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December 5, 2011

Why Not Sell Those Medical Office Buildings?

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Back when the U.S. financial crisis was at its height, hospitals were searching desperately for assets which could keep them above water. And there was one type of asset which largely held its ground.  Though most other investments tanked, medical office buildings were a lone bright spot.

In 2008 and 2009, hospitals began unloading their MOBs, selling them to investors and leasing them back in an effort to keep the ground under their doctors’ feet. Commercial real estate players — notably real estate investment trusts — were only too happy to participate in these deals, as MOB properties had a rep for being nearly recession-proof.

By mid-2010 or so, MOB fever calmed down. But now, with the hospital industry’s health improving, it may be heating up again. If your hospital owns Class A medical office space occupied by affiliated doctors, you’re likely to get courted by real estate investors in the next few quarters.  (That’s my prediction, not some real estate exec’s, but the signs are there and MOB buyout momentum is growing again.

After all, consider the trends. Demand for medical office space is growing, boosted by rents hovering at about 5 percent below pre-recession levels, according to commercial real estate research firm CoStar Realty Information. Also, hospitals continue to need more space to house the practices they acquire, which will absorb any left-over vacancies and raise the value of the properties investors already own.

Not only that, there are long-term forces which are likely to keep demand high for MOBs. Commercial RE investors expect the coming growth in demand for outpatient services — which should hit 22 percent by 2019, according to McKinsey Global — to generate strong returns for medical property owners.

So, what does this mean for you?  Well, if you didn’t sell your MOBs a few years ago, you may have another chance. Bear in mind that investors are more interested in signing MOB deals with big chains like Tenet or HCA, as aggregating properties makes more sense than negotiating one deal at a time. But you’ve still got a special asset there.

Bottom line, if you have new (or newly-upgraded) medical office properties on your campus, consider whether they’d be more valuable as a lease-based tax deduction.  My guess is that you’ll be able to redeploy the cash more effectively in other areas of your operations — such as, say, building up your EMR.  And hey, you’re not really in the real estate business anyway, are you?

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November 21, 2011

Hospital Strategic Partnerships Avoid Mergers, But Create Other Pain Points

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This is one of those periods in health biz history when M&A looks especially attractive.  What CEO wouldn’t give a second thought to getting acquired and picking up a bundle of cash when they’re struggling to survive?

In fact, one attorney with a national health care law firm argues that that as many as 50 to 60 percent of doctors and hospitals are looking for partnership opportunities of late, in part because health reform encourages consolidation.

The question is whether the institutions can put aside their differences long enough to talk business — particularly if they have dueling missions (such as religious charity vs. profit). Not only that, it’s not clear whether partnerships will meet their needs for long, as we’ll discuss below.

Given their druthers, many institutions would prefer to stick it out on their own and do things their own way. And despite the urge to merge, many hospitals are keeping their independence through strategic partnerships, notes Becker’s Hospital Review.

It’s hard to argue that partnerships can have their advantages, as the Becker’s piece notes. Hospitals can cut overhead costs by sharing services and staffing, while expanding on their local reach and adding services they might lack.

Partners can also come together to shore up specific service lines without having to invest heavily on their own. That was the purpose of a recent agreement between Saint Vincent Health Center in Erie, PA and the Cleveland Clinic, which are teaming to further boost the reputation of their already high-profile organizations in cardiac and neurological services, according to the Becker’s piece.

And hospital partners can save big bucks by rolling out the all-but-mandatory EMR system together, too.  Not only do the hospitals save bucks on staffing and technical expenses, they also end up sharing clinical data by default. Ideally, they’ll provide higher-quality care and save money by avoiding duplicate services.

Hospital partnerships may make it easier to build an effective Accountable Care Organization, too. After all, it’s easier to share data and coordinate treatment if you already have a trusting relationship in place, particularly if you’re already integrated clinically.

That being said, partnership building comes with its own set of frustrations. Take last year’s relationship struck by Reston, WA-based Providence Health & Services and Seattle-based Swedish Health Services.

To get along, the two parties had to set up a complicated structure letting Providence’s 27 hospitals keep their Catholic mission, while the five Swedish hospitals stayed non-religious. The two will work together using the Epic EMR to work together on shared best practices and population health.

And that’s far from their biggest headache. Ultimately, hospitals won’t save the kind of money they’d like to save, nor build new business the way they’d hope to, without completing a real merger. At that point, things can get expensive and even more complicated, as individual IDNs or facilities fight to keep key partners of their strategy in place.

Meanwhile, the hospitals in question may find that merging doesn’t meet regulatory approval. Hey, look at what happened when ProMedica Health System of Toledo and nearby St. Luke’s Hospital decided to get hitched. The $1.7B ProMedica chain, has 11 hospitals in Ohio and Michigan, came riding to the financially-ailing St. Luke’s rescue with a $35 million investment in August 2010.

Since then, though, the FTC has cracked down hard on ProMedica, arguing that the deal unfairly monopolizes the Toledo market,  in particularly by raising its share of the inpatient obstetrical services market to 80 percent. (Hey, ask your friendly editor and I have to admit that the FTC’s argument has some merit.)

So, where can hospitals turn if they want to thread their way through the current hospital business climate?

Well, at least one model — promoted by organizations like Paradigm Physician Partners and the LHP Hospital Group — have rolled out a model in which, as privately held companies, they form joint ventures with and sink capital into non-profit hospitals and health systems. LHP, which holds joint interest in some or all of the hospital’s operations through an LLC,  recently closed a deal with Pocatello, ID-based Portneuf Medical Center.

I predict that hospitals will find new ways to take in investment without giving up equity or their non-profit status. If new models pop up on my viewscreen I’ll let you know — I think this’ll be a hot new transaction strategy.

 

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