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Capital Project Solutions – January 2011

The Impact of the Economy and Healthcare Reform on Capital Facility Programs and What Lies Ahead John E. Kemper, CEO

Over the past several months, much has been written as to how the economy and healthcare reform have affected healthcare organizations. A major focus of these articles has been the emergence of a new business model, one that moves the industry away from the fee-forservice payment system driven by volume, to a more value based model. Forces at work in this dynamic marketplace that are causing healthcare organizations to reevaluate how they will operate in the future are: Lack of access to capital The advent of Accountable Care Organizations (ACO) Multiple demands for economies of scale Move toward integrated healthcare delivery systems These factors are also driving the trend toward mergers and consolidation of healthcare organizations. One thing is certain in this environment, tomorrow’s success will not be achieved through the volume of services provided, as has been the case in the past. Instead, organizations that provide patients with the highest value of service for the lowest cost in the right location will emerge as the leaders.

How Does This Environment Impact Capital Programs? The 2008 collapse of the financial markets and the debate and passage of healthcare reform have caused a much needed change in the way healthcare owners plan, finance and implement capital projects. Both of these events caused owners to cancel and/or delay major projects over the past two years. While the financial climate has improved since 2008, owners do not yet fully understand the impact of new regulations and a vastly different capital market and thus are reluctant to restart old projects or begin new ones. Instead of focusing on capital investments, attention has turned toward improving efficiencies and better utilization of existing facilities. In many instances, the goal is no longer to expand capacity but rather to renovate current space to accommodate operational enhancements.

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Capital Project Solutions – January 2011

As healthcare owners move toward a new business model focused on service, they must also reevaluate their approach for the delivery of capital projects. In this period of uncertainty, it behooves the “C Suite” to take a step back and rethink their entire capital program. Prior to beginning any new project, the following questions should be addressed: What is our strategy driving capital investment? Does our current organizational structure support the preferred method of delivering capital projects? Are our current processes efficient and do they effectively control project scope, budget and schedule? How do we assess performance and what is our process for taking corrective action when required? The new equation being applied to healthcare services: Value = Cost + Quality, should also be applied to the delivery of capital projects. The question remains as to how we accomplish this.

Preparing for the Future An organization should begin by examining all of the factors that impact the delivery of their capital facility projects. The examination should include the following steps: evaluation, enhancement, validation and review. Though this may sound like a daunting task, it will pay dividends in the long run. Through a series of Rapid Response Reviews, defined as low cost/high value studies that can be completed in 30 to 90 days, an organization can answer the key questions listed above. Whether this process is conducted internally, externally or through a combination of both, the end result must ensure that the following foundation is in place to effectively and efficiently deliver capital projects: Existing business strategy drives all capital investments. Organizational structure exists to effectively deliver projects based on highest value equation: Value = Cost + Quality. Current processes ensure control of the “Big 3”: Scope, Budget and Schedule. Metrics are in place to achieve superior performance by all team members. Processes exists to monitor and manage fiduciary responsibility. 2


Capital Project Solutions – January 2011

Conclusion The world of healthcare is a very dynamic and every changing landscape. The past two years have been extremely challenging for healthcare owners and the future is still uncertain. However, the one certainty is that organizations will be required to change their care delivery models, and, capital facilities will play a key role in this new model of care. It is critically important that owners evaluate their capital allocations to ensure that each dollar spent is maximized to meet long-term strategic goals. In the next few issues of Capital Project Solutions, we will explore how Rapid Response Reviews can prepare the “C Suite” for this new environment and ensure that they are positioned to meet the challenges of regulatory reform.

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