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.

Related GAO Products

VA Health Care: Key Challenges to Aligning Capital Assets and Enhancing
Veterans' Care. GAO-05-429. Washington, D.C.: August 5, 2005.

Federal Real Property: Further Actions Needed to Address Long-standing and
Complex Problems. GAO-05-848T. Washington, D.C.: June 22, 2005.

VA Health Care: Important Steps Taken to Enhance Veterans' Care by
Aligning Inpatient Services with Projected Needs. GAO-05-160. Washington,
D.C.: March 2, 2005.

High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005.

VA Health Care: Access for Chattanooga-Area Veterans Needs Improvements.
GAO-04-162. Washington, D.C.: January 30, 2004.

Budget Issues: Agency Implementation of Capital Planning Principles Is
Mixed. GAO-04-138. Washington, D.C.: January 16, 2004.

Federal Real Property: Vacant and Underutilized Properties at GSA, VA, and
USPS. GAO-03-747. Washington, D.C.: August 19, 2003.

VA Health Care: Framework for Analyzing Capital Asset Realignment for
Enhanced Services Decisions. GAO-03-1103R. Washington, D.C.: August 18,
2003.

Department of Veterans Affairs: Key Management Challenges in Health and
Disability Programs. GAO-03-756T. Washington, D.C.: May 8, 2003.

VA Health Care: Improved Planning Needed for Management of Excess Real
Property. GAO-03-326. Washington, D.C.: January 29, 2003.

Major Management Challenges and Program Risks: Department of Veterans
Affairs. GAO-03-110. Washington, D.C.: January 2003.

High-Risk Series: Federal Real Property. GAO-03-122. Washington, D.C.:
January 2003.

VA Health Care: VA Is Struggling to Address Asset Realignment Challenges.
GAO/T-HEHS-00-88. Washington, D.C.: April 5, 2000.

VA Health Care: Improvements Needed in Capital Asset Planning and
Budgeting. GAO/HEHS-99-145. Washington, D.C.: August 13, 1999.

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

VA Health Care: Capital Asset Planning and Budgeting Need Improvement.
GAO/T-HEHS-99-83. Washington, D.C.: March 10, 1999.

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