3 Mistakes Hospitals Make With Their Real Estate Management
When the hospital C-suite talks about the organization's largest expense items, labor and supplies usually dominate the conversation — and rightfully so. People and supplies usually represent the highest expenditures. However, a third area, real estate and overall facilities management, is not far behind and could negatively impact bottom line profitability if it is not kept in check.
Peter Bulgarelli, COO of Jones Lang LaSalle's Healthcare Solutions, says hospital systems are excellent in caring for patients and managing their medical staff but are not high performers in real estate. Patients and healthcare are the number one focus, but that doesn't mean real estate should be ignored.
"Real estate and facilities management is an overlooked, ripe area to drive savings while improving quality for system," he says. "We're amazed at how the plant operations and capital planning for real estate are being run today at many hospitals. There's significant room for improvement."
Here, Mr. Bulgarelli details three mistakes hospitals commonly make with their real estate and facilities management.
1. Hospitals overlook the impact real estate has. As mentioned, labor and supplies are the two most common areas hospital executives analyze for cost reduction. However, Mr. Bulgarelli says real estate represents as much as 40 percent of an average hospital system's assets on its balance sheet.
While cutting expense costs by millions of dollars is becoming increasingly more difficult in today's economic climate, it is feasible through a strategic view of real estate and facilities management. "The recent Supreme Court decision has clarified at least one key point," Mr. Bulgarelli says. "Revenue per procedure is going down. That is the fact. Thus, hospitals, already at an average operating margin of only 2 percent, need to have a lower cost and higher performing operating platform. Looking at the network of care for underperforming assets and driving out waste from plant operations can't be overlooked."
2. Hospitals don't optimize their real estate portfolio. There are several key components around capital asset planning and real estate strategies, but Mr. Bulgarelli says hospital executives should start from the most obvious point: examine their real estate portfolio. Does the ambulatory portfolio and network of hospitals match their strategic plan? What assets are underperforming or have become obsolete?
"The best way to improve the efficiency of their real estate is to use less of it," Mr. Bulgarelli adds. "Return on assets in healthcare lags virtually every other industry."
Portfolio optimization requires hospital leaders to analyze which facilities are performing well, what the payor mix is like at different facilities and how demographics are changing. "Eliminate the facilities that are below-average in performance, retain or enhance the ones that are performing above standard and add strategic locations to the portfolio," Mr. Bulgarelli says. "Three strategies: improve throughput, eliminate poor performers and add strategically. This is the big move, and savings of 20 to 25 percent or more are possible. We are actively working with Kaiser [Permanente] across the country to redefine their network of care."
3. Hospitals are not efficient with the good real estate they have. Just because there are not any emergencies does not mean there are not any problems. That holds true for some hospital system's real estate. "Real estate that is good for you — how can you run it more efficiently?" Mr. Bulgarelli asks. "Energy strategies, staff, vendors that you're using, technology that you bring to automate the buildings, using capital more efficiently — these are significant."
For example, an improved operating margin can be a result of properly managed facilities that deliver sustainable cost savings. Two of the biggest components of occupancy cost management are energy cost control and carbon footprint management.
Mr. Bulgarelli cites the firm's partnership with Beaumont Health System in Royal Oak, Mich., which included some of those strategies. Beaumont was able to save 8 percent of their real estate costs in the first year, and as a result, Moody's Investors Service shifted the health system's outlook from negative to stable "because of the aggressive actions Beaumont was taking to mitigate costs, many of which involved real estate," Mr. Bulgarelli says.
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