Rightsizing the Ambulatory Real Estate Footprint for a New Healthcare Environment

As healthcare continues to shift towards chronic disease management and prevention, delivery of health services should be configured to enhance patient convenience and access. The shift from inpatient and hospital-based services to the ambulatory and virtual setting will continue, increasing the demand for local access to specialty, subspecialty, and higher acuity ambulatory services. The COVID-19 crisis has accelerated this shift; substantial increases in telehealth use, for example, have been seen nationwide. As health systems assess the likelihood and potential impact of these changes, they should also consider the viability of their current ambulatory real estate footprint in a new environment.

The Opportunity

Hospitals and health systems today have large portfolios of fixed assets, the product of legacy payment models and a focus on hospital-centric care. More recently, new competitive forces and a strategy of bringing lower acuity care closer to patients have pushed health systems to build more ambulatory sites in broader geographies. As a result, most health systems have unbalanced real estate portfolios, with capital “trapped” in real estate assets that could be deployed more productively elsewhere in the organization. For example, it is all too common for physicians to maintain multiple offices which are only used for some portion of the week.

To the extent less physical space will be needed for clinical care, a large opportunity exists for organizations to reduce costs and free up capital. Organizational leaders should consider both rightsizing owned real estate assets and taking a critical eye to leased real estate, identifying gaps in the portfolio that may impede the organization’s strategic objectives and development of new care delivery models.

This opportunity is best addressed in a context that considers strategic, operational, and financial vantage points to ensure that organizations are making decisions consistent with their plans for future growth and financial strength. There may, for example, be locations where the organization should increase its footprint. There may be opportunities to consolidate activities better within the existing footprint. And there may be opportunities to reduce the footprint, with careful consideration of the best candidates for downsizing and the right approach. This broader assessment is critical to determining the best financing options for the ambulatory real estate portfolio to meet current and long-term needs.

Assessing the Portfolio

The current ambulatory portfolio should be assessed against the organization’s strategic vision for healthcare services to determine the optimal configuration of services and facilities across the network. Considerations will include, among other things, market and consumer demand for services and the impact of telehealth and other technology on future models of ambulatory care. As noted above, assessment of portfolio opportunities must take place within a context that considers operational and financial impacts as well.

Key considerations with respect to strategy, operations, and finance are outlined in the table below.

Assessment of the existing portfolio should result in an objective framework for determining which sites should be retained and which should be exited (see Figure 1). The assessment should also identify gaps in the current portfolio that the organization should seek to close as opportunities in the market arise, with the same framework used to determine which opportunities are of greatest value to the organization.

Figure 1: Sample Framework for Evaluating Portfolio Options

This assessment and framework should inform the organization’s perspective on the “now, near and far” of ambulatory portfolio management. In the “now,” the organization will have a view on what portions of its portfolio may be optimally restructured, monetized, or refinanced with external capital providers to support pursuit of new opportunities and other strategic capital needs of the organization. As organizations transition toward the “near” and “far,” they should be developing points of view on what portions of the portfolio must be repositioned to better align with strategic objectives and longer-term trends in care management.

Optimizing Capital Financing Options

In addition to determining the optimal components and structure of the organization’s portfolio, the organization must determine the optimal ownership and financing options for its real estate assets. For assets core to the organization’s strategic objectives, financing decisions will depend on factors such as the degree of control the organization needs to maintain over the asset, costs of capital, and accounting and cash flow impacts.

With respect to cost of capital and control, ownership options provide greater control and typically lower financing costs. Sale/leaseback transactions provide monetization of the asset value in return for unrestricted cash; these and other leasing options offer the flexibility of shorter terms and can be tailored to an organization’s needs. In return, the organization surrenders some degree of control over the asset, and the transaction may be of higher cost than a pure debt transaction. Regardless of financing choice, organizations should maintain a total cost of ownership/leasing perspective. Accounting and cash flow considerations include how the asset will be presented on the balance sheet and income statements, as outlined in the table below.

Conclusion

Decisions made with respect to an organization’s ambulatory real estate portfolio can have significant impacts on the organization’s future growth, financial position, and capital platform. These decisions should have a sound strategic rationale, balance flexibility with cost-effectiveness, and support the organization’s long-term growth and development. As organizations reposition themselves for what might be a significantly altered healthcare environment, now is the time to ensure that ambulatory real estate assets are best positioned to help the organization adapt and thrive.

For more information, please contact Matt Robbins by email or phone at (224) 724-3262.