This shortfall occurred because the Albuquerque center’s charges were based on an unrealistically high estimate of the total number of lithotripsy procedures it would perform in 1993. Albuquerque Center’s Charges Could Recover Full Costs and Remain Competitive in the Albuquerque Market

The effect of changes in the center’s pricing practices on its competitiveness in the market for lithotripsy services in Albuquerque is also difficult to determine precisely. Recommendations

The Secretary of Veterans Affairs should direct the Director of the Albuquerque medical center to raise the price of lithotripsy services provided to nonveterans to a level that will recover the full fixed and variable costs of the services provided, as VA policy requires; and implement a process for periodically reviewing the adequacy of workload projections as VA procedures recommend, and use the results to adjust prices, as appropriate. This pricing practice may not fully recover costs. This appendix compares the center’s actual costs for the major cost components of its basic lithotripsy service to the amounts the center charged for each component. Two key assumptions in the center’s calculations make it unlikely that this rate will be sufficient for VA to recover the costs of providing lithotripsy services to UNM patients. The center did not follow this approach. Since 2 years of the period have gone by, 3 years remain over which to depreciate the equipment. The center used the actual annual contract cost, as did we.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Department of Veterans Affairs' (VA) Albuquerque Medical Center's contracting practices, focusing on: (1) whether the center fully recovered the government's cost of providing nonveteran lithotripsy services; and (2) the effects of the center's pricing policy on competition for lithotripsy services in the Albuquerque area.

What GAO Found

GAO found that: (1) in 1993, the Albuquerque VA Medical Center did not fully recover the costs of providing lithotripsy services to nonveterans; (2) the center used an unrealistically high annual workload estimate in calculating its fixed costs; (3) the center's lithotripsy prices for 1994 were still unrealistically high, even though VA policy requires price adjustments if estimates are significantly off; (4) the center lengthened the equipment's depreciation period to compensate for its low procedure rate, but this was not practical, since the equipment will be obsolete before the end of its useful life; (5) the contractor lowered its charges for lithotripsy services significantly below market rates, which may have allowed it to gain a larger market share; (6) the impact of the contractor's lower prices is difficult to estimate because consumers' health care decisions are not driven by cost considerations alone; and (7) the center could raise its prices to cover its full costs for the services and still remain competitive.