Feature Story: Providers might be more open to third-party capital

System executives were part of Colliers’ virtual HRE conference on Sept. 24

By John B. Mugford

As noted as part of the description of a panel session that was part of Healthcare Virtual Conference 2020 sponsored and broadcast over the internet last week by Seattle-based Colliers International, “the world turned upside down in March.”

Indeed, while the COVID-19 pandemic has affected nearly everyone and every type of organization, perhaps no entities have had their worlds turned upside down more than the country’s health systems, hospitals, group practices and other care providers. People involved in providing healthcare services say their businesses have always been, and certainly were prior to the pandemic, in a state of flux, causing them to adapt to changes on an ongoing basis.

One of the four presentations during Colliers’ webinar on Sept. 24 focused on the pandemic’s impact on providers, looking at how they have adapted, what they’ve learned and how they are planning for the future in a post-COVID-19 world.

“There is definitely a perception and nervousness in the patient population across the country around going to the hospital, going to receive care in a medical office facility for fear of exposure and just general misinformation,” said Courtney Nelson, director of real estate transactions & portfolio strategy with Chicago-based CommonSpirit Health, which operates 142 hospitals and 700 care sites in 21 states.

So, in addition to still working through various aspects of the 2019 merger of Catholic Health Initiatives and Dignity Health that formed CommonSpirit, system officials have “spent a lot of time in our marketing departments and corporate communication departments … on marketing campaigns … to enhance consumer awareness of the protocols that we have in place and to increase (patient) confidence that they can come into our facilities in a safe environment, receive that preventative care and receive that emergency care that has otherwise been deferred … because of fears of COVID exposure.”

Ms. Nelson was joined on the provider panel by: Mark Yagerlener, real estate director with the 151-hospital Ascension Health system, based in St. Louis; Alex Bateman, CEO of Atlanta-based Resurgens, an orthopedic practice with more than 100 physicians and 24 locations; and Ketan Sanghvi, executive director of real estate at Piedmont Healthcare, which has 11 hospitals and 550 locations in Greater Atlanta. The moderator was Michael Lipton, a senior VP and principal in Colliers’ Atlanta office.

As for the biggest impact of the pandemic, Mr. Yagerlener of Ascension added that the system’s response to an “incredible” loss of revenue has been a “slowing down of our capital spend.”

“We have been so fortunate with Ascension that we’re not seeing layoffs or site closures,” he added. “But the loss of revenue from the initial shutdown of elective procedures “really causes a system, and every hospital system is going through this, (to manage) our capital spend relative to what the revenue is right now. And first and foremost is maintaining and getting back to business, and … having the patients and our customers feeling comfortable coming back into the hospital.”

Mr. Yagerlener noted that the pandemic has accelerated Ascension’s focus on “shifting … from providing procedures inside the hospital to how can we provide more patient care outside of the hospital setting.”

For the developers and healthcare real estate (HRE) firms listening in on the webinar, Mr. Yagerlener added that despite the fallout from the pandemic and a big loss of revenue, Ascension still has an “aggressive growth strategy and moving toward an ambulatory platform.”

For Resurgens, which is considered one of the country’s largest orthopedic groups, the shutdown of elective procedures basically shutdown the business for a number of weeks, as “90 to 95 percent of what we do is elective,” said Mr. Bateman, the CEO.

“As we started to ramp back up, we really had to get patients comfortable with coming to see us and so the protocols that we put in place — the screening at entry, distancing in the waiting room, being moved to the exam room immediately and to get seen as quickly as possible and efficiently out the door — was really important.”

Those measures, he noted, have been “paramount for us to really get back to where we are at — we’re not quite back to business as usual — but we’re a lot closer (close to 90 percent) than we were just two or three months ago.”

Mr. Sanghvi of Piedmont probably said something that perhaps provided the most promise for those with HRE and development firms in the listening audience: “As for owned versus leased perspective, and for the most part we were already in a lease mindset, and I think we will continue to be in that mindset. But I do think that for the many hospitals and health systems that have traditionally been in an owned mindset … they’ll start reconsidering that and start focusing their money on their core business versus real estate.”

Ms. Nelson of CommonSpirit echoed Mr. Sanghvi’s comments, adding that the system, like so many others, has experience a “slowdown and pause, frankly, on capital spend, and the capital spend looking forward is limited given the revenue impacts from COVID.

Prior to the pandemic, CommonSpirit was shifting its philosophy tilted more toward owning healthcare facilities, especially ones in which it occupies a majority of the space, as opposed to leasing.

“But now, with the pandemic, we can’t own and build and expand as part of a strategic growth … as there are just so many dollars to go around,” she said. “So, we’re looking at leasing more, and we’re doing a tremendous amount of comparing traditional leases to things like CTL (credit tenant leases). We like that, and we are examining the accounting treatment further and … how rating agencies or others might view that lease arrangement as compared to a little bit more traditional arrangement.”

However, she noted that the costs (of CTLs) are “from our analysis, less expensive, for those projects that we’ve looked at,” she noted. “And we get the benefit of owning the facility at the end. We’ve done a couple CTLs during this COVID period for projects … so we’re excited to see kind of where that goes as we look at new development, new growth, new strategies … as opposed to the traditional 10-year lease with the (tenant improvement) allowance.”

Even more emphasis on outpatient

As the panelists talked about their organizations’ strategies, Mr. Lipton of Colliers noted that even with many providers facing capital “limitations, I’m not hearing that there’s going to be less ambulatory real estate, it’s just going to be different. Is that accurate?”

Mr. Bateman of Resurgens Orthopaedics agreed, especially when it comes to his organization.

“If there’s a silver lining for us, if you will, it’s that we are primarily outpatient, as we have eight outpatient surgery centers here in the Atlanta market,” he said. “So, from whether it’s the primary orthopedic care to diagnostics with MRI, surgery and follow-up physical therapy, it’s all done with us outside the confines of the hospital. So, from that perspective, I think we’re well-positioned. And our footprint as it is today, is necessary. “

He added that the group is in the process of “building a new supercenter that has all of our ancillaries, including an ambulatory surgery center… We don’t have anything else that’s really near-term on the expansion front but assuming, you know, a vaccine comes out and things start to sort out in that regard, we will continue to adjust and grow our footprint to service the needs of Atlanta. So, you know, really our business is going to persevere, and we’ll continue to add points of access whenever we need to.”

The other panelists noted that their systems, too, continue to look to expand their ambulatory networks in order to bring services closer to their patients and provide them with as much convenience as possible.

“We’re continually looking for opportunities to expand and bring those ambulatory boxes to different areas, and different markets to gain market share,” said Mr. Sanghvi of Piedmont. “We’re looking strategically at putting them in the right populations, while looking at the populations where we currently do not have a presence in order to try to gain some of that market share. And then, we’re looking strategically at the right mix to put in to these small- or medium-size boxes, and so we’re doing some of that analytics in house and seeing what those services are.”

“And, we’re looking at using folks like yourselves (those with HRE firms and developers ) to help find sites, as well as developer partners to implement and execute on the projects.”

Mr. Yagerlener of Ascension added that before making such capital commitments the system is being “very strategic and doing a lot of in-depth locational analysis and demographic studies to make sure that we’re … putting an ASC or an ambulatory function that meets the needs of the patients in that community. Because that’s the key: providing healthcare that is convenient and accessible to our patients. So, you know, in spite of the fact that I mentioned capital is constrained, we’ve set aside a targeted fund of capital specifically for ambulatory growth and ambulatory surgical centers. So, it’s a very focused growth opportunity.”

How can HRE firms help?

At numerous HRE conferences prior to the COVID-19 pandemic, executives with health systems serving as panelists were often asked what they are looking for from their real estate advisors.

That question has taken on even more importance during the pandemic, the panelists noted.

“We don’t make decisions quickly and oftentimes we’ll work on something for years … definitely a long game,” Ms. Nelson said. “But I would say in this current environment, we’re seeking every opportunity to achieve savings, to reduce rents, to negotiate renewals at very aggressive rates. We have huge targets for savings that were in place pre-COVID and certainly now. And I hate to sound like one of those folks, but we know as a tenant that the market in real estate is changing, so for brokers and service providers, keeping a pulse on the markets where you’re working with us is very important.”

As an example, Mr. Nelson said she and her colleagues would like to receive word from brokers when a space that be strategic for the system opens up.

“The boots on the ground knowledge is important … especially since I’m not able to travel at this point in time, unless it’s for very special circumstances, so we’re looking for that immediate market knowledge that you have.”

Mr. Yagerlener of Ascension added that the system values brokers and HRE professionals that “really understand the healthcare business. I mean, to be true, Colliers has really helped us immensely, doing evaluations of clinics based on the productivity and the RVUs and the revenue generated on a per exam room basis. So, it really helps us, it’s more than just rent, as that’s just one component.

“More importantly is, what’s the overall revenue profile of that clinic? It really helps us make good advisory presentations to leadership to really rethink how a facility is performing,” he continued. “The other part is really helping us with mapping. I mean, there’s a whole lot of mapping firms out there and to have a brokerage firm understand the mapping and help us overlay more than just … demographics but along with what else is happening in the marketplace, including rental rates and those sorts of trends.”

Mr.  Bateman of Resurgens added that a good, valued real estate advisor for the group not only helps the company with “mapping and data, you help us with zip code analyses and other things to really make sure we’re making smart decisions, coupled with the market intelligence that you guys provide. (Colliers) is very data driven … and that’s so important, especially in healthcare. We have … limited capital. We’ve got to make great decisions. We can’t afford decisions that don’t work out, so yeah, I think that the high level of service, keeping that up, and also delivering on the data and the analytics is super helpful for us to make good business decisions.”

Other key points raised

Here’s a look at some other salient points raised by the panelists concerning their organization’s responses and strategies around the pandemic.

■ While the pandemic has certainly been hard on Piedmont, the system, according to Mr. Sanghvi, has learned, and is in the process of figuring out, a number of important strategies for moving forward. One of them those involves focusing most of its efforts and resources on moves that are “accretive” to the organization. “There are marginal or lateral moves that the organization can make, but our focus became clear as we really focused on those things that were accretive to the organization, whereas the lateral moves were kind of dropped down to the bottom of the priority list.” Another valuable lesson the system learned is how important it is to control its own supply chain, “specifically to securing and the distributing of PPE as well as testing equipment,” Mr. Sanghvi said.

“We were actually pressed in a matter of days, or weeks, to come up with a short-term lease for additional warehouse space to house our stockpile of PPE, and while we got through the crunch of March, April and May, it kind of became clear that Piedmont as an organization wanted to take more control of the overall supply chain process, and so we’re actually in the middle of evaluating our dependence on some of these third-party vendors and what it would mean to really take control of that process.”

■ While most health systems with growth plans are looking to increase their ambulatory facility network, the pandemic has caused many systems to re-examine how much space they need for administrative purposes. Many systems are looking at plans that could entail having more administrative, or back office, workers work from their home offices. When Dignity and CHI merged, there was not need to close hospitals because the system’s coverage areas did not overlap, according to Ms. Nelson. However, the system has had to look at the amount of space it needs for “corporate services,” not only because of the merger, but now, because of safety measures put in place by the pandemic and an increase in the number of people working from home.  “What has really changed for us is the remote work environment,” she said, noting that the system is relying on its IT department to help the system adapt to the remote-work model. ““Our IT backbone can support it, and that’s really accelerated our initiatives and goals to reduce the administrative spend, the spend on non-revenue generating space.”

■ Along that same idea, Mr. Yagerlener of Ascension said that even before the pandemic’s onset the system was “evaluating just what our administrative footprint needs were, and then with the shift to working remotely we’ve looked pretty seriously and very intentionally as to what our short-term and long-term needs are for our associates.” He said the system is considering implementing a variety of approaches, such as “remote, partially remote and onsite essential and are moving forward very thoughtfully and careful not to overreach back too quickly, with a goal of rolling out an office plan that provides for a safe office environment for our associates. And it seems to be so far very well appreciated and received by our associate pool.”

■ As far as Piedmont Health is concerned, the system is “certainly thinking about how to shrink our footprint from an administrative perspective and this COVID scenario has accelerated some of the thinking around the work-from-home model,” Mr. Sanghvi noted. “There are certain departments that have been taking baby steps towards working from home and the COVID crisis has really forced the issue, and interestingly enough most of these departments have been able to prove out their ability to work from home and have shown that it can be just as effective in that environment.” He noted that the system’s “revenue cycle department, which is typically in an open, tightly-packed cube farm-like setting, was forced to work from home, and as it turns out, their metrics have shown that they’re even more productive than they were back in the office.”

■ As numerous healthcare experts have noted, the panelists indicated that many protocols and changes in how people receive their care that have been put in place since the pandemic’s onset are likely to remain in place over the long term.

“We had clinics that opened just before COVID, part of a series of multi-specialty clinics that we were opening in one of our divisions … and now we are facilitating drive-through appointments in our new design, looking at the check-in process, the waiting room process,” Ms. Nelson said. “I don’t think any of that’s going to change. The process of masking in the offices, regardless of a vaccine, I think those protocols are going to remain in place going forward at least for the foreseeable future. But the way the physical build, we’re adopting a lot of those things as well.”

As is the case for many healthcare systems and providers, the use of telemedicine has increased substantially during the pandemic, in large part to make alleviate patient fears of contracting the virus by visiting a healthcare facility. Since an initial, substantial increase, however, many providers, according to the panelists, have seen the number of telehealth visits flatten, or even decrease. Yet, the panelists say that the use of telemedicine, at higher levels than before the pandemic, is here to stay.

“Like so many other systems, we saw a huge increase (in the use of telemedicine) during the pandemic,” Ms. Nelson of CommonSpirit noted. “And I think there’s definitely a shifting towards adopting more telemedicine.” She noted, however, that there are certain concerns, such as HIPAA rules. “It’s certainly great if a physician can see their patient in their home, but are they in a HIPAA compliance environment. How is that monitored and how do we ensure that there is that security?”

She added that with the use of telemedicine, a lot of responsibility “shifts to the patient side … particularly on the follow-up care, the monitoring of those things.”