The Treasure of Sierra Madre (Hospital)?

By The Economic Development Curmudgeon

Medical Development Trends, Urban Land, Vol. 69. Number 11/12, November/December 2010, P.46-61

This is not intended to be a review of the health care sector. Rather, the Curmudgeon hopes to raise the interest in the health care sector as a high priority target for a local business retention and expansion. Ever more interested in affairs of health, the Curmudgeon, weak, old, and fragile as he is (hopefully that hogwash generates a smidge of sympathy and forbearance from the reader) has become increasingly sensitized to its promise and opportunity—and also its fragility.  With all the recent hoopla surrounding the industry, generated, of course, by the recent health care legislation, it seems amazing that very little attention has been focused on the industry itself.

With all the recent hoopla surrounding the industry, generated, of course, by the recent health care legislation, it seems amazing that very little attention has been focused on the industry itself. This is unfortunate because not only is the industry fascinating, so to speak, but for an economic developer it is an important pillar of the local employment base.This is unfortunate because not only is the industry fascinating, so to speak, but for an economic developer it is an important pillar of the local employment base. The Curmudgeon will softly suggest, in his own subtle but clumsy way, that the health care sector should be a key target for local, state and regional economic developers. It should be a target for business retention and real estate redevelopment efforts not because it is hot and sexy, a gazelle, but precisely because it is NOT! It is a “steady Eddie”, growing in good years and bad, offering jobs for all segments of your community, not just the educated, creative and innovative.

So, from economic developers to the local health care industry “Here’s looking at you, kid”

Not that health care gets any special business retention emphasis from most local economic developers – excepting of, course, from those who are building life sciences-bio-tech-med devices clusters or betting on bio-tech winners in the targeted industry lottery. Since these forms of health care firms are allegedly the gazelles of the future economy, they do receive massively huge attention in the attraction arena. Still, it seems to the Curmudgeon, correctly or not, that existing health care firms (those already located in the community), as opposed to imagined, are treated much like relatives borrowing money.

Business retention and expansion programs seldom target the health and medicals fields, again aside from start up, recruitment and the occasionaltax-exempt bond financing. Part of the reason seems almost obvious: who needs a public program to help fat cat doctors, clinics, nursing homes, hospitals and the other various denizens of a medical office building. Another reason for relative neglect is that if much of the industry seems dominated by undeserving private firms, the remainder is populated with nonprofit firms which, again, are seldom a prime target of local economic developers. This is unfortunate because from the Curmudgeon’s vantage point, the sector is an important element of the local employment base and both represents a future opportunity for the community, or a danger of decline if neglected.

Health care has long been a focus of workforce and WIB-funded programs. Why? Internal to the sector lies virtually any level or type of job/skill/occupation and virtually every income range. What has, we think, not been fully appreciated is the pervasiveness or widespread diffusion of the sector to be a major state and local employer. Consider just hospitals. In 2008 there were over 5800 hospitals in the US; they generated nearly $700 billion in reimbursable expenses and employed in excess of 5 million individuals. (Census Bureau, 2011 Statistical Abstract, p. 117).Reviewing the 2008 County Business Patterns (NAICS), the Curmudgeon constructed additional support for the sector’s significance in the local employment base. In a majority of states, the health care and social assistance industry employed more individuals than any other industry; in more than four out five states, the health care and social assistance industry was either the first or second top employer.

Also, in terms of number of firms, health care and social assistance was almost as significant as employment, in that it was either the second or third ranked in almost every state. Unexpectedly the health care sector was ranked the highest by overwhelmingly most states in firms with 1000+ employees (no doubt hospitals).  Concentrated employment along with small firms creates resources and an anchor around which to focus one’s business retention and expansion program—in other words a viable opportunity.

…despite considerable uncertainty regarding the effects of health care reform, there are “unquestionable needs to expand capacity… as health care organizations face changing demographics, rapid technological advances, and the continuing demand for high-quality patient-centered care and improved outcomes.”Accordingly, it seems worthwhile for local and county economic developers to pay attention to the needs and activities of health care firms in their communities. Suffice it to say, this sector has already attracted interest from private sector developers, to the extent that Urban Land used it as a theme for its November/December 2010 issue. In the article “Health Care Development” by Nancy Egan and Paul Nakazawa they review the trends which they anticipate will affect the local real estate(and indirectly employment) market. The authors contend that despite considerable uncertainty regarding the effects of health care reform, there are “unquestionable needs to expand capacity… as health care organizations face changing demographics, rapid technological advances, and the continuing demand for high-quality patient-centered care and improved outcomes.” (P.51)

Citing David Watkins (Houston-based WHR Architects), they identify three “divergent philosophies” which appear to drive needed future capital projects and expansions by the hospitals. First is “pause, hoard money, and wait” until the future becomes more identifiable and certain. The second is to scale back on the projects/expansions so that smaller projects address the immediate needs of the firms and institutions, avoiding unnecessary debt but securing additional much needed cash flow for the parent firms. The most aggressive philosophy is that despite the fragile existing financial situation, significant large-scale, cash flow rich projects, which usually require more time to acquire approvals and financing, will reach development implementation status at a future time when the issues are more defined and the uncertainty is resolved.

In other words, despite the considerable underlying financial and program uncertainty at present, health care institutions in many, perhaps most communities are continuing to invest in large-scale capital projects in our communities. These projects are necessary (1) to develop services and revenues necessary to maintain financial viability; (2) to respond to legislative and consumer-driven demands and changing lifestyles and health needs; (3) to accommodate technological and scientific innovations which have become incorporated into medical services and service delivery; and (4) to reach out and provide access or to or simply provide services to new geographies and populations currently not well serviced.

These ongoing and future projects will come in a variety of sizes and shapes, depending on the institution and the market it serves. For example, large, prestigious urban hospital campuses built for another era (often in the late 1940’s and 1950’s) cannot accommodate the new, high demand, high revenue technologies and services so vital to the community’s health profile and the institutions financial and medical future viability. In particular, the need to collocate hospitals and research institutions to translate “basic research discoveries into clinical applications that benefit patients” has become imperative. (P.52). These high profile projects often occur in a dense, crowded, physically impacted landscape which necessitate vertical solutions which do not disrupt existing buildings, programs and services. An example of such a project is the in development, 1.2mm sq ft, 1.6 acre Robert & Ann Lurie Children’s Memorial Hospital on the Northwestern Medical Center campus in downtown Chicago.

In those situations where vertical development is not appropriate, or where there is a desired goal to “decompress” intensely developed sites or to expand the institution’s reach into the community or metropolitan area, a “hub and spoke” model can be employed. Using as examples of the hub and spoke alternative, the Memorial Hermann Health care System (Houston), and the brand new Anschutz Medical Center on the former BRAC Fitzsimmons Army Medical Center (whose development partners include: University of Colorado Hospital, Children’s Hospital, Barbara Davis Center for Childhood Diabetes, and the School of Dental Medicine, the authors state that the compelling reason for this alternative is the need and demand to enhance access and bring health care facilities closer to the patients.

Between the need to reduce costs right now and the staggering realization that the baby boomers, some 77 million of them, will be eligible for Medicare in the next 20 years, health care providers have to look at alternatives to existing acute care facilities.This drive to improve access by patients can take several forms including extending care facilities to edge cities, relocating existing facilities to the suburbs, or creating satellite facilities (such as tertiary care hospitals, ambulatory care, specialized and urgent care clinics). Between the need to reduce costs right now and the staggering realization that the baby boomers, some 77 million of them, will be eligible for Medicare in the next 20 years, health care providers have to look at alternatives to existing acute care facilities (says Mitchel Levit).” We are going to see a generationally driven migration from episodic to continuous care, with medical services being delivered from a variety of locations and facility types with an emphasis on ambulatory and urgent care”. (P.53) Other interviewees support this position and emphasize that access to facilities by decentralized and geographically defused elderly population require facilities that are easy to get to and offer a number of services at one location, thereby creating a number of “front doors” to any one metropolitan health care institution.

Satellite facilities (ranging from tertiary care hospitals, ambulatory care and specialized and urgent care clinics) are increasing importance in the provision of medical care. “Between the need to reduce costs … and the staggering realization that baby boomers, some 77 million of them, will be eligible for Medicare in the next 20 years, health care providers have to look at alternatives to acute care …. We are going to see a generationally driven migration from episodic to continuous care, with medical services being delivered from a variety of locati8ons and facility types with an emphasis on ambulatory and urgent care.” (Michael Levitt, P.53)In other words, hospitals are not just your grandfather’s hospital, it is already and it will be even more a series and a variety of facilities throughout the metropolitan region. To maintain an urban area’s competitiveness, it will be vitally necessary for the community to recognize this industry as a high priority industry, important not only as a quality of life factor, but as the community largest single employment and a significant source of real estate development and redevelopment.

The diffusion of hospital care in its various forms throughout the metropolitan and non metropolitan areas will offer to communities of all sizes and types the opportunity to participate to some extent in a growing sector. The impacts, however, are not all positive as public safety costs, hazardous waste, infrastructure and tax exempt status can easily tempt a community not to accommodate these region-wide expansions. Nevertheless, the recently approved health care legislation offers first time access to a significant block of people who were underserved and uninsured, who at present frequent our congested and expensive centrally located emergency rooms. Instead, with the legislation, new urgent care centers will be required and they must be established wherever the new eligible population lives. Each of these facilities will no doubt bring in tow a wide variety of private and non-profit firms which supplement and complement the main hospital facilities. In the good old days, planners and economic developers often saw housing and malls as the principal drivers of real estate development; those days may well be over for most communities, but in its stead may be a vibrant and growing health care industry.

Economic Developers are very concerned these days with innovation and a knowledge-based economic development. Well, here it is. In fact, innovation and technological change is transforming health care and providing new opportunities for community residents to work at cutting edge well-paying, reasonable secure positions. Innovation in health care, however, can translate into real estate issues. “There is a shift toward interventional medicine-which relies on the use of invasive procedures to relieve painful disorders-(and) to minimally invasive surgery, micro-and even nanosurgery and robotics… Advancement in imaging capabilities has changed the nature of the operating suite, where there are now five or six flat screens-delivering information to the surgeon and his team—all in real time”. (P.54) This innovative technology obviously requires a considerable technological infrastructure. “Health care organizations are dealing with new levels of complexity-from data management to wireless connections to multiple facilities to 24/7 IT demand at 99.999 percent reliability”. (P.54) Instead of talking about and trying to create technological innovation, it is now high time that economic developers learn what needs to be done to accommodate infrastructure and real estate development/redevelopment to it.

“medical facilities will have an ever greater influence on the shape of the built environment, from the urban design issues presented by the mega medical centers in large cities to the mixed-use suburban campuses anchored by medical facilities, and to the finer-grain improvements that smaller clinics, medical office buildings, and other facilities bring to local communities”.Egan and Nakazawa conclude by observing that in the future “medical facilities will have an ever greater influence on the shape of the built environment, from the urban design issues presented by the mega medical centers in large cities to the mixed-use suburban campuses anchored by medical facilities, and to the finer-grain improvements that smaller clinics, medical office buildings, and other facilities bring to local communities”. (P.54)

A second article, “Health Care Avenues”, by Tom Dwyer, head of BOKA Powell’s strategic services and health care practice, provides additional depth to our “treatment” of the real estate impact of the local health care industry. {Tom Dwyer, “Health Care Avenues, Urban Land, November-December 2010, pp. 55-57}. Dwyer is most interested in the near immediate impact that the Obama health care legislation will have as it brings in millions of new patients into the health care marketplace. He estimates that by 2010, 30 million new users will enter that system. (Remember this is the same system that will enjoy the enhanced usage by 77 million folks like the Curmudgeon who are baby boomers and who, while they will never, ever die, will consume all sorts of medical procedures to avoid pain and mitigate the consequences of obesity and degenerating body parts).

There will be a need for “smaller boutique medical facilities that have a retail-feel in locations that are adaptable for building reuse”.Returning to the young whippersnappers that are the prime beneficiaries of the Obama legislation, Dwyer further estimates that the number of patients served by community health centers could double in less than eight years, from nearly 19million to almost 34million.(P.56). He acknowledges that hospitals will take the brunt of the impact of dealing with these critters (as we have discussed previously) but he also stresses the impact will be felt elsewhere as well. In particular, private (also presumably non-profit) alternative providers will also be growing. These outpatient surgery centers and other types of facilities will also need to be close to their patient’s homes. There will be a need for “smaller boutique medical facilities that have a retail-feel in locations that are adaptable for building reuse”.

Lo and behold, seeing this need Dwyer recognizes an opportunity as well. Ever look around your post Great Recession community and notice a bunch of big boxes now vacant (if you don’t have any, wait for Blockbuster, Circuit City, Best Buy or Barnes and Noble to announce their future store closings). Dwyer believes these big boxes are ideal for medical centers and he provides several examples of projects presently financed and in redevelopment. Big box locations are the exact opposite of many hospitals and existing medical centers. They are usually closer to the patient’s residence, offer tons of free parking, along key transportation corridors, frequently with some existing public transportation. The health care customer can even kill time or two birds with one stone by shopping at adjacent retail and grocery stores.

Adaptive reuse of big box facilities has other advantages. They usually only require relatively minor adaptations in order to accommodate a medical use. While technology needs are high level and complex, the big box building is not, and can be easily reconstructed to incorporate the infrastructure. “In general, parking, column structure, and the floor-to-floor height of big box buildings work well for health care planning and architecture. Add emergency power, a clerestory roof (whatever that is?) to provide additional light, atriums to separate windowless space, a coordinated waiting area … and space for branding and signs”.(P.57) He alleges that typically no code changes are normally required and medical parking requirements are normally compatible with retail. Medical leases are longer than those of retail uses and hence are usually attractive to whoever winds up with the facility after it is closed. The fit out needed for a medical facility can be expected to enhance the value of the property and in a growing industry like health care any future vacancy is likely to find a suitable replacement.

“Say it again, Sam”: Concluding Thoughts

So in conclusion, it would seem that local economic developers might want to expand their interest to include existing health care firms and institutions. Certainly hospitals are going to continue to be under considerable pressure in the next few years, but since such hospitals are not only vital anchors of the community’s employment base and the local health care sector they can also use the community’s economic development support.

The Curmudgeon has this sneaking feeling that the health care sector is going to be the industry that will most likely replace FIRE as the transformative opportunity of the future. Why does he think that, you ask? Consider the following recent newspaper headlines from Wall Street Journal, Barron’s and the Financial Times:

• “Vanguard (Health Systems LP) Set to Acquire Detroit Hospitals”
• “A Healthy IPO on Tap” (HCA-the nation’s largest, 164 hospitals, owner of hospitals, $32 billion)
• “Demand of Senior Care Spurs Deals” (Ventas acquires rival hospital REIT Nationwide Health Properties, $5.8 billion)
• “Health REITs Shift Stance” (REITs because of changes in federal tax laws, are assuming active management of locally-owned facilities.

Or also consider, if the reader would, some pertinent quotes from an interview with Debra Cafaro, Chairman and CEO of Ventas, as reported in the April 4th, 2011 edition of the Financial Times:

“The health care real estate market in the US is enormous. It’s highly fragmented. It’s about a $1,000 billion (i.e. trillion) market”

“We think the next 10 years will see a lot more consolidation and a lot more transition of ownership from owner/operators and private equity and pension funds into hands like Ventas”.

“Health care and senior housing real estate have the best supply/demand fundamentals of any class of commercial real estate and that’s really supported by demographics”.

Finally, as reported in the April 2, 2011 Wall Street Journal, the current labor market report for March 2011 offers an almost incredible insight into the performance of the health care industry through the recent Great Recession and the trauma of Obama care legislative passage:

The public sector remained a weak point, as local governments shed 15,000 jobs last month in an effort to close budget gaps. But many other sectors showed strong growth. Professional and business services gained 78,000 jobs, while health care added 37,000. Over the past 12 months, health care has added an average of 24,000 jobs a month.

So if we’re going to pick winners in our economic development initiatives, let’s expand our assistance efforts to include industries that are not thought of as gazelles. Let’s pick also the “steady Eddies” like health care which offer a reasonable paying career, with acceptable security due to economic and demographic fundamentals, to those who do not aspire to be PhD’s or who are not entrepreneurs, innovators or members of the so-called “creative class”.  Why not focus efforts on a sector which offers growth in troubled as well as good times and which promises to capture the opportunities which would seem to inevitably arise as America transitions away from homeownership and housing toward a society where health care and access to it, is increasingly viewed as not only desirable, but a human right.

Bogie would have said it best: health care is
“the stuff that dreams are made of”