Health system capital planning for the future: The benefits of master plan portfolio analysis and ambulatory market modeling

Having access to capital is one major reason a hospital will join and consolidate within a system. 

According to the American Hospital Association (AHA Trendwatch Chartbook 2013), approximately 60% of the nation’s community hospitals are part of or affiliated with a larger hospital/health system.  

The merger trend has steadily increased since 2008, coinciding with the downturn of the economy and fiscal crisis from which the U.S. is just beginning to recover amongst other reasons. Among the many reasons for the increase are: gaining economies of scale to reduce operating costs; pool clinical knowledge to increase quality; provide shelter from competition; diversify portfolios; gain payor leverage; and tapping into the perceived “deep pockets” of a multi-hospital regional Integrated Delivery. 

Money continues to be scarce, yet U.S. health systems need to invest and re-invest in their physical future.   

Some of the basic reasons that hospitals choose to invest in facilities include addressing a strategic need in the market, modernizing an aging infrastructure, and/or upgrading to achieve and ensure that the enterprise is operating with the “standard of care.”  

The Affordable Care Act (ACA) has forced health systems to evaluate their entire portfolio and question where their dollars are spent. The focus of healthcare is continuing to shift more and more to an outpatient standard. This idea is not a new trend--hospital-based outpatient visits have more than doubled in the U.S. since 1991, according to the AHA--but one that is getting increased attention given the potential nature of changing reimbursement and delivery of care. 

Providers are investing in non-core hospital assets such as primary care offices, ambulatory surgery centers, and ambulatory care centers.  

With a myriad of campuses and operating units, health systems’ facilities department leaders and chief financial officers have many mouths to feed and not enough money to go around. This begs the question: Are there tools for analyzing and evaluating master plan projects across the health system? The simple answer is yes. Tools do exist that will create a system-wide portfolio of master plan capital projects that prioritizes projects based on a set of criteria, understanding the system has a finite set of capital resources.

There is no panacea to prioritizing and deciding which operating units of a health system get funded first. Portfolio prioritization is one of many important pieces of information health system executives should evaluate when considering funding projects. 

The system’s strategic master facilities plan (SMFP) should be well conceived and pass initial muster. However, when all of the requests are tallied and laid out by the system CFO across a multi-year cash map for the leadership team, there is usually more “ask” for dollars than what the system can spend to remain fiscally solvent.  

The dichotomy is that these individual master plan projects are necessary for the system to remain a sustainable business and care delivery entity. Thus, it is very easy to see how a system can tie itself in knots trying to make funding decisions when the questions are: Do we invest in an aging facility within an important core non-growth market, invest in a facility addition on a campus in a growth market, or invest in a robust outpatient strategy?

THE DEVELOPMENT OF A STRATEGIC MASTER FACILITY PLAN PORTFOLIO

The first step to assist leadership is to develop a multi-year (typically five to 10 years) SMFP for each operating unit, and then prepare a comprehensive portfolio of all the SMFP projects. 

It is important to break these SMFPs into separable, standalone groupings of projects. Typically, a SMFP is multi-faceted and has numerous related projects that can be grouped into “tracks” of investment that can stand on their own and be funded separately. It is important that cash-flow projections (typically quarterly) be developed for each track so the “projected spend” for all projects can be predicted over time.

The next step is to compile all of the operating unit projects into a master plan portfolio. The portfolio should be an easily digestible summary document for operating unit and system leaders. A spreadsheet matrix can be developed so that data can be easily sorted and summarized as a graphic representation of a multi-year “spend-ask” cash map.  

The matrix should capture, at a minimum, the following information as data fields:
• Operating Unit Name
• Master Plan Projects Track Identifier
• Brief Master Plan Project Track Description Summary of Major Components
• Overall Estimated Total Project Cost for each Track
• Overall Estimated Total Project Schedule for each Track –Project Start and End Dates
• Overall Comparison Score

The Portfolio should be reviewed with operating unit leaders to ensure accuracy then augmented by providing each final operating unit SMFP and related documentation as an appendix to the portfolio. 

THE SCORING AND EVALUATION TOOL

In order to add some objectivity to the process of evaluating tracks of projects to fund, not fund, or defer to a later time, a forced scoring evaluation tool should be developed. 

There are many criteria that need to be considered when evaluating SMFP projects. Each criterion should be placed into one of several criteria groups. Each criterion is then scored, and the score for each rolls up into a weighted criterion group, where scores are tallied and then rolled to the total.  

Creating these criteria groups provides a more in depth analysis as to why a project track is important: is it to meet a strategic need, mitigate risk, address an operational issue, or some combination?  

Suggested criterion, groupings and weightings may include:
• Financial (20%) - Potential Return On Investment (ROI) and Capital Cost
• Strategic (25%) -  Growth Initiative or Market Defense
• Critical Need/Risk Mitigation (30%) - Standard of Care Upgrade and Infrastructure Upgrade
• Operational/Physical (25%) - Improve Access, Facelift/ Image Enhancement, Process or Flow Enchancements, Best Practices and Support New Models of Care

Prior to scoring each project track, there must be agreement from each operating unit leader on the criteria, the criteria groupings, and the weighting.  

Each criterion is then scored on a scale of 0-3 related to the main focal points for each SMFP track.  One should ask: What are the main reasons and focal points for the projects within this track? Was it to meet a growth initiative need, improve operational flow, or improve infrastructure? Scores would be 0 = Neutral/Not a Focused Reason; 1 = Limited Focus; 2 = Secondary Focus; 3 = Primary Focus.

Criteria scores within each criteria grouping are totaled, then multiplied by the grouping weight for a grouping score. 

When presented, all scores, not just the total score for each SMFP track, should be presented. The scores for each project track can then be compared to one another. 

However, it is important that absolute score not be the only determinant of funding or deferral, but one indicator of overall rationale and need for a project. 

As stated earlier, creating these criteria groups and presenting the full data, provides a more thorough understanding as to why a project track is important.

THE CASH FLOW MAP

The last piece of the puzzle is to develop a cash flow map that presents cash flows across a multi-year quarterly timeline.  

When looking at all SMFPs across a system, the number of project tracks could easily be in the dozens. By utilizing the information collected in the portfolio matrix, a stacked bar chart is created showing each quarter (say for a five- to 10-year time frame) as the x-axis and potential cash-flow (or spend-ask) as the y-axis. Each quarterly stacked bar represents the total potential quarterly SMFP “spend-ask” for the system. The items in the stacked bars represent color-coded operating units’ project tracks. 

It is important that the system understand its target or available quarterly potential spend related to all of the SMFP projects. If the total spend-ask is below the quarterly capacity, then all is good. In quarters where the spend-ask is over the total spending capacity, and assuming no shift in spending capacity can be made, decisions to fund, defer, or change project timing must be made in order to “smooth” spending so as not to put the system’s fiscal health in jeopardy. 

THE IMPORTANCE OF AN AMBULATORY STRATEGY IN PORTFOLIO ANALYSIS

An often overlooked component of a system’s total spend needs is ambulatory care and outpatient facility investment. Typically, this is related to off-site/non-core hospital campus development in the form of physician offices, ambulatory care centers, free-standing urgent/emergent care centers, and ambulatory surgery centers to name a few.  

It is critical in today’s healthcare environment, and in order to plan for the future, that the ambulatory strategy be well thought out and included in any portfolio master plan. One method of developing such a strategy is to engage in market and location analysis for “off-campus” planning efforts.  

In order to identify opportunities and create strategic master plans for ambulatory care locations, many healthcare organizations are turning to other industries for guidance. The retail and banking industries have historically employed advanced predictive analytic techniques incorporating market demographic and psychographic datasets for guidance in planning their retail and customer oriented store and branch networks.  

By combining these proven techniques with rigorous healthcare and patient center datasets and real-time local market intelligence, systems can identify optimal opportunities for the growth. In addition, this will provide a rationalization for their ambulatory care locations, as well as predict the financial impact and overall feasibility of investment decisions.

The three typical phases involved with the creation of Ambulatory Strategy include:
• Discovery: Full knowledge and approval of system goals and objectives for the outpatient network along with an understanding of existing portfolio distribution, performance, and market specific competitive threats.
• Development: Identification of opportunities for growth, consolidation, or relocation of outpatient facilities through the use of predictive analytic technologies combined with on-the-ground local market intelligence.
• Delivery: The creation of proactive, multi-year strategic plans comprised of market specific strategies and prioritized opportunities for System review, selection, and approval.

Once a system becomes proficient in utilizing such tools, techniques, and processes, it will begin to understand the true power of an ambulatory strategy.  Just imagine the ability to quickly and easily visualize patient demand and payer mix across a market, understand existing outpatient facility coverage of market demand versus competitors, and identify opportunities for future growth and optimization.

For example, a recent healthcare system undertook the challenge of creating a new multi-year ambulatory strategy for their network. The system collaborated with our industry experts to analyze existing market supply versus demand within their market.  

The analysis ultimately identified a need to increase their network of primary care facilities and physicians in areas of high demand and low competition, while limiting their investment in urgent care due to over-saturation in the market.

With the ever-increasing pressure for systems to focus their attention and investment on convenient patient centered care, sound ambulatory strategies are required. These strategies will assist in maintaining/growing market share, increasing overall network efficiency, and positioning healthcare organizations for success in a rapidly evolving healthcare marketplace.

CONCLUSION

When projected quarterly SMFP “ask” exceeds “spend” capacity, adjustments are inevitable. Many decisions need to be made to ensure system resources are appropriately allocated and the strategic and facilities needs of the operating units are met to ensure viability.  

The leadership of the health system will likely launch into healthy debate over the merits of one plan and development track verses another. Objective and subjective cases will be made by committed leaders.  

In an effort to help with these decisions, a completed strategic and master facilities plan portfolio that includes a robust off-campus ambulatory strategy and analysis, as well as scoring matrix and capital request cash map, are tools that leadership can utilize to drive adjustments to plans and make informed decisions.

About the authors
Curtis Skolnick and Charles Black are Managing Directors with CBRE Consulting.