While going though the interview process for the president and CEO positions at Denver's St. Anthony Central Hospital two years ago, Peter Makowski says he kept visiting the institution's Web site to look at the drawings of the new $750 million replacement hospital that Centura Health was proposing to build.
Full speed ahead
Large projects proceed despite challenging economy
“I kept looking at the rendering,” Makowski says. “It looked absolutely magnificent.”
Makowski landed the job—but he won't be working in the hospital he used to daydream about.
“The third day into the job, my boss said, ‘Peter, we have some good news and some bad news,' ” Makowski recalls.
The good news was that Centura said it was forging ahead with its plan to replace its
117-year-old, 265-bed hospital, Makowski says. The bad news was that the hospital's $750 million to $775 million project was being scaled back, reducing the price tag to about $450 million—and it was his job to make that happen.
The important thing, Makowski says, is that the plan moved forward and, in today's
economy, a new $450 million hospital being built is nothing to sneeze at. Several healthcare organizations are going forward with large-scale healthcare construction projects—many out of necessity—and, in so doing, they are helping to keep local economies buzzing while often realizing savings in material and labor costs.
Although, according to Federal Reserve Chairman Ben Bernanke, the economic recession is likely over, news reports continue to talk of a “jobless recovery.” The U.S. Bureau of Labor Statistics, or BLS, reported that in August, construction employment declined by 65,000—which can be perceived as not so bad news when compared with how monthly losses had been averaging 117,000 for the six months ended in April.
Preliminary results for August show 14.3% fewer Colorado construction jobs with the number falling to 1.39 million from last August's total of 1.62 million, according to the BLS. Construction projects like St. Anthony's may help turn that around somewhat.
“This construction project, when it's going full steam—we're about halfway now—it will have 1,000 construction workers on-site,” Makowski says.
In Kentucky, the construction employment numbers are worse than Colorado's. There were 21.5% fewer construction jobs this August in Kentucky, as the BLS reported that there were just 667,000 jobs compared with last August's total of 850,000.
If those numbers change significantly in the months ahead, it could be thanks to the University of Kentucky's $2.5 billion plan to renovate its medical campus anchored by the new $530 million UK Chandler Hospital in Lexington.
“The mayor of Lexington will tell you we're the most important economic driver in the Bluegrass State,” says Michael Karpf, the university's executive vice president for health affairs. “Lexington has done OK through the economic downturn, and we're a major part of that.”
Karpf says that between fiscal 2004 and fiscal 2009, the UK medical campus has “either saved or added 2,000 jobs” and has increased its budget for salaries and benefits by $261 million.
A similar story is being told in Durham, N.C., where the Duke University Health System has a $700 million construction project under way, which includes the new seven-story, 267,000-square-foot Duke Cancer Center and an eight-story, 580,000-square-foot Duke Medicine Pavilion. Scheduled completion dates are 2012 and 2013, respectively.
North Carolina has lost 16.5% of its construction jobs in the last year, falling to 1.94 million this past August from 2.32 million in August 2008, according to the BLS.
“The city and county of Durham are keenly aware that these projects are going to employ people who otherwise could not find employment at good wages at this time,” say Duncan Yaggy, a planner with the Duke health system.
A billion here, a billion there
There are plenty of other major projects going forward nationwide.
Just this month, the Ohio State University board of trustees gave its final approval for a $1 billion plan to renovate its medical campus, which will be mostly financed though a $925 million bond sale. The plan, called ProjectOne, will include a new 276-bed cancer hospital, a 144-bed critical-care building along with research, education and other patient-care facilities. The project is expected to create some 5,000 construction jobs and, when completed, 10,000 new full-time jobs.
Another large project is nearing completion on the East Coast. Work began in 2000 on the Children's Hospital of Philadelphia's $1.1 billion, 1.2 million-square-foot expansion project, which will double the size of its campus. It's expected to be finished next year.
Some 50 miles away, Turner Construction Co. broke ground in October 2008 on the new $442 million University Medical Center of Princeton at Plainsboro (N.J.). Scheduled to open in late 2011, the facility will have 238 single-patient rooms and will occupy about
50 acres on a 160-acre campus. A campaign is under way to raise $115 million to help pay for the project.
“We have signed pledges of $91 million and no one has changed their pledge,” says Barry Rabner, president and CEO of Princeton (N.J.) HealthCare System. “The rate at which we're receiving gifts has exceeded expectations.”
The rest of the funding will come from a variety of sources, including $225 million borrowed from Merrill Lynch and $175 million borrowed from Wachovia Corp., $60 million from its cash reserves, and some from operational funds and the sale of assets. On top of that, Rabner says the system plans to issue bonds “in excess of $200 million” by the first quarter of 2012—if not sooner. The strategy was to take a belt-and-suspenders attitude and make sure they can finish what they start.
“We were trying to take a conservative approach and not assume all of these sources will be there at the level you expect,” Rabner says. “We held off as long as we could to actually go ahead with the project until we had a high degree of confidence in our sources and uses of capital. It's not like we decided and then thought ‘maybe we should, or maybe we shouldn't.' We had a high degree of confidence, and we haven't had any reason to second-guess.”
Rabner adds that bids for materials are coming in 3% to 6% below budget. “In spite of everything, it's turned out to be good timing,” he says. “Inflation was significant a year ago, with the cost of concrete, steel and other metals increasing daily.”
Sustainable energy features—such as photovoltaic cells and nighttime water-chilling technology—added about $50 million to the cost of the project, but Rabner says the savings in energy costs will pay for these features in 14 years or less.
Turner Construction and Gilbane Building Co. are working as a joint venture on another major project nearing completion: the Fort Belvoir (Va.) Community Hospital, an $807 million facility with room for 120 beds that will replace the 46-bed DeWitt Army Community Hospital built in 1957. Construction began on the military hospital in November 2007 and is expected to be completed by late March 2011. Funding came from the military's Base Realignment and Closure process, also known as “BRAC,” which was launched in 2005.
Another major BRAC project is the new $556 million San Antonio Military Medical Center. According to information supplied by the military, the medical center is only one part of a more than $2 billion plan to consolidate Texas medical and affiliated support facilities at Fort Sam Houston, Camp Bullis, Lackland Air Force Base and Randolph Air Force Base.
The project will include additions and renovations to the Brooke Army Medical Center, which will be renamed San Antonio Military Medical Center North and will house one of the military's largest outpatient facilities.
Plans also call for building a medical education and training campus to train combat medics, corpsmen, radiology technicians and other specialists. Among other Texas-sized elements, it will have an 80,000-square-foot dining facility, which reportedly will be the largest in the U.S. Army's inventory. The projects—which began in 2007 and are scheduled to finish in 2011—are expected to employ some 2,200 construction workers and eventually bring an additional 12,000 military personnel and federal employees to the area.
In Chicago, work began in April 2008 on the 23-story, 1.25 million-square-foot Ann & Robert H. Lurie Children's Hospital of Chicago, which is being built at a cost of $1 billion and will replace 247-bed Children's Memorial Hospital. It will have room for 288 beds and is expected to open in 2012.
Children's Memorial has a goal of raising $600 million in donations to help pay for construction and programs at the new hospital, and that goal was boosted immensely by a $100 million gift from local philanthropist and venture capitalist Ann Lurie—a former critical-care nurse at Children's Memorial. In May 2008, the hospital borrowed $380 million, most of which is designated for building the new facility.
Meanwhile, major work began this past May on the University of Chicago Medical Center's new $700 million hospital pavilion. Scheduled to be completed in early 2013, the facility will have 240 private rooms and facilities for new robotic and computer-assisted surgeries as well as isolation rooms for patients with compromised immune systems.
Most of the University of Chicago project funding will come from borrowed money. According to an e-mail from the medical center, in the near future it plans to issue bonds to raise $225 million for the new pavilion. Within the next two years, it plans to issue another $275 million in bonds. The rest of the $700 million will come from either fundraising or the medical center's own cash, according to the e-mail.
Birmingham, Ala.-based Robins & Morton was the highest-ranking general contractor in Modern Healthcare's annual construction and design survey (March 16, p. 30). It worked on 36.8 million square feet of construction projects worth almost $760 million in 2008, but does not have a hand in any of the large projects mentioned above. Still, Robin Savage, the company's chief operating officer, expresses “guarded optimism” for 2010 even though he says many new projects are still on hold.
“Clients who are moving forward are taking advantage of falling construction costs—that may incentivize some owners to cut projects loose in 2010,” Savage says in an e-mail. “I foresee healthcare construction projects picking up on a small scale, but it will be entirely dependent upon available financing, the results of healthcare reform, and investment markets in general, since many hospitals have seen major declines in their portfolios.”
This isn't news to Karpf at the University of Kentucky. He says about $250 million had been borrowed to build the new $530 million hospital and investments would help cover the rest, but he says the university's portfolio set aside to pay for the project lost roughly $100 million in value after Wall Street's meltdown.
“The project got started and was substantially moving forward before markets crashed,” Karpf says. “We had that project basically covered. But, when the market crashed, the value of our money in our reserves decreased substantially.”
Now, he says the UK HealthCare system is set to borrow another $100 million—in part, to keep at least $200 million in cash on hand to maintain its AA2 bond rating.
“We realized we could handle another $100 million in debt,” Karpf says. “We will sell that debt in November.”
On the positive side, the sluggish economy has kept materials and labor costs down and, “with 99% of the project bid out,” Karpf says the project should come in at least $2 million to $3 million under budget.
“That was a great relief for us,” he says. “Many hospital projects get out of hand and blow past their budgets.”
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