Andrew Dick: Well, hello and welcome to the Health Care Real Estate Advisor Podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare focused law firm in the country. Today I’m joined by Michelle Mader and Mark Furgeson from Ankura Consulting. I’ve had the opportunity to work with Michelle and Mark offline on a couple of discussion points. I’ve read some of their thought leadership pieces and thought it would be great if we would have a short discussion about what they’re seeing in the healthcare real estate industry and the capital planning industry. They also do a fair amount of strategy work for hospitals and healthcare systems. And so I thought today would be a perfect time to catch up with them, see what they’re working on. So, Michelle, Mark, thanks for joining me. And why don’t you take just a minute to introduce yourselves?

Michelle Mader: Sure. Thanks, Andrew. So my name’s Michelle Mader. I’ve been a healthcare strategist for the last 25 years. I’ve worked with a number of healthcare providers, both nationally and a little bit internationally as well. Really I focus on service line optimization and distribution and really how we generate revenue and how we control costs. And the other thing that I really have been focusing on lately is looking at and evaluating new and innovative care delivery models for healthcare providers as we’re seeing shifts between the outpatient and inpatient world significantly increase post COVID.

Mark Furgeson: I’m Mark Ferguson. I lead the healthcare real estate team at Ankura. I’m an architect by training and my 30 year career is focused on strategy for healthcare’s physical footprint, the future of care and how policy impacts healthcare buildings.

Andrew Dick: Terrific. Michelle, Mark, thanks for joining me. Really looking forward to the discussion today. I thought we would focus our discussion on two points today, financial trends in the healthcare and hospital industry, and then regulatory trends, because I’ve had discussions with both of you on both of these points. You’ve also written at least one, maybe two articles on some of these points and thought it would be good to catch up. So this will be part one for our audience of a two part discussion that we’re planning with Michelle and Mark.

Andrew Dick: So let’s tackle the first topic, financial trends in the hospital and healthcare industry. The pandemic had a significant impact on hospitals in particular. Let’s talk a little bit about the data. So Michelle, Mark, what are you seeing in the industry? How are hospitals and health systems performing? What type of impact has the pandemic had on their financial performance?

Michelle Mader: Yeah, Andrew, thanks. So it’s been an interesting couple of years as most of ours listeners have probably understand or know, right? The healthcare industry’s been on the front lines of the COVID pandemic and working through that since early 2020. And so as we look at what has happened over the last three to four years, it’s been an interesting ride, mostly because it’s been a combination of what economically has been challenging with COVID as well as the federal government foreign CARES Act money into the industry, right? To buoy it to make sure that we continue to provide access, that we continue to provide services, particularly emergency services and ICU services to the general population.

Michelle Mader: But if you look at sort of this year, which is what I want to concentrate on, Kaufman Hall does an annual report, their National Flash Report. And their June report, which looked at May of 2023 numbers, was very interesting. Basically it’s showing that volumes, which is how the industry essentially gets paid, they’re increasing, but on a slow, steady pace. In other words, what happened was when the pandemic pretty much cascaded out of the, and it’s not all gone, but has cascaded out a majority of the hospitals, you would expect this backlog and people rushing for care, right? All this [inaudible 00:04:22] care. And what we’ve seen is that’s really not happened. It’s been a slow elevation back to 2019 levels, particularly on the ED. And so as we look at those rising numbers, they’re not like an avalanche. It’s not like a tidal wave. They’re just slowly coming up, which means that revenue for hospitals isn’t just coming back in floods, right? They’re just not regaining what they lost during the COVID years. They’re having to try to keep the steady space.

Mark Furgeson: Yeah. And ED volume is especially interesting because so much of inpatient volume is driven through the emergency department. So we still see those volumes down, but of course, behavioral health volumes are significantly up to complexity of those cases. The general complexity and the ED has still kept the ED full.

Michelle Mader: Yeah, I know. Absolutely. And to make things more interesting, length of stay, which is basically how long a patient stays in the hospital from the time they enter the door until the time they’re discharged, the healthcare industry kind of gets paid on a DRG basis or one lump sum for that length of stay. So the shorter our patient stays in a hospital, the more essentially money hospitals make in theory. And what we’ve seen is that the length of stay or the acuity, how sick patients are, is increasing. And it’s actually up five and a half percent from last year, right? So we’re seeing actually sicker patients in the hospital than we were even last year. And last year wasn’t at the height of COVID.

Michelle Mader: On the surgery front, which we always find interesting because it’s the economic engine for healthcare providers, their minutes are not really fluctuating. In other words, the number of surgeries and how long the surgeries are going on is only a 0.1% since last year, which means that this backlog of people not having surgery because they didn’t want to come into the hospital, we’re really not seeing that come back and/or that’s already passed us and we’re kind of leveling out. But that’s the economic engine for most healthcare providers. It produces the most revenue on that front.

Michelle Mader: Now on the flip side of that, right, we’ve been talking about hospitals, is that outpatient revenue is up significantly year over year. Almost 10%, 9.4%. So we’re seeing this shift, right? You heard me talk a little bit about what’s happening at innovative care deliveries in my introduction of this shift from inpatient care going to a hospital, to going to your neighborhood, urgent cares to your neighborhood providers, to your neighborhood CVSs for care. And so we’re really starting to see that as well.

Mark Furgeson: Yeah. And this increase in length of stay in the inpatient side has really added to the complexity of planning for healthcare facilities. We’ve got a client in the Midwest that finished a new hospital in 2019, used all the benchmarks that we have been using to project bed numbers. And they have significant capacity issues because their length of stay is up by almost 50%. And the real trick here as we plan now is trying to project what post COVID two years out, three years out may look like related to length of stay. So we’ll continue to track those things.

Michelle Mader: Yeah. And there’s some other metrics. Revenue is a big deal, right? Top line revenue is what a lot of people look at even in their commercial businesses or in general economic terms. But the thing that everyone, even us who are parents and family members and just general community members, is the rising inflation, escalation and expenses we’re seeing across the country. And the healthcare industry isn’t immune to that. And so they’re really seeing expenses rise which is putting a lot of pressure on operating margins, particularly around labor. They’re over month over month. And there’s been a lot of news and press releases around travel nurses and we’re paying all this money for people to travel around the country to substitute for staffing who aren’t coming back to the hospitals. And that’s generally true, but most providers have gotten a handle on those contracts and are trying to push those labor expenses down.

Michelle Mader: But just to kind of give you an idea, the surge year to date, and this is from January to May, so you’re talking essentially five months or so, labor is up 13.5% and it’s just tremendous in those five months. So when you hear about services closing or access or waiting lists or things like that, a lot of it has to do with staffing and not necessarily their ability to provide services long term. When you look at all of these, so kind of slightly slowly coming back volumes. When you look at the rising expenses that we’re all feeling on a day to day basis, from gas to groceries, the operating margins of the healthcare industry isn’t great right now. And it hasn’t been great and it’s been buoyed by the CARES Act for a number of years.

Michelle Mader: And so we’re starting to see that downturn unfortunately. But year to date, we’re down. From last year of May of 2021, the operating margins are down 45.6%. That’s like almost half. What? They were a year ago? Now again, we’re seeing the slowing and trickling in of CARES Act money, but providers are just… Between the expenses and the slowly rising revenue, they’re just not making it up. And so the operating EBITDA margin from last May is also down 36.1%. Those are double digit huge numbers for the industry. So we’re watching this very, very closely as it relates to what sort of we think is going to happen in the next couple of years.

Andrew Dick: So I want to touch on two points that both of you made. So Mark, you said you were working with the health system in the Midwest, worked on a project, currently used the metrics at the time that were appropriate. Fast forward to today, the hospital doesn’t have enough capacity. What is the advice to that health system? Do you look for expansion options or do you wait and see how things shake out over the next 12 to 24 months, given that we’re still living through a very unique time coming out of a pandemic?

Mark Furgeson: Yeah, we are living through a unique time. And the risk is higher than it was in this last planning cycle because we’re routinely seeing $800 a square foot for construction cost in healthcare. So we will continue to look first towards decanting services to purifying inpatient facilities to inpatient volumes as best we can being conscious of the efficiencies of equipment and things like that. But we will have to look at an option to expand that hospital. And it’ll just come after we’ve looked at ambulatory options.

Michelle Mader: Yeah. And the trick of that is really on the sort of the staffing side, right? Because we’ve got clients who have opened up buildings, who have opened up additional floors not to be able to put patients in there on day one because they just don’t have the staff. So yes, the capacity is at some level in some markets, particularly urban growing markets like Florida and Texas, those capacity issues are what we call beds in a head, right? Or heads in a bed. And so that is very true. But the issue is if we can’t staff them, it doesn’t matter how many beds we build. They’re just going to sit empty. And that’s a capital cost sitting on the books with no revenue generation to support it. And that’s risky. So this balance between the expenses and the staffing and meeting the capacity and purifying the hospital is going to be tremendously important in the years to come.

Andrew Dick: That’s right, Michelle. I mean, I’ve worked on a couple projects on the east coast recently. At least one was put on hold because the health system said, “Even though we’re in a growth market, we can’t find the staff to provide the services in this new to be constructed building.” So I think you’re spot on. It’s a huge challenge.

Andrew Dick: Michelle, I want to hit on another point you brought up as well when you talked about some of the financial data. You talked about the growth in outpatient services. What type of advice are you giving to health systems that are seeing that growth and profitability in outpatient services? Do they continue to double down on those services whether it be urgent care or ASC type services?

Michelle Mader: Yeah. So planning outpatient environments is kind of a little tricky business and mostly because as you would… Most common people or most of the general community thinks that every physician makes a ton of money, right? I mean, everybody wanted to grow up and be a lawyer or a doctor when they were in school, right? Because those are the professions back in the day that made a lot of money. And the reality today is, given the current reimbursement and the current expense structure, a lot of healthcare providers lose money every time they employ a physician practice in primary care. Now that is not the case in specialty. So your orthopod, your neuro, all of some of those subspecialty, they still make what we consider a tremendous amount of money in the industry. And so they’re very profitable. So yes, the healthcare providers are looking at doubling down in some of those key services in order to fuel and to back fill some of what they’re losing on primary care.

Michelle Mader: But what we’re really seeing to shift to outpatient is not only from the hospital to an ambulatory or neighborhood environment, but also from the neighborhood environment into telehealth, right? And those payment structures, the federal government hasn’t… They’re starting to look at them coming out of the pandemic. They’ve solidified them and they’re going to keep them rolling, but we’re not getting anywhere near paid if you go in to see your physician versus if you call them on the video, right? I mean, it’s a delta of almost 3X difference between the two. So we’re still incentivizing providers at some level to continue to push in-person visits to their practices financially. And to some metrics, it’s needed from an outcome and from a patient service standpoint because telehealth financially hasn’t caught up with the rest of the industry to make it more profitable.

Andrew Dick: Interesting. Those are great metrics. Let’s switch gears and talk about private equity and how private equity firms are moving into healthcare and the impact that its had on different markets that you all are working in. Michelle, Mark, what are your thoughts at just a macro level?

Mark Furgeson: Yeah. And we’ll only touch briefly on this today, because let’s face it, this could be a whole podcast in itself. But part of the reason that we’re tracking private equity investment is that we’re concerned at some level that the types of companies and the changes that these companies are making in healthcare could disrupt the pathways by which many of our legacy clients are generating volumes, tracking volumes, projecting volumes. And those are the tools by which these companies balance their for-profit services with the things that are more mission focused. So what we’re seeing, it’s of course I think everybody knows that we’re seeing a tremendous increase in investment by private equity in healthcare. From 2015 to 2019, almost a 300% increase investment. Every year since then double digit increase.

Mark Furgeson: But what’s really interesting to us is the types of companies that private equity is investing in. Initially, these were hospitals under the theory that we had an aging population in America. And then it was on kind high margin, unregulated services, somewhat argue that almost single handedly created the No Surprise Billing Act. But what we’re seeing now is a recognition by private equity that their investment focused on capitated care, healthcare advantage, value based reimbursement. Reimbursement has long term valuation gain. So that started with buying up primary care physicians. We’re now seeing private equity play in the consumer enabling space. And again, all those kinds of things can impact these relationships with physicians and with consumers that legacy healthcare providers have depended on for years to generate volumes, to control volumes, again, to balance the financial side of what they’re doing.

Mark Furgeson: So we’re tracking companies like Babylon that is in the consumer enabling space. It has some really interesting technology that they’re playing in. DispatchHealth has been a fascinating company to watch, a little bitty company in Denver that started in 2013, operating in two or three markets, some private equity backing that came in 2018, 2019. Within a year or two, DispatchHealth was in 19 markets in 12 states. I checked last night and they’re now in 41 markets in 25 states. It’s extraordinary the accelerant that private equity dollars can push to scalability like we’ve seen doing in so many places. So we’ll continue to watch this, Andrew. Again, we want to make sure that we can guide our traditional and legacy clients in a way that will help position them best for success going forward.

Andrew Dick: Yeah, those are great data points, Mark. And I agree that private equity has had a significant impact on healthcare services. Just a few years ago, we saw private equity heavily invest in home healthcare. And just as those companies are looking to exit, it looks like the big healthcare insurers are buying up those companies, really going all in on home healthcare services. Really fascinating to watch.

Andrew Dick: Let’s switch gears again and let’s talk about the regulatory landscape. Both of you co-authored an article titled How To Claim Healthcare Market Share on the Verge of Certificate of Need Irrelevancy. A really, really good article. A timely article. It was published at the end of May, caught my attention because I’ve been tracking the regulatory landscape and changes in the CON laws. Let’s talk about at a high level the regulatory landscape and the certificate of need laws in states and how it’s changing. In your article, you talk a lot about the landscape across the country. Mark or Michelle, just give me your thoughts at a high level. Is COM relevant today? What’s going on across the country as these laws evolve?

Michelle Mader: Yeah. Thanks, Andrew. So this is an area that I’d like to just… CON is certificate of need. And just for our listeners who may be not understanding exactly what we’re talking about, it is a state based law or subtle laws that basically govern healthcare providers, people who provide healthcare services with their ability to expand their ability to provide better access to services or put new services in new markets, et cetera. So originally, historically CONs were put in place to enhance access, making sure that everybody had true healthcare, that they could access services in their local communities. It was really to reduce duplication, right? Let’s not have two MRIs sitting five miles from each other in the same market increasing cost. And then historically, your state legislatures have been looking at making sure that your role, those areas that we don’t have, a lot of infrastructure and your local providers continue to be viable, right? That they weren’t essentially putting each other out of business.

Michelle Mader: And so that’s essentially what CON at a state level. And so right now there are 35 states plus Washington, DC who have some type of CON law, but they very really dramatically across each of the states. And during COVID, about 24 of those states either suspended or permitted emergency exceptions to their CON process, meaning that they said, “Okay, we’re in a pandemic, right? We want to make sure that everybody has everything they need when they need it. And we don’t want them to have to jump through regulatory hoops in order to access the needed infrastructure.” And so they really significantly reduce those.

Mark Furgeson: Yeah. This has been… Excuse me. This has been an interesting thing to watch. This discussion has been bubbling around on the value of not-for-profit healthcare in America for years. COVID was kind of an accelerant to this discussion. We had a lot of the CON legislation, the hurdles were brought down so that we could access care, look at alternative care sites and the things that went with that. And what immediately came out of that really before we had a chance to analyze the data was a discussion as to whether we needed CON at all. And that’s kind of fascinating when you think about it and not all that assuring to me personally, but that’s the situation we’re in.

Michelle Mader: Yeah. And so a lot of policy makers are considering CON reform or elimination in at least 18 states in this past year. So we had 24 that suspended. Out of the 24 that’s suspended, 18 of them have gone, “Well, do we need these at all?” Right? They worked just… The healthcare industry was able to move forward just fine during the pandemic. We removed barriers that were there historically. We’ve not seen us… And to Mark’s point, we haven’t had a chance really to analyze the data on the long-term effects. But they’re looking at this.

Michelle Mader: And so in the last year or two, there have been 10 states such as North and South Carolina that have looked at bills that are either fully or nearly fully repealing their previous laws. In other words, they’re looking at complete elimination or almost complete elimination. But some states are saying, “Oh, hold on one minute. First of all, the jury’s out. We don’t know the long term effects of some of these reductions or these exceptions. And so let’s carve out some sections of the CON that we know that are maybe not applicable in today’s world.”

Michelle Mader: And so for instance, like for cardiology procedure, so a cath procedure or something like that, they’re moving to the outpatient setting in a hurry, right? Just technology and medications are allowing patients to have these procedures in true outpatient settings and not have to go into the hospital to have their heart looked at or to look at a stent or a balloon put in from a vascular standpoint. But some certificate of need in some states have prevent a cardiologist from going out to ASCs. And so we’ve got this momentum that says, “Hey, we can do it in a better care, better outcomes in a cheaper setting. And it’s much more convenient for the patient.” But the state’s going, “Well, wait a minute, you can’t do that.” And everybody’s going, “Okay, what’s going on?” So there are some parts and pieces of the CON law that they are releasing or eliminating that makes sense based on where the healthcare industry is headed, but it’s been fascinating to sort of watch what has been accelerated in the last two years.

Mark Furgeson: Yeah. One of the things we focused on in the article is kind of the levers to partial CON repeal. And I think that might be the most likely scenario that will get states that will focus on health equity or will get states that will focus on the cost side and the cost metrics or creating better pathways to healthcare for rural environments. And that’s something we’ll continue to study because I think again we’re going to see that in an individual state basis.

Michelle Mader: Yeah. And just, everybody is looking at, “Okay, what’s the data going to tell us?” And so, where everybody right now is watching Florida. So back when Florida removed their CON in July, I think, or the summer of 2019. So before the pandemic, a good six, nine months before the pandemic, we’ve seen this huge flood of service development in the state. The number of zoning and building permits have increased dramatically in the last three years and general construction in that state. Now, this is not healthcare specific, but general construction in the state of Florida due to the economy, the COVID backlogs, tremendous demographic growth, I mean, people are pouring into Florida from a state based population, it’s up 31% in the first half of this year, of 2022. So tremendous amount of growth in a state that released their CON. And a lot of that is healthcare to be honest. People are opening new hospitals, new ASCs, new urgent cares, but you have the prime demographic for healthcare, right? And aging retiring population moving there in mass because of the weather and because of their state laws regarding income and things like that.

Michelle Mader: So we are watching. We saw this in Texas several years ago. Texas has had very little regulatory overview in the past decades. We’ve seen them really explode in services. And then capitalistic markets doing what they do, which is regulating demand eventually. But that’s in eventually a couple of years. And I think we’re still several years out from seeing that in Florida.

Mark Furgeson: Yeah. And we’re seeing some interesting things on the real estate side too. I think in both Texas and Florida, we’ve seen things like land banking. I think we bring tools to this as well, but systems know in growth areas where they should be and where their competitors are. So buying up that intersection, looking for opportunities from a regulatory perspective to kind of carve out opportunity to build in places. That’s part of the reason we’ve seen a rise in freestanding Eds, which when you think about it, you couldn’t think of a more operationally expensive model, but it is our flag in the ground to a lot of these fast growth areas.

Michelle Mader: But what we’re saying, the CON is extending into other markets. And so when you look at the overall regulatory mindset right now of the Biden administration and of our current CMS and at the attorney general and at the state level, everybody is looking at healthcare. And the reason is, one, it’s been in the news nonstop, right? Since the pandemic. So it’s on first of everybody’s agenda. Two, it’s a very personal issue, which we all know from an individualistic perspective. But then also it’s one of the highest growth areas of cost for employers, right? They have been seeing for decades that their premiums just increase over and over again. So everybody is focused on healthcare and the cost reduction in healthcare. So we’re seeing a lot of M&A scrutiny as we look kind of moving forward.

Andrew Dick: So let’s talk about that, Michelle. Lots of M&A activity over the past few years. When I’ve had discussions with you and mark about this in the past, it seems like there’s not only been a lot of regulatory oversight, but the results of the M&A activity have been mixed depending on how you look at these larger transactions, in particular big health systems emerging with other big health systems. The question always comes up, is it really good for the patient or consumer in those markets? What are your thoughts?

Mark Furgeson: Well, I think the data would say… In fact, if we asked the justice department, I don’t know that they would quantify it as mixed. They would say consistently, “We have not expanded care. We’ve not lowered cost.” The original idea of certificate of public advantage, those metrics haven’t necessarily played out the way we hope they would. And I think that’s part of the reason we’re seeing a kind of a competition forward administration putting tools in place to limit competitions at least in a horizontal way.

Michelle Mader: Yeah. And they’re being very bullish about it, right? They’re not even trying to hide sort of what they’re doing behind the scenes. They’re just kind of straight out there front. And so as of June of this year, so we’re sitting here the 1st of August, but as of June of this year, nine healthcare systems deals have been called off this year alone based on the FTC, right? Based on the DOJ or the FTC coming and going, “Guys, we don’t really like this look. You’re going to become a monopoly in a market. We haven’t seen the data that says you’re going to be able to pull off what you are promising to the communities. And so we are going to either fight it directly, which they’ve had in some instances, or we’re going to disprove of it so strongly that it’s not worth the expense for you to fight it.”

Michelle Mader: And so we’ve seen this with the for-profits and the not-for-profit. There is no favoritism in this perspective as it relates to the healthcare system. And so it was interesting. I was reading an overview of this in a journal not too long ago. The FTC said this in a statement when they put to bed essentially the Steward Health Care, which was in Utah was going to sell five of its hospitals to HCA. And then RWJBarnabas Health dropped its plan to purchase the New Jersey based St. Peter’s Healthcare System. So when all of this was happening and these examples, the FTC came out and said this, “These deals should have never been proposed in the first place. And the FTC will not hesitate to take action to enforce the antitrust laws to protect healthcare consumers who are faced with unlawful hospital consolidation.”

Michelle Mader: So they’re calling it straight out, right? “These deals shouldn’t be put together to begin with. We don’t want hospital consolidation. We are out here to protect the consumers and the patients, and we want lower costs.” And so we are seeing this everywhere. And it’s not just at the federal level, right? That’s the FTC at the federal level sitting in DC. But also at the state level. So our hometown is Charlotte, North Carolina. And just this last week, our eternal general asked our own in the North Carolina Department of Health and Human Resources to deny HCA Healthcare owned Mission Hospital’s application to expand in Buncombe County based on the lack of competition. So it’s the attorney general in our own state here in North Carolina even in the last week had said, “No. Mission is already in Buncombe. They’re the only player there. We don’t want them adding 67 beds. We want other competition in that area.”

Michelle Mader: And for those of you who don’t know where Buncombe County is, it’s out there by Asheville and it’s in rural North Carolina. We’re not talking about a metropolitan city. We’re not talking about a dense area. It’s rural healthcare, but they want competition even in rural healthcare, which kind of flies in the face of what CON in North Carolina has tried to ensure for years, which is that those rural healthcare providers are viable long term.

Michelle Mader: So when you look across this, they really are scrutinizing and trying to ensure lower cost access for healthcare on a horizontal basis. So anything or of a hospital system, acquiring or merging or doing it with another health service system in the same market, everybody’s coming out and going, “No, if you’re going to create a monopoly, if you’re the only player in town, we really want to discourage those practices.” But that’s not necessarily the case when you look at vertical integration.

Mark Furgeson: Yeah. I think we’re encouraging our clients to look at vertical integration, both because we think it’s good business taking a page from what private equity’s doing. But if they are focused on horizontal mergers, we think it really takes a special focus on the data, a special focus on how they’re going to improve healthcare in the market. Why are they specifically the best player to do it and how are they going to improve equity? How are they going to improve the lives of people in many rural environments who don’t have access to care, have transportation issues? What are they going to bring to that will speak to the FTC and address the issues and concerns they have?

Andrew Dick: Yeah. You’ve all hit on a number of hot topics that we’ve been tracking. Really if I had a headline, it would be the rise of the state attorney general around the country where they’ve taken a more active role in regulating healthcare. Couple points on the east coast. We know that in states like Rhode Island, there seems to be more oversight of nonprofit healthcare systems selling to for-profits for fear that the for-profit health system may sell assets in connection with the sale lease back and then somehow the community may lose control of valuable healthcare assets. And then I know that I had a discussion with both of you about Mass General in the news. Maybe one of you could talk about that. They had very grand plans to expand in their markets. It sounds like the state AG stepped in and started asking some questions. Maybe you could hit on that just briefly.

Michelle Mader: Yeah. And that’s been in the national headlines for… I think we’ve been tracking this almost a year now. It was the first big… And this wasn’t a merger. So for those of you who are listening, this isn’t a consolidation of healthcare systems or a vertical horizontal. This is just them expanding their own system. So they basically proposed… Mass General proposed, which by the way is the largest healthcare provider in the state of Massachusetts, they proposed a $2.2 plus billion expansion plan. It really consisted of about four major projects, four or five major projects depending on how you want to break them down. And then when they proposed this, the state came back and said, “Well, well, wait a minute.” It wasn’t the AG office out of the get-go.

Michelle Mader: It was really Massachusetts health policy commission that they got set up, that they came back and said, “Wait a minute. We want to know a performance plan. We want to see from your performance plan on how you spending all of this money in the state is actually going to decrease healthcare costs that give people more access, and more importantly, make yourself more efficient, right? We are funding through Medicaid and Medicare the portions of your revenue all the time. So we need you to prove to us through a performance plan that you’re going to be able to improve healthcare overall for the state.” So months went by and they put together a plan. Essentially what happened is, ultimately they greenlighted two of those four to five projects that were huge expansions. They’re going to be a billion plus dollar expansion towers essentially that are going to be created. And then the health system took off the plate some of their ambulatory environment or ambulatory for projects. They were going to do two or three ASCs out in the community.

Michelle Mader: So what happened is this health commission essentially cut their proposed expansion by half by saying, “You can’t prove that what you’re proposing is ultimately going to be in the best interest of the Commonwealth. And so therefore we don’t want you to do it, and we’re going to discourage you to do it.” But the amount of expense, the amount of due diligence, the amount of political PR that went into this for months has been tremendous. But it was the first one that we saw where really the state stepped in heavily and said, “No, it’s not just M&A. No, it’s not just monopolies and markets. We don’t want you spending our precious public dollars that you get by being a not-for-profit in in profitable or only focusing on certain aspects of access. So that was really something different.

Michelle Mader: And I think other states are going to do the same thing. I think we’re going to continue to see that these large traditional healthcare providers who have billions of dollars and who control state-based healthcare are going to find more and more scrutiny at the federal level, at the state level, but also at the local level. So I was reading an article not too long ago where Saratoga Hospital in New York, they wanted to rezone 16 acres, right? This isn’t small. This isn’t a $2 billion project, wanted to spend $14 million on expanding the hospital and rezone 16 acres and the local community and the local government came back and said no. Right? “Our healthcare’s already expensive. You can’t prove to us that this is going to make our access and our outcomes any better. It’s just going to be passed along to the consumer and into our employer/payer based and increased premiums, et cetera. So, no, we don’t want it.”

Michelle Mader: And I thought, whoa, that’s taking it to the local community level. So there is enhanced scrutiny and attention at this, for this in the healthcare providers across all levels of oversight.

Mark Furgeson: And I think that as there are healthcare pundits that would say, “Well, that’s just Massachusetts or that’s just New York,” but we see a fairly good consistency with priorities on both sides of the aisle on this issue. This intention to lower the cost of care to prove that not for-profit care is an advantage to Americans, I think it’s something that is not just an administrative specific thing.

Andrew Dick: Yep. Michelle, you hit on something that we’ve talked about in the past. Local planning and zoning authorities stepping in based on feedback from the community. I was talking with one of the major health systems in Florida. They don’t have a certificate of need law to deal with anymore, but what they found is they’ve received quite a bit of resistance in certain communities at the planning and zoning level. So that’s a new hurdle that these health systems historically haven’t had to address in the past. It was always there, but not so much. These planning and zoning bodies are taking a more active role in shaping healthcare, so to speak.

Mark Furgeson: That’s frightening.

Michelle Mader: And it tells us that we aren’t… I’ve been doing this for 25 plus years. And for a long time, there was a subset of the population who really understood healthcare, right? Who at the consumer level who understood their costs, who could decipher an EOB when you get it from your payer and from your insurance. And I think COVID has accelerated the general consumer’s attention on this issue. It has highlighted wellness and behavioral health and mental health sustainability and has also taught people to access lower cost of care. And all of a sudden they said, “Well, I’ve got a sore throat. Instead of going into the ED where it’s going to cost me $2,000 or $3,000 for store throat, I’m going to call telehealth. Or I’m going to go to my urgent care because I don’t want to go to the ED because I don’t want to catch COVID,” right?

Michelle Mader: It wasn’t because of cost to begin with. It was because they were scared. And now that they’ve seen the benefits of that, we’re starting to teach huge population bases on how to navigate the healthcare system because they were forced to do it during COVID. They were forced to look at alternative sites of care and now they’re realizing the financial benefit. And I don’t think that tide’s going to swing back anytime soon if ever. And so COVID really accelerated the teaching of both at a state level, at local levels, at your local community and even within your families on how to navigate healthcare in our system. And I think that’s a benefit to everybody, but it’s changing how we plan. It’s changing how we look at strategy and it’s changing how we’re going to move forward as an industry for sure.

Mark Furgeson: Yeah. And that might be kind of the big takeaway. I think you combine some of the consumer choice changes that we’ve seen that technology’s been an accelerant to. And put that with the double digit impacts of some of those financial metrics we talked about and hopefully we’ll be moving towards new pathways for care, more efficient ways to do healthcare and get the better advocacy.

Michelle Mader: Absolutely.

Andrew Dick: Terrific. Michelle, Mark, this was a great discussion. Thank you for being on the podcast today.

Andrew Dick: Just to remind our audience, this is part one of a two part discussion. Our second part will be focused more on staffing and labor related issues for hospitals and healthcare systems that will be released soon. I want to thank everyone for listening today on your Apple or Android device. Please subscribe to the podcast and leave feedback for us. We also publish a newsletter called The Healthcare Real Estate Advisor. To be added to the list, please email me at adick@hallrender.com. Thank you.

Mark Furgeson: Yeah, our pleasure. Thank you.