Cranes on Campus: How Health Facility Building and Development Projects Affect Health Care Costs
Summary
Seems like everywhere you go hospitals are engaged in building projects. And all the while health costs continue to increase faster than the rate of inflation. Doesn’t all of the building push health costs higher? Don’t hospitals and other health care providers understand how difficult it’s becoming to afford health care?
Building new buildings, adding services and equipment can boost health costs. But hospitals must spend money to keep facilities up-to-date and equipped with the proper diagnostic and treatment equipment.
To learn more about why hospitals are building and investing in their facilities we invite you to read this report. For more information, or to share your comments, contact MHA Vice President Bob Olsen at Bob@mtha.org.
Aging Facilities
To fracture an old saying a bit, sometimes after 40 or 50 years things just wear out. That is the situation in which some health care facilities find themselves. After years of making short term maintenance stretch the life of a health facility, one has to rebuild or substantially remodel its physical plant. No one wants to see dilapidated buildings and outdated equipment when they need health care services.
When facilities fall too far below modern standards regulations such as fire codes make additional remodeling cost-prohibitive. In some cases, old buildings just can’t support current diagnostic and communications technology. Other times, problems like asbestos or limitations of the current campus make building new the only reasonable course of action.
For examples of hospitals that have replaced, or are considering replacing, their aged facilities we suggest you consider projects in Malta, Red Lodge, Whitefish, White Sulphur Springs, Anaconda and Livingston.
Growing Communities Need More Capacity to Provide Care
Some hospitals spent years converting excess inpatient treatment units to outpatient treatment space. Those hospitals now find themselves needing more inpatient capacity. This is occurring in several communities where the population is growing, and the average age of the population is graying. And this phenomenon is not reserved to Bozeman, Missoula and Kalispell. Although these communities are reporting substantial population increases, the same is true for some small towns like Whitefish, Plains, Ronan, Hamilton and elsewhere.
Health care facilities and other treatment settings expand due to population and economic growth. And as Montanans grow older, on average, the population needs more hospital care. The public can’t expect a community to grow and not have its infrastructure grow too. We all agree that more classroom space for schools might be needed, or highway ramps or more roads. More water treatment capacity and more electricity come with the growth as well.
Health care follows the same pattern. More doctors and other health care professionals are required to maintain reasonable access to services. Hospitals provide most of the space and equipment needed to meet the public’s growing demands.
New Services, New Quarters
One can argue that technology is a double-edged sword. While many are concerned about the cost of technology, the proliferation of high tech equipment also reduces its cost. Equipment needed to provide high tech care is, more often than not, considered to be the community standard upon which hospitals and physicians are measured. Equipment like MRI machines that rely on powerful magnets and linear accelerators used to treat cancer require special building features. Specially built rooms with very thick concrete walls and special shielding against radioactivity go hand in hand with this new type of equipment.
Competition also plays a role in prompting the investment in new equipment and services. A community health facility can’t afford to fall too far behind its competitors or the entire organization suffers. Consumers simply prefer to obtain their care at up-to-date facilities.
Hospitals often times assist to recruit and retain physicians and staff who are in short supply and are needed to deliver specialized care in Montana.
Finally, sometimes the hospital is a partner with its medical staff to create outpatient facilities that meet a special need in the community. Ambulatory surgical centers, imaging centers and medical office space are just a few examples of how hospitals and physicians build new services that provide patients with a new choice about service location, convenience and more streamlined services.
Examples of these kinds of projects are evident in Great Falls, Helena, Butte and a host of other Montana communities.
Treatment Standards Cost Money
Each year the regulations that hospitals must meet increase in number and complexity. A hospital should not be known for its asbestos! Hospital buildings must continue to be updated to meet higher fire, life and safety codes. And sometimes bureaucracy costs. In one example, Saint James Healthcare in Butte wanted to install a new kind of elevator that requires less below surface shaft depth. But state rules had not been updated to allow for that new equipment, so the hospital had to spend thousands blasting into solid rock to create the needed space for an older model elevator. The costs are simply part of doing business.
Ever own an old house? Have you ever tried to open an old wall or do some other small remodeling project? Often you discover more problems that need to be addressed and the project grows almost by itself. The hospital at White Sulphur Springs found that its plumbing had eroded away while in the middle of a major remodeling project. The project had to expand to address this new (and surprising) concern.
To improve the quality of care, provide more privacy for patients and protect patients from infection most hospitals are redesigning treatment areas, converting patient rooms to single occupancy and adding special equipment to provide safer care. In the near future, hospitals and other medical providers will be expected to make considerable investments in development of electronic health information. Hospitals in Missoula, Kalispell, Anaconda and Billings are among those leading these health care innovations. St. Peter’s Hospital in Helena was recently named among the top 25 small and rural most wired hospitals in America.
Some Facilities Want to Invest, But Can’t
Even though the sight of construction trailers and cranes dots the landscape, there are many small community facilities that need to rebuild, remodel or buy equipment but may not be able. At least they may not be able to for the time being. In most rural facilities, the problem isn’t over-investing in buildings and equipment, it is under-investment. The divide between the haves and have-nots is growing.
Small facilities often can’t invest the money because they either don’t have the funds in reserve, or can’t access the capital markets to borrow the funds needed to develop their services. The challenge facing small facilities is how to keep up even though your community is small and the patient volumes lower than average.
Problems like this face Poplar and Wolf Point, Columbus, Ennis, Red Lodge and a host of other small Montana towns.
How Does Capital Spending Affect Health Costs?
You might think that a hospital project that costs millions means steep price increases follow. That isn’t usually the case. Each project undertaken by a hospital affects prices in different ways. Most health care providers are finding that when quality improves, the cost to provide care goes down.
A hospital that builds a new building might find its operating costs actually drop. This can happen because a new floor plan and more efficient use of staff, utilities and other resources can mean prices drop. Construction costs are recovered over time, usually long lengths of time. A hospital that has substantial cash reserves might lose some investment income, but will face lower interest costs. Borrowing money today is cheaper than 10 years ago, so the price of debt is actually lower now, especially when compared to the costs of supplies and equipment.
Another consideration is that building a facility or doing a remodeling project today might be far cheaper than waiting. Construction costs are also growing quickly. While a hospital might have wanted to wait to do a project, this strategy can actually work against the facility as costs go up.
Some facilities are adding new equipment or creating new services. The costs for these additional services are borne by those who use the new facilities, rather than by those who do not. Hospital prices overall have been increasing by about 5% per year in recent years. This is not to suggest that all investment comes at no added cost. But spending money on new facilities and equipment is not pushing up costs by extraordinary amounts.
Meanwhile, gains in patient safety, more accurate diagnoses, and safer care standards demonstrate lower medical costs.
Building costs, expressed as the sum of depreciation and interest expense have risen by 7% in 2005 over the previous year. Total costs grew each year from $99 million in 2001, to a high of $120 million in 2003. Since that time, total expense dropped to $112 million in 2004 and then crept back up to $118 million last year. These costs are now about 7% of total expenses, comparing favorably to the 9% of total expense in 2001.
Summary
The recent boom in construction projects in healthcare is not unique to Montana. Public concern about health care spending is warranted. If you have questions or concerns about local projects you should contact the hospital. You are also welcome to contact MHA Vice President Bob Olsen at Bob@mtha.org with your comments and concerns about this important issue.
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