Uncovering cost efficiency measures within healthcare systems building portfolios

Healthcare industry leaders today face formidable challenges, as value-based reimbursement affects business processes, financial margins erode and consolidations fill the news. Healthcare systems' building portfolios offer senior leadership an often-overlooked way to mitigate the impact of these challenges.

With industry construction and consolidation, healthcare systems building portfolios have grown significantly over the past decade and, in most organizations, are the second-largest line item in a healthcare system's budget. Analyzing the building portfolio and facility-related processes can uncover opportunities to strengthen the bottom line, ensure effective use of scarce capital and improve patient satisfaction.

The starting point: Effective data, tools and processes
Uncovering cost-efficiency opportunities requires solid data and metrics on the condition of the buildings in a real estate portfolio, as well as decision support tools to streamline the investment analyses and decision-making processes. Healthcare leadership needs to answer two essential questions:

1. What assets are in the portfolio and what condition are they in? A surprising number of institutions don't have an accessible and accurate master list of the facilities they own, and don't know what condition those facilities are in, how well the buildings support the current business and patient care priorities, or what capital spending is likely to be required over the next five, 10 or 20 years.

2. What are the criteria by which capital funding decisions are made? In many cases, the criteria used to make decisions between competing demands for capital for short-term versus long-term initiatives are implicit and subjective rather than explicit and data-driven.  This complicates the decision-making process and leads to suboptimal outcomes.

Current facilities condition assessments of the buildings and infrastructure can answer the first question. The Facility Condition Index, which is the ratio of existing deferred maintenance (resulting from the FCA) as a percentage of the overall replacement value of the asset, provides a common benchmark with which to objectively compare buildings and highlight those with the greatest needs. Commercially available, high-quality planning systems offer multiple types of analysis and "what-if" scenario modeling.  These tools also facilitate a transparent, data-driven process for prioritization, decision-making and subsequent review, enabling healthcare systems leaders to answer the second question. Using the FCI as a starting point, the leadership can add additional decision criteria such as energy savings, risk analysis and mission-criticality in order to make sound decisions and, ultimately, develop an effective multiyear capital plan that can guide investment decisions across the entire healthcare system.

Uncover cost savings in the building portfolio
With robust analytics gained from solid data and effective decision support tools, cross-functional teams with members from finance, nursing, marketing, operations and facilities can begin to systematically look for cost efficiency opportunities in an organization's building portfolio that will strengthen the bottom line.

Specific opportunities might include the following:

  • Replacing components of aging infrastructure before failure, thereby reducing emergency repair premiums and avoiding business disruption. When facility conditions are known and scheduled repairs and renewals are performed, the likelihood of emergency repairs is decreased. The incremental cost of premium charges for non-standard work hours, special orders and overnight shipping can be significant — between 10 and 50 percent, according to one study conducted by the Gantry Group.  Similarly, unplanned business disruptions, with their negative impact on revenue, patient satisfaction and organizational reputation have been shown to decrease by up to 25 percent through proactive efforts.

  • Reduction in annual material costs and project waste. When organizations can easily view their entire portfolio of planned projects and upcoming needs, they can negotiate lower costs or bulk purchasing discounts, often saving 10 to 15 percent.  Procurement and project managers can also reduce the likelihood of duplicate purchases and overbuying, saving another 10 percent or more.  As one planner said, "It really hurt to spend almost half a million dollars to replace a roof on a building that I was then instructed to tear down a year later!"

  • Reviewing and closely monitoring systems designated as "run to fail." Few organizations can afford to remediate or replace all the older systems which are approaching or may have passed the end of their official useful life. Identifying and actively managing those systems as part of a watch list can reduce short-term expenditures while lowering the risk of emergency repairs and business disruption.

  • Risk mitigation planning to minimize potential business disruption and accelerate recovery from natural disasters and emergency situations. Visibility across the entire portfolio and easy access to detailed data about existing systems can help planners develop more effective contingency plans for emergencies. And, as recovery efforts from Hurricane Sandy demonstrated for one hospital system, rapid access to specification data accelerated Federal Emergency Management Agency insurance reimbursement and put them at the head of the line for ordering replacement equipment from suppliers.

  • Effectively review and plan for adaptive reuse solutions instead of new construction to ensure that buildings cost-effectively meet the changing needs of population health programs. Modeling the economics of adaptive reuseversus new construction can be an eye-opener for many organizations. The ability to do this quickly and accurately means that a facilities team can avoid major new capital investments in cases where it is not justified for economic or competitive reasons.  Alternatively, this analysis can provide a strong business case for decision makers and key stakeholders where it does meet those criteria.

  • Reduce overall project costs through more effective planning. Visibility into the entire set of capital projects allows the bundling of multiple projects into a single bid and/or implementation. This can lead to significant reductions in overall project costs and less need for relocations during the project efforts.

  • Allocate capital to reduce future operating expenses. Replace aging assets with more efficient alternatives prior to the end of their useful life; for example, accelerate the replacement of chillers, boilers, roofs and analog controls with more efficient versions to reduce utility and maintenance spending. In one example, a combined heat and power plant with a total capital cost of $1.6m was shown to generate annual operating savings of over $340,000 with an IRR of 16 percent over 10 years and a simple payback of 4.8 years.

  • Use operating expenses today to reduce future capital needs. Identifying and investing in component level repairs and upgrades that extend the useful life of a system can reduce the need for sizable capital spending in the future. Preventative maintenance can extend the life of systems and reduce the risk of expensive failures.

Ensure effective use of scarce capital
A significant driver of healthcare consolidation activity today is achieving economies of scale. A portfolio-wide view of facilities capital requirements over the next 10-plus years, based on solid data coupled with easy-to-use decision support tools, allows senior leadership to make the best use of the organization's scarce capital. These professionals can perform the following tasks:

Improve patient satisfaction
Patient satisfaction is clearly affected by the condition of hospital facilities. It is an important factor in differentiating between competing institutions and can have direct revenue implications for institutions. Healthcare systems can assess patient satisfaction — including such metrics as time in the system, noise levels and compliance with life and safety codes — with facilities and incorporate that as one factor in the prioritization of projects. By explicitly including patient satisfaction alongside other criteria such as risk, functional adequacy and life/safety, healthcare leadership can make data-driven project funding choices that impact both top line and bottom line results.

Analyzing facility condition and facility-related processes often uncovers opportunities for healthcare systems leaders to strengthen the bottom line, ensure effective use of scarce capital and improve patient satisfaction. Effective data, decision support tools and processes are the foundation for turning these opportunities into reality. Uncovering and quantifying cost efficiency measures for the building portfolio also ensures that the organization's second largest use of capital is aligned with evolving business priorities and the organizational mission of a healthcare system.

Jayne Talmage is a life-long advocate for the performance management and decision support systems required to manage complex healthcare operations. As a nationwide consultant, she pioneered operations research and service delivery methods for managing transformational change in ambulatory care. Ms. Talmage is a former principal with RSMeans Business Solutions, a cost engineering consultancy for public planning and capital building operations.For a continuing dialogue, VFA would like to hear about your healthcare system's best practices for advancing your facility portfolio's performance.  Send your information to info@vfa.com or visit www.vfa.com/clients/healthcare

More articles on healthcare finance:
Cadence operating margin down, total surplus up in FY 2014 
Nonprofit hospitals predict 2 years to risk-based payment switch 
Geisinger operating margin drops to 3.4% for FY 2014 

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