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How Central PA Health Systems are Rethinking Real Estate

Posted on March 21, 2018 by Mike Kushner in Blog, Guest Blogger, Healthcare, Local Market, Trends No Comments

Major changes are taking place in America’s health systems and we are starting to see the impact of some of these changes right here in Central Pennsylvania. Hospitals are no longer the desired “hub” for healthcare, rather free-standing emergency rooms, 24-hour emergency care centers and walk-in clinics are helping to keep people out of the hospital, while expediting their care.

Additionally, telemedicine is reshaping the need for brick and mortar facilities, placing a new emphasis on health systems acquiring “virtual” real estate. These emerging trends are intended to increase access to quality healthcare while allowing health systems to reduce overhead.

To help us answer some of the most important questions surrounding the changes taking place in Central PA’s health systems, we interviewed two guests who are highly knowledgeable on this very topic.

Christian Caicedo MD, MBA, CPE, FACHE is the System Senior Vice President and President of the Cumberland Division at UPMC Pinnacle. Paul Toburen, also with UPMC Pinnacle, is the Senior Vice President of Facilities and Support Services.

With a combined, vast experience in health systems operations, Dr. Caicedo and Mr. Toburen collaborate to lend their insights into how Central Pennsylvania’s health systems are rethinking the way they use commercial real estate.

Omni: Looking at how Central PA’s health systems currently function, what are some of the biggest challenges?

Christian/Paul: One of the most critical challenges we face in Central PA is access to care – not just any access, but the right kind of access. It’s a moving target we are trying to hit. Patients want access to fairly and competitively priced healthcare, in the right setting, with quality resources and skilled staff.

The challenge stems from the fact that we are all trying to live in two worlds: the fee for service world and the value based world. We can’t have it both ways and also provide access to quality healthcare to everyone in Central PA. There has to be a compromise somewhere.

Omni: As Central PA’s health systems see more and more value in serving the outpatient market, what strategies must be implemented to make this shift?

Christian/Paul: The key to shifting our focus to better serve the outpatient market is to make simple and immediate access to healthcare available to patients right where they are. Rather than asking patients to come to us in traditional office and hospital environments, we need to have access points in the work place, malls, retail spaces, home, etc. Health systems are now trying to acquire more virtual real estate than they are brick and mortar locations. This is evident by the more than 120 rural hospitals who have shut their doors since 2005!

Omni: With the use of telemedicine becoming more prevalent in our health systems, what are the pros and cons of diagnosing patients in their home?

Christian/Paul: The pros, as we touched upon above, will be the ease of access and convenience to the patient. It will allow physicians to see more patients in a day, reducing patient wait time and reducing patients exposure to germs and infections. Additionally, telemedicine is a great option for Medicaid recipients.

The cons, well that will evolve as the technology changes. Currently there are limitations as to the level of evaluation one can conduct via the virtual encounter. As technology evolves, (i.e. Haptic pressure feedback) we will have greater ability to perform better virtual exams and arrive at an accurate diagnosis through telemedicine.

Omni: Specifically, how will telemedicine impact brick and mortar healthcare facilities?

Christian/Paul: Simply put, the growing use of telemedicine will diminish the need for brick and mortar facilities and drive the demand for virtual real estate. If done thoughtfully and strategically, this should be a win for both patients and health systems. Speaking from the health systems standpoint, we can save a lot of overhead while providing patients with faster, more convenient care. Hospitals will stay play an important role in the overall health system, it’s just going to look a little different in the future.

Omni: What Central PA health systems do you feel are leading the way in rethinking how they use real estate?

Christian/Paul: We believe all Central PA health systems are rethinking the way we use real estate. The cost of construction continues to escalate. We are now looking at lease agreements versus building-to-own along with repurposing existing buildings to accommodate our current needs, but having flexibility for future needs as well. Speed to the market is critical in today’s healthcare industry, as we must accommodate the patients’ needs.

Given the transformation taking place in Central Pennsylvania’s health systems, and health systems worldwide, how do you feel about the changes taking place and where they will lead us in the future?

Join in the conversation by sharing your thoughts or questions!

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More about Christian Caicedo: Christian Caicedo MD, MBA, CPE, FACHE is the System Senior Vice President and President of the Cumberland Division, UPMC Pinnacle. He is the former Vice President of Operations and Medical Director for West Shore Hospital, and Interim Chief Medical Officer, Pinnacle Health System. He has served as Executive Director of Emergency Services and served as Clinical Director for Community Campus Emergency Department, Pinnacle Health System. Dr. Caicedo also served as medical director for Swatara Emergency Medical Services, and was a member of the Swatara EMS board of directors. Currently, he serves as Medical Director for Susquehanna EMS.

More about Paul Toburen: Paul Toburen is currently serving as Senior Vice President for Facilities and Support Services for the UPMC Pinnacle Health System. Paul oversees fourteen departments with a primary focus on Construction Management and Real Estate. Paul has obtained his MBA and MS and is a member of the ACHE, ASHE, COAA, IFMA among other organizations.

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The Success of Urgent Care Clinics Mostly Depends on Real Estate

Posted on August 1, 2017 by Mike Kushner in Blog, Healthcare, Local Market No Comments

When it comes to healthcare, there is no shortage of demand for convenient and cost-effective providers. As a result, the American Healthcare System has shifted its focus toward creating outpatient urgent care clinics as a low-cost alternative to hospital emergency rooms.

The Urgent Care Centers industry now represents one of the fastest growing segments of the American Healthcare System. There are 340 walk-in clinics and 209 urgent care centers located in Pennsylvania alone. Depending upon where you live, it may feel like there is an urgent care clinic on just about every street corner, but the strategy behind choosing the right real estate space for an outpatient clinic is well researched and carefully considered.

Real Estate Strategy for Urgent Care Locations

Urgent care clinics are commonly located in retail settings that offer high visibility and foot traffic. Shopping centers and free-standing buildings that are located near big box stores, restaurants and food/drug retailers are among the most attractive spots. It’s vital to the success of the clinic that its location be easy to find, have free and convenient parking, and appear clean and attractive.

Aside from the physical aspects of the real estate space, urgent care clinics must also consider the demographics of the market they will serve. A highly viable market will demonstrate substantial health needs that are not currently being met by hospitals’ emergency rooms, due to limited access and long wait times. Next, the market should also have a favorable payer mix of patients who are either covered by insurance or have the ability to pay out-of-pocket.

In addition to these industry-specific considerations, traditional real estate data should also be taken into consideration. The number of residential homes, income levels and location of competitors will also have an impact on determining the best location for an urgent care clinic. As a business that relies hugely on walk-in traffic, the look and location of a clinic is as important as the care it provides.

PinnacleHealth Enters Urgent Care Industry

In Central Pennsylvania we have seen the success of a growing urgent care group that was founded in Silver Spring Township in 2010. AllBetterCare Urgent Care Center opened its first location on the Carlisle Pike and now has two more locations in South Middleton Township (Cumberland County) and Susquehanna Township (Dauphin County). The company says it has seen almost 100,000 new patients since its founding, which makes sense as to why PinnacleHealth announced its affiliation with AllBetterCare that will be completed this fall. The two healthcare businesses share the same desire to reduce unnecessary emergency room visits and decrease emergency room wait times for patients.

Pinnacle’s move into a new sector of the healthcare system aligns with its overall growth strategy to diversify its healthcare services and enter new markets across Pennsylvania. The company recently acquired four mid-state hospitals including Carlisle Regional Medical Center (Cumberland County), not far from two AllBetterCare locations. Pinnacle has also committed to construction of a new campus in York County which will replace the existing Memorial Hospital and continues to work on an affiliation with the University of Pittsburgh Medical Center.

Diversifying Pinnacle’s healthcare services and facilities also means diversifying its real estate portfolio. Affiliating itself with AllBetterCare will serve to help Pinnacle reduce the burden on its hospitals, alleviating the need to expand emergency rooms or construct new facilities that would come at a much larger cost, and risk, than simply making outpatient urgent care clinics more readily available. The partnership between AllBetterCare and Pinnacle is a step in the right direction, not just for the businesses’ bottom-line, but for access to quality healthcare for hundreds of thousands of patients across Pennsylvania.

Have you used an outpatient urgent care clinic? What about the facility and its location made you choose it over another option? Share your insight and experience by leaving a comment!

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Impact of the Repeal of the Affordable Care Act and New GOP Plan on Commercial Real Estate

Posted on March 15, 2017 by Mike Kushner in Blog, Healthcare No Comments

Impact of the Repeal of the Affordable Care Act and New GOP Plan on Commercial Real Estate

One of the hottest issues consuming most of the nation’s attention right now is the proposed repeal of the Affordable Care Act (ACA) or Obamacare. Regardless of your opinion on whether or not this is a smart idea, we can agree on two things – 1. It’s a highly complicated issue. And 2. Any outcome will have a profound impact on us all.

Virtually every person, every business and every industry will be affected in some way if a massive change is made to healthcare. Commercial real estate is no exception. In order to stay afloat, hospitals, medical offices and ambulatory facilities will need to adapt the way they treat patients, which may mean making a change to the size and structure of their brick and mortar facilities.

We can expect to see some interesting business strategies unfold as the healthcare industry reacts to the proposed repeal of the ACA and new GOP healthcare plan. Based upon some of the movement already taking place in the healthcare industry, here is an overview of some of the changes we expect to see in commercial real estate.

Repeal of the Affordable Care Act

Earlier this month, associations representing nearly every type of hospital spoke out in strong opposition to the Republican plan to replace the ACA. As part of their argument, they noted that deep cuts in what hospitals are paid, while dramatically reducing coverage, will reduce their ability to provide essential care to patients and lead to tremendous instability. Simply put, more changes to an already struggling system could be enough to bring down this whole house of cards.

Interestingly, the current climate of uncertainty does not appear to have significantly altered strategic planning on the part of health systems, as market participants indicate that real estate projects in planning phases continue to move forward. For example, Pinnacle is in the process of designing a $22 million addition for a new Women’s and Babies Center, and the Penn State Board of Trustees recently approved a $20 million plan to expand and renovate the Penn State Health Milton S. Hershey Medical Center Emergency Department.

That being said, the proposed repeal of the ACA and the implementation of site-neutral legislation will significantly impact inpatient hospitals. Instead of expanding existing inpatient facilities, acute care providers will continue to look for off-campus opportunities within their community. In particular, we predict an increase in the construction of micro hospitals and other ambulatory facilities.

Changes to Healthcare Delivery Setting

For several decades, we have seen a shift away from the acute care setting, mostly driven by incentives and patient preferences, and this will most likely continue in the uncertainty of the healthcare industry right now. The challenges facing the acute care industry have also contributed to their consolidation, as hospitals seek greater negotiating power, scalability, and improved access to technology. A 2013 academic study found that more than half of all hospitals are now part of larger health systems!

We are moving toward a small number of locally integrated health systems. While the streamlining and coordination of services is beneficial, this also comes with the drawback of potentially higher costs associated with greater market power. The concern of a perceived “monopoly” has come up a few times during proposed mergers and acquisitions. It’s the reason the FTC shut down the Hershey-Pinnacle Merger. However, an alternative merger between UPMC and Pinnacle is on the table and there is still concern that this could result in a monopoly, with Pinnacle operating two of the three hospitals in Cumberland County.

Additionally, large, older hospitals are outdated and oversized, requiring innovative real estate strategies to determine how best to utilize these structures. One such innovative strategy is for hospitals to rent out unused floors and wings to another provider for uses such as long-term acute-care, inpatient rehab, skilled nursing, hospice, or behavioral health. Sharing space, and sharing in the cost of space, could prove to be an extremely valuable strategy to help hospitals keep their doors open, particularly as the healthcare industry reacts and adapts to whatever changes lie ahead for the ACA.

Do you have a different view on how the repeal of the ACA and new GOP plan will impact healthcare real estate? Please share your thoughts by leaving a comment!

In the Wake of the Failed Merger, 6 Ways PinnacleHealth and Hershey Medical Center Can Harness New Growth

Posted on November 3, 2016 by Mike Kushner in Blog, Healthcare, Local Market No Comments

As shared by the Central Penn Business Journal, the Hershey-Pinnacle merger was recently opposed by the Federal Trade Commission (FTC) and the Pennsylvania Attorney General’s Office. The reason for this decision was explained as the Dauphin County-based hospitals are direct competitors, and that their union would eliminate competition in the Harrisburg region. For Harrisburg area residents and employers, a reduction in (or elimination of) competition may result in lower quality and higher cost health care.

While this ruling is a huge blow to what PinnacleHealth and Hershey Medical Center surely felt was a smart business move, it’s not likely stop the two entities’ from pursing alternative business growth opportunities.

The ACA has made the healthcare environment a market share game. So health systems are pursuing volume drivers for their systems, which means putting primary care and urgent care clinics in strategic locations. Among the popular pathways to growth for hospitals and health systems, we expect to see Pinnacle Health and Hershey Medical Center employ some or all of the following opportunities in the near future.

Increase in ambulatory care facilities (i.e. freestanding urgent care, outpatient surgery and imaging centers and emergency care centers). Out-patient centers are an important and cost-effective alternative to higher cost inpatient-focused acute strategies. A health system can greatly increase the number of patients it can see and treat in a day through the operation of freestanding urgent care locations. This follows the trend of the new hub and spoke healthcare delivery model where the hub of a single network branches out into various locations to increase accessibility and efficiency.
Recruitment or acquisition of medical groups that are in-market, but not fully aligned with the hospital. As healthcare reform continues, the number of insured patients seeking access to care will also increase. Therefore, it’s important for a health system to have the added capacity to monetize this growth. Additionally, patients often choose to follow their physicians regardless of hospital affiliation, meaning those with the most aligned physicians will grow the most.
Clinical program development and service expansions or extensions. Health systems that actively seek opportunities to expand the scope of services they provide, such as adding new procedures, diagnostic categories, or subspecialties into their portfolio, are well positioned for growth. The complexity of healthcare and health insurance incentivizes patients to seek all of their care from a single organization, when possible. The more services a health system provides, the less likely a patient will seek care from a competing network.
Geographic market expansion to establish additional locations of care. More and more, healthcare is beginning to look and act like typical retail marketplaces. One example is a preference for convenient venues and access locations. Health systems that extend their reach geographically can raise their growth trajectory. Most importantly, each location should consider its targeted populations so that the services provided meet the most common demands of that specific area.
Merger or acquisition of another hospital or health system (including assets, “book-of-business,” and affiliated provider network). Establishing new locations through merger or acquisition is a fast track to growth. While the Hershey-Pinnacle merger was shot down, it’s not unlikely that they will seek out other possible mergers that do not conflict in the same way. Let’s face it, mergers provide a lot of benefits, including access to efficiencies through combining resources, and the opportunity to grow market position in key centers of excellence, institutes or hallmark clinical programs.
Joint ventures. When market entry or start-up costs pose challenges, joint ventures remain a viable pathway to growth. While the legal nuances are about as complex as a merger or acquisition, with careful evaluation, the benefits can outweigh the effort. One of the biggest advantages of a joint venture is that it creates shared obligation among the parties involved so that everyone is working toward its sustainability and success.

Some Final Thoughts

Due to the changes imposed by the ACA, healthcare is moving toward a new kind of hub-and-spoke model where the focus is for more care to be delivered in the outpatient setting where costs can be reduced, access can be increased and preventative and post-acute care can be administered in a more efficient manner.

While other health systems have successfully teamed up to expand their reach, such as Penn Medicine and Lancaster General Health; Johns Hopkins Children’s Center and WellSpan Health; and Holy Spirit and Geisinger Health System, these partnerships cover entirely separate markets, unlike the proposed merger between PinnacleHealth and Hershey. If there’s anything that can be learned from the failed merger, it’s that an emphasis needs to be placed on better defining geographic markets to avoid the perception of conflict in the future.

What are your thoughts on the failed Hershey-Pinnacle merger and how this will impact their growth strategy for the future? Join in the conversation by leaving a comment!

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The Obamacare Effect on Local Real Estate

Posted on September 6, 2015 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Healthcare No Comments

Note: This article was originally published by the Central Penn Business Journal. Click here to read the original version.

No matter your age, income or current bill of health, in some way or another, we will all be impacted by the major changes taking place in the health care industry nationwide.

The Affordable Care Act, or Obamacare, represents the most significant overhaul of the U.S. health care system since the passage of Medicare and Medicaid in 1965.

While it’s easy to predict the industries where these waves of change will come crashing down the hardest, less obvious industries, like commercial real estate, have also felt the impact of these ripples — and there are more to come.

For real estate investors, the big question is what impact this regulatory overhaul of health care mandates, subsidies and insurance exchanges will ultimately have on the commercial market. The best clues can be found in the emerging trends taking place in local health care real estate across the region.

Simply put, there are two major trends we should be watching closely right now.

Monetization

Noncore real estate, such as medical office buildings and outpatient facilities, have become a common asset that health care systems are monetizing first to help stay financially afloat. Selling off real estate and consolidating square footage is a necessary tool for health care systems right now. Here’s why.

1. Provide an infusion of capital for core investments. Selling off noncore real estate assets can provide health care systems with a quick and significant infusion of cash, allowing them to reinvest this capital back into essential items like construction, renovation and upgraded medical equipment.

2. Focus on strategic growth. Rather than holding on to an underperforming or noncore real estate asset, health care systems are selling them off and using this money to prioritize physician recruitment and retention, clinical expansion and growing their market share.

3. Strengthen balance sheet. The capital gained from monetization will improve liquidity — and a health system’s balance sheet as a result — allowing it to earn a better credit rating.

4. Reduce legal and regulatory exposure. More properties mean more opportunities for a costly violation. Health care systems benefit from reduced legal and regulatory exposure by monetizing their noncore real estate assets.

Mergers and Acquisitions

Some of Central Pennsylvania’s largest health care systems have engaged in discussions regarding merging or acquiring another facility. Specifically, four different mergers have already taken place or are currently in the works, each for unique reasons, but with the same goal in mind — to rein in costs and expand access.

1. PinnacleHealth (JC Blair Health System) and Penn State Hershey (St Joseph Regional Health Network). The most compelling reason for this merger is the projected economic savings. The recurring long-term savings is estimated to be at least $86 million annually through avoided capital and operating costs.

2. Holy Spirit and Geisinger (AtlantiCare Regional Medical Center and health care system, Shamokin Area Community Hospital, Bloomsburg Health System and Lewistown Hospital). In this “affiliation,” a small Catholic health system formally joins with a large, technologically-advanced system in an effort to continue to make health care accessible and affordable to the most people.

3. Lancaster General and University of Pennsylvania Health System. One of the largest benefits of this merger, aside from their entry into a new market, is the ability for patients to receive treatment at one facility and follow up at another. LG Health President and CEO Tom Beeman identified health care reform as the driving force behind this merger.

4. WellSpan (Good Samaritan, Ephrata Community Hospital and Philhaven).Wellspan/Good Samaritan is primarily focused on physical health while Philhaven specializes in behavioral conditions and mental health. Combined, these organizations will be better equipped to serve a broad range of patients at a fraction of the cost of trying to add these specialties independently.

The future

The velocity at which the health care industry is changing cannot be overestimated. While we are already experiencing disruption and change resulting from health care reform, technology, big data, regulatory and other impactful forces in the health care industry, I believe it is simply too soon to accurately predict the full impact these changes will have on the commercial real estate industry.

Despite the many uncertainties surrounding the hot-button issue of health care reform, there is one certain conclusion I will draw. Health care systems are prepared (and have already begun) to proactively make changes to their real estate in an effort to stay afloat.

They will do whatever it takes, even if this means selling off large properties or merging with/acquiring another health care system. We should be prepared to continue to see health care systems tighten up and team up to make their services efficient and competitive.

While there are many more changes yet to come, ones that are sure to be both positive and negative, the real estate industry should remain ready to quickly react to the changing needs of health care systems during this time.

How Major Healthcare Mergers are Impacting Commercial Real Estate

Posted on March 23, 2015 by mike.kushner in Blog, Commercial Real Estate, Healthcare, Trends No Comments

It goes without saying that major changes are taking place in the healthcare industry nationwide. The Affordable Care Act otherwise known as “Obamacare” became effective January 1, 2014. This legislation represents the most significant overhaul of the U.S. healthcare system since the passage of Medicare and Medicaid in 1965. For real estate investors, the big question is what impact this regulatory overhaul of mandates, subsidies and insurance exchanges will have on commercial real estate.

growing mismatch between hospital supply and demand

Here is a quick glance at some of the most compelling trends taking place in hospital supply and demand. It illustrates the struggles healthcare systems are facing to stay in business.

There is no doubt a wave of consolidations is reshaping the U.S. healthcare industry. Generally, in a merger, the smaller hospital is looking to increase its financial stability and gain access to capital. The larger one is looking to increase market share and the number of patient referrals it gets from doctors.

As a result, we’re starting to see more and more mergers between healthcare systems who want to team up to remain competitive. In Central Pennsylvania alone there are four main examples of mergers taking place, each for unique reasons, but with the same goal in mind – to rein in costs and expand access. Let’s take a closer look at each one.

1. PinnacleHealth (JC Blair Health System) and Penn State Hershey (St Joseph Regional Health Network)

In January 2015, the same time in which the Penn State Board of Trustees announced its approval of the propose acquisition of St. Joseph Regional Health Network, the Board also announced its approval of the proposed merger with PinnacleHealth. From Penn State’s perspective, the benefits are obvious. This merger will allow them to grow a long-term patient and revenue base to better support its academic and research missions.

Additionally, the merger will allow Penn State Hershey to have lower-acuity patients treated at one of Pinnacle’s three hospitals, freeing more beds at the medical center for higher-complexity cases that a teaching hospital can best serve. As a result, this will help to increase hospital occupancy rates at both PinnacleHealth and Penn State Hershey.

Possibly the most compelling reason for this merger is the projected economic savings. The first five years should create at least $260 million in savings for both entities through avoided capital and operating costs. The recurring long-term savings is estimated to be at least $86 million annually. It was agreed upon that Penn State University will be the parent entity in this merger. Final action is tentatively scheduled for later this month.

2. Holy Spirit and Geisinger (Atlanticare Community Medical Center Healthcare System, Shamokin Area Community Hospital, Bloomsburg (PA) Health System, and Lewistown (PA) Hospital)

In this merger (more appropriately referred to as an “affiliation”), a small Catholic health system formally joins with a large, technologically-advanced system in an effort to continue to make healthcare accessible and affordable to the most people. Now as a Geisinger Affiliate, Holy Spirit will undergo some major upgrades including an expanded emergency room, improved electronic infrastructure (with an emphasis on electronic medical records) and use of technology to deliver evidenced-based treatments.

In return, Geisinger receives an entry into the highly competitive Harrisburg healthcare market. PinnacleHelath just recently opened a $100 million hospital within a few miles of Holy Spirit in Cumberland County. While there are currently no major plans to downsize, the Holy Spirit-Geisinger union maintains that this aspect of the hospital will be continually monitored and adjusted as needed.

3. Lancaster General and University of Pennsylvania Health System

Earlier this month, Lancaster General Health and University of Pennsylvania Health System signed a non-binding letter of intent to negotiate a definitive agreement for their merger. Each organization brings a unique size, focus and geography that differs from the other. One of the largest benefits of this merger, aside from their entry into a new market, is the ability for patients to receive treatment at one facility and follow-up at another.

LG Health President and CEO Tom Beeman identified healthcare reform as the driving force behind this merger (and many of the other mergers we are presently seeing). To survive, Beeman said, it’s pretty clear nonprofit systems are “going to have to have a critical mass in the $5 billion to $10 billion range.”

The terms of the proposed deal between Lancaster General Health and University of Pennsylvania Health System will remain confidential until both parties approve it, but things are expected to move forward in the coming weeks.

4. WellSpan (Good Samaritan, Ephrata Community Hospital and Philhaven)

In October 2014, Wellspan (which was in the process of taking control of Lebanon’s Good Samaritan Health System) announced that it was also exploring a partnership with Philhaven behavioral services. Much like many of the other mergers, they said the purpose is to allow all organizations to work more efficiently and better manage costs to improve health outcomes and the patient experience.

In this particular merger, each healthcare system brings a slightly different focus. Wellspan/Good Samaritan is primarily focused on physical health while Philhaven specializes in behavioral conditions and mental health. Combined, these organizations will be better equipped to serve a broad range of patients at a fraction of the cost of trying to add these specialties independently. In addition, Ephrata Community Hospital became an affiliate of WellSpan in 2013.

The Impact on Commercial Real Estate

The velocity at which the healthcare industry is changing cannot be overestimated. While we are already experiencing disruption and change resulting from healthcare reform, technology, big data, regulatory and other impactful forces in the healthcare industry, it is simply too soon to accurately predict the full impact these changes will have on the commercial real estate industry.

Despite the uncertainty, we are seeing a number of trends such as an increasing demand for MOBs and heightened activity in this asset class, both of which reflect the healthcare industry’s changing real estate needs. The demand for primary and urgent care facilities is already strong, with so many changes underway and record-breaking medical practice consolidations and mergers, as well as acquisitions of medical practices by large facilities also taking place.

While many changes may reflect the cyclical nature of real estate, the questions remain to what extent the cycle will be guided by outside forces and how investors will respond.

What is your prediction for the future of healthcare real estate? Join in the conversation by commenting below!

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Trend Alert: Why Healthcare Systems are Monetizing Real Estate Assets

Posted on January 1, 2015 by mike.kushner in Blog, Healthcare, Local Market, Trends No Comments

The rising costs of healthcare are impacting more than just the patients and insurance companies. Healthcare systems have also felt the financial pinch and have begun to take more serious actions toward monetizing their real estate assets to increase their capital and decrease their debt.

Healthcare has become an expensive and high-risk industry when it comes to employing and retaining quality physicians and keeping up with ever-changing technology. Combine this with declining reimbursements and increasing regulations and this scenario has called for many healthcare systems to liquidate their assets to create additional revenue. “Non-core” real estate, such as medical office buildings and outpatient facilities, have become a common asset for many healthcare systems to begin monetizing first.

Locally, in Central Pennsylvania, we can look at one recent example that shows this trend. In September 2014, PinnacleHealth System sold 6 office properties to American Realty Capital Healthcare Trust II, Inc for a total of $174,100,000. The various properties ,located in Harrisburg and Mechanicsburg , totaled over 647,036 square feet.

“Health systems need to use their capital wisely for growth initiatives and business opportunities. Many hospitals are monetizing their real estate assets and using the proceeds for these purposes,” explains Phil Guarneschelli, Senior Vice President and Chief Operating Officer of PinnacleHealth System. “Over many years, health systems have built medical office buildings to support their missions. Hospital executives now see this climate as a prime opportunity to monetize as capitalization rates are very favorable.”

This transaction of 6 properties, which would easily classify as a mega office deal, demands attention and begs the question of exactly what benefits healthcare systems receive when monetizing their real estate assets. To help shed some light on this trend, here are four reasons why real estate monetization could help the healthcare industry the stay afloat.

Provide an infusion of capital for core investments

Selling off its non-core real estate assets can provide a healthcare system with a quick and significant infusion of cash. This allows them to re-invest this capital back into essential items like construction, renovation and expansion of core real estate. Additionally, this revenue stream can be used for upgraded IT, medical equipment or mergers and acquisitions that will prepare them for future growth and position them as a leader in the industry

Focus on strategic growth

After using the monetization of real estate assets for core investments, healthcare systems can also use this extra capital to focus on strategic growth. Each organization will have its own unique growth strategies, but the most common fall under physician recruitment and retention, clinical expansion and growing its market share. Rather than holding on to an under-performing or non-core real estate asset, healthcare systems will benefit much more from using this capital for key strategic objectives.

Strengthen balance sheet

The recent changes in healthcare have taken a toll on hospital margins and they continue to steadily decrease. This makes the liquidity of a healthcare system ever more important, especially when analyzing its credit. The capital gained from monetization will improve liquidity – and a health system’s balance sheet as a result – allowing them to earn a better credit rating.

Reduce legal and regulatory exposure

Finally, healthcare systems will benefit from reduced legal and regulatory exposure by monetizing their non-core real estate assets. When reducing properties, they are also reducing the number of landlord-tenant relationships with which they must remain on good terms. Furthermore, a healthcare system must work hard to ensure that each of its properties adhere ever-changing regulations and codes. The more properties they own, the more opportunities for a costly violation. Additionally, the Self-Referral Law and Anti-Kickback regulations make even the perception of a conflict of interest potentially disastrous for a healthcare system, adding even more reason to simplify and condense their real estate assets.

Take a look at this infographic for a visual explanation of the core benefits healthcare systems stand to receive when monetizing their real estate assets.

What does this mean for the Central Pennsylvania real estate market?

For central Pennsylvania, the trend toward hospital systems monetizing non-core real estate assets is a win-win. The hospital system has more capital to further its mission of providing and improving the health and quality of life for the people of central Pennsylvania. And any non-taxable real estate is put on the tax roles which benefits the community. The strong flow of institutional investment capital into the medical real estate sector will create a short- term supply/demand imbalance between the capital and available properties to invest. Simple economics suggests that prices will remain high for some period, until this imbalance changes. Thus, more owners will take advantage of the currently favorable market conditions by monetizing portfolios of properties.

As PinnacleHealth’s mega office deal demonstrated in 2014, health systems have much to gain from monetizing their real estate assets. As we move into the New Year, we can expect to see this trend continue nationally and right here in Central Pennsylvania.

Do you have a local or personal example of a healthcare system who has monetized their real estate assets? Share your thoughts and ideas by commenting below!

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Omni Realty Helps to Open State-of-the-Art Medical Facility in Perry County

Posted on December 5, 2014 by mike.kushner in Blog, Healthcare, Local Market, Success Stories No Comments

A joint venture, three years in the making, between Omni Realty Group and Triple Crown Corporation will officially open its doors to a premiere medical facility in Perry County.

Outside the Medical Professional Center of Newport

This space will house state of the art imaging including MRI, CT, Mammography and X-Ray; laboratory services; cardiology care and cardiology diagnostic testing; and physician specialists – including endocrinology, obstetrics/gynecology, orthopedics, urology and others.

State-of-the-art medical equipment is one of the many benefits the Medical Professional Center of Newport brings to Perry County.

This major project began in January 2012 when Mike Kushner, owner of Omni Realty began researching possible locations for the facility. One of the biggest challenges was finding a well-located tract of land with public water and sewer in Perry County’s semi-rural areas. While it took some time to locate the right land for this project, it was also one of the most critical details to secure.

Mike was successful in finding the ideal location for the facility, named The Medical Professional Center of Newport, on Bretz Court off of Shortcut Road in Howe Township. The new space will allow for many healthcare professionals to move into a shared space that will make quality healthcare more convenient and accessible for Perry County residents.

A look at the community gathering area inside the Medical Professional Center of Newport

“PinnacleHealth is pleased to partner with other healthcare providers in Newport to bring expanded and comprehensive outpatient healthcare to Perry County residents,” states Michael A. Young, president and CEO for PinnacleHealth. “Adding increased access to primary care and outpatient services is part of PinnacleHealth’s implementation plan based on the recent Community Health Needs Assessment completed last year.”

PinnacleHealth FamilyCare, who has operated a family practice presence in Newport for many years, will relocate from its office at 28 Shortcut Road and occupy 20,000 square-feet of this new space. Two additional medical office condos have been built and sold to local practitioners, Sisson-Boyer Eyecare, LLC and Daniel Hengst, DMD, Dentistry. Upon opening, 100 percent of this facility will be occupied by medical professionals.

Inside the new dentist office located within the Medical Professional Center of Newport

The Medical Professional Center of Newport exemplifies an emerging trend in healthcare real estate strategies which is to develop a hub and spoke healthcare delivery model. The center will provide a central location for a majority of common healthcare needs. Perry County residents will now be able to receive primary care, specialty care, imaging and laboratory services at a single facility which will increase efficiencies and service of care.

What are your thoughts on this new facility opening in Perry County, Pennsylvania? Share your opinion by commenting below!

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Healthcare

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