Location, Location, Location

Volume 2 November, 2022

Over the years I have often been dragged into a conversation with Volunteer Trustees on how healthcare is different than most other businesses. The discussion quickly migrates toward the observation that hospitals cannot choose their markets—they are market-bound. History will note some controversy when it became somewhat common for urban facilities to move out of depressed areas into the growing suburbs during the ‘60s and early ‘70s. Clearly, local market conditions affect hospitals. Success or failure of a hospital is often credited to actions by management and/or the medical staff. The truth is that market demographics are likely to be more the issue. While mission may be the driver for certain healthcare organizations, health systems are actively attempting to balance their portfolio of facilities with both attractive and challenging markets when possible. While mission is important, I have not found it possible to make an economically depressed market attractive from a business standpoint. Clearly, strategies differ depending on market conditions.

The result is that strategic planning must first recognize the indelible attributes of the market. Is it growing or not? How concentrated is it (providers, insurers, etc.)? What do the key economic indicators suggest? Surprisingly, these basic elements of can tend to be overlooked. Yet, they are among the most important variables that must be considered. From a strategic perspective, these market constraints reinforce the value of location, location, location.

A reasonable critique of strategic planning in healthcare is that if you have seen one you have seen them all. I say reasonable only in the sense that they tend to appear very similar in organization and structure. Yet, one step below the surface the demographics and related issues (e.g., leadership) surface. No two organizations have the same culture, leadership, or market demographics. However, in many markets, there exist more than one hospital competing to be the provider of choice. Yes, competition is alive and well in healthcare.

Yet the tools available to compete come with certain limitations. This is primarily the case in that hospitals do not have the ability to leave a market or change a market. As if that is not enough, most prices in most markets are dictated by one large buyer—government (specifically Medicare). Over the years we have all joked about wishing we had our hospitals on wheels. And while there are certainly mobile units operating at some level (e.g., CAT scanners), hospitals are essentially fixed assets. As such, they have a definable radius of influence, usually based on drive time. Competition among hospitals has long centered around programs and technology that resides at this fixed location, along with preferences of referring physicians. This relates to the inpatient component of the enterprise. Competition over the past decade or so has quietly but dramatically shifted to the ambulatory side of the enterprise, especially concerning the off-campus distribution of programs and services. Despite this, it remains rare that executive teams fully recognize ambulatory care as a strategic business unit (SBU). Even more confusing is the reality that the majority of profit margin is generated by the ambulatory SBU when appropriately analyzed.?What to do?

Emphasis needs to be placed on three key things: location, access, and proximity/adjacency. Let’s examine each.

Location, while obvious, is taking too long to be shifted. Historically, hospital access points have often been defined by what fixed assets (small buildings) typically came with the acquisition of a medical practice. These were rarely, if ever, in desirable locations. But they were assimilated as part of the asset purchase.?What should have occurred was to sell these non-strategic assets and roll these practices into a larger multispecialty clinic setting. The result would be a branded location in an class-A building on a visible retail site. This strategy is at variance with constraints that existed prior to the industry consolidation that has been taking place, especially for primary care practices.

While class-A buildings exist in desirable locations, they are often leased space built with developer financing. This arrangement involves a dependency on the developer, is expensive and often inefficient. In contrast, a building that uses lower cost bonds and involves a master lease with a nonprofit system can both avoid taxes (in most cases) and apply a lower cost of capital with complete design integrity from day one. It may take a 30-year sale-leaseback to fully realize the balance sheet benefits (i.e., ownership) but such strategic assets can and should ultimately be fully under the control of the health system. In other words, there are cheaper ways to develop a dedicated strategic asset bypassing high-cost developer financing and fully leveraging available tax advantages. The thing that I find most offensive about traditional developer financing is that they are literally using the master lease of the building to secure their high-interest rate debt. Said differently, the health system is financing the developer’s profit. That is leaving significant money on the table that could be put to better use. In a time of limited access to capital, this is a poor option at best. It is not my intent in pointing this out to bad-mouth developers as they have an important role to play. However, developer financing is not the best practice.

In the past, physicians rarely cared about all this stuff as they were tethered to either hospital-based programs (fixed location) or independent offices with or without hospital affiliations. But as the physician component has been integrated into the legal fabric of the health system, physicians too have embraced the significance of location and branding. As a result of this, branding and distribution of services have become key drivers of growth in healthcare in most markets. For the rural markets with sole community providers, this has been perhaps less of an issue, though access to needed programs remains a driver for many of these organizations as well. The challenge they have is the enormous loss of patients who exit the market for specialized care (often even when certain services may be available locally).

The introduction of managed care into healthcare combined with a number of other factors (e.g., growth of ambulatory surgery and process improvements) has greatly reduced the admission rates to hospitals for all age groups. As a result, in many markets local capacity often exceeds local needs. This excess capacity has been reduced over time, largely through mergers/consolidations and replacement facilities that have reduced the number of operating beds. In smaller markets where there are limited means with which to build replacement facilities, hospitals remain with excess capacity that is rapidly becoming obsolete based on a variety of variables. This too places a priority on off-campus access points in terms of addressing community need.

Taking these factors into consideration, we are left with what are the key pressure points that will likely determine the success or failure of a hospital/health system to overcome significant market pressures that threaten their ability to sustain operations?

How concentrated is your market?

Access used to refer to a variety of issues, including financial, physical and acceptance. Acceptance refers, at least in part, to some of the discrepancies that have gained notoriety through a more thorough understanding of social determinants of health.?Mostly, the availability of services tends to refer to convenient location. This variable alone is partially responsible for the dramatic expansion in the past decade of both urgent care and convenient care centers in a variety of retail settings. As these offerings have grown, the issue of concentration has risen to the surface. How saturated is your market with these so-called alternatives? A more recent trend has been to back off some of these facilities as it has become apparent that some of the sites are redundant and/or not competitive with larger, more modern facilities.

A Better Experience

While somewhat elusive, it is the experience that will competitively count in the long run. One-stop care has a certain appeal, especially for certain patients for whom getting around can be a real challenge (i.e., the elderly, mothers with young children, and infirm patients). I have long advocated for the ideal prototype in planning such facilities to be the mother with an infant and young child who is seeking care for one of them, who also must also pick up a prescription and all the other factors that weigh into such a visit. This is where proximity/adjacency comes into play. The definition of convenience is thus extended to include not only location but the connection to other components of care (e.g., lab, imaging, pharmacy, DME) that may come into play. The really advanced facilities with critical mass often include daycare options.

Retail is Replacing Outmoded Forms of Delivery

Not always that obvious is the undeniable reality that more and more retail concepts are creeping their way into healthcare delivery. It cannot happen fast enough. For too long, the healthcare experience has been controlled by insurance companies (precertification of procedures), doctors (limited hours of operation) and inconvenient locations of facilities. The classic proof of this is having ambulatory services located in large community hospitals. This is the least convenient (e.g., parking garage, directions to the lab, etc.) and most expensive way to offer these services. Contrast this with telemedicine (virtual) which involves no buildings. Virtual medicine is nothing more than bringing digital access to healthcare for certain services. One interesting point about digital care is that it can all but eliminate location as a variable for certain services. Obviously, this holds great promise for people who live in remote areas.

Yes, healthcare is different from most other businesses in some important respects. But healthcare delivery will increasingly be required to meet the requirements of an acceptable retail experience. Those healthcare organizations that focus on providing excellent experiences through their future program offerings will more likely come out on top. In doing so, location, access, and proximity/adjacency will be critical variables to consider.