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5 New Rules of Healthcare Facility Development

Most healthcare organizations today are shifting from a hospital-centered strategy to an ambulatory network strategy. The goal is to build a “network of the future” that improves outcomes and controls costs by expanding access, aligning services and increasing efficiency.  

This shift represents a significant investment, and healthcare leaders are carefully managing the risks of this transition. But there is one threat that most leaders are unaware of—the risk that a weak facility development strategy could undercut an otherwise solid network strategy.

One issue is cost. The “first dollar” costs of facility development have increased by about 12 percent in just the last 24 months. The main risk, however, is inflexibility. A poorly planned development strategy will make it hard for an organization to expand quickly into new markets, deliver care efficiently and pivot effectively as conditions change.

The key to avoiding these problems is to understand the five new rules of healthcare facility planning.

1. Flexibility is now a key dimension of facility strategy

The future is uncertain in every healthcare market. Today’s facility development plans must be flexible enough to allow health systems to respond quickly to changes in competitive dynamics, reimbursement and care delivery.

Flexible planning could imply additional space for vertical or horizontal expansion. However, “just in case we need it” is not a sufficient rationale for building more shell space. A solid facility development strategy should be based on plausible and well defined expansion scenarios.

The concept of flexibility should also extend to facility ownership. Rather than locking capital into a series of owned buildings, healthcare organizations should consider utilizing third-party capital by leasing some of their physical assets. A leasing strategy can give an organization the ability to shift access points more easily as markets and care delivery models evolve.

2. We have reached a tipping point in the “build new versus renovate” discussion

Facility renovations today must meet increasingly stringent building code, life safety, energy and seismic requirements. In addition, adding services such as MRI can require extensive facility and system upgrades. As a result, it is now often more cost-effective to build new than to renovate an existing structure. In fact, renovating a facility today can actually cost 20 percent more than new construction.

Even where renovation is cost-effective, location can be a deal-breaker. If an existing facility is not in the right market area, the short-term savings of a retrofit will eventually be erased by weak market penetration.

3. Standardization is key to both operating efficiency and network strategy

With declining utilization, continued downward pressure on reimbursement and growing demand for price transparency, all health systems need a strategy for reducing operational costs. In just the last two years, “efficiency” has replaced “capacity” as the watchword for facility expansion.

One driving force of efficiency is standardization. Design standardization can support both process efficiency and quality improvement, which are important for realizing cost control goals. And facility standardization offers strategic benefits as well. Health systems are finding that well planned facility prototypes can make expanding into new markets more efficient.

4. “Retailization” is now a core concept of facility development planning

Thanks to high-deductible health plans, patients are paying more out of pocket than ever before. As a result, consumer preference now plays a large role in how providers are evaluated and selected. Previously, health systems competed primarily on clinical excellence. Now they must also compete on consumer experience.

Leading health systems are embracing the tenets of successful retailers—convenience, consistency and consumer experience. Healthcare development leaders need to keep these tenets in mind when selecting facility designs and sites. Going forward, healthcare facilities must be close to patients’ homes and work, enable fast “in and out” and provide an inviting environment for service delivery.

5. The “death of hospitals” has been greatly exaggerated

One aim of healthcare reform is to keep patients out of the hospital. The goal is to shift services to lower-cost settings and even provide care at home.

So does that mean health systems should not invest in hospital facilities? No. When you look at the nation’s aging demographics, many regions actually have a shortage of inpatient beds. Type of bed is also a growing concern. Hospital care is moving toward a “hyper-acuity” model, which will place different demands on the existing bed structure. Both trends mean that development strategy will continue to call for significant investment in hospital facilities.

But won’t telehealth reduce the need for clinical space? Not really. The main effect of telehealth is speed. Patients see a provider quicker, which leads to faster referral for diagnostic testing and follow-up care—both of which take place in buildings. Telehealth speeds up the movement of patients through the system, but it won’t replace facility-based care any time soon.

The key takeaway—facility development strategy today must be based on a clear understanding of trends in demographics, market dynamics and healthcare delivery.

Comprehensive planning mitigates risk

All of these rules point to the critical importance of a strategic network development plan.

A comprehensive plan will take into account current demographics, population trends, local health profiles, traditional procedure volumes, existing referral networks, competitive dynamics, market development “hotspots” and many other issues.

A strategic plan that coordinates all these issues is the key to minimizing costs, accommodating change, expanding access and delivering quality care in the years ahead.

About Hammes Company

Hammes Company is comprised of a team of accomplished professionals with deep industry and functional expertise. The company assists a full spectrum of healthcare clients by advising, implementing and managing key strategies and solutions that build high-performing organizations. Hammes Company is recognized by leading healthcare providers and industry insiders as one of the most trusted providers of consulting services in the United States. The company currently serves health systems, hospitals, physician groups and payers. Hammes Company is headquartered in Milwaukee and provides services through a network of regional offices strategically located across the country in Atlanta; Boston; Chicago; Dallas; Denver; Grand Rapids, Mich.; Houston; Los Angeles; Newport News, R.I.; New York; Richmond, Va.; Seattle; and Washington, D.C. For more information, please visit

Co-Authored by Dave Connolly, Senior Vice President of Hammes Company. This article originally appeared in Colorado Real Estate Journal