Seton Hays MOB I in Kyle, Texas, is a four-story 96,829-square-foot medical office building attached to the Seton Medical Center-Hays. It opened in Spring 2010, and includes an ambulatory surgery center and medical office space. 

The healthcare industry-and healthcare real estate-has changed dramatically during the past two years. The industry has been roiled by the financial crisis, the recession, the passage of healthcare reform, the growing trend toward employed physicians, the continuing shift toward outpatient care, and looming physician shortages. Healthcare providers have been forced to reconsider, or even reject, time-honored organizational and business strategies.

And we're not done yet-far from it. Most of the provisions of healthcare reform are years from implementation-if they happen at all in light of Republican efforts to “repeal and replace” the controversial law.

But there is at least one constant in this volatile business: the unrelenting demographic wave that makes growth inevitable. So how do we cope with ever-rising demand in these uncertain times? Healthcare facilities will play a vital role.

Future healthcare facilities must meet these five challenges:

1) Reduce costs and increase efficiency;

2) Better support collaborative care;

3) Provide capacity for current and future technologies;

4) Accommodate higher-acuity services in an outpatient setting; and

5) Build the brand.

There is also a sixth challenge: Outpatient facilities need to get bigger-and smaller. But more about that paradox later. Let's explore the real estate implications of these trends.

Reduce costs and increase efficiency

The dramatic events of the past two years have forced healthcare providers to reexamine how their real estate philosophies affect their costs and productivity. Their strategies with regard to medical office buildings (MOBs) are getting particularly close scrutiny.

Third-party-owned, multi-tenant MOBs became the dominant real estate model for outpatient facilities in recent years. Those MOBs contained separate suites leased to independent medical groups, and frequently offered physicians a share of building ownership. But if most or all of those physician-tenants become employees, some thirdparty MOB owners will soon find themselves with only one tenant: a hospital or health system. That could be beneficial because, even though physicians are usually quite creditworthy, providers tend to be even better credit risks, which enhances property valuations.

The drive for efficiency might also make some providers more likely to use “other people's money” for healthcare facilities. If all the physicians in an MOB have the same boss-the hospital or health system-a significant opportunity will emerge to reduce costs by eliminating duplicated spaces and services, such as by replacing individual waiting rooms with centralized waiting areas, and sharing imaging, lab, and back-office functions. That means existing MOBs will need to be renovated and reconfigured-and that will take money. If providers have limited access to capital, or if they simply prefer to invest in other areas, third-party capital will be more attractive.

The downside for third-party MOB developers and owners will be if providers that employ the majority of the physicians who practice in their buildings conclude that it is more strategic for them to simply own them themselves-particularly if those buildings are on campus. If so, opportunities for third-party MOB development and investment could shrink.

But whether healthcare real estate firms have the opportunity to own new MOBs or simply act as fee-for-service developers, the drive to reduce costs will keep their services in demand because they are experts at delivering cost-effective buildings.

Likewise, with a focus on cost-cutting, property management will grow in prominence. MOBs are special-use facilities that are very different from ordinary office buildings, and that requires a specialized approach to everything from housekeeping to security to compliance with Joint Commission on Accreditation of Healthcare Organization requirements. Providers will gain efficiencies by working with property management firms that specialize in healthcare facilities.

Better support collaborative care

Both the government and private insurers have championed more collaborative approaches to healthcare, which result in better patient outcomes and lower costs, according to proponents. But collaborative care requires a high level of coordinated interaction and patient information sharing among providers, patients, and families.

Healthcare facilities can better support collaborative care objectives if they are designed to encourage communication, such as by positioning related specialists in adjacent suites. Other features might include providing more public spaces like lounges, where families can comfortably gather with the patient, providers, and each other to discuss the diagnosis and treatment of illnesses. All but the smallest facilities should also offer food services, providing handy venues for physicians and staff to gather to compare notes. And many facilities will house classrooms where patients and family members can be educated about the treatment and management of various illnesses.

This will all require design changes for both new and existing MOBs and other facilities, creating fresh demand for healthcare real estate capabilities and capital.

Provide capacity for current and future technologies

It has always been a challenge for healthcare facilities to accommodate current technologies while providing the flexibility to adapt to unpredictable future innovations. But healthcare reform has raised the bar for tech-ready buildings by requiring substantial investments in health information technology.

This means more than simply providing fiber optic lines, roomier electrical closets, and beefier electrical and cooling systems. Today, healthcare facilities must also be designed with materials, including windows and walls, that do not impede wireless data transmission and networking among providers using tablets and other mobile devices.

These wireless-friendly healthcare facilities buildings should also accommodate the needs of patients and their families. They should include Wi-Fi networks and public spaces equipped with computers providing Internet access, allowing visitors to conduct research, check email, keep up with social networks, and more.

If a facility cannot be retrofitted to support these modern necessities, new construction might be the only viable alternative. Experienced healthcare real estate firms can help providers to analyze whether to renovate or replace existing structures.

Accommodate higher-acuity services in an outpatient setting

The gradual transition to delivering the majority of care in outpatient settings is well documented, but that trend will accelerate in the wake of healthcare reform. It now makes more sense than ever to house services in MOBs and other lower-cost outpatient spaces rather than more expensive, more highly regulated inpatient facilities.

That means more higher-acuity services will migrate to outpatient facilities, especially off-campus facilities such as freestanding emergency departments and ambulatory surgery centers. Those more sophisticated standalone buildings demand a higher level of expertise from healthcare real estate developers and the rest of the project team.

Build the brand

As competition for the healthcare dollar intensifies, marketing will play an even more vital role. A health system's brand-including branded facilities-will become an increasingly important component of its marketing mix.

Off-campus facilities will need to be immediately recognizable as part of a certain system based on a design strategy that is distinctive, yet familiar. That ca
n be achieved by the consistent use of certain external design elements, such as unique rooflines, colors, and materials. To make the most of that branding, facilities should also be strategically located in high-visibility, high-traffic sites. Their emphasis on the critical importance of “location, location, location” makes commercial real estate firms highly qualified to help with these off-campus site selection decisions.

Outpatient facilities need to get bigger-and smaller

A few years ago, new MOBs averaged perhaps 40,000 square feet to 60,000 square feet. More recently, as providers have grouped more services, plans have called for MOBs of 80,000 square feet or more. That trend is likely to continue as more hospitals and health systems pursue the goals of lower costs, higher efficiency, increased physician collaboration and integration, and putting higher-acuity services in outpatient facilities.

But these new facilities will not be as big as they would have been a few years ago. The pursuit of lower costs and greater efficiency creates incentives to drive more patient volume through spaces that are the same size or smaller. At a recent healthcare real estate conference, one health system executive said he would have made some buildings now under construction about 15% smaller if he had known two years ago what he knows now. So while we can expect larger facilities, they will pack more patient volume into every square foot.

Adapt for success

In recent months, we have seen more requests for proposals for new healthcare facilities than we have seen since the go-go days of 2007 and early 2008. That promises a welcome uptick in real estate activity for 2011 and beyond.

Yet the many changes taking place in the healthcare industry will demand innovative real estate strategies. There will be plenty of opportunities for success in the years ahead for providers that can tap into not only specialized real estate skills and capabilities, but also the ability to proactively address those changes. HCD

Deeni Taylor is an executive vice president with Duke Realty, specializing in healthcare real estate. For more information, please visit the company's website at Healthcare Design 2011 April;11(4):32-38