Feature Story: Providers still looking to expand despite hard times

Hospital and health system executives on InterFace conference panel discuss strategies, concerns

By John B. Mugford

Just how bad are the financial difficulties currently facing the nation’s hospitals and health systems?

As one health system real estate executive put it during the InterFace Healthcare Real Estate (HRE) Conference on Sept. 7 in Dallas, “Okay, interest rates are incredibly important to the people in this room. But the bigger value-driver to the hospital systems is, what is the revenue going to be? As you look at the lack of profitability within the industry, there has to be a cost-containment, a cost-savings initiative.

“But to be brutally honest, (many health systems) can’t cost-cut their way to profitability,” said Ross Caulum, who works out of Boise, Idaho, and is the regional real estate director with Livonia, Mich.-based Trinity Health, which operates 92 hospitals in 22 states. “The Affordable Care Act put us, the industry, on a trajectory of year-over-year revenue reductions in government pay programs.”

He added that many hospitals and health systems used to be able to break even with the revenue they received through reimbursements and other government payments, but “in my opinion – and this is only my opinion –  that’s not possible anymore when you’ve got challenges of getting nurses, all of the supply costs that have gone up, all of the bricks and mortar costs, and others.”

As a result of such financial challenges, Mr. Caulum continued, many systems need to ask themselves, “How can we get more throughput in our existing brick and mortar? It really goes beyond just the brick and mortar, but it’s also about making the brick and mortar that we have to be more productive and kind of bootstrap in ourselves to where we can then afford to get newer facilities that are in the more appropriate locations.”

As noted, Mr. Caulum was recently part of an InterFace conference a panel discussion. That session was titled, “The Hospital, System & Physician Group Perspective: How are Delivery Models and Real Estate Strategy Evolving?”

John Claybrook, an attorney and partner in the Nashville, Tenn., office of Tampa, Fla.-based Holland & Knight, moderated the discussion.

In addition to Mr. Caulum, the panelists were:

■ Jason Madsen, CEO of Atlanta-based Ascend Medical, which provides primary and pediatric care through telemedicine and home visits as well as urgent care sites in four states and growing;
■ Kyle Marden, corporate director of real estate with Dallas-based Medical City Healthcare, which operates 16 hospitals throughout Greater Dallas-Fort Worth (DFW) and is part of Nashville, Tenn.-based HCA Healthcare Inc. (NYSE: HCA);
■ Steven Stubbs, regional director, clinic and ancillary development/business development with Roseville, Calif.-based Adventist Health, which operates 25 hospitals on the West Coast; and
■ Kevin Womack, director of real estate with Arlington, Texas-based Texas Health Resources, which operates 29 hospital locations and 350 access points in what is known as North Texas.

Although many systems across the country are facing financial hardships resulting from falling revenues and rising costs across the board, many of them still see a need to expand their networks, often through building or leasing outpatient facilities in new communities.

When Mr. Claybrook, the moderator, asked the panelists whether rising interest rates and costs, as well as the potential for an economic slowdown, are altering their systems’ expansion plans, Mr. Womack of THR replied, at least for the time being, no.

“I would say at this time, and we’re in budgeting season right now but, for the coming year, it’s not impacting our growth plans,” he said. “We’re continuing to build new medical office buildings, urgent care centers and others. So, we’re still investing a lot, and we’re speculatively buying land for future growth and development.”

HCA is in a bit of a “wait and see” period when it comes to planning for growth, according to Mr. Marden.

“We have yet to see a project … be canceled,” he said. “But the margin compression is certainly causing a little bit of an impact, including when things are being started or when they are going to be finished. And that’s a challenge because … we’re challenged to grow as a health system and a publicly traded company.

“We have to grow X percent per year,” he added. “We need access points in order to grow. And in order to have more access points, you need capital to do these things, whether it’s to buy land or acquire physician practices or lease space, or whatever it may be, such as building an addition to your hospital… I would say we are taking a little bit more of a conservative approach in terms of how we’re deploying (capital), and maybe prioritizing a little bit differently, focusing more on outpatient, lowering costs, seeing how many access points can we get, or even mergers, acquiring systems.”

When asked how the HRE professionals in the audience can provide value to health systems these days, the panelists said that one way to help is to find them affordable spaces to lease, especially smaller spaces in good locations.

“Our biggest challenge is finding smaller spaces in emerging markets,” noted Mr. Womack of THR. “If you go out to the suburbs and you’re looking for space in a smaller city, there’s just no inventory… We may only be in the market for 5,000 square feet and obviously, no developer wants to build that, or at least not anything that’s affordable.”

Mr. Marden of HCA reiterated Mr. Womack’s point about helping systems find smaller spaces.

He added that the “thing that concerns me more than anything are the escalations we’re seeing in rental rates, especially in some of these high-demand markets, as they’re just not going to be sustainable to make the numbers work for us to lease space.

“So, if anyone has a $20 per square foot, Class A office space for lease, I’m here afterward,” he joked. “Rates are now starting out in the $30s, mid-$30s? Before, this wasn’t the case and … it’s happened pretty quickly.”

Changes resulting from the COVID-19 pandemic

When it comes to changes in the healthcare delivery model resulting from the COVID-19 pandemic, Mr. Womack said that health systems, including THR, “continue to see a hastening of a migration to the outpatient setting, which was accelerated during COVID. A lot of procedures were moved to the ambulatory surgery centers, and they aren’t coming back to the inpatient facility.”

He added, “On the administrative side, as has taken place across industries, all of our administrative folks went home, and they haven’t come back to our offices. As our administrative space comes up for renewal, we’re giving most of it back, actually, we’re giving it all back. We probably got rid of about 150,000 square feet of administrative space to date, and we probably have another 150,000 square feet coming due over the next two or three years that we won’t (renew).”

He also noted that the design of interior spaces has changed in the aftermath of COVID, as before the pandemic there had been a movement towards a more “open design, as you wanted people to walk into a physician practice and have it feel like the Apple Store, with less separation between patients and staff. But that has changed, as we’re bringing back many of those barriers and separations.”

Mr. Marden of HCA noted that the system is designing spaces as if the pandemic is “here to stay. There are cost premiums that we’re having to build into those individual facilities to include enhanced technology for telemedicine and telehealth. We’re investing in technology to allow that to happen and trying to be in the forefront of what needs to be done moving forward.”

Mr. Madsen, the CEO of Ascend Medical, noted that the pandemic “completely changed our business model. We’re a holistic primary care group, as we serve patients from infants to seniors and everybody in between, and the pandemic caused us to completely abandon our real estate strategy.”

As a result, the organization has focused on delivering its services both virtually and at people’s homes through its mobile units.

“There has been such strong demand that we’ve developed new strategies around that and only those delivery models, so the time of having a capital drag of the real estate piece is something that we’ve been able to de-tether from. It’s helped us grow much faster than we could otherwise. And I have to say that our patients love it.”

Mr. Caulum of Trinity Health also noted that the health system’s need for administrative space, including its corporate headquarters space, has decreased by about a “quarter to a third of the size that it used to be. And, at the various hospitals, we’ve shed off a lot of the administrative space, as people are working from home or in what can be considered a hybrid type of situation.”

Mr. Marden of HCA noted that the system, perhaps because it is a for-profit organization, has not seen “a ton of reduction in our administrative space. Maybe that’s because we’re for-profit, and we might’ve been a bit leaner in that regard going into the pandemic. We’re looking for flexibility and giving people the option to work at home. But even at our division office, the expectation is that they will be in the office at least part-time.”

Mr. Caulum added that while the use of telemedicine increased dramatically during the pandemic, when most facilities were shut down, the amount of virtual doctor visits has “abated and come back down.”

In the meantime, the number of clinical office visits has once risen, outpacing pre-pandemic levels, he said.

“What we’re having to work through … is do we create new, shiny medical office locations, or do we figure out how to increase the utilization of our (existing facilities and exam rooms)? Are the doctors using those exam rooms to the fullest, and are the hours of operations (maximized)? And, a bigger question is, can we staff those locations and all of the hours of operations that we need to do so?”

Other topics covered

The panel discussed a number of other topics, including:

■ As Adventist looks to grow, it is doing so through increasing its primary care offerings. Mr. Stubbs noted that the system continues to look for ways to offer more primary care services, not only through opening more clinics, but by expanding the hours at its existing clinics and having more staff particular sites. The system is also looking to grow the number of locations it operates in rural areas. “We’re very good at managing Medicare and Medicaid populations, also managing reimbursements for Medicaid… We’re the dominant provider of rural health clinics in California because we’re very good at it.” When it comes to growing its presence in urban markets, Adventist is doing so in California through Federally Qualified Health Centers (FQHCs). We’re looking at expanding some of our licenses’ ability to do that and we’re also partnering with other owners in that FQHC space.”

■ As Ascend looks to grow, it does not need to do so by finding space in MOBs. “As we continue to grow and face some problems associated with that, one thing we don’t have to worry about is the real estate piece. And that’s because we don’t have to go into a medical office building. We’re not patient-facing in our real estate footprint, so we can go into a general office space. And, there’s actually a lot of (general office) space available for us. Maybe we can help some of these guys up here with me through our home-care delivery model … reduce their footprint a little bit.”

■ More physicians are looking to sell their practices as well as their real estate. Mr. Stubbs of Adventist noted that an increasing number of physicians and physician groups, especially those that have been struggling financially since the pandemic, are finally saying, “Enough is enough.” During his career, Mr. Stubbs said he has never seen as many physician groups looking to sell their practices. “They’re not necessarily the stronger players and include those who have had hardships due to a reduction in reimbursements (and other factors). They can include doctors who are closer to retirement age, or that have struggled during COVID. So, that also ultimately means that we’ll buy the real estate as well.”

■ Systems want good communication from their third-party property managers. When Mr. Claybrook asked the panelists what they would most like to see from their third-party property managers, Mr. Stubbs of Adventist Health noted that the top complaint from physicians is that they sometimes do not hear back from “the property manager for two to three weeks. What we want is for them to keep the communications open and to provide good customer service. Having this from your property manager helps us out when we need to sometimes provide difficult news to our tenants, such as having to raise rents, or there are issues with a building. Having good, open communications with the doctors can probably help solve 75 percent of all issues. So, I can’t stress how important that is.”