Chapter 4. Facility Location

1. Chapter 4. Facility Location According to my astrologer, we should put it. . .here! x Yasar A. Ozcan

2. Outline • Overview of Location Decisions in Healthcare • Demand Characteristics • Population Movement • CON • Condition of Existing Facility • Location Methods • Cost-Profit-Volume (CPV) Analysis • Multi-Attribute Methods • Center of Gravity Method • Graphical Information Systems (GIS) Yasar A. Ozcan

3. Facility Location Overview “… Metro Atlanta has a population of 4.2 million people located in 20 counties around the city core, many of which are projected to grow by as much as 20 percent in the next five years. Demand for hospital beds is projected to grow by 60 percent by 2025, among the fastest rates in the US. The area presently has 61 hospitals plus a Veterans Hospital, and is headquarters of the Centers for Disease Control and the American Cancer Society. The current Atlanta hospital market is fragmented without a dominant referral hospital and with no clear market leaders overall or in many service lines. The big players are vying to fill the leadership vacuum by planning for new hospitals and major expansions and by adding tertiary programs......” (R. T. Stack, 2004). Yasar A. Ozcan

4. The Need and Importance As a Marketing Strategy - expansion and new satellite locations Growth- old facility cannot be expanded Market shift of Population to other Localities (i.e., Suburbs) Location decisions are strategic in nature and require a long-run commitment of your organization’s resources Yasar A. Ozcan

5. Healthcare Manager’s Goal. . . . . . To identify acceptable alternatives, both in physical location and method of expansion using the appropriate decision tools and analytical thinking skills Geographic Information Systems (GIS) Center of Gravity Cost-Volume-Profit (CPV) Analysis Factor Rating Put it There! Put it here! CON Close it! Build Multi-Attribute $$$$ Do Nothing Expand Yasar A. Ozcan

6. A General Approach A location decision for healthcare managers generally arrived at through this process: an agreement on the decision criteria for evaluations of alternatives (profit, market share, and community considerations), identification of important factors, development of location alternatives, evaluation of the alternatives, and final selection. Decision criteria should include factors related to the region, the community, and the site that encompass both cost and non-financial concerns. Yasar A. Ozcan

7. A General Approach Regional factors include availability of markets or market stake holders (patients, physicians, payers, and employers). Community factors include the attitudes of citizens to new developments, the availability of and proximity to supporting services (for example, medical staff offices, social services, security, and allied health services), and environmental regulations specific to that community. Site-related factors include land, size and usable area, acquisition costs; existing facilities on the land if they indicate any renovation or demolition costs; access to public and other transportation, roads, parking; zoning; and CON. Yasar A. Ozcan

8. Location Methods Various quantitative methods are available to aid location decisions, depending upon the nature of the problem. Cost-profit-volume analysis Factor rating methods Multi-attribute methods The center-of-gravity method One or more can be used to make an informed decision. No one method may be right for all facility location problems; however, cost analysis is always part of the solution package. Yasar A. Ozcan

9. Location Methods:Cost-Profit-Volume (CPV) Analysis Profit = Revenue (R) – Total cost (TC), where Revenue = Unit Price (p) * quantity (Q), Total cost = Fixed cost (FC) + variable cost (VC), Variable cost = variable cost per unit (v) * quantity (Q) Profit = (p*Q) – [FC + v *Q] Volume Yasar A. Ozcan

10. Location Methods:Cost-Profit-Volume (CPV) Analysis Example 4.1: Imaging using electron beam computer tomography (EBCT) is a technology for diagnosing and evaluating the presence of coronary artery heart disease and diseases of the lung. Keep-Me-Healthy Imaging Company (KMHIC) provides services in 15 locations across the country and is interested in expanding their centers to other locations. KMHIC expects to collect $300 per unit of service from patients’ insurance. The cost information is determined for the next East Coast location with three alternative sites as: What would be the ideal location based on CPV analysis? Yasar A. Ozcan

11. Location Methods:Cost-Profit-Volume (CPV) Analysis Solution: Calculation of total cost for each of the three sites using formula yields the lowest cost for the Richmond site as follows: Yasar A. Ozcan

12. Figure 4.1 Total Cost of Alternative Imaging Sites Richmond 2.5 Norfolk 2 Baltimore 1.5 Total Cost (in $000,000) 1 Norfolk Baltimore Richmond 5000 10000 15000 Annual patient volume Yasar A. Ozcan

13. Location Methods:Cost-Profit-Volume (CPV) Analysis Solution: When profit is the immediate consideration, using formula Profit = (p-v)*Q – FC, for the same sites, we obtain: The Baltimore site is almost five times as profitable as the Richmond. Yasar A. Ozcan

14. Figure 4.2 Profit Evaluation of Alternative Sites Revenue Richmond 2.5 Norfolk 2 Baltimore 1.5 Total Cost (in $000,000) 1 5770 5000 10000 15000 Annual patient volume Yasar A. Ozcan

15. Location Methods:Factor Rating Factor rating methods are used when site alternatives have to be evaluated on attributes (factors) other than costs (money). Such attributes may be measured on a common scale (scoring from 1-100) or by multiple scales some of which are not numeric (acceptable, medium, good, and excellent). The first step in this methodology is to identify the relevant factors. The next step is to check whether all the factors can be evaluated by the same metric. Third, determine whether for this particular site decision any of the factors are more important than others (determination of weights) Then an analysis of the scores (ranks and weights if applicable) is carried out to identify the best alternative. These analyses may be simple, or weighted summations of assigned scores. Yasar A. Ozcan

16. Location Methods:Factor Rating Example 4.2:A medical center would like to establish a satellite clinic to provide medical care for residents living in recently developed suburbs. Four potential sites are under consideration. Land acquisition, building & equipment costs have been evaluated, as have population, education level, median household income, and percentage insured. Source for none-cost factors: Virginia Atlas of Community Health, 2004. Yasar A. Ozcan

17. Location Methods:Factor Rating Solution: One way to convert the different scores to the same metric is to rate each site’s value for a given factor, relative to the each others. For example, the most desirable value in land cost is $200,000, at site 23832. In comparison, site 23059, with $350,000, has a score of 57. The score is calculated using formula: Yasar A. Ozcan

18. Location Methods:Factor Rating Solution: Table 4.2 Relative Scores on Factors for a Satellite Clinic Yasar A. Ozcan

19. Location Methods:Factor Rating Solution: Table 4.3 Relative Factor Scores and Weights Yasar A. Ozcan

20. Location Methods:Factor Rating Solution: Table 4.4 Composite Scores Yasar A. Ozcan

21. Location Methods: Multi-attribute This method allows for metric-free selection decisions using dominance, minimum attribute (factor) satisfaction, and most important- attribute procedures. Table 4.5 Satellite Clinic Factor Rankings and Minimum Acceptable Levels Yasar A. Ozcan

22. Location Methods:Multi-attribute This method allows for metric-free selection decisions using dominance, minimum attribute (factor) satisfaction, and most important- attribute procedures. Table 4.7 Satellite Clinic Factor Importance Rankings Yasar A. Ozcan

23. Location Methods: Center of Gravity This method is useful when the geographic position of a location is important in terms of distribution of the services or materials. For instance, a multi-hospital system may want to locate their supply warehouse in a community or region that will minimize the distribution distance based on the volume of transactions from this warehouse to each hospital or clinic. Similarly, locating a specialty laboratory or blood bank, or an ambulance service may use this method, which is based on minimum distribution costs. The method works with coordinates on a map and shows existing facilities or communities with respect to the proposed new facility. Yasar A. Ozcan

24. Figure 4.3 Richmond Metropolitan Area Hospitals H3 6 H5 H7(7.8,4.9) 5 4 H6(8.3,3.8) “y” H2 3 H4 2 St. Francis Hospital 1 H1 0 1 2 3 4 5 6 7 8 9 “x” 10 Yasar A. Ozcan Hospital

25. Location Methods: Center of Gravity Table 4.8 Selected Richmond Metropolitan Area Hospitals Yasar A. Ozcan

26. Location Methods: Center of Gravity The center of gravity location is calculated by taking the average of x and y coordinates, using the following formulas: Yasar A. Ozcan

27. Location Methods: Center of Gravity In reality, of course, the blood bank’s interactions with each hospital will not be same. In Table 4.9 yearly shipments from the blood bank to each hospital is identified as Q. Table 4.9 Selected Richmond Metropolitan Area Hospitals and their Interaction with the Blood Bank Yasar A. Ozcan

28. Location Methods: Center of Gravity Inclusion of the frequency of activity between blood bank and hospitals can be formulated using a weighted average formula as follows: Yasar A. Ozcan

29. Figure 4.4 Richmond Metropolitan Area Blood Bank Locations H3(5.1,6.2) 6 H5(5.9,5.4) 5 H7(7.8,4.9) 4 (5.3,3.8) H6(8.3,3.8) “y” (5.2,3.4) 3 H4(5.5,2.9) H2(3.3,2.7) 2 St. Francis Hospital 1 H1(1,1) 0 1 2 3 4 5 6 7 8 9 “x” 10 Yasar A. Ozcan Blood bank Hospital Blood bank-weighted

30. Geographic Information Systems (GIS) in Health Care Geographic information systems are valuable tools for storing, integrating and displaying data for specific geographic areas. Healthcare managers can use color-coded map systems indicating the levels and types of disease and analyze the associated data on utilization and the potential for healthcare business in the area. GIS are excellent starting points to identify potential markets for new product lines, and are used by other service industries such as banks, retailers, and restaurants. Yasar A. Ozcan

31. Geographic Information Systems (GIS) in Health Care Health services researchers have been studying and applying GIS for a decade. The Dartmouth Atlas of Health Care, developed by Dartmouth Medical School provides information helpful to healthcare businesses of many sorts, including primary care (Goldman, Mick, Bott, Stukel, Chang, Marth et al., 2003). Most notably, Atlas of Cancer Mortality in the United States (1950-1994), provides customizable maps at state and county levels for various cancer mortality rates by gender and age-specific groups. Yasar A. Ozcan

32. Figure 4.7 Geographic Information Systems Yasar A. Ozcan

33. The End Yasar A. Ozcan