S&P Ahead of Itself on HC Market

Posted on August 17, 2012


The Advisory Board, a healthcare industry consultancy, reported a dubious outlook for hospitals by Standard & Poor’s (S&P). S&P feels that hospital performances will most likely lag in the near future because of limits reached on cost savings and efficiency. They feel the majority of the value from cost containment, economies of scale and other revenue enhancements has been realized by hospitals. Thus, poorer performance can be expected due to projected weaker volumes, reform implementation, and state budget constraints.

Standard and Poor’s is an expert on the finance and credit analysis and research side of the healthcare industry.  However, from down here in the weeds of healthcare design and construction, S&P’s view is wishful, forward-thinking, and a bit premature.

From my perspective, based on recent and ongoing meetings with hospital leadership from Facilities Directors to CEOs, hospitals have not even begun to scratch the surface of cost containment and efficiency as S&P contends.  Nor have they embraced key concepts that need to be ‘baked in’ during facility design, which would help maximize internal operations and positively affect the bottom line.

To quickly refute S&P’s basic assumptions, economies of scale may be tapped out from a purchasing standpoint, but what about mergers and acquisitions?  The healthcare M&A market is only beginning to heat up, and is expected to continue for the next 10-20 years by some accounts.  To me, that is an economy of scale not fully realized.  Utilizing an integrated team in capital projects is another significant economy of scale underutilized—maybe 15% of the market uses such a team—to reap savings on planning, design and construction services that are mostly piecemealed together on a project by a lot of smaller consultants. Healthcare systems of a certain size and geographic coverage should seriously look at consolidated support services, yet that too, is a somewhat new revelation for administrators.

Additionally, cost containment may be happening on a micro level (departmental) within hospitals; however, hospital acquired infections (HAIs) and readmission are two huge issues that scare a lot of administrators, and not everyone has his electronic medical records (EMRs) in place yet.  These issues cost tens of millions, per year in some cases.  Full-time employees (FTEs) are the largest expense for a hospital, and staffing can be affected by the layout and size of a department, or new projectSimulation studies can right-size facilities using the hospital’s own data, yet few hospitals have employed this. From a project standpoint, the right team and contract can limit the risk and downside cost of hospitals each time; many hospitals have not critically analyzed or adopted that yet.

And efficiency:  there is a lot untapped.  Once again, simulation helps hospitals see, in 3D, how operations actually happen and where the hiccups are in a smooth process.  Simulation improves throughput, staffing and quality, and dovetails with lean and six sigma initiatives—both of which are not embraced by a majority of hospitals, despite being accepted business concepts for decades. On the energy side, hospitals are not doing enough to make sure their central plants are serving their facilities well; huge savings can be reaped through an energy audit and commissioning.  In addition, some technologies like cogeneration and alternative energy, have advanced enough to improve efficiencies at hospitals. And, despite the obvious benefits of sustainability to hospitals, a minority of healthcare systems genuinely and strategically apply green design for the financial benefit of the hospital, and increased well-being of patient residents.

Why is this?  One reason is healthcare is a risk-averse industry. Some of the concepts hospitals should have fully embraced (see also:  the construction industry) and installed in their organizations are still being debated by leadership and Boards of Directors. Perhaps a second reason is healthcare’s culture is skeptical of outside thought and proactivity, where the real fear should not be ‘what if I do something wrong’, but ‘what if I don’t do anything’, aka innovation by others. Another reason is the trickle-down effect—how long it takes for a corporate goal to be implemented throughout an organization.  Depending on the healthcare system, facilities can be the caboose on the train of innovation.

Standard & Poor’s sentiment will be correct eventually, and would have been accurate if they were addressing the retail or technology sector. But this is healthcare, and healthcare is still navigating the rapids of politics and reform.  Sure, the cliché ‘low hanging fruit’ of savings have been picked; yet when the rough ride settles a bit, I hope there will be more emphasis on institution-wide moves to fully implement the cost containment and efficiency initiatives that S&P feels have already been, yet remain thus far, untapped.