Stranded capital is a new term, a derivation of the term stranded costs that emerged from the deregulation of electric companies. It refers to “the existing investments in infrastructure for the incumbent utility which may become redundant in a competitive environment.” Many academic medical centers are weighing the importance of meeting current demand while considering the risk that, in a future competitive environment, dramatic declines could occur in the need for acute care beds. Will their facilities become redundant, or stranded capital?
In 1965, the American Hospital Association recommended a 50-year life for hospital buildings, revised to 40 years in 1966. AHA’s current publication, Estimated Useful Lives of Depreciable Hospital Assets, shows a 40-year building structural component life. Depreciation is no longer a directly reimbursable expense for most hospitals. Subsequently, for-profit hospitals began using the same life for buildings in their financial statements as they did for tax reporting: 39.5 years. There is a shorter life for building service components (such as electrical, plumbing, and HVAC), about 20 years.
So let’s do some math. You finance for your shortest depreciation, 20 years. With a price tag of $1M to $1.5M per bed, completed today, a new building would be paid off in 2032. Why so expensive? Facilities must be:
- Sanitary (built with special materials, finishes, and details for spaces to be kept sterile)
- Easy to maintain
- Accessible and meet all ADA standards
- Comforting aesthetically
- Secure and safe (ensure protection of people and property and pay attention to the risk of terrorism).
Hospital design must also facilitate controlled circulation of health care workers and patients; assist with work flow; and separate support functions from public view, such as the transportation of cadavers to the morgue and movement of supplies, trash, soiled material, and recyclables.
Health care buildings are expensive. It’s hard to determine what the need for hospital beds will be by 2032, but let’s look at the demand starting with our largest population, the Baby Boomers who will drive the use of acute care in the near future.
From Census Bureau statistics, 30 percent of the 1994 population was born during the Baby Boom (between 1946 and 1964). As this population ages, the median age will rise. In 2011, the first members of the Baby Boom reached age 65 and represented 25 percent of the total population. The last of the Boomers will reach age 65 in the year 2029 and will then represent 16 percent of the total population. The Census Bureau projects the nation’s population will grow more slowly between 2030 and 2050 than ever before in its history. So the question, is will the demand for hospital services driven by seniors peak between 2025 and 2030 and then decline?
This is where we get into the stranded capital discussion. There are many variables. Trying to predict demand 18 years from now is almost unthinkable, with the many changes in health care and wellness that could occur within that same time period. Strategic planners have to consider this and are asking, will we need these beds in 2030, only 18 years from now?
Good question! What happens if we are wrong?
Joanne Conroy is Chief Health Care Officer at the Association of American Medical Colleges. She blogs at Wing of Zock and can be reached on Twitter @joanneconroymd.