The healthcare paradigm shift

BOMA PANELISTS DISCUSS NEW FACILITIES, NEW STRATEGIES

 

By John Mugford

There’s been a lot of talk in recent years about ambulatory strategy in the healthcare and healthcare real estate industries.

But what does the term really mean in today’s era of sprawling suburban areas and high-tech medical equipment and procedures?

That was a question asked by Neil J. Carolan, chief physician development officer of Tucson, Ariz.-based Carondelet Health Network, at the outset of a panel discussion during the “2007 Medical Office Building and Healthcare Facilities Seminar” prior to BOMA International’s annual conference in New York this past summer.

“Today’s healthcare environment is significantly different than yesterday’s healthcare environment, which doesn’t look anything like the healthcare environment of five years ago – we all know that,” Mr. Carolan told a large crowd in one of the larger conference rooms at the BOMA MOB conference.

“We want to talk more about the relationship – I call it the marriage – between the developer and the hospital or the healthcare system … the needs of the healthcare system in terms of the clinical integration of the development of buildings and services,” he added.

Mr. Carolan was one four members on a panel discussion titled “Reaching New Markets: Building Ambulatory/Off Campus Strategy.” The other panelists were George Milligan, president of Des Moines, Iowa-based The Graham Group; Cindy Alloway, chief operating officer of Omaha, Neb.-based Alegent Health Lakeside Hospital; and Malcolm Sina, CEO of Palm Beach Gardens, Fla.-based DASCO Cos.

“I want to talk about taking care away from the hospital setting and bringing it more into the neighborhoods, which is becoming more and more popular and much more a part of how care is provided,” Mr. Carolan noted.

That’s because the delivery of healthcare has undergone a paradigm shift, according to Mr. Carolan and the panelists.

“Hospitals are now for the very, very sick,” Mr. Carolan said. “If you’re … sick you have more choices. So more and more of the higher-level of acuity care is going to ambulatory settings. The ancillary care facilities are seeing more ill patients than they did certainly five years ago.”

This move to providing acute-care in outpatient settings has been made possible because of technological advances, Mr. Carolan said.

“We now have better and more complex diagnostic care at the ambulatory setting,” he said.

“The world is changing,” he added, “and as a result of the healthcare world changing, the real estate goes along with that.”

The panelists talked about three different healthcare delivery strategies and the facilities needed for each. Those developments include the following: single-building outpatient facilities, such as MOBs with surgery centers; multi-building medical malls that concentrate solely on healthcare; and healthcare villages, which incorporate healthcare facilities, including hospitals and outpatient facilities, with support buildings such as retail, restaurants and hotels.

Each provides a unique way of delivering healthcare and ambulatory healthcare services, the panelists said in their presentations.

Outpatient strategy

The definition of ambulatory strategy is the decentralization of clinical care, according to Mr. Carolan. He further defined outpatient care as the delivery of healthcare outside of the hospital setting.

“It provides more efficient access, easier parking and while it may be on a hospital campus it is typically away from the main hospital,” Mr. Carolan said.

“I go back to the underside of clinical care because the developers can no longer just build buildings, they’ve got to integrate closely with the provider … to make sure the buildings they are building are going to provide the clinical services that are necessary and are convenient and that are in close proximity to where the consumer or patient wants it,” he said.

Mr. Milligan of The Graham Group said he was asked to talk about how deals come together between developers and health systems, and what role developers play in implementing the strategy of delivering healthcare. As an example, he pointed to a project the company did for Iowa Health System and its Iowa Methodist Hospital in Des Moines.

“The hospital had a radiation therapy unit that was in the bowels of the hospital, level C, you know, 40 feet below grade in a 1940s kind of setting,” Mr. Milligan said. “They wanted to make to make this service more visible and they … had received a very large gift from an individual that they wanted to take advantage of.”

The first thing The Graham Group did was convince hospital administrators to incorporate the cancer center into a large on-campus medical office building. Administrators had been hoping to build two separate buildings on campus: a medical office building with a cancer center next to it.

“As people in this room here know, land on a campus is a very valuable commodity,” Mr. Milligan said. “It took us 18 months to convince Methodist that it made more sense for them to put the cancer center in the lower level of our building, with room for expansion, than to build two separate structures.”

When the new building was complete, the oncology department had three doctors.

“I called one of the docs before I came to this conference and asked how many docs they have today,” Mr. Milligan said. “The answer was 16. And he figured they were doing about 40 percent of the oncology services in the state of Iowa from that building. I would say that for Methodist Hospital it has been a success story. I think Methodist would say that without this facility they never would have achieved the market share they have today.”

The second example Mr. Milligan talked about was an 85,000 square foot orthopedic and neurosurgery project for Morton Plant Hospital in Clearwater, Fla. The hospital wanted to grow its orthopedics and neuroscience service lines.

“So they made a conscious decision to create an orthopedic, neuro-themed building and we were asked to create a world class ortho-neuro pavilion,” Mr. Milligan said

To get the project rolling, The Graham Group helped attract two Clearwater-area orthopedic groups to the on-campus facility. Neither of the groups was growing, as each was located in off-campus, Class C buildings a couple of miles from Morton Plant Hospital.

“Neither group had a clear vision of how to grow and go from A to B,” Mr. Milligan recalled. “One group had three docs, today they have six, while the other group started with seven physicians and today has 14. So, in fact these two groups have attracted 10 orthopedic physicians to an on-campus building at Morton Plant Hospital.”

“Our job was to implement (the hospital’s) strategy – and that’s how we as a developer view our role with these projects,” Mr. Milligan said.

Developer’s role

Mr. Milligan described what he believes are the various roles of the developer in such projects. The first role is to physically create the asset.

“But I think even more important than that is the fact that the facility has to provide a competitive brand,” he said. “The developer can never take the position that, ‘Whatever I create, these physicians will move into the building and pay for it.’ … (The physicians) know what’s going on. They’re intelligent. Today they have very good business managers who know the marketplace.”

Another role of the developer is to educate potential tenants about rent structures.

“It’s not going to be possible for the developer of a new Class A building to offer rent that’s the same as the class C property that’s 20 years old,” he said. “That’s not a realistic expectation. But also the role of the developer is to educate the clients about why they’re going to pay more and what it can mean to their business to move into the new building.”

The role of today’s developer also typically involves finding physicians to rent space in the facility, providing on-site management of the finished building, offering tenant improvement (TI) allowances for physicians, facilitating potential joint ventures between the hospital and physicians, and offering physicians ownership stakes in the new facility.

“When it comes to leasing up a facility, if the hospital does a good job of telling us what physicians and physicians’ groups we should go after, it’s a pretty straightforward process,” Mr. Milligan said. “Our job is to go get the best docs for the hospital. And we don’t work for two hospitals in the same market, we can’t do that.”

Remain flexible

Mr. Sina of DASCO also shared what he feels are important roles for the developer as it builds buildings and relationships with hospital systems. He shared DASCO’s experiences working on three projects in three different areas of the country.

“One on the East Coast, one in the South in Texas and then one out in Colorado,” Mr. Sina said. “I’m talking about different parts of the country, different market shares, different strategies as they relate to the outpatient ancillary services that they’re bringing out into the expanding community. The three different projects show how a developer needs to remain flexible and respond to the wants and needs of the health system.”

One of the examples is in Houston, where DASCO recently completed two projects for Memorial Hermann Heath Systems – one of the dominant providers with a 20 percent market share in the Houston market.

“Memorial Hermann had purchased two approximately 40-acre parcels, one in the north of Houston in an area called Cy-Fair and one in the south in Pearland,” Mr. Sina said. “Both are high-growth population areas.”

Administrators with Memorial Hermann had a “very definite” idea about what they wanted, he said.

“The buildings are exactly the same in both locations – 80,000 square feet, single-story – which they felt would attract the primary care user which has a lot of in and out traffic. And then the two-story portion of the building is where the specialists are teamed.”

Each of the new MOBs was built on land where a hospital was planned in the future. Each has an ASC and in each case Memorial Hermann entered a joint venture with physician/tenants, which DASCO helped facilitate.

Another example is in Towson, Md., just north of Baltimore.

“The game plan was not necessarily to expand the outpatient concept into the suburban area but to really expand the outpatient concept right on the campus,” Mr. Sina said. “We initially went into it to create a cardiology center of excellence … with a smaller oncology center in the back of the building, with a separate entrance. Typically you want to create a separate entrance for oncology patients.”

In the initial development stages, plans called for one radiation vault, Mr. Sina said.

“But right before we started construction, the hospital wanted to add two vaults, so we ended up changing that,” he said. “Then in the middle of construction, the hospital was able to recruit a world-renowned oncologist who had a significantly different concept of what he wanted to be able to do for cancer patients.”

Even though the building was complete the oncologist wanted to add a healing garden.

“So we added a 3,500 square foot, two-story atrium onto the building,” Mr. Sina said. “It’s primarily glass, lots of plants, lots of subdued lighting where the chemotherapy patients can receive some of their treatments. This is under construction right now. So that brings up the point of being flexible. Not only does healthcare itself keep changing, but so can each and every project.”

The last project Mr. Sina talked about is in Parker, Colo., a growing area in the southeast portion of Denver’s metro area. The client was Denver-based Centura Health System, which had started construction on a new hospital on the site – Parker Adventist Hospital – and was considering self-developing an on-campus MOB.

“During the construction of the hospital they elected to go out to an outside developer and we were awarded the assignment,” Mr. Sina said. “This is really a fully integrated model of outpatient services as well as acute care services from the ground up. The main entrance to the hospital is also the entrance for our medical office building. You walk into the atrium area. The MOB is directly off to the left. We have an ASC in there and then you walk into the main lobby of the hospital as well.”

“These represent three very different strategies in terms of outpatient ancillary services and for growth within the different marketplaces,” he said. “If there’s nothing else you come away with today it’s that there is not necessarily one set goal or objective that a hospital or a hospital system has in developing new buildings. Each marketplace is different. Key management is different.”

It takes a village

As the discussion moved into defining healthcare villages, Ms. Alloway talked about Alegent’s healthcare village projects – one well established and another planned for the future – in Omaha and how the health system is using the concept to meet the demands of a growing population.

Ms. Alloway told the crowd she was part of a BOMA panel discussion concerning ambulatory strategy a year earlier as well.

“But this year we have a whole different ballgame,” she said. “That is how quickly healthcare is changing in our environment.”

“We have nine hospitals affiliated with us, and five are metropolitan hospitals, with Lakeside Hospital being the newest of them,” she said. “Omaha is a very growing area with three-quarters of a million population and Alegent Health has very strategically placed our hospitals throughout the community.”

As she summed up the benefits of healthcare villages, Ms. Alloway said that such a concept creates a destination in a growing, developing area.

“The healthcare village offers a collection of services that focus on health, healthy living, and complementary services such as healthcare food stores, book stores – the types of things that complement our healthcare services,” she said. “There is a strong appeal to consumers because it is responsive to their wants as well as their needs. And it’s all within a very attractive environment. We like to design ours with water features and other features that will attract people. It also must have easy access, convenient parking, multiple amenities – it’s a one-stop shop.”

Grow with the growth

Lakeside Hospital, according to Ms. Alloway, is in the fastest growing area of Omaha, in the southwest part of the metro. In seven years, the population has grown 65 percent within a 5-mile radius of the hospital, she said.

To meet the needs of a growing population, a health system cannot simply obtain a couple hundred acres of land and build a “humongous” hospital, Ms. Allow said.

“You have to start off as you normally would because population grows over a span of time,” she said.

That’s why Alegent chose to eventually build a healthcare village around Lakeside Hospital, making it a destination for people seeking a variety of healthcare services. The system also has plans for a healthcare village in the northwest part of the metro area, where it has acquired land and will start small, perhaps with an outpatient clinic inside an MOB.

“The key was to start fairly small and simple and to create a flow, starting with the physician’s offices and the related services that those physicians offer,” she said. “So primarily what you do is purchase a large amount of land but you develop it in phases.”

Like the other panelists, Ms. Alloway noted that bringing in primary care physicians – pediatricians, OB/GYN and family doctors – is one of the keys to successfully developing a growing healthcare services site.

“I’ve been in this business for years and I can tell you that you need to have a good primary care base for referrals because otherwise the specialists will not even look at your location,” she said. “That’s when the specialists will come. In our case, we had limited diagnostic imaging, lab services, X-ray – just the basics when you first start and then, over time, you move up to the health park concept.”

As far as Ms. Alloway is concerned, a health park can eventually be built into a healthcare village.

“It’s when you start building on these primary services that you start to bring in the specialists,” she said. “You start to bring in some general surgeons – orthopedic, EMT, plastic surgery – and that’s what leads to an ambulatory surgery center. So you add things like more diagnostics, MRI, CT, and potentially therapy type of services, maybe a retail pharmacy. Then once you have built that, then you can go to the health village concept.”

“A healthcare village only works in growing areas where people have very busy lives and want the convenience of good healthcare services in one location,” she said. “So this concept benefits us as a provider because it creates additional access points, referral points, for our system and that’s very important.”

She added that providing lots of outpatient services in a healthcare village also frees up capacity, in effect, at the system’s hospitals.

“We will be needing more hospital beds in the future because we have the baby boomers who are going to be getting older, requiring more acute hospital care services,” she said. “And at the same time there are many patients that can be moved out of the hospital to outpatient settings.”

Medical malls

Mr. Carolan talked about the Carondelet network’s development of two medical malls outside of Tucson, one in an area called Green Valley and another in an area called Rita Ranch. The system began an aggressive ambulatory strategy when it conducted a study seven years ago in southern Arizona.

“People didn’t know who we were or what we were,” Mr. Carolan said, noting that the system was primarily known for aging facilities and older doctors.

So the system set out to beef up its ambulatory strategy.

“The first thing we knew we had to do was go through our technology,” he said. “The result is that we now have an ambulatory sleep lab. We now have ambulatory imaging centers. We now have laboratory locations spread throughout southern Arizona. We now have rehab, not just in the hospital, but in off-site locations. We have robotic surgery and more advanced surgical services. We have a medical surgical weight loss program. We provide ambulatory services for women and infants. We have a wound healing center. Most of these components are in ambulatory settings and not within the walls of a hospital.”

The reason Carondelet finds the medical mall concept so advantageous, Mr. Carolan said, is because the system covers such a large geographic area of southern Arizona.

“That means our patients are spread out over a large area and we need to take the care away from the two-day hospitals in the city and get it more out into the suburbs and outside of the suburbs,” he said. “The medical mall concept is very successful for us.”

Tenant improvements?

After the presentations, several members of the audience asked questions of the panelists.

One line of questioning from a couple of audience members dealt with the ever-pesky issue of tenant improvements. How much to provide in TI allowance? How much of the TIs are built into rental rates?

“For a couple years we provided a TI allowance of $50 a square foot, and probably quoting $55 a square foot right now inside the pro forma rents that we’re quoting,” Mr. Milligan answered. “If you have a large package of tenant improvements, you’ve got a shot at making $55 a square foot work. If you’re doing little suites after the big projects have gone through you’re not going to make $55 work. But that’s the number that we’re using right now. I would say that the average tenant improvement package today is coming in between $60 and $65 per foot.

“When that happens you have to communicate to the tenant and then you have to find a payment method that will work for both of you. You can enhance the improvements, you can do a longer lease. There are a whole lot of different things you can do. The one thing you can’t do is say to the physician that whatever you design we’ll pay for it. That’s a bad model.”

Mr. Sina noted that the cost of TIs is going to vary greatly from market to market.

“Getting back to one of the points made earlier: physicians do not like to write checks,” he said. “They also have the tendency to remember only one number, and that one number is their rent. If there is another competing MOB in the marketplace that is offering a rental rate of, let’s say $15 triple net and they offer a lower TI allowance, and we’re offering a $50 TI allowance but our rental rate ends up being $17, the doctor thinks that we’ve offered a bad deal.”

“So the idea is to try to provide a TI improvement allowance that is more equal to what the market is offering, which helps us reduce the rental rate,” Mr. Sina said. “… At least then they’re remembering the lower rental rate.” q