Maria Castellucci
Hello and welcome to Healthcare Insider, a sponsored content podcast series from Modern Healthcare Custom Media. I'm your host, Maria Castellucci, deputy editor of Custom Content at Modern Healthcare. It's my pleasure to welcome back to the podcast for the third time, Mark Kenneday, director of market strategy and development for healthcare at Gordian. Mark is an expert health facilities leader with over 35 years of experience and leadership roles at various healthcare organizations throughout his career. Mark is joined by another guest for this episode, Charles Clay. Charles is the director of support and ancillary services at Sutter Health, a not-for-profit health system based in Sacramento, California. Charles has more than 30 years of leadership experience in facilities management and project management. He is also a licensed professional engineer. Mark, it's great to have you back and Charles, it's great to have you with us.
Mark Kenneday:
It's always a pleasure being here. Thank you so much for the invitation.
Charles Clay:
Absolutely. Wonderful. Good to be here.
Maria Castellucci:
During this conversation, Mark and Charles will share how to prioritize investment in your healthcare facilities and the risk of inaction. I'm excited to dive into this relevant topic with you both. So Charles, let's start with you. Can you talk about why is it important for institutions to prioritize investments in their facilities even with limited resources?
Charles Clay:
Well, first off, investing in your healthcare facilities is essential for maintaining the patient's safety, improving the operational efficiencies and enhancing your patients and staff satisfaction. And we have to invest in our facilities to really maintain regulatory compliance with even looking at the long-term cost savings. If you're planning and prioritizing your investment, then you have a way to be the best stewards of the financial resources that you have for your organization. You're able to minimize the unforeseen or unexpected outages by having those prioritizations in place.
Maria Castellucci:
Yeah, that makes a lot of sense. So Mark, I'd love to talk to you now about how can leaders communicate the significance of the risk of inaction to their financial stakeholders?
Mark Kenneday:
Great question, Maria. Through decision making informed from high quality data that's collected and reported in accurate manner and utilizing tools that all stakeholders understand if the data is suspect, then the stakeholders will never buy in. So we look at stakeholders and we believe they should be included in every investment to assure risk to both patient care and business continuity are evaluated comparatively. And by comparatively what we mean is by portfolio we shouldn't be comparing an MOB to a critical care facility really won't yield very valuable information as well. Prioritizing the various portfolios based on the missions of the institutions will. When we utilize third party evaluations from qualified well training professionals, we'll always get the most impactful and respected information to the boards and to the stakeholders. Like every other aspect of healthcare operations, best outcomes are achieved when the right processes are deployed by the most qualified professionals.
In that conversation, what we say is we want to convert the data into information that can inform investment and facilities decision making, which is really an art and a science and usually not the skillset normally found on most owners' team until a problem's documented, clearly defined and aligned with the mission of the institution's facility, investments will always fall short. And what we see is they've fallen short now for so many years that it's going to be very difficult to stem the tide of ballooning backlogs of capital renewal and deferred maintenance. The present state of backlog, we've documented in institutional net present value as a result of years of underfunding. It can't be arrested in a single business cycle. So we recommend developing a cashflow plan over at least 10 years with the goal of neutralizing degradation as well as additional investments at that point that can be made based on affordability, that will create even a greater risk of reduction. We call it a low hanging fruit strategy deal with the stuff that's most critical to the missions of the institution once you've dealt with that step up to the next level of low hanging fruit and you're really gaining ground each time.
Maria Castellucci:
Yeah, really great advice. So Mark, can you talk about what are the long-term consequences of ignoring the risk of in action?
Mark Kenneday:
Sure. Optimal use and efficiency. The space can be achieved when the owner takes a lean approach and by lean we're talking about kind of the Toyota process as adapted for healthcare utilization. We want to talk about space movement, space utilization, how nurses and patients move through the space. And all of this can be dealt with in small cap projects over time. If we don't, what we see is that from that first initial training when we took first productive use, the teams gain a familiarity of the space and then from that day on, it becomes gradually less optimal. And as care plans and business models evolve over time, users begin to create workarounds within the space to meet their needs. So from the moment of first productive use, which is a financial term used in the construction process, meaning that all risk is now shifted from the contractor managing the space back to the owner.
From that point, throughput begins to degrade. And it's interesting because we find financial viability becomes less and less viable over that time. It's not like whoosh and it occurs, but it's very gradual and always continuing to degrade. So what we want to see is that the same facility infrastructure and we have to understand it's aging out as well. So I guess the best way to explain it is that if we think of the building types that we have, we build and design 35, 50, a hundred year buildings. Each one of those buildings has a different lifecycle, different business products that were used in the building and different purposes for the owners in the use of the building. Some much more critical, much more busy, much more traffic than others as well. Inside those buildings are hundreds, in some cases, thousands of different mechanical assets that are aging out as well.
Not only the corn shell, but the aesthetics pieces, but also pumps and motors and air conditioners and chillers and all of the equipment. What's a challenge is all of that stuff has different life cycles, so it ages differently and we call 'em waves of cycles because at some point a wave may come and you've got a cresting year where any kind of flat line budgeting is just not going to work because that year a tremendous amount of things came due and we traditionally budget capital renewal and deferred maintenance as a flat line straight, whatever it is, one, two, 3%. And that's not always the way the building is demanding need. So we believe that aligning investment needs with the institution's mission can help you also prioritize what that looks like over time. I'll leave with this. The most healthcare facilities are blend of many types of buildings, as we said, but also they're created to meet a specific need.
Their life cycles are different based on design. Literally from inception, as each new addition was designed, they're kind of glued and stuck on the original structure. And a lot of that is due to this one really challenging aspect of healthcare is that we don't transport patients outside from one building to another. They have to be in condition space. And that makes a tremendous amount of sense. If you're in Minneapolis, Minnesota, you don't want to take a patient out in sub zero degree weather or down in south Texas in a hundred plus degree weather. Well, what that results in is the original facility is now encased by newer investments that were glued onto it and becomes the central transport hub for patient transport for all the utilities, all the infrastructure data system, everything goes through that one old structure. And remember, construction types in the fifties, sixties and seventies are not how we build buildings today. So those structures can be in significant need and yet hard to get to because we built everything around it. We believe that's the one issue that we need to spend the most time with leadership to get their head around so that it becomes well understood what that looks like. And in many cases it's such a hard nut to crack that it just keeps getting pushed down the road. So that's the highest single risk of inaction we see in healthcare facilities.
Maria Castellucci:
Yeah, so I would imagine the challenge with prioritizing facilities investments is the competing priorities for leadership. Right? So what advice would you give a leader struggling to balance ROI with risk of inaction concerns? Charles, can you talk about this?
Charles Clay:
Yeah, I mean, one of the things, as a leader, you're going to hear a lot about benchmarking. You need to make sure that your benchmark is actually the highest quality of data that you have. A lot of times they'll use terms from a neighboring hospital or whatever, but your best data is data of your own assets and the condition of those assets and the number of those assets. And really being able to utilize good benchmarks that have true A STM standards, ASHRAY standards, A-I-A-E-P-A, ASCI standards, all things need to be applied when you're looking at benchmarking of your critical infrastructure. One of the things that a lot of healthcare facility leaders struggle with is being able to communicate with the C-suite as to what those needs are. I've heard it many times over, they would say, Hey, I've got an air handler that it's about gone and I need to get this new air handler. And they'll ask 'em how much it costs, but nobody's really talking about what that air handler does and what services does it provide for what areas. And so you need to be able to communicate in a way that's in a language to the stakeholders that are going to approve those budgets that you're asking for. Otherwise, you're going to be the one that said, I needed this replaced. And when it fails, they ask, well, why didn't you say anything? So you need to be very clear, very precise, and be able to speak in a language that administration understands. And the way you do that is to have data that is very professional and it's put into terms of what the cause and effect is of those assets as they age out. And you're able to really look at the risk of inaction through the lens of the optics for healthcare leadership. And that's a big change, a big challenge for most of us.
Maria Castellucci:
Yeah, that makes sense. So to close this out today, this question's for both of you. I'll start with you, Mark. What's the most impactful thing to reduce the risk of inaction?
Mark Kenneday:
First and foremost is to understand and get a definition in your institution or your system of where you are in the lifecycle or what we call the net asset value of your portfolio. So net asset value is a percent good remaining in your plant. So you can take that term and you can apply it to mechanical assets or to the building or to the system. What you're after is defining where you are in that continuum. What we see across the country, and it's a bit of a problem, is that we're in declining that asset value almost completely. So what that means is our facilities are aging out, new investments are being made, and initially if you kind of did A-F-C-I-A facility condition index equation, you might end up thinking you're in good shape because you added more to the denominator, right? More square footed. But in essence, you created more risk.
So now your campus is bigger. Your challenge to meet that financially has grown substantially. So what we really say is defining what your net asset value is and then working with your board and your senior leadership to determine where you're willing to go. But more importantly, I've seen it time and time again where we shared with boards what the net asset value is of their institutions, and they just kind of jaw drops. It's not well understood that healthcare facilities are in declining net asset value. So we're really trying to arrest that. There's a profound value of knowing and not knowing is kind of like if you get a bill in the mail and you don't open it, it doesn't mean that it doesn't come due. It just means you didn't know that it was due. Well, that's what this is. We're providing notice now that the bills come due and we've got to do something about it. But at the same time, we want to see institutions develop models where they can arrest their backlogs, which is the most critical issue right now. We've got to invest to ensure that things that are beyond their useful life are replaced. That's first and foremost. That's why we're saying it's really going to take about 10 years to solve this puzzle. But if we can do that, then we can begin to deal with the next issue, capital renewal and deferred maintenance, but also our goal is ultimately to reduce risk. That's what it's all about.
Maria Castellucci:
Thanks, Mark. Charles, anything to add?
Charles Clay:
I would say Mark's right on the money. With that being to really clearly define what your net asset value is to leadership and the importance of that and understanding what it is as far as based on the percentage of the useful life remaining in that building and the assets that are there, it is a shocker because a lot of times it's not being measured on an annual basis. If it was, you would see this constant depreciation line of that asset. I kind of relate it back to when you buy a car, what you paid for the car and what it's worth after you drive it off the lot and what it's worth after you've run it, you got your first 10,000 miles on it or where it is at 50,000 miles. You need to relate it back to in terms that is very clear and very precise to where that you know what your true cost is. That's coming down the road. If you know it, you can deal with that, but it's not fair to healthcare leaders that they don't know that this big bill is coming due. They don't know that that facility is aged out. It's going need to be replaced. They may have some idea with it, but they may not have the nuances of all the critical infrastructure that's in that facility that is beyond its useful life. And that's a challenge for some healthcare organizations. Fortunately for large systems, they usually do a better job of knowing what their assets are, knowing what their condition is, but a lot of the smaller ones don't. And that's unfortunate.
Maria Castellucci:
Thanks so much for your time, Mark and Charles, it was so nice to speak with you both.
This has been a sponsored episode of Healthcare Insider created in collaboration with Gordian. For more information about them, please visit gordian.com/contact-us. I'm your host Maria Castellucci. Look for more episodes of Healthcare Insider under the multimedia tab at modernhealthcare.com or subscribe to your preferred podcatcher. Thanks for listening.
