Ongoing aftershocks involving California's seismic-safety law as well as market trends nationwide are continuing to fuel a hospital building boom, funneling billions of dollars into the industry.
One 40-year industry veteran calls it the strongest market he's ever seen. "There are about five to six drivers that have been a wind to our back," says Robert Levine, vice president and general manager of healthcare at Dallas-based Turner Corp., with nothing on the horizon to stop the trend.
The inpatient acute-care hospital sector, especially replacement facilities, expansions and renovations, continues to lead the charge with $9.9 billion, or more than half of the roughly $18 billion in total completed healthcare projects last year, according to Modern Healthcare's 25th annual Construction & Design Survey.
Another $15.2 billion in acute-care hospital projects are under way-out of the total $25.1 billion of all healthcare projects that broke ground last year. And $28.5 billion worth of acute-care facilities are in design-of the $44.3 billion in total healthcare projects in the design stage, according to this year's 118 architecture firms and nine design/build respondents. A total of 187 firms participated in the survey this year, up from 182 last year. Respondents also included 26 construction management firms, 18 developers and 16 general contractors.
Aging facilities, shifting demographics, changing technology and the impact of baby boomers, combined with fairly good reimbursement conditions and cheap financing terms, all make for a highly favorable building climate, Levine says. Turner ranks No. 1 among construction management firms, according to the survey, and saw a 7% increase last year in completed healthcare projects to $1.2 billion. The company also reported $1.6 billion of projects that broke ground in 2003, up 45%, from $1.1 billion in 2002.
"If you take all the other drivers and add seismic ... California is the strongest market," Levine says.
Seismic mandates in California calling for structural improvements by Jan. 1, 2008, are forcing billions of dollars through the construction pipeline. Levine says the costs could prompt smaller providers to consolidate, but he doesn't foresee hospitals closing altogether. Earlier this year, Tenet Healthcare Corp., based in Santa Barbara, announced it would sell 19 hospitals in its core market in California because the facilities would require $1.6 billion in upgrades to meet regulatory standards (Feb. 2, p. 8).
Oakland, Calif.-based Kaiser Permanente alone could account for $17 billion in healthcare construction in the next 10 years. The healthcare operator plans to build as many as 19 acute-care hospitals in California, six of them new and 13 replacement, at a total cost of $7 billion. The company also plans $1.9 billion in acute-care expansions and upgrades, as well as billions more in medical office buildings and other healthcare construction.
The replacement hospitals are largely earthquake-safety related, while the new hospitals are market-driven, says Bob Eisenman, director of strategy and external relations at Kaiser. Seismic compliance is a big driver. He says, "It's a better investment to replace than to retrofit."
Kaiser's building costs will be rolled into operating expenses, Eisenman says, but bonds could be issued later to offset rising operating expenses. The managed-care giant, with a large presence in California, owns or operates 28 hospitals in the state and contracts with another 100 hospitals. Kaiser rang up total operating revenue of $22.5 billion for fiscal 2002. Eisenman says he hopes member dues won't be affected but that there are many pressures on healthcare costs.
Kaiser has designed three new hospitals in growth areas where it is currently contracting with existing hospitals: the San Francisco East Bay area, the Central Valley and southern Orange County.
With the sheer size and scope of Kaiser's construction plans, the company has commissioned architects SmithGroup, Detroit, and Chong Partners Architecture, San Francisco, to design three building templates-two for acute-care hospitals and a third for medical office buildings. The template for 200- to 250-bed hospitals will be the model for all three of the new market-driven hospitals, and another template will accommodate larger hospitals. A separate model has been developed for medical office buildings. Kaiser currently owns or operates 431 medical office buildings.
The templates are not a new concept, Eisenman says. Kaiser has been using them for some time for individual departments and services but is now applying the concept to entire hospitals. Using the outlines could shave up to a year from the building process, he says.
Another time-saver is combining the design-build process, says Pamm Killeen, vice president at HDR in Omaha, Neb., the No. 1 architecture firm this year, according to the survey, with $98.5 million in firm fees and $1.3 billion in completed healthcare projects.
"The faster you get the hospital open, the faster you can start making money," Killeen says. With many building projects financed by debt, healthcare operators are anxious to get the facilities up and running so they can generate revenue and start repaying the debt.
Hospital executives are especially eager to complete lucrative specialty projects, such as cancer, cardiac and orthopedic programs, to fend off competitors during an 18-month moratorium on physician-owned specialty centers put in place by the Medicare reform law enacted in December.
"In the next 18 months (hospitals) are going to scramble and try to fill the void," Killeen says. "It's a defensive move to keep for-profits from showing up and taking away market share."
Sentara Norfolk (Va.) General Hospital is one of many operators building hospitals within hospitals to vie for profitable specialty-service patients. Six-hospital Sentara Healthcare is planning a $95 million heart hospital at its 569-bed Norfolk hospital. The six-story, 305,000-square-foot facility will be connected to the hospital and provide comprehensive cardiac services.
Cleveland Clinic, meanwhile, is planning a $200 million heart hospital that will be the facility's new front door on its main campus.
As for whether the moratorium on physician-owned specialty hospitals will affect healthcare construction, Levine says it "doesn't even show up on the radar screen. It's more an annoyance than anything else. It doesn't stop our business in a material way." Turner is working on several heart hospitals: 265,000-square-foot Inova Heart Institute in Fairfax, Va., part of Inova Health System in Falls Church, Va.; a 220,000-square-foot cardiac facility for Riverside Methodist Hospital in Columbus, Ohio; and a 300,000-square-foot heart hospital for Spectrum Health System in Grand Rapids, Mich.
Turner is in good company. Specialty hospitals constituted $2.4 billion of the $18 billion in total healthcare projects completed last year and more than $10 billion of specialty projects in the works, according to survey results.
Karlsberger Cos., Columbus, Ohio, designed two of the three heart hospitals in Columbus. Michael Tyne, chairman and chief executive officer at Karlsberger, agrees that much of the construction is market-driven. Tyne says the shift to outpatient care in the late 1990s "wore thin" after awhile.
"More general hospitals found themselves behind the eight ball," Tyne says.
Outpatient centers represented $2.7 billion in completed construction last year and another $8 billion worth of projects are in the broke-ground and design phases.
Levine, meanwhile, says another 1990s trend, the merger mania in the mid-1990s, has also influenced the recent building boom. The consolidated hospitals are now building hospitals on different sites to align themselves more closely with the new demographics.
"You have a 1955 building, a 1970 addition... and it's in the wrong place," Levine says, as market opportunities appear in growing affluent suburbs of major metropolitan areas. Sacred Heart Medical Center with 432 beds in Eugene, Ore., is building a $300 million, 1 million-square-foot replacement hospital in nearby Springfield, Ore., a few miles away.
Geographically, Levine sees no area of weakness. Even New England, the last area to consolidate, has been seeing a flurry of building activity.
"It's not just a blip," Levine says of the overall healthcare construction market. "We're rebuilding our whole hospital infrastructure and system."
Charts, along with a complete list of respondents can be found in the Surveys/Lists/Data section of modernhealthcare.com