    VA Health Care: Preliminary Information on the Joint Venture
    Proposal for VA's Charleston Facility (26-SEP-05, GAO-05-1041T).

    The Department of Veterans Affairs (VA) maintains partnerships,
    or affiliations, with university medical schools to obtain
    medical services for veterans and provide training for medical
    residents. In 2002, the Medical University of South Carolina
    (MUSC)--which is affiliated with VA's medical facility in
    Charleston--proposed that VA and MUSC enter into a joint venture
    for a new VA facility as part of MUSC's plan to expand its
    medical campus. Under the proposal, MUSC and VA would jointly
    construct and operate a new medical center in Charleston. In
    2004, the Capital Asset Realignment for Enhanced Services (CARES)
    Commission, an independent body charged with assessing VA's
    capital asset requirements, issued its recommendations on the
    realignment and modernization of VA's capital assets. Although
    the Commission did not recommend a replacement facility for
    Charleston, it did recommend, among other things, that VA
    promptly evaluate MUSC's proposal. This testimony discusses GAO's
    preliminary findings on the (1) current condition of the
    Charleston facility, (2) extent to which VA and MUSC collaborated
    on the joint venture proposal, and (3) issues for VA to consider
    when exploring the opportunity to participate in the joint
    venture. VA concurred with GAO's preliminary findings.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-1041T
        ACCNO:   A38138
      TITLE:     VA Health Care: Preliminary Information on the Joint
    Venture Proposal for VA's Charleston Facility
         DATE:   09/26/2005
      SUBJECT:   Facility maintenance
    	     Health care facilities
    	     Health care services
    	     Health centers
    	     Joint ventures
    	     Veterans hospitals

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    GAO-05-1041T

    United States Government Accountability Office

    GAO Testimony

    Before the Subcommittee on Health, Committee on Veterans' Affairs, House
    of Representatives

    For Release on Delivery Expected at 9:00 a.m. EDT in Charleston, S.C.
    Monday, September 26, 2005

    VA HEALTH CARE

                               Preliminary Information on
                               the Joint Venture Proposal
                              for VA's Charleston Facility

    Statement of Mark L. Goldstein, Director Physical Infrastructure Issues

    GAO-05-1041T

    [IMG]

    September 26, 2005

    VA HEALTH CARE

    Preliminary Information on the Joint Venture Proposal for VA's Charleston
    Facility

                                     What GAO Found

    The most recent VA facility assessment and the CARES Commission concluded
    that the Charleston medical facility is in overall good condition and,
    with some renovations, can continue to meet veterans' health care needs in
    the future. VA officials attribute this to VA's continued capital
    investments in the facility. For example, over the last 5 years, VA has
    invested approximately $11.6 million in nonrecurring maintenance projects,
    such as replacing the fire alarm system and roofing. To maintain the
    facility's condition over the next 10 years, VA officials from the
    Charleston facility have identified a number of planned capital
    maintenance and improvement projects, totaling approximately $62 million.

    VA and MUSC have collaborated and communicated to a limited extent over
    the past 3 years on a proposal for a joint venture medical center. For
    example, before this summer, VA and MUSC had not exchanged critical
    information that would help facilitate negotiations, such as cost analyses
    of the proposal. As a result of the limited collaboration, negotiations
    over the proposal stalled. However, after a congressional delegation visit
    in August 2005, VA and MUSC took steps to move the negotiations forward.
    Specifically, VA and MUSC established four workgroups to examine critical
    issues related to the proposal.

    The MUSC proposal for a new joint venture medical center presents an
    opportunity for exploring new ways of providing health care to
    Charleston's veterans, but it also raises a variety of complex issues for
    VA. These include the benefits and costs of investing in a joint facility
    compared with other alternatives, legal issues associated with the new
    facility such as leasing or transferring property, and potential concerns
    of stakeholders, including VA patients and employees. The workgroups
    established by VA and MUSC are expected to examine some, but not all, of
    these issues. Additionally, some issues can be addressed through
    collaboration between VA and MUSC, but others may require VA to seek
    legislative remedies.

                       VA Facility in Charleston, South Carolina

    Source: GAO.

                     United States Government Accountability Office

    Mr. Chairman and Members of the Subcommittee:

    I am pleased to be here in Charleston to provide our preliminary findings
    on the possibility of the Department of Veterans Affairs (VA) and the
    Medical University of South Carolina (MUSC) entering into a joint venture
    for a new medical center in Charleston. For decades VA has developed and
    maintained partnerships, or affiliations, with university medical schools
    to obtain medical services for veterans and provide training and education
    to medical residents. Today, VA has affiliations with 107 medical schools.
    These affiliations--one of which is with MUSC-help VA fulfill its mission
    of providing health care to the nation's veterans. For example, many MUSC
    physicians serve as residents at VA's medical facility in Charleston, the
    Ralph H. Johnson VA Medical Center. This medical facility is an important
    part of the VA health care network, providing over 4,000 inpatient stays
    for veterans in 2004.

    To provide health care to veterans, in part through partnerships with
    university medical schools, VA manages a diverse inventory of real
    property. VA reported in February 2005 that its capital assets included
    more than 5,600 buildings and about 32,000 acres of land.1 However, many
    of VA's facilities were built more than 50 years ago and are no longer
    well suited to providing accessible, high-quality, cost-effective health
    care in the 21st century. To address its aging infrastructure, VA, in
    1999, initiated the Capital Asset Realignment for Enhanced Services
    (CARES) process- the first comprehensive, long-range assessment of its
    health care system's capital asset requirements in almost 20 years. In
    February 2004, the CARES Commission-an independent body charged with
    assessing VA's capital assets-issued its recommendations regarding the
    realignment and modernization of VA's capital assets necessary to meet the
    demand for veterans' health care services through 2022. For example, the
    Commission recommended replacing VA facilities in Denver and Orlando. The
    Commission did not recommend replacing the VA facility in Charleston,
    which is a primary, secondary, and tertiary care facility.2 However, the

    1Department of Veterans Affairs, 5-Year Capital Plan 2005-2010
    (Washington, D.C.: February 2005).

    2Primary care is defined as health care provided by a medical professional
    with whom a patient has initial contact and by whom the patient may be
    referred to a specialist for further treatment. Secondary care is provided
    by a specialist or facility upon referral by a primary care physician that
    requires more specialized knowledge, skill, or equipment. Tertiary care is
    highly specialized medical care, usually over an extended period of time,
    that involves advanced and complex procedures and treatments performed by
    medical specialists in state-of-the-art facilities.

    Commission recommended that, among other things, VA promptly evaluate
    MUSC's proposal to jointly construct and operate a new medical center with
    VA in Charleston, noting that such an arrangement could serve as a
    possible framework for partnerships in the future. In responding to the
    Commission's recommendations, the Secretary stated that VA will continue
    to consider options for sharing opportunities with MUSC.3

    My statement today will cover the (1) current condition of the Charleston
    facility and the actions VA has taken to implement CARES recommendations
    at the facility, (2) extent to which VA and MUSC collaborated on the
    proposal for a joint medical center, and (3) issues for VA to consider
    when exploring the opportunity to participate in the joint venture. My
    preliminary comments are based on our ongoing work for the full Committee
    as well as GAO's body of work on VA's management of its capital assets.4
    For our ongoing work, we interviewed VA and MUSC officials as well as
    other stakeholders in the Charleston area, including officials from the
    City of Charleston and the U.S. Navy. We also reviewed the CARES
    Commission's comments on and recommendations for the Charleston facility;
    documents relating to the MUSC proposal, including correspondence between
    MUSC and VA; federal statutes; and past GAO reports. We obtained comments
    on this testimony from VA and MUSC officials, which we incorporated as
    appropriate. We conducted our work from June through September 2005 in
    accordance with generally accepted government auditing standards.

    In summary:

    o  	The most recent VA facility assessment and the CARES Commission
    concluded that the Charleston facility is in overall good condition and
    with some renovations can continue to meet veterans' health care needs in
    the future. VA officials attribute the facility's condition to VA's
    continued capital investments. For example, over the last 5 years, VA has
    invested approximately $11.6 million in nonrecurring maintenance projects,
    such as replacing the fire alarm system and roofing. The CARES Commission
    did not recommend replacing the Charleston facility; however, the
    Commission recommended renovations of the nursing home care units as well
    as the inpatient wards in order to meet the needs of the projected

    3Department of Veterans Affairs, Secretary of Veterans Affairs: CARES
    Decision (Washington, D.C.: May 2004).

    4See "Related GAO Products" at the end of this testimony.

    veterans' population in the Charleston area. The CARES projections
    indicate that demand for inpatient beds at VA's facility in Charleston
    will increase by 29 percent from 2001 to 2022, while demand for outpatient
    services will increase by 69 percent during the same period. To maintain
    the facility's condition over the next 10 years, officials from the VA
    facility in Charleston have identified a number of planned capital
    maintenance and improvement projects, including repairing expansion
    joints, making electrical upgrades, and adding a parking deck for
    patients. VA officials estimate that the costs of these planned
    maintenance and improvement projects will total about $62 million.

    o  	VA and MUSC collaborated and communicated to a limited extent on a
    proposal for a joint venture medical center over the past 3 years. In
    November 2002, the President of MUSC made a proposal to the Secretary of
    VA to participate in a 20-year, multiphase construction plan to replace
    and expand its campus. Under MUSC's proposal, MUSC would acquire the site
    of the current VA facility in Charleston for part of its expansion project
    and then enter into a joint venture to construct and operate a new
    facility on MUSC property. The CARES Commission recommended that VA
    promptly evaluate MUSC's proposal to jointly construct and operate a new
    medical center with VA. Although there has been some discussion and
    correspondence between VA and MUSC since 2002 on the joint venture
    proposal, collaboration has been minimal. For example, before this summer,
    VA and MUSC had not exchanged critical information that would help
    facilitate negotiations, such as cost analyses of the proposal. As a
    result of the limited collaboration, negotiations over the proposal
    stalled. After a congressional delegation visited Charleston in August
    2005, however, VA and MUSC took some initial steps to move the
    negotiations forward. Specifically, VA and MUSC established four
    workgroups to examine critical issues related to the proposal.

    o  	The MUSC proposal for a new joint venture medical center presents a
    unique opportunity for VA to explore new ways of providing health care to
    Charleston's veterans now and in the future; however, it also raises a
    variety of complex issues for VA. These include the benefits and costs of
    investing in a joint facility compared with those of other alternatives,
    such as maintaining the existing facility or considering options with
    other health care providers in the area; legal issues associated with the
    new facility, such as leasing or transferring property, contracting, and
    employment; and potential concerns of stakeholders. The workgroups
    established by VA and MUSC are expected to examine some, but not all, of
    these issues. In addition, some issues can be addressed through
    collaboration between VA and MUSC, while others may require VA to seek
    legislative remedies. Until these issues are explored, it will be
    difficult to

    Background

    make a final decision on whether a joint venture is in the best interest
    of the federal government and the nation's veterans.

    VA manages a vast medical care network for veterans, providing health care
    services to about 5 million beneficiaries. The estimated cost of these
    services in fiscal year 2004 was $29 billion. According to VA, its health
    care system now includes 157 medical centers, 862 ambulatory care and
    community-based outpatient clinics (CBOC), and 134 nursing homes. VA
    health care facilities provide a broad spectrum of medical, surgical, and
    rehabilitative care. The management of VA's facilities is decentralized to
    21 regional networks referred to as Veterans Integrated Service Networks
    (networks). The Charleston facility is part of Network 7, or the Southeast
    Network.5

    The Charleston medical facility is a part of the VA health care network
    and has served the medical needs of Charleston area veterans since it
    opened in 1966. The Charleston facility is a primary, secondary, and
    tertiary care facility. (See fig. 1.) The facility consists of more than
    352,000 square feet with 117 medical and surgical beds and 28 nursing home
    care unit beds; according to VA officials, the average daily occupancy
    rate is about 80 percent. The outpatient workload was about 460,000 clinic
    visits in fiscal year 2004. VA employs about 1,100 staff at the Charleston
    facility, which has an annual operating budget of approximately $160
    million.

    5This network encompasses an area containing VA facilities in South
    Carolina, Georgia, and Alabama.

    Figure 1: East Side of The Ralph H. Johnson VA Medical Center in
    Charleston, Adjacent to MUSC Project Construction

    Source: GAO.

    VA's Charleston medical facility is affiliated with MUSC. MUSC is the main
    source of the Charleston facility's medical residents, who rotate through
    all major VA clinical service areas. VA also purchases approximately $13
    million in medical care services from MUSC, including gastroenterology,
    infectious disease, internal medicine, neurosurgery, anesthesia,
    pulmonary, cardiovascular perfusion, and radiology services. In addition,
    VA has a medical research partnership with MUSC for a mutually

      VA Determined That the Charleston Facility Is in Good Condition and Is
      Currently Investing in Minor Renovations

    supported biomedical research facility, the Thurmond Biomedical Research
    Center.

    MUSC operates a 709 licensed bed acute care hospital in Charleston that
    also provides primary, secondary, and tertiary services. The services
    available through MUSC span the continuum of care with physician
    specialists and subspecialists in medicine, surgery, neurology,
    neurological surgery, psychiatry, radiology, and emergency medicine, among
    other specialties. During a 12-month period ending on June 30, 2003, MUSC
    admitted 28,591 patients (including newborns), representing an occupancy
    rate of approximately 78 percent of available beds. Outpatient activity
    for the same period included 6,802 same-day surgeries, 551,914 outpatient
    visits, and 35,375 emergency visits. MUSC's net patient service revenue
    for the fiscal year ending on June 30, 2003, was about $559 million.

    VA and the CARES Commission concluded that the Charleston facility is in
    overall good condition and, with relatively minor renovations, can
    continue to meet veterans' health care needs in the future. VA conducts
    facility condition assessments (FCA) at its facilities every 3 years on a
    rotating basis.6 FCAs evaluate the condition of a VA facility's essential
    functions-electrical and energy systems, accessibility, sanitation and
    water-and subsequently estimate the useful and remaining life of those
    systems. The Charleston facility's most recent FCA was conducted in 2003,
    and this assessment showed that the facility currently is in overall good
    condition. According to VA officials, the facility's current condition is
    a result of targeted capital investments. In particular, VA invested about
    $11.6 million in nonrecurring maintenance projects over the last 5 years.
    Such projects include installing a new fire alarm system, replacing
    roofing, painting the exterior of the building, and upgrading interior
    lighting.

    The CARES Commission did not recommend replacing VA's facility in
    Charleston as it did with facilities in some other locations. In assessing
    the capital asset requirements for the Charleston facility, the Commission
    relied on the 2003 FCA and projections of inpatient and outpatient service
    demands through 2022, among other things. These projections indicate

    6According to VA officials, FCAs provide VA with a professional assessment
    of its capital assets that facilitates and enables uniformed planning and
    expenditure of resources. Multidisciplinary teams of architects and
    engineers, in conjunction with facility staff, conduct the FCAs.

    that demand for inpatient beds at VA's facility in Charleston will
    increase by 29 percent from 2001 to 2022, while demand for outpatient
    services will increase by 69 percent during the same period.7 Although the
    CARES Commission did not recommend a new facility in Charleston, it did
    call for renovating the nursing home units and the inpatient wards. In his
    response to the Commission's recommendations, the Secretary agreed to make
    the necessary renovations at the Charleston facility.

    VA officials at the Charleston medical facility have a number of ongoing
    and planned capital maintenance and improvement projects to address the
    CARES Commission recommendations and to maintain the condition of the
    current medical center. For example, two minor capital
    improvements-totaling $6.25 million-are currently under construction.8
    These projects include

    o  a third floor clinical addition, which will add 20,000 square feet of
    space to

    the medical center for supply processing and distribution,9 rehabilitation
    medicine, and prosthetics; and

    o  	the patient privacy project, which will renovate the surgical
    in-patient ward to provide private and semiprivate bathrooms for veterans.

    Planned capital maintenance and improvements projects over the next 10
    years include electrical upgrades, renovation of several wards to address
    patient privacy concerns, renovation of operating rooms and the intensive
    care units, and the expansion of the specialty care clinics. VA officials
    estimate that the total cost for all planned capital maintenance and
    improvement projects is approximately $62 million.

    In addition to the capital improvement projects at the medical center in
    Charleston, VA is currently constructing a CBOC, in partnership with the
    Navy, at the Naval Weapons Station in Goose Creek, South Carolina. The

    7These trends are based on the original CARES workload projections for the
    Charleston facility. VA recently updated the CARES workload projections
    and the updated projections suggest different trends. Neither the original
    or updated projections, however, factor in the potential impact on
    workload of veterans returning from Afghanistan and Iraq.

    8According to VA, minor capital improvement projects are those costing
    less than $7 million.

    9Supply processing and distribution is a section of the medical center
    that is dedicated to the receiving, storage, and distribution of medical
    supplies and the decontamination and sterilization of reusable medical
    supplies and equipment.

    new clinic will be a joint VA-Navy facility and will help VA address the
    projected increase in demand for outpatient services. The new clinic-
    called the Goose Creek CBOC-is scheduled to open in 2008 and will serve a
    projected 8,000 patients who are currently served by VA's Charleston
    facility. VA estimates its investment in the planning, design, and
    construction of the Goose Creek CBOC will be about $6 million.

      Limited Collaboration between VA and MUSC on a Joint Venture Facility
      Characterized Negotiations until Recently

    VA and MUSC have collaborated and communicated to a limited extent on a
    proposal for a joint venture medical center over the past 3 years. As a
    result of the limited collaboration, negotiations over the proposal
    stalled. In August 2005, however, initial steps were taken to move the
    negotiations forward. Specifically, four workgroups were created-which
    include both VA and MUSC officials-and tasked with examining critical
    issues related to the proposal.

    Limited Communication and Collaboration Have Hampered Negotiations over
    MUSC's Joint Venture Proposal

    To meet the needs of a growing and aging patient population, MUSC has
    undertaken an ambitious five-phase construction project to replace its
    aging medical campus. Construction on the first phase began in October
    2004. Phase I includes the development of a four-story diagnostic and
    treatment building and a seven-story patient hospitality tower, providing
    an additional 641,000 square feet in clinical and support space-156 beds
    for cardiovascular and digestive disease services, 9 operating rooms,
    outpatient clinics with a capacity of 100,000 visits, and laboratory and
    other ancillary support services. Phase I also includes the construction
    of an atrium connecting the two buildings, a parking structure, and a
    central energy plant. Initial plans for phases II through V include
    diagnostic and treatment space and patient bed towers. As shown in figure
    2, phases IV and V would be built on VA property. In particular, phase V
    would be built on the site of VA's existing medical center. MUSC has
    informed VA about its proposed locations for these facilities. According
    to MUSC officials, there are approximately 2 years remaining for the
    planning of phase II.

    Figure 2: MUSC Construction Plan

    Note: The circle highlights some of VA's existing property.

    In November 2002, the President of MUSC sent a proposal to the Secretary
    of VA about partnering with MUSC in the construction and operation of a
    new medical center in phase II of MUSC's construction project. Under
    MUSC's proposal, VA would vacate its current facility and move to a new
    facility located on MUSC property to the south of phase I. MUSC also
    indicated that sharing medical services would be a component of the joint
    venture-that is, VA and MUSC would enter into sharing agreements to buy,
    sell, or barter medical and support services. VA and MUSC currently share
    some services-for example, VA purchases services for gastroenterology,
    infectious disease, and internal medicine. According to

    MUSC officials, the joint venture proposal would increase the level of
    sharing of medical services and equipment, which would create cost savings
    for both VA and MUSC. VA officials told us that the proposed joint venture
    between MUSC and VA is unprecedented-that is, should VA participate in the
    joint venture, it would be the first of its kind between VA and a medical
    education affiliate.

    In response to MUSC's proposal, VA formed an internal workgroup composed
    of officials primarily from VA's Southeast Network to evaluate MUSC's
    proposal. The workgroup analyzed the feasibility and cost effectiveness of
    the proposal and issued a report in March 2003, which outlined three other
    options available to VA: replacing the Charleston facility at its present
    location, replacing the Charleston facility on land presently occupied by
    the Naval Hospital in Charleston, or renovating the Charleston facility.
    The workgroup concluded that it would be more cost effective to renovate
    the current Charleston facility than to replace it with a new facility.
    This conclusion was based, in part, on the cost estimates for constructing
    a new medical center. In April 2003, the Secretary of VA sent a
    counterproposal to the President of MUSC, which indicated that VA
    preferred to remain in its current facility. The Secretary indicated,
    however, that if VA agreed to the joint venture, it would rather place the
    new facility in phase III-which is north of phase I-to provide better
    street access for veterans. (See fig. 3 for MUSC's proposal and VA's
    counterproposal.) In addition, the Secretary indicated that MUSC would
    need to provide a financial incentive for VA to participate in the joint
    venture. Specifically, MUSC would need to make up the difference between
    the estimated life-cycle costs of renovating the Charleston facility and
    building a new medical center-which VA estimated to be about $85
    million-through negotiations or other means.

    Figure 3: MUSC's Proposal and VA's Counterproposal

    Note: The circle highlights some of VA's existing property.

    The MUSC President responded to VA's counterproposal in an April 2003
    letter to the Secretary of VA. In the letter, the MUSC President stated
    that MUSC was proceeding with phase I of the project and that the joint
    venture concept could be pursued during later phases of construction. The
    letter did not specifically address VA's proposal to locate the new
    facility in phase III, nor the suggestion that MUSC would need to provide
    some type of financial incentive for VA to participate in the joint
    venture. To move forward with phase I, the MUSC President stated that MUSC
    would

    like to focus on executing an enhanced use lease (EUL) for Doughty
    Street.10 Although MUSC owns most of the property that will be used for
    phases I through III, Doughty Street is owned by VA and serves as an
    access road to the Charleston facility and parking lots. The planned
    facility for phase I would encompass Doughty Street.11 (See fig. 4.)
    Therefore, MUSC could not proceed with phase I-as originally planned-until
    MUSC secured the rights to Doughty Street. To help its medical affiliate
    move forward with construction, VA executed a EUL agreement with MUSC in
    May 2004 for use of the street.12 According to the terms of the EUL, MUSC
    will pay VA $342,000 for initial use of the street and $171,000 for each
    of the following eight years.

    10EUL authority allows VA to lease real property under the Secretary's
    jurisdiction or control to a private or public entity for a term of up to
    75 years. EULs must result in a beneficial redevelopment/reuse of the
    affected VA property by the lessee that will include space for a VA
    mission-related activity and/or will provide consideration that can be
    applied to improve health care and services for veterans and their
    families in the community where the site is located.

    11To provide access to the current VA facility, a new street-the Ralph H.
    Johnson Drive- will be constructed around MUSC's new facility.

    12The Secretary of VA and the Medical University Hospital Authority
    (MUHA), an affiliate of MUSC, entered into a 75-year EUL agreement in May
    2004 for MUHA use of VA property-a one-block segment of Doughty Street.

    Figure 4: Construction of Phase One of MUSC's Project

    Source: GAO.

    Note: The photograph shows the initial construction for phase I of MUSC's
    project. Doughty Street will be encompassed by MUSC's new facility.

    Although both entities successfully collaborated in executing the enhanced
    use lease for Doughty Street, limited collaboration and communication
    generally characterize the negotiations between MUSC and VA over the joint
    venture proposal. In particular, before this summer, VA and MUSC had not
    exchanged critical information that would help

    facilitate negotiations. For instance, MUSC did not clearly articulate to
    VA how replacing the Charleston facility, rather than renovating the
    facility, would improve the quality of health care services for veterans
    or benefit VA. MUSC officials had generally stated that sharing services
    and equipment would create efficiencies and avoid duplication, which would
    lead to cost savings. However, MUSC had not provided any analyses to
    support such claims. Similarly, as required by law, VA studied the
    feasibility of coordinating its health care services with MUSC, pending
    construction of MUSC's new medical center.13 This study was completed in
    June 2004. However, VA officials did not include MUSC officials in the
    development of the study, nor did they share a copy of the completed study
    with MUSC. VA also updated its cost analysis of the potential joint
    venture this spring, but again, VA did not share the results with MUSC.
    Because MUSC was not included in the development of these analyses, there
    was no agreement between VA and MUSC on key input for the analyses, such
    as the specific price MUSC would charge VA for, or the nature of, the
    medical services that would be provided. As a result of the limited
    collaboration and communication, negotiations stalled-prior to August
    2005, the last formal correspondence between VA and MUSC leadership on the
    joint venture was in April 2003. (See fig. 5 for a time line of key events
    in the negotiations between VA and MUSC.)

    13The Veterans Health Care, Capital Asset, and Business Improvement Act of
    2003, Pub. L. No. 108-170, S: 232, 117 Stat. 2042, 2052-2053 (2003).

    Figure 5: Time Line of Key Events in the Negotiations between VA and MUSC

                                      Source: GAO.

                          aAs required by P.L. 108-170 (2003).

    Recent Events Have Spurred Discussion and Collaboration Between VA and
    MUSC

    On August 1, 2005, a congressional delegation visited Charleston to meet
    with VA and MUSC officials to discuss the joint venture proposal. After
    this visit, VA and MUSC agreed to establish workgroups to examine key
    issues associated with the joint venture proposal. Specifically, VA and
    MUSC established the Collaborative Opportunities Steering Group (steering
    group). The steering group is composed of five members from VA, five
    members from MUSC, and a representative from the Department of Defense
    (DOD), which is also a stakeholder in the local health care market.14 The
    steering group chartered four workgroups, and according to VA:

    o  	The governance workgroup will examine ways of establishing
    organizational authority within a joint venture between VA and MUSC,
    including shared medical services.

    o  	The clinical service integration workgroup will identify medical
    services provided by VA and MUSC and opportunities to integrate or share

    14The Department of Defense currently provides medical services to a
    number of its beneficiaries through the Naval Hospital in Charleston.

      Joint Venture Proposal Raises a Variety of Issues

    these services.

    o  	The legal workgroup will review federal and state authorities (or
    identify the lack thereof) and legal issues relating to a joint venture
    with shared medical services.

    o  	The finance workgroup will provide cost estimates and analyses
    relating to a joint venture with shared medical services.

    The workgroups will help VA and MUSC determine if the joint venture
    proposal is mutually beneficial.15 The workgroups are scheduled to provide
    weekly reports to the steering group and a final report to the steering
    group by October 28, 2005. The steering group is scheduled to submit a
    final report by November 30, 2005, to the Deputy Under Secretary for
    Health for Operations and Management and to the President of MUSC.

    The possibility of participating in the joint venture raises a number of
    issues for VA to consider. The proposed joint venture presents a unique
    opportunity for VA to reevaluate how it provides health care services to
    veterans in Charleston. Our ongoing work, as well as our previous work on
    VA's capital realignment efforts, cost-benefit analysis, organizational
    transformation, and performance management, however, suggests many issues
    to consider before making a decision about a joint venture, including
    governance, legal, and stakeholder issues. Some of these issues will be
    directly addressed by the workgroups, while others, such as the concerns
    of stakeholders, will not. In addition, some issues can be addressed
    through collaboration between VA and MUSC, while others may require VA to
    seek legislative remedies. Among the issues to explore are the following:

    o  	Comparing appropriate options and assessing the costs and benefits of
    all options: According to Office of Management and Budget (OMB) guidelines
    on evaluating capital assets, a comparison of options, or alternatives,
    including the status quo, is critical for ensuring that the best
    alternative is selected.16 In its guidance, OMB encourages decision makers

    15VA's Under Secretary for Health directed the workgroups to also examine
    the potential for sharing services with DOD.

    16Office of Management and Budget, Capital Programming Guide, Version 1.0
    (Washington, D.C.: July 1997).

    to consider the different ways in which various functions, most notably
    health care service delivery in this case, can be performed. OMB
    guidelines further state that comparisons of costs and benefits should
    facilitate selection among competing alternatives.17 The finance workgroup
    is examining the potential costs for shared services within a joint
    facility. However, it is unclear whether the workgroup will weigh the
    benefits and costs of a new facility against those of other alternatives,
    including maintaining the existing medical center.

    VA will also need to weigh the costs and benefits of investing in a joint
    venture in Charleston against the needs of other VA facilities in the
    network and across the nation. VA did not include the Charleston facility
    on its list of highest priority major medical facility construction
    requirements for fiscal years 2004 through 2010.18 According to VA, the
    list of priorities, which includes 48 projects across the nation, aligns
    with existing CARES recommendations. Nevertheless, exploring the potential
    costs and benefits of a joint venture gives VA an opportunity to reexamine
    how it delivers health care services to the nation's veterans and uses its
    affiliations with medical universities now and in the future. As we have
    stated in previous reports, given the nation's long-term fiscal challenges
    and other challenges of the 21st Century, such reexaminations of federal
    programs are warranted.19 Moreover, as the CARES Commission noted, the
    potential joint venture between VA and MUSC is a possible framework for
    future partnerships.

    o  	Developing a governance plan that outlines responsibilities and
    ensures accountability: If VA and MUSC decide to enter into a joint
    venture for a new facility, they will need a plan for governing the
    facility. Any governance plan would have to maintain VA's direct authority
    over and accountability for the care of VA patients. In addition, if
    shared medical services are a component of a joint venture between MUSC
    and the VA, the entities will need a mechanism to ensure that the
    interests of

    17OMB and GAO have identified benefit-cost analysis as a useful tool for
    integrating the social, environmental, economic, and other effects of
    investment alternatives and for helping decision makers identify the
    alternative with the greatest net benefits. In addition, the systematic
    process of benefit-cost analysis helps decision makers organize and
    evaluate information about, and determine trade-offs between,
    alternatives.

    18Department of Veterans' Affairs, CARES Major Construction Projects FY
    2004 - 2010 (Washington, D.C.: May 2004).

    19GAO, 21st Century Challenges: Reexamining the Base of the Federal
    Government, GAO-05-325SP (Washington, D.C.: February 2005).

    the patients served by both are protected today and in the future. For
    instance, VA may decide to purchase operating room services from MUSC.20
    If the sharing agreement was dissolved at some point in the future, it
    would be difficult for VA to resume the independent provision of these
    services. Also, if MUSC physicians were to treat VA beneficiaries, or VA
    physicians were to treat MUSC patients, each entity would need a clear
    understanding of how to report health information to its responsible
    organization. Therefore, a clear plan for governance would ensure that VA
    and MUSC could continue to serve their patients' health care needs as well
    as or better than before.

    o  	Identifying legal issues and seeking legislative remedies: The
    proposed joint venture raises a number of complex legal issues depending
    on the type of joint venture that is envisioned. Many of the legal issues
    that will need to be addressed involve real estate, construction,
    contracting, budgeting, and employment. The following are among some of
    the potential issues relating to a joint venture that VA previously
    identified:

    o  	What type of interest will VA have in the facility? If MUSC is
    constructing the facility on MUSC property, will VA be entering into a
    leasehold interest in real property or a sharing agreement for space, and
    what are the consequences of each? If the facility is to be located on VA
    property, will it involve a land transfer to MUSC or will VA lease the
    property to MUSC under its authority to enter into a EUL agreement? What
    are the advantages and disadvantages of these options?

    o  	Because MUSC contracting officials do not have the authority to
    legally bind the VA, how would contracting for the services and equipment
    be handled?

    The legal workgroup is currently identifying VA's and MUSC's legal
    authorities, or lack thereof, on numerous issues relating to entering into
    a joint venture. Should VA decide to participate in the joint venture, it
    may need to seek additional authority from the Congress.

    20Such purchases of health care or other services from MUSC would involve
    contracts that VA would have to manage with oversight mechanisms, such as
    pre- and postaward audits, as it now does for current contracts with MUSC.

    o  	Involving stakeholders in the decisionmaking process: Participating in
    a joint venture medical center, particularly if it includes significant
    service sharing between VA and MUSC, has significant implications for the
    medical center's stakeholders, including VA patients, VA employees, and
    the community. These stakeholders have various perspectives and
    expectations-some of which are common to the different groups, while
    others are unique. For example, union representatives and VA officials
    whom we spoke to indicated that VA patients and employees would likely be
    concerned about maintaining the quality of patient care at a new facility
    and access to the current facility during construction. Union
    representatives also said the employees would be concerned about the
    potential for the loss of jobs if VA participated in the joint venture and
    purchased additional services from MUSC. As VA and MUSC move forward in
    negotiations, it will be important for all stakeholders' concerns to be
    addressed.

    o  	Developing a system to measure performance and results: If VA and MUSC
    decide to jointly build and operate a new facility in Charleston, it will
    become, as noted in the CARES Commission report, a possible framework for
    future partnerships between VA and other medical universities. As a
    result, a system for measuring whether the new joint venture facility is
    achieving the intended results would be useful.21 In our previous work on
    managing for results, we have emphasized the importance of establishing
    meaningful, outcome-oriented performance goals.22 In this case, potential
    goals could be operational cost savings and improved health care for
    veterans. If the goals are not stated in measurable terms, performance
    measures should be established that translate those goals into concrete,
    observable conditions.23 Such measures would enable VA and other
    stakeholders to determine whether progress is being made toward achieving
    the goals. This information could not only shed light on the results of a
    joint venture in Charleston, but it could also enable VA to identify
    criteria for evaluating other possible joint ventures with its medical
    affiliates in the future. It would also help Congress to hold VA
    accountable for results.

    21Under the Government Performance and Results Act of 1993 (GPRA), VA is
    required to develop performance goals for its major programs and
    activities and measures to gauge performance. VA's experience with GPRA
    could help them develop appropriate goals and measures for the joint
    venture.

    22GAO, Results Oriented Government: Using GPRA to Address 21st Century
    Challenges, GAO-03-1166T (Washington, D.C.: September 2003).

    23GAO, The Results Act: An Evaluator's Guide to Assessing Agency Annual
    Performance Plans, GAO/GGD-10.1.20 (Washington, D.C.: April 1998).

    Concluding Observations

    In conclusion, Mr. Chairman, we have stated over the past few years that
    federal agencies, including VA, need to reexamine the way they do business
    in order to meet the challenges of the 21st century. To address future
    health care needs of veterans, VA's challenge is to explore alternative
    ways to fulfill its mission of providing veterans with quality health
    care. The prospect of establishing a joint venture medical center with
    MUSC presents a good opportunity for VA to study the feasibility of one
    method-expanding its relationships with university medical school
    affiliates to include the sharing of medical services in an integrated
    facility. This is just one of several ways VA could provide care to
    veterans. Evaluating this option would involve VA officials, working in
    close collaboration with MUSC officials, weighing the benefits and costs
    as well as the risks involved in a joint venture against those of other
    alternatives, including maintaining the current medical center.
    Determining whether a new facility for Charleston is justified in
    comparison with the needs of other facilities in the VA system is also
    important. Until these difficult, but critical, issues are addressed, a
    fully-informed final decision on the joint venture proposal cannot be
    made.

    Mr. Chairman, this concludes my prepared statement. I will be happy to
    respond to any questions you or other Members of the Subcommittee may
    have.

    Contact and	For further information, please contact Mark Goldstein at
    (202) 512-2834. Individuals making key contributions to this testimony
    include Nikki

    Acknowledgments 	Clowers, Daniel Hoy, Jennifer Kim, Edward Laughlin, Donna
    Leiss, James Musselwhite Jr., Terry Richardson, Susan Michal-Smith, and
    Michael Tropauer.

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