Instead of muscling patients into medical/surgical beds, hospital administrators are sweating over strategies to improve people's health. The exercise has sparked a new boom in fitness center development.
Raising capital to build facilities with saunas, swimming pools and squash courts-instead of surgery suites and nurses' stations-presents a new challenge. But if fitness wonks are right, it's a drill that more chief financial officers will be practicing.
Consultants say the idea of integrating fitness centers into a healthcare network is growing wildly popular.
"It is happening at an exponential rate," said Mark Nadel, president of Health Equities Group, a Canton, Ohio-based consulting firm specializing in the development of hospital-based fitness centers. "I think the next five years will be a period of intense growth for these facilities."
According to the Association of Hospital Health and Fitness, the number of fitness centers affiliated with hospitals and physician groups has doubled since 1991, when the association began tracking them. In its latest survey for the year ended September 1994, the Evanston, Ill.-based association identified a total of 220 such centers.
Survey respondents reported spending $260 million in development costs on fitness centers that generated $83 million in revenues. Such facilities range from 2,000 to 160,000 square feet. Building a large center, of more than 40,000 square feet, generally costs $100 to $120 per square foot, or as much as $4.8 million.
New motivation. John P. Greene, the association's executive director, said motivations for entering the fitness business have shifted over the years. Early entrants saw it as a means of boosting image and distinguishing themselves in the community. In the late 1980s and early 1990s, fitness centers were byproducts of hospitals' diversification strategies. Today, adding fitness centers rounds out providers' continuum of care, keeps people healthy and attracts patients.
"People now are starting to talk more about it," Mr. Greene said. But he doesn't foresee a big boom in development. He believes 10 to 15 projects a year will enter the advanced design and planning stage. For the most part, hospital administrators are preoccupied with other issues, such as becoming affiliated with a network, reducing lengths-of-stay and coping with capital shortages, he said.
Mr. Nadel's firm has completed two "Healthplexes," a concept developed by the company that combines hospital-sponsored ambulatory services and an athletic club. He said he heard from several hospital executives in the past three months whose Healthplex feasibility studies were initiated four years ago. They are ready to take those completed studies off the shelf and begin development, he said.
Caroline Martin, executive vice president of Riverside Health System in Newport News, Va., cites another sign of industry growth. More than 300 hospital representatives and physicians recently attended Riverside's third annual wellness and fitness conference, up from 30 the first year. Significantly more attendees this year had community director or wellness director in their titles, she said.
Riverside, a four-hospital, not-for-profit system, which has been in the fitness center business for 13 years, operates five profitable wellness and fitness centers that serve 20,000 members. Mr. Martin said the centers will post a net gain of $1.4 million this year on Riverside's undepreciated investment of $14 million, which reflects total spending over the years on buildings, equipment, renovations and additions. The centers were funded largely through available cash.
Pumping capital. Jeffrey M. Bensky, president of the Benfield Group, a St. Louis-based consulting firm that specializes in hospital-based fitness centers, said Riverside's financing method is typical of many hospitals that are entering the business. He said funding for such centers typically comes from three sources: bonds, charitable donations and equity capital from hospitals' cash flow.
Mr. Bensky is hearing more interest in "off-balance-sheet" financing, such as an operating lease agreement that enables a hospital to finance a fitness facility without showing a liability on the balance sheet. But for most providers, it's not a viable option, he said. "The hospital still has to lease the building...or guarantee the lease," so there's risk involved, he explained. "The hospitals are going to have to get in a situation where they're willing to take the risk."
There's also "a lot of talk" about joint ventures as a financing option, Mr. Greene said. Nevertheless, just 8% of healthcare sponsors tracked by the association had some form of private financing.
Crozer-Keystone Health System, Media, Pa., may be the exception to the rule. Its $30 million Springfield Healthplex uses off-balance-sheet financing and a private investment by Healthcare Equities Group, which advised Crozer-Keystone on its financing options.
"No one has ever done one as large and as comprehensive on the campus of a hospital and integrated it into a hospital the way we have done," said Stephen A. Robbins, vice president for health system development and director of the project.
The facility, which includes a 170,000-square-foot athletic club and a 65,000-square-foot medical office building, will be attached to a newly reconfigured Springfield (Pa.) Hospital.
In May, as part of its system strategy, Crozer-Keystone slashed the number of beds and revamped services at the hospital, which is now designed for shorter-stay, primary-care admissions. Although its licensed capacity is 122, it operates just 32 beds and an emergency department.
Mr. Robbins was recruited from St. Lawrence Hospital and Healthcare Services in Lansing, Mich., where he led the development of a 167,000-square-foot athletic club. John C. McMeekin, Crozer-Keystone's president and CFO, embraced the notion of a combined fitness center and ambulatory-care facility as a means of fleshing out the continuum of care he was developing in Delaware County.
Here's how the financing works: A real estate trust is formed to purchase and own the land and buildings. Then the space is leased to its respective operators. So, for example, the clinical space will be leased to the hospital, and the athletic club will be leased to the club operator.
The exact amount of Healthcare Equity Group's minority investment hasn't been determined. Mr. Robbins said Crozer-Keystone will hold 60% to 95% of the stock. After rent and other expenses, Mr. Robbins expects the club to generate $1 million a year in profits.
Selling fitness club memberships to people in the community will enable the hospital to support patient rehabilitation activities. Patients will use the facility during off-peak hours. "If you can sell memberships to these kinds of plans, then if the business is profitable, it carries the overhead of the facility," Mr. Robbins said.
Pitfalls. But experts in the hospital-sponsored fitness center business warn of numerous pitfalls. "Many hospitals just simply do not understand the concept and have a very difficult time convincing physicians, management and governance on how the pieces fit," Mr. Robbins said.
Hospitals also mistakenly think they should compete with health clubs, such as Bally's or Gold's Gym, Mr. Nadel said. "We think the market position for hospitals is to be at the top of the market." A high-end club may attract higher membership fees of $55 a month for individuals and $100 a month for a couple.
Experts said smaller fitness centers are more likely to fail than larger centers because they can't offer the same diversity of services. Also, centers in smaller and rural communities may have a difficult time reaching critical mass.
One option may be a joint venture with a major employer or local government. "If you say, `This is important for our strategy,' there are ways it can be done," Mr. Nadel said.
Poor management is probably the greatest threat to a center's success, Mr. Nadel said. The typical health club management firm may know nothing about integrating hospital patients with healthy people.
