As provider organizations look ahead to redesigning their care delivery models and taking part in more risk-based payment structures, their capital spending plans must keep pace with their evolving needs.
This article appears in the January/February 2014 issue of HealthLeaders magazine.
The Patient Protection and Affordable Care Act is a game changer for hospitals and health systems, which are bracing for new reimbursement models based on value, the continued shift in patient volume from the inpatient to the outpatient setting, and the movement toward population health management.
As a result, provider organizations are making major capital investments in their IT capabilities to increase their ability to manage patient records throughout the care continuum and reduce overutilization and duplication of services and in their ambulatory facilities to drive new levels of revenue and more inpatient referrals.
Outpatient volume drives decisions
"The ambulatory side is a big focus for us," says Richard Rothberger, corporate executive vice president and CFO at San Diego–based Scripps Health, a five-hospital, 1,323-bed system with $2.6 billion in fiscal year 2013 revenues.
"We see all of our growth opportunities coming from ambulatory so we bought some land in Oceanside, Calif., and plan to build a supersite with multispecialty clinics, advanced imaging, urgent care, and those kinds of services in a community we don't serve today."
Rothberger expects the building to be completed in 2016 at a cost of $60 million to $75 million. "As it is being defined now, we are looking at building an 85,000-square-foot building with a parking structure," he says.
In addition, Scripps is expanding an orthopedic musculoskeletal center that has for years had a backlog of patients trying to get appointments. The $10 million investment will increase patient access and help drive revenue, Rothberger says.
"It's one of these excellent services we provide that has been limited by size," he says. "We expect it to be a huge growth opportunity."
The expanded outpatient capacity is also expected to result in increased referrals to inpatient services and added patient convenience, Rothberger notes. "We are trying to feed our large infrastructure on our hospital campuses. We are also trying to reach into the community so people don't have to travel so much. We want to give them the opportunity to see their practitioners closer to home and are trying to offload a lot of expensive work away from the hospital."
Mark Bogen, senior vice president and CFO at South Nassau Communities Hospital, a 435-bed hospital in Oceanside, N.Y., with annual revenues of approximately $425 million, also sees the need for more ambulatory capacity, but says that because his organization is located in one of the most densely populated areas in the country, buying a large piece of land and building new is not an option.
Instead, South Nassau is on a mission to buy as many surrounding buildings as possible to accommodate the growth in its ambulatory business. Bogen says the organization's current patient service revenue is 60% inpatient and 40% outpatient, but he expects to see that change over the next five years to a 50-50 split.
"We've been doing a real estate plan of trying to buy as many properties in and around the hospital campus as we can as they become available. There needs to be an ambulatory component to our longer-term capital investment strategy as we acquire docs," he says.
Nick Barto, senior vice president for capital finance at Catholic Health Initiatives, an 87-hospital, $10.7 billion nonprofit health system based in Englewood, Colo., says his organization is increasing the number of its ambulatory sites as part of a strategy to "increase market share and experience organic growth."
Barto says CHI also wants to expand its outpatient capacity because treating patients in an ambulatory setting is more cost-effective than treating them in the hospital—something that will become increasingly important in a value-based payment structure.
"With risk-sharing models, it's important to have lower-cost settings that are traditionally more convenient to the patient," he says.
CHI's goal is to provide 65% of care in an ambulatory setting and 35% in an acute care setting. "We want to reach that level of nonacute care revenue by the year 2020," Barto says.
Major IT investments to continue
Hospitals and health systems know that their reimbursements are becoming increasingly tied to successful population health management and, accordingly, they are continuing to invest heavily in electronic health records and other IT enhancements to manage patients efficiently throughout the entire network of care.
Barto says CHI will spend 28% of its $1 billion to $1.3 billion fiscal year 2014 capital budget on IT projects, up from 10% in 2010.
"IT is a much larger portion of our capital spend in 2014 than it has been in past years," he says. "We are building out the data analytics needed to analyze patient populations and take on risk as we evolve as a healthcare system. The majority of the IT investments we are making is really to be sure we have the data in the system to do the analytics we need to thrive in a pay-for-value culture and in a risk-sharing world."
Barto says that it is not enough merely to capture the data in an EHR; CHI has made it a priority to use the information to improve quality and lower costs, which he says is essential in a risk-based payment environment.
"I think it is about making investments in the IT system and also working on how we make those into better tools to deliver better care in our markets," Barto says. "It's about using the data to get better outcomes and to focus on our high-cost areas and to reduce high utilization. We are using the data to drive cost out of the system."
Richard W. Jones, CPA, senior vice president, CFO, and treasurer at Reading (Pa.) Health System, which had $913 million in total operating revenue in fiscal year 2013 and includes the 735-bed Reading Hospital, says his organization is spending $130 million over a three-year period on an EHR installation, in large part to position itself for better population health management.
"We are in the middle of upgrading our information technology. We have recently implemented Epic and rolled that throughout our system both in the hospital and physician practices," he says.
Jones says the IT spend is part of Reading Health's long-term plan to improve care delivery but has been made more urgent by health reform legislation.
"We were originally embarking on this IT investment before we really understood what the Affordable Care Act was going to bring to the industry, but we now believe we need the IT in place in order to respond to the market and respond to the clinical and quality needs of our patients and communities," Jones says.
"From a clinical integration standpoint, it just made sense for us," he adds. "As more and more payers and consumers are measuring providers on quality and outcomes, it is putting pressure on providers to manage costs across the entire continuum of care, as well as to reduce redundancy of services by providers. By having all of our patient information in one record, whether in the hospital or in an ambulatory setting, it will reduce redundancy and allow for better, faster care."
While Scripps Health already has an EHR in place in its hospitals and clinics, the organization is "constantly spending to update and upgrade" the system and to make other IT improvements, Rothberger says. For example, in fiscal year 2014, Scripps will spend $8 million on a computerized physician order entry system; $9 million on ICD-10 as part of a $30 million, three-year project; and $6 million on a patient portal that will allow patients to access their test results and schedule appointments with their primary care physician.
"We are trying to improve access for our patients with the portal," Rothberger says. "It's a competitive advantage, and it's a competitive disadvantage if you don't have it."
Spending on inpatient facilities still important
Although the trends in capital spending show a clear move toward investments in IT capabilities and outpatient care facilities, significant dollars are still being earmarked for construction and renovation projects on inpatient infrastructure.
Scripps is in the middle of a $456 million construction project to build a seven-story, 383,000-square-foot cardiovascular tower on its La Jolla campus scheduled to open in March 2015. The system's 2014 capital budget includes $100 million for this one venture, says Rothberger, noting that this is on top of the $250 million the system typically spends each year on capital investments.
"We borrowed in February 2012 to be able to deal with the front load of that cardiovascular tower, and we actually expended all those bond proceeds by the middle of 2013," he says of financing the higher-than-usual expenditure. "Now we are on our own and cash out has to equal cash in unless I am willing to reduce our cash balance, which I haven't had to do to date."
Reading Health is also spending on inpatient construction in 2014. "We are at the beginning stages of investing $350 million in new facilities," Jones says. The plans are mainly for a tower that includes surgical and perioperative suites and 100 new patient beds on the top floors and for operating room replacements.
"We will be replacing 24 existing ORs, six of which will be hybrid ORs," Jones says. "While we have continued to upgrade the equipment, the oldest of the rooms themselves were built in the '70s and are quite small. … It is time to invest in the facilities and build completely new surgical towers—structures that will allow us to have OR suites that can accommodate teams and equipment and that are also laid out in such a way to be able to manage those rooms much more efficiently and economically."
At South Nassau, plans are underway to renovate two medical units to convert 38 double-bed rooms to 23 single-bed rooms. "We are continually making investments here to update our existing plant to bring it up to today's standards," Bogen says.
The hospital will also construct an $80 million building for inpatient care within the next few years. However, looking ahead, Bogen says South Nassau will soon turn its capital spending attention to population health management and away from its brick-and-mortar assets.
"That strategic plan and how it relates to health reform and population health management will probably bring some real change as far as how we invest our capital in the future," he says. "This is certainly our last significant on-campus project for the foreseeable future."
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This article appears in the January/February 2014 issue of HealthLeaders magazine.