Peter Heckathorn, CMPE, Executive Vice President, Sacred Heart Health System, Pensacola, Florida
Sacred Heart Health System
April 4, 2011
Hon. Jeff Miller
House of Representatives
Hon. Bob Filner
House of Representatives
Dear Chairman Miller and Representative Filner:
I am Peter Heckathorn, Executive Vice President of Sacred Heart Health System in Pensacola, Florida. I lead strategic and operational planning for the health system and I have been in that role for 14 years. Prior to that I was involved in various health care organizations and was a consultant to large medical systems across the country.
Thank you for the opportunity to provide some information on how private health care organizations plan and budget for operations, technology, and facility investment. I apologize in advance for not being able to see you in person, but I suffered an acute medical condition that has temporarily blinded me in one eye and limits my ability to both write and travel.
Sacred Heart Health System ("SHHS") is part of Ascension Heath, the largest not-for-profit health care provider in the country, with physician clinics, hospitals, and nursing homes in 20 states. Ascension Health providers serve the full spectrum of populations, but with a special preference for the poor and vulnerable.
SHHS is an integrated health system providing physician care, inpatient community hospital services through 3 hospitals (with 543 beds operating at 80 plus percent occupancy), as well as highly specialized regional services such as heart surgery, cancer care, and pediatric specialty services. SHHS provides primary and specialty physician care through clinics and medical offices for citizens throughout a 10 county region in western Florida and southern Alabama. SHHS also provides tertiary care for infants, children, and adults in a 20 county region including services for active duty military personnel and their dependents. Sacred Heart Hospital in Pensacola was named one of the best hospitals in the country in 2011 by HealthGrades, an independent organization that analyzes clinical quality outcomes for all hospitals. Additionally, Thomson Reuters named our Sacred Heart Hospital on the Emerald Coast in Destin one of the top 100 hospitals.
We are presently engaged in the annual development of an integrated strategic and financial plan that includes major capital projects. Over the last 10 years, SHHS has constructed two new hospitals and over a million square feet of ambulatory care space.
What I will share is a standard practice across the health care industry on how large, multi-region health systems engage in effective planning.
Strategic, Operational and Financial Planning Process
Health systems are driven to ensure careful and thoughtful financial stewardship and investment in the services for the communities we serve. Health care financial operating margins are very slim (averaging 1-2%), and the facility and technology driven nature of our industry demands tremendous amounts of capital investment. Careful planning and cash management are critical to survival. Therefore, it is incumbent on multi-regional systems to ensure that each of their local regional health systems annually create and update a five year strategic, operational, and financial plan to support that system's operating and capital expenditures budget.
A well-managed health system ("HS") will create an integrated strategic, operating and financial plan ("ISOF Plan") that incorporates the following elements in a detailed five year forecast document to be used by managers, executives, boards, and regional/national staff to track progress:
- Demographic and Market Analysis: Population, economic and healthcare statistics, trends, and forecasts are developed in a defined geographic market. Detailed population by age, gender, and race are analyzed for changes and trends, as well as employment, local business trends, and disease trends to assess their effects on the potential demand for services. Existing trends of utilization at the local regional system's facilities and other local facilities (including private and public) would be articulated and analyzed relative to the population and economic activity. All local trends and forecasts would be reviewed against national trends. Local, state, and federal government activities, financing, and regulations would all be scrutinized for implications on the demand for care and financing of services. All the data can be obtained from commercially available health information and planning companies who specialize in providing historical data, predictive demand and supply tools, and provide information regarding demographic and technology trends.
- Market Dynamics Review: Strategic and operating trends of other providers (including the VA medical facilities, the active-duty armed forces health care facilities) are analyzed for potential short-term and long-term impacts, In the private sector, there may be an avoidance of duplicating services or a need to provide a competitive service to maintain income viability as facilities compete on quality, customer service and clinical capability. The opportunities would be carefully balanced against the demographic analyses, preferred strategies, and financial investments and returns necessary to ensure organizational sustainability. This situation and opportunities analysis influences strategic planning goals.
- Strategy Plan: Most large health care organizations have developed strategies that are derived from their mission and vision. Those strategies would then be tailored through specific tactics to fit the specific market characteristics of the communities the regional health system serves. The operational implementation of each of these strategies should be addressed in the detail of the regional health system's ISOF Plan with concrete measureable performance goals. Performance against those goals should be tracked throughout the year by the local health system leadership, the regional/national system office, and the local boards of directors to ensure that the local ISOF Plan is effectively being pursued and implemented to further local regional and collective system-wide plans.
- Financial and Capital Investment Budgets: Annually, in concert with the strategic and operational planning process, a five-year financial and capital investment plan is created. These plans reflect the strategic and operating commitments of the local health system. The financial plan would only be approved for one year and although capital investments are listed, they are not approved for more than the current year without a far more detailed and rigorous process which is outlined below. It is the expectation that the five-year financial and capital plans will be reliable and consistent from year to year. Significant variation from year to year would be a major concern, unless major events (e.g., hurricane) occurred. Such variation would reduce the credibility of a local system seeking to add facilities and capacity or start a new location.
- Performance Evaluation: The ISOF Plan would be approved by the local regional health system's board and the national health system's board. Throughout the year, performance against the ISOF Plan's specific goals and financial plan would be evaluated. Most large private systems link executive's and management's compensation to the execution of the ISOF Plan goals.
Major New Technology or Building Projects
Major new technology and facility projects are analyzed separately from routine replacement of equipment. The financial plan described above includes routine capital replacements, including equipment and facility refreshes.
Major technology and capital projects (e.g. over $10 million in expenditures) would demand a multi-year conceptual planning lead time and detailed analysis before receipt of funding approval by the systemwide office. The process for approval and subsequent funding entails written justifications, analyses, and reviews in a through, disciplined, and documented process that involves multiple external and internal experts in planning, technology, operations, and finance. We shall call this the "capital project submission and review process."
Step 1: Initial Project Vetting
A pre-requisite for a project to be qualified for the "submission" process is that the conceptual project has been identified and discussed in the specific local regional health system's five-year ISOF Plan as a critical goal to implement system strategy, and is in the local regional health system's capital investment budget as a priority that "out-ranks" other items it seeks. The creation of the ISOF Plan should involve a large number of stakeholders (e.g. staff, local health system board members [business and community leaders who live in the community)) in the preparation, critique, and refinement of the ISOF Plan document. Potential projects are carefully debated to ensure that the highest-priority, sustainable projects are conceived. Every year each local regional health system's ISOF Plan is also reviewed by an independent team at the system-wide office with the local regional executive that oversees the health system. Each local regional executive also annually presents their ISOF Plan and the proposed projects to other regional executives and system-wide leadership. This process provides for early constructive feedback on the potential project's strategic rationale, financial potential, and alternatives This process also alleviates sudden crisis-driven projects.
It is expected that in each year's version of the ISOF Plan the local regional market statistics and strategies pertinent to a potential project would have been identified, articulated, and modified to identify key rationales and data promoting or proposing other alternatives to the project.
If the regional executive, after feedback from her or his peers, determines that a project has sufficient strategic and financial probability of success, then a "master facility plan" would be completed or updated. The master plan would be prepared by a multi-disciplinary team of independent outside consultants with specific expertise in healthcare planning, finance, operations, and facilities. There are many firms that provide these services. The master facility plan defines, and rigorously evaluates, current and future options including no action, delay, and modifications of current service capabilities against multiple demand and volume scenarios. This external assessment would have a significant influence on whether national system office staff will evaluate the potential project as sufficiently competitive to submit. The external consultants and system staff collectively identify trends that will affect in-and out-patient utilization and how those factors would manifest themselves in that specific community and in the organization's facilities. That detailed strategy, planning scenario, options, and facility-concepts testing process takes 6-8 months to complete. At every evaluation step in the process, the external consultants' findings are reviewed with the local regional health system.
Step 2: Project Review Upon Submission
If a project obtains a positive review in the "master facility plan," a conceptual project application package is created. This includes the master facility plan, preferred options and approaches to the project with a detailed integrated strategy, operating, and financial plan demonstrating various, but hopefully a high, cost-benefit ratio. The project is then formally entered into the capital project submission and review process. Routinely, large national systems have a multi-disciplinary team of experts ("Capital Project Review Team") who review the conceptual project and its plan in entirety and provide a written analysis. Those experts generally are not involved in the local regional health system's operations and therefore can independently evaluate and rank all competing projects from the various local regional systems. The Capital Project Review Team ("CPRT") (made up of planning, finance, and operations staff integrated with design, construction, technology, and contracting staff) provide the ability to evaluate all potential aspects of a project. These experts may have selected the outside experts to perform the master facility plan. Their assessments coupled with input from the submitting regions' staff are vital to determining the project's viability, rationality, priority, and timing.
Acceptance by the CPRT is paramount for a project to proceed into the review portion of the process. The CPRT's rejection of a project would demand that the conceptual project and its plan be reworked. The CPRT team's acceptance is documented in a written summary of the conceptual project with specific cost/benefit metrics and forwarded to a system-wide committee ("System-Wide Committee") charged with allocating the limited five-year forward-looking capital project budget. The capital budget is determined by the financial capacity of the whole national system's financial capacity and cannot exceed established limits in order to maintain credit ratings. Therefore, project ranking is critical. The System-Wide Committee would approve, pend, or deny a project. Approval by the Committee only means that the project can be imbedded in the multi-year ISFO Plan of the local regional system and has been "preliminary" approved subject to subsequent detailed analyses and agreed upon implementation timing.
Step 3: Preliminary Approval of Capital Projects
Once the preliminary approval is obtained, the local regional health system would commence to develop a functional design and operating program as well as an architectural schematic design. Upon completion of that work, which may be overseen by a system-wide facilities manager, the project is resubmitted to the CRPT for analysis. If the CRPT's analysis concludes that the preliminary-approved project will meet operating and financial objectives as originally submitted, it will recommend the project back the System-Wide Committee for a second approval review. The System-Wide Committee can approve, pend, or deny a project when the project is compared to other projects on the Committee's priority list and based on the system's current available capital. If a project exceeds a certain cost (e.g. $50 million) the project must go to the Board of Directors of the national system for approval. If the project was approved, then a "Not-To-Exceed" Budget" is created and the project is subjected to a "best practices test" to ensure that it will be the best possible facility before going to detailed design and bidding.
Step 4: Final Approval for Capital Projects
After the second national system approval, the project enters detailed design and budgeting. The expectation is that the results of this activity would result in a project ready for construction bidding. If during the detailed design and budgeting process, the project appears to have exceeded its approved scope or the detailed cost estimates determine that the project will exceed budget, the project is halted for a review with the system-wide CPRT and potentially facilities consults. If the capital costs cannot be modified to meet the budget and the performance objectives, then a project can be altered or canceled. Therefore, there is a careful focus at the preliminary stages of this process to ensure that the estimates employed are reasonable and consistent with industry standards. If the project moves forward to bidding and contracting, routine meetings, between regional management and the CPRT and facilities staff at the system-wide office, would occur (as frequently as monthly) to review time schedule and budget adherence. Any variation could result in the project being returned for a review by the senior executive level System-Wide Committee or the Board of Directors of the national system.
This process could, in theory, take only two years to get to drawings. However, based on the need to have orderly long term capital planning this process is more likely to have an elapsed time of three to seven years. This necessitates extremely thoughtful and disciplined ISFO Plan processes and analytic capabilities.
Concepts to Potentially Consider:
In many communities, veterans have significant medical needs that cross the continuum of care and require specialized professionals. In our region there are hospitals with excess facility and clinical capacity, recognized high quality services, and experience with caring for active-duty personnel and veterans. Perhaps the VA should consider how to encourage public-private partnerships that would meet veterans and active duty military needs using existing resources in communities in which the beneficiaries reside.
With implementation of new electronic health information exchanges between civilian and military health providers, access to medical history, testing results, and medical records will be even faster than before. Perhaps the VA might consider the alternatives of contracting with community physicians and hospitals to create quick access to care without the costs of building new facilities.
Thank you for letting me share some information and perspectives.
Peter Heckathorn, CMPE
Executive Vice President