After reaching $30 billion in 2008, the health care construction market fell to $24.4 billion in 2010 and $23.0 billion last year, according to McGraw-Hill Construction’s (MHC) Dodge Project Center. Through May of this year, total starts (in square footage) dropped 24%, out of which hospital construction was down by 30%. “Hospitals appear to be taking the brunt of the cuts,” said Jennifer Coskren, a senior economist with MHC, who attributes the declines to an increase in hospital mergers and continued uncertainty about the economy, as well as the debate over health care reform legislation.
However, on June 28, the U.S. Supreme Court upheld the Patient Protection and Affordable Care Act, the health care law of 2010. Coskren told Architectural Record the ruling should help jump-start projects, even while the economy continues to limp along. “Now that the uncertainty is gone, thanks to the Supreme Court upholding the constitutionality of the law, we feel that the industry will be able to move more confidently ahead with capital expenditure plans,” she said. “Demand for health care services is expected to increase, thanks to the more than 30 million people who now will have access to health care insurance.”
In fact, in its “2nd Quarter 2012 Construction Outlook Report,” FMI Corp., engineering and construction management consultant, is forecasting growth in the health care sector. The firm is expecting health care construction to rise 3% in 2012 and, by 2015, to strengthen to double digits, achieving record highs around $52.6 billion (Figure).
Despite this, some industry executives are less certain about the future of the construction health care sector. Although they predict the health care industry will see an increase in construction projects if the law continues to be upheld, there remains serious political opposition to it in Washington, D.C. Congressional Republicans are pledging to repeal the law, and although President Obama has vowed to veto any such measure, November’s presidential election is fast approaching.
Indeed, many hospitals are in holding patterns as they “try to determine the future,” according to Dan Noble, executive VP and director of design at HKS Architects and current president of the AIA’s Academy of Architecture of Health. Noble told Architectural Record the Supreme Court’s decision helps, but it doesn’t fully solve the problem. “If the Supreme Court ruling falls in line with the November election there will be a greater chance of getting something done,” he said. “This, in turn, will allow our clients to move forward, benefiting all design professionals big and small.”
Less is more
Although the Affordable Care Act encourages reduced costs for health care facilities, this has been a concern for hospital administrators since the recession. Regardless of the election’s outcome, health systems may remain unsure of their projected revenues. In fact, many are predicting declines in revenue. “Nobody is able to make big commitments, because they can’t do financial modeling to see if these projects will pencil out or not,” said Sheila Cahnman, group VP and regional health care leader based in HOK’s Chicago office, who said her firm has done a considerable amount of strategic planning for health care clients in recent years, but that few are moving forward with major projects.
While their projects remain on hold, health care clients are re-evaluating their infrastructure plans. Cahnman says they are starting to look for ways to make improvements, including upgrading existing chassis so they can support lean operations or improved patient satisfaction. “They will continue to push for improvements to lean their operations and increase their bottom lines,” Cahnman concludes.
The aging Baby Boomers, new technology, demand for single rooms, and an increase in the consumption of health care will determine decisions about new facility design, size, and location. Money-saving strategies include new hospital projects minus the frills, including overloaded patient rooms and non-critical amenities, such as atriums, fountains, and courtyards. Furthermore, futurists are predicting a dramatic minimalist change for facilities, including hospitals rooms without beds and bathrooms, reserved for patients only in need of acute care.
Hospital facilities may also eschew traditional design elements for more efficient use of materials as well as for increased flexibility to accommodate multiple uses and changes in the future. “We’re building hospitals to allow for wiggle room in the future because there may be other reforms and technical advancements down the line,” said Martin Valins, a principal at Stantec’s Philadelphia office.
Already, many construction firms are seeing more and smaller primary care projects and outpatient facilities over hospital “mega-projects” (see SIDEBAR: Back to School). According to the FMI Corp.’s report, new construction will focus on ambulatory facilities and consolidation of small physician-owned facilities. Increasingly, physician practice groups are working from leased spaces or have their own buildings. Because of technological advancements, which have led to minimally invasive surgeries that don’t require overnight hospital stays, even surgeries can be performed in these outpatient facilities.
“We’re seeing a lot of the specialty boutique-type hospitals,” says John Wright, president, Alterman, Inc., which has specialized in the health care market since 1923, performing construction, renovation, and maintenance of electrical, voice/data/video, and security installations for major hospital and research facilities in the San Antonio area. “Those are being driven by developers with physicians groups that perform specialty surgeries and treatment.”
Health care research facilities are seen as a staple in healthy regional economies. San Antonio, which emphasizes its position as a health care innovator and destination, boasts several research facilities. “We see those types of projects too,” says Wright. “We do some work at Southwest Research Institute and the Texas Biomedical Research Institute. There has been a fairly steady stream of new projects at both those facilities.”
Changes in project delivery are also being made in order to save on construction costs. Many construction firms are exploring alternative project delivery methods, such as design-build and integrated project delivery (IPD) systems. For instance, in 2010, Alterman began preconstruction services and design-assist, using building information modeling (BIM), on the new University Hospital in San Antonio. Through this system, Alterman provided input during preconstruction planning and services, including schedule development, constructability reviews, cost reduction assistance, sustainability study assistance, and assistance in equipment selection.
The use of BIM gave the firm an advantage when competition for projects increased during the recession. “The amount of work did go down for a little while, and you had small- to mid-size contractors bidding work that typically they don’t bid,” says Wright. “They started getting into our market, so we were seeing competition we weren’t used to seeing.”
Wright explains that the recession more than any uncertainty regarding the health care act was responsible for this fight for projects. However, even with added competition, his firm’s health care division hasn’t slowed down. “I’ve seen more health care projects since the Affordable Care Act first started than we did before,” he says. “I haven’t seen it slow down.”
Currently, the firm is working on providing all electrical construction for the 1-million-square-foot, 9-story acute care tower at University Hospital including an emergency/trauma center with 53 treatment and 10 trauma stations, 336 new beds and 84 future beds, and 30 new operating rooms. Installation includes normal power consisting of two 35kV circuits, essential power consisting of three 2000kW, 4,160V diesel emergency generators, UPS, lighting, and fire alarm with voice evacuation notification. The project is expected to obtain LEED 2.2 Gold designation at its completion in January 2014.
Although the firm’s current project portfolio consists mainly of new construction, Wright expects renovation projects to pick up by the end of next year. “After the end of next year, I would say there’s going to be a little more renovation,” he says. “Right now, the majority of it is new, but there’s going to be a mix of both.”
For instance, the firm recently completed a 320,000-square-foot hospital for Christus, but the Christus Santa Rosa Children’s Hospital is going to be mostly renovation. Baptist Health System is preparing for both a new addition and some renovation.
In fact, many hospitals are choosing to renovate and expand rather than build replacement campuses. “Renovation continues strong,” says the FMI report. Changes to existing facilities will make them more efficient, more technologically advanced, and greener. According to the American Society for Healthcare Engineering (ASHE), 73% of construction is currently for facility renovation and modernization to be greener and more patient-friendly and to update IT infrastructure.
The elephant in the room
According to FMI Corp.’s report, the driver for growth in the health care market for the remainder of this year and into next isn’t necessarily the economic recovery, and the June 28 Supreme Court decision hasn’t put any fears to rest. “This is a factor of baby boomer demographics more than an economic boom,” says the report. “The national health care law, reaffirmed by the Supreme Court, will continue to be the elephant in the room that could add millions of new insured needing health care, depending on what the next Congress will do after the elections.”
Richard J. Ducci, president and CEO of Ducci Electrical Contractors, Inc., Torrington, Conn., agrees that the aftermath of the Supreme Court decision could be more detrimental to the health care market than any controversy leading up to it. “The decision on its own hasn’t changed anything,” Ducci says. “The projects we’ve been working on and bidding have been on the books and were budgeted long before the Supreme Court ruling. There’s more a question of the overall uncertainty since this thing has been kicking around for the last couple of years, really.”
There’s now an urgency, says Ducci, to get these projects out to bid and get them built. “Nobody really understands what this thing is going to mean,” he says. “There’s a lot of speculation, and health care facility administrators don’t want to be left in the dark in two or three years with that project they had in the works and not be able to get it out. So, long before the Supreme Court ruling, there was some impetus to get these things out and built because of that expected
uncertainty once this thing all plays out.”
Despite the trend toward smaller, sleeker facilities, in 2010, Ducci Electrical Contractors finished the electrical contract on the 500,000-square-foot, $34-million Yale New Haven Hospital Smilow Cancer Center. The project included radiology and diagnostics departments, operating room suites, and several floors of patient rooms. The project, which required the demolition of the existing hospital facility and construction of the brand new hospital, took more than three years to complete.
Ducci Electrical Contractors’ scope of work included installation of all MEP systems, nearly 3-million feet of copper wire, and 12,500 fixtures. Ducci performed 3D CAD drafting and located every piece of equipment, duct, pipe, medical gases, and other utilities on a 3D BIM system. During this, the firm installed massive amounts of switchgear, roof-mounted generators, and all other MEP equipment with well-coordinated move-in paths and final locations. Particular challenges included the downtown site with no on-site storage or office space.
During the recession and the controversy surrounding the Affordable Care Act that followed, Ducci remained active in the health care market with projects such as this one. “We’ve done an extraordinary amount of health care work over the past many, many years,” says Ducci. “Like many kinds of work, it ebbs and flows over time, but in the last three or four years, we’ve done an enormous amount.”
In addition to the New Haven Hospital, the firm completed contracts on two big projects and some other small ones. Ducci also expects several projects to come to bid within the next six months to a year. “There’s been a tremendous amount of health care work in Connecticut in the last two or three years, and there will be in the next couple of years out,” says Ducci, who is less optimistic about health care spending once the Affordable Care Act goes into effect. “I think after that, then you’re going to really see the repercussions of it. Then, I think you’re going to see a drop-off.”
Ducci is predicting a dramatic decline in three or four years. “We’re budgeting tens of millions of dollars for new projects soon,” he says. “Those are all happening inside of the next year. So far, in this market in large health care, there’s been no drop-off in this state. Now, what’s going to happen in three or four years, that’s anybody’s guess. But my guess is we’re going to see things slowing down.”
SIDEBAR: Back to School
Kathleen Sebelius, secretary of the U. S. Department of Health and Human Services (HHS), recently announced the availability of funding for the construction and renovation of school-based health centers. These new investments, totaling up to $75 million, are part of the School-Based Health Center Capital (SBHCC) program, which was created by the Patient Protection and Affordable Care Act.
The centers enable children with acute or chronic illnesses to attend school as well as help to improve the overall health and wellness of children and adolescents through health screenings, health promotion, and disease prevention activities. By making the connection to health care easy, school-based health centers ensure that children have access to the services they need to lead healthy lives.
“President Obama’s health care law is helping keep kids healthy, and as a mother, I know how important a child’s health is to how they do in school,” said Secretary Sebelius. “Whether establishing a new site or upgrading an existing facility, the availability of funding for school-based health centers will help kids more easily get the health services they need to thrive. The goal is to keep our children healthy so they can learn, grow, and prosper.”
The Affordable Care Act appropriated $200 million for the SBHCC program to address capital needs in school-based health centers. This funding opportunity is the third in a series of awards that will be made available to school-based health centers through the Affordable Care Act. The Health Resources and Services Administration (HRSA), a part of HHS, oversees the SBHCC program.
“It is critical for children and adolescents to be healthy so they can maximize their potential, and being healthy starts with access to primary and preventive care,” said HRSA Administrator Mary K. Wakefield, Ph.D., R.N. “These grants will greatly improve that access and help make our children, and America’s future, strong.”