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900 | s reimburse SCHs using the greater of either a cost-based amount or the allowed amount under a DRG-based payment system. However, each program takes a different approach in implementing these methods. Medicare reimburses each SCH based on which of the following methods yields the greatest aggregate payment for that hospital: (1) the updated hospital-specific rate based on cost per discharge from fiscal year 1982, (2) the updated hospital-specific rate based on cost per discharge from fiscal year 1987, (3) t |
901 | he updated hospital-specific rate based on cost per discharge from fiscal year 1996, (4) the updated hospital-specific rate based on cost per discharge from fiscal year 2006, or (5) the IPPS hospital-specific DRG rate payment. Medicare’s reimbursement rules also include payment adjustments that SCHs may receive under special programs or circumstances, such as adjustments to SCHs that experience significant volume decreases. Beginning January 1, 2014, TRICARE began reimbursing SCHs based upon the greater of |
902 | (1) the SCH’s Medicare cost-to-charge ratio, or (2) TRICARE’s DRG-based payment system. The Medicare cost-to-charge ratio that TRICARE uses is calculated for each hospital by CMS and is distinct from the historical hospital-specific rates based on the cost per discharge that Medicare uses to reimburse SCHs. Under TRICARE’s revised rules for SCHs, the cost-to-charge ratio will be multiplied by each hospital’s billed charges to determine its reimbursement amount. Also, at the end of each year, DHA calculates |
903 | the aggregate amount that each SCH would have been reimbursed under TRICARE’s DRG-based payment system, which it uses to reimburse other hospitals that provide inpatient care to TRICARE beneficiaries. If an SCH’s aggregate reimbursement would have been more under this system than it would have using the Medicare cost-to-charge ratio, DHA pays the SCH the difference. TRICARE’s revised reimbursement rules also include payment adjustments that SCHs may receive under special circumstances, although the specific |
904 | TRICARE adjustments differ from those available under Medicare. For example, effective with the revised reimbursement rules, SCHs may qualify for a General Temporary Military Contingency Payment Adjustment if they meet certain criteria, including serving a disproportionate share of active duty servicemembers and their dependents—10 percent or more of the SCH’s total admissions. At the time of our review, DHA officials did not have an estimate of the number of SCHs that would qualify for this adjustment. Un |
905 | der TRICARE’s revised rules, some SCHs—which were previously reimbursed at up to 100 percent of their billed charges—will eventually be reimbursed at 30 to 50 percent of their billed charges. In order to minimize sudden significant reimbursement reductions on SCHs, DHA’s revised rules include a transition period to the new reimbursement levels for most SCHs. Eligible SCHs are reimbursed using an individually derived base-year ratio that is reduced annually until it matches the SCH’s Medicare cost-to-charge |
906 | ratio that CMS has calculated for each hospital. For each hospital designated as an SCH during fiscal year 2012, DHA calculated a base-year ratio of their allowed-to-billed charges using fiscal year 2012 TRICARE claims data. Based on these calculations, each SCH fell into one of two categories: (1) SCHs with base-year ratios higher than their Medicare cost-to-charge ratios, or (2) SCHs with base- year ratios lower than, or equal to, their Medicare cost-to-charge ratios. Most SCHs fell into the first categor |
907 | y with base-year ratios higher than their Medicare cost-to-charge ratios (339 or 74 percent), which qualified them for a transition period. For these SCHs, their base-year ratios are reduced annually based on their network participation status, and their modified ratios are multiplied by their billed charges beginning January 1, 2014. Specifically, a nonnetwork SCH has no more than a 15 percentage point reduction each year, while a network SCH has no more than a 10 percentage point reduction as its reimburs |
908 | ement level declines to its respective Medicare cost-to-charge ratio. The length of the transition period differs for each SCH and is determined by the difference between its base-year ratio and its Medicare cost-to-charge ratio, and its network status. Figure 1 shows an example of the transition for a network SCH with a 95 percent base-year ratio that is transitioning to a Medicare cost- to-charge ratio of 40 percent. As a network provider, the SCH’s base-year ratio would be reduced by 10 percentage points |
909 | to 85 percent during the first year of implementation of the revised rules and would continue to be reduced until its reimbursement ratio matches the SCH’s Medicare ratio 5 years later. Twenty-four percent (111 of 459) of the hospitals that were designated as SCHs during fiscal year 2012 with base-year ratios less than or equal to their Medicare cost-to-charge ratios did not qualify for a transition period because either their reimbursement increased to their Medicare cost-to- charge ratio, or they continu |
910 | ed to be reimbursed at their Medicare cost-to- charge ratio. Similarly, about 2 percent (9 of 459) of the hospitals that were not designated as SCH in fiscal year 2012 also did not qualify for a transition period. Instead, these SCHs are now reimbursed using their Medicare cost-to-charge ratio in accordance with TRICARE’s revised reimbursement rules. Once an SCH reaches its Medicare cost-to-charge ratio, TRICARE reimburses labor, delivery, and nursery care services at 130 percent of this ratio. This rule is |
911 | based on DHA’s assessment that Medicare’s ratio does not accurately reflect the costs for these services. According to TRICARE’s fiscal year 2013 claims data, 120 SCHs (approximately 30 percent of all SCHs) were already reimbursed using rates that were at or below their Medicare cost-to-charge ratios. Because most SCHs have just completed the first year of a multi-year transition, it is too early to determine the full effect of the revised reimbursement rules on SCHs, including any effect on TRICARE benefi |
912 | ciaries’ ability to obtain care at these hospitals. Nonetheless, early indications show that TRICARE beneficiaries have not experienced problems accessing inpatient care at these facilities. For fiscal year 2013, we found that overall TRICARE reimbursements for SCHs averaged less than 1 percent of their net patient revenue, with TRICARE beneficiaries making up just over 1 percent of their total discharges. We also found that the majority of SCHs—58 percent (265 of 459)—had fewer than 20 TRICARE admissions d |
913 | uring this time while 10 percent (44 of 459) had 100 or more TRICARE admissions. As a result, the impact of TRICARE’s revised reimbursement rules may likely be small for most SCHs. Figure 2 illustrates a breakdown of the 459 SCHs by their fiscal year 2013 TRICARE admissions. DHA officials reported that they do not think access to inpatient care at SCHs will be an issue because hospitals that participate in the Medicare program are required to participate in the TRICARE program and serve its beneficiaries. O |
914 | fficials from the 10 SCHs we identified as having the highest number of TRICARE admissions, the highest reimbursement amounts, or both, told us that they provide care to all patients, including TRICARE beneficiaries—although some of them were not familiar with this requirement. TRICARE reimbursement for these SCHs ranged from about 2 to 12 percent of their net patient revenue, and TRICARE beneficiaries accounted for about 1 to 27 percent of their total discharges. See table 1 for TRICARE percentages of net |
915 | patient revenue and total discharges for each of these SCHs. However, TRICARE beneficiaries’ access to care at SCHs could be affected if these hospitals reduced or eliminated their inpatient services. The SCH officials we spoke with told us that they had not reduced the inpatient services available at their hospitals as a result of TRICARE’s revised reimbursement rules. However, officials at two SCHs did express concerns about future difficulties maintaining their current level of operations as they face fu |
916 | rther reductions in reimbursements not only from TRICARE, but also from other sources, such as Medicare and Medicaid. These officials said that they are concerned about their facilities’ long-term survival. Given the current environment of decreasing reimbursements, some SCHs we interviewed reported taking proactive steps, such as eliminating equipment maintenance contracts, to help offset the reimbursement reductions. Officials from one facility we interviewed told us that they are considering an option to |
917 | partner with another SCH as a way to increase efficiency. TRICARE beneficiaries’ demand for inpatient care at SCHs also may be affected by the availability of inpatient care from their respective military installation. We found that 24 of the 44 SCHs we identified as having 100 or more TRICARE admissions in fiscal year 2013—about half—were within 40 miles of a military installation that only had an outpatient clinic. (See appendix II for a list of the 44 SCHs and their proximity to military hospitals and c |
918 | linics). As a result, servicemembers and their dependents in those locations may be more reliant on a nearby SCH for their inpatient care. We found that TRICARE inpatient admissions for these 24 facilities ranged from 101 to 2,178 in fiscal year 2013, and 6 of them were among the 10 SCHs that we interviewed because they had the highest number of TRICARE admissions, the highest reimbursement amounts, or both. Officials from these 6 SCHs told us that nearby TRICARE beneficiaries tend to rely on their faciliti |
919 | es for certain types of inpatient services, such as labor and delivery. See figure 3 for additional information about SCHs with 100 or more TRICARE admissions and their proximity to military hospitals and clinics. We also found that 12 of the 44 SCHs with 100 or more admissions were located fewer than 40 miles from a military hospital. TRICARE admissions for these facilities ranged from 117 to 2,364 in fiscal year 2013. Three of these SCHs—which are located near Naval hospitals in North Carolina and South C |
920 | arolina—were among the 10 SCHs with the highest number of TRICARE admissions or the highest numbers of both admissions and reimbursement that we interviewed. An official with Naval Hospital Camp Lejeune (North Carolina) told us the hospital relies on local SCHs because it is either unable to meet their beneficiaries’ demand for certain services, such as obstetric care, or because the SCHs offer services not available at the Naval hospital, such as some cardiac care. Naval Hospital Beaufort (South Carolina) |
921 | provides limited inpatient services, and according to an official there, most of that hospital’s beneficiaries obtain inpatient care at the local SCH, including intensive care, all pediatric care, maternity and newborn care, and certain types of specialty care not provided at the Naval hospital (neurology, cardiology, and gastroenterology). We also interviewed officials at two additional military hospitals—Naval Hospital Lemoore (California) and Naval Hospital Oak Harbor (Washington)—that had eliminated all |
922 | or most of their inpatient care and were within 40 miles of an SCH. These officials told us that they rely more on other hospitals that are closer to their installations than the SCHs. For example, an official with Naval Hospital Lemoore told us that Lemoore currently has a resource sharing agreement with another hospital, which is closer to them than the nearby SCH. This agreement allows military providers with privileges to deliver babies for TRICARE beneficiaries at that facility. Officials from Naval H |
923 | ospital Oak Harbor told us that their hospital tends to utilize three smaller facilities closer to it than the SCH depending on the type of service needed. DHA and managed care support contractor officials told us that they have not heard of concerns or issues with beneficiary access at SCHs resulting from the revised reimbursement rules. DHA officials reported that they do not think access to inpatient care at SCHs will be an issue because hospitals that participate in the Medicare program are required to |
924 | participate in the TRICARE program and serve its beneficiaries. DHA officials told us they track access issues pertaining to inpatient care at SCHs through concerns or complaints communicated to them through the TRICARE Regional Offices or directly from beneficiaries. As of February 2015, these officials told us they have not received any such complaints. They noted that they are looking at ways to measure changes in access to care at these facilities, possibly by comparing the number of discharges from one |
925 | year to the next. Although their plans are under development, officials stated that they will likely focus on the 44 SCHs that had 100 or more TRICARE admissions. Officials from DHA’s TRICARE Regional Offices and the managed care support contractors also told us that they have not received complaints or heard of issues from beneficiaries about their ability to access inpatient care at SCHs. In addition, officials from national health care associations and military beneficiary coalition groups that we spoke |
926 | with also reported that they have not heard any concerns about access to care at SCHs resulting from TRICARE’s revised reimbursement rules. We provided a draft of this report to DOD for comment. DOD responded that it agreed with the report’s findings, and its comments are reprinted in appendix III. DOD also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Defense and appropriate congressional committees. In addition, the report will |
927 | be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix IV. We obtained TRICARE claims data on the number of admissions and reimbursement amounts for each sole community hospital (SCH) for fiscal year 201 |
928 | 3. We used these data to select the eight SCHs with the highest number of TRICARE admissions and the eight SCHs with the highest reimbursement amounts. Due to overlap, the number of unique SCHs we selected totaled 10. We interviewed officials at those hospitals about the change in TRICARE reimbursement rules and any resulting effect on access to care. Sole community hospital (SCH) 8 SCHs that were 40 miles or more from a military outpatient clinic or hospital Fiscal Year (FY) 2013 TRICARE admissions 40 mile |
929 | s from a military outpatient clinic(s) military hospital(s) Sole community hospital (SCH) 12 SCHs that were less than 40 miles from a military hospital or a hospital and an outpatient clinic Fiscal Year (FY) 2013 TRICARE admissions outpatient clinic(s) military hospital(s) Debra A. Draper, Director, (202) 512-7114 or [email protected]. In addition to the contact name above, Bonnie Anderson, Assistant Director; Jennie Apter; Jackie Hamilton; Natalie Herzog; Giselle Hicks; Sylvia Diaz Jones; and Eric Wedum made |
930 | key contributions to this report. |
931 | Although VA has been authorized to collect third-party health insurance payments since 1986, it was not allowed to use these funds to supplement its medical care appropriations until enactment of the Balanced Budget Act of 1997. Part of VA’s 1997 strategic plan was to increase health insurance payments and other collections to help fund an increased health care workload. The potential for increased workload occurred in part because the Veterans’ Health Care Eligibility Reform Act of 1996 authorized VA to pr |
932 | ovide certain medical care services not previously available to higher-income veterans or those without service-connected disabilities. VA expected that the majority of the costs of their care would be covered by collections from third-party payments, copayments, and deductibles. These veterans increased from about 4 percent of all veterans treated in fiscal year 1996 to about a quarter of VA’s total patient workload in fiscal year 2002. VA can bill insurers for treatment of conditions that are not a result |
933 | of injuries or illnesses incurred or aggravated during military service. However, VA cannot bill them for health care conditions that result from military service, nor is it generally authorized to collect from Medicare or Medicaid, or from health maintenance organizations when VA is not a participating provider. To collect from health insurers, VA uses five related processes to manage the information needed to bill and collect. The patient intake process involves gathering insurance information and verify |
934 | ing that information with the insurer. The medical documentation process involves properly documenting the health care provided to patients by physicians and other health care providers. The coding process involves assigning correct codes for the diagnoses and medical procedures based on the documentation. Next, the billing process creates and sends bills to insurers based on the insurance and coding information. Finally, the accounts receivable process includes processing payments from insurers and followi |
935 | ng up with insurers on outstanding or denied bills. In September 1999, VA adopted a fee schedule, called “reasonable charges.” Reasonable charges are itemized fees based on diagnoses and procedures. This schedule allows VA to more accurately bill for the care provided. However, by making these changes, VA created additional bill- processing demands—particularly in the areas of documenting care, coding that care, and processing bills per episode of care. First, VA must accurately assign medical diagnoses and |
936 | procedure codes to set appropriate charges, a task that requires coders to search through medical documentation and various databases to identify all billable care. Second, VA must be prepared to provide an insurer supporting medical documentation for the itemized charges. Third, in contrast to a single bill for all the services provided during an episode of care under the previous fee schedule, under reasonable charges VA must prepare a separate bill for each provider involved in the care and an additiona |
937 | l bill if a hospital facility charge applies. For fiscal year 2002, VA collected $687 million in insurance payments, up 32 percent compared to the $521 million collected during fiscal year 2001. Collections through the first half of fiscal year 2003 total $386 million in third-party payments. The increased collections in fiscal year 2002 reflected that VA processed a higher volume of bills than it did in the prior fiscal year. VA processed and received payments for over 50 percent more bills in fiscal year |
938 | 2002 than in fiscal year 2001. VA’s collections grew at a lower percentage rate than the number of paid bills because the average payment per paid bill dropped 18 percent compared to the prior fiscal year. Average payments dropped primarily because a rising proportion of VA’s paid bills were for outpatient care rather than inpatient care. Since the charges for outpatient care were much lower on average, the payment amounts were typically lower as well. Although VA anticipated that the shift to reasonable ch |
939 | arges in 1999 would yield higher collections, collections had dropped in fiscal year 2000. VA attributed that drop to its being unprepared to bill under reasonable charges, particularly because of its lack of proficiency in developing medical documentation and coding to appropriately support a bill. As a result, VA reported that many VA medical centers developed billing backlogs after initially suspending billing for some care. As shown in figure 1, VA’s third-party collections increased in fiscal year 2001 |
940 | —reversing fiscal year 2000’s drop in collections—and increased again in fiscal year 2002. After initially being unprepared in fiscal year 2000 to bill reasonable charges, VA began improving its implementation of the processes necessary to bill and increase its collections. By the end of fiscal year 2001, VA had submitted 37 percent more bills to insurers than in fiscal year 2000. VA submitted even more in fiscal year 2002, as over 8 million bills—a 54 percent increase over the number in fiscal year 2001—we |
941 | re submitted to insurers. Managers we spoke with in three networks—Network 2 (Albany), Network 9 (Nashville), and Network 22 (Long Beach)—mainly attributed the increased billings to reductions in the billing backlogs. Networks 2 (Albany) and 9 (Nashville) reduced backlogs, in part by hiring more staff, contracting for staff, or using overtime to process bills and accounts receivable. Network 2 (Albany), for instance, managed an increased billing volume through mandatory overtime. Managers we interviewed in |
942 | all three networks noted better medical documentation provided by physicians to support billing. In Network 22 (Long Beach) and Network 9 (Nashville), revenue managers reported that coders were getting better at identifying all professional services that can be billed under reasonable charges. In addition, the revenue manager in Network 2 (Albany) said that billers’ productivity had risen from 700 to 2,500 bills per month over a 3-year period, as a result of gradually increasing the network’s productivity s |
943 | tandards and streamlining their jobs to focus solely on billing. VA officials cited other reasons for the increased number of bills submitted to insurers. An increased number of patients with billable insurance was one reason for the increased billing. In addition, a May 2001 change in the reasonable-charges fee schedule for medical evaluations allowed separate bills for facility charges and professional service charges, a change that contributed to the higher volume of bills in fiscal year 2002. Studies ha |
944 | ve suggested that operational problems—missed billing opportunities, billing backlogs, and inadequate pursuit of accounts receivable—limited VA’s collections in the years following the implementation of reasonable charges. For example, a study completed last year estimated that 23.8 percent of VA patients in fiscal year 2001 had billable care, but VA actually billed for the care of only 18.3 percent of patients. This finding suggests that VA could have billed for 30 percent more patients than it actually bi |
945 | lled. Further, after examining activities in fiscal years 2000 and 2001, a VA Inspector General report estimated that VA could have collected over $500 million more than it did. About 73 percent of this uncollected amount was attributed to a backlog of unbilled medical care; most of the rest was attributed to insufficient pursuit of delinquent bills. Another study, examining only professional-service charges in a single network, estimated that $4.1 million out of $4.7 million of potential collections was un |
946 | billed for fiscal year 2001. Of that unbilled amount, 63 percent was estimated to be unbillable primarily because of insufficient documentation. In addition, the study found that coders often missed services that should have been coded for billing. According to a CBO official, VA could increase collections by working on operational problems. These problems included unpaid accounts receivable and missed billing opportunities due to insufficient identification of insured patients, inadequate documentation to |
947 | support billing, and coding problems that result in unidentified care. From April through June 2002, three network revenue managers told us about backlogs and processing issues that persisted into fiscal year 2002. For example, although Network 9 (Nashville) had above average increases in collections for both inpatient and outpatient care, it still had coding backlogs in four of six medical centers. According to Network 9’s (Nashville) revenue manager, eliminating the backlogs for outpatient care would incr |
948 | ease collections by an estimated $4 million, or 9 percent, for fiscal year 2002. Additional increases might come from coding all inpatient professional services, but the revenue manager did not have an estimate because the extent to which coders are capturing all billable services was unknown. Moreover, although all three networks reported that physicians’ documentation for billing was improving, they also reported a continuing need to improve physicians’ documentation. In addition, Network 22 (Long Beach) |
949 | reported that its accounts receivable staff had difficulties keeping up with the increased volume of bills because it had not hired additional staff members or contracted help on accounts receivable. As a result of these operational limitations, VA lacks a reliable estimate of uncollected dollars, and therefore does not have the basis to assess its systemwide operational effectiveness. For example, some uncollected dollars result from billing backlogs and billable care missed in coding. In addition, VA does |
950 | not know the net impact of actual third-party collections on supplementing its annual appropriation for medical care. For example, CBO relies on reported cost data from central office and field staff directly involved in billing and collection functions. However, these costs do not include all costs incurred by VA in the generation of revenue. According to a CBO official, VA does not include in its collections cost the investments it has made in information technology or resources used in the identificatio |
951 | n of other health insurance during the enrollment process. VA continues to implement its 2001 Improvement Plan, which is designed to increase collections by improving and standardizing VA’s collections processes. The plan’s 24 actions are to address known operational problems affecting revenue performance. These problems include unidentified insurance for some patients, insufficient documentation for billing, coding staff shortages, gaps in the automated capture of billing data, and insufficient pursuit of |
952 | accounts receivable. The plan also addresses uneven performance across collection sites. The plan seeks increased collections through standardization of policy and processes in the context of decentralized management, in which VA’s 21 network directors and their respective medical center directors have responsibility for the collections process. Since management is decentralized, collections procedures can vary across sites. For example, sites’ procedures can specify a different number of days waited until |
953 | first contacting insurers about unpaid bills and can vary on whether to contact by letter, telephone, or both. The plan intends to create greater process standardization, in part, by requiring certain collections processes, such as the use of electronic medical records by all networks to provide coders better access to documentation and legible records. When fully implemented, the plan’s actions are intended to improve collections by reducing operational problems, such as missed billing opportunities. For e |
954 | xample, two of the plan’s actions—requiring patient contacts to gather insurance information prior to scheduled appointments and electronically linking VA to major insurers to identify patients’ insurance—are intended to increase VA’s awareness of its patients who have other health insurance. VA has implemented some of the improvement plan’s 24 actions, which were scheduled for completion at various times through 2003, but is behind the plan’s original schedule. The plan had scheduled 15 of the 24 actions f |
955 | or completion through May 25, 2002, but as of that date VA had only completed 8 of the actions. Information obtained from CBO in April 2003 indicates that 10 are complete and 7 are scheduled for implementation by the end of 2003. Implementation of the remaining actions will begin in 2004 as part of a financial system pilot with full implementation expected in 2005 or 2006. (Appendix I lists the actions and those VA reports as completed through April 28, 2003.) In May 2002, VHA established its CBO to undersc |
956 | ore the importance of revenue, patient eligibility, and enrollment and to give strategic focus to improving these functions. Officials in the office told us that they have developed a new approach for improving third-party collections that can help increase revenue collections by further revising processes and providing a new business focus on collections. For example, the CBO’s strategy incorporates improvements to the electronic transmission of bills and initiation of a system to receive and process third |
957 | -party payments electronically. CBO’s new approach also encompasses initiatives beyond the improvement plan, such as the one in the Under Secretary for Health’s May 2002 memorandum that directed all facilities to refer accounts receivable older than 60 days to a collection agency, unless a facility can document a better in-house process. According to the Deputy Chief Business Officer, the use of collection agencies has shown some signs of success—with outstanding accounts receivables dropping from $1,378 mi |
958 | llion to $1,317 million from the end of May to the end of July 2002, a reduction of about $61 million or 4 percent. CBO is in the process of acquiring a standardized Patient Financial Services System (PFSS) that could be shared across VA. VA’s goal with PFSS is to implement a commercial off-the-shelf health care billing and accounts receivable software system. Under PFSS, a unique record will be established for each veteran. Patient information will be standardized— including veteran insurance data, which w |
959 | ill be collected, managed, and verified. Receipts of health care products and services will be added to the patient records as they are provided or dispensed. And PFSS will automatically extract needed data for billing, with the majority of billings sent to payers without manual intervention. After the system is acquired, VA will conduct a demonstration project in Network 10 (Cincinnati). According to the Deputy Chief Business Officer, in May 2003 VA anticipates awarding a contract for the development and i |
960 | mplementation of PFSS. CBO’s plan is to install this automated financial system in other facilities and networks if it is successfully implemented in the pilot site. CBO is taking action on a number of other initiatives to improve collections, including the following: Planning and developing software upgrades to facilitate the health care service review process and electronically receive and respond to requests from insurers for additional documentation. Establishing the Health Revenue Center to centralize |
961 | preregistration, insurance identification and verification, and accounts receivable activities. For example, during a preregistration pilot in Network 11 (Ann Arbor), the Health Revenue Center made over 246,000 preregistration telephone calls to patients to verify their insurance information. According to VA, over 23,000 insurance policies were identified, resulting in $4.8 million in collections. Assessing its performance based on private sector performance metrics, including measuring the pace of collecti |
962 | ons relative to the amount of accounts receivable. As VA faces increased demand for medical care, particularly from higher- income veterans, third-party collections for nonservice-connected conditions remain an important source of revenue to supplement VA’s appropriations. VA has been improving its billing and collecting under a reasonable-charges fee schedule it established in 1999, but VA has not completed its efforts to address problems in collections operations. In this regard, fully implementing the 20 |
963 | 01 Improvement Plan could help VA maximize future collections by addressing problems such as missed billing opportunities. CBO’s initiatives could further enhance collections by identifying root causes of problems in collections operations, providing a focused approach to addressing the root causes, establishing performance measures, and holding responsible parties accountable for achieving the performance standards. Our work and VA’s continuing initiatives to improve collections indicate that VA has not co |
964 | llected all third-party payments to which it is entitled. In this regard, it is important that VA develop a reliable estimate of uncollected dollars. VA also does not have a complete measure of its full collections costs. Consequently, VA cannot determine how effectively it supplements its medical care appropriation with third-party collections. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or other members of the subcommittee may have. For further informati |
965 | on regarding this testimony, please contact Cynthia A. Bascetta at (202) 512-7101. Michael T. Blair, Jr. and Michael Tropauer also contributed to this statement. Certain actions are mandated in the plan, that is, are required, but these actions are not legal or regulatory mandates. One action item was cancelled but its intended improvements will be incorporated into an automated financial system initiative. VA designated the electronic billing project, shown here as “17a,” as completed. However, this indica |
966 | ted only partial completion of action 17, which includes an additional project. VA Health Care: Third Party Collections Rising as VA Continues to Address Problems in Its Collections Operations. GAO-03-145. Washington, D.C.: January 31, 2003. VA Health Care: VA Has Not Sufficiently Explored Alternatives for Optimizing Third-Party Collections. GAO-01-1157T. Washington, D.C.: September 20, 2001. VA Health Care: Third-Party Charges Based on Sound Methodology; Implementation Challenges Remain. GAO/HEHS-99-124. W |
967 | ashington, D.C.: June 11, 1999. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. |
968 | Under the TVA Act of 1933 (TVA Act), as amended, TVA is not subject to most of the regulatory and oversight requirements that commercial electric utilities must satisfy. The Act vests all authority to run and operate TVA in its three-member board of directors. Legislation also limits competition between TVA and other utilities. The TVA Act was amended in 1959 to establish what is commonly referred to as the TVA “fence,” which prohibits TVA, with some exceptions, from entering into contracts to sell power ou |
969 | tside the service area that TVA and its distributors were serving on July 1, 1957. In addition, the Energy Policy Act of 1992 (EPAct) provides TVA with certain protections from competition, called the “anti-cherry picking” provisions. Under EPAct, TVA is exempt from having to allow other utilities to use its transmission lines to transmit (“wheel”) power to customers within TVA’s service area. This legislative framework generally insulates TVA from direct wholesale competition. As a result, TVA remains in a |
970 | position similar to that of a regulated utility monopoly. EPAct’s requirement that utilities use their transmission lines to transmit wholesale electricity for other utilities has enabled wholesale customers to obtain electricity from a variety of competing suppliers, thus increasing wholesale competition in the electric utility industry across the United States. In addition, restructuring efforts in many states have created competition at the retail level. If, as expected, retail restructuring continues t |
971 | o occur on a state-by-state basis over the next several years, then industrial, commercial, and, ultimately, residential consumers will be able to purchase their power from one of several competitors rather than from one utility monopoly. Since EPAct exempts TVA from having to transmit power from other utilities to customers within its territory, TVA has not been directly affected by the ongoing restructuring of the electric utility industry to the same extent as other utilities. However, if the Congress we |
972 | re to eliminate TVA’s exemption from the wheeling provision of EPAct, its customers would have the option of purchasing their power from other sources after their contracts with TVA expire. Under the Clinton administration’s proposal in April 1999 to promote retail competition in the electric power industry, which TVA supported, TVA’s exemption from the wheeling provision of EPAct would have been eliminated after January 1, 2003. If this or a similar proposal is enacted, TVA may be required to use its trans |
973 | mission lines to transmit the power of other utilities for consumption within its service territory. A balancing factor is that recent proposals would have also removed the statutory restrictions that prevent TVA from selling wholesale power outside its service territory. Because of these ongoing restructuring efforts, TVA management, like many industry experts, expects that in the future TVA may lose its legislative protections from competition. TVA’s management recognized the need to act to better positio |
974 | n TVA to compete in an era of increasing competition and, in July 1997, issued a 10-year business plan with that goal in mind. TVA established a 10-year horizon because a majority of its long- term contracts with distributors could begin expiring at that time, and TVA could be facing greater competitive pressures by 2007. The plan contained three strategic objectives: reduce TVA’s cost of power in order to be in a position to offer competitively priced power by 2007, increase financial flexibility by reduci |
975 | ng fixed costs, and build customer allegiance. To help meet the first two strategic objectives noted above, one of the key goals of TVA’s 10-year plan was to reduce debt from its 1997 levels by about one-half, to about $13.2 billion. In addition, while not specifically discussed in the published plan, TVA planned to reduce the balance (i.e., recover the costs through rates) of its deferred assets from about $8.5 billion to $500 million, which TVA estimated to be the net realizable value of its deferred nucl |
976 | ear units. TVA planned to generate cash that could be used to reduce debt by increasing rates beginning in 1998, reducing expenses, and limiting capital expenditures; these actions would increase its financial flexibility and future competitiveness. TVA’s plan to reduce debt and recover the costs of deferred assets while it is still legislatively protected from competition was intended to help position TVA to achieve its ultimate goal of offering competitively priced power by 2007. In a competitive market, |
977 | if TVA’s power were priced above market because of high debt service costs and the recovery through rates of the costs of its deferred assets, it would be in danger of losing customers. Losing customers could result in stranded costs if TVA is unable to sell the capacity released by the departing customers to other customers for at least the same price. Stranded costs, as discussed later, are costs that are uneconomical to recover in a competitive environment due to regulatory changes. For each of the three |
978 | objectives addressed in this report, you asked us to answer specific questions. Regarding debt and deferred assets, you asked us to determine what progress TVA has made in achieving the goals of its 10-year business plan for reducing debt and deferred assets, and to what extent TVA has used the additional revenues generated from its 1998 rate increase to reduce debt and deferred assets. Regarding TVA’s financial condition, you asked us to compare TVA’s financial condition, including debt and fixed cost rat |
979 | ios, to neighboring investor-owned utilities (IOUs). Finally, regarding stranded costs, you asked us to (1) explain the link between TVA’s debt and its potential stranded costs, (2) determine whether TVA has calculated potential stranded costs for any of its distributors, and if so, determine the methodology it used, and (3) determine the options for recovering any potential stranded costs at TVA. We evaluated the progress TVA has made in achieving the debt reduction and recovery of deferred assets goals of |
980 | its 10-year plan, and determined the extent to which TVA is using revenue from its 1998 rate increase to reduce debt and recover the cost of its deferred assets, by interviewing TVA and Congressional Budget Office (CBO) officials; reviewing and analyzing various TVA reports and documents, including annual reports, audited financial statements, the original 10-year business plan and proposed revisions to it; and reviewing supporting documentation (analytical spreadsheets, etc.) and assumptions underlying TV |
981 | A’s 10-year plan. To determine TVA’s financial condition, we analyzed TVA’s debt and fixed costs, and then compared TVA to its likely competitors. To accomplish this, we obtained financial data for TVA and its likely competitors from their audited financial statements; computed and compared key financial ratios for TVA and its likely competitors; analyzed data on the future market price of power; interviewed TVA officials about their efforts to position themselves competitively, including their efforts to r |
982 | educe debt, recover the cost of their deferred assets, and mitigate and/or recover stranded costs; and reviewed IOU annual reports to determine what steps the IOUs are taking to financially position themselves for competition. To assess TVA’s potential stranded costs, we interviewed industry experts at the Federal Energy Regulatory Commission (FERC), Edison Electric Institute (EEI), and CBO on the options other utilities have pursued to recover stranded costs; reviewed Energy Information Administration (EIA |
983 | ) documents on stranded cost recovery at the state level; questioned TVA officials on TVA’s plans for calculating and recovering potential stranded costs; and analyzed TVA’s contracts to determine whether TVA has contractually relieved its customers of any obligation to pay for any stranded costs. Also, to determine the link between TVA’s debt and its potential stranded costs, we analyzed the interrelationship between debt reduction and stranded cost mitigation. Additional information on our scope and metho |
984 | dology is in appendix I. We conducted our review from April 2000 through January 2001 in accordance with generally accepted government auditing standards. To the extent practical, we used audited financial statement data in performing our analyses, or reconciled the data we used to audited financial statements; however, we were not able to do so in all cases and we did not verify the accuracy of all the data we obtained and used in our analyses. In addition, we based information on debt reduction, deferred |
985 | asset recovery, and the future market price of power on TVA’s planned revisions to its key goals and assumptions at the time of our review. We requested written comments from TVA on a draft of this report. TVA provided both technical comments, which we have incorporated, as appropriate and written comments, which are reproduced in appendix III. In April 1999, we reported that capital expenditures not accounted for in the 1997 plan would negatively impact TVA’s ability to achieve its plans to reduce debt and |
986 | recover the cost of deferred assets by 2007. At that time, TVA’s fiscal year 2000 federal budget request acknowledged that TVA would not achieve its goal of reducing outstanding debt by about half until 2009, 2 years later than originally planned. TVA’s goal in its original plan was to reduce debt to about $13.2 billion. Since April 1999, TVA has fallen further behind in meeting its debt reduction goal. TVA now has a target of reducing debt to $19.6 billion by 2007; it no longer is projecting a target for |
987 | debt reduction beyond 2007. For fiscal years 1998 through 2000, TVA reduced its debt by about $1.4 billion. However, TVA’s debt reduction shortfall also totaled about $1.4 billion, which resulted from greater than anticipated capital expenditures and annual operating and other expenses and lower revenues than projected in 1997. These same factors will hamper TVA’s debt reduction efforts over the last 7 years of the plan. In addition, although TVA reduced deferred assets to the extent planned for the first 3 |
988 | years of the plan, it is revising the amount of deferred assets it plans to recover through 2007 downward. TVA now plans to reduce the balance of its deferred assets to about $3.9 billion by September 30, 2007, compared to its original goal of $500 million. To achieve the overall debt reduction goal in the original 10-year plan, TVA established annual debt reduction goals. In the 1997 plan, the annual debt reduction goals ranged from $476 million in 1998 to $2 billion in 2007. TVA has made progress in redu |
989 | cing debt, and in fact, exceeded its target goal in the first year of the plan. However, TVA fell far short in the second and third years. Through the first 3 years of the 10-year plan, TVA reduced debt by about $1.4 billion, but its debt reduction shortfall also totaled about $1.4 billion. In addition, TVA is now planning to issue a revised plan that would significantly reduce the goals for 2001 through 2007. Figure 1 compares the annual debt reduction goals contained in TVA’s July 1997 10-year plan to TVA |
990 | ’s actual debt reduction for fiscal years 1998 through 2000 and to TVA’s proposed revisions to its annual debt reduction goals for fiscal years 2001 through 2007. In its presidential budget submission for fiscal year 2000, TVA acknowledged that it would not achieve its goal of reducing debt by about one-half by 2007. Instead, TVA said it would not meet the debt reduction goal until 2009, 2 years later than the goal in its original 10-year plan. TVA is in the process of revising its goal for reducing outstan |
991 | ding debt again. TVA officials now estimate that its outstanding debt by September 30, 2007, will be between $18 billion and $24 billion, with a target of about $19.6 billion, or about $6.4 billion higher than TVA envisioned when it issued the 1997 plan. TVA is not projecting a target reduction goal beyond 2007. Figure 2 compares the annual outstanding debt goals contained in TVA’s July 1997 10-year plan to TVA’s actual debt outstanding for fiscal years 1998 through 2000 and to TVA’s proposed revisions to a |
992 | nnual goals for fiscal years 2001 through 2007. TVA officials attribute the $1.4 billion debt reduction shortfall over the first 3 years to four factors. The first factor is greater than anticipated cash expenditures for new generating capacity. For fiscal years 1998 through 2000, TVA spent $436 million more than planned to purchase new peaking generator units. The 1997 plan assumed that TVA would meet future increases in demand for power by purchasing power from other utilities, which would have used less |
993 | cash through 2007 than purchasing the peaking units. TVA officials believe that its capital expenditures for new generating capacity will have two positive effects. First, they believe the new generating capacity will ultimately reduce TVA’s cost of power, even though the increased capital expenditures will use cash that could have been used to reduce debt. Second, they believe the new generating capacity will enhance system reliability by providing a dependable source of power. The second factor to which T |
994 | VA officials attribute the debt reduction shortfall over the first 3 years of the plan is greater than anticipated capital expenditures requiring cash for environmental controls to meet Clean Air Act requirements. For fiscal years 1998 through 2000, TVA spent $276 million more than planned on environmental controls. Meanwhile, over the 3-year period, TVA spent about $221 million less than planned on other types of capital items. The net effect of increased spending on new generating capacity and environment |
995 | al controls and decreased spending on other types of capital items is that TVA’s capital expenditures have exceeded the planned amount. TVA had forecast about $1.7 billion in capital expenditures over that 3-year period; its actual capital expenditures were almost $500 million more (about $2.2 billion). Under current plans, TVA expects its major capital costs for new generating capacity and environmental controls to be completed by 2004. Figure 3 compares the annual capital expenditure goals contained in TV |
996 | A’s July 1997 10-year plan to TVA’s actual capital expenditures for fiscal years 1998 through 2000 and to TVA’s proposed revisions to annual goals for fiscal years 2001 through 2007. The third factor to which TVA officials attribute the debt reduction shortfall over the first 3 years of the plan is a net increase in annual expenses requiring cash that could have been used for debt reduction. For fiscal years 1998 through 2000, TVA’s operating and maintenance expenses, and sales, general, and administrative |
997 | expenses were greater than anticipated. This increase in annual expenses was partially offset by a reduction in fuel and purchased power expense and interest expense. The net effect was that annual expenses totaled about $122 million more than planned. The fourth factor to which TVA officials attribute the debt reduction shortfall over the first 3 years of the plan is less revenue than originally anticipated. According to TVA officials, the revenue shortfall was caused primarily by mild winters that lessene |
998 | d demand for electricity. The revenue shortfall for fiscal years 1998 through 2000 totaled about $725 million. Our analysis confirms that the above four factors were the primary ones that hampered TVA’s debt reduction efforts for fiscal years 1998 through 2000. These factors are also projected to limit TVA’s ability to reduce debt in fiscal years 2001 through 2007. Over this 7-year period, the primary factors limiting TVA’s debt reduction efforts are that annual revenue is expected to be lower, and capital |
999 | expenditures and cash expenses are expected to be higher. This reduces the amount of cash that would have been available to repay debt. TVA now anticipates that its revenue will be about $2.2 billion lower, and its capital expenditures and cash expenses—at about $1.6 billion and $2.5 billion, respectively—will be higher than planned in 1997. Table 1 shows our analysis of the factors affecting cash available to reduce debt from 1998 through 2007. In developing its 10-year plan, TVA planned to use the additio |
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