VA Health Care: Improved Planning Needed for Management of Excess Real Property
Published: 2003-01-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Veterans Affairs (VA) has changed from a hospital-based system to primary reliance on outpatient care. As a result, VA expects that the number of unneeded buildings will increase. Veterans' needs could be better served if VA finds ways to minimize resources devoted to these buildings. VA must have an effective process to find alternate uses or dispose of unneeded property. In August 2002, VA completed a pilot test for realigning its health care system in the Great Lakes network. The pilot identified 30 buildings that are no longer needed to provide health care to veterans. VA is currently studying how to realign assets in its 20 remaining networks. GAO was asked to review VA's management of unneeded buildings in its Great Lakes network.
section_title: What GAO Found
paragraphs: The Great Lakes network has developed or implemented alternative use or disposal plans for 21 of the 30 unneeded, vacant buildings. VA has leased 10 of the buildings to the Chicago Medical School and is negotiating a lease for 3 buildings with Catholic Charities of Chicago. Four buildings were demolished, and 4 buildings will be demolished in order to construct new facilities or to expand an existing cemetery. The network identified three obstacles that hinder alternative use or planning for the remaining buildings: (1) VA has been unable to find organizations interested in using the vacant, unneeded buildings due primarily to their location or physical condition; (2) VA may spend more to demolish buildings than it would spend to maintain the buildings as is; and (3) VA is reluctant to transfer disposal responsibility for the buildings to the General Services Administration, primarily because (a) VA would incur costs for environmental and other requirements that could exceed potential savings through avoidance of routine maintenance costs, and (b) any proceeds may only be used for the construction of VA nursing homes.

section_title: Letter
paragraphs: The Department of Veterans Affairs (VA) operates one of our nation’s  largest health care delivery systems, comprising 21 health care delivery  networks that operate and maintain over 4,700 buildings. Over the past  decade, VA’s system has undergone a dramatic transformation, shifting  from predominantly hospital-based care to primary reliance on  community-based VA and non-VA providers for a full continuum of health  care delivered largely on an outpatient basis. As a result, vacant and  underutilized buildings at VA’s inpatient locations have become more  common.
Because the cost to operate and maintain these underutilized and vacant  buildings consumes resources that could otherwise be used to provide  health care services for veterans, VA initiated its Capital Asset  Realignment for Enhanced Services (CARES) process. Under CARES, VA’s  Undersecretary for Health has directed networks to develop asset- restructuring plans to guide future capital investment decisions that would  involve constructing new facilities or renovating or closing existing ones  for the purpose of delivering health care more efficiently in existing  locations or closer to where veterans live.
Through CARES, VA plans to develop a nationwide strategic plan that  identifies capital assets needed to meet veterans’ health care needs, as  well as those assets that are no longer needed. In August 2002, VA  announced the results of its CARES pilot test—a plan to realign capital  assets to improve health care delivery in its Great Lakes network. This  plan described how VA intends to restructure its inpatient facilities as well  as open new outpatient clinics in community settings to provide health  care to veterans. Also, VA identified 30 vacant buildings that are no longer  needed to meet veterans’ health care needs.
Currently VA is conducting CARES studies in its 20 other health care  networks. VA’s goal is to make realignment decisions by October 2003, and  it expects that many additional buildings will be considered excess, given  its extensive inventory of buildings nationwide. As such, timely disposal or  alternate use of excess buildings could play a critical role in VA’s  realignment efforts by avoiding maintenance costs or generating revenue  to enhance services for veterans such as financing needed renovations to  existing buildings.
In your capacity as Chairman of the Senate Committee on Veterans’  Affairs, you asked us to review VA’s management of vacant buildings in  the Great Lakes CARES pilot to better understand the potential  implications of excess property for the entire CARES process.  Accordingly, we assessed the Great Lakes Network’s efforts to develop  alternate use or disposal plans for vacant buildings and identified  obstacles that hinder effective management.
To conduct our work, we visited medical facilities in the Great Lakes  network, where we also did physical inspections of vacant buildings. We  reviewed documents related to the 30 vacant buildings, as well as the  network’s plans for managing these buildings. We discussed these plans  and asset disposal issues with officials responsible for asset management  in VA’s headquarters, in the Great Lakes network office, and at the  network’s health care facilities. We also discussed federal disposal  policies, procedures, and practices with officials of the General Services  Administration (GSA) as well as representatives of the National Trust for  Historic Preservation. We performed our review from January 2002  through January 2003 in accordance with generally accepted government  auditing standards. Appendix I contains a more detailed description of our  scope and methodology.
subsections: section_title: Background
paragraphs: VA spent about $21 billion to provide health care services, including acute  medicine, surgery, mental health, and long-term care, to about 4.2 million  veterans during fiscal year 2001. Of VA’s 4,700 buildings, over 40 percent  have operated for more than 50 years, including almost 200 built before  1900. Over 1,600 buildings have historical significance that requires VA to  comply with special procedures for maintenance and disposal.
VA’s health care infrastructure was designed and built to reflect a concept  of hospital-centered inpatient care, with long stays for diagnosis and  treatment. This concept is now outdated as new technology and treatment  methods have shifted delivery from inpatient to outpatient services where  possible and shortened lengths of stay when hospitalization is required. As  a result, VA’s capital assets often do not align with current health care  needs for optimal efficiency and access.
To address this situation, CARES will assess veterans’ potential demand  for health care over the next 20 years, identify potential service gaps and  develop delivery options for meeting veterans’ needs, and guide the  realignment of capital assets to support the preferred delivery options. VA  conducted a pilot test in the Great Lakes network, which served about  220,000 veterans in fiscal year 2001 with an annual budget of $891 million.  This network includes three general market areas: northern Illinois  (Chicago), Wisconsin, and the Upper Peninsula of Michigan. In February  2002, the Secretary of Veterans Affairs selected strategies for realignment  of services. These strategies included (1) consolidation of services at  existing locations, (2) opening of new outpatient clinics, and (3) closure of  one inpatient location.
Subsequently, VA identified 30 vacant buildings that were no longer  needed to meet veterans’ health care needs. Of the 30 buildings, 11 are  considered to be historic. Under the provisions of the National Historic  Preservation Act, federal agencies are required to take into account the  effect of any federal undertaking on any historic property. Until a decision  is made on demolition, agencies that own or control historic properties are  required to preserve their historic character and minimize harm to them.  The act also establishes federal agency responsibilities that must be met if  historic properties are to be demolished.
During fiscal year 2001, officials in VA’s Great Lakes network told us that  an estimated $750,000 was spent to maintain vacant buildings, primarily  for utilities. Network officials told us that this represents a relatively small  portion of the total resources needed to adequately operate these  buildings for the delivery of health care or other purposes. Actual  expenses were lower because the buildings are no longer used for health  care.
In general, the network considered three options when developing  property disposal or other plans for vacant buildings: Enhanced-Use  Leasing, demolition, or transferring the property to GSA, which has the  authority to dispose of excess or surplus federal property under the  Federal Property and Administrative Services Act of 1949 (Property Act).  Under Enhanced-Use Leasing, VA may lease property to others for up to 75  years; it may transfer title to the lessee at some time during the life of the  lease if such transfer is in the best interests of the federal government.  Demolition is a viable option when the associated costs can be recovered  within a reasonable period, primarily through the avoidance of  maintenance costs. If VA reports the property to GSA as excess, GSA  identifies potential users for the property by going through several levels  of screenings that evaluate users in the following order of priority: federal  users; organizations that will use the property for homeless programs  under the Stewart B. McKinney Homeless Assistance Act; nonprofit  organizations that may want the property for public uses such as parks,  museums, or educational facilities; and state or local governments. If none  of these screening processes produce a user, the site is made available for  public sale.
Following the pilot test in the Great Lakes network, VA made significant  modifications to its CARES procedures, including development of a more  systematic process to guide decisions involving the management of vacant  buildings. For example, networks will use a common format for estimating  future maintenance costs, as well as potential demolition costs. However,  the model does not include costs associated with the transfer of property  to GSA nor the potential revenue that could be realized.
section_title: VA’s Management of 30 Vacant Buildings in Its Great Lakes Network
paragraphs: VA has negotiated Enhanced-Use Leases for 10 vacant buildings and is  negotiating Enhanced-Use Leases for 3 buildings. Four buildings have  been demolished, and 4 additional buildings will be demolished. VA  currently has no disposal plans for the other 9 buildings.
In April 2002, VA contracted with the Chicago Medical School for an  Enhanced-Use Lease of 10 vacant buildings at VA’s North Chicago health  care delivery location. The medical school will either renovate or demolish  these buildings and in return will purchase utilities, including steam,  electricity, and chilled water, from a VA-operated facility. In addition to  generating revenue from the sale of utilities, the network will avoid annual  maintenance costs of over $440,000.
VA is negotiating an Enhanced-Use Lease with Catholic Charities of  Chicago for 3 vacant buildings at the Hines VA hospital in Chicago. Two of  the three were considered historic; VA network officials took steps to have  the historic designation removed. VA expects Catholic Charities to  renovate the buildings to make them suitable for transitional housing for  the homeless. VA also expects to receive rental payments as well as  reimbursement for utilities, grounds maintenance, and snow removal. In  addition, VA is negotiating with Catholic Charities to use at least 50  percent of the housing for veterans who need this service. Network  officials told us that utilities were turned off and that no funds were spent  on these buildings for other purposes during fiscal year 2001.
Four buildings have been demolished, and 4 others will be demolished. At  the Chicago Health Care System’s West Side Division, the Enhanced-Use  Lease partner demolished 3 buildings in November 2002 to provide space  for a new parking garage and a Veterans Benefits Administration regional  office. The U. S. Navy demolished 1 building at North Chicago on land that  VA transferred to it for future use. Four other buildings will be demolished  because they present safety hazards or the land is needed to expand  existing VA facilities, including cemeteries. These buildings are located at  the Milwaukee health care facility and Hines VA hospital. Two of these  buildings, located at Milwaukee, are historic. The other two buildings are  at Hines. One of the two was considered historic. Network officials told us  they were successful in having the historic designation removed. This  building will be demolished in order to construct a surface parking lot for  a new spinal cord injury/blind rehabilitation center. During fiscal year  2001, VA spent about $17,000 to operate and maintain these 4 buildings.
section_title: Obstacles to Alternate Use or Disposal of 9 Vacant Buildings
paragraphs: Despite the efforts of network officials, the lack of interest in 9 of VA’s  vacant buildings has been an obstacle to finding alternate uses for these  buildings. Network officials believe that maintaining ownership of the  vacant buildings is the least expensive course of action, given the  relatively high demolition costs compared to annual maintenance costs  and considerable uncertainties concerning VA’s potential costs to transfer  the properties to GSA.
Network officials told us that they have attempted to interest outside  organizations in utilizing the 9 vacant buildings without success. For  example, officials at the medical center in Tomah, Wisconsin, offered to  transfer ownership of a 23,579-gross-square-foot building to a local Indian  tribe for use as office space and an outpatient clinic. The building, which  was constructed in 1929, has been vacant since 1983. According to VA, the  offer was turned down because of the $2 million cost of renovations  needed to make it suitable for this purpose. The medical center director  told us that because Tomah is located in a rural area, it has been difficult  to find other organizations interested in this building and its two other  vacant buildings.
Likewise, officials at the Milwaukee medical center told us that they have  had discussions with other organizations concerning use of 6 vacant  buildings. They have tried to generate interest in the buildings as elderly  housing, as office space, and for a youth home. These officials suggested  that two of the vacant buildings, a theater and a chapel, could, when  renovated, be used for these purposes if interested parties could be found.  They told us they have held discussions with other government agencies,  school organizations, a labor union, and charitable organizations without  success.
Network officials cited a second obstacle, namely that the cost to  demolish the 9 vacant buildings could not be recovered through avoidance  of maintenance costs, such as utilities, within a reasonable period. For  example, the network determined that the cost to demolish 3 of these   9 vacant buildings would be about $500,000, while maintenance costs for  the 3 buildings were about $26,000 during fiscal year 2001.
The shortest recovery period was about 11 years for 1 of the 4 buildings.  This 33,910-square-foot building, located in Tomah, Wisconsin, has been  vacant since 1998. According to VA, the cost to demolish this building  would be $212,000. During fiscal year 2001, the medical center spent about  $18,600 for utilities for this building. By contrast, demolition costs for   1 building would likely take over 40 years to recover. This 23,579-gross- square-foot building has been vacant at the Tomah medical center since  1983. During fiscal year 2001, the medical center spent about $7,000 to  maintain this building. According to VA, the cost to demolish this building  would be $308,000.
In addition, network officials cited the uncertainty of potential costs as the  third obstacle in declaring the 9 buildings excess property under the  provisions of the Property Act. First there is no assurance that VA could  save money given that property-holding agencies, such as VA, incur costs  in disposing of excess property with GSA. Property-holding agencies are  generally responsible for mothballing and stabilizing property in order to  prevent its further deterioration pending transfer to another federal  agency or its disposal. According to GSA, the landholding agency is also  responsible for studies to detect the presence of hazardous wastes as well  as archeological sites.
GSA officials also told us that they are committed to maintaining the best  and highest use for the property and that historic property will be  transferred only under covenants that protect its historic designation; all 9  buildings are considered historic. According to a network official, the  Great Lakes network has not determined whether the cost of transferring  these excess buildings to GSA exceeds the cost of continuing to own and  maintain them.
Second, VA does not consider the transfer of vacant buildings to GSA (by  declaring them excess) to be an attractive option. This is because  proceeds that are received from the sale of real property must be  deposited into the VA Nursing Home Revolving Fund, which is only to be  used for the construction of nursing homes. VA would prefer to use these  proceeds for the delivery of inpatient and outpatient services for veterans  as well as long-term care. VA officials told us that they had proposed  legislation that would allow VA to use sales proceeds to support veterans’  health care delivery, but it was not enacted. As a result, VA would prefer to  pursue Enhanced-Use Leases, which will allow VA to use revenue to meet  the overall health care needs of veterans.
section_title: Conclusions
paragraphs: Officials in VA’s Great Lakes network have made progress dealing with  vacant buildings that are no longer needed in the delivery of health care to  veterans. When there is no Enhanced-Use Lease potential, however, these  officials have encountered several obstacles, including potentially high  demolition costs or uncertain site preparation costs associated with  reporting buildings to GSA as excess to VA’s needs. Understandably, they  are reluctant to commit potentially large amounts of health care resources  for the demolition or site preparation without sufficient assurance that  most or all costs will be recovered. The Great Lakes network has retained  ownership of 9 vacant buildings and thus continues to spend medical care  resources to maintain them. As the CARES process is completed in the 20  remaining networks, costs associated with an increasing number of  unneeded buildings that will be identified will grow. Therefore, it is critical  that VA take the steps needed to systematically evaluate all relevant cost  information. VA’s recent changes to the CARES process provide a  framework for making effective decisions, although since the changes  have not been tested, it remains unclear whether they will function as an  effective model that includes complete cost information concerning  options to dispose of or find alternate uses for vacant buildings.
section_title: Recommendation for Executive Action
paragraphs: To ensure that the newly developed CARES model for managing excess  buildings will provide an effective decision-making tool that could be used  in the other networks, we recommend that the Secretary of Veterans  Affairs conduct a pilot test of the model in the Great Lakes network and  make modifications, if needed.
section_title: Agency Comments
paragraphs: In commenting on a draft of this report, VA agreed with our findings and  conclusions and concurred with our recommendation. VA’s letter is  reprinted in appendix II.
We modified the report to use the term “Enhanced Use Leasing,” as VA  suggested. We also incorporated VA’s technical comments as appropriate.  VA also emphasized that it had proposed legislation that would allow VA  to use sales proceeds to support veterans’ health care delivery, but it has  not been enacted. Also, VA expressed concern that the process for  removing buildings from historic preservation status is a significant  obstacle when it attempts to find alternate use for or dispose of all  remaining buildings. We agree that this process complicates VA’s ability to  manage vacant buildings, but as we stated in our report, VA has been  successful in removing the historic designation of buildings in the Great  Lakes network in order to facilitate demolition or alternate use. Factors  such as the constraints on the ability to retain proceeds from the sale of  real property and the need to address historical building issues are shared  by many real property-holding agencies. We discuss the factors associated  with excess property in the federal government as a whole in a soon-to-be- released report on longstanding problems in the federal real property  arena.
We are sending copies of this report to the Secretary of Veterans Affairs  and other interested parties. We will also make copies available to others  upon request. In addition, the report is available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff members have any questions about this report, please  call me at (202) 512-7101. Key contributors to this report were Paul  Reynolds, Behn Miller, and John Borrelli.
section_title: Appendix I: Scope and Methodology
paragraphs: To assess the Department of Veterans Affairs’ (VA) efforts to manage  unneeded, vacant buildings, we obtained information from the Great Lakes  network on the number of such buildings, the cost to maintain the  buildings, and its efforts to find alternate uses for the buildings. We asked  for information such as the age of the buildings, the year in which they  became vacant, the cost of utilities and other operating costs, as well as  the cost of any needed repairs. We also asked about the network’s plans to  manage these buildings through such actions as demolition or Enhanced- Use Lease.
After we received this information we visited the network and interviewed  the Director and other network staff members about their efforts to deal  with unneeded, vacant buildings. We discussed with these officials their  plans for implementing Capital Asset Realignment for Enhanced Services  (CARES) options selected by the Secretary. We visited the Hines,  Milwaukee, and North Chicago hospitals. During our visits we met with  hospital directors, associate directors, and their staffs. We discussed with  these officials their actions to find alternate uses for the buildings and  problems they have encountered in doing so. By telephone, we discussed  with the Director of the Tomah hospital and members of his staff  information on the hospital’s vacant buildings. At the Milwaukee and  North Chicago hospitals, we visually inspected vacant buildings. We did  not tour vacant buildings at Hines because of building safety concerns.
At VA headquarters, we met with officials to discuss the CARES process  and VA’s plans for managing vacant buildings. We reviewed CARES  planning documents, including information supporting the network’s  August 2002 realignment decisions. We also met with VA’s Historic  Preservation Officer to discuss the impact of historic significance on VA’s  ability to take actions on unneeded vacant buildings.
We met with General Services Administration officials to discuss the  process for disposing of excess property as well as proposed legislation  aimed at improving federal agencies’ ability to manage federal property.  We also discussed management of historic properties with officials at the  National Trust for Historic Preservation.
We performed our review from January 2002 through January 2003 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Comments from the Department of Veterans Affairs