The term “value for money” is usually applied toward new equipment purchases rather than healthcare facility construction. Or so it would seem. When healthcare executives consider the cost of a new building against wringing the last bits of efficiency out of an already-squeezed facility, value for money quickly becomes paramount.
One solution is the all-in-one package of design, build, financing, operations, and maintenance found in public-private partnerships, or P3s.
In a P3 scenario, services are funded and operated through a partnership of government and one or more private sector companies. Long familiar to Canadian and European developers, American firms are finally dipping their toes into the pool.
And why not? Successful P3s mean less balance sheet drag and, even better, never having to deal with maintenance issues again—or at least for several decades.
The promises
“A P3 asset is not owned by the hospital or the system; it’s owned by the third party,” explains Bill Flemming, president of Skanska USA Building, Inc. “This allows the management of the healthcare facility to focus on providing care. No worries about changing light bulbs, or painting walls, or fixing wall tiles. You focus on what you’re good at, and we focus on what we’re good at.”
Medical office buildings and parking garages are two ways U.S. healthcare executives are testing these claims. For example, a municipal general hospital can partner with a construction company to build, manage, and lease back a new parking structure to the facility. Parking fee revenues cover the monthly lease payments, but since the hospital does not own or maintain the building, there is no impact to its balance sheet.
This means hospital credit capacity can focus on other core elements such as bed towers and upgraded operating rooms. The same scenario also applies to new medical office buildings. Once the office is built, the hospital becomes the master lessee and collects rent revenues from the subleasing physicians to cover the monthly rent.
There is no impact to the balance sheet because the building is leased. The owner (the construction company) takes care of maintenance upkeep and repairs, leaving the hospital free to focus on the business of healthcare.
“It’s the predictability of a fully functioning facility over time, and not just when the doors open, that is attractive,” says Walt Massey, division president, Consultancy Division, Balfour Beatty. “When structured properly, a P3 bed tower can have more certainty around facility maintenance for 30 to 40 years because the private entity is incentivized to not let the building fall into disrepair,” he says.
This is a boon for hospital executives who know all too well that capital improvements aren’t always a primary focus, often to the detriment of patients and medical staff.
P3-constructed facilities also optimize and integrate design and maintenance into the cost life cycle from the outset—something many facility managers only dream about.
“Often we hear the maintenance company say, ‘If I was involved from the beginning, it wouldn’t be built this way,’” says Colin W. Myer, managing director of project financing for FMI Capital Advisors, Inc., FMI Corporation’s registered investment banking subsidiary. “This is the fundamental behind the P3 delivery method.” The efficiency advantage is heightened further if the development team offers local knowledge.
“Construction firms can usually bring to the owner the knowledge of the local markets, subcontractors, prevailing rate, or construction issues,” he adds.
Ultimately, the P3 taproot advantage is its risk/reward allocation for achieving cost and schedule certainty because the construction company assigns the jobs to the engineers, local subcontractors, or architect partners best able to deliver the final product. Since the client doesn’t pay for the facility until it’s complete, P3s provide an efficient solution to a stretched market.
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