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Penn Medicine introduces $1.5 billion patient tower

The University of Pennsylvania Health System gets 56 percent of its nearly $6 billion in annual revenue from outpatient services.

So why is the West Philadelphia behemoth planning to spend $1.5 billion, the largest capital project in Penn's history, on a 17-story, 500-bed patient pavilion for the Hospital of the University of Pennsylvania?

"Inpatient care is not going away, and more and more people are coming to places like us and places like Hopkins and some of the other big places around the country," said Ralph Muller, chief executive of Penn's health system.

"You want your liver transplant done by somebody who does it all the time. You want your heart valve being replaced by somebody who does it all the time," he said.

The new private-room patient tower, an oblong tan structure that will rise on the site of the former Penn Tower Hotel, has been in the works as part of a long-range plan for a decade, but Penn officials formally announced the project at an event Wednesday in the Perelman Center for Advanced Medicine.

The tower will include a new emergency department and 47 operating rooms.

Muller agreed with the frequent lament of health-care executives that there are too many hospital beds in Philadelphia, but HUP needs more beds, he said.

HUP currently uses about 750 beds, but it won't have a net gain of 500 beds when the new tower opens in 2021 because semi-private rooms in the older facility will be made single.

"We'll probably increase by 150, but we're not tearing down beds. We'll wait and see," Muller said. "This doesn't open for another four years. We'll see what happens in '20, '21, '22, and if we need more beds, we have them there, and if we don't need them, we will close them down."

In a sign of the health system's financial strength, it plans to use profits from operations to pay for most of the $1.5 billion cost, borrowing just $450 million, Muller said. The system is counting on some philanthropy, as well.

Using cash from operations for big projects is a relatively new phenomenon as financially strong systems have only gotten wealthier, said Dan Grauman, chief executive of Veralon, a Philadelphia health-care consulting firm.

"This is something that we've seen only in the last five or 10 years. Before that, a much bigger percentage of a major hospital project was financed through debt," Grauman said.

Children's Hospital of Philadelphia and Main Line Health are other Philadelphia-area systems that have been profitable enough to expand without taking on large debt loads.

In the five years ended June 30, Penn Medicine has had total operating income of $1.46 billion. Even as it has expanded through acquisitions in Chester County and Lancaster County, its ratio of long-term debt to total assets has stayed in the range of 17 percent to 19 percent.

"That's incredibly low," Grauman said.

Muller, who started his 15th year at Penn Medicine on Monday, put the new patient pavilion in the context Penn's rejuvenation of its medical campus since he arrived. Projects with an aggregate price tag of more than $1 billion have included the Perelman Center for Advanced Medicine, the Roberts Proton Therapy Center, the Smilow Center for Translational Research, and the Henry A. Jordan Center for Medical Education.

"This is the completion of a 15-year cycle of renewing Penn Medicine," Muller said.