A little over a year ago, the board of directors of Bishop Clarkson Memorial Hospital in Omaha, Neb., met to discuss alternatives for funding a new ambulatory-care center.
The hospital already owned a suitable patch of land 10 miles west of its main campus where it envisioned erecting a 100,000-square-foot center to house its growing array of outpatient surgery and therapy services. It currently provides those services in some 20,000 square feet of leased space in a local shopping center.
After reviewing six proposals from national and regional program managers, design-build firms and other real estate companies, the board decided to go with a deal that kept it from having to put up the $10 million to $15 million needed to fund the center's development.
The board shook hands with Des Moines, Iowa-based Graham Group, which offered to finance the project, oversee its design and construction, and own and manage the facility for the next 25 to 30 years.
Graham is one of a number of real estate development firms that specialize in helping hospitals build and manage outpatient facilities and medical office buildings.
As "investment builders," companies like Graham aim to take hospitals out of the bricks-and-mortar business by financing and owning facilities and then leasing space back to the hospital, private physicians and other medical groups.
In addition to financially backing the new facility, investment builders also prepare initial feasibility studies and oversee the design and construction processes. They make their money from lease payments.
Robert Omer, vice president and chief operating officer of Bishop Clarkson, says the other construction proposals either did not offer financing mechanisms or wanted to sell the facility back to the hospital or a third party in five to eight years.
But for Bishop Clarkson, Omer says, the priority was to hang onto its reserves to fund the development of its primary-care physician network, other facility improvements and future projects.
Omer says keeping the reserves became even more important when the 201-bed hospital agreed to merge by Oct. 1 with another not-for-profit hospital in Omaha: 343-bed University of Nebraska Medical Center.
"There's more movement in this direction where hospitals are looking very carefully at how they invest their capital," Omer says. "The benefit to the hospital is that the large investment of capital didn't have to come from hospital reserves but from a private party."
Under the Graham deal, Omer says, the hospital leased the land to the real estate firm and agreed to occupy at least a third of the center, which was reduced to 85,000 square feet as a result of certificate-of-need concerns.
Graham then financed the project and secured leases from mostly private physician practices to fill the remaining two-thirds.
Construction on the new center began about a year ago and is expected to be completed in two months.
Going a step further, Santa Barbara, Calif.-based Tenet Healthcare Corp. has partnered with an investment builder and a physician practice management company to develop new outpatient centers and physician offices in Phoenix and West Palm Beach, Fla.
The projects are being financed and developed by West Palm Beach-based Dasco Cos., a subsidiary of PhyMatrix Corp., a PPM company.
Like Graham, Dasco will finance, lease, design, develop, construct, manage and own all types of outpatient and medical office facilities. Dasco Vice President Christopher Bowen says the company typically will secure financing and invest its own money in a project and then contract with local architects and construction companies to build the facility.
Bowen says hospital tenants may choose to receive ownership positions in the project as limited partners, while Dasco provides 100% of the funding.
One of Dasco's newest ventures is the development of "medical malls" offering a range of outpatient services and physician groups. Dasco says it plans to develop three to seven medical malls a year.
In Phoenix, Tenet and Arizona's Institute for Bone and Joint Disorders have joined Dasco to build the 160,000-square-foot Biltmore Medical Mall, which will house an orthopedic and related therapy center, an ambulatory surgery center, a physical therapy and sports medicine center, and other outpatient services designed to work with Tenet's seven hospitals in the state.
Construction on the mall, valued at $40 million, is expected to begin at the end of this month and to be completed in fall 1998.
A similar project is under way in West Palm Beach, where Tenet has agreed to lease some 55,000 square feet of space in another 195,000-square-foot medical mall located one mile north of Tenet's 204-bed Palm Beach Gardens (Fla.) Medical Center.
In a joint venture with PhyMatrix, the medical center operates ambulatory surgery, rehabilitation, cardiac catheterization, diagnostic radiology and physical rehabilitation services in the newly opened facility, called the Medical Mall at Palm Beach Gardens. The mall also includes a 120-bed skilled-nursing facility and additional outpatient services, physician offices and retail medical equipment stores.
"These new services in the medical mall support the planned expansion of outpatient services at Palm Beach Gardens Medical Center," says Don S. Steigman, Tenet's regional senior vice president for Florida. "In the changing healthcare environment, it's important for providers to avoid the duplication of capital expenditures whenever possible."
Cooper Health System in Camden, N.J., also has partnered with Dasco to transform a former 115,000-square-foot shopping center into a medical mall by the end of the year.
The system runs Camden's 554-bed Cooper Hospital-University Medical Center and says it undertook the $20 million project to control costs and attract managed-care contracts.
Fred Campobasso, president of Chicago-based American Medical Design Corp., says hospitals need alternative funding sources for their outpatient centers and medical offices because these projects may not be able to take advantage of options with low capital costs, such as tax-exempt-bond financing, that support the development of inpatient facilities.
In addition, Campobasso says, hospitals often want to keep outpatient and medical office buildings off their balance sheets so their costs do not show up as debt.
In Grand Rapids, Mich., AMDC has agreed to manage and own 50% of a $10 million medical office building for 234-bed Saint Mary's Health Services, which is owned by Farmington Hills, Mich.-based Mercy Health Services. Ownership of the remaining 50% will be split equally by a local real estate firm and a local construction company. AMDC has obtained commitments for 97% of the space, including an outpatient oncology treatment center.
Construction began on the 81,000-square-foot facility in May and is expected to be completed by summer 1998.
Jack Weiner, vice president for facilities and ambulatory operations at Saint Mary's, says turning over the financing and development of the medical office building allowed the hospital to pursue simultaneously another $25 million worth of additional renovations and construction projects, including a new teaching facility, a parking deck and an expansion of an existing inpatient facility.
"With all that we had on our plate, we were having capital allocation problems," Weiner says. "The deal allowed us to focus our capital on projects that were appropriate for us to own."