Hospital Construction: Delayed Not Dead

We are already seeing some signs of how the credit crisis and economic downturn is impacting the healthcare industry—hospitals are laying off staff and cutting money-losing service lines. But the healthcare building boom is not dead—just postponed.

The factors that led to the explosion of construction cranes looming over healthcare facilities still exist—demand, technology, demographics, obsolescence, customer experience, efficiency, and the need for additional space. Construction projects well under way will likely continue forward without missing a beat, while remodeling or expansion efforts in the early planning stages may be delayed or revamped.

For instance, Fairview Health Services announced that it was laying off about 150 to 200 employees, as a result of treating a higher burden of uninsured and underinsured patients combined with fewer inpatient admissions. Fairview may consider postponing upgrades to its main lab, but construction on its new children's hospital in Minneapolis would not be affected, according to the Minneapolis Star Tribune.

Robert Levine, senior vice president for healthcare at New York-based Turner Construction Co., says that the healthcare construction market is still strong. Healthcare usually represents about 10% to 15% of the company's business, says Levine, but this year its volume of healthcare projects is closer to 25% to 30% of their workload. "There are some jobs that we are working on that should have started by mid-2009, and now we are being told they might slip six months but they are not coming off of the board," Levine says.

Those hospitals postponing projects may even gain an advantage in pricing for subcontractors and materials. "Where prices were going up 7% a year, which is what we are still anticipating. The weakening economy will moderate the prices, so if there is a delay to the project because of the financing there won’t be a penalty for pricing going up," says Levine, adding that there may even an abatement of pricing.

Still, many hospitals will scale back plans to upgrade and expand their facilities. And they will evaluate even more closely (if that's possible) where their money should go. For instance, updates to a patient room that is outdated but functional may be put on hold. But updates to the cardiac wing may go through—especially if that is one of the hospital's core services.

The credit squeeze could potentially widen the gap between the haves and have nots in healthcare, as well. Hospitals that are positioned well financially will be able to move forward with their construction or expansion efforts, but hospitals with weaker finances may have to put projects on hold, which could make them even more vulnerable—especially if patients view their hospital as rundown facility and seek treatment at the shiny new hospital up the road. "There are many hospitals that are only marginally profitable and can only afford so much new debt as it is. This will make it that much worse," says Frank D. Kittredge, Jr., senior principal for facility planning at the Noblis' Center for Health Innovation.

I spoke with a hospital CEO recently who told me that just as most people are hunkering down, hospitals are doing the same. Hospital CEOs should be prepared to answer some tough questions from their governing board, as well, adds Kittredge. "I can see boards questioning whether we can afford to spend all of this money now. Do we want to use up our debt capacity or line of credit because then we won’t have reserves in case we do see a slide in census or bad debt and free care really spike," he says.

I don't have the answers. But the credit crisis will probably just reinforce areas that hospitals need to focus on like core service lines, efficiency, return on investments, staffing, and quality, because the downside to making a mistake is much greater.