Historically, location, rent rolls, and marketability signified value in healthcare facilities. Facilities located on or near the hospital campus were considered the best.
Today, strategic alignment and operational efficiencies are of the highest importance. An asset performs well if it enables activities inside the building to generate a healthy return on investment. And if it is convenient and effective for the consumer, wherever that may be. Moreover, price transparency pressure demands a simpler way to count physical assets in the overall cost of care.
Our understanding of the future is that the world is shifting from ownership to usership. As with Uber and subscription models, the physical asset becomes an operational cost.
We are starting to see this in the healthcare industry.
Optum is a physician group that employs more than 53,000 physicians and owns few care delivery facilities. This company views buildings as operational costs rather than as long-term investments. Instead, it invests in staff and in ensuring that its care delivery models produce optimal patient outcomes. For them, physical assets are simply a means to their care delivery goals.
In contrast to Optum's model, most hospitals and health systems own their buildings. This provides flexibility and predictability. But today, prioritizing physical assets around market paradigms is paramount. Each deal should be analyzed on its individual merit.
A holistic view of physical assets includes the following:
1. An easier way to calculate facility asset costs in the total cost-of-care equation
Providers gain clarity through a shift in their understanding of true cost. We propose moving from a focus on the cost to carry a building to a focus on how a building contributes to the cost of care.
In most industries, the true cost of manufacturing a product or supplying a service is known. In healthcare, providers face enormous complexity in understanding the true cost of a procedure or visit. Multi-use space, time-shared exam rooms, and 100+-year-old buildings further complicate the math.
Yet, one can quantify development, renovation, maintenance, and depreciation. To figure out ROI more easily, spread these costs over each patient visit based on common utilization metrics.
Then, combine these facility costs with staffing, supplies, pharmaceuticals, nutrition, and so forth. This is where your true costs come together to determine profitability. Now, you can decide whether physical assets call for further investment or divesture.
2. Prioritizing operational efficiency and consumer convenience when planning new assets
The true value of a physical asset lies in its ability to support a convenient, frictionless patient experience. The more conveniently located the facility, the more patients it is likely to attract. And the more patients who are seen due to efficient operational processes, the more revenue the facility can generate. These factors are rarely quantified.
The right location with the right operational processes can achieve:
- Increased market share,
- Enhanced staff recruitment and retention,
- Consumer loyalty, and
- Optimized margins.
Increasingly, the right location is both digital and physical. A virtual-first system can intersect consumer travel patterns with next-level care. This is the opposite approach of our current Emergency Department-first for primary care model. And it has the potential to grow exponentially.
A “build it and they will come” mentality can sometimes be successful. But only when the asset is convenient, strategically aligned with growth, and highly efficient. If you do not focus on market location and operational efficiency, you risk creating a giant, expensive paperweight.
3. Understanding the data justification for upcoming capital expenditures
Your Board likely approved a capital investment based on market and financial parameters to advance a strategy. They expect projects to return a healthy (or at least reasonable) margin, often +10% IRR. Service mix, provider recruitment, market growth, or cost reductions may justify this return.
But any one of those variables could change before the project is constructed. Those who execute the vision must understand its metrics well enough to course-correct if this happens.
It can take a year or longer to design a new building and get it out of the ground. Adjustments to its scope during this period can result in a better-focused asset. Even with minor adjustments to development costs.
Many clients have told us that most of their projects do not meet the financial metrics under which they were approved - let’s change that.
4. Incorporating diverse types of flexibility in new or existing physical assets
By their very nature as life safety structures, flexibility in inpatient assets is expensive. It is often based on a conservative, peak demand philosophy.
Yesterday’s expensive, peak-demand type recommendations for flexibility include:
- Outfitting your waiting rooms or ORs for worst-case scenarios. Putting medical gases in the walls is the most common.
- Equipping all exam rooms with telehealth capabilities. Yet, most urban telehealth is inbound.
- Equipping all inpatient beds with current ICU infrastructure. However, the need is typically less than 10%.
Few organizations can afford to be flexible in these ways. Yet, other forms of flexibility can be built into your operational models and used by your facility assets.
Today, flexibility can mean:
- Tailoring your staffing schedule
- Using modular furniture and equipment in waiting rooms during peak demand
- Using existing primary care exam rooms for urgent care after hours
- Converting dining areas into simulation labs with mobile equipment
- Using modular walls between rooms to increase space for group therapy vs. building individual consult rooms
We learned some things about flexibility during COVID-19 that help us realign how we plan physical assets for the future. Consumers often appreciated the convenience of a virtual visit. They may prefer to wait in their car (or at Starbucks) until their exam room is ready, as opposed to in a waiting room with sick people.
Forethought, creativity, and a changing mindset leverage facilities for ultimate elasticity.
5. Internalize a highest and best use mindset for hospital campuses
The focus of a hospital campus is narrowing to a truly acute facility. Embracing this shift means accepting that anything not crucial to critical care must make way for more valuable uses of that real estate.
We achieve this in three ways. First, we rigorously consolidate and cut redundancies. Second, we scrutinize aged assets. And third, we house traditional hospital functions in less expensive locations.
- Ending redundancy - Consolidating and de-duplicating are necessary to reduce overall and true costs. It’s never too early to weed out these ‘first to go assets’ to avoid a costly strategic mismatch.
- Scrutinizing aged assets - Demolition is one of the hardest strategic parameters to get approved; surely ‘free space’ is good for something! But the long-term costs of keeping a building running past its operational value is high. For example, working in a repurposed, narrow footprint with suboptimal floor-to-floor heights. This is both inefficient and more expensive.
- Housing traditional hospital functions in less expensive locations - Just as advanced care practitioners function at the ‘top of license,’ our healthcare assets need to function at their top of license. If you can legitimately repurpose the space for efficient operations, great. If not, now is the time to talk about the highest and best use of the location and land for functionality rather than for aesthetic or branding purposes.
A highest and best use mindset also leads us to consider different, digitally-enabled avenues. Advancements such as virtual physical therapy make some forms of caregiving possible at home or in lower-cost sites.
Conclusion
Healthcare organizations need a higher-performing footprint. They also need a more sophisticated process for analyzing whether to invest versus divest. Prioritizing and right sizing your physical assets helps make the most of your valuable real estate.
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© Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
