Report: Multiple factors led to $80M loss for VCU Health System

(The Center Square) — After the Virginia Commonwealth University Health System suffered a loss of $80 million in a major capital project gone wrong, the commonwealth’s legislative watchdog agency has concluded that the health system should have more autonomy from the university, better processes and more resources.

Amid COVID, the Health System – which receives state dollars primarily through Medicaid reimbursements – pursued a $325 million capital project that would have provided more office, parking and retail space. The system signed a lease with the developer in 2021 but was later informed that the project would cost more than anticipated due to unsuitable site conditions and pandemic-driven inflation.

Pulling out of the project in 2022 cost the health system nearly $80 million, in addition to some payments to the city of Richmond “in lieu of taxes.”

The General Assembly commissioned the Joint Legislative Audit and Review Commission, which “conducts program evaluation, policy analysis, and oversight of state agencies” on its behalf, to look into any factors within the health system or its relationship with the university that may have contributed to the failed deal.

The commission found that while the health system is imbued by law with its own “authority” and is a separate entity from VCU, there was significant overlap in the institutions’ leadership that “creates potential for VCU leadership’s priorities to supersede VCUHS’s priorities.”

For instance, Michael Rao is the president of VCU, but he is also the board chair and president of the health system. There are other board members who serve on the boards of both the university and the health system.

The health system CEO had the authority to make his own decisions in the capital project but still “sought direction from the VCU president, and members of the VCU president’s cabinet strongly advised the CEO to sign the lease despite his concerns.”

Though many of the system’s major capital projects finished on time and within budget, the commission also found that its process lacked definition and specificity in some key ways. The system has recently improved its process but could still use a “long-term, system-wide major capital strategy plan,” according to the commission. The system also doesn’t have enough staff to support its major capital projects and again has relied on VCU for help in the short term.

As a result, the commission proposed that the role of the VCU president may be confined to a non-voting member on the health system’s board and that instead, the board chair must be elected every two years and not an employee of the health system or the college. It also suggested that the health system’s CEO be elevated to its top executive and the position of health system president be eliminated. Finally, the commission recommended the health system develop full-time positions to maintain major capital projects development.