By Elaina Myers, Assistant Editor

Key Takeaways: 

• Rising construction costs, reimbursement pressures and aging infrastructure are forcing healthcare systems to weigh deferred maintenance against growth and technology investments, increasing the need for flexible capital planning.
• Alternative financing models, including developer partnerships, sale-leasebacks and Energy as a Service, can help healthcare organizations fund facility expansions and infrastructure upgrades while preserving upfront capital, but require careful evaluation of long-term costs and obligations.
• Involving contractors and trade partners early in project planning helps facilities leaders assess real-time costs, identify site and material challenges, and make more informed decisions about project feasibility and contractor selection.

Healthcare systems continue to expand, but rising construction costs and competing capital priorities are forcing building owners to rethink how they plan and deliver projects. Rather than simply putting projects on hold, many are looking for alternative ways to preserve capital while still addressing infrastructure and operational needs.  

The financial environment is pushing healthcare organizations toward more flexible approaches to capital planning, says Meghan Faulkner, project executive at Frampton Construction.  

"Construction costs are up roughly 40 percent since early 2020," she says. "Reimbursement pressure from both government and private payers is squeezing margins at the same time costs are rising." 

That pressure is particularly challenging for health systems with aging facilities.  

"Many health systems require significant capital funds for deferred maintenance," Faulkner says. "These needs are competing with many other capital requests for growth and technology improvements, which often provide a much higher return on investment (ROI) along with patient and provider satisfaction." 

Alternative funding models 

As traditional capital becomes harder to secure, healthcare organizations are increasingly considering developer partnerships, sale-leaseback arrangements and Energy as a Service (EaaS) models. 

Developer partnerships allow healthcare organizations to work with third-party developers that finance and construct facilities, which the health system can then lease rather than own outright. This approach can reduce upfront capital requirements while allowing organizations to expand clinical services. 

Sale-leaseback arrangements offer another option. Under this model, a healthcare organization sells an existing property to an investor and leases it back, freeing up capital tied to real estate for other priorities. However, facilities leaders must evaluate the long-term lease obligations and how the arrangement affects control over future renovations and maintenance. 

EaaS models address a different challenge by allowing third-party providers to finance, install and potentially maintain energy infrastructure in exchange for ongoing payments. This can make it possible to replace aging mechanical and electrical systems without committing substantial upfront capital. 

These approaches are particularly relevant as deferred maintenance creates growing operational risks. 

"Owners are having to ensure maximum efficiency and flexibility with existing facilities and unfortunately despite the need, often capital goes to projects with the best ROI," Faulkner says.  

"The risk of failure with mechanical, electrical or plumbing equipment and infrastructure increases as maintenance and replacement are deferred,” Faulkner says. For example, a water main break or leak over a patient care or procedural area, could lead to significant revenue loss. Older energy infrastructure is also less efficient, resulting in higher operational costs. There can also be additional downtime and cost when replacing failed equipment versus a more proactive replacement strategy." 

For facilities managers, alternative financing can create opportunities to address infrastructure deficiencies before equipment failures disrupt patient care. However, evaluating these arrangements requires looking beyond initial project costs to consider ongoing expenses and long-term flexibility. 

Early contractor involvement 

As healthcare organizations evaluate funding options, involving contractors earlier in the planning process is becoming increasingly valuable. 

"Real-time cost modeling keeps the project grounded in what's feasible for the budget rather than discovering a project is unaffordable after the design is completed, and expectations are already set with the owner and end users," Faulkner says. "Early contractor and trade-partner involvement can also uncover site conditions, material lead times and constructability issues before they become expensive.” 

Identifying these challenges during feasibility planning can help owners determine whether a renovation or new facility offers the most practical use of available resources. 

Contractor selection also becomes more important when budgets are constrained. 

"Owners should inquire about their trade-partner relationships and labor market," Faulkner says. "A good partner should have current market intelligence — that's what determines real cost, more so than historical cost-per-square-foot benchmarks." 

As financial pressures continue, alternative financing and early contractor collaboration will likely play larger roles in healthcare capital planning. 

"Owners should look for a partner who can provide real time cost analysis and estimating, which provides live tracking and cost transparency to the entire team, enabling better decision making and higher confidence in the final project cost," Faulkner says. 

Elaina Myers is the assistant editor of the facilities market. She has covered various topics from pest management to resilience to sustainability and covers all holidays and special days in the facilities field. She also manages the FacilitiesNet social media accounts.