This is the accessible text file for GAO report number GAO-06-430R 
entitled 'VA Health Care: Preliminary Findings on the Department of 
Veterans Affairs Health Care Budget Formulation for Fiscal Years 2005 
and 2006' which was released on February 7, 2006. 

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February 6, 2006: 

The Honorable Steve Buyer: 
Committee on Veterans' Affairs: 
House of Representatives: 

The Honorable Daniel K. Akaka: 
Ranking Minority Member: 
Committee on Veterans' Affairs: 
United States Senate: 

The Honorable Richard J. Durbin: 
The Honorable Patty Murray: 
The Honorable Ken Salazar: 
United States Senate: 

Subject: VA Health Care: Preliminary Findings on the Department of 
Veterans Affairs Health Care Budget Formulation for Fiscal Years 2005 
and 2006: 

This report documents the information we provided to you in a briefing 
on February 2, 2006, in response to your request concerning the 
Department of Veterans Affairs (VA) internal budget formulation 
process. (See enclosure.) This includes information that VA develops 
for its budget submission to the Office of Management and Budget (OMB), 
but it does not include information on subsequent interactions that 
occur between VA and OMB. We will do additional work to incorporate 
information from OMB and complete our analysis in a report to be issued 
at a later date. You requested information on VA's budget formulation 
process because of your interest in ensuring that VA's budget forecasts 
are accurate and based on valid patient estimates. 

As you know, VA provides a uniform set of medical benefits to eligible 
veterans. If sufficient resources are not available to provide care 
that is timely and acceptable in quality, VA is required to restrict 
medical benefits based on veterans' eligibility priorities.[Footnote 1] 
VA also provides other services, such as nursing home care, to certain 
veterans. VA's provision of medical care is dependent upon the 
availability of appropriations. For fiscal year 2005, Congress 
appropriated $31.5 billion for all of VA's medical programs, and VA 
provided medical care to about 5 million veterans. During fiscal year 
2005, the President requested a $975 million supplemental request for 
that fiscal year and a $1.977 billion amendment to the President's 
budget request for fiscal year 2006. In congressional testimonies in 
the summer of 2005, VA stated that its actuarial model understated 
growth in patient workload and services and the resources required to 
provide these services.[Footnote 2] 

In response to your request for information on VA's internal budget 
formulation process, this report provides the following for fiscal 
years 2005 and 2006: 

* A description of VA's process for developing its budget submission to 
OMB for its medical programs, and the role of VA's actuarial model. 

* A description of the medical program activities cited by VA as 
needing additional funding, and how VA identified these activities. 

* Key factors in VA's budget formulation process that contributed to 
the requests for additional funding. 

To conduct our work, we interviewed VA officials, including those in 
the Veterans Health Administration's Office of the Chief Financial 
Officer and Office of the Assistant Deputy Under Secretary for Health 
for Policy and Planning. We also interviewed officials in VA's Office 
of the Deputy Assistant Secretary for Budget. We also analyzed 
documents concerning VA's actuarial model, budgetary data, and workload 
and expenditure data and reviewed our past work. We tested the 
reliability of the data and determined they were adequate for our 
purposes. We have not yet met with OMB officials to discuss the budget 
formulation process for fiscal years 2005 and 2006 and the President's 
subsequent request for additional appropriations. We conducted our 
review from October 2005 through January 2006 in accordance with 
generally accepted government auditing standards. 

Results in Brief: 

VA's internal process for formulating the medical programs funding 
requests was informed by, but not driven by, projected demand. VA 
projected costs based on projected demand for medical care under 
current policy. Throughout the process, VA compared projected costs to 
its anticipated request level for the OMB submission and made 
adjustments to address the difference. VA officials stated that this 
was done in two ways: through cost-saving policy proposals, such as 
assessing an annual health care enrollment fee, and management 
efficiencies.[Footnote 3] After making adjustments to address the 
difference between projected costs and its anticipated request level, 
VA developed its budget submission for OMB. 

VA later cited a number of activities as needing additional funding 
based on programmatic priorities and an analysis of expenditure data. 
Among the activities that were cited for fiscal year 2005 was $273 
million for veterans returning from Iraq and Afghanistan; $226 million 
for long-term care; and almost $400 million for increases in the number 
of patients, as well as increases in both utilization and intensity of 
care. For the fiscal year 2006 budget, VA cited $677 million to cover a 
2 percent increase in the number of patients, $600 million to correct 
VA's estimate for long-term care costs, $400 million for an unexpected 
1.2 percent increase in average cost per patient, and $300 million to 
replace funds VA planned to carry over from fiscal year 2005 to fiscal 
year 2006. VA officials said that they chose to highlight activities 
that were of high programmatic priority and could be supported by 
workload and expenditure data (e.g. veterans returning from Iraq and 
Afghanistan). They also reviewed spending and workload trends to 
determine whether spending trends were on target or whether adjustments 
were needed. 

An unrealistic assumption, errors in estimation, and insufficient data 
were key factors in VA's budget formulation process that contributed to 
the requests for additional funding. According to VA, an unrealistic 
assumption about the speed with which VA could implement a policy to 
reduce nursing home patient workload in VA-operated nursing homes for 
fiscal year 2005 led to a need for additional funds. VA officials told 
us that errors in estimating the effect of a nursing home policy to 
reduce workload in all three of its nursing home settings--VA-operated 
nursing homes, community nursing homes, and state veterans' nursing 
homes--accounted for a request for additional funding for fiscal year 
2006. VA officials said that the error resulted from calculations being 
made in haste during the OMB appeal process. Finally, VA officials told 
us that insufficient data on certain activities contributed to the 
requests for additional funds for both years. For example, inadequate 
data on veterans returning from Iraq and Afghanistan resulted in an 
underestimate in the initial funding request. 

Agency Comments: 

We requested comments on a draft of the enclosed briefing slides from 
VA. VA provided us with technical comments on the briefing slides, 
which have been incorporated as appropriate. 

We are sending copies of this report to the Secretary of Veterans 
Affairs, the Director of the Office of Management and Budget, and 
appropriate congressional committees. We will also provide copies to 
others upon request. In addition, the report is available at no charge 
on GAO's home page at Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. 

If you and your staff have any questions or need additional 
information, please contact me at (202) 512-7101, or 
Major contributors to this letter were James Musselwhite, Assistant 
Director; Denise Fantone; Michael Kendix; Dean Koulouris; Tiffany 
Tanner; Thomas Walke; and Greg Whitney. 

Signed by: 

Laurie E. Ekstrand: 

Director, Health Care: 


[See PDF for images] 

[End of slide presentation] 

[End of section] 



[1] Priority categories are generally determined on the basis of 
service-connected disability and income. There are currently eight 
priority categories. VA used this system to restrict enrollment in 
January 2003 to no longer allow Priority 8 veterans, those in the 
lowest priority category who generally do not have service-connected 
disabilities or low income, to enroll. This policy remains in effect. 

[2] Senate Committee on Veterans' Affairs, Statement of the Secretary, 
Department of Veterans Affairs, Emergency Hearing to Examine the 
Shortfall in VA's Medical Care Budget, 109TH Congress, June 28, 2005; 
House Committee on Veterans' Affairs, Statement of the Secretary, 
Department of Veterans Affairs, Full Committee Hearing on the 
Department of Veterans Affairs Health Care Budget, 109TH Congress, June 
30, 2005; and House Committee on Veterans' Affairs, Statement of the 
Under Secretary for Health, Department of Veterans Affairs, Full 
Committee Hearing on the Department of Veterans Affairs Proposed Health 
Care Budget Amendment for Fiscal Year 2006, 109TH Congress, July 21, 

[3] See GAO, Veterans Affairs: Limited Support for Reported Health Care 
Management Efficiency Savings, GAO-06-359R (Washington, D.C.: Feb. 1, 

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