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

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