Wednesday, November 23 2016
By Jim Damicis, Senior Vice President and Alexandra Tranmer, Economic Development Specialist of Camoin Associates
It has been a year since Alex Tranmer and Jim Damicis of Camoin Associates profiled the health care industry and made the case for why it is important to consider the industry in community economic development plans. This month, Alex and Jim are back to discuss the real estate implications of the changing health care landscape. They find that real estate management is a key component to a health care network’s portfolio and more health care providers are devoting budget and resources to understanding how to strategically position themselves in communities. This requires an understanding of emerging trends driving the industry as well as local and regional economies. Between the shift to a value-based reimbursement system and an increasing number of individuals with access to health insurance, providers have been driven to explore different ways to cut costs and bring in additional revenue-all while still providing high quality care at competitive rates. The answer for many provider networks has been two-fold: revisiting the management of their real estate portfolios and branching out of typical locations to expand how and where they are able to reach a wider patient market – sometimes in unlikely spaces.
It is no secret that health care costs are rising for all parties involved: insurance companies, doctors and patients. For health care consumers (or patients), premiums for health insurance plans have been decreasing, while deductibles, the portion of the procedure that the consumer must pay for out-of-pocket, are simultaneously increasing. In the last five years, the average deductible for a single coverage plan was up $486, or 49 percent to $1,478. Additionally, workers in smaller firms (employing 3-199 people) paid $831 more than workers at firms who employ more than 200 people.1 As individuals are responsible for paying greater portions of their own health care costs, people are shopping around for quality services at affordable rates. In this way, the health care consumer has greater power in the market place, being able to choose one doctor over another based on location, additional amenities offered or quality of care.
Further driving a shift in how health care services are viewed is the change in the patient reimbursement model. The traditional “fee-for-service” model, where hospitals were paid based on the quantity of visits or procedures per patient, has transitioned to a “value-based” reimbursement model, which focuses on the quality of care the patient receives. For example, health care providers can either receive financial incentives or penalties based on formal hospital and physician reviews.2
Based on these programmatic changes to health care service, providers of all sizes have had to reassess their patient care delivery systems. In an effort to reach deeper into communities, while keeping prices for care at reasonable rates, providers are moving non-invasive procedures and many primary care services out of the hospital and into ambulatory facilities such as urgent care centers or other specialty clinics. These are medical offices with flexible and evening hours, where patients can have a more intimate interaction with the doctor without having to go the Emergency Room or wait a week to see their general practitioner, a cost and time savings for both parties. Urgent-care centers and other ambulatory facilities can offer specialty care for acute or chronic ailments and even surgical procedures that do not require an overnight stay. Specialty services could include blood labs, X-rays, or kidney dialysis centers.
As a subsector of the health care industry, Urgent Care has experienced 4 percent annual growth in revenue over the last five years, and is expected to continue to grow, albeit at a slower rate, 2.5 percent annually, between 2016 and 2021.3 Outpatient Care Centers added 4,750 establishments between 2010 and 2015, growing the number of total establishments by nearly one third.4 All Other Ambulatory Health Care Services added almost 1,200 establishments, increasing the number of establishments in that sector by 40 percent.
This industry data makes it clear that more flexible hours, combined with convenient locations and one-on-one medical advice, has rendered urgent care and ambulatory facilities a game-changer in the industry.
But ambulatory care centers can only offer so many services for a patient, and they are just a piece of the wider network coverage that large health care providers must build to be successful in the ever-changing health care landscape. For the greatest patient coverage and cost-efficiency in service delivery, a three-tiered network is the ideal arrangement: a regional hospital, a community-based comprehensive care center and neighborhood clinics like urgent care and primary care.6 To build these multi-levels of care, providers are expanding their real estate acquisitions to build comprehensive networks, rendering property management a vital component of health care administration services. Real estate planning and development for community health centers/ambulatory facilities has essentially grown into its own subsector of health care. Being that health care real estate dealings involve state and federal regulations surrounding patient care, real estate professionals involved in these deals must be experts in both health care and real estate legislation, ensuring that proper precautions are taken in the field of patient safety and privacy.7
Traditionally, providers have preferred to own all of their properties to hedge concerns about privacy and patient care. Yet, with budget crunches cutting into patient care capabilities, leasing opportunities in new-build spaces and existing buildings are proving lucrative for hospitals that need to invest in the latest scope technology or surgical instrument. In a build-to-suit scenario, the real estate developer is typically responsible for the land and the building costs, taking on the construction risk, while the health care network would then sign a long-term lease, up to twenty years, securing them a prime real estate space for patient care without being accountable for the costly and sometimes lengthy building construction and design period.8
Health Care is the New Retail Anchor
While brick-and-mortar retail in general has taken a substantial hit in the last decade, some big box stores like Target and Walmart, as well as pharmacy chains like CVS with its “Minute Clinics,” are still major fixtures in communities throughout the country and are getting into the health care market by offering additional services through their built-in pharmacies, competing on convenience and cost. These “retail clinics” are typically part of a pharmacy or big box store and their primary market is young adults and others who may not have another doctor to go to.9 Retail clinics differ from urgent care centers in that they are staffed with nurse practitioners and physician assistants who are trained to address minor medical issues, while urgent care centers focus their treatment on mild trauma and more severe injuries and may have at least one physician on site.
In the past, landlords of large shopping centers or retail strips would have dismissed medical tenants like urgent care centers in favor of highly preferred retail anchors. Medical tenants and restaurants were considered second-tier tenants because they did not generate extended customer visits to commercial strips. But now, they are bringing back traffic to retail spaces that have been vacant for years. The perception of medical tenants has undergone such a shift that they are now viewed as an amenity to have in a mixed-used or retail development and anchor tenants like grocery stores are eager to have ambulatory services located in close proximity.10
To gain a little perspective on how far medical office real estate has come in the last ten years, a decade ago medical clinics made up two percent of new retail real estate deals, while today, real estate giant JLL reports that in some locations medical space can account for upwards of forty percent of new retail real estate transactions.11 Cushman and Wakefield’s Vital Signs, which reports on the overall status of the health care industry, affirms that the real estate market in health care-related sectors is strong and projected to remain solid in the next year. Vacancy rates in health care buildings dropped in 2015, while net absorption in health care properties jumped by 3.1 million square feet (msf) from 2014 to 2015, reaching 13.2 msf.12
The graph at the right demonstrates the geographic distribution of medical office space sales between March 2015 and March 2016. The Southeast, West and Southwest regions of the country share the top three greatest percentages of medical office sales, while the Mid-Atlantic region captured the smallest percentage of sales, just over 11 percent. These sales figures align with industry data that show that outpatient facilities and other medical practices are concentrated in the Southeast region of the country due to the high proportion of elderly residents. For example, nearly one fifth of Florida’s population is over 65 – nationally, the same cohort makes up 14 percent of the population.13
This type of demographic data is increasingly important to health care providers. Like the former retailers whose spaces they now occupy, providers have gotten into the business of market analysis and consumer profiling, assessing the socioeconomic characteristics of the region to understand exactly who their patients are and better customize the patient experience. Once the clientele is better understood, spaces can be tailored to fit the needs of the community. Those providers that are paying close attention to the patient experience are getting out ahead of the competition. For example, as many communities age and live independently longer, investing in well-placed wayfinding signs can make all the difference in the ability of elderly individuals to find their way through a maze of offices. One real estate professional notes a medical office in a retirement community that actually built in electrical outlets to the exterior of their building so that the residents could recharge their golf carts, the preferred means of transportation, while at their appointments.14
What do these trends mean for economic development?
As hospitals decentralize their services and move into more communities and traditional retail locations, shifts in workforce needs and space demands by large health care networks could shake up job distribution in communities across the nation, especially in highly concentrated areas of outpatient centers. Workforce Investment Boards, economic development professionals and organizations embedded in communities should liaise with local health care providers to keep up to date on anticipated changes in staffing to address necessary changes in workforce training programs.
As communities look toward future employment growth and real estate demand, reuse of vacant retail sites should be viewed as a strategic opportunity. Attracting a suitable medical office tenant could bring new life back into corridors that have run quiet in the last several years.
As market demand for mixed-used development continues, look towards the health care sector to provide an important piece of a sustainable and diverse mixed-use development. Medical office spaces can also prove to be lucrative tenants and therefore bolster feasibility depending on other elements in the project.
Lastly, communities should be prepared to offer the appropriate market information to health care facilities interested in potential medical office sites. The kind of relevant information to offer site selectors has changed considerably. For example, twenty years ago a manufacturing facility might have wanted to know about local energy costs, land costs and the skilled labor pool. Today, health care providers want to know the percentage of population over 65, the number of people covered by insurance, and other health and wellness indicators.
2 Crapo, Jared and Brown, Bobbi. “The Key to Transitioning from Fee-for-Service to Value-Based Reimbursement.” Health Catalyst, 2014, https://www.healthcatalyst.com/hospital-transitioning-fee-for-service-value-based-reimbursements.
3 IBIS Report, 62149 Emergency & Other Outpatient Care Centers in the US Industry Report
4 Based on NAICS Code 62149 Other Outpatient Care Centers, 2016.3 – QCEW Employees, Non-QCEW Employees, and Self-Employed
5 Based on NAICS Code 62199 All Other Ambulatory Health Care Services, 2016.3 – QCEW Employees, Non-QCEW Employees, and Self-Employed
6 Cowell, Dan. Enhancing the Health Care Bottom Line With Leased Facilities, NAIOP. Spring 2015. http://www.naiop.org/en/Magazine/2015/Spring-2015/Development-Ownership/Enhancing-the-Health-Care-Bottom-Line.aspx
7 Hrickiewicz, Mike. “Keeping up with changes in health care real estate.” Health Facilities Management, July 6, 2016, http://www.hfmmagazine.com/articles/2226-keeping-up-with-changes-in-health-care-real-estate.
8 Cowell, Dan. Enhancing the Health Care Bottom Line With Leased Facilities, NAIOP. Spring 2015. http://www.naiop.org/en/Magazine/2015/Spring-2015/Development-Ownership/Enhancing-the-Health-Care-Bottom-Line.aspx
9 Convenient Care: Retail Clinics and Urgent Care Centers in New York State, United Hospital Fund. February 2015. http://nyshealthfoundation.org/uploads/resources/united-hospital-fund-convenient-care-report.pdf
10 Verdon, Joan. “Prime retail spaces just what the doctor ordered.” The Record, July 17, 2016, http://www.northjersey.com/news/business/medical-chains-retail-mix-1.1631544
11 Russell, John. “Why are there so many urgent care clinics everywhere.” The Chicago Tribune, October 9, 2015, http://www.chicagotribune.com/business/ct-healthcare-real-estate-1011-biz-20151009-story.html
12 Cushman & Wakefield. “Vital Signs: Assessing the Health of Healthcare,” May 2016.
13 IBIS Report, 62149 Emergency & Other Outpatient Care Centers in the US Industry Report
14 Hrickiewicz, Mike. “Keeping up with changes in health care real estate.” Health Facilities Management, July 6, 2016, http://www.hfmmagazine.com/articles/2226-keeping-up-with-changes-in-health-care-real-estate.
About the Authors
Alexandra Tranmer, Economic Development Analyst, Camoin Associates