July 1999

In 1995, the Department of Veterans Affairs (VA) health-care system began to transform itself from a confederation of individual medical centers and clinics focused primarily on inpatient care to a fully integrated system that promotes and expands primary and ambulatory health care. To accomplish this, 22 management hubs, called Veterans Integrated Service Networks (VISNs), were created to administer the patient-centered health-care services VA provides to the nation's 25 million veterans.

This transformation, along with the shift in the veterans' population and tighter budgets, called for a new approach in allocating the department's $17 billion medical care budget. The new funding distribution methodology, the Veterans Equitable Resource Allocation (VERA), corrects historic geographic funding imbalances by allocating funds fairly according to the number of veterans having the highest priority for health care. To minimize impact and aid management of the change, the full shift of resources is being phased in, depending on the VISN, and is expected to be completed in FY 2002.

The new funding system replaced VA's Resource Planning and Management system, which had projected workload to determine funding for each VA medical facility. In 1996, VA began to move resource allocation away from facility-specific prices for workload reimbursement to national prices as a first step toward capitated (per-patient) rates. A blended rate was used in 1996, reflecting a combination of local unit prices for care, regional rates, a national unit price, and other factors.

Effective April 1, 1997, under VERA, funds allocated to the 22 networks were based on two different types of patients -- those with "routine" health-care needs (Basic Care) and those with special, typically long-term, needs that are more expensive (Special Care). For FY 1999, the Basic Care component was divided into two sub-components, each assigned a different price. One category, consisting of single outpatient visits, is funded at the rate of $66. All other Basic Care has a price of $2,857. The "Special Care" component of VERA was renamed as "Complex Care" to more accurately reflect the fact that it includes more than VA's traditional "Special Care" patients. The FY 1999 price for Complex Care is $36,955.

Other improvements were made in FY 1999, including refinement of the geographic price adjustment, research support, education support, equipment funding and non-recurring maintenance adjustments.

The geographic price adjustment is based on labor costs paid by VA facilities as they compare to a VA national average salary. For FY 1999, the adjustment for labor is based on the most recent four pay periods during FY 1998. This is being used in place of cumulative actual year-end FY 1997 personal services data because it more accurately reflects current staffing levels among the networks. The geographic price index does not include the effect of holiday, standby, and overtime pay, so that the index reflects more truly the network's controllable payroll.

Resource Allocation--Page 2

In 1997 and 1998, research support was computed by determining each network's portion of VA and non-VA research dollars, based on the previous year's total research dollars. Starting in FY 1999, the workload allocation factor for the distribution of the VERA research support dollars changed from crediting 100 percent of the total amount of the funded research reported by the networks to a revision that rewards VA-administered research. This change credits VA-administered research at 100 percent; non-VA funded, non-VA administered, peer-reviewed research at 75 percent; and other non-VA sponsored research at 25 percent. VA-administered research is encouraged by VERA so that an incentive exists to have VA administer more of the non-VA research dollars. This results in better accountability, and in an increased likelihood that VA will recover indirect costs.

The VERA system also accounts for veterans who receive care in more than one network during the year. Seasonal moves by veterans mean higher usage of medical centers in warmer climates during the winter months. Network budgets are adjusted accordingly, based on the historical usage patterns and cost for these veterans.

As a result of VERA, veterans will have improved access to care, improved quality of care and a wider spectrum of services available. No veteran currently receiving care will be denied care as a result of VERA's implementation.

The VERA system supports VA's goals of:

-- treating the greatest number of veterans who have the highest priority for health care, and allocating funds equitably based on the number of veterans having the highest priority;

-- recognizing the sometimes special health-care needs of veterans;

-- improving accountability in expenditures for research and education support;

-- complying with congressional mandates;

-- creating an understandable resource allocation system that is reasonably predictable; and

-- aligning resource allocation policies to the best practices in health care.

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