Veterans Medical System Faces Serious Funding, Management Challenges

Government Executive

January 16, 2008 – Few federal programs have seen the kind of turnaround experienced by the Veterans Affairs Department’s health care system in the late 1990s. Formerly a poster child for substandard medical care and incompetent management, VA’s health care system now is considered by many to be the best in the country. Its ratings for quality of care and customer satisfaction have risen even as the patient load has increased. Major media outlets have credited the agency’s use of electronic medical records, unprecedented even in the private sector, with improving medical care, and Democratic presidential contenders Hillary Clinton and Barack Obama have held up VA’s system as a model for nationwide health care reform.

But the department’s success is in jeopardy, according to Dr. Kenneth Kizer, undersecretary for health at Veterans Affairs from 1994 to 1999 and the man many credit with leading the management reforms that ultimately fixed the broken health care system. Kizer now serves on the independent Commission on the Future of America’s Veterans, which is examining demographic and budgetary trends, as well as changes in both warfare and health care, with an eye to providing the most effective programs and services to veterans.

“We see a future that is not particularly bright for the VA,” said Kizer, speaking at a forum in Washington sponsored by the New America Foundation, a nonprofit public policy institute. Rising medical costs, aging infrastructure and an increase in patients with serious, and expensive, medical needs all are contributing to growing concern that medical care for veterans will deteriorate under the current system.

“Economics are going to be driving some very difficult decision-making down the road,” Kizer said. For that reason, the commission is planning to recommend later this year that Congress create a government-chartered entity, structured somewhat like the U.S. Postal Service, to manage health care for veterans, he said. The entity’s charter would detail its mission, funding, governance and assets, as well as requirements that senior managers hold specific skill sets and areas of expertise.

As a federal agency dependent on congressional appropriations, Veterans Affairs is increasingly ill-suited to manage health care for veterans, Kizer said. The annual appropriations process creates program instability and prevents strategic planning. In addition, the agency cannot exercise the kind of management judgment that corporations routinely exercise.

For example, VA has found it extraordinarily difficult to close underused or outdated hospitals since no member of Congress wants to lose a medical facility in his or her district, Kizer said. As a result, the agency can’t close hospitals in areas where they’re not needed or build new ones in areas where they are needed.

“The average age of VA hospitals is 50 years old,” said William Diefenderfer, former deputy director of the Office of Management and Budget and now a commissioner. “We haven’t built a new hospital in 20 years. We need a new hospital in Orlando, but we haven’t been able to do it.”

A government-chartered entity “would have the authority to buy and sell assets and borrow money against them,” Diefenderfer said. It also would be able to create new sources of revenue. For example, it could provide health care to all veterans and their families who have the ability to pay – something the VA cannot do currently.

Arthur Hamerschlag, former chief of staff at the Veterans Health Administration, the health care arm of Veterans Affairs, said he was not necessarily opposed to the creation of a government-chartered health system for veterans, but that a number of issues would first need to be resolved, including how the new entity would negotiate drug prices and whether or not it would accept Medicare – something VHA does not do now.

Veterans Affairs has been able to hold down drug costs because federal law allows the agency to negotiate below-market prices from pharmaceutical companies, something private health care systems would likely protest if a new quasi-private entity were created that could compete for patients, as the commission envisions.

“I think VA will find itself in the medical marketplace in a way it does not now,” said Hamerschlag. “That’s not necessarily a bad thing, but it will require a different skill set.”

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