Capital Pressures Hospital leaders face complex issues and decisions as the healthcare environment becomes more competitive. One specific area they must address is the allocation and best use of capital. Four specific trends in healthcare are causing many of these capital pressures. This is prompting hospitals to utilize new approaches to their real estate strategies.

The Aging of America

The first capital pressure is being caused by the maturation of the baby boomers. The baby boom generation started turning 60 years old this year. Currently, there are over 35 million Americans over the age of 65, which is 14% of our population. This baby boom generation segment will continue to be the fastest growing population segment over the next 20 years. By 2030, there will be over 70 million Americans over the age of 65, which equals 21% of the United States population. This has caused healthcare to grow substantially to a point now where the healthcare industry represents 14% of the nation’s gross domestic product. Analysts predict healthcare will represent over 20% of our nation’s gross domestic product by 2030, thus following closely along the same percentage of Americans over the age of 65 by this same time (21%). This is by no means mere coincidence. One study reports only 14% of Americans between the ages of 1 and 64 only will spend the night in a hospital during their life (not counting their nights in the hospital at their birth). Whereas over 80% of Americans will spend the night in a hospital once they reach the age of 65. These dramatic baby boom population pressures are causing hospitals throughout the country to add more inpatient beds, adding millions of dollars in capital expenditures by hospitals for these new bed towers. For the first time since 1975, there has been an actual increase in the number of acute-care beds in the United States, per a recent report by Turner Construction, “Building the Future”. A recent Futurescan Report by the American Hospital Association stated, “Hospitals are scrambling to develop new building plans and find the capital to create capacity. For nearly two decades, hospitals in most markets had far more beds than they could ever fill. Today, in many of these same markets, hospitals are being forced to light up the “No Vacancy” sign.”

The Aging of our Hospitals

While the first pressure comes from the “Aging of America”, the second capital pressure being placed on hospitals is due to the “Aging of Hospitals”. Most of the major inpatient hospitals in the United States were constructed between 1945 and 1965 and the inpatient room sizes, technological capabilities within the rooms, and other issues have caused these hospitals to become obsolete; therefore, many hospital systems are now faced with building new replacement hospitals. Turner Construction’s report also found that over 69% of hospitals will face a major expansion project over the next three years and many of the hospitals are simply in the wrong location, due to how certain cities and towns have migrated to the suburbs over the years. The American Hospital Association’s 2006 Futurescan Report states, “Hundreds of aging hospitals in rural, suburban, and urban communities are being replaced or rebuilt, not in the mold of past projects, but with the patient’s experience at the center and the best interaction of patients, families, and caregivers as the ultimate goal.”

Physician Joint Ventures

The third capital pressure being placed on hospitals is being created by physicians. Due to lowered reimbursements, physicians are seeking other ways to increase their income. One strategy is to create joint ventures between the hospital and the physician groups in which they share in the profits for certain ventures. Physicians have found it easier and more profitable to practice many of their procedures in their office and outpatient settings, moving this income away from the hospital. Such procedures as dermatology, ophthalmology, plastic surgery, and gastroenterology are becoming more outpatient-based and the higher specialty procedures such as orthopaedics, neurosurgery, and cardiology are moving towards outpatient settings as technology and research allows for more minimally invasive procedures. As physicians control more of the outpatient volume and revenue, hospitals compete to be partners with physicians.

Consumer Demands

The fourth capital pressure is due to the American consumer demanding convenience. We live in a world today where we want our glasses in an hour, our oil changed in 10 minutes, drive-through lunch, microwave dinner, and, “I need my shoulder scoped but I don’t want to drive downtown to an urban, tertiary hospital, pay for parking, and spend one or two days on this procedure” mentality. With the healthcare technological advances and procedures available to physicians and surgeons today, American consumers want a facility ten to fifteen minutes away from their home for this outpatient procedure, where they are in and out in half a day or less. Physicians are in favor of this model because it allows them to create a joint venture with the hospital in this outpatient facility setting, schedule their own surgery time’s for higher levels of productivity, while utilizing the newest, latest and greatest technologically advanced equipment. A 2005 Advisory Board Company report shows between 2001 and 2003 outpatient annual growth volume increased by 8% and revenue increased 10%. This trend will most likely continue. For example, this same Advisory Board Company report shows a spine surgery procedure will migrate towards an outpatient procedure in the future. Were only 9% of spine surgery procedures were conducted in an outpatient setting in 2005, over 33% of these same procedures will take place in an outpatient setting by 2015.

Real Estate Solutions

So while a recent GE Healthcare report shows an average hospital CFO’s capital budget is increasing 11.9% annually, and their operating budget is increasing 7.9% annually, hospitals must find new approaches to their real estate development strategies. Next month we will explore how hospitals are successfully outsourcing their real estate development projects to healthcare real estate specialists.