Many healthcare designers are aware of the Fable Hospital, a business case for a theoretical 300-bed, evidence-based design hospital founded on the experiences of some of The Center for Health Design’s early Pebble Projects. Initially conceived by Derek Parker and some of his colleagues in 2004 as a concept to deliver a more compelling client presentation of ROI, the project was updated in 2011, but the framework of the revised paper is the same: Establish the base cost of a feature (a patient room, for example), understand the cost premium to incorporate evidence-based design features (such as acuity adaptability), and estimate the expected payback based on patient and staff outcomes following occupancy.

The Fable Hospital concept has generated discussion about the impact of facility design and the opportunities to improve care and outcomes while reducing costs. In an era of healthcare reform, however, the business case has even more resonance. In today’s healthcare landscape, organizations are challenged by fewer capital dollars allocated to facility improvements, payments based on value and outcomes rather than volume, and growing transparency through consumer rating sites like Hospital Compare or Leapfrog.

While we hear of numerous design interventions that alleviate some of those burdens, we don’t often hear about business case studies that use real operating data measured after occupancy that would support exploring such programs. While challenges like hidden healthcare costs, organizational complexity, and confounding conditions (e.g. patient acuity, comorbidities) must be expected when undertaking a business case analysis, they shouldn’t be a deterrent; there are solutions.

Beyond the basics
Calculating payback determines a return period on an investment, but it doesn’t take into account financial discounting or organization-specific costs, which can vary greatly. These are important calculations for financial decision-makers related to the time value of money. A dollar today is worth more than that same dollar in the future because of investment or alternate project options that could yield a better return. Financial methods such as discounted cash flow are used to compare options, which may have different life cycles resulting in different return periods. When is it best to use the simple payback approach? According to Better Bricks, the commercial building initiative from the Northwest Energy Efficiency Alliance, the simple payback approach is suited to less expensive, simpler projects, but a full life-cycle cost analysis is better for more complicated investments.

Exploring the options
In healthcare design, life-cycle cost analysis tends to look at the more quantifiable aspects of a decision: the initial investment, replacement costs over time, annually and non-annually occurring operating and maintenance costs, energy (if applicable), disposal, and salvage value (if any). According to a 2008 review of life-cycle cost case studies by Eric Korpi’s of Helsinki University of Technology, 70-90 percent of life-cycle costs are defined in the design phase.

While it is an older study, a 1998 paper on flooring by Suzanne Barnes, the former assistant director of design at Florida Hospital, found that while vinyl composition tile (VCT) had the lowest initial cost, the average cost to maintain the VCT was nine to 15 times the initial cost of the floor. Meanwhile, the average cost to maintain a floor like rubber or ceramic tile was less than the original installation. They also evaluated replacement scenarios, concluding that a material like carpet would need to be replaced three times as compared to other options. The framework is still valid today and these considerations are osften taken into account when choosing between material options. This is a simple example that’s familiar to many design teams, but a more robust analysis can be performed, as well.

For example, a 2013 cost utility analysis by Scott Latimer, of the School of Health and Related Research at the U.K’s University of Sheffield, and his colleagues included a cost utility analysis of a PVC shock-absorbing sports flooring material after it was installed at eight hospital sites. Their evaluation focused on falls and included follow-up with patients to determine health-related quality of life—a measure of longer-term societal burden as it pertain to treatment for pain, mobility, or general mood. The researchers indicate that “strictly speaking, the flooring intervention is considered cost-effective,” as determined by an incremental cost effectiveness ratio (ICER)and compared against National Institute for Health and Care Excellence (NICE) funding thresholds, although the authors note limitations in the data.

Another avenue, the cost-benefit analysis, is usually more subjective and considers the potential benefits of a design intervention over time. It might include direct and indirect costs of patient care (for example, salaries, training, absentee wages), as well as direct and indirect benefits that include patient outcomes (satisfaction, length of stay, safety), staff outcomes (efficiency, satisfaction, engagement, stress, retention, safety), environmental outcomes (sustainability, energy use), and throughput. A 2005 study by Kris Siddharthan of the Patient Safety Center at the James A. Haley Veterans Hospital and colleagues measured the impact of patient lift and transfer devices to reduce nursing staff injuries in a Veterans Health Administration program. They considered capital costs related to purchase and installation; maintenance of equipment; staff training costs; direct costs related to injuries (medical care, prescriptions, testing); lost productivity; and workers’ compensation. The authors found decreased costs associated with worker’s compensation, prescriptions, diagnostic tests, absenteeism from work due to injury, mean time to recuperate, and lost productivity, to the tune of a direct net benefit of $207,626, annualized. While they didn’t calculate the net present value over a period of time, they estimated a payback period of 4.3 years. They also acknowledge a conservative approach that didn’t account for indirect benefits such as reduced patient injury or more subjective costs of pain and suffering.

Using a social discount rate (often used for government-funded projects that have a long-term societal impact) of 3.5 percent, a 2011 study by Anthony Boardman of the University of British Columbia and Diana Forbes of HEP Consulting on the cost-benefit of private versus semiprivate rooms in a Canadian hospital found a net present value benefit of $70,000 (2008 Canadian dollars) per bed, with the potential for additional incremental health benefits associated with death or serious illness of approximately $11,475 per bed per year, yielding a present value of $269,000. The authors clearly outline all of their assumptions, creating a solid platform for future researchers to adjust the assumptions according to a specific organizational case.

Glass half empty o
r half full?
Unfortunately, a significant challenge in these approaches is the traditional separation between capital expenditures and operating costs, and numerous studies show that the capital cost of a facility project is often small relative to the operating costs over the life of the building. An important differentiation in healthcare facility design is sunk costs versus capital expenditure. While each term has a specific financial and accounting definition, it’s the mindset surrounding each that’s important. A capital expenditure (CapEx) anticipates future benefit and is added to an asset account increasing the asset’s basis (value). A sunk cost is retrospective—an expense that cannot be recovered. Many think of a facility project as a sunk cost, or money that must be spent for capacity or other functionality, so even before the project is complete, the spending is seen as sunk (a perception separate from actual accounting procedures). A business case can help the design team change the thinking to the CapEx side of the equation. The facility is an investment opportunity with the potential for long-term impact on revenue streams and cost avoidance.

Start small, but do start
There isn’t a single prescriptive approach to the task of the business case, but there are many options to explore that range from aggregating a basic set of generic data and calculating a simple payback up to estimating the long-term impact of societal burden as it relates to design. There’s an increasing amount of information that’s been made available about the generic costs of hospital-acquired conditions, too. Sources include the Pennsylvania Patient Safety Authority September 2010 Advisory, “Demonstrating Return on Investment for Infection Prevention and Control” and the Center for Disease Control‘s information on healthcare-associated infections. More ambitious teams may want to scour the CMS website for fact sheets that highlight costs per stay for certain conditions or regional variations in charges according to region.

The more robust the business case, the more resources will be required, including more extensive statistical analysis and sensitivity calculations, as well as a champion within the healthcare organization who can help locate and translate information from the financial system. A dominant theme across all methods, however, is transparency about data sources and assumptions, especially where information is missing or hypothesized for lack of firm numbers. The value of outlining your assumptions is that if someone argues a number, there’s a better chance to get participation and organizational buy-in for making an appropriate change. Confidentiality agreements may be required to protect how the information is used and shared, and it’s important for everyone on the team to have a common understanding of the goal.

However, the Deficit Reduction Act, the Affordable Care Act, and value-based purchasing are making more of this type of information public, and the coming years should offer additional studies that track some of the results associated with evolving reimbursement changes.

 

Ellen Taylor, AIA, MBA, EDAC, is director of research at The Center for Health Design (Concord, Calif.). She can be reached at etaylor@healthdesign.org.