James G. Lee

Adventist HealthCare saved more than $8 million through a comprehensive approach to facilities maintenance, construction, and real estate management that could produce similar benefits for other organizations.


At a Glance

Adventist HealthCare offers the following lessons learned in improving the value of healthcare facilities, construction, and real estate management:

  • Use an integrated approach.
  • Ensure that the objectives of the approach align the hospital or health system's mission and values.
  • Embrace innovation.
  • Develop a plan that applies to the whole organization, rather than specific business units.
  • Ensure commitment of senior leaders.

Since the advent of DRGs, hospitals have been under ever-increasing pressure to reduce costs. Some organizations have taken steps to reduce facility maintenance costs, while others have examined ways to reduce real estate costs, such as expenses related to lease arrangements. However, there have been few, if any, documented, efforts by hospitals or health systems to develop focused programs aimed at reducing costs associated with facility maintenance, construction, and real estate while also improving service and outcomes.

In late 2010, Adventist HealthCare, based in Rockville, Md., embarked on a comprehensive approach to managing expenses related to facility maintenance, construction, and real estate while improving value for the organization and its patients. To date, the initiative has saved Adventist more than $8 million and has resulted in significant improvements in project management, facility quality and performance, equipment lifecycles, and more.

How Adventist Did It

For much of the previous decade, Adventist's efforts to improve the management of facilities, construction, and real estate services had not been very successful. The health system faced challenges in securing leadership for its facilities and real estate function (a succession of three different leaders for these functions from 2000 through 2010) and in defining the organizational structure for this function (revamped twice in that decade). Moreover, Adventist's various business locations and myriad locations also proved to be difficult to manage from a facilities and real estate perspective. As a result, Adventist was unable to significantly improve its performance related to facilities, construction, and real estate services management.

During that period, Adventist successfully engaged a local real estate attorney to assist in real estate acquisition and disposal, and with real estate lease negotiations. Then, in 2010, the health system also initiated discussions with a few local firms that specialized in facilities and construction management. After reviewing several options, Adventist chose a Washington, D.C.-based firm that had demonstrated significant success in guiding organizations with the alignment of real estate departments, with specific expertise in building performance, energy management, and environmental sustainability.

Adventist worked with this firm and the real estate attorney in managing the health system's needs in the following areas:

  • Property management
  • Leasing/transactions
  • Project management
  • Facility management
  • Energy/sustainability

This effort led to creation of Adventist's facilities and real estate department-affectionately known as FRED. Adventist's stated goal for FRED was to "collaborate with operational leadership, business unit teams, and industry partners to deliver cost-effective support and leadership of the life cycle of facilities and to implement best practices in the [above] mission areas."

The Road to FRED

Adventist worked with the facilities management firm to assess the health system's performance related to three areas:

  • Property, project, and facilities management
  • Energy/sustainability initiatives
  • Real estate leasing/transactions agreements

Based on the assessment, plans for improvement were developed in all five mission areas (see the exhibit below).

Exhibit 1

lee_exh1

The assessment also raised concerns related to the health system's existing organizational structure with respect to facilities and real estate development. A new structure was put in place, with roles and responsibilities aligned to fit the new structure. Adventist then reviewed existing staff to assess their capabilities and overall fit with the organization. Ultimately, a new leadership team was established, and several existing staff found new roles within the organization. This transition occurred over a period of nine months, allowing for a smooth transition and overlap to maintain service and institutional knowledge.

Over time, Adventist recorded improvements and cost savings in each of the five mission areas.

Property management. In addition to its 12 owned locations, Adventist carries more than 65 leases in which the health system is a tenant, a subtenant, a landlord, or a sublandlord. Not all documentation for these many leases was available centrally, making it difficult to keep track of the lease terms, escalation provisions, expiration dates, and more. There also was not a consistent annual reconciliation of rent paid and received or the operating expenses for each entity.

Under FRED, all leases and supportive documentation are now centrally managed across Adventist and accessible via a web-enabled platform. Tenant relationships have also significantly improved with advance notices of rent escalations and operating expenses increases. Reminders are generated well in advance of expiration dates for timely processing of lease functions. All leases have been reconciled retroactively for the past two years. The result: Adventist discovered $303,000 in unpaid or incorrectly underpaid leases and recovered $90,000 in overpaid operating expenses.

Leasing/transactions. Previously, Adventist lacked procedures to evaluate renewals or new leases and did not have a standard approach to establishing lease agreements. Adventist also did not have a set process for establishing leases for physician offices, a growing need within the organization. Finally, the health system did not have space benchmarks with which to understand the rental market.

Under FRED, a new lease initiation process has been implemented to improve standardization of leases and documentation. There is now a process to evaluate all lease renewals, with discussions with the business unit leadership taking place well ahead of termination dates. In addition, a set of space benchmarking metrics is being developed to guide future leases.

Using this approach, Adventist recently negotiated a new system office lease, resulting in more than $640,000 in annual lease cost reductions and more than $6 million in funding from the landlord to build out the new space. The annual savings related to the new lease do not include additional savings expected from the more efficient design and use of the space, as well as energy cost reductions that allow for more innovative and green energy use.

Project management. At any given point, there are many facility construction/renovation projects being undertaken throughout the health system. Some projects are fairly small and limited in scope and cost less than $100,000, while others can be much larger and more expensive.

The process for getting each project priced, approved, and completed varied significantly from project to project and from entity to entity. Adventist did not have a standardized, formal, competitive bidding process, and the project being bid was not always clearly defined and understood by all parties. Some projects were completed without a contract in place. It was not uncommon for significant project delays and material cost overruns to occur. Project files were mostly available in hard copy only, decentralized, and, therefore, difficult to access. An internal audit reviewed deficiencies and improvement opportunities in all aspects of the project management process.

Since FRED was launched, Adventist has implemented a number of changes in its project management processes. There is now a formal process for the selection of contractors and each project has a charter that defines its scope, budget, and schedule. Each project charter is reviewed and approved by the business unit leader for the project. All projects have detailed project accounting and reporting with line-item detail. All project files are electronic and available to every member of the team. A standard set of contract templates was developed and implemented with the approval of Adventist's general counsel.

Now, any changes required for a project must be approved by leaders for the business unit. Contingencies are managed by the project manager and are clearly documented. Adventist has corrected all deficiencies identified by the internal audit and has engaged in the identified opportunities for improvement. Some of the savings in the area of project management are related to avoided costs; others are based on comparison with the health system's budget. Overall, the estimated cost savings related to improvements to Adventist's project management processes are expected to exceed $1 million annually.

Facility management. Before FRED, despite the geographical proximity of the various business units, there was limited coordination among them. Each business unit managed its facilities independently, and there were no joint programs or coordinated purchases of services and supplies. Some business units outsourced the management to a third-party vendor-with mixed results. The health system also had not established clear performance metrics across the organization.

Now that FRED is in place, business units regularly share best practices and offer support to one another. These units often use FRED as an internal consultant for advice and guidance as well. For example, when one business unit facing an imminent Joint Commission visit experienced facility issues, a team from FRED visited the business unit to help prepare the unit for the survey. Adventist replaced the third-party vendor whose performance was not adequate, and both facilities underwent successful surveys. There is now centralized oversight of Joint Commission statement of conditions, survey results, and plans for improvement.

Working closely with leaders for Adventist and senior staff at the business units, FRED is exploring opportunities to align support services that enhance the quality of Adventist's facilities, lower costs, and improve long-term facility performance.

Exhibit 2

lee_exh2

Energy/sustainability. Prior to FRED, Adventist successfully used a reverse auction to achieve approximately $2 million in annual energy cost reductions through lowered commodity costs while using 10 percent green energy. However, there was limited energy cost management conducted at the local business unit level, limited energy efficiency planning, and no clear approach to environmental sustainability.

With FRED, there is now an extensive energy sustainability plan in place. In addition to the cost savings from energy procurement, a building performance management platform put in place throughout Adventist provides detailed information on energy consumption patterns and overall building performance. Recently, another round of reverse auctions increased the health system's annual cost savings by an additional $200,000 while increasing green energy purchases.

According to the Green Power Partnership, a national program administered by the Environmental Protection Agency (EPA) that recognizes organizations that voluntarily use green power from eligible renewable sources, Adventist is the largest purchaser of green energy of any healthcare system in the United States, using 6.75 million kilowatt hours of green energy per year. Now, Adventist purchases nearly 15 percent of its electricity in the form of green energy and is reducing its carbon dioxide emissions by 5,119 metric tons each year, which is equivalent to removing 1,004 passenger vehicles from the nation's roadways each year.

Aligning the Organization's Mission with Its Environment

Last summer, FRED implemented a building performance management platform throughout Adventist to help measure and benchmark energy use and sustainable practices. The objective was to lower costs, identify facility operations and maintenance improvement opportunities, increase equipment lifecycles, and enhance capital investment decisions. This is a big step in aligning the quality of each facility and its operations and maintenance with both modern best practices and the broader mission of the health system.

The planning for this work began in late 2010 and involved meetings with facility personnel as well as site surveys at all Adventist facilities. This phase was followed by the installation of advanced metering and related sensors, integration with building automation systems, and the collection of various data to provide a rich stream of information that allowed for real-time performance monitoring and analysis.

By analyzing the data stream, Adventist developed plans to reduce facilities expense by $2.9 million by 2014 while reducing the use of greenhouse gas by 16 percent. These targets were developed by comparing the facilities' performance with best practices that are being implemented throughout the healthcare industry. Savings will come primarily from reduced use of energy (e.g., electricity, gas) and water and through the elimination of waste. Of the targeted $2.9 million in savings, more than half (about $1.7 million) will come from the following low-cost or no-cost energy use initiatives:

  • Heating and cooling optimization (52 percent)
  • Lighting-load reduction (23 percent)
  • Outdoor air ventilation management (19 percent)
  • Plug-load power controls (7 percent)

If Adventist invests some capital in energy use, an additional $900,000 in savings can be achieved on boilers, solar power usage, LED lighting retrofit, and other initiatives.

To ascertain performance across the system, a tailored sustainability benchmark index (SBI) was established to assess the facilities sustainability profile for all business units as measured against existing industry benchmarks. The SBI was developed to apply industry performance guidelines (e.g., Leadership in Energy and Environmental Design, ENERGY STAR, and American Society of Heating, Refrigerating, and Air-Conditioning Engineers) to Adventist. The SBI metric, which rates facilities on a scale of zero to five, enables Adventist to measure performance at any of its facilities and evaluate a specific credit or category from any or all of these standards. In doing so, the facility itself also is able to rate its sustainability performance and establish target goals for improvement.

Exhibit 3

lee_exh3

Lessons Learned

In addition to the early successes and benefits Adventist has experienced from FRED, health system also has learned a few lessons along the way that could help other organizations improve the value of their facilities, construction, and real estate management.

Use an integrated approach. Having a cohesive vision for how the pieces will fit together is critical to executing an improvement plan such as this. By conducting a thorough assessment of its existing situation, Adventist was able to identify areas to sustain and areas to improve as it moved forward with a comprehensive approach. Individual initiatives should be executed with an integrated vision and objective in mind.

Ensure that the objectives of the approach align the hospital or health system's mission and values. Although improving the quality, performance, and costs of individual facilities is important, these objectives should complement the mission and values of the organization as a whole. At Adventist, all improvements were viewed and undertaken through the lens of improved patient care. The health system's building performance management platform, which addresses many aspects of building management, includes factors that directly affect patients, such as ensuring comfortable room temperature and high-quality air inside the hospital.

Embrace innovation. Continuing advancements in technology and environmentally friendly architecture are changing how buildings are designed, built, and, most important, operated. Using innovative approaches such as reverse auctions, specifically around energy, sustainability, and overall building performance, has had a significant impact and added long-term value to Adventist.

Develop a plan that applies to the whole organization, rather than specific business units. Business units have many unique needs and often have certain ways of doing things. However, with proper mission and vision alignment, the enterprise as a whole can be leveraged to deliver greater value to an individual business unit than it might realize on its own. Under FRED, Adventist's energy sustainability plan takes into account the needs of all business. Making purchase decisions based on the needs of the whole organization rather than a single entity has enabled Adventist to realize hundreds of thousands of dollars in annual cost savings and increase its green energy purchases. This example illustrates that the whole can truly be much bigger than a sum of the parts.

Ensure the commitment of senior leaders. There are many necessary changes required to achieve meaningful results, and it's easy to underestimate the difficulty related to such change. It is therefore common for health systems that are undergoing change on a large scale to experience organizational resistance in varied forms. Without executive commitment and support, the effort will lose momentum and its results will be diminished, especially as changes affect leaders at the business-unit level. 


James G. Lee, FHFMA, FACHE, is executive vice president and CFO, Adventist HealthCare, Inc., Rockville, Md., and a member of HFMA's Maryland Chapter (jlee@adventisthealthcare.com).


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About Adventist HealthCare  

Adventist HealthCare, based in Rockville, Md., is a health system comprising five hospitals, a home health division, and other related services. Adventist's primary service area encompasses the Washington, D.C., metropolitan area and northwestern New Jersey. The health system employs approximately 7,000 full- and part-time staff and 1,300 volunteers, and its patient capacity consists of 855 hospital beds.

Publication Date: Tuesday, May 01, 2012

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