VA Health Care: Capital Asset Planning and Budgeting Need Improvement
(Testimony, 03/10/99, GAO/T-HEHS-99-83).

In fiscal year 2000, the Veterans Health Administration's (VHA) asset
ownership costs could be as much as $4 billion or more, accounting for
25 percent of VHA's proposed $17 billion medical care appropriation.
Instead of using these resources to provide health care more efficiently
in existing locations or closer to where veterans live, Department of
Veterans Affairs (VA) asset plans call for operating hundreds of
unneeded buildings over the next 5 years or more. VHA could save
millions of dollars annually that could be used for medical care if it
conducted market-based assessments to assess its population's needs,
evaluate the capacity of its existing assets, identify performance gaps
(excesses or deficiencies), estimate its assets' life-cycle costs, and
compare such costs to other alternatives, such as partnering with other
public or private providers, purchasing care from such providers, and
replacing obsolete assets with modern ones. VA could enhance the
credibility of its investment decisions if it modified its written
guidelines for the centralized budget development process it uses to
review and approve capital investments of $4 million or more under VHA's
major construction appropriation to describe in greater detail minimum
quantitative data requirements and exclude from prioritization proposals
that fail to meet the requirements. VA should also use its centralized
budget process for a larger share of its less expensive capital
investments now decided through a decentralized process. Other
improvements could include restructuring VHA's asset appropriations into
a single capital investment appropriation and authorizing VA to
accumulate resources for capital improvements from operational savings
available through asset restructuring.

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

 REPORTNUM:  T-HEHS-99-83
     TITLE:  VA Health Care: Capital Asset Planning and Budgeting Need 
             Improvement
      DATE:  03/10/99
   SUBJECT:  Assets
             Financial management
             Health resources utilization
             Reengineering (management)
             Strategic planning
             Investment planning
             Health care cost control
             Veterans hospitals
             Cost effectiveness analysis

             
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HE99083t.book GAO

United States General Accounting Office

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

For Release on Delivery Expected at 10:00 a.m. Wednesday, March
10, 1999 VA HEALTH CARE

Capital Asset Planning and Budgeting Need Improvement

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

GAO/T-HEHS-99-83

Page 1 GAO/T-HEHS-99-83

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Mr. Chairman and Members of the Subcommittee: I am pleased to be
here today to discuss management of health care assets within the
Department of Veterans Affairs (VA). Over the next few years, VA
could spend about 1 of every 4 health care dollars operating,
maintaining, and improving buildings and land at 181 major
delivery locations nationwide--in all, over 4,700 buildings and
18,000 acres of land.

Last June, you asked us to examine VA's capital asset 1 planning
and budgeting processes based in part on your concerns about the
aging of Va's assets, declining veteran populations in most states
outside the Sunbelt, 2

declining need for hospital beds, and limited construction
budgets. 3

My comments this morning are based on  visits to 78 VA locations,
visits to VA's headquarters and 22 regional offices,  discussions
with over 400 VA officials,  review of hundreds of VA planning
documents,  review of industry asset management practices, and
GAO studies completed over the past several years. 4

In summary, VA's asset plans indicate that billions of dollars
might be used operating hundreds of unneeded buildings over the
next 5 years or more. This is because VA does not systematically

 evaluate veterans' or asset needs on a market (or geographic)
basis or  compare assets' life-cycle costs and alternatives to
identify how

veterans' needs can be met at lower costs.

1 Capital assets are generally defined as land, structures,
equipment, and intellectual property (including software) that
have a useful life of 2 years or more. This statement focuses
solely on VA's land and structures, primarily buildings.

2 There is no commonly accepted definition of the Sunbelt; one
definition includes Alabama; Arkansas; Arizona; Florida; Georgia;
Louisiana; Mississippi; New Mexico; Oklahoma; South Carolina;
Texas; Southern California; and Clark County, Nevada.

3 The Chairman, Committee on Veterans' Affairs, House of
Representatives, also requested this examination for the same
reasons.

4 See Related GAO Products listed at the end of this statement.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 2 GAO/T-HEHS-99-83

In our view, 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.

Over the last 2 years, VA has significantly improved its budgeting
process for major capital investments. This process, however,
still relies too heavily on

 inconsistent or incomplete information,  imprecise decision
criteria, and  qualitative (rather than quantitative) measurement
standards.

This results in subjective asset-management judgments, based on
individual viewpoints, rather than objective decisions, based on
systematic assessments of proposed investments' benefits, costs
and risks.

VA's capital asset decision-making also appears to be driven more
by the availability of resources within VA's different
appropriations rather than the overall soundness of investments.
VA, for example, sometimes decides that leasing alternatives
should be used, instead of construction, to obtain needed space,
because money is more readily available in the appropriation that
funds leases than in the construction appropriation. As a result,
VA sometimes spends millions of dollars more than would be needed
to build or buy an asset.

Furthermore, VA's reliance on construction appropriations could be
reduced if VA is given legislative authority to use

 proceeds from the disposal of unneeded assets to invest in more
appropriate ones, or  some or all of operational savings or third-
party collections attributable

to capital investments.

VA Has a Diverse Portfolio of Health Care Assets

Within VA, the Veterans Health Administration (VHA) has primary
responsibility for health care asset management. VHA has divided
its 181 delivery locations into 22 geographic regions, which have
between 6 and 12 major delivery locations. Each region, referred
to as a Veterans Integrated Service Network, has a director and
small staff, which perform a wide range of activities, including
asset planning and budgeting.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 3 GAO/T-HEHS-99-83

Each network director has developed a 5-year business plan. 5
These plans indicate that assets will continue to operate at the
181 locations essentially as they do today. In so doing, VHA's
cost of asset ownership could be as much as $20 billion or more
during this period, primarily for operations 6

and maintenance costs. Historically, VHA's medical care
appropriation has funded over 95 percent of VHA's asset ownership
costs; two separate construction appropriations fund the rest. In
fiscal year 2000, such ownership costs could be as much as $4
billion or more, accounting for a major slice of VHA's health care
budget (see fig. 1). 7

Figure 1: VHA's Proposed $17 Billion Medical Care Appropriation
for FY 2000

5 VHA's latest plans cover the period between 1999 and 2003.

6 Asset-related operations include utilities and services such as
security, grounds care, fire protection, waste collection, pest
management, and custodial work.

7 VA Health Care: Closing a Chicago Hospital Would Save Millions
and Enhance Access to Services (GAO/HEHS-98-64, Apr. 16, 1998)
reports that asset operations and maintenance costs for four VA
hospitals in Chicago generally represent about 25-35 percent of
the hospital's operating budgets. VA officials in headquarters and
regional offices who are familiar with hospitals' operating
budgets generally agreed that asset costs as a percentage of
budgets nationwide could be comparable to the level found in
Chicago.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 4 GAO/T-HEHS-99-83

VHA operates and maintains a mix of buildings and land at its 181
medical care delivery locations. Most delivery locations are
campus-style, comprising over 16 buildings each, although many
locations are urban-style with fewer buildings. (See fig. 2.)

Figure 2: Number of Buildings at VHA's 181 Major Delivery
Locations

VHA faces a profound asset management challenge for four primary
reasons. First, VHA owns 4,700 buildings, over 40 percent of which
have operated for more than 50 years, including almost 200 built
before 1900

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 5 GAO/T-HEHS-99-83

(see fig. 3). Many organizations in the facilities management
environment consider 40 to 50 years to be the useful life of a
building. 8

Figure 3: Age of VHA Buildings

Second, over 1,600 buildings (almost one-third) have historical
significance, according to VA's inventory of historical and
cultural

8 Price Waterhouse, Independent Review of the Department of
Veterans Affairs' Office of Facilities Management , Final Report
(June 17, 1998).

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 6 GAO/T-HEHS-99-83

resources (see fig. 4). Historical significance is based partly on
a building's age, but it also considers architectural features and
history. These buildings are either formally listed or are
eligible for listing on the National Register of Historic Places
and all are equally protected by law. This requires VHA to comply
with special procedures for maintenance and disposal. Almost half
of VHA's 181 locations have historic buildings.

Figure 4: Number of VHA's Historic Buildings

Third, VHA uses fewer than 1,200 buildings (about one-fourth) to
deliver health care services to veterans (see fig. 5). The rest
are used primarily to support health care activities, 9 although
many have tenants or are vacant. Of note, VA has over 5 million
square feet of vacant space, which can cost as much as $35 million
a year to maintain.

9 Health care support buildings include warehouses, engineering
shops, laundries, fire stations, day care centers, and boiler
plants.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 7 GAO/T-HEHS-99-83

Figure 5: Types of VHA Building Use

Fourth, VHA's health care buildings have significant unused
inpatient capacity (see fig. 6). For example, while VHA operated
about 73,000 beds in fiscal year 1995, in 1998, veterans used
fewer than 40,000 beds a day, on average. The greatest
underutilization (about 21,000 fewer beds a day) occurred in acute
medicine, where usage was about 38 percent of potential capacity.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 8 GAO/T-HEHS-99-83

Figure 6: VHA's Unused Inpatient Capacity

VHA's ongoing efforts to improve operating efficiency, coupled
with a rapidly evolving health care market, suggest that bed use
may continue declining. Declining demand for inpatient care is not
unique to VHA. Community hospitals, for example, have tens of
thousands of unused beds. Overall, about 26 percent of community
hospitals' 873,000 beds in 1995 were unused. Like VHA, the number
of unused community hospitals' beds may also increase, given the
rapidly evolving health care market. 10

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

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 9 GAO/T-HEHS-99-83

VHA's Asset Planning Needs to Be Improved

The Office of Management and Budget (OMB) encourages federal
agencies to develop long-term asset plans as part of their capital
planning process and to 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 should conduct market-based assessments to
determine asset needs. 11 These include

 assessing a target population's needs,  evaluating the capacity
of existing assets,  identifying any performance gap (excesses or
deficiencies),  estimating assets' life-cycle costs, and
comparing such costs to other alternatives for meeting the target

population's needs. State and private organizations have also
found that using such planning processes has yielded positive
results. 12

Currently, VHA's planning focuses individually on each of its 181
delivery locations, even though most locations operate in markets
that include two or more VA locations. 13 Also, VHA does not
systematically assess all life- cycle costs or logical
alternatives for meeting veterans' needs before deciding that
capital investment is warranted.

VHA's investment planning focuses primarily on identifying asset
improvements that should be done over the next 5 years. For its
current planning period (1999-2003), VHA estimates high-priority
improvements to cost over $1.8 billion. 14

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

12 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).

13 A market, for purposes of this statement, is defined as a
geographic area generally within 75 miles of an existing VHA major
delivery location.

14 A VHA consultant advised VA in a February 12, 1999, report that
an additional $1.9 billion could be needed to seismically
rehabilitate over 890 buildings. VHA is currently reviewing this
report and expects to revise its 5-year planning as appropriate.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 10 GAO/T-HEHS-99-83

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

 66 with a single VHA location and  40 with multiple VHA locations
(between two and nine).

VHA's 40 multiple-location markets yield great opportunities for
asset restructuring and benefit enhancements for veterans. This is
because they have 115 delivery locations that

 have utilization significantly below inpatient capacity and
compete with other VA locations to serve rapidly declining veteran

populations. Nationwide, the number of veterans (25 million) is
declining and their average age (58) increasing. VHA estimates
that the veteran population will number 16 million by the year
2020, a 36-percent decline from today's level.

The veteran population in some geographic areas, such as the
Sunbelt, is expected to experience smaller declines. Other areas,
such as the Northeast or Midwest, are expected to experience
larger population declines. Most of VHA's multiple-location
markets are in these latter two areas. (See fig. 7.)

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 11 GAO/T-HEHS-99-83

Figure 7: VHA's 40 Multiple- Location Markets

We estimate that VHA spends about $2.7 billion a year to operate
and maintain more than 3,000 buildings and 10,000 acres in the
multiple- location markets. In addition, VHA plans to invest over
$1.2 billion to improve these assets over the next 5 years. This
represents a demand on VHA's health care resources because most
locations in these markets have delivery capacity that VHA
considers functionally obsolete, including

 inpatient capacity not up to industry standards (such as patient
privacy),  substandard outpatient capacity (such as undersized
examination and

operating rooms), and  safety concerns (such as seismicity).

The Chicago market, for example, has four delivery locations,
comprising 126 buildings that cost over $160 million a year to
operate and maintain.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 12 GAO/T-HEHS-99-83

Last year we reported 15 that VHA could save $20 million a year
and care could be improved if veterans were served in one less
location. Veterans' benefits, for example, could be enhanced if
VHA used the savings to purchase primary care closer to veterans'
homes.

VHA has eight other markets like Chicago that have four or more
delivery locations competing to serve the same veterans; these
markets have a total of 42 VHA locations. If these other markets
are similar to Chicago in that veterans needs could be met with
one fewer location, VHA could save $160 million annually.

VHA has opportunities for additional savings in these markets, as
well as its other 31 multiple-location markets, by

 partnering with other public or private providers,  purchasing
care from such providers, and  replacing obsolete assets with
modern ones.

For example, VHA replaced a seismically deficient building in
Martinez, California, with a modern outpatient clinic about 5
years ago. This clinic, along with existing VHA inpatient
locations and contract care, efficiently meets veterans' needs in
that market. Moreover, VHA reported that veterans' satisfaction is
high, including satisfaction with quality of care.

In addition, VHA's 66 single-location markets could yield
significant opportunities for restructuring and enhanced benefits
for veterans. Like multiple-location markets, many are in
geographic areas that have rapidly declining inpatient workloads
and veteran populations. (See fig. 8.)

15 GAO/HEHS-98-64, Apr. 16, 1998.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 13 GAO/T-HEHS-99-83

Figure 8: VHA's 66 Single- Location Markets

We estimate that VHA spends about $1.4 billion to operate and
maintain over 1,500 buildings in the single-location markets. VHA
also plans to invest about $600 million to improve these assets
and bring them up to industry standards. Opportunities to use
partnering, contracting, or asset replacements, as potentially
lower-cost alternatives are also available, given that other
public or private health care providers operate in these markets.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 14 GAO/T-HEHS-99-83

VHA, however, is reluctant to make these business choices. 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. 16

Medical schools' reluctance to change long-standing business
relationships, for example, has sometimes been a major factor
inhibiting VHA's asset management. For example, VHA has tried for
over 2 years to integrate clinical services at two of Chicago's
four locations with limited success. 17 This is because such
restructuring could require two medical schools to use the same
location to train residents, a situation that neither supports.

Unions, too, sometimes appear reluctant to support planning
decisions that result in a restructuring of services. This is
because operating efficiencies often result in staffing
reductions. VHA, for example, recently made a capital investment
to consolidate food service at one location in New York City in
order to reduce expenditures at eight other locations in that
market. Two unions' objections, however, slowed VHA's
restructuring, although VHA and the unions subsequently agreed on
a way to complete the restructuring.

Such stakeholder pressures can lead to decisions that are not in
veterans' best interests. Two years ago, a VHA consultant 18
assessed nine options for restructuring two delivery locations
located 7 miles apart in the Boston market. Subsequently, VHA had
a second consultant 19 study this situation but instructed the
consultant to consider only options under which both locations
remained open. Ultimately, VA decided to keep both locations open
and to provide inpatient care at one facility and establish the
other facility as an outpatient care site. VHA's two consultants
estimate this will

16 VA Health Care: Lessons Learned From Medical Facility
Integrations (GAO/T-HEHS-97-184, July 24, 1997) and VA Healt h
Care: Closing a Chicago Hospital Would Save Millions and Enhance
Access to Services (GAO/HEHS-98-64, Apr. 16, 1998).

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

18 Deloitte & Touche Consulting Group, VA New England Healthcare
System Tertiary Healthcare Project Boston Area (May 1, 1997).

19 AMA Systems, Inc./McGladrey & Pullen, LLP, Boston Integration
Report (Alexandria, Va.: AMA Systems, June 5, 1998).

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 15 GAO/T-HEHS-99-83

save $160 million over a 5-year period. The consultants' studies
also show, however, that VHA could save as much as $77 million
more if veterans' needs are met in one facility. These funds could
be used to enhance veterans' benefits, such as by providing
services at new community clinics, rather than operating and
maintaining unneeded buildings.

To its credit, VHA has initiated a market-based assessment in
Chicago, in response to our recommendation. This assessment also
includes a multiple-location market in Wisconsin. Unlike Boston,
VHA placed no restrictions on options to be considered in this
case. These market assessments are scheduled for completion in
late spring and, if done properly, could serve as prototypes to be
used in assessing VHA's other multiple- and single-location
markets.

In this regard, we recommend that VHA develop asset-restructuring
plans for all markets to guide its future investment decision-
making, among other things. This plan should comply with OMB
guidelines and incorporate best practices of industry, as well as
those of VHA's 181 delivery locations.

VA's Capital Investment Budgeting Needs to Be Improved

VA and VHA have recently taken positive steps toward establishing
an effective centralized budget development process to review and
approve high-cost capital investments ($4 million or more) under
its major construction appropriation. VHA, however, continues to
use a decentralized review and approval of less expensive
investments, including major repairs. 20

VHA's decentralized decision-making is generally done without the
level of systematic, rigorous assessments that the centralized
process uses. In fiscal year 2000, such decisions account for over
85 percent of investment dollars.

High-Cost Capital Investments

VA uses a two-step process for prioritizing high-cost capital
investments. 21

20 These involve improvements or alterations, generally referred
to as minor construction, and repairs beyond ordinary maintenance,
generally referred to as nonrecurring maintenance.

21 VA, VA Capital Investment Methodolog y Guide (Washington, D.C.:
VA, May 1998).

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 16 GAO/T-HEHS-99-83

 First, a capital investment panel 22 validates that proposals use
reasonable assumptions and adequate data and assigns a numerical
ranking score.  Second, a capital investment board 23 reviews the
panel's results and

recommends proposals to be included in VA's budget request. The
investment panel, among other things, requires that proposals
answer affirmatively what are known as OMB's Three Pesky Questions
in order for a capital investment to be considered further. 24
These are

 Does the investment in a major capital asset support
core/priority mission functions that need to be performed by the
federal government?  Does the investment need to be undertaken by
the requesting agency

because no alternative private sector or governmental source can
better support the function?  Does the investment support work
processes that have been simplified

or otherwise redesigned to reduce costs, improve effectiveness,
and make maximum use of commercial, off-the-shelf technology?

Next, the investment board scores each proposed investment on how
well it addresses 20 decision criteria that are grouped into 5
general categories. 25 The five categories and related weights are
26

 improved customer service (56 percent),  return on taxpayer
investment (19 percent),  high performing workforce (14 percent),
risk (6 percent), and  comparison to alternatives (5 percent).

VHA submitted 14 investment proposals for building improvements or
alterations to VA's capital investment panel for fiscal year 2000
funding

22 The panel comprises senior staff in each of VA's major
organizations: VHA, Veterans Benefits Administration, National
Cemetery Administration, and staff offices.

23 The board comprises the Under Secretaries for Health, Benefits,
and Cemeteries; VA's Chief Financial Officer; Information Officer;
and Deputy Secretary.

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

25 Weights are assigned to the criteria using an analytical
hierarchy process widely known as pair-wise comparison.

26 The 5 categories and 20 related decision criteria are listed in
app. I.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 17 GAO/T-HEHS-99-83

consideration. The proposals requested a total of $286 million,
ranging between $11 million and $28 million.

Using VA's data validation procedures, we assessed 12 proposals'
assumptions and data. 27 In general, we found that proposal
information was neither uniform nor complete. Few, for instance,
identified how many veterans would benefit directly from enhanced
services or contained baseline information to demonstrate the
magnitude of expected benefits. This occurred primarily because

 VA's guidance is vague and sometimes confusing and  VHA does not
provide information when clearly requested.

While VA failed one proposal based on its validity assessment, we
concluded that no proposal had sufficient data to answer the pesky
questions. Nine, for example, involved investments in multiple-
location markets where VHA's analyses of alternatives were
incomplete. These included several proposals that failed to
systematically address the most logical alternatives, such as
other nearby VA locations.

A recently completed capital investment demonstrates the risks
that VHA faces when alternatives are not adequately considered.
VHA replaced substandard inpatient and outpatient capacity at
Newington, Connecticut, at a cost of $45 million. In the midst of
construction at Newington, VHA decided to consolidate inpatient
care at West Haven, Connecticut, which serves the same veterans in
that market.

VHA proposed to invest $14 million of fiscal year 2000 funds to
renovate substandard inpatient capacity at West Haven. VHA is
currently using the Newington inpatient space to house
administrative functions. VHA's decision-making essentially led it
to pay inpatient medical space construction costs for office
spaceat a premium generally considered to be about 60 percent.

By contrast, our assessment of potential alternatives to a
proposed high- cost investment in northern California demonstrates
the benefits veterans could realize when market-based planning is
done. VHA initially proposed construction of a $211 million
addition to the Travis Air Force Base

27 We did not assess two projects that received funding in fiscal
year 1999.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 18 GAO/T-HEHS-99-83

hospital. We performed a limited market assessment and recommended
that lower cost alternatives be used. 28

Subsequently, a VHA consultant conducted an extensive marketbased
assessment. 29 This showed that veterans' needs could best be
served if VA, among other things, acquired the former McClellan
Hospital at Mather Air Force Base in Sacramento, California, and
used contract care in other areas closer to veterans' homes. VHA
plans to spend $81 million, savings of $130 million over the $211
million originally proposed.

Using VA's prioritization procedures, we reviewed and scored VHA's
proposed investments. We found it difficult to systematically or
objectively use VA's decision criteria. This is because criteria
definitions are frequently imprecise and seldom defined
quantitatively in terms of outcomes or outputs. VA, for example,
uses one customer service criterion to measure increase in
customer access. This criterion, however, is defined qualitatively
using such measures as increased convenience or less travel time
for veterans. As a result, VA does not have reasonable assurance
that it funds first those proposed investments that provide the
greatest benefits for veterans at the least risk.

Also, VA's measurement standards are vaguely defined. VA, for
example, requires panelists to judge whether expected benefits for
each of the 20 decision criteria will have no effect, some effect,
significant effect, or very significant effect. However, VA
provided little or no quantitative baselines for panelists to use
in making these determinations. As a result, subjective judgment
must be applied when deciding, for example, whether a projected
benefit should be considered to have some effect or very
significant effect.

In addition, weights for certain criteria seem low in relation to
others. As previously mentioned, customer service has a weighting
factor of 56 percent. By contrast, VA used weighting factors of
14, 6, and 5 percent for workforce, risk, and alternatives,
respectively. Given VHA's planning

28 VA Health Care: Travis Hospital Construction Project Is Not
Justified (GAO/HEHS-96-198, Sept. 3, 1996).

29 Price Waterhouse LLP, The Lewin Group, Inc., and Applied
Management Engineering, Inc., Assessment of Veterans' Health Care
Needs in Northern California (New York: Price Waterhouse, July 15,
1997).

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 19 GAO/T-HEHS-99-83

shortcomings, it seems unusual that risk and alternatives are not
afforded much higher values.

To its credit, VA is currently  considering refinements to the
decision criteria and measurement

standards,  offering seminars to improve quality of proposal
information, and  considering revisions to criteria weights.

In our view, to reduce subjectivity and thereby enhance
credibility of investment decisions, VA should

 modify written guidelines to describe, in greater detail, minimum
quantitative data required for each decision criterion and
exclude, from the prioritization process, all proposals that fail
to meet

the information requirements.

Other Capital Investments VA uses a decentralized approach to
budget less expensive capital investments (below $4 million),
essentially empowering its 22 network

directors to make prioritization decisions. Directors use varying
approaches, which are considerably less rigorous than those used
for larger projects. For example, VHA generally makes investment
decisions without addressing systematically OMB's three pesky
questions or expected 30-year investment returns. We find this
troublesome because such decisions account for over 85 percent of
VHA's total investment dollars requested for fiscal year 2000.

Over the last 3 years, VHA has significantly reduced the number of
high- cost investment proposals, involving alterations or
improvements, submitted for VA's centralized review and
prioritization. VHA, for example, submitted 32 proposals for
fiscal year 1998 funding consideration, compared with 21 and 14
for fiscal years 1999 and 2000, respectively.

This relatively small number is not attributable to a lack of
assets requiring high-cost investments. VHA's planning shows that
almost half of the 181 locations need capital investment of $4
million or more, including about 50 with asset needs exceeding $10
million. Overall, individual locations' needs range between $4
million and $38 million.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 20 GAO/T-HEHS-99-83

Instead, the decline in the number of high-cost investment
proposals appears influenced by a

 desire to avoid the rigor of VA's centralized process or  limited
availability of resources for high-cost investments.

Some VHA locations, for instance, do not submit proposals to VA's
centralized process because they could fail VA's validity
assessment or be assigned a low priority. Others believe 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.

Concerns about the availability of funding appear to have merit.
For fiscal year 2000, VHA has requested about $425 million for
capital investments. Of this, VHA's centralized process made
decisions valued at $48 million, and the rest are to be made using
VHA's decentralized process. VA had a similar funding pattern in
the 2 previous years.

In addition, this has resulted in the disturbing situation whereby
VHA's decentralized process approves investments for locations
that VA's centralized process has found to be or would consider to
be low priority or unsound. VHA's planning, for example, shows
that nine investments totaling almost $27 million are to be
considered for improvements at Fargo, North Dakota, over the next
5 years or more. VA's centralized process considered this proposed
investment to be a low priority, even suggesting that lower-cost
alternatives be considered.

Until effective capital asset planning is in place, it is
imperative that investment decisions be based on sound economic
analyses. Toward that end, we recommend that VA

 use its centralized budget process for a larger share of its
investment decisions or  ensure that the fundamental principles
underlying that process are

rigorously implemented when making decentralized investment
decisions.

Last year, VA's Inspector General recommended that VA and VHA work
together to develop policies for, among other things, the types of
investments subject to capital programming, dollar thresholds, and

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 21 GAO/T-HEHS-99-83

responsibilities for considering alternatives. 30 VA expects to
issue the revised policies within the next several weeks.

VA's Appropriations Could Be Restructured

VHA uses widely varying sources of funds to make capital
investments. Sometimes, VHA's decisions appear to be based on the
availability of funds under a specific appropriation rather than
on the soundness of an investment. In such instances, VHA invests
more money than it needs to in achieving its objectives.

VHA, for example, may use a medical care appropriation to perform
nonrecurring maintenance and to lease building space. Nonrecurring
maintenance involves repairs or modifications to existing
buildings, including upgrades or replacements of major building
systems, such as utilities, security, and health care support, or
minor improvements to add space or to make other minor structural
changes.

VHA also has two separate construction appropriations that may be
used for

 improvements or alterations of $4 million or more and
improvements or alterations of less than $4 million.

The availability of funding has varied over the last 5 years.
Historically, VHA's major construction appropriation was the
largest funding source. Currently, it is the smallest funding
source, as funds for nonrecurring maintenance, leases, and minor
construction have increased while major construction funds have
declined precipitously.

VHA has discretion to decide which appropriation to use to meet
most asset needs. VHA, for example, may use health care funds to
lease new space or construction funds to build a building. Given
the limited availability of major construction funds, VHA has
recently decided that more costly leasing alternatives should be
used to acquire needed assets, because funds are more readily
available in the medical care appropriation. For example, VA's
Inspector General reported last year that VHA decided to spend $86
million (present value of life-cycle costs) to lease outpatient
space in five locations, even though construction of new buildings
would

30 VA, Office of Inspector General, Evaluation of VA Capital
Programming Practices and Initiatives, Report No. 8R8-A19-061
(Washington, D.C.: VA, Jan. 28, 1998).

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 22 GAO/T-HEHS-99-83

cost $13 million less, an almost 20-percent savings. According to
the Inspector General, VHA stated that leases were used because
they could be funded using its medical care appropriation.

VHA has asked for funds for two leases in its fiscal year 2000
budget request. VA's Capital Investment Board reviewed and scored
these proposed leases. In one instance, the Board instructed that
alternatives such as build or buy be more seriously considered.
Nonetheless, VA included both leases in its medical care budget
request.

In addition, the availability of funds in the minor construction
appropriation, along with the less rigorous budget process,
provides an incentive to invest in a number of smaller
improvements over several years rather than address needs at the
same time in one potentially less costly investment. As previously
mentioned, VHA plans to use this approach in Fargo as well as many
other locations nationwide.

Historically, VHA has used the minor construction appropriation to
fund improvements at individual locations over a period of years.
VHA, for example, spent about $19 million of minor construction
appropriations at Battle Creek, Michigan, over the last 6 years.
This money funded improved inpatient and outpatient capacity as
well as upgraded major building systems.

Last year VA's Inspector General suggested to VHA that a new
approach be considered, and VHA officials indicated that options
were being discussed. 31 To facilitate VHA's decision-making, we
suggest that the Congress consider restructuring VHA's
appropriations into a single capital investment appropriation.

Alternative Financing Methods Could Be Authorized

VA has proposed a new funding source, namely asset disposal
revenues, to help fund high-priority investments faster. In
addition, VA has other potential funding sources to achieve this
objective, such as operational savings through asset restructuring
and returns on capital investments. These, however, require
legislative action.

31 VA, Office of Inspector General, Evaluation of VA Capital
Programming Practices and Initiatives (Jan. 28, 1998).

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 23 GAO/T-HEHS-99-83

In its fiscal year 2000 budget submission, VA proposes 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. 32

This proposal is compelling for two reasons:  VA has significant
unused or underused buildings, and  VA lacks incentive to dispose
of properties, because funds can, by law,

be spent only to construct, alter, or acquire nursing home
facilities. VA's best opportunity, however, to accumulate
resources for capital improvements could be operational savings
available through asset restructuring. Legislation could authorize
VHA to deposit such savings into a capital asset fund. As
previously discussed, VA might save $180 million a year, for
example, if veterans' needs are met with one fewer location in the
nine largest multiple-location markets. Some or all of these
savings could be used to finance future capital investments.

Legislative action could authorize VA to accumulate resources in
its Capital Asset Fund by charging VHA delivery locations for the
costs of improving or replacing assets. VHA could use returns on
capital investments, such as operational savings or third-party
payments, to pay back some or all of the amount invested over a
prescribed number of years.

As previously discussed, VHA's investment proposals are
prioritized, in part, on their investment return potential. VHA's
Tampa, Florida, proposal, for example, states that operational
savings of almost $2 million annually could be realized as a
result of planned improvements. This is because Tampa will
relocate related services now done on the first, second, and fifth
floors, into existing contiguous space on the ground floor, which
allows VHA staff to deliver health care more efficiently. A
reasonable payback period could be 18 years, given the proposal's
$17.5 million cost (18 years times $1 million).

VHA's Murfreesboro, Tennessee, proposal also states that
operational savings are expected as a result of the investment.
This is because veterans

32 Each major project or major lease would still be subject to
congressional approval.

VA Health Care: Capital Asset Planning and Budgeting Need
Improvement

Page 24 GAO/T-HEHS-99-83

from two other VHA delivery locations will be referred to
Murfreesboro, which, according to its proposal, has unit costs
that are about half of those at the other locations. A reasonable
payback period for this $12.7 million investment, however, cannot
be suggested because Murfreesboro's proposal did not quantify the
magnitude of savings expected.

In addition, VHA's Dallas, Texas, proposal, states that a return
of $2 million a year could be expected from third-parties, if $24
million is invested to improve that location. This is because
Dallas expects such improvements to allow VHA to successfully
compete for TRICARE patients. A reasonable payback period could be
24 years (24 years times $1 million).

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

VHA has the opportunity to reduce significantly the amount of
funds used to operate and maintain unneeded or inefficient health
care delivery locations and reinvest such savings to enhance care
provided to veterans. To do so, VHA needs to develop, and
implement, a market-based plan for restructuring assets. Without
such restructuring, it seems that VHA's resources might be
increasingly shifted to operating and maintaining assets at the
expense of veterans' health care needs.

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

Page 25 GAO/T-HEHS-99-83

Page 26 GAO/T-HEHS-99-83

Appendix I

VA's Five General Categories and Twenty Decision Criteria Appendi
x I

One-VA Customer ServicePriority Weight .56  Increase in customer
access  Increase in quality of service  Decrease in waiting time
Increase in benefit or service provided  Increase in the number of
customers

Return on Taxpayer InvestmentPriority Weight .19  Reduction in
cost per customer  Number of customers affected  Increase in
direct revenue  Cost-effectiveness analysis

High-Performing WorkforcePriority Weight .14  Improve recruitment
and retention of employees  Increase in training and development
Increase in employee morale

RiskPriority Weight .06  Risk of achieving projected benefits
Risk of achieving projected costs  Risk of adhering to projected
implementation schedule  Risk of obsolescence

Comparison to AlternativesPriority Weight .05  One-VA customer
service  Return on investment  High-performing workforce  Risk

Page 27 GAO/T-HEHS-99-83

Page 28 GAO/T-HEHS-99-83

Related GAO Products

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).

VA Health Care: VA's Plan for the Integration of Medical Services
in Central Alabama (GAO/HEHS-98-245R, Sept. 23, 1998).

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

Veterans' Health Care: Chicago Efforts to Improve System
Efficiency (GAO/HEHS-98-118, May 29, 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). VA Health Care: Status of Efforts to Improve Efficiency and
Access (GAO/ HEHS-98-48, Feb. 6, 1998).

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

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

VA Health Care: Travis Hospital Construction Project Is Not
Justified (GAO/HEHS-96-198, Sept. 3, 1996).

VA Health Care: Effects of Facility Realignment on Construction
Needs Are Unknown (GAO/HEHS-96-19, Nov. 17, 1995).

VA Health Care: Need for Brevard Hospital Not Justified (GAO/HEHS-
95- 192, Aug. 29, 1995).

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