Childrens Hospital Costs Revealed

April 13, 2007
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GRAND RAPIDS — Is adding a new children’s hospital to the West Michigan health care market worth the cost and risk?

That’s the question facing the Alliance for Health’s Evaluation Board on Thursday when members meet to review Spectrum Health’s proposal to construct a new building for the Helen DeVos Children’s Hospital. The board’s recommendation will be forwarded to the state Certificate of Need Commission, whose permission Spectrum Health needs to proceed. The Grand Rapids-based, nonprofit Alliance for Health is the first stop in the certificate of need process for health care facilities in 12 West Michigan counties.

A parking structure at the site — located at the southeast corner of

Michigan Street
and
Bostwick Avenue
in downtown Grand Rapids — already has been torn down, and construction could get underway as soon as June, with the opening projected for the end of 2010, according to the CON document.

“This is a very ambitious project,” said Ron Palmer, president of Grand Valley Health Plan and a member of the evaluation board. “It’s expensive, it’s large and it will have a financial impact.”

Palmer said a project of this magnitude means that Spectrum Health intends to market its children’s services to additional service areas. The health system’s CON application states it intends to serve 4 million people in the western half of the Lower Peninsula

“What type of increase in the patient volume are they going to need to support this type of facility?” Palmer asked, noting that C.S. Mott Children’s Hospital at the University of Michigan in Ann Arbor is embarking on $523 million plans for new buildings to open in 2011.

“The risk is that if you are unable to attract that expanded patient population, the existing patient base has to cover the cost, which means you would create a significant increased financial burden on the community,” Palmer added. “I would say this is a substantial risk.”

Among the financial information highlights released by Alliance for Health last week:

  • New construction: $150.9 million
  • Construction interest: $33.8 million
  • Movable equipment: $29.9 million
  • Architect and engineer: $19 million
  • Contingencies: $11.9 million
  • Information systems: $10.4 million

Under CON rules, total capital expenditures for the project amount to $274 million. However, General Accounting Procedures, used by Spectrum, allows for offsetting the amount of construction interest by interest earned, said Joe Fifer, CFO for Spectrum Health Grand Rapids. Because of that, Fifer put the cost at about $250 million.

The hospital intends to sell 30-year, tax-exempt bonds at an estimated 5.5 percent through the Kent Hospital Finance Authority to cover $157.6 million and is counting on $100 million in community donations, the largest capital fundraising campaign ever undertaken in Grand Rapids. Alliance for Health reports that the Spectrum Health Foundation has reached 90 percent of its $100 million goal, but is unable to verify that number due to donor confidentiality.

Spectrum Health spokeswoman Anne Veltema said the gifts from Spectrum Health board member Richard DeVos, co-founder of Amway, and his wife, Helen, for whom the hospital is named, are not being made public. IRS forms show that between 2001 and 2005, the Richard and Helen DeVos Foundation donated a total of $3.7 million to the DeVos Children’s Hospital Foundation. The campaign received a big boost with $50 million in combined gifts from the DeVos’ four grown children.

The Alliance for Health analysis gauges the project cost at $2 million per bed, “a figure that far exceeds the normally expected cost to build acute care hospital beds,” according to the report

But Fifer objected to the measure as a crude tool when more finesse is needed. “It’s overly simplistic and unfair to just run a quick calculation like that,” Fifer said.

Leo Gehring, president of the American Society of Healthcare Engineering and vice chancellor for campus operations at the University of Arkansas for Medical Sciences, said a typical measure for hospital projects is the cost per square foot, calculated using strictly construction costs. That puts the DeVos Children’s Hospital, with $150.9 million in construction costs, at $341 per square foot.

“Even that is still on the high end, but now that’s credible,” Gehring said, noting that the average cost per square foot of an acute care hospital “is in the $300 range.”

The health care construction boom across the country has nearly doubled per-square-foot construction costs over the past five years, from $180 per square foot to the $325 to $350 range, according to an article in Health and Hospital Networks, a magazine published by an arm of the American Hospital Association.

Reed Construction Data/RSMeans tracks hospital construction costs for projects smaller than the DeVos Children’s Hospital. As of November 2006, the average, per-square-foot construction cost for a four- to eight-story hospital in Detroit was $235, up 10.5 percent from 2005.

RSMeans senior engineer Barbara Balboni said costs for a building the size of the planned children’s hospital likely would be pushed up by the need for a stronger foundation and the glass exterior.

“Beyond that, hospitals are loaded — just plain loaded — to the gills with all kinds of specialty equipment that is not in this model,” Balboni said, adding that options such as high-speed elevators and fancy finishes can easily boost costs.

Fifer said the children’s hospital is expected to lose money for its first few years. “There are a couple years perhaps where there is a negative impact on our margins; then we would grow out of that,” Fifer said.

Spectrum Health projections show that without the project, by June 30, 2008, revenues over expenses could be expected to be 9.84 percent, but drop by nearly two points to 7.93 percent when the children’s hospital project is figured in.

“The margin levels are above those recommended by the general Alliance for Health guidelines, which call for a margin of from 2 percent to 7.5 percent for a healthy and viable nonprofit organization,” the Alliance for Health analysis stated.

The analysis goes on to note that Spectrum Health considered building the children’s hospital across the street from the Butterworth Campus, at the site of the Lemmen-Holton Cancer Pavilion. That option was rejected, however, when construction costs were estimated at $50 million more than the current project because of the inability to share certain services with the main hospital, such as dietary and pharmacy.   

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