VA Health Care: VA Is Struggling to Respond to Asset Realignment
Challenges (Statement/Record, 04/06/2000, GAO/T-HEHS-00-91).

Pursuant to a congressional request, GAO discussed the Department of
Veterans Affairs' (VA) management of health care assets that are
operated by the Veterans Health Administration (VHA), focusing on: (1)
VHA's progress to date; (2) concerns regarding VHA's realignment
process; and (3) the potential effects of VHA's actions on VA's capital
budgeting process.

GAO noted that: (1) VHA has been unsuccessful over the past 13 months in
its efforts to design a capital asset realignment process; (2) VHA's
efforts have focused on discussions of who should lead such a process,
how stakeholders should participate, and how decisions are to be made;
(3) moreover, VHA estimates, as it did 8 months ago, that it could be
several months before its process is operational; (4) GAO's assessment
of VHA's process, as currently designed, raises concerns about whether
the right people are involved at the right times and in the right ways;
(5) specifically, senior managers at headquarters may not be proactively
involved in a leadership role at key decision points; (6) in addition,
stakeholders with vested interests appear to be involved in
decisionmaking, rather than advisory, roles; (7) activities supporting
key components, such as options development and evaluation, are not
sufficiently rigorous; (8) as a result, VHA may not be able to produce
within a reasonable timeframe capital asset plans that are in the best
interest of veterans; (9) VHA's slow progress creates dilemmas for VA's
capital budgeting process; (10) in the short term, VHA and VA's Capital
Investment Board face the challenge of maintaining and improving capital
assets without sufficient information about future asset needs to ensure
cost-effective capital investment decisions; (11) by contrast, if
funding for projects is delayed until capital asset plans are completed,
the longer-term challenge will be how to successfully finance and
implement capital realignment investments potentially totalling billions
of dollars; and (12) these challenges could be ameliorated, in part, if
VA effectively manages short-term investment risks and Congress provides
alternative financing arrangements for future investments.

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

 REPORTNUM:  T-HEHS-00-91
     TITLE:  VA Health Care: VA Is Struggling to Respond to Asset
	     Realignment Challenges
      DATE:  04/06/2000
   SUBJECT:  Veterans benefits
	     Federal downsizing
	     Health services administration
	     Federal agency reorganization
	     Health resources utilization
	     Strategic planning
	     Decision making
	     Veterans hospitals
IDENTIFIER:  VA Capital Asset Fund
	     Chicago (IL)

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   * Not to Be Released
   * Before 9:30 a.m.
   * Thursday, April 6, 2000

GAO/T-HEHS-00-91

va health care

VA Is Struggling to Respond to Asset Realignment Challenges

        Statement for the Record by Stephen P. Backhus, Director

Veterans' Affairs and Military Health Care Issues

Health, Education, and Human Services Division

Testimony

Before the Subcommittee on VA, HUD, and Independent Agencies, Committee on
Appropriations, U.S. Senate

United States General Accounting Office

GAO

VA Health Care: VA Is Struggling to Respond to Asset Realignment Challenges

Mr. Chairman and Members of the Subcommittee:

We are pleased to contribute this statement for the record for the
Subcommittee's deliberations on the fiscal year 2001 budget request for the
Department of Veterans Affairs (VA). It discusses the management of VA's
health care assets that are operated by the Veterans Health Administration
(VHA). VHA has primary responsibility for capital asset planning activities,
whereas VA's Capital Investment Board has primary responsibility for capital
budgeting activities, including review of VHA's capital investment
proposals.

Between its establishment in 1946 and 1995, VHA's health care system grew
into our nation's largest direct provider of health care, serving veterans
at over 600 locations nationwide. In October 1995, VHA began to transform
its system from a hospital operator to a health care provider that relies on
community-based, integrated networks of VA and non-VA providers to meet
veterans' needs.

Over the next few years, VHA will spend billions of dollars operating,
maintaining, and improving buildings and land at health care delivery
locations nationwide. Currently, VA's health care capital assets total over
4,700 buildings and 18,000 acres of land at 181 major delivery locations.

In March 1999, we reported that VHA could enhance veterans' health care
benefits if it reduced the level of resources spent on underused,
inefficient, or obsolete buildings and reinvested these savings in providing
health care more efficiently in modern facilities at existing locations or
new locations closer to where the veterans live.

VHA agreed in general with our evaluation and committed at that time to
taking the steps needed to realign its portfolio of health care assets. In
essence, VHA agreed to implement in a timely manner a strategic planning
process that systematically studies all its medical care markets in order to
develop capital asset realignment plans. VA's Capital Investment Board will
use these plans to determine the best investment opportunities.

Last April we reported to this Subcommittee that VHA's transformation had
made significant progress, although it appeared to be losing momentum. We
concluded that VHA's transformation could not be successfully completed
until VHA had addressed its greatest management challenge: realigning its
massive portfolio of aged capital assets.

Last July we reported that VHA had made limited progress toward implementing
a realignment process and estimated the opportunity cost of delay was as
high as $1 million a day. VHA's efforts had focused primarily on discussions
among VHA officials, VA officials, and stakeholders, such as veterans'
service organizations, regarding a conceptual framework for its asset
realignment process. VHA reported at that time that its realignment process
would be operational within 2 months (September 1999).

Our statement today (1) assesses VHA's progress to date, (2) identifies
concerns regarding VHA's realignment process, and (3) examines the potential
effects of VHA's actions on VA's capital budgeting process.

My comments this morning are based on

   * discussions with officials responsible for VHA's asset realignment and
     VA's capital budgeting processes and
   * reviews of documents, primarily those relating to VHA's proposed asset
     realignment procedures and VA's Capital Investment Board decisions
     concerning VHA investment proposals considered for funding in fiscal
     year 2001.

In summary, VHA has been unsuccessful over the past 13 months in its efforts
to design a capital asset realignment process. VHA's efforts have focused on
discussions of who should lead such a process, how stakeholders should
participate, and how decisions are to be made. Moreover, VHA estimates, as
it did 8 months ago, that it could be several months before its process is
operational.

Our assessment of VHA's process, as currently designed, raises concerns
about whether the right people are involved at the right times and in the
right ways. Specifically, senior managers at headquarters may not be
proactively involved in a leadership role at key decision points. In
addition, stakeholders with vested interests appear to be involved in
decision-making, rather than advisory, roles. And activities supporting key
components, such as options development and evaluation, are not sufficiently
rigorous. As a result, VHA may not be able to produce within a reasonable
time frame capital asset plans that are in the best interest of veterans.

VHA's slow progress creates dilemmas for VA's capital budgeting process. In
the short term, VHA and VA's Capital Investment Board face the challenge of
maintaining and improving capital assets without sufficient information
about future asset needs to ensure cost-effective capital investment
decisions. By contrast, if funding for projects is delayed until capital
asset plans are completed, the longer-term challenge will be how to
successfully finance and implement capital realignment investments
potentially totaling billions of dollars. These challenges could be
ameliorated, in part, if VA effectively manages short-term investment risks
and the Congress provides alternative financing arrangements for future
investments.

VHA Is Struggling to Design Asset Realignment Process

Over the past 13 months, VHA has taken an inordinate amount of time trying
to develop a method to achieve these objectives. In March 1999, VHA
developed a broad conceptual framework to guide its design efforts. Over the
next 3 months (July 1999), VHA developed a draft statement of work needed to
conduct the market studies and an action plan for completing the studies.
Three months later (October 1999), VHA developed a draft capital asset
management policy statement that outlined a proposed design method as well
as a revised statement of work and action plan. In February (4 months
later), VHA provided a revised draft policy statement to a wide variety of
stakeholders for their review.

These critical documents are currently being revised again. Over the next
several months, VHA expects to (1) continue refining its capital asset
realignment design method on the basis of stakeholder concerns and
suggestions, (2) complete work needed to solicit and award a consulting
contract, and (3) obtain senior management review and final approval of a
method to employ.

During the same period, VHA has also struggled to develop a capital asset
realignment plan for its Chicago market. This initiative, started in July
1998, produced a draft realignment plan in September 1999. VHA has spent the
last 6 months obtaining and evaluating stakeholders' concerns and advice as
well as reevaluating potential options. VHA expects this experience to help
shape the ultimate design of its systemwide asset realignment process.

VHA's Proposed Capital Asset Realignment Process Raises Concerns

VHA's Senior Managers Lack Proactive Role

However, VHA plans to give a consultant primary responsibility for
developing options and evaluation criteria as well as for conducting the
evaluation of potential options. Senior managers at headquarters are to be
primarily in an oversight role, reacting to the consultant's proposed
evaluation criteria, methods for evaluating potential options, and choice of
the best option.

We are concerned about this arrangement. The capital asset plans that result
from these market studies are expected to guide VHA's future investment
initiatives for the next decade. Without strong leadership in the
development of these plans, VHA risks not being able to timely implement
meaningful capital asset realignments. A case in point is VHA's Chicago
market realignment process. Senior managers at headquarters were not
actively involved until after stakeholders and others raised significant
concerns about the recommended realignment option. VHA has since convened a
special review group that has spent the last 2 months assessing
stakeholders' concerns and deciding how such concerns could be best
resolved. Now, 20 months after the study was initiated, this review group
has decided to set aside the originally recommended option and consider
others, including options that had not been considered before. If senior
managers had been involved, such options might have been considered earlier.
With senior managers continuing in a reactive role in its proposed
systemwide asset realignment process, VHA risks replicating in other markets
its struggle to make progress realigning assets in Chicago.

VHA's Stakeholders Have Decision-Making Role

VHA plans to have national and local committees, which possess
decision-making authority, review the consultant's products, such as its
proposed evaluation criteria and data collection methods. The committees'
members include representatives of veterans' service organizations, union or
labor organizations, medical school affiliates, research organizations,
state veterans and health associations, and local VHA staff.

We remain concerned that stakeholders' participation as decision-makers on
such committees could bias the market studies and, ultimately, the capital
asset plans. VHA stakeholders are a diverse group with competing interests,
who, quite naturally, could oppose some changes that they believe are not in
their best interests. For example, medical schools' reluctance to change
long-standing business practices has sometimes been a factor inhibiting
VHA's asset management. In addition, unions sometimes are reluctant to
support decisions that result in a restructuring of services because
operating efficiencies can result in staffing reductions.

We believe it is essential to involve stakeholders in an advisory role in
the capital asset realignment process. This is because they can provide
valuable perspectives on the evaluation criteria for selecting the best
market study option and on procedures for scoring realignment options in
relation to the criteria. Such input could enhance stakeholder understanding
of VHA's capital asset realignment process and build confidence that
realignment decisions are fair and fact-based.

Realignment Decision Points Lack Rigor

   * ill-defined capital asset realignment evaluation criteria lead to
     unsupportable decisions;
   * flawed asset realignment options result in flawed decisions; and
   * an unstructured, subjective evaluation process impedes stakeholder
     acceptance.

It does not appear, though, that VHA has taken these lessons into account
for its proposed realignment process. First, VHA's systemwide evaluation
criteria, when developed, could be vaguely defined. VHA's draft statement of
work for its systemwide process calls for a consultant to develop evaluation
criteria, but it does not require the evaluation criteria to be defined in
terms of quantifiable measurement standards that are clearly linked to each
criterion. The lack of well-defined criteria can lead to problems, as it did
in the Chicago realignment process. There, VHA used accessibility of health
care services as a criterion without adequate measurement standards that
could be quantified, such as the potential effect on veterans' travel time
and the number of veterans affected. Moreover, because VHA's draft statement
of work for its systemwide process does not require the consultant to
develop a systematic data collection approach that directly links data to
individual evaluation criteria, the consultant's data collection could be
incomplete. This could significantly reduce the likelihood that VHA would
select the best option available.

Second, we are concerned that VHA's systemwide realignment process may not
consider the best options that are potentially available. For example, VHA's
Chicago process appears to have explored flawed options because VHA's
steering committee and consultant limited the options evaluated to ones that
would generally rearrange services among existing assets. On the basis of
its assessment of stakeholders' comments pertaining to the Chicago process,
we understand that VHA is reevaluating options, including ones not
originally evaluated. VHA's draft statement of work for its systemwide
process calls for a consultant to develop at least three alternative asset
configurations. VHA plans to rely on the consultant's judgment to develop
the best options for consideration. Unless options other than incremental
reconfiguration of current assets are considered, the realignment process is
likely to take a narrower view than is needed to identify the most efficient
and effective way to meet veterans' health care needs. For example, building
or leasing a replacement facility in a location closer to where veterans
live might not be evaluated.

Third, we are concerned that VHA will use an unstructured process to decide
which of the available capital asset realignment options best meets the
evaluation criteria. For example, in its Chicago process, VHA did not
prioritize its evaluation criteria, nor did it use a systematic scoring
method to reach decisions about how well each option met the evaluation
criteria. Rather, its recommended realignment option was determined on the
basis of the subjective consensus of a steering committee, but the draft
report did not elaborate sufficiently on VHA's rationale. VHA's draft
statement of work for its systemwide process calls for a consultant to
develop a method for evaluating realignment options. At present, this
statement of work has no requirements for the consultant to develop a
systematic way to score how well each option meets the evaluation criteria,
nor has anyone in VA been charged with doing this. Without a systematic
method for reaching a decision about the best option, VHA's realignment
decisions may be difficult to explain, support, and defend.

While VHA possibly could satisfactorily address our concerns within the
coming months, its progress to date casts doubt on its ability to do so.
This is because, in part, VHA may not possess the requisite financial
planning skills to make the best realignment decisions. Currently, VHA is
using health care professionals to make financial decisions. While such
professionals have the necessary skills to make decisions about veterans'
health care needs, they may not have the business skills necessary to make
the best financial decisions. For example, financial experts possess
knowledge and skills for analyzing life cycle costs of assets under
different scenarios as well as for determining potential pay-back schedules
for initial capital investments for options and potential long-term returns
on those investments.

Clearly, it seems desirable to bring to bear the combined expertise of
financial experts and health care professionals to evaluate potential
realignment options to identify those that provide the best investment
return for veterans and other taxpayers. There is a unit within VA that, in
our view, has worked to develop financial expertise regarding capital asset
management decision-making, namely, VA's Capital Investment Board. The Board
has (1) experience developing options evaluation criteria that are more
clearly defined than criteria used in VHA's Chicago realignment process, (2)
a systematic data collection approach that directly links data to each
evaluation criteria, (3) guidance for developing options, and (4) a
systematic options evaluation process. The Board currently uses a capital
budgeting model for major investments that embodies the key attributes
needed to address our concerns about VHA's process. Its model has been used
and refined over the past 3 years, and it gives decisionmakers, in our view,
better information than they had in the past.

New Business Model Could Be Considered

Transferring capital asset management responsibilities to another unit
within VA, such as the Capital Investment Board, could better combine VHA's
health care expertise with VA's financial experts. As previously discussed,
VA's Capital Investment Board appears to have a business model that could
address financial management decisions involving capital asset realignment
options. This approach has appeal because the Board has a full-time
dedicated group that has studied industry best practices for capital asset
management and has used this knowledge to develop evaluation criteria and
procedures to score capital asset investment options.

Capital asset decision-making could also be moved outside of VA. This could
be accomplished through the establishment of an independent commission or
comparable group to develop and evaluate options for realigning capital
assets. This option could be advisable if it is determined that VA lacks the
desire or wherewithal to realign capital assets or that the pressures from
competing stakeholders inherent in VA's environment are deemed to be
insurmountable.

Regardless, VA needs to finalize its capital asset realignment process as
quickly as possible because its delay is creating dilemmas for short-term
and long-term capital investment decisions, as I will discuss next.

VHA's Delays Create Capital Budgeting Dilemmas

Appropriately, they seem unwilling to accept much risk when making high-cost
capital investment decisions-those exceeding $4 million. They have
significantly limited such investments over 4 fiscal years (1998 through
2001) and could continue this de facto moratorium for another 3 years
(through 2004), given VHA's struggle to realign its assets. VA's fiscal year
2001 budget for high-cost capital investments, for example, requested only
$25 million for one new project after VA's Capital Investment Board
considered 14 VHA high-cost investment proposals totaling $350 million.

By contrast, there appears to be a greater willingness to accept more risk
for less expensive capital investment decisions-those below $4 million. We
find this troublesome because there have continued to be significant
investments requested for less expensive capital improvements-about $400
million for each of fiscal years 2000 and 2001. These involve improvements
at many locations, such as ward renovations; outpatient space
reconfigurations; and enhanced heating, ventilation, and air conditioning
systems. To successfully manage investment risks, VHA needs to carefully
consider its less expensive construction investments at delivery locations
that could ultimately be determined to be unneeded to meet veterans' health
care needs once capital asset plans are completed.

In March 1999 we reported that, until an effective capital asset planning
process is in place, VHA's less expensive investment decisions should be
subjected to tighter scrutiny. Toward that end, we suggested that VHA ensure
that the fundamental principles underlying the Capital Investment Board's
evaluation process for high-cost capital investment be rigorously
implemented when making less expensive capital investment decisions.

An effective risk assessment process should identify health care delivery
locations where, for example, there are no alternatives for providing care.
This process could involve two key components: (1) risk measurement factors
and (2) data to evaluate investment proposals in relation to risk factors.
Low-risk factors, for example, could include noncompetitive markets, large
veteran population growth, or large growth in veterans' use of VHA services.

On a longer-term basis, VA faces a different dilemma. Today VHA's high-cost
capital investment needs are not known and will remain so until its capital
asset plans are completed; nonetheless, VHA believes, and we agree, that
they will likely require a significant investment. VHA's investment needs
may not be as daunting as they now seem because, for example, investments
will be spread over the next decade and each will require many years to
implement. VHA's Chicago realignment process, for example, is expected to
take 10 years to be fully implemented.

Moreover, the magnitude of the new investment resources needed could be
mitigated. First, VHA should realize significant returns on these capital
investments-up to 100 percent or more in the form of annual operational
savings. VHA's Chicago realignment option, for example, was estimated to
yield annual operating cost savings of $189 million, compared with one-time
capital investment needs of $92 million. In March 1999 we suggested that
some or all of these savings could be used to finance future capital
investment decisions. Legislative action, for example, could authorize VA to
accumulate resources (that is, savings) in a Capital Asset Fund by charging
VHA delivery locations for the capital investment costs used to realign
assets. Locations could return to the fund some or all of the amount
invested over a prescribed number of years.

Second, last year VA proposed a new funding source to help finance
high-priority investments faster. In its fiscal year 2000 budget submission,
VA proposed a 5-year demonstration that would allow VHA to sell, transfer,
or exchange up to 30 excess or underutilized properties; deposit proceeds
into a new Capital Asset Fund; and use the Fund to invest in more
appropriate assets. This proposal, which we supported last year, offers a
way to help finance capital investments needed to realign assets for two
reasons: VA has significant unused or underused buildings, and it lacks
incentives to dispose of properties because funds can, by law, be spent only
to construct, alter, or acquire nursing home facilities.

In addition to addressing high-priority asset needs faster, such funding
sources could also provide incentives for more effective capital planning
and greater accountability for investment decisions. To realize such
benefits, the Congress would need to expand the types of deposits that VHA
could make into its proposed Capital Asset Fund or establish a separate
revolving fund for this purpose.

Concluding Observations

Because VHA is struggling to reach a sound realignment decision in Chicago
and complete the design of a systemwide realignment process, and because
VA's Capital Investment Board has a model that could address many of VHA's
weaknesses, it seems appropriate that VA consider transferring the asset
planning responsibility to the Board. The daily cost of delayed decisions is
unacceptably high.

For future contacts regarding this testimony, please call Stephen P. Backhus
at (202) 512-7101. Individuals who made key contributions to this testimony
include Paul Reynolds and Walter Gembacz

GAO Contact And Staff Acknowledgments

(406193)

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