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Development decisions that will affect your organization's future

By Samuel Essak

As the national economy continues to struggle and financial capital becomes evermore scarce, hospitals in metropolitan areas are increasingly being forced to make tough decisions regarding how – and in some cases, if – they can continue to provide healthcare to their communities. Most of the financial deliberations revolve around how to best deploy capital into, and out of, hospital facilities and real property. These decisions must incorporate the appropriate strategic and financial considerations to achieve the best outcome for the organization and its patients. Often, creative approaches are necessary.

From a facilities perspective, most decisions fall into one of four primary categories: build new facilities, modify current facilities, buy existing facilities and/or dispose of owned facilities. Likewise, hospitals have similar decisions to make regarding the real estate parcels on which these facilities are, or could be, located. The sizeable costs related to all of these options generally require sound external financial advice to make the best decisions for the organization.

Strategic considerations should begin with an organization’s mission statement, because the results of all major decisions must be evaluated against how they support that mission and the organization’s established brand. After ensuring consistency with the mission, the details can then be addressed. A thorough understanding of an organization’s primary and secondary markets, including demographics, service modalities and reimbursement methodologies is necessary. For example, markets with aging populations will clearly require different healthcare services than markets with a significantly younger population. And what are the projected growth rates for your markets? Hospital leadership teams must consider both current and future market trends, changes in technology, and trends in service modalities when identifying the needs of their patients and deciding how they can best fulfill those needs.

Ambulatory network planning, strategic health care market analysis and master facility planning all play an integral role in a hospital’s strategic planning when considering facility development and real estate strategies. Frank answers to important strategic questions will help healthcare organizations identify the most appropriate site for a new facility, and help determine the overall size and scope of services to be provided at that new site.

If strategic planning answers the question of what and where to build, acquire, modify and/or divest, then financial considerations will determine how to best realize those strategies. Any strategic decision made by the leadership team must also support an organization’s financial goals in order to be viable. Therefore, the result of a healthcare facility development decision should improve the overall financial health of the organization.

A new or renovated facility must support current and projected volumes with a minimum of additional expense to drive additional revenue to the bottom line. The first critical topic to be addressed is site selection and, if warranted, acquisition. Site selection criteria include current and projected market demographics and market share; payer mix; service line analyses; and reimbursement trends. When acquiring property – particularly large and/or multiple parcels – it is often wise to utilize experienced third parties to evaluate potential sites and facilitate acquisition. All too many hospitals have learned the hard way that real estate prices often escalate when it is learned that there is a large institutional buyer interested.

Following prudent site selection and acquisition is the physical development of the facility. Considerations when developing a healthcare facility are convenient patient and staff ingress and egress; operational efficiency; positive patient and staff experiences; and the flexibility/adaptability of the facility. In-depth operational planning can address many of these issues to ensure that the patient, work and process flows are all optimized for operational efficiency. A well thought out operational assessment (and the ensuing recommendations) can significantly reduce the FTE’s required to operate that facility. Combining these efforts with the advice from patient and staff experience teams will ensure that the identified efficiencies support the hospital’s mission and values, and meet the expectations of the marketplace.

Healthcare facilities are developed for both current and future life cycles, it is important to select and design a site for maximum flexibility. Changes in technology, service modalities and reimbursement can all impact how and where specific services are provided to a hospital’s patients. Clearly, sites with minimal opportunity for flexibility will become obsolete earlier than sites with optimal flexibility, and will result in a lower ROI (return on investment) for the project.

Finally, after a facility is designed and constructed, hospital organizations need to be cautious about the structure of tenancy, if applicable. While most hospitals expect to attract a strategically and financially advantageous mix of physicians, the Stark Laws (OBRA 1989 and OBRA 1993) must be taken into consideration for a project to be successful. Though far too detailed to discuss in depth here, it is important to note that the lease terms and valuation must be subjected to rigorous review to ensure compliance with these laws and requires a highly specialized level of expertise.

In summary, navigating the complexities of healthcare facility design and development can seem overwhelming, but it helps to understand the key steps involved in these projects.

Strategic Planning Do’s

  • Validate organizational mission
  • Conduct market analyses
  • Review organizational branding
  • Review or conduct ambulatory network plan(s)
  • Perform service line gap analyses
  • Engage in strategic site selection and analysis

Financial Planning Do’s

  • Develop financial modeling and variance analyses for potential site/facility recommendations
  • Review and/or develop Master Facility Plan
  • Perform and validate operational analysis
  • Develop real estate and facility deployment strategy
  • Develop Stark compliant tenancy structure

In addition to hospitals’ in-house capabilities, there are significant external resources that can provide the necessary education and guidance for the specific steps previously noted.

As reimbursement methodologies continue to evolve and capital markets continue to contract, hospital facility development decisions will continue to play a major role in the success – or failure – of the healthcare organizations both today and far into the future. It is incumbent upon the leadership teams of healthcare organizations to make sensible strategic and financial real estate development decisions that will ensure the long-term viability of their organizations and patients they serve.