How the Affordable Care Act Affects Healthcare Construction

The pace of healthcare development is on the rise again after two years of declining construction starts. The long-term trend — hospitals and healthcare networks expanding to meet the needs of an aging U.S. population — was disrupted in recent years in part by uncertainty over the fate of the Patient Protection and Affordable Care Act.  

Now that there is more clarity on the direction of healthcare delivery, hospitals and networks are back in expansion mode. But their development plans are likely to be much different than those of five to 10 years ago, when hospital design often followed hospitality industry trends. Now, as construction ramps up again, the focus is on efficiency and cost-containment.

Construction starts in the healthcare sector totaled just 63 million square feet in 2012, down from a peak of 109 million square feet in 2008, according to McGraw Hill Construction's annual outlook in November. Big developments were largely put on hold, with only 15 projects over $100 million breaking ground in the first nine months of 2012. Overall, the level of construction starts was 16 percent lower last year than in 2011, which in turn was lower than in 2010.

The poor economy was a major factor in the slowdown, but demand for healthcare services did not decline as much as for many other sectors. Another factor, arguably as important as the overall economy, was the question of what healthcare delivery would look like in the future. Even after passing Congress, the Patient Protection and Affordable Care Act — also known as Obamacare — faced political hurdles, including dozens of attempts to overturn it in Congress, a Supreme Court challenge and, ultimately, the presidential election.

With its namesake winning a second term, there was at last a general consensus that Obamacare would be implemented. Healthcare organizations now knew which strategies to put into play, and some had plans ready to go. McGraw-Hill noted that construction activity in the sector jumped 12 percent in December 2012.

For hospitals, healthcare reform is a mixed blessing. Some 30 million additional Americans will have the insurance to pay for check-ups and preventive care rather than having to resort to the emergency room. Also, insurance companies won't be able to deny coverage due to pre-existing conditions. So the upside for hospital systems is a greatly expanded customer base and fewer uncollectible bills to patients.

On the downside, PPACA sets limits on the amount that can be charged in various situations and ties Medicare reimbursement levels to performance. In addition, healthcare organizations will be increasingly responsible for encouraging wellness across the entire population of the communities it serves — programs that may cost more than they yield in direct revenue. When the pros and cons are combined, hospitals stand to make more money, but with fewer opportunities for strong profit margins.

To get their slice of the expanding pie, healthcare organizations need to offer more beds, more operating rooms, more outpatient and ambulatory facilities and more medical office space. But to protect profit margins, they need to keep costs to a minimum. For many, the way to balance the opposing goals of growth and constraint is to renovate existing facilities to be more efficient whenever possible, and when expansion is necessary, to carry it out in ways that minimize expense and maximize the efficiency of physicians, nurses and medical staff.

If that sounds like a tall order, it is. But it's not an entirely new mandate for the healthcare sector. In fact, the most significant effects that Obamacare will have on the market amount to acceleration of trends that were already in play.

Focus on cost controls

Minimizing expense has been a rising focus for healthcare organizations for several years. A decade or more ago, the trend was toward palatial new hospitals designed by star architects as a way to make the healthcare experience more like a luxury hospital stay. But that trend was seeing a reversal even before the economic downturn. By limiting what hospitals can charge for procedures, the PPACA merely turns up the heat on hospitals to manage expenses.

The reality is that healthcare operating margins are very low — 2 to 3 percent is considered an industry average, but many hospitals lose money. When margins are so thin, a program to boost revenue may not do much to improve an institution's financial condition, while strategies that reduce cost drop directly to the bottom line as profit.

The need to minimize cost means that hospitals want to renovate and retrofit existing buildings whenever possible. Often a hospital can be reconfigured for greater efficiency, reducing the number of steps physicians and nurses must take in getting around. Infrastructure can also be upgraded, for greater energy efficiency and new technology.

Renovations don't serve every situation, however. Hospitals that were built before digital technology changed the medical landscape often lack the ceiling clear heights to accommodate cabling and new features in today’s facilities. For example, some new hospitals include ceiling-mounted lifts over patient beds to enable nurses to lift patients without straining their own backs and potentially endangering the patient's health. Sixty-two percent of nurses report suffering from musculoskeletal pain primarily from lifting patients, and patient falls are not uncommon. Retrofitting an older hospital with overhead lifts may not be feasible.

When new construction is needed, there are many ways to minimize cost, maximize functionality and efficiency, and still end up with an appealing place for patients, their families and medical staff. The healthcare sector has taken a strong interest in new construction practices such as building information modeling, integrated project delivery and design-build processes that have generally resulted in better designed facilities completed faster and with fewer obstacles along the way. By getting project managers and contractors more involved in design specifications at the front end, IPD and design-build procurement also enable the team to identify less expensive construction materials.

Although hospital systems can save millions of dollars on new construction costs with the right team and process in place, the greater savings opportunity over time may be in the day-to-day efficiencies of new facilities. An increasing trend is for design and construction teams to talk with physicians and nurses about ways that facilities can help them to perform better, often by spending less time walking from place to place and more time serving patients. The opportunity to improve energy efficiency can also result in large-scale savings over time, while boosting the hospital's efforts toward sustainability.

Increase in outpatient centers

Another healthcare construction trend that is being fueled by Obamacare is the shift of more physician visits and surgical procedures away from major hospitals to ambulatory and outpatient centers, and even to medical office buildings.
Outpatient procedures can be done at a much lower cost than in-hospital stays, and use physicians' time more effectively. Patients often prefer outpatient facilities for procedures that need to be performed multiple times, such as cancer radiation and kidney dialysis, because these centers are often more accessible in terms of parking and walking; and there are often centers closer to the patient's home or work than the hospital is.

Today, more than 60 percent of elective surgical procedures in the U.S. are performed at ambulatory facilities, and experts expect this percentage will increase to nearly 75 percent by the end of this decade. Laser therapies and other less-invasive procedures have fueled this trend; the percentage of all surgeries that did not require an overnight stay increased from just 16 percent in 1980 to 63 percent in 2005.

This trend supports the goals of PPACA by delivering lower-cost procedures to an expanding range of patients. It makes physicians more productive by enabling them to perform procedures at times when operating rooms may not be available. And by moving more healthcare delivery away from central hospitals to more accessible centers throughout a hospital's service area, the decentralization trend also supports PPACA's mandate for population wellness. Experts agree that construction of outpatient and ambulatory centers will grow faster than the base of large, expensive hospitals in the coming years.

Effects of change

Although the emphasis on cost containment and efficiency is the main trend that will drive healthcare construction under Obamacare, other issues are likely to affect the shape of new development. For example, the ability to attract top-notch physicians is an important factor in hospitals' decisions to include state-of-the-art features in new or renovated facilities.

While reform may add up to 30 million new patients by 2015, the number of new physicians in the U.S. is expected to increase by only 50,000 in that same time. Moreover, hospitals that can attract the country's top-rated physicians in a particular area of medicine can attract patients from across the country, and can charge premium rates that result in higher profit margins.

Often, new hospitals under development are able to announce that high-profile physicians will join the hospital upon completion of the new facility, due to better equipment and an overall superior work environment. As the implementation of PPACA increases the patient-physician imbalance and ups the ante on attracting star surgeons, expect to see more physician-driven design features in new developments.

Another healthcare construction trend that's fueled by PPACA is the importance of information technology in design and development. Effective data management and 'smart' systems technology make hospitals more efficient by preventing opportunities for errors and by reducing the number of trips that nurses and orderlies must make between patients and areas where medicines and linens are kept.

Obamacare increases the importance of data management by introducing additional layers of record-keeping and, more important, by increasing the number of patients to keep track of. One result is that IT infrastructure and equipment is an increasingly important element in the design and development of new and renovated hospitals. The downside of this trend for architects and contractors is that construction initiatives and processes face greater competition from IT features and functions for limited capital improvement dollars.

Overall, the PPACA brings change to healthcare delivery that necessitates new and expanded facilities, emphasizing cost-effective construction that enables efficient operations. Firms in the construction business  that serve the healthcare sector will see strong growth opportunities in the coming years, but we must also continually raise our game to ensure low-cost delivery that meets the present and future needs of a fast-changing industry.

Michael T. Leopardo is senior vice president at Hoffman Estates, Ill.-based Leopardo Companies, Inc., one of the nation's largest construction firms and the trusted builder for 40 hospitals.

More Articles on Healthcare Construction:

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Nor-Lea General Hospital Plans $16M Expansion
Memorial Hospital Begins Construction of $128M Satellite Campus Facility

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