Feature Story: What’s shaping systems’ strategies

Providers are contending with a deteriorating financial model, Winstead panel says

By John B. Mugford

As the host of the recent 2026 Winstead Healthcare Real Estate & Construction Forum in Nashville, Tenn., Andy Dow, a healthcare real estate attorney and co-chair of the Real Estate Industry Group with Dallas-based law firm Winstead, relayed just how important health systems and other providers are to everyone involved in the HRE sector.

As he introduced HREI™ Publisher Murray Wolf as the moderator for a panel titled, “The Provider Perspective: Strategy, Growth and Real Estate Partnerships,” Mr. Dow said: “I think the panel that everybody always anxiously waits for the most (is the provider panel), because everybody wants to know what the providers are thinking and what the providers are doing … (as) everything in HRE revolves around them. These folks are our tenants, our customers, our clients, and they are very important to everybody who owns healthcare real estate.”

As noted, the panel was moderated by Mr. Wolf, who said it was his “privilege for the next 45 minutes or so to take (the audience) on a guided tour of what’s happening with hospitals and health systems and their overarching strategies, and then how that manifests itself in terms of their real estate strategies.”

Mr. Wolf opened the discussion by asking one of the panelists, Michael Arvin, president and CEO of Alliance Development Partners in Dallas, to sum up what’s currently happening with and on the minds of the health systems. Alliance is a healthcare advisory and development firm that works with development firms, hospitals, health systems and provider groups.

“Last year, the buzzword was ‘tariffs,’ and obviously we had to work through what that looks like from a construction-cost perspective,” Mr. Arvin said. “But you know, this year, it’s really about reimbursement cuts, and it’s going to be obvious in terms of how we look at development.”

Mr. Arvin added that as health systems look for ways to expand their reach, they are increasingly looking at doing so in outpatient settings.

“When we look at that migration (to providing more outpatient care), it’s mostly been with ambulatory surgery centers (ASCs),” Mr. Arvin said. “The opportunity today is to partner with health systems to accelerate that growth, and to look at those higher-margin, lower-acuity type cases that can move into an outpatient setting…

“From a trend perspective,” he added, the Centers for Medicare & Medicaid Services (CMS) has “added 547 new procedures to the ASC covered list, and that’s just in 2026. And then, (Washington, D.C.-based) The Advisory Board has projected an outpatient volume growth of 10 percent over the next four years, and about a 19 percent growth over the next decade, while inpatient volume will stay flat.

“That’s really where we are today from an outpatient development perspective and how the health systems are looking to respond to that based upon those market dynamics.”

The other panelists were:

■ Angel Benschneider, system VP, transaction management, with Dallas-based Baylor Scott & White Health, which operates 52 hospitals and has a real estate portfolio of 27 million square feet;
■ John D. Claybrook, VP legal, with Brentwood, Tenn.-based Surgery Partners Inc. (Nasdaq: SGRY), which operates 170 ASCs and 25 short-stay surgical hospitals in 33 states;
■ Jack Tillman, chief development and strategic planning officer with Atlanta-based Piedmont Healthcare, which operates 27 hospitals and hundreds of other locations.

‘Outpatient’ space takes many forms

When Mr. Wolf asked the panelists about their strategies moving forward, the panelists said much of their focus is on figuring out ways to continue to grow their footprints in order to keep up with growing populations and demand for services while also navigating the financial pressures coming from a variety of sources. To do so, the systems are looking to grow their presence in outpatient locations, even as some continue to build new hospitals.

Mr. Tillman of Piedmont Healthcare noted that the system is fortunate to be in a state “where we have net macro positive trends of population growth and good employment… Georgia has been a growth story for a long, long time. So, we’re in a position where we’re responding to increasing demand, which looks like hospital expansions – which is hard to do … in our state, a CON (certificate of need) state – but it also looks a lot like ambulatory expansion, as our tenancy now in the ambulatory space is about 3.5 million square feet of space in 2,000 locations.

“So, we’ve got every type of medical outpatient asset you can have,” with one of its big focuses being on freestanding emergency departments (FSEDs), which he said “are still CON constrained. We’re trying to get a number of those done, as well as (ASCs), both through acquisitions and ground-up (projects), and we have the run-of-the-mill medical outpatient building (MOB). And, we’ve also got a large and growing urgent care platform.

“Our strategy is sort of population-driven, macro-economic commercial payer mix-driven in a state and where, at this point, our growth story has us within a 30- to 40-minute drive of 85 percent of the population of our state.”

Ms. Benschneider of Baylor Scott & White said the system currently has a “quite a bit going in a lot of different directions.

“But I would say if I looked at just what we accomplished last year, we opened a new hospital campus (in the Dallas suburb of Frisco, Texas), and we are going to continue to invest pretty heavily over the next seven to 10 years in our hospital campuses and the growth of those campuses.”

Because many of the system’s hospital campuses are site-constrained, Ms. Benschneider said, “and we have a need to continue to add bed towers and capacity,” the system is looking for ways to “redesign and find better ways, quite frankly, to utilize the land that we have.

“In addition, I would say that we, as well as our competitors in Texas … are all fighting to get the best land in the growth areas. So, last year we sold over $100 million worth of excess land, and we are reinvesting that into what we think the future is for the system … looking out five to 10 years to see where those opportunities might be.”

As part of its growth strategy, Baylor Scott & White has also “expanded our joint venture relationships … we have a number of them, and we focus on what we do best and we use joint venture partners to provide a number of our services,” such as imaging, physical therapy and rehabilitation services, behavioral health, and others.

As for expanding its outpatient footprint and services, the system is looking at “what our campuses need, and so we do a lot of work in single retail clinics of 10,000 to 15,000 square feet. I think you’ll also see (us grow) of our neighborhood health locations, our PCP (primary care) clinics along with all of our JV partners as well.”

Mr. Claybrook of Surgery Partners noted that the firm is a provider, not a real estate owner.

“We do not own a single ambulatory surgery center,” he said, adding that “we lease everything. A year ago, we owned one and we sold it.

“So, our bread and butter, our sweet spot, if you will, is to partner with physicians. We will go in and buy, if it’s an existing (ASC), between 51 and 60 percent, maybe, of the operating entity. And then we’ll also do a management agreement.”

He noted that the firm is looking at “doing more de novo surgery centers, as well as partnering with physicians or joint ventures, either with Baylor Scott & White or Duly Health and Care, in the Chicago Market, or whoever it might be.

“So that’s our model, as we look at the macro trends that all seem to be driving service delivery to outpatient settings. And those trends are the aging population, the ‘silver tsunami.’

Mr. Claybrook added that cost pressures are certainly a factor in trying to keep growing, as “everything is more expensive. It’s more expensive to develop new real estate. It’s more expensive to maintain existing real state.

“Meanwhile, there’s incredible pressure on reimbursement rates and, at the same time, there’s a desire among consumers of healthcare for more convenience. So, all of those trends are pushing the delivery of services into outpatient settings. And, we feel like we are very well-positioned to take advantage of that.”

The financial model is changing

The 2000s and 2010s were perhaps the golden age for hospitals and health systems, as consolidation enabled large players to use their market power to negotiate more favorable commercial insurance reimbursement rates that subsidized lower Medicare and Medicaid payouts. The Affordable Care Act (ACA) of 2010 also expanded Medicaid and brought millions of previously uninsured patients into covered status, further boosting revenue.

However, several trends have put increasing pressure on provider revenues in recent years. The use of Medicare Advantage, which pays less than commercial insurance, has grown significantly; insurers are pushing back harder on hospital rates; private equity-backed physician groups are competing for the highest-margin specialties; and the rise of retail and ambulatory care has been siphoning off profitable outpatient volume.

In addition, with the phased 2025-28 rollout of the various provisions of the One Big Beautiful Bill (OBBB), providers are facing a gradual tightening of Medicare and Medicaid eligibility requirements and reduced reimbursement rates, which, although lower-margin, generate enormous volume.

Also, because the U.S. Congress didn’t extend the ACA subsidies enacted in 2021 beyond Dec. 31, 2025, an estimated 4.8 million more people will become uninsured, with more than 7 million losing subsidized marketplace coverage overall. For health systems, more uninsured patients means more uncompensated care and an overall decline in patient volumes.

In discussing the challenges facing health systems, now and in the not-too-distant future, Mr. Arvin of Alliance Development Partners expounded on why reimbursement rate cuts are such a major issue.

“Medicare and Medicaid roughly account for about 44 percent of total reimbursement for the health systems,” he explained. “About 37 percent is private pay and managed care. That 37 percent is where the hospitals really generate their margins.”

And that 37 percent is also becoming less profitable, in part, due to the patients who seek insurance through the online ACA Healthcare Insurance Marketplace, commonly referred to as The Exchange. With rising insurance rates and the end of ACA subsidies, healthy patients are more likely to go without insurance altogether, leaving The Exchange increasingly dominated by a more unhealthy population that is more expensive to care for and insure.

“So it’s not just the cuts on the Medicare Medicaid side, but now, as polluted as the exchange is, the payers are now starting to refocus on that. About 10,000 people become eligible for Medicare every day, and the Medicare enrollment went from 52 million in 2013 to 67 million by 2023.

However, the growth is mostly in (less profitable) Medicare Advantage … and if you think about that component of it, and the Medicare beneficiaries, (that number) went from 15 million to 32 million, just in Medicare Advantage.”

The effect of the OBBB Act has been “excessive,” he concluded. “It’s been hard, and nobody has been immune. It’s no longer a red state-blue state issue. Everybody’s been hit by this. So that’s been one of the things that CMS has certainly had to work through, which has been leading towards the drive to outpatient.”

Owning versus leasing

Mr. Wolf asked a question of the panelists that is always on the minds of HRE professionals: When it comes to the outpatient properties they occupy and operate, do they prefer to own their buildings or lease space from third-party owners?

Ms. Benschneider of Baylor Scott & White responded that when it comes to outpatient space, the system uses “developers right now for everything that we do that’s outside of our main campus. Sometimes, we actually use them on our campuses as well. But for the most part, we’ve exercised quite a few right of first refusals (ROFRs), and we’ve taken back a number of our on-campus buildings this last year and the year before. We will probably likely continue to do so as those trade.”

Mr. Tillman of Piedmont Healthcare said the system uses a wide variety of approaches, although it likes to rely on third-party firms to own the outpatient spaces it occupies.

“Our system came together over the last 20 years through significant merger and acquisition activity,” he said. “So, we have it every which way you can have it. But, our philosophy on campus is pretty straight down the middle, as we are willing to ground lease, with controls, to third parties.

“Our capital is like anybody’s capital, limited. We enjoy a high credit rating, but we’re mostly focused on investing in our core business, which is hospital towers and heavy infrastructure for the hospital business. Ambulatory is something we’re totally comfortable with using other people’s money and other people’s expertise to help us go faster.”

He added that the system is willing to acquire and develop facilities with its own capital, as “we’re more like a merchant developer in those instances because we almost always do it and then flip it based on our tenancy. We like to make money that way.

“Our philosophy in the ambulatory space is to make it make money,” he said. “Most medical office buildings don’t make money unless they have procedural volumes, unless they have imaging, unless they have these things that produce real earnings.

“The network of doctors in our system is really about our downstream value… We’re not doing it in a way where we’ve got a 100,000 square foot building out there that’s full of primary care doctors. We’ll do a 20,000 or 30,000 square foot building, as we’re probably a little more conservative than some of our competitors, at least in our geography. I’ve noticed that there are a lot of large medical office buildings out there sitting mostly empty, occupied by our competitors. Ours are all full, as it’s our philosophy to be full (rather) than a little bit empty.”

Other topics covered

Several other topics were discussed furing the panel session, including the following:

■ Both the amount of development and the sales volume of MOBs have seen an increase in activity, starting in 2025, Mr. Wolf, the moderator, pointed out. “There was some good news for healthcare real estate, as I think you probably know,” he said. “According to the new Revista Outpatient Real Estate Development Report (from HRE data firm Revista and its RevistaMed service), which is based on 2025 data, the amount of outpatient square footage started last year rose to 21.8 million square feet, which was an 18.5 percent increase over the 18.4 million square feet that was started in 2024. Also the dollar value of the MOB projects that broke ground in 2025 rose significantly to 14.5 billion which was the largest aggregate dollar value of MOB project starts in at least the past 10 years.” As for the MOB sales volume, Mr. Wolf noted that “we saw a spike in the fourth quarter of sales volume to 7.4 billion, which was the highest level since Q3 2022.”

■ When Mr. Wolf asked the panelists to point out some of the other challenges facing health systems, they noted that the current and looming shortage of healthcare professionals is certainly a major one. Mr. Tillman of Piedmont Healthcare said, “While I love thinking about capital and square footage and all this … we’re still relatively constrained by the population of physicians … which I think is probably the biggest challenge right now for us… I can go build buildings, as that’s pretty darn easy, actually. But filling it up with providers that are going to do a good job and are of a high quality and take good care of patients, that’s actually the harder thing to do. And so, a lot of our ambulatory growth is more constrained by our ability to recruit and retain providers. We hired 100 primary care doctors last year; we’ve got the largest primary care employed group in the Southeastern United States, you know, the volume of execution we need to do to enable physician growth is probably the hardest thing to coordinate.” Ms. Benschneider of Baylor Scott & White, agreed, adding, “When we look at the demographics and we say, ‘Look, we’ve got deficits of these different specialties… in a certain area, they’re huge, and they’re growing rapidly and you’re not going to turn out enough providers to take the gap’… Yes, we can put a facility there. Yes, we can build it large enough to fill it, you know, but you’ve got to have the providers to fill it.”

■ Mr. Claybrook of Surgery Partners said that he believes the healthcare industry will continue to see “higher and higher acuity procedures and services migrating to outpatient settings. You know, every year there are hundreds of new procedures that get approved for reimbursement in ambulatory settings.” He added that “our company is obviously looking to higher value, not just higher volume, but higher value cases, whether that’s total joint replacements, which are now being done in an outpatient setting, or spine cases, or you’re starting to see more cardio cases.” 