real estate planning for population health
Health systems can cut costs and improve returns by taking a strategic approach to consolidating their physician offices and outpatient services.
Driven by healthcare reform, hospital mergers and physician practice acquisitions continue to accelerate. One effect of such consolidation is the rapid expansion of a health system's ambulatory footprint, but consolidation can also create fragmented outpatient networks replete with underperforming real estate assets.
Often, the newly acquired facilities-whether owned or leased-are redundant and inefficient, too small to offer the broad range of outpatient services required for population health management, and in the wrong location to support strategic growth. To avoid such pitfalls, health systems require a systematic process for evaluating, integrating, and managing their entire ambulatory real estate portfolios. Such a process can:
* Improve ambulatory site efficiency and reduce costs
* Enhance patient and physician satisfaction
* Strengthen the health system's brand
* Advance enterprise strategies for effectively managing population health
Trends in Consolidation and Physician Integration
Outcomes-oriented payment and more widespread insurance coverage under healthcare reform are driving a frenzy of health system mergers and physician integration not seen since the late 1990s. Hospital transactions jumped from 58 in 2009 to 109 in 20i3, with continued high activity noted in 2014.a Meanwhile, the proportion of physicians remaining independent has seen a steady decline, with one study noting that independent physicians dropped from 57 percent of the market in 2000 to 3ç percent by the end of 20i3.b
A major purpose of this consolidation is to develop new care delivery models that better integrate care across the continuum, including pre- and post-acute care and hospital-based services. These models are designed to coordinate prevention, wellness, chronic disease management, urgent care, and ambulatory procedures, as well as rehabilitative, skilled nursing, and home care. They emphasize primary care and make extensive use of midlevel providers in virtual, office, home, and various levels of outpatient settings. The goal of these models is to improve population health while reducing inpatient stays, emergency department (ED) visits, and overall costs.
Over the next 10 years, this integration is expected to boost outpatient volume 28 percent while shrinking inpatient days 4 percent.c But accumulating physician offices and ambulatory clinics is not the same as creating an efficient and integrated ambulatory service network.
Common Strategic Limitations of Acquired Facilities
Strategically, an acquired ambulatory facility may not be well-located, or it may not provide the most convenient access for the health system's patient population. In some instances, facilities are too small for the broad range of services needed for effective care coordination and one-stop patient convenience.
Operationally, multiple physician office locations can be redundant and inefficient. The space configurations also may be outdated, making it difficult to transform practices for team-based care and medical homes. Occasionally, buildings that are in poor physical condition can detract from the health system's brand image.
Financially, facilities often have excess capacity or are overbuilt for their function, increasing operating costs. Owning underutilized or unneeded space also ties up capital. New accounting rules also will soon require reporting lease obligations as liabilities on the balance sheet, creating additional impetus to better manage rented space.
Why a Strategic Assessment Can Be Beneficial
Real estate also typically is the second-largest asset on the system balance sheet, making effective management of the portfolio a strategic, operational, and financial imperative. A comprehensive review and redeployment of ambulatory real estate assets can generate significant immediate savings while positioning the enterprise for strategic service development and new-market entry.
In the author's experience, a typical ambulatory portfolio consisting of 600,000 square feet leased at an average of
The experience of an 11-hospital system with 90 ambulatory care sites in the Midwest underscores this point. A plan to relocate or consolidate 40 percent of existing sites over five years cut clinic operating costs by
Ambulatory Real Estate Assessment: Points of Focus
A strategic ambulatory real estate assessment and realignment should take into account the following key considerations. The following discussion provides pro forma examples based on actual portfolios.
Inventory. The first step in optimizing a real estate portfolio is to identify the components that constitute a comprehensive inventory of all of the health system's ambulatory properties, excluding inpatient and residential facilities, occupied by any entity that is part of or affiliated with the health system. These properties include:
* Physician offices, clinics, clinical labs, diagnostic centers, ambulatory surgery centers, urgent care centers, and walk-in and retail clinics
* Outpatient rehab, home care, day care, and senior-service facilities
* Pharmacies and medical equipment, food service, and retail facilities
> Facilities housing administrative or support services
Information for each property should include, at the very least, the property name, location, whether it is owned or leased, square footage, current tenants and use, ownership entity, rental rates, and expenses. The simple act of reviewing this information can uncover significant savings opportunities. For example, a comprehensive inventory for one health system found that, within the system's 331-location "outpatient network," 26 sites were actually vacant and another 85 were used primarily for administrative functions.
Once a comprehensive inventory is completed, the next step is to systematically consider each of the following elements in strategic and financial terms.
Location. The central question in looking at location is, "How well do the health system's properties serve current and anticipated patient needs, particularly for population health management?" Assessment criteria include presence in defined submarkets, demographic trends. competitors, and visibility. Convenience factors including location accessibility, drive times, and parking availability also are important. Systems that have grown through acquisition can almost always improve patient service and cut costs by reducing locations. Simply mapping the network can be revealing. For example, one multihospital regional system had a large network with 69 ambulatory sites. However, many were competing in the same submarkets and even the same buildings, while other strategic markets had no system outpatient presence at all.
Facility condition. Every property a health system owns represents its brand. Patients will judge the quality of care in part by the condition and cleanliness of a provider's facilities. Evaluation criteria include curb appeal, exterior condition, public areas, interior spaces, signage, amenities, and parking. Consistent design and signage across locations also builds brand awareness for a health system.
Service mix. Placing the appropriate level and mix of services together for each market, minimizing duplication, and placing each in the lowest-cost setting are the chief goals of an ambulatory strategy. Combining specialty and primary care services with lab and diagnostics in one facility supports care coordination, is convenient for patients, and can reduce operating costs by consolidating check - in and support functions. The previously cited regional system with 69 ambulatory sites lacked a full range of services in any of its submarkets but, through its strategic assessment, was able to identify 11 key locations for developing coordinated services through expansion, consolidation, and redevelopment.
As technologies and care models develop, health systems should plan for housing more home health, mobile health, telehealth, and virtual health services. These services will not require traditional medical office space, and there might be potential savings from locating them in lower-cost space or alternative space.
Space use and capacity. Ambulatory facilities often are found to be underutilized, with excess capacity. For example, a Midwestern health system had 71 unused exam rooms in nine clinics, one of which had an entire floor vacant five years after opening. Another health system found that 6 percent of its leased locations were actually vacant, representing
To assess space use and capacity, health systems should compare their own measures on factors such as visit volumes, examination room throughput, and practice hours with industry benchmarks, such as those published by the
Potential extra capacity in the form of undeveloped owned space or unoccupied space adjacent to leased space is also a factor, as it permits future growth while minimizing current operating costs.
Occupancy metrics. Patient volume relative to capacity is just one factor influencing facility costs. Others include operating expenses such as base rent, utilities, housekeeping, repairs and maintenance, management fees, insurance, and grounds maintenance. These factors also can vary considerably, even within the same market. For example, as shown in the exhibit on page 125, at one system, utility costs among four large leased clinics ranged from
Strategie and economic opportunities. With a complete assessment of properties in hand, strategic opportunities can readily be identified, including options to close, consolidate, relocate, maintain, or expand various locations. A sample matrix of one health system's assessment of its properties and the strategic recommendations it developed based on that assessment is shown in the exhibit on page 136.
Strategic opportunities also can produce positive effects such as increased utilization and productivity of existing space, improved property performance, reduced lease obligations through exiting of leases, disposal of unused owned properties, and monetized owned assets. These improvements can free up significant capital for developing core services, as in the monetization of an owned medical office building shown in the exhibit on page 127.
Reduction of lease obligations also can help improve system financial performance. Often this process must unfold over a period of years as obligations expire, as in the exhibit above.
When restructuring ambulatory networks, own-versus-lease decisions, as well as various shared-ownership and financing options, all have advantages and drawbacks that should be carefully considered when moving toward implementation.
The Assessment Goal
The goal of strategic real estate portfolio assessment is to examine existing facility locations, costs, capabilities, and capacity in the context of long-term health system goals, and to identify opportunities for better serving population health needs and reducing costs. Because coordinated care delivery and related payment models are still evolving, precise requirements for future facilities may not be certain. However, the advantages of consolidating services in efficient and convenient locations are immediate and clear. The best approach, therefore, may be to optimize current property use first and then pursue comprehensive redevelopment and new construction as market conditions develop. *
AT A GLANCE
Factors that health systems should consider when performing strategic assessments of their portfolios of ambulatory facilities include:
* Inventory
* Location
* Facility condition
* Service mix
* Space use and capacity
* Occupancy metrics
* Strategic and economic opportunities
This health system has the opportunity to realign its real estate to support growth and efficiency in its evolving ambulatory care models and its nonclinical space.
Findings of an analysis of actual versus poieniial annual patient volumes at three clinics disclosed that Clinic A had exceeded its patient visit capacity by 8,286 patients (18 percent), while clinics B and C showed untapped capacity of 37,635 (82 percent) and 1,003 (18 percent) patient visits, respectively. Potential patient visit volumes were estimated based on provider scheduling and room utilization, among other factors.
a. Update on Mergers & Acquisitions Activity in the Hospital Industry, Ponder 8. Co., Q12014.
b. Clinical Transformation: New Business Models for a New Era in Healthcare,
c. 2014 Impact of Change Forecast Highlights, Sg2,
About the author
is senior vice president o( advisory services at
the 6 lenses of population health management
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