Time For Healthcare To Borrow From the Corporate Real Estate Playbook

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By Richard Taylor

One of the world’s largest corporations occupies hundreds of facilities in countries around the world. The real estate team collects data and information from every site, which informs their understanding of which locations have the highest operating costs, are underutilized or most productive, or don’t fully support the larger business. Facility management is centralized, enabling the company to save millions through operational efficiencies in workflow, supply chain management and workforce administration. 

How many healthcare organizations can say the same about their real estate portfolios?Few healthcare systems have adopted a holistic approach to the real estate aspect of their operations. For most, real estate is left in the hands of individual hospital or outpatient facility leaders—and the healthcare organization misses opportunities to enhance patient care, realize value and reduce costs through its real estate. 

In fact, healthcare is one of very few industries that has not embraced a systemic approach to its real estate and facilities. By managing their real estate holistically, companies in many other sectors have reduced operating costs, improved environmental sustainability, boosted talent retention and recruitment, and achieved other vital goals. Leading companies view their facilities as productive assets with the potential for bottom-line and top-line value. 

Give that real estate is the third-largest expense for most organizations in other sectors, it stands to reason that a more strategic and holistic approach would be advantageous for healthcare, too. In a time of stressed margins, pricing pressures and intensifying competition for healthcare providers, real estate presents an opportunity to boost an organization’s profit margins and debt ratings and, ultimately, its cost of capital. 

Overcoming tradition in the healthcare sector

One reason the healthcare sector has not embraced the “systemness” approach to real estate is the unique nature of the healthcare mission itself. Approximately 75% of healthcare organizations operate as nonprofits because of their commitments to charity care. Facilities typically are viewed as the places where caregivers deliver services—not as productive assets in and of themselves. 

The reality, however, is that nonprofit hospitals and health networks need to achieve profits—just as any other corporation would—to reinvest into patient care. While healthcare systems will always focus on their patient populations and their missions, real estate can play a substantial role in driving cost savings and meeting evolving patient needs.

The rapid pace of mergers and acquisitions of recent years have only added to the opportunity real estate can provide. Many healthcare systems have accumulated complex networks of facilities, but lack the data and insights to create strategic plans. Unfortunately, facilities often come to the forefront only when something goes horribly wrong, such as a burst pipe or a power outage. 

Healthcare real estate can be managed like HR and IT

Successful healthcare organizations excel at managing other business aspects of healthcare. A typical system has centralized HR and IT, with fully integrated systems for tracking clinical care and outcomes, and, of course, managing the revenue cycle across the organization. 

Now, of course, myriad external pressures are creating a compelling argument to reinvent healthcare real estate. Healthcare pricing is under a microscope, while the pandemic has left many systems with a revenue shortfall this fiscal year. Competition for patients continues to intensify across state lines.

Amidst these demands, one of the largest healthcare systems in the Western US seized the opportunity to use its real estate for competitive advantage. Partnering with a third-party facilities management provider, the healthcare system implemented savings of more than $50 million. How? By viewing its facility operations holistically from the perspectives of facility quality, risk and financial performance. 

In another part of the country, a leading health system engaged in a real estate portfolio management program for its 40+ medical office buildings and 300 distributed locations. Through effective lease administration, smart energy programs, and efficient operations, the system achieved $8 million in property and real estate savings.  

Understanding real estate quality, risk and financial performance

As the saying goes, “You can’t manage what you can’t measure.” Just as corporations with high-performance real estate portfolios rely upon data-driven decision making, a healthcare organization should start by aggregating data about its facilities. From there, analytics tools will reveal valuable insights about each property. Rethinking the facilities portfolio from the perspectives of facility quality, risk and financial performance will uncover steps toward opportunities to enhance patient experiences while addressing other business issues. 

For example, in every healthcare organization’s real estate portfolio are facilities that have low operating costs, yet support high-volume patient flows and resulting revenues, and vice versa. Surprisingly, sometimes the newest facility with the state-of-the-art buildout may be the costliest to operate—even though aging buildings are typically less energy-efficient than newer ones. One site may generate high revenues, but require ongoing capital investments because it is aging and prone to regulatory compliance infractions. Sites may be competing for the same patients, or facing high employee turnover because of facility issues. A site may be under-performing compared to other sites, suggesting that it should either be closed or reconfigured to boost patient volume and service revenue.  

With a better understanding of how facilities are being used, and the associated facilities costs and revenues, an organization will be equipped to develop a master plan that aligns facilities with business goals. For example, real estate strategies that increase the efficiency of outpatient facilities can add convenience for patients while optimizing revenue streams. 

Risk mitigation is another critical perspective in a talent-driven, highly regulated industry such as healthcare. Facility risks can encompass everything from a chronically malfunctioning chiller to hidden Stark law violations. In addition to potentially jeopardizing patient wellbeing, facilities regulatory compliance infractions can be very costly and come from unexpected quarters.   

A healthcare organization’s buildings should be productive assets. Reducing operating costs is important, but so is top-line value. For example, consolidating primary and specialty care into one facility—with access to parking and public transit—can capture a larger patient share and improve employee retention. Modifying spaces to provide a different mix of services, additional exam rooms or telehealth offices, or lease out excess space to other medical or retail tenants, also can boost building profitability.  

A healthcare network also may have opportunities to monetize unused assets. On a hospital campus, for example, land could be leased to a third-party to build and operate a facility—while the healthcare organization retains control over the ground. Many healthcare providers have used ground lease arrangements to support outpatient programs like surgery centers, cancer treatment, rehab and behavioral services. Leasing rooftops to telecommunication partners that need antenna locations or energy providers to install solar panels to power the surrounding communities can also be a way to generate immediate and long-term revenue from real estate assets. 

By implementing creative approaches and strategies across the real estate portfolio, a healthcare organization can offer patients the best possible care while reducing expenses and boosting margins.
It’s past time for healthcare organizations to take a page from the corporate playbook to future-proof their real estate.  

Richard Taylor is President, Healthcare Solutions, at JLL. He leads a team of more than 2,300 professionals helping healthcare providers and property owners improve patient outcomes through real estate and facilities. A respected expert in healthcare real estate, Taylor has authored numerous articles  and regularly speaks at national conferences hosted by top industry associations, such as the American College of Healthcare Executives (ACHE), Urban Land Institute (ULI), Building Owners & Management Association (BOMA) and CoreNet. 

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