Hospital Construction in the Age of Obamacare

The recession has hurt even the usually vibrant healthcare segment. Nearly three out of four hospital systems have put the brakes on capital projects.  We asked five capital expenditure insiders for their advice on how Building Teams can still succeed in this highly competitive sector.

Lou Ruvo Center for Brain Health
PHOTO: The $80 million, 61,000-sf Lou Ruvo Center for Brain Health opened last fall in Las Vegas. The Frank Gehry-designed facility, which specializes in Alzheimer's research and ambulatory patient care, is an example of Cleveland Clinic's outreach strategy.
February 09, 2011

Healthcare facility design and construction enjoyed a spectacular boom during the first decade of the 21st century, as hundreds of projects, ranging from major tertiary facilities to community hospitals to medical office buildings, many of them mega-medical centers running into the hundreds of millions of dollars, came out of the ground. That furious pace continued even into the economic downturn of 2008-9, with major capital projects surviving thanks to pre-recession funding commitments.

However, the last 12-18 months have seen a dramatic slowdown, with hospital projects being stretched out, downsized, delayed, and in some cases canceled outright. Compounding the situation is the uncertainty over how the Obama healthcare plan will impact hospital systems. In this context, we asked top executives in charge of capital expenditures at four major healthcare systems: Where does hospital planning and construction stand today?

Let’s put this in perspective: The U.S. healthcare sector, which consumes one-sixth of the nation’s gross domestic product, is bleeding badly. As a result of the economic recession, 70% of hospitals that replied to a March/April 2010 American Hospital Association survey reported reduced patient volumes, staff reductions (53%), cuts in services (25%), and fewer elective procedures (72%).

The AHA survey of 572 nonfederal, short-term acute care hospitals found that:

• Nearly three-quarters of hospitals (74%) reported reduced operating margins; 50% reported reductions in non-operating income.

• 87% had taken on more bad debt and charity care as a percentage of total revenue; 65% said the percentage of patients covered by Medicaid, the Children’s Health Insurance Program, and similar programs had gone up.

• 44% reported a restricted access to capital, and nearly a quarter of hospitals said that their ability to access capital was worsening.

• Of direct importance to the U.S. design and construction industry, 67% of these hospitals said they had not started or continued capital projects that were put on hold due to the economic recession, and nearly three-fourths (73%) had delayed capital investments.

Looking ahead, the pace of economic recovery and the impact of Obamacare on operating and capital budgets are two gigantic unknowns for hospital systems. Yet, in the face of the enormous pressures and constraints resulting from the economic downturn, coupled with the financial and administrative uncertainties posed by the new paradigm of Obamacare, healthcare systems planners and managers continue to soldier on in formulating and implementing their capital construction strategies.

To assess the infrastructure situation at the grassroots level, Building Design+Construction interviewed several major healthcare system capital planners in the private and public sectors to gain their perspective on future strategies and what their would-be AEC partners will need to know to collaborate successfully with them. Our panel of insiders:

• William Peacock, Chief of Operations, Cleveland Clinic

• Sid Sanders, Senior Vice President, Construction, Facilities Design and Real Estate, The Methodist Hospital System, Houston

• Greg Strahan, Chief Operations Officer, Owensboro (Ky.) Medical Health System

• Kip Edwards, Vice President of Design and Construction, Banner Health, Phoenix

• Robert Smoot, Chief of Cost Estimating and AE Evaluation Service, the Veterans Administration Office of Construction & Facilities Management, Washington, D.C.

Let’s take a look at where these systems are headed with their capital programs.

FIVE SYSTEMS, FIVE STRATEGIES

Cleveland Clinic: Stretching out to the community. In the past year, Cleveland Clinic completed the $80 million, 61,000-sf Lou Ruvo Center for Brain Health, in Las Vegas, specializing in Alzheimer’s research and outpatient care and designed, in his inimitable style, by Frank Gehry, FAIA; and the $634 million, 1.3 million-sf Sydell and Arnold Miller Family Pavilion in Cleveland, designed by NBBJ and housing the most up-to-date clinical offerings of the Clinic’s bread-and-butter specialty, cardiovascular care.

Operations chief Bill Peacock says current plans call for $284 million worth of  major renovation work in the community hospitals that form the Cleveland Clinic healthcare network throughout the Cleveland metropolitan area. The Clinic is renovating operating rooms, emergency departments, and intensive care units in several of these hospitals, all with an eye toward pushing increasingly sophisticated healthcare out into the community.

Banner Health: Growth leading to innovation. Cleveland Clinic is not alone in this kind of outward strategic thrust. Banner Health’s Kip Edwards says that his system’s current emphasis is to expand its community hospital presence and services throughout the system’s seven-state service area, stretching from Banner’s home base in Arizona out to California, Colorado, Nebraska, Nevada, Wyoming, and as far away as Alaska.

“We’re moving from a growth phase for our system to an innovation phase, the innovation being to redesign community care,” he says. In its “growth” phase, Banner recently constructed three new greenfield medical centers, added a children’s medical center to its main campus, and performed major renovations on four more campuses.

As a first step in its “innovative” phase, Banner is also developing a $108 million collaborative cancer care facility with the Houston-based University of Texas MD Anderson Cancer Center. When the facility opens late this year, it will be a 130,000-sf, three-story cancer outpatient center, with 76 patient beds on two floors in Banner Gateway, Gilbert, Ariz. “This is a big deal for us,” says Edwards. “It doesn’t take a genius to see that healthcare in general is moving toward ambulatory care.”

Another key component of the innovation process, says Edwards, involves developing Banner’s information technology infrastructure to enhance the quality of care. “We have a highly automated IT system already, but we foresee developing a much larger data infrastructure,” he says. Banner recently completed a $130 million data center and is developing increasingly sophisticated information pathways—an indication that additional data center capacity may be needed in the future.

Methodist Hospital System: Extending the brand. Houston-based Methodist Hospital System has completed four patient care facilities in the past five years: an ambulatory care tower and three large community hospitals. “We took one hospital up from 109 beds to 340 beds, another from 56 to 240, plus a new hospital of 193 beds, for about a $1.2 billion total cost,” reports SVP Sid Sanders.

Like Cleveland Clinic and Banner Health, Methodist is spreading its tentacles out into the community. “We’re taking our brand and our reputation and moving it out into the greater Houston metropolitan area, into areas that are seeing major population growth,” says Sanders. “These facilities will provide high-level acuity services, such as open-heart procedures in the new hospital, so we can make sure we are not pushed out of the marketplace by other hospitals taking advantage of the new opportunities.”

Owensboro Medical Health System: Centralizing services. From its base in western Kentucky, about 40 miles east of Evansville, Ind., Owensboro Medical Health System is moving somewhat in the opposite direction: constructing a new central mega-hospital that will offer full-service care to residents of 11 metropolitan counties in Kentucky and Indiana, as well as populations in Tennessee and Missouri. Scheduled for completion in 2013, the new hospital will be a 477-bed tertiary care facility offering all services except burn care and transplants.

COO Greg Strahan explains the build-new strategy: “When I arrived here in 2005, there was thought of expanding our current facilities, but our consultants pointed out that these facilities went back to 1938, had poor infrastructure, and had many physical areas in need of replacement.” Based on those factors, building fresh on a new 162-acre greenfield site was determined to be the way to go. The project got under way last fall and already has six stories out of the ground.

Veterans Administration: Detailed growth plan. One healthcare system that has grown and will continue rapidly paced growth for the foreseeable future is the Veterans Administration’s. The VA’s Robert Smoot notes that the organization has a five-year Strategic Capital Investment Planning (SCIP) process that is readily available to interested AEC firms (“VA Strategic Plan FY 2011-2015,” under Highlights at www.va.gov).

Smoot says the VA’s chief strategy is to be “veteran-centric”—developing any and all the services that are needed to serve veterans, in just the right mix and volume, as required in specific geographical areas of the country. From inpatient care to rehab for blindness and spinal trauma, from mental health care to long-term care, the goal is to build new facilities of various types and sizes and upgrade old ones, some of which date back 60 years and more.

“We’re confident that the budget will be there,” Smoot says. “Even if there are major federal budget cuts in the future, I think the VA will be among the last government agencies to be seriously impacted. It would be political suicide for elected officials to go against the healthcare interests of veterans in this day and age.”

‘THE SYSTEM HAS TO CHANGE’

Reading between the lines of the AHA survey, it’s clear that capital facilities planners at many hospital systems must be scratching their heads trying to figure out how to keep moving ahead with sorely needed projects, especially in light of the uncertainty over the Obama Administration’s healthcare reform, which, at the time of this writing, was under assault by the new Republican majority in the U.S. House of Representatives.

There is a consensus, however, that something has to give in the U.S. healthcare system, if only because of the continuing trends toward community-based ambulatory care and the growing need for healthcare access and improved quality—not to mention the tremendous cost, well over $2.3 trillion a year. “Whether or not healthcare reform stays in its current form, the system has to change,” says Banner’s Kip Edwards. “What we have now is a sick-care system, with reimbursement for organizations to heal people when they’re sick. This is necessary, of course, but not ideal. In my personal opinion, we need a true healthcare system, one that maintains personal health through prevention and education. And I’d like to plan for that 10-year future now, rather than having it dictated to us.

What’s New at Four Major Private Healthcare Systems? See PDF at the bottom of this page.

BIG THREE: BIM, IPD, AND SUSTAINABILITY

How are BIM, IPD, and sustainable design impacting the plans and activities of these hospital systems? What are the implications for AEC firms that seek work with these and other healthcare systems?

BIM: Underused, but inevitable. All four healthcare planners interviewed said their organizations are committed to BIM as an inevitable design technology. Banner Health and the VA already require it on major capital projects. “I can’t help thinking that we’re only using about 10-20% of BIM’s potential,” says the VA’s Smoot. “It is, in fact, a complete database, and we are learning about its capabilities from the contractors we work with all the time. It has a lot of power.”

The Methodist System’s Sid Sanders says that “the next time we do a large project—for example, the one-million-square-foot project we have on hold right now—we will have a full-time BIM coordinator focused on optimizing the use of BIM. We’ll be developing the specific models we’ll need for different areas of the project, identifying the parties responsible for implementing that model, and developing a set of project protocols, all prior to design development.”

Sanders says he expects to move beyond clash detection in 3D to using 4D BIM and devising programs for off-site fabrication and sequencing construction. “We will develop a BIM manual to guide implementation of all this, including completing the design, doing off-site fabrication, scheduling the work, and assigning specific responsibility,” he says. Construction managers and key subcontractors will be require to have in-house software capability to contribute to the BIM model. “This will be no time for us to have technological ‘weak sisters’ on the team,” says Sanders.

IPD: Get in the spirit. One thing is certain: AEC firms had better be willing to work within the spirit, if not the letter, of integrated project delivery. While formal, three-party risk-sharing IPD contracts are still somewhat rare, these planners without exception insist that project delivery will move toward greater integration of Building Teams. “As owners, we are very much engaged with the architects and construction managers early in the process, integrating the efforts of all the subs right from the conceptual stage,” says Cleveland Clinic’s Bill Peacock. “We want to ensure in prompt fashion that ideas are constructible and that the pricing is done in real time.”

Banner Health’s Kip Edwards goes so far as to say, “I thoroughly believe that IPD will dominate the industry within the next few years. We haven’t done formal agreements yet, but we do make sure that the teams we select are prepared to work in that manner. We do state this expectation in our agreements, and we’re using this approach on every major project now.”

Edwards recalls one recent project, a 200-bed patient tower and emergency department, in which Banner wanted the architects and engineers to do portions of the design documents in a design-assist process, probably the most intense form of integration short of a formal contract. “There was some squirming and attorneys getting nervous, but to their credit they sat down and figured it out,” he says. “And it turned out that we had only three mechanical RFIs for the whole $289 million project.”

Sid Sanders says Methodist Health System recently concluded a de facto controlled study of the design-assist process with BIM modeling versus a more traditional CM at risk approach using conventional design methodologies. The design-assist-cum-BIM model saved 14 months on one project and eight months on the other compared to the CM at risk approach.

“A big part of this was bringing in the manufacturers of mechanicals and electrical installations earlier in the process to help us develop pricing options, which isn’t usually done,” says Sanders. He adds that, despite the time savings, there were still plenty of miscues along the way; the learning curve for firms involved in design-assist can be very steep. “Off-site fabrication still led to more than enough ‘uh-ohs’ at the end of the day, and more things got by without being caught in time than I would have liked.” Sanders concludes that only AEC firms willing to set aside their egos and innovate in this way will produce the major schedule and budget reductions possible with design-assist IPD.

Owensboro Medical Health System’s Greg Strahan says owners aren’t having that much difficulty coaxing firms to give at least informal IPD a try. “In our system we expect everyone on the team to work together to give us a great building that works well and saves money,” he says. With today’s economy, AEC firms are hungry and very willing to work together toward a common goal, and Building Teams that work with Owensboro can earn a bonus for saving money and time.

But it’s not just about pecuniary matters, says Strahan. It’s also about quality work. “What I say to them is that, at the end of the day when you leave the project behind, I’ll be stuck with it, so it had better be good,” he says.

The VA’s Smoot says that his agency has three IPD-type projects under way. “As a government agency we can’t do at-risk contracting, but we’re borrowing from the model of the Army Corp of Engineers by bringing the general contractor in for pre-construction services as early as possible,” he says. Contractors in projects in San Antonio, New Orleans, and Denver are “working hand-in-glove” with the respective design teams to sequence the projects and use BIM to do off-site fabrication. “Although it’s still early days, we expect savings of 25-30% on the schedule,” says Smoot.

Sustainability: Holding down costs. As with IPD adoption, another area in which the spirit outweighs the letter of the law is sustainable design. There is a sense among the planners I spoke with that they didn’t need the LEED plaque on the wall, although both Cleveland Clinic and the Veterans Administration are aiming for LEED Silver certification on their projects these days. Others simply want to be LEED-like, designing for energy efficiency and resource conservation and, in Smoot’s words, “doing things we should be doing anyway.”

“We have to find ways to run these buildings efficiently,” says Peacock. “Especially with healthcare reform coming up, with possibly lower reimbursements and higher volumes, we have to keep costs under control.”

Whether or not hospital owners believe that LEED certification is worthwhile, LEED criteria are widely embraced. “We applaud LEED, because we think it has pushed the industry harder in this direction than it would have been otherwise,” says Banner’s Kip Edwards. “There is no question but that we want facilities that are well-designed, efficient, and environmentally friendly.”

While it is the case that the healthcare industry is going through a period of agonizing reappraisal, chances are excellent that major construction activity will pick up in the not-too-distant future. Current trends in accessibility and quality and intense concerns raised by a still largely outdated healthcare infrastructure demand no less. For AEC firms that are committed to the field and up-to-date with current project delivery mechanisms like BIM and IPD, the opportunities in healthcare design and construction are enormous.  BD+C

What Hospital Planners Demand of Their AEC Partners

Judging from the comments of the five healthcare systems executives interviewed for this article, their recipe for the ideal AEC partner can be boiled down to two words: collegiality and experience. “Collegiality” comes through loud and clear in their demand for the kind of team-based behavior that should be evident in a well-run integrated project delivery job. “This is a people business,” notes the Veterans Administration’s Robert Smoot. “Many firms have qualifications, but they need the ability to work person-to-person, without prima donnas getting in the way. That is critical.”

“Experience,” as defined by these hospital planners, encompasses more than sheer longevity in the field or total number of healthcare projects completed. As Owensboro Medical Health System COO Greg Strahan says, “We want people who show that they know we’re living in an era of lean management, environmental friendliness, and willingness to work together and, when necessary, compromise.”

By the way, make sure you put the right people on the job. “When you say you will involve your A team on the project, please give us your A team,” says the VA’s Smoot. “If you’re building a $200 million specialized healthcare facility for us, we don’t want to find out that the guy running the job has only built a bunch of strip malls. Use common sense.”

Banner Health VP Kip Edwards puts it this way: “We want a team that has already done a similar project or tells us a story in a way that shows they know what it will take to manage our particular project. No one will hire you so you can get experience on our nickel. Fortunately for us, there are plenty of experienced, well-qualified firms out there” to choose from.

This does not, however, completely rule out the possibility of AEC firms on the outside being hired by major healthcare systems. The Veterans Administration, for example, is open to new talent. “Yes, it would be ideal if, for a spinal cord rehab facility we could find a firm that has done 10 such projects in the specific geographic area we need, but that’s not likely to happen,” says Smoot. “We will also look for technical experience in other fields that might apply to healthcare.”

He gives the example of the team that designed the sophisticated HVAC system at the Bellagio in Las Vegas, where even penetrating cigar smoke can be contained to within a distance of three feet from the smoker. “That tells you that the firms involved in that project know something about sophisticated air-handling systems,” he says. “That sort of experience is helpful in qualifying someone for working with the sophisticated systems of healthcare.”

Smoot notes that when he headed AEC firm evaluation and selection for the VA, one in four contracts went to firms that had never worked for the VA. “We were then, and are now, willing to take a roll of the dice for people who can bringnew ideas, energy, and focus to the project,” he says.

For those firms that are still on the outside looking in, one more suggestion: Look for the “insiders” and start partnering up with them. BD+C

         
 

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