Four-month flat line ends for healthcare

Healthcare construction spending increased 3.3% in June ending a four-month period of no growth when the economy was weaker and investors more cautious earlier this year. An 8-9% annual growth pace is expected through the end of next year. This is sharply lower than the 25-30% pace from late 2001 through the end of 2002. That surge was financed by a similar size 1997-2000 increase in the cash flow to healthcare providers from employer health plans and tax-financed government payments.

It is a different economic environment now. Employment is lower, the federal deficit has ballooned and efforts to reduce healthcare costs have been stepped up.

The situation was similar in the in the early 1990s after an earlier multiyear run of double-digit healthcare cost increases. Resistance to cost increases forced fundamental changes in healthcare. It spawned the advent of HMOs, pre-approval for specialist referrals, and higher co-payments for branded drugs. The result was a stall in the growth of cash flow to healthcare providers and subsequently no growth in healthcare construction spending, after inflation, in 1993-95.

A repeat period of cost cutting and reductions in capacity needs appears to be a few years off. The impact on construction spending will occur two years after a new round of cost cutting. This could happen by 2005, which would keep spending for healthcare construction growing at a near double-digit pace for the next three-and-a-half years.