Hospital Construction Boom Has Not Slowed Down

In this time of economic crisis, you might think that hospitals were no longer engaged in multimillion dollar building projects. But you would be wrong.

Methodist Mansfield Medical Center, located in a Dallas/Fort Worth suburb, recently launched a $34 million construction project, including a 36-bed medical/surgical unit, an expanded emergency department, and a doubling in the size of its intensive care unit. And Florida Hospital in Orlando is about to open a new $255 million building that holds space for 440 patient rooms and a very large emergency department. The building will also house a dozen cardiac cath labs.

The hospital construction market, which has been booming for the past several years, has not slowed down despite the meltdown of Wall Street and the residential housing market. "October building starts for hospitals were about the same as September, and not much different from August, which was better than June and July," says Jim Haughey, chief economist at Norcross, GA-based Reed Construction Data, a subsidiary of Reed Business Information. In contrast, he says, other commercial projects like office buildings, hotels, and retail stores "took a real plunge in October, partly because of cash flow problems, and partly because of a reevaluation of how much space they needed."

It has been widely reported that hospitals have less capital to sink into new facilities because of stock investment losses. But Haughey says that's a fairly minor source of funds for hospital construction and renovation. Even bond issues--which haven't been impacted by the crisis too much yet--aren't the major source of hospital financing, he says. "The bulk of the money comes from the fees they collect every day," some of which hospitals set aside for capital investments.

Nor are hospitals dependent on bank lending, he says, even if they're not-for-profit and can't raise money on the stock market. "When they start a project, they generally have the financing lined up, and they don't need 7-day notes from Goldman Sachs." If they have sold bonds, they're usually 20-year notes, and the interest rate on those hasn't varied much since the crisis began, he points out.

Nevertheless, a new report from the American Hospital Association shows that hospitals are seeing a big drop in profits, and the majority are also experiencing declines in admissions and elective procedures. That, coupled with a 15 percent increase in borrowing costs, may finally bring the construction binge to a halt sometime in the next year. Already, the AHA report notes, 56 percent of hospitals that responded to the association's survey are considering postponement of or putting off planned renovations and expansions.