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This Old House: Why Medical Systems Are Looking to Rebuild Older Office & Retail Space as New Medical Space

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Healthcare has entered into a new world. The world large health systems now find themselves in is still evolving, but centers around several key operating factors. Today, let’s focus on cost.

Cost is King
Health systems operate in an environment where cost can only be squeezed out of so many business units before it affects the ability to retain and grow. Both provider and patient costs must be driven by efficiencies.

The most historically recognizable area where systems had cost waste was in commercial real estate, both in corporate facilities and practitioner offices.

The corporate real estate side is endemic of a greater problem – lack of recognition that better efficiencies i.e. better space, equals more productive workers and more seamless patient care. Often in the case of hospital-centric systems the corporate functions are scattered throughout intensive care environments, essentially taking the most expensive real estate and using it in the least effective way for both the users and the providers and patients.

Deja vu – 1980’s or 1990’s?
By unifying the space used for shared services, health systems can be better integrated and have a more rational cost structure.

Interestingly enough, if this had to be compared to anything – it resembles the corporate revolution of office space by companies in the 80s and 90s, where decisions regarding location selection and design were standardized by companies. Because healthcare has been so provider-focused for so long, the basic administrative functions were almost always an afterthought.

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Doctor K from Suburb B

Rational Real Estate
For the most part health systems are now aggressively seeking to rationalize their corporate shared services real estate, but the quest to get at the real cost bogey remains. Providers in medical offices where patients are seen, and individual practitioners either own their own buildings or lease offices with the help of commercial real estate brokers. This is the largest real estate based cost and impediment to higher quality lower cost streamlining.

Example: Dr. K from Suburb B
To examine the fundamental problems with individual practice group facilities, let’s illustrate a lifecycle example for these offices:

45 years ago Dr. K, a general practitioner, opened his first office in suburb B. He saw patients and paid rent; if he had a critical patient he sent to them to the hospital. Insurance worked much differently.

Dr. K flourished, and he ultimately purchased the 5,000 square foot building where he shared space with three other practice groups, all in about 1500 square feet.

25 years ago, Dr. K sold his practice but kept the building and started seeing patients part time. Dr. Z paid rent on his 1300 square feet for 15 years.

Dr. Z then became part of a bigger group that affiliated with a hospital, but because Dr. Z now owned part of the building, he had his lease guaranteed as part of the bigger physician group.

This type of scenario is one of literally hundreds of thousands that will be dealt with over the next ten years and is being worked on right now. The space at the beginning was a nice modern commercial office space that was efficient and user friendly. The space at the end has no ability to create a unified care model – it’s unconnected and unusable. Worst of all it takes money out of both the providers’ and the patients’ pockets.

Eugene McGrane Director Cushwake Walnut Creek CA

Health systems are moving to large, 100,000 square feet medical office buildings

The Dillema: What To Do Now?
Following the model of integrated care set up by Kaiser – under which all the specialty practice groups and the general practitioners co-habitate, so that referrals can be seamless and patient care can be better monitored – health systems are moving to large 100,000 square feet medical office buildings. The integrated care model basically understands that more preventive care and less acute care lead to better results and lower costs.

Essentially if a general practitioner thinks you have a stress fracture in your foot and can get you to imaging in the same building and orthopedics on the same day, then you are more likely to get the problem taken care of in the least intensive way. If the general practitioner recommends you get imaging but because you have to go somewhere else for it you skip it, then one year later the problem that could have been dealt with by getting you a walking boot for three weeks now has to be dealt with through surgery and rehab.


More preventive care and less acute care lead to better results and lower costs

Buildings, Bells & Whistles
Back to cost, if you’re a health system and you want to build this type of integrated care delivery how do you go about it in a cost effective manner? The health system can build a ground-up building, complete with all the bells and whistles, which would probably cost $800 to $900 per square foot, depending on the market and land values and scarcity and zoning and a million other things. In San Francisco Sutter Health utilized this route building the new Cathedral Hill Medical Office Building.

Repurposing Office Stock
Another viable option is to repurpose existing office stock. Typically this works only during specific times in the office market cycle. Planning ahead for growth, systems should allocate funds to opportunistically buy strategic class B commercial office buildings where conversion and acquisition costs are more in the $300 to $400 per square foot range. This works best in the suburbs where existing class B office buildings can be repositioned as integrated care facilities.

So the next time you go to the doctor, you’ll know where their parent system is in the process by looking at the walls.

This article from the New York Times describes some of the symptoms of the changing of the individual practice model.



05823e8Eugene McGrane is a Senior Director at Cushman & Wakefield’s Walnut Creek Office. He is both an advocate and advisor for companies who lease or own real estate and has an extensive and wide ranging background in complex commercial real estate projects, from small business office leases, to large corporate site selection and negotiation. Eugene has also handled complex disposition and acquisition of Retail, Land, Office, Industrial, Medical and Development sites. He is a regular Guest Blogger for blog.cushwake.com.


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