Centralized approach may improve performance
CHICAGO - Healthcare systems with a centralized and strategic approach to their real estate activities may enjoy significant competitive advantages over systems that delegate property decisions to individual hospitals, according to a new study from the financial services firm Jones Lang LaSalle.
The “Improving Healthcare Systems through Strategic Real Estate and Property Management” study was based on telephone interviews that were conducted with executives from 40 U.S. healthcare systems from January through May. An independent research firm produced it on behalf of Chicago-based Jones Lang LaSalle’s Healthcare Solutions Group.
The study found that a more centralized and strategic approach benefits all areas of the healthcare real estate function – planning, design, construction, leasing and property management – resulting in significantly better overall financial and operational performance.
“Those systems that have focused on how real estate can facilitate strategic improvements have enhanced competitive positions, built financial strength and become industry leaders,” said Peter Bulgarelli, chief operating officer of Jones Lang LaSalle’s Healthcare Solutions group. “Those who manage real estate at the most local level will struggle to remain competitive and survive in today’s healthcare environment.”
Bulgarelli said Jones Lang LaSalle has created a model that defines four stages of healthcare real estate organization: locally managed, centrally administered, centrally managed and strategically managed.
The study revealed that health systems experienced steady improvement in operating margins as they advanced along the continuum to “strategically managed” status. Of the systems surveyed, those with a locally managed focus had an average operating loss of 0.28 percent, whereas those that were strategically managed had an average operating profit of 3.89 percent.
Nonetheless, only seven of the 40 U.S. health systems surveyed are strategically managing their property assets, Bulgarelli said.
The 40 systems collectively generate about 11 percent of the $1.27 trillion spent on hospital and physician services nationally. The combined revenue of the 40 systems exceeds $140 billion, with nine of 10 of the systems achieving revenues of more than $1 billion annually.
Those health systems in the study that take a strategic approach to real estate planning are some of the more notable in the United States for both care quality and financial solvency.
For instance, the leadership of Geisinger Health System in Danville, Pa., believes that standardized construction designs have played a role in boosting care quality and growth, from $955 million in 2001 revenue to $2.3 billion in 2010. The health system introduced standard construction designs across facilities in the 42 Pennsylvania counties that it serves.
“Facilities absolutely have a role to play in improving the quality of the operation,” said Tom Gensemer, associate vice president of facilities administration at Geisinger. “Our facilities need to be built in a way that allows our providers to practice medicine in the most efficient and effective way.”
Duke Health System, a $2 billion health system based in Durham, N.C., uses income from real estate management to fund essential investments in medical and information technology.
“If we buy an X-ray machine, we know we can make 11-12 percent on it,” said Scott Selig, Duke’s associate vice president for capital assets and real estate. “If we build a building, we may only make a 7 percent or so return on it. So it’s better for us not to have bricks and mortar but to have X-ray machines.”
Bulgarelli said the study showed that some of the leading health systems have centralized their leasing and lease administration functions, which minimizes compliance risk and improves the flexibility of the system’s real estate footprint. They are also freeing up capital for clinical purposes by identifying and processing non-strategic assets, he said.
Catholic Healthcare West, a 40-plus hospital system in California, Arizona and Nevada, drove down energy consumption by 26 percent and cut costs by $5 million a year with a tiered management approach, said Jeff Land, vice president of corporate real estate at Catholic Healthcare West.
“By centralizing energy management activities, the organization puts one eight-hour-day person a week on each site to ensure equipment is operating at pre-established set points,” Land said. “While there is an associated cost, the payback happened in year one.”
Sydney Scarborough, managing director at Jones Lang LaSalle, said the capital constraints now facing hospitals are changing the way systems leverage real estate to implement their strategic, long-term objectives.
“Real estate and facilities have been viewed as a ‘means to an end’; they are not the core business of the hospital,” said Scarborough. “Yet the opportunity to reduce real estate carrying costs and capital spending is real and those resources could be re-deployed to the hospitals critical healthcare mission.”