Healthcare Real Estate Strategies That Enhance Value

September 20, 2017 12:10 pm

Strategies such as improving outpatient care and incorporating patient feedback in new facilities are becoming increasingly vital as health systems make the transition to value-based care and population health management.

As health systems adjust their real estate holdings to increase access to services, improve patient care, and lower costs, the physical environment of health care is shifting. Although hospital construction accounts for the majority of industry projects, according to a recent Colliers International research report, 83 percent of 283 projects in 2016 focused on expansion of existing facilities instead of building new ones. a

Value-based care with a focus on population health and the rise of consumerism have altered healthcare delivery, leading to new real estate strategies that include enhancing hospital facilities and building outpatient centers or smaller-scale micro-hospitals. The migration from inpatient to outpatient care, which has been taking place over the past 20 years, has contributed to a decrease in the national occupancy rate for hospitals from 77 percent to 61 percent since 1980, according to data from the Medicare Payment Advisory Commission.

In response, healthcare organizations have developed locations that are easier for patients to access. “Being able to locate many, varied services, including physician services and ancillary services that are necessary to manage populations in one location, provides an advantage when you care for patients—patients want convenience,” says Peter Schoch, MD, vice president for value-based care and payment at SSM Health St Louis.

The transition to value is a key driver, with healthcare organizations exploring ways to keep populations healthier and control costs by reducing unnecessary utilization such as hospital admissions and readmissions. This approach has influenced efforts to define the most appropriate care setting while aligning inpatient and outpatient services.

Organizations thus are looking outside the walls of hospitals. “We’re seeing organizations completely rethink how they are going to deliver care and where it is going to be delivered,” says Carole Faig, U.S. health deputy leader at EY.

Increasing Access to Care

To reach patients more efficiently, healthcare organizations have rethought their real estate strategies by expanding, transforming, and building facilities.

Use of off-campus outpatient facilities. In building off-campus facilities that improve access and contribute to a continuum of care, health systems also are seeking to control costs, as outpatient centers often are less expensive to construct and operate than traditional hospitals.

In April of this year, SSM Health opened its third outpatient center in St. Charles, Mo. The 55,700-square-foot, $26 million facility joins SSM Health’s network in St. Charles County, including three hospitals, two urgent care sites, existing outpatient centers in St. Peters and Wentzville, and SSM Health Medical Group.

Given limited space on hospital campuses and the value of the property, the outpatient center presents a less expensive option compared with a similarly sized hospital construction or expansion.

“Patients don’t have to go to the hospital,” says Rachel Donlan, director of strategy and business development with SSM Health St. Charles. “They can access a very convenient outpatient center and get multiple services in one location.”

The new outpatient center in St. Charles offers primary and specialty care services, including an urgent care clinic and advanced imaging services such as MRI, CT, X-ray, ultrasound, mammography, and bone density. The organization also has launched an outpatient palliative care pilot, the first outpatient-based chronic disease management program in the St. Charles network.

UCSF Benioff Children’s Hospital Oakland (Calif.) is working on a 10-year expansion plan that includes a second outpatient center. The new center will include pediatric clinics that offer services such as outpatient rehab, a neurosurgery clinic, surgery offices, cardiology, neurology, dermatology, and ENT as well as the hospital’s clinical lab.

Transforming current facilities.  In addition to developing outpatient services, organizations are embarking on projects that improve, expand, and repurpose facilities in a number of areas.

UCSF Benioff Children’s Hospital Oakland plans to shift its NICU and PICU inpatient accommodations from wards to single-patient rooms to improve the care experience, for example.

“You have kids in varying ages all the way up to 18 or 19, and it makes it really difficult when you have a very, very sick kid, and there’s really no privacy and there’s a lot of stress put on the family,” says Doug Nelson, vice president of development, construction, and real estate services. The 38-NICU and 23-PICU bed count will not increase, but the square footage for each space will more than double.

Providence Tarzana Medical Center in Tarzana, Calif., has started an expansion that will cost more than $514 million and feature a new patient wing, enhancements to its NICU and women’s health pavilion, expanded diagnostic and treatment areas, and a new and expanded emergency department (ED).

One of the project’s goals is to improve inpatient services while growing outpatient capabilities. The hospital is repurposing the existing patient wing to serve as ancillary and support space and aims to expand outpatient services such as advanced imaging services and surgery in adjacent office buildings.

“Rather than having a patient come in for ancillary services within the walls of a hospital, most patients—especially for lower-acuity ancillary procedures such as imaging activities—prefer doing that in a more a convenient location, which tends to be more affordable,” says Dale Surowitz, Providence Tarzana Medical Center’s CEO.

Building on a smaller scale. Another strategy that health systems use to increase their reach is building micro-hospitals. Since 2014, Texas-based Baylor, Scott & White Health has built eight micro-hospitals, with a ninth scheduled for completion later in 2017. While meeting licensing and regulatory requirements, these facilities are much smaller in scale, costing between $7 million and $30 million to build.

“We wanted to go into markets close to people’s homes, and it’s a much more cost-efficient strategy to build a micro-hospital than a full-service hospital,” says Jerri Garison, president of Baylor Scott & White Medical Center-Plano and senior vice president of the health system’s East Region. The micro-hospitals typically include six to eight inpatient beds, most ED services, and office space for physicians and primary care specialists.

Redesigning the Care Experience

In addition to improving access to care and controlling costs, health systems are using real estate strategies to support adjustments in healthcare delivery.

In the Health Facilities Management 2016 Hospital Construction Survey, 86 percent of respondents placed high value on patient satisfaction when exploring changes in facilities and services. Moreover, 63 percent involved the community in the conversation surrounding design changes to their facilities. b

“We talked about it every step along the way,” Nelson says of the patient and family feedback process for the UCSF Benioff Children’s Hospital Oakland expansion.

“A lot of thought went into what needs to be in a patient room, what do you expect to see there that you didn’t see, and how can we improve that?” Patients and families wanted quiet, private spaces with areas that afforded the opportunity to rest, contributing to the organization’s decision to transition its NICU and PICU inpatient accommodations from wards to single-patient rooms.

Operating under both fee-for-service and value-based payment models, SSM Health’s outpatient palliative care services in St. Charles reflect a broader population health approach. The new outpatient center offers a convenient, less expensive way for providers to discuss and set expectations for care with patients and their families.

“Many healthcare expenditures at end-of-life are because we haven’t had conversations with patients around how they would like to approach end-of-life,” Schoch says. “Palliative care is our mechanism to do that, and we hope to integrate it completely with our ambulatory settings and inpatient setting.”

Palliative Care Consult Orders at SSM Health-St. Louis

SSM Health has developed a screening tool for patients who enter the system on an inpatient basis and who might benefit from outpatient palliative care services. Those patients receive an inpatient consult and a follow-up meeting at the new outpatient center. While the outpatient center has been operational for only a few months, SSM Health anticipates that the services offered will help reduce unnecessary hospital admissions and readmissions.

“For those risk-based contracts we’re entering, a key component is keeping patients out of the hospital and at the lowest level of the most appropriate care, and that’s really going to be the outpatient setting,” Donlan says. In addition to growing its outpatient palliative care program across St. Louis, SSM Health aims to expand this care approach to manage other chronic conditions such as diabetes, congestive heart failure, and chronic obstructive pulmonary disease.

Settings such as outpatient centers and micro-hospitals are helping organizations reach more patients at lower costs, reflecting a larger care continuum that relies on a range of facilities to better serve the needs of a population.

“We’re now shifting the paradigm fundamentally to say, ‘You as the provider of care are responsible for the health of this patient,’” says Jacques Mulder, U.S. health sector leader at EY.

“Inpatient settings, outpatient settings, acute care, pharmacy, everything they touch the healthcare system with—in population health, infrastructure is absolutely critical,” Mulder adds.

For Baylor Scott & White, which includes 48 hospitals, more than 1,000 patient care sites, and an estimated 5,500 active physicians, micro-hospitals help extend its reach while also serving as an entry point to another part of the system should the need arise.

“Through our network, we can push people to the more appropriate level of care,” Garison says, referring to the health system’s micro-hospitals, the success of which is measured according to quality metrics and patient satisfaction. “If someone comes in with chest pain and that’s not appropriate at that location, we can transfer to another hospital. It’s our whole system of care that is making us successful.”

In population health management, the tracking and sharing of patient data supports care across visits and facilities, providing an opportunity to identify inefficiencies and examine information across patient populations to plan potential interventions. Organizations have the opportunity to consider the most effective way to deliver this data when redesigning and expanding facilities.

For instance, Providence will be exploring ways to streamline its electronic health records to improve information flow and increase efficiency through its redesigned facilities.

“This project will allow us to have better communication going back and forth between the ambulatory side and the hospital,” Surowitz says.

The Site-Neutrality Issue

Real estate strategies must account for Medicare’s site-neutral payment policies, which adjust payment based on the location of off-campus hospital outpatient centers. The rule, which defines such facilities as off-campus if placed more than 250 yards from a hospital, codifies larger payment for hospital-based procedures than for those at off-campus outpatient sites.

By paying lower amounts for services performed in certain structures, site-neutral legislation has challenged organizations to consider location of care as a factor in benchmarking and forecasting. “We figured that into our process,” Providence’s Surowitz says. “We had to plan already that certain services, such as imaging, are not going to be under the hospital umbrella.” The medical center has started discussions with other organizations to consider joint ventures and other types of partnerships to expand outpatient services while controlling costs.

Organizations can be granted exceptions depending on the time frame of construction projects. The construction phase of SSM Health’s third outpatient center in St. Charles began before the rule took effect Nov. 2, 2015, for example, thus exempting the facility from site-neutral payment restrictions.

Nonetheless, SSM Health has incorporated the policy into future planning. “Financial modeling, including any potential impact of site neutrality, and many other factors are taken into account when SSM Health considers investing in new facilities,” Karen Rewerts, regional vice president of finance and CFO for SSM Health St. Louis, says via email.

The Implications

As organizations strive to achieve the Triple Aim and to incorporate patient feedback in their real estate strategies, the physical environment of care delivery will continue to evolve. “The need to build coliseums where people can gather is no longer the primary driver,” EY’s Mulder says.

Sweeping changes in approach may take some time to implement, especially while fee for service continues to be the dominant form of payment. “That march toward value has been much slower than we anticipated in the industry compared to where we thought we would be at this point,” EY’s Faig says.

Yet changes will continue.

“From an industry-wide perspective, we’re looking to do more with less, and if you believe in value-based care and population health as the direction we’re moving, the goal is to move more of the care we deliver upstream from the hospital,” Schoch says. The SSM Health palliative care model, while utilizing the new outpatient center in St. Charles, also looks to emphasize care in the home to further reduce unnecessary admissions and readmissions.

Additional approaches to care, such as telemedicine, reflect a continued push to meet patients in an easily accessible space in a more cost-effective way. “It’s all a different way to look at a coordinated approach on how we deliver care,” Surowitz says, “from the most effective, efficient and service-oriented perspective where it’s got to be more patient-centered.”

Elizabeth Barker is a digital communications professional and freelance writer in Chicago.

Quoted in this article: Rachel Donlan, director, strategy and business development, SSM Health St. Charles; Carole Faig, U.S. health deputy leader, EY; Jerri Garison, president, Baylor Scott & White Medical Center-Plano, and vice president, East Region, Baylor Scott & White Health; Jacques Mulder, leader, U.S. Health Sector, EY; Doug Nelson, vice president, development, construction, and real estate services, UCSF Benioff Children’s Hospital Oakland; Karen Rewerts, regional vice president, finance, and CFO, SSM Health St. Louis; Peter Schoch, MD, vice president, value-based care and payment, SSM Health St. Louis; Dale Surowitz, CEO, Providence Tarzana Medical Center.


a. Colliers International, “Despite Record Occupancy, Areas of Uncertainty Remain for Health Care,” U.S. Research Report: 2017 Health Care Marketplace, 2017.

b. Hoppszallern, S., Vesley, R., and Morgan, J., “2016 Hospital Construction Survey,” Health Facilities Management, Feb. 3, 2016.


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