VA Health Care: Expanding Food Service Initiatives Could Save Millions
(Letter Report, 11/30/2000, GAO/GAO-01-64).

The Department of Veterans Affairs (VA) has opportunities to save
millions of dollars by systematically considering consolidating food
production, employing Veterans Canteen Service workers to provide
inpatient food services, and competitive sourcing. VA already has
experience in implementing these options at a number of locations,
although VA's experience with food service contractors is limited. Using
a systematic approach to assess available options at each location would
allow VA to provide food service at the lowest cost while maintaining
quality.

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

 REPORTNUM:  GAO-01-64
     TITLE:  VA Health Care: Expanding Food Service Initiatives Could
	     Save Millions
      DATE:  11/30/2000
   SUBJECT:  Food services
	     Health services administration
	     Cost effectiveness analysis
	     Privatization
	     Veterans benefits
	     Cost control
	     Patient care services
	     Veterans hospitals
IDENTIFIER:  VA Nutrition and Food Services Program
	     VA Canteen Service Program
	     VA Veterans Integrated Service Network

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GAO-01-64

A

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

November 2000 VA HEALTH CARE Expanding Food Service Initiatives Could Save
Millions

GAO- 01- 64

Letter 3 Appendixes Appendix I: Scope and Methodology 30

Appendix II: Locations Converting From Nutrition and Food Service to
Veterans Canteen Service Workers, April 2000 33

Appendix III: Comments From the Department of Veterans Affairs 34 Appendix
IV: Comments From the American Federation of

Government Employees 39 Appendix V: GAO Contact and Staff Acknowledgments 45

Related GAO Products 46 Figures Figure 1: Reduction in Average Daily
Inpatient Census,

FY 1995– FY 1999 6 Figure 2: VA Decrease in Food Service Workers, FY
1995– FY 1999 7 Figure 3: VA Inpatient Food Production Locations in
Chicago Area 10 Figure 4: VA Inpatient Locations: Food Production
Consolidations

and Candidates for Consolidation 12

Abbreviations

AFGE American Federation of Government Employees NFS Nutrition and Food
Services OMB Office of Management and Budget SPV Subsistence Prime Vendor VA
Department of Veterans Affairs VCS Veterans Canteen Service

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) provides food
service for more than 36, 000 inpatients daily in its hospitals, nursing
homes, and domiciliaries. 1 VA's Nutrition and Food Services (NFS) program
spends about $324 million annually to provide these services in 177
inpatient locations. About 70 percent of these expenditures are for the cost
of labor of 7,000 NFS wage- grade employees 2 who cook and prepare food;
distribute food to patients; and retrieve and wash plates, trays, and
utensils. 3

As agreed with your office, we assessed three major initiatives VA has taken
to lower the costs of its inpatient food services: (1) consolidation of food
production, (2) employing Veterans Canteen Service (VCS) workers to provide
inpatient food services, and (3) competitive sourcing to determine if it is
more cost effective to maintain services in- house or contract with the
private sector. 4 We assessed the extent to which these initiatives have
reduced costs in some inpatient locations and what additional savings may be
possible if these initiatives are implemented in other locations. 5

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 Numbers of employees in this report refer to full- time equivalent
employees. 3 These costs represent the direct production and distribution
costs of inpatient food services. We excluded the clinical dietetic,
technical, and administrative costs of NFS dietitians and other general
schedule employees.

4 VCS is a unit of VA that has authority to provide, at reasonable prices,
merchandise and services (for example, food and vending machines) at VA
inpatient locations and other health care locations (38 U. S. C. 7801).

5 For baseline data on VA's inpatient food services, see VA Health Care:
Food Service Operations and Costs at Inpatient Facilities( GAO/ HEHS- 00-
17, Nov. 19, 1999).

To conduct our work, we obtained data on food services from VA's 22 health
care networks for all VA's inpatient locations for fiscal year 1999. We also
obtained data from VA headquarters officials and conducted site visits and
telephone interviews with local VA officials and with contractors. (See app.
I for a complete description of our scope and methodology.) Our work was
performed between October 1999 and November 2000 in accordance with
generally accepted government auditing standards.

Results in Brief To reduce the costs of inpatient food service operations
over the past two decades, about one- fifth of VA's 177 inpatient locations
have consolidated

food production, shifted to VCS workers, or contracted with private- sector
food service organizations. If VA systematically evaluated these options and
implemented the most cost- effective one at each inpatient location, VA
could save an estimated $79 million annually- about one- quarter of its
inpatient food service expenditures.

To enhance efficiency, VA has consolidated 28 food production locations into
10. These locations transport food to other inpatient locations, generally
within 90 minutes' driving distance. Currently, VA operates 63
unconsolidated production locations that are within similar driving distance
of another production location. Our assessment suggests that consolidating
these 63 locations into 29 production locations could save an estimated $12
million annually. To achieve these savings, VA could be required to make a
one- time investment of an estimated $11 million for equipment.

In addition, VA recently began to employ VCS workers, whose wage rates are
lower than NFS employees, to provide inpatient food services at nine
inpatient locations. The wage differences result from differences in how
wage rates for their respective pay schedules are determined, but both are
federal government employees with the same standard government benefit
coverage. VCS job descriptions are similar to those of NFS and both receive
similar training when providing inpatient food services. When VCS workers
provide inpatient food services, NFS dietitians continue to ensure that
patients at these locations receive quality nutrition as part of VA's health
care program. Three other inpatient locations are scheduled to make the
change from NFS to VCS employees. Before these changes, VCS only provided
retail food services for employees, visitors, and outpatients at these and
other inpatient locations. NFS employees still provide inpatient food
service at 166 other inpatient locations; our assessment suggests that
having VCS employees provide inpatient food services at these 166

locations could save an estimated $67 million annually in addition to $12
million in estimated savings from consolidations.

VA also currently uses food service contractors to a limited extent.
Contractors provide food service at two VA long- term- care inpatient
locations that do not have VCS retail food services. VA may be able to
reduce costs through competitive sourcing at other locations to determine if
in- house or private sector operation is more cost effective. We cannot
estimate potential savings from competitive sourcing because of uncertainty
regarding the availability of interested contractors at each VA location,
the price of contractor services, and variability by location in VA's
ability to decrease the costs of its in- house service delivery as part of a
competitive process. Difficulty in estimating potential savings is
compounded by NFS's limited contracting experience and VCS's unwillingness
to combine its retail business with NFS inpatient business when contractors
are solicited.

We recommend that VA systematically assess each inpatient food operation to
determine if consolidation, employment of VCS workers, competitive sourcing,
or a combination of these options would reduce costs while maintaining
quality, and then implement the least- costly options in a timely manner. VA
agreed in principle and stated that it has already initiated actions to
implement these recommendations. However, VA did not provide concrete plans
or timelines for implementing the least- costly options. By contrast, the
American Federation of Government Employees, AFL- CIO (AFGE) opposed the use
of all three options we recommended that VA assess, citing a number of
concerns. Foremost, AFGE questioned whether VA should focus its cost
containment strategies on efforts that, in its view, could further
impoverish current workers or compromise food quality. While we understand
and appreciate AFGE's legitimate concerns about current workers' wages and
employment and the quality of food provided to veterans, we believe VA can
adequately address these concerns when implementing our recommendations.

Background In 1995, VA began transforming its delivery and management of
health care to expand access to care and increase efficiency. As part of
this

transformation VA decentralized decision- making and budgeting authority to
22 Veterans Integrated Service Networks, which became responsible for
managing all VA health care. The networks and their health care locations
became responsible for responding to changing inpatient food service needs
and for maintaining or improving quality.

Since 1995, the networks have focused on providing 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 numbers have 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.

Because the decreased number of inpatients meant less need for food
services, VA downsized its inpatient food service staff by about 22 percent
as a result of actions taken by networks and inpatient locations (see fig.
2).

Figure 2: VA Decrease in Food Service Workers, FY 1995– FY 1999

10,000 9,000

8958.7 FTEEs 8571.5

8,000 7786.1

7319.6 7,000

6977.8 6,000 5,000 4,000 3,000 2,000 1,000

0 1995

1996 1997 1998 1999 Fiscal Year

Note: Numbers of employees refer to full- time equivalent (FTEE) positions.
Source: GAO calculations based on data from VA.

Unlike most health care systems, VA divides its food service operations into
inpatient and retail operations, usually with separate kitchens and staff at
each inpatient location. The NFS program, funded by appropriations, is
responsible for ensuring that VA's inpatients receive quality nutrition as
an integrated part of their health care. VCS is generally responsible for
providing food and other retail services to outpatients, visitors, and
employees at VA's health care delivery locations. Although the law
authorizes VCS to receive appropriations, VCS has operated for many years
solely on funds earned from sales.

As with direct health care services, VA's networks have also explored ways
to improve services that support health care, such as food service
operations. While VA networks have the option to focus exclusively on
improving the efficiency of in- house provision of food service, they also

have the option of competing their in- house operations versus contractors
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
identifies the work to be performed- described in the performance work
statement- and prepares an in- house cost estimate, based on its most
efficient organization, to compare with the best offer from the private
sector.

Additional To enhance the efficiency of food service, VA has consolidated
food

Consolidation of Food production (the cooking and preparation of food) for
28 inpatient locations

into kitchens at 10 VA inpatient locations. One of these consolidations took
Production Locations

place in the Central Texas Healthcare System and resulted in elimination of
Could Save Millions of

food production at two facilities. This example illustrates key elements of
Dollars

the consolidation process. Before consolidation, the Temple, Waco, and
Marlin locations each produced their own food for average daily inpatient
populations of 664, 679, and 74, respectively. After consolidation, food for
Waco and Marlin was produced at Temple because adequate space was available
and driving distances (the time needed to transport food) to the receiving
locations were less than 90 minutes. The consolidation was phased in over
about 3 years and completed in 1998. The consolidation required one- time
equipment purchases of about $1 million and resulted in recurring annual
labor savings of about $1.3 million. 6 Labor savings were achieved by a
reduction of 32 employees, primarily through attrition and buyouts.

The Central Texas Healthcare System produces food in one location and
transports it to other locations using an advance food preparation and
delivery system. Food is prepared in advance and chilled for serving up to 5
days later. The chilled food can be transported in refrigerated trucks from
one location to another without losing freshness or becoming unsafe. The
food is reheated at the location where it is served. VA reports that patient
satisfaction at the Central Texas Health Care System is higher, as measured
by patient surveys, since consolidation. VA's NFS dietitians continue to
have responsibility for ensuring food quality and that the nutrition needs
of patients are met.

6 No equipment purchase was required at Waco because it already had the
equipment needed for food delivery and reheating.

Additional VA health care regions provide opportunities for consolidation.
For example, four VA locations in the Chicago area are within a 1- hour
drive of one another (see fig. 3); in fact, three are within 20 minutes of
each other. Yet all four continue to prepare their own food for inpatients.
The Chicago network is developing plans for food consolidation for some of
these locations.

Figure 3: VA Inpatient Food Production Locations in Chicago Area

WISCONSIN

94

ILLINOIS

41 45

North Chicago 14 12

Lake Michigan

90 20

Hines Chicago

(Lakeside) Chicago 88

(Westside) 30

34 55

80 41 52

80

ILLINOIS

231

Miles INDIANA

45

0 10 0 10 KM

55

Source: GAO analysis.

Overall, VA currently has 63 unconsolidated production locations within 90
minutes' drive of another production location. 7 Our analysis suggests that
VA could increase its efficiency by consolidating food production for these
63 locations into 29 production locations (see fig. 4). 8 These
consolidations could save an estimated $12 million annually from a reduction
of 348 employees, with as many as 38 positions eliminated in a single
location. To achieve these savings, we estimate that VA may have to make a
one- time investment of an estimated $11 million to purchase advance food
preparation and delivery equipment. (One- time expenditures are held to this
amount because 24 of the potential consolidation locations already own the
advance food delivery equipment, which makes up the bulk of equipment
costs.)

7 We define consolidation as one VA location preparing at least 80 percent
of the food consumed at another location. Some consolidations do not reach
100 percent production at one location for consumption at another because
some receiving locations continue to prepare certain food items, such as
breakfasts or salads.

8 Some of these 29 locations already produce food for other VA locations.

Figure 4: VA Inpatient Locations: Food Production Consolidations and
Candidates for Consolidation

Source: GAO analysis.

Making the changes required to consolidate food production requires
management commitment to a process that may take several years and much
effort to achieve but one that could yield significant savings. Network
officials indicated in our survey of VA's health care networks that 29
production locations are considering or planning to consolidate food
production. In commenting on a draft version of this report, VA stated that
networks 1 (Boston), 3 (Bronx), 8 (Bay Pines), 12 (Chicago), and 22 (Long
Beach) have conducted feasibility studies to consider consolidated
production. VA has already consolidated some food production locations in
these networks. However, these networks could potentially consolidate 14
additional locations into 7 locations.

VA's actual savings from consolidations could exceed our estimates for two
reasons. First, VA's Central Texas Health Care System consolidation, from
which we obtained a benchmark for estimating potential savings, does not
appear to have yet achieved its full savings potential, which suggests that
our savings may be understated. VA officials have indicated that several
food service positions will not be filled when they become vacant. Some
positions were retained to minimize involuntary separation of employees.
Second, we used a 90- minute driving distance to determine potential
consolidations and it seems possible that VA could elect to use greater
distances. For example, the VA facility in Dayton is preparing and
delivering food as far as Butler, Pennsylvania- a 6- hour drive. The Dayton
facility has technologies that can keep food safely chilled for more than 30
days. In addition, two facilities in Texas that are about a 2- hour drive
from one another are currently in the process of consolidating their food
systems. Using greater travel distances could allow more facilities to be
consolidated, thereby increasing cost savings.

Expanded VA can save millions of dollars in labor costs by employing VCS
workers,

Employment of VCS rather than NFS workers, to provide inpatient food
service. These savings

can be achieved because these workers are paid, on average, about 30 Workers
Could Save

percent less than NFS wage grade employees. The wage differences Millions of
Dollars

between the two result from differences in how wage rates for their
respective pay schedules are determined. 9 VCS job descriptions are similar

9 The Office of Personnel Management developed the criteria used for both
wage rate schedules under 5 U. S. C. 5341.

to those of NFS and both receive similar training when providing inpatient
food services. VCS workers are federal government employees paid under the
Non Appropriated Funds Regular Wage Rate Schedule. NFS workers are also
federal government employees but are paid under the Federal Wage System
Regular and Special Production Facilitating Wage Rate Schedule. Both VCS and
NFS employees have the same standard government benefit coverage. VA is able
to employ VCS workers to provide inpatient services through NFS agreements
with VCS under the Economy Act. 10

Recently, nine VA locations began to employ VCS workers rather than NFS
workers to provide inpatient food services (see app. II for a list of these
locations). In some of these locations, VCS employees provide all inpatient
food services; in others VCS workers are only beginning to be included in
inpatient food services. In all cases, NFS dietitians continue to ensure
food service quality. Before these changes to VCS inpatient food service,
VCS had only provided retail food service at these locations.

Three of the locations converting to VCS labor were at Marion, Illinois, and
the Jefferson Barracks and John Cochran locations in St. Louis, Missouri.
These examples illustrate different stages of VCS conversion and different
sizes of health care facilities.

VA began its VCS conversion in Marion, Illinois, in 1997. Today, Marion
employs mostly VCS workers to serve an average daily census of 95 patients.
VA reports that patient satisfaction is higher, as measured by patient
surveys, than it was before and that NFS dietitians continue to be
responsible for quality. When the conversion to VCS employees is complete,
VA estimates that $375,000 a year could be saved through reductions in wage
costs. NFS workers have left Marion inpatient food service through normal
attrition, including retirement, moving to other VA jobs, or leaving VA
voluntarily. Personnel changes were monitored by the facility's Labor
Management Partnership Council, which included union representation. Those
employees who remain retain their NFS salaries.

St. Louis's two locations began VCS integration in 1999. Today the
consolidated St. Louis locations serve an average daily census of 301

10 The Economy Act (31 U. S. C. 1535) permits one government agency or a
unit within an agency to purchase services from a unit in the same agency or
another agency when in the best interest of the government.

inpatients by employing NFS employees and a VCS manager. Other VCS employees
are being recruited. When fully implemented, VA estimates that St. Louis
could save $803,000 in wage costs annually. St. Louis expects to follow
Marion's experience in protecting current NFS employees' job security and
salary and phasing in VCS conversion.

Our analysis suggests that VA could lower labor costs by an estimated $67
million annually (in addition to the estimated $12 million consolidation
savings discussed earlier) if less- expensive VCS workers are employed in
place of NFS workers at 166 additional locations. The Marion and St. Louis
experiences suggest that the full extent of these savings would be realized
over a number of years as VCS conversion is phased in. However, some savings
can be achieved in the first year of implementation. Currently, NFS wage
grade workers provide inpatient food services at these 166 locations. VCS
employees could cook and prepare food, distribute food to patients, and
retrieve and wash dishes, trays, and utensils for inpatients at these
locations while NFS dietitians continue to assure quality.

Three locations- Kansas City, Leavenworth, and Topeka- are scheduled to
begin conversion to VCS inpatient food service provision. In our survey of
VA health care networks, VA officials indicated that another location is
considering conversion. Making the changes required to convert to VCS
inpatient food service provision requires management commitment to a process
that may take several years and much effort to achieve but has the potential
for significant cost savings.

Actual savings may vary from our estimates because of many local factors at
each inpatient location. To determine actual savings through the use of VCS
employees, VA would need to conduct studies of each inpatient food location
and weigh alternatives for providing the lowest- cost food service while
maintaining quality. VA would also need to incorporate in this process
consideration of the effect such changes could have on other VA priorities,
such as maintaining job opportunities for veterans and compensated work
therapy patients.

A key element of such a study is recognition that VA's inpatient food
service operations are developing along the lines of other hospital food
service operations, which are changing the nature of the hospital food
service industry. This includes the use of more pre- prepared food products,
less need for specialized cooking skills, and more reliance on computer
ordering for preparation and placement of food on patient trays. All of
these processes reduce both the need for a higher- skilled work force and

the degree of training needed to successfully produce and distribute
hospital food, whether VA inpatient food service is provided by NFS or VCS.
NFS and VCS managers agree that employees can be trained more quickly today
than in the past to provide inpatient food services. VCS managers also
believe that higher turnover rates for lower- paid employees would not
adversely affect services.

VA May Be Able to VA uses private contractors for inpatient food services at
two inpatient

Achieve Additional locations- Sodexho Marriott at its Anchorage domiciliary
and SkyChef at

the Honolulu nursing home. These locations have no VCS retail food Savings
by Using

services and have only a long- term- care inpatient mission. In addition,
both Competitive Sourcing

locations began inpatient food services with a contractor rather than with
NFS employees.

While VA has used competitive sourcing only to a limited extent, our
analysis suggests that VA may be able to lower costs by determining if
inhouse or private sector provision of food services is more cost effective.
VA could realize additional savings by competing, through the use of OMB's
Circular A- 76, the costs of government provision of these services versus
the costs of private- sector provision. Our work at the Department of
Defense shows that, by competitive sourcing under OMB Circular A- 76, costs
decline through increased efficiencies whether the government or the private
sector wins the competition to provide services. 11 This work indicates that
savings are probable for VA, but we cannot estimate potential savings from
competitive sourcing because of uncertainty regarding the availability of
interested contractors at each VA location, the price of contractor
services, and the extent to which VA food services units are able to
decrease their operating costs in a competitive process. 12

Savings from competitive sourcing might be higher if VA expanded competitive
sourcing to include locations that combine NFS inpatient and VCS retail
operations. When food contractors provide services to non- VA hospitals,
they usually operate both inpatient and retail as one operation

11 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 competing various efficiency options using the
OMB Circular A- 76 process. 12 See DOD Competitive Sourcing: Savings Are
Occurring, but Actions Are Needed to Improve Accuracy of Savings Estimates(
GAO/ NSIAD- 00107, Aug. 8, 2000) for a discussion

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

and most of their profits come from retail sales, according to food service
contractors with whom we spoke.

However, VA may not offer the most attractive business opportunity for food
contractors for two reasons. First, VCS opposes consideration of contracting
for retail food services because it uses profits from a minority of
profitable locations to subsidize operations at the remainder. Moreover, VCS
believes that some of its other retail activities, such as vending of
toiletries and personal articles that are not generally provided by food
service contractors, are not viable without retail food. This is important
to VCS because it receives no appropriations and funds its operations based
on revenues earned.

Second, the small size of VA inpatient workloads at many locations may be
less attractive to contractors because there is less opportunity to spread
fixed costs over higher volume. For example, 27 percent of VA locations have
an average daily census of less than 100 inpatients, and 56 percent have an
average daily census of less than 200. However, it may be possible for
potential contractors to combine food services at smaller locations with
services at other nearby VA and non- VA locations to generate higher volume.

To achieve savings through competitive sourcing, VA would need to conduct
studies of each inpatient food location to weigh alternatives for providing
the lowest- cost food service while maintaining quality. In these studies,
VA would need to consider the effect such changes could have on other VA
priorities, such as maintaining job opportunities for veterans and
compensated work therapy patients. To date, however, VA has done little to
explore either its own experience with using contractors or contractor
interest. Although fostering competition among government and private
contractors to provide food services can be a time- consuming process, it
offers opportunities to create more efficient and less costly operations
when in- house organizations win the competition, or savings when private
competitors win. This process can be demanding, however, and requires strong
management commitment to achieve.

VA could foster competition among government and private providers in the
provision of inpatient food service by using the competitive process of
OMB's Circular A- 76. VA could compete all its food service operations or
any part of these services at each location. VA could consider competitive
sourcing alone or in combination with consolidation or use of VCS employees,
as we discussed earlier.

Conclusions VA has opportunities to save millions of dollars by
systematically considering consolidating food production, employing VCS
workers to

provide inpatient food services, and competitive sourcing. VA already has
experience in implementing these options at a number of locations, although
VA's experience with food service contractors is limited. VA has not,
however, systematically compared these options at all 177 inpatient
locations. Using a systematic approach to assess available options at each
location would allow VA to provide food service at the lowest cost
consistent with maintaining quality.

Recommendations for We recommend that the Acting Secretary of Veterans
Affairs direct the

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

assess each inpatient food service location to determine if consolidation,
employment of VCS workers, competitive sourcing, or a combination of these
options would reduce costs while maintaining quality; and (2) implement the
least- costly options 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 the National President of AFGE. Their comments
and our

responses are discussed in the following sections. The comments in their
entirety from VA and AFGE are in appendixes III and IV, respectively.

Department of Veterans VA agreed in principle with our recommendations,
noting that it is already

Affairs consolidating food production locations, converting to VCS inpatient
food

service provision, and using competitive sourcing. VA should be commended
for its progress to date. However, VA has not systematically assessed each
of these options at each location as we recommend. VA stated that the three
options we identified are part of its Nutrition and Food Service strategic
plan for improving quality and cost effectiveness. In our review of the
plan, we found the VCS option to be clearly identified. However, the
consolidation option discussed in the plan appears to deal with NFS
consolidation with other services rather than consolidating food production
locations and we found no reference to competitive sourcing. In addition, we
found no reference to the systematic assessments we recommend. We believe
the strategic plan could help VA implement our recommendations if the plan
clearly specified that all three options we

identified to reduce costs are to be systematically assessed for each
location.

Although VA agreed with our recommendation for timely implementation, it
provided no operational plan or timeline for conducting the assessments we
recommended. VA states that it is assessing the feasibility and subsequent
implementation of these options at a deliberate pace to carefully consider
relevant factors. We agree that VA should carefully consider these factors
but believe the recommended assessments should be completed as expeditiously
as possible. Delay means that millions of dollars per year may be spent
unnecessarily on food services.

VA expressed several specific concerns on a number of issues. Consolidation
of food production. VA raised issues regarding (1) the need to do a study at
each location, (2) transportation of perishable food, (3) costs, (4) VA's
Subsistence Prime Vendor (SPV) program, and (5) integration of NFS employees
with environmental management services. First, VA stated that studies of
food consolidation have already been done in Veterans Integrated Services
Networks 1 (Boston), 3 (Bronx), 8 (Bay Pines), 12 (Chicago), and 22 (Long
Beach), suggesting that additional studies are not needed at each location
in these networks. We commend VA's efforts to study ways to reduce costs in
these networks. However, based on our discussions with NFS officials at
several of these networks and reviews of several of these studies, we
disagree that VA has systematically assessed all three options in each
network. VA focused more on the potential for consolidations, but this
option may be even more costeffective if implemented in conjunction with the
use of VCS employees or competitive sourcing in these networks. Because VA
has not assessed all three options, it may not have identified the least-
costly options in each network.

Second, VA stated that the safety of transporting perishable food products
and related logistics are key factors in determining the viability of
consolidating VA facility food production. VA's statement suggests that, as
a result, fewer locations may be able to consolidate than we estimated and
that the speed of consolidation could be slow. We agree that VA needs to
carefully consider these factors, but we factored in the transportation and
logistical issues in our analysis based on VA's experience. As discussed in
the report, VA has successfully addressed these factors in 28 other
locations that are comparable to the potential locations we identified.
Therefore, we do not view such factors as reasons for not moving ahead

expeditiously but rather as factors that require strong management
commitment in order to realize potential savings.

Third, VA stated that large capital investment costs for equipment and space
are key factors affecting the viability of potential consolidations. Again,
we agree. However, investment costs must be assessed within the context of
potential savings. For example, once fully implemented the savings realized
in 1 year under the consolidation of food services in the Central Texas
Healthcare System exceeded the investment costs, making that consolidation
viable. We included in our assessments of the viability of consolidation at
other VA locations the costs of a blast chill system of food production,
such as that operated by the Central Texas Healthcare System, and the costs
of the related advanced food delivery equipment. 13 Therefore, the potential
consolidation locations we identified could result in annual savings greater
than the required investment costs within a reasonable time period.

Fourth, VA also stated that its SPV program needs to be considered in
consolidation decisions. The SPV program reduces the costs of food items
through high- volume purchases by all of VA and certain other government
agencies. We agree that the SPV program should be considered in
consolidation decisions at each location, but we are doubtful that this
would affect a decision on whether to consolidate. Our review of
consolidations showed that savings result from reduced labor costs, not
reduced food costs. Moreover, we are doubtful that the SPV program will
affect food costs in a consolidation because the same number of patients
will be fed whether consolidation occurs or not and all VA locations already
participate in the SPV program.

Fifth, VA stated that integration of NFS employees with environmental
management services should be considered in consolidations. NFS integration
with environmental management services includes having some employees work
in both services so that an employee with downtime in food services can work
in environmental services and vice- versa. Again, we agree that this factor
should be considered in consolidations at each location, but it is unclear
how this would affect a consolidation decision. While integrating NFS
workers with other services can reduce food production costs without
consolidation by shifting unneeded staff time and charges to other services,
it is unlikely to reduce costs to the degree they

13 The blast chill system can chill food for up to 5 days before the food is
consumed.

would be reduced in consolidation. Consolidation reduces costs primarily
through economies of scale whereby fewer workers in one location can produce
food for patients in two or more locations than the smallest number of
workers combined could produce food separately at each location. Therefore,
consolidation would provide greater cost savings. In addition, NFS
integration with environmental management services could be included in a
consolidation.

Employing VCS workers. VA raised issues regarding (1) time needed to phase
in conversions, (2) variability in savings by location, (3) separation
costs, and (4) training costs.

First, VA stated in its comments, and we agree, that the savings from
converting to VCS workers would take years to fully achieve. However, VA
officials told us that some savings are possible in the first year of
implementation. The magnitude of savings possible makes it worth the effort
even if several years are required to fully achieve savings. Our report
reflects this point. Our savings estimate of $67 million represents the
total potential annual cost reductions for employing VCS workers to provide
inpatient food services and not the savings that could be realized in fiscal
year 2001. VA would not realize the full savings at each location for a
number of years because VCS workers would only be phased in when NFS workers
left through normal attrition such as retirement, voluntarily leaving for
other VA jobs, or for jobs outside VA.

Second, VA stated that potential savings from employing VCS workers to
provide inpatient food services would vary from location to location, making
it difficult to project a total cost benefit at this time. We agree that
actual savings achieved would likely vary from location to location.
However, we estimated total potential savings assuming that VA's locations
could save an average of about 30 percent of combined wage and benefit
costs. This rate approximates the rate VA is realizing in its conversion to
VCS employees at Marion, Illinois. VCS headquarters managers and network and
facility officials in the VCS conversions studied agreed that using a 30
percent savings rate is reasonable for estimating nationwide savings.

Third, VA also suggests that our estimated savings for employing VCS workers
are overstated because of additional separation costs for NFS employees that
would be required to implement this option. We do not agree. In the VCS
conversions we reviewed, NFS workers typically continue working until they
leave through normal attrition including

retirement, moving to other jobs in VA, or leaving VA voluntarily. Thus, no
special separation costs are incurred.

Fourth, VA states that training costs could reduce our estimated savings. VA
said these training costs would be for (1) NFS workers who leave food
service to take other VA jobs, (2) VCS employees who replace NFS employees,
and (3) part- time workers providing food service. We do not agree that
these costs would reduce our estimated savings. As previously discussed, in
VCS conversions NFS workers are expected to leave through normal attrition
such as retirement, voluntarily leaving for other VA jobs, or voluntarily
leaving for jobs outside VA. The training for NFS employees taking other
jobs would be required whether NFS or non- NFS employees were hired for
those jobs. Similarly, training for VCS employees replacing NFS employees
would be required whether the replacements were VCS or other employees.
Finally, both VCS and NFS already use many part- time workers and VA
indicates it will continue this strategy. As a result, these training costs
would be required in any event and are not additional costs.

Competitive sourcing. Although VA concurred with our recommendation to
consider competitive sourcing as an option in providing food services, VA
raised concerns about the opportunities to use contractors in VA's inpatient
settings. We agree, as stated in the report, that VA may not offer the most
attractive business opportunity for food contractors because of VA's unique
structure for providing inpatient and retail food services separately at its
locations and because of the small inpatient workload at most locations.
Because of these and other uncertainties we could not estimate the number of
locations that could benefit from competitive sourcing or the potential
savings. Nonetheless, we believe that competitive sourcing should be
considered because of its potential to increase efficiency. As previously
discussed, our work in other areas has shown that the competitive sourcing
process reduces costs through increased efficiency whether the government or
a contractor wins the competition to provide services.

American Federation of AFGE opposed all three options we included for study
in our

Government Employees recommendations, expressing a number of concerns
regarding these

options. AFGE's overarching concern is whether VA should focus its cost
containment strategies on efforts that, in its view, could further
impoverish current workers or compromise food quality. While we understand
and appreciate AFGE's legitimate concerns about current workers' wages and
employment and the quality of food provided to veterans, we believe 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 food 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 food service workers.

We discuss AFGE's specific concerns below. Employing VCS workers. AFGE
expressed six concerns about employing VCS workers in place of NFS workers
to provide inpatient food service. First, AFGE stated that our estimate of
$67 million in annual savings from employing VCS workers is misleading. AFGE
said that the savings we estimated would be a one- time occurrence and
establish a new baseline once achieved. We do not agree. Because there is no
specific appropriation for inpatient food services, VA will not return
savings from its food service operations to the U. S. Treasury and thereby
establish a new lower baseline budget for VA. Rather, VA retains the savings
achieved through management efficiencies in its budget, thereby making the
savings available for other purposes in each subsequent year.

Second, AFGE suggested that part of the savings we estimated are based on
the government paying less for its match of employee health care premiums
because lower- paid VCS employees will less frequently participate in
government- sponsored health care plans than NFS employees. We did not
assume that government costs would be less because fewer VCS workers would
participate in government- sponsored health care plans than NFS workers.
Information provided by VA shows that the proportion of NFS and VCS workers
currently purchasing health insurance through government plans is 32 and 25
percent, respectively.

Third, AFGE said that our estimated savings for VA in employing VCS workers
are overstated because they do not include increased federal costs for
programs such as Medicaid, the Earned Income Tax Credit, the CHIP
(Children's Health Insurance Program), Head Start, Housing and Urban
Development rent subsidies, and other expenses related to increasing the
ranks of the working poor. We disagree that our savings are overstated
because our assessment of VA's recent experience suggests there would be
little or no additional costs to other federal programs as a result of VCS
conversion. Based on VA's experience to date, no NFS worker has had his or
her wages reduced or lost employment under the VCS conversions we reviewed
and no VCS worker was required to accept lower wages and benefits than they
already had or could obtain elsewhere. In VCS

conversions, NFS workers are being replaced as a result of normal attrition,
including retirement, voluntarily moving to other jobs in VA, or voluntarily
leaving for non- VA jobs. As such, the departing NFS workers would have the
same impact on other federal programs as if there were no VCS conversion.
Current VCS workers who replace NFS workers maintain their wages and
benefits and therefore have no impact on other federal programs. Newly-
hired VCS workers who replace NFS workers choose VCS over other employment
opportunities. Presumably, wages for these new workers are competitive with
wages in jobs these workers otherwise would have taken.

Fourth, AFGE raised questions regarding the legality of VCS providing
inpatient food services in place of NFS employees under the Economy Act.
AFGE questioned if VCS could enter into an agreement under the Economy Act
and supervise civil service employees, such as NSF employees, and if VCS and
NFS employees with similar job descriptions could be paid different wages.
We found no legal deficiency in these areas under VA's use of the Economy
Act. An “instrumentality of the United States,” VCS is
authorized to receive and has received appropriated funds credited to a
revolving fund. VCS's revolving fund is a permanent, indefinite
appropriation available to cover its operating expenses. Therefore, we agree
with VA that VCS can be a party to an agreement under the Economy Act. In
addition, VCS employees hold “excepted” positions within the
federal civil service and are not barred from supervising NFS employees.
Finally, VCS employee positions are exempt under 38 U. S. C. 7802 (5) from
requirements of title 5 of the United States Code regarding equal pay and
VCS employees are subject to a different pay scale than NFS employees.

Fifth, AFGE said that it will take years to realize the estimated savings.
We agree that it will take years to fully realize these savings, as our
discussion of Marion and St. Louis indicate, but some savings can begin to
accrue in the first year of implementation. Moreover, the amount of savings
possible makes it worth the effort even if several years are required to
fully achieve them.

Sixth, AFGE said that higher VCS turnover rates will create problems for
converting to VCS provision of inpatient food services. We do not agree.
Based on experience to date, VCS managers at headquarters and at Marion have
stated that turnover has not affected their ability to provide inpatient
food services or affected quality.

Consolidation of food production. AFGE expressed two concerns related to
consolidation of food production and incorrectly stated that we said that
VCS opposes consolidation. First, AFGE said that our estimates of kitchen
consolidation savings are overstated because we underestimate the financial
and practical costs of losing in- house food production. We do not agree.
Our savings estimates account for additional costs required by consolidation
that were identified by VA officials and representatives of the food service
industry who have consolidated food production locations. As we discuss in
our evaluation of the Central Texas Healthcare System, our savings model is
conservative and probably understates savings.

Second, AFGE stated that consolidations lower the quality of food provided
to veterans. For example, AFGE expresses concerns regarding frozen food and
other issues. We disagree. As we discussed in the report, VA reports that
patient satisfaction increased at the Central Texas Healthcare System after
consolidation, as measured by improvements in the taste and temperature of
food. The Central Texas Healthcare System received an award from VA
headquarters for reducing costs and maintaining quality in its consolidation
activities. The award included citations for (1) provision of consistently
high- quality meals, (2) improvements in timeliness, (3) increased patient
satisfaction, and (4) maintenance of quality controls. Moreover, in all VA
locations that consolidate, NFS dietitians continue to have quality control
responsibility to ensure that veterans' nutrition needs are met.

AFGE also stated that we noted that VCS opposes privatization and
centralization. We said that VCS opposes privatizing the services it
provides, but we did not say that VCS opposes consolidation. In fact, VCS
officials told us that VCS does not oppose consolidation.

Competitive sourcing. AFGE expressed five concerns about competitive
sourcing. First, AFGE stated that there is no evidence that contracting
saves money. We believe it is important to distinguish between an objective
to contract and an objective to compete government versus private service
provision. Our recommendation is that VA consider competitively sourcing
food service operations rather than outright contracting as an end in
itself. Competitive sourcing can result in the government either retaining
its position as service provider, or contracting with a private provider. As
we have discussed, our work shows that competitive sourcing reduces cost
through increased efficiency. The costs are reduced whether government or
the private contractor wins the competition. We believe it would be a

mistake to eliminate the competitive sourcing option for reducing VA's
costs.

Second, AFGE expressed concern as to whether VA would use the OMB Circular
A- 76 process for competitive sourcing or contract without the benefit of a
public- private competition. We agree that VA could, under limited
circumstances specified in OMB's Circular A- 76, convert to contract
performance without cost comparison. However, our recommendation to VA was
that it consider competitive sourcing rather than contracting. VA agreed in
principal with our recommendation.

Third, AFGE also expressed concern about the quality of food service under
contracting. We do not share AFGE's concern because the same quality
controls VA currently uses for in- house provision of food service could be
included and enforced in the contract if a private firm chooses to compete
and wins the competition under competitive sourcing. We note that some of
VA's medical affiliates, including major university hospitals, provide
inpatient food service through contractors.

Fourth, AFGE expressed concern that veterans currently employed in VA's in-
house food production 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 food
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.

Fifth, AFGE stated that there is little opportunity for a contractor to
provide services less expensively than VA if VA uses lower- paid VCS
employees. AFGE believes that the only way to lower costs in contracting is
to lower wages and does not believe this is possible if a contractor is
competing with VCS's wage rates. We disagree. Competitive sourcing is an
incentive to both government and the contractor to increase efficiency as
much as possible to achieve cost reductions. These increased efficiencies
can be achieved through improvements in process operations that reduce the
amount of capital or human resources needed to process the same workload.

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
available to others upon request.

If you have any questions about this report, please call me at (202) 512-
7101. Other staff who contributed to this report are listed in appendix V.

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)
inpatient food services for fiscal year 1999 to assess potential savings
nationwide if VA were to implement system- wide the three types of
initiatives it has used in some of its VA inpatient health care locations:
(1) consolidating food production, (2) employing Veterans Canteen Service
(VCS) rather than Nutrition and Food Service (NFS) workers to provide
inpatient food services, and (3) competitive sourcing.

We interviewed VA headquarters officials in NFS, VCS, the Office of General
Counsel, and other offices. We obtained documents from headquarters on the
consolidation of food service, the use of VCS labor, and contracting with
private food service contractors.

We obtained data on food services at each inpatient location by surveying
each Veterans Integrated Service Network. We obtained information on food
service needs, how VA provides services, costs, and number of meals at each
VA inpatient location. Networks and locations also provided us with
information on advance food technologies and excess capacity, and with
additional information on consolidating food services, the use of VCS, and
private contractors.

We also obtained additional data through interviews, documents, and physical
inspections of kitchen facilities and food delivery at VA locations. We
visited Veterans Integrated Service Network 17 (Dallas) locations in Temple,
Marlin, Waco, and Dallas. We also visited locations in Marion, Illinois, and
Jefferson Barracks and John Cochran in St. Louis, Missouri, in Veterans
Integrated Network 15 (Kansas City).

To estimate savings from consolidation, we first identified areas with
multiple food production locations, using the criterion that two or more
locations were located within 90 minutes' driving distance of each other. We
then examined the combined workloads and costs of unconsolidated locations
in these markets to determine whether savings could be achieved through
consolidation. Locations were considered to be already consolidated if they
received 80 percent or more of their food from another location or produced
80 percent or more of the food for another location.

Our analysis of VA cost data and discussions with VA officials suggested
that the ratio of employees to the average number of daily patients (average
daily inpatient census) is an appropriate measure for benchmarking savings
in food services. We confirmed this relationship using 1999 data by
regressing average daily patients on total employees. The resulting model

showed that the average daily patients accounted for 86 percent of the
variation in staffing.

We computed savings estimates for the consolidations using the staffing
ratio of one employee per 6. 7 average daily patients. This staffing ratio
was achieved by the Central Texas Healthcare System after completing
consolidation of inpatient food services at Temple, Marlin, and Waco. To
validate this measure we spoke to VA officials representing both NFS and
VCS, who agreed that using the Central Texas Healthcare System staffing
ratio after consolidation was a reasonable, perhaps conservative, estimate
of achievable staffing levels. Some VA production locations, in fact, are
more efficient (lower ratio of employees to the average number of daily
patients) than operations at the Central Texas Healthcare System.

To calculate total savings from food consolidation we first multiplied the
total average number of daily patients of the proposed market by the Central
Texas Healthcare System staffing ratio (one employee per 6. 7 average daily
patients) to arrive at a projected employee total for the consolidated
market. 1 We then subtracted this projected total from the fiscal year 1999
employee total of the individual locations in an area to determine the
number of employees not needed, if any. Cost savings for the area were
computed by multiplying the number of positions saved by the average salary
costs of NFS wage grade, including benefits, within each market. We
aggregated savings from each market to determine the total savings from food
consolidation.

The one- time investment for equipment was estimated by assuming that one
location in each consolidated area required an advance food preparation
system and every location required an advance food delivery system. To
project the total cost of advance food preparation equipment (a fixed cost
that includes items such as the blast chiller), we multiplied the cost of
Central Texas Healthcare System's advance food preparation system (purchase
amount adjusted to 1999 dollars) by the number of locations within areas
that required this system. We calculated the total cost for the advance food
delivery systems (a variable cost that includes items such as reheating
carts, trays, and plates) by multiplying the total average daily patients of
locations without this system by Central Texas

1 We adjusted the average daily inpatient census workload of locations where
NFS provides noninpatient meals (or provides meals to non- VA locations) by
adding one inpatient to the average daily inpatient census for three
noninpatient meals served daily.

Healthcare System's cost per average daily patients (adjusted to 1999
dollars).

We calculated the costs of transporting food from a central location using
data obtained from the Central Texas Healthcare System. To project the total
costs of transportation for the consolidated areas, we multiplied the annual
cost of one leased refrigerated truck by the total number of consolidated
areas. Because this cost recurs each year, we subtracted this cost from the
annual recurring savings from consolidation.

We determined the potential savings from converting from NFS to VCS labor by
applying a 30 percent savings reduction to NFS employee costs. VCS salaries
are based on the Department of Defense's survey of food service worker wages
in a local area, and are competitive with the private sector. Nationally,
NFS salaries average about 70 percent of total NFS food production costs.
VCS salaries are normally about 30 percent below NFS salaries. VCS
headquarters established this percentage, and network and facility officials
have agreed that using a 30 percent savings rate is reasonable.

We also conducted a literature review of the food services industry,
interviewed selected non- VA food service officials and officials from the
private vendor sector and food service industry organizations, and visited
contractor food production facilities.

We validated survey data used to construct cost estimates by comparing
questionable data supplied on the 1999 survey with VA data sources. When
necessary, we also contacted survey respondents and/ or VA officials to
clarify or correct data. We performed our review between October 1999 and
November 2000 in accordance with generally accepted government auditing
standards.

Locations Converting From Nutrition and Food Service to Veterans Canteen
Service

Appendi xII

Workers, April 2000 Percentage VCS VA inpatient

Year conversion inpatient food

1999 Average daily location agreement signed

service workforce a census

Martinez, California 1996 100 97 Marion, Illinois 1997 70 95 Poplar Bluff,
Missouri 1998 41 50 Wichita, Kansas 1998 21 36 Columbia, Missouri 1999 13 88
Mather, California 1999 100 9 Orlando, Florida b 1999 100 10 St. Louis
Jefferson Barracks, Missouri c 1999 0 d 218

St. Louis John Cochran, Missouri c 1999 0 d 83 a NFS dietitians continue to
provide quality assurance but are not part of the inpatient food service
workforce. b Food is produced at Tampa, Florida, location.

c VCS food manager is on staff at the St. Louis consolidated locations;
recruiting continues for other VCS positions. d Most food is produced at St.
Louis Jefferson Barracks location.

Comments From the Department of Veterans

Appendi xI II Affairs

Comments From the American Federation of

Appendi xI V Government Employees

Appendi xV

GAO Contact and Staff Acknowledgments ' GAO Contact Paul R. Reynolds, (202)
512- 7109 Staff

Deborah L. Edwards, James C. Musselwhite, William R. Stanco, John R.
Acknowledgments

Kirstein, Thomas A. Walke, Elsie M. Picyk, Susan Lawes, John G. Brosnan, and
Roger J. Thomas contributed to this report.

Related GAO Products VA Laundry Service: Consolidations and Competitive
Sourcing Could Save Millions( GAO/ 01- 61, 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: Improvements Needed in Capital Asset Planning and Budgeting(
GAO/ HEHS- 99- 145, Aug. 13, 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).

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).

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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

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Appendix III

Appendix III Comments From the Department of Veterans Affairs

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Appendix III Comments From the Department of Veterans Affairs

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Appendix III Comments From the Department of Veterans Affairs

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Appendix III Comments From the Department of Veterans Affairs

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Appendix IV

Appendix IV Comments From the American Federation of Government Employees

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Appendix IV Comments From the American Federation of Government Employees

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Appendix IV Comments From the American Federation of Government Employees

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Appendix IV Comments From the American Federation of Government Employees

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Appendix IV Comments From the American Federation of Government Employees

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Appendix V

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

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