April 23, 2009

New health care construction: Always costly, rarely needed

  • If the question is how to deliver better care, health care executives should consider the alternatives first.
    Rona Consulting Group


    In 2008, an estimated $48 billion in new health care construction was in process in the United States. For an industry that is so controversial for its product quality, availability and cost, this is a remarkable figure. Considerable head scratching is required to understand the benefit of this next $48 billion.

    When considering building, the core issue for health care executives is, What is the business problem to be solved? In so many cases, building in health care is perceived as a sign of past success and a promise of a brighter future, but seldom has building been a sustainable business solution.

    The core business problem in health care is delivering value. However, the quality of this product is average, the safety of it is poor, and customer satisfaction is inconsistent (as is the morale of its workers). Moreover, the cost of health care is not sustainable, bordering on intolerable.

    Estimates place the per capita cost of health care in the U.S. at over $8,000 per year, the highest in the world. Yet it is well known that the clinical outcomes of our system pale in consideration to most Western nations that produce health care at a much lower cost.

    This is the definition of value perverted: Instead of the best possible product at the lowest possible cost, the U.S. health care system creates mediocre products using exorbitant resources.

    When we purchase goods as regular consumers, we search for the best value. When comparison shopping for similar products, we would never consider paying more for a product simply because company A just built a new plant. We expect that this is a cost that the company has somehow incorporated into its business planning so that it can be more successful, but not so it can raise its prices.

    While occasionally consumers pay a premium for a certain brand they trust, most shopping comes down to value.

    Buying on price

    Health care is different, especially when it comes to the cost of building. CEOs assume that the added cost will be incorporated in higher payment rates in the future and by spreading the new costs across more patients.

    This has worked in the past when such costs could be passed onto Medicare and private payers. This philosophy has also worked in markets of rapidly expanding populations and demand.

    Yet it is clear that the future environment will no longer support this line of thinking. As we look forward, every hospital in the country will be competing for that extra patient and fighting mightily over him. Every small business and employer will scrutinize their costs of purchasing health care for their employees, and will begin to ask why they are paying varying amounts for the same product.

    Insurance companies, online research portals and organizations like Hospital Compare will produce more transparent information on quality, safety and cost differences. As individual consumers become responsible for a larger share of health care costs, they will buy more carefully and become more critical in their approach.

    When consumers of health care find out that it is very difficult to differentiate on the health care product, they will buy on price. They will not care about the health care executives' multimillion decisions to add facilities. While they may have thought that beautiful lobbies and well-appointed waiting rooms were very thoughtful and comfortable, when they find out the cost that they are paying for such amenities and inefficiencies, they will think differently.

    Opportunity cost

    So, what is the executive to think about as he contemplates construction? It is essential to return to the business problem being resolved through building. There are many issues that raise the question of construction: codes, safety, regulations, market competition, age of the facility, growth and donors, changes in patient care, changes in technology, changes in customer needs and perceptions, and many others.

    But the key consideration is the opportunity cost of new construction or what we should do instead. The reason for this is simple: Historically, there has been little or no return for investing in new facilities.

    New construction always adds cost and rarely delivers a competitive return on investment in health care. In an environment of limited opportunity to grow profitable business, tightening payment structures, continued inflation and higher costs of financing and construction, the idea of new construction must be critically and rigorously examined.

    This question of what could you do instead is just not any fun. It is so much more exciting for everyone to build something new. The fundraisers always want a compelling project around which to fundraise. Sometimes executives see new buildings as some sort of legacy opportunity.

    New construction is seen as a signal of a thriving and successful organization. Staffs like the idea of new. New makes an organization feel as though it will be more attractive to physicians and more competitive in the marketplace. It is still a veritable arms race in some places as to who can build the biggest and most dramatic facilities.

    Health care executives should consider alternatives to new construction simply because they are able to deliver better value now. The opportunity for better value is becoming increasingly understood in health care as leaders force themselves and their organizations to look at their processes of care and come to understand how much is lost to waste.

    In health care, those who have adopted new approaches to management, commonly known as lean, based upon the Toyota management system, have seen improvements such as:

    * Half the human effort to do the work

    * Half the space needed

    * Half the investment in materials

    * Half the time to produce the service

    * At least half the inventory on hand

    * Half the time for patients to receive what they need

    * Greater flexibility to produce a greater variety of services

    * Dramatic reductions in defects

    * Significantly lower costs

    By closely examining the processes of health care delivery from the patient's perspective, and then seeking the elimination of waste in all of these processes, one finds irrefutable evidence of the potential to improve quality, safety and cost.

    What enlightened health care leaders find out when they comb their processes of health care delivery is that they are an unequivocal mess. Before any consideration of new construction, leaders need to fix these processes.

    In too many cases one finds that what was thought to be needed in the way of space and configuration was 100 percent wrong. In most cases no new space was needed; in many, far less was needed.

    Considering needs

    Once executives possess a solid understanding of the current state of existing processes, they need to change the processes using existing space. This endeavor — formalized, data driven and rapidly executed — enables the organization and the executive to see what is possible by becoming leaner.

    It always reduces cost and improves quality. It always makes the work of the staff easier and it always makes the customer happier. It is only at this point that the executive understands the capability of the organization — with the least amount of waste and defects. It is only at this point that one would consider new construction.

    At that point, the next step involves considering what new construction can deliver in terms of quality, throughput performance and unit cost.

    New construction needs to be considered as more of a machine than one's living room. If one builds only what one needs and not what is traditionally built using "industry standards" for everything, the new facility will cost at least 20 percent less, and some of that can go to address some of the softer and very important aspects of health care construction.

    The question of unit cost is really the question of target cost performance. When fully operational, what is this new building (machine) supposed to be able to produce?

    This is a question that few executives can reliably answer. But it is critical. In any other industry considering large capital investments, they would ask what would the resulting investment produce and at what specifications.

    This is a foreign question in health care. Of course, in other industries, they would also ask what is the return on this investment. No one would consider zero return as a tolerable benchmark.

    With a few exceptions related to regulatory and code requirements, very little in new construction is generally needed.

    Most of the improvements that health care needs in order to cut waits, delays, defects and cost can be addressed within existing facilities with lean remodeling as the primary approach. There is always the argument that, from an investment point of view, you will get more for your money with new construction, but all that can be reliably proven is higher costs.

    The question of new construction is always, at its core, What are we becoming?

    The facility ought to represent what an organization is and, most importantly, build in its promise to deliver the best value. To do this, the leaders of the organization will need to get involved and see the flow (or lack of) all their processes.

    They will need to set seemingly impossible targets for quality, safety and cost. They will have to insist that this begin within current facilities. They will need to set the quality, safety and cost performance targets of the new facility, if they decide to build one, so those who are to design it and those who are to live in it understand what they are making.

    Only under these circumstances should the executive consider a new building.

    Mike Rona is a principal in Rona Consulting Group, which focuses on improving quality, safety and cost in health care using the Toyota management system. Rona has spent 30 years managing health care organizations, most recently as president of Virginia Mason Medical Center in Seattle.


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