Commercial ventures present opportunities and risks for health systems

Like a lot of health systems across the nation, Beaumont Health is looking to diversify its revenue stream. So the Southfield, Mich.-based health system is stepping out into commercial real estate.

Beaumont is building a 117,000-
square-foot shopping center formerly occupied by the Northwood Shopping Center adjacent to its Royal Oak hospital campus. The $32.8 million Woodward Corners by Beaumont will be anchored by a Meijer grocery store and include a five-story hotel, urgent-care facility, dance studio, brewpub, café and several restaurants. It’s slated to open this year.

As admissions decline and visits get shorter, revenue related to hospital operations is shrinking. Health systems have to adapt and find alternatives, Beaumont Chief Operating Officer Carolyn Wilson said. 

“Most are doing that with more outpatient facilities and free-standing diagnostic and surgery centers. We will also likely do more of that, but we anticipate that a retail element can factor into those centers as a larger component,” she said, adding that Beaumont will carefully wade into the retail space as it doesn’t want to venture too far outside of its main skill set and take money away from its core mission.

Schostak Bros. & Co. and A.F. Jonna Development are co-program managers for the project with Tower Construction overseeing construction. 

Beaumont’s new venture represents a growing trend of health systems building out ancillary businesses as they try to adapt to a less profitable operating environment. Healthcare providers are building sports complexes, spinning off artificial intelligence-enabled apps, supporting medical marijuana dispensaries, investing in specialized food delivery services and financing housing projects.

“Board members need to understand that healthcare today is much more than healthcare. They have to go beyond what is traditional and embrace what is possible,” said Lyndean Brick, CEO of healthcare consultancy Advis Group.

There is an internal struggle of how far hospitals should extend themselves beyond the familiar. If it doesn’t have some tie to health and wellness, boards are hesitant, experts said. But that type of thinking may pigeonhole them into a declining market. 

“They have to be willing to embrace new sources of revenue if they are going to keep their role in the community as a hub, large employer and safety net,” Brick said. 

The shopping center aims to fill a need for some 13,000 people who visit Beaumont’s Royal Oak campus every day, Wilson said. For children and adults who receive care at its proton center, which requires a six-week treatment cycle, their families will have a place to stay, fresh food options and gardens and a walking trail to relax. And the urgent-care center mirrors the national trend of hospitals looking to increase their patient base through more convenient and affordable settings, said Ed Puerta, a partner at Nixon Peabody. Health systems are getting more creative in their acquisition targets, expanding beyond community hospitals and physician groups, he said.

Beaumont announced a joint venture with WellStreet Urgent Care last year that will have 30 facilities in the Detroit area. That represented an opportunity to expand revenue and access without taking on too much risk, Wilson said.

Puerta said several of his health system clients have dedicated real estate departments to run cost-benefit analyses on potential real estate acquisitions.

Health systems in the West and South are looking to acquire or develop land in partnerships with developers and financial companies, Puerta said. But naturally, there are growing pains in managing a number of scattered sites, staffing appropriately and dealing with security and compliance issues, he said. 

Providers could run into some issues related to due diligence, code compliance, land-use restrictions, rising construction costs and the volatility of the retail sector, real estate experts said. It’s possible they are overextending themselves, said Angie Weber, a first vice president at commercial real estate firm CBRE overseeing the Los Angeles area.

Healthcare provider-backed “lifestyle plazas” that pair medical facilities with healthy restaurants and exercise options are becoming more popular, although they are typically done in partnership with developers, real estate managers or outside investors. One-stop shops make a lot of sense, and there will likely be more built over the next five to 10 years, said Kate Morris, a first vice president at CBRE overseeing the Phoenix area. 

“But health systems usually don’t try to use their own capital,” she said. 

Part of this is a response to new competitors like CVS Health and Aetna that threaten to take people away from the hospital, real estate experts said. Amazon, Google, Apple and others are eying the healthcare market and this a way to try to get ahead of them, they said. 

Sioux Falls, S.D.-based Sanford Health has a weight-loss venture, Profile by Sanford, that is growing quickly. It also has a 54,000-square-foot golf entertainment facility planned for its sports complex, including an interactive driving range with a restaurant and meeting space as well as an institute for golf performance and injury prevention research. 

The complex not only provides an alternative revenue source that it hopes will attract corporate events, fundraisers and families, but also a perk for its employees, executives said. The 500-acre sports complex will include a range of restaurants, retailers and a hotel.

“There is increasing pressure for organizations like ours to continue to pursue these types of nontraditional revenue sources,” Micah Aberson, executive vice president at Sanford, told Modern Healthcare in January.

St. Louis-based Ascension’s latest reorganization will, in part, facilitate the growth of its subsidiaries both within and outside of the company as it pledged to commercialize more of its ventures, executives said. 

If these providers want to remain a cornerstone of the community, they have to embrace creativity and get better at business, Brick said. “Healthcare’s economic realities have not set in universally across this country yet,” she said. “When margins are not able to be sustained, there is going to be more pressure to let go of the chains of their ‘mission.’ ”