Technology and the Future in Health Care–Transformational Trends and Forces

Infrastructure

Smart money

01.03.14 by David Stymiest P.E., FASHE, CHFM

Making the case for hospital infrastructure funding

Many health facilities managers would like to be more successful in obtaining depreciation dollars to fund

maintenance and infrastructure capital renewal adequately. Gaining access to depreciation funding often

involves being more successful at selling the maintenance mission and requires a multifaceted approach.

The rules of engagement include such disparate approaches as communicating with budget committees

and chief financial officers (CFOs) while employing the terminology they use for other hospital initiatives,

wise use of empirical information to communicate salient facts regarding the hospital infrastructure,

making sure to shift the risk of non-funding to those who make funding decisions, and fitting budget

requests into the strategic big picture.

Facilities managers need to be able to produce and present sophisticated but brief financial analyses

based on all of the facts relating to the facility infrastructure and risks associated with its condition.

Accessing data

An effective tool to help facilities managers prepare for and engage in budget negotiations is the amount

of historical and current facility infrastructure data. This includes the total infrastructure asset inventory

including the ages and condition of the physical plant's major equipment, useful life compared with actual

years in service, availability or unavailability of spare parts due to obsolescence, past operational history

and other considerations.

An overall database or even a simple spreadsheet matrix of major building infrastructure components with

this information facilitates proactive management and analyses. In health care systems, putting

infrastructure information on all member hospitals literally on the same page — either in a database or

spreadsheet — also helps to make budget discussions more thorough.

It is often very helpful to relate specific components and systems to the areas that they serve, such as the

operating rooms, critical care units, emergency department and imaging facilities. For example, obsolete

and operationally problematic equipment — whether HVAC, medical gas, electrical or other systems —

that serves major operating suites should be highlighted during budget discussions. It also can be helpful

to provide photos or tours of existing infrastructure that is in poor condition or other weak links. Facility

condition assessments are helpful in establishing the current infrastructure status. The results of these

assessments can include equipment age, equipment failure histories and repair or replacement costs.

Because many facility managers are hamstrung by ongoing under-budgeting that results in deferred

maintenance, a master list of all deferred maintenance can be a useful tool in future budget discussions.

Infrastructure assets that are near or past their useful lives are a potential operational liability due to

decreasing reliability. Facilities managers' opinions of useful lives, however accurate, may not be

accepted by the hospital financial team. An authoritative resource regarding useful lives of facility

infrastructure components used by many hospital financial professionals is the Estimated Useful Lives of

Depreciable Hospital Assets, which is published by the American Hospital Association's Health Forum

group.

Updated last year, the publication is described as "an approved reference for the assigned life of hospital

and physician office health care assets" that has been an accepted Centers for Medicare & Medicaid

Services reference. Facilities managers should consider obtaining this publication and using its

information to reflect the estimated useful lives of their own facility infrastructure equipment. That

information, including its tables on buildings and building components, can provide helpful backup during

future infrastructure capital-renewal budget discussions.

Another area that is not covered often in capital-renewal budgeting and discussions is the results of

critical system or critical equipment vulnerability analyses. A major mission statement topic of most

organizations and also of many facilities departments relates to the quality of patient care and patient

safety. An unreliable critical infrastructure system or component can have a major detrimental effect on

both patient care quality and patient safety despite the best efforts of caregivers. Facilities managers

should consider conducting vulnerability analyses of their own critical infrastructure systems and

equipment so that the results can be considered prior to the next budget cycle.

Making the case

A health facilities manager should propose a separate facility infrastructure budget for annual capital

expenditures that need to be considered separately from such areas as radiology, plus surgery

equipment replacement and information technology expenditures. An argument in favor of this approach

can be that the organization is financially depreciating its facilities and those depreciation dollars should

be rolled back into the facility as much as possible to support the organization's mission. Facility

infrastructure systems that are unreliable will quickly defeat the strongest cosmetic impressions.

Splitting budget requests into different categories often is a helpful approach, but the categories can be

varied. Some organizations prefer to consider infrastructure capital-renewal requests categorized as

jurisdictional (code or regulatory requirements), replacement (mission-critical systems and equipment that

must be replaced immediately due to age, condition or concern about imminent failure) and cost-

reduction (permitting direct comparison to profit centers). Other organizations prefer to consider capacity-

related needs, categories that specifically address the organization's strategic plans, current hot-button

topics or concerns, or simple categorization by infrastructure system type.

Utility operating budget preparation should take into account multiyear analyses that consider facility

growth, changing fuel costs, weather normalization, previous demand-side energy conservation

measures and other high-impact issues. Many facilities employ benchmarking comparisons in British

thermal units per square foot, but it is important to take into account all related causative factors when

comparing benchmarked data. Some organizations successfully have used energy utility demand-side

funding grants to install demand-side management measures that offset higher energy costs while

lowering overall energy use.

Both operational and capital renewal budget benchmarking literature and data are available from

professional organizations such as the American Society for Healthcare Engineering, the International

Facility Management Association and APPA, a similar organization for facilities managers in higher

education.

Today's facilities managers no longer can rely upon simple payback analyses in most cases when

discussing capital investment alternatives. It is necessary to communicate in effective financial language

with the CFO and finance committee, using the types of analyses and terminology they use when

considering new profit centers.

Facilities managers will find it helpful to present facilities costs in terms of the total cost of ownership.

Total cost of ownership can include first costs, operations costs, maintenance costs, repair and

replacement costs, energy/utility costs, space renovation costs, lost revenue costs due to failures and

similar occurrences from not undertaking appropriate life-cycle activities such as preventive maintenance

or predictive maintenance, lost-revenue costs due to other uncorrected vulnerabilities, occupancy and

use costs, technology-realization costs, disaster-containment costs and contingency-planning costs.

Because effective supporting arguments for budget discussions often make use of revenue, cost, value or

their combination, it will be necessary to use all of this information to identify the total cost of ownership.

Investing in flexibility

Infrastructure flexibility is important because the costs of operations, space renovations, relocations and

ongoing asset resource items quickly exceed initial construction costs. Financial analysis tools that are

helpful in presenting the total cost of ownership are return on investment, life-cycle cost, net present

value, the internal rate of return, time value of money and fuel price fluctuations.

Many facility infrastructure upgrades will require multiple years to accomplish. Phasing the projects into

smaller subprojects is an effective approach to reflect the realities of changing annual budgeting priorities.

Some organizations often plan their major capital renewal projects with a three- to five-year moving

window that splits major initiatives into two or more budget cycles. That way the more comprehensive

picture is always in sight while each year's annual budget preparation and review are in process.

Facilities managers should be able to put together fact-based arguments as to whether the organization's

30- to 50-year-old buildings can support today's strategic medical initiatives. Many issues need to be

considered in an analysis of physical obsolescence. With the building itself, floor plate limits and slab-to-

slab height restrictions may negate the possibility of some strategic medical capital initiatives.

The existing mechanical and electrical infrastructure limitations may make needed electrical capacity,

emergency power availability or reliability, mechanical operational reliability, sufficient air changes, proper

pressure relationships or sufficient cooling impossible or infeasible without major infrastructure upgrades.

Sufficient space and infrastructure for the needed IT systems and equipment, including modern video

broadcast initiatives, may not be available in existing buildings. The space required and the infrastructure

services needed for modern operating suites may not be economically feasible in existing buildings. The

replace-or-renovate issues can be considered more completely when these and other issues are

considered.

Moreover, infrastructure impacts can delay the installation or startup of new medical equipment without

an early review and sufficient time for infrastructure upgrades.

Because new medical systems and equipment usually have an impact on both the IT infrastructure and

the facilities infrastructure, many organizations ensure that the IT manager and the facilities manager are

represented during the budget review process for new medical technology.

Consideration of new medical technology should take into account its impact on the remainder of the

organization and its existing infrastructure; otherwise, the cost-benefit analyses for the new medical

technology are inaccurate and can lead to wrong decisions. Both the information technology manager

and the facility manager should sign off on all new capital equipment requests.

Because many members of the clinical community do not understand the different types of supporting

system failures that can occur, it is also helpful to discuss critical operational needs during the medical

equipment budgeting process to determine the cost of supporting infrastructure systems. For example,

the impact of loss of power or cooling should be taken into account when determining the infrastructure

for major new medical equipment installations.

It is wise for facilities managers to have at least two reasons to replace major infrastructure equipment or

systems. Because new mechanical systems and equipment are often more efficient than much older

systems and equipment, the facilities manager may be able to address several needs simultaneously in a

budget discussion, such as fixing existing vulnerabilities, reducing energy costs and replacing obsolete

equipment that no longer has spare parts available.

Risk of non-funding

Once these issues have been investigated, the facilities manager should be able to shift the risk of non-

funding to the financial decision-makers. It is important that hospital administrators, including the CFO

and other C-suite executives, clearly understand the impact of equipment and infrastructure

obsolescence on the organization's business interests.

This doesn't simply mean age-related issues. All the items that make up the total cost of ownership

should be unequivocally presented and understood. Facilities managers also should provide examples of

the kinds of issues encountered when proactive infrastructure renewal is not funded, such as

organizational impacts, higher costs and lost revenue due to a chiller failure in the summer or a boiler

failure during the winter.

Even issues related to uncorrected vulnerabilities, such as the potential for an emergency power failure

during a natural disaster, can be taken into account. The impact of such failures, including loss of revenue

or prestige then can be understood as the business context of facility infrastructure financing needs.

The organization's business goals should be related to critical areas and functions which, in turn, should

be related to the reliable performance of critical infrastructure systems and equipment. Then, the existing

condition and recommended capital renewal can be put into the context of the organization's business

goals. Once the business disruption issues are clearly understood, the organization can make educated

decisions on business risk.

Finally, facilities managers need to use their volumes of information in a quick and concise manner, much

like the "elevator speech" concept. It is helpful to be organized and present the main features of their

needs as benefits to the organization in terms that listeners are interested in and responsible for. The

closing should summarize and sell the funding request.

A persuasive case

As hospital administrators continue to keep a close eye on new spending, health facilities managers will

find it more likely that their requests for needed infrastructure spending will be granted if they present a

persuasive case.

David Stymiest, PE, CHFM, CHSP, FASHE, is a senior consultant for compliance and facilities

management at Smith Seckman Reid Inc., Nashville, Tenn. He can be reached at DStymiest@SSR-

inc.com.

Sidebar - Resources on the Web

Need more information on making the case for hospital infrastructure funding? Try the following

resources, which the author used in preparing this article:

» Estimated Useful Lives of Depreciable Hospital Assets, 2013 edition, published by the American

Hospital Association's Health Forum group:

http://ams.aha.org/eweb/DynamicPage.aspx?WebCode=Prod DetailAdd&ivd_prc_prd_key= 3591a778-

8a0a-4469-afcc-8dea7c9f0512

» An explanation of return on investment considerations:

www.investopedia.com/terms/r/returnoninvestment.asp

» "Selling the Maintenance Mission" by David Kistel, Lee Memorial Health System, Lee County, Fla.,

Robert Carpenter, Ochsner Health System, New Orleans, and David Stymiest, Smith Seckman Reid Inc.,

Nashville, Tenn.; American Society for Healthcare Engineering 44th Annual Conference white paper,

2007 (accessible to ASHE members): www.ashe.org/resources/white_papers/member/pdfs/07an/38.pdf

» The Department of Energy's "Guide for Financing EnergySmart Schools" provides a summary of cost-

benefit methods, including a resource on considerations related to combining life-cycle cost analysis and

net present value:

http://apps1.eere.energy.gov/buildings/publications/pdfs/energysmartschools/ess_financeguide_0708.pdf

» "Needs Indexing, Then Benchmarking, Now What?" by Matt Adams, APPA facilities manager,

September-October 2010:

http://www2.bakersfieldcollege.edu/nstrobel/collegecouncil/facilitiesconditionindexbrief-appa.pdf

» American Society for Healthcare Engineering/International Facilities Management Association

"Benchmarking 2.0 for Health Care Facility Management" survey results jointly conducted by ASHE and

IFMA (available to ASHE and IFMA members through their respective organizations or to nonmembers

for full-price purchase through the following website): http://hci.ifma.org/research