Over the last decade, a growing number of healthcare systems in the U.S. found that the way they manage their property holdings – the land, medical office buildings and hospital facilities that can account for as much as 70% of their total assets – had become essential to staying competitive. Long overlooked in many systems as a function they needed to centralize and master, many hospital systems have become far more sophisticated in the way they manage hospitals and other properties.
In looking at the declining fortunes of the healthcare services industry in the last five years, it’s not difficult to understand why. Hospitals and physician offices, a $1.27 trillion-a-year sector, were hit hard by the acute recession of 2008-2009. A 2008 study of more than 400 U.S. hospitals of all sizes found that half were unprofitable, compared with 33% of hospitals that suffered operating losses just two years earlier. The result: Healthcare systems have had to greatly tighten their belts.
But costs aren’t the only source of pressure. Increasing the quality of the care – at hospitals and the other medical facilities that healthcare systems own today (physician offices, outpatient clinics, etc.) – has become a major concern. With the prospect of national healthcare reform making Medicare and Medicaid reimbursements no longer based on fees but rather on medical outcomes, it becomes easy to see why hospital systems are scrambling to become more efficient and effective.
One response has been for independent hospitals or small hospital systems to merge with larger healthcare systems. There were 77 mergers and acquisitions of U.S. hospital companies in 2010, the most since 2001, and 112 deals combined in 2008 and 2009. For these institutions, taking advantage of economies of scale in purchasing and other areas became essential. And M&A activity in 2011 continued unabated, with the acquisition of struggling non-profit systems by private equity companies, for-profit hospital chains and larger non-profit systems.
But for systems big enough to make it in the new environment, size is not enough. They need to make a slew of changes to be cost competitive, deliver high-quality healthcare, give easy access to all their potential patients, and attract them away from the competition. Leading systems are pursuing those changes. They include putting more clinics in the suburbs, making those clinics more multidisciplinary, establishing fewer but better centers of excellence for the system as a whole, making acute space more hospitality-oriented, designing new facilities around streamlined clinical processes, and presenting the system’s facilities in a uniform and favorable light. None of these things can be done without the right facilities environment. And the right environment won’t be there in time if a provider’s real estate and facilities strategy is not totally in synch with its business and clinical strategies.
A mere 18% of the 40 healthcare systems surveyed in our study are strategically managing their property assets. The operating margins of these systems are on average four percentage points higher than those that manage their property assets locally.
We conducted research this year with 40 U.S. healthcare systems that collectively account for more than $140 billion in annual revenue – about 11% of the total spent at hospitals and clinics. Our research found that the way these systems manage their real estate and facilities is critical to whether they can accomplish today’s key mandates. We believe our most significant finding is this: Hospital systems that manage real estate and facilities in a centralized function and synchronize their strategies with their organizations’ business and medical strategies have a huge competitive advantage over systems that continue to delegate property decisions down to the community level.
Systems that had centralized many more aspects of real estate and facilities management generated significantly more benefits, not only in the cost of their property assets, but the degree to which they could contribute to better quality and more accessible care.
Organizations like Geisinger Health System and Duke Health System demonstrate the significant role that a system-wide real estate and facilities function can play in improving care and reducing costs. Only when such a headquarters function works closely with top management to guide and execute major real estate and facilities decisions, in support of business and clinical strategies, does a healthcare system gain the capabilities to prosper in the future environment.
The historical way that hospitals and hospital systems managed their real estate and facilities – i.e., at the community level – is what accounts for today’s problems in managing these assets. However, most of the healthcare systems that we interviewed had centralized some aspects of construction, leasing medical office buildings and outpatient clinics, and running hospital facilities.
Many had gotten a central grip on new construction (for both renovations of existing facilities and building of new facilities). Numerous systems had centralized some aspect of medical office leasing. Some systems standardized the way they manage hospital facilities, and for a few, facilities management personnel reported to headquarters, not the community hospital CEO.
From extensive interviews with executives in 40 U.S. healthcare systems, both for-profit and non-profit, and most with more than $1 billion in annual revenue, we found numerous practices in real estate and facilities that were cutting costs, freeing up funds for clinical investments, and helping to improve the quality of care. We organize these practices in four basic areas of property management:
The most advanced systems have let go the constraints of locally managed facilities altogether and operate from a facilities master plan drawn up for the system as a whole. Mercy Health System, for instance, went through the process of doing a physical plant assessment on all of its properties. Previously, physical plant was not always at the top of the priority list.
For example, getting a new chiller installed sometimes required including it in a clinical upgrade project. By tracking facilities across its four hospitals, the headquarters function of the Philadelphia-area system is much more in tune with the costs of maintenance, when things must be replaced, and how to plan those expenditures.
Our research found whether a healthcare system gets those kinds of benefits depends largely on how it organizes its real estate and facilities operations. From our interviews, we found that the way they managed their real estate and facilities assets fell into one of four categories. These categories can be seen as a continuum on which property management moves from being a decentralized and tactical function to a centralized, strategic one. Those that had centralized many more aspects of real estate and facilities management generated significantly more benefits, not only in the cost of their property assets, but the degree to which they could contribute to better-quality and more-accessible care. The categories are:
Jones Lang LaSalle’s National Healthcare group works with hospitals and health systems throughout the nation delivering program management, strategic consulting, financial strategy, transaction and sustainability advisory services and facilities and property management. Through its work, the Healthcare group drives efficiencies and enhances quality through the unrealized potential of real estate assets and infrastructure.
Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2010 global revenue of more than $2.9 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.8 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with $45.3 billion of assets under management. For further information, please visit our website, www.joneslanglasalle.com.