Healthcare Market Trends Q4 2023

by Hamilton Espinosa and Sean Ashcroft

Healthcare worker assisting a patient to stand from a wheelchair.

Hospital’s “Labordemic”

Hospital margins are stabilizing as patients resume more normal patterns of care, according to the latest Kaufman Hall National Hospital Flash analysis, which reported positive operating margins for the sixth month. Although the financial situation has shown improvement, median operating margins, now slightly above 1%, are well below both pre-pandemic numbers and the 3% operating margin necessary to sustain operations and invest in growth.

Although patient volumes are increasing, a greater percentage of patient revenue originates from the outpatient setting, underscoring the continued shift away from hospital-based settings to lower-cost sites of care. Additionally, hospitals are challenged by decreasing reimbursement rates as more patients age into Medicare or federal-payer insurance. Adding to the financial challenges is an increase in bad debt and charity care resulting from Medicaid eligibility reevaluations, causing millions to lose access to Medicaid coverage.

Expenses remain elevated, as a “labordemic” is expected to continue through 2024 due to shortages in many categories of health workers. Increased staffing costs will continue to drive high operating expenses and drain balance sheets as health systems continue to access cash reserves to support operations. This economic trifecta of reduced reimbursements increased operating expenses, and minimal margins is leading to projects being delayed, put on hold, or canceled altogether.

In this challenging financial market, some health systems are seizing the opportunity to double down on higher growth, higher margin outpatient and ambulatory care services, focusing on geographies with favorable demographics, commercial payers and strong population growth. There is significant growth in specialty care like behavioral health, cancer centers, and proton therapy centers. As the last of the Baby Boomers age into Medicare by 2030, the demand for post-acute care and inpatient rehabilitation continues to be in high demand.

Erik Swanson from Kaufman Hall states, “this ‘new normal’ is an incredibly challenging environment for hospitals.” Understanding this, the model of providing care based on what was profitable in the past has shifted. The industry must work collaboratively to transform the existing hospital business model and create new and unexpected value.

Strategies Proven to Assist in

Navigating this Shifting Terrain

Plan Early and Often

With continued constraints on hospital operating margins, an early, collaborative and integrated approach to capital planning for projects will yield greater returns, extending the ability to maximize capital investments to do more with fewer resources, accurately calibrating cost expectations to program outcomes. Onboarding the contractor with or immediately following the design team ensures their collective insight into a volatile market informs design solutions to maximize value. Historical case studies show builders can successfully limit unanticipated cost overruns through earlier engagement in project development.

Integrated Prefabrication Approach

Similar to the healthcare industry, the construction industry is experiencing a significant skilled labor shortage. A robust prefabrication approach will help alleviate field labor capacity constraints. Additionally, delivering prefabricated assemblies eases, if not eliminates, adverse impacts to active campus operations, reducing time of installation and disruption. On a recent vertical expansion project, DPR leveraged prefabricated elements to deliver the project four months faster than a traditional stick-built approach. This construction approach was cost-neutral; however, the healthcare system was able to activate the project and see patients faster, leading to accelerated revenue.

Cost Certainty within a Volatile Market

In concert with both strategies mentioned above, a Target Value Delivery (TVD) process can be one of the most effective tools in mitigating cost volatility and unanticipated capital expenses in today’s market. TVD is a multi-disciplinary approach organized around building systems where owners, designers and builders work collaboratively to clearly define project goals and performance expectations, establish budget targets that align with the owner’s capital plan, proactively research and evaluate alternative approaches, and ultimately maximize value.

How Can We Help?

In today’s evolving healthcare world, DPR is committed to staying ahead of the industry’s everchanging needs and partnering with health providers throughout the entire lifecycle of project development. While technology and regulations change, the foundation of healthcare remains the same: providing an exceptional care environment for patients.

As a leading healthcare builder, we take that charge seriously. DPR’s healthcare team, backed by a team of clinical operations specialists, regulatory and design professionals, digital health advisors and data analysts, provides our builders unique insight into health organization’s current condition, performance opportunities, and future growth opportunities—enabling enhanced conviction in the clinical and operational decisions informing capital investments in real estate and technology.

Healthcare Insights

Healthcare Insights is a series from DPR Construction’s healthcare core market team designed to consider how new pressures on the market will transform the delivery of care.

Focusing on rapidly addressing today’s environment, our teams advance value to health care providers through strategic assessment, program and cost validation, and informing capital investments in real estate and technology—enabling strategic decisions much earlier in the delivery cycle.

Looking for more general market insights? Take a look at our full market conditions report of Q4 2023. Or take the full report with you by downloading the PDF.

Photo: McGinn Photography

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