The grim uncertainty that froze the healthcare construction industry during the Great Recession appears to have lifted—only to be replaced with a new type of uncertainty.

Healthcare organizations are still figuring out what facilities and services are best suited for healthcare payment reform and the brave new worlds of accountable care, bundled payments and patient satisfaction.

While work continues on billion-dollar projects such as the replacement for Parkland Memorial Hospital in Dallas, UCSF Medical Center at Mission Bay in San Francisco, and University Medical Center in New Orleans, many companies contacted as part of Modern Healthcare's 34th annual Construction & Design Survey are thinking smaller.

Andrew Quirk, senior vice president and national director for Nashville-based Skanska USA's Healthcare Center of Excellence, is calling hospital projects in the $200 million range “the new normal.”

This year's survey of 2012 projects included responses from 169 companies from across the healthcare construction sector. Compared with the 173 responding with 2011 figures last year, architects, construction managers, general contractors and designers completed, started and designed fewer acute-care hospitals and finished, began and planned more medical office buildings.

“We're seeing a shift in the marketplace,” Quirk says. “It might be the new normal for a while. Obviously, occasionally, you'll get a few that are larger than that.” But many projects will be even smaller. Quirk says he's seen a lot of requests for proposals in the $50 million range—with large medical office buildings and facility upgrades being the order of the day.

Natalie Miovski, a principal and healthcare director for Philadelphia-based EwingCole architects, is working on the $110 million expansion of St. Christopher's Hospital for Children in Philadelphia along with an expansion project at the Geisinger Medical Center's Women's Center in Danville, Pa. Miovski says the West Coast “megasystem” model has moved east, and she's seeing it take shape with large systems buying up small, independent community hospitals and converting them into specialty centers—such as an orthopedic center of excellence.

“That's sort of the trend we're seeing in the Northeast. Geisinger is a good example,” Miovski says. “I think there's going to be more consolidation.”

An interesting piece of this development, Miovski says, is how independent hospitals are working on plans to make themselves more attractive to buyers.

This includes revamping master plans and making facility upgrades. “There's a lot of that going on: single hospitals positioning themselves so they can pick who they want to partner with,” she says, adding that these hospitals often have significant market share in desirable communities and they are saying to health systems, “Woo us.”

Richard Galling, president and chief operating officer of Brookfield, Wis.-based developer Hammes Co., says that after the Patient Protection and Affordable Care Act was upheld by the U.S. Supreme Court last year and with the re-election of President Barack Obama, healthcare reform “has passed all of its tests and it looks like it's here to stay.”

Healthcare organizations are adjusting, but they're also still recovering from the financial crisis, so their plans are coupled with an extra dose of caution. Whatever the direction healthcare reform takes for providers, Galling says most realize they aren't going to be paid more—so they're looking to cut costs wherever they can.

That doesn't mean merely building cheaper, he says, but having the new and renovated facilities developed in a way that makes operations more efficient and removes costs from the system. Analyzing how new facilities might raise revenue also has gained a higher priority.

Miovski says this includes centralizing facilities such as laboratories and pharmacies instead of having separate units at each location in a multihospital system. To illustrate how seriously organizations are taking this concept and how it's just not something large systems are doing, Miovski notes that she is working on a centralization project for a system with only two hospitals.

Galling also notes that a major part of healthcare reform includes the widespread implementation of health information technology, which is being financed through the same budget as facility construction and renovation. “That comes out of capital,” Galling says. “And that's having an impact on the amount of capital available to do construction projects.”

Galling predicts that, for the next three years or so, most projects will be in the $25 million to $75 million range, followed by those between $100 million to $200 million, with bigger projects being “few and far between.”

This is continuing to shift the priorities of healthcare system executives, who previously looked at inpatient and ambulatory services as two separate worlds. They are becoming one, Galling says.

“They're at a point where, with accountable care, a light bulb goes on and they see ambulatory care as an essential part of what they do,” Galling says. The strategy involves buying physician practices so systems can offer all the follow-up services that patients require after hospitalization, he says, which will be especially important as bundled payment systems advance.

Galling calls healthcare reform “perhaps the greatest structural change in payment since Medicare,” emphasizing that “everyone came through Medicare all right.”

But the result of all these economic forces converging is a slowdown in the approval of construction and renovation projects.

“They are clearly scrutinizing projects to a greater degree than I've ever seen in my lifetime,” he says. “They have to get comfortable that they can handle the risks of healthcare reform and completely digest the upfront costs of putting an IT platform in place.”

Miovski agrees, adding that decisions are slow in coming, but—once they're made—organizations are moving quickly and want projects completed as soon as possible. Miovski recalls talking to a healthcare CEO who extended her hand out as far it could go and said, “The future used to be out here.” She then pulled her hand halfway in and said, “Now it's here.”

“She said, 'Our biggest challenge is how do we live in an environment where we don't know what we need? And, when we know, we need it right away,' ” Miovski says. “Once they say, 'Go,' they want to know when they can open it up and when they can start generating some revenue.”

In its survey response, Thomas, Miller & Partners, a Brentwood, Tenn.-based engineering and architecture firm, reported that they worked on Poplar Bluff (Mo.) Regional Medical Center on an accelerated time frame. After being hired in late 2010, it turned in its plan in April 2011 and the hospital received its certificate of need the next month. Ground was broken that October and the first load of steel was delivered in December, the firm reported. The $173 million facility with 250 private rooms opened in January.

Quirk at Skanska notes that many healthcare systems have recovered from the recession, but are cautious about spending money.

“The healthcare industry is fairly well-flushed with cash right now,” he says. “Hospitals are sitting on cash reserves, but their attention is being pulled in so many different directions, and there are so many competing needs for capital.”

Galling reiterated that these delays are not because providers don't have the financing. “You're not seeing projects under construction stop, but you're seeing a lot more securitization before they pull the trigger,” he says. “The focus is more on the business plan than work on the design—which is smart. I know it's impacting architects, but clients need to answer these business questions.”

Galling's firm, Hammes, finished on top of the survey's ranking of developers. It reported completing projects worth more than $1.1 billion and covering more than 2.9 million square feet in 2012. These numbers were down significantly from the previous year.

Hammes' completed projects last year had a dollar volume almost 28% lower than 2011's figure of almost $1.54 billion. Also, the square footage of 2012's projects was 29.3% lower than the more than 4.1 million square feet they completed in 2011.

Galling isn't worried though, noting that the drop-off is the result of four large projects all being completed within 60 days of each other in 2011. Those projects were Elmhurst (Ill.) Memorial Hospital; St. Anthony Hospital, Lakewood, Colo.; Swedish/Issaquah (Wash.) Health Campus; and Virtua Voorhees (N.J.) Hospital.

With high patient-satisfaction scores in mind, the design of Forest Park Medical Center, San Antonio, features 16 VIP suites. The $95 million facility is set to open next year.

Skanska USA placed ninth in the construction management sector, according to the survey, with almost $952 million in volume for completed projects covering about 2.5 million square feet. Skanska's dollar volume was off more than 25% from the $1.27 billion seen in 2011. Square footage was down nearly 30% .

Quirk says Skanska has a backlog of $1.8 billion in work for which it has been selected as manager. “It's still taking a little bit longer for projects to become reality,” he says. “But we are no longer seeing projects canceled or delayed,” which was common in the economic downturn.

Redwood City, Calif.-based DPR Construction, the No. 2 general contractor according to the survey, reported skyrocketing business with completed construction dollar volume up 248% to more than $1.22 billion, compared with just $350.8 million in 2011. Square footage rose 21.2% to more than 2.3 million square feet from more than 1.9 million square feet.

DPR, which is working on the UCSF Medical Center project, signed a letter of intent this year to acquire Atlanta-based Hardin Construction Co. Hamilton Espinosa, DPR's healthcare leader, says once its projects get going they keep going until completed.

“We have really never had a project start construction and then get put on hold,” Espinosa says in an e-mail. “However, we have had some projects get put on hold or shrink during pre-construction.”

Traditionally, the healthcare segment of the construction industry has been the model of stability. Unlike other sectors, such as retail or residential, once a healthcare project got rolling, work continued until the project was done, but that changed during the most recent recession. Starting in 2010, Modern Healthcare began asking participants to report if any projects they were working on in the previous year had been stopped after work had begun.

For 2009, 116 companies (62% of survey respondents) reported that work had stopped on at least one project after it began. It added up to 575 halted projects, including 135 that restarted later that year.

The number improved for 2011, when 67 companies (about 39% of respondents) noted involvement on projects where work had stopped. They reported that work stopped on 244 projects but resumed on 72 of those by year-end. It was also reported that work resumed on 67 projects that had been put on hold in 2010.

For 2012, 70 out of 169 companies (about 41% of respondents) reported having work stopped on a project, affecting 317 projects. Of these projects, 33 companies reported that 105 restarted before year's end. In addition, 27 companies reported that 69 projects that stalled in 2011 were restarted in 2012.

According to the survey, reasons for stopping projects included financial issues, the scope of the work having changed, contested certificates of need, changes in client strategy or ownership, failed mergers and government regulation, including the documentation of an endangered species on the site.

In a nod to how healthcare is seen as a foundation of the construction industry, 107 survey participants (63% of the total) reported experiencing competition for jobs from companies new to healthcare construction.

In an effort to boost their bottom lines, 43 respondents (25%) reported working on healthcare construction projects outside the U.S. Countries where they found work included China (12 companies), United Arab Emirates (10), Saudi Arabia (nine), India and the United Kingdom (six for both) and Canada (five).

Also, 59 respondents (35%) reported working on retrofit projects where an existing structure was converted to a healthcare facility. These included converting stores, offices, car dealerships and a school into clinics; converting a car dealership and automotive assembly plant into research facilities; turning a store into a free-standing emergency department; and a bookstore into a medical office building.

Shawn Janus, managing director at Chicago-based real estate manager Jones Lang LaSalle, says the blurring of retail and healthcare facilities will continue, as developers of both look to share the foot traffic they each attract. He says healthcare organizations are becoming less attached to their real estate and are more open to long-term leases and allowing third parties to manage property assets.

Jones Lang LaSalle finished 12th on the survey's ranking of construction management firms, but Janus noted a 300% increase in his firm's capital assets strategy service line, which helps systems decide what types of facilities they need and where they need them.

Increasingly, the decision is being made to invest in outpatient care and to deliver care in the community spokes rather than the hub, Quirk says. “In today's paradigm, the only people you want at the central hospital ever are the high-acuity patients,” Quirk says. This also plays into hospitals' patient-satisfaction concerns. Healthier patients, he says, don't want to be in the hospital. As a result, they are more likely to give lower scores.

Dallas-based architecture firm BOKA Powell believes it has the answer to that. It has just completed designs for the first phase of the Forest Park Medical Center in San Antonio, a $95 million physician-owned specialty surgical hospital and medical office building said to be inspired by five-star resorts.

The 54-bed hospital will have 16 VIP suites with separate sleeping areas for family members and guests, as well as kitchenettes. Care was also taken to use building materials that create “an immersive luxury experience” with chef-prepared meals, coffee bar and outdoor spaces. Almost lost in the shuffle are the facility's 12 operating rooms, two procedure suites and 10 intensive-care beds.

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