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First, both proposals would allow some VA medical care to be financed through direct, or mandatory, spending rather than by annual appropriations. In the case of H.R. 1362, VA would be given authority to spend the amounts it received from Medicare. In the case of the other proposal, VA would be allowed to spend the amounts it received from certain nongovernmental sources.

Second, the additional mandatory resources provided to the VA health care system could either supplement or supplant discretionary spending, with the outcome depending on the results of future appropriation action. The receipts from Medicare subvention are intended to finance the care of veterans who would otherwise not have access to VA facilities, but that result cannot be assured.

Third, even if additional mandatory spending allows for lower discretionary appropriations, the current budget enforcement rules do not allow a reduction in one category of spending to offset an increase in the other. Mandatory spending is governed by pay-as-you-go procedures, which require increases in mandatory spending to be paid for by reductions in other mandatory programs or by increases in receipts. Discretionary spending is limited by statutory caps on budget authority and outlays.
 

MEDICARE SUBVENTION

H.R. 1362 would establish a demonstration project in which Medicare would reimburse VA for the care that VA provides to certain veterans who are also eligible for Medicare. The demonstration project would have the following characteristics:

• The project would be conducted during the 1998-2000 period in up to three geographic service areas where there would be a high demand for the program;
• Medicare would reimburse VA at 95 percent of the rate paid to private providers for care given to certain veterans. Those veterans would have to be eligible for Medicare, participate in Medicare Part B, have no service-connected disability, and have an annual income of between one and three times the threshold for veterans medical care. Such veterans receive care from VA if resources are available and if the veteran pays a share of the costs.
• VA would be responsible for maintaining a basic level of effort in order to be eligible for reimbursement by Medicare. The required level of effort would be based on VA's estimate of how much it spent for eligible veterans in 1997. That amount would then be adjusted for increases or decreases in appropriations for medical care, any shortfall between the rates of growth in the appropriation and the cost of medical care, and reductions in the priority of eligible veterans stemming from recent legislation;
• VA and the Department of Health and Human Services (HHS), in consultation with the General Accounting Office, would monitor Medicare's expenditures in an attempt to ensure that it spent no more than it would have without the demonstration; and
• Medicare's payments under the demonstration would be limited to $50 million a year.

Assuring budget neutrality for Medicare would be difficult to achieve in practice, however, for three reasons. First, although VA provides some services (for examples, drugs and long-term care) that are not covered by Medicare, the bill nevertheless includes those services in calculating VA's effort. Second, even if that oversight were corrected, VA could understate the amount of its current workload that is attributable to targeted veterans. Third, adjustments to the required level of effort could allow further shifting of costs from VA to Medicare in later years.

Under the bill, the required maintenance-of-effort level is based on the total amount of VA medical expenditures for targeted veterans in 1997. However, Medicare does not cover all medical services that VA provides. If VA increased its noncovered services and decreased its provision of covered services by the same amount, it would shift costs to Medicare without reducing its level of effort.

But again, even if that problem was corrected, VA could still shift costs to Medicare by underestimating the level of care that it has been providing. Data for 1997 are not yet available, but VA informally estimates that in 1996 it saw fewer than 35,000 targeted veterans who were eligible for Medicare and provided about one-third of the total health care services that those veterans received. If those figures were correct, assuring budget neutrality would require that the maintenance-of-effort level equal about 22 percent of the Medicare-covered services provided to those veterans. CBO's analysis of data from the 1992 Survey of Veterans and the 1997 Patient Treatment Files indicates, however, that VA provides about 52 percent of covered services for targeted veterans who are eligible for Medicare.

The provisions for adjusting VA's maintenance-of-effort amount could also lead to higher spending for Medicare. According to CBO estimates, the services VA provides to targeted veterans would not fall in proportion to any drop in appropriations as specified in the bill. CBO also expects that the services provided to targeted veterans would decline less than VA would estimate as a result of changes in their priority for services. Those adjustments enable VA to reduce its required level of effort for targeted veterans and thereby increase its payments from Medicare.

As Table 1 shows, the likely outcome would be higher Medicare costs. Knowing how many Medicare beneficiaries will receive care from VA is difficult enough to determine in the short term. But that uncertainty only grows over time as populations change and the availability of discretionary funding for VA's health care programs varies. VA and HHS also face different incentives and access to information.
 

As introduced, the bill would probably raise Medicare's costs by $50 million or more. Because VA could count services that are not covered by Medicare toward its maintenance-of-effort, the costs could exceed the cap set in the bill for Medicare's expenditures. Under that scenario, VA's expenditures to care for targeted veterans may equal the maintenance of effort, but Medicare would not cover that care. Medicare would pay to private providers or VA the costs for covered services that are provided and funded through VA under current law. If the bill's language was modified to focus the maintenance-of-effort requirements on services covered by Medicare, the bill would cost roughly half as much.
 

SPENDING FROM FEES AND COLLECTIONS

The Committee also asked CBO to address the budgetary impact of legislation to give VA the authority to spend amounts that it collects from third parties and user fees. Under current law, VA's net collections are estimated to total $485 million in 1998, but only about $300 million a year after that because the collections authorized by the Omnibus Budget Reconciliation Act of 1993 will expire.

Through 1998, VA will collect per diem payments for hospital stays and copayments for outpatient visits and prescription drugs, but it has no authority to spend those funds. After 1998, VA will continue to collect about $400 million a year from third parties, and it will spend about $100 million a year from those receipts to cover the related costs of administration. Thus, the costs of legislation giving VA the authority to spend whatever it collects would be $485 million in 1998 and about $300 million a year after that.
 

CONCLUSION

Both proposals would increase mandatory spending and would be subject to the pay-as-you-go procedures established in the Budget Enforcement Act. Those increases in mandatory spending would allow discretionary authorizations to decline by the same amount. Whether discretionary savings would actually occur, however, would depend on annual appropriation actions.