This report documents the information we provided to Congress in a briefing on February 2, 2006, in response to a request concerning the Department of Veterans Affairs (VA) internal budget formulation process. 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. Congress requested information on VA’s budget formulation process because of its interest in ensuring that VA’s budget forecasts are accurate and based on valid patient estimates. In response to the request for information on VA’s internal budget formulation process, this report provides the following for fiscal years 2005 and 2006: (1) 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; (2) a description of the medical program activities cited by VA as needing additional funding, and how VA identified these activities; and (3) key factors in VA’s budget formulation process that contributed to the requests for additional funding.
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. 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.