Michael Sherman


At a Glance

When planning for an infrastructure renovation or expansion, hospital executives should ask five questions to guide the decision-making process:
 

  • What is the best way to plan for infrastructure improvements?  
  • What funding options exist?  
  • What is the best way to manage risk?  
  • What outcomes should I expect from my investment?  
  • When complete, will my project support the intended use?  

Assessing infrastructure needs through a disciplined process helps hospital executives maximize their investments and avoid any costly surprises.

With today's healthcare executives focused on navigating through healthcare reform and the fallout from the recession, budgeting for infrastructure needs may seem like a low priority. But hospitals invest more in maintaining their physical operations than many other commercial interests because of their critical missions and 24-hour operation requirements. Moreover, even though the recent construction boom in health care has slowed following the recession, many hospitals are still investing significantly in upgrading facilities and campuses.

A recent survey by the American Society for Healthcare Engineering found that 73 percent of hospital construction projects involve renovations or expansions, while new facilities account for 15 percent and replacement facilities represent 11.6 percent. Interestingly, 33 percent of the renovations include improving air handling systems, which can have a direct impact on patient outcomes.

Projects such as these are usually driven by inescapable infrastructure needs. Increasing spending on an infrastructure project may be the last thing a hospital administrator wants to do, but as long as the project cannot be avoided, it is best to do it right and only once. If not managed properly, an infrastructure project can result in costly surprises. Following are recommendations on how best to proceed.

Planning Approach

Hospitals often engage in-house engineering or facilities departments to develop infrastructure needs assessments, which usually address repair or replacement issues. In these assessments, costs for equipment, such as chillers, cooling towers, and pumps for chilled water systems, are presented to the CFO in an annual budget. In this planning approach, these items often are denied or cut in difficult times. In-house engineering teams end up stretching equipment beyond serviceability, sometimes resulting in complete failure. At this point, the hospital faces an emergency and often has to overpay to correct the problem.

An alternative approach is to develop a five-year infrastructure management plan. Such a plan can help a hospital maximize its investment, prioritize projects, improve outcomes, and mitigate risk.

Most hospitals follow a strategic plan, and many have a master plan. A well-developed five-year infrastructure plan strategically ties into these broader goal-setting exercises. The plan's purpose is to identify needs and problems in advance and help executives prioritize their infrastructure costs over a longer timeline. A typical five-year plan includes specific infrastructure needs related to mechanical functions, such as heating and cooling systems. It also includes assessment and analysis of electrical systems, plumbing, and piping systems. Building envelope needs, such as window, roof, and facade upgrades, are also included, as are life safety, disaster preparedness, and building code upgrades. Short-term and long-term energy efficiency goals are captured. Tactically, an effective plan outlines a repair and replacement forecast and offers a research-based rationale to prioritize investment.

At a higher level, a five-year infrastructure management plan should take into account expansion or changes facilitated by a hospital's strategic plan. For example, let's assume that a hospital's strategic plan outlines population demographics that encourage expansion of prenatal care services from 550 to 1,500 births a year. Let's also assume that because of competitive pressures, the hospital will need all private rooms and new technologies to achieve this vision, which will require the addition of 60,000 square feet to the facility. With a five-year infrastructure plan, the hospital can evaluate its existing electrical, mechanical, and plumbing systems and outline what investment might be necessary to reach the goal.

Overall, the plan offers the executive team a thorough assessment to evaluate risk and infrastructure spending over an extended term. The executive team, assisted by an internal or external planning professional, then can carefully integrate the infrastructure investment with the hospital's mission and goals.

"The five-year infrastructure planning process fit well with our strategic and capital planning process," says Cary Fox, regional vice president and chief administrative officer with CHRISTUS Santa Rosa Healthcare, San Antonio, Texas. "We were able to identify key infrastructure needs and assign priorities based on criticality, which gave us the ability to develop a more strategic long-term capital plan that incorporated these projects during a time of limited capital availability."

Says Fox, "Knowing the priorities and whether a particular project, if not undertaken, would impact patient safety or quality of care helped us understand and budget for essential capital expenditures versus those that are nice to have."

Managing Risk

No hospital CFO wants to gain board approval for a $30 million renovation project and have to come back to ask for an additional $10 million because of unforeseen circumstances that led to project overruns.

Unfortunately, such scenarios happen. Whether a hospital is expanding a facility or upgrading systems, it should understand the full scope of work so it doesn't later have the surprise of finding the project is much larger than anticipated. This point especially applies to hospitals that have older facilities or expansion plans that their current systems cannot support.

"Most important is the need for a disciplined, rigorous process where all infrastructure projects are carefully vetted," Fox says. "This approach will ensure that short- and long-term capital needs are surfaced and budgeted for appropriately, mitigating surprises as much as possible."

Much of the risk management comes from the team that plans and manages the infrastructure project. A hospital will often assemble a team comprising in-house engineering staff, an architectural firm, an engineering firm, and a cost estimator. This team collectively evaluates the scope of the work, estimates the cost, and manages the project. This approach may result in a positive outcome for the hospital, but is a time-consuming process that distracts the in-house staff from the day-to-day requirements of operating the facility.

Among the team's constituents, only the in-house engineering staff has added incentives to ensure financials are on budget; the architectural firm, engineering firm, and cost estimator lack such incentives. Therefore, if an unforeseen project cost occurs, it is likely to be passed directly on to the hospital. Many times, project estimates are based on guides that use general cost per-square-foot formulas rather than digging into the specific hospital's infrastructure accounting for the facility's age and its operating systems. In fact, some estimating models create the same estimates for newer and older facilities. This approach can miss variables that ultimately lead to increased costs.

Some other risk areas include the communication of work status, a schedule to ensure work is complete and operational at the planned finish date, and an evaluation of the project upon completion. Projects that take longer ultimately cost the hospital money.

An alternative to the multifirm team approach is to engage a partner that can offer a turnkey or design-build option. The partner will enter a facility, conduct an in-depth analysis (sometimes free of charge), and return with a plan and estimate for the work. A turnkey partner will engage any architectural and engineering support required, provide the project management, and hire subcontractors. Throughout the project, the turnkey partner is responsible to the hospital for managing the project from a single source. In addition, some turnkey partners will guarantee a fixed cost based on an in-depth estimate, provide ongoing executive progress reports, and stand behind the work after completion. The downside of this approach is that the hospital must have a comfort level with outsourcing the project completely and must carefully evaluate the partner.

"When choosing a partner, checking references is very important," says Carrie Helm, CEO of Arkansas Surgical Hospital in Little Rock. "That means not only going beyond a partner's provided reference list, but also asking for a list of projects the company has worked on over the past 12 months and contacting those hospitals as well."

Creating Efficiencies

One of the easiest ways that infrastructure management can contribute to the bottom line is to ensure that the hospital's mechanical systems are as efficient as possible. Gas, electric, and water consumption can add up to significant cost.

In many situations, hospital heating systems and boiler performance can result in 10 to 15 percent savings on energy bills. The right group of experts may also help achieve this type of savings using the hospital's existing equipment. Water conservation is another area of opportunity. Hospitals can reduce water consumption by 25 to 30 percent with more efficient chilled and domestic water systems.

Energy costs vary depending on geography. New York City, for example, is far more expensive than a city in Texas, but as a general rule, hospitals should spend below $3.50 per square foot on energy. Expenses above this figure represent an opportunity to save. Some hospitals have energy expenses as high as $7 per square foot.

A good infrastructure management partner will analyze energy efficiency and capture it within five-year infrastructure planning recommendations. In some cases, energy savings can be guaranteed with upgrade projects.

Impacting Patient Outcomes

Healthcare reform is driving hospitals to reach the 75th percentile on Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) survey scores, while reducing costs to around the 25th percentile. While working to achieve these goals, the hospital needs to keep patient satisfaction high, as it will be an ongoing metric for reimbursement. With this in mind, room temperature is an important satisfaction driver. Patients react to environments that are too hot or cold. The condition of a hospital's mechanical systems has a direct impact on temperature consistency.

Indoor air quality also plays an important role in reducing infection rates. Poor air quality can transmit germs and microbes through a hospital's duct system. A poorly functioning air handling system also can contribute to a negative patient environment as unpleasant odors can circulate through a facility. Interestingly, the percentage of hospitals investing in new air handling projects is relatively high, according to the American Society for Healthcare Engineering survey.

"One of the infrastructure projects that we invested in was the upgrade of our air handling systems," says CHRISTUS's Fox. "In addition to contributing to a safer environment, the impact was noticed by our patients and visitors. We received feedback that our facility did not smell like a hospital."

Other clinical outcomes can be directly impacted by the effectiveness of a hospital's mechanical systems. For example, the ability to integrate sophisticated heating and cooling systems into operating rooms (ORs) can be critical for successful surgery.

In one case at Arkansas Surgical Hospital, where ORs were considered relatively new at 10 years old, a group of surgeons approached the administration to upgrade the cooling systems for the rooms. The surgeries ran a high risk of infection and the physicians were accustomed to wearing heavy gowns and hoods. When room temperatures dropped to 64 degrees, humidity levels would significantly increase and posed risks for infections.

The hospital needed a system that would produce desired temperatures and eliminate moisture to ensure patient safety. Even on a 100-degree day, the ORs needed to be 60 degrees with low humidity.

With this goal, the hospital decided on a turnkey approach to assess the situation and provide a mechanical system solution. The hospital achieved the needed outcome with a guaranteed cost and a commitment that the solution would perform to task.

"When our physicians presented their needs, we wanted to approach the project with a degree of certainty that it would meet their requirements and ensure patient safety in a cost-effective way," says Arkansas Surgical's Helm. "Our investment in advanced heating and cooling technology helped us create an environment where our physicians are more comfortable and our infection risk is reduced."

5 Questions to Guide Infrastructure Planning

Hospital executives who are factoring their infrastructure needs into their long-term financial and strategic plans will help to eliminate unplanned costs over time. As they embark on developing their organizations' infrastructure plans, these executives also should consider five key questions to guide their efforts and help them define the parameters of informed and effective infrastructure planning.

What is the best way to plan for infrastructure improvements? A few options exist to assess needs. An in-house construction or building team can manage an architect or engineering firm and cost estimator to create a cost estimate and plan. Another alternative is to engage a third-party organization that specializes in turnkey hospital infrastructure management that can cost and manage the project from beginning to end. The primary function of the assessment should be to help prioritize needs and spending. It is helpful to plan and budget on a five- to seven-year timeline rather than react to crucial needs on an annual basis.

What funding options exist? Securing funding for an infrastructure project can be an obstacle in today's environment. Funding options include using the hospital's existing capital, seeking a bond issue, or exploring relatively new alternative financing models that are separate from the hospital's balance sheet. Some external partners can help executives understand alternative financing options.

What is the best way to manage risk? Managing financial risk is an important part of planning any infrastructure project. When the scope of the work is not clearly defined, the potential exists for unplanned project overruns that aren't included in the budget. Also important is working with an organization that has a strong understanding of infrastructure and health care and engaging a group that will guarantee the cost of the work and stand behind the project after completion.

What outcomes should I expect from my investment? In addition to determining how the project fits into the hospital's overall vision, it is helpful to define other desired outcomes, including cost savings in energy efficiency, improved functionality, patient satisfaction, or infection control improvements.

When complete, will my project support the intended use? It is important to work with organizations that will ensure the infrastructure is functioning as planned when the project is complete. As work is being performed, it is helpful to have ongoing status summaries and a performance assessment upon completion. The organization also should consider having a project performance evaluation conducted six months after completion to ensure systems are performing as promised. At that time, any necessary adjustments can be made to ensure performance.


Michael Sherman is vice president of asset solutions, ARAMARK Healthcare, Philadelphia, (sherman-michael@aramark.com).


 

Publication Date: Tuesday, November 01, 2011

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