Strategic Approaches to Aging Infrastructure in Low-Growth, High Construction Cost Markets
The cost of new hospital construction is becoming increasingly prohibitive. In many markets, a 300-bed replacement facility can now exceed $1 billion in total project costs, driven by escalating labor expenses and geopolitical dynamics. Rising interest rates further compound the challenge, making borrowing significantly more expensive. The result? Extended payback periods and heightened strategic uncertainty introduce unacceptable risk. Hospital boards, physician groups, and other stakeholders are increasingly walking away from new-build projects, unwilling to absorb the financial burden on their profit and loss (P&L).
For health system executives, the challenge is intensifying — addressing outdated infrastructure in low-growth regions amid demographic shifts, quality care imperatives, and the competitive pressures of consumer-driven healthcare. While new facilities may appear to be the obvious answer, they are not always the most financially sound or quality care-focused solution.
Instead, we recommend a three-pronged approach that prioritizes ensuring portfolio alignment, maximizing existing assets and real estate, and redistributing patient volumes to lower-acuity settings. This strategy enhances cost efficiency, expands access for patients, and relieves capacity constraints — while reducing the financial strain of new construction.
1. Portfolio Alignment
The first step is ensuring the portfolio of clinical services offered today aligns with leadership’s vision for the future. Understanding the current state of service delivery relative to the future trajectory of market need ensures that facility plans accommodate changing community dynamics. This enables flexibility as the organization continues to pursue strategic imperatives.
2. Effective Utilization of Existing Real Estate
Before considering new construction, seek to fully utilize the space you already own or lease. Renovating existing facilities is significantly more cost-effective than building new. Health systems can unlock substantial capacity by repurposing underutilized assets:
- Transition strategically misaligned units into spaces that advance priority service lines and accommodate projected growth. For one system, our planning team recommended the conversion of rehab and transitional care units into medical/surgical beds at community hospitals, capturing more than 100 beds in a short timeframe.
- Retrofit and reimagine closed units: Repurpose closed inpatient areas — such as women’s health, rehabilitation, or correctional care — to deliver immediate capacity while advancing next-generation care models.
- Reconfigure space to support new service lines or expand outpatient offerings.
These actions offer near-term solutions that improve patient flow, reduce costs per case, and enhance financial sustainability — without the timelines and risks of new construction.
3. Decant Patient Volumes to Lower Acuity Settings
Redistribute low-acuity patient volumes away from tertiary and quaternary campuses to free up space for high-acuity care. This strategy not only improves throughput but also positions the system to deliver care closer to home in more cost-effective environments.
Identify neighborhoods or suburban markets where ambulatory services can be expanded. These sites often include:
- Primary and specialty ambulatory clinics — often the first place to start.
- Imaging/ancillary services — like laboratories and retail pharmacies.
- Surgery centers — ensure scale to maximize facility investment.
- Comprehensive cancer centers — especially infusion.
Depending on scale and community need, future inpatient beds may be added to create full-service medical campuses. This preserves the role of flagship hospitals as high-acuity centers while expanding access and efficiency at community hospitals.
Strategic Benefits
Implementing this approach yields measurable impact across five key dimensions:
- Cost Efficiency: Lower-cost sites reduce the cost per case and improve financial sustainability.
- Capacity Relief: Frees up beds for high-acuity patients, ensuring timely and efficient care.
- Access Expansion: Brings care closer to home, especially in underserved areas.
- Infrastructure Modernization: Enables targeted upgrades across a smaller footprint, minimizing construction scope, cost, and timelines. Making critical infrastructure updates also mitigates risk to revenue-generating functions.
- Strategic Growth: Positions the system to respond to regional economic shifts and population trends.
Conclusion
For health systems facing infrastructure and capacity challenges, the most strategic path forward is not always new construction. By first optimizing existing assets and redistributing patient volumes, systems can preserve capital, enhance operational efficiency, and prepare for the future. When new facilities are eventually built, they can be reserved for high-acuity, revenue-generating functions — ensuring every square foot operates at “top of license” and delivers maximum return on investment.
© Copyright 2025. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
