Health systems race to build in Florida following certificate of need repeal

For years, the fate of Jackson Health System's future hospital just outside of Miami was murky.

The public health system had become entangled in an expensive legal battle with the state and HCA Healthcare, which wanted to build a hospital just five miles from Jackson's site in Doral, a Miami suburb.

The fight ended in July 2019, when Florida lawmakers significantly deregulated the state's hospital industry by eliminating a requirement that regulators sign off on whether there's enough demand for the services they're looking to add. The so-called certificate-of-need process often took years and cost millions of dollars to litigate. Florida is among several states that have partially or fully repealed their CON laws.

Suddenly, state regulators no longer had authority to block either of the Doral hospitals, regardless of demand projections. In 2017, state data show hospitals in Miami-Dade County—of which there are many—were only 53% full, which was below the state average.

Jackson is now moving full steam ahead on its Doral hospital, which opens in June. For-profit HCA said it doesn't immediately plan to open a hospital in Doral, where it currently has a free-standing emergency department.

"We were able to get that done through the elimination of CON," said Jackson Health CEO Carlos Migoya. "We're excited about that."

With the CON roadblock gone, several health systems have restarted planning or construction on acute-care hospitals and other projects that either had been held up in the regulatory process or the state's Agency for Health Care Administration may not have approved under the former rules. Nursing homes and hospice providers in Florida are still subject to CON review.

Floridians are no strangers to hospital construction. But the pace of today's development might surprise even longtime residents, as some local health systems report their biggest construction budgets yet. Some providers said they've placed their development on a faster timeline following the partial CON repeal.

"For us personally, it's busier than ever, quite frankly," said Phil Schuck, senior vice president with Catalyst Healthcare Real Estate in Ocala, Fla.

Inpatient rehabilitation facilities, used by patients recovering from hospitalizations for serious events like strokes, car accidents or amputations, have seen a noteworthy uptick. They are among the most expensive and most profitable medical settings.

When the deregulation takes effect for inpatient rehabilitation in July, construction will be underway on over a dozen such facilities. By the end of 2023, the state will have well over 800 new inpatient rehabilitation beds.

The law change has also triggered an uptick in health systems buying large plots of land they plan to gradually build out in the coming decade as the state's population grows. In a nod to consumerism, some hospitals are peppering their sites with restaurants and retail businesses—even parks and housing.

It's too early to say what the effects of all this will be, especially since the COVID-19 pandemic held up some providers' 2020 construction timelines. Some predict healthcare costs will rise as providers race to add more services. Others think it'll be business as usual, noting that hospitals still must jump through rigorous licensing and zoning hoops before adding facilities.

"Even with (CON) gone, healthcare is still the most regulated industry outside of perhaps flying," said Rene Larkin, an attorney with Hall Render, whose analysis showed Florida's AHCA rejected more than one-third of CON applications between February 2017 and February 2019.

Florida's hospital operators are surprisingly polarized when it comes to CON. Free-market thinkers hold that Florida's law restricted necessary services from reaching certain parts of the state and helped large providers protect their monopolies. They say patients will benefit from the increased competition in the form of higher-quality care.

Opponents of repeal worry that powerful companies with money to spend will build duplicative services in excess of demand, which drives up costs. If Miami is any indication, the rest of the state could be headed toward higher costs, said Steven Ullmann, director of the University of Miami's Center for Health Management and Policy.

Miami has long had a reputation as being among the highest-cost healthcare markets in the country, partly the product of being overcapitalized. Miami had among the country's highest Medicare spending of any hospital referral region in the U.S. per the latest Dartmouth Atlas data, and it has hung at or near the top for more than a decade.

South Florida is a hypercompetitive market, with providers putting up expensive facilities and equipment to outdo their competition. That in turn drives them to perform lots of procedures—some of questionable necessity—to cover those costs, Ullmann said.

"With technology and competition, prices don't go down, they go up and utilization goes up," he said, "and that's a cost driver."

Repeal skeptics also fear well-capitalized systems will restrict their growth to high-income areas, saddling other providers with a higher ratio of uninsured or underinsured patients.

"We think it's critically important that the safety-net providers are protected," said Jason Barrett, CEO of Flagler Health+, a single-hospital system in St. Augustine, Fla. "Because as you see this cannibalization of these systems going into areas that have better economics, it does affect safety-net providers in continuing to serve on their mission."

Several Florida health system leaders said they're getting more pitches than ever to joint-venture with inpatient rehabilitation providers. Inpatient rehab is a fast-growing sector in Florida, and growth has accelerated even more since the CON repeal.

"Inpatient rehab seems to be the area du jour that people are focusing on," said Matt Taylor, Orlando Health's vice president of asset strategy.

The biggest builders are—perhaps unsurprisingly—out-of-state powerhouses with money to spend. That's HCA Healthcare, a massively profitable company with more than $50 billion in annual revenue and more than 180 acute-care hospitals, and Encompass Health, a for-profit rehab provider with $4.6 billion in revenue.

Nashville-based HCA is spending up to $300 million on inpatient rehab in Florida, with at least three new rehab hospitals and an expansion already underway. Encompass, headquartered in Birmingham, Ala., is building eight new rehab hospitals across Florida and expanding an existing one. Both providers declined to discuss their plans.

Florida's growing population—especially among people over 65—makes inpatient rehab an attractive area for providers to invest. As hospitals adopt value-based reimbursement contracts that put them on the hook for patient outcomes, they increasingly want to have total control over a patient's treatment, including inpatient rehab after a hospitalization.

Even as that's happening, some industry insiders predict the continued rise of value-based contracting, often in the form of Medicare bundled payments for episodes of care, will incentivize providers to refer patients to less-expensive settings like home health and outpatient physical therapy.

Nathan Carroll, assistant professor of health services administration at the University of Alabama at Birmingham, was among the healthcare experts who predicted that scenario. His 2019 study, however, suggested the opposite is true. He found that hospitals' participation in Medicare's Bundled Payments for Care Improvement program doesn't make them any less likely to refer patients to their own inpatient rehab.

"What it suggests to me is that maybe the financial incentive under the bundled-payment program isn't stronger than the financial return for treating patients at the inpatient rehab that you own," Carroll said.

Carroll's study also found that Medicare paid more for hospitalizations—inpatient and post-acute combined—in cases where hospitals owned inpatient rehab compared to when they owned skilled-nursing facilities and home health services.

If those results hold true in Florida, the federal government can expect to spend more on care when the forthcoming inpatient rehab facilities come online, Carroll said.

"Post-acute is a big concern with respect to controlling the overall Medicare budget," he said.

Another trend that's been on hyperdrive since the CON repeal: land banking. That's where hospital operators buy up large acreages that they build up gradually over a decade or so.

Health systems of all sizes and ownership types have announced multiuse campuses in different parts of the state. Others are quietly buying land with only loose plans. Free-standing emergency departments tend to go in first, followed by physicians' offices and finally, once demand is high enough, a full-blown hospital.

"Everybody is sort of staking out their territory, if you will," said Gary Davis, a partner in McDermott Will & Emery's healthcare group.

The rationale is twofold: generate revenue for the company and control a big plot of land that no one else can build on, said Chad Costello, managing principal with Healthcare Realty Advisors, a South Florida commercial real estate firm.

"They can control a large municipality," he said, "and they don't want their competition coming in and buying that site, which is zoned for hospitals."

Some systems have expanded the concept into what they hope will be a destination for not only healthcare services, but stores, restaurants and even housing. Some of the developments will have parks and walking trails.

"They realize they are really a civic anchor and have the ability to be, rather than just a place to go when you're sick, a place to go when you're well," said Schuck of Catalyst Healthcare Real Estate.

Flagler Health+ is going all-in on its own version of this concept. In the past two years, the not-for-profit system has stood up two such campuses, which it calls health villages, one in northwest St. Johns County and another in a planned community called Nocatee in Ponte Vedra. In addition to primary, specialty and urgent care, the developments have parks, coffee shops and community-based programming, like yoga classes and amphitheaters. Those two campuses will not have acute-care hospitals.

Flagler has two more such developments planned, with groundbreakings slated for this summer. One is in Durbin Park in St. Johns County. This one will eventually have a hospital. The other will be located on a six-acre site in Palm Coast that Flagler bought in 2019. The system is also under contract for 71 acres in southern Palm Coast, where it plans to build an acute-care hospital. That one is likely years out.

That's a lot of growth for a small system with just one acute-care hospital currently. Flagler's Barrett said top-line revenue has grown 31% in the past three years because of the health villages. Planning for the complexes happens in partnership with local organizations like councils on aging and community advisory councils, he said.

"These are burgeoning communities," Barrett said. "They're looking for a sense of identity and we think we can play a role in helping establish that."

Similarly, Baptist Health South Florida submitted plans in St. Johns County to add a hospital to a broader development covering a few dozen acres it owns that will eventually have a surgery center and retail offerings like a bank, gym and childcare center. The health system did not return requests for comment.

Healthcare changes by the day, so it's important that future sites have flexibility, said Taylor of Orlando Health.

"Most of our campuses—if not all—to date have been set up that way, where we buy enough property that would allow us to build a future hospital at that site with medical pavilions," he said.

Orlando Health has just over $1 billion in active construction underway, the largest expansion in the system's 103-year-old history. The 10-hospital system will open a free-standing ED southeast of Orlando in June and another southwest of Orlando—not far from Walt Disney World—in early 2022. Both sites will eventually have acute-care hospitals and medical clinics, Taylor said.

Orlando Health also is sitting on large plots of land it plans to develop in the future, including a 51-acre site it owns northwest of Orlando in Apopka. The system in fall 2020 closed on an 80-acre site in Lakeland, which is between Orlando and Tampa. Construction on those is still several years out.

By and large, providers aren't itching to build the 500-bed hospitals of the past, instead sticking to scaled-back facilities with fewer inpatient beds.

When Florida's CON repeal passed, AdventHealth realized it needed to build hospitals for less money, said David Banks, chief strategy and organizational transformation officer of the Altamonte Springs, Fla.-based system.

To that end, AdventHealth has created standardized designs for 50-, 100- and 200-bed hospitals. That saves money because new facilities don't have to be designed from scratch every time, Banks said. Its forthcoming hospital in Riverview is the first facility to roll out under the new design template. It will have 80 beds when it opens in 2023 but can grow to 100.

"Basically our goal was, 'Can we build a hospital for $1 million a bed?' " Banks asked. Hospital construction has gotten close to $2 million a bed. Based on CON going away, we felt competition would be increasing and we needed to be more efficient with how much capital we were putting into hospitals."