A healthcare organization can reduce risk and costs by examining the FACTS—the functionality, age, capital investment, transparency, and sustainability—of its facilities assets.
At a Glance
- By looking at metrics focusing on the functionality, age, capital investment, transparency, and sustainability (FACTS) of their organizations’ facilities, facilities management teams can build potential business cases to justify upgrading the facilities.
- A FACTS analysis can ensure that capital spent on facilities will produce a higher or more certain ROI than alternatives.
- A consistent process for managing spending helps to avoid unexpected spikes that cost the enterprise more in the long run.
When a freezer malfunction at McLean Hospital in Boston damaged one-third of the world’s largest collection of autism brain samples, it was a wake-up call for thousands of healthcare administrators that their facilities must be run with the same level of skill and professionalism as the medical procedures that are performed inside those facilities.
Scientists say the damage caused by the freezer malfunction may set back autism research by several years. Investigators are still determining how better maintenance and repair protocols could have prevented the failure, but the incident underscores the growing awareness of the mission-critical nature of many healthcare facilities and the role of “smart” building management systems to mitigate risk and address cost pressures.
From operating rooms (ORs) to blood storage facilities to data centers, hospitals have a critical need to avoid system failures; however, availability of capital to repair and replace aging building systems has never been scarcer than it is today. Capital funding requests require substantive metrics and objective risk analysis to be successful. Facility managers can obtain the requisite data by examining the FACTS—the functionality, age, capital investment, transparency, and sustainability of their facilities assets—in calculating the real value of an organization’s physical assets.
Cost Benefits and Improvements
Consultants can provide benchmarks and calculate metrics in determining the value of a physical asset, but averages are not always the best guideposts to manage a healthcare organization’s specific facilities and the associated operational risks. For example, the types of services an organization’s facilities provide and the intensity of usage may dictate a completely different approach.
Experience-based analysis using hospital- or system-specific data and facilities can be more effective than simple benchmarking. The critical outcome is a process that defines the data needs, converts raw data into relevant data, and aids in developing key performance indicators specific to a hospital system’s mission, business strategies, and financial position.
Taking the time to prepare a FACTS analysis can equate to real money for a healthcare organization, given the impact property plant and equipment items have on a hospital or health system’s budget. Studies have shown that real estate and related property, plant, and equipment represent the healthcare industry’s third-highest expense after personnel and supply costs.
Healthcare executives have historically viewed their owned and leased real estate as a support function most effectively managed at the local level. But decentralized decision making in areas such as capital planning and procurement have led to inefficient capital allocation and inconsistent data.
As administrators look to their facilities as key areas for expense reduction, they are finding that centralized control provides not only cost benefits, but also opportunities for performance improvement and risk mitigation.
Depending on the size of the hospital or health system, there are likely tens of thousands of pieces of equipment—from air handlers and medical gas systems to blood pressure cuffs and IV pumps—typically inventoried and managed “cradle to grave” by the facilities management and biomed teams. By sheer volume alone, the financial risk and implications associated with managing this inventory is daunting.
Yet it comes with great opportunity for economic impact.
For example, consider the many pieces of equipment necessary to keep an OR functioning at peak efficiency. Should the chiller malfunction, the power drop and the generator fail to kick in, or the medical gases fail to flow efficiently, there will be financial ramifications for the organization. The most obvious consideration is the cost to repair, maintain, and/or ultimately replace the chiller. Further exacerbating the situation could be the timing of the equipment failure: When such failures occur on a weekend or during another off-peak time, repair services are charged at a premium rate. If a procedure is in process when the malfunction occurs, the cost of the breakdown may be incalculable in terms of its effect on patient safety, quality of care, and reputation.
Another important factor is the potential for lost revenue related to the breakdown of a physical asset. Having to shut down an OR that generates a considerable amount of revenue per day translates to lost revenue that cannot be replaced.
Fortunately, advances in both technology and human skill sets have made it possible for facilities managers to circumvent the risk of equipment failure. Implementing an effective management system can reduce operating costs to the point that the up-front cost of installation is repaid within a few years.
Making the Case for Capital Priorities
With reliable data in hand, two arguments bolster funding requests for improvements and replacements:
- Capital spent on facilities will produce a higher or more certain ROI than alternatives.
- Failure to spend on facilities will result in an unacceptable level of enterprise risk, as in the McLean Hospital example.
The ROI argument is relatively straightforward. Healthcare organizations typically operate on operating profit margins of 1 to 3 percent. Assuming an average 2 percent margin, a $1 million reduction of facility-related expenses is equivalent to a $50 million increase in revenue.
Building an ROI-based business case is easier for some initiatives than others. For example, many energy improvement initiatives have predictable results within 1 or 2 percent of projections, so administrators can allocate capital with confidence. A renovation program designed to make physicians and nurses more productive may result in a high ROI, but it will be difficult to measure and nearly impossible to predict.
When ROI is unpredictable, risk mitigation can be a very powerful alternative argument for capital investment. Data analysis is key. It’s impossible to say for certain that a particular piece of mission-critical equipment will or won’t fail in the next year, and to calculate the cost of failure to the enterprise. But looking at the portfolio in the aggregate, it’s easier to make a case that a percentage of potential equipment failures will in fact occur.
At the macro level, the facilities management function focuses on strategic and capital planning and asset life cycle evaluation. At this level, it is about maintaining the operations and functionality of individual assets and capital resources, ensuring the sanctity of the patient care environment and the vast functions/areas of the hospital they support.
The case for facility spending to mitigate risk can be bolstered by this argument: A consistent process for managing spending helps avoid unexpected spikes that cost more in the long run. If contingency funds for building systems replacement are not entirely used in a particular year, that simply means that some equipment lasted a little longer than expected. The opposite may occur the next year. Carrying over the excess funds will help the organization deal with the spike in replacement costs without cutting into profitability.
To effectively spend the “next” capital dollar made available as a resource to a facilities team, it is critical to ensure that these opportunities are measured objectively and prioritized in a manner credible in the eyes of the executive management team.
A FACTS analysis can provide hospital executive teams with a simple means to understand those opportunities, such as when equipment is reaching a critical replacement stage and when equipment has fallen into a critical state of disrepair leading to failure and expensive emergency replacements.
It also can ensure the data integrity crucial to the challenge facing healthcare facilities management and real estate teams, now and in the future.
Daniel P. O’Neill is a managing director, healthcare solutions unit, Jones Lang LaSalle, Chicago.
Sydney Scarborough is a managing director, healthcare solutions unit, Jones Lang LaSalle, Chicago, and a member of HFMA’s First Illinois Chapter.
Advancements Aid Facility Management and Save Money
Automated systems now allow facility managers to compare energy usage at many buildings across a portfolio in graphical formats that make it easy to spot outliers that require attention. For example, if one air conditioning unit is suddenly drawing more power than other similar units, or if a water heater doubles its usage from one month to the next, facility staff can quickly detect the anomalies and address the root causes.
In the latest generation of “smart” buildings, sensors and meters on individual components alert facility staff when a piece of equipment is not running efficiently and often can diagnose the likely cause so that repair people can show up with the right tools and replacement parts.
New cloud-computing based systems enable large portfolios to be monitored around the clock from a single location—when a problem requires immediate attention, “command center” personnel alert on-site staff to problems they otherwise might have missed even working 20 feet away.
Combined with a well-trained professional staff, an automated system can reduce portfolio energy costs by many millions of dollars annually. Add to that the reduction in equipment and labor costs and the savings can pay for the initial installation of the automation within one to three years.