U.S. military personnel returning from Iraq and Afghanistan with disabling wounds are still being evaluated by a system set up decades ago and which urgently needs upgrading, the Institute of Medicine said Thursday.

"With troops being injured nearly every day, the VA's system for evaluating and rating former service members' disabilities should be as up to date as possible," said Lonnie R. Bristow, former president of the American Medical Association.

"Right now, the rating schedule is out of sync with modern medicine and modern concepts of disability," said Bristow, chairman of the IOM committee that looked at the issue.

In 2006 about 2.7 million veterans were receiving $26.5 billion in disability compensation from the Department of Veterans Affairs. The agency estimates that compensation payments to veterans will increase to about $32.4 billion in 2008, when there are expected to be about 2.9 million beneficiaries.

Injured veterans are rated for their degree of disability based on their ability to hold a job. They can receive monthly payments ranging from $115 a month for a 10 percent disability rating to $2,471 per month for a 100 percent rating.

The IOM called for the VA to update the rating system, parts of which haven't been changed since 1945, particularly focusing on new understanding of conditions such as traumatic brain injury.

Also, the report said, a new rating system should consider how much veterans' disabilities affect their quality of life and limit any aspect of their daily lives, not just their ability to work.

The committee pointed out that veterans who can and do work can still be disabled in other ways, such as the ability to maintain their family and other personal relationships or to engage in sports, hobbies, or other activities they formerly pursued.

The report was prepared at the request of the federal Veterans' Disability Benefits Commission. The IOM is an arm of the National Academy of Sciences, a private organization chartered by Congress to advise the government on scientific matters.

In addition to brain injury, the rating system needs to be updated with new understanding of conditions such as diabetes and hearing loss, the report said.

And the system should be updated every 10 years or as needed, it said.

The report suggested the VA establish an external advisory committee including medical professionals, vocational experts and representatives of the veteran community.