Cover Story: Are you ready for the disruptors?

Healthcare has changed in recent years, but you ain’t seen nothing yet

By Connie M. McCaffrey

Editor’s note: This is an expanded version of this article that originally appeared in the April 2018 edition of HREInsights magazine.

For some time now, healthcare real estate (HRE) professionals have debated what major influences or “disruptors” are significantly impacting the healthcare industry and changing medical facility usage. That was the subject of a spirited panel discussion at the InterFace Healthcare Real Estate West conference on Feb. 28 in Los Angeles.

The panel, titled “What Do Hospitals and Systems See Coming in 2018 When It Comes to Market Share, Consolidation and Delivery of Care, and What Will Be the Impact on Real Estate Usage and Utilization?” was moderated by Bryan Lewitt, Senior VP with CBRE. The panel included:
■ Craig Beam, President, Petra Integrated Construction Strategies;
■ Jeff Land, Senior VP, Corporate Real Estate, Dignity Health;
■ Michael Low, Principal, LP Healthcare LLC; and
■ Ross Caulum, Assistant VP, Corporate Real Estate, Scripps Health.

(Shortly after the InterFace conference, Mr. Caulum left Scripps and to become regional director of real estate for Boise, Idaho-based Saint Alphonsus Health System, a member of Trinity Health, which is headquartered in Livonia, Mich.)

Consolidation as a disruptor

Mr. Lewitt began the discussion by asking the panelists about the increase in consolidations in the sector. Mr. Land of San Francisco-based Dignity Health said that technology and other disruptors are driving the need for more partnerships and joint ventures. He also gave examples of healthcare companies that are tapping into specific verticals and operating new categories of medical facilities, such as Emerus and Adeptus, which have developed micro-hospitals in a number of communities.

Speaking to the largely local InterFace West audience, Mr. Lewitt noted that there are 18 standalone hospitals in Southern California and asked Mr. Low of LP Healthcare, a management consulting firm, how that is impacting the marketplace.

“Being an independent hospital in that market is becoming increasingly difficult,” Mr. Low replied. “In terms of the ways healthcare is being provided in Southern California with managed care, it’s difficult for those hospitals to extend beyond their traditional geography. This is forcing these hospitals to set up joint ventures and partnerships as they try to figure out how to compete.”

He added, “It used to be that hospitals wanted to own everything. No more.”

Mr. Beam of La Palma, Calif.-based Petra, a firm that provides design and construction management, as well as other services, said, “The M&A (activity) really bifurcates itself. You have large systems that are merging for scale and scope and trying to match what’s going on in the insurance industry for contracting leverage and some scalability in terms of purchasing and other things. You also have a subset which is the proprietaries such as Tenant and HCA that are pruning their portfolios. You also have smaller VC private equity money coming into the marketplace and seeing opportunities. That’s a completely different subset but still a strategy of making the hospital work.”

When asked about the San Diego market, where Scripps is based, Mr. Caulum said, “We’re looking to do what we do well: acute care and medical foundation space. We’re also trying to figure out how to do partnerships and affiliation so we don’t have to be all things to all people.

“However, from the spectrum of the delivery of healthcare, we can be all things to all people. That’s a change you see across the entire industry. Before, you had to own to have it. Now as an industry, we’re getting smarter. We’re seeing mergers, from individual hospitals to true corporate systems.”

Mr. Lewitt kicked of a discussion about healthcare integration by saying, “You have health insurance companies buying physician groups, you have drug stores buying insurance companies, bigger hospitals buying little hospitals, bigger doctor groups buying smaller doctor groups. So you have … medical records of the hospitals that aren’t the same platform as what the physicians have. So how are you handling integration?”

Mr. Caulum gave examples of technology platforms such as EPIC that are fully integrated and “very expensive.” He noted that because money is being spent on these platforms, there’s less money available for real estate.

Mr. Beam mentioned some examples of integration that haven’t been successful, such as Catholic Health Initiatives and Baylor being harmed by getting into the insurance business.

The big disruptor: technology

What are the underlying reasons for this integration?

“I wasn’t kidding when I said technology is a disruptor,” Mr. Land said. “There’s literally nothing that isn’t being done differently in the healthcare landscape today. And the technologies that are already here, currently being rolled out – telemedicine, robots, remote surgeries, remote film reading, remote education, SIMLAPS – all of it – that’s going on right now…” (SIMLAPS is an acronym for Simulated Laboratory-based Acute Physiology Score, which is a computer-based predictive model for the potential severity of a patient’s illness based on such factors as their age, sex, diagnosis and comorbidities, and whether or not they were admitted via the emergency department.)

“Those are disruptions on a monumental scale, but those are just the ones that are right now happening. Where you can actually go see it right now. The ones that are coming are so much more disruptive and in a very, very foreseeable timeframe.”

Mr. Land described the test that Dignity is conducting with IBM Watson in Arizona “that has already saved lives.” He said that today, doctors can press a button and in less than a second get comparisons of hundreds of thousands of existing and previous cases. He said the IBM Watson system pinpoints specific data that is likely to be an underlying cause of a patient’s illness.

“If you extrapolate what can be done with artificial intelligence on top of what we do now remotely, moving to the bedside at home is a reality,” he said.

Mr. Land then mentioned a recent Wall Street Journal article titled “What the Hospitals of the Future Look Like,” which had been mentioned by a panelist during one of the previous discussions at the conference. The article, which appeared Feb. 25, 2018, noted that healthcare providers are shifting away from their traditional inpatient facilities and are investing in outpatient clinics, same-day surgery centers, freestanding emergency rooms (FEDs) and micro-hospitals. The article noted that they are setting up programs that monitor people 24/7 in their own homes, and using digital technology “to treat and keep tabs on patients remotely from a high-tech hub.”

“If you believe what’s in the Wall Street Journal article, oh, trust me! That isn’t even the half of it,” Mr. Land said. “And that is just the stuff you can go take pictures of. What you don’t see and is coming like a freight train is huge…

“I’ve got news for you. It’s actually going to leapfrog the MOB. It will… I’m not saying our industry’s dying or anything like that. But it’s going to change the trajectory on the demand and the scale that we need for ambulatory facilities” because so much will be done through remote monitoring.

“We are in this boat together,” Mr. Land concluded, “and it’s entirely about the disruption on the technology platform.”

Private equity is a disruptor, too

When asked about private equity, Mr. Low said he doesn’t understand why private equity firms are pursuing hospitals because there are apps that already read imaging better than physicians.

As another example of how mergers and acquisitions (M&As) don’t always work out, Mr. Low recounted how DaVita Inc. (NYSE: DVA) acquired the HealthCare Partners medical group in 2012. But he said that acquisition wasn’t successful, so DaVita is in the process of selling the group – now known as DaVita Medical Group – to the “information and technology-enabled health services business” Optum, which is a part of the insurer UnitedHealth Group (NYSE: UNH). He noted that it will be interesting to see if Optum can integrate DaVita’s large physician practice.

Mr. Beam noted that technology and M&As are the only disruptors in the healthcare industry.

“St. Joseph Heritage built a clinic at Western Digital’s corporate headquarters,” said Mr. Beam, “and that’s where the employer came to St. Joe’s and said, ‘We want to control our costs and we don’t think it significantly controls our costs just through contracting.’ So two years later, they reduced the number of ER visits by 73 percent and had zero lower back MRIs.

“So you think, ‘Well, that’s not a big deal.’ But it turns out that’s like $10 million a year in savings for them by having a clinic on site and a physical therapist on site.

“So the disruptors, I think, are going to come in many different ways.”

Mr. Caulum said, “All of these disruptors will make the delivery of healthcare more accurate and quicker. They’ll be able to detect the underlying diseases better. This isn’t a guessing game; there is more finite defining of what the issues are.

“The good thing is there will still be a physical space where healthcare is delivered; however it won’t be the traditional doctor’s office, 8 to 5. Now the doctor’s office has to be open when patients want it to be open. And if you want to change doctors, you don’t have to go into the doctor’s office and argue about getting your paper medical records. You move where you want to move and the medical records are with the patient. It’s already here.”

Mr. Caulum said he’s concerned that the industry won’t be able to keep pace with all of these technology changes, but that the good news is that today’s medical school graduates are being trained differently that physicians were in the past.

Mr. Land said a big difference today is that Millennials trust technology more than they do doctors and that trust is part of what will bridge this issue. He also noted that mid-level extenders, such as physician assistants and nurse practitioners, are becoming more common, which could result in the need for fewer doctors and a difference in where healthcare is practiced.

Other panelists agreed with Mr. Land’s comments about extenders and noted that healthcare design must change to more team spaces rather than doctor’s offices. Other trends the panelists discussed were newer physicians wanting to be employees rather than owners, and older baby boomer physicians wanting to retire and sell their practices but having trouble finding buyers. One panelist noted that as more practices are being sold to hospitals, systems are reacting in a defensive mode to acquire those patients. 

Off-campus strategies equity

“Let’s talk about off campus,” said Mr. Lewitt. “Ten years ago, everyone wanted on-campus facilities. But now there are all types of attractive real estate out there to spread your wings. What’s going on with your off-campus strategies?”

Mr. Beam said the trend today is retailization of healthcare facilities and moving them into neighborhoods. He said Millennials don’t expect to have a relationship with a doctor; their priority is convenience. Mr. Land said his organization recently closed on 3,000 care locations across the country, which gives them a large enough scale to test concepts.

“This gets to the theme of being relevant to the patient/customer,” said Mr. Caulum. “Instantaneous gratification is important: same-day, efficient service and don’t make me wait too long in the waiting room. Finding the right locations is very much like retail: finding out where the right locations are from customers’ perspective and where the communities are growing. But you can’t afford to invest in multi-million dollar pieces of equipment in multiple locations, so it’s back to the future with a return to centers of excellence.”

The panelists were then asked what impact Centers for Medicare and Medicaid Services (CMS) reimbursements have on the HRE space. One panelist said that as customers pick up more of their healthcare costs, price transparency will become more important. Several panelists said lower reimbursements could result in an increasing reliance on cyber visits rather than visits to traditional doctor’s offices, as well as alternative medical services such as Aetna’s call centers. The panelists agreed that reimbursements drive consumers’ behavior and that their behavior can change “in the blink of an eye” with CMS changes.

During the question and answer period at the end of the discussion, a member of the InterFace HRE West audience asked the panelists whether they think Amazon will get involved in healthcare. One panelist noted that Google has its own clinic and other companies such as Apple want to do the same thing to lower their healthcare costs, so it’s “not beyond the pale” to think that Amazon will also do that and more.

Another audience member said he’s heard that hospitals need more space because there’s been a growth in demand, but that this contradicts what some of the panelists said about hospitals not needing more space. He said, “So what what’s the reality? Are they going to want to start owning again?” A couple of the panelists from health systems said they prefer to buy their own facilities, with one of them saying in his market, real estate is appreciating faster than inflation and that they also benefit from lower operating expenses and tax exemptions.

Another member of the audience asked if huge, centralized hospitals aren’t needed anymore.

Mr. Beam replied, “Most of the owned assets are on the acute care side. The demise of acute care has been exaggerated for about 40 years now. There’s been a consolidation.” He noted that inpatient admissions have been declining by about 1 percent a year for the past 10 years, but capacity has also been taken out of the marketplace. The leading systems are actually seeing growing inpatient demand while “second-tier” providers are seeing declines – much like older MOBs with smaller floor plates are finding it difficult to compete with today’s larger facilities.

Mr. Land said Dignity Health expects to have fewer acute care beds in the future – which raises the questions about what is to be done with vacated hospital buildings. There are opportunities for conversions, he said, citing the example of a small college moving into one former hospital.

“Are there uses for dead campuses? Well, it’s hard, but there are…,” Mr. Land said. “We won’t end up knocking them all over. I think there will be uses for those.” 