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
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.1

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.2 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

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

10, 1999).

2A market, for the purposes of this statement, is defined as a geographic area generally within 75 miles

of an existing VHA major delivery location.

VA Health Care: VA Is Struggling to Respond

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

Respond to Asset Realignment Challenges

Page 2 GAO/T-HEHS-00-91

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.3

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.4 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).5

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.

3Veterans’ Affairs: Progress and Challenges in Transforming Health Care (GAO/T-HEHS-99-109, Apr.

15, 1999).

4VA Health Care: Challenges Facing VA in Developing an Asset Realignment Process (GAO/T-HEHS-99-

173, July 22, 1999).

5VA’s Capital Assets Realignment Plan for Enhancing Services to Veterans, hearing before the

Subcommittee on Oversight and Investigations, House Committee on Veterans’ Affairs, No. 106-20

(July 22, 1999).
VA Health Care: VA Is Struggling to

Respond to Asset Realignment Challenges

Page 3 GAO/T-HEHS-00-91

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.

The goal of an asset realignment process, in our view, is to produce within

a reasonable time frame a capital asset plan that is in the best interest of

veterans—namely one that provides better health care services for

currently enrolled veterans while enabling more veterans to access VA

care. The capital asset plan should conform to Office of Management and

Budget guidelines.6 If done successfully, the capital asset plan should

provide a road map to guide investment decisions over the next decade.

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

6Capital Programming Guide, Office of Management and Budget (July 1997).

VHA Is Struggling to

Design Asset

Realignment Process
VA Health Care: VA Is Struggling to

Respond to Asset Realignment Challenges

Page 4 GAO/T-HEHS-00-91

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,7 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.

We identified three weaknesses in VHA’s proposed method. First, senior

managers at headquarters appear to be in reactive, rather than proactive,

leadership roles. Second, stakeholders appear to have decision-making,

rather than advisory, roles. Third, key components, such as development

of evaluation criteria, lack rigor; that is, they do not appear to be driven by

quantifiable, objective data clearly linked to well-defined measurement

standards.

VHA’s senior management should play a critical leadership role in the

development of (1) well-defined evaluation criteria that have the

measurement standards needed to guide the collection of data necessary

to make capital asset realignment decisions, (2) guiding principles that

consultants and others could use when developing asset realignment

options for consideration, and (3) systematic procedures for scoring

options in relation to each evaluation criterion.

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

7VA Health Care: Closing a Chicago Hospital Would Save Millions and Enhance Access to Services

(GAO/HEHS-98-68, Apr. 16, 1998) recommended that VHA develop and implement a plan that meets

veterans’ needs by operating fewer capital assets.

VHA’s Proposed

Capital Asset

Realignment Process

Raises Concerns

VHA’s Senior Managers

Lack Proactive Role
VA Health Care: VA Is Struggling to

Respond to Asset Realignment Challenges

Page 5 GAO/T-HEHS-00-91

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.

Last July we expressed concern that VHA’s capital asset realignment

process as then proposed could rely too heavily on local stakeholders who

may have vested interests in maintaining the status quo. Our assessment of

VHA’s proposed asset realignment process today suggests that

stakeholders remain heavily involved in a decision-making role.

VHA plans to have national and local committees, which possess decisionmaking 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

VHA’s Stakeholders Have

Decision-Making Role
VA Health Care: VA Is Struggling to

Respond to Asset Realignment Challenges

Page 6 GAO/T-HEHS-00-91

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.

From our perspective, VHA’s experience with the Chicago capital asset

realignment study offers three valuable lessons so far that could improve

VHA’s systemwide asset realignment process:

• 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

Realignment Decision

Points Lack Rigor
VA Health Care: VA Is Struggling to

Respond to Asset Realignment Challenges

Page 7 GAO/T-HEHS-00-91

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.
VA Health Care: VA Is Struggling to

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Page 8 GAO/T-HEHS-00-91

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.

There appear to be two alternative business models for completing the

design and implementation of a capital asset realignment process in a

timely manner, besides continuing with VHA’s current efforts. First,

leadership of the asset management responsibilities could be transferred

to another unit within VA, but outside of VHA. A second model could

involve the shifting of capital asset decision responsibility outside VA.

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.

New Business Model

Could Be Considered
VA Health Care: VA Is Struggling to

Respond to Asset Realignment Challenges

Page 9 GAO/T-HEHS-00-91

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 slow progress creates dilemmas for VA’s capital budgeting process.

On a short-term basis, VHA, VA’s Capital Investment Board, and the Office

of Management and Budget must decide what level of risk they are willing

to tolerate as they continue maintaining or improving capital assets

without sufficient information about VA’s future asset needs to ensure

cost-effective investment decisions.

Appropriately, they seem unwilling to accept much risk when making highcost 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 budget8 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.9

9VA Health Care: Capital Asset Planning and Budgeting Need Improvement (GAO/T-HEHS-99-83, Mar.

10, 1999).

VHA’s Delays Create

Capital Budgeting

Dilemmas
VA Health Care: VA Is Struggling to

Respond to Asset Realignment Challenges

Page 10 GAO/T-HEHS-00-91

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 highcost 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 onetime 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.10

Second, last year VA proposed a new funding source to help finance highpriority 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

10GAO/T-HEHS-99-83, Mar. 10, 1999, p. 23.
VA Health Care: VA Is Struggling to

Respond to Asset Realignment Challenges

Page 11 GAO/T-HEHS-00-91

incentives to dispose of properties because funds can, by law, be spent

only to construct, alter, or acquire nursing home facilities.11

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.

We are concerned that VHA’s slow progress in establishing an asset

realignment process needlessly delays critical decisions and the

opportunity to reinvest resources to enhance veterans’ future health care.

Furthermore, the weaknesses we identified in VHA’s realignment process,

as currently proposed, undermine our confidence that, once implemented,

it will produce within a reasonable time frame capital asset plans that are

in the best interest of veterans and taxpayers. It appears that if a capital

asset realignment process is patterned after the Capital Investment

Board’s decision-making model, the process would be less likely to

replicate VHA’s Chicago experience.

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.

Mr. Chairman, this concludes my prepared statement. I will be happy to

answer any questions that you or Members of the Subcommittee may have.

11GAO/T-HEHS-99-83, Mar. 10, 1999, p.23.

Concluding

Observations
VA Health Care: VA Is Struggling to

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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

(406193)

GAO Contact And

Staff

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