Twenty-four hours a day, 365 days a year-hospitals are some of the most vital facilities in society, and the mission-critical nature of the equipment and requirements of operating time make them extremely expensive to operate and maintain. Given today's economy, it is more important than ever for healthcare organizations to streamline their capital planning and budgeting processes, ensuring the efficiency and effectiveness of their overall capital plan, while keeping patient care as the top priority.

With a continuous influx of patients and with aging facilities and infrastructure, healthcare facilities are experiencing continued “wear and tear”-as soon as one system is fixed, another needs to be replaced and so on. One third of hospital CFOs reported to the Healthcare Financial Management Association (HFMA) that their hospitals were in worse physical condition now than they were 10 years ago, and almost half reported that their infrastructures were deteriorating faster than they could make capital improvements.

After several years of consolidation and underfunding, healthcare providers were once again planning to invest in capital spending to meet the need for increased bed capacity and technology upgrades. However, with recent economic events, many of those plans are on hold. According to HFMA's Healthcare Finance Outlook 2008-2013 Report, the capital spending growth rate remains behind the growth rate for total operating expense, suggesting the need for capital investment spending may grow at the same time actual spending shrinks. In this tightening situation, hospitals must find an effective and efficient process for ensuring that their facilities are running smoothly over the short-term while they are also planning for the long-term.

Developing an effective long-term capital plan requires a healthcare organization to maintain a comprehensive understanding of the entire facility portfolio, determine what improvements are required, prioritize those improvements to align with the overall goals of the organization, and finally ensure that the dollars are spent as planned.

A foundation for the development of any capital plan is a detailed understanding of the current condition and lifecycle of facilities, systems, and equipment. For organizations that manage a large and complex facility portfolio, keeping such information up-to-date can be a challenge. Many organizations rely on internal facilities staff to collect data on requirements, an approach which can be effective if the organization has adequate resources for this task and they are trained in a consistent methodology for the data collection. However, in many organizations-particularly those with large or geographically dispersed facilities-information about requirements in each facility is often not collected consistently or documented in a common format. This inconsistency is the first hurdle that the organization needs to overcome to ensure that it has an accurate picture of its capital requirements.

Organizations have two basic approaches they can take to address this issue. They can provide training and tools to existing staff to ensure facility requirements are consistently collected and documented. Or they can engage contract assessment personnel with expertise in healthcare systems. In the former case, there will be specialized systems or requirements for which a more detailed, expert assessment is required.

Whichever strategy an organization chooses, its approach should result in data that can be readily maintained and analyzed, rather than “shelf-ware” that becomes outdated shortly after it is printed. Creating a centralized database for the collection and analysis of capital requirements is a first step. Some organizations modify financial applications to track this data, which provides the advantage of ready integration with existing systems, but they generally lack the sophisticated analysis and modeling tools that specialized capital planning software provides.

Independent of the system they choose, organizations should base information about the cost of addressing a specific requirement on industry-standard cost data, with the flexibility to adjust this data based on past experience. Detailed data on construction material cost by region, for example, is available through RSMeans (, and integrating cost line items into the organization's costing system will ensure an appropriate baseline. For any nonstandard items, organizations should at least annually adjust cost data for inflation. In the past year, for example, the annual construction cost inflation rate was 4.3%, which exceeded the consumer price index for the same period. A similar process is required for labor costs. Failure to continually incorporate these increases, and project them forward into future years can result in a large cost gap when multiplied across a large facility portfolio.

Industry-standard data about systems' expected useful life is available from multiple sources, including the Building Owners and Manager's Association (BOMA) and the American Society of Heating, Refrigerating, and Air-Conditioning Engineers, Inc. (ASHRAE). These data provide a baseline for assumptions about when a particular piece of equipment, such as a boiler or chiller, will need to be replaced. Lifecycle renewal costs can be a significant percentage of major operational and maintenance expenses, and a detailed understanding of renewal timelines and costs is important to effectively prioritize deferred maintenance requirements and avoid unanticipated spikes in required funding over time.

By employing a capital planning and management software tool to view this information in aggregate from a variety of perspectives-for example, by cost, priority, and category-hospitals can make better-informed spending decisions and begin to convert facilities' data into action plans with achievable deadlines as part of a larger capital plan. While this ability is important for a single hospital, it is even more valuable the larger and more geographically diverse a healthcare organization's real estate portfolio becomes.

Most organizations have a 5- to 10-year horizon for reviewing their capital requirements. Prioritizing capital projects begins with categorizing identified requirements in this time horizon into major “buckets,” which may also affect funding sources. These categories typically include major operations and maintenance projects including system renewal, strategic capital projects such as construction of a new facility, and mandated projects such as those involving regulatory compliance.

The next step in implementing a repeatable, defensible process for identifying which capital project to fund, is creating consistent evaluation criteria and a consistent process for applying those criteria. Identifying criteria and ranking them by importance can limit the sometimes political nature of the capital allocation process. Some of the common criteria organizations use in prioritizing requirements, which they may weigh based on relative importance, include: impact on quality of care and relation to code compliance, strategic importance, and accreditation or licensing requirements.

Another common measure used in evaluating spending priorities across different facilities is the Facility Condition Index (FCI)- FCI = Deferred Maintenance Cost ÷ Replacement Value of the Asset-an industry-standard parametric tool used to relatively compare building conditions. The FCI is the ratio of deferred maintenance or problem dollars to replacement dollars. The FCI is typically applied at the building level, but institutions can develop similar indices at the systems or portfolio level to help prioritize maintenance activities and capital investments.

The lower the FCI, the lower the need for remedial or renewal funding relative to the facility's value. An FCI of 0.1 signifies a 10% deficiency. An FCI of 0.7 means that a building needs extensive work or that it needs replacing. Different institutions target different FCI levels. Because of the sensitive environments they are expected to provide, healthcare organizations generally target relatively low FCIs.

As an example, a hospital with a $25 million replacement value and $5 million worth of deferred maintenance has an FCI of 0.20. It may have several types of deficiencies, including:

  • Building code compliance: Doors not fire rated, deficiencies related to electrical outlets, electrical receptacles, entry vestibule, and landing

  • Building integrity: Aged canopy, entry doors (aging and operational problems), aged exit doors, wear/rust of exterior stair, aged water pipes, ceilings (over patient and common rooms), water heater deterioration, etc.

  • Energy: Overall site energy issue, lack of control system integration

  • Life Safety: Exit stairs not fire resistant, emergency lighting needs upgrading

  • Functionality: Directional signage inadequate, miscellaneous electrical issues

By employing industry cost standards to estimate spending requirements for each suggested improvement, the hospital can associate specific dollar amounts with each potential maintenance activity. Ranking the deficiencies by urgency on a multipoint scale enables the hospital to determine one level of relative priority. Using this ranked list, and further applying weights based on overall organizational criteria, will yield a comprehensive picture of how projects should be prioritized for budget allocation. Statistical ranking methods, such as pair-wise comparisons, can be used to facilitate the process, effectively tying requirements to organizational priorities. After each capital request is scored individually, all requests for a funding source can be ranked by score.

The result is a multiyear capital budget that will help achieve the organization's facility and business objectives.

Healthcare organizations have multiple goals for the capital planning process, including ensuring the most effective asset utilization, justifying expenditures to various constituencies, smoothing spikes in spending requirements, and making optimal use of finite funds. It is important that organizations go into the process with both a clear view of their end goals and the realization that a strategic capital plan is a fluid document that needs ongoing review against organizational objectives. Successful capital plans and their effective execution enable organizations to reduce both risk and cost, provide facilities that are less expensive to operate, promote better patient care, and better serve the overall organizational mission. HD

Ray Dufresne is Vice-President at VFA, a provider of software and services for facilities capital planning and asset management. He can be reached at Healthcare Design 2009 June;9(6):36-40