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VETS' COMMISSION VOTES NOT TO RECOMMEND LUMP-SUM

BUYOUTS OF VA DISABILITY BENEFITS -- Sanity reigns as

Commissioners vote 13-0 not to consider lump-sum

buyouts as an option when making their final

recommendations to the President and Congress.

 

 

Last week, the Veterans' Disability Benefits Commission (VDBC) voted 13-0 not to consider lump-sum buyouts of veterans' disability benefits as an option when making their final recommendations to the President and Congress.

Background here... http://www.vawatchdog.org/milcom/buyingoutdisabledveterans.htm

This is incredibly good news for veterans.

The unanimous vote came after testimony from Joe Violante, National Legislative Director of the Disabled American Veterans (DAV).  Violante spoke on behalf of many veterans' organizations.

Here is the final paragraph of Violante's testimony:  In the final analysis, any lump-sum scheme devised would constitute a reduction in veterans’ benefits to save the Government money. The proponents of lump sums have never been veterans’ advocates who have veterans’ interests at heart. As veterans’ advocates, we are compelled to oppose any recommendation that would have the Government pay disability compensation in lump sums. We hope this Commission, in looking at the “appropriateness” of disability benefits for veterans, will also conclude that it would be highly inappropriate to use lump sums as a means to relieve the Government of its moral obligation to provide adequate resources for veterans’ programs and its responsibility to administer those programs efficiently.

According to the Commission's 8-step process, they will issue a paper on their findings on Lump-sum buyouts.

It should be noted that the Commission can re-open this issue if new and compelling evidence is presented to change their position.  Insiders tell me that the chance of that is nil.

We should thank the DAV and the other VSOs for their hard work on this matter.  Without their compelling testimony the Commission's decision could have been different.

VDBC web site here... http://www.vetscommission.org/index.asp

The complete written version of Joe Violante's testimony is presented below (NOTE -- Violante's oral testimony was abbreviated and limited to ten minutes.) : 

--------------- 

 

STATEMENT OF

JOSEPH A. VIOLANTE

NATIONAL LEGISLATIVE DIRECTOR

DISABLED AMERICAN VETERANS

ON BEHALF OF

THE AIR FORCE SERGEANTS ASSOCIATION ● THE AMERICAN LEGION AMVETS ● THE BLINDED VETERANS ASSOCIATION

THE DISABLED AMERICAN VETERANS ● THE FLEET RESERVE ASSOCIATION THE JEWISH WAR VETERANS OF THE USA ● THE MILITARY OFFICERS ASSOCIATION OF AMERICA ● THE NATIONAL ASSOCIATION FOR THE UNIFORMED SERVICES ● THE NON COMMISSIONED OFFICERS ASSOCIATION THE PARALYZED VETERANS OF AMERICA ● AND THE VETERANS OF FOREIGN WARS OF THE UNITED STATES

BEFORE THE

VETERANS’ DISABILITY BENEFITS COMMISSION

OCTOBER 19, 2006

 

Mr. Chairman and Members of the Commission:

 

            In response to your invitation, I am pleased to present the views of the Air Force Sergeants Association, the American Legion, AMVETS, the Blinded Veterans Association, the Disabled American Veterans, the Fleet Reserve Association, the Jewish War Veterans of the USA, the Military Officers Association of America, the National Association for the Uniformed Services, the Non Commissioned Officers Association, the Paralyzed Veterans of America, and the Veterans of Foreign Wars of the United States on the question of whether the Commission should recommend that veterans’ disability compensation be paid in lump sums instead of monthly payments.  In our view, a lump-sum settlement for compensation would be inadvisable for many reasons.  The organizations comprising this group therefore oppose changes in the current mode of compensation payments made by the Department of Veterans Affairs (VA) to incorporate lump-sum settlements. 

 

            Various entities have from time to time suggested consideration of a lump-sum settlement in lieu of ongoing periodic payments for service-connected disability, ostensibly to improve efficiency in the delivery of benefits.  The “List of All Possible Issues to Address,” compiled for the Commission by staff and presented to the Commission at its second meeting on May 9, 2005, included for consideration the issue of lump-sum disability payments.  The Commission adopted the lump-sum issue as one for consideration and included among its research questions the following:  “Should lump sum payments be made for certain disabilities or level of severity of disabilities?  Should such lump sum payments be elective or mandatory?  Consider the merits under different circumstances such as where the impairment is to quality of life and not to earnings capacity.”[1]  The narrative explaining the rationale for the study of this issue states:

 

The option of making lump sum payments for disabilities has been debated for many years.  The Veterans’ Claims Adjudication Commission (VCAC) suggested consideration of this option and discussed “pros” and “cons” without proposing policy solutions.  The VCAC cited “pros” of lump-sum payments as a financial advantage at transition to civilian life, an opportunity to make long-term investments, reduction in the volume of claims, and taxpayer savings. VCAC cited “cons” as reduction in opportunity for increased ratings for worsened conditions, unwise use of the lump sum, high early years program costs, and increases in claims with little merit.  DOD separates those found unable to perform their military duties but whose disabilities are 30 percent or less disabling with a lump-sum payment based on base pay and years of service.  Analysis of this option in several different designs is needed to determine the appropriateness or inappropriateness of lump sums in the disability compensation program.[2]

 

As requested by the Commission, the Center for Naval Analyses (CNA) has prepared an analytical paper[3] reviewing and discussing the existing data on lump-sum settlements, history and terms of lump-sum buyouts in other programs, and methodologies for determining discount rates in computing lump-sum amounts.[4]  The information in that preliminary paper reinforces our objections to lump-sum settlements for veterans’ disability compensation, and I will address its contents along with my broader discussion of the inappropriateness of lump-sum payments for service-connected disabilities. 

 

            In our society, lump sums have customarily been used for paying damages awarded by courts in tort actions.  Lump sums have not typically been deemed to be an appropriate method for dispensing disability benefits.  Of course, it is not the function of the courts to administer or oversee ongoing disability benefit payments.  The legislatures have created government agencies for that specific purpose.  Thus, courts award damages in personal injury actions in the form of lump sums to cover past and future losses at one time, while disability programs generally pay periodic benefits to run concurrently with the disability. 

 

Our current disability compensation program has its origins in the War Risk Insurance Act of October 6, 1917,[5] and was modeled somewhat on the then newly emerging workers’ compensation program.[6]  Because of the “social insurance” purposes of workers’ compensation, awards are typically periodic payments, and tort-like settlements or commutation of payments are therefore disfavored for compensating work-related disabilities.  Workers’ compensation “is part of a statutory scheme designed to cushion an injured worker during the period of his or her disability.  It is the stated policy for the administration of the workers’ compensation system that it is in the best interest of the injured worker to receive benefit payments on a periodic basis. . . .  The purpose of the periodic payment method is to preclude the possibility of an imprudent employee or a dependent wasting the means of support and thereby becoming a burden upon society.”[7]  Under most workers’ compensation laws, lump-sum payments, when allowed, are allowed only under limited circumstances.[8]  “Critics of lump-sum awards point out that periodic  . . .  payment of income benefits advances the important objective of ensuring that workers regularly receive income support for the duration of the disability and allows for adjustments if conditions change.”[9]

 

            Both the disability compensation program for veterans and military disability retirement system are similar to workers’ compensation “theory and practice” insofar as they consider that the amount of compensation should be scaled according to the measured severity of loss or disability.[10]  However, prior to reform of the military retirement system by the Career Compensation Act of 1949,[11] the amount of disability retired pay was not tied to the degree of disability.  That legislation related the amount of compensation to the severity of the disability and established incapacity of 30 percent as the minimum which would qualify the individual for retirement.  A lesser degree of incapacity would be compensated by the granting of a lump-sum “severance” pay instead of long-term retirement pay.[12]  Rather than being computed to compensate for a certain degree of disability throughout the life of the member, severance pay was an amount equal to 2 months of basic pay, multiplied by the number of years of active service.[13]  The thinking was that a condition rendering a member unfit for military service and rated 30 percent or more would interfere with civilian employment enough to warrant disability retirement from the military service.  Such a member would be handicapped but not necessarily totally unable to work.  On the other hand, those rated less than 30 percent disabled would not be so handicapped as to warrant long-term retirement pay but rather would be provided a temporary payment to tide them over until they resumed civilian careers.[14]  The concept of severance pay was thought to be an “entirely new departure in military retirement” and the “idea of attaching severance pay to a disability system seem[ed] unique although perhaps not unwarranted.”[15]  Because there was no limited duty in the military service, “severance pay, as conceived by the Armed Forces, was proposed as a device for disability separation” with “an immediate cash benefit.”[16] The separated service member could thereafter receive compensation from VA for the disability with a deduction of the amount of the severance pay.[17]  If the disability worsens during the recoupment period, the veteran receives the differential between the initial disability and the increased disability.[18]  Thus, disability severance pay was not intended to serve the purpose or take the place of compensation for the lifelong effects of disability.  Though it ends the military department’s obligation to the member, it does not foreclose future compensation for the disability.  Therefore, disability severance pay from the Armed Forces is not a precedent or good analogy for a lump-sum settlement of veterans’ disability compensation, notwithstanding the Bradley Commission’s suggestion to the contrary.

 

            The Bradley Commission conducted no analysis of it own on the feasibility and advisability of lump-sum payments for veterans’ disability compensation, and it fell short of outright recommending lump-sum settlements itself, but it did raise the issue in recommending that “[c]onsideration should be given to discharge of the Government’s obligation in static cases rated at 10 and 20 percent by an appropriate lump-sum or short-term settlement.”[19]  It cited programs in Canada and Great Britain as a precedent for this approach and observed the provisions for disability severance pay in our own military retirement system:

 

   The payment of monthly benefits to persons who are disabled only slightly, if such benefits are not justified in terms of medical criteria, actuarial data, or material loss of earning capacity, presents an important area for possible improvement.  Such improvement is significant not only in terms of benefit expenditures but also administrative outlays, since the cases in the 10- and 20-percent categories constitute 57 percent of all the cases on the Veterans’ Administration rolls.  The soundest course of action would appear to be to find some method of discharging the obligation to such cases once and for all, and to remove them from the monthly payment files.  This is especially true of the many thousands of static cases where small monthly payments on a lifetime basis would otherwise be made for healed muscle wounds or losses of toes or fingers.

 

   The most satisfactory way to do this would appear to be to make a realistic assessment of the actual extent of disability and to terminate the Government’s responsibility by making a reasonable lump-sum settlement.  Precedent for this approach is to be found in countries like Canada and Great Britain.  Furthermore, under our military disability retirement system (since 1949), provision has been made for severance pay for personnel who are disabled less than 30 percent, if they cannot qualify on the basis of age and length of service.  This modification should serve no hardship on the present beneficiaries of the Veterans’ Administration rolls, particularly since their earning capacity on the average is not significantly impaired by their disabilities.  In some conditions, for example, those of a psychiatric nature, final settlement of a claim might even be beneficial in assisting the recovery of a patient.

 

   Experience with settlements for industrial accidents shows that the lump-sum arrangement in cases where the degree of disability is substantial has proven unwise because many of the recipients tend to squander their settlement money.  In view of this experience, it would not be desirable to extend the lump-sum approach to other than the small disabilities.  It should also be recognized that some of the conditions may be progressive in nature.  Therefore, in cases where lump sums were paid and the disability worsened, protection to the veteran should be provided by allowing him to requalify for compensation on a monthly basis.[20] 

 

As I will discuss later, the CNA analysis casts doubt on the wisdom and practicality of this approach to reducing “benefit expenditures” and “administrative outlays” by “discharging the [Government’s] obligation” to “slightly” disabled veterans “once and for all,” and we certainly questions the fairness of this goal.

 

            Some 40 years later, VCAC took somewhat the same approach.  It did not itself recommend lump-sum settlements but raised the issue for consideration:  “Another approach to compensating veterans at the lower levels—an approach which the Commission does not endorse but believes has potential—would be to concentrate the benefit around the point of veterans’ transitions to civilian life.  One way to do so would be to pay compensation benefits in a lump sum to veterans with the least disabling service-connected conditions.”[21] [22] 

 

            Citing lump sums as one of the “cost-saving and product-feature strategies” of commercial insurers,[23] VCAC suggested they present a means to reduce future claims and fiscal obligations of the Government, while supposedly better serving veterans’ needs at the same time.  Where the Bradley Commission’s reason for offering lump sums was almost entirely for the purpose of getting less severely disabled veterans off of the compensation rolls to reduce the burden on the Government and save it money, the VCAC attempted to present the idea as potentially beneficial to both VA and veterans.[24]  The VCAC’s rather tentative reasoning about the advantages of lump-sum payments for veterans did not obscure the fact that reduction of claims workloads and program costs were the stimulus for its foray into this area of exploration.  Sprinkled throughout VCAC’s discussion of lump sums, were remarks concerning the objective of savings for the Government.  For example, VCAC stated:  “significant budgetary savings would be expected in the future, with the cumulative effect of declining monthly payment obligations to veterans with 10 percent disabilities.”[25]

 

            For its exploration of the pros and cons of lump-sum payments, VCAC’s concept assumed that it would apply only to “minimally” disabled (rated 10 percent) veterans.[26]  VCAC premised its assessment of the advantages of lump sums for minimally disabled veterans upon the conclusion that their needs are not the same as other disabled veterans: 

 

[T]he Commission reasoned that the needs of minimally disabled veterans are substantially different from those who are more seriously disabled.  While the seriously disabled can be expected to require ongoing, long-term support, those who are minimally disabled may be better served by concentrating the support at the point of transition to civilian life.  In that way, the minimally disabled may have a better opportunity to achieve full occupational competitiveness and self reliance in the civilian marketplace.[27]

 

VCAC further reasoned:

 

In some important ways, newly separated military veterans are placed at a competitive disadvantage among their non-veteran peers in the civilian labor market.  While in the military, veterans generally do not earn college degrees, gain specific civilian job experience, build seniority in a civilian occupation, nor learn civilian employment skills, as their nonmilitary counterparts may.  Consequently, they are likely to have fewer employment and financial options.  In addition to these drawbacks, minimally disabled veterans are still learning to adjust to their disabilities.[28] 

 

VCAC questioned whether monthly compensation for a 10 percent disability “meaningfully assists with a veteran’s rehabilitation or meaningfully promotes the veteran to economic parity with his civilian contemporaries.”[29]  VCAC reasoned that, “[i]f veterans realize that the lump sum payment represents the only compensation to which they will be entitled (unless, e.g., the disability worsens dramatically), they may be more motivated to fully rehabilitate themselves for competitive employment.”[30]  According to VCAC, a lump-sum payment “could provide transition opportunities [the veteran] would otherwise not have in the adjustment to civilian life.  A lump sum could be invested in a business, applied to a college education, or used for a down payment on a house.  Concentrating the benefit at the point of transition to civilian life may conform more closely with the intent of the program for these veterans than does the monthly payout system.”[31]  At the same time, VCAC pointed to the advantages of having compensation as a lump sum because a “benefit payment invested in commonly available financial instruments could provide veterans with substantial monetary benefits during their lifetimes,”[32] and give them “a clear opportunity to make long-term investment that could greatly exceed uninvested monthly disability payments.”[33]  Yet, VCAC stated a “veteran who does not invest a lump sum benefit payment may realize little or no advantage from receiving entitlement in that form.”[34] 

 

            The contradictions are apparent.  First of all, compensation is not a “transition” or “readjustment benefit.”  Congress has recognized the need for and authorized such benefits.  Rehabilitation and employment assistance are provided through VA and the Department of Labor.  Educational benefits are provided through the GI Bill.  VA guarantees home loans, alleviating the necessity for the down payment required in conventional loans.  Other programs for veterans aid in starting small businesses.  Veterans, and service-connected disabled veterans in particular, have special employment preferences and rights.  If veterans are deemed to need lump sums to expend immediately because they do not have occupational competitiveness, they are adjusting to their disabilities, need rehabilitation, or need transition opportunities for adjustment to civilian life that immediate cash could provide, such as investment in business, education, or home, how can they invest their money for savings?  On the one hand, VCAC extols compensation’s value as a transition benefit that will satisfy the veteran’s need for money up front at a time the veteran is “learning to adjust to [his or her] disability,” and on the other hand, VCAC is touting the benefits the veteran will derive from a savings investment and acknowledges that, absent such investment, the veteran may not realize an advantage from receiving a lump sum.  In short, if a lump sum is not advantageous unless invested, it is a contradiction to say that it could provide transition opportunities. 

 

            Among the many other problems we found with VCAC’s reasoning was its solution to the problem created by the worsening of disability subsequent to a lump-sum settlement.  VCAC acknowledged that dilemma:  “The Commission believes that any lump sum proposal should provide a ‘safety net’ for those veterans whose conditions worsen severely.  These veterans should be allowed to apply for and receive the benefits they would have been entitled to under the current system.  However, a policy that contemplates too many exceptions could have the effect of negating many of its advantages.”[35]  Proponents of lump-sum payment have a tendency to gloss over the inherent contradictions and complications in their suggested schemes, and VCAC’s suggestion that provision could simply be made for circumstances in which a veteran’s disability worsens “severely” raises some problematic questions.  What if a veteran’s disability suddenly worsens to the severe level (in itself a complex and problematic issue) within a short period of time after the lump sum is paid?  Will there be some complex offset formula?  Will veterans not have to file repeat claims, contrary to the goal of eliminating them, to have the question decided as to whether their disability is severe?  Will there not be an incentive to file more repeat claims if the determination is unfavorable, especially if the veteran is rated just one step below the threshold for renewed entitlement?  “Severe” is not synonymous with “total” (100%) disability under many of the disability rating formulae in the rating schedule.[36]  Does this mean that compensation would resume for disabilities substantially less than total?  If so, where will the line be drawn without some purely arbitrary basis?  The broader this resumed entitlement, the less savings for the Government.  On the other hand, without some exception for renewed entitlement with worsening disability, the most persuasive selling point is lost, as was indicated by the views of the focus group sessions VCAC conducted. 

 

According to VCAC, most veterans in the focus group wanted more information before offering an opinion on lump sums, but “[b]y the end of the discussion,” “nearly all said they would be open to the lump sum payment idea provided that: (1) the lump sum was a fair amount, (2) they would maintain VA medical care, (3) there would be counseling and education on how to manage the lump sum, including financial management, and (4) they could return to the system if their condition seriously worsened.”[37]  Naturally, a lump sum sounds attractive.  What is a “fair amount”?  Will VA hire a legion of professional investment counselors, and what is the cost-effectiveness of this?  As noted above, an exception to return to the system if the condition “seriously worsened” opens up a whole new set of complications.

 

In addition to the problem posed by worsening of a disability subsequent to a lump-sum settlement, VCAC acknowledged other potential disadvantages.  These potential adverse effects included the potential for squandering the lump-sum payment, the fact that program costs would be high in the short term, and that “the lure of a lump sum” could lead more veterans to file claims for service connection of minor disabilities.[38]

 

            On May 21, 1997, the House Committee on Veterans Affairs held a hearing on the VCAC’s report.  In addition to a strong negative reaction to lump sums by the veterans service organizations, the VA Deputy Secretary testified in opposition.  With regard to lump sums and 13 other suggestions VA rejected, he said:  “The 14 [recommendations] on which we part company were generally found to have the potential for diminishing in some fashion a veteran’s well-earned rights, and the Secretary staunchly opposed recommendations that would bring about changes which in any way could adversely affect veterans.”[39]  This testimony followed from a May 2, 1997, memorandum from the Secretary of Veterans Affairs which included an attachment prescribing action to be taken on VCAC recommendations.  The VCAC recommendation to “[f]urther examine the pros and cons of utilizing lump sum payments” was listed among the VCAC recommendations with which VA non-concurred, along with the accompanying comment:  “This proposal does not merit further study, despite the fact that certain interests raise it periodically. The inevitable effect would be to cut off some veterans from what they earned by their service.” 

 

Because it took no action on this recommendation, we can only infer that Congress rejected it as well.  Unfortunately, the idea did not die a well-deserved death.  The Government Accountability Office (GAO), previously the General Accounting Office, addressed the VCAC recommendation in the context of ways to reduce the claims backlog in VA, but its report adds nothing of substance to VCAC’s discussion of the issue.[40]  VA’s Office of Inspector General (OIG) has raised the issue, most notably in its report on variances in average compensation payments among the states.[41]

 

            While admitting that the review of rating practices were generally inconclusive for the purpose of attributing the variations to them,[42] OIG recommends that consideration be given to establishing a lump-sum payment option as a solution to variations,[43] the causes of which are not satisfactorily understood.  Observing that 46.9 percent of service-connected veterans are rated 0, 10, and 20 percent, OIG recommends payment of lump sums “for all veterans with disabilities rated 20 percent or less,” which would “result in reducing 46.9 percent or 1.117 million active case files” and result in “reducing recurring compensation payments of $1.96 billion a year and free up staff to improve the quality and timeliness of future workload.”[44]  As of the end of 2004, approximately 15,300 veterans were rated 0 percent.  Apparently OIG would pay lump sums to veterans rated 0 percent who may never otherwise have compensable disability.  It is unclear whether multiple lump sums would be paid for multiple noncompensable disabilities.  However, OIG does admit, perhaps unwittingly, that the real problem is poor quality and timeliness due to inadequate staff, where it elsewhere acknowledged only that payment levels “may be” affected by timeliness pressures, staffing levels, and adjudicator experience and training.[45]

 

            Ironically, OIG was earlier highly critical of lump-sum settlements, when offered by commercial companies in exchange for veterans’ future compensation payments.  Regarding this practice, OIG said “These schemes seem to target the most financially desperate veterans who are the most vulnerable. For many unsuspecting veterans, these benefit buyouts could be financially devastating.”[46]  In an article written for publication in veterans’ newsletters titled “Don’t Let Them Steal Your Future,” a member of OIG’s staff observed of these “advanced funding” arrangements:  “The obvious downside to this is that, statistically speaking, people who take lump sums tend to spend the money faster than they need to, and then there’s nothing down the road for them to live on. . . .  These schemes seem to target the most financially desperate veterans who are the most vulnerable.”[47]  Congress enacted legislation to expressly prohibit these advanced funding plans.[48]

 

            In its review for this Commission, CNA was naturally confronted by the same issues regarding the merits of paying disability in lump sums.  The CNA report states that a “lump sum program for disabled veterans has potential advantages both for veterans and VA.”[49]  However, for the reasons I will cover in the following, that appears to be a diplomatic launch or lead-in to CNA’s analysis.  

 

            Before considering the implications of the CNA report, commissioners should ask themselves: Is there something fundamentally inappropriate about the current longstanding method of payment, and if not, why are we considering lump-sum settlements as an alternative to the periodic mode of compensation payments?  The simple answer is:  A half of a century after the current compensation system was established, and a half a century ago, the Bradley Commission suggested one-time payments might be a good way to get large numbers of veterans off of the compensation rolls, and the idea has been so attractive to those with that motive that it still lives today, despite the fact that no Congress has ever accepted it as a legitimate change to the compensation program.  Fortunately, CNA’s fairly candid report lays the available facts on the table and lays out, in principle, the case for and against lump sums while arguing for neither.  Though the available data is woefully lacking, it provides enough information that the case against lump sums makes itself.

 

            Because the Bradley Commission’s interest was solely for the purpose of reducing spending, it did not consider any of the other consequences or how a lump-sum scheme might work in practice.  VCAC entertained some of the pros and cons from the standpoint of VA and veterans, but much of its discussion was theoretical and conjectural. 

 

            The CNA analysis assumes that any lump-sum plan would necessarily have the dual goals of benefiting veterans and producing savings for VA, but acknowledges the challenges of achieving both:  “A lump sum program has the potential both to serve disabled veterans better and to produce savings for VA.  One challenge in designing the program is to determine exactly how veterans would best be served overall.  Is there a way to design the program so that all veterans are ultimately better off and no one’s welfare is put at risk?  And would that program design also be able to generate savings for VA?”[50] 

 

In its attempt to answer these questions, CNA conceded at the outset that there is no existing model from which to draw the lessons of experience:  “In looking at the various U.S. federal lump sum programs and other countries’ programs for their disabled veterans, we found that basically no program was directly comparable to a potential VA lump sum program.”[51]  Though CNA thought further data on the DOD disability severance pay program might provide some helpful information on such things as how recipients used the money and the administrative costs of that method, it did not view severance pay as analogous to a lump-sum settlement as an alternative to an annuity.[52]  Further, while the Bradley Commission may have believed that programs in Canada and Great Britain served as a precedent for lump-sum payments of compensation for American veterans from a public policy standpoint, CNA found that they did not provide useful models:  “The compensation programs for disabled veterans in Canada, the United Kingdom, and Australia have limited applicability for a VA lump sum program.  The primary reason is that those three countries have separate compensation for economic losses and non-economic losses, and the lump sum is paid only for the latter.”[53] 

 

In its exploration of several aspects of program design, CNA acknowledged the lack of experience or data for guidance.  For example, as I will further discuss, CNA noted that there is no information on which to base a judgment or prediction about whether veterans would use lump sums wisely, a question of primary importance:  “Another concern is that some veterans’ ‘unwise’ use of their lump sums might jeopardize their basic financial welfare. . . .  Unfortunately, because disabled veterans have not been offered lump sums in the past, there is no direct evidence on how much this should be a concern.”[54]  CNA cited the lack of data on administrative savings:  “The greatest challenge in estimating administrative savings from a lump sum program is the lack of detailed data.”[55]  CNA noted that the amount of savings in benefit payments “would depend on many factors.”[56]  In several areas, CNA noted that conclusions on a lump-sum program would require further studies.  For example, CNA stated:  “If VA seriously considers a lump sum payment option, it needs to conduct a study to estimate personal discount rates.”[57] [58] CNA admitted that its estimate of the potential costs and savings that might result from a lump-sum program is insufficient for purposes of deciding for or against a recommendation on the issue:  “We view our estimates of savings as a starting point for a more extensive analysis of costs and savings in a lump sum program.”[59]  CNA was therefore limited to a conceptual analysis, without sufficient information to support firm conclusions about the advantages, disadvantages, practicality, and wisdom of a lump-sum settlement for disability compensation.  CNA candidly admitted that the existing information provides an insufficient basis for choosing a program design:  “For most elements in the design of lump sum program, it is not clear which of multiple alternative approaches would best meet the dual goals of serving veterans better and reducing the costs for VA.”[60]

 

Because of the structure of the current disability compensation program and because the goal of government savings through a discounted payment is inherently at cross purposes with the best interests of disabled veterans, consideration of a design for a lump-sum payment program presents many difficult questions and challenges.  The CNA report addresses some of these questions and challenges.

 

The choices on two basic questions of program design have implications for the remaining questions, as well as how fair the plan would be and how much the potential for savings would be.  Those two questions are whether the program will be optional or mandatory for veterans and how many types of disabilities will be subject to lump-sum payments. 

 

Whether the lump sum would be optional is one of the decisions VA would need to make about program design, according to CNA.[61]  As with other features of a lump-sum plan, VA does not have the authority to make such decisions.  Such a fundamental element of a compensation program would affect budget considerations and would by nature be a decision for Congress to make and prescribe in authorizing legislation.  Because the impact of each of the choices on program design would be interdependent with the other choices, no sound recommendation can be made to Congress for a lump-sum program without a reasonable understanding of the likely outcome of such a program, and the likely outcome cannot be known without some agreed-upon program configuration and an understanding of the impact of each of the elements of that program design.

 

The Commission cannot make a defensible recommendation for Congress to enact legislation to provide for lump-sum settlements without any understanding of whether it would be beneficial or detrimental, whether its problems would outweigh its benefits, and whether it would result in enough savings to justify the change without undue violence to the concept and principles of compensation as we know them.  To have such understanding, the Commission must consider all the ramifications of various elements of the program design.  

 

According to CNA, one “advantage would arise if the program were designed so that the lump sum would be optional, because having a choice is generally considered inherently beneficial.  In other words, offering a lump sum would necessarily make veterans at least as satisfied as without that offer because they would still be able to decline the lump sum in favor of receiving compensation in monthly payments just as they currently do.”[62]  We must disagree with CNA’s view that having a choice is, for its own sake, inherently beneficial.  The fact that some veterans might find it desirable does not demonstrate that it is a warranted program change.  If it is optional, the veterans that it might benefit the least, those most vulnerable to an unwise decision, may elect to receive it.  We doubt that many of those veterans who entered into advanced funding agreements with commercial enterprises did so to get the money just to invest it.  As OIG stated, lump-sum plans appeal to the most vulnerable veterans, and the ones who choose the option are usually people who tend to spend the money right away.  Many of society’s rules limit our individual choices for the good of the whole, and having a choice is not inherently or invariably beneficial for the individual or the whole.  Having the choice of instant gratification or satisfaction is not synonymous with good judgment.  We oppose any lump-sum program, but, in our view, making a lump-sum settlement optional rather than mandatory would be the lesser of two evils, because wiser veterans could reject a lump-sum settlement, and that would moderate its adverse impact somewhat.  It would be bad enough for the Government to entice disabled veterans to accept reduced compensation in the form of a lump sum to achieve savings: it would be worse for the Government to force it upon them.

 

Deciding whether to include for lump-sum payments disabilities at all levels of severity as opposed to lower-rated ones and whether to include all disabilities or only disabilities unlikely to worsen presents a perplexing labyrinth.  In that regard, CNA posed a question as a basis for its discussion: 

 

Would the lump sum be provided only for certain disabilities and ratings?  If it would be available for all disabilities and ratings, then that could raise concerns about possible negative effects on veterans who depend on disability compensation for a significant portion of their income.  If the lump sum would be available only to some disabilities and ratings (which raises the issue of fairness), then which candidates would make the best recipients, based on concerns about VA administrative savings and veterans’ financial welfare?[63] 

 

CNA again mistakenly designates this as an issue VA must decide,[64] but that does indicate, nonetheless, that a decision on this issue would be essential to a well-founded recommendation for lump-sum settlements.  However, that question would be an extremely difficult one to decide even if with sufficient data for an informed judgment on it, which CNA’s report admittedly does not contain.[65]  That difficulty is at least implicit in CNA’s analysis.

 

In its approach to analysis of the effects of lump sums, CNA focused “only on the lower ratings” because veterans with the less severe disabilities would not rely on compensation as a principal source of income, and misuse of the lump sum would not pose as great a risk.[66]  In a contradictory fashion, CNA speculated:  “it seems probable that disability, at least at greater levels of severity, might make someone more likely to save because of less certainty about his or her future earnings capacity.”[67]  Regardless, these lower-rated disabilities could worsen, and that presents the question of whether to include all or some disabilities in a lump-sum program.  How to deal fairly with disabilities that worsen after payment of a lump sum presents a separate complex question, but CNA thought limiting lump sums to disabilities unlikely to worsen would solve that problem to some extent:  “If the lump sum program did not allow veterans to apply for rerating of disabilities for which they had received a lump sum, then concern about the effect of increased disability could be addressed by limiting eligibility to disabilities with a low probability of worsening.”[68]  Regardless of whether the program permitted additional compensation for worsening after the lump-sum settlement, CNA deemed knowledge of which disabilities were likely to worsen as essential to program design:

 

Knowing which disabilities and ratings are likely to worsen is a very important component of designing a lump sum program.  If reapplications would be allowed in cases where a condition deteriorates, then administrative savings would be best obtained by offering a lump sum only for conditions with a low probability of worsening.  If reapplications would not be allowed, then addressing the concept of fairness in compensation would require either of the following approaches: (1) calculating the lump sums to incorporate the expected deterioration or (2) calculating the lump sums with the assumption that the rating would not increase but offering the lump sums only for conditions with a low probability of deteriorating.  Clearly, all of the options just mentioned require knowing about the tendency for different conditions to deteriorate. [69]

 

As noted, CNA indicated that the “tendency for each type of disability to worsen over time” is an area where additional information is necessary:[70] 

 

For a program design in which lump sum recipients are not allowed to apply for additional compensation to account for deterioration, then knowing re-rating probabilities allows the lump sums to incorporate the expected deterioration. Alternatively, it allows the lump sums to be offered only to disabilities with a low probability of worsening. For a program design in which application for additional compensation is allowed, knowing which disabilities tend to worsen will allow more accurate estimates of the administrative costs from those reapplications.[71]

 

Anyone contemplating a lump-sum program should fully understand the enormity of this particular area of inquiry by itself.  CNA is observing that the potential for worsening must be known for all disabilities within the multitude that could be compensated:  “[E]ach diagnosis should be considered individually with respect to eligibility for a lump sum offer because each has different probabilities of worsening.”[72] 

 

            From its preliminary study, CNA singled out certain skin conditions, disabilities of the auditory system and eye, thumb amputation, and hypertension as “good candidates for a lump sum.”[73]  In concluding that hypertension has a lower incidence of worsening, CNA apparently looked only at the disease over a 5-year period by diagnostic coding in VA’s Compensation and Pension Master Record.[74]  That method and time period would likely not present an accurate picture of the clinical course of arterial hypertension.  Of the conditions cited by CNA, hypertension is perhaps the best example of why choosing certain diseases for lump-sum settlement is not as simple as it might appear.  While hypertension as such is rated based on the degree of elevation of blood pressure,[75] it may progress to involve vascular changes in the heart, brain, kidneys, and eyes, for example.  Hypertension is a leading cause of cardiovascular disease, stroke, and renal failure.[76]

 

Though such manifestations are separately ratable under the bodily system affected, they are not new and separate diseases.[77]  If CNA did not examine these cases for occurrence of such separately ratable manifestations, it did not get a true picture.  More to the point, however, this provokes the question of whether a lump sum for hypertension rated 10 percent would be deemed to compensate for all subsequent manifestations, such as heart disease and cerebral atherosclerosis, no matter how severe?  

 

            Even if we could, through careful study, isolate a group of disabilities that, based on experience, have a lower incidence of worsening, that does not mean there will be no cases of worsening of those disabilities, and the numbers of cases of worsening among all disabilities in the group might be substantial, consequently resulting in inequities for many veterans.

 

How to deal with worsening disabilities in lump-sum program is another facet of the puzzle that presents many daunting questions.  “One of the biggest challenges in designing a lump sum program is deciding how to handle situations where a disability for which a lump sum payment has been made worsens over time.”[78]  CNA provides three program design options:  “How would the possibility of a condition deteriorating after receipt of the lump sum be addressed?  Options include the following: (1) incorporating that possibility into the lump sum, (2) offering the lump sum only for disabilities with a ‘low’ probability of deteriorating, and (3) allowing applications for re-rating and additional compensation.”[79]

 

            As noted, CNA acknowledged that fairness to disabled veterans dictates that any lump-sum plan address the prospect of increasing disability in one of two other ways if claims for increased ratings were to be precluded:  “If reapplications would not be allowed, then addressing the concept of fairness in compensation would require either of the following approaches: (1) calculating the lump sums to incorporate the expected deterioration or (2) calculating the lump sums with the assumption that the rating would not increase but offering the lump sums only for conditions with a low probability of deteriorating.”[80]  Choosing the first option would, again, require that the lump sums include additional amounts to cover anticipated or potential worsening of the disabilities:  “If applications for re-rating were not allowed, then expected deterioration in a condition would need to be incorporated into calculation of the lump sums in order to address issues of fairness.”[81]

 

            As with the second option, factoring into the amount of the lump sum some additional amount to offset the effects of increased disability in the future would require not only knowledge of the propensity of every disease and its sequelae and every kind of injury and its residuals to worsen over time, but also to know for each such service-connected disability the propensity to worsen or expected clinical course of the disability given the affected veteran’s age.  Some degenerative disabilities might be expected to progress steadily.  Some may remain relatively static during the earlier years of life but deteriorate at an increased pace later in life.  Thus, the veteran’s gender and age at the time of the award might add another variable to the factor for potential worsening of the disability.  These variables would require, perhaps, some average potential for worsening to be assigned to every possible service-connected disability subject to a lump sum.  This factor would vary the lump-sum amount in addition to the variance for life expectancy given the veteran’s gender and age at the time of the award.  It is foreseeable that a lump-sum program with this design might result in great inequities or perceived inequities.  For example, one veteran might receive more or less for his 10 percent disability than his twin brother for a 10 percent disability of another type because of the difference in the likelihood of worsening.  This difference in payment amounts would be in addition to differences because of age and gender, which would quite probably by themselves result in veterans with identical disabilities receiving different lump sums because of those two variables.  Moreover, this would likely result in great inequities where some disabilities of a type did in the cases of some veterans worsen more than predicted, worsen less than predicted, worsen none, or improve to non-compensable levels.  Even if the Herculean task of devising these myriad complex formulas for fair lump sums could be accomplished, the complexity of applying them would likely be an administrative challenge. 

 

            Moreover, simply adjusting a veteran’s lump-sum award for any potential future worsening cannot be deemed to remedy all inequities that might otherwise occur if the disability rating could not be revisited.  If the lump sum were for a disability rated 10 percent, it could limit the veteran’s future entitlement to vocational rehabilitation.[82] The inability to be rated higher could cost the veteran entitlement to more VA health care services and a higher priority for those services,[83]as well as dental treatment,[84] and exclusion from medication copayments.[85]  The level of the disability rating can determine entitlement to a variety of benefits offered by the states.  In addition, veterans’ survivors and dependents derive entitlement to dependency and indemnity compensation (DIC),[86] medical care,[87] and educational benefits[88] from the veterans’ status as totally disabled. 

           

I have already touched somewhat on the difficulties associated with option 2, but we need to revisit that option to address related questions.  The second option, paying lump sums only for conditions that have a “low probability” of worsening requires, as did the first option, knowledge about the tendencies of each and every possible service-connected disability.  This option creates its own set of problems and additional complications regarding its interaction with other options of program design.  To target disabilities unlikely to worsen, the lump sum would have to be separate from and in addition to compensation for other service-connected disabilities:  “Would the lump sum be designed to compensate for combined disability or for specific disabilities?  If the lump sum were compensating for combined disability, then that would diminish the program’s ability to account for differences across disabilities in their tendency to worsen over time.”[89]  CNA recognized that one of the unavoidable questions of program design is whether to pay lump sums for specific disabilities as opposed to combined disabilities; [90] however, CNA again made the mistake of assuming this was a question for VA to resolve.[91]  CNA envisioned a design in which “a veteran could accept a lump sum for one disability and continue to receive an annuity for any other disabilities that he or she has.”[92]  CNA concluded from its hypothetical model for estimating savings that “the results in this chapter support designing a lump sum program based on veterans’ individual disabilities, as opposed to their combined disability ratings.”[93] Accordingly, with this option, we are confronted by the complications of paying lump sums for certain disabilities when veterans have other service-connected disabilities.  CNA did not address these complications.

 

For purposes of compensation, VA “combines” rather than adds the ratings for two or more disabilities.[94]  Under the combined rating formula, disabilities are combined in their descending order of severity.  The most severe condition retains its full value.  It is subtracted from 100 percent, leaving the remaining ability.  The percentage rating for each successive disability is multiplied by the remaining ability at that point to arrive at a value for that disability, which is then added for a combined rating.  The process is repeated until all service-connected disabilities have been combined.  For example, when combined, a 50 percent, a 30 percent, and a 20 percent disability would not be 100 percent for compensation purposes.  Subtraction of the 50 percent rating from 100 percent leaves 50 percent remaining ability.  Multiplying the remaining 50 percent by 30 percent yields a value of 15 which is added to the 50 percent, making the combined value 65 at that point.  The remaining ability is thus 35 percent.  To find the value for the 20 percent disability, 35 percent is multiplied by 20 percent, which yields a value of 7, and that is added to the prior combined value of 65, resulting in a combined value of 72.  The final combined value of 72 is rounded to the nearest number divisible by 10, resulting in a combined rating of 70 percent for all disabilities.  The sole reason for this method seems to be to avoid a sum exceeding 100 percent, as would sometimes occur if an additive approach were used.  In effect, all disabilities other than the most disabling do not receive their full value in combination.  As a consequence, a 10 percent rating combined with other disabilities may not result in any increase in the combined rating.  Consideration of option 2 raises the question of how this effect would be dealt with in a lump-sum program where a given 10 percent disability would not change the compensation rate.  For purposes of the amount of the lump sum and the monthly payment for the other disabilities, how will VA factor in the reduced value of a disability as part of a combined rating?

 

Let me employ some hypothetical situations to illustrate the problem.  If the basic rule were that a veteran will be paid a lump sum for disabilities rated 10 percent, for example, will he or she be entitled to a lump sum for all such disabilities?  The answer is significant because, under the combined rating formula, four 10 percent disabilities are compensated at the 30 percent rate.  The fourth 10 percent does not raise the combined rating to 40 percent.  If the veteran was initially service connected for three disabilities and rated 10 percent for each, with the lump sum paid for each of those three, and several years later, he or she was rated 10 percent for a fourth disability, would a full lump sum be payable for the fourth disability, would a reduced lump sum be payable, or would no lump sum be due?  If the maximum lump sum under such circumstances was the amount for three disabilities, consistent with the effect the combined rating formula, and  the plan prohibited any additional compensation once a lump sum had been paid for a given disability, could the veteran receive additional compensation for worsening of one of the four, and if so, which one?

 

The combined rating for a 60 percent disability and a 10 percent disability is 60 percent.  The separate 10 percent disability does not raise the combined rating, and such veteran would receive compensation at the 60 percent rate.  Would he or she nonetheless receive a lump sum for the 10 percent disability, and if so, would it be the same amount as it would be if the 10 percent disability were the only service-connected disability?  Consider the veteran who had a 40 percent service-connected disability and a 10 percent service-connected disability with a combined 50 percent rating who received a lump sum for the 10 percent disability.  Shortly thereafter the 40 percent disability was increased to 60 percent, at which time the 10 percent disability would not result in a greater combined disability and would therefore not result in any higher compensation.  Would the veteran keep the lump sum or have to pay it back?  If the latter, would the veteran be required to repay the full amount of the lump sum, or would the time between the award of the lump sum and the increase in the 40 percent rating to 60 percent be taken into account under some prorating formula to reduce the amount to be recouped?

 

            Attempting to pay a lump sum for a disability or disabilities that comprise part of a combined rating presents an additional conundrum inasmuch as all 10 percent and 20 percent ratings are not equal in their effect on the monetary payment.  For example, during 2006, a veteran with a 10 percent rating received $112 monthly and a veteran with two 10 percent ratings combining to a 20 percent received $218 monthly.[95]  The compensation for a 20 percent rating is $106 more than for a 10 percent rating.  We might conclude that one of the two disabilities is worth $112 and the other is worth $106 a month.  As the combined rating gets higher, the value of a 10 disability increases dramatically where it accounts for a higher combined rating.  Let us consider an example in which one veteran has an 80 percent disability and a second 70 percent disability.  The combined value is 94, and rounded down would be a combined rating of 90 percent for purposes of compensation.  At the rate for a veteran with no dependents, that veteran would receive $1,436 per month.[96]  Another veteran also has an 80 percent disability, a 70 percent disability, and a 10 percent disability, producing a combined value of 95, rounded up to 100 percent for the combined rating.  At the rate for a veteran with no dependents, that veteran would receive $2,393 a month.[97]  In that instance, a 10 percent disability is worth $957 a month.  How would a lump-sum formula equitably address this differential? 

 

            Pursuant to sections 4.29 and 4.30 of title 38, Code of Federal Regulations, veterans may be paid compensation at the 100 percent rate on a temporary basis when a service-connected disability requires hospitalization for more than 21 days or post-hospital or post-surgical convalescence for a month or more.  Given that lump sums will be in lieu of lifetime payments and given the principle that the compensation for all service-connected disabilities is not to exceed the 100 percent rate, will the award of a lump sum for a service-connected disability make a veteran ineligible for compensation under these provisions, even if the lump sum was paid for a disability other than the one requiring hospitalization or convalescence?  If a lump sum has been paid for a disability and the effects of that disability in concert with other service-connected disabilities later render the veteran unemployable, would the veteran be ineligible or eligible for compensation at the 100 percent rate based on individual unemployability?  Consider the same scenario, but where the unemployability is due entirely to disabilities other than the one for which a lump sum was paid.  Could the veteran receive compensation at the 100 percent rate, if so, would the lump sum be recouped?  A veteran who is eligible for both disability compensation and pension may elect to receive the one most advantageous and could therefore switch from one to the other but could not receive both concurrently.[98]  Again, considering that a lump sum would be in place of lifetime compensation, would it bar the veteran’s election to receive pension as the greater benefit on the theory that would be tantamount to concurrent receipt or a duplication of the two benefits?  Service-connected disability can be considered in determining whether the veteran meets the total disability requirements for pension.[99]  If a lump sum has been paid for a service-connected disability, would the veteran be allowed to receive pension if the finding of total disability was based in part on the effects of the service-connected disability?

 

            These are just a few of the examples that come immediately to mind.  Any lump-sum plan must account for how these complicating factors will be resolved.

 

Under CNA’s third design option for addressing concerns about disabilities that worsen after payment of a lump sum, veterans would be permitted to seek additional compensation for the increased disability.  As CNA noted, “the additional compensation for an increased rating would have to account for the compensation already received as a lump sum,”[100] and “a decision would need to be made about how to best provide the additional compensation (i.e., an additional lump sum or an annuity reduced in accordance with the lump sum already received).”[101]  Here again, this is an option that seems practical in theory, but would likely be much more difficult to administer in actual practice.  How would such a reduction/offset formula work?  Would the full amount of the lump sum be recovered from future compensation payments, or in the case where many years had elapsed between payment of the lump sum and the increase in disability, would only that portion of the lump sum exceeding what would have been paid in monthly payments up to the time of the increase be recovered?  How would the future compensation payments “be reduced in accordance with the lump sum already received” if the disability waxed and waned, i.e., alternated between exacerbations and remissions, requiring periodic increases from 10 percent to some higher rating with subsequent reductions back to 10 percent?  Like the numerous other complications that are likely, extensive statutory changes could prescribe feasible solutions, but the added complexity and administrative burdens in such a Rube Goldberg contrivance might well outweigh any government savings, especially in view of the reality that the ability to return to the system with new claims for increased compensation, though necessary perhaps for fairness, would itself largely defeat the purposes of lump-sum settlements.  Of course, the Commission has no empirical data from which to perform a cost-benefit analysis of option 3, taking into account these many complicating factors.

 

In addition, CNA did not address many other complications that would arise because of the fundamental disharmony between the structure of the current periodic payment system and the one-time payments that some would have cobbled onto it in pursuit of savings for the Government.  Because provisions for worsening disability were a major concern of focus groups, CNA recognized that any lump-sum plan would need to deal with that problem in some way, but it did not discuss how the system would deal with factual or legal changes that result in reduced or terminated entitlement under the current system.  Here again, the secondary or collateral “ripple effect” complications that would result from the modification of the compensation system could be addressed through pervasive statutory changes, but the Commission needs to be cognizant of the magnitude of the complications.  The Commission needs to have a greater awareness and understanding of these complications than is evident in entities such as OIG that have so offhandedly surmised lump sums may be a solution to such problems as large claims backlogs in VA.

 

In recognition that disabilities may worsen or may improve and that a multitude of other factors may require a reduction, offset, or termination of benefits, the current system is flexibly structured to increase, decrease, or terminate compensation as required.  With periodic payments, such changes allow the benefit rates to change accordingly.  “The term ‘compensation’ means a monthly payment made by the Secretary to a veteran because of service-connected disability. . . .”[102]  Obviously, compensation is dispensed through recurring, periodic payments to make it run with the disability.  Payments continue for as long as there is compensable disability.  Thus, its flow is regulated to coincide with the ongoing economic effects of disability, and ideally it would neither be received in advance of nor after the time of need (as too often occurs with protracted appeals).  In addition to being attuned to benefit the veteran contemporaneous with persisting need, compensation is adjusted as necessary to correspond to degree of disability.  This is the clear intent of the design. 

 

Because lump sums would essentially be paid for future entitlement based on current circumstances, the ability to adjust payments according to contemporary circumstances is lost.  As a consequence, an inelastic lump-sum settlement scheme would inevitably result in inequities in the form of under payment or over payment of compensation, to the detriment of the veteran or the Government.  Here are some of the issues that would unavoidably confront any entity seeking to develop a recommendation for a coherent and workable lump-sum program.

 

Though veterans with 10 percent ratings are not routinely scheduled for reexaminations,[103] VA may conduct an examination where individual circumstances warrant.[104]  Would veterans paid in lump sums be subject to reexamination?  What if the veteran refused to report for the examination?  In the event the service-connected disability did improve to a non-compensable level subsequent to the payment of a lump sum, would that be a windfall for the veteran, or would he or she be required to repay the lump sum?  Because lump sums in other settings are deemed settlements, we are unaware of any practice in which a condition subsequent would require a refund by the recipient.  If repayment of a VA lump sum were required, would the amount be equitably prorated based on the time between the beginning date of entitlement and the effective date for the reduction of the rating to 0 percent?  

 

For many veterans, the law still requires that military retirement pay be waived to receive disability compensation, in effect offsetting compensation against military retired pay.[105]  With periodic payments of both compensation and retirement pay, the veteran waives receipt of monthly retirement pay by the amount of VA disability compensation payment.  How would that waiver be accomplished where compensation is paid in a lump sum? 

 

Similarly, pay for active duty for training and inactive duty training (weekend drill pay) from the National Guard or a reserve component must be offset against disability compensation, except that it is the compensation that must be waived in that instance.[106]How will a waiver of compensation based on anticipated receipt of pay for active and inactive duty training be accomplished?  Because compensation must cease when a veteran returns to active duty,[107]will the veteran be required to repay the lump sum upon reenlistment, and if so, will he or she be required to repay the full amount or a prorated amount, deducting for the period between the effective date of compensation entitlement and reenlistment?  Will a recomputed lump sum again be paid upon that veteran’s subsequent separation or discharge from active service?

 

How will VA be able to award apportionments for child support[108] where a lump sum has been spent?  How will VA pay a lump sum due an incarcerated veteran in view of the limitation on such payments, and how will a lump sum paid to a veteran before incarceration be reconciled with that limitation?[109]  How will VA recover amounts owed the Government because of overpayments when the veteran has been paid a lump sum?[110]

 

Entitlement to compensation may terminate entirely under certain circumstances.  For example, service-connection may be rescinded, or voided (“severed”), when it was granted by reason of clear and unmistakable error or a change in interpretation of law on which it was based.[111]If, upon its quality review of a rating decision, VA found a grant of service connection to have been clearly and unmistakably unjustified, would it require the veteran to repay the lump sum awarded for the disability?   If so, how much of the lump sum would have to be repaid, given that such reductions and terminations in periodic payments are prospective only?[112]  Any lump-sum plan would require detailed statutory provisions for any amounts to be recovered by the Government under the many varying circumstances of reduced or ceased entitlement. 

 

Incidentally, because the beginning dates for compensation may be tied to the material facts creating entitlement or to some other date by operation of law and because the age of the veteran would influence the amount of the lump sum, new statutory provisions would be required to prescribe whether the age of the veteran upon onset of the disability, the age of the veteran on the effective date of entitlement to benefits, or some other date would be used to compute the lump-sum award.  An understanding of all of the statutory changes that would be required to accommodate one-time payments of compensation would perhaps require a detailed review of virtually all provisions for benefit entitlement that is tied in some way to service-connected status.  Otherwise the risk of unintended consequences would be extreme.

 

            Also, it can reasonably be expected that these added complexities will add to the cost of claims adjudication on an ongoing basis.  There will necessarily be added initial costs for such things as preparation and distribution of interim instructions, reprogramming data processing systems, a massive rewrite of VA regulations, rewriting form letters to veterans, and development and conduct of training, etc.  Such a major change in adjudication methods is likely to disrupt the flow of claims decisions and compensation awards, slowing production in the short term.

 

            Whether to make the lump-sum program applicable to all veterans or limit its applicability to new awards of service connection is another design option noted by CNA.[113]  As with its discussion of the other program features, CNA mistakenly assumes VA would decide the element of the plan.[114]  CNA observed: “If eligibility were limited to newly compensable cases, this might raise concerns that current recipients are not being treated fairly.”[115]  Further discussing the pros and cons with the assumption that lump-sum payments would be at the option of the veteran, CNA stated:  “offering a lump sum to more veterans would result in more veterans accepting it, which would mean more savings for VA.  This argues for offering it to all current recipients of disability compensation.  However, it might be administratively simpler to offer the lump sum only to newly compensable cases.”[116] 

 

A plan that applied to all veterans with disabilities subject to a lump sum as opposed to a plan that applied to new awards of service connection would add other complications and quite likely magnify the administrative burdens and associated costs tremendously.  If all veterans already on the compensation rolls at the inception of the program were to be included in the plan, that would require some form of review and processing for thousands of claims to determine whether the veterans had disabilities subject to or suitable for a lump-sum settlement, to apply the lump-sum formulas for their particular disabilities to determine the advantages and disadvantages of the lump sum, provide financial counseling, and to institute the administrative actions necessary to transition those opting for the plan from monthly payments to the lump-sum settlement.  If the lump sum were mandatory for all these veterans with 10 percent or 10 and 20 percent disabilities, including all veterans with higher combined ratings, the review and processing would involve hundreds of thousands of claims.  As of the end of fiscal year 2005, there were 773,805 veterans with 10 percent ratings and another 407,589 with 20 percent ratings.[117]  Many of the veterans in the remaining 1.4 million rated from 30 to 100 percent could also have individual disabilities rated 10 and 20 percent.[118]  This additional work would not likely help reduce the claims backlog and “lead to more timely processing of claims.”[119]  No doubt, it would be administratively simpler to apply the lump sum only to newly compensable cases, but it would by no means be simple. 

 

            Another major element of a lump-sum plan is the basis of the lump-sum amount itself.  In this respect CNA states:

 

How would the lump sum be calculated? This relates to both VA savings and fairness to veterans.  The only way for VA to achieve savings in the area of compensation payments is to provide lump sums that are less than equivalent to lifetime monthly payments.  How much less than equivalent can the lump sums be and still be considered fair?  Veterans’ personal discount rates could be used to address this question.[120]

 

As CNA notes, lump sums for the future effects of disability are typically “discounted.”  With an immediate payment for expected future compensation, the lifetime sum of all future compensation is reduced, i.e., discounted, to its “present value.”  The present value of all future compensation is the amount of money today that, with interest, would equal the sum of the expected compensation on a monthly basis over the remainder of the veteran’s life.  Therefore, the future value of compensation would be discounted to its value today.  CNA succinctly describes the function of the “present discounted value” as expressing the “value of future payments in terms of their value today.”[121]  In theory, the lump sum would be of equal value to all future compensation, and the veteran will have realized no loss or gain.  Given the Government’s loss of the time value (investment value or borrowing cost) of the money, it would gain or lose nothing by payment of a lump sum.  Therefore, for the Government to profit (derive a valuable return-save on benefit payments) by paying veterans lump sums, it must apply a further reduction or discount to the lump sum, discussed by CNA as the “personal discount rate”:  “[I]f the lump sums were calculated simply as the present discounted value of monthly payments over the veteran’s expected lifetime, without incorporating a personal discount rate to account for time preference, then administration would be the only source of savings from a lump sum program.”[122]  If the recipient of the lump sum has a say in the matter, this further discount is however much additional reduction in the lump sum the recipient is willing to accept to receive the money immediately, hence the personal discount rate.  Of course, this may be somewhat of an oversimplification of these principles.  CNA’s definitions of present discounted value and personal discount rate more aptly express the concepts.[123]

 

            The discount for present value would presumably be tied to some market rate for investments that involve minimum risk of loss and do not require investment skill, such as average interest rates on U.S. Securities.[124]  However, by CNA’s approach, the personal discount rate would essentially be determined based on “what the market will bear”:

 

Even if both the interest rate and the inflation rate are 0 percent, resulting in no differences over time in the value of any given amount of money, on average people tend to prefer receiving a particular amount of money now to receiving that same amount in the future. This tendency is known as time preference. Each person has his or her own rate of time preference, which we will refer to as the personal discount rate.[125]  

 

“Accounting for veterans’ time preference (using a personal discount rate) in calculating the lump sums would result in savings for VA in total compensation paid.”[126]

 

CNA further explains how taking advantage of the desire to have money today rather than in the future could result in government savings:  “If lump sum offers are calculated using a personal discount rate, then every time a veteran accepts the lump sum offer, there will be savings to VA in the form of decreased compensation payments.”[127]  

 

Thus, there is reciprocal relationship in the nature of a zero sum game between the Government and the veteran.  The Government’s gain is inversely proportionate to the veteran’s loss.  This would counterpose the interests of the Government and interests of the veteran.  However, consistent with its premise that lump sums could be mutually beneficial for the Government and veterans, CNA seems to suppose that a fair balance could be struck between the Government’s gain and the veteran’s loss:  “in designing the program, it is important to use personal discount rates that result in lump sums low enough to generate savings but high enough to provide ‘fair’ compensation and attract enough takers.” [128]  

 

If a lump sum were optional, then some would argue that a veteran’s willingness to take a lump sum would necessarily mean it is fair.  According to this line of reasoning, fairness would not be a concern.  Others would argue, however, that a veteran’s willingness to take a “low” lump sum might simply reflect his or her immediate financial needs and limited access to credit, or even just a strong preference for having money now as opposed to later, rather than the inherent fairness of the amount.[129] 

 

This further assumes that veterans would be given the option to accept or decline a lump sum.  Even in the unlikely event the lump sum were to be optional, it still could not be fair in our view.  Making the lump sum optional does not itself make any lump-sum amount fair.

 

It would be unfair because it exploits the desire for quick cash that quite probably will never be as beneficial as full lifetime payments.  Lump sums would not be a wise and fair way to dispense disability compensation even if no discount were applied.  Proponents of lump sums are not motivated by the objective of allowing veterans to have all their future compensation in advance.  Any lump-sum program would necessarily be established to save the Government money.  If it did not accomplish that by discounting, it would do so by prohibiting additional future benefits in the event of worsening, and that would be neither wise public policy nor beneficial to disabled veterans and their families.

 

Although CNA conceded, in essence, that it had no data from which to predict how veterans would use lump sums,[130] [131]CNA seems to assume for purposes of discussion that, given the choice, veterans would rationally decide based on economic efficiencies how much future compensation to sacrifice or relinquish in return for the benefit of immediate cash:  “Clearly, some of the lump sums would be used for current consumption, but we would also expect some to be used for long-term investments and some to be used to help secure the veteran’s current financial situation. . . .”[132]  This assumption itself rests on two additional unwarranted assumptions:  (1) that veterans would at some point have bargaining power in setting personal discount rates and (2) that the choice of a lump sum would be potentially beneficial and prudent for many or most veterans. 

Regarding the first assumption, it is likely that the Government would simply dictate the personal discount rate to its own advantage.  CNA did not seem to have a good understanding of how lump-sum rates are set in government programs:  “Note that programs that provide only a lump sum (such as DOD disability severance, which is described in Chapter 4), as opposed to a choice between a lump sum and an annuity, have necessarily managed to make decisions about what levels of compensation qualify as fair.”[133]  We would question, fair by whose standards?  To our knowledge, service members had no role in developing the formula for disability severance pay, which is not based on personal discount rates but rather a somewhat arbitrary legislative judgment about what is adequate for veterans during a transition period.

 

Regarding the second assumption, we suspect that few veterans would find lump sums attractive for their investment potential.  Based on common experience and knowledge of human nature, veterans’ advocates and veterans themselves[134] seem skeptical of that assumption.  Why would a wise veteran be so eager to receive a lump sum that he or she would accept an amount that has been discounted to present value and further reduced for a personal discount rate of 10 percent, 20 percent, or more?[135]  Why would the veteran do that just so he or she could then put the money away in a bank where it could not be spent to get a return over a lifetime that quite probably would not equal the amount discounted and would be taxable as income, and in the end be less than what would have been paid as periodic compensation payments?  With the periodic payments, the veteran could get the full value of his or her money and have it available for use throughout his or her lifetime to supplement other income and perhaps apply it to the purchase of the necessities of life or a mortgage payment, etc.

 

As with the other aspects of program design, applying discounts to compensation has its own complications.  With protracted times for claims and appeals processing, retroactive awards of compensation covering several years are commonplace.  In addition, a denial may be reversed on grounds of clear and unmistakable error at any time.[136]  When decisions are reversed on such grounds, benefits are granted as of the date they would have been granted but for the clear and unmistakable error, and they are paid at the rates in effect during the period for which they were erroneously denied.  Sometimes these awards go retroactive for decades.  The Government does not pay interest on these overdue amounts.  Certainly, no basis would exist for discounting retroactive awards.  Depending on the discount rates and the age of the veteran, a retroactive award for clear and unmistakable error could possibly exceed the lifetime lump sum.  This would add to the many other complications that would require special provisions and add administrative burdens.

 

            As noted, discerning the appropriate personal discount rate for lump-sum payments of compensation—assuming any discount could be appropriate—is an area for which CNA conceded there is no useful data.  CNA observed that this “is a key component in determining the level of savings that the program will generate.”[137]  CNA stated:  “VA would need to conduct a separate study to estimate the personal discount rates specifically applicable to disabled veterans in order to design an effective lump sum approach to disability compensation.”[138]  We are once again compelled to point out that a preliminary understanding of this design element would be essential to any recommendation for a lump-sum program and any legislation to establish such a program.  VA would not be the designer of the program:  VA would be the implementer.  As CNA acknowledged, “it is important to do a thorough analysis of the net savings under the various program design options before deciding whether and how to establish the program.”[139] 

 

            As CNA has stated, the goal of a lump-sum program for VA would be to “reduce its costs for compensation payments and administration,” but “whether a lump sum program would in fact produce these benefits, without having any negative effects on veterans’ welfare, depends on the program design.”[140]  “The decisions about all of [the] components of a lump sum program would have an impact on the savings that VA could realize.”[141] 

 

As we have discussed, the “VA savings in compensation payments would come from paying lump sums that are less than the present discounted value of expected lifetime monthly payments,”[142] and that necessarily would have a negative effect on veterans’ welfare.  The amount of savings for VA from reduced benefit payments to veterans would depend on how much veterans’ lump sums are discounted and the scope of the lump-sum program in its coverage of types and degrees of disabilities:  

 

[T]he amount of “savings in compensation payments that would result from establishing a lump sum program would depend on many factors.  Within the area of program design, savings would be affected by which disabilities and ratings would be eligible for a lump sum and what personal discount factor would be used when calculating the lump sums.  The relationship between veterans’ personal discount rates and the personal discount rate used in calculating the lump sums determines how many accept the lump sum offer. Other factors affecting the level of savings would be the actual future COLAs and interest rates and how much they differ from the COLAs and interest rates used in calculating the lump sum. The variability of the estimates in this chapter illustrates the importance of these factors in determining the savings that a lump sum program could produce.[143]

 

            The savings in administrative costs would supposedly come from reduced workloads:  “Savings in administrative costs could arise simply from having fewer veterans in the system generating the routine costs associated with monthly payments.”[144]  CNA asserted that veterans would have fewer interactions with VA, “which could lead to more timely processing of claims.  VA could potentially reduce its costs for compensation payments and administration.”[145]  That contains an apparent contradiction because reduced interactions with VA would reduce the incoming workload and either permit VA to gain on the backlog with existing staff or save VA money by allowing it to reduce staff, or at least not increase staff as would otherwise be necessary, but not both.

 

As with savings in benefit payments, the amount of administrative savings would depend on choices in program design, such as whether there would be provisions for reassessment of disabilities that have worsened:  “Not surprisingly, for many areas of administration, the extent of savings from a lump sum program depends on the design of the program.  First, whether the costs from applications for re-rating of disabilities would be eliminated by a lump sum program depends on whether lump sum recipients would be allowed to reapply for compensation if their condition worsened.”[146]  “[I]f lump sum recipients were restricted in applying for re-rating of their disabilities, then the costs of processing those applications would be eliminated.”[147]  “As an alternative, the program could be designed to allow applications for re-rating, but that would decrease administrative savings per case (compared to not allowing applications for re-rating).”[148]  “If reapplications would be allowed in cases where a condition deteriorates, the administrative savings would best be obtained by offering a lump sum only for conditions with a low probability of worsening.”[149]

 

            The amount of savings in administrative costs would also depend on the breadth of coverage of the lump-sum program in terms of the kinds of disabilities:  “the level of savings from lump sum recipients not generating the routine administrative costs associated with dispensing monthly payments depends on whether the lump sum would compensate for a specific disability or all disabilities.  For example, if the lump sum would compensate for only a specific disability, then it is likely that little savings would be realized for veterans with other disabilities for which a lump sum was not paid, because monthly payments would need to continue for those other disabilities.”[150] 

 

The advantage of each choice among design alternatives for the elements of a lump-sum program seem to be counteracted by an equal disadvantage.  Each choice of program design would necessitate acceptance of one of several equally objectionable alternatives.  If we first considered a lump-sum program that was mandatory for all veterans, applied to all disabilities at all levels, and allowed no reopening of claims for increased compensation, the compensation program as we know it would come to an end.  The adverse effects upon veterans would be inestimable.  Any less draconian combination of choices in design elements would involve a Hobson’s choice between savings for the Government and fairness to veterans.  If the lump sum applied to all diseases and injuries but only when rated 10 percent or 10 percent and 20 percent, it would be greatly unfair if no provision were made for worsening, but if compensation could be increased upon worsening, there would be little savings on benefit payments and administrative costs.  If lump sums were optional and limited to newly established disabilities unlikely to worsen or with maximum 10 percent ratings, for example, this would somewhat address the issue of fairness and be more practical to administer, but it would result in such a small savings as to not be worth the cost and effort of a program change, both because it would be such a small portion of all service-connected disabilities and because the veterans in this group would not typically be reopening their claims for increase anyway.  Each variation runs headlong into irreconcilable internal contradictions.  As CNA acknowledges, “the dual goals of reducing VA costs and serving veterans better are conflicting.”[151]  Because a lump-sum program would have to be crafted to satisfy this internal discord of competing goals, in the end, no program design would accomplish the dual but mutually exclusive goals of benefiting both the Government and veterans.  The lump-sum square peg does not fit into the compensation round hole.

 

            In fashioning a hypothetical program[152] to estimate savings in compensation payments and administrative costs, CNA did not resolve these conflicts, but its analysis did, in our view, call into question whether the highly theoretical savings potential would justify the increase in short term costs and disruption.  For savings in compensation payments, CNA arrived at this estimate:

 

Given all of these assumptions, we estimate that if VA offered a lump sum for only newly compensable disabilities, compensation costs would be $545 million higher in the first year compared to costs if no lump sums were offered. Note that the net cost (rather than a savings) occurs because the lump sum represents the present discounted value of lifetime payments. So, even though in the long run the lump sum is less costly for the government, the costs in the first year are higher because future compensation liabilities are basically shifted to the current year. Looking out to the tenth year, a lump sum program would still result in a net cost of $88 million for that year. This is because the cost of the lump sums exceeds the savings from removing some veterans from the annuity program. We estimate that it would take 25 years for the program to break even.

 

Similarly, if VA offered a lump sum for all eligible disabilities, not just the newly compensable ones, we estimate that the net cost in the first year would be $6.7 billion. However, unlike the case where the lump sum was only offered for newly compensable disabilities, annual savings would start in the second year of the program. These annual savings would be $461 million by the tenth year, but due to the magnitude of the net costs in the first year, there would still be a cumulative net cost of $3.6 billion in the tenth year. We estimate that it would take 17 years to break even.[153]

 

For savings in administrative costs, CNA arrived at this estimate:

 

According to our assumptions, all the additional administrative costs from a lump sum program (i.e., providing financial counseling and processing lump sum claims) would be incurred in the first year, whereas administrative savings would be achieved over time in the form of a reduction in repeat claims. We estimated that it would take 5 to 7 years to recover the administrative costs of a lump sum payment for a new recipient and 16 to 24 years to recover the costs for a current recipient of disability compensation. Thus, it is clear that net administrative savings from a lump sum program would not be seen immediately.[154]

 

It appears that CNA is referring only to the direct administrative costs for awarding a lump sum in an individual veteran’s case.  There would be other administrative costs that would not necessarily be calculated on a per case basis.  Thus, we think the assumption that all added costs will be incurred in the first year is highly optimistic given the time typically required for a bureaucracy to develop and incorporate new procedures and substantive rules, especially if the plan also included existing service-connected disabilities, thereby requiring review and processing of untold numbers of claims.  The added complexities and replacement of uniform rules and rates with individualized lump-sum formulas and lump-sum amounts would likely slow decision making, increase the potential for errors, add points that could be disputed, and provide fertile ground for increasing VA’s appellate workload.  The added burdens and costs would be ongoing.  If the lump sum were optional, the veteran would naturally want to know the amount and its basis before accepting it.  Because such preliminary determination would not be a “decision” subject to appeal,[155] VA would need to add a procedure for reconsideration of the lump-sum calculation where the veteran challenged its validity.  That would have a cost.  If lump sums were mandatory, there would have to be a process in place to recoup the lump sum where, for example, the veteran appealed a 10 percent rating and was awarded a 30 percent rating on appeal.  That would add administrative burdens and costs.  There might be a propensity to assign a disability rating that would result in a lump sum, and that would increase appeals.  On the other hand, if the application of formulas, etc., made the decision making an onerous exercise, there might be a tendency to award higher ratings, with a cost to the Government.

 

CNA considered financial counseling essential to a lump-sum program:  “To address the concern about possible negative effects of a lump sum payment on the financial welfare of recipients, additional financial education and counseling would be an important component of establishing a lump sum program.  Consequently, we include the cost of improved financial counseling in our estimates of administrative savings, which are provided in a later chapter.”[156] 

 

With new awards of service connection occurring daily, VA might well have to employ a corps of financial counselors, and while the counseling would presumably be provided during the first year for each veteran,[157] the personnel costs would be ongoing:  “there would be the on-going costs of providing the improved financial education and counseling that veterans’ focus groups emphasized as important to the success of the program.”[158]  We question whether financial counseling would be of much benefit if veterans did not have the option of rejecting a lump sum and we question whether financial counselors would honestly steer most veterans away from lump sums if they were optional.  There would be an ongoing cost, nonetheless.

 

With the short-term costs and potential for long-term savings juxtaposed, CNA seemed surprised at the lack of political attractiveness of lump sums:

 

The most striking result is how long it would take for a lump sum program to begin generating cumulative savings, due to the large up-front cost of paying lump sums. In particular, we estimated that it would take about 17 years to break even for a program offering a lump sum for all currently compensable (and otherwise eligible) disabilities. For a program offering a lump sum for only newly compensable (and otherwise eligible) disabilities, it would take about 25 years to break even.[159] 

 

CNA concluded:  “even though a lump sum program would save money in compensation costs over the long term, the length of time for compensation costs to break even raises concerns about program feasibility, given the realities of the budgeting process.”[160] 

 

In addition to the doubts raised by the immediacy of the substantial short-term costs and the remoteness of the prospects for undetermined government savings, CNA expressly questioned whether lump sums were appropriate as a matter of public policy under our compensation system:

 

The information that we provided about disability compensation for veterans in Canada, the United Kingdom, and Australia actually suggests that it might not be advisable for VA to offer lump sum compensation at all.  It is true that those three countries all use lump sum compensation, but they use it only for non-economic losses.  All three choose to use annuities to compensate for economic losses, which is what VA compensation is intended to do.  We can infer that, although each country sees advantages to lump sum compensation in some situations, for purposes of addressing economic losses they all have apparently decided that those advantages do not outweigh the potential disadvantages.[161]

 

            The goal of government savings is, of course, a legitimate one.  The principle that the legitimacy of the goal does not justify all means by which it could be achieved is just as certain.  The goal of reducing VA’s claims backlog is also a pressing matter.  That goal should be accomplished by correcting the root causes of the problem, inadequate resources and inefficiencies.  Rather than correct the problem by providing adequate resources and addressing inefficiencies, some want to reduce veterans’ benefits thereby reducing the workload to accommodate the inadequate resources and inefficiencies of the status quo.  Shortchanging veterans for this purpose is not a legitimate means to achieve the goal.

 

While a lump-sum settlement plan for veterans’ disability compensation has more recently been marketed as mutually beneficial for the Government and veterans, background materials leave no doubt that the impetus for and primary goal of such a fundamental change in program design has always been savings for the Government.  There is little likelihood that any policy maker would seriously entertain a break-even program for the purported advantages to veterans of an immediate sum of cash.  The Government realizes a profit only to the extent the veteran suffers a loss.  In actual practice, however, government savings may be offset to a great extent by increased ongoing costs.  In that eventuality of government waste, everyone loses.

 

In the final analysis, any lump-sum scheme devised would constitute a reduction in veterans’ benefits to save the Government money.  The proponents of lump sums have never been veterans’ advocates who have veterans’ interests at heart.  As veterans’ advocates, we are compelled to oppose any recommendation that would have the Government pay disability compensation in lump sums.  We hope this Commission, in looking at the “appropriateness” of disability benefits for veterans, will also conclude that it would be highly inappropriate to use lump sums as a means to relieve the Government of its moral obligation to provide adequate resources for veterans’ programs and its responsibility to administer those programs efficiently.

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Larry Scott

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