Most of us started out as renters, whether in college or early in our adult life. Renting clearly has its attractions: you don’t have to worry about maintaining or improving the property’s value, and it is easy to move on to something new when the lease expires. At some point, many of us decided to become homeowners. Homeownership also has its advantages. It gives us more control over the space we occupy and allows us to enjoy the appreciation of a property’s value over time, assuming we make the investments needed to keep the property in good shape. 

When health system leaders are thinking about building a medical office building (MOB) or ambulatory surgery center (ASC) as part of their ambulatory and physician affiliation strategy, the first question they should ask is, “Do we need to incentivize physicians in this market with real estate and create owners instead of renters?” To arrive at the answer, health system leaders should think carefully about what physicians in their market want, and what options are available to them. The desire and necessity for physician incentives in a given market can greatly influence the types of real estate financing options that are appropriate.

What Physicians Want

Recent data from the American Medical Association show that, as of 2020, less than 50% of physicians were working in private physician-owned practices. A report commissioned by the Physicians Advocacy Institute found that an even lower percentage—just 30% of physicians—practiced medicine independently at the start of 2021, with the remaining 70% employed by hospitals or corporations such as private equity firms or health insurers.

As the percentage of independent physicians goes down, we may be reaching a core percentage of physicians who are committed to remaining independent. This group will be the focus of health system real estate initiatives designed to strengthen physician affiliations.

Independent physicians will be looking for opportunities different from those sought by employed physicians, who have traded the administrative hassles and business risk of independent practice for the stability of employment.

First—and most obviously—they have chosen to remain independent. They do not want to give up control over decisions affecting their patients and their business.

Second, they often want to manage two lines of business. The first is the business of their practice, and once they have developed a patient panel, that business can easily be moved within the geography of a market. The second is a real estate business. Besides paying themselves rent for owned real estate, many independent physicians look to these assets as a retirement pool and want to maximize their equity in them.

Finally, these physicians have many options. Investors unaffiliated with a health system—REITs, for example, or private equity investors—may offer an equity split on real estate, with clinical decisions left to the physicians. In addition to granting a general equity buy-in, there are other potential models. Some may be offering a rent-to-own option or a professional condominium option, in which the physician can use the condominium itself to secure financing. Under both options, physicians can limit the amount of capital needed for the initial investment.

The Decision for Health Systems

Given these considerations, health systems can return to the initial question: Do they need to incentivize physicians with real estate and create owners instead of renters? This question must be answered before any financing decisions are made, as the strategic considerations will be very different depending on the path chosen.

In certain respects, the “renters” answer is the easier of the two. If the strategic goal is revenue diversification and there is sufficient demand for space in the market, the health system can develop the real estate and receive a rental stream without the entanglements of a partnership. The downside is that the renting option will do little to develop loyalty among the tenant physicians, who are free to move to a better offer when their lease expires. Health systems also should be very clear-eyed about actual market demand for space and not fall into a “if we build it, they will come” mentality.

If the strategic goal is stronger affiliations with independent physicians, the “owners” answer deserves serious consideration. The structure of the ownership model will require health systems to give equally serious consideration to what physicians want.

Historically, joint ventures between health systems and independent physician practices have had a mixed track record. There have been at least two primary sources of tension. First, how do the physicians create and realize meaningful equity in the joint venture? Second, if, for example, the joint venture involves an ASC, who determines which cases go to the ASC and which cases stay at the hospital?

A decision to pursue the “owner” option, in other words, requires recognition that independent physicians will be looking for a true partnership. Health systems need to be both flexible and creative in designing their partnership opportunities, keeping their strategic goal of stronger physician affiliations front and center. This might mean giving physicians more say in clinical decision-making than the system expects. It also might mean looking at models—such as condominium ownership or rent to own—that eventually shift a significant portion of the equity in the MOB or ASC from the health system to the physicians. If strong physician affiliations are the goal, the real estate venture should be seen as a means to the end. Often the preferred financing model of the health system is different from what may be proposed by developers or other private capital providers.

Healthcare continues to migrate to ASCs and other outpatient settings. Health systems may not be able to control the flow of that migration, but with the right partnership structure—one that acknowledges what independent physicians want and understands what other options are available to them—they can stay involved. An affiliation strategy that relies on owners, not renters, will almost certainly prove more stable and durable over time.


For more information, contact John Andersen at jandersen@kaufmanhall.com or Matthew Bates at mbates@kaufmanhall.com.

Meet the Authors
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Matthew Bates

Managing Director and Physician Enterprise Service Line Lead
Matthew leads Kaufman Hall’s Physician Enterprise Service practice. He works with physician and administrative leaders to create financially sustainable great places for physicians to practice and patients to receive care.
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John Andersen

Vice President
John Andersen is a Vice President of Kaufman Hall and a member of the firm’s Treasury and Capital Markets practice.
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