Health Care and the Future of Medical Office Buildings: A Perspective on the Care-Location-Cost Trifecta in a Changing Industry

By Dougherty, Brian J.; Muhlebach, Richard F. | Journal of Property Management, September-October 2011 | Go to article overview

Health Care and the Future of Medical Office Buildings: A Perspective on the Care-Location-Cost Trifecta in a Changing Industry


Dougherty, Brian J., Muhlebach, Richard F., Journal of Property Management


HEALTH CARE IN THE UNITED STATES--AN ANNUAL $2.3 TRILLION INDUSTRY EMPLOYING AND SUPPORTING NOT ONLY MEDICAL PRACTITIONERS, BUT THOSE IN SEVERAL OTHER INDUSTRIES, INCLUDING PHARMACEUTICAL, REAL ESTATE, ARCHITECTURE, FINANCE, TECHNOLOGY AND INSURANCE-HAS THE POTENTIAL TO BE A BRIGHT SPOT IN THE ECONOMY.

However, its costs and rate of growth are pushing medical inflation significantly higher than the nation's core inflation rate. Inefficiencies are being addressed in order to more effectively serve not only those currently in the health care delivery system, but also the estimated 30 million uninsured and underinsured people who will be brought into the system, as a result of new national health care legislation.

Longstanding assumptions real estate professionals and property owners have relied upon for successfully developing, marketing and leasing medical office buildings are being tested. Real estate managers will be called upon to manage medical facilities in need of repositioning and redevelopment as well as to manage new medical facilities designed to accommodate changing health care delivery methods. By becoming aware of the complex issues surrounding medical office buildings--including location, design, layout, systems, appearance and conditions--real estate managers will be able to determine which medical office buildings can compete in the current target market or whether managers can create viable management plans that meet the new, dynamically changing needs of most health care providers.

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CHANGING COMPONENTS IN HEALTH CARE DELIVERY

The macro and micro components of health care--access to capital, cost and revenue areas, architectural changes, advancements in technology, etc.--are shaping and influencing the dynamics of health care delivery; thus, new delivery models are emerging in response to economics, regulatory challenges and uncertainties. While medical treatment in the United States is considered excellent, its current delivery options through office visits, hospital stays and the like, have become fragmented and inefficient.

AVAILABILITY OF CAPITAL

Health care is a capital-intensive industry. Significant investment by medical office providers or hospital owners is required to achieve greater efficiencies, acquire new technologies and create and implement expansion plans. Challenges regarding access and availability of funds and cost of borrowing are prevalent, however.

METRICS: COST-AND REVENUE-DRIVEN DELIVERY SYSTEMS

Medical practices and hospitals must achieve efficient economies of scale to develop new markets and provide additional services necessary to produce the revenue stream required to support medical practices and hospitals. Well-capitalized and successful medical practices and hospitals will leverage their success to raise capital, develop efficiencies, acquire strategically located real estate and negotiate with suppliers for value pricing and insurance companies for optimum reimbursements.

DECREASING REIMBURSEMENTS PROMPT INCREASED EFFICIENCIES

A majority of the payments for health care are made by government programs and insurance companies selected by private companies for employees' health care coverage. Government programs' and insurance companies' reimbursement rates to medical providers have been decreasing--and this trend is expected to continue--placing significant stress on delivery systems and providers, and forcing increased efficiencies across the spectrum of care.

Reimbursement rates are being designed to reward efficiencies and penalize errors and inefficiencies, e.g., unnecessary or preventable repeat visits, re-admissions to hospitals and additional tests. Therefore, the implementation of new health care models will be designed to reduce costs through a combination of many factors, including changes to the design and layout of medical space/facilities, improved standardization of procedures, new technologies and the more efficient use of resources.

ARCHITECTURAL AND DESIGN CHANGES: FORM FOLLOWS FUNCTION

Strategic and business plans will drive architecture and design plans based on flexibility, sustainability and efficiency of flow of operations. Coordinating the consumers' successful clinical experience is multifaceted and, as competition for patients increases, building owners, medical practitioners, architects and planners are being called upon to respond to marketplace needs.

In order to achieve efficiencies in economy of scale, many medical practices are leasing larger spaces, with plans that incorporate smaller work areas and flexible spaces. Efficiencies regarding parking ratios, lighting, wayfinding, HVAC controls, ergonomics, family spaces, bacterial control and teleconferencing infrastructures are being incorporated into the design and use of space.

TECHNOLOGY: A DOUBLE-EDGED SWORD

Recently, the advent of tele-medicine and electronic record-keeping has enabled physicians to diagnose illnesses, read images, review patients' medical history and collaborate with other physicians who are miles, and even continents, apart. Increasingly, tele-medicine allows patients to be monitored without scheduling an office visit, thus reducing the space needed for certain equipment and procedures--and ultimately, the need for extra commercial space. As a result, medical practices no longer need to cluster around hospitals. Medical practices are considering the possibility of relocating to areas with more cost-effective rents. In addition, new modes of delivery--such as "concierge" medical practices, where patients pay a monthly fee based on the desired level of service--are offering an alternative level of care. The complex equation of "rightsizing" the space of a medical office building while maintaining its ability to deliver cutting-edge care, is key.

In an industry based primarily upon testing and procedures, where increased standardization of practices leads to improved productivity and reduction of errors, advancing technology is a double-edged sword. While technology helps successful practices remain competitive and maintain acceptable profit margins, it also increases the transparency of patient satisfaction, putting even more pressure on the quality of care as patient quantity increases.

CHANGES TO THE LEASING PROCESS

The radical shift of health care delivery is also impacting the leasing process. The health care delivery models and the facilities in which they operate will likely involve hybrid models shaped by economics of affordability. Perhaps the possibility of selling the property to investment groups or developers who have the ability to take the financial risk necessary to reposition and redevelop these sites will be considered a viable option for the property.

Property owners, real estate managers and tenants might need to consider the possibility of changing space needs and lease requirements as a result of heath care delivery occurring in non-traditional space, such as retail centers and box stores. As medical practices expand or contract due to mergers or sale, they must maintain flexible lease terms and prepare to skillfully and aggressively negotiate shorter, more flexible lease terms, which might include lease cancellation rights, flexible holdover provisions, relocation of practices within the building and noncompete provisions.

Meanwhile, other disciplines are working to develop medical facilities that will provide a delivery model for the right care at the right location at the right cost. The pursuit of this care-location-cost trifecta in health care will continue to impact the evolution of medical office building management. Even successful medical practices and hospitals that leverage their success to raise capital, develop efficiencies, acquire strategically located real estate and negotiate with suppliers for value pricing and insurance companies for optimum reimbursements, must be supported by insurance coverage and/or patients' ability to pay out-of pocket for health care.

The owner, investor and real estate management team for each building will have the challenge of determining the appropriate positioning of the building, given its uniqueness and how it fits into the local health care delivery system.

BY BRIAN J. DOUGHERTY, CPM AND RICHARD F. MUHLEBACH, CPM

[left] Brian J. Dougherty, CPM (brian@pemreal.com), has 25 years experience in the leasing, management and development of medical office buildings, as well as consulting to medical practices, building owners and hospitals.

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[right] Richard F. Muhlebach CPM (rmuhlebach@comcast.net), has 35 years experience managing and leasing medical office buildings. He served as the 1998 IREM national president.

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