The federal Veterans Administration (VA) owns or operates 168 medical centers and 1,053 outpatient facilities that serve a population of 8.9 million veterans each year, ranking it among the largest healthcare providers in the United States. It is also one of the largest property-holding agencies in the federal government, owning 6,091 buildings outright and leasing 1,586 buildings at an annual rent cost of $340.6 million.
However, a US Government Accountability Office (GAO) report published early this month warns that many of these facilities are underused and in need of updating—despite earlier efforts to do just that. GAO has placed the overall matter of veterans’ health care on its High-Risk List because of proven weaknesses in quality, cost-effectiveness and timeliness; at the same time, the VA’s property portfolio, along with that of the entire government, is considered to be at high risk owing to the agency’s inability to dispose of excess or underused property effectively.
The GAO also observed that VA’s capital project planning procedures have not served the agency well. The agency’s planning processes have not adequately tracked with various demographic shifts, including where veterans live, and how healthcare is best delivered to them. The report notes that such shifts include both an aging veteran population from the Vietnam era and a large and growing body of younger veterans who served in Iraq and Afghanistan. The VA’s medical centers provide inpatient, outpatient, and extended care, while most of the agency’s outpatient facilities are classified as “community-based outpatient clinics.” In addition, the veteran population is served by networks of civilian providers who work under contract to the agency, and for which the agency obligated more than $10 billion in FY 2015.
The agency’s planning processes have also not adequately accounted for the best use of facilities. The result, noted in an independent assessment commissioned through the Choice Act, was “a disconnect in the alignment of demand, resources, and authorities.” Coupled with an aging infrastructure, this disconnect continues—and it is growing ever more pronounced. The GAO report observes that aging veterans are increasingly moving to the Sunbelt states, leaving facilities in the Midwest and Northeast underused while those in the South and Southwest are becoming overtaxed. Demand is especially great for long-term care. This pattern is expected to continue into the next decade, at which point, because of the attrition of the Vietnam-era population, overall demand is expected to fall considerably. The challenge for the agency is now to “balance the expansion of services to meet the near-term demand with the potential excess capacity in the long-term.”
Like the rest of the healthcare industry, the VA has shifted from inpatient to outpatient care whenever practicable. In many VA medical centers, as a result, portions have been closed, yet continue to consume staff time and incur utility and maintenance costs. Of its inventory, 370 buildings are wholly vacant or more than half-vacant, and another 770 buildings are underused. GAO recommends the disposition of facilities to improve inventory efficiency yet the VA has been reluctant to do so, especially as appropriations uncertainty could require the agency to again provide community healthcare services that it currently outsources.
For investors of government-leased properties, many of whom are more actively exploring the VA inventory for buying opportunities, GAO’s report is a warning that underwriting won’t be simple. VA property investments reside at the crossroads of facilities capital planning, federal budgeting, healthcare and demographics. Investors will need to have a solid handle on all of these factors to fully assess the viability of VA healthcare facility investments.
Kurt Stout is the national leader of Colliers International’s Government Solutions practice group, which provides government real estate services to private investors and federal agencies. He also writes about federal real estate on his Capitol Markets team blog. You can contact Kurt by email or on Twitter.