With approval yesterday by the state Health Care Commission, Mercy Medical Center can move forward on its $400 million project to build a new 18-story tower to replace its 1963 main hospital building.
Adjacent to Mercy's existing building on St. Paul Place, the new downtown tower is to have larger operating rooms and single rather than semi-private patient rooms as well as amenities such as a rooftop garden and valet parking.
Preparatory moves, including the opening of a new garage and the demolition of an old one, are scheduled for this fall. Construction of the new tower could begin in January, for an opening in the fall of 2010.
The replacement hospital marks another step in Mercy's 15-year evolution from a troubled urban hospital to one that has successfully attracted patients and revenue, giving it the capacity for an ambitious rebuilding program.
"Many non-teaching urban hospitals are struggling," said Thomas R. Mullen, president and chief executive officer of Mercy Health Services, the hospital's parent.
In 1991, when Mullen came to Mercy as chief financial officer, "there were questions as to whether this hospital should remain here. The physicians were unhappy. They said their patients were moving to the suburbs," he said.
Mercy determined that to continue its historic mission of caring for the poor - the Sisters of Mercy have been running a hospital on the downtown site since 1874 - it needed to attract more insured, paying patients from the suburbs. "That allows us to take care of the people who can't pay," Mullen said.
The hospital began a strategy of shaping and marketing programs - particularly in women's health, cancer care and orthopedics - that would appeal to insured patients. And to draw the patients, Mercy recruited a series of "magnet docs" - well-known specialists with established referral networks. In 2003, Mercy added a sparkling modern outpatient center.
The strategy has worked. Revenue and cash flow have more than doubled since 1999, the year Mullen became CEO and Sister Helen Amos, who had been chief executive since 1991, became executive chairwoman of Mercy's board. The number of surgeries has increased more than 60 percent.
While patient admissions are up 20 percent, growth has been even greater in outpatient visits - more than double since 1999. Most of that growth - a 65 percent increase - has come since 2003, when the new outpatient center opened.
Mercy has outperformed its urban peers. From fiscal 1999 to fiscal 2006, Mercy's revenue increased 108 percent, compared with an average of 76 percent at other Baltimore community hospitals - Harbor, Maryland General, Bon Secours, Maryland General, Union Memorial, Good Samaritan and St. Agnes, according to figures from the state Health Services Cost Review Commission.
Mercy's path - from endangered to successful - has been followed by urban hospitals elsewhere, although Mercy was somewhat ahead of its peers, said Paul B. Ginsburg, president of the Center for Studying Health System Change in Washington. His center has done long-term studies of health markets in about a dozen cities, not including Baltimore.
"More than 10 years ago, there was a panic that urban, independent hospitals had," Ginsburg said. "It turned out that an independent hospital that's notable is in fine shape." Urban hospitals that thrived, he continued, often followed "specialty line strategies," similar to Mercy beefing up its offerings in cancer and orthopedics.
While other hospitals have done this in the past few years, Mercy has been at it for more than a decade.
Mercy may have been an early practitioner of the "specialty line strategy," but in terms of hospital construction, it's coming somewhat late to a very big party.
Maryland hospitals have more than $3 billion in major construction and renovation projects in the pipeline, including a $1 billion project at Johns Hopkins, according to Pamela W. Barclay, director of the Center for Hospital Services at the Maryland Health Care Commission, the regulatory agency that reviews hospital and nursing home capital projects.
Many of the projects, such as Mercy's, are to replace buildings constructed in the 1950s and 1960s, when a hospital building boom was fueled by postwar population growth and a federal program to finance hospital construction.
New construction, at Mercy and elsewhere, features larger rooms, waiting areas and operating suites to accommodate new technology and more family involvement in patient care.
Mercy's new tower, at 672,000 square feet, will contain the same number of beds, and only a few more operating rooms, than the 500,000-square-foot tower it replaces.
Mercy's old tower will be used for offices, and will retain some functions of the current hospital, such as pharmacy and labs.
As for the new tower, it won't be fully complete when it opens. Mullen said the first phase of the tower would cost about $300 million, but Mercy plans to spend $100 million more after the opening to fit out a "shell" floor and add other features.
Mercy followed a similar approach with its Weinberg outpatient building, which opened in 2003 but outfitted a surgery center floor the next year and a cancer center floor in 2006.
"We'll only be in 60 to 70 percent of the [new] hospital [tower] on Day 1," Mullen said. "The last 30 percent, we've got to earn our way." But with a cramped urban campus, Mercy wanted to build enough to cover future needs, he said.
The expansion weathered the opposition of preservationists, who protested the demolition of historic rowhouses on St. Paul Place.
Barclay, of the Health Care Commission said such "shell" space is becoming a common feature of hospital projects, in part because the hospitals want to build as much as possible before costs go up. The cost per square foot of hospital projects has risen to $312 from $263 two years ago, an increase of 18.6 percent, Barclay said.
"A number of projects have had to come in for modifications because of the escalation in construction costs," she said.
Even with a softening of residential construction, Mullen said, Mercy is worried about finding enough subcontractors who can handle a large high-rise project. "If Hopkins is building a billion-dollar building and putting in 40 elevators," he said, "there's already a shortage of elevator people."
Mercy also must compete for philanthropic dollars. Overall, it plans to finance the project, including debt service, by selling about $250 million in bonds this fall, generating $150 million from operations and a fundraising drive similar to the $43 million collected in a drive that ended in 2003.
Here, however, Mullen said he's not worried about competition from Hopkins, which is drawing from an international constituency. For example, Sheikh Khalifa bin Zayed Al Nahyan, ruler of Abu Dhabi and president of the United Arab Emirates, announced a major gift to Hopkins' building project in April.
"They're just in another league," Mullen said, while Mercy's pitch will be, "If you believe in downtown Baltimore, you want to support Mercy Hospital."