Industry Consolidations Shape Future Of Healthcare Design
Health systems, hospitals, and physician practices nationwide are consolidating as a means to maximize profits and restructure how care is provided, a move fueled by the Patient Protection and Affordable Care Act (ACA). And many believe the trend is here to stay.
As we move into this new era of healthcare, it’s worth examining why all this consolidation is happening and what it means for facility design and construction.
For-profits are acquiring not-for-profits, and not-for-profits are acquiring for-profits. In January 2012, Catholic Healthcare West changed its name to Dignity Health and broke away from the church so it could expand nationally. In August, Dignity acquired U.S. HealthWorks Medical Group. Ascension Health, which already has a 50 percent stake in Via Christi Health, signed a memorandum of understanding in May to acquire Marian Health System. Trinity Health and Catholic Health East announced a merger in October, as did Beaumont Health System and the Henry Ford Health System.
And those are only a few of the deals that have been made so far.
To establish the strong continuum of care being pushed by the government, hospitals are also acquiring physician practices and collaborating with health insurers to set up accountable care organizations. Others, like Vanguard Health System’s Detroit Medical Center, which signed a letter of intent in June to acquire ProCare Health Plan, are buying health insurers.
“There’s still going to be a lot of consolidation in the healthcare industry,” says Fred Compobasso, managing director, healthcare real estate, at the financial and management consulting firm Navigant (Chicago). “It will take on different forms, though. A system may end up with hospitals that it actually owns and others that it has a management or support services agreement for.”
“In the past, consolidation was more of a competitive thing,” says William Peacock III, chief of operations at the Cleveland Clinic (Cleveland). “Today, hospital systems are doing it to manage volume and impact revenues.”
Access to capital and other resources also gives smaller organizations incentive to merge with larger ones. According to Campobasso, the buyer is often able to source capital at a lower cost. “That’s a game changer,” he says.
Peacock agrees: “The marriage of a stronger and weaker partner resets the bar in the overall portfolio. Those types of marriages require capital to be successful. But it doesn’t always immediately convert into a building project.”
Instead, the capital might be invested in the purchase of new technology, infrastructure improvements, or even physician practices.
According to John Messervy, director of capital and facility planning, Partners HealthCare (Boston), the total availability of capital is pretty consistent, but how it’s being allocated is changing. For example, Partners is investing in information technology and systems to reduce its energy costs. “It’s taken some capital investment to reduce our energy costs by 25 percent since 2008,” he says. “And we’ll have to do this for new hospitals coming into our system. Some will also need other building improvements.”
Technology is also driving consolidation, as providers seek to connect with patients online to help manage their care.
“It’s no different than what’s happened in other service industries, like airline or banking,” says Kenneth Kaufman, managing director and chair at consulting firm Kaufman Hall (Skokie, Ill.). “It took a lot of money to create the hardware and software for people to bank online or through ATMs, which is why many smaller banks were acquired by larger banks. Many of us think the same thing is happening in healthcare.”
Without a doubt, the changes being brought on by the ACA are turning the healthcare industry’s focus from acute care settings to ambulatory care settings. Almost every system is looking at a “hub-and-spoke” strategy, where the main hospital is surrounded by outpatient specialty centers. Yet existing hospitals aren’t going to go away anytime soon, because there’s still a need for critical care beds and more complex operation and procedure rooms.
And while many in the healthcare and design industries have said that the days of new big-box hospitals are numbered, many systems still have aging acute care facilities that will need to be replaced. Partners HealthCare, for example, has 17 million square feet of space, 80 percent of which are buildings that are more than 15 years old. Some date back to the early 1800s.
Consolidation won’t necessarily change the facility strategy of the larger systems as they acquire others, but it likely will change the size and scope of projects, with the focus in the next five to 10 years on renovation and repurposing of facilities.
“With consolidation and reorganization, many hospital systems will find themselves with not exactly the right facility configuration they need in order to compete,” Kaufman says. “This will drive renovation and construction. Many may have too many inpatient towers and not enough ambulatory centers.”
Kaufman also believes that there will be a lot more pressure to be efficient in spending capital. “In the past, if a new tower was required and it was going to cost $105 million, there wasn’t much vetting,” he says. “Now, hospitals are looking at only so much capital that they can spend.”
Messervy says that Partners had been doing $400 to $500 million in new projects per year for the past decade. “It’s going to be half of that moving forward,” he says, adding that the bigger hospital projects are the ones that fall off the list, but that the system will continue to update inpatient units and expand emergency departments.
Navigant’s Compobasso sees other building opportunities in adaptive reuse. “When Best Buy closes 50 stores nationwide, you’re going to see some of those being converted into clinics,” he says. “The Mall of America [in Minnesota] is in redevelopment mode. The anchor tenant is the Mayo Clinic.”
Guiding the way
As hospital systems consolidate and restructure how healthcare is provided, they’ll be looking to architecture and design firms for more than renovation projects. They’l
l also be seeking best practices on using Lean and evidence-based processes to construct cost-effective facilities that are flexible and sustainable. “Firms will have to be flexible enough to work with templates and standards,” says Hamilton Espinoza, healthcare core market leader for DPR Construction (Redwood City, Calif.). “We’re all going to have to be more nimble.”
As hospitals try to become more efficient and cost-effective at planning and designing new facilities, “consolidation will make the discussions between architects, designers, and contractors happen a lot earlier in the process,” says Cleveland Clinic’s Peacock. And when two systems merge, it may mean a blending of several different facility departments and new people put in charge of projects. Those people may only want to work with the firms with whom they’ve had long-standing relationships.
Providers will need architects and designers to bring a new level of expertise and understanding of their business to their projects, to help them figure out how to increase revenue per dollar spent on capital improvements. “It requires an integration of multiple disciplines to understand and address the many demands of the healthcare business,” says Chris Bormann, vice president, East region healthcare director, HDR (Omaha, Neb.).
All planning and design solutions must demonstrate and prove strategic value. Navigant is partnering with architecture and design firms to do strategic and operational planning for healthcare clients, but Compobasso sees an opportunity for architecture and design firms to add these areas of expertise to their business. Many larger firms already do.
There will also likely be more consolidation of healthcare design firms, too, leaving big players or smaller niche players. “Middle-sized firms will be a thing of the past,” Compobasso predicts. “But you can still play in the healthcare arena as a specialist.”
“The question for architects goes beyond how to develop built solutions but rather how to develop business solutions and healthcare delivery networks; it’s not just what providers can do, but what they should do,” Bormann says, referring to the emerging role of healthcare-focused design firms as strategic advisers and even operational experts.
Bob McCoole, senior vice president, facilities resource group, at the nation’s largest not-for-profit system, Ascension Health (St. Louis), says the firms he works with have to be willing to invest the time, expertise, and resources to become extensions of his team—and that kind of commitment takes a lot of effort on both sides. “So, there’s a limit to the number of deep relationships we can have,” he says, adding that there are four architecture firms that currently work with Ascension. “As we grow, that number may have to grow.”
Also, McCoole says, “It’s not about how we pour concrete or how big a room should be. It’s about culture.”
Sara O. Marberry, EDAC, is a contributing editor for Healthcare Design. She is a writer, blogger, speaker, and strategic marketing and business consultant in Evanston, Ill., and the former executive vice president of The Center for Health Design. She can be reached at firstname.lastname@example.org.