Q&A: How to unlock value in non-acute healthcare real estate

Healthcare’s relationship with real estate is becoming more complicated. As the industry transitions to a value-based system, organizations are rethinking their once hospital-centric portfolios to better serve an expanding and changing patient population. In the wake of COVID-19, health systems are also realizing the importance of “systemness” and having flexible and adaptable non-acute facilities for emerging crises.

Recent research from the American Hospital Association shows that outpatient care is likely on the rise nationwide, as patients increasingly gravitate toward more convenient, cheaper options for primary, urgent and even emergency care.

Moving patient care out into the community is creating more complex real estate portfolios, which might include everything from hospital campuses and medical office buildings, to leased clinics in retail centers. And the consolidation of healthcare organizations into fewer, but larger, systems is further complicating matters as newly merged entities address the intricacies of combining portfolios.

Meanwhile, health systems face razor-thin margins, with median operating margins for hospitals reaching 1.7% in 2018, according to Moody’s Investors Service.

Proactive industry executives are seeking new ways to unlock value in real estate, using outside-the-old-toolbox strategies to build new revenue streams and ultimately evolve business models. For example, many are finding fresh reasons to welcome in trusted external partners, who can help identify costs savings opportunities and standardize excellence across complex networks.

There is no one right path to managing healthcare real estate, but there are key considerations all healthcare executives should bear in mind.

Six top healthcare real estate questions, answered

From strategic partnerships to advanced data and analytics programs, Kimberly Lamb, Executive Director, Healthcare Solutions at JLL, shares her industry insight to address six questions many healthcare executives are asking today.

1) What are creative ways healthcare companies can improve margins without impacting the patient experience?

Kimberly Lamb: It may sound surprising but there are often extensive opportunities for savings hiding in today’s healthcare portfolios, from sustainability and energy efficiency programs to space optimization and improved lease management practices.

For inspiration, consider the health system that engaged in a real estate portfolio management program for its 40+ medical office buildings and 300 distributed locations. Through effective lease administration, smart energy programs, and efficient operations, the system achieved $8 million in property and real estate savings. What can other organizations learn from their experience?

For starters, with the right real estate partner, you can leverage bulk purchasing power to improve capital expenditure (CapEx) management, getting the best prices possible on supplies and services for a lighting retrofit, roof replacement or other major upgrade. You might also renegotiate service provider contracts to leverage bulk purchasing power, creating savings in areas such as janitorial, medical waste removal, security, snow removal and landscaping.

Healthcare facility leases also offer hidden opportunities to improve margins, which you can uncover with effective portfolio and space optimization programs. By studying real-time utilization alongside larger cost trends, you can ensure your organization only pays for the space it needs. A holistic program empowers you to negotiate for the best rates and terms in your lease. It also helps spark occupancy savings, equipping you to better assign base building costs and common area costs as appropriate.

2.) As health systems expand care into communities, how can they improve the patient, family and physician experience in non-acute space?

KL: Truly effective real estate management directly addresses patient needs in a range of ways. This includes solutions that may seem mundane, from improving wayfinding and co-locating related services, to simply–but critically­–keeping the lights on. So as you expand out into the community, consider: how easily do patients and visitors find their way to their destination? Is it easy to access, and do all the necessary functions perform as needed, without fail? Effective management can control easily-overlooked details that influence whether a patient is likely to return to your facility.

But there are broader strategic opportunities to enhance the patient experience, too. Beyond functionality and accessibility, clinical space design is an emerging area of opportunity. Today’s patients are not comforted by yesteryear’s stark, cold design. They want to receive care in inviting, spa-like spaces, designed to nurture a peaceful, hospitality-like experience.

Healthcare leaders would do well to look to other pioneering industries in this space, especially in a post-COVID-19 world, learning from hotels, shops and restaurants to consider the holistic needs of those who enter their doors, not just as patients–but as consumers with the freedom to take their care needs elsewhere.

3) With rampant consolidation occurring in the healthcare industry, many systems are evaluating how to integrate real estate portfolios following a merger or acquisition. What are some best practices to ensure real estate portfolios and facilities management teams are as efficient as they can be?

KL: Careful portfolio analysis helps leaders navigate challenging M&A real estate decisions, leveraging data to ensure facilities are neither too close to each other, nor redundant. It can help you identify new sites that may be underperforming, and formulate a way to improve their utilization rates, or consolidate duplicative sites.

The key is to harness a “systemness” approach. By following one interconnected system rather than piecemeal tactics, your health system can streamline real estate integration for the greater good of the growing organization.

For example, by reviewing the existing practices of both entities and proactively determining a go-forward standardized process for lease expirations, you can avert the huge pipeline block of expirations that would otherwise occur. Reporting also benefits from standardization, considering different health systems tend to have different methodologies. By laying out a best practice for reporting based on factors like KPIs and cost savings, you can ensure your newly integrated organizations are compiling the right data, with the right parameters.

4) In recent years healthcare systems have been fined tens of millions of dollars for real estate-related compliance issues. What are the biggest compliance risks executives should have on their radar, and how can they take steps to mitigate them?

The original intent of Stark Law may have been to prevent physician self-referral, but the evolution of the statute has resulted in a complex set of regulations that have a major impact on the minutia of real estate lease agreements. The day-to-day operations of healthcare facilities touch on seemingly innumerable site- and industry-specific dictates of the Stark Law. It is important to have a highly experienced team trained on a deeper, more intense level to minimize potential compliance issues.

Even something as simple as free parking or storage space can create regulatory compliance issues, if given to a physician who refers into the hospital system. For instance, a healthcare tenant storing oxygen tanks in a hall closet that is not specifically included in the lease agreement can be a serious infraction. Why? Providing storage space at no cost is seen as giving that tenant a financial advantage, thereby violating Stark Law and putting the provider at risk of incurring steep fines—all because of a need for a few square feet of storage.

Many provisions of the Stark Law apply to owner/tenant relationships, which vary greatly in the healthcare industry. In some instances, the landlord can be a health system leasing space to a third party, such as an independent practitioner. Or the health system may lease their space in a building where there are non-healthcare tenants. It is also not uncommon for physicians to own buildings and lease space to other doctors or a health system.

Ultimately, no matter what the landlord/tenant relationship looks like, regulatory compliance is an ongoing challenge–whether it has to do with Stark Laws, the Occupational Safety and Health Administration (OSHA), Health Insurance Portability and Accountability Act (HIPAA), the Department of Justice, the Federal Trade Commission or others. Executives must ensure their advisors and building managers are thoroughly versed in each of these sets of regulations, a tactical challenge that may be best facilitated and maintained with a trusted third-party partner.

5.) Thanks to technological advances, healthcare companies have more data available on their facilities than ever before. How can that data be leveraged to manage the portfolio more efficiently?

KL: Analyzing your real estate assets through a data-informed lens can help you ensure your portfolio is optimized to drive business value. Data analysis is critical for streamlining and drilling down which areas need attention. For example, graphing a building’s operating expenses can easily identify outliers and allow teams to laser in on where the issues are, such as energy consumption.

If healthcare providers want to better serve patients in the communities where they live and work, there is no shortage of data to help identify the locations that will most effectively meet that goal. Today’s advanced analytical tools make it possible to compile and analyze countless data points including demographics, drive times and proximity of competitors’ locations. For example, if you want to provide more convenient access for young millennials as they grow their families, it is possible to pinpoint the exact neighborhoods where they are settling. 

6.) What are the issues that should be top of mind for executives seeking to future-proof their facilities?

KL: Value-based healthcare requires organizations to rethink how they present themselves to existing patients and potential new ones. They must become fully realized brands, and effective real estate property management can ensure that the appeal of a well-maintained hospital is matched by off-site facilities and medical office buildings within the same system.

The aesthetics and appearance of healthcare facilities factor into the patient experience, and HCAHPS scores reflect that. First-class real estate management can elevate the patient experience, and those scores.

Engaging an experienced partner who can provide the highest level of management across a dispersed portfolio of properties allows executives and clinicians to concentrate on their top priorities: treating patients, improving outcomes and staying ahead of a game in which the rules are constantly changing.