“We’d be a lot better off if the government stopped trying to kill us while they were saving us.” ………. Ted Petrillo Sr., Westage Companies

Welcome back from the July 4th holiday weekend. As you can see, I spent it writing Part 2 of my article re-capping June 24th’s BOMA International Medical Office Buildings & Healthcare Facilities Conference in Philadelphia, PA. To refresh your memory, I will repeat the seven main themes I culled from the two day conference below.

1. Healthcare real estate professionals have always been an optimistic bunch but now it was joined by the conference buzzword – caution – as everyone seemed to express “cautious optimism.”

2. Equity capital is definitely out there and debt is supposedly available (more on this later) and deals are being offered, but each are passing each other unable to connect like ships in the night. Why? Where are the distressed sellers?

3. Hospital systems and large healthcare providers have newfound focus on outpatient facilities, de-leveraging and honing their finances.

4. The rapid de-centralization of hospitals and the rapid rise of the ambulatory clinic and its real estate needs.

5. Seamless care through healthcare system/physician integration.

6. THE GOVERNMENT IS IN THE WAY AND GETTING WORSE!

7.  Dr. Peter Linneman ’s (BOMA Keynote Speaker) take: “Get ready for a bumpy ride.”

We already discussed the first three items so I will jump right into the fourth. There were several discussions about (and one even named after) the de-centralization of hospital campuses with the advent of ambulatory surgery centers nearby and now more dramatically, the primary care clinic with no geographic relevance to the hospital (i.e. miles away). This ‘hub and spoke’ model has several consequences such as the declining importance of ‘on-campus’ medical office buildings and the disproportionately high prices they have garnered – just ask any of the healthcare REITS such as  Grubb & Ellis Healthcare, VENTAS or HCPI.  And, since the White House had said that $110 billion in savings could be achieved by pressing hospitals to treat patients more effectively with more preventive care, using health information technology and better coordination of care that would reduce the need for expensive specialists, off-campus primary care clinics are gaining steam fast. PJ Camp said in our interview that he is currently working on several real estate transactions involving off-campus clinics and that a “new set of analytic tools to evaluate relative value are necessary.” This link from Fortis Healthcare Hub and Spoke is an excellent visual example of the growing trend. For real estate professionals, I personally believe the rise of the clinic and the hub and spoke trend mean obviously more off-campus properties to be developed or upgraded, and the growing importance of urban infill healthcare real estate locations such as the Northeast and other major CBD’s.

The theme of the ascendancy of health system/physician integration is an updated (and hopefully improved version!) from the mid-1990’s. While the lifeblood of health systems (their referring doctors) may be moving more distant geographically, they are actually becoming more economically integrated. While this model failed in the mid-1990s for reasons that no longer apply like reacting to managed care contracting pressures with capitated payments, now the improved version consists of two types: Clinic model & Hospital-based Group Practice model (HBGP). Here we will only discuss the HBGP model talked about at BOMA which characterizes the hospital/physician relationship more as a partnership than as employer-employee.

A hospital-based group practice (HBGP) is created by consolidating many or most of the market’s physicians into a multispecialty group practice owned or connected to a hospital. The primary task is to achieve alignment among physicians long accustomed to economic and professional separation. Features of a successful HBGP include:

• roll-up of formerly independent physician practices;

• improved financial performance through increased reimbursements and cost structure advantages;

• lessened financial insecurity, which reduces resistance to clinical integration and competition for revenue streams;

• a major share of physicians in market area;

• jointly developed strategic vision for health care market;

• operational management of HBGP is under direction of physician leadership;

• access to capital for improved facilities and technology; and

• branding and quality of care differential marketing opportunities.

The take-away message is that hospitals of all sizes in urban and rural communities may have strategic opportunities not originally imagined when they consider their need to employ physicians. Creating high-performing, hospital-based group practice organizations will yield tremendous real estate opportunities as hospitals and physicians de-emphasize real estate ownership as hospital/health system infrastructure becomes mere resource inputs to the management equation.

While not spoken publicly during panel discussions, the issue of government intervention was on almost every attendee’s mention. The quotation above from the esteemed Mr. Petrillo Sr. sums up the feeling of all the real estate professionals we spoke to: PLEASE GET OUT OF THE WAY BECAUSE YOUR LEADERSHIP IS KILLING US. Even the renowned Wharton economist -  Dr. Peter Linneman – said that, “when you throw out all the economic rules, the resultant lack of trust makes us all run to cash.” Coupled with the banks hording of TARP funds and the insincere lip service paid to ‘loosening of the credit freeze,’ the government has created an environment riddled with such uncertainty that our healthcare clientele – hospital systems, physician groups, – have frozen their capital expenditures as well as their disposition strategies until clear direction is given. One more thing from Dr. Linneman’s keynote speech is that the current, massive monetary policy experiment will inevitably lead to significant inflation. “Without death there cannot be life; we must let the weak institutions fail.”

–see “Caution Runs Rampant at BOMA Medical Office Conference – Part 1”

Stay tuned for the debut of BLACKSWAN video interviews in 2 weeks!