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Aging population, demand for new sites inject optimism

Rochester Business Journal
February 8, 2013

After a few difficult years, area construction firms are looking to capitalize on projects in the health care sector. Though government regulations and economic challenges threaten robust growth, an aging population and demand for new structures breed optimism.
 
In its 2013 Dodge Construction Outlook, McGraw-Hill Construction predicts total U.S. construction starts for 2013 of $483.7 billion, 6 percent higher than the $458 billion estimate for 2012 and a marked improvement on the 1 percent uptick from 2011. Despite these gains, the report shows that total volume remains 32 percent below its peak in 2005. Health care is one sector likely to see a modest rebound in 2013, the report states.
 
Aging baby boomers are a primary driver for much of this anticipated growth in health care construction, both nationally and in Rochester, says Aaron Hilger, president of the Builders Exchange of Rochester.
 
"By 2030, one in five Americans will be 65 or older," Hilger says, and with the growth of this demographic comes a rise in the need for new medical facilities. "We anticipate that between now and 2015, there will be a 25 to 35 percent increase in the health care space needed. ... Strong and Rochester General (hospitals) are already utilized at 125 percent, so the demand for care is clearly outpacing the current supply."
 
The composition of that health care space also will change, with fewer large hospitals being built and a greater focus placed on elder and urgent care facilities, considering the relative ease of building new, smaller structures instead of renovating massive hospitals that need to remain open during construction.
 
New beds in existing hospitals will mostly focus on specialized care because of the potential for a greater return on investment, Hilger says.
 
As in many areas of the economy, uncertainty about federal government spending has many major players in the health care sector taking a wait-and-see approach toward large capital projects.
 
Under a series of automatic spending cuts known as sequestration, Medicare providers would be subject to a 2 percent payment cut, or $11 billion in the 2013 fiscal year, with hospitals shouldering a $5.8 billion share of the reduction, according to a report from Kaiser Health News, a unit of the Kaiser Family Foundation.
 
Possible changes coming to the Medicaid reimbursement rate in 2014 because of the Patient Protection and Affordable Care Act also have led to a cautious approach to investment.
 
"Government funding is a tremendous concern going forward," Hilger admits. "The level of uncertainty certainly affects how companies chose to invest."
 
For instance, such concerns led Rochester General Health System to delay construction of a new tower on its campus, he says.
 
Steve Bills, a vice president with LeChase Construction Services LLC, said the 2008 recession caused a decline in the construction industry that his firm and other builders are only now starting to recover from.
 
"Health care construction was affected by the recession of 2008," Bills says. "We saw some rather large projects in the planning stage put on hold due to lack of financing.
 
"We have seen a bounce back in 2011 and 2012 as the need to continue with capital improvements to address aging infrastructure and the needs of the community have allowed the health systems to obtain the capital needed. In general, the health care sector tends to be more stable in the face of economic challenges."
 
Patrick Rogers, vice president at the Pike Co. Inc., says the climate for construction projects in the Rochester market is unusual because all three big health care centers have recently expanded.
 
"The construction market typically lags behind the rest of the economy, so steady growth there is a good sign," Rogers says. "It's been a tough last couple of years, but we're starting to see some investment in new construction, and health care projects in particular have been a bright spot in an otherwise dreary outlook."
 
Noting that the need for major capital projects may slow down but never halt in the health care sector, Bills says LeChase Construction is working on significant projects here. At Strong Memorial Hospital the builder broke ground last fall on the $145 million expansion of the Golisano Children's Hospital. It is halfway through a $90 million expansion of Unity Hospital's surgical space and is a constructing a new ambulatory surgery center for Rochester General Hospital.
 
Pike has completed a $60 million expansion of the Wilmot Cancer Center at Strong and is currently partnered with Lecesse Construction Services LLC to construct a senior-living center on Westfall Road. Last month Pike and Lecesse decided to affiliate their businesses.
 
LeChase Construction also has seen business come from the growth of senior-living centers, such as its project for the Village at Unity Health System, although long-term care providers face their own set of economic challenges, along with the potential for growth.
 
"Although the need is there, the Medicaid reimbursement structure does not fully cover the expenses needed to care for patients, operate a facility and make much-needed capital improvements," Bills says.
 
Though large projects such as adding a wing to a hospital can be a boon to the builder that wins the bid, medical construction in an active hospital brings with it challenges that not all firms are equipped to handle.
 
As the leader of his firm's Healthcare Center of Excellence, Bills uses his decades of experience in managing health care projects to ensure that LeChase Construction's clients see a minimum of disruption during construction and get the maximum amount of utility from the project once construction ends.
 
"Health care facilities are 24-hour-a-day, 365-days-a-year operating facilities that care for patients," Bills says. "Given the acute level of care required, these facilities are equipped with special life-safety systems such as medical gases, emergency power and high-tech environmental controls that must be maintained at all times in occupied spaces.
 
"A construction team must also be familiar with the regulatory requirements that must be met to work in these facilities. The ability to work, expand and renovate these facilities on occupied campuses requires intense logistical planning and expertise working with the special systems and regulations."
 
Despite the challenges and concerns facing this sector, competition to excel in this field remains fierce, especially because of the key role that health care plays in the local economy.
 
"Given the aging infrastructure at the health care facilities and the continual need to expand or renovate facilities for new technologies in health care, ... capital projects ... will continue to be a large part of the non-residential construction market in our community," Bills says. 
 
Jason Schultz is a Rochester-area freelance writer.2/8/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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