VA Health Care:

Contract Labor Cost Analysis in RAND Study

GAO-03-579R: Published: Jun 30, 2003. Publicly Released: Jun 30, 2003.

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Cynthia A. Bascetta
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The Department of Veterans Affairs (VA) spent about $23 billion to provide health care to over 4 million veterans in fiscal year 2002. To provide this care, VA relied primarily on its own employees, totaling about 190,000. VA also used contract employees, sometimes referred to as contract labor, to provide these services. In response to the requirements of the Federal Activities Inventory Reform Act of 1998 (the FAIR Act), VA compiled an inventory of more than 180,000 full-time equivalent (FTE) positions that it determined to be "health care commercial" in nature. This means that the work carried out in these positions is also done in the private sector and could potentially be done by contract labor. As part of its management initiatives, the Office of Management and Budget (OMB) has emphasized that competition should be used to determine the most effective and efficient way to provide commercial services. The process used to make this determination--referred to as competitive sourcing--is established in OMB Circular A-76. This process generally provides for competition between the government and the private sector on the basis of costs or costs and other factors. OMB has established competitive sourcing FTE targets for federal agencies to achieve as part of OMB's management initiatives. In response to OMB's FTE target for VA, VA established a plan to complete studies of competitive sourcing of 55,000 positions by 2008. RAND addressed limited aspects of the use of VA contract labor in a report that examined another subject. In that report, RAND found that increased use of contract labor appeared to decrease the overall costs at VA health care facilities. However, the report's finding differed from the interim finding that RAND briefed Congressional staff on earlier. In that briefing, RAND stated that contracting for labor could result in higher, rather than lower, VA health care facility costs. Because of this difference in RAND's findings and ongoing concerns about the impact of using contract labor at VA, Congress asked us to (1) determine what data RAND used in its contract labor analysis, (2) explain why RAND's final and interim findings differed regarding the effect of using contract labor on facility costs, and (3) assess whether RAND's report finding provides an adequate basis for making competitive sourcing decisions.

RAND used contract labor data provided by VA from its financial accounting system. These data were for contract labor costs, such as for laundry and dry cleaning, for each VA health care facility in fiscal year 2000. According to VA officials, the costs in these accounts are predominately for contract labor costs. However, an undetermined proportion of these costs could also be for costs other than contract labor. Data refinements that RAND made explain most of the difference between RAND's report finding and interim finding on the effect of contract labor on VA facility costs, according to the study authors. In its report, RAND found that increasing contract labor was associated with decreasing VA health care facility costs. In its interim finding, RAND reported the opposite, namely that contract labor was associated with higher, not lower, VA health care facility costs. RAND study authors told us that the difference between their interim finding and their report finding resulted from certain data and analytical refinements that they made during the course of their research and data validation work after the briefing. The most important refinement was to exclude the costs of medical resident stipends and benefits from the contract labor analysis in the report. RAND excluded these costs for the report because they are not funded through the VA health care resource allocation system that RAND was examining. RAND's finding on contract labor does not provide an adequate basis for making competitive sourcing decisions. First, RAND's purpose was not to address this issue but instead to evaluate ways to improve VA's health care resource allocation system, according to the RAND study authors. For example, RAND did not examine the effect of using contract labor for each contract service even though the association with facility costs may vary by type of service. Second, VA contract labor data have limitations that may affect their usefulness for analysis of the relationship between use of contract labor and facility health care costs. One of these is that the data may include some nonlabor costs. In addition, the small proportion of VA labor costs that are for contract labor and the small variation across VA in the use of contract labor limit the usefulness of these data for examining the relationship between contract labor and facility costs, according to the RAND study authors.

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