Healthcare Construction Bounces Back

by K. Robert Wendel

After spending much of the 1990s in a contraction mode, healthcare facilities owners appear to be cracking open their wallets, focusing on new general and specialty hospitals, while clinical and nursing home construction also appears to be bouncing back after a two-year slide.

According to F.W. Dodge Dataline, more than $7 billion in healthcare projects with individual contract values of more than $1 million are in various stages of pre planning, planning and construction in Arizona, Nevada and New Mexico. Low interest rates and demand are teaming to create a sound Southwest healthcare market.

"We are seeing a lot more hospitals doing a lot more new projects and remodels right now, because when interest rates are down, hospitals are the first one to step up and start more work," said Jeff Cox, a principal with Phoenix-based Stein Cox Group. "They want to take advantage of that inexpensive cash and usually, the price of construction also goes down."

Nationally, according to lead McGraw-Hill Construction economist Robert Murray, the first nine months of 2002 showed hospital construction gaining 22 percent, while clinics and nursing homes rose 10 percent. Another 2 percent gain is expected in 2003.

"Right now, there is a bed shortage, but it's hard to say where we will be in two years when those beds (in new projects) open up," said Professor Bradford Kirkman-Liff at Arizona State University's W.P. Carey School of Business. "That's the nature of a having a free market for healthcare. When you have a shortage, so many people jump in and build facilities, then you end up with a surplus. I don't see a potential for over capacity, but obviously, it is always a risk."

Locally, the largest project by far is the planned Nevada Medical Specialty Center in Las Vegas, a private, $700 million, multi-phase project that features a non-profit children's hospital, a cardiovascular hospital, a rehabilitation hospital and a behavior health center. Developed by Houston-based Genesis Healthcare International, an initial phase will see the construction of an 800-bed hospital and medical facility. A construction date, contractor or architect has not been determined.

In Arizona, plans are calling for a $250 million, six-story addition to St. Joseph's in Phoenix, with Kitchell Contractors expected to break ground in the fourth quarter, 2003. In Albuquerque, the University of New Mexico is eyeing plans to construct a 450,000-sq.-ft., $170 million women and children's critical care hospital, but no firm date has been set. DCSW Architects is designing that project.

Carson-Tahoe Hospital, Carson City, Nev., expects a decision this month on its application for a city permit to build a $132 million regional medical center. The hospital plans to break ground in June on a 338,000-sq.-ft. facility.

There are several hospital projects in the $50 million range. On the West side of Phoenix, Banner Health and contractor DPR Construction are building a $50 million, three story, 452,000-sq.-ft. hospital, with Banner Health planning a Gilbert hospital, also valued at $50 million, and is remodeling Good Samaritan. Kitchell Contractors is building the $50 million, five-story St. Rose Dominican Hospital on a 40-acre parcel in Henderson, Nev., as well as a $50 million hospital and medical office in Las Vegas. Kitchell also won the contract for an estimated $75 million dollar renovation and expansion of a children's hospital in Clark County. In Albuquerque, McCarthy is underway on the $35 million renovation and expansion of the Presbyterian Hospital.

"In 1999, we predicted that the healthcare industry was on the verge of a major building boom, and I'm happy to say that we were right," said David Burda, editor of Modern Healthcare. "This year's survey results show that healthcare providers are spending billions of dollars to meet and satisfy increasing patient demand for services."

Experience Makes or Breaks Deal

"I think what we are really enjoying right now is the expansion of pent-up demand," said Bo Calbert, president of McCarthy Companies Southwest Division. "We have two things happening at one time: There's been very little new hospital construction through the 90s and the demographics are changing. We have an older population needing healthcare, and with the pent-up demand and restrictions on growth in the past decade, there's been a lot of correction in the (healthcare) market place."

Calbert noted that as other construction sectors dry up, there has been increasing competition among general contractors in the healthcare market. But, like getting your first job out of school, breaking into the hospital market is a catch-22. You need experience to win the job, but you can't get that experience unless, well, you land a hospital project.

"Experience is the number one thing we look for," said Jim Jeppson, administrative director of Albuquerque's Presbyterian Hospital, which is undergoing a $35 million renovation with McCarthy Building Companies. "We are looking for architects and contractors who have done these sorts of projects before and have learned over time in these situations."

Many hospital owners have developed a sophisticated set of criteria to aid the decision making process, assigning experience modifier ratings, creating objective scoring grids for architects and contractors and reviewing safety ratings. Hospitals also review the architect's and contractor's experiences with local municipalities. Often, a key factor in choosing a firm comes down to the individual people involved in the building team.

"First off, one of the biggest indicators is the firm's overall experience with healthcare, but one of the drivers for decision making is the team the company puts forth. It comes down to the individual members of the team," said Kim Burk, director of design and development for Banner Healthcare. "In a hospital project, one of the more fundamental differences is infrastructure. You see a high level of redundancy in the mechanical and electrical systems because life safety issues are critical in a hospital setting. If you lose water in a normal building, it's really not a big issue. But if you lose the ability to wash your hands in a healthcare facility, it is definitely a huge issue. We need a building team that understands that."

Design and Hospital Trends

With new medical technology developing at a rapid rate, hospital owners said design flexibility has become a key issue when planning a hospital. Today's modern, efficient magnetic resonance technology could be replaced with tomorrow's technology de jour, but if the hospital's design is inflexible, that technology may not easily get incorporated.

"Hospitals are subject to the most rapid changes in medical technology," said Nick Devenney, principal of Phoenix-based Devenney Group LTD Architects. "They are developing a lot of machines called "heavy iron," and these pieces of equipment are highly sensitive to one another.
They have to be separated or screened, so the design of a hospital becomes very technical, but it still must remain flexible."

Hospitals are moving away from semi-private rooms to all private rooms for a variety of reasons.
The private rooms create better infectious control and also eliminate the need to "match up" patients who are compatible.

Hospitals are also attempting to move from an "institutional" feel to a more home-like environment with a focus on healing, with more open areas, and an emphasis on landscaping. Banner's Burk said the healthcare company has been leaning to concrete and masonry building systems, versus stucco and EFIS, to create a more permanent and solid feeling. More and more, birthing units are also being separated from the actual hospital either physically or internally.

"When you have people coming into visit a new mother and they are tramping through the hard side of the hospital where you have people bandaged up and sick, it's not nice," Devenney said. "That's why we have seen the birthing aspect move to an independent image. Everything else the hospital does is dealing with injury and sickness."

The computer record management revolution is also taking hold in hospital, which in the past, have dedicated huge spaces for the storage of medical records. Industry watchers said that eventually hospitals will have 100 percent digital storage solutions for the documents. The adoption of digital record management will free up space for other uses such as office or meeting rooms.

Specialty Hospitals a Concern

New hospital construction is taking a different tack than in past cycles, with more specialty hospitals catering to specific sets of needs. New advances in technology mean cheaper and smaller diagnostic equipment, so private individuals and firms can strike out on their own to target specific ailments.

"We are seeing a lot of specialized ambulatory surgery centers, some of which are integrated into medical office buildings," said Bill Malloy of Phoenix-based Devman Company LC, a medical project developer. "It seems to be a general trend around the country because of Medicaid and Medicare reimbursement. Hospitals are growing more concerned about what is going on in that direction because specialty hospitals are stealing the better portions of the reimbursement program and leaving hospitals with the ones that are more costly to maintain."

The specialty hospital issue is raising concerns in Nevada, where members of the Nevada Hospital Association recently fended of legislation to allow the construction of specialty hospitals.
Association officials fear the specialty hospitals will siphon away lucrative practices in heart surgery, orthopedics and plastic surgery.

Nevada is one of 18 "crisis" states, according to the American Medical Association, where malpractice insurance is becoming prohibitively expensive for doctors, many of whom are beginning to finance their premiums through bank loans. In the crisis states, the cost of insurance for each staffed bed was $11,435, compared with $4,228 in states with reform, according to the survey.

"Specialty services help underwrite the emergency services, so if you take away the specialty services, to help cover overhead, emergency rooms may have to downsize or even close," said Bill Welch, CEO and president of the Nevada Hospital Association. "More than 70 percent of Clark County receives their medical care in the emergency room because of a shortage of physicians. We can't afford to have that E.R. service infrastructure compromised."

New Mexico recently joined Arizona in allowing specialty hospital construction, although New Mexico Legislature House Bill 802 mandates that specialty hospitals must provide emergency services to indigents, regardless of their ability to pay. Specialty hospitals would also have to go through an intensive community approval process and demonstrate the actual project need.

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