VA Laundry Service: Consolidations and Competitive Sourcing Could Save
Millions (Letter Report, 11/30/2000, GAO/GAO-01-61).

The Department of Veterans Affairs (VA) operates 67 laundries that serve
patients in its hospitals, nursing homes, and domiciliaries. Most of the
operating costs for these laundries are for labor. VA has an opportunity
to reduce these costs by closing 13 of its 67 facilities and moving
those workloads to its underused laundries. By doing this, VA makes more
efficient use of its existing facilities and saves money by closing
costly laundries that require expensive renovations and new equipment.
In addition, VA could make greater use of competitive sourcing as a
means of keeping costs down. GAO's review of current VA laundry
contracts showed that labor costs were significantly reduced.
Furthermore, competing VA in-house services with the private sector
would ensure that VA would receive the most efficient and lowest-cost
laundry service.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-61
     TITLE:  VA Laundry Service: Consolidations and Competitive
	     Sourcing Could Save Millions
      DATE:  11/30/2000
   SUBJECT:  Financial management
	     Cost control
	     Cost effectiveness analysis
	     Federal downsizing
	     Service contracts
	     Centralization
	     Privatization
	     Patient care services
	     Labor costs
IDENTIFIER:  VA Veterans Integrated Service Network
	     OMB Circular A-76 Program

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GAO-01-61

A

Chairman, Subcommittee on Oversight and Investigations, Committee on
Veterans' Affairs, House of Representatives

November 2000 VA LAUNDRY SERVICE

Consolidations and Competitive Sourcing Could Save Millions

GAO- 01- 61

Letter 3 Appendixes Appendix I: Scope and Methodology 20

Appendix II: Fiscal Year 1999 Data for VA's 67 Laundries 23 Appendix III:
Laundries Located in Multi- Laundry Markets, Fiscal

Year 1999 26 Appendix IV: Commercial Laundries Used by VA 27 Appendix V:
Comments From the Department of Veterans

Affairs 28 Appendix VI: Comments From the American Federation of

Government Employees 30 Appendix VII: GAO Contacts and Staff Acknowledgments
34

Related GAO Products 35 Figures Figure 1: Reduction in Average Daily
Inpatient Census,

FY 1995– FY1999 6 Figure 2: Map of Inpatient Locations Served by the
St. Albans

Laundry 8 Figure 3: VA Laundries in Multi- Laundry Markets 10

Abbreviations

AFGE American Federation of Government Employees OMB Office of Management
and Budget VA Department of Veterans Affairs

Lett er

November 30, 2000 The Honorable Terry Everett Chairman, Subcommittee on
Oversight and Investigations Committee on Veterans' Affairs House of
Representatives

Dear Mr. Chairman: The Department of Veterans Affairs (VA) operates 67
laundries that serve more than 36,000 inpatients a day in its hospitals,
nursing homes, and domiciliaries. 1 In fiscal year 1999, VA spent about $52
million to process more than 166 million pounds of laundry. 2 Most of these
expenditures are for the cost of labor of approximately 1, 100 employees 3
who sort, wash, dry, fold, iron, and transport laundry for 177 inpatient
locations. 4

As agreed with your office, we assessed major initiatives VA has taken to
reduce inpatient laundry service costs by (1) consolidating laundry
workloads and (2) competitively sourcing to determine if it is more cost
effective to use VA- owned and -operated laundries or to contract with the
private sector. We assessed the extent to which these initiatives have
reduced costs for some inpatient locations and what additional savings may
be possible if they are implemented in other locations.

We conducted a nationwide survey to obtain data on operating practices from
all of VA's laundries for fiscal year 1999. 5 We also obtained data from all
locations that were consolidated or used competitive sourcing in fiscal year
1999. We interviewed VA headquarters officials, local VA officials, and
private- sector laundry companies. We conducted site visits to locations

1 A VA domiciliary is a residential rehabilitation and health maintenance
center for veterans who do not require hospital or nursing home care but are
unable to live independently because of medical or psychiatric disabilities.

2 The costs of purchasing and repairing textiles and internal distribution
of laundry within inpatient locations are excluded from this analysis. 3
Numbers of employees in this report refer to full- time equivalent
employees.

4 This includes about 700, 000 pounds of laundry that VA laundries process
for 47 outpatient clinics. 5 For baseline data on VA's laundry services, see
VA Health Care: Laundry Service Operations and Costs( GAO/ HEHS- 00- 16,
Dec. 21, 1999).

that had consolidated or used competitive sourcing. In our review of one of
these sitesï¿½VA's laundry in Albany, New Yorkï¿½we questioned certain
contractor practices and subsequently conducted a special investigation. Our
overall evaluation was performed between January and November 2000 in
accordance with generally accepted government auditing standards, and our
special investigation of the VA Albany laundry was conducted in June and
July 2000 in accordance with quality standards for investigations
established by the President's Council on Integrity and Efficiency. (See
app. I for a complete description of our scope and methodology.)

Results in Brief VA has the opportunity to reduce costs by closing 13 of its
67 laundries and moving their workloads to other, underused VA laundries. VA
has already

closed 49 laundries over the last two decades through consolidations. The
additional consolidations would require transporting laundry to inpatient
locations that are generally within a 4- hour or less (one- way) drive,
which is comparable to the driving times required as a result of VA's
previous consolidations. If those consolidations occurred, VA would operate
only 54 laundries and could potentially reduce operating costs by $2 million
or more annually. By taking this action, VA could avoid about $9 million in
one- time costs for equipment and building renovations that would otherwise
be required for the continued operation of the 13 laundries, most of which
have aged equipment or buildings.

In addition, VA has the opportunity to further reduce costs by greater use
of competitive sourcing, which would involve comparing VA operation of its
laundries to private- sector operation of VA laundries or use of commercial
laundries off- site. VA currently uses private- sector companies to operate
2 of the 54 laundries that would remain if the 13 laundries closed. VA also
uses 10 commercial laundries to provide off- site laundry service. Our
review of three of these laundry operations (two VA laundries operated by
contractors and one off- site commercial laundry used by VA) found that
competitive sourcing resulted in lower costs because these three laundries
had higher labor costs or aged equipment compared to the contractors.

Our assessment of the 52 VA- operated laundries that would remain after
consolidation shows that many of these laundries have some of VA's highest
labor costs and also have aged equipment. Achieving savings from competitive
sourcing of laundry workload at these locations would depend on factors such
as the availability of interested contractors, the price of contractor
services, and VA's ability to decrease the cost of its in- house

service delivery as a result of a competitive process. When competitive
sourcing results in contracting out, VA must monitor contractor performance
effectively to ensure that payments and service quality are consistent with
contract terms. For instance, weaknesses in VA's contract monitoring at its
Albany laundry appear to have resulted in overpayments that reduced savings.

We recommend that VA assess its laundry operations to determine where
consolidations, competitive sourcing, or both would reduce costs while
maintaining quality, and implement the most cost- effective option
identified. VA agreed with our recommendations, although it did not provide
a plan or timetable for implementing the least- costly options.

By contrast, the American Federation of Government Employees, AFL- CIO
(AFGE) disagreed with our recommendations, citing a number of concerns. AFGE
contended that the options we recommend VA assess (consolidations and
competitive sourcing) would, in its view, exploit our nation's most
vulnerable workers and undermine their living standard by either reducing
their wages or eliminating their jobs. While we understand and appreciate
AFGE's legitimate concerns about current workers' wages and employment, we
believe VA can adequately address these concerns when implementing our
recommendations.

Background In 1995, VA began transforming the delivery and management of
health care to expand access to care and to increase efficiency. VA's
transformation

included decentralization of decision- making and budgeting authority to 22
Veterans Integrated Service Networks, which are responsible for managing all
VA health care. As a result, networks and their health care locations became
responsible for responding to laundry service needs.

Since 1995, networks have focused on providing health care in the most
appropriate setting by following headquarters' guidance and responding to
performance measurement incentives. This has resulted in an increase in
outpatient care and a decrease in inpatient care. The inpatient average
daily census declined by 35 percent during this period (see fig. 1).

Figure 1: Reduction in Average Daily Inpatient Census, FY 1995– FY
1999

Average Daily Census

60,000 56,283

50,812 50,000

42,798 40,000

39,685 36,510

30,000 20,000 10,000

0 1995

1996 1997 1998 1999 Fiscal Year

Source: VA.

The amount of laundry processed by VA decreased by 16 percent from fiscal
year 1994 to fiscal year 1999. VA considers the current average for laundry
usage per inpatient to be about 12. 9 pounds of laundry per day.

As with direct health care services, VA's networks have also explored ways
to improve health care support services such as laundry operations. While VA
networks have the option to focus exclusively on improving the efficiency of
their in- house laundry operations, they also have the option of competing
their in- house operations with the private sector to improve efficiency. VA
could do this through the Office of Management and Budget (OMB) Circular A-
76 process. In the A- 76 process, the government describes the work to be
performed in the performance work statement,

prepares an in- house cost estimate based on its most efficient
organization, and compares it with the best offer from the private sector.

Additional Our analysis suggests that VA could reduce costs by additional
laundry

Consolidation of consolidations. While VA has already enhanced the
efficiency of laundry

services by reducing through consolidations the number of laundries (from
Laundries Could Save

116 to 67 between 1979 and 2000), there are still 24 laundries in
multilaundry Millions of Dollars

markets- that is, located within 4 hours' drive time of one or more other VA
laundries. According to a VA headquarters official, VA policy provides that
a one- way 4- hour drive time is reasonable when considering consolidation.
(See app. II for summary information on VA's 67 laundries.)

The VA laundry at St. Albans (Queens), New York, illustrates how
consolidation can result in more efficient operations in multi- laundry
markets. During a 10- year period, VA consolidated six laundries into one.
In 1988 and 1989, the Brooklyn, Northport, and New York laundries were
closed and their workload transferred to St. Albans. In 1997, the other two
laundries (Montrose and Lyons) in the St. Albans laundry market were also
consolidated. These two annually processed 3. 2 million and 3.5 million
pounds of laundry, respectively, prior to consolidation. The St. Albans
laundry now provides laundry service- a total of over 13 million pounds
annually- for all of the facilities in Veterans Integrated Service Network 3
(Bronx) (see fig. 2).

Figure 2: Map of Inpatient Locations Served by the St. Albans Laundry

Note: Mileage and driving time are one- way from St. Albans in Queens, NY.
Source: GAO analysis.

VA consolidated laundry processing at St. Albans because adequate space was
available there and transport distances made consolidation feasible. Driving
distances to St. Albans ranged from 13 to 87 miles one way, and drive times
ranged from 27 minutes to 1 hour and 49 minutes. The St. Albans management
stated that based on quarterly surveys sent to all inpatient locations
served by the laundry, nurses and patients at those locations report that
the quality of laundry service has improved since the consolidations.

The consolidations of the Montrose and Lyons laundries with St. Albans
resulted in annual savings totaling about $2 million through cost reductions
in labor, supplies, and utilities. Prior to consolidation the Montrose and

Lyons laundries employed a total of 51 employees. Following the
consolidations most of these employees either transferred to other VA
positions at their inpatient locations or retired, while employment at the
St. Albans laundry increased by 20 employees.

To handle the increased workload resulting from the last two consolidations,
St. Albans spent $6.3 million for capital improvements. By contrast,
continuing laundry processing at Montrose and Lyons would have required
about $18 million in capital improvements. As a result, the consolidation
allowed VA to avoid spending about $11. 7 million for onetime capital
improvements.

Our analysis suggests that VA could further increase the efficiency of its
laundry operations by closing at least one laundry in 11 markets (see fig.
3). Our analysis showed that such consolidations could reduce costs because
a single large laundry can operate more efficiently than multiple laundries
by using fewer employees to process comparable amounts of laundry. In
addition, such consolidations could reduce spending for equipment and
building renovations that would otherwise be required for the continued
operation of laundries that have aged equipment and buildings.

VA could potentially save over $2 million annually and avoid about $9
million in one- time capital investments by closing 13 of the 24 laundries
currently located in the 11 multi- laundry markets that we reviewed. 6 (See
app. III for summary information about laundries located in multi- laundry
markets.) Currently these 13 laundries employ a total of approximately 150
employees, ranging from about 3 to 26 per location. We made certain
assumptions to illustrate the potential savings from closing these
laundries. We assumed that in most instances the workloads of smaller
laundries could be handled by larger laundries and that laundries needing
capital improvements in the near future could send their workloads to
laundries with newer equipment. However, our savings are for illustrative
purposes; VA's assessment, based on more detailed information, could
determine that another location would better meet VA's needs as a
consolidation site.

6 Some consolidated locations may need to purchase additional textiles
depending on the frequency with which they deliver laundry. One- time
additional costs (for these purchases) could range from $345, 000 to $690,
000.

Figure 3: VA Laundries in Multi- Laundry Markets

Source: GAO analysis.

VA's actual consolidation savings may differ from our estimates. For
example, our estimate assumes that each laundry, once consolidated, can meet
VA's production standard of 160,000 pounds of laundry annually per employee.
Some laundries, however, may not be able to achieve this level due to
building configuration or other factors. Such laundries may need more
employees than we estimated, which would reduce potential cost savings.

The 24 laundries in multi- laundry markets are located in 11 networks. We
surveyed these 11 networks to determine what actions they had taken to study
laundry consolidations. We found that all networks plan to study laundry
consolidation in the future as the workload at individual facilities
decreases and laundry equipment reaches the end of its useful life. 7 Three
are currently studying potential consolidations.

Expanded Use of VA currently has 12 contracts for inpatient laundry service.
VA contracting

has reduced costs by lowering labor costs 8 and avoiding capital Competitive
Sourcing

investments to replace aged laundry equipment or renovate buildings. Our
Could Reduce Costs

analysis suggests that expanded competitive sourcing could achieve lowercost
laundry service- either by maintaining services in house, possibly with
enhanced efficiency, or by contracting with the private sector.

VA Laundry Competitive VA uses contractors to operate VA- owned laundries
and to process VA

Sourcing Initiatives laundry at off- site commercial laundries. Two VA
laundries accounting for

about 3 percent of VA's total laundry needs are currently operated by
contractors; one is a for- profit contractor, while the other is a nonprofit
contractor. In addition, VA currently contracts with 10 commercial laundries
to provide laundry service for inpatient locations. Three commercial
laundries serve from two to four inpatient locations each and seven serve
single inpatient locations. Commercial laundries account for nearly 5
percent of VA's total laundry needs. (See app. IV for summary information
about these 10 commercial laundries.)

To determine whether costs were reduced, we reviewed several VA laundries.
In one case, VA's Albany laundry was able to reduce labor costs because the
contractor employed significantly fewer workers to process a comparable
workload. In 1995, using the A- 76 process, VA's Albany laundry determined
it was more cost effective to contract with Universal Linen, a for- profit
contractor, to operate the laundry. Albany paid nearly $350,000 in wages and
benefits to 12 VA employees the last year the laundry was operated by VA and
the following year paid about $270, 000ï¿½a 23 percent savingsï¿½to Universal
Linen to operate the laundry with 6 employees. As

7 VA's official guidance on equipment useful life ranges from 13 to 30
years; actual useful life varies greatly depending on maintenance and
workload levels. 8 Higher labor costs can result from low employee
productivity, higher wages, or both.

shown below, these $80, 000 in savings could have been increased if the
contract had been properly managed.

VA's Battle Creek laundry was also able to reduce labor costs by contracting
for services. In 1998, VA's Battle Creek laundry contracted with Summit
Point, a nonprofit contractor, to operate VA's new laundry plant. Summit
Point provides rehabilitation services through employment for disabled
workers. These employees' wages and benefits are established by the
Department of Labor and must not be less than the prevailing wage for a
laundry worker in the Battle Creek area. VA administrators at the Battle
Creek laundry estimated that on an annualized basis VA saved about $340,000,
or 24 percent, by using workers provided by Summit Point.

In Palo Alto it was more advantageous to VA to close its laundry and have a
commercial laundry provide laundry service. Before contracting with a
commercial laundry, Palo Alto processed laundry for its own inpatient
location, as well as inpatient locations at San Francisco, Menlo Park, and
Livermore. The Palo Alto laundry was facing capital improvement costs in
1995 amounting to nearly $5 million and had relatively high operating costs
of about 49 cents per pound because it had a large number of laundry
employees for the amount of laundry processed. 9

Using the A- 76 process, Palo Alto determined it was more cost effective to
contract with Sodexho Marriott to provide laundry service for the four
inpatient locations served by the Palo Alto laundry. The contract price was
29 cents per pound in fiscal year 1996 and gradually increased to 32.7 cents
for fiscal year 1999. This contract resulted in avoidance of one- time
capital costs of nearly $5 million. In addition, annual operating costs were
60 percent lower, decreasing from over $2 million to less than $800, 000 for
a comparable workload of laundry services. 10 VA officials in Palo Alto told
us that nurses and patients are satisfied with the quality of laundry
service provided by Sodexho Marriott. VA oversight includes unannounced
monthly site visits to check on quality.

9 In fiscal year 1995, Palo Alto's 45 employees processed about 4. 5 million
pounds of laundry or about 100,000 pounds per employee per year, which was
well below the VA standard of 160,000 pounds.

10 Operating costs include direct and administrative labor, supplies,
utilities, maintenance and repair, and transportation.

VA oversight is critical to ensure that the government receives all the
services paid for under contract arrangements. Our Office of Special
Investigations found that VA failed to properly oversee the Albany laundry
contract with Universal Linen. First, contrary to the contract, the
contractor's payments were based on estimated laundry weights instead of
actual weights. Second, invoices for payment were submitted by a government
employee instead of the contractor as called for by the contract. As a
result of the poor management of this contract, the contractor was likely
overpaid for the services provided. 11 VA's Inspector General is reviewing
this situation, and Albany's laundry has taken steps to improve its internal
controls.

Opportunities to Reduce VA may be able to lower costs by competing in- house
against private- sector

Costs at 52 VA Laundries laundry services. Our work at the Department of
Defense shows that

competitive sourcing under OMB Circular A- 76 leads to cost reductions
through increased efficiencies whether the government or the private sector
wins the competition to provide services. 12 This indicates that savings are
probable for VA, but the magnitude of savings from competitive sourcing
depends on factors such as the availability of interested contractors at
each location, the price of contractor services, and the extent to which VA
laundries are able to decrease their operating costs in a competitive
process. 13 Some markets, for example, may have many contractors competing
for contracts and offer greater opportunities for VA. VA might realize
greater savings in such markets. On the other hand, some VA laundries may
increase efficiency by such means as reducing the number of laundry
employees, and thereby offer lower prices than contractors. While the
numbers have varied over time, historically government agencies have won a
large portion of the A- 76 competitions.

11 See Inadequate Oversight of Laundry Facility at the Department of
Veterans Affairs, Albany, New York, Medical Center( GAO- 01- 207R, Nov. 30,
2000) for further details on VA oversight of the Albany laundry contract
with Universal Linen. 12 See DOD Competitive Sourcing: Some Progress but
Continuing Challenges Remain in Meeting ProgramGoals( GAO/ NSIAD- 00- 106,
Aug. 8, 2000) for a discussion of the benefits of

using the OMB Circular A- 76 process. 13 See DOD Competitive Sourcing:
Savings Are Occurring, but Actions Are Needed to Improve Accuracy of Savings
Estimates( GAO/ NSIAD- 00- 107, Aug. 8, 2000) for a discussion

of calculating savings under the OMB Circular A- 76 process.

Our analysis of VA laundries suggests that VA has opportunities to reduce
costs further through competitive sourcing. Thirty- four of VA's 52
remaining laundries appear to be prime candidates for achieving savings
through competitive sourcing (not including the 13 laundries that could be
closed following consolidation and the 2 that could continue to use private
contractors to operate VA laundries). This is because their labor use does
not meet VA's labor productivity standard of 160, 000 pounds per employee
per year, indicating that there are efficiencies to be realized. If VA's
productivity standard were met at all locations, an estimated $2 million
could be saved annually. This savings estimate is based on reducing the
number of employees to meet the standard and then applying the average wage
rate at each laundry.

Using the competitive sourcing process could help VA overcome difficulties
in meeting the productivity standard. According to VA officials, for
example, some laundries were not meeting the productivity standard because
they are not managed as well as others. In addition, the design of some
laundry plants limits productivity and more employees are needed to operate
them than the productivity standard allows.

In addition, competitive sourcing might help avoid capital investment costs.
Thirteen of the 52 laundries reported that they are facing major capital
investments within the next 5 years to replace aged equipment or to renovate
buildings. Capital investment needs at the 13 laundries range from $200,000
to $3 million, with an average cost of $1.2 million.

To achieve savings through competitive sourcing, VA would need to conduct
studies of each laundry to weigh alternatives for providing the lowest- cost
laundry service while maintaining quality. In these studies, VA would need
to consider the effect such changes could have on its career workforce. VA
could foster competition among government and contractors to provide laundry
service by using the competitive process under OMB's Circular A- 76.
Although fostering competition among government and contractors to provide
laundry service can be a timeconsuming process, it offers management
opportunities to create moreefficient and less- costly operations when in-
house organizations win the competition, or to realize savings when private
competitors win. Management could consider competitive sourcing in
combination with consolidation, which we discussed earlier. This process can
be demanding, however, and requires strong management commitment.

Conclusions VA has made good progress in consolidating laundries, but more
remains to be done. VA has the opportunity to save millions of dollars by

systematically assessing where it could consolidate laundries, obtain
laundry services through competitive sourcing, or both. VA already has
experience in consolidating laundries and implementing competitive sourcing
at a number of locations. VA has not maximized its cost savings potential,
however, because it has not systematically compared options for all 67
laundries. Such comparisons, in effect, establish a competition between VA
laundries and contractors to provide laundry service for the lowest cost.
The resulting competition is likely to increase efficiency no matter which
competitor wins- VA or private- sector laundries.

Recommendations for We recommend that the Acting Secretary for Veterans
Affairs require the

Executive Action Under Secretary for Health to direct the 22 networks to (1)
systematically

assess each laundry to determine which option or combination of options-
consolidation and competitive sourcingï¿½would reduce costs while maintaining
or improving quality, and (2) implement the most costeffective option in a
timely manner.

Agency Comments and We received written comments on a draft of this report
from VA's Acting

Our Evaluation Secretary and from the National President of AFGE. Their
comments and

our responses are described in the following sections. The comments in their
entirety from VA and AFGE are in appendixes V and VI, respectively.

Department of Veterans VA concurred with our recommendation to
systematically assess each

Affairs laundry to determine which option or combination of options-

consolidation and competitive sourcingï¿½would reduce costs while maintaining
or improving quality. In addition, VA stated that selling laundry services
to non- VA facilities could create additional savings by offsetting VA's
costs. We agree this is a significant factor that should be considered when
assessing consolidation and competitive sourcing.

Also, VA agreed to implement the most cost- effective option in a timely
manner, although no plan or timetable was provided. VA stated that it is in
the process of developing program oversight policy and reporting systems to
be used to obtain comparative information for operational and opportunity
improvement. While VA is to be commended for taking this

action, we believe that it should move as quickly as possible to develop a
plan and timetable to conduct the comprehensive assessments we recommended
at each laundry. Delaying these assessments could result in unnecessarily
spending millions of dollars a year on laundry services.

AFGE AFGE opposed both options we included for study in our recommendations.
AFGE contended that implementing the options we recommend that VA assess
would, in its view, exploit our nation's most vulnerable workers and
undermine their living standard by either reducing their wages or
eliminating their jobs. While we understand and appreciate AFGE's legitimate
concerns about workers' wages and employment, we believe that VA can
adequately address these concerns when implementing our recommendations. In
the past, VA has demonstrated the ability to implement comparable options
without adversely affecting laundry service workers. Further, our
discussions with VA officials indicate that they remain sensitive to the
importance of taking appropriate steps to prevent adverse effects on current
laundry service workers.

We discuss AFGE's specific concerns below. Competitive Sourcing AFGE
expressed eight concerns about the increased use of competitive

sourcing. First, AFGE stated that VA might contract out without the benefit
of a public- private competition as set forth in OMB's Circular A- 76. We
agree that VA could, under limited circumstances specified in OMB's Circular
A- 76, contract rather than use in- house service provision without using
competitive sourcing. However, our recommendation is to consider competitive
sourcing rather than to contract out. VA agreed with our recommendation to
assess competitive sourcing. Competitive sourcing is not new to VA
laundries. For example, 43 of its 67 laundries have used the A- 76 process
over the past 15 years.

Second, AFGE expressed concern that federal workers currently employed in
VA's in- house laundry processing could lose their jobs if a contractor wins
the competition. We agree this is possible. As stated in the report, we
believe that VA should include this as a consideration in its assessments of
laundry service at each location. We note, however, that government
employees adversely affected by decisions under the OMB A- 76 process
competition often are offered positions with winning contractors. VA could
specify, as other agencies have, that a contractor hire such employees if it
wins the competitive sourcing competition.

Third, AFGE stated that cost savings are unlikely to be achieved through
privatization, competitive or otherwise. We believe it is important to
distinguish between an objective to privatize or contract out which is an
end in itself, and an objective to compete government service provision
versus private service provision. Our recommendation is that VA consider
competitive sourcing of laundry service operations, which can result in
either the government retaining its service provision role or in contractors
providing services. Either way, competitive sourcing reduces costs through
the increased efficiency that results from competition between the
government and the private sector. For example, over half of VA's laundries
do not meet VA's productivity standard of 160,000 pounds of laundry
processed annually per employee. Competition between the government and the
private sector could increase efficiency, whichever competitor wins, and
reduce costs accordingly.

Fourth, AFGE stated that cost savings are achieved by paying lower wages. We
agree that some cost savings may be attributable to lower wages. However,
cost savings are often achieved through increased efficiency rather than
paying workers less. For example, over half of VA's laundries use more labor
than called for by VA's productivity standard of 160,000 pounds of laundry
annually per employee. Increasing productivity to the standard could achieve
$2 million in savings. Competitive sourcing could be used to increase
productivity to the standard and to achieve savings.

Fifth, AFGE stated that VA laundries with high labor costs were targeted for
competitive sourcing. AFGE further states that these higher labor costs can
only derive from a federal system that pays a premium for longevity to its
workers and that our analysis penalizes a loyal, career workforce. While we
did state that VA laundries with high labor costs could realize savings from
competitive sourcing, we do not agree with the reasons for this cited by
AFGE. The higher labor costs to which we refer are often the result of low
productivity. For example, before the Albany laundry used the competitive
sourcing process it employed 12 people. A contractor won the competitive
sourcing process, and was able to process a workload of similar size with
six employees.

Sixth, AFGE stated that VA laundries with aged equipment were targeted for
competitive sourcing. AFGE further stated that aged equipment reflects
management's failure to upgrade and maintain equipment. While we did state
that VA laundries with aged equipment could realize savings from competitive
sourcing, we do not agree with the reasons for this cited by AFGE. Aged
equipment is the natural outgrowth of capital depreciation as

equipment wears out over its useful life. VA management replaced much of its
laundry equipment throughout the system during the 1980s and, given a
13– 30 year useful life, it is understandable that many laundries'
equipment is nearing the end of its useful life. Capital equipment, such as
laundry machines, will need to be replaced at some point, but greatly
reduced workloads in some locations make this a poor investment of capital.
Sending workloads to commercial laundries or combining the workloads of two
or more locations to be processed by one laundry could be a better business
decision.

Seventh, AFGE stated that privatization could be avoided through better
management of VA laundries. We agree. Competitive sourcing can provide an
incentive to increase productivity and correct management deficiencies. Our
report cited VA officials' acknowledgement that some laundries are not
managed as well as others. Improving management performance may result in
laundries staffed with fewer employees, but the government retaining its
service provision role.

Eighth, AFGE stated that VA has a poor record of contract oversight. We
agree that the Albany contract was poorly managed and likely resulted in
overpaying the contractor. VA's Inspector General is reviewing this matter.
VA oversight is critical to ensure that the government receives all the
services it pays for under contract arrangements.

Consolidation AFGE expressed four concerns about consolidating VA laundries.
First, AFGE stated that our projected savings are unrealistic because
transportation costs are not included. We do not agree. Our estimated
savings reflect the increased cost of transportation, which we obtained from
local VA officials, for each potential laundry consolidation.

Second, AFGE stated that consolidation should not occur without considering
the revenue potential of providing laundry service to other federal and
nonfederal sources. As stated in our response to VA's comments, we agree
that potential revenue is a significant factor that should be considered
when assessing consolidation and competitive sourcing. We already had
incorporated revenue earned by VA laundries in our analysis of consolidation
options.

Third, AFGE stated that our work targeted laundries with high labor costs
for consolidation, which raises concerns about age discrimination. Our draft
report did not characterize laundries with high labor costs as candidates
for consolidation, but as candidates for competitive sourcing.

See our responses above under competitive sourcing regarding high labor
costs.

Fourth, AFGE stated that our work targeted laundries with aged equipment for
consolidation, which raises concerns about proper management. We disagree.
As stated above under competitive sourcing, aged equipment is the natural
outgrowth of capital depreciation as equipment wears out over its useful
life.

As arranged with your staff, we are sending copies of this report to the
Honorable Hershel W. Gober, Acting Secretary of Veterans Affairs; interested
congressional committees; and other interested parties. We will make copies
of the report available to others upon request.

If you have any questions about this report, please call me at (202) 512-
7101 or Paul Reynolds at (202) 512- 7109. Other major contributors are
listed in appendix VII.

Sincerely yours, Stephen P. Backhus Director, Health Careï¿½Veterans' and

Military Health Care Issues

Appendi Appendi xes xI

Scope and Methodology We reviewed the Department of Veterans Affairs (VA)
laundry services for fiscal year 1999 to assess major initiatives it has
taken to reduce laundry service costs by consolidating laundry workloads and
by using competitive sourcing to determine if it is more cost- effective for
VA to operate its own laundries or to contract with the private sector. We
estimated potential savings if VA were to consolidate laundry workloads and
conducted case studies to illustrate savings that have been realized by
laundries that have used competitive sourcing. Savings from competitive
sourcing at each location depend on a number of factors including the
availability of interested contractors, the price of contractor services,
and VA's ability to decrease the cost of its in- house delivery as part of a
competitive process.

We interviewed VA headquarters officials in the Environmental Program
Service, the Office of General Counsel, and other offices, and obtained
historical documents from headquarters on the consolidation of laundry
service and competitive sourcing. We also conducted a nationwide survey of
all VA laundries to obtain data about fiscal year 1999 laundry service
needs, how VA provides services, its costs, and the amount of laundry
processed at each VA laundry. VA laundries also provided us with current
information on consolidating laundries and competitive sourcing. We obtained
fiscal year 1999 data from each of the VA inpatient locations that use
commercial laundries.

We also obtained additional information through interviews, documents, and
physical inspections of VA laundries and commercial laundries that provide
service for VA. For this report we visited VA laundries in St. Albans and
Albany, New York; the VA inpatient location in Palo Alto, California; and
the commercial laundry that provides laundry service for Palo Alto and three
other inpatient locations. For our December 1999 report on VA laundries, we
visited VA laundries in Richmond, Virginia, and Battle Creek, Michigan. We
also visited the VA inpatient location in Denver, Colorado, and the
commercial laundry that provides laundry service for VA inpatients in Denver
and in Cheyenne, Wyoming.

In our review of VA's laundry in Albany we questioned certain contractor
practices and asked our Office of Special Investigations to investigate.
Their objectives were to (1) observe the weighing and processing of laundry,
and (2) determine whether the contractor was billing VA for services not
provided.

For our analysis of potential savings from consolidation, we identified
multi- laundry markets using VA's criterion that two or more laundries be

within 4 hours' (one- way) driving distance of each other. To select the
potential consolidation site, we interviewed laundry managers in these
markets to determine whether existing equipment could handle the additional
workload.

To determine the number of employees required to process the combined
laundry workload, we used VA's productivity standard of 160,000 pounds per
direct- labor employee for the potential consolidation sites that were below
the standard, and current productivity rates for the potential consolidation
sites that exceeded the standard. We multiplied the average direct- labor
wage of the potential consolidation site by the total number of direct-
labor employees to determine the consolidated direct- labor costs.

To determine the number of supervisors needed to manage the consolidated
laundries, we used VA's criterion of one administrative employee per 25
direct- labor employees. The average administrative labor salary at
potential consolidation sites was multiplied by the number of administrative
employees to determine consolidated administrative costs.

Because transportation costs due to consolidation vary by market, we
contacted each of the laundry managers at potential consolidation sites to
obtain their consolidated transportation cost estimates (based on their
knowledge and experience). We estimated the costs of additional supplies,
utilities, and maintenance and repair costs that would be incurred by the
potential consolidation sites, based on preconsolidation costs per pound of
these elements.

Recurring annual savings from consolidation were computed by subtracting the
estimated consolidation costs from the combined costs of the unconsolidated
laundries. 1 A net cost- per- pound savings was computed by dividing the
total consolidated estimated costs by the total consolidated pounds. We
aggregated savings from each laundry to determine total annual savings from
consolidation.

We surveyed each of the laundries to determine whether they need to make
major capital improvements within the next 5 years. A VA headquarters
laundry expert verified that the capital improvement costs the laundries

1 Consolidation costs used to calculate recurring savings do not include the
allocation of capital improvement costs because we accounted for these costs
as a one- time cost avoidance.

reported were reasonable and needed within the next 5 years. To determine
one- time cost avoidances from consolidation, we totaled capital improvement
costs for the laundries that could close and subtracted capital improvement
costs for the potential consolidation sites.

We performed our review between January 2000 and November 2000 in accordance
with generally accepted government auditing standards.

Appendi xII

Fiscal Year 1999 Data for VA's 67 Laundries Total pounds Operating cost per
Laundry State processed VA employees pound a

Albany N. Y. 2, 250, 962 b 1.20 c $0. 254 Albuquerque N. Mex. 871, 213 9.03
0. 369 Alexandria La. 1, 526, 292 11.55 0. 429 Augusta Ga. 5,969,548 52.00
0. 376 Battle Creek Mich. 3, 295, 828 1. 00 c 0.382 Bay Pines Fla. 3,724,402
21.03 0. 226 Big Springs Tex. 310,979 7. 90 1. 037 Biloxi Miss. 5, 264, 728
41.00 0. 334 Boise Idaho 427,450 3. 75 0. 416 Brockton Mass. 4, 806, 152
40.00 0. 383 Buffalo N. Y. 2, 891, 771 19.10 0. 244 Canandaigua N. Y.
2,101,962 15.55 0. 382 Clarksburg W. Va. 600, 000 4.75 0. 376 Cleveland Ohio
2, 985, 434 17.00 0. 270 Dallas Tex. 2, 759, 125 18.00 0. 319 Dayton Ohio
2,929,043 26.00 0. 337 Erie Pa. 854, 265 8. 10 0.401 Fargo N. Dak. 818, 245
6. 70 0.301 Fayetteville Ark. 676,379 9. 30 0. 538 Fayetteville N. C.
2,384,205 20.60 0. 318 Fort Harrison Mont. 286, 692 3. 03 0.541 Fort Lyon
Colo. 592, 642 6.75 0. 433 Fort Meade S. Dak. 1, 035, 766 8. 77 0.387 Fresno
Calif. 457, 315 5. 03 0. 317 Grand Island Nebr. 924,823 8. 00 0. 329 Grand
Junction Colo. 264,427 3. 52 0. 556 Hines Ill. 3,339,727 26.00 0. 355
Houston Tex. 3, 303, 180 21.80 0. 222 Huntington W. Va. 740, 087 5.40 0. 338
Iron Mountain Mich. 328, 519 3. 49 0.471 Kerrville Tex. 2,295,389 17.60 0.
317 Knoxville Iowa 2, 718, 455 24.56 0. 407 Lake City Fla. 2,536,801 18.40
0. 270 Leavenworth Kans. 2, 985, 505 20.70 0. 346 Lebanon Pa. 725, 987 10.00
0. 564

Total pounds Operating cost per Laundry State processed VA employees pound a

Little Rock Ark. 3, 915, 302 31. 50 $0. 396 Louisville Ky. 1, 457, 539 21.50
0. 545 Madison Wis. 3, 203, 347 15. 90 0.250 Martinsburg W. Va. 1,337,473
13.50 0. 465 Milwaukee Wis. 4, 185, 076 24.50 0. 218 Minneapolis Minn. 2,
991, 134 22.58 0. 333 Mountain Home d Tenn. 1, 411, 798 12. 00 0.352
Murfreesboro Tenn. 2,187,278 12.50 0. 255 Northampton Mass. 1,608,835 12.60
0. 367 Oklahoma City Okla. 1, 315, 468 13. 00 0.348 Perry Point Md. 4, 903,
741 39.90 0. 424 Phoenix Ariz. 2, 941, 250 22.60 0. 326 Pittsburgh Pa.
6,033,288 42.50 0. 362 Portland Oreg. 1, 771, 952 14.10 0. 305 Reno Nev.
508,330 3. 75 0. 393 Richmond Va. 5, 224, 632 44. 00 0.331 Roseburg Oreg. 1,
353, 042 14.18 0. 461 Salem Va. 1,473,597 9. 40 0. 321 Salt Lake City Utah
931, 272 9. 00 0. 383 San Juan P. R. 3, 329, 245 12. 25 0.209 Sheridan Wyo.
363,913 3. 75 0. 497 Sioux Falls S. Dak. 800, 000 8.00 0. 336 Spokane Wash.
649, 998 7.50 0. 325 St. Albans N. Y. 13, 113, 432 69.00 0. 245 St. Cloud
Minn. 1, 055, 064 7. 25 0.373 St. Louis Mo. 2, 881, 664 20. 80 0.394 Togus
Maine 866,754 6. 10 0. 327 Tuscaloosa Ala. 2,358,523 29.00 0. 453 Waco Tex.
2,327,006 24.00 0. 340 Walla Walla Wash. 301, 210 2. 75 0.432 West Los
Angeles Calif. 4,947,378 55.00 0. 332 West Palm Beach Fla. 3, 686, 858 22.35
0. 224

a Operating costs include direct labor, administration, supplies, utilities,
and transportation of laundry to other locations. b VA paid the contractor
for processing this amount of laundry, but this was an estimated amount and

likely resulted in overpayments. c These numbers do not include the number
of private contractor employees who operate these

laundries.

d VA laundries in Asheville and Salisbury, North Carolina, are not listed in
this table because they both recently closed and consolidated with the VA
laundry in Mountain Home, Tennessee.

Laundries Located in Multi- Laundry Markets,

Appendi xI II

Fiscal Year 1999 Number of laundries in market Laundries Employees a One-
way drive time b

2 Lebanon, Pa. 10.00

1 hour and 42 minutes Perry Point, Md. c 39.90 2 Clarksburg, W. Va.

4.75 2 hours and 9 minutes Pittsburgh, Pa. c 42.50 2 Salem, Va.

9.40 3 hours and 44 minutes Richmond, Va. c 44.00 2 St. Cloud, Minn.

7.25 1 hour and 16 minutes Minneapolis, Minn. c 22.58 2 Walla Walla , Wash.

2.75 3 hours and 5 minutes Spokane, Wash. c 7.50 2 Northampton, Mass.

12.60 2 hours and 7 minutes Brockton, Mass. c 40.00 3 Huntington, W. Va.

5.40 3 hours and 43 minutes from Huntington to Louisville

Murfreesboro, Tenn. 12.50

3 hours and 54 minutes from Murfreesboro to Louisville Louisville, Ky. c

21.50 2 Cleveland, Ohio

17.00 4 hours and 1 minute Dayton, Ohio c 26.00 3 Hines, Ill.

26.00 1 hour and 42 minutes from Hines to Milwaukee Madison, Wis.

15.90 1 hour and 33 minutes from Madison to Milwaukee Milwaukee, Wis. c

24.50 2 Fayetteville, Ark.

9.30 3 hours Little Rock, Ark. c 31.50 2 Dallas, Tex.

18.00 1 hour and 42 minutes Waco, Tex. c 24.00 a As stated earlier, numbers
of employees in this report refer to full- time equivalent employees.

b MapQuest was used to compute drive time. c Indicates the laundry used in
our assessment to take on additional workload. However, VA's assessment,
based on more detailed information, could determine that another location
would better meet VA's needs as the consolidation site.

Appendi xI V

Commercial Laundries Used by VA Type of FY 1999 pounds

FY 1999 total VA facility Contractor patients processed Price basis cost

Amarillo, Tex. Panhandle Laundry Inpatient Not available Per piece $303, 000
Anchorage, AK a Portland

Inpatient 18, 814 Per pound 14, 111 Rehabilitation Center Danville, Ill.
Human Resource

Inpatient/ 1,200, 000 Per pound 399, 600 Center of Edgar and

outpatient Clark Counties Denver, Colo.

Proserve Laundry Inpatient/ 1,039, 938 Per pound 450, 522 Cheyenne, Wyo.
outpatient Hilo, HI Tykes Laundry Inpatient Not available Per piece 2, 490

Honolulu, HI Queens Medical Inpatient 123, 843 Per pound 83, 000 Center
Health Care Linen

Miles City, Mont. Miles City Laundry Inpatient/

86, 800 Per pound/ piece 65, 000 and Cleaners outpatient Palo Alto, Calif. b
Sodexho Marriott Inpatient/

3,602, 970 Per pound 1, 124, 049 outpatient Seattle, Wash.

University of Inpatient 1, 637, 396 Per pound/ piece 852, 907 American Lake,
Wash. Washington Hospital

Laundry Wilmington, Del. General Healthcare

Inpatient 300, 000 Per pound 90, 000 Laundry Total 8,009, 401 $3, 334, 679

a All data for this location are for fiscal year 1998. b This contract also
serves VA inpatient locations in San Francisco, Menlo Park, and Livermore.

Comments From the Department of Veterans

Appendi xV Affairs

Comments From the American Federation of

Appendi xVI Government Employees

Appendi xVII

GAO Contacts and Staff Acknowledgments GAO Contacts Stephen P. Backhus,
(202) 512- 7101 Paul R. Reynolds, (202) 512- 7109 Staff

In addition to those named above, Deborah L. Edwards, Jean N. Harker,
Acknowledgments

Michael L. Gorin, John Borrelli, James C. Musselwhite, Thomas A. Walke,
Susan Lawes, Donald G. Fulwider, John J. Ryan, Norman M. Burrell, Woodrow H.
Hunt, John G. Brosnan, and Roger J. Thomas made key contributions to this
report.

Related GAO Products Inadequate Oversight of Laundry Facility at the
Department of Veterans Affairs, Albany, New York, Medical Center( GAO- 01-
207R, Nov. 30, 2000).

VA Health Care: Expanding Food Service Initiatives Could Save Millions (GAO/
01- 64, Nov. 30, 2000).

VA Health Care: VA Is Struggling to Respond to Asset Realignment Challenges(
GAO/ T- HEHS- 00- 91, Apr. 6, 2000).

VA Health Care: VA Is Struggling to Address Asset Realignment Challenges
(GAO/ T- HEHS- 00- 88, Apr. 5, 2000).

VA Health Care: Laundry Service Operations and Costs( GAO/ HEHS- 00- 16,
Dec. 21, 1999).

VA Health Care: Food Service Operations and Costs at Inpatient Facilities
(GAO/ HEHS- 00- 17, Nov. 19, 1999).

Veterans' Health Care: Fiscal Year 2000 Budget( GAO/ HEHS- 99- 189R, Sept.
14, 1999).

VA Health Care: Challenges Facing VA in Developing an Asset Realignment
Process( GAO/ T- HEHS- 99- 173, July 22, 1999).

VA Health Care: Progress and Challenges in Providing Care to Veterans (GAO/
T- HEHS- 99- 158, July 15, 1999).

VA Health Care: Improvements Needed in Capital Asset Planning and Budgeting(
GAO/ HEHS- 99- 145, Aug. 13, 1999).

Veterans' Affairs: Progress and Challenges in Transforming Health Care (GAO/
T- HEHS- 99- 109, Apr. 15, 1999).

VA Health Care: Capital Asset Planning and Budgeting Need Improvement (GAO/
T- HEHS- 99- 83, Mar. 10, 1999).

(406201) Lett er

GAO United States General Accounting Office

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Contents

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Appendix I

Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix II

Appendix II Fiscal Year 1999 Data for VA's 67 Laundries

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Appendix II Fiscal Year 1999 Data for VA's 67 Laundries

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Appendix III

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Appendix IV

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Appendix V

Appendix V Comments From the Department of Veterans Affairs

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Appendix VI

Appendix VI Comments From the American Federation of Government Employees

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Appendix VI Comments From the American Federation of Government Employees

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Appendix VI Comments From the American Federation of Government Employees

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Appendix VII

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United States General Accounting Office Washington, D. C. 20548- 0001

Official Business Penalty for Private Use $300

Address Correction Requested Bulk Rate

Postage & Fees Paid GAO Permit No. GI00
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