VA Health Care: Challenges Facing VA in Developing an Asset Realignment
Process (Testimony, 07/22/1999, GAO/T-HEHS-99-173).

During the last decade, hospital use by the Veterans' Health
Administration's (VHA) has dropped about 58 percent, or by 28,000
patients a day. It is expected to continue to decline during the next 20
years, primarily because of a projected 36-percent decrease in the
veteran population. About one in three VHA hospitals serves markets with
the highest declines in the veteran population and the lowest VHA
hospital utilization. VHA's limited progress toward establishing an
asset realignment process needlessly delays the reinvestment of scarce
resources to enhance veterans' health care. Potential shortcomings in
VHA's proposed processï¿½locally led steering committees that have heavy
stakeholder involvementï¿½do not instill confidence that VHA will be
significantly closer to having a restructuring plan by this time next
year than it is today. It seems that a better option would involve a
more centralized planning model that is based on consultant or field
information and that is free from undue influence from local
stakeholders. Without firmer leadership, VHA might take many years to
decide on, much less accomplish, systemwide asset realignment. The daily
cost of unduly delayed decisions is unacceptably high, given that the
Department of Veterans' Affairs could be spending $1 million or more a
day to operate and maintain unneeded assets.

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

 REPORTNUM:  T-HEHS-99-173
     TITLE:  VA Health Care: Challenges Facing VA in Developing an
	     Asset Realignment Process
      DATE:  07/22/1999
   SUBJECT:  Veterans hospitals
	     Federal downsizing
	     Veterans benefits
	     Health resources utilization
	     Health services administration
	     Federal agency reorganization
IDENTIFIER:  VA Veterans Integrated Service Network
	     VA Capital Asset Realignment for Enhanced Services
	     Initiative

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

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

For Release on Delivery
Expected at 10:00 a.m.
Thursday, July 22, 1999

VA HEALTH CARE - CHALLENGES FACING
VA IN DEVELOPING AN ASSET
REALIGNMENT PROCESS

Statement of Stephen P.  Backhus, Director
Veterans' Affairs and Military Health Care Issues
Health, Education, and Human Services Division

GAO/T-HEHS-99-173

GAO/HEHS-99-173T

(406176)

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

  CARES - Capital Asset Realignment for Enhanced Services
  HHS - Department of Health and Human Services
  VA - Department of Veterans' Affairs
  VHA - Veterans' Health Administration

VA HEALTH CARE:  CHALLENGES FACING
VA IN DEVELOPING AN ASSET
REALIGNMENT PROCESS
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss utilization of health care
assets owned by the Department of Veterans' Affairs (VA) and operated
by the Veterans' Health Administration (VHA).  VHA could spend about
one of every four health care dollars operating, maintaining, and
improving buildings and land at 181 major delivery locations
nationwidein all, more than 4,700 buildings and 18,000 acres of
land. 

Four months ago, we reported that VHA's asset plans indicate that
billions of dollars might be used operating hundreds of unneeded
buildings over the next 5 years or more.\1 This could result because
VHA does not systematically

evaluate how veterans' needs relate to asset needs on a market (or
geographic) basis or

compare assets' life-cycle costs and alternatives, such as
purchasing care from other public or private providers, to identify
how veterans' needs can be met at lower costs. 

We concluded 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, instead, to provide
health care more efficiently in modern facilities at existing
locations or new locations closer to where veterans live. 

We recommended that VHA systematically develop asset restructuring
plans for all medical care markets in a timely manner.  From our
perspective, such assessments would involve 106 markets, including 66
that have a single VHA delivery location and 40 with multiple
locations.  Overall, these markets include 165 VHA hospitals. 

VHA agreed, in general, with our evaluation and said, at that time,
that it would take the steps needed to restructure its portfolio of
health care assets.  In light of VHA's commitment, you asked us to
provide (1) additional information on VHA's hospital utilization and
(2) an assessment of efforts to implement an asset realignment
process. 

My comments this morning are based on our studies completed over the
past 5 years that involved

visits to more than 100 VHA health care delivery locations,

visits to VHA's headquarters and VHA's 22 regional offices, and

discussions with more than 500 officials. 

Also, we reviewed reports by inspectors general of VA and the
Department of Health and Human Services (HHS), as well as private
sector consultants regarding hospital utilization. 

In summary, VHA's hospital utilization systemwide has dropped
dramatically (about 58 percent, or 28,000 patients a day) during the
past decade, with most of this decline occurring over the past 3
years.  Furthermore, hospital utilization is expected to continue to
decline significantly over the next 20 years, primarily because of a
projected 36-percent (9 million) reduction in the veteran population. 
Currently, utilization of individual VHA hospitals varies widely,
ranging from an average of 4 to 389 patients per day.  About one in
three hospitals serves markets experiencing the highest declines in
veteran population and lowest utilization among VHA's hospitals
(fewer than 50 patients daily in rural hospitals or 150 in urban
hospitals). 

Over the past 4 months, VHA has made limited progress toward
implementing a realignment process.  To date, 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. 
On the positive side, VHA seems to be leaning toward a process that
would allow for stakeholder participation and incorporate asset
planning guidelines that are consistent with industry practices. 
When implementing this process, however, VHA could rely too heavily
on local stakeholders who may have vested interests in maintaining
the status quo.  VHA's past experience suggests that this could
result in a protracted decision-making process that continues the
expenditure of scarce resources on unneeded buildings, at a rate
potentially as high as $1 million a day. 

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

   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Within VHA, 22 regional offices, referred to as Veterans Integrated
Service Networks, have primary responsibility for health care
delivery to more than 4 million veterans.  In each network, a
director and a small staff perform a wide range of activities,
including asset management. 

VHA's 165 hospitals provide a wide range of medical and mental health
services.  More than three-fourths (125) provide primarily medical
and surgical services, whereas the rest provide primarily mental
health servicesboth shorter-term (fewer than 30 days) and
longer-term. 

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 VHA and non-VHA providers to meet veterans'
needs more efficiently and effectively.\2 The most notable
initiatives involved shifting veterans' care to appropriate
outpatient and residential settings, reengineering administrative and
clinical processes, and closing services, including medicine or
surgery, primarily because of low utilization. 

In fiscal year 1999, VHA requested a $17 billion appropriation to
serve veterans' health care needs; VA requested a comparable
appropriation for fiscal year 2000.  VHA could spend as much as $4
billion annually for asset operations and maintenance costs, which is
generally referred to as the cost of asset ownership.  Such ownership
costs include utilities and services such as security, grounds care,
fire protection, waste collection, pest management, and custodial
work.  Of note, VHA has more than 5 million square feet of vacant
space, which could cost as much as $35 million to maintain annually. 

--------------------
\2 VA Health Care:  Status of Efforts to Improve Efficiency and
Access (GAO/HEHS-98-48, Feb.  6, 1998). 

   MOST VHA HOSPITALS HAVE LOW,
   DECLINING UTILIZATION
---------------------------------------------------------- Chapter 0:2

VHA hospital utilization dropped dramatically over the past decade,
falling from 49,000 patients a day in 1989 to 21,000 in 1998.  Most
of this decline has occurred over the past 3 years.  During this
time, VHA experienced comparable declines in medicine and mental
health patients. 

These declines stemmed primarily from changing medical practices that
reduced inpatient admissions and lengths of stay.\3 VHA hospital
admissions decreased from about 1 million in 1989 to about 600,000 in
1998, a decrease of about 40 percent.  Patients' average lengths of
stay per medical admission dropped from 18 days to about 10 days
during this time. 

As utilization declined, VHA reduced the number of beds that it kept
in service.  The average VHA hospital size declined from 415 beds in
1989 to 158 in 1998.  Over the past 3 years, VHA has removed about
24,000 beds from service. 

Hospital utilization and operating beds are expected to continue to
decline over the next 20 years.  Nationwide, the number of veterans
(25 million) is declining and their average age (58) is increasing. 
VHA estimates that the veteran population will number 16 million by
the year 2020, a 36-percent decline from today's level.  All VHA
hospitals project a declining population base for their primary
market areas with two-thirds expecting declines greater than 33
percent. 

Over the next 20 years, most of VHA's health care buildings will
approach or pass their normal useful life expectancy.  More than 40
percent, for example, have already operated for more than 50 years,
including almost 200 built before 1900.  Many organizations in the
facilities management environment consider 40 to 50 years to be the
useful life of a building.\4

To gain a perspective on VHA's hospital utilization, we examined
hospital closure studies that have been issued annually by the HHS
inspector general since 1989.\5 These studies show that about 600 of
5,400 private hospitals have closed over the past 10 years. 

The findings from these studies of hospital closures were similar. 
Closed hospitals were small, as measured by numbers of operating
beds, and had low patient utilization.  When the hospitals closed,
few patients were affected, primarily because they could get medical
care nearby. 

The inspector general's latest study, for example, showed that 10
rural hospitals and 28 urban hospitals closed during 1997.  Of the
rural ones, 6 had fewer than 50 beds.  By contrast, 24 of the urban
hospitals had 150 beds or fewer. 

Our assessment of VHA's 165 hospitals showed that 74 have operating
beds comparable, in numbers, to private sector hospitals that closed. 
Nearly half of VHA's urban hospitals (64 of 136) have fewer than 150
inpatient operating beds and more than one-third of rural hospitals
(10 of 29) have fewer than 50 operating beds.  As previously noted,
VHA's hospitals include longer-term mental health patients, whereas
private sector hospitals generally do not.  Thus, if VHA's
longer-term mental health patients are excluded, a larger number of
its hospitals would likely be considered to have low utilization. 

On average, VHA's urban hospitals had about 133 patients a day, with
72 percent (89 hospitals) averaging fewer than 150 patients a day. 
Rural hospitals averaged about 75 patients a day, with about half
(15) having fewer than 50 patients a day. 

Of note, nearly three-fourths (56) of the 74 smaller urban and rural
hospitals serve a veteran population base that is projected to
decline more than 33 percent over the next 20 years.  In addition,
most of these hospitals have health care buildings that are or will
soon be more than 50 years old.  Over the past 3 years, utilization
of those hospitals has dropped by about 50 percent. 

--------------------
\3 VA Hospitals:  Issues and Challenges for the Future
(GAO/HEHS-98-32, Apr.  30, 1998). 

\4 Price Waterhouse, Independent Review of the Department of Veterans
Affairs' Office of Facilities Management, final report (n.p.:  June
17, 1998). 

\5 HHS, Office of the Inspector General, Hospital Closure, series
1989 through 1997 (Washington, D.C.:  1991-99). 

   VHA'S PROPOSED REALIGNMENT
   PROCESS FACES IMPLEMENTATION
   CHALLENGES
---------------------------------------------------------- Chapter 0:3

Over the past 4 months, VHA has worked to design a process for
developing asset realignment plans, although progress has been
limited.  These efforts have focused primarily on discussions between
VHA officials and stakeholders.  As of last week, VHA officials
stated that a decision would be made within 2 months regarding how
its asset realignment process will be designed and implemented.  They
told us that an initiative, referred to as Capital Asset Realignment
for Enhanced Services (CARES), had been proposed but that some
changes are being considered. 

This proposal, as explained to us, appears to be consistent with VA's
stated desire to use the Office of Management and Budget's capital
asset planning guidelines to systematically develop asset realignment
plans.  CARES, for example, would direct each region to perform a
comprehensive assessment of existing markets that would focus on

current and future utilization rates;

asset location, capacity, and condition;

congruence between need for assets and veterans' demand for
services; and

alternatives to current service delivery modes, including purchasing
care from other public or private providers, partnering with such
providers, or replacing obsolete assets with modern ones. 

As they currently envision it, VHA officials expect locally led
steering committees to be established in each of VHA's 22 networks
and to serve as the key management entities in the realignment
process.  They anticipate broad stakeholder membership on these
committees, including heads of state veterans' agencies, medical
school deans, and representatives of veterans' groups, as well as
regional VHA officials.  VHA leadership of the committees is not
assumed but is to be determined among each committee's members. 

VHA officials also expect that each steering committee will (1)
independently determine its operating and policy guidelines; (2) use
private consultants to collect, verify, and analyze data needed to
develop realignment options; and (3) recommend ways that health care
assets should be realigned.  Officials told us that decisions on
recommendations would ultimately be made by top managers in VHA or
VA.  The steering committees will have the latitude to set their own
time periods for completing work, although VHA expects to require
periodic progress reports, such as at 6-month intervals. 

To be successful, VHA will need to overcome several critical
challenges.  Foremost, it seems inevitable that the locally led
steering committees could struggle to achieve consensus on difficult
decisions affecting the status of VHA hospitals and other health care
assets.  This is because the steering committees could (1) have
considerable discretion to make critical decisions concerning how
studies will be designed and conducted, (2) be composed primarily of
major stakeholders, and (3) not be under the leadership of key VHA
managers.  In our view, this arrangement could lead to conflict among
the various stakeholders sitting on the committees if they attempt to
protect their interests at the expense of the overall process. 

Our work has shown that VHA's environment contains a diverse group of
competing stakeholders, who, quite naturally, could oppose some
planned changes that they feel are not in their best interests, even
when such changes benefit veterans.\6 Medical schools' reluctance to
change long-standing business relationships, for example, has
sometimes been a major factor inhibiting VHA's asset management. 
Unions, too, sometimes appear to be reluctant to support planning
decisions that result in a restructuring of services.  This is
because operating efficiencies often result in staffing reductions. 

Two years ago, we reported on lessons learned from VHA's efforts to
integrate the management and services of 36 hospitals in 18
markets.\7 In general, we noted that objective facility integration
planning based on independent judgment and appropriate stakeholder
participation was critical to successful integrations.  Making
decisions to restructure medical facility services when the decisions
could adversely affect the planners' own interests presented an
inherently difficult situation. 

As planners, these groups may not aggressively consider all viable
options and may avoid difficult choices by focusing only on marginal
changes to the status quo.  We concluded that in such situations VHA
integrations might yield less than their full potential benefit to
veterans, needlessly limiting savings available for reinvestment. 

To overcome this problem, we suggested a more independent planning
approach using planners (full-time VA planners or consultants) with
no vested interests in the geographic area to develop data and
recommend options for improving VHA hospitals' operation, in
consultation with stakeholders.  We also encouraged VA to provide all
stakeholders with sufficient information to understand and support
integration decisions. 

Another challenge VHA could face involves inherent difficulties in
achieving consistent results among the 22 networks without uniform
guidelines and criteria on how to conduct market assessments.  If
steering committees are given wide latitude to develop their own
guidelines and criteria, as CARES currently suggests, it seems likely
that a variety of approaches to gathering data, assessing
information, and decision-making could emerge.  As a result, it may
not be possible to determine, and therefore ensure, that fair and
equitable decisions are made systemwide. 

Steering committees may also find it difficult to complete their work
in a timely manner.  This is because VHA believes that it is
essential to use private sector consultants to perform most of the
market assessment work, and resources may be available to do only a
limited number of markets at one time.  VHA estimates, for example,
that contracts could cost between $700,000 and $1 million for each
market that has multiple VHA locations. 

As a result, VHA may find it necessary to prioritize its market
assessments in order to realize the greatest return on its
contracting investment.  In this regard, it seems preferable for VHA
to establish the 40 multiple location markets as a top priority.  Of
these, nine have 4 or more delivery locations competing to serve the
same veterans; these markets have a total of 46 locations, including
12 with low utilization and rapidly declining veteran populations. 

Completing asset realignment plans for these markets first could also
help VHA address its financing challenges for conducting other market
assessments.  This is because such markets should provide an
opportunity to dispose of excess or underutilized properties or to
develop initiatives that could result in an enhanced use by other
public or private organizations.  The Congress is currently
considering proposals that increase VA's opportunities to retain
revenues from the disposal or enhanced use of unneeded buildings. 
These proposals are compelling because they could provide VA with
much needed incentives to make difficult asset realignment decisions
in a timely manner. 

In recent years, VHA has realized little success with a locally led
planning model, like CARES, that relied heavily on stakeholders'
involvement.  Almost 4 years ago, VHA's New England network began
efforts to realign assets among its five delivery locations in the
Boston market.  Similarly, about 3 years ago, the Great Lakes network
initiated efforts to realign services among two of its four delivery
locations in the Chicago market.\8 Both of these efforts were
characterized by time-consuming debates among stakeholders that
resulted in piecemeal decisions.  In neither market has VHA yet
reached decisions that are in veterans' best interest. 

By contrast, VHA had notable success using a more centralized
planning model when assessing the needs of veterans in the Northern
California health care market during 1997.  In general, a private
contractor, in consultation with stakeholders and others, collected
data on veterans' needs, existing VA assets, and lower-cost
alternatives and presented options to VHA's central office, which
also consulted with stakeholders.  This approach allowed veterans'
needs to be met without building a previously proposed $200 million
hospital addition.  These results were achieved in a shorter time
than VA experienced in Boston and Chicago. 

Of note, VHA has initiated a new asset realignment effort in Chicago
that does not heavily involve local stakeholders.  A steering
committee composed of high-level officials from several regions was
established to review data collected by a private consultant and
recommend realignment options to VHA's central office.  However, VA
has delayed announcing its decision and therefore the success of this
approach is uncertain at this time. 

These experiences suggest that constituting steering committees with
major local stakeholders may invite protracted conflict.  This
conflict could delay VHA's realignment progress if entrenched yet
opposing interests dominate the workings of the steering committees. 
In addition, investing stakeholders with decision-making authority
could lead to incremental decision-making if consensus cannot be
reached on difficult issues.  In such cases, conflict could
frequently lead to suboptimal decisions. 

Prolonging decisions, in our view, is not in the best interest of
veterans because it will delay the identification of resources that
could be better reinvested to enhance services.  Given VA's current
and proposed budgets, it seems inevitable that VA's ownership of
unneeded assets will eventually compromise veterans' health care
services.  In contrast, restructuring its capital assets could reduce
budget pressures or generate revenues that could be used to enhance
veterans' health care benefits. 

While it is not possible to say with certainty what the level of
operational savings could be, it seems plausible, based on our
assessment of VA's Chicago market, that annual savings could reach
$400 million nationally.  In Chicago, we found that VA could save $20
million annually (about 10 percent of asset operations and
maintenance costs) if it met veterans' needs in three rather than
four hospitals.\9 As previously stated, VA could spend about $4
billion annually for asset operations and maintenance nationwide. 

Prolonging the completion of market assessments also increases the
pressure on VA's capital asset investment process to ensure that
scarce resources are not invested in assets that VA will vacate in a
few years.  VHA's existing plans show that individual locations'
needs range between $4 million and $38 million, including about 50
with asset needs exceeding $10 million.  Recently, we recommended,
and VA agreed, that its capital investment decisions should be
subjected to a more rigorous management review. 

--------------------
\6 Veterans' Health Care:  Chicago Efforts to Improve System
Efficiency (GAO/HEHS-98-118, May 29, 1998). 

\7 VA Health Care:  Lessons Learned From Medical Facility
Integrations (GAO/T-HEHS-97-184, July 24, 1997)

\8 GAO/HEHS-98-118, May 29, 1998 1998. 

\9 VA Health Care:  Closing a Chicago Hospital Would Save Millions
and Enhance Access to Services (GAO/HEHS-98-64, Apr.  16, 1998). 

   CONCLUDING OBSERVATIONS
---------------------------------------------------------- Chapter 0:4

We are concerned that VHA's limited progress toward establishing an
asset realignment process needlessly delays the reinvestment of
scarce resources to enhance veterans' health care.  Furthermore,
potential shortcomings in VHA's process as currently
proposed-locally led steering committees that have heavy stakeholder
involvement--do not instill confidence that VHA will be significantly
closer to having a restructuring plan by this time next year than it
is today. 

Given VHA's past experiences, it seems that a better option for
realizing asset realignment decisions in a timely manner would
involve a more centralized planning model that is based on consultant
or field information and that is free from undue influence from local
stakeholders.  Without firmer VHA leadership, it seems likely that
VHA could take many years to decide on, much less accomplish,
systemwide asset realignment.  The daily cost of unduly delayed
decisions is unacceptably high, given that VA could be spending $1
million or more a day to operate and maintain unneeded assets. 

-------------------------------------------------------- Chapter 0:4.1

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

*** End of document. ***