VA Health Care: Preliminary Information on the Joint Venture Proposal for VA's Charleston Facility
Released: 2005-09-26T00:00:00

Letter

Background

VA manages a vast medical care network for veterans, providing health care services to about 5 million beneficiaries. The estimated cost of these services in fiscal year 2004 was $29 billion. According to VA, its health care system now includes 157 medical centers, 862 ambulatory care and community-based outpatient clinics (CBOC), and 134 nursing homes. VA health care facilities provide a broad spectrum of medical, surgical, and rehabilitative care. The management of VA’s facilities is decentralized to 21 regional networks referred to as Veterans Integrated Service Networks (networks). The Charleston facility is part of Network 7, or the Southeast Network.

The Charleston medical facility is a part of the VA health care network and has served the medical needs of Charleston area veterans since it opened in 1966. The Charleston facility is a primary, secondary, and tertiary care facility. (See fig. 1.) The facility consists of more than 352,000 square feet with 117 medical and surgical beds and 28 nursing home care unit beds; according to VA officials, the average daily occupancy rate is about 80 percent. The outpatient workload was about 460,000 clinic visits in fiscal year 2004. VA employs about 1,100 staff at the Charleston facility, which has an annual operating budget of approximately $160 million.

VA’s Charleston medical facility is affiliated with MUSC. MUSC is the main source of the Charleston facility’s medical residents, who rotate through all major VA clinical service areas. VA also purchases approximately $13 million in medical care services from MUSC, including gastroenterology, infectious disease, internal medicine, neurosurgery, anesthesia, pulmonary, cardiovascular perfusion, and radiology services. In addition, VA has a medical research partnership with MUSC for a mutually supported biomedical research facility, the Thurmond Biomedical Research Center.

MUSC operates a 709 licensed bed acute care hospital in Charleston that also provides primary, secondary, and tertiary services. The services available through MUSC span the continuum of care with physician specialists and subspecialists in medicine, surgery, neurology, neurological surgery, psychiatry, radiology, and emergency medicine, among other specialties. During a 12-month period ending on June 30, 2003, MUSC admitted 28,591 patients (including newborns), representing an occupancy rate of approximately 78 percent of available beds. Outpatient activity for the same period included 6,802 same-day surgeries, 551,914 outpatient visits, and 35,375 emergency visits. MUSC’s net patient service revenue for the fiscal year ending on June 30, 2003, was about $559 million.

VA Determined That the Charleston Facility Is in Good Condition and Is Currently Investing in Minor Renovations

VA and the CARES Commission concluded that the Charleston facility is in overall good condition and, with relatively minor renovations, can continue to meet veterans’ health care needs in the future. VA conducts facility condition assessments (FCA) at its facilities every 3 years on a rotating basis. FCAs evaluate the condition of a VA facility’s essential functions—electrical and energy systems, accessibility, sanitation and water—and subsequently estimate the useful and remaining life of those systems. The Charleston facility’s most recent FCA was conducted in 2003, and this assessment showed that the facility currently is in overall good condition. According to VA officials, the facility’s current condition is a result of targeted capital investments. In particular, VA invested about $11.6 million in nonrecurring maintenance projects over the last 5 years. Such projects include installing a new fire alarm system, replacing roofing, painting the exterior of the building, and upgrading interior lighting.

The CARES Commission did not recommend replacing VA’s facility in Charleston as it did with facilities in some other locations. In assessing the capital asset requirements for the Charleston facility, the Commission relied on the 2003 FCA and projections of inpatient and outpatient service demands through 2022, among other things. These projections indicate that demand for inpatient beds at VA’s facility in Charleston will increase by 29 percent from 2001 to 2022, while demand for outpatient services will increase by 69 percent during the same period. Although the CARES Commission did not recommend a new facility in Charleston, it did call for renovating the nursing home units and the inpatient wards. In his response to the Commission’s recommendations, the Secretary agreed to make the necessary renovations at the Charleston facility.

VA officials at the Charleston medical facility have a number of ongoing and planned capital maintenance and improvement projects to address the CARES Commission recommendations and to maintain the condition of the current medical center. For example, two minor capital improvements—totaling $6.25 million—are currently under construction. These projects include a third floor clinical addition, which will add 20,000 square feet of space to the medical center for supply processing and distribution, rehabilitation medicine, and prosthetics; and the patient privacy project, which will renovate the surgical in-patient ward to provide private and semiprivate bathrooms for veterans.

Planned capital maintenance and improvements projects over the next 10 years include electrical upgrades, renovation of several wards to address patient privacy concerns, renovation of operating rooms and the intensive care units, and the expansion of the specialty care clinics. VA officials estimate that the total cost for all planned capital maintenance and improvement projects is approximately $62 million.

In addition to the capital improvement projects at the medical center in Charleston, VA is currently constructing a CBOC, in partnership with the Navy, at the Naval Weapons Station in Goose Creek, South Carolina. The new clinic will be a joint VA-Navy facility and will help VA address the projected increase in demand for outpatient services. The new clinic— called the Goose Creek CBOC—is scheduled to open in 2008 and will serve a projected 8,000 patients who are currently served by VA’s Charleston facility. VA estimates its investment in the planning, design, and construction of the Goose Creek CBOC will be about $6 million.

Limited Collaboration between VA and MUSC on a Joint Venture Facility Characterized Negotiations until Recently

VA and MUSC have collaborated and communicated to a limited extent on a proposal for a joint venture medical center over the past 3 years. As a result of the limited collaboration, negotiations over the proposal stalled. In August 2005, however, initial steps were taken to move the negotiations forward. Specifically, four workgroups were created—which include both VA and MUSC officials—and tasked with examining critical issues related to the proposal.

Limited Communication and Collaboration Have Hampered Negotiations over MUSC’s Joint Venture Proposal

To meet the needs of a growing and aging patient population, MUSC has undertaken an ambitious five-phase construction project to replace its aging medical campus. Construction on the first phase began in October 2004. Phase I includes the development of a four-story diagnostic and treatment building and a seven-story patient hospitality tower, providing an additional 641,000 square feet in clinical and support space—156 beds for cardiovascular and digestive disease services, 9 operating rooms, outpatient clinics with a capacity of 100,000 visits, and laboratory and other ancillary support services. Phase I also includes the construction of an atrium connecting the two buildings, a parking structure, and a central energy plant. Initial plans for phases II through V include diagnostic and treatment space and patient bed towers. As shown in figure 2, phases IV and V would be built on VA property. In particular, phase V would be built on the site of VA’s existing medical center. MUSC has informed VA about its proposed locations for these facilities. According to MUSC officials, there are approximately 2 years remaining for the planning of phase II.

In November 2002, the President of MUSC sent a proposal to the Secretary of VA about partnering with MUSC in the construction and operation of a new medical center in phase II of MUSC’s construction project. Under MUSC’s proposal, VA would vacate its current facility and move to a new facility located on MUSC property to the south of phase I. MUSC also indicated that sharing medical services would be a component of the joint venture—that is, VA and MUSC would enter into sharing agreements to buy, sell, or barter medical and support services. VA and MUSC currently share some services—for example, VA purchases services for gastroenterology, infectious disease, and internal medicine. According to MUSC officials, the joint venture proposal would increase the level of sharing of medical services and equipment, which would create cost savings for both VA and MUSC. VA officials told us that the proposed joint venture between MUSC and VA is unprecedented—that is, should VA participate in the joint venture, it would be the first of its kind between VA and a medical education affiliate.

In response to MUSC’s proposal, VA formed an internal workgroup composed of officials primarily from VA’s Southeast Network to evaluate MUSC’s proposal. The workgroup analyzed the feasibility and cost effectiveness of the proposal and issued a report in March 2003, which outlined three other options available to VA: replacing the Charleston facility at its present location, replacing the Charleston facility on land presently occupied by the Naval Hospital in Charleston, or renovating the Charleston facility. The workgroup concluded that it would be more cost effective to renovate the current Charleston facility than to replace it with a new facility. This conclusion was based, in part, on the cost estimates for constructing a new medical center. In April 2003, the Secretary of VA sent a counterproposal to the President of MUSC, which indicated that VA preferred to remain in its current facility. The Secretary indicated, however, that if VA agreed to the joint venture, it would rather place the new facility in phase III—which is north of phase I—to provide better street access for veterans. (See fig. 3 for MUSC’s proposal and VA’s counterproposal.) In addition, the Secretary indicated that MUSC would need to provide a financial incentive for VA to participate in the joint venture. Specifically, MUSC would need to make up the difference between the estimated life-cycle costs of renovating the Charleston facility and building a new medical center—which VA estimated to be about $85 million—through negotiations or other means.

The MUSC President responded to VA’s counterproposal in an April 2003 letter to the Secretary of VA. In the letter, the MUSC President stated that MUSC was proceeding with phase I of the project and that the joint venture concept could be pursued during later phases of construction. The letter did not specifically address VA’s proposal to locate the new facility in phase III, nor the suggestion that MUSC would need to provide some type of financial incentive for VA to participate in the joint venture. To move forward with phase I, the MUSC President stated that MUSC would like to focus on executing an enhanced use lease (EUL) for Doughty Street. Although MUSC owns most of the property that will be used for phases I through III, Doughty Street is owned by VA and serves as an access road to the Charleston facility and parking lots. The planned facility for phase I would encompass Doughty Street. (See fig. 4.) Therefore, MUSC could not proceed with phase I—as originally planned—until MUSC secured the rights to Doughty Street. To help its medical affiliate move forward with construction, VA executed a EUL agreement with MUSC in May 2004 for use of the street. According to the terms of the EUL, MUSC will pay VA $342,000 for initial use of the street and $171,000 for each of the following eight years.

Although both entities successfully collaborated in executing the enhanced use lease for Doughty Street, limited collaboration and communication generally characterize the negotiations between MUSC and VA over the joint venture proposal. In particular, before this summer, VA and MUSC had not exchanged critical information that would help facilitate negotiations. For instance, MUSC did not clearly articulate to VA how replacing the Charleston facility, rather than renovating the facility, would improve the quality of health care services for veterans or benefit VA. MUSC officials had generally stated that sharing services and equipment would create efficiencies and avoid duplication, which would lead to cost savings. However, MUSC had not provided any analyses to support such claims. Similarly, as required by law, VA studied the feasibility of coordinating its health care services with MUSC, pending construction of MUSC’s new medical center. This study was completed in June 2004. However, VA officials did not include MUSC officials in the development of the study, nor did they share a copy of the completed study with MUSC. VA also updated its cost analysis of the potential joint venture this spring, but again, VA did not share the results with MUSC. Because MUSC was not included in the development of these analyses, there was no agreement between VA and MUSC on key input for the analyses, such as the specific price MUSC would charge VA for, or the nature of, the medical services that would be provided. As a result of the limited collaboration and communication, negotiations stalled—prior to August 2005, the last formal correspondence between VA and MUSC leadership on the joint venture was in April 2003. (See fig. 5 for a time line of key events in the negotiations between VA and MUSC.)

Recent Events Have Spurred Discussion and Collaboration Between VA and MUSC

On August 1, 2005, a congressional delegation visited Charleston to meet with VA and MUSC officials to discuss the joint venture proposal. After this visit, VA and MUSC agreed to establish workgroups to examine key issues associated with the joint venture proposal. Specifically, VA and MUSC established the Collaborative Opportunities Steering Group (steering group). The steering group is composed of five members from VA, five members from MUSC, and a representative from the Department of Defense (DOD), which is also a stakeholder in the local health care market. The steering group chartered four workgroups, and according to VA: The governance workgroup will examine ways of establishing organizational authority within a joint venture between VA and MUSC, including shared medical services.

The clinical service integration workgroup will identify medical services provided by VA and MUSC and opportunities to integrate or share these services.

The legal workgroup will review federal and state authorities (or identify the lack thereof) and legal issues relating to a joint venture with shared medical services.

The finance workgroup will provide cost estimates and analyses relating to a joint venture with shared medical services.

The workgroups will help VA and MUSC determine if the joint venture proposal is mutually beneficial. The workgroups are scheduled to provide weekly reports to the steering group and a final report to the steering group by October 28, 2005. The steering group is scheduled to submit a final report by November 30, 2005, to the Deputy Under Secretary for Health for Operations and Management and to the President of MUSC.

Joint Venture Proposal Raises a Variety of Issues

The possibility of participating in the joint venture raises a number of issues for VA to consider. The proposed joint venture presents a unique opportunity for VA to reevaluate how it provides health care services to veterans in Charleston. Our ongoing work, as well as our previous work on VA’s capital realignment efforts, cost-benefit analysis, organizational transformation, and performance management, however, suggests many issues to consider before making a decision about a joint venture, including governance, legal, and stakeholder issues. Some of these issues will be directly addressed by the workgroups, while others, such as the concerns of stakeholders, will not. In addition, some issues can be addressed through collaboration between VA and MUSC, while others may require VA to seek legislative remedies. Among the issues to explore are the following: Comparing appropriate options and assessing the costs and benefits of all options: According to Office of Management and Budget (OMB) guidelines on evaluating capital assets, a comparison of options, or alternatives, including the status quo, is critical for ensuring that the best alternative is selected. In its guidance, OMB encourages decision makers to consider the different ways in which various functions, most notably health care service delivery in this case, can be performed. OMB guidelines further state that comparisons of costs and benefits should facilitate selection among competing alternatives. The finance workgroup is examining the potential costs for shared services within a joint facility. However, it is unclear whether the workgroup will weigh the benefits and costs of a new facility against those of other alternatives, including maintaining the existing medical center.

VA will also need to weigh the costs and benefits of investing in a joint venture in Charleston against the needs of other VA facilities in the network and across the nation. VA did not include the Charleston facility on its list of highest priority major medical facility construction requirements for fiscal years 2004 through 2010. According to VA, the list of priorities, which includes 48 projects across the nation, aligns with existing CARES recommendations. Nevertheless, exploring the potential costs and benefits of a joint venture gives VA an opportunity to reexamine how it delivers health care services to the nation’s veterans and uses its affiliations with medical universities now and in the future. As we have stated in previous reports, given the nation’s long-term fiscal challenges and other challenges of the 21st Century, such reexaminations of federal programs are warranted. Moreover, as the CARES Commission noted, the potential joint venture between VA and MUSC is a possible framework for future partnerships.

Developing a governance plan that outlines responsibilities and ensures accountability: If VA and MUSC decide to enter into a joint venture for a new facility, they will need a plan for governing the facility. Any governance plan would have to maintain VA’s direct authority over and accountability for the care of VA patients. In addition, if shared medical services are a component of a joint venture between MUSC and the VA, the entities will need a mechanism to ensure that the interests of the patients served by both are protected today and in the future. For instance, VA may decide to purchase operating room services from MUSC. If the sharing agreement was dissolved at some point in the future, it would be difficult for VA to resume the independent provision of these services. Also, if MUSC physicians were to treat VA beneficiaries, or VA physicians were to treat MUSC patients, each entity would need a clear understanding of how to report health information to its responsible organization. Therefore, a clear plan for governance would ensure that VA and MUSC could continue to serve their patients’ health care needs as well as or better than before.

Identifying legal issues and seeking legislative remedies: The proposed joint venture raises a number of complex legal issues depending on the type of joint venture that is envisioned. Many of the legal issues that will need to be addressed involve real estate, construction, contracting, budgeting, and employment. The following are among some of the potential issues relating to a joint venture that VA previously identified: What type of interest will VA have in the facility? If MUSC is constructing the facility on MUSC property, will VA be entering into a leasehold interest in real property or a sharing agreement for space, and what are the consequences of each? If the facility is to be located on VA property, will it involve a land transfer to MUSC or will VA lease the property to MUSC under its authority to enter into a EUL agreement? What are the advantages and disadvantages of these options?

Because MUSC contracting officials do not have the authority to legally bind the VA, how would contracting for the services and equipment be handled?

The legal workgroup is currently identifying VA’s and MUSC’s legal authorities, or lack thereof, on numerous issues relating to entering into a joint venture. Should VA decide to participate in the joint venture, it may need to seek additional authority from the Congress.

Involving stakeholders in the decisionmaking process: Participating in a joint venture medical center, particularly if it includes significant service sharing between VA and MUSC, has significant implications for the medical center’s stakeholders, including VA patients, VA employees, and the community. These stakeholders have various perspectives and expectations—some of which are common to the different groups, while others are unique. For example, union representatives and VA officials whom we spoke to indicated that VA patients and employees would likely be concerned about maintaining the quality of patient care at a new facility and access to the current facility during construction. Union representatives also said the employees would be concerned about the potential for the loss of jobs if VA participated in the joint venture and purchased additional services from MUSC. As VA and MUSC move forward in negotiations, it will be important for all stakeholders’ concerns to be addressed.

Developing a system to measure performance and results: If VA and MUSC decide to jointly build and operate a new facility in Charleston, it will become, as noted in the CARES Commission report, a possible framework for future partnerships between VA and other medical universities. As a result, a system for measuring whether the new joint venture facility is achieving the intended results would be useful. In our previous work on managing for results, we have emphasized the importance of establishing meaningful, outcome-oriented performance goals. In this case, potential goals could be operational cost savings and improved health care for veterans. If the goals are not stated in measurable terms, performance measures should be established that translate those goals into concrete, observable conditions. Such measures would enable VA and other stakeholders to determine whether progress is being made toward achieving the goals. This information could not only shed light on the results of a joint venture in Charleston, but it could also enable VA to identify criteria for evaluating other possible joint ventures with its medical affiliates in the future. It would also help Congress to hold VA accountable for results.

Concluding Observations

In conclusion, Mr. Chairman, we have stated over the past few years that federal agencies, including VA, need to reexamine the way they do business in order to meet the challenges of the 21st century. To address future health care needs of veterans, VA’s challenge is to explore alternative ways to fulfill its mission of providing veterans with quality health care. The prospect of establishing a joint venture medical center with MUSC presents a good opportunity for VA to study the feasibility of one method—expanding its relationships with university medical school affiliates to include the sharing of medical services in an integrated facility. This is just one of several ways VA could provide care to veterans. Evaluating this option would involve VA officials, working in close collaboration with MUSC officials, weighing the benefits and costs as well as the risks involved in a joint venture against those of other alternatives, including maintaining the current medical center. Determining whether a new facility for Charleston is justified in comparison with the needs of other facilities in the VA system is also important. Until these difficult, but critical, issues are addressed, a fully-informed final decision on the joint venture proposal cannot be made.

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

Contact and Acknowledgments

For further information, please contact Mark Goldstein at (202) 512-2834. Individuals making key contributions to this testimony include Nikki Clowers, Daniel Hoy, Jennifer Kim, Edward Laughlin, Donna Leiss, James Musselwhite Jr., Terry Richardson, Susan Michal-Smith, and Michael Tropauer.

Related GAO Products

VA Health Care: Key Challenges to Aligning Capital Assets and Enhancing Veterans’ Care. GAO-05-429. Washington, D.C.: August 5, 2005.

Federal Real Property: Further Actions Needed to Address Long-standing and Complex Problems. GAO-05-848T. Washington, D.C.: June 22, 2005.

VA Health Care: Important Steps Taken to Enhance Veterans’ Care by Aligning Inpatient Services with Projected Needs. GAO-05-160. Washington, D.C.: March 2, 2005.

High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005.

VA Health Care: Access for Chattanooga-Area Veterans Needs Improvements. GAO-04-162. Washington, D.C.: January 30, 2004.

Budget Issues: Agency Implementation of Capital Planning Principles Is Mixed. GAO-04-138. Washington, D.C.: January 16, 2004.

Federal Real Property: Vacant and Underutilized Properties at GSA, VA, and USPS. GAO-03-747. Washington, D.C.: August 19, 2003.

VA Health Care: Framework for Analyzing Capital Asset Realignment for Enhanced Services Decisions. GAO-03-1103R. Washington, D.C.: August 18, 2003.

Department of Veterans Affairs: Key Management Challenges in Health and Disability Programs. GAO-03-756T. Washington, D.C.: May 8, 2003.

VA Health Care: Improved Planning Needed for Management of Excess Real Property. GAO-03-326. Washington, D.C.: January 29, 2003.

Major Management Challenges and Program Risks: Department of Veterans Affairs. GAO-03-110. Washington, D.C.: January 2003.

High-Risk Series: Federal Real Property. GAO-03-122. Washington, D.C.: January 2003.

VA Health Care: VA Is Struggling to Address Asset Realignment Challenges. GAO/T-HEHS-00-88. Washington, D.C.: April 5, 2000.

VA Health Care: Improvements Needed in Capital Asset Planning and Budgeting. GAO/HEHS-99-145. Washington, D.C.: August 13, 1999.

VA Health Care: Challenges Facing VA in Developing an Asset Realignment Process. GAO/T-HEHS-99-173. Washington, D.C.: July 22, 1999.

VA Health Care: Capital Asset Planning and Budgeting Need Improvement. GAO/T-HEHS-99-83. Washington, D.C.: March 10, 1999.

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