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Healthcare Insights: The New Capital Balance of Healthcare

Digital, social, and environmental concerns influencing capital project planning.

While Healthcare organizations face myriad financial and operational pressures in the wake of the COVID-19 pandemic, an elevating tide of social and environmental considerations is placing more strains on precious capital than ever. Ultimately, these considerations will have ramifications for how systems plan capital projects and the role of contracting and design partners.

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A trio of forces has culminated and accelerated via the pandemic.

  • Telehealth evolved into a viable offering for many systems as barriers to access and reimbursement fell away, ushering a new era of digital health. A July 2021 analysis by McKinsey and Company estimates that telehealth utilization has leveled off at 38x the pre-pandemic utilization, with the percentage of patients who say they will use telehealth at 40% up from 11% before the pandemic.
  • Health and social equity, which were hardly discussed a decade ago are now significant issues landing on the priority list for many providers. In a 2021 survey of 500+ health professionals by the Institute for Healthcare Improvement, 58% of all respondents identified Health Equity as a top 3 priority. Of those, nearly 60% identified a multi-prong approach that includes the incorporation of health equity into their organization's strategic plan, developing partnerships with community organizations and addressing equity in the hiring process.
  • Environmental stewardship is an escalating priority for many systems in the wake of undeniable evidence of climate change. A January 2022 by NOAA confirmed that 2020 and 2021 involved $1B+ more climate-related disasters than any previous year. Increasingly violent and variable (storms, drought, wildfire) climatic events are underscoring the dire reality of our planet’s health and the imperative for every industry to act swiftly.

Digital, social and environmental concerns are neither new to health systems nor solely attributable to the pandemic. However, the pandemic has sharply highlighted that health providers must demonstrate quantifiable progress in these areas when capital is more constrained than ever.

Everyone in the healthcare value chain, including suppliers and advisors, must be prepared to partner with health systems on digital, health, social and environmental challenges, even if they initially appear tangential to a supplier relationship. Organizations that deliver capital construction projects to health systems are acutely aware of this reality.

“The bottom line is that any partner who isn’t feeling the pressure within healthcare probably isn’t paying attention,” said DPR Construction’s Kevin Matuszewski.

REBALANCING OUR APPROACH

Scarce capital in the U.S. healthcare sector presents challenges to many providers and their suppliers, planners, builders, and advisors but with scarcity comes opportunity. “Previous events from wars to economic disruptions show that great progress happens when partners affected by these challenges work together,” Matuszewski said. “A spirit of inventiveness fosters innovations that not only help us step beyond present challenges but often open remarkable new possibilities. While financial realities and the trajectory of consumer expectations are not likely to wane, the digital-social-environmental realm offers many opportunities for those who design and build for healthcare to shine.”

DIGITAL

The pandemic forced rapid adaptation to digitally-enabled care, even for late-adopting systems and consumers who are less comfortable with digital platforms. Over the long run, a digital strategy will increasingly affect every aspect of the patient and provider experience, which plays into both virtual and physical site-of-care planning.

The physical site of care is no longer the million-dollar question,” Matuszewski said. “People will always want access and convenience, but that is increasingly taking the form of a hybrid digital/in-person interaction. For many consumers, the provider’s digital ‘front door’ has become the first encounter with the health system. Older consumers, who comprise the majority of patients, are seeking a digital experience that is simple, failsafe, and intuitive. Younger consumers demand easy access, convenience, and transparency of both costs and outcomes. All consumers want a positive digital experience to complement what they experience in physical environments.

For capital investments, this means bearing in mind that physical sites are increasingly part of a larger health ecosystem. “The biggest physical intersection,” Matuszewski said, “is at healthcare facilities where people now expect to virtually check-in, freely move about the facility while armed with information, and access learning and support resources throughout their care journey and beyond.”

Enabling a robust digital strategy will require capital planners to anticipate higher technology expenditures as a percentage of the project cost. Tech, once dwarfed by other soft costs such as medical equipment, can now command 8% or more of a total project budget depending on the complexity of a digital and technology strategy. Capital planners can also expect more space requirements for head-end equipment, and enhanced supporting systems (HVAC, energy, etc.) for onsite technologies and offsite connectivity. It also calls for earlier and more robust engagement of technology design consultants and specialty trade partners to ensure that systems are properly integrated within the facility.

SOCIAL

The pandemic heightened awareness that historically-disadvantaged communities still lack equitable access to healthcare, financial, and social support. A 2021 report by The Commonwealth Fund highlighted challenges that Black and Latinx/Hispanic populations face in accessing care resulting from structural, financial, and social inequities.

Community leaders and consumers are increasingly looking to health systems to demonstrably combat health inequity by offering access, resources, and physical sites of care in disadvantaged areas. That expectation also extends to healthcare consultants, builders, and suppliers.

Capital project investments open many opportunities to build social programs and systems that improve reliable healthcare access. “Every project partner has a role to play in creating a healthier and more equitable world,” Matuszewski said. “Establishing and delivering on Disadvantaged Business Enterprise (DBE) commitments has been a great foundation to advancing social equity via construction, but it is only a starting point.”

Looking ahead, health organizations will seek real estate partners designers and builders that extend their social footprint by setting more aggressive DBE participation targets with meaningful scopes of work, as well as investing in community programs by widening the geographic search range for qualified businesses and breaking down bid packages to enable more small businesses to engage in delivery. For instance, construction firms that are willing to break down buyout packages will pave the way for more disadvantaged-certified small businesses to bid on manageable scopes of work.

Additionally, procurement may begin to favor partner vendors who are well-positioned with mentoring / training/employment academies that not only foster practical skills but also pave a pathway for long-term financial stability.

Associated Builders and Contractors recently estimated the 2022 shortage for skilled construction labor alone to be 650,000 jobs above and beyond the normal pace of hiring to meet the labor demand. The percentage of skilled workers in the prime working ages of 25-54 has fallen 8% in the last decade, underscoring the need to recruit, train, and retain skilled labor.

A relatively low threshold to entry coupled with solid long-term prospects for stable income means that construction training and employment programs are a win-win scenario with the halo benefit of financial independence and improved access to preventative and advanced healthcare.

ENVIRONMENTAL

The role of healthcare in climate change is undeniable. Healthcare accounts for almost 10% of U.S. greenhouse gas emissions, and healthcare facilities account for 17% of the sector’s total footprint. Environmental responsibility in healthcare is quickly moving to the center stage as systems commit to aggressive carbon reduction and neutrality targets in response to climate change. There are also early indications that future bond issuances may specify environmental impact covenants and even offer favorable ratings for projects that reduce the environmental footprint of providers.

As in the realm of health equity, providers often seek designers and builders that can propel their environmental objectives. Sustainability is an area where builders have been on the front foot for more than two decades, finding ways to build high-performance facilities at or near market rates. “Many contractors are already well-versed in waste diversion, sustainable material sourcing, energy and water reduction systems, and more,” Matuszewski said. “We’re also ready to help guide the market on next-level design and construction approaches that will move the needle.”

Climate change carries serious financial consequences for the healthcare industry that are forcing action. A recent analysis by Deloitte underscores these influences, including health conditions that are driving up the cost of care and service interruptions that defer or cancel elective procedures. Real estate executives are seeking builders that drive environmental innovation in service of combatting costs and social effects of climate change. Innovation can include reducing materials and waste throughout the project lifecycle, investing in products that truly align to circular economic principles, and aiming for net-zero carbon, net-zero energy or water not only within the finished project but also through onsite construction operations and lifecycle maintenance.

The foreseeable mix of financial, consumer, digital, social, and environmental pressures on health providers signals a steep road ahead for systems and their builders and suppliers. Those who prevail will embrace the challenge as an opportunity to evolve.

“Today’s pressures don’t mean the future is written,” Matuszewski said, “What they do mean is that everyone in capital development for healthcare, including suppliers, builders, and advisors, must step up to the challenge of realizing affordable, sustainable, and equitable healthcare. By supporting healthcare organizations as partners in addressing these challenges, enduring change can be achieved.”