FACTORS AFFECTING LOCATION OF MULTISPECIALTY

HOSPITALS

Francis Jose

School of Management Studies

CUSAT, Kochi-22
E-mail: francisjose09@gmail.com

Abstract: Deciding on the location of a hospital in a community is not an everyday

decision for decision makers. However, it is important to study the factors affecting its
location, simply because of the strategic nature, operating complexities under competitive
environment, which means that building or relocating new facilities like multispecialty
hospitals is a strategic decision that cannot tolerate mistakes. The facility must be located
to meet both current and future demand accurately, or the location must have expansion
opportunities. It needs accurate forecasting of current and potential demand for location
decisions which means examining the primary, secondary and tertiary markets for the
proposed facility selection for hospitals.

Decision makers must examine parameters like population characteristics in terms

of age, sex, education, employment, and prevailing epidemiological outcomes. To identify
potential alternatives, both for the physical location and for the method of expansion,
using appropriate decision tools as well as analytical skill. The major objective of health
care services is to deliver the service as quickly as possible. A study of decision making
methodologies such as cost-profit-volume analysis, factor rating method, analytic
hierarchy process and weightage scaling method for selecting optimal location for a health
care unit.

Keywords: Multispecialty hospitals, Location decisions, methodologies.

1. INTRODUCTION

1.1 General Information

Location decision is the function of determining where the facility is to be located, for maximum
operating economy and effectiveness. A facility is a place where men, materials, money,
machines and equipment are brought together for build it and serve the mankind. Factors like
fixed cost, variable cost, revenue, total cost, profit, land cost, building cost etc. are to be taken
into considerations. All firms need to address the location decisions because it affects both
fixed and variables costs as it has a major impact on overall profitability of the firm. Every firm
must use location planning techniques. There are many options for location planning.
Corporations choose from expanding an existing location, shutting down one location and
moving to another, adding new locations while retaining existing facilities, or doing nothing.

In health care, facility construction faces the hurdle of first obtaining a certificate of need (CON).
Deciding on a location does not guarantee a quick startup, as in retail or fast-food industries.
In the health care industry, then, sound forecasting of current and potential demand is
indispensable for location decisions. Usually that means examining the primary, secondary,
and tertiary markets for the proposed facility, especially for hospitals, whose managers must
examine such population characteristics as age, sex, education, employment, and prevailing
epidemiological outcomes (Virginia Atlas of Community Health, 2004). The many factors in
demand analysis delineate the kind of facility that should be built or relocated to the location(s)
under consideration. Examples are the service mix (young population needing OB/GYN and
pediatric specialties), technology (extensive cardiac technologies for aged populations), and
size. A market shift of population to other localities (for example, the suburbs) is a major reason
for location decisions. As part of marketing strategy, health care facilities want to expand their
services to new suburbs by opening satellite locations. Multiple-campus health care facilities
are now almost the norm in many markets for hospital chains, IDS, or strategic health care
alliances. They also serve to feed complicated cases to the main hospital. If demand for the
current health care facility is strong and growing, and there is enough land and capability to
expand it, the facility need not move to a new location unless other factors (such as high
operational costs, traffic congestion, and parking facilities) have become significant.

On the other hand, a new location decision does become necessary when a facility cannot
be expanded because no more land is available to it. If the demand is strong in the current
location, facility managers would seek new, additional sites, to distribute the supply of health
care for the strong demand by opening satellite facilities. However, if the demand has shifted
to the suburbs and the current facility is very old, a more appropriate decision would be to build
a new facility at a new location. In all cases, location decisions are strategic, requiring a long-
run commitment of the health care organization’s resources. To identify acceptable
alternatives, both for the physical location and for the method of expansion, using appropriate
decision tools as well as analytical skill is necessary. A location decision for health care
managers is generally arrived at through this process: 1) an agreement on the decision criteria
for evaluations of alternatives (profit, market share, and community considerations); 2)
identification of important factors; 3) development of location alternatives; 4) evaluation of the
alternatives; and 5) final selection. Decision criteria should include factors related to the region,
the community, and the site that encompass both cost and nonfinancial concerns. Regional
factors include availability of markets or market stakeholders (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. There are a variety of methods and
models used to decide the best location or alternatives for the health care Centre. Various
quantitative methods are available to aid location decisions, depending upon the nature of the
problem.

1.2 Background studies

The location analysis of medical service centers are often focused on accessibility and activity-
based impacts by applying accessibility indicators. Accessibility is defined as “the relative
nearness or proximity of one place to another”. The concept of accessibility is used to explain
the degree to which a product, device, service, or environment is available (Wikipedia, 2011).
In a broader term, accessibility means ease of reaching opportunities within a reasonable time,
cost and comfort. GIS (Geographic information system) is the most common tool applied so far
to spatial analysis. The capabilities of GIS to handle massive amounts of data over large
geographic areas at fine levels of geographic details make it suitable to analyze accessibility
to medical service providers (Harea & Barcus, 2007). The work by Parker and Campbell (1998)
explored the potential for GIS technology in examining the utilization of general practitioner and
accident and emergency services in Britain (Parker & Campbell, 1998). GIS was successfully
employed to examine perceived and predicted accessibility of general practices and spatial
distribution of patients using general practitioner services in study period. In a similar study, a
GIS application was created in Jeddah City, Saudi Arabia, to cover three main health planning
issues which were distribution of health demand, classification of hospital patients and the
definition of hospital service area (Murad, 2007).

2.0 LOCATION OF MULTISPECIALTY HOSPITALS

2.1 Importance of facility location:

> Facility Location requires large investment that cannot be recovered: For a multispecialty
hospital, location decisions tend to be very strategic decisions because they commit large
amounts of money to long-term plans. The cost for acquisition of the equipment’s in a
multispecialty hospital is exorbitant.

> Facility Location decisions affect the competitive capacity of the organization: Competitive
advantage is presented in terms of its sources and the level of its innovation capacity.

> All areas/dept. of the organization are affected by Facility Location: There are many hospital
departments, staffed by a wide variety of healthcare professionals, with some crossover
between departments. For example, physiotherapists often work in different departments and
doctors often do the same, working on a general medical ward as well as an intensive or
coronary care unit.

> The facility location decisions affect not only costs but the organization’s income: A for-profit,
or investor-owned, hospital, owned by private investors or owned publicly by shareholders, is
part of a company that issues shares of stock to raise revenue to expand the hospital activities.
For-profit hospitals have historically been based in the southern part of the United States,
particularly in Florida and Texas. But in recent years, investor-owned hospitals have expanded
nationally, purchasing often financially distressed facilities or stand-alone hospitals that are in
need of access to capital for expansion. Depending on economic conditions, for-profit hospitals
can have better access to capital than nonprofits that expand by issuing debt through tax-
exempt bonds.

> Proximity is critical to determine the capacity to attract customers: proximity is being
considered as one of the most important criteria in hospital site selection. Furthermore, having
appropriate access is a key criterion taken into account by patients to choose a hospital to go.

> Regarding costs, facility location affects a great variety of them:

1. Land costs.

2. Labor costs.

3. Raw materials.

4. Transportation and distribution

2.2 Issues in facility location

> Proximity to Customers: Proximity is being close to or near. In the case of a multispecialty
hospital, the closer it is located to a population dense area, more likely are the chances for it to
effectively serve that community.

> Business Climate: It is the general economic environment comprising of the attitude of the
government and lending institutions toward businesses and business activity, attitude of labor
unions toward employers, current taxation regimen, inflation rate, and such

> Total Costs: It refers to the total expense incurred in reaching a particular level of output; if
such total cost is divided by the quantity produced, average or unit cost is obtained.

> Infrastructure: The infrastructure that supports a company's operations is a key factor in
determining critical availability and uptime

> Quality of Labor: It covers registered medical practitioners like physicians, surgeons,
cardiologists, pathologists etc.

> Suppliers: most reliable and leading "Hospital and Medical Products" manufacturers based
in India and other countries like China, Dubai etc. provide medical supplies necessary for the
functioning of a hospital.

> Other Facilities: Includes other facilities like 24 hours accident & emergency care unit,
Wellness Centre for Patients, Training courses in Nursing & Paramedical Courses, integrated
Software, home Care Nursing Services etc.
> Political Risks: Governments can quickly change business rules that negatively affect
organizations.

> Government Barriers: Refer to hindrances a firm faces in trying to enter a market or industry—
such as government regulation and patents, or a large, established firm taking advantage of
economies of scale.

> Environmental Regulation: Whether you produce or result in products that could potentially
harm the environment, are engaged in agricultural farming, or need to dispose of pollutants or
hazardous or non-hazardous.

> Host Community: Host community is important in achieving sustainable growth. This is just
one of the many reasons why successful organization’s planning begins with an understanding
of the needs and aspirations of the community.

> Competitive Advantage: Competitive advantage is presented in terms of its sources and the
level of its innovation capacity.

2.3 Site Selection and Analysis

Factors for Site Selection –

• Shape and Attributes

Many times we find the shape and size of the piece of land to be unsuitable for the healthcare
facility desired. In urban areas in India the price of land is very high, especially so in Mumbai.
If a client who wishes to start a hospital approach architects with the desire to build a hospital
and a budget for the land, they could then evaluate various potential sites with regard to
location, size, shape and orientation, in short, evaluate their suitability to house the proposed
facility. Among the above four factors, location, size, shape and orientation, for a proposed
healthcare facility the most important is location. Whether it is in an urban area or not, the
location of the facility will be an important determinant in its financial success.

Corporate healthcare providers even study which city to base their facilities in based on
various demographic conditions. Proximity to transportation hubs, good access roads, visibility,
the location of competitor’s hospitals with regard to the proposed facility all contribute to the
suitability of the site.

The size of the piece of land is linked to its price and also to the Floor Space Index (FSI)
of the site. This, taken along with the various statutory requirements of the piece of land
determines how much built-up area the site will sustain. The FSI (similar to the Floor Area Ratio
or FAR) is the ratio between the site area and how much area in square feet can be built upon
it. Healthcare facilities command an increase in FSI over other usages even on adjacent or
nearby plots, and with the right kinds of authorities being approached many times this FSI can
be increased, which will substantially enhance the value of the plot. It is best if this is determined
before purchasing the plot. Hospitals in India can possibly get an FSI of 2.0 all the way up to
5.0. A note of caution here; the size (area) of the plot and the FSI will not be the only
determinants of how much area can be built. Other municipal regulations such as the open
spaces to be left around the building (which are often related to its height) and the Ground
Coverage, which is the percentage of the site the footprint of the proposed building can cover,
will sometimes prevent you from using the full FSI. Thus you see that a careful analysis of the
plot will go a long way to determine the efficiency and thus the cost-benefit advantages of its
proposed usage. There may be a high tension electrical line running through the plot. It should
be ascertained whether these can be shifted or how much it will disrupt planning if not. Many
such pitfalls await the unwary.

While the municipal regulations that come hand in hand with every plot of land will permit
the desired usage are a very important site attribute, they differ considerably from city to city,
and even with in cities from site to site, and a detailed discussion on them is beyond the scope
of this book. The National Building Code of India, however, specifies that the maximum height
a hospital building can go up to is 30.00. This height is usually measured from the centerline of
the access road to the site, i.e. the widest, major road.

The third attribute, the shape of the site is usually a matter of common sense. As a thumb
rule, we have found that given the area as a constant, for the smaller sites, a ratio of 1:1.5
between the two sides of a rectangle (approximately) works best. Usually you will find there is
only one access road on the short side of the site. If it is on the long side you are luckier. If
there are roads on two or more sides of the site, you are even luckier and it has access roads
on all four sides you are indeed blessed. Small sites with odd, jagged shapes are obviously
unsuitable, large sites are a pleasure to work with, despite a few zigs and zigs.

Orientation of a site means the orientation of the building(s) it will permit. In the smaller
urban sites, it is unlikely you will have any choice in the matter. As large parts of these hospitals
are likely to be artificially lit and ventilated, the orientation is important as to the heat gain from
sunlight. Techniques exist to calculate and minimize this with various building features and
materials. On larger semi-urban and rural sites the opportunity exists to orient the buildings to
make most use of natural light and ventilation. This is the subject matter of a science called
Climatology and a detailed discussion is beyond the scope of this book. A lot of reading and
reference material is available on this subject in this age of green architecture.

An inherited site or a site bought on the attractiveness of the asking price is not the most cost-
beneficial way of going about planning a healthcare facility. Attention to the selection factors
outlined above would go a long way to contributing to the success of the project.

• Understanding the Scale of the Building

In this age of AutoCAD, one of the greatest problems young architects face, who have grown
up working largely on this software, is their inability to conceptualize scale, both of drawings
and buildings. Model making skills too seem to have suffered and there is a reluctance to build
a lot of quick and dirty study models because of the time taken and the easiness with which
the building views can be prepared in 3-D. The conceptualization of the scale of buildings while
designing on paper can help a lot in site selection. Design assignment with the same site and
the same brief the size of the buildings put down on paper by architects vary greatly. It is very
important to understand the scale of designs; simplistically put, you could say it is what
architectural space is all about.
• Zoning

Zoning of a site is a concept every architect is familiar with. On a site that has multiple usages,
it is useful at the onset of design to block out appropriate areas that each usage will occupy.
This is done by considering the following factors:

• The functional and spatial relationships between the various buildings/usages.

• The topography of the site.

• The vehicular and pedestrian circulation connections between the buildings.

• Any special site features such as trees, existing buildings, water bodies, HT lines etc.

• Orientation of the buildings with respect to sunlight and prevailing winds.

3.0 RESEARCH METHODOLOGY FOR IDENTIFYING FACTORS AFFECTING

LOCATION:

Various quantitative methods are available to aid location decisions, depending upon the
nature of the problem. In this chapter we present cost-profit-volume analysis, factor rating
methods, multi-attribute methods, and 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. The following are the research
methodologies used:

3.1 Cost-Profit-Volume (CPV) Analysis:

In this method, also known as break-even analysis, health care managers evaluate the fixed
costs and the variable costs of building and operating a facility in each of the alternative
locations. Of course, the revenues and resulting profits expected to be generated by volume
(demand) help to justify the selection of a site. In general, the cost structures of each site,
especially the fixed cost, will differ from each other, as will volume. Besides hospitals, examples
of facilities that can face location decisions and hence use CPV analysis would be nursing
homes, assisted living facilities, independent laboratories, imaging centers (MRI, CT scan),
physician practice (group) offices, and small to medium-size clinics. The CVP analysis
assumes one product line at a time for simplicity. For multiple product lines such as hospitals,
CVP analysis may be based on Diagnosis Related Groups (DRGs) or on each product; then
the analysis can be aggregated to the hospital level. For simplicity, I will examine the use of
this method for an imaging facility.

CVP analysis begins with the basic profit equation.

Profit = Total revenue - Total costs

Separating costs into variable and fixed categories, we express profit as:

Profit = Total revenue - Total variable costs - Total fixed costs

 Profit = P * Q - V * Q - F = (P - V) * Q – F

Where, P = Selling price per unit

V = Variable cost per unit
(P - V) = Contribution margin per unit
Q = Quantity of product sold (units of goods or services)
F = Total fixed costs

Variable cost = variable cost per unit (v) * quantity (Q).

Profit = R – TC

Revenue = Unit Price (p) * quantity (Q)

TC = FC + VC and

VC = v * Q

Profit = (p * Q) - [FC + v * Q] and

Profit = (p - v) * Q - FC.

Analysis may first consider the total cost outcomes, and then one performs profitability
analysis using possible charges (price) per unit. The above formula can be used to determine
the volume for an assumed level of profit:

Q = (F + profit) / (p-v)

3.2 Factor rating method:

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). Thus, this method for evaluating alternative sites varies with information
availability and scoring metric.

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; if so, either
each factor can be ranked, or weights can be assigned to each factor according to its relative
importance. 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.

The formula is, Relative score = Most desirable outcome/ evaluated outcome

3.3 Multi-Attribute Methods

This method allows for metric-free selection decisions using dominance, minimum attribute
(factor) satisfaction, and—most important—attribute procedures. To illustrate an application of
these procedures to site selection, Table 4.5 lists importance rankings and minimum
acceptable levels for each factor for the satellite clinic problem presented earlier in the chap-
ter. A health care manager would make the assessments for each factor, together with his or
her analytical team.

Dominance Procedure.

Dominance is defined as follows: if an alternative site (X) is at least as good as another

alternative (Y) on all attributes and strongly the choice at least on one attribute, then alternative
X dominates alternative Y. evaluation of alternatives using dominance procedure views one
pair of alternatives at a time, so for many alternatives, many pair-wise comparisons have to be
completed. In this example, there are four alternatives, so there will be six pair-wise
comparisons.

Minimum Attribute Satisfaction Procedure.

Evaluation of alternatives, especially in site selection, often considers minimum acceptable

standards. Therefore, when developing site alternatives, analysts and managers often specify
these acceptable standards. Evaluation of alternatives, though, is conducted differently than
those in dominance procedure. Here, as we saw in the supplier selection example in Chapter
Three, pair-wise comparisons are not used; instead, for each factor all alternatives are
considered simultaneously. If any alternative does not meet the minimum acceptable standard
satisfactory for a given factor, that alternative is eliminated.

Most Important Attribute Procedure.

When the previous procedures yield no solution, this procedure in most instances will. Like the
minimum attribute satisfaction procedure, this one considers all alternatives simultaneously,
beginning with the highest-ranking attribute. If the site’s scores for that attribute do not point to
a solution, analysis moves to the next ranked attribute. The top ranking attribute here is
“Insured.”

3.4 Center-of-Gravity Method

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 multihospital 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, a 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.

3.5 Weightage scaling method:

The technique used for calculating weightage of the criteria involves the pair wise comparison
of each decision criterion in a systematic manner in line of unranked paired comparison
technique developed by Dean and Nishry (1965). Let, ‘m’ be the total number of criteria, ‘n’ is
total number of alternatives, ‘E’ be the total number of experts and Cik is the preference value
assigned by expert (k) for criteria (i). A dummy is included so as to preclude the net assignment
of value of zero to any of the basic criterion in the process of pair wise comparison. A preference
rating matrix of the order (m+1) x m (m+1)/2 is to be created taking elements corresponding to
dummy row and column are taken as zero. Let ‘i’ denote the row and ‘r’ denotes the column.
Starting from the 1st element i.e. i =1 and r =1. If Cik>Cjk then Mir=1, if Cik<Cjk+ then Mjr=1,
if Cik=Cjk then Mir=Mjr=0.5 where j = i+1, m, r=r+1 the process is repeated for next values of
‘i’ and each time ‘r’ is incremented by 1.

3.6 Geographic Information Systems (GIS) in Health Care

Geographic information systems are valuable tools for storing, integrating, and displaying data
for specific geographic areas. Health care 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 health care 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. 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 health care businesses of many sorts, including primary care
(Goodman and others, 2003). Most notably, National Cancer Institute provides customizable
maps at state and county levels for various cancer mortality rates by gender and age-specific
groups. Using GIS, health care managers can develop new service lines or adjust the current
offerings for their service areas.

5.0 ILLUSTRATIONS

5.1 Exploration of population data

Population were spatialized using the gridding approach (Diechmann and Balk 2001; Davis
2003). This was to establish where people are concentrated using a fairly accurate method.
The gridded dataset is utilized to visualize the spatial distribution of population in Uganda
before relating it to services provision for decision making. Decision making requires robust
data on location of services and population which provides the demand side of services.
Exploration of population distribution in Uganda indicates concentration of population in areas
around the major water bodies in Uganda of Lake Victoria and Lake Kioga, mountainous areas
although there are a few outliers especially in the areas of conflict lying to the north eastern
and north of the country. But the exploration also reveals distribution in areas with population
less than the mean of the grids as shown in map 2. The implication of this analysis is that
location of services needs to be sensitive and responsive to the distribution. A further analysis
of the data indicates that 251 grids have population which is lying in the upper outlier implying
high concentration of population in relatively small areas which are areas of conflict. This
distribution has an implication on services location and planning and is later in the paper utilized
to analyze the relationship between population and services to generate information useful for
decision making.
5.1 hospital site selection criteria table

Based on hospital size and scale, a broad range of site selection criteria has been advised by
medical authorities or researchers which are partly in use around the world. A summary is
provided below.

Hospital type and scale Criteria Suggested by

General Capture rate of population; Virginia Hospital

Current and projected population Center(VHC),2009
density; Proximity
to major commuter and public
transit routes; Distance from
other hospitals; Anticipated
impact on exist hospitals.

Children (a) Technical Issues: Site Queensland State

Government, Australia, 2008
purchase cost, Existing
infrastructure and availability
of services, Site gradient,
Ground conditions (soils/rock),
 Access;
(b) Site Qualities: Environmental
considerations, Heritage
considerations, Site area, Site
orientation, Site shape;
(c) Site Character: Healing environment;
(d) Location: Proximity to public
transport, Traffic routes,
Availability of land for long-term
expansion, Future population and
prominence.

Children Conformity to surrounding Hospital of saskatche,

region; Incremental operating wan 2010, U.S.
costs; Travel time; Site
ownership; Site shape; Ease of
patient flow and staff
movement; Perimeter buffer zone.

General Population density; Travel time; Vahidnia

Distance from arterials; Land cost; et al. (2008)
Contamination.

General (a) Population number, density Wu et al.,2007

and age profile; (b) Firm
strategy, structure and rivalry;
(c) Related and supporting
industries; (d) Governmental
policy; (e) Capital, labor and land.

General Travel time; Population Schuurman et al. (2006)

density; socio-demographics of
service area.

Professional medicine and Proximity to future expansion UCSF (University of

cure space; Consistency with city California,
zoning/policies; Compatibility San Francisco), 2010
with surrounding uses;
Character and scale; Cost of
site control; Helicopter access.
 Professional medicine Local community preferences; Estill & Associates
and cure Accessibility; Centrality; Environment; (2006)
Land ownership; Size and future.

6.0 SUMMARY

Reasons that prompt health care managers to consider new locations for health care facilities is
provided in this report. The methodology of location site selection depends on a particular
problem and available data. A portfolio of site selection methods: cost-profit-volume analysis,
factor rating methods, center-of-gravity method etc. and their use can be offered as potential
tools to health care managers.

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