Falling stocks, rising hospital construction costs
Waning investment income, coupled with rising material costs of lumber, steel and other construction supplies, is also leading some healthcare facility managers to rethink their strategies.
A March paper published in Health Affairs Forefront saw the investment income of 10 large nonprofit health systems, including Chicago-based CommonSpirit Health and St. Louis-based Ascension, decline 184% from 2021 to 2022. Investment income is often used to help fund capital expenditures. Meanwhile, steel prices neared an all-time high in June 2022, according to a report from S&P Global.
“There is no prediction on when these inflated material costs will end. Therefore, uncertainty remains more of a constant,” said Laura Stillman, principal and national director of the healthcare practice of Flad Architects.
Flad is helping design a bed tower for one of its health system clients, which Stillman didn’t identify. It was budgeted at $300 million about two years ago, and is now estimated to cost $450 million, Stillman said, citing higher material costs and construction staffing shortages.
While none of Flad’s clients have paused projects yet, providers are trying to find ways to reduce costs by “shelling out” parts, meaning building the exterior framework and leaving the interior construction for a later date. They are also designing “bare bone” projects or selling a building to a developer and leasing it back, Stillman said.
“It is unbelievable the inflated cost of supplies and bids we are getting,” she said. “Clearly the owners have major headaches trying to figure out how to absorb these costs.”
Many health systems are ordering key materials earlier to give them plenty of lead time and avoiding any unnecessary expedited shipping costs, said Peyton Robertson, quality manager at construction firm Brasfield & Gorrie.
UAB Medicine saw construction costs for renovation and expansion of its rehabilitation, inpatient and nursing facilities increase 17% in the 12 months ended Sept. 30.
The academic medical center in Birmingham, Alabama, is renovating its Spain Rehabilitation Center, slated to be completed in 2025. The $157 million project will feature 78 rehab beds and 28 acute-care beds, some of which will be reallocated from the existing facility and some will be new. The system’s renovation of a floor at its UAB Highlands inpatient facility that opened in April includes 24 acute nursing beds. It has additional plans to expand, though it would require a certificate of need to do so.
UAB is operating at maximum inpatient capacity. Although the health system does not intend to pause construction, it may have to extend timelines if demand drastically slows or if its capital budget drops significantly, said Arpan Limdi, chief facilities officer.
“We cannot just think we are going to build more and more forever, and we aren’t,” Limdi said.
One large health system in California paused all expansion and renovations other than the seismic retrofitting required to hit the state’s 2030 deadline, said Molly Wolf, a senior associate at the architecture firm NBBJ. Wolf didn’t name the system. California set a 2030 deadline for meeting a law designed to keep hospitals fully operational after earthquakes.
“It wouldn’t be a surprise if we continue to see a decline in capital budgets,” Wolf said. “We have gone from having a fixed scope of a project and the cost being a variable item, to now a fixed cost and the scope being a variable item.”