Healthcare. The right place for the right care. United States 2017 Outlook Report Series. JLL Research

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1 Healthcare United States 2017 Outlook Report Series The right place for the right care JLL Research

2 2 Mapping the health system of tomorrow, amid today s uncertainty How can we improve the health of our communities, while also reducing costs and maintaining high-quality care? And how will we pay for it? These are the most vexing questions facing healthcare executives today. An expanded patient base will be necessary for survival. Location is an increasingly critical factor in determining future success, with many asking: Where do we need to be and what kind of service do we need to deliver? Health systems have made great strides in recent years keeping patients healthier by providing more care outside of the main hospital facility walls. Making smart decisions about where to deliver care can reduce costs for hospitals and patients alike, while also introducing new sources of revenue to hospital systems. While debates swirl around healthcare reform policies, the focus on improving population health and affordability of care will stick. More than 120 healthcare industry groups, including hospitals and health systems, have urged Congress not to abandon the transition to value-based care that began nearly 20 years ago. To succeed and thrive in this changing environment is both a matter of clinical success and developing a wellinformed strategy for where you should be tomorrow. As new revenue sources and efficiencies are explored, real estate has an increasingly influential role in achieving sustained financial stability and success. This paper is the first in a series exploring the actions healthcare systems can take today to improve quality of patient care while reducing costs even in the face of uncertainty. Top 5 Healthcare real estate trends to watch Build in room for change. More outpatient facilities are popping up all over the country, but how will these facilities need to evolve over the next decade? There must be room for change in today s rapidly evolving healthcare market. Optimize existing real estate to stretch dollars. A healthcare system s real estate assets represent one of the largest sources of value and capital investment for the organization. A data-driven analysis can help identify opportunities to create efficiencies and drive more value from each existing facility, and put each to its highest and best use. Put convenience on center stage to increase patient accessibility. Convenience increasingly drives where patients go for care. Hospitals are learning from retailers, making it easy for patients to stop in. Demographics matter more than ever. Smart site selection requires predictive and deep analytics, considering age and income levels, competitors, traffic patterns, visibility and hundreds of other factors. More locations can mean more risk but there are ways to reduce it. As health systems manage more and more diverse locations, rising complexity means rising risks. Advanced management can stem the tide.

3 3 More locations on the map must leave room for future change While healthcare systems are seeking more patients overall, acute care hospitals are more focused than ever on keeping patients out of their beds. Is it a lack of hospitality? Quite the opposite. While patient services are improving within the hospital environment, health systems are doing their best to keep patients healthy, and minimize the need for acute care. Welcoming patients in the right place for the right care not only offers conveniences and better outcomes, but it keeps costs down for everyone patients, providers and healthcare systems alike. Drive through many communities today and you ll see more ambulatory facilities, urgent care centers, retail clinics, microhospitals, and freestanding emergency departments (EDs). It s a much different healthcare landscape than even one decade ago and we expect the future of healthcare to become even more distributed and regionalized. HCA Holdings, the nation s largest investor-owned hospital company, in late January announced it would add 48 urgent-care locations by the end of 2017 and increase its free-standing emergency departments nationally by 31 percent to a total of 80. On an earnings call, HCA president Sam Hazen said, If we don t invest and expand to add more capacity, our growth will be limited. Smaller, off-campus medical office buildings (MOBs) are the hot commodity today. In 2016, 447 new MOBs were developed off campus, averaging 63,585 square feet, while only 186 were on-campus, averaging 97,949 square feet, according to Revista. We expect demand for large parcels of land for new hospital developments to continue, but at a much slower pace. This outward expansion to blanket more communities and regions, while taking on increasing responsibilities for improving wellness, raises new questions as health systems plot their next move: Where can we make a difference? Reaching underserved communities is a critical part of the mission for many healthcare organizations. We re seeing more ambulatory facilities surface in wealthy zip codes to help generate revenue that can help systems deliver on their promise to serve those who can t afford care. One not-for-profit healthcare organization carved a niche targeting underserved, rural areas in California, Portland, Washington and Hawaii. In these communities, the system is expanding locations to advance its goals of improving access to comprehensive, high-quality healthcare, while enhancing the quality of lives it serve. How do we become an anchor for the community? Leading health systems have realized that biggerpicture thinking is necessary to have a meaningful impact on wellness. Having visible and accessible care locations is only one piece of a much more complex puzzle; how can you further entrench yourself as a true partner in the community? One of the nation s largest health systems brings resources that help generate jobs and improve local economies when it opens new facilities. In the long term, this strategy helps improve population health by increasing income that can be spent on preventative care. Where is there needless duplication? Health systems that have recently acquired facilities should consider whether disparate buildings can be combined into one centralized center of care, to better serve the community. An analysis of the payer base can help evaluate possible overlaps in the coverage area. 5 actions to take to ensure your real estate portfolio is positioned to withstand the challenges facing the healthcare industry in the years ahead: 1. Seek flexible space Regardless of the type of space health systems pursue, one common thread never changes: the need for flexibility. A building that serves as a freestanding emergency department today may need to transform into an outpatient clinic five to 10 years down the line. Demand for various services will inevitably evolve over time and real estate needs to keep up with changing demands for space.

4 4 Your health system today: working with what you ve got The real estate in a healthcare system s footprint typically represents one of the largest sources of value and capital investment for the system. A portfolio analysis should challenge the status quo, and ask Are we doing the most we can with what we have today? In an uncertain environment where reimbursement models are shifting, healthcare systems need to prioritize capital investments to ensure that their limited cash is put to the best use. The total number of U.S. hospital beds is steadily shrinking down from about 1.73 million beds in 2012 to 1.68 million in 2015, according to the American Hospital Association. While that difference may seem small, it s a signal of larger trends that are in play. The mix of services provided at the main hospital campus is shifting, with emphasis being placed on more critical and specialty care. Patients who are recovering from surgery are more likely to be cared for in a less costly rehabilitation center, freeing up beds so healthcare systems can create more centers of excellence on their main campuses. Total U.S. Staffed Hospital Beds Additionally, many hospitals are renovating to offer more private rooms. This shift allows them to increase patient comfort and satisfaction, while also reducing the risk of hospital-acquired infections. Since private rooms require more space per person than shared rooms, this trend is reducing the overall number of beds. It s notable that while the total number of acute care beds is declining, not every healthcare system is shrinking. In fact, many systems in major population centers are in growth mode. And for those systems, these trends are even more profound, since the new construction can be designed with an eye to the future without the constraints of buildings designed in a different era. There are multiple ways hospitals can optimize their existing real estate assets to support a growth strategy and reduce costs. Here are a few key questions that the smartest systems are asking: Is the main campus the best home for administrative staff? Many health systems are finding efficiencies in consolidating finance, human resources, information technology and other non-clinical staff in an office building outside the main hospital campus. 920, , , , , , , ,188 How can we generate a return and reduce holding costs from unoccupied space? Some healthcare systems hold large pieces of land or buildings for future expansion strategies. If a site won t be needed for another 10 years, leasing to a third party may make the space profitable in the meantime and generate muchneeded income that can be put to use immediately. Are our current hospital beds compliant? Changing building codes can leave executives wondering if their facilities pass muster with the latest regulations. One example: California s Senate Bill 1953, a state law designed to ensure acute hospitals can withstand an earthquake. If a feasibility study determines the hospital does not meet standards, executives must decide whether to renovate, build a new wing or provide acute services elsewhere in the community. Every state has different regulations, of course, but ensuring compliance is critical wherever you are. 2. Analyze your current portfolio Real estate portfolios have grown increasingly complex as healthcare systems have expanded their networks in recent years. It s important for executives to ensure that they have the right tools and people to fully analyze the data and provide a comprehensive picture of where they are today Source: The American Hospital Association Total Staffed Beds in All U.S. Registered * Hospitals Staffed Beds in Community** Hospitals

5 5 What do patients want? Accessibility is key Many healthcare systems have prioritized the need to improve population health and expand their patient base. In theory, opening more locations can help reach more patients. But picking the right locations is crucial; datadriven decision-making can help avoid costly mistakes. A key question: How far are patients willing to travel for care? That answer may differ depending on their ailments. An individual requiring cancer treatments, for example, may be willing to travel long distances to see the best doctors. But a patient who has a stomach ache or who needs weekly allergy treatments will prefer a close, convenient office for a spur-of-the-moment visit. The matter of convenience becomes even more complex when you consider different types of care. Patients may want to visit an optometrist or dentist office near their workplace for quick lunchtime check-ups, but prefer urgent care centers located near their homes for easy access on weekends. Another consideration: helping reluctant patients help themselves. A growing segment of the population includes people who don t want to go out of their way to see a doctor. To reach these patients, healthcare providers are following new retail playbook location strategies, choosing to open care centers where patients are already spending time. Retail clinic locations have increased 38 percent in the last five years, according to Kalorama Information, and are positioned for significant growth in the future, as patients continue to seek out convenient, low-cost healthcare services. Healthcare systems are taking bold steps to make healthcare part of the fabric of a routine day. For some providers, this means partnering with retailers to open clinics within supermarkets and drug stores. Others choose locations in heavily trafficked shopping centers where their brand receives exposure. Data and analytics tools can help inform these location decisions. opened a new medical center in Cincinnati with an emergency department right next to the on ramp of a major interstate, also bordering a residential community. The colors of the building façade incorporate the brand s colors and make the building stand out to locals and interstate travelers alike. The intentional architecture and building placement helps ensure that when patients need care (emergency or otherwise), they think of the brand. 3. Follow the patients Managing a complex network of various types of medical facilities requires a thoughtful strategy informed by location analysis. Thinking differently can reap big rewards, such as when a new urgent care center brings in a steady stream of patients because of its position as an anchor tenant in a highly-trafficked shopping center. It s important for executives to carefully weigh the risks and benefits of paying a little more to be closer to where patients already spend time. Where to plot your next move? Look to big data Just like traditional retailers, robust data and analytics can help healthcare executives to understand where patients are coming from, what they want and what their future needs may be. But identifying the right location to provide medical care also requires a more nuanced approach than simply finding a site for a clothing store or supermarket. After all, treating a medical condition doesn t always mean a visit to a one-stop shop. A patient may see their primary care doctor for stomach pains and leave with a referral to a specialist. And the specialist may order tests that can be completed at a nearby outpatient lab. Moreover, healthcare systems can predict that a chronically ill patient with one condition has a very high likelihood of experiencing additional conditions that will need treatment. To ensure that all these complimentary services provide the best patient experience and outcome, healthcare executives need to look at a map of facilities in their network, a patient s likely path from one to another, and thoughtfully consider how different providers work together to support patients total health. A side benefit to more, smaller locations: increased brand visibility. In 2013, a Midwest-based healthcare system

6 6 The good news: the data is there to be analyzed, understood, and used in decision-making. The vast amount of data available today enables healthcare executives to make smarter location decisions than ever before. Customer data is not just about their healthcare. For example, population growth statistics and new housing starts can help identify areas where more primary care physicians may be needed in the future. Demographics can point to where aging populations are creating new healthcare needs. Traffic data, competitor locations and drive times can all help narrow the options. Until very recently, however, different departments within the typical healthcare system have not shared the vital big data they have collected for years to truly help optimize and find the best locations to better serve patients. Consider the various forms of related data, compared to the distinct responsibilities that exist in a healthcare system: Physician assistants (PAs) have access to key performance indicators (KPIs) related to utilization of exam rooms, net operating income, physician referrals, drive times, underperforming practices and wait times. C-suite executives own the key initiatives and mission for the entire system. Business development and analytics departments identify new opportunities. Real estate departments maximize the portfolio by eliminating duplicate facilities and adding more specialties to one location. Typically, no single group mentioned above has all the data even the C- suite executives. When departments break down the silos and create a method to share this vast knowledge and history of data, real estate departments can add significant value. Consider what happens when a health system layers in raw data such as patient addresses, payor mix, no shows/cancellations, referral partners, competition and acquisitions with current and projected demographics. These analytics can help identify the perfect patient for each specialty, where they live, their habits, and the likelihood of traveling to a physician or potentially having a no-show or finding a competing provider. Health systems that leverage predictive analytics to better plan their real estate portfolios can better fulfill their mission to serve the population effectively, creating the best patient experience possible. Advanced data and analytics tools are helping executives bring together these many disparate data points to create a holistic understanding of a health system s potential. Nextgeneration geographic information system (GIS) technology can visually integrate every data point that matters in your location decisions. The right technology tools can layer in details such as real estate market trends, neighborhood demographics, buying patterns and competition from other healthcare providers, sometimes on a highly granular level. One major healthcare system, for example, is leveraging multiple tools to plot a future for its network of healthcare facilities on the west coast. Using one seamless tool, the health system is examining demographics, construction starts, competitors and other diverse data points. The technology it uses allows it to fly in to a neighborhood, and choose from thousands of data points, including other locations in its own portfolio. This level of customization supports rapid and thoughtful decisionmaking that can generate scenarios in real time. 4. Leverage digital tools Organizations often invest significant time and energy on identifying the right submarkets, but then fall short when it comes to analyzing the best location inside that market. The latest analytics tools can help health systems to understand market specifics and benchmark what s happening in different communities. How do you manage the risks? Offering the right place for the right care carries many benefits, but there are risks, too. As healthcare providers expand into more locations, risks from ongoing operations multiply exponentially, as does the risk that a system may take on more space than it needs. At a fundamental level, health systems in growth mode face the risk of over-locating, with too many locations serving overlapping geographies. Excess capacity is especially likely when an acquisition of a hospital or another healthcare system expands the portfolio of facilities overnight. In these cases, a data-driven portfolio analysis can help identify locations best suited to serving the patient population and shine a light on less-productive locations that may need to be closed.

7 More facilities also mean more opportunities for things to go awry on a day-to-day basis. Unfortunately, a problem at one location can have a ripple effect on the reputation of the entire system.

7 7 More facilities also mean more opportunities for things to go awry on a day-to-day basis. Unfortunately, a problem at one location can have a ripple effect on the reputation of the entire system. A patient who hears a news story about unsterilized surgical equipment at a local hospital will be less likely to visit another hospital or urgent care center under the same brand, even if no problems have ever occurred beyond one single location. Facilities risks can often seem small in the beginning. A leaky faucet is more of an annoyance than a true disruption. But deferred maintenance costs more to fix in the long run and can have drastic consequences. Consider the case of one hospital that deferred the repair of a hot water line problem that had been flagged as an issue for years. Eventually a pipe burst over a patient room, pouring 190-degree water over the bed by sheer luck when the patient was in the bathroom. Problems like this can be avoided when hospitals take a preventative approach to maintenance and centralize facility management so all facilities in a system are managed to the same standards. 5. Allocate capital to facilities management Capital must be prioritized to maintain facilities infrastructure across the system. Centralizing facilities management can also make a big impact. Applying common standards and processes for all facility managers in a health system can provide consistency and ensure quality service across the board. What does the future hold? Uncertainty is unavoidable in the healthcare industry. But regardless of what direction healthcare reform may take, certain facts will not change. Healthcare costs must decrease to provide more care to more people, and keeping patients out of expensive hospital settings can drive down the cost of care and simultaneously improve population health. The right real estate strategy can help hospitals ensure that they have the right places for the right care.

8 Peter Bulgarelli Executive Managing Director Richard Taylor Facilities, East Region Rob Perez Facilities, West Region Michael Marsh Facilities, South Central Region Chad Pinnell Facilities, Midwest Region Greg Gerber Transactions, Chicago Region Bruce Gordon Transactions, Indianapolis Region Greg Baxendale Transactions, Atlanta Region Paul Heiserman Transactions, Columbus Region About JLL JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $136 billion. At year-end 2016, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of more than 77,000. As of December 31, 2016, LaSalle Investment Management has $60.1 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit About JLL Healthcare JLL Healthcare enhances the patient experience, improves clinical outcomes and drives financial performance through real estate and facilities solutions. We provide dedicated support to manage real estate needs, facilities, guidance on portfolio and location strategy, financing support for purchase or development and assist with transactions for the healthcare system campus. As a leading provider of healthcare facility management services with 540 hospital clients, our team of 1,500 dedicated professionals supports 343 million square feet of healthcare facilities. JLL executes more than $1 billion annually in capital markets transactions serving investor and provider clients with capital solutions such as investment sales, financing, monetization, development advisory and debt and equity capital raise. For further information, visit Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

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