A Blueprint for Managing Risk

Last month, Princeton (N.J.) HealthCare System completed a $523 million replacement hospital project on what will be a $1.2 billion, 171-acre campus. After a three-year strategic planning process, the PHCS board of trustees in 2005 determined that the University Medical Center of Princeton would not survive unless it drastically improved its physical plant, acquired new technology and added new programs and services to better serve the needs of the residents of Central New Jersey. Expansion at its current location was not an option so a new site that met PHCS criteria was chosen.

The new campus will include a replacement hospital for UMCP at Plainsboro; a medical office building; a health and fitness center; nursing facilities; an assisted living complex; and several other buildings, including a cogeneration power plant and a community park. At full build-out, the campus will generate 4,800 jobs and $1.1 billion in annual economic activity, not including the 3,300 construction jobs and accompanying economic benefits during construction.

Construction projects of this magnitude contain major risks. The purpose of this article, written from my perspective as chief executive officer of PHCS, is to explain those risks and offer strategies to manage them.

Before Breaking Ground

When a health care organization decides to replace or expand its facility, the construction project challenges begin well before the first shovel hits the ground. This kind of project is of great interest to the people directly associated with the organization, but also to those who believe they will be affected by such a decision. Patients, physicians, staff, residential and business neighbors, competitors, government entities and regulators all seek input into project scope, design, location, schedule and budget, which can complicate the smooth implementation of the project and, in the process, increase the already significant financial risk.

Access, environmental, traffic, aesthetic and tax issues matter to both individual residents of the region and those affiliated with nongovernmental organizations. Individually and collectively, all of these have the potential to stop, delay or redefine the project, making it cost prohibitive. And in addition to challenging the project directly, competitors may work behind the scenes to delay or stop it by encouraging and supporting individuals and groups who have concerns about moving the hospital.

The board of trustees and the CEO have critical responsibilities at this point in the process. First, the board can play a crucial role in mitigating risks. The organization should determine if its board reflects the composition of the community served by the hospital and represents the community's interests. If so, then every trustee must be well-informed about the project and be prepared to support it publicly. The organization also should work to ensure that the community knows who serves on the board and understands its role in representing the community's interests. This is essential in gaining public trust and support.

Meanwhile, the CEO must take on the time-consuming and often challenging process of engaging the community directly in the earliest stages of strategic and facility planning. This includes:

• sharing all data and explaining the problems facing the organization
• describing how the organization delivers care now and how care is envisioned at the new facility
• presenting the solutions the organization has identified to improve care quality and value
• detailing the project costs and financial consequences of not making necessary investments
• attending governmental and community group meetings
• inviting selected community leaders to attend hospital board meetings and planning retreats
• arranging one-on-one meetings with individuals who have the ability to impact the project

The CEO also should meet with the editorial boards of area publications, appear on local cable network programs and establish a social networking presence to describe the organization, its needs, goals and options.

The success of these efforts depends on the organization's being inclusive, transparent and comprehensive. It should present options rather than final decisions, and be open to criticism, suggestions and compromise. The organization must demonstrate a willingness to change based on the feedback of all of its stakeholders.

These activities are labor-intensive, often emotional and always risky. Nevertheless, not undertaking them early and voluntarily may make it prohibitively expensive or too difficult to respond to feedback. Every effort should be made to prevent organized resistance to the project. Once positions have hardened, alliances formed and resources committed, overcoming organized resistance can be extraordinarily difficult. These up-front investments can prevent such resistance.

Prepare to Plan

The activities that occur throughout a construction project can be divided into two major stages: strategic facility planning and project implementation. Ninety percent of a project's cost is spent during project implementation, yet the ability to influence project costs materially takes place during the planning phase. Therefore, the greatest project risk occurs very early, when the CEO, management and the board likely are the least knowledgeable, least prepared and most pressed to make financial, clinical and market-based decisions which, perversely, will have the greatest impact on the project's cost, quality, functionality and long-term success.

As a result, the board and management must begin an intensive self-education program at the project's inception, including a thorough assessment of the organization's structure and leadership to determine if it is capable of successfully completing the project and, if not, what changes are needed. For example, what changes in executive management should be made to accommodate the project's implementation? Should you hire a project manager, a fundraising and development executive, or a government relations executive?

The organization likely will assume significant debt and spend large amounts of money over a short period on many consultants and contractors. It is also likely to change its programs and services and attract new physicians. Controls must be in place to manage these transactions carefully. The following governance functions should be examined and strengthened to help reduce risk.

Governance: Among the most important organizational resources to be engaged in a replacement hospital effort is the board. To strengthen the board's oversight capabilities, evaluate trustees' knowledge and expertise in the following areas to determine if additional education is needed: finance, accounting, auditing, construction and project management, real estate, and fundraising. If necessary, recruit new trustees with strengths in those areas. Additionally, board committees will need to take on additional roles:

• The finance committee should meet at least monthly and should establish an ad hoc project financing subcommittee to assist the organization in securing project financing.
• The audit committee should be an independent board committee and internal audit staff should report directly to it. This committee is responsible for assuring that project-related risks are identified and appropriate controls are in place. Given the increased risks, the committee likely will need to meet more often than it did before the project launch.
• A board project oversight committee should be established and meet at least monthly to track progress of the entire project beginning with the strategic plan, budget and schedule. In turn, the committee should report to the full board at every board meeting.

Increased project risk increases risk to trustees. Therefore, directors and officers insurance should be evaluated and adjusted to match financial risks associated with the project.

Retreats: All the issues surrounding a construction project are too complex to address during regular board meetings. Focusing on these elements in semiannual retreats can keep the project on track. Retreats also can strengthen physician, donor and community support for the project.

Executive education: Among the most powerful learning experiences for the project team is visiting newly built hospitals. The knowledge gained can inform almost every aspect of the project. It is impossible to develop even the most preliminary budget without first seeing actual design options and understanding what they cost.

Staff also should participate in health care design trade group activities, which can help equip them with the knowledge to work effectively with architects, engineers and interior designers. The collaboration can lead to greater use of evidence-based design, more innovation and the fullest achievement of guiding principles.

Identify Objectives

Guiding principles define the project by establishing values-driven, quantifiable objectives, such as reducing operating costs, improving patient satisfaction and quality, and reducing errors, infections or falls. It is the CEO's responsibility to ensure that all planning, design and implementation decisions are guided by these principles. Failure to rigorously apply the principles is likely to result in scope creep, cost escalation and a failure to achieve the master project plan.

Those providing professional services must align with the guiding principles. One way to achieve that alignment is using evidence-based design to ensure that design solutions are effective in addressing important organizational objectives.

Another consideration should be payment for design services tied to evidence-based, long-term facility performance such as reduced infections, falls and errors, more rapid patient throughput, increased staff productivity, and reduced operating costs. The retention of a percentage of professional fees, the payment of a bonus or a combination of the two should be tied to the post-occupancy performance of the facility and should be established when contracting for professional services.

Redesign Processes, Reassess Staffing Needs

Among the many risks associated with moving to the new facility, the two most complex and potentially costly ones are process redesign and staffing.

In process redesign, the organization develops new policies and procedures and trains staff to operate safely and efficiently. Given how radically different the design of the new hospital likely will be, new procedures often must be significantly different than they are currently, and create a need for extensive staff training.

Assuming that both procedures and training are imperfect and that, initially, staff likely will be uncomfortable in the new facility, care and service problems will arise. A common response of staff is to fall back on old practices, which are unlikely to help achieve the new facility's objectives. Therefore, management should monitor the use of new practices, establish teams to assist in process redesign and support additional training.

The first evidence of imperfect systems and training will be criticism of the facility's design and general staff dissatisfaction and failure to achieve business plan goals. Old solutions typically reflect pragmatic work-arounds used by staff to deal with the older, inefficient building and, therefore, most often cannot work well in the new facility. New goals of improved clinical outcomes, greater efficiency and increased patient and staff satisfaction virtually assure that old procedures will not work.

The next great challenge is determining the staffing needs in the new facility. Risks to patient safety, new programs and services, different size and layout, new equipment, the public's lack of familiarity with the facility, new employees, and new policies and procedures may result in managers' becoming overly cautious in developing staffing requirements. Senior leaders should establish expectations for overall utilization rates as well as those by program and service. These rates should be revisited periodically; for example, at the opening of the new facility, one month later and six months later. The organization also should be sensitive to managers' solving problems in isolation and without their colleagues in other departments or programs. It is likely that staffing requirements adjusted for demand will decrease meaningfully over the first year of operation, which suggests that contract labor and overtime might be wise options to consider.

Secure Financing

The greatest risk to the construction project involves the failure to secure acceptable financing. Imprecise project budgeting, unpredictability in the local and national economy, and the organization's fiscal performance all combine to make dependable calculation of capital sources and uses difficult and, thus, risky.

PHCS sources of capital included a construction line of credit, tax-exempt bonds, philanthropy, sale of real estate, investment income and ongoing cash flow from favorable operations. Business planning was particularly challenging given the number, size and difficulty of predicting many of these capital sources.

Changes in the economy from the project's inception in 2003 to scheduled completion in 2012 have been enormous. Strategic planning began in 2003, followed by business plan development in spring 2005. Site work began in early 2007 and real estate sales and fundraising activities still are under way. From 2005 through the start of construction in the spring of 2008, there was significant inflation in construction labor and materials. The economy experienced the most significant blow since the Great Depression, and capital became scarce. Charitable-giving levels dropped nationally by the greatest rate since 1929 and real estate sales dropped significantly. More than 50 percent of the 74 acute care hospitals in New Jersey operated in the red and several closed.

Although this perfect storm of negative economic factors may be rare, it illustrates the unpredictability inherent in a large project that takes many years to implement.

Three strategies should be considered to manage and thus mitigate the effects of these risks:

• Cultivate a board of trustees that is independent and possesses special knowledge and experience.
• Ensure that the organization's CFO and finance team are strong, experienced and otherwise up to the task. They must have a record of working well with the hospital's board, audit firm, current lenders and staff.
• Retain an experienced financial advisor at the beginning of strategic planning and through financing.

Among the most important and difficult decisions to be made is whether to proceed with, delay or terminate the endeavor when the best available information on the sources and uses of capital becomes available. Remaining dispassionate and objective in order to make a sound decision after years of planning, encouraging the support of constituents, and coming to more fully understand the benefits of the new facility and limits of the old one, is difficult for all involved. Trustees, executives and financial advisors must work together to review all available information, assess risk and make one of the most significant decisions in the history of the organization.

All project decision-making is interdependent. Given the complexity of a construction project, its inherent risks and the impact on the health of the community, the CEO, the senior management team, physician leaders, the board, the broader internal and external communities, elected and nonelected leaders, and residents must all be directly involved in the entire project — starting with strategic planning and continuing to post-move.

Barry S. Rabner (brabner@princetonhcs.org) is president and CEO of Princeton (N.J.) HealthCare System.