Construction: Under-bedded?

What a difference a decade makes: Empty wings and shuttered facilities are now giving way to a demand for more hospital beds.

If you think you’ve noticed more hospital construction in the past few years, you’re not mistaken. Perhaps your own integrated delivery network (IDN) is in the midst of a project.

In fact, hospital construction was estimated to be $16 billion in 2004, according to the Center for Healthcare Design in Houston. And that may be just the beginning. “The projections we’ve seen show construction volume increasing steadily over the next five to 10 years,” says John Crane, president and CEO of FKP Architects, a healthcare construction firm in Houston. This assessment, widely shared in the industry, could point to a growing demand for equipment contracting.

True, the outlook is not without some clouds. “One thing that could shock this boom into a stall is the continuing increase in the cost of healthcare and the declining reimbursement environment,” says Tom Fannin, director of healthcare planning at FKP. “That may tip the economic balance so that health systems can’t continue to afford new construction. It’s happened before and, sometimes, it brings on government intervention in cost freezes or regulation. We saw minor jogs with [certificate-of-need] laws and with the consideration of national health insurance, for example.” That said, Fannin says construction prospects overall look well.

Last year, leading healthcare builder Turner Construction in Brentwood, Tenn., hired Bayer Consulting to survey 200 senior healthcare executives on capital planning. Sixty-nine percent of the executives indicated their institutions were very or extremely likely to undertake a major expansion by 2007. Executives at institutions with capital budgets of $5 million or more were about 33 percent more likely to make that statement than other executives.

Six interrelated factors are driving hospital construction today, says Robert Levine, VP of healthcare for Turner. “Any one of them would make for a good market, but the fact that all of them are moving in the same direction is responsible for this phenomenal growth,” he says.

Aging hospitals, baby boomers
Experts say facility obsolescence is self-evident. “Many systems are still operating 1950s- and 1960s-era buildings,” Levine says. “No other industry would be putting high-technology equipment in buildings that are half a century old.”

The second driver, increased demand for hospital care, is being fueled by baby boomers. “The average baby boomer will be retiring in 2013, and he’s now at an age when things start to go wrong for knees, prostates, etc.,” Levine says. “Only five years ago, the managed care environment was helping to drive the transition to an outpatient emphasis in the industry, and that resulted in empty beds. Empty wings were converted to add procedure rooms or for other uses, and now we’ve gone from being over-bedded to being under-bedded.”

Futurist Russ Coile told Levine that if one 100-bed hospital were built every week for the next 10 years, there still would not be enough beds to accommodate all the baby boomers needing care. “That’s 500,000 new beds,” Levine points out. “And some people in the industry think we’ll really need more like 700,000 new beds.”

Keeping up with equipment demands
The third driver behind construction is the speed with which technology is changing. “Operating rooms have to be about one-third larger than they used to be to allow room for booms and computer equipment,” Levine says. In addition, doors and corridors have to be wider, utilities have to be universal, and patient rooms have to be larger. All of this makes it increasingly difficult to retrofit older facilities.

Lisa Charrin, president of Houston-based Equipment Collaborative Inc., makes a living planning for technology futures. Her firm, which spun off from FKP in 2004, provides equipment inventory, planning, procurement, installation and relocation services for healthcare facilities under development.

According to Charrin, imaging technology now evolves within six to 10 months, and surgical technology evolves within 18 months or so. “The way we have to deal with this is to design and build hospitals to be as flexible as possible,” Charrin says. “We have to plan the space, layout, conduits, access panels and so forth to accommodate technologies that don’t even exist yet. You should be a couple of years into the construction before you actually decide on the models and order the equipment, typically six to nine months before construction is complete.”

Crane says planning should go even deeper. “We have to plan for the flexibility to handle not only technology that won’t be obsolete when the hospital opens in three years, but also technology that’s 10 or 20 years down the pike,” he says.

Trends in design
The fourth driver is evidence-based design, which grew from the Planetree (a non-profit organization dedicated to promoting a holistic, patient-centered approach to medical care) model of patient friendly design. “It’s increasingly clear that patient recovery is affected by the built environment,” Levine says. Evidence-based medicine calls for natural light, private patient rooms, healing gardens, reduced noise levels, and so forth, all of which have been shown to speed healing.

Hospitals have always been interested in improving quality of care and reducing average length of stay. “But because of capital constraints, and because hospitals are often conservative and risk-averse, it is really only among larger academic medical centers and among the more visionary community hospitals that evidence-based medicine has been applied up to now,” says Crane. “It takes a champion to push it Ð someone who really wants to see it done right.”

The same is true for green construction, another design trend that has been slow to gain currency in the hospital market. As of October 2004, only 49 of the 450 building projects registered under the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) rating program for new construction were healthcare projects, according to the Center for Healthcare Design. That number is projected to increase steadily, however, because energy-efficient designs ultimately save hospitals money.

Building environmentally friendly facilities doesn’t cost more, when costs are viewed over the entire life of the buildings, says Fannin. “But it does require a somewhat higher upfront cost. Owners are sometimes led to expect unrealistically low prices on construction, equipment and IT. This means they sometimes have to scale back after construction begins.” Other times, costs just increase as with the 30 percent increase in steel prices in 2004.

When hospital boards are forced to scale back, the green and evidence-based design components are often the first to go, because they’re new and different. Boards are unwilling to cut programs to pay for them. A good example might be the new Carlisle, Pa., Regional Medical Center, a replacement facility Turner is building for investor-owned hospital chain Health Management Associates (HMA), based in Naples, Fla. HMA had planned for all private patient rooms, but has now scaled back to semi-private rooms.

“HMA promised the community a state-of-the-art facility,” says Dr. Philip Carey, a pulmonologist at the current hospital. “Instead, what we’re getting is a hospital that will be structurally obsolete the day it opens.”

Fannin agrees. “That’s about as short-sighted as you can get,” he says. The new minimum standards for healthcare facilities recommend all rooms be private, both to prevent transmission of nosocomial infections and to conform to privacy rules instituted as a result of the Health Insurance Portability and Accountability Act of 1996. Many states have adopted those standards for licensing purposes. And experts predict that by 2006, the federal government will require all new hospitals to have private rooms.

Cutting corners
“Investor-owned organizations are driven very much by the bottom line,” says Fannin. “In construction, they’ve been the main lobbying force behind keeping space in patient rooms at 125 square feet. And in technology, they only buy the showcase technology, which they can use to highlight themselves, like the only stand-up MRI in the market area.”

Charrin says sticker shock can lead facilities to opt for cheap or reused equipment. “One [facility] we recently worked with wouldn’t put a flexible gas boom in the ceiling, which is what most state-of-the-art operating rooms are doing because the rooms are so big and the cords snake across the floor, etc.,” she says. “(Despite the advantages of the booms) they just say, ÔWe’ll live with the cords.'” Facilities that scrimp on everyday equipment may find themselves 15 years behind the curve.

By contrast, although it is not LEED-certified for green, Texas Children’s Hospital in Houston (which FKP completed about three years ago) incorporates the principles of evidence-based medicine and is patient and staff friendly. “The staff friendly design features become very important in the competitive environment of children’s hospitals, because all of them are trying to attract the top clinicians and physicians,” says Fannin. “Paying attention to staff friendly design results in easier recruitment and better retention.”

No soft spots in current growth
Levine says the fifth trend driving hospital construction is today’s relatively favorable reimbursement environment. “Hospital CEOs might not agree with that,” he admits. “They’re fighting for pennies all the time. But, in fact, it has been worse. It could also get worse (in the future), in the effort to pay for the Medicare prescription drug plan. But government payments are now relatively friendly, and interest rates have been good.”

The final driver is consolidation among hospitals. “As long as I can remember, consolidation has always resulted in a capital program,” says Levine. “When two hospitals partner, they look for savings. First, they pick the low-hanging fruit, and they consolidate duplicative departments. Secondly, they reach out beyond their catchment areas and try to attract more revenue from the suburbs (if they are inner city facilities), typically by establishing outpatient facilities. These facilities act as feeders to the hospitals. Finally, they begin expanding the home base. They may abandon one campus and build on the other, or they may abandon both campuses and build a new, state-of-the-art hospital.”

IDN formation boomed in the 1990s. Levine says many of those systems are now reaching the stage of consolidation where major construction is beginning. “The Northeast, particularly New England, was the last area to consolidate, and even that’s occurring now,” he says. “There are no soft spots around the country.”

Other drivers Fannin would add one more driver to the list: the need for healthcare providers to establish a distinct market advantage, or niche. “Those who have the money and leadership are trying to position themselves within a market slice, either by moving to the suburbs (something we’re seeing a lot of) or by entering a niche market,” he says. “We’re seeing a tremendous boom in children’s facilities, because they have a high degree of reimbursement, and they are also strong in attracting donated funds.” Heart and orthopedic hospitals are another trend, driven by an appeal to specific physician groups and by a high rate of return.

And, of course, there’s the California factor. The state of California has mandated that, by 2013, hospitals must be able to stand up after a major earthquake. By 2030, facilities must be able to remain fully operational during and after an earthquake. These regulations make the California hospital construction environment exceptionally vigorous.

About the authors: Sharon M. Ruff Richter is vice president of industry research and analysis for U.S. LifeLine Inc., the Carlisle, Pa.-based information division of MDSI, publisher of Repertoire and the Journal of Healthcare Contracting. U.S. LifeLine publishes the Major Accounts Exchange (a.k.a. The MAX), an online supply chain community of news and industry intelligence. Richter can be reached via e-mail at smrrichter@uslifeline.com. Janice M. Bartle is an industry analyst for U.S. LifeLine.

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