Magazine article Journal of Property Management

Medical Facilities Outsourcing

Magazine article Journal of Property Management

Medical Facilities Outsourcing

Article excerpt

Historically, health care systems have not considered themselves in the real estate business, despite the fact that most own and lease multiple facilities. But during the last decade, health care has undergone significant changes with much of the focus on improving efficiencies and containing costs. The BJC Health System[sm] of St. Louis reflects this trend. What a decade ago were three independent hospitals - Barnes, Jewish, and Children's - have merged with the Missouri Baptist Medical Center and the Christian Health Care System to create a regional network of not-for-profit hospitals, nursing homes, outpatient clinics, and medical office buildings totaling 13 million square feet and employing 24,000 persons. A partnership with Washington University Medical School provides access to academic and research facilities.

With a real estate staff of three, the health system recognized that outsourcing day-to-day management was the best option for streamlining physical plant operations, providing single-source information on all real estate holdings, and allowing the hospital to concentrate on the delivery of health care services.

Influencing the decision to consider management outsourcing were recent changes in laws governing the leasehold relationships between physicians and hospitals. The Stark II Amendment is a 1995 law that prohibits physicians with a "financial relationship" in an entity from making referrals to that entity for certain "designated health services" paid for by the government. To comply with Stark II, not-for-profit organizations that lease space to physicians must execute a written lease of at least one year at market value for space in the area. In the past, hospital administrators often were not required to focus on strict leasing practices, and some were inconsistent. Physicians were seen as sources of patient referrals rather than as commercial tenants. For hospitals with larger holdings, these practices could easily result in significant annual revenue losses.

The hospital system recognized that it needed a more comprehensive, organized approach to its leased portfolio, both to comply with Stark II and bring order to the confusion resulting from several years of rapid consolidation. The BJC board created an audit committee to work with the systems real estate department to develop a compliance plan. The first step in the process was to inventory all assets, especially the smaller outlying facilities. This work was done by an outside consulting firm with health-care real estate expertise.

The survey results found 13 million square feet of space, half of which was acute-care buildings. The remainder were the types of buildings (medical offices, ambulatory care, and clinics) that would benefit from third-party management. However, the prospect of immediately outsourcing 6 million square feet of space spread over 250 miles seemed daunting. To begin the process and develop procedures that would eventually allow outsourcing of all non-acute-care properties, BJC developed a "pilot portfolio" of four medical office buildings totaling 225,000 square feet and issued a request for proposal. BJC hoped that by improving performance on a small scale, it would eventually reach a point at which all of the 6 million square feet of non-acute space was outsourced.

Taking Over Management

In 1995, the contract for the management of the pilot portfolio was awarded to Colliers Turley Martin Tucker. In some ways, management for BJC was easier than for many health care providers became its real estate department was headed by former developer Ronald Silverman. Frequently, hospital facilities executives have limited real estate knowledge and require more effort to educate them about standard real estate management practices. At the same time, it is vital for real estate practitioners to understand the goals and mission of the health care system, which are focused more on providing optimal space for physicians and patients than on real estate profitability. …

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