Comparing the Costs of the Veterans' Health Care System with Private-Sector Costs

Legislation enacted in 2014 calls for the Veterans Health Administration (VHA) to expand the availability of health care to eligible veterans. That legislation provided temporary funding to expand VHA's capacity to deliver care and to increase the amount of care purchased from the private sector.

CBO has conducted a limited examination of how the costs of health care provided by VHA compare with the costs of care provided in the private sector. Although the structure of VHA and published studies suggest that VHA care has been cheaper than care provided by the private sector, limited evidence and substantial uncertainty make it difficult to reach firm conclusions about those relative costs or about whether it would be cheaper to expand veterans' access to health care in the future through VHA facilities or the private sector. Uncertainty about relative costs in the future is compounded by uncertainty about how VHA would structure contracts with private-sector providers.

This report briefly describes some of the features that distinguish the health care system run by VHA from health care provided in the private sector. It also examines the available evidence about the relative costs of VHA and private-sector care and explores possible reasons why costs might differ in the two settings and why they can be difficult to compare. Finally, CBO briefly considers some factors that could influence the cost-effectiveness of alternative means of expanding health care services to veterans in the future.

What Has Previous Research Concluded?

Distinctive features of the VHA system—such as its mission, mix of enrollees, and financing mechanism—complicate cost comparisons with other sources of health care. One useful analytic approach, which was most carefully and comprehensively employed by researchers in 2004, estimates what costs would be if private-sector doctors, hospitals, and other health care providers supplied the same number and types of services as those actually delivered by VHA. Similar to earlier studies, those researchers concluded that the health care provided by VHA generally cost less than would equivalent care provided in the private sector, even though the comparison used Medicare's relatively low payment rates for private-sector doctors and hospitals.

How Applicable Are Previous Findings Now?

Whether such findings can be extrapolated to the present is uncertain, for several reasons. The limited number of comprehensive studies that have been done and the complexity of the research methods contribute to uncertainty about their conclusions. In addition, previous research has generally relied on cost information from 1999 or earlier, but changes since then in the VHA system and the health care sector as a whole could produce different results today. Such differences could go in either direction, which increases the range of uncertainty.

Another complication is that past studies do not fully explain why VHA care might be less expensive than private-sector care—making it hard to tell whether the same considerations apply now—and do not address whether patients would get the same amount and mix of services in both systems. More broadly, cost comparisons do not reflect such important considerations as the quality of the care provided, its effects on patients' health, and patients' satisfaction with a given health care system. Thus, even if VHA care was less expensive, determining whether that care was a better value would still be difficult.

Why Might Costs Differ Between VHA and the Private Sector?

CBO's analysis indicates that VHA pays lower prices for pharmaceutical products than private-sector health care systems do (largely because of federal price controls) and may also pay less to doctors. For other medical goods and services, however, CBO could not determine whether VHA or the private sector has lower unit costs. In addition to any differences in prices per service, veterans might receive a larger amount or more complex mix of services if they were treated by private-sector doctors and hospitals than by VHA because those providers have stronger financial incentives to deliver more expensive care. At the same time, having the government provide health care through VHA may not be efficient. All of those factors make it hard to draw firm conclusions about relative costs.

Even if VHA currently provided care at a lower cost than the private sector, expanding the VHA system might not be cheaper in the longer term than increasing the use of private-sector providers. That would depend on the manner in which VHA chose to expand its own staff and facilities or the terms of any contracts it arranged for care with private-sector providers. One key consideration would be the relative flexibility that those contracts gave VHA to adapt to future changes in the population of veterans, the number of veterans who enrolled in the VHA system, and the medical services they used.

What Additional Information Would Help in Comparing Costs?

Comparing health care costs in the VHA system and the private sector is difficult partly because the Department of Veterans Affairs (VA), which runs VHA, has provided limited data to the Congress and the public about its costs and operational performance. Additional data, particularly if it was provided on a regular and systematic basis, could help inform policymakers about the efficiency and cost-effectiveness of VHA's services.

For example, the Department of Defense publishes an annual report to the Congress about its health care system, known as TRICARE (in response to a statutory requirement established in the National Defense Authorization Act for Fiscal Year 1996). The most recent of those reports contains more than 100 pages of operating statistics, including trends among beneficiaries and their demographics; funding by appropriation category; use and costs of inpatient, outpatient, and pharmacy services; beneficiaries' cost sharing; and patients' satisfaction with their care. A virtue of the annual, recurring nature of those reports is that each contains consistent trend data from the previous few years, and longer data series can be compiled by comparing past years' volumes. A corresponding annual report on VHA—if one existed—would facilitate comparisons between VHA and the private sector. However, such comparisons would still be challenging, in part because private-sector data might also be incomplete, unavailable, or difficult to make comparable with VHA data.