NEWMARK KNIGHT FRANK

Improving a Provider’s Economic Health

Written by GHS team member John Cobb

Today’s healthcare environment continues to strain provider economics. Costs have increased - largely due to increased IT requirements, value-based models, and the assembling of provider networks – while reimbursements continue to decline. There are a myriad of solutions to consider, but some of the simplest and most effective can be found in the real estate realm.

Buffalo Law Journal recently published an article offering turnaround advice for strained hospitals and health systems*. One particularly compelling point made is, “When organizations are in distress and considering how to respond to their situation, they have an obligation to pursue the option that best achieves the purpose.” Obligation… it’s a strong word but the right one for the situation. The article (a checklist of sorts) offers an array of ideas for improving provider economics, with two in particular relating to real estate and its financing.

Sale of assets is suggested as a structural change. Operating units may come to mind first, but real estate holdings are often a far simpler solution. At today’s cap rates, a sale leaseback (for example) can convert an owned property’s annual net operating income gain to a capital injection of 12.5X to 20X (or more) that annual NOI. Sale leasebacks carry the added benefit of resolving potential Stark and Anti-Kickback compliance issues.

Detailed Financial Analysis and the renegotiation of major financial commitments are suggested as operational changes to consider. As the 3rd largest expense category for providers, real estate costs must be considered. With leased space, for example, there’s a general perception that rents can’t be altered until the end of a contract term and that billing is accurate. Surprisingly often, however, one of these perceptions (or both) is inaccurate. Lease obligations can be renewed ahead of schedule, and rates aren’t always accurately applied. Adjustments in this arena can have significant impact... savings of over $400,000 per year are not uncommon on a [single] hospital campus.

Of course, providers want to understand what outcomes are possible before committing to a path. However, those same providers often lack the budget to hire a consultant. Fortunately, on the real estate side, step one of the process is the analysis that provides the anticipated outcome. Global Healthcare Services routinely reviews such matters for providers wanting to predict outcomes without having to commit to a course of action. Contact us today to arrange a review of your objectives.

*The Buffalo Law Journal article can be found at http://www.bizjournals.com/buffalo/blog/buffalo-law-journal/2016/07/effective-turnaround-programs-for-distressed.html (free subscription required).
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