PMB recently completed an $18.9 million conversion of Community Rehabilitation Hospital South in Greenwood, Indiana. | Courtesy a representative of PMB

The Costs, Concerns, and Benefits of Healthcare Renovations

Carrie Rossenfeld Healthcare & Education

Healthcare’s new patient-centered focus has resulted in numerous renovations to medical facilities in order to keep them current, efficient, and attractive. But renovations of any kind can be costly, and there are special concerns in updating operating medical facilities that aren’t present in construction for any other industry sector.

San Diego–based Gilliland Construction Management (GCM) has been active in healthcare real estate construction. Principal Kirt Gilliland tells SoCal Real Estate, “Healthcare organizations need to do significant pre-planning to make sure they are clearly communicating with all their clients and end users as well as their renovation project team. The healthcare client and its building team should perform an extensive study of existing conditions and utilities before construction begins. All this pre-planning will help ensure the client doesn’t start projects that have to be postponed or altered during construction, which could be costly and disruptive.”

Kirt Gilliland | Courtesy a representative of Gilliland Construction Management

Jim Rohan, SVP of development for Orange, California–based healthcare-construction firm PMB, tells SoCal Real Estate that whenever a healthcare facility (inpatient hospital, medical office building, surgery center, etc.) considers a renovation, it needs to analyze a variety of factors in order to keep costs in check. These include: Will the renovated facility achieve a long-term solution to the need that is motivating the renovation or is the renovation a stopgap to forestall the need for a much greater capital expenditure? Based on the answer to No. 1, is a new building a better option? Will displacing existing tenants or patients during construction pose a significant logistical problem and will the price of solving that problem affect the project’s viability?

Beyond the obvious feasibility questions, the level of updated design needs to reflect the market conditions for the area and for the services offered in the renovated area, Rohan says. “Inpatient surgeries will demand a high level of design input, code compliance, and technical sophistication, where simpler patient pre- and post-op areas can be renovated more modestly. The greatest determinant of whether a project’s budget is in check may be the economic analysis of the return that can be anticipated from the renovated area or, looked at from the opposite direction, what loss might occur if the facility isn’t renovated?”

Concerns that come along with healthcare renovations are cleanliness, disruption to facilities, and disruption to utilities, Gilliland says. In order to subdue those concerns, healthcare groups need to communicate — and construction teams need to implement — strict protocols governing infection control, cleanliness, and airborne particles, all of which can literally mean the difference between life and death for patients, he points out.

Concerns on the facility-side analysis are partly economic (Will new income from the renovation support the project?) and partly operational (Will construction-related disruption be manageable, and will there be operational improvements associated with the renovation?), Rohan says. “There is also the question of where the renovation fits in the capital budget for the facility as a whole. Is the renovation mandatory or just desirable? Will other facility requirements have to be delayed to make way for this renovation, and will the delay push the next area in the priority list into functional jeopardy over time?”

Jim Rohan | Courtesy a representative of PMB

Rohan adds that the construction company faces the potential problem of the affected area not having been built to the drawings and specifications that describe it. What may look like a relatively straightforward renovation can have hidden issues not reflected on existing drawings. “This can cause a cascade of problems to address project unknowns that would not exist in new construction. Depending on the age of the area to be renovated, the complexity of its construction, and the potential ripple effects of the unknowns, a contractor can be exposed to potentially serious budget issues.”

Noise can be especially disruptive in a healthcare facility, where the focus is on wellness and healing, Gilliland adds. “For a hospital, performing construction work at night isn’t a good option for noise control since patients need to sleep. In addition to particulate matter, construction teams need to contain noise and smells as much as possible when working at healthcare facilities.”

Also, many healthcare facilities, especially hospitals, have significant power, oxygen, fire and life safety, heating, ventilation, and exhaust systems that cannot be disrupted without thorough contingency planning, Gilliland says. “Construction teams need to know what systems run behind walls, under floors, and above ceilings before they start any demolition or construction.”

The benefits of healthcare-renovation projects vary, but as often as not in Southern California, they either address SB 1953 seismic upgrade requirements — which don’t convey any direct economic benefit, but do allow the facility to continue to operate — or they address a functional or operational deficiency that compromises operational efficiency or patient safety, Rohan says. “Corrections for efficiency or safety reasons may offer some economic benefit, but in many cases are only upgrading a service already being provided. The renovation may be economically self-sustaining, but it’s likely to inflict a negative economic impact in the form of added cost and only a marginal benefit. “

Gilliland points out that healthcare organizations may choose to renovate and upgrade their facilities either in order to meet current codes or simply to provide a better environment for patients and staff, Gilliland points out. “A better environment can promote healing, wellness, employee retention, customer satisfaction, and healthy revenues.” A healthcare facility may also embark upon a renovation to accommodate new technology or science that an existing space won’t accommodate, he adds.

Renovations may also be driven by wanting to grow the customer base. “Most people have a choice when selecting their healthcare providers, and a modern, pleasing facility can be a factor in driving that decision,” Gilliland says.

Hiring the right building team is extremely important in healthcare renovations, especially for a facility that must comply with OSHPD requirements, Gilliland notes. “A healthcare client should look for a team well versed in the complex protocols and safety measures outlined in OSHPD standards. Teams with this experience will know what to consider as part of proper planning, which helps lead to successful outcomes.”

Mark Toothacre | Courtesy a representative of PMB

Healthcare clients should also be aware that renovation work could be disruptive and may remove the area from the client’s ability to serve patients, which could also affect revenue, he says. “The client may need to establish temporary facilities to mitigate these adverse factors.”

Rohan says renovations of existing facilities, usually hospitals, are regular parts of the requirements to maintain efficient, safe facilities. “The pros include a less-expensive-than-new-construction option, more rapid completion, and less overall campus disruption. The cons are the displacement of tenants or patients, the unknowns of renovations which can be substantial in older facilities, and the inability, generally, to make dramatic improvements to the delivery concept embedded in an older facility’s design.”

PMB recently completed an $18.9 million conversion of Community Rehabilitation Hospital South in Greenwood, Indiana, according to a release from a representative of PMB. The release says Community Health Network and Kindred Healthcare formed a joint venture to convert Kindred Hospital Indianapolis South, a pre-existing 60-bed long-term acute care hospital (LTACH) into a 44-bed inpatient rehabilitation facility (IRF). PMB was chosen to develop and own the project based on its long-term partnership with Kindred.

Rohan tells us when first introduced, LTACHs relieved a functional and financial burden on hospitals attempting to limit their exposure to patients requiring extended stays. Since they became popular nearly 20 years ago, the number of LTACHs has proliferated to the point that they have become the targets of cost-cutting efforts that are predicated on the theory that there are too many LTACHs and that many of their services overlap similar services offered at acute-care and rehabilitation facilities.

Beginning in 2002 the Centers for Medicare and Medicaid Services, what most people call Medicare, began reducing reimbursement to LTACHs and changing the rules defining who was qualified to receive care in an LTACH, Rohan explains.” The pattern of reimbursement reduction and tightening rules defining who is qualified for care in an LTACH has continued to the point that today there are very few, if any, new LTACHs being built. In addition, across the nation, the conversion of existing LTACHs to IRFs has accelerated.”

Rohan adds that the issues facing an LTACH are no different than what hospitals confront when they need to remodel or upgrade an operating facility. “Among the most significant challenges are noise and dust control, infection control, and the management of patient location. If the facility has unused capacity that allows patients to be moved during the renovation of their care site, the burden is reduced. If the entire facility can be shut down during construction, the burden is eliminated. If neither of these is possible, a rolling transfer of patients to other facilities while work is being done progressively in the vacated areas may be needed.”

Mark Toothacre, partner and president of PMB, tells us that with the challenges facing retail properties, it is becoming more common to repurpose existing properties for medical use. He says in Goodyear, Arizona, his firm is involved with the conversion of a multi-screen movie theater into a medical office building. “This property had great characteristics, including its location adjacent to a busy acute-care hospital and ample parking, which is necessary for a high-quality medical-office building. From a speed-to-market perspective, the project could be delivered 12 months faster than a similar new build. Finally, the purchase price for the property allowed for a competitive rental rate to be offered to potential tenants.”

Toothacre adds that PMB anticipates that the availability of vacant, well-located big box retail space, combined with the economic and speed-to-market advantages of such sites, will result in many more of these projects in the future.