The rapid pace of change for hospitals and healthcare systems has been accelerating over the last several years.
National issues, including first the economic slowdown, then healthcare reform, and now the fiscal cliff, sequestration and myriad other factors, only serve to draw further attention to the challenges facing the healthcare industry as a whole and individual hospitals and healthcare systems specifically.
Diving deeper, some of the key issues confronting hospitals include:
- Hospitals are challenged by flat revenue, declining reimbursement, and average bad debt expenses that exceed 10 percent.
- Most hospitals and healthcare systems operate at razor-thin profit margins ranging from 1-3 percent.
- Real estate comprises as much as 40 to 50 percent of a hospital's assets and the third largest expense item.
In response to national issues, and their own localized challenges, hospitals and healthcare systems are experiencing greater upward pressures on expenses and, as a result, downward pressures on profitability. Now more than ever, hospitals and healthcare systems must begin to operate more like corporations for which expense management is a matter of survival while staying true to their core mission of providing unparalleled medical care.
Healthcare executives increasingly need to focus attention on operational efficiencies as a mean to sustaining any bottom line. Real estate is an untapped source of savings for most heath systems. A capital asset strategy can serve as a road map for improving an organization's cost of occupancy through active management of the performance of all land and buildings.
Developing a strategy
With all of the pressures hospitals and healthcare systems face, the importance of developing a detailed capital asset strategy has never been greater. Yet, as the industry has changed and evolved, so has the focus of the strategy. Historically, a capital asset strategy would have emphasized ways to grow and generate top-line revenues. It would have identified directions for facility expansion and outlined how to add capacity to accommodate ever-increasing volume.
Today, with incremental growth in revenue more challenging and utilization declining or shifting to the ambulatory setting, the focus is shifting to cost containment, consolidation and improved operational efficiency. A strategy will serve as a roadmap to guide improvement in performance of the balance sheet (return on assets) as well as margin (via expense reduction).
If, for example, a two percent operating profit level is assumed, a hospital or healthcare system seeking to improve profitability by $2 million has two options. The first, to improve top line revenues by $100 million, is something of a herculean task in today's environment. Alternatively, it can reduce operating expenses by $2 million.
A capital asset strategy begins with and is tightly linked to the organization's overall business strategy. The program complement, anticipated volumes of service and market aspirations form the inputs, which are then rendered in terms of investment required in land and buildings, and expected return via elimination of duplication or improved efficiency.
Measure it
To be truly effective, of course, any strategy must be detailed and measurable. For example, if a hospital or healthcare system has a long term goal to accommodate increased patient activity to a certain level, or to become a market leader in a certain segment of care, it will be essential to specifically forecast the source of that activity and the resources that are necessary to bring it to support the resultant care. Scenario planning can help identify most likely futures.
Most organizations build their plans to five- and ten-year horizons. This makes sense; any facility move could take five years to complete, and you want to envision the stable system beyond any identified changes. Some wish to think further into the future, and the process can serve as an excellent vehicle for facilitating that conversation. The strategy also provides guidance as to the specific sources and uses in an organization's rolling 18-24 month capital plan.
Today there is intense demand for the very limited capital resources that are available to fund IT programs, capital expenditure improvements, equipment purchases and mergers and acquisitions, among other things. In fact, it wouldn't be exaggerating to say that for every dollar available there likely is justifiable demand for as many as five dollars. Consequently, difficult questions must be asked; hard choices must be made. The planning process, again, creates a transparent and structured venue for thoughtful consideration and decision-making:
- What are our highest priorities?
- What helps advance the mission of our institution?
- Which initiatives/investments will generate the greatest return, and potentially generate capital to meet other needs?
The process of strategy development can take many forms, but most proceed in two sequential phases. Initially, a group of senior executives set the direction, priorities and framework for the strategy. They have full command of the strategic direction of the institution, its resources and opportunities. This group will ask the hard questions, make the tough decisions and set the guardrails for the plan. A second phase will then be initiated with a broader group of key stakeholders to flesh out the plan and build the buy-in that will be necessary to make the strategy successful.
In the end, a capital asset strategy entails a ranking of priorities via a careful examination of alternative future scenarios and the likely outcomes. It is a guide to how you can best live within your means and melds program strategy and financial strategy with infrastructure renewal strategy. And, it will not only provide a path to dramatic improvement in financial and operational performance, your capital asset strategy will become the roadmap for system transformation.
Scot Latimer is Managing Director, Healthcare Solutions, at Jones Lang LaSalle.