CHARLOTTE, N.C. — Healthcare systems and physicians groups once viewed their real estate operations as a line item on a ledger and not as high a priority as staffing, education or equipment. In the years since reimbursements from Medicare began tightening as it went from a fee-for-service model to an outcome-based one, healthcare systems and physicians are getting more savvy when it comes to their real estate strategies.
“With respect to real estate, healthcare systems used to be naïve,” said Mark Curtis, director of Greenville Health System, a not-for-profit system serving the Upstate South Carolina area. “Now they’re far more sophisticated than they were five years ago.”
Curtis was one of five healthcare real estate experts on stage at a panel entitled “What Do Hospitals & Systems See Coming in 2018?” Rex Noble, senior vice president of asset management at Flagship Healthcare Properties, moderated the discussion.
The panel was the closing act at the eighth annual InterFace Healthcare Real Estate Carolinas show, which took place on May 31 at the Hilton City Center hotel in Uptown Charlotte. The event drew 160 attendees in the healthcare real estate space from across North and South Carolina.
The hospitals and healthcare systems panel was the closing act of the eighth annual InterFace Healthcare Real Estate Carolinas conference.
Operations are Under the Microscope
Spurred on by lower reimbursements and increasing expenses due to inflation, healthcare systems are taking a holistic view of their business strategies. As a result, a higher priority is given to real estate than ever, according to the panel.
“We’re absolutely trying to be more sophisticated with our real estate,” said Tony Perez, vice president of real estate at Atrium Health. Formerly known as Carolinas HealthCare Systems, the not-for-profit group operates more than 7,600 beds across 900 care locations. “Five years ago we weren’t talking about yields coming in and cap rates going out, we were talking about rental rates.”
Atrium Health recently announced it plans to invest more than $1 billion in the next seven years around the metro Charlotte area. At the same time, Perez said the company is focused on cutting expenses, including on the real estate side.
“We are absolutely trying to cut expenses — $300 million by 2020,” said Perez. “Last year we did $35 million and we’ve already done $35 million this year, but our goal this year is $95 million. Everyone is going to bleed, and on the real estate side, capital is scarce.”
Healthcare real estate professionals are looking internally at doctors’ daily practices in order to drive efficiencies as well. Elisa Cooper, director of property management at Roper St. Francis Healthcare, a nonprofit healthcare system in Charleston, says that real estate sustainability is now prioritized over expansion.
“We’re driving down operations to the metrics of how many patients touch an exam room,” said Cooper. “If a physician can’t put five patients a day in that exam room, they don’t need it. We take it out and add another doctor’s office.”
On the development side, site selection is in the limelight for healthcare real estate professionals because patients now want ease of access to their medical care more than anything, according to the panel.
“The ‘build it and they will come’ days are long gone,” said Greenville Health’s Curtis.
Perez says that healthcare groups are still novices when it comes to site selection for hospitals and medical centers, but soon they will have the capabilities and resources on the same level as major retailers.
“I don’t theorize a lot, but I’d say that large health systems will be as proficient as Target and Walmart about sites in the future,” said Perez.
Physicians themselves are looking at real estate in a different light too, according to the panel. Curtis said that physicians are more actively involved in operation expense discussions as they look to get better returns on their real estate investments.
“If I look at where physicians are in those conversations, they’re partners at the table,” said Curtis. “Physicians are looking at what we do and how we deliver care and what that cost is.”
“When I first came into the business 14 years ago, our meetings with the doctor groups were all about how big could we build it and how pretty could we make it,” added David Park, senior vice president of Novant Health. The Winston-Salem, N.C.-based healthcare network operates 14 medical centers and more than 500 physicians clinics and outpatient centers across North Carolina, South Carolina, Georgia and Virginia.
“The conversation today with the doctors are more around trimming the size down and cutting the costs,” said Park. “It’s a new level of education for the entire core of the healthcare industry.”
Caring for Millennials
In addition to dwindling reimbursements, healthcare systems are also feeling the pinch from the rise of millennials, who by and large are shifting the way healthcare is provided. Atrium Health’s Perez doesn’t think that millennial preferences will eliminate the need for brick-and-mortar medical office buildings, but their presence is certainly felt.
“Millennials will bend the curve for some specialties, family practices and maybe urgent care,” said Perez, who emphasized what Atrium Health is preparing for in its consumer readiness program. “Our view is that one day you’ll be able to use your phone, be able to virtually talk with a physician who will order your drugs and then a drone will drop it off at your house.”
“We’re planning for today, but really we can’t plan for today. We have to plan for 10 years from now,” added Cooper of Roper St. Francis.
Cooper said that millennials are propping up the urgent care business model and are electing not to visit or even select a primary care physician. She doesn’t envision this as a long-term trend as millennials are aging and will eventually need more services than they currently receive.
“They don’t go to primary care doctors unless they’re really sick and they don’t go in for checkups unless they’re forced to by their employer,” said Cooper. “Millennials today will actually need the healthcare service that they don’t think they need today.”
Jeff Brown, principal of healthcare real estate advisory firm Meadows & Ohly LLC, said that millennials’ preferences for healthcare are forcing healthcare systems to walk a tightrope between planning for an uncertain future and making sure that the current needs of aging baby boomers are being met.
“It’s going to be a balancing act,” said Brown. “Being on the real estate side, we’re trying to figure out where the right bets are.”
In the near-term, Brown said that millennials are changing the way healthcare groups are looking at their operations as they strive to maximize traffic in that age cohort.
“More than anything healthcare systems are talking about their ambulatory and digital strategies,” said Brown. “It’s been proven urgent care doesn’t work from a profitability standpoint, but from a need and access standpoint it does work for millennials.”
— John Nelson