As Costs and Demand for Care Soars, Here Are Four Ways to Reduce Financial Risk in Healthcare Design Projects
As one of the largest healthcare designers in the world, we are stewards of our clients’ precious resources. So, the fact that many face shrinking reimbursement, labor shortages and rising material costs means it’s more important than ever to help them do more with less, while developing strategies to meet increased demand for care. At a planning scale, we recommend refreshed master plans and to look for ways to utilize existing real estate. At the design and construction level, collaborative delivery and securing materials and equipment early could be helpful.
Healthcare systems face a perfect storm of financial uncertainty due to rising operating costs coupled with high demand for care. While much of this cost escalation is due to reimbursement and labor issues, design can help minimize financial risk when it comes to the construction of healthcare facilities. Here, we outline four strategies for clients to consider as they embark on an estimated $45 billion in construction projects in 2023.
Master Plans: From One and Done to Real Time
Master plans are no longer a once-in-a-generation exercise. Instead, they can evolve in real time based on changing needs and growth goals, helping a client understand how best to invest capital. For example, our team worked with the University of Washington Medical Center (UWMC) to embrace an ambiguous future by developing multiple master plan and “strategy-agnostic” inpatient scenarios to help the hospital reach its 20-year growth goals. One approach involved developing all required square footage in one large project with flexible shell space to be infilled over time, an approach which required more up-front capital but decreased the total investment over the lifetime of the master plan. Another explored building a series of smaller projects over the 20-year period, which may cost more in the long-term but allows for the university to adapt each project to the program need and available capital at that time. Depending on funding and speed, these flexible design and planning approaches allow the organization to reach the same long-term goals while pivoting based on market conditions.
Due to ever-thinning profit margins, many healthcare organizations are also shifting their offerings to those that generate additional revenue. Therefore, another interim planning strategy involves the prioritization of high-revenue-generating service lines and projects like cardiology or cancer care to fund lower or non-revenue-generating work like behavioral health and maintenance projects. To help finance the seismically required replacement hospital tower at UC Davis Health, the organization decided to build an ambulatory surgery center to raise capital through revenue-generating outpatient surgeries. This decision not only helps to offset the cost of using expensive hospital space for outpatient surgery, but allows for more inpatient surgeries at a higher rate of reimbursement to happen.
Sometimes the Best Building Isn’t a New Building
Look for ways to extend the life of existing real estate investments—asking questions about what needs to be built immediately, what can wait, what needs to be rebuilt, or if efficiency tools can be used to better optimize existing space. For example, we worked with UC Davis Health to consolidate its ambulatory care services from three locations to one by improving exam room utilization, refining space standards and creating universal department floor plans—saving $150 million in construction costs and $1.1 million in occupancy costs.
In addition, consider infrastructure or seismic overhauls rather than building new. If these upgrades are not feasible, once a replacement is built, adapt old patient care spaces to be leveraged for different uses. For example, repurpose hospitals that have been deemed seismically unfit to support high acuity patients to instead house offices, telehealth or even resources for the homeless and those with behavioral health needs. These interventions have added benefits, such as taking the pressure off area emergency departments and providing the right care in the right environment for those in need.
The Best Relationships Are Collaborative
A collaborative delivery model—one that includes early integration with general contractors as part of the design team, hiring key trade partners earlier and an emphasis on design-build—offers protection since costs are managed and locked in early. Collaborative delivery can also provide greater speed to market since the team is able to streamline procurement and blur the line between a traditional design and construction process. For example, on the Oregon Health and Science University (OHSU) hospital expansion project, our team employed all the traditional tenets of collaborative delivery—an integrated project delivery model, cluster and functional teams, a close relationship with trade partners and a traditional big room (that went virtual during Covid).
Close collaboration with the general contractor partner can also positively impact cost estimation. While cost estimation at a project’s onset is a given, “continuous cost estimating” and leveraging target value design to break down and manage costs lets clients know where the design sits in relation to the budget moment by moment. Working with the general contractor to benchmark costs based on similar projects until the design is far enough along to begin project-specific pricing, or engaging an outside party to test and review projections helps identify areas where economy can be found. Lastly, defining and anticipating operating costs, staff retention and any other direct financial compensation that augments the bottom line—in other words, balancing return on investment—is equally important.
Time is Money
In construction, every day that passes can increase costs of materials and equipment, especially in today’s high-inflation environment. Early buyout and ordering of big-ticket items such as elevators, HVAC equipment, chillers or other components can limit risk and save money over time—both by locking in a lower price early in the project and because it solidifies system coordination to help avoid requests for information (RFI’s) and costly change orders during construction. On the OHSU project, we employed this strategy by contracting with trade partners during design, coordinating and approving submittals during the design phase, and integrating shop drawings as part of permit approval packages. This required additional upfront coordination from the team but resulted in the preemptive resolution of complications that can slow the process and drive up costs later.
Taking this idea one step further, prefabrication provides an opportunity for consistent quality at a lower cost by “buying in bulk” and securing materials and components early. Prefab can also reduce labor costs, minimize the number of workers and traffic on site and shorten construction schedules by executing portions in a more efficient space than working within an active construction site. For example, on the Atrium Health Carolinas Rehabilitation Hospital project, the team used prefabrication for the headwalls and toilet pods, purchasing the components in bulk and storing them locally, which helped mitigate rising costs. It is worth noting, however, that prefabrication or preordering also results in increased storage needs, which can be costly and requires space that some organizations—especially those in more urban areas—may not have.
While the benefits of acting early are invaluable, examining what needs to be built now, and what can be pushed out until later in a project can also positively impact long term cost and near-term cash flow. For example, OHSU is designed with reserved space for a desired additional chiller but deferred the cost by establishing it as a future option. On the flip side, to meet day one required positive air pressurization requirements to protect patients vulnerable to external infection sources, the project includes the flexibility to reverse the air pressure relationships if needed—a method that saves long term costs while enhancing safety and care. Additionally, the team prioritized the need for emergency power generation, deciding to build in reserve capacity up front since it would support not just the main building but also others on campus.
Financial uncertainty is inevitable, and it’s impossible to predict the future. However, when taking on the extraordinary financial responsibility and risk of a new healthcare project, it is important to be as accurate as possible in anticipating budgets and planning for unforeseen costs. The value of a team that can do this effectively cannot be overstated. And by implementing some of or all the solutions detailed above, healthcare organizations can continue to plan for and deliver the care their communities need, both now and in the future.