Strategic Facility Planning Improves Capital Decision Making. JOHN R. REEVE.

Full Text: COPYRIGHT 2001 Healthcare Financial Management Association

A large, Midwestern IDS undertook a strategic facility-planning process to evaluate its facility portfolio and determine how best to allocate future investments in facility development. The IDS assembled a facility-planning team, which initiated the planning process with a market analysis to determine future market demands and identify service areas that warranted facility expansion. The team then analyzed each of the IDS's facilities from the perspective of uniform capacity measurements, highest and best use compared with needs, building condition and in vestment-worthiness, and facility growth and site development opportunities. Based on results of the analysis, the strategy adopted entailed, in part, shifting some space from inpatient care to ambulatory care services and demolishing and replacing the 11 percent of facilities deemed to be in the worst condition.

Effective facility asset management plays a significant role in ensuring the financial success of an integrated delivery system (IDS). A strategic facility-planning process can help an IDS's financial decision makers make critical decisions regarding facilities investment.

The issues that should be addressed in such a process are exemplified by the experience of a large, Midwestern IDS, referred to here as ABC Health System. ABC Health System faced circumstances typical of those faced by many regional IDSs today ABC's flagship hospital was selected as one of the 100 best hospitals in the country for two consecutive years. Yet despite ABC's history of excellent management and strong market share, the organization faced declining margins in the late 1990s due to inadequate managed care payments, even as patient volumes were growing and length of stay declining. In addition, ABC faced increasing competition from an existing Catholic health system and the entry of entrepreneurial niche players into the market. Further, ABC's capital requirements were soaring due to pressure for continued investment in new medical technologies, information systems, and facilities to expand ambulatory care services and replace deteriorating infrastructure.

ABC's clinical capacity was concentrated in two acute care sites located seven miles apart--a 1,000-bed suburban hospital and a 400-bed urban hospital. The original buildings were constructed in the 1950s. Roughly every seven years, additions to each campus increased space inventory, while older facilities were rarely demolished. Increasingly even modest facility alterations had become complicated planning exercises, often involving multiple department moves and high implementation costs.

Further, between 1983 and 1998, to better serve the region's healthcare needs, ABC had expanded into surrounding geographic markets, developing several ambulatory care sites and medical offices. During this time, ABC's total facility assets steadily increased from about 1.6 million building gross square feet (BGSF) to roughly 2.6 million BGSF distributed across several dozen buildings and around 20 discrete sites (see Exhibit 1, page 36).

Until 1993, this facility growth coincided with steady growth in annual net patient revenue. Adjusted to 1998 dollars, revenues doubled from about $300 million in 1983 to about $600 million in 1993. In the late 1990s, however, managed care and Balanced Budget Act payment reductions reversed this trend. Thus, as Exhibit 1 shows, ABC's annual net patient revenues were lower in 1998 than in 1993 and were expected to drop further by 2003. ABC was concerned that if facility space continued to increase at its current pace, the return on facility assets would decline from about $209/square foot (SF) in 1998 to $160/SF in 2003. ABC's executive leadership decided to address this problem by undertaking a strategic facility-planning process.

Strategic Facility Planning

ABC's executive leadership assembled a facility-planning team of 30 individuals, including the CEO, COO, and CFO; physician leaders; the director of marketing; vice presidents of each clinical service area; the directors of real estate and facilities; and a consultant to facilitate the process. Including diverse representation on the team ensured that there would be consensus among organizational leaders regarding analysis and conclusions, The planning process was structured around monthly meetings of the facility-planning team, during which the team reviewed various data regarding ABC's facilities and market and considered strategic options.

First, the planning team met to clarify goals and shape expectations for the process. The initial thesis, based on a preliminary overview of ABC's market and strategic direction, was that investment in the high-cost, acute care campuses should be reduced by redirecting more patients to ambulatory care sites. To test this thesis, the team undertook a detailed assessment of ABC's market environment, examining business assumptions regarding managed care, market volumes and demographics, and ABC's market share. As part of this assessment, the team performed a standard analysis of ABC's strengths, weaknesses, opportunities, and threats (commonly called a SWOT analysis) to evaluate the system's strategic direction in terms of vision, financial strategies, and ideal delivery concepts.

To make realistic predictions of future clinical volumes and, thereby, identify physical space requirements, the planners developed workload projections for a five-year planning horizon using market models developed by several national healthcare market information firms. The models took into account expected demographic changes, practice patterns, and expected changes in business conditions, including managed care penetration, regulatory policy, and healthcare practice trends.

The data collected for the market analysis supported the thesis that growth in ambulatory care would be sufficient to justify shifting some care from the acute care campuses to freestanding facilities. Yet this finding still needed to be reconciled with the separate business plans of each clinical service line, both to validate the data by comparing it with the market-share projections of the service-line managers and to ensure that the strategic facility plan would take into account the business strategies of the individual services.

[Graphic omitted] The market-share projections for each clinical service line, obtained through structured interviews with their respective managers, reinforced the initial findings of the facility-planning team that the projected increase in ambulatory care services most likely would be offset by a 1.5 percent decline in inpatient volume.

Some service lines, however, had developed business plans that accounted for a potential loss of inpatient volume due to external factors. Heart services, for example, predicted that, even though patient demand for these services was expected to increase, the service line's market share would decline because competition was investing heavily in this area and a for-profit entity was poised to enter the market. Nonetheless, the service line's managers projected that modest growth in market share still could be achieved by opening a comprehensive cardiovascular rehabilitation facility.

In addition to performing the market assessment, the planning team analyzed ABC's hospitals and major ambulatory care sites in terms of each facility's needs, assets, and capital plans. This analysis, which included a review of workload data and operational issues, helped the team to develop a shared vocabulary and foundation of accepted facts and concepts on which to base future decisions about priorities and specific capital investments.

Specific issues that were addressed during the facility analysis included:

* Uniform capacity measurements;

* Highest and best use compared with needs;

* Building condition and investment worthiness; and

* Facility growth and site development opportunities.

Uniform capacity measurements. To determine how ABC's facilities might accommodate services, the facility-planning team needed reliable information about each facility's capacity. "Capacity" refers to a facility's potential to efficiently handle specified work volumes, such as a set number of procedures or tests per patient day that can be delivered by a particular department or functional area. The capacity of a surgery department, for example, is based on factors such as the number of operating rooms of a particular size, the hours of operation, average room turnover, and case mix. Using a consistent approach to measuring capacity for all facilities within an IDS can identify how volume can best be distributed across the system.

Highest and best use compared with needs. As a prerequisite to linking physical assets with strategic direction, the facility planners needed to establish information about best potential uses of buildings and sites. Planners characterize this potential as the "highest and best use," representing the optimal utilization of the existing inventory of facility assets to meet projected clinical and functional needs. The resulting designation for each building reflects the distinctive physical requirements for each basic functional category (ie, diagnostic and treatment, inpatient, support, and administrative).

Exhibit 2 shows ABC's allocation of space among the four functional categories in terms of current use, highest and best use, and need. For ABC, current inpatient space of 482,206 department gross square feet (DGSF) compares with a "highest and best use" calculation of 476,588 DGSF, which takes into account the building's design and its current appropriateness as inpatient space. For example, an inpatient unit requires a certain floor plan, access to daylight, and an efficient relationship to specific diagnostic and support functions. An area that does not meet these basic criteria is not included in the highest-and-best-use category for inpatient use, although it may meet criteria for another type of use.

"Need," on the other hand, relates specifically to market demand for services. Exhibit 2 shows that, based on projected volumes, ABC's space needs for inpatient services are significantly less than its current space allocation for these services.

Evaluating building condition and investment-worthiness. The facilities in ABC's real-estate portfolio included structures as old as 50 years. To fully assess the physical condition of these structures, the planning team met with key facility personnel to uniformly evaluate all buildings in the system according to criteria that considered shell condition, infrastructure, and usability The result was a ranking of ABC facilities into the following five condition strata:

[Graphic omitted] * Worst (11 percent);

* Poor (17 percent);

* Moderate (14 percent);

* Good (26 percent); and

* Best (32 percent).

Facility growth and site development opportunities. Independent of particular needs, existing buildings and building complexes have their own "logic" for growth and change. For example, corridor geometry defines opportunities for building additions. Existing sites either allow or inhibit growth based on site geometry and zoning regulations.

The expansion potential for the suburban campus of 60 acres was constrained by the logic of the existing building's internal circulation and by saturated surface parking. The expansion potential for the urban campus was constrained by the tight grid of the urban street pattern and by bordering buildings not owned by ABC.

Through the facility-planning process, the planning team sought consensus answers to four key questions:

* Are existing facilities being used effectively compared with industry standards?

* What are the opportunities to improve operational efficiency and patient satisfaction?

* Which facilities, if any, are not worthy of continued investment?

* What magnitude of facility investment is called for?

The data from the various analyses were organized into a comprehensive framework to facilitate discussion of the overall findings through the remaining portion of the facility-planning process. This framework allowed facility assets to be examined with respect to factors such as market potential and practice patterns. Through ongoing discussions, the planning team identified and evaluated potential capital projects for cost-effectiveness in terms of initial investment and ongoing operational costs. The team then reached a consensus on the best options from the standpoint of rationale, cost, and timing.

Key Findings and Actions

ABC's facility-planning team concluded that both of the hospital campuses had critical space deficiencies that restricted the ability to deliver optimal patient care efficiently, thereby suppressing revenue growth and adversely affecting patient satisfaction. The facility-planning team determined that an investment of about $100 million over five years would be required to address all of these deficiencies. However, actual projects would need to be prioritized according to revenue potential (eg, determining whether to invest in heart services versus behavioral health, considering factors such as market demand and payment rates).

In particular, the team determined that the 17 percent of space in poor condition did not warrant significant future investment. Moreover, the team determined that the 11 percent of space deemed to be in the worst condition represented the best opportunity for potential redevelopment and therefore should be phased out of service and demolished.

For example, at one location, an old nurses' residence hall (now used for offices) blocked logical expansion of the main hospital building. Although office functions could occupy the old residence hall, such use was inefficient functionally and in terms of net square footage to gross square footage. Demolition and replacement of the residence hall would further ABC's strategic objectives by reducing operations and maintenance costs and improving operational efficiencies, while also offering an opportunity to potentially increase market share by allowing the space to be tailored for optimum use in meeting market demands (ie, for ambulatory care).

ABC's executive leadership, however, was concerned that replacement of the old facilities would be problematic. Given the limitations on growth and development of the acute care campuses, developing new facilities on the sites of the old facilities could be costly, possibly exceeding the facility-planning team's recommended level of investment. Moreover, the new development could take years, during which time the original set of needs might change due to shifts in payment or competitor activities.

ABC's executive leaders therefore considered alternatives to constructing new facilities. At this point, it became apparent that the fundamental benefit of the strategic facility-planning process was the flexibility it offered for considering multiple facility options in terms of cost, phasing, and meeting strategic objectives.

The value of the process proved itself when a smaller hospital system serving the same metropolitan area was offered for sale. ABC's leadership saw an opportunity to eliminate a competitor, increase its market share by 9 percent, and replace outmoded facilities. Moreover, one of the acquired system's acute care facilities was close to an ABC hospital campus and therefore redundant. An evaluation of fit and capital implications indicated the facility afforded ABC a clear opportunity to move forward with plans to demolish outmoded facilities and replace them quickly at a relatively low cost. These considerations were informed and supported by planning data and capacity surveys developed during the strategic facility-planning process. As a result, the acquired facility was developed into a clinical specialty hospital for the system.

Conclusion

In its purpose, process, and products, a strategic facility-planning process goes far beyond traditional facilities master planning, which considers individual capital projects in relative isolation from the organization's overall long-term strategy. By contrast, because strategic facility planning takes into account long-term strategy and other broad factors, it provides a basis for evaluating multiple opportunities and identifying optimum facility investments.

John R. Reeve, AIA, is president, Christner, Inc., St. Louis, Missouri.

             HIGHEST AND BEST (H&B) USE VERSUS CURRENT USE AND
                            PROJECTED NEED [*]
                       Administrative/public Support Inpatient
Current 1,345,566 DGSF        157,198        255,143  482,206
H&B Use 1,345,566 DGSF        116,198        282,781  476,588
Need    1,296,415 DGSF        155,498        263,138  460,107
        Diagnosis/treatment
Current       451,019
H&B Use       263,138
Need          471,677