Christopher (Chris) S. Dunn, Member of the Firm, in the Health Care & Life Sciences practice, in the firm’s Nashville office, was featured in a Healthcare Finance Q&A profile titled “Navigating the 'Unpredictable Construction Contract Landmines,'” by Susan Morse.
Following is an excerpt:
Chris Dunn, who is with Epstein Becker Green's Healthcare Construction Group in Nashville, Tennessee, counsels healthcare owners and developers on all aspects of construction projects. He recently led a conference to discuss how executives can navigate the complex regulations.
In this Q&A, Dunn shares his thoughts on managing projects during a time of staffing shortages, budget changes, cost increases and what he called unpredictable construction contract landmines.
Healthcare Finance News: Can you please tell us about yourself and your work with the Epstein Becker Green's Healthcare Construction Group?
Dunn: Since 2000 I have worked as a construction lawyer in Nashville, primarily in the representation of owners and developers. About 40% of my work is regional development in the Nashville area, with the remaining 60% focusing on healthcare construction across the country. In either of those two sectors, my work includes counseling owners and developers on all aspects of construction projects, from the creation of custom design and construction agreements to handling any claims or litigation that might result from the project.
Working on the claims and litigation over my career has really shaped the way I look at the transactions my clients enter into – poorly coordinated contract documents invite conflict.
HFN: What are the healthcare construction challenges, and how can executives navigate complex regulations?
Dunn: In healthcare construction there were always the traditional, pre-pandemic challenges related to the CMS technical and reimbursement requirements, and state agency oversight. In some states, the industry had lobbied for and achieved great advantages in legislation. Those were all a given. But since the pandemic, construction in the U.S. has changed and comes with several new challenges such as intense labor shortages, supply chain disarray and decreases in revenue parallel to inflation and interest rate increases.
Today's healthcare executives not only have all the traditional challenges of the past but also must handle these new adversities and associated risks that have made careful planning and negotiation of design and construction agreements critical for project success. You cannot be on autopilot today. Provisions dealing with delay and cost escalation used to be boilerplate. Those days are gone for the time being.
HFN: What are you seeing for hospital and ancillary construction during a time of higher interest rates?
Dunn: Although a high interest rate environment is causing adverse effects across the board in construction, healthcare is nonetheless an all-weather industry that needs growth in both difficult and prosperous times. We are currently seeing an upward trend in specialty hospital construction, as evidenced by a March 2023 survey by the American Society of Health Care Engineers (ASHE), which forecasted that behavioral health facilities would see growth rates of 36% while cancer treatment centers and children's hospitals would also see growth at 26%.
Higher interest rates are having an impact on the volume of product as well as the speed with which they're moving. In turn, projects are staying in the design phase longer, which we can attribute to two drivers: First, providers are being more cautious as they try to get a sense of when and where interest rates are going to stabilize. Second, the value engineering process is taking more time for providers to analyze current efforts and become more budget-efficient. The key is to refine the program and scope of the project to create the leanest budget possible.
HFN: What are your recommendations for executives who have a construction project as part of their strategic plan? Should they wait or move forward?
Dunn: There would be a number of factors that would shape my thoughts on that question:
- Pricing does appear to be moving into a new normal range with 3-5% annual increases for the foreseeable future. That is a significant improvement over 2020-2022.
- On the level of competition, it's good to ask, "What are my greatest competitive threats doing? Are they inactive? Are they giving me an opening to use the "A" team members of the top healthcare designers and contractors and move before they do?"
- The amount of facility growth backlog they can stomach. During the pandemic many hospital companies greatly slowed the renovations, expansions and new construction, which created backlogs – are the backlogs going to start impacting me in patient and physician recruiting?
- Do I operate in a growth region where the top designers and contractors can move to mission-critical data centers and domestic manufacturing projects? Those sectors have been more active than healthcare in the last 36 months.
- Do I operate in behavioral health, cancer treatment or children's hospitals? If so, all three specialty hospitals are expected to see jumps in development in the next three years.
HFN: Please talk about the conference your firm held in Nashville.
Dunn: On May 18, we held our first conference and drew over 75 attendees. Our goal was to offer healthcare providers a chance to meet peer-to-peer and speak candidly about what they were seeing from their designers and contractors on their projects. There are several great and very effective trade groups available to architects and engineers and contractors in the U.S, but there are very few dedicated to the interests of owners and developers.
This is especially true in healthcare despite the fact that healthcare construction is a $40 billion market segment annually – trailing only power and manufacturing in the U.S. construction economy. At EBG we wanted to fill that gap for our clients.
At the conference we had discussed in detail the most up-to-date material and labor cost assessments, modern points of emphasis from the Joint Commission, the 2022 Facility Guideline Institutes editions, and got the latest on prefabricated construction and AI from a Nashville area hospital company, as well as an excellent segment on constructing and operating energy-efficient hospitals from another publicly traded hospital company here in the Nashville region.
Another major takeaway focused on the need to ensure that providers were getting very good guidance on reimbursement in building their business cases for their facilities before and during early design phases. Assumptions made about a reimbursement – either through a private insurance or a CMS-based source – are too often ill-informed. When business cases involve issues like site selection, grandfathering status with CMS and the boundaries of campus expansion, there are many factors that can be disruptive to reimbursement.
Savvy providers are beginning to see this and are making sure they deliver greater input to their designers on the legalities of reimbursement – before the design process gets too advanced. That input comes best from healthcare regulatory lawyers working side-by-side with construction counsel.
HFN: Anything else you'd like to discuss?
Dunn: Healthcare construction in the U.S. attracts the best design and construction talent in the country. It is a $40 billion a year market. It can slow down at times – but it's like slowing down a train going downhill – you can only do so much to stop the momentum for a service that never takes a day off. Demographics and technology always push American healthcare development forward – even when there are headwinds like interest rates, inflation or supply chain problems. There is always a smarter, more savvy way to get projects built – the best projects always start with very good business cases, cases that have an informed view on reimbursement, projected budget and schedule. When you have the right talent in place, those things can all happen, and it will be pennies on the dollar in terms of outlay.