Fred Campobasso
Joe Kucharz

Healthcare organizations should consider financial goals before deciding on real estate strategies.


At a Glance

When approaching facility and real estate development, healthcare leaders should:

  • Enhance clinical integration and ensure more patient-friendly facilities
  • Focus on a facility's business requirements and operating needs
  • Create a business plan that demonstrates how a project would help deliver better care at lower cost during a time of declining payment levels
  • Develop an approach that balances the needs of all stakeholders, including payers, staff, and patients

As the requirements of the Affordable Care Act take hold and capital becomes scarce due to the economic environment, there is increasing pressure on healthcare organizations to expand healthcare delivery capacity, ensure higher standards of patient care, and comply with reform provisions. Many healthcare organizations also expect to make significant enterprisewide cost reductions-as much as 20 percent in some cases-over the next few years before some key provisions of the healthcare reform act are implemented. If healthcare organizations are going to refocus and redevelop facilities with the goal of improving quality and lowering costs, they should consider taking a business approach to facilities development.

Healthcare organizations can benefit by considering how facilities development can deliver better business outcomes. Taking a business-driven approach, rather than an architectural view, can help an organization develop and achieve strategic goals, discover financing options, and even change an organization's culture.

With a business view, organizations can improve operational planning, build a strong framework to deliver lower-cost care, and improve processes, which can lead to more cost-effective facilities in the long run.

A Business Plan That Delivers  

Sacramento, Calif.-based Sutter Health is an example of a healthcare organization taking a business approach to facilities development and realizing the benefits of delivering better care at a lower cost.

Sutter Health had planned to rebuild several facilities for strategic reasons and to meet state seismic requirements. It developed a future model that would be scalable to the community's and organization's needs. Many of the lessons learned on the smaller community hospital development programs also benefited the system's larger tertiary facilities.

The Sutter Health Prototype Hospital Initiative used Lean patient flow characteristics to create a scalable 60-90-120-bed hospital prototype. Three integrated project teams of designers, builders, and operations experts worked with a high-level evaluation committee of physicians, nurses, hospital executives, and facilities leaders to incorporate cellular manufacturing concepts into clinical operations. The concepts included single-station care capable of providing complete or key milestone outcomes in the clinical care pathway.

The new facilities will incorporate best practices, including consolidated patient flow, and reflect the growing need for outpatient and ambulatory care. The project's "aggressive, but possible" objectives include a 50 percent reduction in average cycle times for preadmission testing; a 30 percent reduction in total building space for equivalent service capacities, such as beds, surgeries, and diagnostic procedures; and 40 percent greater efficiency as measured in direct nursing-to-patient time. Other goals include reducing staffing, facility maintenance, operations, and total project costs by at least 20 percent; reducing required square footage per bed; and cutting planning design and construction cycle time by three to six months by deploying Lean principles and an integrated project delivery approach.

Throughout this process, the project team relied on guiding principles when making decisions, such as creating a patient-centric facility and using evidence-based principles to increase the efficiency of labor and the return on other operations expenditures. The project team standardized care protocols and spaces and identified ways to facilitate patient scheduling through technology. For example, one key effort focused on reducing patient movement and waiting times to minimize space requirements.

A key challenge was balancing the need for ample, but potentially costly, facility-level scalability and flexibility with the need to manage required capital investment. For example, standardizing technology and infrastructure in every patient room, such as telemetry access and step-down beds, lowered operational costs and enabled bed utilization for diverse patient encounters.

Key Focus Areas

Sutter's approach to facilities development, which is becoming more prevalent across the industry, requires the dedicated leadership of facilities and real estate professionals, with a deliberate focus on six key areas:

  • Integrating strategic, financial, and facilities goals
  • Implementing effective operational planning
  • Identifying creative financing options
  • Developing a strong framework and approach
  • Managing technology and process improvements
  • Driving culture change

Integrating strategic, financial, and facilities goals. In this environment, healthcare organizations should no longer make decisions about strategy, finance, and facilities in isolation. As they compete by doing more with less, healthcare organizations can leverage the changes they are undertaking-including modifying existing facilities and unbundling centralized hospital campuses-to enhance clinical integration, generate more patient throughput at less cost, ensure more patient-friendly facilities, and enhance their overall brands.

To develop an integrated solution, hospitals should focus on four dimensions: strategy, operations, facilities, and finance.

With respect to strategy, hospitals should set service-line priorities based on market conditions, physician resources, and the long-range strategic vision. They should outline how improvements in clinical integration can impact future service volume reduction.

Using a best-practice driven operational plan can reduce operating expenses by changing clinical and nonclinical processes inside and outside the hospital. Such a plan should address the patient experience, technology, culture, and managed care/payer changes.

To maximize the facility solution, the organization should use integrated project delivery that aligns risks and rewards and promotes best practices, such as BIM technology and Lean principles.

With respect to finance, the organization should implement a financial model that analyzes the ROI for various project components, such as clinical, support, physician office, parking, and retail.

Our Lady of Lourdes, Lafayette, La., recently completed a 192-bed replacement hospital using up-front business planning to justify the capital allocation. Using an integrated strategic, operational, financial, and facilities process, the hospital was able to identify:

  • Services and programs that could be expanded, consolidated, or reduced
  • Clinical and nonclinical care delivery processes that required changes to reduce operating costs and improve quality
  • Future-state finances, assuming healthcare reform payment changes are realized
  • Strategies for reducing facility costs per square foot without compromising strategic and operational goals

Implementing effective operational planning. As the need to reduce cost structures assumes greater importance, the operating model for these facilities is likely to change. Instead of holding planning discussions driven by architectural considerations, hospital executives should focus on a facility's business requirements and operating needs.

When this operations process-oriented approach is successful, organizations have more options available. Kishwaukee Community Hospital (KCH) in DeKalb, Ill., began operational planning for a 100-bed replacement hospital before architectural planning in order to identify the current state and desired future state for all key clinical and nonclinical processes. The so-called "70/30 rule" applied in this situation, with approximately 70 percent of the future-state processes covering implementation planning and adoption within the existing facility, while the remaining 30 percent depended on the physical design of the new facility. Beginning the future-state planning process early in the overall planning timeline allowed for a more effective transition/activation planning process, reducing adoption risk in the new facility and leading to an overall 6 percent expense reduction goal.

In an environment where capital is a key consideration for many hospitals, the tradeoffs between flexibility and expense can be difficult. By using operational scenario planning, healthcare organizations can better evaluate available options against needs, requirements, and capital allocation.

Identifying creative financing options. Regarding access to funding for such projects, health care is divided into the haves and the have-nots. Financially stable organizations with strong balance sheets can gain access to more capital at a lower cost by issuing revenue bonds or taxable bonds. This lower cost translates into lower debt payments and greater flexibility when executing a project.

As long as capital remains scarce, the have-not healthcare organizations will likely need to turn to nontraditional financing sources, such as private equity, federal or state funding programs, third-party developers, or a combination of these sources. For example, a hospital in a market with a lofty percentage of high-cost, low-margin, indigent patients seeking $100 million for an ambulatory care facility might need to gather funding from state grants, federal programs, the Federal Housing Authority's Section 242 program, and the New Markets Tax Credit program, designed to finance revitalization efforts in low-income communities. But even when an organization assembles the necessary financing, the overall financing cost is often higher than it is for more financially stable organizations, which puts pressure on the project's financial feasibility.

Regardless of the funding that healthcare organizations pursue, they should have a strong business plan that demonstrates the viability of a project. The business plan should describe how the project would help deliver better care at lower cost during a time of declining payment levels. A business plan can illustrate how integrating strategic and financial planning with operational and facility planning can help reduce real estate costs. By building a strong business case, organizations have a better chance of reducing financing costs and potentially attracting state and federal funds.

Developing a strong framework and approach. As a project moves forward, it is important to develop a strong approach that balances the needs of all stakeholders, including payers, staff, patients, and customers. In this environment, an effective program should integrate facilities, physicians, and programs with the goal of delivering lower-cost care with higher-quality outcomes and enhanced patient experiences.

This integrated project delivery and execution approach should include strategic vertical thinkers on the operational team, including management, senior physicians, clinicians, and support personnel, rather than the traditional functional user group approach. Such an approach ensures that the organization has everyone, including the architect and construction team, on board with an agreed set of guiding principles and an execution plan that includes strategic, operational, technological, financial, facility, and real estate implications.

Such a plan also is more likely to focus on the desired future state rather than the past. This approach not only ensures necessary organizational buy-in and support, it can also keep the team accountable for delivering its promise of a higher-quality building planned in an operationally efficient manner. For example, if an organization is planning to modify and renovate an existing facility, the capital allocation will be focused on expansion, renovation, and modernization designed to support execution of desired operational change, enhancements, and efficiencies.

Managing technology and process improvements. Designing a facility's desired future state begins with an analysis of the current state of operations-the way things work now-using process flow diagrams. For example, the current state of a presurgical area would show how the admitting, registration, and intake processes work, the flow of the clinical process, and how and where patients move throughout the facility, including entry and exit.

Like many industries, health care has embraced innovations such as Lean technologies and Six Sigma to drive process improvement that is supported by technology and that addresses the challenge of improving quality while reducing cost. For example, facilities may need to modify processes to reduce the labor and nonlabor costs of delivering care before making facilities-level decisions.

With the current state, hospitals can identify best practices to define the desired future state for processes and operations, including process flow and facility set up. Lake Health System's TriPoint Medical Center in Concord Township, Ohio, completed a 119-bed replacement hospital where future-state planning focused on assembling all staff and physical resources for surgical, gastrointestinal, and cardiology labs in a colocated interventional platform. By locating these resources nearby, TriPoint made all similar processes occurring before and after surgeries and procedures as lean as possible, eliminating unnecessary labor costs while improving patient and staff satisfaction. Completing future-state work before beginning architectural planning ensures that all functional and process needs are factored into the final design.

Because current state mapping and future state planning require leadership resources, organizations can focus these efforts on operations with the greatest promise of payback. With more efficient processes and a cross-trained staff, hospitals are likely to see more opportunities to create cost-effective facilities using Lean approaches that remove process steps and reduce required square footage.

Driving culture change. The approach to more innovative facilities development represents a significant change for many organizations and requires a concurrent culture change to support the desired future state of operations. Without that culture change, people can more easily undermine the innovations by gradually returning to familiar habits rather than developing new ways of working.

Many organizations underestimate the amount of culture change and reinforcement required to make sure these improvements take hold. This effort requires not only strong leaders who continually emphasize change, but also an ongoing campaign to make sure everyone understands how they should change. For example, it is critical to help physicians understand the new way of operating so they can support and model the required changes.

To reduce uncertainties that can undermine culture change when activating a new facility, organizations can use a transition planning process for managing a move into the new space. This process requires everyone to consider the critical details of the transition, such as how to transport and hand off patients to the new facility. It also requires working through the details of managing nonclinical issues, such as moving equipment and furniture, setting up new phone systems, planning for and developing new procedures, and scheduling staff training.

To address these issues, the executive leadership at KCH and TriPoint developed formal structures and processes for transition planning before the expected first patient day in their new facilities. To reduce risk, these hospitals developed detailed tasks of implementing future-state operating plans that allowed sufficient time to recruit and train staff, build readiness assessments, and even perform mock simulations of new hospital operations before activating the new facility.

A Business-Driven Approach

Although healthcare reform is driving many of these changes, taking a more business-driven, rather than architecturally driven, approach to facilities development can yield better outcomes for the organization. By making the business case for a project, organizations can show the facility will be sustainable from a business perspective, realize the expected ROI, and achieve its short-, medium- and long-term goals. In turn, that can help the organization attract the right kind of financing.

Organizations are more likely to realize improvements in cost, quality, and safety while achieving an optimum plan of finance by investing in front-end strategic planning around service lines, demand, and capacity requirements. 


Fred Campobasso is managing director, construction real estate, Navigant, Chicago (fred.campobasso@navigant.com).

Joe Kucharz is director, healthcare real estate, Navigant, Chicago (joe.kucharz@navigant.com).

Publication Date: Tuesday, May 01, 2012

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