Capital Equipment TrackFinancing for the Future

Catherine Irwin Corbin, Sr. Vice-President and Health Practice Leader, CannonDesignRandy A. Nice, President, The Nice Way

Session Overview

• Uncover strategies to make your capital outlay decisions more effective. • Learn what others have done to balance a dynamic healthcare environment against the static nature of long-term facility investments. • A major component of most capital expenditure decisions is ROI. • Measuring ROI based on procedure and reimbursement rates can make a big difference in the bottom line. • Solid ROI data makes those investment decisions easier for you to make and easier for your organization’s Board of Directors to feel good about.

Learning Objectives

• Analyze capital planning strategies in today’s changing healthcare environment.• Outline processes to make capital planning accountable, communicable and standardized.• Describe the challenges that face those who must make capital planning decisions.• Outline measurable ROI procedures based on procedure and reimbursement rate.

This Session will be a Back-and-Forth Dialogue

Randy Nice• Capital Equipment Phase-

by-Phase• Micro scale• Questions you’re asking

today• Relevant process steps

Catherine Corbin• Capital Project Question-by-

Question• Macro scale• Questions you should ask 6-

18 months prior• Relevant case studies

CAPITAL EQUIPMENT CAPITAL PROJECT

This is not Proper ROI• Letting a vendor have full control of capital equipment

decision by allowing them to design spaces, drawings, etc.• Letting a trade (architect, engineer, etc.) have full control of

capital equipment evaluations• Letting a healthcare team (Department Director, Biomed,

etc.) have full control of capital equipment evaluations• Having Supply Chain simply use a preferred vendor without

any additional research

CAPITAL EQUIPMENT

Start with Data, then People

CAPITAL PROJECT

5 Phases to an ROI Project• Discovery Phase• Financial Phase• Decision Phase• Costing Phase• Evaluation Phase

CAPITAL EQUIPMENT

Discovery PhaseNeeds Assessment-Current Equipment

and Processes

• Meet with C-Level Executives, Department Directors, and End Users • Document current equipment available and what is needed or wanted along with current processes being used

CAPITAL EQUIPMENT

Is Process Creating Artificial Need?CAPITAL PROJECT

Sample Area: Diagnostic Imaging• What patients are you scanning today? • What is the process prior to scan?• Is there hidden virtual capacity, just waiting to be found?

Extra capacity can be found right here

Case Study: Quantifying CT Needs in One of the World’s Largest EDs• 500,000 pts/year, 35% female• 25% scan rate = 43,750 scans/yr (female only)• 10% cancellation rate = 4375 scans/yr• Equivalent to half, or up to a full, machine!

CAPITAL PROJECT

Image Source: CannonDesign 2014

Discovery PhaseTypes and Volumes of Procedures in Past

Years

• Review volumes of procedures performed in the past couple of years• Sort the results and group by same types of procedures in order to aggregate needs

CAPITAL EQUIPMENT

Is Your Forecasting Methodology Still Relevant?

CAPITAL PROJECT

External Considerations Internal ConsiderationsAre you transferring existing market share or will it be organic growth?

Process improvement initiatives?

Is this market going to drive different procedures (i.e. one market is elderly and the other is close to a high school?)

Changes to the care model?

Case Study: Validating Need and Location of U/S• 4 story ED, distributed Imaging

department• U/S desired on already-dense

ground floor• Imaging “heat map” to identify

logical locations for U/S• Use data to dispel myths on

resource use• U/S space for 1 pt/day = 4

treatment rooms• Getting to a mobile solution for

better care

CAPITAL PROJECT

Image Source: CannonDesign 2015

Discovery PhaseCore Business Need or Additional

Functionality

• What are the core business needs for the community?• What procedures is the organization looking to add?• Are there any expansion plans in immediate future?

CAPITAL EQUIPMENT

CAPITAL PROJECT

Have You Considered a Phase 2, 3, 4…?• Long term facility plans? • What other patients may be here one day? • What D&T services come with those new patients?

Case Study: Adding Observation Capabilities

CAPITAL PROJECT

EDED

IP/Obs

• ED with 4 Observation beds

• Observation for shell floor

• 23 hour stays = cardiac testing rule-outs

• How do we plan for Nuc Med? Should Stress Test be part of Phase 1?

Image Source: CannonDesign 2015

Financial PhaseLease or Buy?

• What is the current policy in place?• Are there some leased equipment onsite and what are the terms?• Are there government or local incentives?• What is the current depreciation schedule?

CAPITAL EQUIPMENT

“Do You Have a Flag?”• Establishing a foothold to

ultimately drive business elsewhere? Or are you in it for the long-term?

• Is your capital equipment life aligned to your building life?

CAPITAL PROJECT

Financial PhaseBudgeting: Capital or Operating as well

as Financing Costs

• Is there a formal approved capital equipment budget or will the funds come from operating?• Are there financing considerations involved and how much?

CAPITAL EQUIPMENT

• If it’s capital, is it part of the bigger capital project budget? • Can the building project afford it? • What are the trade-offs with relocation, and operating vs.

capital?

CAPITAL PROJECT

Does the Building Have to Pay for It?

Case Study: It’s Never Too Early to Engage the Equipment Planner• Team charrette for greenfield

replacement hospital• $120MM project budget,

$5.75MM equipment budget• Expected to have dedicated X-Ray

in ED

Team Question:• Re-examine remaining life of

equipment – hold off on purchase, relocate existing, then buy in next operating cycle?

CAPITAL PROJECT

Image Source: CannonDesign 2016

Decision PhaseTimeframe and Approval Process as well

as Internal or Vendor Analysis?

• What is the overall timeframe for making a decision?• Are there any bottlenecks and how can they be fixed?• What is the outlined process for getting signatures?• Will any internal or external resources (vendors) be required to conduct studies for documented studies?

CAPITAL EQUIPMENT

• If you’re asking the rest of your project team to race as fast as possible and then get held up in selecting equipment, the accelerated project process is in jeopardy.

• Do we need to upsize rooms to plan for worst-case scenario on equipment clearances?

Speed to Market Requires Speedy – not Hasty - Decisions

CAPITAL PROJECT

Case Study: Planning for the Unknown • Health system with ambulatory

room prototypes • Prototypes aid speed to market• Building to recruit physicians• Specialists unknown• Use CT prototype for Nuc Med

room• Conversion to SPEC CT

CAPITAL PROJECT

Image Source: CannonDesign 2015

Costing PhaseInitial Acquisition, Consumables, Service

Level and Maintenance Agreements• What are all components needed in acquiring equipment?• What are the various consumables costs and are there any special considerations?• Review the service level agreement (SLA) and what are potential costs to organization?• Is a maintenance agreement included and if not, what is the cost?

CAPITAL EQUIPMENT

• While we’re asking our vendors, imaging techs, bio-med teams to do things differently, what have nursing staff and providers been asked to do differently, too?

CAPITAL PROJECT

New Project = New Process Opportunities

Case Study: New ED with High GOMERs Volume• 2 hospital system• Main hospital = 70k+ visits/yr with

Trauma• Second hospital = 42,000 visits/yr

in 2023• 28 bays projected need• Budget constraint = building shrink• 40% of patients are ESI 4 or 5• 8 of 28 bays are “multi-purpose”

for care initiation, treat & street, results waiting

• Reduced equipment load per bay

Image Source: CannonDesign 2015

Costing PhaseInfrastructure Cost (Building and

Construction)• Are there any special room design needs for the new equipment and at what cost?• Are there any special trades which need to be utilized and at what cost?• Are there any special permits, zoning variances, or other considerations and what are the costs?

CAPITAL EQUIPMENT

• Construction type, occupancy type. • Who you’re scanning/testing today may change tomorrow –

OP to IP. • If you have to house the equipment in a more sophisticated

room, what does that do to the other cost considerations, particularly first costs?

“Should we make that ‘hospital-grade’?”CAPITAL PROJECT

Case Study: Planning for Future Use and Occupancy• Business occupancy for outpatient

services• Departments in “hospital-grade”?• First cost vs. occupancy premium• Changes to CMS reimbursement

always unknown (2012 Life Safety Code and ambulatory care occupancy)

• If CMS implements the Proposed Rule as currently written, facilities would be required to meet the applicable requirements of the 2012 LSC….

• CMS proposes…ASCs and outpatient surgery centers must satisfy the ambulatory health occupancy standard….

• It is unclear whether hospital outpatient surgical departments or other hospital outpatient space would be required to meet the health care occupancy requirements….

Source: Hall Render Killian Health & Lyman

$21/sfConstruction Cost PremiumBusiness Ambulatory Care

occupancy

Construction Cost58%

Soft Costs42%

60,000 SF Business Occ. Project

Construction Cost63%

Soft Costs37%

60,000 SF Ambulatory Care Occ. Project

CAPITAL PROJECT

Costing PhaseTraining Cost

• How much training is included with the new equipment being considered?• Which type of team members are included in the training?• Is the new equipment being considered new to the organization and will require house-wide training?

CAPITAL EQUIPMENT

• Where is this going in the project and what staff efficiencies are assumed?

• Co-location of equipment and cross training of staff is a given

CAPITAL PROJECT

What About Human Capital?

Case Study: (Re)Cross-training Imaging Techs• Replacement hospital with 20,000

sf Imaging department• Project goal = lean-led design• Modality fiefdoms• Aha moment: we used to be cross-

trained…

CAPITAL PROJECT

Image Source: CannonDesign 2015

Costing PhaseTrade-ins or Upgrades to Defray Costs

• Will the new equipment potentially replace an existing item?• Could surplus equipment be re-purposed elsewhere in the organization?• Is there surplus equipment in the organization that could be used as trade-ins?• Is there an opportunity to upgrade software or options of existing equipment instead of buying new?

CAPITAL EQUIPMENT

Evaluation PhaseTotal Cost of Ownership vs. ROI

• Add up all of the various potential costs involved in acquiring the new equipment (converted to US $)• Add up all of the various benefits involved in using the new equipment (converted to US $)• Compare the bottom-line of the TCO vs the ROI to see how long (in months) it will take to recoup the investment

CAPITAL EQUIPMENT

Conclusion• Equipment is an essential piece of the capital

project equation • Early equipment planning activities have bi-

directional benefit• Taking shortcuts with ROI will often lead to

increased costs and decreased ROI