Efficient Investment in Beds

Posted on October 8, 2012

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Depending on who you ask, hospital beds are either something worth stockpiling, or more likely to sit vacant in the next few years.  Those who think beds will be empty cite a huge transition from inpatient to outpatient care, while those who desire more beds cite the sheer numbers of aging Baby Boomers. This is one example of the lack of consensus on where healthcare is going, and what kind of physical infrastructure will be needed to serve our future population.

Dr. Brian Gibler, a hospital CEO interviewed by Becker’s Hospital Review for a recent article was quoted:  “If you’re going to undergo hospital construction and it doesn’t meet one of three buckets — creating private rooms, meeting some type of code requirements or improved energy efficiencies — then you really should look at it even more carefully.”

At a healthcare conference earlier this year, I listened in on a debate on the value of investing in all-private patient rooms.  The presentation was the business case supporting all-private rooms.  I will summarize:  considering hospital acquired infections (HAIs), patient falls, transfers, and medical errors—all of which were argued as greater financial liabilities and more prevalent in semi-private rooms—it makes sense to build or convert to all-private rooms given the typical costs associated with that conversion.

The math behind the calculations figured it cost roughly $820,000 per-bed for a new all-private room; this includes a room, toilet and allocated support space at roughly 820 square feet ($1000/sf).  A renovated room that previously held two beds would cost about $548,000 per-bed to convert to an all-private room with the same space allocation as the new construction, albeit at a more palatable $450/ sf expense.  On the more practical side, annual debt service for each of these options would be pricy.  For the $820,000 new construction bed, a hospital would pay $52,800 per-bed-per-year (assuming 30 year note at 5% interest), while the renovation bed would be $35,300 per-bed-per-year. 

The above costs do not include the operational costs associated with the beds and associated square footage, which would include heating, cooling, lighting, cleaning, and maintenance. For comparison, it would be useful to have a calculation for the economic value of a bed to a hospital (what the hospital would gross or net, annually, from the use of a bed), but alas I do not have that at this time.

In the same article cited above, a hospital executive noted that her hospital is acquiring new beds for an even more attractive price, $180,000 per-bed.  Through some space shifting and off-loading at another facility, her hospital is freeing up some space and adding new beds through leasing.  Leasing is not often considered by hospitals, who typically like to own their buildings.  Yet, it might take shrewd moves like leasing to get to endgame less expensively.  In her mind, “if you built a new tower, those [beds] could be $2 million per bed” so she is scoring more beds “at ten percent of the cost.”  Though perhaps a bit exaggerated in her estimates, she is likely concluding a new, all-private bed would be closer to $2 million all-in (using the $820,000 number above, the fully financed cost of the bed over 30 years @ 5% would be $1,584,000 per-bed).

Transitions to all-private rooms have been cited by some as a reason healthcare costs are rising—the poster child for unnecessary or unwise investment in costly infrastructure.  However, it can be argued with the reasoning above that all-private rooms provide a good payback with other, more pricy considerations taken into account.  

One of the points I made in my last blog post on A/E/C fees is that there are more significant costs to be scrutinized, with far more detrimental financial outcomes, than A/E/C fees; the battle should not be with fees that amount to fractions of one percent, but centered on those costs that could be exponentially greater.  A similar contention could also be made:  all-private rooms cost more money, but they help manage four, far more detrimental financial outcomes that are potentially crippling for a hospital. Like A/E/C fees, you could tag all-private rooms an investment in risk management.

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Posted in: Project Cost