As health systems grapple with providing exceptional healthcare in a cost-effective way, they are increasingly moving both diagnostic procedures and healthcare treatments, including surgeries, into medical office buildings with ambulatory surgery facilities, which are located in communities where patients reside. The 2007 Seminar examined the implications of these trends, exploring such issues as models for ambulatory care; clinical JV structures, economic profiles, and tenancy needs; property management requirements for ASCs; strategies for controlling costs—both in design and construction and in operations management. For a more detailed overview of the education sessions offered, click on the title below:
• Reaching New Markets: Building Ambulatory/Off-Campus Strategies
• Clinical Joint Ventures: Your Next Tenant
• The Economics of Operating Practice Joint Ventures
• Let There Be Demand: Market Analysis Strategies
• Capital Markets: Opportunities and Challenges for Investors and Lenders
• Healthcare Construction Methodologies to Control Costs for New Construction and TIs
• Green Building Options for Healthcare
• Monetization Revisited
• How to Prepare an MOB for Sale
• Emerging Trends in Healthcare
• Property Management Strategies for Ambulatory Surgery Centers
• 4 Property Management Strategies You Can Use Monday Morning to Control Expenses
• Parking for On-Campus MOBs
• Key Indicators of Property Performance
• A STARK Primer
Reaching New Markets: Building Ambulatory/Off-Campus Strategies
Featuring Cindy Alloway, Vice President and Chief Operating Officer, Alegent Health Lakeside Hospital, Omaha, NE; Neil Carolan, Network Vice President—Physician Development & Integration, Carondelet Health Network, Tucson, AZ; George Milligan, President, The Graham Group, Des Moines, Iowa; Malcolm Sina, President, The DASCO Companies, Palm Beach Gardens, FL
• Ambulatory strategies are now expanding beyond the more common outpatient care facilities to medical malls, which house a range of healthcare services including diagnostic centers, primary and specialist care, and even further, to healthcare villages. Technological advances have allowed for better and more complex patient care in ambulatory settings.
• Carondelet Health Network shared a case study of its Rita Ranch Medical Mall, whose base tenants include 4 primary care physicians, 7 time-shares for specialists, full time imaging and rehabilitation.
• Alegent Health shared a case study of its healthcare village, which includes physician office components as well as advanced diagnostic services, along with additional health-related, non-clinical services, such as a wellness center. In addition, there’s targeted retail, including restaurants/cafes. The goal is to provide a mixed use, pedestrian friendly development that integrates retail, wellness, clinical/medical services into a cohesive development that will become a destination center focused on meeting the future needs of consumers and become an asset to the community.
• In some cases, the ambulatory strategies target rapid growth areas comprised mainly of young professional households who desire quick, convenient, quality services in a comprehensive upscale setting.
Clinical Joint Ventures as Tenants
Featuring: Gretchen M. Leiterman, Vice President, Ambulatory Services and Cardiology, Regions Hospital/HealthPartners, St. Paul, MN; Richard G. Hanley, President & CEO, Health Inventures, Broomfield, CO; Robert L. Cohen, Attorney at Law, Kutak Rock, LLP, Omaha, NE; Richard Wicka, Managing Principal, Frauenshuh HealthCare Real Estate Solutions, Minneapolis, MN; Ronald J. Smith, Principal and Co-Founder, Frauenshuh HealthCare Real Estate Solutions, Minneapolis, MN
• Physicians and hospitals benefit from clinical joint ventures by protecting and growing their market share, improving community access and reducing costs by shifting outpatient services from a hospital to a less expensive, freestanding ambulatory setting.
• The joint venture should be considered concurrently with the real estate component. Joint venture formation often involves lengthy negotiations concerning ownership split, governance and management and must be considered early in the overall process.
• Joint ventures benefit from partnering with a developer for access to capital as well as expert pre-construction planning, professional building management and leasing, and knowledge of important legal concerns. Most joint venture transactions require extensive analysis of regulatory and reimbursement implications.
• Ancillary services, like surgery centers, imaging centers and others, function both as an anchor tenant and as a means to get physicians as tenants for your medical office building.
• If hospital-physician joint ventures are organized properly and the business planning is thorough and complete, the ambulatory venture will be a sustainable business.
Understanding the Operating Economics of Clinical JVs
Featuring: Monica Cintado, Vice President, United Surgical Partners, Inc., Nashville, TN
• Clinical joint ventures have become common tenants in MOBs, particularly those located on hospital campuses. The most common clinical JV structure is a partnership between not-for-profit hospital, physicians, and an ambulatory surgery center provider.
• Physician compensation issues drive their demand for ownership of ancillary service business like ASCs.
• Economic factors that can affect the success of these clinical joint ventures are physician cases and specialty mixes, payor mix, and operating expenses (salaries, lease, supplies, and other OpEx)
• Real estate implications include location (proximity to physicians utilizing ASC), location (standalone or part of MOB), lease vs. own (developer partnerships), tenant improvement costs, cost psf (and building size), and physician ownership interest in real estate.
Let There Be Demand: Market Analysis
Featuring: Mark Engstrom, CEO, InSite Properties, Denver, CO; Jason Dodd, President, The Cirrus Group, Dallas, TX; Eric Fischer, Principal, Trammell Crow Healthcare Services, Washington, DC; Corey Perdue, Senior Director, Ambulatory Services, Inova Health, Fairfax, VA; Moderator: Sharon Harper, President and CEO, The Plaza Companies, Peoria, AZ
• The demographic drivers coupled with the infusion of investment dollars insures a bright future for this industry sector.
• Bioscience and technology are great new trends associated with medical office development.
• Decentralization of the medical campus has provided significant business opportunity for medical office development. Properties adjacent to hospital campuses are major attractions for physicians who are restricted from the campus but who would benefit from the synergy and patient flow.
• Collaboration with hospitals, medical schools and research centers provide significant growth opportunities in this sector.
• Panelists shared a number of analytical tools and data methodology for site underwriting.
Capital Markets: Opportunities and Challenges for Investors and Lenders
Jim Kornick, Senior Director, Marcus & Millichap Healthcare Real Estate Group, Washington, DC; Ray Lewis, Executive Vice President and Chief Investment Officer, Ventas Healthcare Properties, Chicago, IL; Jeff Piehl, Director of Valuation Services, Cushman & Wakefield, Denver, CO; Ari Weinberger, Vice President, Shattuck Hammond Partners LLC, New York, NY; Moderator: Brent Tharp, Senior Vice President, GE Healthcare Financial Services, La Jolla, CA
• Healthcare spending has outpaced both the consumer price index and gross domestic product by a large margin. Population growth plus historically low cap rates have created the current high capital needs.
• MOBs are now institutional assets as valuations have climbed rapidly, but loan pricing has compressed. Capital market considerations driving higher mortgages could push higher cap rates, which could help maintain current yields.
• Among the key drivers of uncertainty in the MOB markets are these: new development may affect occupancy, especially in off-campus assets; how the markets treat MOBs (as core investments vs. niche properties); and investors’ demands for higher cap rates as interest rates increase.
• Questions surrounding who will pay for increasing costs for MOBs. Tenants cannot absorb the increases any further, and panelists expect that increased costs will be distributed among hospitals, developers and tenants.
Build It Right From the Start: Design & Construction Methodologies for Ground Up and TI Projects
Featuring: William Eveloff, AVP, St. Joseph Health System, Orange, CA; Ola Ostlund, Principal, Overgaard Construction Inspection Management, Toluca Lake, CA; Michael Kim, Sr. VP/Director of Healthcare, HKS Architects, Inc., Beverly Hills, CA; Rik Kunnath, CEO, Charles Pankow Builders, Ltd., Pasadena, CA
• Demand for healthcare facilities is increasing, but so are construction costs—in fact, they have doubled in the past five years—due to market factors such as materials escalation and labor costs and the great complexity of healthcare projects. Panelists emphasized the importance of well-defined processes as key to controlling costs, but also indicated that understanding the healthcare client’s needs and budget expectations is essential and must be established prior to developing processes.
• Many factors influence design such as changing demographics, advancing medical technologies and market competition. Access to construction and design information and the costs associated with those options increases with time over the course of a project; however, as time passes, the ability to influence those costs declines. Finding a balance between the two is necessary.
• One important cost management strategy is to ensure that the owner’s team leader has the authority to speak for the owner, make decisions about time and budget changes, and is knowledgeable of industry practices.
• Panelists also advised drafting the RFP with project goals in mind then chosing the system that best matches them.
Green Building Strategies for Healthcare
Featuring: Mark Petterson, LEED AP, NBBJ, New York, NY; Jeff Mickler, President/CEO, Jacob White Construction Co., Webster, TX.
• Benefits to “greening” are myriad and include cost savings from energy and water conservation, a better social standing for your brand, a healthier environment for your employees and customers and regulatory compliance.
• Case studies of a green building illustrated some of the savings, including recoding the building for 24/7 tenant access from anywhere via the Internet lowered operating expenses.
• Other savings came from a 175,000 gallon underground storm water storage and treatment facility which recharges after two inches of rainfall. The total building usage is an average of 50,000 gallons per month. Therefore, every two inches of rain can potentially provide a 3 month supply of water for irrigation and flushing toilets.
• Other features include a roof-mounted, non CFC, air cooled, variable load stepping chiller HVAC, which has CO2 sensors in the return air stream which activated pretreated and filtered fresh air from outside; 2 electric, traction elevator cars, large enough for gurney and requiring only 6.7 HP for hydraulics, which reduces cost as no oil is required, no machine room is required, and it uses electronic logic controls and is low heat.
• Extremely tight building envelope consisting of stucco and glass, and 75 percent of the building benefits from daylight. Studies show that increased natural daylight in the work environment leads to less sick days and higher productivity. Building also benefits from solar heat gain. And icynene insulation reduces air leakage and noise transmission.
• Extensive green roofing leads to additional green space for LEED certification purposes, additional plant life for healthier humans, reduction of UV rays on roof and increased retention of water.
Monetization Revisited
Featuring: Thomas E. Gallagher, SVP Business Development, SETON Healthcare Network Austin, TX ; Darren Redick, Vice President of Real Estate, Swedish Hospital, Seattle WA Todd Lillibridge, CEO, Lillibridge, Chicago, IL; Glenn Preston, Vice President, Acquisitions, Health Care Property Investors, Nashville, TN; Dan Prosky
• Case studies of Swedish Health and Seton Health monetizations were used to illustrate the intricacies of monetization. The hospital monetization process is long and involved, often time taking 3-5 years from initial contemplation until completion of sale.
• Buyer selection is not based solely upon pricing. Other considerations are taken into account, such as experience and ability to work closely with the hospital system.
• Pricing on these types of transactions, especially the larger ones, has become extremely competitive.
• The relationship between Buyer and Seller is ongoing.
• Hospitals are extremely concerned with the Buyers’ ability to maintain a good working relationship with physician tenants. For this reason, physician tenants may also be invited into the selection process.
How to Prepare an MOB for Sale
Featuring: Kevin M. Hanrahan, Senior Manager, Ernst & Young Transaction Real Estate, Atlanta, GA; Tim Couch, Managing Director, CB Richard Ellis, Dallas, TX; Bob Neyland, CFO, Montecito Medical, Jacksonville, FL; Tim Schier, Senior Vice President, Cain Brothers & Company, LLC, Houston, TX
• Panelists recommended developing a 30-60 day strategic evaluation of the property that includes the development of goals and a thorough review of the property characteristics.
• The typical healthcare real estate transaction involves a sale of building improvements subject to a long term ground lease from the hospital with the hospital leasing back space for its needs. Hospital retains ownership of the land under the building and adjacent common areas and enters into a ground leases with the investor for terms ranging from 65 - 100 years. Numerous control provisions are structured in the ground lease. If the transaction makes sense as part of the hospital/system’s strategy, the overall impact on the financial ratios of the organization is likely to be positive.
• From the healthcare system perspective it’s important to confirm where the authority resides and communicate the benefits. The sale team should consist of a system-level and campus-level executive sponsor, system-level financial officer, physician liaison and for technical issues, a property manager, legal support, title company, and a building infrastructure expert. Preparation for the transaction should include determining which properties to include; resolving any tenancy issues; and ruthless pursuit of accurate property-level P& L. Practical considerations include shared infrastructure – parking & plant; SF measurement; shared services such as janitorial and patient transport; hidden or forgotten unrecorded restrictions; naming rights; sub-division of tracts; aesthetic controls; and long-term growth needs, and options to expand.
Keynote Session: Building a Better Healthcare System for New York
Vital Signs: Emerging Trends and the Health of Healthcare
Featuring: Todd Sloane, Op-Ed Columnist, Modern Healthcare, Chicago, IL; Murray Wolf, Publisher, Healthcare Real Estate Insights, Deephaven, MN; Moderator: Gordon Soderlund, Senior Vice President, Strategic Relationships, The DASCO Companies, Oakbrook Terrace, IL
• To enhance revenues, hospitals are examining the sphere of interaction with their patients, seeking to extend their brand and enhance the patient experience and increasingly exploring options to bring retailing to healthcare. What’s the impact on MOB’s? Anticipate more retailing on the first floor of your buildings, an expanded pharmacy, and hospital utilization studies to move non-clinical, non-revenue producing functions out of the hospital and into your buildings to make room for these opportunities.
• Consolidation among insurers and hospitals seems to indicate that large insurers are gaining clout at the expense of hospital systems and physicians. We are also seeing the rise of large multi-specialty physician groups, which is likely the future of medicine with their ability to win patients, negotiate contracts, manage chronic care, and afford and utilize information technology systems.
• When it comes to healthcare law enforcement, the picture is extremely unsettled. Nobody seems to agree on whether there are clear boundaries as to what is antitrust, what is a kickback and what is a good business plan. Physician agreements tend to be at the heart of a lot of what is going on, but it’s wide-ranging, with HHS, the IRS and the FTC all looking hard at healthcare business practices.
• Institutional investor interest in medical properties continues to grow. Investors are also looking beyond medical office buildings to pursue other property types, including long-term acute care hospitals, behavioral health facilities, rehab centers, surgical hospitals and specialty hospitals. In a diversification play, Health Care Property Investors (NYSE:HCP) acquired the U.S. portfolio of Slough Estates plc (now SEGRO) for $2.9 billion.
• Aside from the costs to provide healthcare insurance coverage for the 48 million uninsured in this country, finding enough talented healthcare workers will be an equally difficult challenge. To service the demand created by universal healthcare coverage, we would need to add 35,000 physicians, 40,000 nurses, 15,000 pharmacists, 125,000 health aides and technicians and 4,000 dentists.
Property Management Strategies for ASCs
Featuring Ken Catellier, BremnerDuke Healthcare Real Estate, Indianapolis, IN;Ross Goyer, General Manager, Lauth, Indianapolis, IN; Chad Nahrup, Operations Manager, Henkle Schueler Property Management, Lebanon, OH; Dave Roberson, Vice President, Environmental Services Brand Management, SODEXHO Healthcare, Brentwood, TN
• ASCs are subject to federal regulation if they accept Medicare payments, and are licensed in most states. They are subject to AAAHC and JCAHO accreditation and checks as well. The nature of the procedures performed in ASCs increases the property management responsibilites across the board.
• Operationally, issues such as life safety equipment, mechanical and plumbing in particular have increased needs, including frequent inspections. For mechanical equipment, air exchange rates and very specific temperature and humidity parameters are specified, as are specialized filters.
• Property management staffing requirements are higher for ASCs than for “standard” MOBs, ranging from one FTE per 31,500 sf (on the low end) to one FTE per 18,200 sf (on the high end.) The service and documentation requirements associated with ASCs are higher.
• ASCs can be integrated within an MOB or function as a “building” within a building. PM must understand the clinical functions performed within the ASC in order to manage effectively and guide design/development of an ASC within an MOB.
Four Property Management Strategies you Can Use Monday Morning to Contain Runaway Costs
Featuring: Jim Wissinger, Vice President, Sales & Marketing, ABM Janitorial Services, Chicago, IL; Chip Schroeder, Vice President, National Bureau of Property Administration, Chicago, IL; Jennifer Kearney-Herold, Director of Energy Programs, New York Presbyterian Hospital, New York, NY; Brian Ruane, Executive Vice President, Willis of New York, Inc., New York, NY.
• Janitorial service costs can quickly run amok if not tightly controlled. Partnering with other managers to bid multiple sites may afford more bargaining power and discounted prices. Review position descriptions, consider switching a day porter to a part-time position or perhaps share them with another building. Hire a handyman rather than an engineer and re-examine consumable products and dispensers, e.g. use foam soap instead of liquid, for cost savings.
• MOBs have been increasing in value leading to a purchase price that is typically greater than the assessment value. Panelists recommended converting assessment price to market value presenting the case to the assessor before the new assessment has been finalized as Assessor has more flexibility before the tax roll has been approved.
• A case study from the New York Presbyterian Hospital (NYPH) illustrated innovative techniques to trim energy costs. Among the strategies deployed were development of an in-house management office and a strategic partnership with the EPA. They implemented upgraded light fixtures and chillers and installed advanced building controls to help conserve energy and cut costs.
Parking Strategies and Structures for On Campus MOBs
Featuring: Sam Botros, Parking Administrator, The Cleveland Clinic, Cleveland, Ohio; Roamy R. Valera, CAPP, Vice President, Timothy Haahs & Associates, Doral, FL; David Hoyt, Regional Vice President, Standard Parking Corporation, Miami, FL
• Many hospitals face a “space crunch,” whereby areas once reserved for parking are needed to develop additional treatment or office space, resulting in limited parking availability. This session examined asset management strategies for parking inventory, including master planning for parking—allocating sufficient space, sequencing building of parking and/or MOBs or other treatment facilities, and determining who bears the cost (the hospital or the developer, or both).
• Parking in the urban core can be challenging, but new strategies, such as shared parking, can benefit multiple land uses and can drive sustainable lifestyles. Shared parking experiments, where spaces are shared among users rather than having spaces dedicated to individual users, leverage resources of adjacent property owners. Facilitating a shared parking strategy requires careful examination of zone requirements, land use demand data as well as peak demand ratios.
• Parking management strategies such as lot assignments, parking enforcement, shuttle and valet parking, can also help alleviate space crunches as can employee transit reimbursements.
• Alternative options for financing parking costs including public/private partnerships, tax reform, and additional allocations.
Key Indicators of MOB performance
Featuring: Drew Cressman, Asset Manager, Healthcare Property Investors, Inc., Nashville, TN; Alton Penz, Consultant to BOMA International’s Experience Exchange Report and President, The Gimbal Group, Arlington, VA
• There are a wide variety of MOB performance measures from tenant satisfaction to total rentable area; metrics are driven by the owner’s goals for the building.
• Control samples of MOB operating expenses over a two-year period, from BOMA’s Experience Exchange Report (EER), indicate some significant decreases in cleaning costs, while other categories of expanses, such as utilities, repairs/maintenance and administrative expenses increased, though in most cases only slightly.
• New operating expense data from BOMA’s 2007 EER, revealed that “anchor tenants” in MOBs typically did not pay operating expenses directly.
The Practical Guide to STARK
Featuring: John Thomas, President of Cirrus Health, Dallas, TX; Todd Maxwell, Vice President of Real Estate for HCA, Nashville, TN; Jim Moloney, Managing Director and Head of Real Estate for Cain Brothers, San Francisco, CA
• Federal regulations known as STARK and Medicare/Medicaid Fraud and Abuse regulations govern the financial relationships involving health care providers and their referring physicians. STARK prohibits physicians from referring Medicare/Medicaid beneficiaries for designated health services (DHS) to an entity with which they (or an immediate member) have a financial relationship and the entity from billing for the provision of DHS to those patients. When the MOB owner/landlord is also an entity that provides healthcare services, these regulations require more consideration than just the traditional rules of leasing and building management.
• From the hospital/landlord perspective, these laws govern many of the parameters of the lease relationship between tenant and landlord. STARK applies to all leasing situations—expansions, terminations, subleases, amendments, holdovers, capital leases, operating leases and renewals—between physicians (including dentists, optometrists, podiatrists, and chiropractors) and healthcare entitles. In other words, it applies to Leases deemed to be out of compliance with either STARK or Anti-kickback are subject to financial penalties. Even physicians who do not refer to the hospital or only see private pay patients could still serve as a potential referral source, and the lease should be structured to comply with STARK accordingly.