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No Consensus on Capital Spending

Karen Minich-Pourshadi, for HealthLeaders Magazine, January 8, 2010
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The impact of the delayed 2009 projects has yet to be determined.

It wasn't long ago that the 583-licensed bed DCH Regional Medical Center in Tuscaloosa, AL, was poised to build a gleaming 80- to 90-licensed bed tower to help offset crowding and eliminate some of the semiprivate rooms at the hospital. Then the recession paused that vision.

"We had a rough time the summer of 2008; we took our first-ever loss at this organization," says John Winfrey, CFO at DCH Regional Medical, which opened in 1916. "So we felt like before we took on any significant projects we needed to restore the bottom line and see what happens with the market and healthcare reform."

Like DCH Regional Medical Center, when the economy took a turn in 2007, large and small not-for-profit facilities alike took a one-two punch to the pocketbook—first with investment losses and then with diminished access to financing options. When the money dried up, most CFOs called a halt to or delayed large capital expenditures. For the first time in nearly two decades, facilities stopped building, and they waited for the economy to stabilize and healthcare reform to come to a head.

The 2008 construction numbers barely registered the pause, as many projects came to completion. However, the first nine months of 2009 reflected the change in attitude with a sharp 43% decline in square footage for new hospital project construction starts, according to a McGraw-Hill Construction survey.

"When the economy collapsed and the credit market evaporated, the construction projects we had under way or that were already funded continued, but we did suspend the start of any new projects," says Chris Van Gorder, FACHE, president and CEO of Scripps Health, and chair-elect of the American College of Healthcare Executives (ACHE).

The McGraw-Hill survey findings mirrored those of another industry benchmark, the Health Facility Management/American Society for Healthcare Engineering (ASHE) 2009 report, which showed 42% of surveyed hospitals reporting "all or some of their construction projects were canceled or delayed due to the rising cost of financing" them.

A capital divergence
Unfortunately, there's no beacon to guide CFOs in these circumstances, so there's no consensus on what strategic steps should be taken for this area of the budget. At healthcare facilities nationwide, the discussion of capital expenditures remains in the forefront; the question: Can we afford to proceed with construction or should we wait? The answer is very individual. For the Sisters of Charity of Leavenworth Health System, which is composed of nine hospitals and four stand-alone clinics located in California, Colorado, Kansas, and Montana, the answer is: Proceed with caution.

"There's a constant question about the strategic value of construction," says Michael Rowe, senior vice president of finance at the Kansas-based health system. "While some planners are pushing for people to grab the lower-cost construction that's available today, there are quite a few who believe that we should lay low and not jump in just now."

Rowe's sentiments are echoed by many CFOs, though the primary question in 2008 was "if they should build" and by 2009 the question became "how long should, and can, facilities wait?" For some hospitals, delaying construction too long has the potential to affect their ability to remain open.

In California, healthcare facilities such as Scripps Health—which operates five acute care hospital campuses, 19 outpatient centers, and regional home healthcare services—must get their capital expenditure projects back online and retrofit hospitals to meet the California Hospital Seismic Safety Law. The law requires that by 2013 hospitals, at a minimum, must be retrofitted to standards that keep them operational following a major earthquake. Failing to comply with these regulations could force hospitals to close—and that's just one problem hospitals face by delaying construction.

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