VA Health Care: Improvements Needed in Capital Asset Planning and
Budgeting (Letter Report, 08/13/1999, GAO/HEHS-99-145).

GAO recommends that the Department of Veterans Affairs (VA) implement
more effective health care capital asset planning and strengthen its
budgeting processes to avoid spending billions of dollars operating
hundreds of unneeded buildings over the next five or more years. VA
should focus on Office of Management and Budget guidelines that suggest
that agencies use market-based assessments to determine target
population needs, evaluate the capacity of existing assets, identify
excesses and deficiencies, estimate assets' life-cycle costs, and
compare these with alternatives for meeting the population's needs. VA
has 40 markets with two to nine VA locations that have utilization
significantly below inpatient capacity and that compete with other VA
locations to serve rapidly declining veteran populations. VA could
restructure these assets and enhance veterans' benefits. VA has 66 other
markets with a single VA location, also in areas with rapidly declining
inpatient workloads and veteran populations, where assets could be
restructured and benefits enhanced. VA's centralized budget development
process to review and approve capital investments of $4 million or more
under its major construction appropriation relies on inconsistent or
incomplete information for decision-making. The 22 regional offices that
make less expensive investment decisions in VA's decentralized
assessment process generally do so without systematically assessing ways
to redesign or simplify work processes or explore lower-cost
alternatives. Such decisions account for more than 85 percent of VA's
total health care investment dollars requested for fiscal year 2000.
Over the past 3 years, VA has significantly reduced the number of
high-cost investment proposals involving alterations or improvements by
dividing them into less expensive ones, which require less information
about benefits, risks, and alternatives. This has resulted in VA's
decentralized process having approved investments that VA's centralized
process considered to be a low priority or unsound.

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

 REPORTNUM:  HEHS-99-145
     TITLE:  VA Health Care: Improvements Needed in Capital Asset
	     Planning and Budgeting
      DATE:  08/13/1999
   SUBJECT:  Veterans benefits
	     Cost effectiveness analysis
	     Strategic planning
	     Health resources utilization
	     Reengineering (management)
	     Cost control
	     Financial management
	     Veterans hospitals
	     Assets
IDENTIFIER:  VA Veterans Integrated Service Network

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Cover
================================================================ COVER

Report to the Secretary of Veterans Affairs

August 1999

VA HEALTH CARE - IMPROVEMENTS
NEEDED IN CAPITAL ASSET PLANNING
AND BUDGETING

GAO/HEHS-99-145

Capital Asset Restructuring

(406173)

Abbreviations
=============================================================== ABBREV

  HUD - Department of Housing and Urban Development
  OMB - Office of Management and Budget
  VA - Department of Veterans Affairs

Letter
=============================================================== LETTER

B-282935

August 13, 1999

The Honorable Togo D.  West
The Secretary of Veterans Affairs

Dear Mr.  Secretary: 

On March 10, 1999, we testified before the Subcommittee on Health,
House Committee on Veterans' Affairs, on the management of health
care assets within the Department of Veterans Affairs (VA).\1 In
summary, we concluded that unless VA implements more effective
capital asset planning and budgeting processes, it may may spend
billions of dollars operating hundreds of unneeded buildings over the
next 5 years or more.  This report contains recommendations to VA for
completing key actions necessary to meet these objectives.  Our March
10th testimony is reprinted as appendix I.  Among other things, the
testimony describes the scope and methodology of our work, which was
performed between July 1998 and February 1999 in accordance with
generally accepted government auditing standards. 

--------------------
\1 VA Health Care:  Capital Asset Planning and Budgeting Need
Improvement (GAO/T-HEHS-99-83, Mar.  10, 1999). 

   VA'S ASSET PLANNING NEEDS TO BE
   IMPROVED
------------------------------------------------------------ Letter :1

VA's large, aged infrastructure could be the biggest obstacle
confronting its efforts to transform itself from a hospital-based
operator to a health care provider that relies on integrated networks
of VA and non-VA providers to meet veterans' health care needs.  Over
the next few years, VA could spend one of every four of its health
care dollars operating, maintaining, and improving capital assets at
its 181 major delivery locations that encompass over 4,700 buildings
on 18,000 acres of land nationwide. 

The Office of Management and Budget (OMB) encourages federal agencies
to develop long-term asset plans as part of their capital planning
process and use these plans, among other things, to justify budget
requests to the Congress. 

To obtain the best use of capital resources, OMB guidelines suggest
that agencies conduct market-based assessments to determine asset
needs.\2

These assessments include

  -- determining a target population's needs,

  -- evaluating the capacity of existing assets,

  -- identifying any performance gaps (excesses or deficiencies),

  -- estimating assets' life-cycle costs, and

  -- comparing such costs with alternatives for meeting the target
     population's needs. 

State and private organizations have achieved positive results using
such planning processes.\3

VA has delegated basic health care planning responsibilities to its
22 regional offices, each of which oversees from 5 to 11 major health
care delivery locations.  Each regional office has developed a 5-year
business plan that includes management of the health care assets
under its control. 

These plans indicate that billions of dollars may be used to operate
hundreds of unneeded buildings over the next 5 years or more.  This
is because VA plans to continue to operate and therefore necessarily
maintain its 181 major delivery locations, even though most locations
operate in markets that include two or more VA locations.\4 Also, VA
does not systematically assess all life-cycle costs or logical
alternatives for meeting veterans' needs before deciding that capital
investment is necessary. 

If VA followed OMB's guidelines, in our view, its planning would
focus on assets needed to meet veterans' needs in 106 markets.  These
markets include

  -- 66 with a single VA location and

  -- 40 with multiple VA locations (between two and nine). 

VA's 40 multiple-location markets yield great opportunities for asset
restructuring and benefit enhancements for veterans because these
markets have 115 delivery locations that

  -- have utilization significantly below inpatient capacity and

  -- compete with other VA locations to serve rapidly declining
     veteran populations. 

VA's 66 single-location markets also could yield significant
opportunities for restructuring and enhanced benefits for veterans. 
Like the multiple-location markets, many single-location markets are
in geographic areas that have rapidly declining inpatient workloads
and veteran populations. 

--------------------
\2 OMB, Capital Programming Guide, Version 1.0 (Washington, D.C.: 
OMB, July 1997). 

\3 Executive Guide:  Leading Practices in Capital Decision-Making
(GAO/AIMD-99-32, Dec.  1998) and VA, Capital Inve$tment$:  Survey of
Best Practices (Washington, D.C.:  VA, May 1998). 

\4 A market, for purposes of this statement, is defined as a
geographic area with a high concentration of veterans, generally
within 60 minutes of an existing VA major delivery location. 

   VA'S CAPITAL INVESTMENT
   BUDGETING NEEDS TO BE IMPROVED
------------------------------------------------------------ Letter :2

In our testimony, we also pointed out that VA's budgeting processes
have weaknesses that could result in unwise capital asset investment
decisions totaling hundreds of millions of dollars.  Improvements are
needed in VA's centralized budget development process to review and
approve high-cost capital investments ($4 million or more) under its
major construction appropriation as well as in its decentralized
review and approval process that is used for less expensive health
care capital investments under VA's minor construction and medical
care (nonrecurring maintenance) appropriations. 

To its credit, we noted that VA has significantly improved its
centralized budget process by requiring more rigorous, systematic
assessments of proposed major investments than VA has done
previously.  But this process, in our view, still relies on
inconsistent or incomplete information.  Improved data could allow VA
to enhance the precision of its guidance for rating some decision
criteria and thereby strengthen its asset management decision-making
process. 

We also expressed concerns about VA's decentralized assessment
process for less expensive capital investments.  VA's 22 regional
offices use varying approaches, which are considerably less rigorous
than that used in VA's centralized process.  These investment
decisions, for example, are generally made without systematically
assessing ways to redesign or simplify work processes or explore
lower-cost alternatives for meeting veterans' needs. 

We find this troublesome because such decisions account for over 85
percent of VA's total health care investment dollars requested for
fiscal year 2000.  Some VA service delivery locations, for instance,
opt not to submit investment proposals to VA's centralized process. 
Officials at some of these locations told us that there is a better
chance of receiving funds, through the decentralized process, if a
high-cost investment is divided into several less expensive
investments that can be spread over several years.  The decentralized
process requires less information from locations regarding benefits,
risks, or alternatives to a proposed investment. 

Over the last 3 years, VA has significantly reduced the number of
high-cost investment proposals, involving alterations or
improvements, submitted for VA's centralized review and
prioritization.  This has resulted in a disturbing situation whereby
VA's decentralized process has approved investments that VA's
centralized process had found to be or would consider to be low
priority or unsound. 

   CONCLUSIONS
------------------------------------------------------------ Letter :3

VA could enhance veterans' health care benefits if it reduced the
level of resources spent on underused or inefficient buildings and
used these resources instead to provide health care more efficiently
in existing locations or closer to where veterans live. 

   RECOMMENDATIONS TO THE
   SECRETARY OF VETERANS AFFAIRS
------------------------------------------------------------ Letter :4

We recommend that you develop asset-restructuring plans for all
markets to guide future investment decision-making, among other
things.  These plans should comply with OMB guidelines and
incorporate best practices of industry as well as those of VA's 181
delivery locations. 

Until more effective capital asset planning is in place, we recommend
that you

  -- require that a larger share of health care investment decisions
     be made using VA's centralized budget process or

  -- ensure that the fundamental principles underlying that process
     are rigorously implemented when making decentralized health care
     investment decisions. 

To reduce subjectivity and thereby enhance the credibility of VA's
centralized budget process, we recommend that you

  -- modify written guidelines to describe, in greater detail,
     minimum quantitative data required for each decision criterion
     and

  -- exclude from the prioritization process all capital investment
     proposals that fail to meet the information requirements. 

   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :5

In commenting on a draft of this report, the Department of Veterans
Affairs generally concurred with our recommendations.  VA said that
it and the Veterans Health Administration are considering several
approaches for addressing our recommendations, but that no final
decisions had yet been made.  VA further noted that the Capital
Investment Board will work with the Veterans Health Administration to
achieve a balance in the centralized investment process and will
obtain outside review to revalidate that process.  We urge VA to
develop such an approach as expeditiously as possible, because the
cost of delaying realignment of VA's health care system is high.\5

As you know, 31 U.S.C.  720 requires you as the head of a federal
agency to submit a written statement on actions taken on our
recommendations to the Senate Committee on Governmental Affairs and
the House Committee on Government Reform not later than 60 days after
the date of this report and to the House and Senate Committees on
Appropriations with the agency's first request for appropriations
made more than 60 days after the date of this report. 

--------------------
\5 VA Health Care:  Challenges Facing VA in Developing an Asset
Realignment Process (GAO/T-HEHS-99-173, July 22, 1999). 

---------------------------------------------------------- Letter :5.1

We are sending copies of this report to Chairman Stearns and Ranking
Minority Member Gutierrez of the Subcommittee on Health, House
Committee on Veterans' Affairs; Chairman Everett and Ranking Minority
Member Brown of the Subcommittee on Oversight and Investigations,
House Committee on Veterans' Affairs; Chairman Bond and Ranking
Minority Member Mikulski, Subcommittee on VA, HUD, and Independent
Agencies, Senate Committee on Appropriations; Chairman Walsh and
Ranking Minority Member Mollohan, Subcommittee on VA, HUD, and
Independent Agencies, House Committee on Appropriations; and the
Director of the Office of Management and Budget.  We will also make
copies available to others upon request. 

If you or your staff have any questions concerning this report,
please contact me at (202) 512-7101.  Other GAO contacts and staff
acknowledgments are listed in appendix III. 

Sincerely yours,

Stephen P.  Backhus
Director, Veterans' Affairs and
 Military Health Care Issues

(See figure in printed edition.)Appendix I
GAO TESTIMONY DATED MARCH 10, 1999
============================================================== Letter 

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(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
VETERANS AFFAIRS
============================================================== Letter 

(See figure in printed edition.)

GAO CONTACT AND STAFF
ACKNOWLEDGMENTS
========================================================= Appendix III

GAO CONTACT

Paul Reynolds, (202) 512-7109

STAFF ACKNOWLEDGMENTS

Walter Gembacz, Fred Caison, Dawn Shorey, Mike Gorin, Richard Wade,
Maria Vargas, and Jim Espinoza made key contributions to this report. 

RELATED GAO PRODUCTS

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

Veterans' Affairs:  Observations on Selected Features of the Proposed
Veterans' Millennium Health Care Act (GAO/T-HEHS-99-125, May 19,
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). 

Major Management Challenges and Program Risks:  Departments of
Defense, State, and Veterans Affairs (GAO/T-NSIAD/HEHS/AIMD-99-104,
Feb.  25, 1999). 

Major Management Challenges and Program Risks:  Department of
Veterans Affairs (GAO/OCG-99-15, Jan.  1999). 

Executive Guide:  Leading Practices in Capital Decision-Making
(GAO/AIMD-99-32, Dec.  1998). 

Veterans' Health Care:  Challenges Facing VA's Evolving Role in
Serving Veterans (GAO/T-HEHS-98-194, June 17, 1998). 

VA Hospitals:  Issues and Challenges for the Future (GAO/HEHS-98-32,
Apr.  30, 1998). 

VA Health Care:  Closing a Chicago Hospital Would Save Millions and
Enhance Access to Services (GAO/HEHS-98-64, Apr.  16, 1998). 

Budget Issues:  Budgeting for Capital (GAO/T-AIMD-98-99, Mar.  6,
1998). 

Department of Veterans Affairs:  Programmatic and Management
Challenges Facing the Department (GAO/T-HEHS-97-97, Mar.  18, 1997). 

*** End of document. ***