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Vital Signs Improving During Downturn

by Mark Wangrin

Texas hospital construction weathering economic dip

The national economic downturn has stalled some medical facility construction plans across Texas, but many substantial medical projects are being built where demand for health care is increasing.

“Money has been a little hard to come by, but it does seem to be picking up,” says Mike Easley, vice president at Preferred Management, a corporation that operates rural hospitals. “Where it took Van Horn County 17 months to sell bonds issued last May, it’s only taking Kimble County three months now to sell its bonds.”

Texas was one of nine states with at least $1 billion in new hospital construction from January-October 2008, according to Reed Construction Data. Previously projected record growth in 2008, though, stalled when the U.S. economy faltered and financing became harder to find.

McGraw-Hill’s 2010 Construction Outlook estimates that health care facility construction will contract nationally by 36 percent in 2009 to 70 million square feet. 2010 could improve with forecasters projecting a 5 percent upswing in the contract value of health care projects to $21.7 billion. However, that remains 31 percent lower than the record high of $30.1 billion in 2008.

Jeff Schaub, senior director for Fitch Ratings, says there are several reasons for the hospital sector’s bond market difficulties.

“The most immediate was a flight to safety by investors as the financial sector’s problems peaked in the fall, and the disappearance of credit enhancement — bond insurance, letters of credit,” Schaub says. “By flight to safety, I mean that investors were putting their money into Treasury securities.”

Schaub says that hospital bond ratings actually remained stable, “except perhaps for those whose immediate obligations could not be paid from internal resources and could not be refinanced in the credit markets, which had frozen.”

The ensuing recession has limited elective surgeries and fundraising and caused a payer shift from commercial health insurance to Medicare, costing hospitals millions of dollars in revenue, analysts say. Added pressure for the not-for-profit sector came from increases in bad debt and charity care, which were not as severe for for-profits.

Hospital funding is generally acquired through two methods — revenue bonds and county hospital districts, which repay the debt with property taxes and or general obligation bonds, says Steve Murray, Austin-based analyst for Fitch Ratings.

“The state, in general, economically is holding up well,” Murray says. “The (bond market) mood here is good, not as troublesome as in other parts of the country.”

Other methods include obtaining loans from Housing and Urban Development (HUD), the U.S. Food and Drug Administration and the U.S. Department of Agriculture, although all typically require significant up-front costs — such as hiring architects and planners — to apply for those loans.

Rising costs of financing caused 42 percent of the 771 hospitals surveyed nationally to cancel or partially delay building projects, according to a 2009 construction survey produced by Health Facilities Management/American Society of Hospital Engineers.

Suburbs and exurbs, the planned communities beyond suburban centers, are expected to host much of the future growth, and are where hospitals are hoping to find a more profitable payer mix. Many are specialty hospitals — such as cancer, cardio-vascular and orthopedic centers — and many are joint ventures with doctors.

In the Austin suburb of Lakeway, a 240,000-square foot medical center that will include a rehabilitation hospital, an eldercare facility, extended-stay hotel and 30,000 square feet of retail and restaurant space is under construction. Lakeway Regional Medical Center will be primarily owned by its physicians — about 90 of them will hold an 80 percent share — with management firm Surgical Development Partners of Franklin, Tenn., owning 15 percent and private investors the other 5 percent.

The outlook for the not-for-profit sector remains “negative” for the next year, Schaub says.

“However, while we expect downgrades to exceed upgrades for the next 12 to 24 months, our predominant rating action is expected to continue to be ‘affirmation,’” he says. “The ‘negative’ outlook is driven mainly by expected reductions in governmental reimbursement levels, higher capital costs and continuing effects of investment losses experienced over the past year.”

Other ongoing projects, ranging from urban to rural, include:

• The $430 million Texas Children’s Hospital Maternity Center in Houston, a 796,000-square foot facility that’s projected to host 5,000 births a year after its scheduled opening in 2012.
• A 34,000-foot replacement for the original Parmer (County) Medical Center, last significantly upgraded in 1964, is expected to open next year in rural Friona. The facility is funded by $25 million in county bonds.

Hutchison County voters rejected a $25 million bond proposal in 2004 to build a new hospital in Borger, so officials turned to Critical Access Healthcare (CAH), a Dallas-based firm specializing in management of rural hospitals.

CAH submitted a request for a 40-year, $18 million loan from the U.S. Department of Agriculture and lined up a contingent 25-year, $10 million note from Happy State Bank to build a 25-bed hospital in Borger. If the loan is approved, construction on the Golden Plains Community Hospital is set to begin in early 2010. TR