Think you had a tough time selling your company’s reengineering plan? Think again. After all, did you have to fend off a motion on the floor of the House of Representatives aimed at killing yours? W. Todd Grams did.
The chief financial officer of the Veterans Health Administration (VHA), Grams faced a buzz saw of congressional opposition to his ideas for transforming the huge government bureaucracy into a financially astute organization. The VHA provides health-care services to more than 3 million veterans every year. But before Grams came on board, the agency’s $17 billion budget was largely determined by spending in prior years, regardless of trends in patient demographics.
Grams was intent on reallocating funds in a predictive way: in other words, he wanted the money to be available in the places it was most likely to be needed in the future. But that money paid for more than 200,000 jobs–some of which were threatened by Grams’s proposed reforms. “The politics were very challenging,” Grams concedes.
In beating back efforts to derail his Veterans Equitable Resource Allocation system, or VERA, Grams says it helped that the plan called for funding increases at most of the agency’s 22 regional networks. But he is convinced that what carried the day for VERA was the vow that better fiscal management could improve medical care for veterans nationwide. And since the phase-in of VERA began in 1996, the VHA has seen measurable gains in patient satisfaction and quality of care, as well as improvements in such service indicators as waiting time.
Independent sources support Grams’s claims. A 1997 General Accounting Office report, for example, found that “VERA shows promise for correcting long-standing regional funding imbalances that have impeded veterans’ equitable access to services.” Similarly, a study last year by Price Waterhouse LLP of the plan’s fairness and effectiveness concluded that “VERA generally performs quite well.”
Indeed, Grams’s reengineering work is one of the few real success stories of the CFO Act of 1990 (see “Baby Steps,” CFO, July 1995), which required every federal agency to have a CFO who would bring financial discipline to its operations. As a result, the VHA has been able to expand services to veterans at a time when the federal budget is shrinking, and it now is run in a way that would make a for-profit health maintenance organization proud.
Gram, in fact, compares the VHA to an HMO, “in that we project users of the system, their health-care status, and local market conditions. The difference is we’ve done it on a national level,” he says.
Simple in Theory
The 40-year-old Grams was hardly a government neophyte when he became the first-ever CFO of the VHA. In 1983, he joined the White House’s Office of Management and Budget, where he honed his bureaucracy-busting skills under President Reagan’s wunderkind budget director, David Stockman. Then, in 1992, Grams became one of the youngest appointees to the Senior Executive Service, the federal government’s group of top career-level officers. In that post, he had oversight of the Department of Veterans Affairs.
Arriving at the VHA in June 1994, he already knew that the old fiscal policies spawned high-cost care, and that the efficient facilities were punished for being efficient. For instance, even though doctors were encouraged to treat more veterans on an outpatient basis, they would get higher allocations for their facilities if the patients were admitted to the hospital. Under the old system, a facility would get $3,200 for a cataract patient who was admitted to the hospital, but only $438 if the same procedure was done in a clinic on an outpatient basis.
“The financial incentives were 180 degrees away from where the agency wanted to go in terms of health-care management,” Grams says. In addition, a few facilities that couldn’t live within their budgets had come to expect end-of-year bailouts from the VHA.
Grams’s first step was to document the per-patient costs at the VHA’s networks, which confirmed his suspicion about large variances across the system. The highest-cost network, New York City, spent 118 percent more than the lowest, Phoenix–$6,516 versus $2,991–and the review further revealed that networks with higher-than-average costs had high staffing levels, more bed days of care, and longer hospital stays.
The findings, which Grams distributed to all the networks, were hard to dispute, but it remained to be seen whether he could come up with a better plan.
In 1995, Grams convened a task force that included health-care professionals from several networks to devise a new allocation system. The approach, Grams insisted, should be patient-based, reflecting actual health-care demands, rather than the old way of inflating each network’s previous budget. The group spent nine months developing the VERA system that had, at its core, a fundamental principle that Grams insisted upon: The VHA would fund only cost variances that were significant, quantifiable, and not under the control of local health-care management.
“This principle seems exceptionally simple, and it is,” states Dr. Thomas L. Garthwaite, a deputy undersecretary for health. “But the principle had never before driven VHA financial policy.”
Grams concurs: “The key was understanding why there are cost differences [among the networks] and justifying them to Congress and to the taxpayers.”
Under VERA, the VHA sets national prices for basic care and special care–$2,857 for basic care and $36,955 for complex care–and then provides each network with a fixed budget based on likely health-care demand. That budget is further enhanced based on local factors, such as patient case-mix, labor costs, and research and education activities. For instance, the labor market dictates that New York City doctors earn more than Phoenix doctors, something the network administrator in New York can’t change, so the New York network gets an adjustment upward for labor.
“The budget builds up to hit a total,” Grams explains. Not surprisingly, New York City has the highest-cost network, at $5,413 per patient, or 23 percent above the systemwide average of $4,409, while Phoenix is the lowest-cost, at $3,888, or 12 percent under.
What was remarkable was that the cost difference between New York and Phoenix was “only” 39 percent.
“This is well below the 118 percent variance that was perpetuated by past VHA financial policies,” Garthwaite avers. “And more important, the VHA can explain and justify the variance to its stake-holders.”
Difficult in Execution
In all, VERA shifted some $522 million across the VHA network, with 6 centers losing funds (New York, Boston, and Chicago lost the most) and the 16 other centers gaining extra dollars. But to Grams, the real appeal of the new allocation system was that it encouraged each network to take a more financially prudent approach to patient care. If outpatient treatment were appropriate, the network would no longer be penalized for providing the lower-cost services. Rather, lower operating costs and more-cost-efficient care would allow the networks to stretch resources to offer additional services.
Take the network based in Jackson, Mississippi. Thanks to a 15 percent allocation increase and its ability to bring down its per- patient costs, the network has been able to open several new community-based clinics that provide outpatient care. “VERA gives you a mechanism for lowering your costs and increasing the [number of] veterans you treat,” says Dr. John Higgins, the network’s director. “We now have an incentive to find the right way to care for every patient.”
Overall, since 1996, the VHA has treated 13 percent more veterans, while reducing its per-patient staffing levels by 16 percent and its per-patient bed days of care by 47 percent. Furthermore, the agency has consolidated administrative functions at 204 medical units, integrated the management of 36 medical facilities, and begun establishing national contracts to leverage buying power. The use of a purchasing card for expenses under $2,500 has saved $90 million and eliminated the processing of 1.1 million documents annually.
Indeed, Grams’s fiscal reform efforts have gone far beyond setting up the VERA system. Some were common sense, such as setting systemwide standards for bill paying to save $1.3 million in annual interest penalties. Some involved wiping away unnecessary activities–like 30 percent of the monthly financial reports. And 76 programs run out of Washington, D.C., such as laundry management, were left to the networks to run. Others required new processes, such as calling veterans at home before their appointments to find out if they have insurance.
Still other reform efforts are ongoing, such as leveraging the network’s buying powers and the use of a color-coded financial report card that shows in red, yellow, and green how each network measures up against dozens of performance indicators. “The network that had the most red took that to heart when they saw how badly they performed,” Grams says.
And, finally, one reform called for an act of Congress. Before 1996, all insurance reimbursements went directly into the U.S. Treasury. Now, thanks to a new law, each network is allowed to keep the money it can recover from health insurers. For Higgins, the director of the Mississippi network, the reimbursements have meant an extra $50 million added to his $1.2 billion budget. “It’s not a big percentage,” he says, “but it gives us flexible dollars that we never had before to do what our clinicians want.”
Not Everyone Was Happy
As it turned out, obtaining congressional approval to allow the network to keep insurance proceeds was a slam-dunk compared with getting lawmakers’ support for VERA, the central piece of Grams’s reform efforts.
Past attempts at improving the VHA’s financial operations had failed because of an unwillingness to challenge the system’s inherently unfair approach to resource allocation. Previous belt-tightening bids inevitably met with complaints that inefficiencies were beyond a network’s control and that the authorities in Washington just didn’t understand the complexities of the allocation models.
“It seems fairly remarkable what Todd has done, given the previous efforts that failed,” says Patrick Ryan, a staff member for 15 years of the House Committee on Veterans Affairs. “In the past, the financial managers were reluctant to challenge medical professionals who gave answers they couldn’t validate, like ‘My patients are sicker’ or ‘We have to provide care this way.’ The financial-management side had no credibility.”
Certainly Grams’s inclusion of network officials on the task force that developed VERA helped him get buy-in, but Ryan cites two other key factors. One was the sheer simplicity of the new allocation plan, which left no room for gamesmanship, fostered widespread understanding, and squashed suspicions that other networks were getting an unfair advantage. The other important factor was the decision made by Kenneth W. Kayzer, undersecretary for health, to phase VERA in over a three-year period so that the networks that were losing money did not lose it all at once.
But with the fiscal 1999 budget, which took effect last October, the phase-in was complete, with the exception of New York, whose network had the most to lose under the new plan. In response, Rep. Maurice Hinchey (D-N.Y.) introduced an amendment to repeal VERA. Grams was not called on to testify, but he was able to submit the favorable reports by the General Accounting Office and Price Waterhouse to support VERA. “One thing Todd did that was really smart was to get the GAO and Price Waterhouse to validate the system,” Ryan says. “He did that in advance, and it was easy to make a good argument that VERA was not biased or unfair.”
In the end, the Hinchey amendment was defeated 285-146, but Grams may not be finished selling his reengineering plan yet. On January 6, Rep. Benjamin Gilman (R-N.Y.) introduced a bill that would “correct [the] inherent flaws within VERA.” In response, the chairman of the veterans affairs committee, Rep. Bob Stump (R-Ariz.), might introduce legislation that would lock Grams’s VERA plan into law.
If it comes to another fight on the House floor, Grams will stick to the same tactics that allowed the VHA to prevail last year. “The only way we survived,” he says, “was by being able to explain to people what we wanted to do.”
Stephen Barr is senior contributing editor of CFO.
———————————————————————— THE VHA’S FINANCIAL BEST PRACTICES
* Instituted a credit card for purchases under $2,500, eliminating processing of 1.1 million documents annually; reduced 270 staff. Savings: $90 million. * Reduced or eliminated 76 programs run by VHA headquarters. Savings: more than $100 million annually. * Established first-ever national contracts for nursing-home care, leveraging VHA’s buying power. Savings: $20 million annually. * Increased percent of bills paid on time; reduced interest penalties by one-third. Savings: $1.3 million annually. * Reviewed utilization of 71 monthly financial reports, eliminating 22. Savings: $1.5 million annually.
* Redirected health insurance and beneficiary copayments from U.S. Treasury to VHA operating budget. Revenue: $585 million in 1998, projected at $900 million annually by 2003. * Developed preappointment phone-call policy; increased identification of veterans with insurance generated $75 million annually. * Developed insurance data match with Health Care Financing Administration; increased identification of veterans with insurance increased revenue by estimated $60 million to $90 million.
Improved Financial Management
* Developed VERA, a prospective capitated financing system; shifted $581 million from high-cost, inefficient networks to historically underfunded networks. * Eliminated long-standing accounts receivable and depreciation errors; mistakes totaled almost $1 billion. * Shifted $1.4 billion from headquarters control to networks’ control; reduced annual operating budget controlled by headquarters by 40 percent. * Developed policy that made revenue available without annual restriction; VHA operation funds now available beyond one fiscal year. * Developed a VHA financial report card to assess and improve the integrity of financial operations. During first six months of use, all 22 networks demonstrated improvement.