NEWMARK KNIGHT FRANK

Cost Reduction: The Anatomy of a Deal

Written by GHS team member John Cobb

There’s no questioning the severe economic pressures of our current healthcare environment. Reimbursements drops place constant downward pressure on revenues, while regulations and requirements continue to drive up the cost of providing services. Providers are caught in the middle of these two factors and must constantly be looking for new cost reduction strategies.

After staffing and supplies, providers’ 3rd largest expense category is real estate – often equaling 18% to 25% of total OpEx. There’s a tendency to believe that real estate costs are fixed – and sometimes they are. In some cases there’s simply nothing that can be done to reduce a given provider’s real estate-associated costs. But such cases are not typical. More often than not, providers are pleasantly surprised to learn that real estate occupancy costs can be reduced, and in the very near term. Below is a behind-the scenes overview of how Global Healthcare Services (GHS) reduced one provider’s operating expenses.

A multi-campus hospital system in an MSA of roughly 1M people had sold several MOB’s to different investors over the years. Still more than 3 years from lease expiration, facing fierce competition from other market hospitals, and recognizing that they lacked the bandwidth and market knowledge to qualify opportunities themselves, the system engaged GHS as a “third set of eyes” to review their assets and obligations and determine what savings may be attainable. Through its (cost-free) review, GHS identified a number of moving parts with the potential to create cost savings, including (1) other-owned space (both on and off campus) that the hospital could shift services to, (2) spend overlaps between different owners’ buildings, (3) hospital use shifts that permitted modest consolidation, (4) lease rate versus billing rate discrepancies, and (5) owner goals and operating modes that weren’t totally aligned with the current contractual structure.

On a standalone basis, none of these factors were actionable. Other-owned space creates leverage, but leverage can be difficult to tap when one is several years from lease expiration. Similarly, spend overlaps and use shifts need resolution, but remaining lease term makes resolution difficult. Lease versus billing rate discrepancies become very complex very quickly and tend to drag on indefinitely… often to the point that settlement agreements are the only option. And a “big” negotiation is often the only thing that will bring both parties to the table on that front. And the owner lacked the leverage to resolve its business operation imbalances because the hospital wasn’t motivated to change their processes.

Put together, however, the landlord’s and hospital’s needs, combined with the right moving parts, a holistic view, and an experienced negotiation approach were actionable. Through very involved negotiations, GHS structured a new relationship with the system’s largest landlord that (1) is saving the hospital system roughly $500K per year, (2) provides roughly $2M in landlord-provided tenant improvement monies, (3) resolved the historical and future billing discrepancies, and (4) includes flexibility to accommodate a number of potential changes in how the hospital operates. The hospital is elated, and the property owner is satisfied because they resolved both their balance discrepancies and their uncertainty about the hospital’s ongoing tenancy – with both factors serving to stabilize their investors’ ROI.

Every case is different, of course, and the moving parts can be myriad. Global Healthcare Services has created results of this type time and time again, however, and we’d love to help determine what’s possible in your scenario.

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