DOTmed Healthcare Business News
When it comes to strategic real estate capital investments, it’s no coincidence that for-profit provider return on investment is typically higher than not-for-profits. Navigant Managing Director Fred Campobasso provides insights on why for-profits are more successful, and steps not-for-profits can take to drive equivalent outcomes.
HealthCare Business News: Why are for-profit providers more successful than not-for-profits at generating ROI on their real estate investments?
Fred Campobasso: The secret to for-profit organizational momentum lies not only in their mastering of team-based decision-making, but also their ability to quickly implement informed strategies. For-profit leadership is much more likely to rapidly assess the data, to listen to their trusted advisors, and to weigh the risk-reward analysis around options. Combined, these attributes allow them to succinctly make informed go or no-go decisions.
HCB News: Why is it essential that provider leadership mitigate indecision and uncertainty in real estate development?
FC: As a healthcare real estate developer, our aim is to enable providers to make decisions in a timely fashion. But the bottom line is, we are not in control of when these decisions are made.
Herein lies one of the greatest challenges and risks to the development process and provider-tenant investment. Speed to market is a critical success factor in the world of healthcare real estate. On the other hand, indecision unnecessarily inflicts havoc on strategic development opportunities, and can lead to weeks, months, and, believe it or not, years of delay. During these periods, projects once deemed feasible risk becoming impractical due to such changing market dynamics as increased competition, interest rate increases, construction cost escalation, site availability, mergers and acquisitions, and more.
HCB News: What can not-for-profit providers do to overcome indecision and associated risk?
FC: They need to deploy a development approach that addresses key questions around location, timing, costs, risk, and ROI. Ideally, a well-informed solution incorporates a disciplined process, to include market and financial assessment underpinned by data analysis and benchmarking of similar investments. It also requires a leader or project champion who understands the science and art that enables timely and informed decision-making. Together, these aspects can provide an accurate forecast of the future.
The reality is even successful projects leave a lot of money on the table due to indecision. For example, Navigant recently worked with a health system to create a regional ambulatory care network as a part of its enterprisewide population health strategy. The system wanted to develop highly accessible sites of care to complement their existing locations and service offerings, and maximize the return on these investments.
Serving as their development partner, we implemented our proven decision-making process to determine the business case for proceeding, based on analysis of new locations, service offerings, and their physician strategy. We leveraged benchmarking of similar national and local projects, and data-driven “what if” scenario planning and financial modeling inclusive of such variables as volume, competition, reimbursement, and cost assumptions. It’s an approach we’ve leveraged with dozens of hospital, health system, and ambulatory care projects nationwide representing billions of dollars.
Unfortunately, indecision led to delayed decision-making. As the project shot clock kept ticking and time was lost, competition got out in front of the system, impacting forecasted volumes. In addition, interest rates increased and inflation spiked construction costs, not to mention across-the-board increases in soft costs.
Now, this initiative will still prove to be successful despite the lost time and execution delays. But, at a time when operating margins continue to shrink, the health system missed out on an opportunity to be wildly successful.
HCB News: How can leadership appropriately assess a project’s risk level?
FC: Most people tend to over-estimate the risk of making a bad decision, without understanding the risk of inaction. Furthermore, it’s easy to over analyze mid- and low-risk decisions. To avoid “paralysis by analysis,” providers should define their desired level of risk to decide how much certainty is required.
We encourage leadership to ask the following questions to better determine a project’s riskiness: This includes; Who is involved in making the decision? How much time should be spent to make the decision? How much certainty is required to proceed with a project? What is the tolerance for error? Addressing these questions can help leaders both make better use of their and the organization’s time, and empower employees in the process.
There will always be risks associated with “brick and mortar” planning and execution, including, over- or under-building, budget control, team performance, technology integration, entitlements, and more. An experienced development partner can help providers control these risks and inevitable schedule impacts.