Rewriting the playbook for healthcare real estate and facility management

While many health systems have paused capital projects during the pandemic, COVID-19 has not slowed Presbyterian Healthcare Services’ new inpatient tower.

The not-for-profit system went to the bond market last year to fund a $260 million 192-bed tower in Albuquerque and the project continues to move forward. COVID-19 reinforced the need for more capacity, particularly high-acuity care, as well as the imperative for greater control over its facilities, said Clay Holderman, Presbyterian’s chief operating officer, adding that much of its revenue comes from premiums, which helped insulate the integrated system.

All the rooms in the 335,000-square-foot tower will be sealed so they could meet standards for either regulatory isolation or negative pressure. The emergency department will be modified to house separate triage centers and waiting areas for those with respiratory disease symptoms. There will also be a resuscitation room.

The tower, which is replacing an aging facility with shared rooms, will give Presbyterian substantial flexibility in future responses to infectious diseases and other pandemics, Holderman said.

“We think this is a 9/11 event,” he said, adding that customer expectations have been irrevocably changed. “Just like airports were not the same after 9/11, we don’t think hospitals will be the same after COVID. We’re looking at this as many potential waves of not just COVID, but other SARS-like infectious agents. It is changing how we think of a hospital altogether.”

The rise in high-acuity cases, the telehealth surge, social distancing guidelines, work-from-home arrangements and margin crunch are among a host of COVID-19 consequences that have prompted providers to reassess their real estate. Health systems are evaluating how to prepare for future disasters, consolidate where appropriate, and design flexible spaces.

Before COVID-19, only about 7% of Presbyterian’s primary care was virtual. That has shifted to 82%, and executives expect that to ultimately settle around 50% to 70%. Presbyterian is contemplating consolidating its outpatient footprint as physicians rotate through shared pods during the week, limiting the necessary staff support, preparation and other overhead since they may handle more of their cases through video visits from their homes.

The cost of an in-person primary-care visit has gone up around 60% per patient, accounting for the additional spacing and cleaning requirements, Holderman said. Maintaining most of its virtual business makes financial sense and meets customers’ expectations, he said. “Customers expect different practices—they don’t want to be in a waiting room next to someone,” Holderman said.

There is also opportunity to cut square footage for the around 3,000 administrators of its health plan, revenue cycle, call centers, and legal and human resources services, he added. About 85% of its administrative employees said they can work more effectively from home.

For years, the push to cut expenses has spurred talk of how overbedded markets are a “drag on health systems’ cost structure,” said Jay Johnson, national director of healthcare markets at real estate management firm JLL.

The average occupancy rate of acute-care beds at short-term hospitals was 48.1% in 2019, up from 48% in 2018, according to a Modern Healthcare analysis of Medicare cost reports from more than 1,800 hospitals via HMP Metrics. Meanwhile, average critical-care bed occupancy dropped slightly from 55.2% to 55%. According to American Hospital Association data, average inpatient occupancy has declined about 11 percentage points from 1975 to 2018.

“But in the grip of the pandemic, providers may realize they need to have not just excess bed capacity but ICU beds, whether they are permanent or convertible,” Johnson said. “A lot of health systems don’t think COVID-19 is the black swan—in some ways this could be a dress rehearsal for something far worse.”

Still, Johnson expects a net reduction in total square footage of healthcare space.

Organizations will be carrying the costs associated with capacity expansions for decades to come, said Mark Grube, managing director and national strategy leader at Kaufman Hall.

“There’s a tightrope organizations are walking. Pre-pandemic, inpatient utilization continued to decline as more work was handled in ambulatory settings and the home, and the hospitals were left with the sickest patients,” he said, projecting that inpatient utilization will likely decline 10% to 20% from its current level in the next five to 10 years. “One common theme is that organizations that are more invested in value-based care and have their own health plan or a steady stream of capitation revenue are doing really well compared to those who have depended on elective fee-for-service business.”

Square footage may decline as a result of consolidated outpatient facilities that offer a suite of services, or as health systems lease out or sell portions of their unused ambulatory facilities, JLL concluded in a recent report. Administrative offices will downsize as more employees work from home.

“It is difficult to deliver cost-effective healthcare services with excess capacity sitting idle for the majority of the time. That’s not a burden the industry can support,” Grube said. “Providers should focus more on having contingency plans in place to handle surges of various magnitudes.”

Telehealth—which according to FAIR Health data rose from 0.2% of all private claims in the first quarter of 2019 to 7.5% in Q1 2020—has dampened the short-term demand for medical office space, which had been an active market prior to the pandemic, according to the report.

But over the long term, medical office buildings are positioned well in a post-COVID environment that will still require in-person care and as lower-acuity care continues to migrate to ambulatory facilities, JLL experts said.

In fact, there is high demand for medical office space nationally, said Hunter Beebe, a managing principal at advisory firm Healthcare Real Estate Capital.

“Investors still see medical office buildings as a relatively safe place, with a ton of overseas money coming in,” said John Claybrook, a partner at Waller Lansden Dortch & Davis. In those spaces, system administrators are leveraging technology to do more with less space, said John Poulos, national healthcare director for commercial real estate firm CBRE. But Poulos doesn’t expect to see a net reduction in overall clinical square footage in the near term.

The pandemic has impacted providers differently based on their market and structure. Some were better prepared and had revenue sources outside of non-urgent procedures to fall back on.

New Orleans-based Ochsner Health System, for instance, recently added four floors to its main hospital and converted some of that space to intensive-care units, Claybrook said.

But in many cases, hospitals should partner with area health systems to better coordinate resources rather than add beds, real estate experts said.

“Collaboration helped prevent (New Mexico) hospitals from bearing a disproportional load of COVID-19 patients,” Holderman said, noting that antitrust regulations will limit that collaboration when the emergency declaration ends.

Those that were the hardest hit and are leasing space hope to get some relief from their landlords. Oman-Gibson Associates, a Nashville-based healthcare real estate developer and property manager, has been renegotiating leases with several tenants to defer payments, CEO Bond Oman said.

Distressed providers will seek buyers or merger partners, but real estate is often overlooked in the integration process, Johnson said.

As for Presbyterian, it will explore closing some smaller clinics if caregivers share more spaces and more care shifts to virtual, Holderman said. It may also downsize its administrative office space if work-from-home trends continue after the pandemic, he said.

Its new tower has several floors of shell capacity that could be outfitted for the next wave or a future outbreak, Holderman said.

“In states like New Mexico that have a disproportionate share of Medicaid beneficiaries, COVID-19 does point to the need to have more contingency capacity available and not running at 90% occupancy year-round,” he said.