that ARP 
collected payments for some of the cases shown in table 4 after 
November 2002--the time of AFIP's data request to ARP. In the 5 months 
that followed AFIP's analysis, ARP collected 37 additional payments, 
which AFIP did not consider when calculating ARP's collection rate. 
Including these additional collections would have increased ARP's 
collection rate for the 250-case sample from 55 to 73 percent.[Footnote 
31] In addition, ARP stated that the sample included 30 cases that were 
not invoiced by ARP. For 17 of the cases, the pathologist did not 
provide ARP with documentation of which medical procedures had been 
performed. For the other 13, it was AFIP's policy not to bill for those 
types of cases.[Footnote 32]

2. AFIP officials assumed that they would collect an average of $555 
per case under AFIP's new fee schedule. However, in 2004, the first 
year in which the new fee schedule was in effect, the average revenue 
per case was $299.83. This is primarily because AFIP's sample of 250 
cases was not a reliable predictor of average cases over an entire 
year. 

3. In its business plan, AFIP assumed that it would receive 30,224 
civilian cases a year. However, AFIP officials reported to us that the 
institute had received approximately 23,600 civilian cases in 2002. 
AFIP officials said they made the larger assumption and used that 
number as a baseline for their calculation because at one time they had 
identified 30,224 civilian cases for 2002. Since then, they have 
engaged in a quality review of their data and discovered that some of 
the consultations had been entered incorrectly. AFIP identified 15,646 
civilian consultation cases to be billed in 2004. 

Results from Our Calculation Using Actual 2004 Data: 

If the assumptions presented in the business plan are replaced with 
actual data collected by AFIP in 2004, AFIP stands to generate $6.4 
million less in annual revenue than originally projected. Table 6 shows 
how we developed our calculation of AFIP's likely financial benefits 
using 2004 data. We estimate that AFIP will achieve approximately $1 
million in additional annual revenues. 

Table 6: Calculation Using Actual Data from 2004: 

Calculation: Step 1: AFIP identified 15,646 civilian consultation cases 
to be billed in 2004; 
Inputs: 15,646. 

Calculation: Step 2: AFIP reported that the average invoice per 
consultation case in 2004 was approximately $300 under the new fee 
schedule; 
Inputs: $299.83; 
Total: $299.83. 

Calculation: Step 3: Multiply average revenue per case by the number of 
anticipated cases; 
Inputs: 15,646 x $299.83; 
Total: $4,691,000. 

Calculation: Step 3: AFIP anticipates that it will achieve an 80 
percent collection rate of invoices billed[A]; 
Inputs: 80 percent of $4,691,000; 
Total: $3,753,000. 

Calculation: Estimate of the total amount collected by AFIP after 
taking over billing and collection from ARP and increasing fees; 
Total: $3,753,000. 

Calculation: Step 6: AFIP reported that ARP collected $2.7 million in 
2003; 
Total: $2,713,000. 

Calculation: Step 7: AFIP's new projected revenue compared with those 
of ARP in 2003; 
Inputs: $3,753,000 -$2,713,000. 

Calculation: New estimate of increased revenues; 
Total: $1 million. 

Source: GAO analysis of AFIP data. 

Note: Numbers may not sum because of rounding. 

[A] AFIP instituted its new fee schedule in January 2004. Since AFIP 
took over billing and collection from ARP in October 2004, it is too 
early to accurately assess AFIP's actual collection rate. AFIP assumed 
in its previous calculation that it could achieve an 80 percent 
collection rate; therefore, we used that estimated percentage in our 
calculation. 

[End of table]

[End of section]

Appendix IV: Comments from the Department of Defense: 

OFFICE OF THE ASSISTANT SECRETARY OF DEFENSE: 
HEALTH AFFAIRS: 
WASHINGTON, DC 20301-1200: 

JUN 13 2005: 

Ms. Marcia Crosse: 
Director, Health Care: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Ms. Crosse: 

This is the Department of Defense (DoD) response to the GAO draft 
report, "ARMED FORCES INSTITUTE OF PATHOLOGY: Business Plan 
Implementation is Unlikely to Achieve Expected Financial Benefits and 
Could Reduce Civilian Role," dated May 26, 2005 (GAO Code 290395/GAO-05-
615). 

Thank you for the opportunity to review the draft report. Overall, we 
"concur with comment." Our position is based on the following points: 

a. The Armed Forces Institute of Pathology (AFIP) Board of Governors 
(BOG), chaired by the Assistant Secretary of Defense for Health 
Affairs, reviews the implementation of AFIP's business plan quarterly 
and has approved changes as required. The BOG is also making 
preparations to deal with the proposed Base Realignment and Closure 
recommendations. 

b. On 9 Jun 05, the U.S. Army Audit Agency will begin an audit of AFIP 
business practices to determine if the Institute is operating 
effectively and efficiently, and possesses the tools to accurately 
articulate costs, accomplishments, and contributions to the military 
mission. 

My points of contact are COL Gary Matteson (functional) at (703) 681-
1703 and Mr. Gunther Zimmerman (Audit Liaison) at (703) 681-3492. 

Sincerely,

Signed by: 

Jack W. Smith, MD, MMM: 
Acting Deputy Assistant Secretary of Defense: 
Clinical and Program Policy: 

[End of section] 

FOOTNOTES

[1] DOD and AFIP staff generally refer to the document describing 
planned changes to AFIP's operations as "the business plan." However, 
its formal title is The Transformation Plan of the Armed Forces 
Institute of Pathology. In this report, we refer to this document as 
"the business plan."

[2] S. Rep. No. 108-260, at 349 (2004). 

[3] AFIP's Scientific Advisory Board is made up of pathologists from 
both the civilian and military medical communities. The board provides 
the Director of AFIP and her staff with scientific and professional 
advice in matters pertaining to the operational programs, policies, and 
procedures of AFIP. 

[4] Pub. L. No. 94-361, ß 811, 90 Stat. 923, 933-936 (1976) (codified 
at 10 U.S.C. ßß 176, 177 (2000)). 

[5] The DOD Executive Agent for AFIP is responsible for the 
administration of resources required to support the missions and 
functions of AFIP, as well as reporting on AFIP's activities to the 
Assistant Secretary of Defense for Health Affairs. 

[6] For the purpose of this report, unless otherwise noted, 
"consultations" refers to second-opinion surgical consultations. 

[7] An internal control is a component of an organization's management. 
Internal controls are a series of actions and activities that occur on 
an ongoing basis which help managers achieve key outcomes and minimize 
operational problems. For more information on internal controls, see 
GAO, Standards for Internal Controls in the Federal Government, 
GAO/AIMD-00-21.3.1. (Washington, D.C.: November 1999). 

[8] These reviews are listed in appendix I. 

[9] The draft report recommended that the medical examiner function and 
the DNA registry continue to receive funding through DOD. 

[10] This is a part of a larger initiative to close the Walter Reed 
installation in the District of Columbia and to build a new facility 
for specialty and subspecialty medical services in Bethesda, Maryland. 
This new facility will serve all of the military departments and will 
be named the Walter Reed National Military Medical Center. 

[11] The business plan refers to these guidelines as Standard Operating 
Procedures or Practice Guidelines. 

[12] The business plan refers to this type of system as an "activity-
based cost accounting system."

[13] A MID is a decision document designed by DOD to institutionalize 
management reform decisions. 

[14] Case materials include such items as tissue samples, x-rays, and 
case histories. 

[15] A collection rate is the ratio of revenues collected versus 
revenues billed. 

[16] ARP assists AFIP in hiring staff in two ways. ARP manages several 
DOD-funded personnel contracts which allow ARP to hire and pay for 
contractors to work at AFIP. In addition, AFIP department chairs can 
ask ARP to hire contract personnel with funds available in their 
registries. AFIP officials explained that it was staff from the second 
category, staff hired with funds from registries, that they had 
difficulty identifying at the time of the business plan's development. 

[17] The Board of Governors meets quarterly and establishes guidelines 
and broad administrative and professional policies, consistent with the 
objectives of the institute. The members of the Board of Governors are 
the Assistant Secretary of Defense for Health Affairs; the Surgeons 
General of the Army, Navy, and Air Force; the U.S. Surgeon General; the 
Under Secretary for Health, Department of Veterans Affairs; and a 
former Director of AFIP. 

[18] AFIP published an announcement of the fee increase in its 
newsletter dated December 2002, and AFIP sent a letter announcing the 
increase to all of its civilian customers. These announcements stated 
that AFIP would increase its fees on January 1, 2003. AFIP did not 
raise its fees until a year later because of delays in developing the 
necessary accounting infrastructure to support the fee increases. 
However, AFIP's civilian clients were not notified of this delay. 

[19] Although this is generally the way DOD and AFIP officials have 
discussed "militarily relevant" research within the context of the 
business plan, some AFIP officials believe that if the research is 
relevant to medicine, it is relevant to military medicine because 
military men and women and their families ultimately benefit from this 
research. 

[20] We surveyed or conducted interviews with 20 AFIP department 
chairs; however, 3 chairs did not respond to this question. 

[21] Center for Naval Analyses, An Analysis of Organizational and 
Funding Alternatives for the Armed Force Institute of Pathology 
(Alexandria, Va.: February 2001). 

[22] The majority of AFIP's staffing cuts have not yet occurred. In 
anticipation of AFIP's need to save $4 million annually in personnel 
costs, AFIP is not refilling many of its vacant positions. In addition, 
in a move unrelated to the business plan, AFIP eliminated 55 positions 
in 2003 to address that fiscal year's budget shortfall. 

[23] S. Rep. No. 108-260, at 349 (2004). 

[24] DOD, Office of the Inspector General, Administration and 
Management of the Armed Forces Institute of Pathology: Report No. 00-
010 (Arlington, Va.: October 1999), and DOD, Office of the Inspector 
General, Controls Over Case-Related Material at the Armed Forces 
Institute of Pathology: Report No. 99-119 (Arlington, Va.: April 1999). 

[25] Center for Naval Analyses, An Analysis of Organizational and 
Funding Alternatives for the Armed Force Institute of Pathology 
(Alexandria, Va.: February 2001). 

[26] In December 2004, AFIP officials provided us with a current list 
of all AFIP department chairs. Since that time, some departments have 
been eliminated or experienced personnel changes. 

[27] DOD Directive 5154.24, October 3, 2001. 

[28] For a variety of reasons, some consultation cases were written 
off, or not charged to the client. In some cases, it was AFIP's policy 
not to charge certain types of clients. For example, AFIP did not 
charge clients from developing nations. In other cases, AFIP department 
chairs could write off consultation fees in instances where they had 
asked fellow physicians to send them rare cases for research purposes. 
However, these cases were still counted as consultation cases in AFIP's 
data. 

[29] AFIP officials conducted this analysis in 2002, before they 
instituted the new fee schedule. However, they had already developed 
the fee schedule, and, therefore knew what the fees would be. 

[30] As a part of AFIP's practice guidelines, AFIP established policies 
that were designed to ensure that only the minimum number of tests 
needed to provide a diagnosis was performed. AFIP officials assumed 
that this would lower the total number of procedures performed per 
consultation case, thereby affecting anticipated revenues. 

[31] According to data provided by AFIP, ARP also achieved an 80 
percent collection rate for all consultations revenues generated in 
2003. 

[32] Prior to the expansion of AFIP's electronic Pathology Information 
Management System, AFIP pathologists filled out work sheets (called 
"Green Sheets") by hand which would indicate what medical procedures 
were performed on a consultation. This work sheet was then sent to ARP, 
where an invoice was generated and the client was billed. 

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