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TRENDSConstruction Activity In U.S. Hospitals
Hospital construction activity is increasing, but little information exists on what types of hospital capacity are affected and what is motivating specific efforts. Our analysis of Round Five Community Tracking Study data revealed four general types of activity: new hospital construction or expansion of existing general hospital capacity; new or expanded capacity in specialty services; replacement of aged facilities; and expansion of capacity-constrained services. Some of these actions are responsive to community need, but others resemble a medical-arms-race response. Overall, current construction activity will provide more convenient access for some consumers but at high cost if excess capacity results.
HOSPITALS NATIONWIDE have initiated an array of major construction projects in the past few years. Although rigorous tracking does not take place, data from Modern Healthcare’s annual surveys of health care architects and builders indicate the growing scale of construction activity. The trade magazine reported that costs for completed acute care hospital construction rose from $9.2 billion in 2000 to $13.0 billion in 2004, and costs for construction that broke ground or was in the design phase increased from $30.8 billion in 2000 to $54.0 billion in 2004.1 The increased pace of construction activity is driven by several factors, including recent improvements in hospital payment and profitability, the availability of low-cost capital, the changing competitive environment, and the aging of hospital facilities nationwide. Limited information exists, however, on what types of hospital capacity are affected, to what extent capacity is being added rather than being replaced or restructured, which market and institutional factors are affecting these activities, and what the likely impacts of the increased spurt of construction will be on health care markets. We address these issues using data from Round Five of the Community Tracking Study (CTS), which was conducted in 2005.
Data. The CTS has tracked changes in the health care systems of sixty randomly selected and nationally representative U.S. markets for the past ten years. Site visits occur every two years in twelve of these markets; in Round Five, 1,008 interviews were conducted with major local stakeholders. Interview protocols included questions that explored the kinds of construction projects hospitals planned, had under way, or had recently completed. Hospital respondents were asked questions about the types of capacity affected by their construction projects, the reasons these projects were important, the major factors motivating them, and their potential effects on the market and community. Questions about potential effects were also asked of health plan executives, employers, and local benefit consultants, to gain payers’ perspectives. The CTS also involved interviews with national representatives from a hospital trade association and bond-rating agencies to get their views on hospital motivation and factors influencing construction activity. Information on specific construction activities was obtained from thirty hospitals belonging to multihospital systems and fifteen freestanding institutions in the twelve CTS markets. It is important to recognize that our research was not intended to create a comprehensive catalog of all hospital construction in the CTS markets. Questions focused attention on the most important projects as viewed by local stakeholders. Given the methods used by the CTS to select hospitals for participation, interviews were conducted at only the largest two or three hospital organizations in each market. However, this information was supplemented with interviews of people who could provide marketwide perspectives. Overall, though, we lack information on a number of hospitals operating in the CTS communities, especially those unaffiliated with major hospital systems in the central city. Analysis. Analysis of the study data identified four common types of hospital construction activity across the twelve study sites. The first involved the building of new full-service hospitals or substantial expansion of existing general hospital capacity. The second focused on the building of new facilities or expansion of existing capacity for specific specialty services, such as cardiac care, neurology, orthopedics, women’s and children’s health services, and oncology. The third involved the replacement of old facilities, either in total or in part, including in some instances the replacement of semiprivate patient rooms with private rooms. The final type of activity involved expansion of capacity in particular service areas for which patient demand typically exceeded the available supply of services. These latter efforts differed from the first type of construction activity in that incremental increases in specific beds or services were occurring rather than an overall expansion in the scale of operations of a given hospital. Two points are important in relation to this four-category schema. First, the ordering of these four categories is largely arbitrary, although respondents generally spoke of the first type of activity as involving substantial cost and the fourth category as involving much less cost. In addition, although the scale of the second type of activity varied markedly across hospital organizations, new specialty facilities in some instances involved as much capacity, and thus probably as much cost, as the construction of a new full-service hospital. Second, these general categories are not mutually exclusive. For example, some hospital organizations were building new full-service hospitals (type 1 activity) that also contained new units or dedicated centers for specialty services (type 2 activity). Other hospitals were building new facilities to house certain specialty services (type 2 activity) so that they could free up space in existing facilities to expand constrained service areas (type 4 activity). In such cases, the construction activities of individual hospital organizations were recorded in multiple categories to reflect their diversity.
Overall, we found that the first type of construction activity was present in half of the CTS markets and was reported by fifteen hospital organizations, all of which were hospital systems (Exhibit 1  ). The other three types of activity were more common across the CTS markets. About three-quarters of the hospital organizations studied had expansions under way for contained service areas, and more than half reported construction focused on specialty services. Several organizations were engaged in multiple projects. In fact, the forty-five hospital organizations reported a total of ninety projects, which in part reflects the overlapping nature of construction activity noted above.
Building new hospitals or expanding general hospital capacity. Respondents in six CTS markets reported being engaged in building new full-service hospitals or in expanding existing general hospital capacity (Exhibit 1  ). The six markets were Greenville, Indianapolis, Miami, Orange County, Phoenix, and Seattle. Of these, Indianapolis and Phoenix had the most activity under way. Indianapolis. In Indianapolis, three multi-hospital systems were building three new full-service hospitals and expanding two other existing general hospitals. Clarian Health Partners opened an eighty-bed hospital in the western part of the city in 2004 and was expected to open another 175-bed facility in the northern part. Respondents indicated that these actions in part reflected the movement of some of Clarian’s existing capacity from downtown Indianapolis to population-growth areas in specific areas. Meanwhile, Community Health Network opened a new facility in the northeast section of the city, reportedly to improve its payer mix and to relieve its south campus of high patient volume. Finally, the Sisters of St. Francis Health System was expanding its south campus, given continued population growth in this suburban community. In total, respondents estimated that the three hospital systems were spending more than $1 billion on new or expanded facilities. Phoenix. Population growth in Phoenix, which gains more than 100,000 new residents each year, was a major reason for its new hospital construction and expansion of existing capacity. Banner Health Arizona is the city’s largest multihospital system, with a 34 percent market share in 2003. In January 2005, Banner Health opened a new 172-bed facility, and this hospital will likely grow to 300 beds by 2010. Banner also has a $189 million facility under construction in another part of the city that will open in 2007 with 165 beds and the ability to expand to 350 beds. The system also recently completed a $90 million expansion to its flagship Good Samaritan Regional Medical Center, adding more than 100 beds, and it has plans to open 256 additional medical-surgical and rehabilitation beds over the next five to ten years. Meanwhile, Scottsdale Healthcare is also building a new hospital that will have 160–180 beds and is expanding two existing hospitals from about 250 beds each to 350 beds each. Finally, Catholic Healthcare West is expanding capacity at one of its hospitals; it is adding 144 beds, 80 of which are medical-surgical beds. Overall, the general perception from both hospital and nonhospital respondents in Phoenix was that hospital construction activity cannot keep up with the demands of the market’s booming population. Greenville, Seattle, Orange County, and Miami. As in Indianapolis, hospital organizations in Greenville, Seattle, and Orange County were expanding in localized areas of the market that were experiencing population growth, particularly of people with good insurance coverage. Actions of study hospitals in Miami, on the other hand, resembled those in Phoenix in that there was substantial population growth throughout the entire metropolitan area, which was leading existing facilities citywide to greatly expand operations.
Building new or expanding capacity in specialty service areas.
Among the twenty-five study hospitals actively engaged in this second type of activity, cardiac care and oncology emerged as the two dominant areas of focus (Exhibit 2
Hospital organizations engaged in this activity were typically building or expanding dedicated bed towers, distinct units within a hospital, or stand-alone facilities for particular service lines. These facilities centrally house all relevant services needed to treat specific patients. For example, a dedicated cardiac facility would include all relevant cardiac diagnostic services, specially equipped operating and procedure rooms, intensive care units (ICUs) and regular floor beds strictly for heart patients, and related rehabilitation services. There was great variability in the scale of these efforts across the study hospitals. In some cases, hospitals were renovating an underused floor or cluster of units in an existing facility. However, others were building the equivalent of new full-service hospitals for the specialty services, with some hospital systems consolidating services from multiple system affiliates into one location. The rationale for engaging in these activities varied across hospital organizations. Some were seeking to showcase specialty services as a dedicated center of excellence, to attract market share. Others were centralizing specialty services as the first step in a longer-term plan to renovate existing facilities. Some hospital respondents also noted that they were taking these actions in response to increased physician entrepreneurship: They were offering joint ownership opportunities to physicians to keep them from creating their own specialty facilities. One example of this type of construction activity focused on specialty services was that of the Cleveland Clinic Health System, which was adding a new bed tower with 300–350 beds focused exclusively on cardiac care at its Cleveland Clinic Foundation Hospital. Respondents indicated that this action was intended not to increase existing cardiac care capacity, but rather to free up space throughout the main hospital facility to enable expansions and restructuring of other services. However, the strategy is consistent with the system’s continuing focus on expanding national and international admissions at its flagship hospital by showcasing services for which it already has a strong reputation. In the Indianapolis market, all four major health systems have developed specialized cardiac care facilities. Efforts to build this capacity were spurred in large part because local cardiologists expressed interest in building a heart hospital with MedCath, a national for-profit chain for cardiovascular facilities.2 This build-up in specialty service capacity, in conjunction with new construction of full-service hospitals, has led to much concern among Indianapolis payers about rising health care costs. There is also much interest in building specialized facilities for oncology. In northern New Jersey, there is strong emphasis on this capacity. The suburban Atlantic Health System has developed cancer centers at two of its hospitals. Similarly, St. Barnabas Healthcare System, which is also largely suburban, has a major cancer center expansion under way at one of its hospitals. Even the safety-net hospital, Trinitas Hospital in Elizabeth, New Jersey, is developing facilities dedicated to cancer care. Replacing old facilities. Many hospitals across the United States are in need of replacement, having been built in the late 1940s and early 1950s with financial support from the 1946 Hill-Burton Act. During the mid- to late 1990s, hospitals had relatively poor financial performance; thus, minimal replacement and renovation activity took place.3 As a result, there was much pent-up demand to replace aged facilities in the early 2000s, which is being relieved through accelerated hospital construction activity. An example of this type of activity was apparent in Little Rock, where St. Vincent Health Care System replaced all of its semi-private patient rooms with private rooms throughout its main flagship hospital. The hospital was able to undertake this conversion and not reduce the number of beds available because it was located in a large building with much unused space. Nearly one-quarter of the hospital organizations expressed interest in converting their existing bed capacity to private rooms, either in total or in part. Also in Little Rock, the University of Arkansas for Medical Sciences Hospital is in the planning stage of building a new 360-bed hospital that will be completed in 2008. The primary objective here is to replace the original facility, which was built in 1951. The new facility will also include incremental increases in some service areas that are now strained, including the medical-surgical ICU, general medical-surgical beds, and psychiatric beds. A number of hospital respondents also cited the need to restructure hospital space to accommodate new technology. Sparrow Health System in Lansing spoke of this need in relation to enlarging its operating rooms. Ingham Regional Medical Center, also in Lansing, discussed enlarging its procedure rooms for cardiac catheterization. Finally, Parma Community General Hospital in Cleveland noted the need to expand the size of its ICUs to accommodate new technology. Expanding capacity in strained hospital services. Findings from Round Four of the CTS indicated that in 2002–03 several hospitals were experiencing capacity constraints in their emergency departments (EDs), medical-surgical ICU beds, and general medical-surgical beds.4 Round Five interviews revealed that several hospitals were undertaking construction projects to expand capacity in these strained areas. Hospital organizations also noted efforts to increase capacity in operating rooms, diagnostic radiology, telemetry-observation beds, critical care capacity for newborns and children, and outpatient services. Some of these construction projects simply required the reconfiguring of existing space to expand one service at the expense of another service or a nonclinical activity. For example, Baptist Health System in Little Rock noted that it moved out some services from its main hospital facility to other buildings, which allowed the facility to free up space for additional medical-surgical beds. Beth Israel Deaconess Medical Center in Boston converted some space to administrative and ambulatory care space several years ago and was converting this space back to inpatient care. Also, Fountain Valley Regional Hospital and Medical Center in Orange County eliminated its general psychiatric services and converted the freed space to a forty-two-bed medical-surgical unit.
An array of market and institutional factors can create either barriers to or facilitators of specific types of hospital construction activity. A review of these factors provides insights into why certain kinds of construction activity were present in specific hospital organizations and CTS markets.
Population growth.
Perhaps the most notable market factor affecting hospital construction activity was population growth, either present throughout a market or localized in certain areas. This was a major factor behind the first type of construction activity (building new hospitals or expanding general hospital capacity). As evident in Exhibit 3
Growth of well-insured populations. One would also expect that population growth specific to middle- and higher-income populations would be particularly attractive for hospitals because these populations are typically well insured. Hospital respondents noted that their construction plans, not only for the first type of activity but also for the second type (expanding capacity in specialty areas), were intended to capture the business of these income groups. This was especially true for Indianapolis, Seattle, Orange County, and Greenville. For example, one hospital system in Indianapolis indicated that it was transferring some hospital capacity from stagnant inner-city areas to growing and more prosperous suburbs. Further, even the building plans of some safety-net hospitals were focused on improving payer mix, including one facility in Miami that was rebuilding its hospital in a different location, with hopes of attracting more insured patients, and a safety-net hospital in Cleveland that rebuilt its ED in part to be more welcoming to insured patients. Presence of CON regulation. We found a great deal of variation in certificate-of-need (CON) regulation across the study markets. (Through this regulation, some states require hospitals to gain CON agency approval for hospital expansion and building projects.) Interestingly, the data suggest that CON regulation was as prevalent in communities with the first type of construction activity as it was in markets where this activity was absent. The presence of CON also does not appear to have foreclosed the occurrence of the other three types of hospital construction activity we examined, given that these activities were present in virtually all of the CTS markets. More likely, CON has affected the intensity and speed with which hospitals pursue particular construction activities. For example, the absence of CON in Indianapolis is likely an important factor in its rapid build-up of new full-service hospitals and specialty facilities. In Seattle, where CON is present, multiple hospital organizations are seeking to build new facilities in population-growth areas, but they must await review and final approval. CON requirements in this community could explain why Seattle hospitals expressed greater interest in better management of their existing capacity in the face of growing demand, because they cannot move quickly to build more capacity. Availability of capital. Availability of capital was frequently noted as a facilitator by hospitals that were in good financial shape or as a barrier by those that were not. Strong financial performance provides not only internal sources of funds for construction but also opportunities to obtain bond financing or to borrow at relatively low rates. Those with strong financial performance also have greater ability to structure bonds and debt in innovative ways to finance capital projects. Of course, this institutional factor is typically tied to an important market factor: the socioeconomic condition of the community in which a hospital is located. The CTS sites have much intramarket variation in this regard—most notably, northern New Jersey, which contains hospitals in both well-insured, upper-income suburbs and the depressed central city of Newark. The suburban northern New Jersey hospitals not only have strong profits as a result of favorable payer mix but also serve patients who have made large financial donations to the hospitals. These donations have been instrumental to the creation of new specialty service facilities, not only in this community but also in other CTS markets where hospitals have shown a willingness to name institutes and facilities after their large donors. CTS study hospitals lacking strong financial performance were still engaged in some construction activity, but these efforts were much more limited than in communities with strong socioeconomic bases. In particular, financially weak CTS hospitals largely focused on expansion of constrained service areas. The costs of adding capacity in constrained areas can be small, especially if hospitals are creative in thinking of ways to use existing space to expand services. In addition, some financially strapped hospitals in the CTS markets were innovative in identifying capital to support certain projects, such as obtaining grants for such things as ED or ICU expansions.
On the positive side, several aspects of the recent spurt of hospital construction activity appear to be responsive to community need. In many instances, hospitals had limited internal funds and access to external capital to reinvest in their aging infrastructures in the mid- to late 1990s, and now, with better financial positions, they are able to step up construction activity to address long-standing needs. In addition, there has been growing demand for inpatient care and emergency services in many markets, and some hospital construction activities have focused on relieving the strain in affected departments. It is also clear that some communities are experiencing population shifts or overall population growth, and this requires hospital capacity to be built or expanded in locations where demand is increasing. Finally, technological innovation, both in terms of clinical care and new information systems, requires facility restructuring and updating in many instances. Generally, both hospital and nonhospital CTS respondents recognized these as important needs requiring hospitals’ response to ensure that access to convenient services is available and that capacity is restructured or grown in response to changing needs. However, we have several concerns about certain aspects of recent construction activity. Although the movement to private hospital rooms partly reflects concerns about infection transmission and patient privacy, by and large, it reflects hospitals’ desire to provide a potentially costly patient amenity to attract or maintain business. In addition, we are concerned about the construction of new and sometimes duplicative general hospital capacity and specialty service facilities in some markets. Hospital respondents often indicated that they needed to build these new facilities to maintain or grow business that could be captured by other hospitals or entrepreneurial physicians. Thus, actions to convert to private rooms and build redundant full-service hospitals and specialty facilities might be a "medical arms race" reaction in a number of instances.5 The reactions of health plans, employers, and health benefit consultants to this build-up of general and specialty service capacity were interesting. On the one hand, they felt that if hospitals developed excess capacity, there would be increased competition to fill that capacity. This would be to the advantage of payers, which could use their ability to direct large blocs of business to negotiate favorable rates. However, there is concern that hospitals and physicians could ramp up utilization within a given population as they seek to cover the costs of renovated and expanded capacity. In this case, favorable pricing garnered by payers might not yield reductions in overall spending.
Our analysis identified a number of important consumer benefits from hospital construction activity in relation to bringing new and updated capacity on line. Overall, these kinds of construction activities will likely improve consumers’ access to hospital services, but these improvements are not likely to be spread evenly geographically. Those living in population growth areas, especially where CON is absent, will benefit from the presence of new facilities nearby and many providers from which to choose. However, people living in lower-income areas will continue to rely on hospitals with aging infrastructure and with limited resources for widescale upkeep and renovation. Ultimately, a great deal of added cost to the health care system will result from recent construction activity, some of which might be attributable to costly duplicative and underused capacity.6 It is important, therefore, to study how the benefits of increased capacity balance with its costs. Our analysis provides a foundation for such in-depth research, especially through the identification of the major types of construction activity, but it was not designed to provide all of the information needed to fully assess the costs and benefits of existing construction activities. In particular, our study focused primarily on the two or three largest hospital organizations in each CTS market and on the construction projects that local stakeholders viewed as most important. A more comprehensive assessment of the array of construction projects under way or planned by all hospitals in a market would be valuable. If this were contrasted with local patterns of population change, it would be possible to identify the types of services and geographic areas that could be at risk of under- or overinvestment in hospital capacity. Even though our analysis could not provide such a comprehensive assessment, our results suggest that the financial impact of existing hospital construction on consumers, employers, and health plans is likely to be substantial. Payer representatives in the CTS sites were especially concerned about the double hit they could face—not only for patients they cover but also unfunded hospital costs that could be present for Medicare and Medicaid patients. Continuing budget problems at the state and federal levels could lead to growing constraints on public-sector hospital payments. Private payers fear that this might leave hospitals scrambling to find funds from the private sector to meet short- and long-term construction obligations. In addition, refinements in Medicare diagnosis-related group (DRG) payment rates, as recommended by the Medicare Payment Advisory Commission (MedPAC) to deal with concerns about specialty hospitals, could also affect hospital organizations we studied that are developing new specialty service facilities.7 Increases in hospital spending are expected, given the scale of hospital construction activity under way, but there is concern that the private sector might have to absorb a disproportionate share of this burden.
Gloria Bazzoli (gbazzoli{at}vcu.edu) is a professor in the Department of Health Administration, Virginia Commonwealth University, in Richmond, and a senior consulting researcher at the Center for Studying Health System Change (HSC) in Washington, D.C. Anneliese Gerland is a health research assistant and Jessica May is a health research analyst at HSC. This research was conducted as part of the Center for Studying Health System Change’s Community Tracking site visits, which are funded by the Robert Wood Johnson Foundation.
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