With its spectacular panoramas and laid-back lifestyle, Denver's ever-expanding metropolitan area has enjoyed an explosion of population growth over the past dozen years, triggering an unprecedented building boom in almost every sector except one: hospitals.
At a time when Colorado's bustling capital and its widening circle of suburbs were adding almost a half-million residents during a heady economic revival that spanned much of the 1990s, not a single new hospital was built to serve this latter-day gold rush of urban settlers.
Now, this intensely competitive healthcare market appears to be making up for lost time. Four new hospitals, all brimming with state-of-the-art amenities like healing gardens, hot tubs and made-to-order meal service, are either newly opened or under construction in the suburbs that surround the city.
"There's been a pent-up demand for a long time," said Ken Bacon, chief executive officer of Parker (Colo.) Adventist Hospital, a 101-bed facility scheduled to open in early 2004 in Douglas County, just south of Denver. "All of this new construction is designed to meet that demand. If we weren't building new hospitals now, we'd really be hurting in five years."
While Denver may be one of the nation's hottest markets for healthcare construction, the constant roar of heavy machinery reflects a nationwide surge in major capital projects unlike anything since the post-World War II building boom triggered by the Hill-Burton Act. Hospital construction totaled more than $8.9 billion in 2002-$1.4 billion higher than the previous year and about $3.2 billion more than the figure just two years earlier, according to a report from McGraw-Hill Construction Analytics and Consulting. Of the 58 metropolitan statistical areas covered by the company, just 15 showed a decline in construction from 2001 to 2002.
"We've never seen (total dollar figures) that high before," said Richard Branch, an economist with the research and consulting firm. "It was due mostly to the depths to which construction fell through most of the 1990s. Demographics and aging cohorts are now pushing construction along. Demand for services has been picking up quite strongly."
Huge new hospitals dot the landscape as healthcare systems across the nation--like those in Denver--scramble to meet expected demand. For instance, Sacramento, Calif.-based Sutter Health, a 26-hospital behemoth in Northern California, will spend about $3.5 billion over the next decade to expand services and upgrade or replace aging hospitals.
Turner Construction Co., the nation's biggest healthcare construction management company, is currently overseeing about $650 million in projects in the New York City area and approximately $1.3 billion more in Northern California.
These days, it seems everybody is playing catch-up, building furiously to meet patient demand now and into the future.
Bacon said the timing of this trend is serendipitous. Metro-area hospitals are catching up with demand at about the same time that a new, consumer-focused era in hospital design is dawning, he suggested. Cold, sterile waiting areas have been replaced by warm colors, leather sofas and cavernous fireplaces. Semiprivate rooms are relics of the past, replaced by spacious private rooms that feature amenities such as room-service menus, Internet connections and high-end DVD players. On a recent tour, he proudly showed off the half-finished lobby at Parker Adventist, which, even during the midst of construction, looks more like a ski lodge than a hospital, highlighting the remarkable change in architecture since the last new facility opened in the area.
"As far as new hospital beds in Denver, the last of those were in 1989--that was it," said Bacon, maneuvering around construction material outside the hospital, where the landscape seemingly stretches to the horizon with recently completed, upscale housing developments. "That's pretty remarkable, considering the tremendous growth of this area. By the time the late 1990s rolled around, hospitals in this city were full."
First in 14 years
The metro area's first new hospital in nearly 14 years was Sky Ridge Medical Center, a $148 million facility that opened in August in the village of Lone Tree, about five miles from the Parker Adventist construction site. The 106-bed hospital, which features a healing garden, a children's playground and "amenity suites" complete with private chefs, is owned by seven-hospital HealthOne, the metro area's largest healthcare provider and a 50/50 joint venture between Nashville-based HCA and HealthOne Alliance, a not-for-profit private foundation.
When Parker Adventist opens in February, it will set up a battle of titans--HealthOne vs. not-for-profit Centura Health, which is the state's largest hospital system, operating 12 facilities across Colorado. The hospital is located in Parker, a rapidly growing suburb in Douglas County that was little more than pasture two decades ago, growing from about 290 residents in 1980 to almost 24,000 20 years later. The 100-bed facility will open with 58 beds and is eventually expected to nearly double in size to meet future demand.
At the same time Centura and HealthOne do battle south of Denver, two smaller systems will go toe-to-toe along the Boulder-Denver corridor. Exempla Good Samaritan Medical Center, a $175 million facility owned by two-hospital Exempla Healthcare, will open in the fourth quarter of 2004. The 143-bed facility is under construction in Lafayette, just south of Boulder Community Foothills Hospital, a $75 million facility with 60 beds that opened three months ago as a satellite to its parent, 204-bed Boulder Community Hospital System.
The four new hospitals, built at a total cost of about $500 million, will add more than 400 beds to the market, which has grown by about 30% in population from 1990 to 2002.
What's more, a vast $2.1 billion healthcare, research and educational complex, anchored by replacement facilities for the University of Colorado Hospital and Children's Hospital in Denver, is rising on a former Army base in a suburb just east of Denver, transforming the bustling metropolitan area into one of the nation's epicenters of hospital construction. While many major markets are experiencing feverish growth in one of the hottest construction markets in history, few are as dynamic or as highly concentrated as Denver's.
"There are some who say that the pendulum has swung back," said David Hamm, president and CEO of Exempla Good Samaritan, about a half-hour drive from downtown Denver. "But if one assumes 3% population growth each year, we think the pendulum swings back for three years or so, and then we go from excess capacity to underserved again."
Mirroring the long-term strategic goals of other hospital systems, Exempla's top officials are leaving plenty of room for future expansion in their building plans. The new hospital, for instance, can expand from 143 beds to 230 within the existing physical plant, and long-term plans call for an additional tower, bringing total capacity to 350 beds.
"We needed to plan a facility that will continue to grow to meet the needs of the community," Hamm said.
Driving the cost spiral?
Despite those projections of continued growth across the Front Range, some business leaders and industry observers have expressed misgivings that the huge costs of new construction for all these gleaming new facilities ultimately will be passed along to consumers in the form of higher costs and premiums.
"Our major concern is that, somewhere down the line, we're going to have to pay for all this new infrastructure with higher rates that are going to be passed back on to us," said Donna Marshall, executive director of the Colorado Business Group on Health, a not-for-profit whose employer-members represent about 225,000 covered lives in the state.
Health insurance costs in Denver rose 19.8% from 2002 to 2003--higher than any other major U.S. metropolitan area and far above the national average of 14.7%, according to a report from Hewitt Associates, a global consulting firm.
Marshall said she's almost certain that these lavishly appointed hospitals, all with private rooms, won't help reduce insurance premiums, which are based largely on hospital costs. "I can't put my finger on any number," she said. "But there's no question in my mind that all this construction is going to continue to fuel costs."
Hospital officials and industry experts, meanwhile, say the building boom is simply a matter of supply matching demand.
In fact, when Sky Ridge swung its big doors open on a stunning entrance facing the snow-capped Rocky Mountains to the west, it marked the first entirely new hospital for the metro area since Littleton (Colo.) Adventist Hospital opened south of Denver in 1989. Since that long dry spell, one hospital has closed and two others have consolidated, effectively shrinking the market by several hundred beds, according to Larry Wall, president of the Colorado Health and Hospital Association. "On the surface, it seems like there's a lot of construction going on," Wall said. "Considering the spike in population over the last five years or so, we don't consider it to be unusual or abnormal. We're just catching up to the population gains."
Still, the torrid rate of construction has left even some officials connected with Denver hospitals wondering if too many new beds are being built at once.
"Of course, the big question is whether there'll be enough patients to fill all those beds," said John Shaw, executive project director at Children's Hospital, which will open a $450 million replacement hospital and research complex in the fall of 2007 alongside the University of Colorado at the old Fitzsimons Army base in Aurora. "I would think there'll be a surplus. But I think consumers will be the beneficiaries, because this will lead to far greater competition."
That intense competition is likely to include a metrowide battle over one of America's most precious healthcare commodities--nurses. Like almost everywhere else in the nation, Denver has experienced a severe shortage of registered nurses, and this infusion of new beds is almost certain to exacerbate that tense and unstable market. Even under the best circumstances, hospital systems like Centura may be forced to raid existing facilities to staff their new ones.
"I think we're going to have some real challenges in staffing these new hospitals," said Sue Carparelli, CEO of the Colorado Center for Nursing Excellence in Denver. "I don't think it's going to be possible to staff them without having an impact on the existing staff of the older hospitals, so I would be very watchful of what's happening in the inner city."
A healthy economic climate for hospitals has helped fuel the stunning construction pace in Denver, where many systems struggled despite the population boom of the past decade as a result of several key factors. For one, excess capacity left them unable to exert any real bargaining power in contract negotiations with managed-care companies. Also, an unusually high rate of capitation tightened margins.
"Our financial performance could not support the infrastructure," said Joseph Swedish, Centura's president and CEO. "We were not positioned to grow as the population grew. We couldn't build. Now, we've enjoyed a few years of prosperity, and it's a catch-up phenomenon. Our capacity is now catching up to demand."
Maureen Tarrant, president and CEO of Sky Ridge, said margins have been "healthier" in the past five years because hospital executives have been able to negotiate "rational prices" with managed-care firms, allowing systems to finally expand to meet suburban demand.
"It was almost as if we just weren't paying enough attention to building," she said. "Now we're in a state of equilibrium."
At the same time, however, most hospital systems in Denver are faced with a growing pool of uninsured and underinsured that threatens to strain margins at many hospitals.
Wall, the hospital association's longtime chief, said charity care and bad debt in 2002 is expected to top $800 million for Colorado hospitals--or nearly double the figure of about $462 million just four years ago. Even saddled with those mounting charges for uncompensated care and a downturn in the local economy, the state's two big hospital systems both have been profitable in recent years, generating a strong cash flow that has helped fuel the construction boom. In the fiscal year ended June 30, 2002, Centura posted net income of $110.6 million on revenue of $1.2 billion. HealthOne declined to provide financial information for 2002, but reports in the local media indicated the company had net income of $127.7 million in 2001.
Jim Hertel, editor of Managed Care Review, a monthly newsletter that covers the state's insurance and healthcare industry, said the consolidation of big systems like Centura and HealthOne have provided the fiscal clout to address concerns on capacity, priming the pump for hundreds of millions of dollars in new facilities.
"With the consolidation of hospitals into a relatively small number of groups, you've got better access to capital," Hertel said. "Combine that with a return to accelerating growth in hospital charges, low interest rates and a general perception that Medicare isn't going to change too dramatically, you'll find hospitals looking to invest in capacity for the next 20 years."
That's the case at University of Colorado Hospital, where 101-bed Anschutz Inpatient Pavilion is set to open in February 2004 on a large site that once housed Fitzsimons Army Medical Center. The $145 million facility is the twin sister of the Anschutz Outpatient Pavilion, named for wealthy philanthropist Philip Anschutz, which opened in December 2002 at a cost of about $120 million.
Nearby, the massive Children's Hospital complex will include a 264-bed inpatient facility, a 250,000-square-foot outpatient building, medical offices and research buildings. It is expected that the Veterans Affairs Department also will build a facility on the campus, which stretches over a square mile and will include everything from an $8 million biosciences park to the $25 million Colorado State Veterans Home at Fitzsimons. Total cost of the VA project, including an inpatient tower, research facilities and some long-term-care beds, is expected to be about $300 million.
"Right now, there's nothing like this going on anywhere," said Dennis Brimhall, president and CEO of the University of Colorado Hospital since 1988 and a principal proponent of the massive relocation to the old Army garrison.
Yet this new construction--all of it in Denver's suburbs--has triggered concerns that the big healthcare systems are abandoning their flagship hospitals in the heart of Denver's business district, neglecting their older, inner-city properties to focus primarily on more affluent markets in outlying areas.
Swedish bristled at the suggestion that his system is disregarding its mission in central Denver. He said Centura plans to invest about $539 million in the next three years in expanded, renovated and new facilities, equipment and services throughout Colorado--much in downtown Denver, where Centura-owned 358-bed St. Anthony Central Hospital is a principal safety-net facility. "The evidence is clear that we're committed to Denver and to serving the uninsured," he said.
Still, almost every system seems to be setting its sights squarely on the suburbs--and for good reason. Suburban Douglas County, home to both Sky Ridge and Parker Adventist, has been one of the nation's fastest-growing areas for the past decade. From 1990 to 2001, the county's population swelled from 61,609 to 199,753--a 224% increase. There wasn't a hospital in the county until Sky Ridge opened four months ago amid much fanfare, including glowing reports in the local newspapers about the hospital's "Venetian-style" architecture, black slate floors, healing gardens, leather armchairs and made-to-order meals.
All those amenities are designed to appeal to a high-end patient population--the median income in Douglas County in 1999 was $82,929, or more than double the $39,500 figure in Denver. The payer mix is equally attractive to bottom-line administrators. In Sky Ridge's service area, about 73% of the population is covered by an HMO or PPO, Tarrant said.
The same is true in Denver's northern suburbs, where Exempla and Boulder Com- munity's new hospital will duke it out for a share of a market that boasts a median income almost 40% higher than Denver's. The struggle for patients in this sector was signaled last year when Exempla announced its new partnership with Kaiser Permanente, which has about 145,000 members in the northern metro area.
The managed-care giant will build a $75 million, four-story medical office adjacent to the new Exempla hospital, severing its relationship with Boulder Community when that contract expires Jan. 1, 2005. When it made plans to expand by opening the nearby Foothills facility, Boulder Community was counting on continued business with Kaiser Permanente, whose members represented about 20% of its total business.
"It will have a severe impact in terms of volume," said Joe McDonald, vice president of finance at Boulder Community. "The blessing, if you can call it that, is that Kaiser doesn't pay very well, anyway."
He conceded that Boulder Community might have held off on plans to build its facility if it knew Kaiser was going to forge an exclusive relationship with its strongest rival. But he added that Foothills hospital remains a positive step for the small system. Boulder Community, already beyond capacity, cannot be expanded at its current site in a highly built-up area.
"If we'd seen this coming," McDonald said, "we probably would have planned a bit differently. We probably would have delayed expansion. But we'll just have to wait for growth to take over. And it will."
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