Three Ways Healthcare Facility Design Can Save Money
June 16, 2015 | Michelle Mader
The healthcare industry must figure out how to provide services less expensively. It must implement effective cost-cutting initiatives while developing policies and procedures for managing the future costs of the emerging healthcare system. And quickly, if the Mayo Clinic offers any indication. It expects a twenty to forty percent decrease in annual revenue due to cuts in Medicare and state-run health exchanges, among other challenges.
While facilities and real estate are recognized as capital assets on the balance sheet, often they are not strategically designed to maximize their contribution to the achievement of business objectives. Facilities and real estate have the potential to decrease operating costs and increase revenue. We discuss three ways to do this: optimize the space allocation/revenue stream relationship, adapt existing space for new uses, and standardize design and layout.
Make every square foot generate revenue
When one finds inefficient space in healthcare facilities, the challenge is to make it more efficient — not by curtailing services or reducing the size of the space, but by changing operations or reallocating the space to serve a function that generates more revenue. Otherwise, it remains a cost center. This takes less time and often less money than building new space.
Five signs you have an underused space or cost center
- Volume is low for the number of KPUs (key planning units – ORs, Beds, ED rooms, etc)
- Looks “empty” during peak operating hours.
- Maintenance and upkeep issues – flooring, wall coverings, cleaning turnarounds etc.
- Opening and closing the unit on a consistent basis.
- Difficulty routinely staffing an area.
By necessity, critical access hospitals (CAH) are configured to directly attribute every square foot of the facility to an organizational revenue stream without wasted space. For example, a CAH receives reimbursements on a “cost + 1” basis for each square foot with a defined function. Thus, they maximize the function of every single space and allocate very little to “overhead.”
A large hospital can also apply this tactic. Hospitals have to heat, cool, clean, and maintain every square foot. Underused space dilutes profits by spreading revenue across a larger cost base. Instead, hospitals can ensure that all existing and future space supports revenue generation.
Waiting rooms are a prime example of non-revenue generating space. While an intake area for revenue-generating exam rooms, they could be designed to serve multiple functions and contribute to more than one revenue stream. Waiting rooms could perform retail functions such as selling food or gifts that generate revenue. The space could be designed to be adapted for conferences or meetings after office hours.
Using facility space and real estate to cut costs requires an 180-degree change in perspective. It takes a real estate developer mindset to build a cost-effective property that generates revenue from every square foot.
Designing for adaptation: avoiding present and future costs
Incrementally adapting existing space over time costs less than major renovations or building new space. Repurposing an exam room is always cheaper than building a new one. New construction costs more because of site work, shell-and-core construction, and the opportunity cost of unavailable services during the construction time period.
For example, a typical 25,000 sf ambulatory care center is relatively inexpensive to design and build due to several factors. These include its simple standard design, simple equipment installation, and light medical gasses. Business occupancy construction costs less than hospital grade construction. One can design this type of facility to share space between several uses, such as immediate care, primary care, and imaging. By adding higher acuity services like outpatient surgery over time, one can avoid the need to build a separate outpatient surgical center.
There are several ways to share space between functions. For example, pre-op or PACU can overflow into primary care exam rooms. During off-peak hours, waiting rooms can house group meetings, nutrition counseling, and health education presentations.
Shared ambulatory spaces require a flexible scheduling approach, and multi-use spaces must be large enough to accommodate several different functions. To use an exam room as a procedure room, it may need to grow from 100 to 160 square feet. While the cost of the room itself is higher, it is less expensive to build fewer multi-use spaces than to build more single-use spaces. One can easily adapt larger multi-purpose rooms for different uses as healthcare trends change over time.
Ambulatory centers with shared areas require less square footage, costing less to build.
Healthcare leaders also struggle with ways to adapt high acuity spaces to new uses. As the ACA expands access to insurance coverage and more patients see a primary care physician and stay healthier, theoretically, they would avoid using the ED for routine care.
When this happens, we expect hospitals will adapt high-acuity, lower-volume space to other functions to reduce costs. Such as a general hospital intake/triage area for observation and direct admit patients rather than routing them through the ED. Hospitals could morph EDs into ambulatory care centers, even leasing them to a provider group.
There are many opportunities to share space in the adapted inpatient environment, such as nurse stations and bathrooms. Individual offices can and should be eliminated, with providers, including physicians, sharing a desk area designed like an airport lounge.
Standardization: avoiding costly variations
Standardizing the design and layout of similar spaces can also reduce construction costs. With standard sizes, layouts, stationary equipment, and furnishings, family practitioners to Ob/Gyns can use the same exam rooms. By sizing every room at 105 square feet, providers are more willing to share — rather than vying for a few larger exam rooms.
Because healthcare is by people for people, everyone, including providers, has varying preferences. Therefore, we apply the “80/20 rule.” If 80 percent of the cases use the same equipment and supplies for the same procedures, then you manage only 20 percent on a daily basis. This increases efficiency. When leaders standardize the universal components and create protocols around provider preferences, then it is a win-win.
Of course, there are exceptions to every rule: Some cases do not fit any protocol, and some physicians won’t follow protocol no matter what— those are the 20 percent. In any surgical center, preference cards for instruments, drugs, and implants vary between physicians. This creates inefficiency in ordering and stocking. To the extent that physician leaders can design the process around standard protocols, they can reduce cost and increase efficiency.
The most helpful way to encourage behavioral and preference modification is to tie it to cost: Show the space, infrastructure and cost savings gained by standardization. When the physicians own the surgical center, they realize the benefits of standardization as increased revenue. At the hospital, the case for standardization is more difficult to make because the incentive is often intangible and impersonal.
Healthcare is a service industry; it does not make products. The conversation around standardization is different for healthcare than it is for other industries. This is because hospitals are dependent upon providers whom they may or may not employ. Healthcare relies upon relationships — physicians’ relationships with patients, the hospital’s relationship with payers, and so forth. While the way to approach standardization in healthcare is unique, there are always opportunities to pick the low-hanging fruit. Like standardized exam rooms. And the more that end users and leaders work together, the more they will save.
Optimizing the space allocation/revenue stream relationship, adapting existing space for new uses, and standardizing design and layout are proven strategies to cut costs.
Michelle Mader helps hospital system leaders envision the future. She works with the largest healthcare organizations across the country to align services with community needs and revenue growth. As the Director of Strategy at FreemanWhite, she collaborates with hospital leaders to achieve high-level performance and identify profitable market opportunities. A frequent speaker at national conferences, Michelle has published several articles on ambulatory strategy and population health.
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