Patient preferences tug hospital spending toward outpatient facilities

“Over the past several years, we’ve put our capital in growth, because we had to turn down almost 2,000 admissions last year because of capacity issues.” Chuck Stokes Chief operating officer Memorial Hermann Health System, Houston

Finishing work on big projects in Detroit, El Paso and San Antonio, Tenet Healthcare Corp. is about to throttle back capital spending for hospitals to the tune of $150 million. Tenet’s 2017 capital budget is expected to range between $700 million and $750 million. That doesn’t mean the nation’s third-largest investor-owned hospital company is done spending on healthcare facilities though. In fact, it’s just the opposite on the ambulatory side.

Tenet plans to open 15 free-standing emergency departments or micro-hospitals over the next 18 to 24 months, as well as add urgent-care centers in its hub markets, Eric Evans, president of hospital operations, said in a recent earnings call. He added that Tenet expects growth in those areas to strengthen volume.

Tenet isn’t alone. Hospital systems have begun in earnest to shift more of their capital spending to outpatient facilities to provide more cost-effective and convenient settings for consumers. As fee-for-service medicine gives way to value-based reimbursements that put providers at greater financial risk, hospital systems need access points in the community that offer convenient care at what is normally a fraction of the cost of going to the hospital.

That means not only building more ambulatory centers, but investing in information technology as well.

Oakland, Calif.-based Kaiser Permanente, the nation’s largest integrated health system, spends one-quarter of its $3.8 billion capital budget on information technology, CEO Bernard Tyson said. And it’s easy to see why.

More than half of the 100 million patient encounters that Kaiser Permanente clinicians have with the company’s 11.7 million health plan members are now virtual visits through telemed- icine or other electronic means.

While the focus is shifting to outpatient settings, executives aren’t ignoring necessary upgrades to their aging hospital infrastructures, many of which were deferred during and immediately after the Great Recession.

Memorial Hermann Health System in Houston, for example, is putting the bulk of a $2 billion annual capital budget into new hospital towers to relieve overcrowding at its flagship Texas Medical Center campus in Houston as well as its campuses in Katy and Sugar Land, Texas, Chief Operating Officer Chuck Stokes said.

“Over the past several years, we’ve put our capital in growth, because we had to turn down almost 2,000 admissions last year because of capacity issues,” Stokes said.

Likewise, the University of Kansas Health System last month raised $190.2 million in the bond market, $120 million of which will be used to add floors to a patient tower that was already underway on its main Kansas City campus. Such is the patient demand there.

Many hospitals delayed projects after the recession to see how fast value-based reimbursement would take hold following passage of the Affordable Care Act, said Ryan Freel, senior vice president at healthcare financial advising company Kaufman, Hall & Associates.

Though the lion’s share of capital spending at Memorial Hermann will necessarily go into hospital projects, the 14-hospital system is “very cognizant” of outpatient trends, Stokes said. Memorial Hermann has eight large “convenient care” centers either open or being built in its markets that offer a wide variety of ambulatory services.

The centers each feature a 24-hour free-standing ER with an imaging center. They are anchored, Stokes said, by a primary-care practice with other services as well, including physical therapy and rehab space.

Northwell Health, based in suburban New York City, plans to spend about $200 million on ambulatory facilities in 2017 or nearly twice what it spent in 2015, Senior Vice President Terry Lynam said.

That’s about 25% of the $800 million to $900 million that Northwell spends annually for capital expenditures, including nearly $250 million on IT, Lynam said.

Northwell is aggressively building clinics and outpatient centers around its 21 hospitals to provide patients with easy, lower-cost access to care, he said.

Projects run the gamut, including medical office buildings; medical and surgical specialty centers; cancer centers; acquisition of new physician practices; and joint ventures such as ambulatory surgery centers, urgent-care centers and dialysis centers, he said.