Kaufman Hall reported in July 2023 that the typical hospital operating margin calendar year to date (CYTD) was 1.4%. While this is the best result seen in the last 12 months, pressures on liquidity and capital funding for bricks and mortar projects continue.
One such pressure is decreased revenue, which reduces the available capital for facility upgrades, renovations, and new construction. Because emergency visits are shifting towards lower-cost sites of care, hospitals are earning less revenue although the average length of stay (ALOS) is starting to trend downward and alleviating some marginal pressure. These shifts are positive for patients, but the drain on healthcare finances over the last 18 months has significantly reduced liquidity and margins. Other revenue pressures include rising bad debt and charity care, as well as staff, supply, and purchased services inflation.
If you are like most health systems, you have a long list of infrastructure requests or facility strategies for stabilization and growth. But if your capital balance is low, how do you prioritize projects based on the financial health and well-being of the organization?
Below are some due diligence questions to ask when you are trying to determine which projects to fund:
- Is a bricks and mortar solution the only possible solution? Could you produce the same result by delivering a portion of the care through virtual, mobile, or in-home methods?
- Can you partner with providers or management companies to reduce your capital outlay? Does your state allow P3 partnerships that would enable you to lease, rather than own, a capital improvement project from a developer?
- Is the proposed facility sized to accommodate future growth? If so, is it in profitable service lines?
- Have you stratified inpatient versus outpatient services by percentage distribution to decide what type of occupancy is needed by the majority? Does that occupancy require I-2 construction or business occupancy construction?
- Have you reduced duplication of services within a geographical region to hit financial and staffing economies of scale targets in profitability and productivity?
- Do you know your revenue per square foot target? If so, does it exceed your cost per square foot?
- What is your current staffing vacancy rate? Will you have enough staff to operate the new project on its go-live date?
- Is the proforma reliant on Hospital Outpatient Department (HOPD) funding? If so, would you be doing this project without it?
- What is your projected utilization rate per key planning unit? Do you know your thresholds for profitability? If so, are you over or under-programming the facility?
- Have you truly prioritized your facility's infrastructure around a reasonable annual spend based on revenue supported?
- Does the project have a realistic, positive return on investment (ROI)? If not, could you tell me why you are considering it?
Ultimately, we foresee that remote monitoring and hospital at home will reduce the scope and scale of bricks and mortar solutions, even for ambulatory care. As we start to anticipate that future, it is important to build only what we can afford, with projects that produce margins for long-term viability and to fund community mission-driven services.
Michelle Mader is a Managing Director in the Ankura Healthcare Real Estate Strategy group. For more than 22 years, she has guided the transformation of healthcare organizations with a broad range of system-based strategic initiatives, specializing in national, multistate, and regional network planning. She develops strategic and capital planning scenarios based on financial variables related to market, demand, payers, utilization, productivity, technology, and other OpEx and CapEx requirements. By starting with financial viability and positive investment indicators, she shortens our client’s development process, enables quicker funding approvals, and expedites implementation.
The Ankura Healthcare Real Estate Strategy group helps healthcare providers manage costs and risks to ensure that their investments realize their financial value to the organization today and decades into the future. We are an experienced team of professionals who create targeted solutions using strategic imperatives and data justification. Our investment scenarios include operational metrics to cultivate leadership consensus around future performance targets and financial viability.
© Copyright 2023. 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.