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Why Our Clients Are Saying “No” To Hospital Systems
Several years ago, a partner and I undertook a major leap of faith to become exclusively intertwined with the medical industry. With over 40 years of combined commercial real estate experience, looking back, we took some bold steps to immerse ourselves into this growing healthcare provider network.
In the beginning, we were witnessing tremendous demand from every medical network to expand ancillary service types and locales, and imaginations were certainly running wild. We became instant beneficiaries of this growth spurt and soaked up transactional experience and a command of the tenant mix and business components that were successful for a given medical office building or hospital system.
In just a few years, with changes occurring so rapidly, so dramatically, it is now difficult to talk ‘expansion’ with using the term ‘consolidation’ in the same sentence. This is not to say that medical groups are not expanding, it continues. As to where, you would not be surprised.
But this time, several hospital systems have been kind enough to request our perspective on the physician marketplace and their specific growth opportunities. Ultimately, these calls begin, and circle back to, our long standing commitment to physician groups, whereby equipping them with best potential business and real estate options in the marketplace.
But, recent dialogue suggests that hospitals are having a difficult time inducing established physician groups to become part of their system. There are several reasons, most of which revolve around healthcare reform as a general theme, but others tend to be more specific to the physicians’ professional future and their general discontent of employment.
Thus, we want to highlight the reasons some physician groups are saying “no” to hospital employment.
1. Some hospitals are at significant risk of hiring too many doctors. With too many doctors come too many competitive pressures for doctors to perform comfortably.
a. Doctors will need to prove their worth during the contract, especially if new groups are absorbed. The thought alone may jeopardize physician commitment.
b. Hospitals may struggle with financial issues relative to their business plans in the mid-2000’s, or with future obligations of regulatory nature.
c. Contracts may include, sometimes discreetly, clauses that pertain to early termination.
d. Sometimes Hospitals go through mergers or acquisitions of another that has the ability to affect physician relations with one or all.
2. The intricacies of how employees should be compensated by hospital systems creates an unfair advantage from one to another.
a. Hospitals have the advantage when implementing metrics to determine the highest profitability within practice endeavors.
b. RVU methods can be abruptly changed when given the uncertainty of less or greater government support.
c. Patient increases have the ability to overwhelm certain pratice areas, such as family practice, without compensation measures that adequately provide for such increases.
3. Seniority is perceived not to be an attribute within the hospital system.
a. Hospitalists have assisted in call duty challenges, but more often than not, the younger physician population is not enthusiastic about taking a tremendous call load and are voicing their concerns.
b. Hospital systems may not provide adequate measures to control call duty and patient volume, where private practices may employ these actions.
4. Physicians are accustomed to being in control of outcomes under their supervision.
a. Physician groups are quickly implemented into system and can become disenchanted in how their doctors, or staff, are being utilized.
b. Ancillary services may be a large component of a practice’s income, in which most are absorbed or non-negotiable when entering into a hospital contract.
c. With the advent of electronic health records, comes the hospital systems consumption of physician data into the coffers of a strategic, web-based marketing and patient assimilation network.
5. Non-compete clauses could take the most highly informed physician groups by surprise, especially if contracts are for a limited period of time.
a. A Hospital system made have affiliates, or may merge or acquire another hospital or network of physicians which effectively places additional limits on where a physician, or practice, may perform.
b. Upon the conclusion of a contract or severe downturn in economy, non-compete clauses can interfere with a physician, or practice group, whereas services are no longer needed and physicians may not partner or practice where they choose.
These are just a few of basic issues that come to our attention regularly within physician discussions of Hospital employment. Hospital systems have been fairly reactive and are tailoring their contracts to remedy such objections, but a certain stigma permeates throughout the physician public which has kept most conversations mute or placed to sidelines…for now.
Bifurcating Commercial Real Estate…
…could get worse (or better). This truly depends on which camp you associate with regarding the economic divide that is now a larger topic of debate in our country. As for policy that is directed towards a remedy, both political parties could not be wider opposed to proposed solutions from the other, which is certainly indicative of our political and economic divorce.
The dichotomy is evident throughout the consumer world. For an example, high end retailers such as Nordstrom are recording excellent profit, and the low end, Dollar Stores, is doing great volume. As for the middle, JCPenney is laying off.
Apple has the highest market capitalization for a technology company (or any company for that matter) with continued pricing power, yet products and inexpensive technological innovations from Google continue to see enormous, reliable volume. Yahoo and Blackberry are getting slaughtered.
From a real estate perspective, multi-family is witnessing increasing occupancy levels from above normal rental activity and, on the opposite end, high end homes are picking back up once again as salaries, stock market and stable investments are paying greater tangible and mental dividends.
Farm and shale land are all the buzz, with prices quadrupling during a recessionary period, yet large tracts of land unloaded by lenders are dirt cheap. Midsize land tract owners and developers have had no place to hide, with speculative plays now in another’s coffers.
This all said, there remains activity in the middle and it is improving, which is absolutely essential for commercial real estate to fully function as a healthy investment consideration. When the headlines such as ‘commercial real estate is gradually improving’ echo throughout, it is the middle where analysts tend to concentrate. As for the high end, which I consider to be strategically located, newly developed, and freshly tenanted, it is going up, while the low end is dissolving. The middle (aka. the fence) is falling on one side or the other.
As for our firm, we are well positioned to guide and administer needs of the small (combining forces), middle (established, seeking to compete in other markets or adopt new identity) and large (strengthening and capitalizing on current position); we have solutions for all.
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8 Brain Benders (from easy to more difficult):
Property sales prices may be $600 per square-foot tenanted and will likely continue higher. What could change this trend? Stronger Dollar.
Property sale prices may be $6 per square foot vacant and will continue lower. What could stop this trend? Lower Oil Prices.
Lease Rates will continue improving. What will change this trend? More Problem Banks.
Rental concessions will likely continue to increase. What will change this trend? Mortgage Rates Moving Higher.
Tenants will begin to purchase buildings. It is going to happen. As for cautions, several purchases on high end will eventually suffer due to current and future price speculation and a small percentage on the low end with sacrifice their business principles for a real estate play that will weaken their competitive position in the long run.
CPI will likely remain steady. What will change this outcome? Stock market decreases significantly.
Buildout costs will continue higher. What will change this trend? Fannie and Freddie are officially taken over.
Eyesore buildings will continue to worsen. What could change this trend? REIT prices continue higher.
Hospitals Employing Physicians: Is It Different This Time?
Around 15 years ago, physician practices were purchased by hospitals at compellingly high prices. Unfortunately for these hospital systems, within a matter of just a few years, the physicians were re-injected back into the community, largely because the hospital systems had not realized a return on investment. Fast forward to 2012, we hear similar stories about physicians becoming incorporated into a hospital’s network.‘
The reasons for hospital systems obtaining physician groups may be many. But, most conversations boil down to either a specialty or geographic play, whereby hospitals seek entrance or command of certain designated fields or locales. Also, with the establishment of healthcare reform, and impetus from both hospital and physicians for greater reimbursements, as well as a movement to adopt a more streamlined, technologically advanced care distribution model — we think this time may be different.
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Based on casual conversations, the motivations to join a hospital from a physician perspective is appearing much greater today than it was in the mid-90′s. A weakened economy, high employment or practice costs, entry barriers, a more savvy-consumer, and the potential for declining reimbursements, are among the top justifications that we hear from physician groups.
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There seems to be a greater number of differences in how the hospital systems are purchasing medical practices today, though, when compared to that of years past. Mainly, hospital systems are not offering to pay exorbitant prices, likely as a result of previous miscalculations. As for those that we speak with, many are not seeking to purchase practices outright (staff, equipment, management, real estate, in some cases). Instead, the hospital is offering employment compensation, with greater emphasis on incentives for productivity, to a select group of physicians for a number of years. Also, because reform will include greater regulatory oversight of physician purchases, this may be an incentive for hospitals to complete acquisitions prior to 2014, when the majority of reform’s initiatives take effect.
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The most common way that a physician practice group is absorbed by a hospital is through a method where physician owners and practice administrators keep an ongoing operation in place, essentially subjecting to less guidelines and oversight, but to assume some naming rights, some jurisdiction, as well as partnership for likely for potential future transaction.
As for the outright sale of a practice to a hospital, it may be achieved in several different ways. A hospital may purchase a practice’s tangible assets with physicians and staff as employees of the practice, whereby the unit is obtained as a separate entity. In another instance, the hospital may acquire the assets, physicians and staff to become employees of the hospital, in which the practice discontinues. As for unique circumstances, the staff becomes employees of the hospital, but the physicians remain separate.
A certain consideration should be made by physician groups as to the value of their practice to the hospital system. Because anti-kickback laws exist, the hospital cannot pay a physician group more than ‘fair value’ for their practice. Any payment that is beyond a certain amount could be considered a ‘kickback’ for services provided to the hospital. Also, keep in mind, the revenue generated by physicians for referrals outside of the practice itself are not considered in the valuation.
Another issue that comes from a practice purchase is that physicians are not relieved of their responsibilities. This is because the acquisition is commonly considered a separate operating division or profit center of the hospital. Consequently, the physicians compensation is still tied to the profitability of their previous medical practice. This provides troublesome if physicians are nearing retirement.
One last reminder, and a stark reminder of how this time may be different, is how the practice’s patients now can easily become part of hospital’s affiliated practice, especially with the advent of electronic medical records. In essence, the hospital now owns and operates all patient lists and records that have been accumulated by the practice group.
While I will leave you with the determination of whether it is better to sell, partner or lease with a hospital, MREA has established healthcare real estate professionals, accountants and attorneys to whom you have access. Contact us for our wide range of client responsibilities that incorporate business strategies with extensive real estate capabilities.
Why We Perform Our Own Market Research
In light of recent articles regarding the largest commercial real estate brokerage firm in the world NOT providing data to the largest online commercial real estate data provider, we thought we would make our viewers aware of the positive and negative of seeking commercial real estate information online.
Having spent considerable time with a few of the largest commercial real estate platforms in the country, I can attest that commercial real estate dealings are kept sacred, some having bound agreements as to non-disclosure among all parties involved, and rightfully so. These are business engagements that involve competitive people, seeking a competitive advantage in their respective competitive markets. Mirroring the administrative behaviors of everyday business affairs within other industries, commercial real estate is, and should be treated, no different.
Which brings me back to the first line of this article to which I may provide an analogous, hypothetical point. In general, should businesses voluntarily engage in providing market data to third parties so that they can republish, or repurpose the data to fit their own needs? Further, should we provide privileged information from a competitive business landscape to online platforms that are controlled by competitive businesspersons that sell this data to our competitors, and worse yet, may sell this to a purchasing entity to be taken private or sent overseas? Well, it appears that the largest commercial real estate firm in the world thinks not.
So, given the fact that not all commercial real estate listings, transactional activity or data is secured by online platforms, and, in all actuality, less than 50% is captured, it is certainly questionable as to why users seek such data or trends to influence their financial decisions. Given the certainty now, that some, or most, commercial real estate transactional activity goes unreported, or underreported, to online platforms, why are individuals, owners, investors, businesses or hospital systems relying on this information for a perceived advantage in real estate negotiations. It just proves wasteful, ill-informed and, dare I say, lazy. Given the fact that state politicians and regulatory authorities largely determine how much information a business should share to the public, it is in our belief that the commercial real estate industry should rely on such data, as well as their own best efforts to influence decision-making in the sector. This promotes competition where, eventually, the creme rises to the top.
As for commercial real estate listing or transactional reporting right now, most will say that ‘it is the best we got”, to which I disagree. This suggests that anything is better than nothing and proves why it is imperative to seek qualified professionals that specialize, who become proficient within a certain sector, or area, of their market. The greater the specialization within a segment, the more efficient the data. The businesses that capture this data then hold the advantage to whom it should be shared, which will lead to a competitive advantage for themselves and their clients. See, the industry does not need underutilized, poorly informed, general salespeople seeking to sidle up to every potential transaction by distributing data that appears convincing in the hopes that an unjustified reward will find its way in their direction. Rather, we need, and deserve, active, intelligent leaders who comprehend that a high level of command, or mastery, within any endeavor, is the greatest path to long-term financial reward.
Stop, Go, Stop, Go, Stop…Go!
2012 is shaping up to be a good year for commercial real estate practitioners with a recession now becoming less of a reality. By simply observing search queries that funnel to this blog (by no means an economic indicator), it would appear that we will see steeper interest in the consummation of land purchases for proposed developments, as well as the disconnection of locked down building construction plans.
It is our responsibility to observe and record trends on how the money migrates within commercial real estate sectors to properly advise our clients within health care. And, over the past few years, we have remained exceedingly cautious in advocating large, speculative investments into the sector. As my financial advisors always remind me, the trend is your friend and the trend remains down.
But, as the stock market has remained trapped in a trading range for more than a year, coupled with a stable outlook for real estate investment trusts (REITS), where pent up demand has the potential to make a bold re-emergence, our interest, as well as our clients, is certainly improving.
As for a simple analysis on capital migration, the last year+ has witnessed investor interest rocket higher in areas such multifamily and farmland with, and without, fundamental, long-term supportive cases for upside to continue within the either sector. See, one investment type can be characterized as deflationary and the other inflationary, and both are highly speculative with the potential be burned if the glut of homes is efficiently dealt with and economy/dollar stabilizes.
This type of investment activity implies that money is burning holes in the wealthiest of investment capital and/or non-domestic capital is playing a larger role than is being reported. In any case, this risky capital allocation suggests that once a firmer footing in the economy is gained, the beaten down sectors within commercial real estate sectors will see tremendous activity.
What are indicators that suggest money is moving into commercial real estate? Certainly, studying the largest investment houses is important, but also leasing activity through tenant relocation or expansion is another. From a middle market perspective, we believe keeping an eye on investment in land by seasoned developers or JV interest in more speculative plays could be the catalyst in determining when to enter the neglected business investment sector. For instance, if news publications get a hold of large plots of land or large urban infill tracts transferring, it may be time to contact your brokers again.
Until then, we are all running the red light.
Cleaning House: HIPAA & Medical Records
‘Cleaning House’ is a simple, figurative analogy as to what is currently taking place in the health care industry.
Now that reform has been responsible for identifying and correcting some of the system’s major abusers of taxpayer dollars, the latest news is with regards to the significant security breaches of medical records that have the potential to have much greater ramifications to the local, state and even our country. Most of the breaches have been concentrated within the medical industry, but keep in mind that this is now one of the most scrutinized sectors of our economy.
We wanted to touch upon a few ideas when selecting where files are headed to secure that the information does not come back to haunt you.
The truth is that in each business, large and small, several employees have the ability to access personal financial or medical records that cover a huge spectrum of our population. Many companies opt not to deal with this appropriately, compiling the information and throwing it in the nearest waste receptacle. Also, many organizations to not adhere to standards to store or destruct legal documentation, which makes it even easier to attract the wrong group of conspirers or thieves.
In the health care industry, the potential ramifications, are, and will be, even greater. Not properly storing proprietary information, or discarding it without destroying it, is exposing the organization to a risk of litigation and a potential loss of business. HIPAA law requires medical organizations to maintain a reasonable and appropriate amount of technical and personal safeguards to prevent an unauthorized breach of critical information. The fines are still regarded as a ‘slap on the wrist’ by many physicians, but the way that a ‘contagion of transparency’ is now firmly planted and spreading rapidly, complying to any HIPAA regulation is in your best interests.
For unintentional violation of the HIPAA regulations, the Department of Health & Human Services can levy:
A fine of $100 per violation and a maximum of $25,000 per year. And, trust me when I tell you that, the buzz circulating within our network of attorneys suggests that is it is becoming increasingly more difficult to challenge these rulings.
For intentional violations of the HIPAA regulations, the Department of Justice may levy:
- A fine up to $50,000 and 1 year of prison for knowingly obtaining or disclosing PHI
- A fine up to $10,000 and 5 years if done under false pretenses
- A fine up to $250,000 and 10 years if intent to sell, transfer, or use for commercial advantage, personal gain, or malicious harm
Penalties may apply to the individual violator but they may also apply to the organization or even to its officers.
As for proper measures of disposing physical or technical medical records when involving real estate decisions, please contact our office.
For the complete HIPAA regulations, visit the Department of Health and Human Services.
To learn more about HIPAA insurance reform or HIPAA administrative simplification, visit Center for Medicare & Medicaid Services (CMS).
Healthcare Bankruptcy & Receivership – Real Estate Services
MREA is dedicated to improving the health and wealth of ita clients through several varying healthcare real estate competencies, many of which are located on our website. Our specialization within this narrow, niche sector provides our physicians, investors, owners and medical center customers with direct exposure to healthcare real estate opportunities. Currently, our firm is fielding a greater number of inquiries for the assistance of distressed real estate property offerings. So, we offer a quick post of our services.
As most are aware, an unfortunate reality exists in today’s real estate marketplace. The financial system is working on ways to deal with those that relied too heavily on leverage and debt instruments to fund real estate purchases during the middle to latter years of last decade. This reality haunts the medical real estate industry that, just 5 to 7 years ago, expanded greatly to accommodate forecasting models that placed significant emphasis on serving a growing, health-conscious population, especially that of the baby boomers.
As the commercial and healthcare real estate industries are in the initial stages of coping with an abundance of over-leveraged property, our firm is well positioned to capture a lion’s share of these opportunities. It is because our firm has developed “across-the-board” relationships within the healthcare real estate sector whereby delivering property offerings (lease, sale, redevelopment) directly to the doorstep of an actively managed database of medical tenants, investors and hospital owners.
MREA Distressed
The Medical Real Estate Advisors (MREA) have the expertise required to effectively manage a variety of distressed situations involving non-performing loans, as well as the management, leasing, disposition and redevelopment of Real Estate Owned (REO) property. Our professionals are actively involved in loan workouts, mortgage possessions and foreclosures and we seek avenues to eliminate overexposure by directing any offerings to a secure database of medical professionals and investors. Along with traditional distressed real estate services, our specialized competencies include judicial and non-judicial foreclosures, court-appointed receiverships, bankruptcies and deed-in-lieus.
Receivership Services
Mr. Robert S. “Bob” Lowery and his team of associates are versed in court proceedings that involve the foreclosure and appointment of a receiver. Our comprehensive real estate solutions for the medical industry play a vital role in the efficient transition of the asset from its current position to that of significant value to the marketplace. Services include:
Strategic Planning – Stabilization of Property — Tenant Retention — Property Management — Marketing & Advertising — Leasing — Exit Strategies
Bankruptcy Services
To complement an expansive list of healthcare real estate services, MREA is involved in working with bankruptcy trustees to assist with businesses that are financially troubled, either directly or indirectly, from their real estate holdings. Our services:
Assisting Turnaround Management Companies — Monetizing Assets — Advising Lender Workouts — Creditor Assignments — Representing Buyers & Sellers — Real Estate & Recapitalizations – Equipment, Furniture, Business Item Liquidations
Robert S. “Bob” Lowery is Managing Partner of MREA | Medical Real Estate Advisors
Social Media VS. Commercial Real Estate
I remember the day in early 2010 like it was yesterday. After a horrible year for our industry, the company called in all of the associates to mention that the firm’s corporate marketing platform was shifting to adopt very unique selling strategies incorporated within social media. For the firm, social media would be the horse to pull the cart for the indefinite future.
As an avid participant of social media marketing techniques for several years prior, whereby utilizing it as a defined percentage of my overall personal branding strategy, my reaction was not one of rejoice. It was not that we were implementing 21st century technology to benefit our organization and its associates; we were. My discontent was that we would dilute ourselves and our profession by largely incorporating social media’s bold, yet sloppy entrance into the internet as our preferred method of corporate branding and potential client interaction.
Why? In my mind, social media is, and will always be, in whatever form, utilized as a simpler, more cost-effective alternative to professional corporate public relations and marketing. Therefore, if I am in the majority on this, which I certainly believe I am, using social media suggests to an educated, informed public, especially within the ranks of healthcare and commercial real estate, that our message, any message, is important. It is not.
Utilizing a “free” media campaign as a large percentage of the company’s brand and product distribution is simply recipe for disaster. In business, through education it is realized that just because someone else is, or is not doing it, does not make it a sound business decision (or even profitable). By exclusively implementing social media, simply because it is the easiest way to promote your product or service, or worse, to gather fiduciary relationships, suggests that not everyone should actually be in business. Remember the expression — Talk is cheap, well, social media is essentially cheapening our words with each egregious talking point or reference. The thought that forwarding material by clicking buttons just because someone else’s story line looks appealing is a good idea, it is not.
So, how can social media work for you?
A few suggestions: Build a profitable brand prior to implementing social media. This takes years of effort, but when your brand is ready for mainstream, implement it wisely. Because, in the end, it truly depends on the time spent utilizing it (or abusing it) and what you are delivering that separates you from the noise. So, if you are in the widget business, you should advertise your widgets or help people understand how your widgets work, or how your widget is worth something over your competitors widgets. Be realistic though, no one wants to hear your message again and again. If so, the “any message” just gets lost in a verbal chaos known as social media and time could be wisely spent in more productive, profitable ways for yourself, your company and, especially, your clients.
See, social media is free because it has no direction, no purpose, no unique selling points to deliver to its customers; large or small. It resembles an enormous disfigured mass of molten hot lava that swallows each unsatisfied marketing campaign or underfunded budget and dilutes it through over absorption. Using this analogy, the heat eventually cools and turns into a hardened object called igneous rock. The rock signifies time lost chasing a passing fad.
So, is your time better served Twittering or working? We think working. Remember the days when companies told their employees not to use the internet in lieu of working. Still true today.
By the way, I just missed a potential client’s call writing this post.
This is an educated opinion written by Robert S. “Bob” Lowery.
Ambulatory Care Centers: Growth in 2012?
With 2011 coming to a close and the healthcare building boom in a second year of cautious or tabled expansion plans, we want to highlight a growth model that will hold a significantly greater amount of real estate discussions in 2012, especially from community hospitals:
Ambulatory Care Centers.
Ambulatory Care Centers, by our definition, are locations that provide personal consultation, treatment or intervention through medical technology or physician procedures that occur all in the same day. Medical treatments for illnesses, including surgical and medical procedures such as dental, dermatological and diagnostic, emergency and rehabilitation occur in ASCs. These centers are cost-effectively and beneficial towards performance, patient reliability and satisfaction.
From the hospital’s perspective, ambulatory care centers can be highly lucrative, allow it to differentiate from its competition, improve patient satisfaction through proximity and preventative measures, as well as align physicians with hospitals (especially in areas where physicians live).
And reform, if implemented, should accelerate the growth of ambulatory care services and the need for more integrated care hubs. While a city such as Houston, where our firm is headquartered, has witnessed expansive growth in the ASC model and may not see as large of an impact, other cities where the population is shifting to, not away, with competing hospital systems should be beneficiaries of the expansion of Ambulatory Care Centers.
Reasons: As patients are forced to become more aware of their health, and physician incomes continue to decline, the need for hospitals to offer more localized and convenient care will be essential for the hospital’s long term growth. The ambulatory care system can accomplish this by shortening ambulance and patient travel times, preventing hospital overcrowding, providing same day care and increasing patient & physician convenience and satisfaction.
The strategy should be well organized to include service line analysis and strategy. This will evaluate the services presently offered with the services that expand screening, prevention and care management. Also, and along the same line, a comprehension of how changing technology, reimbursement and regulation affect future services at the ambulatory care center will be essential to creating a successful center.
Under reform, it will be very interesting to see how a potential influx of new money, and new regulations, will affect the medical and healthcare real estate industry’s growth as medical service providers. With a US economic climate that will remain fragile in 2012, to which we expect greater job losses, private and government, an injection of capital into the healthcare sector should present some opportunities across the board, instead of a tapered decline in the sector. One thing is for certain, investors will be hungry for government-backed healthcare real estate…just take a look at how US Treasuries have performed.
