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Hospital Execs, Get Strategic About Capital Expenditures

By Jack Hobbs, for HealthLeaders Media  
   November 29, 2010

The nation’s health reform priorities have shifted in the time since President Obama signed the historic healthcare bill into law earlier this year. Access to care for millions of uninsured, expanded coverage for families under existing health plans and the removal of lifetime caps and other onerous insurance provisions are the jewels of Obama’s healthcare policy triumph.

Although no one is quite sure of the impact of the healthcare bill on the behavior of institutions, there will clearly continue to be downward pressure on them and a critical need to justify capital spending.

But controlling the cost of care and all the factors that drive cost up is still the elephant in the room when it comes to treating whatever ails Americans. Every dollar counts and every expenditure is subject to scrutiny in the business of medicine. That includes major capital investments in healthcare facilities, often the largest single expense incurred by healthcare providers in any given year.

These are decisions an institution simply cannot get wrong. Sticking with an outmoded and inefficient facility for even a few years too long will swamp an operating budget with huge maintenance and operational costs and more. Faulty allocation of capital in anticipation of growth without the benefit of a proper master plan can saddle an institution with a crushing debt load from which it may never recover.

You would rarely see a for-profit commercial or housing developer green light a project and its associated risk without a well-vetted pro-forma and proper due diligence. Yet healthcare providers, whose decisions have even more impact on a community, often proceed with a project based on a fraction of the information they really need.

In any industry or sector—be it commercial, educational or healthcare—capital investment decisions need to be strategically based with the end user in mind. In healthcare, it’s all about the patient. Indeed the underlying attitude is that the patient care mission is of singular importance no matter what the cost. But this well-meaning myopia often leads to misdirected decision making with missed opportunities for savings and long-term efficiency.

Every large project presents a variety of challenges. Yet if the strategy for meeting them is simply dealing with the “item of the day” then these individual challenges will aggregate into a large and costly problem. When strategic decisions are made without the help of financial modeling, a review of the long-term objectives of an institution and a consideration of the overarching effects a decision has on parallel activities. Then healthcare administrators may actually find themselves reacting too quickly to a perceived need or competitor’s capital project without having all the actual facts.

When this happens, projects start busting budgets and blowing deadlines. Then financial leaders need to really start thinking about the patient, because ultimately those added costs for the capital projects will trickle down to them.

Healthcare administrators are rightly focused on achieving the mission for patient care. They are always asking the questions: Are we improving the patient experience? Are we enhancing the delivery of care? It is with this goal in mind that the most successful healthcare projects integrate that singular focus and passion with the work of an effective, professional project manager.

PMs have their own series of questions that guide the process:

  • Is the project consistent with community expectations?
  • Does it enhance the institution as a community asset?
  • Does it strengthen the institution’s future and contribute to economic sustainability?
  • Are we controlling costs and delivering value over time?

Effective PMs can ensure that all issues related to a proposed capital project are studied properly and advanced as the project is being considered. The project manager provides the capacity to evaluate opportunities for savings and improvements in an apolitical environment that’s unencumbered by the conflicts that can emerge among employees.

With so many complexities and challenges to navigate during a large capital project, it’s surprising to find that so many of them often proceed with little strategy behind the approach.
In the age of reform and cost control, smart and efficient healthcare strategic planning, effective designs, and an on-time budget and construction experience is an absolute must.

These days, major capital projects can be make or break financial decisions, with lasting and permanent impacts on an institution. Getting it wrong once means you may never get a second chance to make it right.

Jack Hobbs is president and CEO of RFW Collaborative Partners.

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