Brave New World: Marketing and Leasing: Medical Office Buildings in a Changing Health Care Delivery Environment
Dougherty, Brian, Muhlebach, Richard, Journal of Property Management
For years, the analysis of marketing and leasing of medical office buildings (MOBs) was a very static and formulaic process.
* FIRST, determining the location of the building in relation to local hospitals. If the building was within walking distance or a short ride to a hospital, the building would likely maintain a high occupancy
* SECOND, reviewing the tenant mix A mix of primary care physicians and some specialists and a pharmacy was ideal. This mix would generate referrals among tenants and create value for them to remain in the building.
* THIRD, relying on tenant retention. Though the lease-up of MOBs was often slow, turnover was rare since the cost for a medical practitioner or group to relocate was enormous. When physicians retired they sold their practices and the new physician would extend the lease.
The changes in health care delivery initiated by legislation and within the health care industry have forced medical professionals to operate more efficiently and change their space requirements. Before real estate professionals can respond to these changes, they should learn how these changes affect the practice of medicine and medical office buildings' tenants in order to position their MOB to compete in a changing and dynamic health care system. With this knowledge, along with an understanding of the medical office building market, real estate professionals can position or reposition their MOBs to compete for medical and related tenants in an industry that will experience change for many years to come.
The Evolution of Health Care Delivery
For several decades, health care in America has been delivered through a model known as "fee-for-service." This model has centered on volumes of visits, tests and procedures. Toward the goal of better care as well as defensive medicine with medical liability in mind, volumes expanded. As the population has grown and new procedures perfected, medical office spaces have evolved and grown. To appreciate the scale of health care, consider that health care is approaching $2.5 trillion annually, consumes approximately 20 percent of GDP and health care inflation is currently running at about 8 percent. While care has been considered excellent by several metrics, the costs to the nation, companies and individuals are unsustainable. Additionally, new legislation could result in an additional 30 million individuals having greater access to the delivery system.
Providers Looking to Reduce Costs
Private and government insurers, as well as individuals, are working toward greater efficiencies in order to prevent care from becoming prohibitively expensive and expenses are being scrutinized more carefully. Additionally, increased technology is providing greater transparency and increasing efficiency. How does this affect property managers? The increased examination of costs demands that providers look at all line items of expenses, including building occupancy and space costs. Building and occupancy cost is the third highest expense of most medical groups. Workflow analysis and economies of scale are being looked at throughout the health care system. More efficient, less expensive, high-quality care must include appropriate care at the appropriate location and space at the most efficient price.
Medical practices and hospitals are going through new alignments and mergers in order to achieve better economies of scale. It is estimated that 65 percent of physicians and medical practitioners will be employees of hospitals rather than private practices. Telemedicine, including electronic medical records and mobile computing, are changing the way health care is delivered. There is increasing emphasis on outpatient care from a variety of different types of space, not necessarily expensive space co-located with a hospital.
The latest estimates predict that 32 million new and/or previously underserved patients will be receiving health care as a result of new national health care legislation. …