Kaiser Permanente would like to thank the Committee on Veterans Affairs of the United States House of Representatives for the invitation to answer specific questions at today’s hearing.
The Kaiser Permanente Medical Care Program is the largest private integrated healthcare delivery system in the U.S., delivering health care to approximately 8.7 million members in nine states and the District of Columbia. Kaiser Permanente is comprised of Kaiser Foundation Health Plan, Inc., the nation’s largest not-for-profit health plan, and its health plan subsidiaries outside California and Hawaii; the not-for-profit Kaiser Foundation Hospitals which operates 36 hospitals and over 400 other clinical facilities; and the Permanente Medical Groups, independent physician group practices that contract with Kaiser Foundation Health Plan to meet the health needs of Kaiser Permanente’s members. The vast majority of medical, pharmacy, diagnostic, and laboratory services delivered to Kaiser Permanente members are performed within Kaiser Permanente.
Kaiser Permanente’s capital scope includes expenditures in three major categories; new facility, information technology investments, and plant maintenance and renovations. Facility expenditures include investments in new hospitals, medical offices, and other ancillary space to meet growing membership needs and enable the internalization of care and services. These include both owned and leased space. Facility expenditures also include the cost of expansion of existing facilities, seismic upgrades, regulatory requirements, and maintenance projects. Ancillary space includes pharmacies and laboratories, as well as administrative space and business services.
The Professional Staff of the Committee contacted Kaiser Permanente to request input to this hearing in the form of specific questions regarding our own capital planning processes, as follows.
Questions and answers:
1. Does your organization use a cost analysis in planning construction or renovation projects for purchase or lease?
All capital projects require the submission of a business case for funding approval. There are predetermined thresholds, based on the dollar amount associated with the capital investment, which determine the specific requirements of each business case. The business case for major capital investments includes a full cost analysis of all operating expenditures and capital expenditures evaluated over a 10 year time frame. Individual cost analysis inputs (for example, costs expressed as dollars per square foot) are compared to internal metrics. Additionally, high level place holders are used for long range capital planning. These numbers are determined based on a high level internal cost model estimates. At the time of the actual funding request, business cases and options are developed and evaluated in more detail. Kaiser Permanente is in the process of developing benchmarks that are tied to external industry standards.
2. How is an analysis of alternatives conducted?
We assemble a comparative matrix that allows us to evaluate the short list of options for capital projects. This matrix includes the pertinent qualitative and quantitative drivers to the decisions (i.e. entitlements, parking, hard and soft costs, etc.)
It is the responsibility of the group who is submitting the business case to identify and evaluate the most relevant, realistic alternatives to proposed projects. Key considerations include--
- Can existing facilities accommodate forecasted service demand?
- Can existing facilities be renovated / modified to accommodate forecasted service demand more cost effectively?
- Is there an option to lease space for services in a way that is more financially beneficial to the organization?
- Is a lower cost venue available for purchase and renovation?
- Can the project be built using a smaller footprint? Reduced scope?
- Are there other providers in the market that can accommodate demand via contracting or partnership arrangement in an appropriate manner?
- Is there a higher and better use for the planned invested capital in other parts of the region?
In addition to describing these alternatives, regions are responsible for identifying and to the extent possible quantifying key risks associated with each alternative to the end of providing a full rationale for the recommended option.
3. On average, how many pages constitute a cost analysis of any given small and large project?
The length of a cost analysis really depends on the complexity of the cash flows and the transactions at hand. A typical business case includes the following in the cost analysis: comparative summary, net present value (NPV) analysis for each option under consideration, cash flow for each option considered, profit and loss (P& L) analysis for options considered and capital cost estimates for all options.
4. Who provides the analysis (internal to your organization or independent third party)?
Comprehensive cost analysis is generated, reviewed and approved internally.
5. Is the organization providing analysis contracted to provide the service? If so, is that expense valuable in overall cost savings related to your organizations decision?
This type of analysis is done using internal resources. While it’s impossible to assign an accurate dollar amount to the value our organization receives through these thorough analyses, experience shows that a poorly planned investment can cost the organization millions of dollars over the life-cycle of a facility. For example, over-building a facility (building more square footage than is needed to meet market demands) increases both the initial investment and ongoing operational cost. It also “locks-up” capital resources that could be utilized to address other areas of need. Under-building a facility may force us to outsource services at a less efficient cost that could be achieved internally.
6. What is the value of comprehensive cost analysis in relation to your organization’s construction or renovation projects?
Comprehensive cost analysis is an essential element of informed decision-making and project approvals at Kaiser Permanente. This type of analysis allows Kaiser Permanente to:
- better predict total project cost;
- appropriately plan and build a long-term, multi-year capital program;
- compare predictive cost models to our actual costs so that we may improve analysis of future projects;
- properly evaluate a range of options to make informed capital decisions going forward; and
- provide a benchmark against completed project cost and published industry cost data.
We hope that these answers are helpful to the Committee as it examines the Department of Veterans Affairs capital planning process. Kaiser Permanente would be happy to answer any additional questions the Committee may have.