VCU, Rao should further separate from health system, state watchdog says (2024)

Virginia Commonwealth University and its health system should further separate from one another, the state legislature’s investigative body said Wednesday.

In response to the health system’s failed deal to redevelop the Public Safety Building in downtown Richmond, the Joint Legislative Audit & Review Commission, or JLARC, determined VCU and its president, Michael Rao, have too much influence over the health system.

The review suggested changing Rao’s role with the health system, hiring new staffers focused on real estate and reimagining the board of directors that governs the health system. Some of those changes VCU can implement on its own. Others require lawmakers to write legislation.

The report specified that JLARC’s concerns lay with the structure of the VCU president’s position and not Rao’s performance.

Rao said he’s amenable to altering his role with VCU Health, where he serves as chair of the board and president of the health system.

“I don’t know of anyone else” who serves as a university president and health system president, he said Wednesday.

Though the Public Safety Building project was halted more than a year ago, its fallout continued Wednesday. A payment of $2.5 million from VCU Health to the city of Richmond was due that day, but VCU Health did not intend to make the payment.

The state has called on VCU Health to pursue exiting the agreement, which calls for VCU Health to pay the city more than $50 million over 25 years. City leaders repeated their position that VCU Health should pay what it contractually owes.

Failed project raised questions

In 2021, VCU Health discussed a three-way plan with a developer and the city to replace the Public Safety Building at 500 N. 10th St. with a $325 million complex. The new construction would include a roughly 17-story office tower for VCU Health.

But Dr. Art Kellermann, the CEO of VCU Health at the time, expressed concern about the deal, saying it put all the risk on the health system. Rao directed the university’s chief financial officer to analyze the risks and advise Kellermann on the project’s next steps.

Knowing the Public Safety Building parcel was a priority for Rao, the chief financial officer and another high-ranking VCU employee encouraged Kellermann to proceed with the deal despite his concerns.

Kellermann signed the contract in 2021, but just a few months later, it became clear the project was not feasible. There was not enough demand for an office tower in that location. In 2023, VCU Health paid $73 million to exit the agreement, a move that has drawn criticism. Kellermann was later asked to resign.

“We all regret the result wasn’t what anyone wanted,” Rao said Wednesday.

The failed project raised questions about VCU’s influence over VCU Health decisions, the report said.

More capital projects are expected. VCU Health has spent about $1 billion on new buildings and renovations in the past five years and has outlined several more planned improvements. But the health system lacks a process for evaluating capital project proposals or the necessary staff to evaluate them.

“There are staffing gaps,” said Lauren Axselle, a project leader for JLARC.

Separate, but working together

VCU and VCU Health are separate legal entities, but they overlap in many ways — including research, police, marketing, the Massey Comprehensive Cancer Center and more. VCU medical students treat patients and learn from residents.

But the current structure allows VCU too much influence over VCU Health, as the Clay Street debacle illustrated, according to the report.

Rao has many titles. He serves as president of the university, chairman of the health system’s board of directors and president of the health system.

The CEO of the health system, Dr. Marlon Levy, oversees the enterprise but reports to the VCU president. It’s difficult for the CEO to work independently of the president, the report notes.

No other university with a health system has the same set up, where the president of the university is also president of the health system, Rao said.

“I think it creates nothing but confusion,” Rao said. “Having that title, I think, is a problem.”

So the report suggests VCU Health eliminate the position of president of the health system and make the health system CEO the top executive. The CEO would report to the board of directors, and Rao would no longer serve as chairman of the board. Lawmakers would have to approve changes to the board.

Acknowledging the difficulty of managing so many positions, Rao has said for months that he supports revamping his relationship with the health system.

“Health care is changing rapidly and significantly, and the board of directors requires a chair 100% devoted to the health system,” Rao said.

The report also suggests splitting VCU Health’s CEO into two jobs. Currently, Dr. Marlon Levy serves as interim CEO of the health system and senior vice president of health sciences for the university. He’s simultaneously a medical leader and business leader.

Splitting the jobs in two would reduce the risk of turf wars for funding and space, the report said.

The report also recommends lawmakers restructure the VCU Health board of directors, shrinking the number of appointees and requiring commercial real estate and finance expertise of its members. Rao’s position could become a nonvoting spot on the board.

One suggestion JLARC did not make was to follow UVa’s model. Axselle said there isn’t enough evidence to suggest there’s one best way to run an academic health system, and VCU Health should not become a subsidiary of VCU.

UVa Health does not operate under its own authority, as VCU Health does. While UVa Health is a part of UVa, university president Jim Ryan has less power in health system matters. Because the two systems are different, JLARC does not recommend these changes for UVa.

VCU Health already has begun making these changes, Rao said, noting he welcomes improving the health system’s structure. VCU Health created a more rigorous capital project process, began hiring new real estate management employees and made progress toward a 10-year capital plan, Levy said.

Added Rao: “We’ve made significant improvements in the capital process to help ensure every project that is proposed by anybody is going to be fully vetted.”

Kellermann, the former health system CEO who opposed the Clay Street deal, said he hoped for a more substantive analysis of the failed project, given the harm it inflicted and the warnings that were ignored. He said he agrees with the recommended changes to protect the health system, its CEO and senior leaders from improper university pressure.

$56 million to the city

When VCU Health signed the three-way agreement to redevelop the Public Safety Building, it agreed to pay the city about $56 million over 25 years. State leaders have characterized the payment as a payment in lieu of taxes, or PILOT, and Sen. Jeremy McPike, D-Prince William, wondered whether the payment is even legal.

But Lincoln Saunders, chief administrative officer for the city, said Wednesday that what VCU Health agreed to is not a PILOT. Under state law, a PILOT addresses when a state authority owns a tax-exempt property. In the case of VCU Health, the developer would have owned the property, and instead of the developer paying a real estate tax, it transferred the tax burden to VCU Health.

Lawmakers directed VCU Health to seek terminating the deal, but city leaders maintain that VCU Health should pay the city what it owes. If the health system is interested in a lawful way to exit the obligation, the city is open to that conversation, Saunders said.

Dismantling of the Public Safety Building continued Wednesday – at a cost of about $5 million to VCU Health.