The Leaflet Article
What does it take for a hospital or health system to be a 'winner?'
Amid the massive changes taking place in the healthcare business, it has become a cliché for industry observers to hold forth that, among hospital and health systems, "there will be winners and losers." However, like most clichés, this one contains a germ of truth. Whenever an industry undergoes a major transformation, some competitors will prosper while others will fall by the wayside.
So what will it take to be a winner in the "new" healthcare industry? In an effort to find answers to that question, Duke Realty recently hosted an invitation-only gathering of industry thought leaders, prominent hospital and health system executives, and its own team of healthcare real estate experts. Together, at this first annual Duke Realty Healthcare Symposium, these industry leaders explored and discussed several viable, sustainable strategic alternatives hospitals and health systems could implement to be successful in this rapidly changing industry.
Here are six of the most intriguing ideas.
1. Focus on growth, not just cost cutting. Understandably, most healthcare executives have been almost obsessed with cost cutting in recent years due to reduced revenues and increased expenses they face as a result of the Patient Protection and Affordable Care Act (PPACA). But you can’t cut your way to prosperity. While it’s always important to manage costs, it is equally important to have a growth strategy. That’s according to one of the speakers at the Duke Realty Healthcare Symposium, Ken Leonczyk Jr., a senior director with The Advisory Board Co., a global research, technology and consulting firm focused on the healthcare and higher education industries.
In the future, Mr. Leonczyk predicted that traditional hospital growth strategies, such as raising prices, consolidating market share and locking up referral streams, will no longer be enough – or might not even be viable. In recent years, rising healthcare prices have been able to offset declining volumes, but that can’t continue, he warned. In fact, prices are expected to fall due to reductions in Medicare reimbursement rates, private insurance payments and employer-sponsored healthcare insurance, as well as the continued shift from inpatient visits to increasingly popular (and lower-cost) outpatient facilities.
We are entering a new era of patient choice with new decision makers and a new healthcare delivery system that will present growth opportunities for health systems, Mr. Leonczyk continued. Now rather than simply raising prices, successful hospitals and health systems will need to partner with other providers to establish robust care networks, and attract demand from “wholesale buyers” such as employers and commercial payors (insurance companies), as well as “clinical shoppers” (individual buyers of healthcare).
So when it comes to healthcare in this new era of choice, the most successful hospitals and health systems will not focus only on cost cutting, they also will have a customer/patient focused, productive, strategic growth strategy, he said.
Real estate can play a key role in that growth strategy, particularly with consumers who appreciate convenience. For instance, more and more consumers are flocking to outpatient medical office buildings (MOBs) because they’ve been built close to where they live, and they don’t have to worry about a long commute or having to negotiate a large, unfamiliar hospital campus. Many of Duke Realty’s clients tell us they want to increase market share by increasing access locations for outpatient services. We are helping our clients plan and develop these locations in strategic areas of growth for their health systems.
2. Pursue "smart" mergers. Historically, hospitals and health systems have pursued mergers and acquisitions (M&As) primarily as a way to increase negotiating power and control referral pathways. But size and scale will be more important than ever to take advantage of the new opportunities in healthcare, Mr. Leonczyk advised. This is why hospitals and health systems have been pursuing M&As, as well as acquiring or affiliating with physician practices. In addition to achieving traditional consolidation goals, these steps all help health systems increase regional or even national size and scope, add new locations and services, and be more competitive. Increased size and scope also gives hospitals and health systems more leverage in attracting demand from wholesale buyers such as insurance companies and employers, and perhaps individuals as well.
Vince Caponi, Executive Chairman of the Board at St.Vincent Health and Senior Vice President at Ascension Health shared statistics on the popularity of hospital consolidations. He noted that in a 2012 study on M&As, 87 percent of the surveyed hospital and health system executives said alignment is at least a consideration in their strategic plans and only 13 percent said they intended to maintain independence from alignment.
However, not every merger makes sense. Mr. Caponi noted that the planned merger between the Henry Ford and Beaumont health systems was called off last year because of different perspectives and major cultural differences. Even when an M&A appears logical and strategic, a philosophical fit is paramount, he said.
The most successful mergers are “smart" mergers, such as when the merging companies can create a regional footprint, Mr. Leonczyk of The Advisory Board said, citing the recent Baylor-Scott & White Health merger as an example. He observed that there was very little overlap between the two adjacent but geographically distinct systems, which were combined to create the largest integrated delivery system in Texas and one of the largest in the United States. The merger, which was completed in September, resulted in a system with 42 hospitals, 4,000 physicians and combined revenue of $7.7 billion. It is also in an economically healthy region with many large employers – wholesale buyers who might be attracted to a larger, more integrated system.
Don Dunbar, Executive Vice President of Duke Realty, noted, “As health systems merge, assessing the need for more or less medical office space is an important consideration. We work with our clients to consider the viability of existing hospital campuses and the opportunities of new campuses in regard to new medical office development.”
3. Invest in post-acute care. One of the most talked-about aspects of the PPACA, or healthcare reform, is that hospitals and health systems now face financial penalties for above average rates of readmissions for certain “preventable” conditions covered by Medicare. The new policy, dubbed the Hospital Readmissions Reduction Program, is overseen by the Centers for Medicare & Medicaid Services (CMS), the federal agency that administers Medicare, Medicaid and the State Children’s Health Insurance Program (CHIP). The new program withholds up to 1 percent of regular reimbursements for acute-care hospitals that have what
CMS considers too many 30-day readmissions for heart attack, heart failure and pneumonia patients.
One percent might not sound like much. But when you consider that most hospitals have thin operating margins to begin with – often in the 2 percent range – the penalties can be significant. The financial implications of the Hospital Readmissions Reduction Program have prompted providers to explore any viable way to minimize readmissions. Because studies suggest that discharged acute-care hospital patients who receive post-acute or home care are less likely to be readmitted, many providers have been pursuing the possibility of acquiring, partnering with or developing alliances with post-acute and home care providers.
Mr. Leonczyk noted that a number of hospitals and health systems are investing in post-acute care in the form of more comprehensive patient assessments at the time of hospital discharge, as well as closer collaboration and information-sharing with caregivers and post-acute facilities. Some providers have taken this a step further by forming legal partnerships with post-acute care providers to develop and operate post-acute facilities.
This new focus on post-acute care has also created opportunities for providers to cost-effectively partner with healthcare real estate developers and owners. Particularly in light of the growing competition to develop or acquire MOBs, some healthcare real estate firms – including many that have concentrated exclusively on MOBs in the past – have expanded their business models to develop, finance and own post-acute facilities.
A recent example of a partnership between a hospital, a post-acute provider and a healthcare real estate firm is the $28 million, 60-bed Mercy Rehabilitation Hospital Springfield in Springfield, Mo. Slated to open in April, the two-story, 63,000-square-foot rehab hospital is being developed and will be owned by Duke Realty and will be 100 percent leased and managed by Mercy Springfield Communities, a partnership of Mercy Hospital Springfield, other regional hospitals and clinics, and Nashville, Tenn.- based Centerre Healthcare Corp., a national developer and operator of rehab hospitals. Mercy Hospital Springfield is part of the 32-hospital Chesterfield, Mo.-based Mercy system, the nation’s sixth largest Catholic health system.
Plans call for the facility to provide inpatient rehab for patients recovering from strokes, brain or spinal cord injuries, amputations, complex orthopedic injuries and other conditions.
Although Duke Realty is perhaps better known for its MOB development and acquisitions, the Mercy Springfield project isn’t its first foray into third-party development and ownership in the post-acute space. The firm recently completed a $23 million, 60-bed rehab hospital near the campus of Community Hospital North in Indianapolis. That project is also being leased and operated by Centerre, this time in partnership with Community Health Network of Indianapolis, a not-for-profit system with more than 200 sites of care and affiliates throughout Central Indiana.
4. Expand access with new care models. One of the most exciting trends in the healthcare industry is the emergence of new care models, Mr. Leonczyk said. This includes phone and email physician consultations for minor illnesses and ongoing health management, online patient portals, home deliveries of prescriptions and lab work, online and mobile applications that rate physicians and health providers and help consumers comparison shop for the best quality and prices, healthcare provider presence on social media sites, health-related video games, and same-day appointments booked online or through mobile apps.
These new models can provide significant cost savings for employers and a number of benefits for consumers, including convenience, cost savings, clinical quality and a “premium patient experience,” he said.
Of course, these virtual and home care models are often still no substitute for hands-on healthcare in bricks and mortar buildings. The industry still needs high-quality facilities that can complement these new models, emphasized Dr. Brett Spencer formerly of Booz & Co. and now with Boston Consulting Group. Dr. Spencer noted that the growing popularity of outpatient facilities is leading the movement toward more “consumer-centric, retail-oriented care.”
Convenient, consumer-centric, retail-oriented care is a major characteristic of new medical office developments for Duke Realty clients. Whether the facility is a freestanding emergency department (FED) at a retail location or a multispecialty medical office building on or off campus, the focus on the patient experience in the buildings is critical.
“Turbulent times provide disruptive opportunities,” Dr. Spencer added. Although providers that resist change will be in trouble, he said that the ongoing transformation of the healthcare industry presents many promising new ways for hospitals and health systems to formulate viable, sustainable plans for success.
5. Emphasize convenience. In this new era of choice, price is a critical element. Cost-conscious consumers are moving to higher-deductible health plans, so more of their money is at stake and they are taking a much more active role in healthcare decision making. Many of them are price shopping using sophisticated price comparison technology such as online reviews and shopping sites. Mr. Leonczyk noted that these reviews and sites are becoming increasingly popular: 48 percent of consumers read online reviews of health providers and 33 percent of consumers use online reviews to determine where to obtain care.
But, in addition to price, another critical factor is convenience. Consumers are increasingly seeking alternatives to the standard healthcare office visit such as at Walgreens and Walmart clinics. Mr. Leonczyk noted that research shows that 42 percent of consumers age 18 to 24 prefer independent retail pharmacies for primary care because they have convenient nearby locations, reduced wait times, good service and price transparency.
Mr. Caponi of St.Vincent Health and Ascension Health said he is less concerned about competition from other health systems than he is from emerging nontraditional competitors like Walgreens. Some providers are experimenting with retail-style loyalty programs – even coupons – to provide consumers with increased convenience and reduced costs. This is designed to build “lifetime customers,” he said.
Providers need to develop “targeted, advantaged products,” Dr. Spencer advised. “Your competition is going to have multiple, smaller, more convenient locations within 12 minutes of consumers’ homes for retail-type services.” One interesting theory he shared was “the gravitational equation,” which postulates that the further away a healthcare facility is from a prospective patient, the less likely it will be to win their business. That logical assumption speaks to the need to have conveniently located facilities in strategic locations.
Mr. Caponi added that inpatient use is declining and outpatient use at MOBs and FEDs is increasing significantly, primarily because they’re more convenient. For real estate, that means that health systems must be much more nimble. Maybe grocery stores are a better place to put clinics, he said, because
people go there even more often than drug stores or Walmarts.
6. Don’t try to be all things to all people. Dr. Spencer noted that many hospitals and health systems try to offer a comprehensive range of services in every geographic market. There is a temptation to try to be all things to all people, thinking that makes them more competitive. But they might not be skilled in – or even capable of – every kind of care, or perhaps certain services aren’t widely needed in every market. For example, a fast-growing, youthful suburban area might generate strong demand for pediatric and OBGYN care, but not necessarily for services more commonly needed by seniors with more chronic conditions.
On the same topic, Mr. Leonczyk said you might get more of a competitive advantage from differentiating yourself and becoming the leader in certain, selected services. It’s important for health systems to determine their key assets, skills, competencies and their best mix of clinical services, and focus on those, he said. This also relates to branding and how a hospital or health system communicates its cost, quality and services advantages.
Don Dunbar of Duke Realty noted, “Medical real estate can be the end result of health system strategies. The MOB is not a strategy. Market research, planning clinical services and establishing a brand should be completed before putting up a building. We assist our clients with this process.”
What’s your winning strategy?
Following these strategic options won’t necessarily guarantee that your hospital or health system will be successful. Some of these strategies might not be a good fit for a specific organization or its market. But as your organization grapples with industry evolution, there is no question that innovative thinking and action with hold the keys to your success. Implementing strategies like these – as well as others not yet devised – will enable you to reap many benefits, including strategic growth, an expanded patient base and greater market share, and improved quality of care.
Being open to the new opportunities presented by these changing times – and implementing some of these strategies along with careful, strategic planning and collaboration with knowledgeable experts – will improve your hospital or health system’s chances of emerging as a "winner."
Deeni Taylor is an Executive Vice President with Duke Realty Corp. (NYSE: DRE), which owns, maintains an interest in or has under development approximately 152.6 million rentable square feet of industrial and office assets, including medical office, in 22 major U.S. metropolitan areas. Mr. Taylor joined Duke Realty in 2006 after a 25-year-career as a hospital executive. His role is to work with physicians and hospitals in understanding the intricacies of the hospital’s goals and objectives regarding their physicians and real estate.
Duke Realty’s medical office portfolio includes 73 existing properties totaling 5.6 million square feet, plus 13 buildings totaling 1 million square feet in the development pipeline. With more than 25 years in the industry, the firm’s healthcare team offers proven experience in providing hospitals and physician groups comprehensive planning, development, ownership and facility management services. Projects have ranged from small medical office buildings to large ambulatory care centers with diagnostics, oncology and surgery services. To find out more, please visit www.dukerealty.com/healthcare.