In 1995, VA began transforming its delivery and management of health care to expand access to care and increase efficiency. As part of this transformation VA decentralized decision-making and budgeting authority to 22 Veterans Integrated Service Networks, which became responsible for managing all VA health care. The networks and their health care locations became responsible for responding to changing inpatient food service needs and for maintaining or improving quality. Since 1995, the networks have focused on providing care in the most appropriate setting by following headquarters’ guidance and responding to performance measurement incentives. This has resulted in an increase in outpatient care and a decrease in inpatient care. The inpatient average daily census numbers have declined by 35 percent during this period (see fig. 1). Because the decreased number of inpatients meant less need for food services, VA downsized its inpatient food service staff by about 22 percent as a result of actions taken by networks and inpatient locations (see fig. 2). Unlike most health care systems, VA divides its food service operations into inpatient and retail operations, usually with separate kitchens and staff at each inpatient location. The NFS program, funded by appropriations, is responsible for ensuring that VA’s inpatients receive quality nutrition as an integrated part of their health care. VCS is generally responsible for providing food and other retail services to outpatients, visitors, and employees at VA’s health care delivery locations. Although the law authorizes VCS to receive appropriations, VCS has operated for many years solely on funds earned from sales. As with direct health care services, VA’s networks have also explored ways to improve services that support health care, such as food service operations. While VA networks have the option to focus exclusively on improving the efficiency of in-house provision of food service, they also have the option of competing their in-house operations versus contractors to improve efficiency. VA could do this through the Office of Management and Budget (OMB) Circular A-76 process. In the A-76 process, the government identifies the work to be performed—described in the performance work statement—and prepares an in-house cost estimate, based on its most efficient organization, to compare with the best offer from the private sector. To enhance the efficiency of food service, VA has consolidated food production (the cooking and preparation of food) for 28 inpatient locations into kitchens at 10 VA inpatient locations. One of these consolidations took place in the Central Texas Healthcare System and resulted in elimination of food production at two facilities. This example illustrates key elements of the consolidation process. Before consolidation, the Temple, Waco, and Marlin locations each produced their own food for average daily inpatient populations of 664, 679, and 74, respectively. After consolidation, food for Waco and Marlin was produced at Temple because adequate space was available and driving distances (the time needed to transport food) to the receiving locations were less than 90 minutes. The consolidation was phased in over about 3 years and completed in 1998. The consolidation required one-time equipment purchases of about $1 million and resulted in recurring annual labor savings of about $1.3 million.Labor savings were achieved by a reduction of 32 employees, primarily through attrition and buyouts. The Central Texas Healthcare System produces food in one location and transports it to other locations using an advance food preparation and delivery system. Food is prepared in advance and chilled for serving up to 5 days later. The chilled food can be transported in refrigerated trucks from one location to another without losing freshness or becoming unsafe. The food is reheated at the location where it is served. VA reports that patient satisfaction at the Central Texas Health Care System is higher, as measured by patient surveys, since consolidation. VA’s NFS dietitians continue to have responsibility for ensuring food quality and that the nutrition needs of patients are met. Additional VA health care regions provide opportunities for consolidation. For example, four VA locations in the Chicago area are within a 1-hour drive of one another (see fig. 3); in fact, three are within 20 minutes of each other. Yet all four continue to prepare their own food for inpatients. The Chicago network is developing plans for food consolidation for some of these locations. Chicago (Lakeside) Chicago (Westside) Overall, VA currently has 63 unconsolidated production locations within 90 minutes’ drive of another production location.Our analysis suggests that VA could increase its efficiency by consolidating food production for these 63 locations into 29 production locations (see fig. 4).These consolidations could save an estimated $12 million annually from a reduction of 348 employees, with as many as 38 positions eliminated in a single location. To achieve these savings, we estimate that VA may have to make a one-time investment of an estimated $11 million to purchase advance food preparation and delivery equipment. (One-time expenditures are held to this amount because 24 of the potential consolidation locations already own the advance food delivery equipment, which makes up the bulk of equipment costs.) Making the changes required to consolidate food production requires management commitment to a process that may take several years and much effort to achieve but one that could yield significant savings. Network officials indicated in our survey of VA’s health care networks that 29 production locations are considering or planning to consolidate food production. In commenting on a draft version of this report, VA stated that networks 1 (Boston), 3 (Bronx), 8 (Bay Pines), 12 (Chicago), and 22 (Long Beach) have conducted feasibility studies to consider consolidated production. VA has already consolidated some food production locations in these networks. However, these networks could potentially consolidate 14 additional locations into 7 locations. VA’s actual savings from consolidations could exceed our estimates for two reasons. First, VA’s Central Texas Health Care System consolidation, from which we obtained a benchmark for estimating potential savings, does not appear to have yet achieved its full savings potential, which suggests that our savings may be understated. VA officials have indicated that several food service positions will not be filled when they become vacant. Some positions were retained to minimize involuntary separation of employees. Second, we used a 90-minute driving distance to determine potential consolidations and it seems possible that VA could elect to use greater distances. For example, the VA facility in Dayton is preparing and delivering food as far as Butler, Pennsylvania—a 6-hour drive. The Dayton facility has technologies that can keep food safely chilled for more than 30 days. In addition, two facilities in Texas that are about a 2-hour drive from one another are currently in the process of consolidating their food systems. Using greater travel distances could allow more facilities to be consolidated, thereby increasing cost savings. VA can save millions of dollars in labor costs by employing VCS workers, rather than NFS workers, to provide inpatient food service. These savings can be achieved because these workers are paid, on average, about 30 percent less than NFS wage grade employees. The wage differences between the two result from differences in how wage rates for their respective pay schedules are determined.VCS job descriptions are similar to those of NFS and both receive similar training when providing inpatient food services. VCS workers are federal government employees paid under the Non Appropriated Funds Regular Wage Rate Schedule. NFS workers are also federal government employees but are paid under the Federal Wage System Regular and Special Production Facilitating Wage Rate Schedule. Both VCS and NFS employees have the same standard government benefit coverage. VA is able to employ VCS workers to provide inpatient services through NFS agreements with VCS under the Economy Act. Recently, nine VA locations began to employ VCS workers rather than NFS workers to provide inpatient food services (see app. II for a list of these locations). In some of these locations, VCS employees provide all inpatient food services; in others VCS workers are only beginning to be included in inpatient food services. In all cases, NFS dietitians continue to ensure food service quality. Before these changes to VCS inpatient food service, VCS had only provided retail food service at these locations. Three of the locations converting to VCS labor were at Marion, Illinois, and the Jefferson Barracks and John Cochran locations in St. Louis, Missouri. These examples illustrate different stages of VCS conversion and different sizes of health care facilities. VA began its VCS conversion in Marion, Illinois, in 1997. Today, Marion employs mostly VCS workers to serve an average daily census of 95 patients. VA reports that patient satisfaction is higher, as measured by patient surveys, than it was before and that NFS dietitians continue to be responsible for quality. When the conversion to VCS employees is complete, VA estimates that $375,000 a year could be saved through reductions in wage costs. NFS workers have left Marion inpatient food service through normal attrition, including retirement, moving to other VA jobs, or leaving VA voluntarily. Personnel changes were monitored by the facility’s Labor Management Partnership Council, which included union representation. Those employees who remain retain their NFS salaries. St. Louis’s two locations began VCS integration in 1999. Today the consolidated St. Louis locations serve an average daily census of 301 inpatients by employing NFS employees and a VCS manager. Other VCS employees are being recruited. When fully implemented, VA estimates that St. Louis could save $803,000 in wage costs annually. St. Louis expects to follow Marion’s experience in protecting current NFS employees’ job security and salary and phasing in VCS conversion. Our analysis suggests that VA could lower labor costs by an estimated $67 million annually (in addition to the estimated $12 million consolidation savings discussed earlier) if less-expensive VCS workers are employed in place of NFS workers at 166 additional locations. The Marion and St. Louis experiences suggest that the full extent of these savings would be realized over a number of years as VCS conversion is phased in. However, some savings can be achieved in the first year of implementation. Currently, NFS wage grade workers provide inpatient food services at these 166 locations. VCS employees could cook and prepare food, distribute food to patients, and retrieve and wash dishes, trays, and utensils for inpatients at these locations while NFS dietitians continue to assure quality. Three locations—Kansas City, Leavenworth, and Topeka—are scheduled to begin conversion to VCS inpatient food service provision. In our survey of VA health care networks, VA officials indicated that another location is considering conversion. Making the changes required to convert to VCS inpatient food service provision requires management commitment to a process that may take several years and much effort to achieve but has the potential for significant cost savings. Actual savings may vary from our estimates because of many local factors at each inpatient location. To determine actual savings through the use of VCS employees, VA would need to conduct studies of each inpatient food location and weigh alternatives for providing the lowest-cost food service while maintaining quality. VA would also need to incorporate in this process consideration of the effect such changes could have on other VA priorities, such as maintaining job opportunities for veterans and compensated work therapy patients. A key element of such a study is recognition that VA’s inpatient food service operations are developing along the lines of other hospital food service operations, which are changing the nature of the hospital food service industry. This includes the use of more pre-prepared food products, less need for specialized cooking skills, and more reliance on computer ordering for preparation and placement of food on patient trays. All of these processes reduce both the need for a higher-skilled work force and the degree of training needed to successfully produce and distribute hospital food, whether VA inpatient food service is provided by NFS or VCS. NFS and VCS managers agree that employees can be trained more quickly today than in the past to provide inpatient food services. VCS managers also believe that higher turnover rates for lower-paid employees would not adversely affect services. VA uses private contractors for inpatient food services at two inpatient locations—Sodexho Marriott at its Anchorage domiciliary and SkyChef at the Honolulu nursing home. These locations have no VCS retail food services and have only a long-term-care inpatient mission. In addition, both locations began inpatient food services with a contractor rather than with NFS employees. While VA has used competitive sourcing only to a limited extent, our analysis suggests that VA may be able to lower costs by determining if in- house or private sector provision of food services is more cost effective. VA could realize additional savings by competing, through the use of OMB’s Circular A-76, the costs of government provision of these services versus the costs of private-sector provision. Our work at the Department of Defense shows that, by competitive sourcing under OMB Circular A-76, costs decline through increased efficiencies whether the government or the private sector wins the competition to provide services.This work indicates that savings are probable for VA, but we cannot estimate potential savings from competitive sourcing because of uncertainty regarding the availability of interested contractors at each VA location, the price of contractor services, and the extent to which VA food services units are able to decrease their operating costs in a competitive process. Savings from competitive sourcing might be higher if VA expanded competitive sourcing to include locations that combine NFS inpatient and VCS retail operations. When food contractors provide services to non-VA hospitals, they usually operate both inpatient and retail as one operation and most of their profits come from retail sales, according to food service contractors with whom we spoke. However, VA may not offer the most attractive business opportunity for food contractors for two reasons. First, VCS opposes consideration of contracting for retail food services because it uses profits from a minority of profitable locations to subsidize operations at the remainder. Moreover, VCS believes that some of its other retail activities, such as vending of toiletries and personal articles that are not generally provided by food service contractors, are not viable without retail food. This is important to VCS because it receives no appropriations and funds its operations based on revenues earned. Second, the small size of VA inpatient workloads at many locations may be less attractive to contractors because there is less opportunity to spread fixed costs over higher volume. For example, 27 percent of VA locations have an average daily census of less than 100 inpatients, and 56 percent have an average daily census of less than 200. However, it may be possible for potential contractors to combine food services at smaller locations with services at other nearby VA and non-VA locations to generate higher volume. To achieve savings through competitive sourcing, VA would need to conduct studies of each inpatient food location to weigh alternatives for providing the lowest-cost food service while maintaining quality. In these studies, VA would need to consider the effect such changes could have on other VA priorities, such as maintaining job opportunities for veterans and compensated work therapy patients. To date, however, VA has done little to explore either its own experience with using contractors or contractor interest. Although fostering competition among government and private contractors to provide food services can be a time-consuming process, it offers opportunities to create more efficient and less costly operations when in-house organizations win the competition, or savings when private competitors win. This process can be demanding, however, and requires strong management commitment to achieve. VA could foster competition among government and private providers in the provision of inpatient food service by using the competitive process of OMB’s Circular A-76. VA could compete all its food service operations or any part of these services at each location. VA could consider competitive sourcing alone or in combination with consolidation or use of VCS employees, as we discussed earlier. VA has opportunities to save millions of dollars by systematically considering consolidating food production, employing VCS workers to provide inpatient food services, and competitive sourcing. VA already has experience in implementing these options at a number of locations, although VA’s experience with food service contractors is limited. VA has not, however, systematically compared these options at all 177 inpatient locations. Using a systematic approach to assess available options at each location would allow VA to provide food service at the lowest cost consistent with maintaining quality. We recommend that the Acting Secretary of Veterans Affairs direct the Under Secretary for Health to direct the 22 networks to (1) systematically assess each inpatient food service location to determine if consolidation, employment of VCS workers, competitive sourcing, or a combination of these options would reduce costs while maintaining quality; and (2) implement the least-costly options in a timely manner. We received written comments on a draft of this report from VA’s Acting Secretary and the National President of AFGE. Their comments and our responses are discussed in the following sections. The comments in their entirety from VA and AFGE are in appendixes III and IV, respectively. VA agreed in principle with our recommendations, noting that it is already consolidating food production locations, converting to VCS inpatient food service provision, and using competitive sourcing. VA should be commended for its progress to date. However, VA has not systematically assessed each of these options at each location as we recommend. VA stated that the three options we identified are part of its Nutrition and Food Service strategic plan for improving quality and cost effectiveness. In our review of the plan, we found the VCS option to be clearly identified. However, the consolidation option discussed in the plan appears to deal with NFS consolidation with other services rather than consolidating food production locations and we found no reference to competitive sourcing. In addition, we found no reference to the systematic assessments we recommend. We believe the strategic plan could help VA implement our recommendations if the plan clearly specified that all three options we identified to reduce costs are to be systematically assessed for each location. Although VA agreed with our recommendation for timely implementation, it provided no operational plan or timeline for conducting the assessments we recommended. VA states that it is assessing the feasibility and subsequent implementation of these options at a deliberate pace to carefully consider relevant factors. We agree that VA should carefully consider these factors but believe the recommended assessments should be completed as expeditiously as possible. Delay means that millions of dollars per year may be spent unnecessarily on food services. VA expressed several specific concerns on a number of issues. Consolidationoffoodproduction. VA raised issues regarding (1) the need to do a study at each location, (2) transportation of perishable food, (3) costs, (4) VA’s Subsistence Prime Vendor (SPV) program, and (5) integration of NFS employees with environmental management services. First, VA stated that studies of food consolidation have already been done in Veterans Integrated Services Networks 1 (Boston), 3 (Bronx), 8 (Bay Pines), 12 (Chicago), and 22 (Long Beach), suggesting that additional studies are not needed at each location in these networks. We commend VA’s efforts to study ways to reduce costs in these networks. However, based on our discussions with NFS officials at several of these networks and reviews of several of these studies, we disagree that VA has systematically assessed all three options in each network. VA focused more on the potential for consolidations, but this option may be even more cost- effective if implemented in conjunction with the use of VCS employees or competitive sourcing in these networks. Because VA has not assessed all three options, it may not have identified the least-costly options in each network. Second, VA stated that the safety of transporting perishable food products and related logistics are key factors in determining the viability of consolidating VA facility food production. VA’s statement suggests that, as a result, fewer locations may be able to consolidate than we estimated and that the speed of consolidation could be slow. We agree that VA needs to carefully consider these factors, but we factored in the transportation and logistical issues in our analysis based on VA’s experience. As discussed in the report, VA has successfully addressed these factors in 28 other locations that are comparable to the potential locations we identified. Therefore, we do not view such factors as reasons for not moving ahead expeditiously but rather as factors that require strong management commitment in order to realize potential savings. Third, VA stated that large capital investment costs for equipment and space are key factors affecting the viability of potential consolidations. Again, we agree. However, investment costs must be assessed within the context of potential savings. For example, once fully implemented the savings realized in 1 year under the consolidation of food services in the Central Texas Healthcare System exceeded the investment costs, making that consolidation viable. We included in our assessments of the viability of consolidation at other VA locations the costs of a blast chill system of food production, such as that operated by the Central Texas Healthcare System, and the costs of the related advanced food delivery equipment.Therefore, the potential consolidation locations we identified could result in annual savings greater than the required investment costs within a reasonable time period. Fourth, VA also stated that its SPV program needs to be considered in consolidation decisions. The SPV program reduces the costs of food items through high-volume purchases by all of VA and certain other government agencies. We agree that the SPV program should be considered in consolidation decisions at each location, but we are doubtful that this would affect a decision on whether to consolidate. Our review of consolidations showed that savings result from reduced labor costs, not reduced food costs. Moreover, we are doubtful that the SPV program will affect food costs in a consolidation because the same number of patients will be fed whether consolidation occurs or not and all VA locations already participate in the SPV program. Fifth, VA stated that integration of NFS employees with environmental management services should be considered in consolidations. NFS integration with environmental management services includes having some employees work in both services so that an employee with downtime in food services can work in environmental services and vice-versa. Again, we agree that this factor should be considered in consolidations at each location, but it is unclear how this would affect a consolidation decision. While integrating NFS workers with other services can reduce food production costs without consolidation by shifting unneeded staff time and charges to other services, it is unlikely to reduce costs to the degree they would be reduced in consolidation. Consolidation reduces costs primarily through economies of scale whereby fewer workers in one location can produce food for patients in two or more locations than the smallest number of workers combined could produce food separately at each location. Therefore, consolidation would provide greater cost savings. In addition, NFS integration with environmental management services could be included in a consolidation. EmployingVCSworkers. VA raised issues regarding (1) time needed to phase in conversions, (2) variability in savings by location, (3) separation costs, and (4) training costs. First, VA stated in its comments, and we agree, that the savings from converting to VCS workers would take years to fully achieve. However, VA officials told us that some savings are possible in the first year of implementation. The magnitude of savings possible makes it worth the effort even if several years are required to fully achieve savings. Our report reflects this point. Our savings estimate of $67 million represents the total potential annual cost reductions for employing VCS workers to provide inpatient food services and not the savings that could be realized in fiscal year 2001. VA would not realize the full savings at each location for a number of years because VCS workers would only be phased in when NFS workers left through normal attrition such as retirement, voluntarily leaving for other VA jobs, or for jobs outside VA. Second, VA stated that potential savings from employing VCS workers to provide inpatient food services would vary from location to location, making it difficult to project a total cost benefit at this time. We agree that actual savings achieved would likely vary from location to location. However, we estimated total potential savings assuming that VA’s locations could save an average of about 30 percent of combined wage and benefit costs. This rate approximates the rate VA is realizing in its conversion to VCS employees at Marion, Illinois. VCS headquarters managers and network and facility officials in the VCS conversions studied agreed that using a 30 percent savings rate is reasonable for estimating nationwide savings. Third, VA also suggests that our estimated savings for employing VCS workers are overstated because of additional separation costs for NFS employees that would be required to implement this option. We do not agree. In the VCS conversions we reviewed, NFS workers typically continue working until they leave through normal attrition including retirement, moving to other jobs in VA, or leaving VA voluntarily. Thus, no special separation costs are incurred. Fourth, VA states that training costs could reduce our estimated savings. VA said these training costs would be for (1) NFS workers who leave food service to take other VA jobs, (2) VCS employees who replace NFS employees, and (3) part-time workers providing food service. We do not agree that these costs would reduce our estimated savings. As previously discussed, in VCS conversions NFS workers are expected to leave through normal attrition such as retirement, voluntarily leaving for other VA jobs, or voluntarily leaving for jobs outside VA. The training for NFS employees taking other jobs would be required whether NFS or non-NFS employees were hired for those jobs. Similarly, training for VCS employees replacing NFS employees would be required whether the replacements were VCS or other employees. Finally, both VCS and NFS already use many part-time workers and VA indicates it will continue this strategy. As a result, these training costs would be required in any event and are not additional costs. Competitivesourcing. Although VA concurred with our recommendation to consider competitive sourcing as an option in providing food services, VA raised concerns about the opportunities to use contractors in VA’s inpatient settings. We agree, as stated in the report, that VA may not offer the most attractive business opportunity for food contractors because of VA’s unique structure for providing inpatient and retail food services separately at its locations and because of the small inpatient workload at most locations. Because of these and other uncertainties we could not estimate the number of locations that could benefit from competitive sourcing or the potential savings. Nonetheless, we believe that competitive sourcing should be considered because of its potential to increase efficiency. As previously discussed, our work in other areas has shown that the competitive sourcing process reduces costs through increased efficiency whether the government or a contractor wins the competition to provide services. AFGE opposed all three options we included for study in our recommendations, expressing a number of concerns regarding these options. AFGE’s overarching concern is whether VA should focus its cost containment strategies on efforts that, in its view, could further impoverish current workers or compromise food quality. While we understand and appreciate AFGE’s legitimate concerns about current workers’ wages and employment and the quality of food provided to veterans, we believe VA can adequately address these concerns when implementing our recommendations. In the past, VA has demonstrated the ability to implement comparable options without adversely affecting food service workers. Further, our discussions with VA officials indicate that they remain sensitive to the importance of taking appropriate steps to prevent adverse effects on current food service workers. We discuss AFGE’s specific concerns below. EmployingVCSworkers. AFGE expressed six concerns about employing VCS workers in place of NFS workers to provide inpatient food service. First, AFGE stated that our estimate of $67 million in annual savings from employing VCS workers is misleading. AFGE said that the savings we estimated would be a one-time occurrence and establish a new baseline once achieved. We do not agree. Because there is no specific appropriation for inpatient food services, VA will not return savings from its food service operations to the U.S. Treasury and thereby establish a new lower baseline budget for VA. Rather, VA retains the savings achieved through management efficiencies in its budget, thereby making the savings available for other purposes in each subsequent year. Second, AFGE suggested that part of the savings we estimated are based on the government paying less for its match of employee health care premiums because lower-paid VCS employees will less frequently participate in government-sponsored health care plans than NFS employees. We did not assume that government costs would be less because fewer VCS workers would participate in government-sponsored health care plans than NFS workers. Information provided by VA shows that the proportion of NFS and VCS workers currently purchasing health insurance through government plans is 32 and 25 percent, respectively. Third, AFGE said that our estimated savings for VA in employing VCS workers are overstated because they do not include increased federal costs for programs such as Medicaid, the Earned Income Tax Credit, the CHIP (Children’s Health Insurance Program), Head Start, Housing and Urban Development rent subsidies, and other expenses related to increasing the ranks of the working poor. We disagree that our savings are overstated because our assessment of VA’s recent experience suggests there would be little or no additional costs to other federal programs as a result of VCS conversion. Based on VA’s experience to date, no NFS worker has had his or her wages reduced or lost employment under the VCS conversions we reviewed and no VCS worker was required to accept lower wages and benefits than they already had or could obtain elsewhere. In VCS conversions, NFS workers are being replaced as a result of normal attrition, including retirement, voluntarily moving to other jobs in VA, or voluntarily leaving for non-VA jobs. As such, the departing NFS workers would have the same impact on other federal programs as if there were no VCS conversion. Current VCS workers who replace NFS workers maintain their wages and benefits and therefore have no impact on other federal programs. Newly-hired VCS workers who replace NFS workers choose VCS over other employment opportunities. Presumably, wages for these new workers are competitive with wages in jobs these workers otherwise would have taken. Fourth, AFGE raised questions regarding the legality of VCS providing inpatient food services in place of NFS employees under the Economy Act. AFGE questioned if VCS could enter into an agreement under the Economy Act and supervise civil service employees, such as NSF employees, and if VCS and NFS employees with similar job descriptions could be paid different wages. We found no legal deficiency in these areas under VA’s use of the Economy Act. An “instrumentality of the United States,” VCS is authorized to receive and has received appropriated funds credited to a revolving fund. VCS’s revolving fund is a permanent, indefinite appropriation available to cover its operating expenses. Therefore, we agree with VA that VCS can be a party to an agreement under the Economy Act. In addition, VCS employees hold “excepted” positions within the federal civil service and are not barred from supervising NFS employees. Finally, VCS employee positions are exempt under 38 U.S.C. 7802 (5) from requirements of title 5 of the United States Code regarding equal pay and VCS employees are subject to a different pay scale than NFS employees. Fifth, AFGE said that it will take years to realize the estimated savings. We agree that it will take years to fully realize these savings, as our discussion of Marion and St. Louis indicate, but some savings can begin to accrue in the first year of implementation. Moreover, the amount of savings possible makes it worth the effort even if several years are required to fully achieve them. Sixth, AFGE said that higher VCS turnover rates will create problems for converting to VCS provision of inpatient food services. We do not agree. Based on experience to date, VCS managers at headquarters and at Marion have stated that turnover has not affected their ability to provide inpatient food services or affected quality. Consolidationoffoodproduction. AFGE expressed two concerns related to consolidation of food production and incorrectly stated that we said that VCS opposes consolidation. First, AFGE said that our estimates of kitchen consolidation savings are overstated because we underestimate the financial and practical costs of losing in-house food production. We do not agree. Our savings estimates account for additional costs required by consolidation that were identified by VA officials and representatives of the food service industry who have consolidated food production locations. As we discuss in our evaluation of the Central Texas Healthcare System, our savings model is conservative and probably understates savings. Second, AFGE stated that consolidations lower the quality of food provided to veterans. For example, AFGE expresses concerns regarding frozen food and other issues. We disagree. As we discussed in the report, VA reports that patient satisfaction increased at the Central Texas Healthcare System after consolidation, as measured by improvements in the taste and temperature of food. The Central Texas Healthcare System received an award from VA headquarters for reducing costs and maintaining quality in its consolidation activities. The award included citations for (1) provision of consistently high-quality meals, (2) improvements in timeliness, (3) increased patient satisfaction, and (4) maintenance of quality controls. Moreover, in all VA locations that consolidate, NFS dietitians continue to have quality control responsibility to ensure that veterans’ nutrition needs are met. AFGE also stated that we noted that VCS opposes privatization and centralization. We said that VCS opposes privatizing the services it provides, but we did not say that VCS opposes consolidation. In fact, VCS officials told us that VCS does not oppose consolidation. Competitivesourcing. AFGE expressed five concerns about competitive sourcing. First, AFGE stated that there is no evidence that contracting saves money. We believe it is important to distinguish between an objective to contract and an objective to compete government versus private service provision. Our recommendation is that VA consider competitively sourcing food service operations rather than outright contracting as an end in itself. Competitive sourcing can result in the government either retaining its position as service provider, or contracting with a private provider. As we have discussed, our work shows that competitive sourcing reduces cost through increased efficiency. The costs are reduced whether government or the private contractor wins the competition. We believe it would be a mistake to eliminate the competitive sourcing option for reducing VA’s costs. Second, AFGE expressed concern as to whether VA would use the OMB Circular A-76 process for competitive sourcing or contract without the benefit of a public-private competition. We agree that VA could, under limited circumstances specified in OMB’s Circular A-76, convert to contract performance without cost comparison. However, our recommendation to VA was that it consider competitive sourcing rather than contracting. VA agreed in principal with our recommendation. Third, AFGE also expressed concern about the quality of food service under contracting. We do not share AFGE’s concern because the same quality controls VA currently uses for in-house provision of food service could be included and enforced in the contract if a private firm chooses to compete and wins the competition under competitive sourcing. We note that some of VA’s medical affiliates, including major university hospitals, provide inpatient food service through contractors. Fourth, AFGE expressed concern that veterans currently employed in VA’s in-house food production could lose their jobs if a contractor wins the competition. We agree this is possible. As stated in the report, we believe that VA should include this as a consideration in its assessments of food service at each location. We note, however, that government employees adversely affected by decisions under the OMB A-76 process competition often are offered positions with winning contractors. VA could specify, as other agencies have, that a contractor hire such employees if it wins the competitive sourcing competition. Fifth, AFGE stated that there is little opportunity for a contractor to provide services less expensively than VA if VA uses lower-paid VCS employees. AFGE believes that the only way to lower costs in contracting is to lower wages and does not believe this is possible if a contractor is competing with VCS’s wage rates. We disagree. Competitive sourcing is an incentive to both government and the contractor to increase efficiency as much as possible to achieve cost reductions. These increased efficiencies can be achieved through improvements in process operations that reduce the amount of capital or human resources needed to process the same workload. As arranged with your staff, we are sending copies of this report to the Honorable Hershel W. Gober, Acting Secretary of Veterans Affairs; interested congressional committees; and other interested parties. We will make copies available to others upon request. If you have any questions about this report, please call me at (202) 512- 7101. Other staff who contributed to this report are listed in appendix V. We reviewed the Department of Veterans Affairs (VA) inpatient food services for fiscal year 1999 to assess potential savings nationwide if VA were to implement system-wide the three types of initiatives it has used in some of its VA inpatient health care locations: (1) consolidating food production, (2) employing Veterans Canteen Service (VCS) rather than Nutrition and Food Service (NFS) workers to provide inpatient food services, and (3) competitive sourcing. We interviewed VA headquarters officials in NFS, VCS, the Office of General Counsel, and other offices. We obtained documents from headquarters on the consolidation of food service, the use of VCS labor, and contracting with private food service contractors. We obtained data on food services at each inpatient location by surveying each Veterans Integrated Service Network. We obtained information on food service needs, how VA provides services, costs, and number of meals at each VA inpatient location. Networks and locations also provided us with information on advance food technologies and excess capacity, and with additional information on consolidating food services, the use of VCS, and private contractors. We also obtained additional data through interviews, documents, and physical inspections of kitchen facilities and food delivery at VA locations. We visited Veterans Integrated Service Network 17 (Dallas) locations in Temple, Marlin, Waco, and Dallas. We also visited locations in Marion, Illinois, and Jefferson Barracks and John Cochran in St. Louis, Missouri, in Veterans Integrated Network 15 (Kansas City). To estimate savings from consolidation, we first identified areas with multiple food production locations, using the criterion that two or more locations were located within 90 minutes’ driving distance of each other. We then examined the combined workloads and costs of unconsolidated locations in these markets to determine whether savings could be achieved through consolidation. Locations were considered to be already consolidated if they received 80 percent or more of their food from another location or produced 80 percent or more of the food for another location. Our analysis of VA cost data and discussions with VA officials suggested that the ratio of employees to the average number of daily patients (average daily inpatient census) is an appropriate measure for benchmarking savings in food services. We confirmed this relationship using 1999 data by regressing average daily patients on total employees. The resulting model showed that the average daily patients accounted for 86 percent of the variation in staffing. We computed savings estimates for the consolidations using the staffing ratio of one employee per 6.7 average daily patients. This staffing ratio was achieved by the Central Texas Healthcare System after completing consolidation of inpatient food services at Temple, Marlin, and Waco. To validate this measure we spoke to VA officials representing both NFS and VCS, who agreed that using the Central Texas Healthcare System staffing ratio after consolidation was a reasonable, perhaps conservative, estimate of achievable staffing levels. Some VA production locations, in fact, are more efficient (lower ratio of employees to the average number of daily patients) than operations at the Central Texas Healthcare System. To calculate total savings from food consolidation we first multiplied the total average number of daily patients of the proposed market by the Central Texas Healthcare System staffing ratio (one employee per 6.7 average daily patients) to arrive at a projected employee total for the consolidated market.We then subtracted this projected total from the fiscal year 1999 employee total of the individual locations in an area to determine the number of employees not needed, if any. Cost savings for the area were computed by multiplying the number of positions saved by the average salary costs of NFS wage grade, including benefits, within each market. We aggregated savings from each market to determine the total savings from food consolidation. The one-time investment for equipment was estimated by assuming that one location in each consolidated area required an advance food preparation system and every location required an advance food delivery system. To project the total cost of advance food preparation equipment (a fixed cost that includes items such as the blast chiller), we multiplied the cost of Central Texas Healthcare System’s advance food preparation system (purchase amount adjusted to 1999 dollars) by the number of locations within areas that required this system. We calculated the total cost for the advance food delivery systems (a variable cost that includes items such as reheating carts, trays, and plates) by multiplying the total average daily patients of locations without this system by Central Texas Healthcare System’s cost per average daily patients (adjusted to 1999 dollars). We calculated the costs of transporting food from a central location using data obtained from the Central Texas Healthcare System. To project the total costs of transportation for the consolidated areas, we multiplied the annual cost of one leased refrigerated truck by the total number of consolidated areas. Because this cost recurs each year, we subtracted this cost from the annual recurring savings from consolidation. We determined the potential savings from converting from NFS to VCS labor by applying a 30 percent savings reduction to NFS employee costs. VCS salaries are based on the Department of Defense’s survey of food service worker wages in a local area, and are competitive with the private sector. Nationally, NFS salaries average about 70 percent of total NFS food production costs. VCS salaries are normally about 30 percent below NFS salaries. VCS headquarters established this percentage, and network and facility officials have agreed that using a 30 percent savings rate is reasonable. We also conducted a literature review of the food services industry, interviewed selected non-VA food service officials and officials from the private vendor sector and food service industry organizations, and visited contractor food production facilities. We validated survey data used to construct cost estimates by comparing questionable data supplied on the 1999 survey with VA data sources. When necessary, we also contacted survey respondents and/or VA officials to clarify or correct data. We performed our review between October 1999 and November 2000 in accordance with generally accepted government auditing standards. Deborah L. Edwards, James C. Musselwhite, William R. Stanco, John R. Kirstein, Thomas A. Walke, Elsie M. Picyk, Susan Lawes, John G. Brosnan, and Roger J. Thomas contributed to this report. VALaundryService:ConsolidationsandCompetitiveSourcingCouldSave Millions(GAO/01-61, Nov. 30, 2000). VAHealthCare:VAIsStrugglingtoRespondtoAssetRealignment Challenges(GAO/T-HEHS-00-91, Apr. 6, 2000). VAHealthCare:VAIsStrugglingtoAddressAssetRealignmentChallenges (GAO/T-HEHS-00-88, Apr. 5, 2000). VAHealthCare:LaundryServiceOperationsandCosts(GAO/HEHS-00-16, Dec. 21, 1999). VAHealthCare:FoodServiceOperationsandCostsatInpatientFacilities (GAO/HEHS-00-17, Nov. 19, 1999). Veterans’HealthCare:FiscalYear2000Budget(GAO/HEHS-99-189R, Sept. 14, 1999). VAHealthCare:ImprovementsNeededinCapitalAssetPlanningand Budgeting(GAO/HEHS-99-145, Aug. 13, 1999). VAHealthCare:ChallengesFacingVAinDevelopinganAssetRealignment Process(GAO/T-HEHS-99-173, July 22, 1999). VAHealthCare:ProgressandChallengesinProvidingCaretoVeterans (GAO/T-HEHS-99-158, July 15, 1999). Veterans’Affairs:ProgressandChallengesinTransformingHealthCare (GAO/T-HEHS-99-109, Apr. 15, 1999). VAHealthCare:CapitalAssetPlanningandBudgetingNeedImprovement (GAO/T-HEHS-99-83, Mar. 10, 1999). The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. 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Summary: The Department of Veterans Affairs (VA) could save millions of dollars by systematically consolidating food production, employing Veterans Canteen Service workers to provide inpatient food services, and using competitive sourcing. VA already has experience in implementing these options at several locations, although VA's experience with food service contractors is limited. Using a systematic approach to assess available options at each location would allow VA to provide food service at the lowest cost while maintaining quality.