VA Real Property: VA Should Better Justify Its Need to Lease Major Medical Facilities
Published: 2016-09-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: VA operates the largest health care network in the United States, with over 2,700 health care sites, including hospitals and outpatient facilities. However, many facilities are outdated, and VA estimates that its capital needs will require up to $63 billion over the next 10 years. In recent years, VA has increasingly leased its facilities, including major medical facilities.
This testimony discusses (1) the factors that account for VA’s decisions to lease major medical facilities and (2) the extent to which VA’s cost-estimating process for leasing these facilities reflects best practices. This testimony is based on GAO’s June 2016 report (GAO-16-619). For that report, GAO analyzed agency documents, VA data on major medical facilities’ leases, compared VA’s cost-estimating procedures to best practices in GAO’s Cost Guide, and interviewed VA officials.
section_title: What GAO Found
paragraphs: VA’s cost-estimating procedures for leasing major medical facilities generally align with GAO’s 12 cost-estimating best practice steps and recent changes in VA’s approach may improve the quality of VA’s estimates. GAO’s review of cost data for these leases since 2006 found that actual costs often varied more than 15 percent above or below the estimates included in VA’s proposals for these leases, often due to project design changes. In 2016, VA introduced a design guide for leased medical facilities that delineates VA and federal requirements, such as security and sustainability standards, that may reduce the risk that a project, and its cost, change from what the VA proposed. VA also initiated a lessons-learned effort to evaluate the factors that contribute to differences between actual lease costs and those included in proposals. The success of these steps will depend on how quickly and effectively VA implements them.
section_title: What GAO Recommends
paragraphs: In its June 2016 report, GAO recommended that VA assess the benefits of leasing major medical facilities and use the information in VA’s annual capital plans. VA concurred with GAO’s recommendation.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our report on the Department of  Veterans Affairs’ (VA) leasing practices. VA operates the largest health  care network in the United States through the Veterans Health  Administration, with over 2,700 health care sites, including hospitals and  outpatient facilities. However, many facilities are outdated and VA  estimates it will need $63 billion over the next 10 years to address its  capital needs. In recent years, VA has increasingly leased space for its  medical facilities, including major medical facilities. From 2005 to 2015,  the number of VA’s leased medical facilities grew by 80 percent to 1,246  facilities and included leases for 57 major medical facilities. VA’s major  medical facilities provide numerous services such as mental health and  other clinical care, are generally built by developers to meet VA and  federal-design requirements, can exceed 200,000 square feet, and have  an average annual rent in excess of $1 million. Before it can execute  leases for certain facilities, a prospectus must be submitted to Congress  for authorization.
My statement today summarizes the findings from our June 2016 report,  which examined the factors that account for VA’s decisions to lease major  medical facilities and the extent to which VA’s cost-estimating process for  leasing these facilities reflects best practices. To conduct that work, we  reviewed documentation on VA’s Strategic Capital Investment Planning  process, GAO and Office of Management and Budget (OMB) guidance on  capital planning, and GAO guidance on cost-estimating, and reviewed  prospectuses for the 51 major medical facilities submitted to Congress for  fiscal years 2015 through 2017. We also analyzed data and other  documentation on VA’s 23 major medical facility leases authorized and  completed between fiscal year 2006 and fiscal year 2015, and  interviewed VA officials. More detailed information on our scope and  methodology can be found in the issued report. Our work was performed  in accordance with generally accepted government auditing standards.
Our review resulted in the following findings. First, VA leases major  medical facilities to benefit from shorter timeframes to open a facility and  to attain flexibility to relocate, but VA has not assessed and provided  information to decision-makers on how it has benefited from the flexibility  to relocate. Second, VA’s cost-estimating procedures for major medical  facility leases generally align with our 12 cost-estimating best practice  steps and recent changes in VA’s approach may improve the quality of  VA’s estimates.
subsections: section_title: VA Justifies Leasing to Open Facilities More Quickly and to Obtain Flexibility to Relocate but Does Not Provide Information to Decision Makers Demonstrating the Benefits of This Flexibility
paragraphs: VA prioritizes all proposed capital projects using six major-decision  criteria (see table 1), which focus on addressing needs that (1) can  demand quick solutions, such as the need to replace an expiring lease  that cannot be renewed, and (2) often change, such as demands for  veterans’ access to care options. As such, according to VA officials,  leasing is often VA’s preferred alternative for major medical facilities  because project implementation times are often shorter than the time for  constructing a federally-owned facility and leasing can provide flexibility to  relocate in the future to meet changes in VA’s needs.
VA cited a shorter project time frame and flexibility to relocate in all 51 of  its prospectuses for major medical facilities’ leases submitted to Congress  since fiscal year 2015. For example, in the fiscal year 2015 submission,  VA cited a shorter implementation time frame and flexibility to relocate as  justifications for a new lease in Johnson County, Kansas, to address  growing demand and overcrowding at the Kansas City Veterans Medical  Center and to reduce the drive time for a high concentration of veterans in  the area to within VA’s 30-minute drive-time target.
VA also generally identified leasing as the lowest cost alternative in its  prospectuses, but in some cases preferred leasing for the two previously  cited reasons when other options may have been less costly. For  example, in fiscal year 2015, VA proposed a new lease in Lafayette,  Louisiana, to replace a facility that the VA determined was too small and  estimated leased space would have a total life-cycle cost of  approximately $259 million, compared to $201 million for construction of a  new federally-owned facility. According to VA, an owned facility would  require a longer time frame to open than a leased facility and limit VA’s  flexibility to adapt to potential changes in the veterans population,  demand for services, new technologies, or health care delivery.
Leasing may offer VA greater efficiencies and flexibilities when major  medical-facility projects are compared to construction. Specifically, VA’s  use of GSA delegated leasing authority to execute its major medical  facility leases requires that VA’s lease terms not exceed 20 years. This  period provides some of the flexibility that VA values in terms of relocating  to facilities that align with VA’s changing needs. Construction of federally- owned facilities may not offer this flexibility given the challenges that we  have previously identified with renovating and disposing of some federal  properties, including VA’s, due to issues such as competing stakeholder  interests that can make renovating or closing facilities difficult. Further,  construction of a federally-owned facility requires a full upfront funding  commitment that can be difficult to secure in the current budgetary  environment. VA officials added that although VA’s major medical facility  lease projects also generally require a lessor to construct a new facility to  VA’s specifications, leasing tends to have a shorter project timeframe  because it does not require VA to acquire the land on which the facility  will be constructed, which can require additional time and resources.
Although VA has justified leasing its major medical facilities to its  department leadership and congressional decision makers based on the  flexibility that leasing offers compared to other alternatives, VA has not  provided these stakeholders with information on the extent to which it has  benefited from that flexibility, nor does VA regularly assess information  that would help it do so. In particular, while VA regularly cited future  “flexibility,” such as ability to move when needs change, as a justification  for the leases included in its annual capital plans, the benefits that VA has  experienced from this flexibility with major medical facility leases are not  presented to VA stakeholders responsible for selecting projects to present  to Congress or to congressional decision makers. VA officials told us that  VA’s data systems do not provide VA staff responsible for planning new  leases with information on the use of flexibilities with existing major  medical facilities’ leases, such as how far VA has moved from a  previously occupied medical facility and why it has moved to new leased  locations. We and OMB have previously identified the importance of  assessing the results of capital decisions and incorporating lessons  learned from those assessments into capital decisions. Without  transparency on the actual benefits VA has experienced from leasing its  major medical facilities, VA and congressional decision-makers may lack  information to make informed decisions about the need for VA’s major  medical facility leases. Further, greater transparency could help decision- makers and taxpayers understand the value of leasing in cases in which  VA proposes leasing major medical facilities when other alternatives,  such as construction of a federally-owned facility, may have a lower cost.
In our issued report, we recommended that the Secretary of Veterans  Affairs annually assess how VA has benefited from flexibilities afforded by  leasing its major medical facilities and use information from these  assessments in its annual capital plans in order to enhance transparency  and allow for more informed decision making related to VA’s major  medical facility leases. VA agreed with our recommendation, noting that  assessing and explaining the benefits and flexibilities of leasing major  medical facilities could improve transparency. VA agreed to add this  information to future annual budget submissions.
section_title: VA’s Cost Estimating Process for Major Medical Facility Leases Aligns with Most of Our Best Practice Steps and Recent Changes May Improve VA’s Estimates for These Leases
paragraphs: VA’s cost-estimating procedures for major medical facilities’ leases  generally align with 9 of the 12 best practice steps for cost-estimating that  we have previously identified, and recent changes may improve the  quality of VA’s cost-estimating process for these leases. (See fig. 1.) For  a cost-estimating process to support the creation of reliable cost  estimates, it should substantially or fully meet each of the four  characteristics in GAO’s Cost Guide—comprehensive, well-documented,  accurate, and credible—based on the extent to which the procedures  incorporate the underlying best practice steps for each characteristic. We  found that VA’s cost-estimating procedures for major medical leases fully  met the comprehensive characteristic, substantially met the well- documented characteristic, and partially met the accurate and credible  characteristics.
Our finding that VA’s cost-estimating process partially met the  characteristics for producing reliable cost estimates is based on the  following:
Comprehensive: VA’s cost-estimating process fully met the  comprehensive characteristic because its procedures include both the  best practice steps of developing an estimating plan and determining  the estimating structure.
Well-documented: VA’s process substantially met the well- documented characteristic because its procedures incorporate a large  number of related best-practice steps, such as defining the estimate’s  purpose and presenting the estimate for approval.
Accurate: VA’s process partially met the accurate characteristic  because the procedures incorporate some elements of the two  associated best practice steps. Specifically, VA’s process includes the  best practice step of developing a point estimate and comparing it to  an independent estimate, which is based on the market rental rate  determined by a market survey that VA conducts and the cost of  specific improvements required for VA’s intended medical purposes.  VA applies several standard and variable adjustments to the market  rental rate to determine the rental portion of the estimated first-year  lease cost to include in the VA’s prospectuses to Congress. (See  Table 2.)
This best practice step normally includes comparing the estimate to  an independent cost estimate, which VA does not obtain. Because of  the standardized nature of the adjustments to the rent rate and pricing  for improvements for major-medical facilities’ lease cost estimates,  obtaining an independent cost estimate for these inputs would likely  yield little new information; accordingly, we consider the rating for this  best practice step to be substantially met. The procedures also  include updating the estimate, another best practice step supporting  this characteristic, but VA does not update it with actual costs as the  best practice step requires. Estimates are updated during the  development process to calculate whether actual costs are likely to  rise more than 10 percent above the prospectus-estimated cost. For  leases executed under GSA authority, the estimated maximum cost  provided in a prospectus may be increased for construction or  alterations but may not exceed 10 percent. After leases are  executed VA does not update the estimate with actual costs. Updating  the estimate with actual costs is a best practice step because it  enables a “lessons learned” analysis, which can strengthen estimates  going forward.
Credible: VA’s process partially met the credible characteristic  because VA’s procedures incorporate some elements of the three  associated best practice steps. For example, the best practice step of  conducting a sensitivity analysis on the lease’s cost estimate is not  directly included in VA’s procedures, but some procedures do address  uncertainty and risk. A sensitivity analysis reveals how to assess the  potential variability in the estimate by calculating how the estimate is  affected by a change in any single underlying assumption. These  calculations identify the cost elements that represent the most risk to  an estimate. Instead, VA officials said that VA applies an annual  escalation rate to adjust for increases in market rental rate and  inflationary increases in the cost for tenant improvements over time,  two key assumptions supporting the estimate that could cause actual  first-year lease costs to fluctuate from the prospectus estimated costs.  We found that VA’s use of an escalation rate often did not fully  account for variation in lease costs. Specifically, our review of cost  data provided by VA for 18 of the 23 most recently completed major  medical-facility leases activated by the end of fiscal year 2015 shows  that actual costs for 15 of the 18 leases varied substantially from  adjusted prospectus costs, including 7 leases that were more than 15  percent above VA’s adjusted estimates and 8 that were more than 15  percent below the VA’s adjusted estimates. For example, actual  first-year lease costs increased about 26 percent over the adjusted  estimate for VA’s San Francisco, California, medical facility’s lease  and decreased about 44 percent for the VA’s Montgomery, Alabama,  facility.
VA recently issued a new standard design guide to increase the reliability  of its prospectus estimates for major medical facilities and plans to  conduct a “lessons learned” study that could further improve how VA  estimates its costs. The standard design guide, issued in January 2016,  covers the different types of outpatient clinic facilities and provides  guidance on VA activities, such as site selection, and delineates minimum  federal-facility requirements for security, sustainability, and seismic  standards. VA officials told us that the new guide was developed to  reduce the risk of facility changes and consequent cost changes for lease  projects, and that moving forward all authorized major medical facility  leases would use this guide. Reducing the potential for design changes— which we have previously found to be a main driver of increases in facility  costs—after a prospectus is submitted may enable VA to better  estimate facility costs. Second, VA officials told us that the department is  planning a “lessons-learned” review that would involve updating data  used for planning major medical facilities’ leases with actual cost data  after the facility is accepted. This type of review can improve cost- estimating processes over time by exposing the precise reasons why  actual costs differed from the estimate, such as faulty project ground rules  and assumptions, and previously unrecognized risks. The new design  guide and the lessons-learned study are in the early stages, and their  success will depend on how quickly and successfully VA implements  them.
In conclusion, the recent changes in VA’s leasing program show promise  for improving cost estimates for VA’s major medical facility leases. In  particular, VA’s new guidance could introduce more discipline into the  process and VA’s “lessons learned” study could identify factors that lead  to cost variance from what is proposed to Congress. Further, VA’s  commitment to assess and provide information to Congress on the  benefits and flexibilities of leasing major medical facilities could provide  much needed transparency to VA’s decisions to pursue leasing versus  other alternatives. We will continue to monitor how VA proceeds with  these changes.
Chairman Barletta, Ranking Member Carson, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff members have any questions concerning this  testimony, please contact Rebecca Shea, (202) 512-2834;  shear@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this  statement. GAO staff who made key contributions include Heather  MacLeod, Assistant Director; Jennifer Echard, Delwen Jones, James  Leonard, and Crystal Wesco.
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