STATEMENT OF
THOMAS L. GARTHWAITE, MD
DEPUTY UNDER SECRETARY FOR HEALTH
DEPARTMENT OF VETERANS AFFAIRS
BEFORE THE
SUBCOMMITTEE ON HEALTH
COMMITTEE ON VETERANS' AFFAIRS
U. S. HOUSE OF REPRESENTATIVES

March 10, 1999

Mr. Chairman and members of the subcommittee, I am pleased to appear before the committee this morning to discuss the Veterans Health Administration’s planning, budgeting and management of capital assets.

Before discussing our efforts to plan for and manage our capital assets, it is important to recognize how our capital asset needs have been impacted by the unprecedented transformation of VA health care that has occurred during the past four years. As you know, powerful forces are rapidly transforming American health care. Prominent among these forces of change are market-based restructuring of health care which includes the rise of managed care; the explosive growth of knowledge with technological advances that are dramatically expanding the ability to treat illness and injury; unprecedented developments in information and data management; and the changing demographics and aging of America.

As has been discussed in previous hearings before the committee, in the early 90’s the veterans health care system was described as having serious operational and managerial problems. Like its private sector counterparts, VA provided hospital-focused, specialist-based, and episodic treatment of illness. A number of different entities independently concluded that VA health care needed radical change if it were to have a future.

Since 1995, we have made significant progress in transitioning from a disease-oriented, hospital based, professional discipline focused health care system to a system that is patient centered, prevention oriented, community based and which has universal primary care at its foundation.

To accommodate this transformation, VHA established 22 Veterans Integrated Service Networks (VISNs) at the beginning of FY 1996. Each VISN forms a fully integrated health care system that provides a continuum of health care services to veterans who reside in a geographical area rather than a collection of individual facilities providing episodic services to veterans who come to those facilities.

VA’s transformation is still in process but results have already been achieved. The following accomplishments illustrate this change:

• More than 52% of all hospital care beds were closed between FY 1994 and FY 1998.
• VHA’s bed days of care per 1,000 patients has declined by more than 62% nationally – from 3,530 to 1,333 from October 1995 through September 1998.
• Inpatient admissions have declined by 31.7% since FY 1994.
• Ambulatory care visits have increased by almost 10 million per year – a 35.4% increase between FY 1994 and the end of FY 1998.
• Management and operation of 48 hospitals and/or hospitals and clinic systems have been, or are in the process of being merged into 23 locally integrated health care systems since September 1995.
• 271 new community based outpatient clinics (CBOCs) have been sited, or are in the process of being sited since 1995.
• Ambulatory surgeries increased from 35% of all surgeries performed in 1995 to about 92% in FY 1998.

These changes and the continuing rapid changes in health care technology have significantly impacted our physical infrastructure needs. While these changes are guided by an improved strategic planning process, the rapid pace of the change has made capital asset planning especially difficult, given that capital plans can take many years to accomplish.

VA has implemented a new, and we believe improved, Departmental Capital Investment Planning Process to assure that proposed capital investments support the priorities of the core mission of VA and VHA. Capital asset planning starts at the VISN level. VISNs prepare capital asset plans utilizing the principles in the OMB "Capital Programming Guide." Proposed investments must answer three questions: 1) Does the proposal support core missions of the Department that must be performed by the government; 2) Is there no other government or private sector source that can do it better or cheaper; and 3) Have current work processes already been optimized?

The network must then identify the primary customers who would benefit from the capital investment and the specific linkages to VA and Network goals.

VISN capital asset plans contain two sections. One describes the linkage of the capital acquisition to VA/VHA/VISN mission, goals, management strategies and performance goals. The second is a Baseline Assessment that describes the extent that existing capital assets are helping the network to achieve goals, management strategies, operating strategies, and performance goals. The difference between current and projected performance, which cannot be met with existing assets, is the performance gap. In this section of the plan, VISNs explain options considered for closing the perceived gap, including non-capital options such as sharing and contracting. If asset acquisition is thought to be the best option, the network plan identifies the asset that is uniquely suited for closing existing performance gaps. In addition, in this section, the network plan explains why the capital asset investment is the best alternative of all the available options, including non-capital alternatives.

The result of these efforts is a VISN specific Capital Asset Plan. Network Capital Asset Plans are not submitted to HQ in total. Only those proposals exceeding the established threshold ($4.0 million for construction) are provided to VA Headquarters as part of the Network Strategic Plan submission. Analyses for capital asset expenditures not exceeding the threshold are conducted at the VISN level to facilitate their decision making. The justification includes the basis for selecting the project; a cost-effectiveness analysis; an analysis of alternative options and an analysis of the full life-cycle costs.

From the 22 Network strategic plans, a major construction project inventory is compiled. Projects are reviewed by the VA Capital Investment Board (VACIB) for budget consideration.

The VACIB was created to foster a "One VA" approach to the use of capital funds (including construction, information technology, and equipment) and to ensure all major capital investment proposals are based upon sound economic principles and are fully linked to strategic planning, budget, and performance goals. The VACIB includes senior management officials from across the Department. The VACIB reviews proposals that have high risk, national visibility or exceed dollar thresholds ($4.0 million for construction). The Board provides an analysis to the Secretary about each proposal’s viability for inclusion in the VA Capital Plan and VA budget request to OMB.

The major criteria used to select capital construction investments are prioritized and weighted by the Capital Investment Board members. The criteria for FY 2000 included:

Using the criteria approved by the Board, all investments including major construction projects are scored and prioritized. The VACIB recommended a list of investments to the VA Resources Board for approval. Approved major projects are submitted to OMB as part of VA’s request for budget and authorization consideration.

The FY 2000 budget proposes three major construction projects to improve VHA facilities. These include a project for a new surgical suite at Kansas City, Missouri; a spinal cord injury facility at Tampa, Florida; and the renovation of psychiatric nursing units at Murfreesboro, Tennessee. In addition, a project at the Leavenworth, Kansas VA Medical Center will demolish 39 buildings that are no longer needed to permit the expansion of the National Cemetery at that location. I urge the committee’s favorable consideration of our authorization request for these medical projects.

While we believe that we have improved our capital assets process, I would like to describe four initiatives now underway within the Department that we believe will enhance our capital asset effectiveness.

The first of these relates to improving our capital asset management program. Capital Asset Management is a business strategy that seeks to maximize the functional and financial value of capital assets through thoughtful acquisition, allocation, operation and disposition. It is an active search for ways to increase the value of an organization’s assets. In recent years, private for profit, not-for profit as well as public entities have begun to pay increasing attention to the relationship between capital assets and organizational performance. The impact of capital assets on productivity and profitability has led to a significant increase in the recognition of assets as a resource.

The VA is making efforts to establish a capital asset management program that embodies a set of corporate policies and operating procedures that promote the goals of the asset management program. The functions of a program include policy development, planning, investment strategies and decision-making, portfolio management, performance measurement and administration.

The second initiative is the Department’s proposal to increase the flexibility we have to dispose of property that is no longer needed to meet our needs. The Department is proposing a pilot program to significantly improve its management of capital resources by encouraging and streamlining the process of converting properties we no longer need into active assets. This proposal would allow the VA to dispose of these properties (including land, structures or any equipment associated with the property) by sale, transfer, or exchange, and to reinvest the bulk of the proceeds into the system. The pilot would be restricted to thirty dispositions over its 5-year life.

VA’s capital portfolio consists of over 22,000 acres of land and 4,400 facilities at nearly 1,200 locations. Disposal is currently a cumbersome and lengthy process with limited benefits to VA. For example, to dispose of property with an estimated value over $50,000, the asset must first be reported to Congress in an annual budget submittal. Then VA must transfer the surplus property to GSA for disposal. Before GSA can attempt to sell the asset to the private sector, they must offer it to other federal agencies, then to State, local and qualifying non-profit organizations. Disposals must also comply with the Stewart B. McKinney Homeless Assistance Act that requires that excess property be offered to homeless organizations at no cost. GSA is also authorized to offer discounts of up to 100% to public and non-profit institutions. Any proceeds realized by VA after covering GSA’s expenses of the disposal are deposited into the Nursing Home Revolving Fund. These monies can then only be used to build nursing homes -- currently not VA’s highest priority need.

We propose to establish a Capital Asset Fund. All proceeds of disposals, after deductions, will be deposited into this fund to be reinvested into the system’s capital requirements. Allowable deductions would include all costs of disposing of the asset such as site preparation, demolition, administrative expenses etc. This fund will have a cap of $50 million, with excess proceeds to be transferred to the minor construction program.

The pilot would raise the threshold for reporting disposals in an annual budget document from $50,000 to an amount equal to the cost of a major medical facility project (currently $4 million). For disposals under this threshold a notice of intent would be provided to the local community and the congressional committees.

We also propose an innovative approach to supporting the homeless by directing 10% of the proceeds to local homeless assistance groups, which would include support for veterans. An additional 5% would be utilized to support VA-specific homeless programs. Homeless assistance groups would continue to benefit from the disposal of federal surplus property, consistent with the spirit and intent of the McKinney Act.

Because of the resources that will directly benefit VA programs, the Department will move quickly to establish procedures to implement this authority, as a part of its overall Asset Management program and I urge the Committee’s support for this initiative.

A third initiative, that I would like to address, has been ongoing for a few years and has proven to be beneficial to VA. This is the Department’s Enhanced-Use leasing program. This authority, which is unique among Federal agencies, is an integral part of the Department’s management of its assets. The program was authorized by law in 1991.

The Department has used this authority to consolidate operations and dispose of unneeded facilities, collocate VBA office space onto VA Medical Center grounds, obtain child care services, expand parking facilities for veterans and employees, and re-direct operational funds from managing golf courses into direct medical care. In doing so, these leases have achieved significant cost savings, have enhanced employee recruitment, added substantial private investment to the Department's capital assets, provided new long-term sources of revenues, and created jobs and tax revenues for the local economies. Recently completed projects at VAMCs Portland, Oregon and Atlanta, Georgia illustrate the utility and versatility of this authority.

The VA Medical Center in Portland, entered into an Enhanced-Use lease with a local authority for the development of a "Single Room Occupancy" Facility on available property at its Vancouver Division. In return for the lease, the VAMC will have no cost access to one-half of the 120-unit facility for its use in connection with its own homeless programs. Occupancy is scheduled for this summer. The present value of the cost savings to the VAMC is estimated at $8 million.

The Department used the Enhanced-Use leasing authority as a means to co-locate its Veterans Benefits Office with the VA’s Atlanta Medical Center. Through an Enhanced-Use lease, the Department entered into innovative arrangements with a local development authority for the necessary financing and with a developer for the construction and operation of the development. Construction is now underway for the office building and the associated parking facility. When completed, the average annual VA rent over the term of the lease for office space, parking, furnishings, and associated data and telecommunication equipment, will be approximately $11.00 per square foot as compared to the market rate of $20.00 to $26.00 per square foot for comparable office space alone. Finally, the Department will also obtain revenues from non-VA users in the development.

Other Enhanced-Use initiatives currently underway include medical and research facilities, VBA regional office collocations, assisted and specialty housing, child development centers, energy plants and parking garages.

While the program has achieved some level of success, it has limitations; namely market demand, compatibility issues and VA mission requirements. By understanding its strengths and constraints the Department is moving toward further application of this authority as one tool in its capital asset program.

And a fourth initiative that I would like to address and which has proven to be economically beneficial to the Department is the Energy Savings Performance Contract Program. This program was authorized by the Energy Policy Act of 1992 and provides Federal Agencies unique opportunities to upgrade capital assets to achieve energy savings. VA has completed seven projects at various medical centers and a total of 92 medical centers have awarded contracts under this program. In short, a private contractor updates the facility with energy saving technology. The savings from utility charges are shared between VA and the contractor until the contractor’s cost of the upgrades is covered. This program has allowed VA to address many of its energy related infrastructure needs without an investment of appropriated capital funds.

Mr. Chairman, our objective is to ensure that VA capital assets are utilized in ways that bring the greatest value to the Department at the lowest cost. We believe the initiatives that I have discussed here this morning will help in moving the Department forward in this area. This concludes my opening statement and I would be pleased to answer any questions you or the members of the committee may have.