Area hospital construction taking break after expensive binge

A truce of sorts in the hospital arms race is upon us.

Economic factors have forced Indianapolis-area hospitals
to stop battling one another with big guns—the inpatient hospital expansions that thudded into place around the city
the past decade. Local observers expect no additional inpatient facilities for at least five years—maybe longer.

Nevertheless, they do expect local hospitals, both large and small, to wage a firefight with their equivalent of smaller
arms—outpatient clinics and surgery centers.

“The need for inpatient beds—I think five years
from now, we’ll need half as many as we have now,” said Kevin Speer, chief strategy officer for St. Vincent Health.

Hospital building affects not only local construction employment, but also the cost of health insurance for employers
and individuals.

More supply of hospital services typically induces more use of them, according to decades of research
by Dr. Jack Wennberg at the Dartmouth Medical School. The extra spending on health care services means health insurers have
to raise premiums to cover the higher costs.

It’s hard to find a hospital executive who disagrees with Wennberg’s
findings. But they keep erecting new facilities in the wealthy suburbs in a quest to attract patients with employer-sponsored
insurance, which pays at rates high enough to offset money-losing customers insured by government programs.

This
suburban warfare raged all around Indianapolis the past 10 years, with area hospitals adding more than 900 staffed, inpatient
beds, according to IBJ research. That’s a 17-percent increase locally compared with a 2.6-percent decrease
across the country, according to data from the American Hospital Association.

Before the building boom, the Indianapolis
area already had slightly more hospital beds per person than the national average.

“They’re essentially
following population growth that’s pretty well-heeled,” said John Snell, an Indianapolis real estate evaluation
agent.

The extra beds came as part of entirely new hospitals, such as the St. Vincent Heart Center, the Indiana
Heart Hospital, the Indiana Orthopaedic Hospital, and the Clarian West and North medical centers.

There also were
major expansions of Community North Hospital, Indiana University Hospital, the St. Francis Mooresville Hospital and Riverview
Hospital.

The increase was fueled by easy credit and historically low rates on bonds and other forms of borrowing.

Not everyone is taking as drastic a view as Speer at St. Vincent—otherwise Community Health Network would have
reconsidered the $130 million expansion of its Community South Hospital, which will add 40 beds to that campus.

Also,
Clarian would not have restarted construction on its 44-bed Saxony facility near Fishers. The $190 million hospital will be
similar to the Clarian North hospital in Carmel, which opened in 2005 and has yet to post a profit.

The losses
at Clarian North have made Clarian and its peers more cautious about the speculative building they did in the previous decade,
said Shawn Mulholland, director of business development at BSA LifeStructures, a health care design firm in Indianapolis.
It also has led hospitals to spend far more time calculating potential return on investment, not merely whether they can afford
the debt service on a new project.

“It’s forced hospitals to be much more disciplined in their capital
expenditures,” Mulholland said.

Bond collapse

The source of these changes dates
to the collapse of the auction-rate bond markets in spring of 2008. Rates on hospital bonds soared, doubling for borrowers
with less-than-perfect credit ratings.

Those rates have come back down now, but bond buyers, banks and even hospital
boards are far less willing to see a hospital add debt—just in case there’s another unforeseen financial shock.

In the past decade, hospitals financed many building projects using gains on their large investment portfolios. But
the meltdown on Wall Street hammered investment portfolios, and they have yet to fully recover.

Meanwhile, a generation-long
trend toward outpatient services is accelerating.

An outpatient procedure is anything where a patient stays at
a hospital facility less than 24 hours. Outpatient services account for one-half to two-thirds of hospitals’ revenue,
which is true for large systems like Clarian as well as small ones like Riverview.

Increasingly, outpatient procedures
are not even performed in the massive hospitals themselves, but in smaller, clinic-like buildings or in physician offices.
These smaller buildings are often attached to an inpatient hospital, but they can stand on their own, conveniently placed
near the most popular strip malls.

Outpatient is picking up steam again because new technology continues to turn
surgeries and procedures that once required overnight stays into minimal-impact affairs where patients go home the same day.
In addition, shifts in federal reimbursement rates continue to favor outpatient procedures over inpatient ones.

On
top of those two trends, physicians—the driving force behind many of the new hospitals of the previous decade—will
be generally banned from investing in new hospitals by provisions in the health care reform bills pending before Congress.

“They will make the business model so unattractive” for physician-only ventures, Mulholland said. “What
that might do is force the physicians to develop partnerships with the hospitals.”

But health reform will
increase the number of people with insurance coverage (read: paying customers), so demand for health care services will likely
grow.

Hospitals may also need to tear down and replace aging facilities. That’s essentially what Wishard
Health Services will do by replacing its 353-bed complex at 10th Street and Indiana Avenue with a 303-bed hospital just west
of the IUPUI campus. The new hospital is scheduled to open in December 2013.

St. Francis Hospital & Health
Centers is also expanding its campus near Interstate 65 and Emerson Road before it abandons its aging hospital in Beech Grove.

Otherwise, however, the action will be elsewhere.

Lingering hot spots

So where
are the likeliest places health care facilities might be built?

The most obvious answer is where the hospital systems
already have land.

Sometimes that means hospitals could add new services on excess land surrounding existing facilities.
That’s what Community Health is already doing at its campus along County Line Road in the southernmost part of Marion
County. Community used the same strategy on its campus in Castleton, where it opened the Indiana Heart Hospital in 2003 and
a massive expansion to its North hospital in 2007.

St. Vincent has the ability to do similar expansions, if it
wishes—this around a free-standing emergency room, outpatient surgery and other services at Exit 10 off Interstate 69,
near the Clarian Saxony hospital.

Clarian, too, has committed only to building the first phase of its hospital
project, and has most of a 96-acre parcel where more could be added.

On the same road as the St. Vincent and Clarian
facilities, Community Health has a physician office building and, a few miles south, Hancock Regional Hospital is opening
a physician office and imaging facility.

Near Zionsville, Witham Health Services is moving to acquire the eight-acre
parcel on which it built a free-standing emergency room and imaging facility in the Anson development. That leaves room to
add services—if residential developments grow enough to demand it.

In Avon and Carmel, Clarian has extra
land that could be used for further development on the campuses of its Clarian West Medical Center and its Clarian North Medical
Center.

The other way hospitals could expand is on land they have bought speculatively.

The most active
hospital on this front has been Clarian. It owns sizable pieces of land at 146th Street and Hazel Dell Parkway in Carmel that
it now wants to sell, said Abbe Hohmann, senior vice president at the Indianapolis office of St. Louis-based Colliers Turley
Martin Tucker. Clarian also owns a 158-acre parcel at the southwest corner of State Road 135 and Whiteland Road near Bargersville.

Also, Danville-based Hendricks Regional Hospital holds a 90-acre parcel in Avon available for further expansion. The
hospital is already nearing completion on a $60 million, 37-bed addition to its Danville hospital.

“They
would look to their own land. That’s just common sense,” Hohmann said. She added, “All of the larger health
care providers—St. Vincent, Clarian, Community, Hendricks Regional—they all continue to have needs as the demands
for health care delivery continue.”

Other alternatives

If hospitals don’t
buy and develop land on their own, look for them to locate along major, untapped corridors of the city, said Deeni Taylor,
executive vice president at developer BremnerDuke Health Care Real Estate.

“We usually see it following rooftops
and retail,” Taylor said of outpatient medical developments.

On the southern edge of the city, that means
anything along U.S. 31 or I-65. To the west, the key roads are U.S. 36, the Ronald Reagan Parkway and whichever roads around
the new airport terminal become most traveled.

To the north, Taylor sees potential for growth along I-65 near Zionsville
or along U.S. 31 in Westfield. Otherwise, he expects activity along east-west routes, such as 146th Street, since U.S. 31
and I-69 already have an abundance of medical development.

Town leaders in Fishers unveiled plans in October for
a medical technology corridor on a strip of land running along 136th Street west of the cluster of medical development at
Exit 10.

Not everyone thinks the corridor will be able to duplicate the major hospitals and medical offices along
U.S. 31 in Carmel. But hospitals are still battling one another with smaller developments, which Fishers would be in a good
position to chase.

“We are seeing a pickup,” Taylor said. “This health reform thing is clearer
and because they will be covering more people and taking care of more patients, they have to turn loose on some of their projects.”
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