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United States General Accounting Office: 
GAO: 

Report to Congressional Requesters: 

February 2002: 

VA Health Care: 

Allocation Changes Would Better Align Resources with Workload: 

GAO-02-338: 

Contents: 

Letter: 

Results in Brief: 

Background: 

VERA Has Had A Substantial Effect on Network Resources and Workload: 

VERA Provides A Reasonable Approach to Resource Allocation: 

VERA Changes Required to Better Align Resources With Workload: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Comments From the Department of Veterans Affairs: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: VERA Patient Workload Compared to VERA Allocation, Fiscal 
Year 2001: 

Table 2: VERA Capitation Amounts, Fiscal Year 2001: 

Table 3: Complex Care Workload Allocations Compared With Complex Care 
Expenditures, Fiscal Year 2000: 

Table 4: VA Patient Classes, Costs, and National Capitation Amounts, 
Fiscal Year 2000: 

Table 5: Network Supplemental Funding, Fiscal Years 1999 through 2001: 

Figures: 

Figure 1: Proportion of Veteran Population by Region, 1990 through 
2020: 

Figure 2: Resource Allocation Shifts Resulting from VERA from Fiscal 
Years 1996 through 2001: 

Figure 3: Percentage Increase in Veterans Treated by Network, Fiscal 
Years 1996 through 2001: 

Figure 4: Growth of Priority 7 Veterans Treated, Fiscal Years 1996 
through 2001: 

Figure 5: Priority 7 Veterans Treated by Network, Fiscal Year 2001: 

Figure 6: Estimated Change in VERA Allocations from Adding Priority 7
Basic Vested Veterans to VERA Workload at Half Their National Cost, 
Fiscal Year 2001: 

Figure 7: Estimated Change in VERA Allocations Among Networks as a 
Result of Using 44 Case-Mix Categories, by Network, Fiscal Year 2001: 

Figure 8: Estimated Change in VERA Allocations from Incorporating 44 
Case-Mix Categories, Most Current Expenditure Data for Case-Mix 
Weights, and Priority 7 Basic Vested Veterans Treated, Fiscal Year 
2001: 

Abbreviations: 

DCG: Diagnostic Cost Group: 

VA: Department of Veterans Affairs: 

VERA: Veterans Equitable Resource Allocation: 

[End of section] 

United States General Accounting Office: 
Washington, DC 20548: 

February 28, 2002: 

Congressional Requesters: 

The Department of Veterans Affairs (VA) spent about $21 billion for 
health care in fiscal year 2001 to treat about 3.8 million 
veterans.most of whom had service-connected disabilities or low 
incomes. Since fiscal year 1997, VA has used the Veterans Equitable 
Resource Allocation (VERA) system to allocate most of its medical care 
appropriation as part of its overall strategy to reform VA health 
care. As a health care payer, like the Medicare and Medicaid programs, 
VA faces the challenge of allocating resources to account for 
differences in patient workload treated, encourage efficiency, and 
ensure quality. As a direct provider, VA also operates a major health 
care system consisting of 22 regional health care networks that are at 
risk for budget shortfalls if the cost of providing care to veterans 
treated by the network is greater than available resources. 

Our reviews of VERA in its first 2 years concluded that it was an 
important step forward in equitable resource allocation compared to 
the allocation practices it replaced.[Footnote 1] Prior to VERA, VA 
allocated resources primarily on the basis of facilities’ historical 
expenditures. By contrast, VERA was intended to equitably allocate 
health care resources, that is, allocate comparable resources to 
networks with comparable workloads. In turn, VA’s networks have budget 
and management responsibilities that include allocating VERA resources 
to facilities, clinics, and programs within their networks and 
ensuring equity of access to appropriate health care services. 

Congressional stakeholders have expressed concern as to whether VERA 
has been designed and implemented to allocate resources commensurate 
with workload. To address concerns you raised, this report (1) 
describes the effect VERA has had on network resource allocations and 
workloads, (2) assesses whether VERA’s design is a reasonable approach 
to resource allocation, and (3) identifies weaknesses in VERA that may 
limit VA’s ability to allocate comparable resources for comparable 
workloads. As agreed with your offices, we focused our work on VERA’s 
allocation of 1U.S. General Accounting Office, VA Health Care: 
Resource Allocation Has Improved, but Better Oversight Is Needed, 
GAO/HEHS-97-178 (Washington, D.C.: September 17, 1997) and resources 
from headquarters to the networks but we did not examine the extent to 
which networks in turn allocate comparable resources for comparable 
workloads to their respective facilities and programs. 

To examine these issues, we reviewed VA documents and consultants’ 
reports on VERA’s original design, proposed VERA changes, and actual 
VERA changes. We also interviewed VA headquarters officials and 
officials in 8 networks, conducted site visits in 5 networks, surveyed 
all 22 network directors, and interviewed VA and other public and 
private sector health care resource allocation experts. In addition, 
we analyzed changes in resources allocated among the 22 networks from 
fiscal year 1996 through 2001, changes in the number of veterans 
treated, and the effect of making adjustments to VERA. We also relied 
on our more than 10 years of work reviewing VA’s resource allocation 
process in addition to other health care financing work.[Footnote 2] 
For a complete description of our scope and methodology, see appendix 
I. Our work was performed from October 2000 through December 2001 in 
accordance with generally accepted government auditing standards. 

Results in Brief: 

VERA has had a substantial impact on network resource allocations and 
workloads. First, VERA shifted resources among regions. VERA shifted 
approximately $921 million from networks located primarily in the 
northeast and midwest to networks located in the south and west in 
fiscal year 2001 compared to what allocations would have been without 
the implementation of VERA. Second, VERA, in concert with other VA 
initiatives, has provided an incentive for networks to serve more 
veterans. The number of veterans treated nationally in VA health care 
programs increased from 2.6 million to 3.8 million, an increase of 47 
percent, from fiscal year 1996 through fiscal year 2001. All 22 
networks contributed to this increase, including networks from which 
VERA shifted resources. 

VERA’s overall design is a reasonable approach to allocate resources 
commensurate with workloads. It provides a predetermined dollar amount 
per veteran served to each of VA’s 22 health care networks. This 
amount varies depending upon factors beyond networks’ control, namely 
the health care needs of the veteran served and certain local cost 
differences. This approach is designed to allocate resources 
commensurate with each network’s workload in terms of veterans served 
and their health care needs. It also aims to hold networks accountable 
for efficient service provision by attempting to vary resource 
allocation only for costs beyond their control. To protect patients 
from the risk that a health care network cannot deliver needed 
services with the resources allocated, VERA includes a National 
Reserve Fund to provide supplemental resources to networks 
experiencing budget shortfalls. 

Although VERA’s design is a reasonable approach to resource 
allocation, we identified weaknesses in its implementation. First, 
VERA excludes about one fifth of VA’s workload in determining each 
network’s allocation. The excluded veterans are those with higher 
incomes who do not have service-connected disabilities. Second, VERA 
does not account for cost differences among networks resulting from 
variation in their patients’ health care needs as well as it could. 
For example, VERA does not use enough categories to adjust for patient 
health care needs in order to adequately account for patient cost 
differences among networks. These two weaknesses compromise VERA’s 
ability to allocate comparable resources for comparable workloads. 
Third, the process for providing supplemental resources to networks 
through VA’s National Reserve Fund has not been used to analyze the 
extent to which the need for such resources is caused by potential 
problems in VERA’s allocation, network inefficiency, or other factors. 
VA uses the National Reserve Fund to supplement networks’ VERA 
allocations when they have difficulty operating within their available 
resources. The lack of information on why networks need assistance 
from the National Reserve Fund limits VA’s ability to provide 
assurance that supplemental funding of networks is appropriate or to 
take corrective action. 

We are recommending that VA correct weaknesses in VERA to better 
allocate comparable resources for comparable workloads. In addition, 
we are recommending that VA use the National Reserve Fund process to 
learn why networks need supplemental resources beyond their VERA 
allocations and take action to correct problems identified in this 
process. 

In commenting on a draft of our report, VA agreed with our conclusions 
and concurred with our recommendations. However, pending completion of 
ongoing studies and further consideration, VA did not commit to 
specific actions and timelines for implementing our recommendations to 
correct weaknesses in VERA’s implementation. VA’s response also did 
not fully address our recommendation to improve the supplemental 
adjustment process. Delay in implementing our recommendations to make 
needed improvements to VERA means that approximately $200 million 
annually will not be allocated as well as they could be to align 
resources with workloads. Moreover, until improvements are made in the 
supplemental funding process, VA will not be able to provide assurance 
that its supplemental funding of some networks is appropriate. 

Background: 

VA policy is to allocate comparable resources for comparable workloads 
in its 22 health care networks as an important step in ensuring 
equitable access to care for the nation’s veterans. To achieve this 
allocation in its national health care system, VA has used VERA since 
fiscal year 1997 to prospectively allocate resources to the networks. 
VERA allocates nearly 90 percent of VA’s medical care appropriation in 
six categories: complex patient care, basic patient care, equipment, 
nonrecurring maintenance, education support, and research support. 
[Footnote 3] Resources for the first four categories are allocated on 
the basis of patient workload and account for approximately 96 percent 
of the resources VERA allocates.[Footnote 4] Allocations for education 
support and research support are based on workload measures specific 
to those activities within the VA health care system. 

Developed in response to a legislative mandate,[Footnote 5] VERA was 
designed to correct regional inequities in resource allocation created 
by shifts in the veteran population from the northeast and midwest to 
the south and west (see figure 1) without a corresponding shift in 
resources.[Footnote 6] The resources did not shift before VERA was 
implemented because resource allocation was based primarily on 
facilities’ historical expenditures. VA expects that veteran 
population shifts from the northeast and midwest to the south and west 
will continue at least through 2020. 

Figure 1: Proportion of Veteran Population by Region, 1990 through 
2020: 

[Refer to PDF for image: vertical bar graph] 

Year: 1990; 
Northeast and midwest: 45% (approximate); 
South and west: 55% (approximate). 

Year: 2000;
Northeast and midwest: 40% (approximate); 
South and west: 60% (approximate). 

Year: 2020[A]; 
Northeast and midwest: 33% (approximate); 
South and west: 67% (approximate). 

[A] 2020 numbers are projections. 

Note: Veteran assignment to a particular region is based on the state 
of residence. 

Source: GAO calculations based on VA data. 

[End of figure] 

Two other major changes to VA health care provision accompanied the 
implementation of VERA as a result of the Veterans’ Health Care 
Eligibility Reform Act of 1996. The first change was a major shift in 
VA health care delivery from an inpatient to an outpatient emphasis 
that was consistent with changes in health care delivery outside of 
VA. The act eliminated restrictions that previously prevented VA from 
treating some veterans in outpatient care settings, allowing VA to 
shift its focus from inpatient to outpatient care delivery. For 
example, VA no longer had to admit certain veterans to an inpatient 
setting to make them eligible for outpatient treatment or to receive 
prosthetic devices, such as crutches. As a result of eligibility 
reform, VA has been successful in shifting medical care to outpatient 
settings by taking advantage of advances in medical technology and 
practices, such as laser, endoscopic surgery, and other less invasive 
surgical techniques. VA has also identified alternatives to inpatient 
care, such as home-based care, for many chronically ill patients. From 
fiscal year 1996 through fiscal year 2000, VA closed almost 24,000 
acute inpatient beds, a 52 percent reduction systemwide. During this 
time period, VA’s inpatient admissions decreased and outpatient visits 
increased from approximately 29 million to 40 million visits, a 36 
percent increase systemwide. 

The second change was the introduction of a veterans’ enrollment 
system to manage access in relation to available resources due to the 
expected increase in demand on the VA system as a result of the new 
eligibility rules. As required by the act, VA established seven 
priority categories for enrollment. A higher priority for enrollment 
is given to veterans who have service-connected disabilities, lower 
incomes, or other statuses such as former prisoners of war. These 
higher priority enrollees are ranked in priority order from 1 through 
6. The lowest enrollment priority is given to veterans not included in 
priorities 1 through 6, referred to as Priority 7 veterans. These 
veterans are primarily nonservice-connected veterans with higher 
incomes. The act requires VA to restrict enrollment consistent with 
these enrollment priorities if sufficient resources are not available 
to provide care that is timely and acceptable in quality to all 
priority categories. If needed, enrollment restrictions would begin 
with the lowest priority category. For, fiscal year 2002, VA has 
decided to continue enrolling veterans in all priority categories. 

VERA Has Had A Substantial Effect on Network Resources and Workload: 

VERA has been a key part of VA’s strategy to change its health care 
system. First, VERA shifted substantial resources among regions 
reflecting shifts in workload. Second, VERA, in concert with other VA 
initiatives, has provided an incentive for networks to serve more 
veterans. 

VERA has shifted substantial resources from networks located primarily 
in the northeast and midwest to networks located in the south and west 
(see figure 2). VERA shifted approximately $921 million among networks 
in fiscal year 2001 compared to what allocations would have been if 
networks received the same proportion of funding they received in 
fiscal year 1996, the year before VERA was implemented. This included 
additional resources Congress appropriated from fiscal year 1996 
through fiscal year 2001. VERA shifted the most resources—-
approximately $198 million.to Network 8 (Bay Pines), and VERA shifted 
the most resources from Network 3 (Bronx)--approximately $322 million. 
The shift occurred because VERA allocated resources based primarily on 
patient workload rather than continuing VA’s prior process of 
incrementally funding facilities based on historical expenditures. 

Figure 2: Resource Allocation Shifts Resulting from VERA from Fiscal 
Years 1996 through 2001: 

[Refer to PDF for image: illustrated U.S. map] 

Map depicts networks in two caetegories: 
VERA shifted resources to these networks; 
VERA shifted resources from these networks. 

Note: To calculate the amount of resources shifted as a result of 
VERA, we assumed that networks would receive the same proportion of VA’
s allocations in fiscal year 2001 as they did in fiscal year 1996. We 
made this assumption because, prior to VERA, VA allocated resources on 
the basis of past expenditures. 

Source: GAO calculations from data in Department of Veterans Affairs, 
Veterans Equitable Resource Allocation: Equity of Funding and Access 
to Care Across Networks (Washington, D.C.: 2001), p. 34. 

[End of figure] 

VERA’s implementation resulted in 10 of VA’s 22 networks receiving a 
smaller share of VA’s medical care appropriation in fiscal year 2001 
than in fiscal year 1996. However, because VA’s total medical care 
appropriation rose 22 percent during this period, all but two of these 
networks received more resources in fiscal year 2001 than in fiscal 
year 1996. The two networks with fewer resources from fiscal year 1996 
to 2001 were Network 1 (Boston) and Network 3 (Bronx), which 
experienced 1 percent and 10 percent declines, respectively. 

VA has also used VERA as one component of a larger strategy to improve 
access to care by increasing the number of veterans treated.[Footnote 
7] Because VERA allocates resources based on workload, it provides 
incentives for networks to increase the number of veterans treated. 
The number of veterans treated nationally in VA, in all priority 
groups, increased from 2.6 million in fiscal year 1996, the year 
before VERA was implemented, to 3.8 million in fiscal year 2001, an 
increase of 47 percent. All 22 networks contributed to this increase 
(see figure 3). This includes networks from which VERA shifted 
resources. VA’s reduction in inpatient care, closure of acute care 
beds, shift in emphasis to less expensive outpatient care delivery, 
and a 22 percent increase in VA’s annual medical care appropriation 
since fiscal year 1996 have provided additional capacity allowing 
networks to increase workloads. 

Figure 3: Percentage Increase in Veterans Treated by Network, Fiscal 
Years 1996 through 2001: 

[Refer to PDF for image: vertical bar graph] 

Percentage increase indicated for the following networks: 

1. Boston; 
2. Albany; 
3. Bronx; 
4. Pittsburgh; 
5. Baltimore; 
6. Durham; 
7. Atlanta; 
8. Bay Pines; 
9. Nashville; 
10. Cincinnati; 
11. Ann Arbor; 
12. Chicago; 
13. Minneapolis; 
14. Lincoln; 
15. Kansas City; 
16. Jackson; 
17. Dallas; 
18. Phoenix; 
19. Denver; 
20. Portland; 
21. San Francisco; 
22. Long Beach. 

Source: GAO analysis of VA data. 

[End of figure] 

VERA Provides A Reasonable Approach to Resource Allocation: 

VERA’s design promotes the allocation of comparable resources for 
comparable workloads to VA’s 22 health care networks consistent with 
principles used by other payers, such as the Medicare and Medicaid 
programs, and expert views on the design of payment systems.[Footnote 
8] VERA allocates resources based primarily on networks’ patient 
workloads. To ensure the comparability of networks’ resources with 
their workloads, VERA adjusts these allocations for factors beyond 
networks’ control, namely patient health care needs and certain local 
costs. By adjusting allocations only for costs beyond a network’s 
control, VERA holds networks accountable for providing services 
efficiently. Also, VERA provides protection for patients from the risk 
that a health care network would not be able to provide services 
because its expenditures exceed available resources. 

VERA allocates resources primarily on the basis of network patient 
workload. Each network receives an allocation based on a predetermined 
dollar amount per veteran served.[Footnote 9] This is consistent with 
how other federal health care payers allocate resources to managed 
care plans to care for their patient workload. Because VERA uses 
workload to allocate resources, networks that have more patients 
generally receive more resources than networks that have fewer 
patients (see table 1). However, allocation adjustments result in some 
situations in which networks with fewer patients receive higher total 
and per patient allocations. For example, Network 3 (Bronx) received a 
larger VERA allocation in fiscal year 2001 than Network 9 (Nashville) 
even though Network 3 (Bronx) had a smaller workload. By receiving 
funding based on workload, VA’s health care networks have an incentive 
to focus on aligning facilities and programs to attract patients 
rather than focusing on maintaining existing operations and 
infrastructure regardless of the number of patients served. 

Table 1: VERA Patient Workload Compared to VERA Allocation, Fiscal 
Year 2001: 

Network (location): 16 (Jackson); 
Fiscal Year 2001 VERA patient workload: 334,613; 
Fiscal Year 2001 VERA total allocation: $1.447 billion; 
Fiscal Year 2001 VERA per patient allocation: $4,324. 

Network (location): 8 (Bay Pines); 
Fiscal Year 2001 VERA patient workload: 299,242; 
Fiscal Year 2001 VERA total allocation: $1.365 billion; 
Fiscal Year 2001 VERA per patient allocation: $4,563. 

Network (location): 7 (Atlanta); 
Fiscal Year 2001 VERA patient workload: 218,084; 
Fiscal Year 2001 VERA total allocation: $1.021 billion; 
Fiscal Year 2001 VERA per patient allocation: $4,680. 

Network (location): 22 (Long Beach); 
Fiscal Year 2001 VERA patient workload: 216,060; 
Fiscal Year 2001 VERA total allocation: $1.051 billion; 
Fiscal Year 2001 VERA per patient allocation: $4,866. 

Network (location): 4 (Pittsburgh); 
Fiscal Year 2001 VERA patient workload: 213,482; 
Fiscal Year 2001 VERA total allocation: $947 million; 
Fiscal Year 2001 VERA per patient allocation: $4,437. 

Network (location): 6 (Durham); 
Fiscal Year 2001 VERA patient workload: 185,511; 
Fiscal Year 2001 VERA total allocation: $849 million; 
Fiscal Year 2001 VERA per patient allocation: $4,579. 

Network (location): 9 (Nashville); 
Fiscal Year 2001 VERA patient workload: 183,288; 
Fiscal Year 2001 VERA total allocation: $811 million; 
Fiscal Year 2001 VERA per patient allocation: $4,427. 

Network (location): 3 (Bronx); 
Fiscal Year 2001 VERA patient workload: 173,512; 
Fiscal Year 2001 VERA total allocation: $921 million; 
Fiscal Year 2001 VERA per patient allocation: $5,306. 

Network (location): 17 (Dallas); 
Fiscal Year 2001 VERA patient workload: 172,246; 
Fiscal Year 2001 VERA total allocation: $799 million; 
Fiscal Year 2001 VERA per patient allocation: $4,637. 

Network (location): 1 (Boston); 
Fiscal Year 2001 VERA patient workload: 171,323; 
Fiscal Year 2001 VERA total allocation: $842 million; 
Fiscal Year 2001 VERA per patient allocation: $4,915. 

Network (location): 20 (Portland); 
Fiscal Year 2001 VERA patient workload: 165,637; 
Fiscal Year 2001 VERA total allocation: $805 million; 
Fiscal Year 2001 VERA per patient allocation: $4,863. 

Network (location): 18 (Phoenix); 
Fiscal Year 2001 VERA patient workload: 165,349; 
Fiscal Year 2001 VERA total allocation: $721 million; 
Fiscal Year 2001 VERA per patient allocation: $4,358. 

Network (location): 12 (Chicago); 
Fiscal Year 2001 VERA patient workload: 164,776; 
Fiscal Year 2001 VERA total allocation: $886 million; 
Fiscal Year 2001 VERA per patient allocation: $5,374. 

Network (location): 21 (San Francisco); 
Fiscal Year 2001 VERA patient workload: 164,540; 
Fiscal Year 2001 VERA total allocation: $900 million; 
Fiscal Year 2001 VERA per patient allocation: $5,471. 

Network (location): 11 (Ann Arbor); 
Fiscal Year 2001 VERA patient workload: 157,358; 
Fiscal Year 2001 VERA total allocation: $758 million; 
Fiscal Year 2001 VERA per patient allocation: $4,816. 

Network (location): 15 (Kansas City); 
Fiscal Year 2001 VERA patient workload: 151,016; 
Fiscal Year 2001 VERA total allocation: $681 million; 
Fiscal Year 2001 VERA per patient allocation: $4,512. 

Network (location): 10 (Cincinnati); 
Fiscal Year 2001 VERA patient workload: 145,406; 
Fiscal Year 2001 VERA total allocation: $662 million; 
Fiscal Year 2001 VERA per patient allocation: $4,554. 

Network (location): 19 (Denver); 
Fiscal Year 2001 VERA patient workload: 103,727; 
Fiscal Year 2001 VERA total allocation: $462 million; 
Fiscal Year 2001 VERA per patient allocation: $4,453. 

Network (location): 5 (Baltimore); 
Fiscal Year 2001 VERA patient workload: 102,628; 
Fiscal Year 2001 VERA total allocation: $563 million; 
Fiscal Year 2001 VERA per patient allocation: $5,483. 

Network (location): 2 (Albany); 
Fiscal Year 2001 VERA patient workload: 101,549; 
Fiscal Year 2001 VERA total allocation: $499 million; 
Fiscal Year 2001 VERA per patient allocation: $4,916. 

Network (location): 13 (Minneapolis); 
Fiscal Year 2001 VERA patient workload: 94,941; 
Fiscal Year 2001 VERA total allocation: $453 million; 
Fiscal Year 2001 VERA per patient allocation: $4,771. 

Network (location): 14 (Lincoln); 
Fiscal Year 2001 VERA patient workload: 68,012; 
Fiscal Year 2001 VERA total allocation: $303 million; 
Fiscal Year 2001 VERA per patient allocation: $4,455. 

Network (location): VA systemwide; 
Fiscal Year 2001 VERA patient workload: 3,752,301; 
Fiscal Year 2001 VERA total allocation: $17.746 billion; 
Fiscal Year 2001 VERA per patient allocation: $4,729. 

Source: Department of Veterans Affairs, Veterans Equitable Resource 
Allocation: Equity of Funding and Access to Care Across Networks 
(Washington, D.C.: 2001), pp. 27 and 64 and GAO calculations. 

[End of table] 

VERA seeks to ensure that comparable resources are allocated for 
comparable workloads by adjusting for differences in networks’ patient 
health care needs and certain local costs in calculating networks’ 
allocations. Without these adjustments, networks with justifiably 
higher costs could face pressure to compromise access to care or lower 
health care quality, while networks with lower costs could receive 
more resources than needed. To prevent this problem, VERA, like other 
federal health care payment systems, makes adjustments to its per 
patient allocations or capitation amounts. 

VERA adjusts for patient health care needs.case mix.by first 
classifying patients into categories by overall level of health care 
need and then by setting capitation amounts for each of these patient 
categories. VERA classifies patients into one of three categories 
according to the level of health care needs and associated costs. The 
first category is complex care, which includes patients who generally 
require significant high-cost inpatient care as an integral part of 
their rehabilitation or functional maintenance, and is about 4 percent 
of VA’s workload. This category includes most patients in VA’s special 
disability programs such as those with spinal cord injuries and 
serious mental illness.[Footnote 10] The second category is basic 
vested care, which includes patients who have relatively routine 
health care needs and are principally cared for in an outpatient care 
setting. These patients--84 percent of VA’s workload--rely primarily 
or completely on VA for meeting their health care needs, may require 
short-term inpatient admissions, and typically require significantly 
fewer resources than complex care patients. The third category is 
basic non-vested care which is 12 percent of VA’s workload. This 
category includes patients who also have relatively routine health 
care needs but receive only part of their care through VA, are less 
costly to VA than basic vested patients, and have not undergone a 
comprehensive medical evaluation by a VA practitioner. 

The adjustments to capitation amounts for each category reflect 
whether patients in a category are more or less costly than patients 
in another category. These adjustments, or case-mix weights, determine 
what proportion of VERA resources will be allocated to networks to 
care for patients in each case-mix category, such as complex care. As 
a result, VERA’s patient case-mix adjustment provides more funding to 
networks with greater proportions of complex care patients. For 
example, if two networks have the same number of patients but one has 
more complex care patients, it will receive a greater allocation 
because the VERA case-mix weight for complex care is higher. 

In addition, VERA adjusts for uncontrollable geographic price 
differences in the resources it allocates. These differences result 
primarily from variations in federal employee pay rates in different 
parts of the country. VERA makes this adjustment by applying a price 
adjustment factor to each network’s allocation. The adjustment lowers 
the VERA allocation for networks located in lower cost areas and 
raises the allocation for networks located in higher cost areas. In 
fiscal year 2001, Network 8 (Bay Pines) had the largest decrease 
resulting from the geographic price adjustment. 2.8 percent. Network 
21 (San Francisco) had the largest increase resulting from the 
geographic price adjustment. 6.3 percent. Through fiscal year 2001, 
this adjustment was for services provided only by VA employees. 
Beginning in fiscal year 2002, VA expanded the geographic price 
adjustment to all VERA allocations by including contract labor costs 
and contract nonlabor purchases, such as energy. 

VERA’s allocation of resources based on workload with adjustments only 
for costs beyond the networks’ control aims to promote equity and 
efficiency. To promote equity, VERA adjusts network allocations by 
case mix and geographic price to standardize measures of workload and 
resources so that each network receives comparable allocations for 
comparable workloads. To create an efficiency incentive, VERA provides 
fixed capitation amounts for patient categories that are the same for 
each network and are intended to reflect VA’s average costs instead of 
historical local costs. Using fixed capitation amounts is consistent 
with how other health care payers provide managed care plans with an 
incentive to operate efficiently by placing them at risk if their 
expenses exceed the payment amount. 

VERA also provides protection of patients from the risk that a health 
care network would not be able to provide services because its 
expenditures exceed available resources. VERA does this annually 
through the National Reserve Fund which provides supplemental 
resources to networks when they have difficulty operating within their 
available resources. VA’s National Reserve Fund is used to cover 
network requests for supplemental allocations over and above networks’ 
annual VERA allocations and other sources of revenue. For fiscal years 
1999 through 2001, VA has set the National Reserve Fund amount at $100 
million using a combination of annual and carry-over funds. Since 
fiscal year 1999, resources distributed through the National Reserve 
Fund have averaged approximately 1 percent of total VERA allocations 
and supplemented VERA allocations in six networks. 

VERA Changes Required to Better Align Resources With Workload: 

Although VERA’s overall design is a reasonable approach to allocate 
resources, we identified weaknesses in its implementation. First, 
VERA’s calculation to ensure the comparability of networks’ resources 
with their workloads and their patient health care needs is not as 
accurate as it could be. Second, the process for providing 
supplemental resources through the National Reserve Fund process does 
not provide adequate information to determine the extent to which 
networks need supplemental funding as a result of potential problems 
in VERA, network inefficiency, or other factors. 

VERA’s Calculation of Networks’ Workloads and Patient Health Care 
Needs Is Not as Accurate as It Could Be: 

VERA’s calculation of networks’ workloads excludes most higher income 
veterans without a service-connected disability—a growing proportion 
of VA’s users. In addition, VERA does not account for variation in 
patients’ health care needs and related costs among networks as 
accurately as it could. 

Excluding Most Higher Income Veterans Without a Service-Connected 
Disability Compromises the Comparability of Network Allocations: 

When VERA was established, the number of higher income veterans 
treated without a service-connected disability was small—approximately 
108,000 or about 4 percent of the total number of veterans treated in 
fiscal year 1996. Because of their small numbers and the expectation 
that collections from copayments, deductibles, and third-party 
insurance reimbursements would cover the majority of their costs, VERA 
did not include most of these higher income veterans in basic care 
workload. However, the number of these veterans treated increased 
greatly in recent years and represent about 95 percent of VA’s 
Priority 7 health care enrollment category. The number of Priority 7 
veterans treated increased to approximately 827,722 users (see figure 
4).[Footnote 11] Priority 7 veterans comprised 22 percent of VA’s 
total fiscal year 2001 patient workload. This rapid growth in the 
number of Priority 7 veterans treated has occurred even though 
networks do not receive additional VERA allocations for the majority 
of this workload and collections covered only 24 percent of Priority 7 
veterans’ costs in fiscal year 2000.[Footnote 12] Networks pay for 
most of the costs of Priority 7 services through VERA allocations made 
mostly on the basis of non-Priority 7 workload. 

Figure 4: Growth of Priority 7 Veterans Treated, Fiscal Years 1996 
through 2001: 

[Refer to PDF for image: line graph] 

Fiscal year 1996: 
Patients treated: 107,520. 

Fiscal year 1997:
Patients treated: 135,378. 

Fiscal year 1998: 
Patients treated: 235,523. 

Fiscal year 1999: 
Patients treated: 397,230. 

Fiscal year 2000: 
Patients treated: 574,516. 

Fiscal year 2001: 
Patients treated: 827,722. 

Note: Because the Priority 7 classification was not developed until 
fiscal year 1999, we used VA’s previous classification that most 
closely represents this priority group, Category C. The Category C 
data we used for fiscal years 1996 through 1998 slightly underestimate 
the number of Priority 7 veterans for those years. 

Source: VA. 

[End of figure] 

The omission of these veterans from VERA’s workload calculation 
creates an inequitable allocation of resources across networks because 
networks’ proportion of Priority 7 veterans treated varies (see figure 
5). For example, in fiscal year 2001, Priority 7 users were 32 percent 
of Network 14’s (Lincoln) total veterans treated compared to the VA 
average of 22 percent. Consequently, networks with a higher proportion 
of Priority 7 veterans, like Network 14 (Lincoln), have fewer 
resources per patient to treat veterans than networks with a lower 
proportion of Priority 7 veterans. 

Figure 5: Priority 7 Veterans Treated by Network, Fiscal Year 2001: 

National average: 22%. 

Percentage of overall workload is depicted for each of the 22 networks. 

Source: VA. 

[End of figure] 

VA assessed the possibility of including Priority 7 veterans in VERA’s 
basic vested workload. However, it had concerns that including 
Priority 7 veterans in VERA workload would create a possible incentive 
to serve higher income veterans at the expense of service-connected 
and low-income veterans. VA considered providing a capitation amount 
for Priority 7 veterans that was less than the average cost of their 
care. However, rather than including Priority 7 veterans in the 
workload calculations with a reduced capitation amount, VA decided 
instead to pursue other options. 

One of the options VA is examining is the effect of changing the 
income threshold used to classify enrolled veterans. Specifically, the 
current uniform national income standard used in part for determining 
Priority 7 status would be replaced with a regional income standard to 
account for regional differences in the cost of living. This would 
change the status of some Priority 7 veterans in high-cost regions to 
low-income veterans—-who are included in VERA’s workload calculation. 
Although adopting a regional income threshold could improve the equity 
of resource allocation, the alignment of workload with resources would 
still be compromised if some networks continue to have 
disproportionate numbers of the remaining Priority 7 veterans. 

Inclusion of Priority 7 veterans in VERA basic vested care workload 
would increase the comparability of resources among networks per 
patient treated.[Footnote 13] This would move resources from networks 
with a smaller proportion of Priority 7 veteran workload to networks 
with a larger proportion of Priority 7 veteran workload. If, for 
example, Priority 7 basic vested veterans--those who rely primarily or 
completely on VA for meeting their health care needs-—were capitated 
at half the average national cost of their care, as VA had considered, 
this would have increased the allocation to 9 networks in the 
northeast and midwest and decreased the allocation to 10 networks in 
the south and west in the fiscal year 2001 VERA allocation (see figure 
6). 

Figure 6: Estimated Change in VERA Allocations from Adding Priority 7 
Basic Vested Veterans to VERA Workload at Half Their National Cost, 
Fiscal Year 2001: 

[Refer to PDF for image: horizontal bar graph] 

Network: 1 (Boston); 
Estimated change: $928,351. 

Network: 2 (Albany); 
Estimated change: $2,544,252. 

Network: 3 (Bronx); 
Estimated change: $10,326,688. 

Network: 4 (Pittsburgh); 
Estimated change: $4,659,927. 

Network: 5 (Baltimore); 
Estimated change: -$1,051,028. 

Network: 6 (Durham); 
Estimated change: -$2,348,346. 

Network: 7 (Atlanta); 
Estimated change: $269,207. 

Network: 8 (Bay Pines); 
Estimated change: -$2,449,086. 

Network: 9 (Nashville); 
Estimated change: -$1,474,387. 

Network: 10 (Cincinnati); 
Estimated change: -$1,404,498. 

Network: 11 (Ann Arbor); 
Estimated change: $945,779. 

Network: 12 (Chicago); 
Estimated change: $1,717,229. 

Network: 13 (Minneapolis); 
Estimated change: $314,752. 

Network: 14 (Lincoln); 
Estimated change: $1,021,387. 

Network: 15 (Kansas City); 
Estimated change: $412,685. 

Network: 16 (Jackson); 
Estimated change: -$5,495,659. 

17 (Dallas); 
Estimated change: -$2,354,313. 

Network: 18 (Phoenix); 
Estimated change: -$920,077. 

Network: 19 (Denver); 
Estimated change: $1,235,141. 

Network: 20 (Portland); 
Estimated change: -$3,550,297. 

Network: 21 (San Francisco); 
Estimated change: -$1,172,620. 

Network: 22 (Long Beach); 
Estimated change: -$2,155,086. 

Note: For this simulation we used VERA fiscal year 2001 workload 
numbers for basic vested care, which are the total unduplicated number 
of veterans served for fiscal years 1997, 1998, and 1999. 

Source: GAO analysis of VA data. 

[End of figure] 

VERA Does Not Adjust for Justifiable Cost Differences As Accurately As 
It Could: 

Although VERA adjusts network allocations for cost differences 
resulting from the mix of patients networks serve, it does not do so 
as accurately as it could. This is because the case-mix weights 
assigned to each category of patients are based on historical cost 
data from fiscal year 1995 and VERA only uses three case-mix 
categories to allocate resources. 

Case-Mix Weights Based On Historic Data Do Not Reflect Changes In VA 
Health Care: 

VERA uses case-mix weights based on VA health care expenditures in 
fiscal year 1995 to allocate resources for basic and complex care 
workload. These weights are determined by the share of resources spent 
on basic and complex care in that year--61.6 percent of expenditures 
for basic care and 38.4 percent for complex care. For the VERA 
allocation in fiscal year 2001, for example, $6.2 billion was 
available for complex care (38.4 percent) and $10.0 billion was 
available for basic care (61.6 percent). 

These case-mix weights, however, have not been updated to reflect the 
health care that VA is providing. Because of VERA, VA Eligibility 
Reform, and other VA initiatives, the number of basic care patients 
has increased since fiscal year 1995 while the number of complex care 
patients has remained relatively constant. The rising proportion of 
basic care patients has contributed to a greater proportion of VA 
expenditures for basic care and a smaller proportion of expenditures 
for complex care. By fiscal year 1999, 66.9 percent of expenditures 
were for basic care and 33.1 percent were for complex care. Adjusting 
capitation amounts to reflect current expenditures for basic and 
complex care would result in an approximately 9 percent increase in 
the basic care capitation amounts and about a 14 percent reduction in 
the complex care capitation amount (see table 2). 

Table 2: VERA Capitation Amounts, Fiscal Year 2001: 

Case-mix category: Basic non-vested care; 
Actual 2001 VERA capitation amount[A]: $121; 
Capitation amount if most current data used for 2001 VERA 
allocations[B]: $132. 

Case-mix category: Basic vested care; 
Actual 2001 VERA capitation amount[A]: $3,126; 
Capitation amount if most current data used for 2001 VERA 
allocations[B]: $3,395. 

Case-mix category: Complex care; 
Actual 2001 VERA capitation amount[A]: $42,765; 
Capitation amount if most current data used for 2001 VERA 
allocations[B]: $36,869. 

[A] Capitation amounts based on fiscal year 1995 VA expenditures. 

[B] Capitation amounts based on fiscal year 1999 VA expenditures. 

Source: Actual fiscal year 2001 capitation amounts from Department of 
Veterans Affairs, Veterans Equitable Resource Allocation: Equity of 
Funding and Access to Care Across Networks (Washington, D.C.: 2001), 
p. 9. Capitation amounts for most current data calculated by GAO. 

[End of table] 

VA considered updating the weights for basic and complex care based on 
the most recent available costs. VA officials told us they have 
maintained the fiscal year 1995 case-mix weights because using more 
current expenditure data that would lower the allocation for complex 
care and increase the allocation for basic care could be seen as a 
weakening of VA’s commitment to serve veterans with complex care 
needs, such as those with spinal cord injuries or serious mental 
illness. However, continuing to base VERA case-mix weights on fiscal 
year 1995 expenditures has not ensured that resources were spent on 
complex care patients. VERA, like other allocation systems, provides 
networks with resources but it does not require networks to spend 
resources in a particular way. Rather, VA program guidance and network 
management decisions determine how resources are spent. Eighteen of 22 
networks spent less for complex care than they received based on their 
complex care workload in fiscal year 2000, the most recent year for 
which expenditure data are available (see table 3). As a result, the 
proportion of VA’s total expenditures on complex care has declined 
since fiscal year 1995 even though the proportion of VERA’s allocation 
for complex care has remained constant. However, VA has decided to 
defer action on using the most recently available costs pending 
further study of how costs and workload vary in complex care 
categories among networks. 

Table 3: Complex Care Workload Allocations Compared With Complex Care 
Expenditures, Fiscal Year 2000: 

Network: 16 (Jackson) 
Complex care workload allocation: $433.8 million; 
Expenditures on complex care: $315.0 million; 
Allocation in excess of expenditures: $118.8 million. 

Network: 8 (Bay Pines) 
Complex care workload allocation: $461.5 million; 
Expenditures on complex care: $350.4 million; 
Allocation in excess of expenditures: $111.1 million. 

Network: 20 (Portland) 
Complex care workload allocation: $276.2 million; 
Expenditures on complex care: $213.2 million; 
Allocation in excess of expenditures: $63.0 million. 

Network: 18 (Phoenix) 
Complex care workload allocation: $207.6 million; 
Expenditures on complex care: $153.7 million; 
Allocation in excess of expenditures: $53.9 million. 

Network: 9 (Nashville) 
Complex care workload allocation: $253.6 million; 
Expenditures on complex care: $205.6 million; 
Allocation in excess of expenditures: $48.0 million. 

Network: 7 (Atlanta) 
Complex care workload allocation: $340.1 million; 
Expenditures on complex care: $294.3 million; 
Allocation in excess of expenditures: $45.8 million. 

Network: 15 (Kansas City) 
Complex care workload allocation: $208.9 million; 
Expenditures on complex care: $167.1 million; 
Allocation in excess of expenditures: $41.9 million. 

Network: 17 (Dallas) 
Complex care workload allocation: $277.1 million; 
Expenditures on complex care: $243.4 million; 
Allocation in excess of expenditures: $33.7 million. 

Network: 13 (Minneapolis) 
Complex care workload allocation: $169.7 million; 
Expenditures on complex care: $142.0 million; 
Allocation in excess of expenditures: $27.6 million. 

Network: 14 (Lincoln) 
Complex care workload allocation: $99.7 million; 
Expenditures on complex care: $73.2 million; 
Allocation in excess of expenditures: $26.4 million. 

Network: 21 (San Francisco) 
Complex care workload allocation: $280.8 million; 
Expenditures on complex care: $256.0 million; 
Allocation in excess of expenditures: $24.9 million. 

Network: 4 (Pittsburgh) 
Complex care workload allocation: $322.2 million; 
Expenditures on complex care: $302.4 million; 
Allocation in excess of expenditures: $19.8 million. 

Network: 19 (Denver) 
Complex care workload allocation: $128.4 million; 
Expenditures on complex care: $109.9 million; 
Allocation in excess of expenditures: $18.4 million. 

Network: 5 (Baltimore) 
Complex care workload allocation: $212.9 million; 
Expenditures on complex care: $194.9 million; 
Allocation in excess of expenditures: $18.0 million. 

Network: 2 (Albany) 
Complex care workload allocation: $179.7 million; 
Expenditures on complex care: $165.4 million; 
Allocation in excess of expenditures: $14.3 million. 

Network: 6 (Durham) 
Complex care workload allocation: $282.2 million; 
Expenditures on complex care: $268.1 million; 
Allocation in excess of expenditures: $14.1 million. 

Network: 10 (Cincinnati) 
Complex care workload allocation: $243.4 million; 
Expenditures on complex care: $232.2 million; 
Allocation in excess of expenditures: $11.3 million. 

Network: 12 (Chicago) 
Complex care workload allocation: $334.9 million; 
Expenditures on complex care: $328.6 million; 
Allocation in excess of expenditures: $6.3 million. 

Network: 22 (Long Beach) 
Complex care workload allocation: $298.9 million; 
Expenditures on complex care: $304.8 million; 
Allocation in excess of expenditures: ($5.9) million. 

Network: 1 (Boston) 
Complex care workload allocation: $270.6 million; 
Expenditures on complex care: $279.0 million; 
Allocation in excess of expenditures: ($8.4) million. 

Network: 11 (Ann Arbor) 
Complex care workload allocation: $236.1 million; 
Expenditures on complex care: $245.5 million; 
Allocation in excess of expenditures: ($9.5) million. 

Network: 3 (Bronx) 
Complex care workload allocation: $366.6 million; 
Expenditures on complex care: $408.8 million; 
Allocation in excess of expenditures: ($42.2) million. 

Network: National total 
Complex care workload allocation: $5.885 billion; 
Expenditures on complex care: $5.254 billion; 
Allocation in excess of expenditures: $631.3 million. 

Note: The complex care allocation includes the VERA fiscal year 2000 
geographic price adjustment. 

Source: GAO calculations based on VA data. 

[End of table] 

Aligning VERA case-mix weights proportionally with current 
expenditures is one way to better reflect how health care is delivered 
in VA. Doing so, however, assumes that expenditures alone are an 
appropriate measure of health care need. This is not always the case. 
For example, if health care in a particular case-mix category is not 
being provided efficiently, using expenditure data alone would result 
in a higher than necessary case-mix weight. This would lead to excess 
resource allocation for the case-mix category. On the other hand, 
using expenditure data only would result in a lower case-mix weight 
than appropriate if health care providers are not using more expensive 
treatments when needed to provide clinically appropriate care. This 
would lead to insufficient resource allocation for the case-mix 
category. As a result, setting case-mix weights may begin with 
consideration of current expenditures, but ultimately must use the 
best available data to reflect efficiency and clinically appropriate 
care. 

The Small Number Of Case-Mix Categories In VERA Does Not Accurately 
Adjust For Network Differences In Veterans’ Health Care Needs 

VERA uses only three case-mix categories—complex, basic vested, and 
basic non-vested—-to adjust for differences in health care needs and 
related resource requirements for veterans. These three case-mix 
categories are based on 44 patient classes VA uses to classify its 
patients. Using all 44 patient classes as case-mix categories would 
more accurately adjust for differences in needs and related resource 
requirements because the average costs of patients in the classes 
within the VERA categories vary significantly and can be dramatically 
higher or lower than their capitation amounts for the current three 
case-mix categories (see table 4).[Footnote 14] For example, the 
national average patient cost for domiciliary care--one type of 
complex care.in fiscal year 2000 was roughly $17,000 less than the 
$42,153 capitation amount for complex care, while the average patient 
cost for ventilator-dependent care--another type of complex care.was 
about $121,000 more than the complex care capitation amount. 

Table 4: VA Patient Classes, Costs, and National Capitation Amounts, 
Fiscal Year 2000: 

Patient classes: Complex care; 

Chronic mental illness: 

Schizophrenia and dementia; 
National average cost: $51,992; 
National capitation amount: $42,153. 

Other psychosis; 
National average cost: $43,313; 
National capitation amount: $42,153. 

Substance abuse; 
National average cost: $40,254; 
National capitation amount: $42,153. 

Post-traumatic stress disorder – chronic; 
National average cost: $21,472; 
National capitation amount: $42,153. 

Patient classes: Extended and residential care; 

Specialized care; 
National average cost: $78,963; 
National capitation amount: $42,153. 

Physical; 
National average cost: $68,992; 
National capitation amount: $42,153. 

Behavioral; 
National average cost: $66,630; 
National capitation amount: $42,153. 

Clinical complex; 
National average cost: $63,929; 
National capitation amount: $42,153. 

Rehabilitation; 
National average cost: $63,885; 
National capitation amount: $42,153. 

Low activities of daily living; 
National average cost: $44,097; 
National capitation amount: $42,153. 

Community nursing home; 
National average cost: $36,321; 
National capitation amount: $42,153. 

Domiciliary; 
National average cost: $24,810; 
National capitation amount: $42,153. 

Home-based primary care; 
National average cost: $24,468; 
National capitation amount: $42,153. 

Hepatitis C with antiviral therapy; 
National average cost: $11,211; 
National capitation amount: $42,153. 

Patient classes: Spinal cord injury; 

Spinal cord injury quadriplegic – new injury; 
National average cost: $68,023; 
National capitation amount: $42,153. 

Spinal cord injury paraplegic – new injury; 
National average cost: $60,879; 
National capitation amount: $42,153. 

Spinal cord injury quadriplegic – old injury; 
National average cost: $33,013; 
National capitation amount: $42,153. 

Spinal cord injury paraplegic – old injury; 
National average cost: $26,570; 
National capitation amount: $42,153. 

Patient classes: Other complex care classes; 

Ventilator dependent; 
National average cost: $163,436; 
National capitation amount: $42,153. 

Transplant; 
National average cost: $78,211; 
National capitation amount: $42,153. 

End stage renal disease; 
National average cost: $70,662; 
National capitation amount: $42,153. 

Blind rehabilitation service; 
National average cost: $33,545; 
National capitation amount: $42,153. 

Stroke; 
National average cost: $26,533; 
National capitation amount: $42,153. 

Traumatic brain injury;
National average cost: $24,146; 
National capitation amount: $42,153. 

Acquired Immune Deficiency Syndrome or human immunodeficiency virus 
positive with antiretroviral therapy; 
National average cost: $19,870; 
National capitation amount: $42,153. 

Patient classes: Basic vested care; 

Acute care: 

Acute post traumatic stress disorder; 
National average cost: $16,041; 
National capitation amount: $3,249. 

Multiple medical conditions; 
National average cost: $13,948; 
National capitation amount: $3,249. 

Psychiatric disorder with substance abuse; 
National average cost: $13,447; 
National capitation amount: $3,249. 

Medical with psychiatric/substance abuse; 
National average cost: $9,907; 
National capitation amount: $3,249. 

Hepatitis type C without antiviral therapy; 
National average cost: $9,427; 
National capitation amount: $3,249. 

Oncology; 
National average cost: $8,576; 
National capitation amount: $3,249. 

Pulmonary disease; 
National average cost: $4,593; 
National capitation amount: $3,249. 

Gastroenterology disorder; 
National average cost: $4,444; 
National capitation amount: $3,249. 

Addictive disorders; 
National average cost: $4,400; 
National capitation amount: $3,249. 

Cardiovascular disease; 
National average cost: $3,685; 
National capitation amount: $3,249. 

Acute mental disease; 
National average cost: $3,478; 
National capitation amount: $3,249. 

Musculoskeletal disorders; 
National average cost: $2,848; 
National capitation amount: $3,249. 

Central nervous system disorder; 
National average cost: $2,690; 
National capitation amount: $3,249. 

Endocrine, nutritional, and metabolic disorders; 
National average cost: $2,498; 
National capitation amount: $3,249. 

Other acute diseases; 
National average cost: $2,050; 
National capitation amount: $3,249. 

Ear, nose, and throat; 
National average cost: $1,514; 
National capitation amount: $3,249. 

Compensation and pension exams; 
National average cost: $242; 
National capitation amount: $3,249. 

Patient classes: Other basic vested care class; 

Human immunodeficiency virus positive without antiretroviral therapy; 
National average cost: $7,988; 
National capitation amount: $3,249. 

Basic non-vested care; 
National average cost: $358; 
National capitation amount: $105. 

Note: These are the patient classes VA uses to group patients into 
complex care, basic vested care, and basic non-vested care categories 
in VERA’s case-mix adjustment of workload. 

Source: GAO calculations based on VA data. 

[End of table] 

Our analysis shows that considerable variation exists among networks 
in the type of workload represented by VERA’s three case-mix 
categories, which limits VERA’s ability to allocate comparable 
resources for comparable workload. VERA provides more resources to 
networks, relative to their costs, that have proportionately more 
workload in less expensive patient classes, such as domiciliary care, 
than other networks. VERA provides fewer resources to networks, 
relative to their costs, that have more workload in more expensive 
patient classes, such as ventilator-dependent care. Using VA’s current 
44 patient classes rather than the three case-mix categories VERA used 
in fiscal year 2001 would result in a significant movement of 
resources for some networks because of the variation by network in the 
type of workload (see figure 7).[Footnote 15] This would move 
resources from networks having proportionately fewer patients in 
expensive patient classes to networks having proportionately more 
patients in expensive patient classes, resulting in an average 
movement of resources of 2 percent per network. 

Figure 7: Estimated Change in VERA Allocations Among Networks as a 
Result of Using 44 Case-Mix Categories, by Network, Fiscal Year 2001: 

[Refer to PDF for image: horizontal bar graph] 

Network: 1 (Boston); 
Estimated change: $40,537,063. 

Network: 2 (Albany); 
Estimated change: -$11,093,936. 

Network: 3 (Bronx); 
Estimated change: $32,254,369. 

Network: 4 (Pittsburgh); 
Estimated change: $31,575,297. 

Network: 5 (Baltimore); 
Estimated change: -$21,906,515. 

Network: 6 (Durham); 
Estimated change: $9,258,404. 

Network: 7 (Atlanta); 
Estimated change: -$14,181,751. 

Network: 8 (Bay Pines); 
Estimated change: $16,827,649. 

Network: 9 (Nashville); 
Estimated change: $31,955,011. 

Network: 10 (Cincinnati); 
Estimated change: -$5,659,975. 

Network: 11 (Ann Arbor); 
Estimated change: $10,335,432. 

Network: 12 (Chicago); 
Estimated change: -$7,415,374. 

Network: 13 (Minneapolis); 
Estimated change: $5,342,154. 

Network: 14 (Lincoln); 
Estimated change: $3,176,377. 

Network: 15 (Kansas City); 
Estimated change: -$2,804,687. 

Network: 16 (Jackson); 
Estimated change: $3,773,183. 

Network: 17 (Dallas); 
Estimated change: -$10,138,298. 

Network: 18 (Phoenix); 
Estimated change: -$21,841,759. 

Network: 19 (Denver); 
Estimated change: $1,108,355. 

Network: 20 (Portland); 
Estimated change: -$36,471,841. 

Network: 21 (San Francisco); 
Estimated change: -21,797,992. 

Network: 22 (Long Beach); 
Estimated change: -$32,831,165. 

Note: We used fiscal year 1999 expenditure data for the calculations. 

Source: GAO analysis of VA data. 

[End of table] 

In 1998, VA conducted a similar analysis using 54 patient classes for 
allocation and found that this would have moved a significant amount 
of resources among networks, an average of 4 percent per network. 
[Footnote 16] The analysis further concluded that using only 7 of the 
54 classes achieved nearly the same result. A 1998 Price Waterhouse 
analysis of VERA also concluded that additional case-mix categories 
would increase equitable resource allocation.[Footnote 17] VA 
officials told us they have not introduced more than three case-mix 
categories because VA wants VERA to be easily understood by 
stakeholders. 

While using more case-mix categories can increase the accuracy of 
allocations, the literature and experts we consulted suggest that a 
case-mix classification system needs to address two concerns in order 
to prevent providers from receiving inappropriately high levels of 
resources. First, having a larger number of case-mix categories may 
provide more opportunities for networks to inappropriately classify 
patients to receive the highest capitation amount. However, increasing 
the VERA case-mix categories from three to a higher number, but not 
necessarily 44, may strike an appropriate balance between improved 
allocation and the need to control for potential inappropriate coding 
of patients into higher capitation categories. Second, basing case-mix 
categories in part or in whole on utilization of services provides the 
incentive to overuse services. For instance, in VERA, a patient who 
receives nine home-based primary care visits is categorized in basic 
vested care with a capitation amount of $3,126; however, a patient who 
receives 10 visits is categorized in complex care, which has a 
capitation amount of $42,765. Consequently, if networks increase the 
number of such visits, they can increase their funding more than 13-
fold. Currently, 22 of VA’s 44 patient classes incorporate utilization 
factors in classifying patients. These utilization factors are found 
primarily in the patient classes for extended and residential long-
term care and chronic mental health services and for classifying basic 
non-vested patients. Replacing utilization criteria with diagnosis and 
functional measures where possible in VERA’s case-mix categories would 
reduce the incentive to overuse services, especially for complex care 
patients. 

Most VERA complex care patient classes are based in part on some 
measure of service utilization because of the difficulty in predicting 
the costs of these classes based solely on diagnostic data. Because 
complex care costs are high and unusually difficult to predict, the 
literature and experts we consulted suggest that it is prudent to 
partially insure networks from such unpredictable costs.[Footnote 18] 
Therefore, it may be advantageous to use a mechanism to help 
providers, such as VA’s health care networks, cope with their highest 
cost complex care patients by providing additional resources for their 
care based on a formula. If VA used such a funding mechanism, networks 
with complex care patients in the 99th percentile of cost, for 
example, would receive the network complex care capitation amount plus 
a predetermined percentage of the cost above the capitation amount. 
The additional funds above the capitation amount would partially 
offset the network’s expenses for high-cost complex care patients. 
Resources for this funding mechanism could be set aside as part of the 
National Reserve Fund. 

Currently, VA is exploring alternative case-mix classification 
systems, such as Diagnostic Cost Groups (DCG), that could provide more 
case-mix categories, classify patients based on nonutilization 
criteria, and better predict costs for acute care patients. DCGs place 
patients into different groups based on patient demographics and 
medical diagnoses. However, VA researchers have found that the DCG 
diagnosis-based system may not be sufficient to allocate resources for 
certain complex care patient classes. Predicting the costs of many 
complex care patients is problematic because complex care patients, 
including those with mental illness and those in extended care 
settings, may have the same diagnosis but may need very different 
levels of treatment and support. VA is studying the possibility of 
supplementing a diagnoses-based system with utilization information in 
order to better predict the costs of complex care patients. 

Combined Effect of Changes in Workload and Case-Mix Measures to Better 
Align Resources and Workload Would Result in Significant Reallocation 
Among Some Networks: 

Implementing changes to VERA could better align resources with 
workload for VA’s 22 health care networks by addressing case mix and 
workload issues. Incorporating all 44 of the current case-mix 
categories, updating case-mix weights to reflect the current 
distribution of expenditures, and funding Priority 7 basic vested 
veterans at 50 percent of costs would better align resources and 
workloads. Incorporating the 44 case-mix categories would have the 
largest effect on resource allocation. The combined effect of these 
changes would provide additional resources to some northeastern and 
midwestern networks and reduce resources for some southern and western 
networks (see figure 8). The allocation change represents about 2 
percent of networks’ budgets, but is more substantial for some 
networks. Network 1 (Boston) would get approximately a 5 percent 
increase and Network 20 (Portland) approximately a 5 percent decrease. 
These changes would better align approximately $200 million with 
workload. 

Figure 8: Estimated Change in VERA Allocations from Incorporating 44 
Case-Mix Categories, Most Current Expenditure Data for Case-Mix 
Weights, and Priority 7 Basic Vested Veterans Treated, Fiscal Year 
2001: 

[Refer to PDF for image: horizontal bar graph] 

Network: 1 (Boston); 
Estimated change: $41,360,897. 

Network: 2 (Albany); 
Estimated change: -$8,718,416. 

Network: 3 (Bronx); 
Estimated change: $41,573,159. 

Network: 4 (Pittsburgh); 
Estimated change: $35,767,167. 

Network: 5 (Baltimore); 
Estimated change: -$23,395,750. 

Network: 6 (Durham); 
Estimated change: $6,757,548. 

Network: 7 (Atlanta); 
Estimated change: -$13,596,270. 

Network: 8 (Bay Pines); 
Estimated change: $14,540,999. 

Network: 9 (Nashville); 
Estimated change: $30,637,119. 

Network: 10 (Cincinnati); 
Estimated change: -$7,454,361. 

Network: 11 (Ann Arbor); 
Estimated change: $11,133,452. 

Network: 12 (Chicago); 
Estimated change: -$6,647,790. 

Network: 13 (Minneapolis); 
Estimated change: $5,335,814. 

Network: 14 (Lincoln); 
Estimated change: $4,298,150. 

Network: 15 (Kansas City); 
Estimated change: -$2,041,802. 

Network: 16 (Jackson); 
Estimated change: -$541,935. 

Network: 17 (Dallas); 
Estimated change: -$12,456,323. 

Network: 18 (Phoenix); 
Estimated change: -$21,888,405. 

Network: 19 (Denver); 
Estimated change: $2,735,082. 

Network: 20 (Portland); 
Estimated change: -$39,781,854. 

Network: 21 (San Francisco); 
Estimated change: -23,159,943. 

Network: 22 (Long Beach); 
Estimated change: -$34,456,538. 

Note: We allocated resources for Priority 7 basic vested care veterans 
at 50 percent of the national average cost which is $849 per veteran. 
We used fiscal year 1999 expenditure data for these calculations. 

Source: GAO analysis of VA data. 

[End of table] 

Inadequate Network Supplemental Funding Information Limits VA’s 
Ability to Take Corrective Action: 

VA has focused its process for administering the National Reserve Fund 
almost solely on providing supplemental resources to networks to get 
through a fiscal year but has not included in this process an 
examination of the root causes of networks’ needs for supplemental 
resources. To operate the National Reserve Fund, VA, for the last 3 
fiscal years (1999 – 2001), has set aside about 1 percent of the VERA 
allocation in anticipation of networks requiring supplemental 
resources.[Footnote 19] No networks requested supplemental funding in 
fiscal years 1997 and 1998. However, six networks have requested 
supplemental funding from fiscal year 1999 to fiscal year 2001 (see 
table 5). Supplemental allocations to four networks in fiscal year 
2001 totaled $220 million. Officials in 10 of 22 networks told us, in 
June 2001, that they anticipated requesting supplemental funding at 
least once from fiscal years 2002 through 2006.[Footnote 20] 

Table 5: Network Supplemental Funding, Fiscal Years 1999 through 2001: 

Network (Location): 1 (Boston); 
1999: 0; 
2000: 0; 
2001: $53.2 million. 

Network (Location): 3 (Bronx); 
1999: 0; 
2000: $66.2 million; 
2001: 73.8 million. 

Network (Location): 8 (Bay Pines); 
1999: $7.0 million; 
2000: 0; 
2001: 0. 

Network (Location): 9 (Nashville); 
1999: $5.0 million; 
2000: 0; 
2001: 0. 

Network (Location): 13 (Minneapolis); 
1999: 0; 
2000: $14.7 million; 
2001: 44.7 million. 

Network (Location): 14 (Lincoln); 
1999: 0; 
2000: $9.8 million; 
2001: 48.3 million. 

Network (Location): Total; 
1999: $12.0 million; 
2000: $90.7 million; 
2001: $220.0 million. 

Source: VA. 

[End of table] 

VA has used three different approaches to determine whether networks 
requesting additional resources would receive supplemental 
allocations. In fiscal years 1999 and 2000, VA created teams 
consisting of staff from networks not requesting supplemental funds. 
These teams reviewed networks’ funding requests and made 
recommendations regarding the amount of supplemental allocations and 
efficiency initiatives networks needed to implement in order to close 
gaps between their expected expenditures and VERA allocations. In 
fiscal year 2001, responding in part to criticisms of network staff 
review of allocation requests, VA replaced the team review process 
with a review by VA headquarters officials. In this process, VA 
headquarters officials reviewed requests for supplemental resources 
from networks anticipating a budget shortfall for the year. In fiscal 
year 2002, VA created a team to examine networks’ need for 
supplemental resources. This team consisted of headquarters and 
network officials, including representatives from networks that 
requested supplemental allocations and those that did not. 

None of VA’s approaches to supplemental allocations has systematically 
evaluated the extent to which certain factors caused networks to 
require supplemental allocations. In fiscal years 1999 and 2000, VA 
teams conducted site visits and reviewed financial and clinical 
information that requesting networks provided. The teams made 
recommendations for supplemental allocations in order to prevent 
network shortfalls. However, VA could not determine to what extent 
supplemental resources were needed due to imperfections in VERA, lack 
of network efficiency, inability to predict complex care patients’ 
costs, or lack of managerial flexibility to close or consolidate 
programs or facilities because the teams did not collect the 
information needed to make this determination.[Footnote 21] Although 
the evaluation process changed in fiscal year 2001, VA was still 
unable to make such a determination. For example, in fiscal year 2001, 
about half the supplemental resources VA provided to networks was for 
“inflation and miscellaneous program adjustments.” All networks 
experienced inflation, however, and VA did not distinguish between the 
level of inflation in networks that requested supplemental resources 
and those that did not. 

VA officials told us that the changes for fiscal year 2002 will still 
not allow them to determine the extent to which various factors cause 
networks to need supplemental resources. As a result, VA cannot 
provide adequate assurance that supplemental allocations are 
appropriate or take needed action to correct problems that cause 
networks to have budget shortfalls. 

One of the corrective actions VA could take is to assist networks that 
experience budget shortfalls because of an unusually large number of 
high-cost complex care patients in a given year. This is important 
because the methods used to predict health care costs are not as 
precise in predicting the costs of many complex care patients as they 
are in predicting the costs of many basic care patients. As a result 
some networks’ budget shortfalls could be explained in part by a 
higher than expected number of high-cost complex care patients. To 
address this risk, some other payers have established funding 
mechanisms to address the costs of these very expensive patients. For 
example, some state Medicaid programs have used a mechanism called 
stop-loss or reinsurance to reimburse managed care plans for certain 
benefits that exceed a specified expense limit.[Footnote 22] If VA 
were to use a similar funding mechanism as part of the National 
Reserve Fund, this could help protect networks from budget shortfalls 
by providing additional resources above the capitation amount for 
complex care patients that reach a predetermined level of cost. VA is 
studying ways to address the risk that a network may have unusually 
high-cost patients in a given year that are not predicted in a 
resource allocation model. 

Conclusions: 

VERA’s overall design is a reasonable approach to resource allocation 
and has helped promote more comparable resource allocations for 
comparable workloads in VA. This approach is reasonable because VERA 
allocates resources primarily on the basis of workload and attempts to 
adjust network resources for factors beyond the control of network 
management, encourage efficiency, and provide protection to patients 
against network budget shortfalls. The implementation of this approach 
resulted in VA’s shifting resources to more closely mirror shifts in 
the veteran population from the northeast and midwest to the south and 
west. 

Although VERA’s design is a reasonable approach to resource 
allocation, VA could correct weaknesses in VERA’s implementation to 
improve the comparability of resource allocations with networks’ 
workloads. One of VERA’s implementation weaknesses is that it does not 
include most Priority 7 veterans in its workload even though the 
Priority 7 workload now represents about one-fifth of patients served. 
If the number of Priority 7 veterans VA treats continues to increase, 
this may create even more serious inequities in the future. 

VERA’s adjustment for differences in patient health needs across 
networks emphasizes simplicity at the cost of increased accuracy. 
Maintaining only three case-mix categories in VERA does not adequately 
account for important variations in health care needs among networks. 
Increasing the VERA case-mix categories from three to a higher number 
would better account for the variation in health care needs across 
networks and would have the largest effect on resource allocation. In 
addition, changes are needed to update VERA’s case-mix weights to 
better reflect how VA health care is now delivered. Updating case-mix 
weights may begin with using current expenditure data, but additional 
consideration should be given to using the best available data on 
appropriate clinical care and efficiency. 

In addition to these weaknesses, VA has not used the supplemental 
funding process for improving VERA allocations and management of VA’s 
resources. Although the amount of resources provided to networks 
through the supplemental funding process has continued to increase, VA 
has not been able to determine the relative contribution of factors, 
such as imperfections in VERA, network inefficiency, inability to 
predict complex care costs, or lack of managerial flexibility to close 
or consolidate programs or facilities, to the need for supplemental 
resources. An important factor that other health care payers have 
identified and account for that may contribute to VA network budget 
shortfalls is the inability to accurately predict the cost of complex 
care patients. Other payers have addressed this risk by using a 
funding mechanism to partially offset the unanticipated costs of such 
patients. Because VA has not identified the relative contribution of 
this factor and other factors that could cause network budget 
shortfalls, VA is unable to provide assurance that the supplemental 
funding is appropriate or take needed action to correct problems that 
cause networks to have budget shortfalls. 

Making changes to address weaknesses in VERA will add some complexity 
to how VA allocates resources. Doing so, however, will better align 
the allocation of approximately $200 million with workload. 

Recommendations for Executive Action: 

To continue to improve the allocation of comparable resources for 
comparable workloads through VERA, we recommend that the secretary of 
veterans affairs direct the under secretary for health to: 

* better align VERA measures of workload with actual workload served 
regardless of veteran priority group, 

* incorporate more categories into VERA’s case-mix adjustment, 

* update VERA’s case-mix weights using the best available data on 
clinical appropriateness and efficiency, 

* determine in the supplemental funding process the extent to which 
different factors cause networks to need supplemental resources and 
take action to address limitations in VERA or other factors that may 
cause budget shortfalls, and, 

* establish a mechanism in the National Reserve Fund to partially 
offset the cost of networks’ highest cost complex care patients. 

Agency Comments and Our Evaluation: 

In comments on a draft of this report, VA agreed with our conclusions 
that VERA’s design is a reasonable approach to allocate resources 
commensurate with workloads and that VERA, in concert with other VA 
initiatives, has provided an incentive for VA to serve more veterans. 
VA also acknowledged the opportunities for improvements in VERA’s 
implementation that we identified and concurred with our 
recommendations. VA’s comments are in appendix II. 

VA concurred with our workload and case mix recommendations, 
recognizing the substantial trend in Priority 7 workload expansion and 
the case-mix limitations of having only three pricing groups within 
VERA. VA anticipates that the distribution of an expected fiscal year 
2002 supplemental appropriation will consider the Priority 7 workload, 
but as of February 22, 2002, Congress has not provided VA with the 
supplemental appropriation it anticipates. Further, VA is evaluating 
the appropriateness of expanding the number of VERA price groups to 
include corresponding updates of case-mix weights, but will not make a 
decision about these potential fiscal year 2003 VERA modifications 
until September 2002. In its comments, VA also indicated that it plans 
to wait for further study of VERA’s workload and case-mix measures to 
determine whether all Priority 7 workload and case-mix refinements 
should be incorporated in the fiscal year 2003 VERA model. Given the 
extensive study of most of these issues already conducted by VA and 
others, we encourage VA to implement our recommended VERA workload and 
case-mix improvements in its fiscal year 2003 allocations to networks 
and to further refine these improvements in the future as needed. 
Delaying these needed improvements to VERA means that approximately 
$200 million will be allocated annually in a manner that does not 
align workload and resources as equitably as possible among networks. 

VA also concurred with our recommendation to determine in the 
supplemental funding process the extent to which different factors 
cause networks to need supplemental resources, but the actions VA 
discussed to improve the supplemental funding process do not address 
our recommendation. VA used a new supplemental adjustment process in 
fiscal year 2002 to better identify different factors that cause 
networks to require supplemental resources. However, this process does 
not identify the root causes of a network’s need for additional 
resources as we recommended. Specifically, VA’s new supplemental 
process does not provide VA information on the relative contributions 
of specific factors to network shortfalls such as network 
inefficiency, imperfections in VERA, and the inability to predict 
complex care costs. Until VA implements our recommendation, it cannot 
provide assurance that supplemental resources are appropriate or take 
needed actions to reduce the likelihood of network shortfalls in the 
future. 

In addition, VA’s discussion of actions for establishing a mechanism 
in the National Reserve Fund to partially offset the cost of networks’ 
highest cost complex care patients do not fully address our 
recommendation. VA stated that the resources it distributed to five 
networks through the fiscal year 2002 supplemental adjustment process 
are expected to meet these networks’ supplemental funding needs, 
including the cost of their highest cost patients. To address our 
recommendation, however, VA would have to identify individual complex 
care patients with unexpectedly high costs over the course of the 
fiscal year and provide stop-loss coverage for such patients to each 
network. VA’s current process does not do this. However, as we have 
noted, ongoing VA studies could develop ways to provide stop loss 
coverage to networks for unpredictable high-cost complex care 
patients. Until VA establishes such a funding mechanism, some networks 
may experience budget shortfalls as a result of these unpredictable 
complex care costs. 

We are sending copies of this report to the secretary of veterans 
affairs, interested congressional committees, and other interested 
parties. We will make copies of the report available to others upon 
request. 

If you or your staffs have any questions about this report, please 
call me at (202) 512-7101. Another contact and key contributors are 
listed in appendix III. 

Signed by: 

Cynthia A. Bascetta: 
Director, Health Care--Veterans’ Health and Benefits Issues: 

List of Requesters: 

The Honorable Lane Evans: 
Ranking Minority Member: 
Committee on Veterans’ Affairs: 
House of Representatives: 

The Honorable James T. Walsh: 
Chairman: 
The Honorable Alan B. Mollohan: 
Ranking Minority Member: 
Subcommittee on VA, HUD, and Independent Agencies: 
Committee on Appropriations: 
House of Representatives: 

The Honorable Charles E. Grassley: 
The Honorable Chuck Hagel: 
The Honorable Tom Harkin: 
United States Senate: 

The Honorable Doug Bereuter: 
The Honorable Leonard Boswell: 
The Honorable Tom Latham: 
The Honorable James A. Leach: 
The Honorable Jim Nussle: 
The Honorable Lee Terry: 
House of Representatives: 

[End of section] 

Appendix I: Scope and Methodology: 

We reviewed the Department of Veterans Affairs (VA) resource 
allocation for fiscal years 1997 through 2001 to (1) describe the 
effect the Veterans Equitable Resource Allocation (VERA) system has 
had on network resource allocations and workloads, (2) assess whether 
VERA’s design is a reasonable approach to resource allocation, and (3) 
identify weaknesses in VERA that may limit VA’s ability to allocate 
comparable resources for comparable workloads. 

We worked with VA officials from the Resource Allocation and Analysis 
Office to obtain documents and data on how VERA works and how VERA has 
changed since fiscal year 1997. We also relied on other VA officials 
for our assessment of VERA including officials from the Office of the 
Under Secretary for Health, the Office of the Assistant Deputy Under 
Secretary for Health, the Office of the Chief Financial Officer, the 
Office of Quality and Performance, the Office of Policy and Planning, 
the Spinal Cord Injury Strategic Healthcare Group, the Geriatrics and 
Extended Care Strategic Healthcare Group, the Mental Health Strategic 
Healthcare Group, Health Services Research and Development Service, 
and the Northeast Program Evaluation Center. In addition, we 
interviewed officials from veteran service organizations and payment 
system experts outside of government. 

We obtained information on VERA’s effect and how it could be improved 
through interviews and documents from VA’s networks. We visited five 
network offices: Albany (2); Bay Pines (8); Bronx (3); Lincoln (14); 
and Minneapolis (13) and conducted telephone interviews with officials 
in three additional networks: Denver (19), Kansas City (15), and 
Phoenix (18). We chose these networks because they were geographically 
diverse and had different financial experiences under VERA. We also 
obtained information from network officials about potential 
improvements to VERA including adding basic vested care Priority 7 
users, basing VERA case-mix weights on more current expenditures, 
using more categories to adjust for case-mix differences, and other 
factors. We had follow-up telephone interviews with network officials 
in Bronx (3), Minneapolis (13), and Lincoln (14) regarding fiscal year 
2001 supplemental resources from the National Reserve Fund. 

We conducted an electronic mail survey to obtain the input of all 22 
network directors about VERA. We also obtained information on network 
directors’ anticipation of future supplemental funding requests. 

To assess the reasonableness of VERA as an approach to resource 
allocation, we performed a literature review using works published 
primarily within the last 5 years. We searched the following databases: 

MEDLINE, ABI/Inform Global, and Econlit, and relied on publications 
from other federal agencies. We focused our search on finding 
information on similar health care payment systems, case-mix 
adjustment for acute and extended care populations, and managing risk 
for mental health and special care populations. 

To assess the effect VERA has had on network resource allocations and 
workload, we identified how resources have shifted among regions and 
increased veterans’ access to care as measured by the number of 
veterans treated. We calculated the resources VERA shifted by 
projecting what allocations would have been in fiscal year 2001 if 
networks received the same proportion of funding in that year that 
they received in fiscal year 1996, the year preceding VERA’s 
implementation. We calculated the resource shifts by subtracting 
networks’ actual 2001 VERA allocations from their projected 
allocations. To calculate the total amount of resources VERA shifted, 
we summed the absolute value of networks’ net gains or losses and 
divided by two. We divided the total by two to avoid double counting 
because a dollar transferred to one network is the same dollar 
transferred from another. 

To determine weaknesses in VERA, we first examined our more than 10 
years of work reviewing VA’s resource allocation processes. In 
addition, we relied on external evaluations of VERA completed by Price 
Waterhouse, LLP and The Lewin Group, Inc., AMA Systems, Inc., and the 
RAND Corporation. We constructed simulation models to estimate the 
effect in fiscal year 2001 of 1) funding basic vested care Priority 7 
patient users, 2) basing the case-mix weights on current expenditures, 
3) using all 44 VERA patient classes to allocate network resources, 
and 4) the result of combining all three of these simulations. VA 
provided workload and expenditure data from fiscal years 1996 through 
2000 and the actual VERA allocations received by networks during 
fiscal years 1997 through 2001. These data were obtained from VA’s 
Office of the Chief Financial Officer, Allocation Resource Center, and 
Office of the Assistant Deputy Under Secretary for Health. 

To estimate the effect on VERA allocations of funding basic vested 
care Priority 7 patients, we used the total unduplicated number of 
basic vested care Priority 7 veterans served for fiscal years 1997, 
1998, and 1999. In addition, we assumed that these patients would be 
funded at 50 percent of the national average cost or $849 in fiscal 
year 1999. In our simulation, we chose to fund them at 50 percent of 
the national average cost based on documentation from a prior 
recommendation by the Veterans Health Administration Policy Board. 
Funding these patients at less than full cost lessens the incentive 
for networks to serve more Priority 7 veterans. 

To estimate the effect on network allocations of basing case-mix 
weights on current expenditures, we compared VERA’s fiscal year 2001 
allocations made on the basis of fiscal year 1995 expenditure data to 
what fiscal year 2001 allocations would have been if they were based 
on fiscal year 1999 expenditure data. The fiscal year 1999 expenditure 
data were the most recent available for case-mix weight calculations 
for the fiscal year 2001 VERA allocation. Using fiscal year 1999 data, 
we computed new capitation amounts for basic non-vested care, basic 
vested care, and complex care. 

To estimate the effect on network allocations of using all 44 VERA 
patient classes, we used fiscal year 1999 expenditures based on VERA 
workload. To calculate new capitation amounts, we first calculated the 
percent of expenditures spent on each of the 44 classes. Second, we 
calculated the amount of resources available for each class by 
multiplying the new percentages for each class by the total fiscal 
year 2001 resources that VERA allocated. Third, we calculated the new 
capitation amounts by dividing the amount of resources available by 
the corresponding VERA workload. 

To estimate the combined effect on network allocations of making each 
of these changes, we calculated capitation amounts for each of the 44 
classes and funded basic vested care Priority 7 users at 50 percent of 
the national average cost based on fiscal year 1999 expenditures 
related to VERA workload. In our simulation we created a separate 
category for basic vested care Priority 7 patients because we did not 
have data on Priority 7 veterans for each basic care patient class. 

We tested VA computer-based data used in our analysis and concluded 
that it was adequate for our purposes. To do this, we assessed the 
reliability of workload (VERA and non-VERA) and expenditure data we 
obtained from VA that were used in our analyses. When we identified 
inconsistencies between databases, we tried to resolve them by 
interviewing officials responsible for creating or maintaining the 
databases, updating the databases with additional information VA 
provided, and requesting special data runs with parameters that we 
specified. In addition, we confirmed that VA’s Allocation Resource 
Center verifies all workload and expenditure data used in the VERA 
allocation process. We did not, however, verify whether these 
processes were adequate. We relied on previous work to determine what 
limitations, if any, VA’s data may have had on the analyses we 
completed. We performed our review from October 2000 through December 
2001 in accordance with generally accepted government auditing 
standards. 

[End of section] 

Appendix II: Comments From the Department of Veterans Affairs 

The Secretary of Veterans Affairs: 
Washington: 

February 11, 2002: 

Ms. Cynthia A. Bascetta: 
Director, Health Care-—Veterans' Health and Benefits Issues: 
U. S. General Accounting Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Ms. Bascetta: 

This responds to your draft report, VA Health Care: Allocation Changes 
Would Better Align Resources with Workload (GAO-02-338). The 
Department of Veterans Affairs (VA) agrees with the General Accounting 
Office's (GAO) conclusions that the Veterans Equitable Resource 
Allocation (VERA) system's overall design is a reasonable approach to 
allocate resources commensurate with workloads and that VERA's 
methodology has had a substantial impact on network resource 
allocations and workloads. Also, as your report observes, VERA. in 
concert with other VA initiatives, has provided an incentive for the 
Veterans Health Administration's (VHA) networks to serve more veterans. 

VA acknowledges the opportunities for improvement that GAO identifies 
and concurs with GAO's recommendations. Inherent in our approach to 
managing the VERA allocation process is an emphasis on ongoing 
evaluation of model effectiveness and the flexibility to initiate 
modifications and refinements on an as-needed basis. The enclosure 
details actions underway and plans to implement GAO's recommendations. 

Thank you for the opportunity to comment on your draft report. 

Sincerely yours, 

Signed by: 

Anthony J. Principi: 
Enclosure: 

Department Of Veterans Affairs Comments To GAO Draft Report, VA Health 
Care: Allocation Changes Would Better Align Resources with Workload 
(GAO-02-338): 

To continue to improve the allocation of comparable resources for 
comparable workloads through VERA, GAO recommends that the Secretary 
of Veterans Affairs direct the Under Secretary for Health to: 

* Better align VERA measures of workload with actual workload served 
regardless of veteran priority group. 

Concur - As GAO reports, VERA funds complex care patients in all seven 
veteran priority groups, as well as basic care patients through 
priority 7a. VHA continues to review the issue of providing workload 
and funding credit for priority 7c veterans. VHA is examining various 
VERA models/simulations for FY 2003 network budget allocations that 
reflect VERA workload and funding credit for patients in that 
category, both in whole and in part. Because of the substantial trend 
in priority 7 workload expansion, VA anticipates that the distribution 
of the additional supplemental appropriation associated with the 
Secretary's enrollment decision for FY 2002 will consider the priority 
7c workload. 

VA continues to stress that VERA is not a static model; rather, it is 
reviewed and refined on an ongoing basis through both VHA internal 
workgroups and external studies such as GAO's. VA is committed to 
thoroughly evaluating the appropriateness and feasibility of including 
basic care priority 7c workload in the funding methodology. For 
example, the RAND Corporation is conducting a Phase II VERA study that 
will address workload scope among other objectives. The RAND study 
should be published at the end of this fiscal year. At that time VHA 
will be better able to assess the benefit of permanently incorporating 
priority group 7c workload in the FY 2003 VERA model. 

* Incorporate more categories into VERA's case-mix adjustment. 

Concur - VA recognizes the case-mix limitations of having only three 
primary pricing groups within VERA. The VHA Patient Classification 
Workgroup is reviewing several alternatives, including the impact of 
incorporating Diagnostic Cost Groups (DCGs) or additional VERA pricing 
groups to establish more definitive case-mix and risk adjustment 
options. Movement in this direction would retain the strengths of VERA 
while providing increased flexibility in allocation determinations. As 
part of this assessment, the Management Science Group, a field unit of 
VHA's Office of Policy and Planning, has modified the DCG method to 
reflect the unique characteristics of the VA population and illness 
patterns in VA. 

VHA will make VERA modifications and enhancements as it gains more 
experience in the application of selected case-mix allocation 
strategies. VHA expects to finalize preliminary decisions about 
modifications in the FY 2003 methodology by the end of September 2002, 
at which time recommendations of the RAND study and other internal 
workgroups will also be considered. 

* Update VERA's case-mix weights using the best available data on 
clinical appropriateness and efficiency. 

Concur - As noted in our comments above, the Patient Classification 
Workgroup will complete a feasibility study to determine the 
advantages of incorporating DCGs into the VERA methodology. VHA is 
also evaluating the appropriateness of expanding the number of VERA 
price groups. Corresponding updates of case-mix weights will be 
integral to the anticipated model modifications. 

* Determine in the supplemental funding process the extent to which 
different factors cause networks to need supplemental resources and 
take action to address limitations in VERA or other factors that may 
cause budget shortfalls. 

Concur - VHA management officials have been carefully tracking 
budgetary trends in funding levels since the supplemental funding 
process was initiated in FY 1999. It has given special attention to 
targeting specific causes for the supplement requests and accompanying 
justification. Many of the supplements reflected unanticipated 
developments that could not be predicted during the initial allocation. 

Although there is no evidence to suggest that limitations in the VERA 
methodology influenced the budget shortfalls, VHA decided to apply a 
rigorous new supplemental adjustment process in FY 2002, in order to 
better identify the different factors that lead to supplemental 
network funding requirements. Adjustments are now executed as part of 
the initial VERA allocation of the Medical Care appropriation. As part 
of the process, a concerted effort was made to develop updated 
estimates of each network's projected FY 2002 financial status. This 
included developing estimates of all the resources that would be 
available to each network and their corresponding estimated expenses 
for the year. Included among the available estimated expenses were 
funds carried over from FY 2001. estimated collections, estimated 
reimbursements, and the estimated VERA allocation of the Medical Care 
appropriation. The estimated FY 2002 expenses were based on the actual 
expenses of FY 2001, plus approved budget increases for inflation and 
pay raises, minus a 2 percent efficiency target. Based on this 
analysis, VHA determined that five networks (Networks 1, 3,12, 13, and 
14) should receive an adjustment to their initial VERA allocation. VHA 
will assess the effectiveness of the adjustment during this fiscal 
year, and introduce additional corrective modifications as necessary 
in future budget cycles. As stated earlier, the VERA development 
process is a dynamic one that continually undergoes internal review by 
both VHA work groups and external bodies such as GAO. 

* Establish a mechanism in the National Reserve Fund to partially
offset the cost of networks' highest cost complex care patients. 

Concur — The Department's response to this recommendation coincides 
with the previous response. Through the supplemental adjustment 
process, VHA distributed a VERA adjustment of more than $267 million 
to five networks. It is expected that this additional funding will 
meet the five networks' patient care supplemental funding needs, 
including the cost of the highest cost patients. In addition, as the 
VHA Patient Classification Workgroup studies the DCG model and other 
risk adjustment refinements to the FY 2003 VERA, the impact of 
extraordinarily high cost patients will also be considered. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James C. Musselwhite, (202) 512-7259: 

Staff Acknowledgments: 

In addition to the contact named above Marcia A. Mann, Jacquelyn T. 
Clinton, Thomas A. Walke, Diana Shevlin, Maria Vargas, Leslie D. 
Blevins, Deborah L. Edwards, and Susan Lawes made key contributions to 
this report. 

[End of section] 

Related GAO Products: 

Medicare Managed Care: Better Risk Adjustment Expected to Reduce 
Excess Payments Overall While Making Them Fairer to Individual Plans. 
[hyperlink, http://www.gao.gov/products/GAO/T-HEHS-99-72]. Washington, 
D.C.: February 25, 1999. 

Medicare Managed Care: Payment Rates, Local Fee-for-Service Spending, 
and Other Factors Affect Plans’ Benefit Packages. [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-99-9R]. Washington, D.C.: October 
9, 1998. 

VA Health Care: More Veterans Are Being Served, but Better Oversight 
Is Needed. [hyperlink, http://www.gao.gov/products/GAO/HEHS-98-226]. 
Washington, D.C.: August 28, 1998. 

VA Health Care: Resource Allocation Has Improved, but Better Oversight 
Is Needed. [hyperlink, http://www.gao.gov/products/GAO/HEHS-97-178]. 
Washington, D.C.: September 17, 1997. 

Veteran’s Health Care: Facilities’ Resource Allocations Could Be More 
Equitable. [hyperlink, http://www.gao.gov/products/GAO/HEHS-96-48]. 
Washington, D.C.: February 7, 1996. 

VA Health Care: Resource Allocation Methodology Has Had Little Impact 
on Medical Centers’ Budgets. [hyperlink, 
http://www.gao.gov/products/GAO/HRD-89-93]. Washington, D.C.: August 
18, 1989. 

VA Health Care: Resource Allocation Methodology Should Improve VA’s 
Financial Management. [hyperlink, 
http://www.gao.gov/products/GAO/HRD-87-123BR]. Washington, D.C.: 
August 31, 1987. 

[End of section] 

Footnotes: 

[1] U.S. General Accounting Office, VA Health Care: More Veterans Are 
Being Served, But Better Oversight Is Needed, [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-98-226] (Washington, D.C.: August 
28, 1998). 

[2] See the Related GAO Products page at the end of this report. 

[3] Networks and their facilities also receive resources from the 
medical care appropriation not allocated through VERA for such things 
as prosthetics, homeless programs, and readjustment counseling. In 
addition, VA facilities’ budgets include collections for insurance 
reimbursements, copayments, and deductibles for the care of some 
veterans. 

[4] We examined these four categories in our analysis. We did not 
examine the education support and research support categories which 
constitute approximately 4 percent of VERA’s allocation. 

[5] The 1997 appropriation act for the Department of Veterans Affairs 
required VA to establish a plan to equitably allocate health care 
resources. Pub. L. No. 104-204, Section 429. 

[6] We classified VA’s 22 health care networks into geographic regions 
according to U.S. Census definitions. 

[7] Eligibility Reform also added to the number of veterans enrolled 
to receive care. The number of enrolled veterans increased from 4.2 
million in the first full year of enrollment in fiscal year 1999 to 
6.0 million in fiscal year 2001. 

[8] For a discussion of payment system principles and implementation, 
see Medicare Payment Advisory Commission, Report to the Congress: 
Medicare Payment Policy (Washington, D.C.: March 2001) and Nigel Rice 
and Peter C. Smith “Capitation and Risk Adjustment in Health Care 
Financing: An International Progress Report,” The Milbank Quarterly, 
Volume 79, No. 1, 2001. 

[9] VERA allocated about $16.2 billion in fiscal year 2001 for basic 
care and complex care and $878 million for equipment and nonrecurring 
maintenance based on patient workload. In addition, VERA allocated 
about $688 million for research support and education support based on 
other workload measures. 

[10] VA’s special disability programs provide services to veterans 
disabled by spinal cord dysfunction, traumatic brain injury, 
blindness, amputations, serious mental illness, and post-traumatic 
stress disorder. 

[11] VERA does include some Priority 7 veterans in its workload 
measure. In fiscal year 2000, about 8 percent of Priority 7 veterans 
treated were included in VERA’s workload measure because they were 
complex care patients or basic care patients with service-connected 
conditions. 

[12] Facility collections from copayments, deductibles, and third-
party insurance reimbursements cover some of the costs of services for 
Priority 7 veterans. 

[13] VA’s Office of Inspector General also recommended that VA include 
Priority 7 workload in the VERA model. See Office of Inspector 
General, Department of Veterans Affairs, Audit of The Availability of 
Healthcare Services in the Florida/Puerto Rico Veterans Integrated 
Service Network (VISN) 8, Report Number 99-00057-55 (Washington, D.C.: 
August 13, 2001). 

[14] RAND, An Analysis of the Veterans Equitable Resource Allocation 
(VERA) System (Santa Monica, California, 2001), pp. 21-22 discusses 
the need for additional case-mix adjustment in VERA as does Price 
Waterhouse LLP and The Lewin Group, Inc., Veterans Equitable Resource 
Allocation Assessment – Final Report, March 27, 1998. 

[15] For our simulation we used VA’s 44 patient classes because data 
were readily available. 

[16] The number of VA categories declined from 54 in 1998 to 44 in 
2001 because VA combined some of the 1998 categories. 

[17] Price Waterhouse LLP and The Lewin Group, Inc., Veterans 
Equitable Resource Allocation Assessment – Final Report, March 27, 
1998. 

[18] For discussion of predicting costs for mental health patients 
using different risk adjustment models, see Susan Ettner, Richard 
Frank, Thomas McGuire, and Richard Hermann, “Risk Adjustment 
Alternatives in Paying for Behavioral Health Care Under Medicaid,” 
Health Services Research, Volume 36, No. 4, 2001. 

[19] Funds in the National Reserve Fund not needed for supplemental 
allocations can be used for other purposes. 

[20] We asked network directors if they expected to request 
supplemental allocations under these conditions: VERA’s design, 
current enrollment, and third-party policies remain the same and 
budget increases are consistent with recent years. 

[21] RAND, An Analysis of the Veterans Equitable Resource Allocation 
(VERA) System (Santa Monica, California, 2001), pp. 24-28. RAND 
discusses barriers that some networks may face to achieve the 
efficiencies VERA incentives provide because of difficulties in 
consolidating facilities. 

[22] John Holahan, Suresh Rangarajan, and Matthew Schirmer, Medicaid 
Managed Care Payment Methods and Capitation Rates: Results of a 
National Survey, Urban Institute, May 1999, p. 21. 

[End of section] 

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