VA Health Care

Albuquerque Medical Center Not Recovering Full Costs of Lithotripsy Services Gao ID: HEHS-95-19 December 28, 1994

The price charged by the Department of Veterans Affairs' (VA) medical center in Albuquerque, New Mexico, for lithotripsy--a procedure that uses shock waves to crush kidney stones into small pieces that can be passed through a patient's urinary tract--did not fully recover the center's costs. The main reason for the problem--a flawed price-setting methodology--can be corrected. First, the Albuquerque medical center should develop the lithotripsy charges using a workload estimate that is based on historical workload for veterans and potential demand under sharing agreements. Second, the center should include an equipment depreciation cost that is based on a shorter useful life. Without such actions, it seems likely that the Albuquerque center's pricing practices will continue to fail to recoup costs and may harm the market for lithotripsy services in the Albuquerque area.

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.

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