Why the hospital building boom?

Via Aaron Renn’s twitter (aka @Urbanophile), I see that the Chicago Tribune is reporting on Chicago’s hospital building boom:

Driven by the need to replace aging facilities, integrate new technology and equipment and, of course, fend off fierce competition, hospital systems spent more than $6.6 billion between April 2009 and April 2011 to build new facilities and update old ones, according to Illinois Hospital Association data scheduled to be released Monday.

This prompted me to do some research, and it turns out there are quite a few regions similarly extending itself in building additions or outright new hospitals—the Pittsburgh Tribune-Review reports that:

From 2008 through Nov. 1 [2011], U.S. hospitals borrowed $144 billion through public bond issues for construction, refinancing, equipment and other expenses, the Tribune-Review found as part of a yearlong investigation into the rising cost of health care.

The questions that occur are: why? and, is this a good thing?

The “why” part appears to be attributable to “gaining market share.” Let’s run through the reasons mentioned in the Chicago Tribune article. Technologically, updating things seems to be a reasonable idea which is hard to assess from this angle. The “age” idea mentioned in the Chicago Tribune can be looked at skeptically, from the facts stated in their own article—the 2007 median age of an Illinois hospital was 10.55 years versus the national median of 9.77. One doubts the road to hospital obsolescence is measured by .8 years (or that somehow that substantial a percentage of the nation’s hospitals should be updated).

There’s an emphasis throughout both articles on providing amenities—the hospitals in Chicago will apparently feature “luxury finishes” i.e. flat-screen TVs and “other hotel-like amenities.” Apparently, also, a hospital in Western Pennsylvania brought in a consultant from the Ritz-Carlton, which should put in context the sort of thing you’re looking at. They probably aren’t alone in this—a recent New York Times article talked about New York area’s hospitals’ efforts to add luxe features to entice rich people (who would then cross-subsidize the hoi polloi’s care)—but it is it worth it? I don’t want to convey the idea that it’s all frivolity—this WSJ article about the challenges of cooking food for the sick or recovering is worth a read—but it’s hard to avoid agreeing with the conclusion of the Tribune article (“Does every patient really need a 40-inch TV in their room?). If it’s not to improve care, what is it? Attracting patients away from other hospitals, presumably, in a way that probably won’t help the bottom line in the long run. (Though this article speculates that gaming patient satisfaction surveys that the government will be using in the future is another possibility; ultimately it’s the same thing, though.)

One of the striking facts in the Pittsburgh Tribune-Review article is that hospital capacity has dropped by 250,000 beds since 1990…but occupancy is holding steady at around 70%. This despite substantial population growth and significant demographic changes. Do hospitals expect additional demand? No argument in either article is made for that, and given the preceding factoid, it’s hard to bank on one either. So it would seem to be a market share play, and with such a large percentage of Chicago-area hospitals spending money at the same time, it looks likely that they’re moving to a lose-lose equilibrium for everyone, at least in that market. (If everyone builds, everyone raises prices and passes on the price increase at the very least.)

A worse case scenario is that the debt loads incurred by capital expansion ends up causing big problems for some of these hospital systems. The worst case scenario, from the perspective of those expanding hospitals, is changes in the health care system. Given all the noise about the subject, it’s not hard to envision cuts in the Medicare system, whether as a result from a penny-pinching Congress or from the hope of doing care better and cheaper. The latter must seem particularly fearful, because a large portion of the health care efforts look specifically aimed at reducing hospital utilization. Reducing infections and hospital readmissions? Obvious. An emphasis on primary care? Again, more care outside the hospital. Do you believe in retail clinics and urgent care clinics? Again, often outside the hospital. A move away from fee-for-service and towards some other payment system? Less health care consumption—which one presumes means a decline for hospital use.

Given the extent of debt, construction, and the size of the hospital footprints in local economies, these hospital leaders are making big bets on something approximating business as usual in health care. One hopes they aren’t successful, though the price of failure looks high also.