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B6. How do VA costs compare to the cost of non-VA providers?

Reasons to compare VA costs

There are a number of reasons to compare the cost of VA care to the costs of other providers. VA users often obtain additional care outside the VA system through Medicare, Medicaid, or other forms of insurance. This “dual use” is particularly common among veterans eligible for Medicare. A natural question, therefore, is how VA costs compare to those of Medicare-funded services. Policy makers are also interested in learning whether it is more efficient for VA to make or buy the health care services that it provides to veterans, and whether VA is operating as efficiently as non-VA hospitals.

Comparison of VA Cost to Medicare Reimbursement

The most thorough study comparing the relative cost of VA provided care was an HSR&D study that compared actual VA costs at six VA medical centers to the hypothetical fee-for-service payments for the same services that would have been paid by Medicare. The final report (Nugent, 2004) found that VA was providing care at a lower cost. Details from this study appeared as a series of papers in a special supplement of Medical Care in 2003. The overview paper for the papers in this supplement is cited below (Nugent, 2003). The supplement includes papers with detailed comparisons for difference services, including acute hospital stays, outpatient care, nursing home, and other types of care. FAQ B7 describes Medicare and VA cost data, the differences between these data, and what can be done to make them more comparable.

Evaluation of VA Pharmacy Costs

It has been estimated that VA’s Pharmacy Benefits Management (PBM) program saved VA $1.5 billion between 1995 and 1999 (Sales, 2005). VA prices for 20 medications commonly used by seniors are lower even than those negotiated by private PBM companies for the Medicare Prescription Drug Plan (Families USA, 2005).

Other Comparisons of VA Costs

A review of the literature comparing VA to non-VA costs (Hendricks, 1999) found no evidence that VA costs were higher than the private sector. Most studies have noted the difficulty in comparing costs between systems in which the patients served and the scope of services provided are so different.

There do not appear to be any more recent comparisons between VA and non-VA costs. VA costs, the case-mix of patients served, and the scope of benefits have shifted rapidly in the last decade. Eligibility reform led to doubling of the VA patient population. The VA appropriation increased more slowly, but increased substantially in the last few years. The implications of these changes on the VA costs relative to the non-VA sector have not been studied.

Prepared by
Paul G. Barnett and Mark W. Smith
May, 2008

References (with Abstracts)

Nugent, G.N., Hendricks, A., Nugent, L.B., Render, M.L..
Value for taxpayers' dollars: what VA care would cost at medicare prices.
Medical Care Research and Review 2004; 61, 495-508.

Critics charge that Veterans Health Administration (VA) medical centers are inefficient and the cost of veteran health care would be reduced if VA purchased care for its patients directly from private-sector providers. This analysis compares VA medical care expenditures with estimates of total payments under a hypothetical Medicare fee-for-service payment system reimbursing providers for the same counts of each service VA medical centers provided in fiscal 1999. At six study sites, hypothetical payments were more than 20 percent greater than actual budgets. Nationally, this represented more than 3 billion US dollars in 1999 and more than 5 billion US dollars in 2003. Data limitations suggest the estimate is conservative. Less than half of the difference is due to VA's low pharmacy costs. The study demonstrates the potential savings to patients and taxpayers of the VA health care system.

Nugent, G., Hendricks, A..
Estimating private sector values for VA health care: an overview.
Medical Care 2003; 41, II2-10.

OBJECTIVES: To provide an overview of methods used to establish what taxpayer costs would be if all Veterans Health Administration (VA) patient care were paid for by the federal government but provided in the private sector.
METHODS: Study assumptions included (1) that there would be a hypothetical policy change to pay for VA care through a Medicare-based fee-for-service program, (2) that the VA coverage benefit would not change, (3) that practice styles would remain the same, and (4) that there would be no impact on market values. To achieve the objective, project staff adapted Medicare payment schedules and guidelines, where available, with oversight of an advisory committee with VA and non-VA expertise in costs and data. For six sites, detailed payments were estimated using VA utilization databases and software and Medicare rate schedules available in the private sector. Overhead, interest on capital, and malpractice costs were added to VA-reported operating costs. Patient severity was examined, and patient-level costs were explored.
FINDINGS: Detailed methods for pricing seven types of health services are presented. Three methods articles focus on process issues.
DISCUSSION: Because VA care is not directly comparable with private sector health care as a result in part of differences in benefits covered and the scope of services provided, estimating costs for this care based on a private sector model requires careful consideration of market valuation approaches. The articles in this supplement describe the methods used to estimate market values for VA care so that other researchers can use them in future studies.

Sales, M.M., Cunningham, F.E., Glassman, P.A., Valentino, M.A., Good, C.B.
Pharmacy benefits management in the Veterans Health Administration: 1995 to 2003.
American Journal of Managed Care 2005; 11, 104-112.

The Department of Veterans Affairs (VA) Pharmacy Benefits Management Strategic Healthcare Group (VA PBM) oversees the formulary for the entire VA system, which serves more than 4 million veterans and provides more than 108 million prescriptions per year. Since its establishment in 1995, the VA PBM has managed pharmaceuticals and pharmaceutical-related policies, including drug safety and efficacy evaluations, pharmacologic management algorithms, and criteria for drug use. These evidence-based practices promote, optimize, and assist VA providers with the safe and appropriate use of pharmaceuticals while allowing for formulary decisions that can result in substantial cost savings. The VA PBM also has utilized various contracting techniques to standardize generic agents as well as specific drugs and drug classes (eg, antihistamines, angiotensin-converting enzyme inhibitors, alpha-blockers, and 3-hydroxy-3-methylglutaryl coenzyme A reductase inhibitors [statins]). These methods have enabled the VA to save approximately dollar 1.5 billion since 1996 even as drug expenditures continued to rise from roughly dollar 1 billion in fiscal year (FY) 1996 to more than dollar 3 billion in FY 2003. Furthermore, the VA PBM has established an outcomes research section to undertake quality-improvement and safety initiatives that ultimately monitor and determine the clinical impact of formulary decisions on the VA system nationwide. The experiences of this pharmacy benefits program, including clinical and contracting processes/procedures and their impact on the VA healthcare system, are described.

Hendricks AM, Remler DK, Prashker MJ.
More or less?: Methods to compare VA and non-VA health care costs.
Medical Care 1999 Apr; 37(4 Suppl Va):AS54-62.
PMID: 10217385
Link to HERC Publication

OBJECTIVE: To examine past comparisons of the costs of the Veterans Health Administration (VA) and of non-VA providers to determine lessons and data requirements for future cost comparisons, particularly those assessing VA efficiency and to determine whether VA should purchase care from non-VA providers.
CONCEPTUAL FRAMEWORK: Over the past two decades, researchers have tried to establish how VA costs compare to those of non-VA health care delivery systems. Existing studies of overall acute care costs address one of two distinct questions: How do VA costs compare to costs in private sector hospitals? and Would it cost more to have VA patients treated in nonfederal hospitals? For both questions, the major factors underlying differences in health care costs are variations in outputs, input prices, and levels of efficiency. Health care cost comparisons across systems must also wrestle with accounting differences.
CONCLUSIONS: That review finds no convincing evidence that VA has been significantly more or less efficient than nonfederal hospitals in delivering care. However, VA costs do appear to have been significantly lower than fee-for-service charges that the federal government might have to pay if veterans were treated in private sector hospitals for the same diagnoses. Future comparisons of costs in the era of managed care will require better diagnostic and population data to control for observable and unobservable case-mix differences. They should also include measures of the quality of outcomes. Finally, consistent accounting practices, particularly in the treatment of capital costs, are needed.

Families USA. Falling short: Medicare prescription drug plans offer meager savings. December, 2005.
Families USA Special Report

SUMMARY: When the new Medicare prescription drug benefit was under consideration, the Administration and congressional leaders promised that a program operated through a multitude of private firms would provide choice and low drug prices to those in Medicare. Supporters claim that “competition brings about more choices and lower prices, while a lack of competition does just the opposite.”

Now, as the drug benefit gets underway, there is no doubt that the program is bringing choices to people in Medicare—a confusing array of dozens upon dozens of drug plan options for each senior to evaluate. But did it bring lower drug prices? Does the program—as the Administration promised—use the “power of health plans to negotiate low prices for prescription drugs and save money for both Medicare beneficiaries and the taxpayer”?

An analysis of plans’ drug prices shows that, on the promise of low drug prices, the program fails. Families USA looked at Medicare prescription drug plan prices for the top 20 drugs prescribed to seniors in 2004 for two regions: 1) Region 5, which covers the District of Columbia, Maryland, and Delaware; and 2) Region 14, which covers Ohio. We compared those prices to the prices negotiated by the federal government through the Department of Veterans Affairs (VA). We found that the lowest price negotiated by the VA was, in every case but one, lower—often substantially so—than the lowest drug price available through any Medicare prescription drug plan operating in either locale. The median percent price difference for the top 20 drugs was 48.2 percent. This means that, for half of the top 20 drugs prescribed to seniors, the lowest price offered by any Medicare prescription drug plan was at least 48.2 percent higher than the lowest price available through the VA.

Related Content
More or less?: Methods to compare VA and non-VA health care costs
Hendricks, A. M.; Remler, D. K.; Prashker, M. J.
Med Care (1999) | Download »
  • OBJECTIVE: To examine past comparisons of the costs of the Veterans Health Administration (VA) and of non-VA providers to determine lessons and data requirements for future cost comparisons, particularly those assessing VA efficiency and to determine whether VA should purchase care from non-VA providers. CONCEPTUAL FRAMEWORK: Over the past two decades, researchers have tried to establish how VA costs compare to those of non-VA health care delivery systems. Existing studies of overall acute care costs address one of two distinct questions: How do VA costs compare to costs in private sector hospitals? and Would it cost more to have VA patients treated in nonfederal hospitals? For both questions, the major factors underlying differences in health care costs are variations in outputs, input prices, and levels of efficiency. Health care cost comparisons across systems must also wrestle with accounting differences. CONCLUSIONS: That review finds no convincing evidence that VA has been significantly more or less efficient than nonfederal hospitals in delivering care. However, VA costs do appear to have been significantly lower than fee-for-service charges that the federal government might have to pay if veterans were treated in private sector hospitals for the same diagnoses. Future comparisons of costs in the era of managed care will require better diagnostic and population data to control for observable and unobservable case-mix differences. They should also include measures of the quality of outcomes. Finally, consistent accounting practices, particularly in the treatment of capital costs, are needed.