To longtime industry observers, it's no secret that the healthcare building boom that began several years ago continues to rumble across the country, especially in affluent suburban areas in states such as Arizona, Colorado and Texas, among other fast-growing locales.
But a new study provides additional confirmation that there is a clear consequence to the widespread growth in new or replacement hospitals, ambulatory surgery centers and the one-stop specialty facilities that focus on high-margin services like cardiac care and surgery.
This torrid expansion, which is shifting more and more medical care from hospitals to doctors' offices and outpatient centers, is destined to lead to higher costs and increased utilization of the most expensive services, according to a report by the Washington-based Center for Studying Health System Change.
"There are people who will argue all these services are wonderful -- that they'll do a lot to help patients," said Paul Ginsburg, president of the nonpartisan policy research organization. "But I don't think anyone would quarrel with the fact that this is driving costs up."
He said it's difficult to quantify how much medical costs have increased as a direct result of this construction boom and the increased competition between hospitals and physicians eager to cash in on profitable ancillary services in their offices or surgery centers. But the long-term impact of health insurance premiums rising at a higher rate than inflation will be an increase in the number of uninsured Americans.
The stampeding pace of healthcare construction hasn't slowed despite sharply increased costs in the past year, thanks to a worldwide steel shortage and other factors. The growth in healthcare construction is "unrelenting," said John Driscoll, president of the healthcare division of the Alter Group, a major real-estate development firm that focuses on outpatient facilities. "You're starting to see significant escalations in the costs healthcare providers are spending for construction," Driscoll said. "That correlates into increased costs for healthcare services."
Notwithstanding these higher construction costs, healthcare building is already surpassing early estimates for this year, according to McGraw-Hill Construction Analytics. Last year, the firm was forecasting about $16.7 billion in total healthcare construction for 2005, with about half of that in hospitals, said Richard Branch, an economist with the research and consulting firm. That estimate has been increased to about $18.5 billion for this year, with as much as $9.3 billion or more in the hospital sector. "We're seeing the biggest gains in the south Atlantic, in Texas (the state ranked No. 1 in hospital construction starts in 2004, with $963 million) and the Pacific southwest, including California (No. 2, with about $957 million), Arizona and Nevada," Branch said.
(For a look at several construction projects planned for the suburbs of Phoenix, see this quarter's Construction Digest, starting on p. 28.)
Ginsburg's focus on the medical building boom and the growth in competition for high-margin services is part of his organization's ongoing national research study of healthcare markets in 12 communities, including Cleveland, Indianapolis, Orange County, Calif., and northern New Jersey. The study found that the building boom is being driven by competition for several profitable service lines, notably cardiac, orthopedic and cancer care.
What's more, specialists focusing on these high-margin services in outpatient settings are becoming less dependent on hospital privileges, which usually obligate these doctors to provide on-call emergency department coverage. As a result, many hospitals are scrambling to find specialists to cover this essential service. "All the signs in the 12 communities are pointing toward higher costs and growing gaps in access to care by income and geographic location," Ginsburg said.
In Denver, for instance, five new hospitals have been built in the fast-growing metropolitan area in recent years. At the same time, health insurance costs rose nearly 20% between 2002 and 2003, the height of this construction activity. "I don't think there's any question that supply drives demand," said Donna Marshall, executive director of the Colorado Business Group on Health, a not-for-profit whose 21 employer-members represent about 200,000 covered lives. "When you build more beds, more ICUs, more specialty services, you drive utilization."
Doctors are more intent on capturing this market than ever before as they struggle with stagnant reimbursement, sky-high malpractice premiums and increased operational costs.
Meanwhile, about 100 physician-owned specialty facilities have sprouted across the nation, drawing the best-insured patients away from community hospitals who once used profits from service lines like orthopedics and cardiac care to underwrite money-losers like burn units. A moratorium on new specialty hospitals ended in early June, but the American Hospital Association is pushing for an end to these physician-owned facilities, claiming that community hospitals are at risk.
As part of its effort to lobby for the moratorium earlier this year, Richard Pollack, the AHA's executive vice president, said specialty facilities attract the best-insured patients and leave full-service community hospitals "to provide essential services that are seldom self-supporting -- emergency services, burn units, trauma care and care for the uninsured."
Ginsburg recalled a recent conversation in which he asked one hospital executive about plans for capital projects. The executive, Ginsburg said, replied that the hospital was focusing funds strictly on "the ones that are profitable -- orthopedics, oncology, cardiovascular services."
"Hospitals," Ginsburg added, "have always been aware that some services are more lucrative than others. Historically, that's always been a way of life-hospitals made money on these services and used it to subsidize others. Now, because of this more competitive environment and additional financial pressures, the reaction has been, `Well, this is profitable, so let's do more of it.' "