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 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. 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. 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.