In Grand Rapids, Mich., the smallest healthcare facility in town has carved out 170 acres for a new campus that will feature everything from a hotel/convention center to a nationally franchised steakhouse and a mall-like selection of drugs, medical goods and other healthcare items.
Oh, yes-there's a hospital in there somewhere, too.
Metro Health Village at 190-bed Metropolitan Hospital, scheduled to open in mid-2007, is healthcare's version of a mini-Wal-Mart-something for everybody, all in one place.
"We're starting from scratch. How often do you get an opportunity like that?" asks Michael Faas, the hospital's president and chief executive officer. "Our intent ... was to create a destination. We're not creating just a healthcare village-we're creating a community. It's our own downtown that will have a hospital at its centerpiece."
To many industry observers, this creative project and others like it represent one more giant step into an age of entrepreneurship in the healthcare industry. Whether it's mater-nity clothes, prostheses or oncology-related products, hospitals are incorporating more retail than ever before to help boost their bottom line and grab a larger chunk of the multibillion-dollar market in hospital and healthcare-related products.
"You're going to increasingly see the `retailization' of healthcare services because consumers are becoming more accountable-and more active-in how they spend their healthcare dollars," says Todd Jensen, senior vice president of healthcare at the Lauth Property Group, a large real-estate development and construction firm with dozens of current projects in the healthcare arena.
Across the country from Grand Rapids in Northern California, meanwhile, two big hospitals have included an imaginative mix of retail outlets as part of large expansion projects.
Sutter Health in Sacramento is building a medical complex across a seven-block swath in California's capital city that will include a new 200-bed hospital, a theater complex and a separate retail area. That huge complex-expected to cost about $465 million and include as much as 10,000 square feet of retail shops and other nonmedical space-is scheduled to open in late 2008.
And 426-bed El Camino Hospital in Mountain View has kicked off a $300 million project with a four-story, 450,000-square-foot patient tower connected to a two-story pedestrian mall boasting a half-dozen retail outlets. The shops are expected to generate as much as $3.5 million annual revenue on health-related products.
Lee Domanico, El Camino's CEO, describes the venture, which also includes food outlets, coffee shops and a health library, as "the hospital community of the future." That's accurate in both a literal and figurative sense-the giant project isn't scheduled to debut until 2008 in California's Silicon Valley.
"We're not going to become a shopping mall," Domanico says. "Our goal is to connect these services and products, mostly health-related, to the healthcare that people are receiving on the campus. It's all about full service. And it's also about the fact that, increasingly, consumers are paying more out-of-pocket for services and products not covered (by insurance). This is a response to consumerism, and our research shows that it can produce a very healthy (profit) margin."
What's more, this is just the beginning of a trend that's expected to accelerate in the coming years. "What hospitals are beginning to realize," says James Orlikoff, a health economist who is president of Orlikoff & Associates, "is that there is a brand extension to linking a center of excellence-like, say, breast cancer-to a retail product line that is needed by patients. Hospitals are beginning to generate a lot of retail revenue free of the government restrictions. Retail is low volume, but high-margin. It's a new source of badly needed revenue."
While the amount of revenue obviously varies depending on size, volume and traffic, a midsize hospital can generate "millions of dollars in additional revenue" by adding this retail component, Orlikoff says.
The current emphasis on retail represents a world of difference from the past decade or so, when many hospitals added a limited mix of ground-floor retail space as a convenience to their patients. Food courts, bookstores and expanded florist shops blossomed as practical adjuncts to the small, low-volume gift shops that represented the sum total of a typical hospital's retail operation for many years.
A once-haphazard approach has evolved into an integral part of overall operating strategy as well as an increasingly important source of revenue. In addition to food courts and large pharmacies rivaling the offerings of a big-city Walgreens, hospitals are building new retail space-or renovating existing areas-to provide patients with a much wider range of products. Instead of surrendering that revenue to outside retailers, hospitals are claiming that cash for themselves by offering their patients convenient access to these full lines of products on their own campuses.
A different approach
"Hospitals have adopted an entirely different approach to retail offerings-they're out to make money on it," says Mindy Thompson, founder and president of Simply Retail, a company that's working with about 15 hospital clients in the U.S. "There's tremendous opportunity, even for the little guy, a small hospital."
Hospital gift shops, Thompson says, are being taken to a "whole new level."
And no wonder. Thompson says out-of-pocket healthcare spending is estimated to top $256 billion this year, increasing about 10% from 2004, for healthcare-related products such as prosthetics, wigs and mother-baby products. Among several of the other 10 separate kinds of retail products she's helping to promote: A boutique catering to breast-cancer patients and "general-store" concepts featuring hearing aids, optical products and cosmetology services.
Although most traditional hospital gift shops generate about $500 per square foot annually, Thompson says, stores providing higher-end products in hospitals typically produce $800 to $1,000 per square foot. The average net margin: 15% to 20%, Thompson says.
One of her clients, two-hospital Park Nicollet Health Services in St. Louis Park, Minn., generated about $69 million in gross sales in 2003, just two years after implementing a wide-ranging retail program, Thompson says. The ever-expanding retail empire could reach about $110 million in gross sales by 2006, she says.
Success, of course, depends on luring shoppers into the stores. Anywhere from 2,000 to 3,000 people pass through a midsized, 250-bed hospital in the typical day, Thompson says, which rivals the foot traffic in some sections of shopping malls and is more than enough to generate solid revenue numbers.
Fred Campobasso, a Chicago developer who helped design both the Metro Health Village and the El Camino project, says these facilities and many others are "reinventing" themselves, transforming hospital campuses into "destination points" by offering the kinds of retail services unheard of as recently as just a few years ago.
While hospitals are hamstrung on the reimbursements they get from Medicare, Medicaid and commercial insurers, discretionary retail services and health-related products can typically produce an additional 3% to 5% of revenue, says Campo- basso, president of AMDC Corp., a leading healthcare consulting and development firm. "On $100 million, that's $3 million to $5 million that floats right to the bottom line," he says.
At mixed-use "health villages" such as the one envisioned at Grand Rapids, the plan is to actually draw local shoppers who otherwise would have no reason to visit a medical campus. They presumably will shop at the organic-oriented grocery store, dine at nearby restaurants and spend money at the beauty salon and other retail outlets. The more-focused retail at many other newly built hospitals are designed almost exclusively for patients who require special products or services.
"There are many different definitions of hospital `retail,' " Thompson says. "We're focusing on patient services."
Not all of these projects depend on retail as the key to success. Sutter, for example, is not sure whether it will license or subcontract retail elements of its project or sell part of its holdings to avoid potential problems with mixing a not-for-profit hospital system with a for-profit retail operation. Though that initial plan may change, "the approach has been to be very conservative," one spokesman says. "I don't think they've necessarily ruled out the ability to take another look at this."
Most hospital administrators, according to Thompson, are not too concerned with any potential pitfalls of mixing for-profit retail projects with not-for-profit medical care-a combination that has become increasingly common. "We're not hawking products," she says. "In our case, it's about offering the captive audience of a hospital some products they really need."
For El Camino, which will break ground this fall on its far-reaching hospital-retail project, a pedestrian mall could potentially include more than 5,000 square feet of retail space with products and services for new mothers, cancer patients and other healthcare supplies, Domanico says. He says he expects the retail space may generate about $5 million in revenue annually. "The idea," he says, "is simply to connect the care with the services and products so physicians can refer you to these outlets as part of continuing care. It's convenient, and we've got employees with expertise."
Adding 1% to 2% to revenue
Faas is optimistic about the retail prospects at Metropolitan Hospital, a $150 million, eight-story, 500,000-square-foot facility that occupies the middle one-third of the big new development in Wyoming, a suburb about 20 miles south of the facility's old home in Grand Rapids. The hospital, Faas says, will act as developer, lessor or part-owner of sections of the project, generating a healthy-but not huge-sum in revenue and profit.
"The real money is still in sick care," he says. "In terms of the total budget (retail) may mean a 1% to 2% impact."
Based on last year's total revenue of about $250 million, that's anywhere from $2.5 million to $5 million added to the bottom line from future retail sources at Metropolitan, one of four hospitals in the greater Grand Rapids area.
Though specific plans are still in flux, the 50 acres of retail development are expected to include restaurants, a hotel (three lodging companies have already expressed interest, Faas says), a full-service grocery store featuring organic products, a fitness center, a clothing store, a bank, a barber shop and a salon.
A loft-style housing development with about 75 units will also be built along with parks, ponds, bike trails and running tracks, adding more incentive for local residents to seek out the health village for more than just their health needs. Faas says the "ultimate goal" in about 10 years is to derive 10% to 15% of net income from nonhealthcare-related retail outlets on the sprawling campus.
Adds Thompson: "This is predictable revenue, year in and year out. Any hospital that is building a new facility and isn't including plans for retail is behind the eight ball."
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