VA Real Property: Actions Underway to Improve the Leasing of Outpatient Clinics
Published: 2015-06-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: VA operates one of the nation's largest health-care delivery systems. To help meet the changing medical needs of the veteran population, VA has increasingly leased medical facilities to provide health care to veterans. In April 2014, GAO reported that VHA's leasing program had long-term liability of $5.5 billion and was growing.
This statement discusses VA outpatient clinic lease issues, specifically, (1) the extent to which schedule and costs changed for selected VA outpatient clinics' leased projects since they were first submitted to Congress and factors contributing to the changes and (2) actions VA has taken to improve its leasing practices for outpatient clinics and any opportunities for VA to improve its project management. It is based on GAO's April 2014 report ( GAO-14-300 ) along with selected updates conducted in August and October 2014 to obtain information from VA on actions it has taken to address GAO's prior recommendation. For that report, GAO reviewed all 41 major medical leases that were associated with outpatient clinic projects for which a prospectus had been submitted to Congress, as required by law.
section_title: What GAO Found
paragraphs: In its April 2014 report, GAO found that schedules were delayed and costs increased for the majority of the Department of Veterans Affairs' (VA) leased outpatient projects reviewed. As of January 2014, GAO found that 39 of the 41 projects reviewed—with a contract value of about $2.5 billion—experienced schedule delays, ranging from 6 months to 13.3 years, with an average delay of 3.3 years. The large majority of delays occurred prior to entering into a lease agreement, in part due to VA's Veterans Health Administration (VHA): 1) providing project requirements late or changing them or 2) using outdated guidance. Costs also increased for all 31 lease projects for which VA had complete cost data, primarily due to delays and changes to the scope of a project. For example, first-year rents increased a total of $34.5 million—an annual cost which will extend for 20 years (the life of these leases).
GAO's report also found that VA had taken some actions to address problems managing clinic-leased projects. First, it established the Construction Review Council in April 2012 to oversee the department's capital asset programs, including the leasing program. Second, consistent with the council's findings and previous GAO work, VA was planning the following improvements:
Requiring detailed design requirements earlier in the facility-leasing process . VA issued a guidance memorandum in January 2014 directing that beginning with fiscal year 2016, VA should develop detailed space and design requirements before submitting the prospectus to Congress.
Developing a process for handling scope changes. In August 2013, VA approved a new concept to better address scope changes to both major construction and congressionally authorized lease projects. According to VA officials, among other improvements, this process ensures a systematic review of the impact of any ad-hoc changes to projects in scope, schedule, and cost.
Plans to provide Congress with clearer information on the limitations associated with costs of proposed projects. VA's 2014 budget submission did not clarify that its estimates for future lease projects included only one year's rent, which does not reflect the total costs over the life of the leases, costs that VA states cannot be accurately determined in early estimates. VA officials clarified this estimate beginning with VA's 2015 budget submission.
However, these improvements were in the early stages, and their success will depend on how quickly and effectively VA implements them.
Finally, GAO reported that VA was also taking steps to refine and update guidance on some aspects of the leasing process, for example the VA's design guides, but VHA has not updated the overall guidance for clinic leasing (used by staff involved with projects) since 2004. In October 2014, VA reported that it was in the process of revising its clinic leasing guidance in response to GAO's recommendation and that its leasing authority was now under the General Services Administration (GSA) and the handbook was undergoing further revisions to incorporate GSA leasing processes.
section_title: What GAO Recommends
paragraphs: In its April 2014 report, GAO recommended that VA update VHA's guidance for the leasing of outpatient clinics. VA concurred with GAO's recommendation and is taking actions to implement the recommendation.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work examining schedule  delays and cost increases at the Department of Veterans Affairs’ (VA)  major leased outpatient clinics. VA operates one of the nation’s largest  health-care delivery systems. To help meet the changing medical needs  of the veterans’ population, including a greater need for outpatient  services, VA has increasingly leased the facilities from which it provides  its health care services. VA believes that leasing the Veterans Health  Administration’s (VHA) medical facilities rather than owning them allows  VA to provide more veterans with accessible health-care services and  gives it the flexibility to respond to changing service demands,  demographic shifts, and improvements in medical technology.  Depending on the facility’s size and scope of services, VA’s outpatient  clinics can provide primary care; dental care; pharmacy, laboratory, and  radiology services; nutritional medicine; women’s health care; mental  health and suicide prevention services; and other types of specialty care.  As of November 2013, VHA’s leasing program had a long-term liability of  $5.5 billion and growing with a total of 1,889 leases.
At the time of our work, VA was required to submit a prospectus to  Congress for all major medical-facility leases and construction projects.  VHA is responsible for developing the requirements for build-to-suit and  remodeled lease facilities. The Office of Construction and Facilities  Management’s (CFM) Office of Real Property Service (RPS) is  responsible for acquiring land and leasing space for the construction of  medical and medically related facilities for VA, and provides guidance to  regional and local VA offices regarding real property.
This testimony discusses VA’s leasing management issues, specifically:  1.  the extent to which schedule and costs changed for selected VA  outpatient clinics since they were first submitted to Congress and the  factors that have contributed to any changes, and  2.  the actions, if any, VA has taken to improve its leasing practices for  outpatient clinics and any opportunities that may exist for VA to  improve its management of project schedules and costs.
This testimony is based on our April 2014 report on VA’s major leased  outpatient clinics along with selected updates conducted in August and  October 2014 to obtain information from VA on actions it has taken to  address GAO’s prior recommendation. In that report, we discuss 41  current major medical leases that are outpatient clinic projects for which a  prospectus had been submitted to Congress, as required by law. The  total contract value of these 41 projects is $2.5 billion. The prospectuses  for these projects were submitted to Congress from 1997 to 2011. We  reviewed VA data as of January 2014 on each of these projects. We  reviewed and analyzed the original cost estimate and completion date  from when a project’s prospectus was first submitted to Congress and the  project’s current status. To examine specific outpatient projects in greater  detail, we selected 11 clinic projects in 8 locations: (1) Jacksonville,  Florida; (2) Baltimore, Maryland; (3) Las Vegas, Nevada (four facilities);  (4) Austin, Texas; (5) McAllen, Texas; (6) Corpus Christi, Texas; (7)  Parma, Ohio; and (8) Ft. Wayne, Indiana. We selected these projects and  locations based on the following criteria: (1) projects status; (2) project  costs; (3) scope and cost changes; and (4) schedule delays. We  reviewed VA’s leasing guidance and directives, VA’s Strategic Plan Fiscal  Year 2011 to 2015, and other relevant documents. In addition, we  reviewed relevant prior GAO reports, Office of Management and Budget  guidance on leasing practices, and relevant legislation pertaining to VA’s  leasing authority and amounts appropriated for these projects. We  interviewed VA officials and representatives from private companies  involved in VA leasing projects. The work on which this statement is  based was conducted from May 2013 to April 2014 in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to reasonable basis for our findings and conclusions based on  our audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings and conclusions based on our audit  objectives. For a more detailed explanation of our scope and  methodology, see the April 2014 report.
subsections: section_title: Project Delays and Cost Increases for Outpatient Leases Mostly Occurred in the Planning Stages Prior to VA Entering into the Lease Agreement
subsections: section_title: Project Delays
paragraphs: Our April 2014 report noted that VA has experienced substantial delays in  executing new outpatient-clinic lease projects; nearly all of the delays  occurred in the planning stages prior to entering into a lease agreement  with the developer. Specifically, we found that 39 of the 41 outpatient- clinic projects for which a prospectus was submitted experienced  schedule delays, ranging from 6 months to 13.3 years, with an average  delay of 3.3 years, while 2 projects experienced schedule time decreases.  Our data analysis showed that 94 percent of these delays occurred in the  planning stages prior to entering into the lease agreement. For all but one  of the projects that experienced a delay, the delay occurred during the  pre-lease agreement stage. We also compared the length of delays that  occurred during the pre-lease agreement stage to the length of delays  that occurred once a lease agreement was entered into with the  development firm. We found that the average delay during the pre-lease  agreement stages for all 41 projects totaled nearly 3.1 years. Conversely,  the average project delay once a lease agreement was finalized totaled  approximately 2.5 months, and 11 outpatient-clinic projects actually  experienced schedule decreases during this stage. VA officials at 6 of the  11 outpatient-clinic projects selected for detailed review mentioned that  the large majority of schedule delays occur during the planning stages  prior to entering into a lease agreement.
For the 41 lease projects we reviewed, we found that several factors  contributed to delays:
VHA’s late or changing requirements: According to data we analyzed  and VA officials we interviewed, late or changing VHA requirements  were the most common reasons for delays. Requirements can pertain  to facility size, types of treatment rooms, types of medical equipment,  electrical voltage needs, and other details. We found in many  instances, either that CFM either did not receive VHA’s requirements  on time or that VHA changed its requirements during the solicitation of  offers, necessitating a re-design that affected the schedule. In  evaluating VA data, we found that 23 of the 41 leasing projects (56  percent) experienced delays because VHA was late in submitting  space requirements to CFM, or VHA changed space requirements  and thus the scope of the project. For example, the size of the  Jacksonville outpatient clinic had increased by 29 percent, and the  Austin outpatient-clinic site we visited had increased by 36 percent  from the time the prospectuses for these projects were submitted to  Congress to the time they were completed.
Site Selection Challenges: In analyzing VA data, we found that 20 of  the 41 outpatient-clinic projects we reviewed (49 percent) experienced  delays due to difficulties in locating or securing a suitable site. For  example, an increase in scope to the Jacksonville project resulted in a  larger building design that then required more land. To accommodate  these changes, the landowner worked to acquire additional properties  around the already selected site. Although the developer was  ultimately successful in obtaining additional land for the project, this  process led to delays. According to VA officials, prior to entering into  the lease agreement, there were delays associated with difficult  negotiations with the developer. However, the officials said that the  negotiations resulted in keeping project costs lower. In addition, there  were significant environmental clean-up requirements at the site,  requirements that needed to be satisfied before construction began.  The original site’s location was obtained in December 2002, but the  larger site was not obtained until December 2009, a delay of 7 years.
Outdated Guidance: At the sites we reviewed, we found that outdated  policy and guidelines resulted in challenges for VA staff to complete  leasing projects on time. For example, officials from the four Las  Vegas outpatient sites we visited stated that VA’s policies for  managing leases seem to change for each project, creating  uncertainty regarding CFM job responsibilities.
section_title: Project Cost Increases
paragraphs: In addition to substantial delays, our April 2014 report noted that VA also  experienced cost increases to its outpatient-clinic projects when  compared to the costs in the projects’ prospectuses. VA provided cost  data for its outpatient-clinic lease projects in January 2014. For the 31  projects with complete cost data, we found that “total first-year costs,”  when compared to the prospectus costs, increased from $153.4 million to  $172.2 million, an increase of nearly $19 million (12 percent). However,  for the 31 projects, the total “prospectus first-year rent” was estimated at  $58.2 million, but the total awarded first-year rent for these projects  equaled $92.7 million as of January 2014, an increase of $34.5 million (59  percent).because the department must pay the higher rent over the lifetime of the  lease agreement. For example, all 31 VA lease projects included in this  cost analysis have lease terms of 20 years, and the increase in rent must  be paid for the duration of the contract. Although first year’s rents  increased for the 31 projects—increasing overall total costs—VA’s total  “build-out” costs were lower than reported in the projects’ prospectuses.  Build-out costs are one-time, lump-sum payments VA makes to  developers for special purpose, medically related improvements to  buildings when VA accepts the projects as completed. VA officials said  the decrease in build-out costs from those originally estimated in the  prospectuses was due to the national downturn in the commercial real  estate market starting in 2008. The downturn created more competition  among developers and helped VA realize more competitive pricing on its  medical build-out requirements than was anticipated in the prospectuses.
Such increases in rent have long- term implications for VA,  The causes of the total cost increase can be attributed primarily to  increases in the projects’ awarded first-year rent due to the schedule  delays and changes to the design or scope of a project that we discussed  previously. Schedule delays can increase costs because of changes in  the local leasing market during the period of the delay. Therefore, when  VA estimates costs as part of the prospectuses submitted to Congress in  the annual budget request, an automatic annual escalation is applied to  each project to account for rising costs and market forces that make  construction and leased space more expensive over time. VA officials  said the escalation ensures that the authorized cost of the project is in  line with the realities of the real estate and construction markets. Because  VA annually adjusts a project’s cost by an increase of 4 percent for each  year the project is delayed, project delays directly result in cost increases.  Additionally, we found that projects we reviewed increased in total size by  203,000 square feet. Changes in a project’s size expand the scope of the  project, requiring design changes, which can result in schedule delays,  further adding to costs.
section_title: VA Has Taken Some Actions to Improve Its Leasing-Management Practices for Outpatient Clinics; However, Its Guidance Could Be Improved
paragraphs: Our April 2014 report found that VA has made some progress in  addressing issues with its major medical-facilities leasing program.  Specifically, in April 2012, VA formed a high level council, the  Construction Review Council, to oversee the department’s capital asset  program, including leasing. Based on the findings of the council and our  work for the April 2012 report on VA’s major leased outpatient clinics, VA  is planning the following improvements to the major medical-facilities- leasing program: requiring detailed design requirements earlier in the  design process to help avoid the delays, scope changes, and cost  increases. However, these improvements were in the early stages, and  their success will depend on how quickly and effectively VA implements  them.
Requiring detailed design requirements earlier in the facility-leasing  process. VA issued a guidance memorandum in January 2014  directing that beginning with fiscal year 2016, VA should develop  detailed space and design requirements before submitting the  prospectus to Congress:
Developing a process for handling scope changes. In August 2013,  VA approved a new concept to better address scope changes to both  major construction and congressionally authorized lease projects.  According to VA officials, among other improvements, this process  ensures a systematic review of the impact of any ad-hoc changes to  projects in scope, schedule, and cost;
Plans to provide Congress with clearer information on the limitations  associated with costs of proposed projects. VA’s 2014 budget  submission did not clarify that its estimates for future lease projects  included only one year’s rent, which does not reflect the total costs  over the life of the leases, costs that VA states cannot be accurately  determined in early estimates. VA officials clarified this estimate  beginning with VA’s 2015 budget submission.
However, we also found that while VA has updated and refined some  guidance for specific aspects of lease projects—including design  guidance for the construction of outpatient clinics—to better support VA’s  leasing staff and prevent project delays, it has not updated its VHA  guidance for clinic leasing (used by staff involved with projects) since  2004. We reviewed VHA’s 2004 Handbook 1006.1, Planning and  Activating Community-Based Outpatient Clinics, VHA’s overall guidance  for leasing outpatient clinics. This Planning Handbook is intended to  establish consistent planning criteria and standardized expectations. The  Planning Handbook is widely used by VA officials and provides important  guidance, in particular, clarifying the differing responsibilities of officials  and departments and the legal authorities of the leasing process.  However, this guidance is out of date and no longer adequately reflects  the roles and responsibilities of the various VA organizations involved in  major medical-facilities-leasing projects. According to VA officials, the  close collaboration of these organizations is necessary for a successful  lease project.
As of November 2013, VHA’s leasing program has a long-term liability of  $5.5 billion, but its guidance on outpatient clinics is a decade old and no  longer relevant. Standards for Internal Control in the Federal Government  calls for federal agencies to develop and maintain internal control  activities, which include policies and procedures, to enforce  management’s directives and help ensure that actions are taken to  address risks. Such activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of  government resources and for achieving effective results. The lack of  updated guidance can affect coordination among stakeholders and could  contribute to schedule delays and cost increases. Using outdated  guidance can lead to miscommunications and errors in the planning and  implementing of veterans’ leased clinics. Furthermore, the policy,  planning criteria, and business plan format in the Planning Handbook  were developed based on an old planning methodology that VA no  longer uses; thus, the guidance does not reflect VA’s current process.
In our April 2014 report, we recommended that the Secretary of Veterans  Affairs update VHA’s guidance for leasing outpatient clinics to better  reflect the roles and responsibilities of all VA staff involved in leasing  projects. VA concurred with our recommendation and reported that it had  created a VHA Lease Handbook that was in the concurrence process to  address the roles and responsibilities of staff involving in leasing projects.  In October 2014, VA reported that it had revised its clinic leasing  guidance in response to GAO’s recommendation and that its leasing  authority was now under the General Services Administration (GSA) and  the handbook was undergoing further revisions to incorporate GSA  leasing processes.
Chairman DeSantis and Ranking Member Lynch, 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.
If you have any questions about matters discussed in this testimony,  please contact Dave Wise, (202) 512-2834 or WiseD@gao.gov. Other key  contributors to this testimony include Ed Laughlin, Assistant Director;  Nelsie Alcoser; George Depaoli; Jessica Du; Raymond Griffith; Amy  Rosewarne; and Crystal Wesco.
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