VA Kat,
Welcome! It is always nice to have members who work helping others.
At first blush, it is hard to address the example you provided of the AO exposed Veteran. Unless he had length of service retirement (20 years or more) or disability retirement with combat-related injuries, he would not appear to be able to collect both.
But, your question raises some issues. You have to remember that the "combat-related" question comes up in a few contexts. One is for the taxation of benefits. Under 26 USC Section 104, combat-related injuries are not taxable:
"(3) Special rules for combat-related injuries
For purposes of this subsection, the term “combat-related injury” means personal injury or sickness—
(A) which is incurred— (i) as a direct result of armed conflict,
(ii) while engaged in extrahazardous service, or
(iii) under conditions simulating war; or
(B) which is caused by an instrumentality of war."
The other is for Combat-Related Special Compensation (which would allow the member to receive some or all of his otherwise offset VA compensation).
So, this has nothing to do with geographic location. A Soldier at Ft. Bragg who breaks his ankle on a morning run is not combat-related. But, arguably, the same Soldier who breaks his ankle doing a tactical road march as part of a field training exercise would be combat-related. If he broke that ankle on landing from a parachute jump, he definitely would be eligible.
Okay, now, what has changed is that the 2008 NDAA Sec 1646, has stated that there is enhanced payment of severance pay minimum amounts for those injured in a combat zone in a line of duty. So, if the Servicemember is injured and receives severance pay, the minimum he would normally calculate his years of service is three years. But if he is LOD in a combat zone, the minimum is 6 years (his minimum is doubled). If a Soldier has 2 years of service and lands poorly on a parachute jump, and breaks his ankle and only gets 10% and severance pay, he calculates his severance as 3 years (the minimum) times 2 times base pay. He basically gets 6 months base pay. Same Soldier trips coming out of the latrine in Iraq and breaks his ankle and gets 10% rating. He calculates his severance pay as 6 years (the minimum under Section 1646) times 2 times base pay. He gets a years base pay. This is the only area that currently places the import on geography in military disability pay calculations.
The interface between VA and DoD compensation is basically dependent on years of service (20 being the magic number of years) and combat-related nature of the injury.
This is completely different from presumptive service connection for certain conditions incurred in Vietnam (and presumptive AO exposure), which is geography dependent.
Clear as mud, right?