Health Care Real Estate Advisor

An Interview with Greg Gheen, President and Co-Founder of Realty Trust Group

An Interview with Greg Gheen, President and Co-Founder of Realty Trust Group

An interview with Greg Gheen. In this interview, Andrew Dick interviews Greg Gheen, the President and Co-Founder of Realty Trust Group. Realty Trust Group is a national healthcare real estate firm that provides advisory, development, operations, transaction and compliance services.

Podcast Participants

Andrew Dick

Attorney, Hall Render

Greg Gheen

President and Co-Founder, Realty Trust Group

Andrew Dick: Hello and welcome to the Healthcare Real Estate Advisor podcast. My name is Andrew Dick. I’m an attorney with Hall Render, the largest healthcare-focused law firm in the country. Today, we’ll be speaking with Greg Ghee, the president and co-founding member of Realty Trust Group. Greg is a seasoned healthcare real estate professional who started his career working for a hospital system, then decided to start Realty Trust Group, a healthcare real estate consulting firm which is an affiliate company of PYA, a national healthcare consulting and accounting firm.

Andrew Dick: Greg has a great story to tell. I’ve known Greg for a number of years and really admire the company he’s built and he’s a man of integrity, always enjoy catching up with him. We’re going to talk with Greg about the state of healthcare real estate, where he sees opportunities in the future, and a little bit about how he started his business and how he’s grown it to what it is today.

Andrew Dick: Greg, thanks for joining me.

Greg Ghee: Hello, Andrew. Thank you. Good hearing your voice and thank you for the introduction and the very kind words. I would also like to say about you, I appreciate our friendship over the years. I want to thank you for not only the opportunity to join you today and talk a little bit about our company but I also appreciate what you and your firm have done for the healthcare industry over the years and the thought leadership. As you know, Andrew, and what I’d like our audience to know is you’re one of the go-to people that not only myself but other professionals at Realty Trust Group rely on when there’s a question that is really complicated and complex before we call our client back with our opinion, we like to use you as a sounding board. So thank you for your friendship, professional and personal, over the years.

Greg Ghee: Now, as to your first question, I’m a product of where our corporate headquarters is located. I’m in Knoxville, Tennessee. I was actually born at the hospital where I work and I was born here and other than leaving for college, have spent my entire life here in East Tennessee. When I graduated from high school, I worked construction for a couple of years and I was a general laborer and also a brick mason apprentice. After a couple of hard, cold winters in East Tennessee, I decided that the classroom looked pretty inviting and so I went back to school at a community college called Roane State Community College. There, I studied and received my associates in business administration, and then following that, I went to Maryville College and Liberal Arts School, probably 30 minutes away from Knoxville, and got a BA, Bachelor of Arts degree in economics in 1983.

Greg Ghee: My first job out of college, I was a land-use planner working for the State of Tennessee and it was a great experience working in the regulatory side of land development and after spending two years there at the state in that job, I went back to UT-Knoxville and got an MBA in finance and new venture analysis and then my first job out of graduate school was with the local health system here and now, 32 years later, I’m blessed to still be working in healthcare.

Andrew Dick: Greg, it’s a great story. I’ve known you for years but didn’t have all this background information. I found it really interesting that you were a land use planner and then you started to work in the healthcare industry and talk a little bit about that because I think you started in the healthcare real estate business as it was taking off. Today, what we see in the healthcare real estate world is a very mature market. Healthcare real estate, in terms of asset classes, is a mature class, not as mature as some of the others but it’s been around and it’s well recognized but talk about how you stepped into your role working for a health system and helping that health system build out their real estate platform.

Greg Ghee: Okay, and as I think about my real estate career, I’ll rewind a little bit and talk about that, the land use planning job that I mentioned earlier. I had actually written my senior thesis in college at Maryville College on the 1982 World’s Fair and my thesis was what was the impact of the World’s Fair and the government spending in infrastructure to prepare Knoxville to host the world coming here for the World’s Fair, what was the impact of that on the local taxpayer? And that really got me interested in real estate infrastructure of how do communities prepare to welcome people and in that case, the real estate was for the World’s Fair, which the World’s Fair site is still very integral to Knoxville, Tennessee and I was very lucky to have a person in career planning and placement that helped me take that experience from my senior thesis and say you maybe really interested in working as a land-use planner. And so that’s kind of how I got into the land use planning part of it.

Greg Ghee: And when I think about how my land-use planning prepared me to step into the shoes or into the job I had in healthcare when I look back on it, I think about the old adage that that may look good on paper as it relates to a development plan or a regulation but here’s why it doesn’t work in the real world and so, Andrew, that was so impactful on me in my career as it relates to what are the governmental entities and the policy decisions that are being made, how are they being implemented and how does that prepare you for healthcare.

Greg Ghee: When I came out of graduate school, so after land-use planning, two years in graduate school, and then I went to work in healthcare for Fort Sanders. In graduate school, when I came out, I was actually going to be a commercial mortgage originator for a large life company and that was in 1988 and there was quite a bit of real estate in receivership and vaguely do I remember having a candid conversation with my wife about another job offer I had that I ultimately took and that’s how I wound up in healthcare. So, I would like to say that I can take credit for really planning out a very direct linear approach for getting into healthcare but the truth is and the fact of the matter is it was divine intervention. I was blessed that I just liked the people that I interviewed with at Fort Sanders and took that job.

Greg Ghee: And one of the things I’ve thought about as I’ve prepared my notes for today that I want to speak to if there are young professionals thinking about getting into real estate or in our profession, some of the things is one of the first things I want to mention is be flexible in your thinking and always be prepared for an opportunity that you didn’t even really plan for to present itself to you and then follow your heart.

Andrew Dick: That’s good advice, Greg. That’s something I think we’ll talk about a little bit more at the end of our conversation as well because I get a lot of questions from younger folks who are thinking about different career paths and seem to be intrigued by healthcare real estate and I often provide similar advice. So Greg, you get this opportunity to work for Fort Sanders Health, which I think you said is now Covenant Health, talk about that opportunity because you really got in at a time when the health system was growing and you were able to help the health system plan out it’s longterm real estate strategy and execute on that strategy. Talk a little bit about that.

Greg Ghee: I would love to. Went there my first day of work at Fort Sanders, was June 28, 1988. So you can see, Andrew, I remember it. It was a great 10 years there and how I got there was through an opportunity in graduate school, along with two of my friends, Roger McFalls and Mark Fioravanti, and Roger’s the one that actually picked up the engagement and then got Mark and I to help him. Roger and Mark and I put together a business plan on how to execute on real estate operations for a new ambulatory care campus in West Knoxville that was being built by Fort Sanders Health System. The ambulatory care campus was probably two to three miles away from a large hospital that, at the time, was owned by HCA. We ultimately bought that hospital in 1990 or ’91 from them but we were going to compete in our market with ambulatory care services.

Greg Ghee: And so in 1988, Andrew, that was a very risky endeavor and we, Fort Sanders and Covenant Health to this day is still a not for profit with local board leadership and governance and they said this is a good model and let’s pursue it and it really changed our community. But getting back to what we did in graduate school, we prepared a business plan, made a presentation and after the presentation, one of the executives there named Larry DeWine asked me to leave a copy of my resume and long story short, got to interview with Larry and others there. Larry offered me a job as a project manager for the outpatient campus. I accepted it and spent 10 wonderful years working with Larry and a lot of other people there at Fort Sanders and ultimately, it became Covenant Health.

Greg Ghee: That was probably one of the most impactful and productive periods of my career working with Larry and others and that’s also where I met Ed Pershing, who’s co-founder of RTG with other people back in 1998. So let me continue, Andrew, talking a little bit about that because there’s some other things I wanted to mentioned as it relates to that ambulatory care campus. So, I was 15 years there and we not only grew the ambulatory care campus, it was 62 acres and it’s still 62 acres but it’s pretty much well-developed today and we worked not only on an ambulatory care strategy which was complementary to the acute care strategy, but they had a very robust … Fort Sanders had a very robust physician alignment strategy in place as well.

Greg Ghee: So, if you think about my career at the time, I was directly involved with acute care. I worked with the … Excuse me, I was directly involved with the ambulatory care. I had reporting relationships with the acute care, the hospital presidents, worked with strategic planning teams, the finance folks, the attorneys and many others to help grow that network that, today, is one of the more compelling networks in the East Tennessee Region compared to others, but it includes not only the Covenant Hospital locations but the ambulatory and the physicians.

Greg Ghee: One of the things that we did, and I just don’t recall the exact year but one of the things we did is we helped the local orthopedic practice develop a facility for them to relocate and at that time, and this still happens today in certain communities, a lot of medical office buildings are beside the hospital or across the hospital. In Knoxville, in 1990, 90, and those periods were about the same. We helped relocate an orthopedic group that had been on the campus of one of our competitors onto the Fort Sanders West campus and that really changed not only the trajectory of what Fort Sanders and Covenant was able to do but it actually changed our marketplace because other physician practices saw that they were able to work at multiple hospital campuses and multiple hospital sites without being right across the street, if you will, from the hospital, and so that was very impactful and a great learning experience for me.

Andrew Dick: Greg, talk about that transition. So you worked for the health system for a number of years and then ultimately made a transition to starting RTG. How did that happen? How did that transition occur?

Greg Ghee: I had been invited to be a panelist on a national survey that one of the … I guess it was big eight, maybe big six back in the day was putting together and I had colleagues from across the country that were on this panel and I say panel, we provided a very detailed survey as to how we manage real estate and what was interesting is we were one of the few companies that domiciled our real estate operations in the for profit arm of the not for profit health system and I think that was one of the attractions that got the national accounting firm to want to include Fort Sanders in that survey. And so Larry DeWine and I participated in that and me directly and Larry indirectly and met a lot of people across the country and really became enthusiastic if you will about taking some of the things I’ve learned and experienced in doing at other places.

Greg Ghee: And I was being recruited away from someone and decided that I just wanted to stay at home and had an opportunity to stay in Knoxville and help start a company with my colleagues and partners at PYE and so we did that March 1, 1998 is when we stood up Realty Trust Group. What I think about when I think about those early days coming back to your question is really, I guess, what I brought from my experience to the company in addition to the great resources that PYE already had in place and Ed Pershings’ experience but what I brought was really my experience working with physicians and understanding alignment of physicians and how important physicians as stakeholders are in all of your real estate decisions.

Greg Ghee: Secondly, I tried to always have a holistic mindset even today, 22 years after starting Realty Trust Group and 32 years after my first day of being in the business. I try to keep a holistic mindset about the continuum of care. I’ve already mentioned it a couple of times from the community and the ambulatory and physician and now, Andrew, we’ve got urgent care, we’ve got telemedicine. We’ve got a lot of other care models out there and so my holistic mindset has even broadened more. And then the other thing is thinking about the capital that’s available and is necessary as far as growing healthcare real estate.

Greg Ghee: I’ll tell you, I was a little spoiled coming from a large, well-positioned, well-funded, very successful health system and the balance sheet they had and I was a corporate vice president doing things only for Covenant Health and then when I transitioned into the company, Realty Trust Group, and going out and helping physicians do certain things, the first project we ever did was integrated three discrete physician practices into one LLC operating model and then helped them build a surgery center, a single specialty surgery center called Tennessee Valley Eye Center, we probably started that project in late 98 or early 99 but my point there is, what I’ve really learned now with RTG is how important capital is and the different sources of capital that are available for healthcare real estate.

Andrew Dick: Yeah, you’re exactly right and there are companies that are out there just specializing and providing capital to healthcare real estate projects and it’s become a very important part of the development process. Greg, before we talk about what RTG is like today, talk a little bit about the early days when it was really you and co-locating your office with some of the PYE folks. What was that like? I mean it had to be exciting. Talk about the early days a little bit.

Greg Ghee: Yeah, I appreciate it and I’d love to. I’m employee 001 for the company. Today, we have 91 employees across six different offices and so the first day I walked in, I don’t want to leave the impression I was by myself, although I was the first employee at RTG because, as you mentioned, I was co-located in PYE and essentially part of their team and was able to leverage the infrastructure here and to this day, we’re still co-located and do a lot of things together that really helps us leverage some fixed costs and other things. We’re also co-located with PYE in Tampa and Nashville and so that model, from day one, continues to work today 22 years later and 90 employees later, and it’s also really rewarding to be part of a larger enterprise.

Greg Ghee: Andrew, you’re blessed to work with a big law firm, that’s also very great and vibrant if you will to be able to talk to other people that are in different segments of your law firm as well and that’s … I able to draw upon the other folks at PYE. We set up RTG from day one as a real estate company and under standards of practice of real estate and we are a separate company and not … And we are a separate affiliate company and not a subsidiary and I say that because PYE practices under AICPA standards. They do a great job across the board in strategy and attest and taxation and have a huge consulting evaluation practice but RTG is a separate, distinct real estate company.

Greg Ghee: We’ve been able to not only help PYE when they’re assisting their clients where facilities or real estate or location services maybe necessary for PYE to bolt that on if you will to the delivery to their clients but the inverse of that has worked very well. When we’re helping physician clients stand up new medical facilities and many times, we’re a joint venture partner with them, we’re able to bring tax services and we’re able to bring strategic planning services that PYE offers to those clients that are coming to us for real estate.

Greg Ghee: And so, to your question, what was it like in the early days? In the early days, it was … And this is a true statement, it was on the back of a napkin that I had written out a few bullet points as to what the plan of attack and the business plan ought to look like. I have that napkin still in my jewelry box and with the PYE people and now the other people that have joined us and RTG over the last few years, we’re able to still continue to execute on some of the fundamentals that we thought about in 1988.

Andrew Dick: So, Greg, what type of services were you offering in the early days? Was it consulting type services? Was it development services or all of the above?

Greg Ghee: No, we were offering advisory services and that’s a great question and it’s one of the things that when we talk to new clients, when we’re talking about our company, we’ve grown our services following our clients’ request of us or evaluating what the future maybe in our industry and then running to add those services and compliance is one of those that I’ll talk about a little bit deeper here as I explain what I mean by that.

Greg Ghee: We were engaged very early on to help the health system in an advisory engagement go through due diligence for the acquisition of seven hospitals from HCA that was part of the 1988 divestiture and they sold I forget how many hundreds of hospitals across the country and PYE’s client was picking up several … PYE had several clients but the one that I worked on specifically was in Tennessee and so we helped them with the due diligence which meant going through all of the leases, flagging anything that we saw that might not meet either an FMD or a commercial reasonable standard, flag those, bring them up to the internal legal council, which ultimately went to external legal and then once we helped them with due diligence and the acquisition was closed, to help them stand up a property management company.

Greg Ghee: So, Andrew, day one, we were pretty much advisory. Within a year, we were still an advisory and had gotten into the operations, what we call operations, it’s property management. Within that year as well, we were asked to help those three physician groups come together and so we stood up our project management arm, which probably we only did owners rep/project management for the first four years and probably in the fifth or sixth year of us being around, we were asked to do our first [inaudible 00:23:15] where we were at risk and we built a cancer center for a hospital up in Virginia and owned that and then after a certain period of time, when they were ready to go to the bond market, we allowed them to buy that facility back from us and they aggregated it and took it to the bond market and so first was advisory, then project management.

Greg Ghee: And I want to tell you that part of the advisory did start us into the compliance and over the years, we had worked episodically on client engagements, helping with fair market value, rent studies, maybe giving opinion letters on acquisitions, working for either the board or the executive team before they were ready to either buy or sell either one asset or three or four, primarily, medical office buildings but before they were going to sell a portfolio of assets, is this a fair deal to the organization and so we did that quite a bit and then we did … This was one of the service lines where we really anticipated the emerging trend and the importance of having people that fundamentally understand real estate and Andrew, you know because you know us but 95-98% of our total revenue is healthcare real estate.

Greg Ghee: We have a few clients who we serve through relationships that are non-healthcare but we are a healthcare real estate advisory and services firm and so when we’re doing any of the work in compliance, those people know that we’re not out that morning doing a Walmart or a Target or some other food type of the advisory work. We are healthcare. Everybody in our company is working healthcare throughout the day but we saw PYE rapidly growing their compliance arm as well as it relates to valuation services and some of the other compliance/regulatory and so we decided to invest in our resources, people, processes and technology to significantly stand up a compliance, a real estate compliance arm and today, we’ve worked on some pretty nice projects. Most of those, we keep confidential but we’ve worked on some national level projects in our compliance service line.

Andrew Dick: So, fast forward to today, Greg, talk about how the business has grown, where you’re located and new services that you’re offering.

Greg Ghee: As I sit here today, we’re in Atlanta, Greensboro, Johnson City, Knoxville, Nashville and Tampa. And I say that because we have plans for a couple of other locations and we have some people working with us on a contractual basis that may take us before the end of this year into a couple of other markets. When people look at our footprint, you can tell we’re generally a Southeast company but we are growing our footprint. I think we’ve worked in 32 or maybe 33, it may be 35 states over the years and as I mentioned a moment ago, we have 90 employees and our services lines, our three primary service lines are as they were back in 89, advisory development, which is our capital projects and then operations, which is our property management and then the other two service lines that we have are transactions and the compliance and the reason I mention three primary versus the other two is the transactions is a function of what we’re doing in our operations and compliance is essentially a function of what we’re doing in our advisory work.

Greg Ghee: When you ask about our company today and maybe what makes us a little different than others, I have my own opinion and others, our clients have their opinions about us but what I hear when I’m asking our clients at the end of an engagement or a project why they selected us, one of the things that comes to mind to them quickly and it is repeated is the RTG difference. The first characteristic is we are healthcare. We are healthcare real estate day in and day out. A lot of people really appreciate the relationship, the affiliate relationship that we have with PYE because they know that we have additional resources to call upon if we need those and we also understand how to operate as a professional services firm, which PYE is as well.

Greg Ghee: And we also tend to do most of our work as objective advisors. We go over budgets and we go over fees and we go over scope of work with our clients on the front end and if there are any contingency or condition related aspects or tasks to that, we separate our work, our deliverable and our opinions from that additional work, and so many of our hospital clients appreciate the way that we do that but that also honors any relationships that they may have locally. So they want a healthcare advisor with a national footprint and national experience to bring them an objective, independent business plan or plan of action and if they need us to help them execute, we can do that or if they want to use something local to help them execute, we can certainly do that and that’s always been part of our value proposition to our clients and also part of our delivery platform.

Greg Ghee: Then the second thing, Andrew, is our clients tell us just the breadth of our services platform, they don’t have to go get someone else if they want to manage a project. If we’ve helped them with a site location and they want to put an urgent care center or something else there, their internal resources are stretched, they need some help, through a separate engagement, we can help them with the construction and the project management on that and they don’t have to go get another firm and get them up the learning curve and everything is still under a very discrete engagement with them with the confidentiality and everything in place. So, I’ll tell you the second is just the breadth of our services platform.

Andrew Dick: So, Greg, tell me about typical clients. You’ve talked about physician groups, hospital systems, what’s the breakdown in terms of amount of work or revenue in terms of those different categories?

Greg Ghee: That obviously changes from quarter to quarter, although it stays within a bandwidth, a pretty close bandwidth. So, as I mentioned, around 95% of our work is healthcare and I would say 60% of that today and it could be 60-65% of our work today is through health systems and then 30-35% is physician groups and then there’ll be 5%, could be 3-7%, there’ll be a percentage there where we may be working with a banking client and that may either be an RTG relationship or it could be a client of PYE that has said we need some help from a real estate professional group on a new branch location, and so we do a lot of work with banks but it’s interesting how closely aligned, when you’re thinking about locating a bank branch or locating an urgent care center or primary care group, how important the real estate part of that is but that’s generally it. About two thirds hospitals/health systems, one third physician groups.

Andrew Dick: So, Greg, let’s switch gears a little bit and talk about the industry of healthcare real estate, because you’ve been working in the industry for a number of years, have grown RTG doing work all over the country, where do you see the industry going in the future, what type of trends are you seeing?

Greg Ghee: We are as busy today as we have ever been and in a moment, you and I may be able to talk a little bit about COVID, because that’s certainly an area right now in history that’s different for me and you and everybody else in this business but if we had had this conversation in January of this year or February, I would tell you generally about the same thing that I’m telling you right now, that we’re very busy and I don’t mean necessarily the volume of work as much as I mean the pace it’s playing.

Greg Ghee: What I mean by that is we are doing a lot of work today and we’ve done a lot of work over our last 22 years and Andrew, this may be the same for you, so I’d kind of like to ask you this question when I finish but it seems that our clients, the pace of play and how competitive it is, not only in the hospital sector and whether you’re working for profit or not for profit but even with physicians and venture capital coming in, the pace of play, how quickly they want to not only understand the plan and execute on the plan and know what the plan is and get the physicians aligned, that really is about as busy as it’s ever been in my career.

Greg Ghee: As it relates to the healthcare real estate, I think we’re a direct function of the healthcare industry per se. Is that everyone is just incredibly busy, even before COVID-19 came to us and I think, again, that’s a function of intense competition, real competition, the first to market, to get their flag into a market subset, to make sure they’re aligned with the doctors, that the physicians want to grow. They need to have a place to perform their procedures, to get their diagnostic tests taken care of. So they’re also trying to take care of the doctors because they’re trying to grow as well and then I also think it’s a function of macroeconomic, I guess, demographics, if you will, of just the aging population and the necessary volumes that are happening and I’ll tell you, this is anecdotally although I could probably present some empirical evidence to you, as you know, we’re really transitioning from the acute care hospital environment to the ambulatory environment.

Greg Ghee: Most of our clients have already cross over the 50/50 threshold where they are mostly … I shouldn’t say most. They’re probably either 50/50 or 49 inpatient and 51 outpatient as far as their revenues and so that has also really quickened the pace as it relates to that and their facilities or building new facilities but the pace of play, is that how you see it, Andrew, with your clients?

Andrew Dick: Absolutely. I think it’s interesting the way you described it as pace of play. The transactions just seem to be moving faster and faster, more compressed timeframes. We worked on a [inaudible 00:35:46] back transaction on the West Coast last month, helped a client close on four outpatient facilities and the timeline was I think three and a half weeks and there was a lot to do and I’ll tell you, Greg, it can be really exciting but also very stressful as well. So, pace of play is a good way to describe it as things just keep moving faster and the industry’s evolving and you really have to be on your game when you jump into some of these opportunities. So I think you’re right.

Andrew Dick: Greg, you mentioned COVID. Because we’re recording this really in the midst of COVID, a number of states have opened. Some still have stay-at-home orders. Some have opened and are now slowly rolling back their reopening plans. How has COVID impacted your work and what you’re seeing in the industry?

Greg Ghee: Yeah, it’s a very different time, Andrew, as a person and as a professional. A few things come to mind right off the bat. Fundamentally, I think it’s brought a lot of well-deserved attention to the profession of property management and I’ll say this not only about our people and it’s more than just the people in our property management service line because our construction management people and a lot of people in our advisory service line are supporting others, so it’s really about our company but I want to speak specifically to the people that are on the front line in our property management and I’ll also broaden that comment because we work with a lot of different companies out there and we also have clients that are real estate investment trusts and they have property managers internal in their organization and other property management firms, so I want to extend my compliment and my respect to everyone in the property management arena, not just RTG.

Greg Ghee: But it’s been very inspiring to see how integrated and essential our property management team, our people have been and continue to be to our hospital clients and other building owners during this time. I mean they are literally on the front line and so you think about an MOB that’s on a hospital campus, could be connected to the hospital campus or it’s off-campus but those doctors and those patients, it’s critical and we’ve been considered, as you know, an essential service and so every day that they’re open, we’re open. We’re there to make sure they’re open. We’re there to help with the traffic. We’re there to help police the security. We’re there to help make sure that the housekeeping and the additional sanitary conditions and cleaning and all of that is in place. We’re there to answer the phone in the middle of the night when things are not going well.

Greg Ghee: So, again, it’s not only the RTG team but everyone in this business. COVID, I think, is also really focused on the importance of technology. We’re doing this podcast today, you and I talked earlier about how many team meetings we have and Zoom meetings. Technology, communication protocols and really broad-based communication, how do we communicate directly with a risk manager or an infection control expert at the hospital or at our REIT client, how do we communicate with them directly and then how do we communicate out to the public and how do we communicate out to the other tenants in our building and you all may, as a law firm, also see it and I keep up with your great advice coming out on COVID-19 and the impact on real estate. We follow you guys and appreciate you sending out that thought leadership as well.

Greg Ghee: And so I think it’s not only drawing attention to what we do in the real estate/property management business, but I think it’s also drawing attention to skills and I said technology a moment ago but the people skills and Andrew, you touched on it a minute ago when you mentioned the timeframe. There’s no way to measure, although I think when we get past COVID-19 and we all look back, what percentage increase of our daily stress quotient that we’ve all put up with and some days, I am certain, I’m a believer that it has been beyond the 100%, many days maybe but it’s really been something to watch and we try to be supportive of everyone in our company and I know you guys are doing the same thing there with your company but the other thing there is I think that will also enhance our people skill training and we use a term, our emotional intelligence, how you’re taking care of yourself before you can help take care of other people and making sure that you’re thinking about that as you think about what you do from the time you wake up to the time you finish at the end.

Greg Ghee: And then the last thing that I’ll mention, Andrew, I know it’s evolving but I think it will impact the design of buildings in the future, whether that’s in materials and there’s people smarter than me that’ll be doing this but we work with a lot of great healthcare architectural firms across the country and I’m sure they’re looking at that but they’re also looking at how you enter and leave buildings. We talk about smart buildings all the time. We’ve talked about telemedicine. So I’m certain that it’s going to have a big impact on really facilitated design moving forward.

Andrew Dick: Yeah, those are all really good points and I was writing some notes down as you were talking. I think COVID’s going to have a significant impact on the push for healthcare systems to expand their outpatient network or their ambulatory network. I think you mentioned that earlier, Greg. That was really already happening but I think it’s going to accelerate the pace of more outpatient development, off-campus development. Just a couple days ago, one of the major healthcare REITs published an independent survey of consumers where they asked consumers where would you prefer to have healthcare and outpatient facilities was where most of the consumers indicated they’d prefer to be treated, primarily because there’s some fear associated with going to hospitals today as we live through COVID, but I think you’re right, it’s going to change facility design. I think it’s going to change or accelerate, I should say, how some health systems implement their ambulatory strategy. So all really good points.

Andrew Dick: Greg, as we wrap up here, I’ve got a couple more questions for you. Where do you see the opportunities for the industry, for healthcare real estate professionals, give us a couple of thoughts there.

Greg Ghee: Well, I’m extremely bullish on the healthcare real estate industry. You could probably have guessed that but I love it as much today as I loved it 32 years ago and through divine intervention, I was able to go to work for Fort Sanders and as a young person or whatever age person, if they’re transitioning into the healthcare real estate, I think there are opportunities across the continuum. I mentioned our service lines and our service lines tend to follow where the work is if you will but the one thing I would mention as they think about managing their professional career is to really develop an understanding of the patient experience.

Greg Ghee: While you and I are talking about ambulatory or acute care and then telemedicine, some virtual medicine, whatever term we want to use, that’s still a patient experience and so if you want to understand the destination or what you’re trying to accomplish, really seek to understand what the user is doing and we’re all, at a certain time in our life, users of healthcare. It’s important to pay attention when you go to your doctor’s appointment and how you go through that process but I would say to really figure out a way to understand the patient experience and look at the different facilities, if you will, my oldest daughter who lives in Washington D.C., she’s been in Knoxville for the last two and half months because of this pandemic but she’s based in D.C. working with one of the big public accounting firms, she accesses her provider through a smartphone and then does FaceTime and I just get a kick out of that. I think that’s just a mindblower.

Greg Ghee: We don’t do much of that here in East Tennessee but I can see it coming quicker and again, pace of play, I think change will be even more rapid than it has been but no need to call and schedule that. She just does it online and it picks up the phone and there you have it. So the reason I segued from the patient experience, the individual has to …

Greg Ghee: You need to think about what it is for them, what it’s like in the parking facility, where do they drop off their family member or themselves, how do they come in, how do they access the building but then also, what’s the impact of technology going to be on that end user and then as most things in life, you triangulate, so it’s end user, technology, destination to the facility and so I would just say as far as the opportunities in the industry, jump in anywhere you see it as far as construction all the way into management. I’m a big believer in first being an advisor, first be a consultant so you really have a broad based opportunity to do a lot of different things. So, I’m a big believer in the advisory side of the business but always keep in mind who you’re serving, the patient.

Andrew Dick: That’s good advice. Greg, we talked a little bit earlier on about what advice you’d give to someone who wants to get into the healthcare real estate industry. You talked about being flexible. What other advice would you have for someone who’s interested in starting a career in the healthcare real estate industry?

Greg Ghee: It’d be great if you had a mentor or someone that … professional real that you can ask about what it’s like to be in the healthcare real estate arena in our business. If not, there are different professional organizations where you can develop a network. I’m a member of CCIM. I’m also part of [inaudible 00:47:46] and lastly, Counselors of Real Estate and we have networks with people who can talk about different areas in real estate. You could also volunteer at local … I do a lot with our local United Way but you could also volunteer at one of the hospitals or something just to get a little bit of experience so to speak or a little bit of time with them but last thing I do, I read quite a bit, Andrew, and I’ll mention just a few of these off the top of my head.

Greg Ghee: One of the thought leaders in our business is the Advisory Board, that’s a subscription but you may be able to find some of their stuff online but the Advisory Board. Modern Healthcare is something out there that people could get and look at. Healthcare Design, but I would say kind of if a person is thinking about getting into, try to come into it through their real estate professional network one way or the other, through a professional relationship.

Andrew Dick: That’s good advice. Greg, really appreciate you taking the time to chat with me today. I’ve enjoyed it. I too have enjoyed our friendship and getting to know you over the years. Where can our audience learn more about you and RTG?

Greg Ghee: Yeah, thank you, Andrew. Thanks again for the opportunity and good seeing you and be safe and pass that along to your other colleagues that I know and talk with up there. I’ve talked with you most of the time but in answer to your question, over the last couple of years, we’ve really made significant investments in our website and there’s a lot of information on our website. Our marketing manager’s name is Angie Surface and she does a great job of keeping up with our resources there. My email address is on the website, gd@realtytrustgroup.com. If you don’t see any information on our website, you can either hit Angie on a link or hit me on a link and we’ll get back to you.

Greg Ghee: And really do appreciate the opportunity to talk to you, Andrew, today.

Andrew Dick: Great. Likewise, Greg. Thanks to our audience for listening to the podcast on your Apple or Android device. Please subscribe to the podcast and leave feedback for us if you have ideas for future podcasts. We’d love to hear from you and like to hear those ideas. We also publish a newsletter called The Healthcare Real Estate Advisor. To be added to the list, please email me at adick@hallrender.com.

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Health Care Real Estate Trends Observed During the COVID-19 Pandemic (Webinar)

Health Care Real Estate Trends Observed During the COVID-19 Pandemic

Join a panel discussion hosted by Hall Render attorney Libby Park with health care real estate professionals John VanSanten, Managing Director, Valuation Advisory, Stout Risius Ross, LLC; Lorie Damon, Managing Director, Healthcare Advisory Practice, Cushman & Wakefield; Perry Bacalis, Broker, Denver Medical, Carr; and Shawn Janus, National Director, Healthcare, Colliers International.

The conversation will focus on health care real estate trends observed through the COVID-19 pandemic to date and what health care entities may expect in the months to come. Some of the issues to be discussed include rent relief, fair market value, considerations for re-opening medical practices and other issues related to a return to “normalcy” post-COVID-19. Time permitting, the webinar will open for questions from participants.

Podcast Participants

Libby Park

Attorney
Hall Render

Shawn Janus

National Director, Healthcare
Colliers International

Lorie Damon

Managing Director, Healthcare Advisory Practice
Cushman & Wakefield

John W. VanStanten

Managing Director, Valuation Advisory
Stout Risius Ross, LLC

Perry Bacalis

Broker, Denver Medical
Carr

Libby Park: Hello and welcome to the Healthcare Real Estate Advisor Podcast. I’m Libby Park, a healthcare real estate attorney with Hall Render. For today’s episode of the podcast we are going to listen in on a webinar that discusses health care real estate trans observed during the COVID-19 pandemic. I hope you enjoy the podcast and feel free to contact me at lpark@hallrender.com with any follow up questions you may have.

I like to thank everyone for turning into our webinar today to discuss healthcare real estate trans-observed during the COVID-19 pandemic. My name is Libby Park and I am an attorned with Hall Render. The largest healthcare focused law firm in the country and then based out of our Denver Colorado office. I work primarily with the firms reals estate service line and it’s my pleasure to be here with each of you over the course of the next hour for our discussion. I like to start of today by thanking all of our healthcare workers on the front line that are working to keep our community safe.

We appreciate the work you do each day. On the webinar today we are joined by distinguish panel of experts in the healthcare real estate field. John VanSanten, Lorie Damon, Perry Bacalis and Shawn Janus. Each of whom will introduce themselves to you in a moment. Our goal in hosting this webinar is to bring a group of professionals together to talk about best practices in industry trends affecting healthcare real estate during the current public health emergency. We will discuss topics including rent relief, fair market value, reopening considerations and what a post COVID-19 return to normalcy may look like. Our goal is to learn from one another and our panel and take the information back to our respective organization. And with that lets hear from our panelist. John could you please start out introductions and tell us about yourselves.

John VanSanten: Sure. Libby I’m happy to be a part of the panel. My name is John VanSanten. I’m a managing director [inaudible 00:02:11] as a financial consulting firm that has a number of service lines including investment banking, dispute consulting, management consulting and valuation, which I’m a part of. And valuation includes business valuation, machinery and equipments as well as real estate valuation. I’m based in our Chicago office although this firm actually has offices in 16 cities around the country as well as some international offices too. So I called the real estate valuation practice for stout and I focus my practice on healthcare real estate where I’ve been practicing for about 30 years and we do valuations in the healthcare space for a variety of purposes including stark. And as I kicked back compliance and other matters as well. Very happy to be part of a panel.

Libby Park: Thanks John. Lorie, can you please introduce yourself?

Lorie Damon: Sure. Thanks Libby. I’m Lorie Damon. I lead Cushman and Wakefield’s healthcare advisory practice. I have a team of roughly 300 healthcare real estate professionals who collectively manage 34 million square feet of medical office and ambulatory assets. We also provide advisory and transaction expertise for healthcare systems, physician practices and investor owners and developers.

Libby Park: Thanks for that Lorie. And Perry, can you please introduce yourself?

Perry Bacalis: Thanks Libby. My name is Perry Bacalis. Thanks again everybody for being on the panel of your time this morning. I’m honored to be on a panel with everyone. I am a healthcare real estate advisor, a broker here in Denver. Company I work with is called Carl Health Care Realty. I’ve been with Carl for about six years. When I joined Carl, there was four of us in Colorado. And now there are over a hundred men and women across the country representing real estate professionals. We’re a tenant buyer only firm. So it’s exciting to watch our company grow and to be helping people that help people.

Libby Park: Thank you Perry. And Shawn, please tell us about yourself.

Shawn Janus: Thanks Libby. I’d also like to make a note to thank all the health care workers. Any of you may be on the phone as well. So we do appreciate all your efforts. My name is Shawn Janus. I’m the national director of Healthcare for Colliers International. So I run our US healthcare practice seven of business for over 20 years on both the principal and advisory side. Colliers is a global organization in the real estate side full service. So we do brokerage, capital markets advisory, project management, et cetera. We actually have we pride ourselves on kind of taking national best practices, kind of the healthcare level and having local brokers and advisors deliver that at a local level. So we have a healthcare [inaudible 00:05:14] program, which are folks dedicated to the healthcare space in our specialists. And I’m looking forward to today’s discussion.

Libby Park: Thank you Shaw, and thanks everyone for those introductions and for telling us more about what you do each day. Now let’s jump into our first topic of rent relief. Landlords and tenants across the US are experiencing the financial ripple effect of the COVID-19 crisis, particularly as it relates to payment and collection of rent. Shawn, what types of rent relief structures are landlords and tenants asking for in order to deal with the pandemic?

Shawn Janus: It would be interesting. I think one of the unique things, and obviously I give him a nose out of the real estate asset classes the industrial space has fared better than most. I think healthcare is probably potentially best positioned after that currently. Just to give some perspective, it’s been a read the wall street journal today. You look at retail tenants and SL-green, one of the largest owners of space in New York city, their April rents were less than 40. They received less than 45% of their April rents. By contrast in surveys that we’ve been doing across healthcare owners across the country on the landlord side. On April rents 14 to 18% on average is either tenants who have sought rent relief or have come to some conclusions with their landlord relative to how that would be held in going forward.

Shawn Janus: I think most importantly, it’s important to communicate and openly early and honestly between landlords and tenants so that folks are aware of what’s going on. I will tell you, landlords typically want to see when tenants are coaching them for potential rent relief. They’ll want to make sure that the tenants have pursued the PPP applications with the federal government or the payroll protection plan. They’ll also typically want to see financials of those tenants as well. So they can make prudent decisions and try to keep them moving forward as well. In terms of specific structures, it’s interesting. I think hospital and health system owners typically have a standard policy is what we’ve seen relative to how they deal with tenants. A part of that is I’m sure folks on this call know we have the blanket waiver of the cert provisions, et cetera.

Shawn Janus: And even given that the uncertainty of what things will look like afterward had caused the hospitals and health systems to try to get to a situation where those treat each of those tenants in a similar manner. So again, a standard policy. A contrast that to the investor developers who are approaching it more on a case by case basis. And again, we’ll work with each particular tenant given their circumstances and try to work out what that relief might be. To specifically address kind of your question, Libby, in terms of what we’re seeing in the marketplace currently, I think on average it’s fair to say we’ll probably the two to three months rent relief rent before rural situation for most folks, how that is then dealt with from the landlord tenant perspective changes a bit in terms of how it might be structured.

Shawn Janus: We’ve seen it where those two three months may be paid back at the end of the calendar year or paid back over the last two to three months of the calendar year. We’ve also seen it where the rent deferral has been amortized over the balance of the lease term. So you’re capturing over that time. And we’re also seeing it whether it be amortized it over just this calendar year. So if you get two months of deferral, you would then take you through say June, you would end up resenting amortize that over the July through December period. We’ve also seen in a couple of instances where they’ve added months to the end of the term to extend the term as well.

Shawn Janus: Some of those examples are two months extension for every month of deferral. So if you were to do for your rent for two months, you would add four years of term onto the back end as well. So again, those are the few examples of what we’re seeing. But again, I think most importantly, it’s the tenants approaching the landlords early, honestly communicating. And I think the landlords in most cases then will deal with the tenants may ask for certain financials, as I said, PPP applications. But that’s kind of what we’ve seen in the marketplace.

Libby Park: Thanks for that Shawn. And Perry, can you speak a little bit to what you’re seeing from the tenant perspective of what type of documentation landlords are requesting? Is it similar to the same things Shawn is making through here?

Perry Bacalis: Yeah, absolutely. I mean Shawn covered it pretty thoroughly, but I think what interesting question that I’ve gotten from several clients of mine is, should you approach my landlord on this one or do you want me to do that? And typically, if the lease is coming up in the next 18 months, year to 18 months, I think that’s an appropriate time to talk about a renewal potentially. And giving free rent right upfront as you’re renewing obviously the term extends and then you get the free rent now which is helpful.

Perry Bacalis: My response to my clients when they asked me that question, who should approach a landlord? It’s well, if you’re going to think about a renewal and that’s coming up within the next year, let’s have that discussion together and then we’ll negotiate with the landlord. I would negotiate for you. But then if there’s time left on the lease we’ve encouraged our clients to do exactly what Shawn was saying is, approached the landlord. It’s personal. We’re not just trying to leverage extra money here. We can’t pay this rent or we need relief here. This is what we’re doing. And so I’ve advised our clients to go and have those conversations. And then if they say that got a deal or some terms that they’re not sure about, we’re happy to advise them on.

Perry Bacalis: But that’s one thing that I’ve just said, “Hey, I think it’d be good for you to have that conversation with your landlord and I can get involved to say if I need to.” And so far I think it’s been pretty good. Right when this all just started happening, there was a lot of questions and fear, but things have really kind of flat-lined a little bit in terms of that hole that kind of fear based mentality if I can’t make rent. So yeah, it’s changed even in the last couple of weeks on that one.

Shawn Janus: This is Shawn. I would add one of the things which I found somewhat interesting is kind of piggybacking off that comment is some of the landlords have actually… we may have approached them, the clients, like the tenants would like us to do that. Some of them have actually reached out directly to the tenants themselves. It’s up you to not less renewals and more kind of rent to full discussions. And part of that we believe is just because they don’t want to be on the hook for potential lease commissions. In terms of restructuring these things, I would tell you that our approach has been as advisors to our clients that we’re not looking for commissions. We’re trying to find the best solutions for those we believe with a longterm that would come back. So I do point that out that some landlords are talking directly to the tenants who haven’t been going through some of the leasing brokers.

Perry Bacalis: I’d agree with that as well.

Libby Park: Can anyone speak to in terms of standard policies that you’re seeing from healthcare systems, what exactly are the specifics of the terms of these policies? Does this vary by healthcare system or are you saying consistencies nationwide with the policies that are being implemented?

Lorie Damon: Libby if you’d like, I can jump in here across our portfolio about 80% of the square footage that we manage is owned by health systems or master leased by them. And by and large, their approach has been a short term deferral either 60 days or 90 days. Very few have looked beyond that. All of it is structured as a deferral and it’s either repayable through the end of the calendar year or through the end of the year as defined by the term. A few of them have also amortized it or have tacked it on as additional rent at the end and almost every case it’s structured as additional rent and late fees and interest are waived.

Shawn Janus: I would agree with Lorie’s comments. I would say that specifically to your other part of that question, Libby, is that while within a particular health system we typically standardized, but across the country from health system, the health system it may be a little bit different. So we’ve seen each of those act independently, but typically with a standard procedure,

Lorie Damon: Yeah. Applicable generally to everybody. In the interest of out of an abundance of caution. Stark as the blanket waiver doesn’t specifically address rent deferments and they do still typically have to be sensitive to looking like they’re not incentivizing referrals. I think it also just makes it administratively easier frankly.

Libby Park: Yeah, I agree. Thanks for those perspectives everyone. Making sure that there’s a process in place and standardized documentation is very important as we move through the COVID crisis. And unless anyone has anything to add on to rent relief. Let’s move on to our next topic of discussion. Fair market value. John, can you speak to what you’re seeing in regard to the pandemics effect on valuation and how our healthcare systems assessing fair market value currently?

John VanSanten: Sure. Well, even under normal circumstances it’s always very facts and circumstances specific. But under current circumstances I would say it’s even more so. And as appraisers, one of the challenges that we have is that a lot of our analysis in our opinion is based on analysis of recent comparable transactions. And so if you’re talking about a leasing arrangements under normal circumstances, if we were able to find a comparable lease of the property next door from two months ago, we might say that’s probably a really good indication of a fair market rent for the space we’re looking at. But obviously a lot has changed in the last two months. And so, relying on that transaction even that recent may not necessarily be the right thing to do. But then the challenge there is that we’re really about the end of this because there haven’t really been recent transactions that we could point to that really show the impact of the crisis.

John VanSanten: Oftentimes not a lot in the way of recent comparables that we can point to that says that market rather is an indication of what rent is, posts or while we’re into the crisis. So in the absence of actual transactions though, we can turn to what we really have to do is spend a lot of time talking to participants in the market. And talking to the people on this panel trying to understand what is it that they’re seeing, what are they hearing? What kind of arrangements are they hearing about? Whether it’s rent concessions, rent relief or for purchase and sale transactions. Are they working at a different cap rate now or are they looking at underwriting with a greater level of credit and collection loss? All of the things are conversations that we’re constantly having as appraisers to try and understand in the absence of specific transactions that we can point to, what’s going on.

John VanSanten: And we might still rely to some degree on that two month old transaction, but now we at least have a basis for being able to make some adjustments to that to reflect the current state of what’s going on. But read a lot on what that, one of the questions you ask, we often are asked as appraisers is, well, why was that opinion good for you? Is it good for a month, two month, six months? If you’re saying the fair market rent today is $20 a square foot, is it going to be $20 a square foot a month from now? And I think with the uncertainty in today’s environments there’s no guarantees that it’s going to be the same amount from now. It could literally change in a week potentially.

John VanSanten: And again, it’s all going to be very facts and circumstances specific. But I think it’s probably good practice when you’re getting an FMB opinion. And there may be some delay between one the opinions rendered and one the transaction actually closes that you might want to circle back with the appraiser to find out if there’s been any material changes in that intervening period of time. But those are some of the things we’re definitely seeing and things we’re dealing with in today’s environment.

Libby Park: Thanks for that John. In light of as you mentioned, the lack of recent transactions to base these valuations off of. And it sounds like you’re keeping a pulse on the marketplace. How do you recommend that client’s document these types of facts and circumstances to support the valuation?

John VanSanten: Well, typically if we’re preparing an appraisal report, we would document those facts and circumstances within our report and all the different considerations we’ve taken our analysis. We obviously have points actual transactions, but we would also document the conversations we’ve had with brokers who are actively involved in leasing space or investors rationally buying a space and just document the kind of conversations that we’re having. So that definitely would be part and parcel of any kind of fair market value opinion that we provide. It would be included within our appraisal. But again, I think it’s important to understand that things could change very rapidly. And I think it would be a best practice to circle back, particularly if there’s some delay between one of the tenants issues and when the transaction closes.

Shawn Janus: This is Shawn. I might weigh in on, in terms of valuation trends just on some of the disparity and maybe this way to describe it relative to cap rates. And John brought that up in terms of where cap rates may or may not go kind of in the future. Some of the surveys that we’ve been involved in that I’ve seen, I think we’re predicting kind of the cap rates within the healthcare sector could go up 25 to 50 basis points. On the outlier side, they’re saying they could look 50 to 100 basis points. Over the last week, I’ve actually had other conversations which are actually saying that they believe that the cap rates or healthcare properties may not move much at all. And the reasons for those being that healthcare, everyone believes coming out of this will be a preferred asset class.

Shawn Janus: Some of the other ones, retail in particular obviously hospitality, some of those stand out in terms of how they will be affected by the crisis. But I think we’re getting more and more questions from investors who are looking to get into the space. So there may be additional supply of capital coming into the space, which then will obviously keep cap rates at a lower level. So to be interesting to see how it plays out, no one has the crystal ball, but I think there’s at least good news from a healthcare perspective. I know there’s healthcare folks who are on this call that cap rates should not be significantly impacted. They may creep up, obviously.

John VanSanten: Yeah Shawn. What we’re hearing as well, we work with a number of real estate investment trusts and other types of investors as well. And in general, what we’re hearing is they don’t anticipate cap rates changing much. And then their underwriting, they may be forecasting greater credit and collection loss in sort of a short term basis. But from an overall cap rate standpoint, they’re not necessarily, we’re seeing a big change there.

Lorie Damon: John, this is Lori. I would agree with all of that. I think one of the other really important considerations on pricing is the quality of the assets. So I think a cap rates, we’re not seeing much movement there on anything that’s core or core plus particularly if it has a strong health system credit. I think the more interesting and possibly more volatile sector is going to be what happens with the value add properties. With a lot of different physician tenant credits, especially smaller physician tenants, we don’t yet know what the longterm financial impacts of this are going to be. And even as elective cases start opening back up, I think it’s really difficult in some cases for smaller tenants maybe to forecast what their revenue stream is going to look like and how quickly they can recover their patient base, and work through what may be pent up demand.

Lorie Damon: So I think that’s a really important segment of the industry that we’re going to have to keep a close eye on. I also think that longer range as investors if more capital comes into this sector that may allow pricing to remain what it was. But it’ll be interesting to see how investors who are new to the sector underwrite the risk. I think a lot of them have been surprised that medical office actually saw rent really for costs. I’ve worked in the sector for more than 20 years and I’ve never seen that before. And much of that was by what was perceived as a government edict to shut down caseload. So I think as we get a flock of, or potentially get a flock of new investors to the space will be interesting to see how those new investors look at the factor, how they underwrite it, how they come to understand potential risks that they may not have foreseen in the past.

Libby Park: Thanks for that, Lorie. You raised an interesting point about how these considerations will be relevant as we transition into the next phase of reopening medical practices. And we’re all likely aware that on April 19th CMS issued its recommendations for reopening healthcare facilities for non-emergent non-COVID-19 care in certain communities. And Lorie, can you speak to how healthcare clients are readying their buildings for resumption of service and what are operational considerations as practices begin to resume activities?

Lorie Damon: Sure. So across our portfolio, 100% of our health system clients are now working through their internal planning to open up elective cases. Obviously that will be phased and they will work through the requirements issued by CMS to be able to safely open up hospitals and [inaudible 00:25:20] of course, will go first. And then because many medical office buildings have surgery centers and then we’re preparing the buildings now. There are of course many, many consideration. 100% of our medical office buildings have remained open throughout this, but patient volumes have been significantly curtailed. And a lot of physician staff maybe in there, but their patient flows are much lighter. So a couple of things that we’re thinking about and working through on our case, all of this is directed by the by health systems who are the owners are masters lessors of the buildings.

Lorie Damon: One of the considerations is just looking at the volume of people coming into the building. A number of health systems restricted visitors so that they have a patient drop-off. And patients can not be accompanied unless they have a need for a helper to get them physically into the building. So in some cases those restrictions will remain in place. We’re looking at restricting ingress and egress to specific entryways so that you can carefully control the flow of patients. Limiting the number of patients in elevators is another one. There’s still some discussion about screening and whether or not patients will be screened. In many cases patients are going to be screened in advance with a phone survey. But then many health systems are also looking at doing some form of temperature screening at the entry prior to the entry to the building.

Lorie Damon: So those spaces will have to be set up and secured against an inclement weather and staffed to lots of discussion around cleaning and making sure that they’re all common areas and high touch surfaces are cleaned adequately. Everyone is concerned about making sure that buildings reopened safely. I think one of the other challenges is making sure that not only that we can document the safety initiatives that we’re taking, but also that patients sense that they are safe. So the building is going to have to look and feel and smell clean in order for patients to feel good receiving things like preventative care visits and the like. So far some physician practices are looking at having patients check in and then wait in their cars until it’s time for their appointments so that we can reduce waiting room traffic.

Lorie Damon: And I think in markets where that’s accessible and parking is available that’ll probably end up being a popular choice. So those are the primary considerations. Lots of additional I would describe this as a work in progress. We’re working through that with individual tenants and trying to develop very specific documents to guide those protocols. And also reminding our team to be flexible because the best practices are likely to evolve over time and shift a bit as we understand better what patients need and what works most effectively in the various settings.

Shawn Janus: This is Shawn. The one thing I would add, I agree with everything. We’ll reset it and it goes over those are spot on in terms of the things that owners of medical office are looking at along the extended building hours. The other thing I was going to bring up, and this is less of a real estate issue than it is an operational issue or operational potential solution. So for example, for AFCs where they may have a staff on a percent of their people, they’re shifting those to where they’re actually at the other day using 50% of that staff on Monday. 50% on Tuesday, and then rotating that and it makes a whole bunch of sense. And the reasoning being if they do, God forbid have a positive COVID test, they would need to quarantine and self isolate for the 14 day period potentially. So at least then they would have the other 50% of the folks who could step in and begin working every day. So the theory being you’re obviously not going to lose a hundred percent of your revenue, but if you can be able to keep 50% of that revenue on a limited basis moving forward. So I think those are some of the creative solutions that health care providers are looking at, ways to kind of keep the business going in a thoughtful manner.

Lorie Damon: Yeah, I think that’s a great point Shawn. And we’re doing the same thing with the building management and engineering staff. Creating teams and rotating them to limit their risk of exposure already throughout the pandemic today. We’ve staggered hours for maintenance and try to schedule preventative maintenance or even repairs that don’t have to be done immediately. Try to do those when there’s nobody in this suite. And a lot of tenants have said that they’re going to do some of their own cleaning particularly wiping down exam rooms between patient visits just to mitigate their risk and mitigate the introduction of yet another person into this space. So I do think we’re going to see slower volumes of patients based out. That may mean that building operations hours get extended. But I do think we’ll see that phase over time and not be the immediate response.

Libby Park: It sounds like there’s already a lot of movement and implementation of practices and procedures to make sure that buildings are reopened in a compliant manner. And maybe this is evaluation question, but generally as we progress through COVID, who do we think is going to absorb these costs in relation to even cleaning or screenings? Will these be passed through to tenants? How will the owners or landlords of buildings absorb these costs?

Lorie Damon: I think that’s a good question Libby. I think it’s going to be interesting to see. I think it really depends and buildings that are owned by health systems, I think if they’re being prescriptive about what happening they may agree or feel obligated to shoulder some of the costs. I think the other issue here is the duration. Certainly additional cleaning in common areas and for instance staffing a security guard in an elevator so that one person pushes the buttons and not every patient pushing buttons to whatever for the floor they want to go to. I think there’s a case to be made that those are shared expenses that benefit the entire tenant base.

Lorie Damon: Again, I think this will require some negotiation. It requires being able to forecast what those costs are going to be so that all parties, the landlord and the tenant base understand what those additional costs will be. And then I think wherever possible and appropriate looking really hard at where other operations savings can be accomplished to offset some of these costs so that physician tenants and even health systems who have experienced pretty significant financial hardship are not also then upon resuming in cases facing significant additional capital outlay as they try to ramp their businesses up. John, I don’t know what your thoughts are on that one, but that’s my off the cuff hunch.

John VanSanten: Yeah. I mean I would agree with it. It’s really hard to say for sure. But I think you’re off the cuff conscious probably. I mean similar to what I would think as well, so we’ll just have to wait and see how it all plays out.

Libby Park: And how are we seeing which this can be open to anyone, but how are we seeing the transition for reopening in regard to short term leases that have been put into place to deal with the COVID-19 crisis? For example, repurposing AFCs or potential leasing of hotel spaces. How are parties thinking of transitioning out of those short term arrangements?

Lorie Damon: So I haven’t seen any movement on them, I think one of the remaining questions is really understanding or trying to feel like you have a good grasp on what potential additional capacity is going to be needed. And so a lot of health systems really expanded their bed capacity and especially their ICU bed capacity. And some of them did took down short term leases and AFC is in order to have that on the shelf. I could envision that if they think they have enough capacity in the event of a second wave or an unpredictable reopening where they can’t accurately forecast the number of potential cases, that they may allow some of those AFCs to either be sublet back to their original users. So that they can resume caseload there.

Lorie Damon: Some of them may just leave those short term leases in place. I mean most of those leases least the ones that I saw were only three or four months in duration. And the health systems who took them over took complete control of them. So there would be no switching back between hospital use and non-hospital use or regular surgery center use. So some of those may just be easiest to leave them in place in the event of needed capacity. I haven’t seen directives on that one yet, but I’m sure that will get figured out in the coming weeks.

Shawn Janus: Yeah, I would agree with Lorie. I think Lorie, that was well put and this is kind of one of the areas of which so many of these are, which is we have to see how things play out a bit. Obviously there’s two components to that. There’s those that kind of health systems are controlling as you mentioned AFCs and then you kind of have the whole other world of what municipalities are doing, whether it be replace here in Chicago, which were converted to hospital beds or the Javits center in New York. And there’s examples around the country as well. So some of those will be driven by municipalities in terms of what kind of that excess overflow capacity might look like. Some thing thing with as it relates to the leasing of hotels, which are I would say hard hit city of Chicago has as least hotels on two fronts.

Shawn Janus: One, they actually house those who have tested positive for COVID-19 but not serious condition, but just need to be isolated and not being in intensive care. And then also other hotels which are effectively have been leased so that health care workers can utilize those facilities to isolate from their families as hard as that may be as a way to that effect those families as well. So you have the two components with our hospitals and health systems doing on that front and then what are the municipalities doing. But I do think it’s a big swag in terms of how things continue to progress over the next weeks and months.

Libby Park: And that’s a common theme that we’re all in this together and we’re all taking the pulse of how things will progress over the coming weeks and months. So I think having discussions like we are today so that we can share knowledge amongst each other and best practices for handling these things moving forward is important. Thanks for those perspectives. Let’s shift to our an extension of our consideration for reopening topics. Perry, could you speak a little bit on the tenant side of what the most pressing issues are relating to the return to normalcy post-COVID and in particular, what are physician practices thinking through?

Perry Bacalis: Yeah, that’s a great question. So two things come to mind there. One is the insurance reimbursement lag coming. I feel like there’s been a lot of practices that have said, yeah we’re good now. But what is maybe going to look like in June, and that some of those things start to drive because our traffic has been at a fraction of what it was last couple of months. So there’s that aspect. Hopefully most of those practices have the rent relief in place. But really that’s just going to give them an idea of okay, those practices that have kind of that tag or savings saved up so they can kind of weather the storm. I think that’s going to be one of the most interesting things to see. But I think going forward once we kind of get over that hump and obviously going back to speaking to that the telehealth that those insurance companies are reimbursing those visits at a 100%, so like a regular office visit.

Perry Bacalis: So does that continue, does that go back to where it was before all this sort of happening? Is there going to reimburse it at 50% going forward? How is that going to affect practices? And I think the biggest concern or question really that most of my clients are having is what is my space going to look like going forward? The physical space itself which goes right back into telehealth, has something like that. Something we’re going to be able to do, we’re going to be able to do follow up visits where they don’t even have to come back into the office. What is my waiting room going to look like? Are we going to have folks wait in their car and then come in right as their appointment comes in. Our waiting room is going to get bigger. Are they going to get smaller? Is the six feet distancing a new normal now? So is that going to impact our space? I’ve got multiple clients right now. We’re planning on okay, what’s your space gonna look like in the future on relocation, or renewal.

Perry Bacalis: They don’t know how to plan their space out. How’s it going to change. And I will be interested to see kind of the new future space knowing that hopefully this is the last time something is this large of a pandemic will be around. But in the future, what could be more we’re prepared for how can our spaces be laid out for the new normal. And I don’t really have an answer to that, but that’s something that I’ve got several clients going. I wish I knew how the space is going to lay out. So that’s the main thing I’m seeing and trying to advise my clients the best I can. I would be curious to know what other folks are seeing out there with how physical spaces are going to change.

John VanSanten: And Perry, you bring up some great points to Shawn in terms of I think that… the best news is that this is what people are thinking about here over the course of I’ll call it the last week, whereas before it was what am I doing the next minute, the next hour from a health perspective as a healthcare. I think it’s a positive perspective that we’re starting to think about getting back to normalcy and what are some of those implications. Let’s get out in front of this beforehand. Obviously testing which is all over the news will be a key component of that. And you’re right Perry and things of people are conjecture at this point. I mean, obviously some of the things that you touched on that Lorie touched on earlier, which I thought were great points in terms of single entrance and exits.

John VanSanten: One way thoroughfares through the space, checking in online, getting rid of the front desk in terms of check-ins, the waiting room was it can be boys in their cars. And then kind of get texted and say, okay, it’s your turn to come in. And there was just having a larger waiting things that may be congregating and all those types of things. The other interesting thing that you mentioned, which is kind of that telehealth component, I think that’s from my perspective will be one of the more interesting components that will flush itself out in our space. In the healthcare world States the healthcare space has been talked about for a long time. It’s really been a slow adoption of telehealth, telemedicine and I will tell you primarily two reasons. One is as you touched on reimbursements and that the fact that they weren’t being reimbursed.

John VanSanten: And then secondly, the fact they’ve relaxed the kind of interstate guidelines as it relates to that as well. So it will be interesting to see what happens after this and how that changes. Some of those discussions have been, we may need dedicated space within our offices that we’re going to use for telehealth, so that providers, whether it’s nurse practitioners or physicians, will be kind of doing the telehealth within a certain component of the office. So I think it’ll be interesting. I think originally people were thinking, boy, could this is going to shrink the space that’s needed. Will this grow the space that’s needed? And I think it’s a big swag at this point. But I think all of those things been positive news again, is that they’re on the table and people are starting to talk through it. And what are those solutions and what will that look like.

Lorie Damon: I also think it’ll be interesting to see, particularly with respect to telehealth with how well it really works. There’s been a lot of those, a lot of headlines lately about patients who have experienced really serious health issues, who’ve been afraid to go to the Ed. So the incidents of heart rates was down, but not really. People were having a heart attack at home. And that they have a stroke and appendicitis and all sorts of things, all of which is not easily diagnosed from telemedicine. So I think one of the interesting questions that we should ask out of this is what are we going to, what do we know about the quality of diagnostics available to us from telemedicine on the back end of this? Because I think between, the answer to that question and then how reimbursements are going to change or if reimbursements are going to change.

Lorie Damon: And then the regulations around patient privacy that allow telehealth that have been lifted to allow, for instance, a FaceTime visit with your doctor to count as a check-in. Are all going to really dictate what the demand for whether or not telehealth has any impact on demand for space or the kinds of space in a physician office or whether it gets aggregated together in some other telehealth hub. I think we’ve got to have some better data around how it works and how it is assessed using really rigorous scientific measures in order to help guide those decisions for patients. I do think we might see the pace of adoption accelerate, but I think we’re still a long way out before we see it have really dramatic impact on a footprint.

Shawn Janus: That was a great point Lorie. This is Shawn Janus. I agree with that completely. It also hearkens back, it struck a chord when you had talked about read the same things in terms of heart attacks or cancer screenings and folks not wanting to go into the healthcare environment. And what could the impacts of that do? So I just tie that back to your earlier comment in our discussion, which is really getting the confidence of the consumer of that patient to be comfortable coming back to the hospital and, or the medical office building. And, we as real estate advisors and providers need to make sure that that space is designed in the correct manner so that they do feel safe if you have the social distancing, we have the way finding and all those types of things. And even to your point, the back that even the air quality such that it smells clean, it looks clean are all gonna be very important cause that’s going to start getting us back the road.

Lorie Damon: And it may be that, it’s not an all or nothing solution. I was talking to a colleague yesterday who his partner is a diabetic and there’s a lot of concern around his underlying health condition. That’s also a condition that can be safely monitored remotely. And there are lots tools in place already to do that. But for other conditions that may not be so easy. The other, comment I would share on tele-health as I was thinking about this because I used to work in higher education and I remember when online learning was first launched that everyone, the naysayers came along and declared that professors were going to go away and university classroom footprints were going to shrink. And there were all of these very dire prognostications about that.

Lorie Damon: And now of course that many of us who have small children are at home suffering through online learning are grateful to have it or whatever your perspective is. I don’t know very many parents, teachers or even students for that matter who are not going to run back to a physical classroom the very minute that they are able to do the fel. I mean, even my son who has pretty good setup for online learning told me this morning, he was like, mom, I’m so sick of this. I actually cannot wait to go back to school. And so I have a feeling that for some dinner, racially speaking, I think patients may also feel the same way, that they might just appreciate some of the social aspects of being seen physically and in person by a doctor.

Perry Bacalis: I’m with you there, Lorie. This is Perry. I’d love to just interact with another human, that’s not my family.

Lorie Damon: Right. Like even if I have a hangnail, I might just go ahead and make an appointment because why not?

Perry Bacalis: And the excuse to see another human being having a conversation.

Lorie Damon: Great that’s an in person visit would be great.

Perry Bacalis: Yeah. No, I agree with that. I think, just like in any other major event that happens, we learned from it, take the best practices and we adapt and going forward. But things are going to be, 90% the way they were beforehand. We just, take the best practices and move forward. I think that’s what it’s going look a lot like going forward.

Libby Park: It sounds like it may be a little early to see health systems reconfigure, pared down a brick and mortar spaces in light of the fact that we all are craving social interaction. But can someone speak to bottom line considerations that executives should think about as we progress through into the new normal if brick and mortar spaces are a real necessity? Or to what extent brick and mortar spaces should remain?

Lorie Damon: I’m a believer in brick and mortar. And I don’t think that’s wishful thinking on my part. I just think there’s an awful lot of medicine that must be done in person and especially for specific patient populations who are chronic disease or complex comorbidities. Caring for them is really, really challenging and it requires a lot of a lot of diagnostics that cannot best be done remotely. It also requires, I think, medicine in recent years has moved much more to teaming to treat some of those chronic conditions and that requires interaction among care providers as well as with the patient. So I just can’t imagine really even in my wildest dream having technological tools really quickly that would supplant or replace as fully what is accomplishable in an in person visit.

Shawn Janus: This is Shawn. I would agree totally Lorie. I think from, bricks and mortar, we’ll always, we’ll always have a place and again, the makeup and what that looks like may change, may shrink, may grow, but I think it is important for some of the reasons you mentioned. And also healthcare is at its nature, high touch. I mean as you guys were, as you and period we’re talking about with your kids and schooling and the wanting to see other people, it’s the same thing. And even accelerated when we talked to our physicians, you have a physician you can, get personally interacted with.

Shawn Janus: Do you have an emotional connection with doing that over the phone or via telehealth or the other setting technological settings. It’s not the same as seeing your physician. So will change and most likely will change. And we all, none of us have the crystal ball, but we’re beginning to work through that. I think you know, the bricks and mortar component will continue for my lifetime for sure.

Lorie Damon: If I think back to higher ed and what happened after classrooms, after we equipped classrooms with computers and facilitated some version of online learning, almost everything became blended. It did. One did not complete supplant the other. They started to work in tandem and in fact, many universities put prints grew, they didn’t shrink. And so it be interesting to sort of keep those two situations in tandem and look to other industries to see how widespread technological adoption is going to work. I mean, one of the challenges that we’re seeing now with online learning across an awful lot of the United States is that a remarkable number of people do not have reliable internet access. And I think, widespread adoption of telehealth really requires that.

Lorie Damon: And that conversation really needs to proceed because some of the places now that are most susceptible to COVID and are experiencing really significant issues related to dealing with the pandemic are in rural markets where there’s limited hospitals, limited numbers of ICU beds, limited numbers of clinicians to care for these people. So, just at the very pragmatic brass tacks terms, we can’t adopt tele-health widely unless we’re sure everybody has access to the internet and to technology that can facilitate it.

Shawn Janus: Yeah, I would agree. And as Perry had mentioned earlier, we as a society here in the United States in particular, we learn from things that have happened and not just as it releases pandemic. And ways to go for [inaudible 00:52:29] going forward we’ll be able to address this in different ways. But to your point, Lorie, I think being able to take best practices from other industries who have dealt with things which are similar, different but similar in ways that we can leverage that and be more efficient as we roll this out. I would agree with that.

Libby Park: Those are great points. Thank you. We’ve been receiving questions throughout on the webinar Q&A platform as well. And we have one that I will post to the group from one of our participants that’s state, excuse me. We’re seeing conversations regarding future design and build senior housing in light of the potential paradigm shift in the delivery of care. Can anyone offer any early insight on the potential evolution of senior care?

John VanSanten: I’d be happy to kind of do my observations with John. So we do a lot evaluations to senior housing facilities. You have the full spectrum from independent living, the assisted living, the memory care to nursing homes and we’ve all certainly heard the tragic stories of what’s been happening in some of the nursing homes as well as some of the assisted living. And there definitely are some concerns that we’re hearing that may cause a big paradigm shift. And how those types of facilities are designed. Do people really want to go to a facility that has 90 people all congregate in a close quarters like that where something like Corona can be so easily transmitted from person to person. And typically that the move to a facility like that is more driven by a healthcare need rather than a lifestyle choice.

John VanSanten: So they have to get the care from somewhere. And so the most logical alternative is home health. And so you start to wonder, is there going to be more demand for home health as opposed to people moving into these facilities? Or are they going to have to change the design of these facilities to be able to sort of protect people who live there and give them the sense of security that they’re not going to catch the next communicable disease that comes around. They’re still very early in the discussions about that, but it’s definitely some serious concerns that we’re hearing within the industry about that.

Libby Park: That’s an interesting contemplation, John, regarding the shift to home health and raises questions regarding again, cost absorption. The transition to home health becomes the new norm what will that look like. Another question that we’ve received shifting gears is in regard to construction. Have we been seeing construction delays as a result of the coven 19 pandemic? And if so, how are parties dealing with those?

Shawn Janus: Oh, this is Shawn. I can weigh in a little bit on that one. So I think I was just on a call actually just yesterday. I guess it was with a large group of investor developers and we were kind of touching on some of those similar topics. So I think from the construction side, again it varies state by state. Here in Chicago construction is continuing see crews out there and other States it’s prohibited and it’s not in steam, not non-essential or not moving forward, but I think in all instances everything has been delayed because even on the construction side when you get to that, they still are trying to practice social distancing. So obviously that just delays, it makes things slower. We also have a supply issue in terms of when you can get the supplies, how those come in.

Shawn Janus: So we are seeing construction at least on our side, seeing construction continue. The developers, in fact I’m at call I was somewhat surprised that how rosy their outlook was relative to projects they had in the pipeline. Most of those are moving forward. I’ll be it with delays, whether it be on the construction side as we talked about. Or the other piece is just getting through the governmental regulatory process getting permits done. [inaudible 00:56:36] when you get to the back end, et cetera. But surprisingly also from a leasing perspective, they were still having success in leasing those projects. Again, those are further out in the future. So folks that didn’t go looking beyond kind of the current situation and that there might be some positives. So I think that speaks both to the industry as well.

Perry Bacalis: This is Perry, same thing out here in Denver. It’s a surprisingly on track for construction. Even so much I’ve got a quite a new medical office building and obviously they’ve been delayed not being able to address lease comments, but construction still on schedule so we kind of could go in and we don’t want to miss our date. So yeah that’s one of the nice surprises is there really hasn’t been much of a delay in we are starting construction costs were an all time high out here in Denver months ago and now they’ve kind of come back down to earth too. So that’s also good for our clients.

Shawn Janus: The same thing that was also brought up in terms of the construction cost that those had escalated kind of in the short term. But they’re seeing those come down and I actually had one individual say that they foresee that construction costs overall could come down another 15% here in fairly short order.

Libby Park: We have another question. Jumping back to reopening consideration, what are the panel’s thoughts on multi-tenant medical office buildings and whether a landlord should be responsible for testing at the main entrance of the building or if the testing obligation should fall to the tenant for their own individual suite.

Lorie Damon: This is Lorie. I’ve had a thousand conversations about this matter, so I will weigh in with what I think is prudent. And with the caveat that I’m not an epidemiologist, so here’s what I think. It depends on who the landlord is. It’s a landlord as a health system and they have specific directives and many of the tenants in there are either aligned or affiliated physicians, then I think they are likely going to direct how and where and when testing is going to occur. In the early days of the pandemic, we experienced an awful lot of instances where tenants took it upon themselves to temperature screen patients and some of them were doing it in the common areas of the building and they were doing it suite by suite. That is not only problematic because the common area of the building is not theirs to use for that.

Lorie Damon: It also meant duplication of effort. So in many cases, we worked collaboratively with the tenants, with the landlord to raise the question, can this more safely be done prior to entering the building. Because the goal is to just reduce risk and reduce exposure for everybody entering this space. And then also to reduce the need for interim cleaning so that you can deep clean all of those areas maybe once a day or maybe two times a day if you need to, but try to manage how much cleaning has to occur all the time. And so I think to the extent that tenants and landlord can come to some sort of agreement that screening will happen outside of the building in a secured location and that all parties can contribute to that if all parties can benefit from it.

Lorie Damon: And some of the cases that we had, the tenants who had staff available rotated staff to perform the temperature screening. And so that became very efficient and very cost effective. It allowed for order the path of ingress into the building. So patients were notified, all of the tenants could notify their patients, hey, this is going to happen. Before you enter you’re going to have to go through a temperature screening. And if somebody’s had a high temperature, then they were directed to another entry way or were directed for additional screening to determine whether or not they should proceed with their appointment or not. I mean, temperature screening overall are murky. You can have a fever for lots of reasons, one of which might be COVID and lots of other reasons might not be. So I think part of the goal there is just the whole purpose of temperature screening is to reduce risks for everyone. And the idea of having tenants do it individually in their suite just gives me a pause.

Libby Park: Thanks for your thoughts on that Lorie. I realized that we are at time everyone and I want to be sensitive to everyone’s schedules. I’d like to say thank you to Lorie, John, Perry and Shawn for our conversation today. I’d also like to let everyone know that Hall Render publishes an E-newsletter each month called the Healthcare Real Estate Advisor and also a podcast. If you’d like to receive this newsletter, please email real estate at hallrender.com. Thank you again to everyone for joining the webinar and please feel free to reach out to me directly or any of our panelists with any followup questions. Thank you.

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Demonstrating Hospital Community Benefits

Demonstrating Hospital Community Benefits 

Providing charity care and community benefits is important for hospitals because it affects the way they’re viewed in the eyes of the public and is a requirement for property tax exemption and income tax exemption. Increasing we’ve seen pressure at the federal level and in numerous states to challenge hospital tax exemptions. This episode is designed to help hospitals devise innovative ways to demonstrate charity care and community benefits in preparation for and in response to governmental and third-party scrutiny.

Podcast Participants

Joel Swider

Attorney at Hall Render

Kerry McKean Kelly

Vice President of Communications & Member Services, New Jersey Hospital Association

Neil Eicher

Vice President of Government Affairs, New Jersey Hospital Association

John Palmer

Director of Media and Public Relations, Ohio Hospital Association

Joel Swider: Hello and welcome to the Health Care Real Estate Advisor podcast. I’m Joel Swider, an attorney with Hall Render, the largest healthcare focused law firm in the country. And today we’re going to be discussing hospital community benefits and sharing some ideas for how hospitals can demonstrate the good work they’re doing in the community. I’m excited to have three guests with me today. The first is Kerry McKean. Kelly. Kerry, welcome to the show.

Kerry McKean Kelly: Yeah, thanks Joel. My name’s Kerry. I’m the vice president of communications and member services for the New Jersey Hospital Association. And some of what I do here is take issues like community benefit that we’re talking about today and make sure our external stakeholders hear about it, whether that’s community members or legislators or members of the media.

Joel Swider: Great. Well Kerry, welcome. And our next guest is Neil Eicher. Neil, can you tell us a little about what you do?

Neil Eicher: Sure. So I’m vice president of government relations and policy at the New Jersey Hospital Association. I run the advocacy department both on the state side and the federal side. I’ve been at NJHA for 12 years now. Prior to NJHA I was chief of staff to a local state Senator. So came up from the political route and look forward to the discussion today.

Joel Swider: Great. And last but not least, we have John Palmer. John, welcome.

John Palmer: Hi Joel. Thank you for having me. I’ve been with the Ohio Hospital Association for eight years, working in our advocacy department, focusing primarily on media relations and community outreach initiatives and the community benefit program and initiative has been one of my areas for the last eight years at OHA and I’m happy to be on to talk a little bit more about that and its role in community health.

Joel Swider: Great. Well thank you all for being here and being willing to share your knowledge. We’re talking about demonstrating hospital community benefits. So why is this important? Well, providing charity care and community benefits is important for hospitals for one thing because it affects the way they’re viewed in the eyes of the public. Not only that, but also demonstrating charitable purposes or community benefits is a requirement for tax exemption at the federal level and in almost every state at the state and local levels. We’re talking here about exemption from federal income tax, property tax exemption at the state and local level is a big one as well as exemption from state income tax and sales and use tax. But increasingly we’ve seen, we at Hall Render have seen at the federal level as well as at the state level in numerous States, challenges to hospital property tax and other types of tax exemption.

So today we’ll try to help hospitals come up with some innovative ways to demonstrate levels of charity care and community benefits in order to respond to and hopefully even preempt some of these governmental and third party attacks. So the first question I have, and this is really directed to both, Ohio Hospital Association and New Jersey Hospital Association. Both of you in, in addition to several other state hospital associations have been calculating and publishing a report for several years, which is a community benefits report. Could you tell us a little bit about what the impetus was in putting together that report?

John Palmer: Hi Joel. I think I’ll take this one from OHA’s perspective. Probably about nearly 20 years ago, we were working internally with one of our committees and there was a desire to have a document that really captured the statewide kind of figures and numbers to really look at as a whole, as a state. How are we implementing community benefit. At the time, charity care, the financial assistance services that hospitals have provided was getting growing that was causing some concern about the amount of uninsured Ohioans and what opportunities we had to help address that because it was putting some strain on hospitals. So eventually OHA spearheaded and led a collection process capturing all of our members community benefits, our charity care, Medicare losses, Medicaid losses, community benefit activities, bad debt, kind of compiling that into a report. Instead of creating those parameters, we followed the national Catholic Health Associations guidelines for community benefit reporting.

And those categories that I mentioned come from that national standard there. And so we put together a report and ever since then we’ve been issuing that. It’s taken some different forms over the years, whether it was an online webpage, a printed report, a fact sheet, brochure and any of those things. It took different form to meet the audience needs or to really focus on the story that we wanted to tell.

Joel Swider: Sure. So could you tell me, and I don’t know if the NJHA folks want to weigh in on that, do you have any other impetus and why you decided to put the report together?

Kerry McKean Kelly: Our experience is similar to that that John described, but just speaking very simply, I would say that our goal is to make sure that stakeholders are aware of the depth and breadth of the contributions our hospitals make. It becomes a very good tool in telling that story in your community, but also for use in policy development and advocacy. It’s important that everyone sees not only that data and how impressive that number is when you count it all up across the state, but also the community stories that are behind that data. Hospitals are such important anchors of their communities and I think there can be a tendency for people to take that for granted. But it’s such an important reminder for us to see that the dollars and support reaches into the billions. And that’s not just in delivering healthcare services and jobs, but also those value added programs in their communities.

Joel Swider: That makes sense. And so you’ve talked a little bit about where the data comes from in terms of schedule, age. I guess, could you tell me a little bit about how the reports are set up and what types of metrics are included?

Kerry McKean Kelly: There is a pretty standard reporting structure in these community benefit reports. The categories and definitions are established by the Catholic Health Association and they cover four main areas and they are free and discounted care, community health improvement services, health professions education, and kind of a catchall category called other community benefit programs. So the idea I think is to have any organization across the state, or I’m sorry, across the nation adhering to these standard definitions and categories so we can get a pretty good picture and comparison across the nation. But I would say that with that said, we here at NJHA have had some discussions about whether the standard categories that were developed, I don’t even know how long ago, whether they’re really capturing all of the work that hospitals are doing today in their communities. With so much growing focus on social determinants of health, for example, hospitals are investing in programs like housing and transportation quite apart from traditional healthcare. And we’re not sure that we’re really capturing that in all of these community benefit reports.

Joel Swider: And so let’s drill down a little bit into what these reports show and what the advice is for hospitals. I guess we’ll start with New Jersey. The 2019 New Jersey community benefit report indicated that New Jersey’s nonprofit hospitals contributed 2.83 billion dollars, and that’s billion with a B, in community benefit support within their local communities in 2017 what does that consist of?

Kerry McKean Kelly: The largest chunk of those dollars and New Jersey’s report is in free and discounted care. And that total is 1.9 billion. And that includes charity care for those people without health insurance. And it also includes the shortfalls that hospitals incur when they care for a Medicare and Medicaid beneficiary. Because, of course, we know that both of those programs reimburse hospitals at rates that are less than the actual costs of providing the care. And that total also includes uncollectible patient care costs, which is more commonly called bad debt. It’s basically quite simply care that the hospitals provide, but for which they never recouped payments. New Jersey’s total also includes 247 million in health professions education. That includes graduate medical education and again that’s an area that people might not really think about, but it’s so important for developing the next generation of physicians and other healthcare professionals.

Our total also includes 60 million in community health improvement services, and those are the things that you would normally think about when you hear the term community benefit. So that would include services like health screening, support groups, health classes, fitness classes, those sorts of things. And finally, our other category total $620 million. And that includes a lot of those overlooked areas. One of those important ones that people may not think about are service lines that a hospital may operate at a loss, but they continue to provide that service because they’ve identified a need in the community. Another area that would be included in that are payments in lieu of taxes or other contributions that hospitals make to their host municipalities.

Joel Swider: So for OHA, I’m looking at your report here and the latest OHA report shows a couple of interesting things to me. One of which is that Ohio hospitals provided 7.5 billion dollars in total uncompensated care in 2016 which I assume is the latest year that we have data for and this was up from 4.9 billion in 2013 which was pre expansion of Medicaid eligibility. It seems to me wasn’t one of the stated goals of Medicaid expansion that more people would be covered by insurance and therefore costs to the system would go down as there would be less uncompensated care? If that’s the case, how is it that the total uncompensated care figure has risen about 65% it looks like over that three year period post Medicaid expansion? I don’t know John, if you have any thoughts on that.

John Palmer: Yeah, thanks Joe for bringing that up because you know it’s one of those things as we develop our community benefit reports, another aspect, or another term that’s often affiliated is our total uncompensated care. So when you look at community benefits, you’re looking at your charity care, your community benefit activities, the Medicaid loss, and then any reimbursements from the Federal DSH Program. And then that’s where you get your net community benefit. And then to go a step further to calculate the uncompensated care, you also look at the Medicare losses and then the bad debt that the hospital has incurred. When we report out our data, we have community benefit, but we also report out on uncompensated care. And the situation with Medicaid expansion that came through with the affordable care act, Ohio implemented that in 2014 with covering more Ohioans low income onto the Medicaid program.

And so in that year of 2013 we had a decent amount of uninsured after an expansion happened in 2014 we saw the uninsured population decrease significantly and all of a sudden now you’re shifting that population from uninsured over to government payer. And so you saw that drop in charity care. What happened also in that time is we saw a pretty decent uptick in hospital’s community benefit activities. So there are efforts around research, health education, community health services, subsidized health services to what Kerry was referenced earlier, community building, financial aid and kind contributions. So we saw a huge uptick, about 1.5 billion dollars of that with 2016 data. We saw Medicaid and Medicare losses also increased as well. And so you shifted from one major category because before expansion, charity care did occupy a pretty big allocation of our community benefit.

And so once that decreased then you saw increases in hospitals making investments in their community benefit activities. But they were also taking some greater losses when it came to the Medicaid and Medicare program during that time. We will have 2017 data out here. We’re kind of putting some final touches on our 2019 report, which focuses on 2017 data that we would have out before the end of the year. And I will say that we are seeing increases in all those areas of charity care, community benefit activities as well as Medicaid and Medicare losses. So it continues to be kind of volatile when it comes to these numbers reporting and trying to get some trend analysis going on there too. But I think it’s responsive to the communities that we’re seeing and a lot of utilization of services or a lack of utilization of services around in some areas. So I think we’ll continue to see some of those fluctuations. [crosstalk 00:14:59]

Joel Swider: Well John, that’s interesting. And I know you said the report isn’t out yet, but have you, just in your preliminary look at the 2017 data, have you seen those trends continuing?

John Palmer: Yeah, we’re seeing increases in charity care, community benefit activities, as well as Medicaid and Medicare losses are gone up as well. Bad debt has increased a little bit, but overall we’re seeing, we’ll be reporting out a total community benefit increase from 2016 data and then a total uncompensated care increased as well. For the end of the year.

Joel Swider: So it sounds like, as I’m listening to you and reading these reports, there are a couple of elements. It seems to this concept of community benefit or contributions generally to the community. There’s the uncompensated or charity care side. And then there’s also this concept of community building or outreach activities. According to both of your reports, hospitals are engaging really in both of these activities. Could you talk about what’s driving this kind of multi pronged approach?

Kerry McKean Kelly: I think it’s really part of the growing recognition that what happens in your home and in your community has a greater influence on your health than what happens within the four walls of the hospital. Hospitals have always made these commitments and community benefit, but I think it’s becoming much more of a strategic approach under healthcare reform and the focus on population health. Hospital investments and healthy communities simply make good sense for improved patient outcomes, lower healthcare costs, and a much more sustainable healthcare delivery system.

Joel Swider: Well, the numbers that are cited in these reports seem to indicate that not only are your member hospitals providing huge amounts of charity care, but the amount of charity care and community benefits and community development funds has actually been increasing steadily. I want to switch gears and start looking from benefits to costs, because there was a report that was put out in September of this year, September, 2019 by an economics professor at Ball State University here in Indiana, and his report asserted that the increasing cost of healthcare is largely attributable to what he calls monopolization of the not for profit healthcare sector. In other words, nonprofit health systems, which by the way comprise over half of the hospitals in the United States are acute care hospitals with the remaining 44% split fairly evenly between for profit and governmental. These nonprofits have grown in size and in market concentration by purchasing and aligning with independent hospitals to such an extent that they have the ability to unilaterally push prices up in a given market, at least that’s the argument.

Joel Swider: And while the data that professor Hicks used to support his conclusions was largely correlational, I mean in my eyes it did make for some splashy headlines here in Indiana. It also made some national trade publications as well. And his proposed solution was more taxes on revenue, more taxes on real estate. And more taxes on asset holdings by these not-for-profit healthcare providers. I think if you peel back the onion on some of these arguments, at the root of it is a perception that hospitals, particularly nonprofit hospitals are just not providing enough charity care to justify their exemptions. And it seems to me and part of the reason why I am excited to have you on the show is that what OHA and NJHA and other hospital associations are doing is really creating a snapshot of what good that these hospitals truly do in our communities. How do you, OHA, NJHA, respond to these types of challenges and how do you advise your member hospitals to respond?

John Palmer: Well, this is John. I would just comment that, and in fact that yes, charity care has gone down just in response to this great achievement that we’ve had with being able to offer coverage options to many Ohioans that wouldn’t be eligible to if it wasn’t under the affordable care act with Medicaid expansion. The affordable care act was a significant piece of legislation. It is a law of the land. There’s been attempts to repeal it and replace it and I think there’s always going to be efforts. We should always be focused on improving and making improvements and reforms appropriately to build upon successes and look at impacts because the ACA was significant, but they still have some flaws and areas that needed to be addressed. One of those in particular was Medicaid expansion was offered in response to a cut and a reduction that hospitals were going to take with our supplemental programs through the DSH initiative.

John Palmer: And that’s forthcoming as far as what the latest reports are out of Washington is that those cuts are going to be coming to as well. And so even though it might’ve seemed like the affordable care act handed hospitals, providers, a lot of resources at the same time, it came at a cost to kind of balance things out. I think on top of that, you’re seeing hospitals and healthcare beyond what is happening with these healthcare reforms and healthcare laws. Hospitals continuing to make significant contributions with community benefit activities. When you saw when expansion was implemented, charity care dropped, but we saw an increase in community benefit activities. Hospitals making strong efforts and making investments in their communities, looking at clinics, establishing community health initiatives through clinics, looking at population health issues like diabetes and obesity and smoking, some of these areas that really have an impact in helping to turn around a community’s health.

John Palmer: So I think overall we’re going to continue to focus on our community benefit programming because numbers are important. Numbers tell a pretty big story, but it really needs to have a narrative. It really needs to start doing snapshots. And we’re seeing a lot of our hospitals make that effort in their reporting of community benefits and really telling that story about those programs that they’ve initiated, those partnerships that they’ve established to really advance healthcare and wellness in the community. So I think you’ll see that moving forward [crosstalk 00:22:10] your report.

Joel Swider: Neil, anything you missed?

Neil Eicher: Sure I’ll just… John outlined it very well. It’s easy to look at the expansion of Medicaid and the reforms in the ACA in a vacuum and not understand that hospitals were significant contributors financially and still are, still after the expansion. But it was something that we had supported as an industry nationwide because we recognize the financial and the healthcare quality benefits of providing insurance to people ahead of time so that they can access the care, hopefully not even in the hospital and not getting to that point. So it’s important to remember that hospitals were a partner in actually funding a lot of these reforms. And the ACA doesn’t get talked a lot about, but the way that they’ve changed the value based programs and how the federal government is now reimbursing for outcomes instead of actual procedures and services in a way.

Neil Eicher: And a fee for service model that we were all used to. And it’s really driven the changes that John alluded to about providing more care in the community, A, because it’s the right thing to do and it’s part of our mission. But B, as payment models change hospitals have to adjust and recognize that they are going to benefit from keeping patients healthy and out of the hospitals. And then getting to professor Hick’s point, every state is different. I can speak for New Jersey. About 10 years ago we had a significant hospital closures because a lot of these community hospitals could not keep up with the growing uninsured and charity care and other issues that they were facing. And so what we’ve seen is a consolidation has actually saved a lot of hospitals in New Jersey and then instead of hospitals closing, they’re getting acquired or working on partnerships with larger systems.

And this has created efficiencies in technology, investment of capital, bulk purchasing, better coordinated care throughout the community. It’s not just nonprofit hospitals getting with other nonprofit hospitals, they’re acquiring urgent care centers, home care agencies, nursing homes, and recognizing that helping the patient through the continuum of care makes the most sense for the community. Just the last thing I’ll add is that I think, again, taking this out of the vacuum at one issue at a time, recognizing the economic benefits that hospitals provide to the state and to its local community through individual income taxes through sales and use taxes through other taxes that hospitals pay. Sometimes it gets lost in a discussion that there’s this assumption that as nonprofits we pay no taxes, which is absolutely false.

So we contribute greatly to the economy. I think that needs to be seen. And it was mentioned a couple of times about a snapshot and we talk about this all the time is how can we tell the story and how can we help each hospital tell its story and showing the community involvement and having it relate, and not just be numbers, but recognizing that hospitals here are safety nets for those who absolutely need us. We’re telling our story and why we’re important and why we take our missions very, very seriously.

Joel Swider: Sure, well and continuing in that theme of telling the story. I believe it was commissioned by the American Hospital Association, but in May 2019, put out two reports analyzing community benefits in tax exempt hospitals, and they compared those benefits to the forgone income tax revenues that the government loses by nature of granting exemption to these hospitals. In the reports they looked at tax returns, forms 990 from tax exempt hospitals and they also looked at CMS cost report data and they found some interesting things. One was the amount of forgone federal income tax revenue due to the tax exempt status of us nonprofit general hospitals in 2016 was $9 billion in the aggregate. That’s a lot of money, but the amount of community benefit provided by these hospitals the same year was $95 billion, so that’s about 11 times more than the foregone revenues.

Another finding I thought was interesting is that almost $44 billion of community benefits that were provided by these hospitals came from financial assistance, unreimbursed Medicaid and other unreimbursed costs from means tested government programs. So these programs really are not filling the gaps. It’s the hospitals themselves, at least it appears to me that these hospitals are really being forced to fill those gaps. So to me these numbers are pretty compelling evidence of the value add that nonprofit and tax exempt hospitals provide. Is this consistent, and John, I guess I’ll ask you specifically at OHA, is this consistent with what you found in Ohio and how do you make sure that state and local officials are aware of these, the good things that these hospitals are doing?

John Palmer: Yeah, I think that was an important study and that one aspect that you pointed out about $44 billion of community benefits from financial assistance and un-reimbursed Medicaid and those are important factors. Charity care is always the focal point and always that go to historically. But I think as we’re coming into a new era of healthcare delivery. Areas around the community benefit programs, those are the stories that I think when you go into those individual communities, that’s where you really see that work come to light. Particularly when you look at subsidized healthcare services, emergency and trauma services, these are 24/7 operations that have a lot of requirements for accreditation, recognition and staffing and equipment and training and outpatient services, behavioral health services under this subsidized healthcare.

A lot of these don’t get at cost for Medicaid and Medicare, but hospitals are providing a lot of that care through different delivery channels. And so I think that’s an important factor there. When you look at this kind of tax exempt and looking at charity care, you really need to look at that greater picture of the total community benefit because there’s a lot of elements in there where you would go into respective communities and talk to the local mayor, city council members, the principal at the local school, any other social services. And you’ll start hearing that story of how the hospital is working to make some of those improvements. The opioid crisis has hit a lot of States and has hit our country significantly and Ohio is one of them. And I can tell you that has had a detrimental impact on a lot of communities and our state. But hospitals are working to try to turn that around and get those numbers to where they need to be. So I think you’ll see a lot more of that spelled out in these reports moving forward.

Joel Swider: We’ll end with this question. Senator Chuck Grassley, chair of the Senate finance committee, sent a letter in October 2019, to UVA Health System about its collections practices being too aggressive and also about the high costs of medical bills in general. And I personally, I’m guessing that we’re going to see some legislative and or administrative posturing on this issue in the near future. Question to both, what are your legislative priorities in the coming year or so regarding hospital exemptions and community benefits?

Neil Eicher: Sure. So a comment from the federal side and a comment from the state side on the federal side, not directly relating to exemptions, but we do see a fight on surprise out of network medical bills. And it’s comments like the senator’s and others that are looking to create a dispute resolution system or a cap on what hospitals and doctors can receive as far as out-of-network payments, which will significantly reduce payments to providers for in-network services. So I think there are multiple legislative initiatives afoot to try to address this and of course looking at things through a vacuum, not completely understanding how costs get calculated. I think that’s pretty much our next biggest threat on the federal level.

On the state side, directly related to your question, Joel, is that we’ve been fighting in New Jersey for over three years for a legislative solution from a court case back in 2015 with one of our nonprofit hospitals who had been in a battle with its town over its nonprofit property tax exemption, which our law currently allows for, and I assume most, if not all States also allow for, but the judge made a decision in tax court, not superior court, that the hospital should be paying property taxes.

We obviously disagreed with this court opinion, but since then had feared that our towns would start coming after hospitals, nonprofit hospitals, and trying to subject them to property taxes. We have 59 nonprofit hospitals in the state. 71 total acute care of the 59 over 40, four, zero, had been engaged in litigation with their towns over their property tax exemption. We’ve had about 12 or 14 have settled with their towns for a period of three to five years with a payment in lieu of taxes in order to not be put on the tax rolls. But we have been pushing strongly for a legislative solution so that we’re not wasting resources and spending money just going after protecting our property tax exemption and paying lawyers and legal fees to defend it. Instead, the money would be best served putting it back into the care that we deliver to the community.

So our legislative solution generally is to, again codify more clearly in statute our property tax exemption. But recognizing that nonprofit hospitals have changed over the last few decades, recognizing that hospitals have and do utilize municipal resources like fire, ambulance, emergency services, et cetera, that we would pay a community contribution fee to our local town. And for us, we came up with a number of $2.50 per bed per day, the nonprofit hospital with calculate, make it publicly available, what that number is and then on a quarterly basis make that payment directly to the municipalities. Then in exchange, they cannot come after us for property taxes the way that they’re doing now. It’s not the ideal solution, it’s about $20 million statewide that we are voluntarily raising our hands and saying that we want to contribute, but it beats having to go through the legal process and having to justify why we deserve our property tax exemption.

And so this is, NJHA’s number one priority to try to solve over the next couple of years. It’s been very difficult because as you can imagine, each town wants to maximize how much money they can get out of the hospital industry. And unfortunately in some instances it has created bad blood between the towns and the hospitals who originally had a good relationship. And it’s also making hospitals kind of fill the budget gaps that municipalities are facing, and instead seeing it as a legitimate healthcare or community contribution, they’re looking at us for dollars to fill their budget gaps. And that is completely out of the intent of what the hospital’s mission is to the community. And as we were talking about today, the economic benefits and community benefits that we provide.

And that’s why the community benefits report is so important because it really drives that narrative so that the legislature, the governor’s office, the policymakers understand that there is a value in having this property tax exemption and having a hospital in the community and all of the resources and all of the contributions they provide, not to just the local municipality, but the surrounding area. So that’s a big issue for NJHA and we’re hoping to get some legislative solution soon.

Joel Swider: So Neil, you and I talked about this issue in the past. I think a lot of us around the country really are looking at New Jersey just because of the sort of public nature of the Morristown case and the resulting posturing and are you any closer do you think to a legislative fix at this point than you were a couple of years ago?

Neil Eicher: We are, and again, thanks to the good work of this community contribution report or community benefits report, we did a good job at laying the groundwork and educating policy makers. But just like in every state there’s local politics you have to deal with and when you’re faced in a state with municipalities facing budget shortfalls and mayors being very influential, you always hit these local roadblocks. And for us, we got the leadership and our legislature and the leadership in the governor’s office fully on board. It’s just hammering out a few details for a couple of local issues that we have to try to navigate through. So hopefully we can break that log jam and get it done quickly.

Joel Swider: And John, what about you? What are your legislative priorities this coming year?

John Palmer: Well, it’s never a dull moment. I mean, legislative issues are abundant. We have a new governor that just is rounding out his first year administration, but we’ll be pressing forward. I think the big one is the price transparency efforts that have happened at the federal level. But there’s also been a lot of activity here in Ohio around that. Consumers are looking for health care information and trying to make the best decisions for them and their families. And so we need to be working on that collectively payers, providers, policy makers to find a solution that’s going to meet those consumer needs.

So we’ll continue to focus on that. As far as community benefit for 2020 we’re going to be incorporating some more repositories on our own respective website of our hospitals, and really doing a showcase and featurettes of what some of those community benefit activities look like around the state. So we’ll be deploying that probably second quarter going into hospital week in May 2020, to really kind of hallmark what hospitals are doing in their communities. So we’re going to be focusing on that kind of report for 2020 and really kind of leveraging that with policy makers and community leaders to really tell that that story more effectively.

Joel Swider: Great. Well thank you all for being here, John. I guess I’ll for OHA, how can our listeners learn more about either the community benefits reports or becoming a member of OHA, who can they reach out to you or look on your website?

John Palmer: Yeah, we’re happy to take any inquiries or any questions. Feel free to reach out to me. Our website is www.ohiohospitals.org and we have a webpage there with a community benefit and our contact information is also there under staff directory. And we’re happy to take any questions or help with any efforts that might be going on out there.

Joel Swider: Great. And Neil, what about for New Jersey?

Neil Eicher: Yeah, NJHA.com and again we have a public resources available and Kerry manages that and of course you’ll have our staff directory, so if anyone has any questions about legislative stuff, please feel free to reach out to me or to Kerry on any community benefits related issues.

Joel Swider: Well Kerry, Neil, John, thank you all for joining me and thanks to our audience for listening today. If you liked this podcast, please subscribe and leave feedback for us using your Apple or Android device. If you’re interested in more content on Healthcare Real Estate, we also publish a newsletter called the Healthcare Real Estate Advisor. And to be added to the list, just send an email to me at jswider@hallrender.com.

How Can Hospitals Better Protect Their Property Tax Exemptions? With Mark Adams (Webinar)

How Can Hospitals Better Protect Their Property Tax Exemptions

Hospital property tax exemptions are increasingly at risk. We discuss which hospitals could be in the crosshairs next and how nonprofit hospitals can protect themselves.

Podcast Participants

Joel Swider

Attorney with Hall Render.

Mark Adams

Attorney with Hall Render.

-Transcript Coming Soon-

An Interview with Shawn Janus, Colliers National Director of Healthcare

An Interview with Shawn Janus, Colliers National Director of Healthcare

An interview with Shawn Janus at the Colliers Indianapolis office. In this interview, Andrew Dick interviews Shawn Janus, the newly appointed National Director of Healthcare. Colliers is an international real estate firm that provides real estate brokerage, property management, transaction management and strategic advisory services.

Podcast Participants

Andrew Dick

Attorney with Hall Render.

Shawn Janus

National Director of Healthcare for Colliers.

-Transcript Coming Soon-

Andrew Dick:  Hello and welcome to the Health Care Real Estate Advisor podcast. I’m Andrew Dick, an attorney with Hall Render the largest health care-focused law firm in the country. Today, I am in Indianapolis at the Colliers office and I am going to interview Shawn Janus, who is the newly appointed national director of health care at Colliers. Shawn is an industry veteran and we thought it would be interesting to sit down with Shawn to hear his story and his vision for the Colliers health care platform. We’ll also talk about the state of health care real estate and where Shawn sees opportunities in the future. Shawn, thanks for joining me.

Shawn Janus:  Thank you. Andrew. Good to be here.

Andrew Dick: Shawn, before we talk about your current role at Colliers, let’s talk about your background. Tell us where you’re from, where you went to college, and what you aspired to be at a younger age.

Shawn Janus:  What I aspired to be. That’s interesting. So actually I grew up, I’m Chicago bred, born and raised in the Chicago area. I actually grew up in the far southwestern, excuse me, far south suburbs of Chicago, a town called Chicago Heights, very blue-collar. The Ford Stamping Plant was down there through all rail cars. So it was again, very, very blue-collar area that I grew up in, but I loved it down there and it sets the foundation of who I became today. So that’s where I’m originally from.

Andrew Dick: And after you went to college, Shawn, what was your first job? What did you end up doing?

Shawn Janus:  Well, essentially, actually college was a complicated journey for me to some extent. So I played football in college. I think, Andrew, we talked about this a little bit when we last saw each other, but so I was recruited to play college football and I was overwhelmed by the process my parents didn’t go to college. They didn’t really have a perspective. My high school football coach was a first time football coach. Actually, it was a great experience and it was a long way of getting to where I work. Your question is more specifically, but I actually signed my national letter of intent to play at Iowa State. Got enthralled with the big eight and Earle Bruce went on to coach at Ohio State, was the head coach there. Actually broke my letter of intent, never matriculated there and the reason being I continued to be recruited by the Ivy leagues at the time.

Shawn Janus:  So I actually matriculated to Yale for my freshman year. But just found that I didn’t really fit into the Yale culture if you will. Again, being blue collar, some of the values that I had grown up with a little bit different than what was on the East coast. So I ended up transferring to University of Illinois. Absolutely loved it, played football there and I always had an interest in accounting, like the fact that there were answers, specific answers. When you’re young in your career made some sense. So I became an accounting major. I got my CPA coming out of school and that led to my work experience. I actually interviewed for jobs coming out of school and took a job with, which was then, this is my age, Peat Marwick and Mitchell and now KPMG and just so happened that I got thrown on the JMB audit account.

Shawn Janus:  JMB for those who don’t know is one, was one of the largest syndicators in the world at that point in time. So I spent nine months of the year, nine and a half months of the year on the JMB audit, really got to understand real estate and really had an affinity for it. I really enjoyed the business and liked what it did. Interestingly, in the summer months when we weren’t on the JMB account, I happened to get thrown into health care. So it came full circle later in my career. I didn’t actually focus on health care at that point, but started with the DuPage hospital, way back when it said DuPage hospital. So that’s how I got into the business if you will.

Andrew Dick: So fast forward, Shawn, at one point you worked with Todd Lillibridge when he was starting his business and building up his MOB portfolio. Talk a little bit about that.

Shawn Janus:  Yeah, so interestingly, so I was actually in investment banking. At the- around that time with Continental Bank in Chicago and like a lot of big, big investment banks, commercial banks, we have training sessions, et cetera. We’re in this big auditorium theater and the gal giving the presentation announces herself as Lynn Lillibridge. So I went up to her afterward and said, “Wait, any relationship to Todd? Well, I had gone to school with Todd little bridge, we were fraternity brothers.” Turns out that was her husband and she goes, “Oh my God, how do you know Todd?” So Todd actually put me onto his advisory board, you know, during his formative years. This was when he was still a little virgin company I believe. And he was really doing property management consulting. He actually tried to bring me onboard a couple of times. But my background had been really on the deal side of the business, capital markets acquisition and development.

Shawn Janus:  So when, we would get together two, three times a year, they usually come to Chicago, just meet for coffee or breakfast, stayed in touch. And then when he made the strategic decision to hire Lehman brothers when they were still around to begin the roadshow to raise the capital, the first to bring that capital solution to health care institutions. So he again approached me and said, “Hey, you say you love the business, you love real estate, you love health care. I need someone now on the deal side, we don’t have that capability in house.” So I was one of the initial five senior executives who formed and ran the first Lillibridge REIT if you will. So initially I was in charge of acquisition and development and the consulting practice. After a couple of years, we brought someone in who are specifically focused on the consulting side. So that I could focus on acquisition and development because that’s really where the meat of the organization was going.

Andrew Dick: So that had to be a pretty dynamic time to be in health care real estate. Todd’s a pretty dynamic guy, built a very successful business. It sounds like you were along for the ride and were you there when Lillibridge spun out and sold some of its assets to Ventas?

Shawn Janus:  So actually, so I was there through the iteration of the first two REITs, the first REIT, which was Lillibridge Health Trust, actually ends up being sold to CalSTRS. We were- Lillibridge was owned at that point in time by Prudential AEW and JP Morgan Chase along with managements. Those are the four entities we owned. The REIT itself, that was sold to CalSTRS. They wanted to buy the entire entity for tax reasons and other things and then Prudential wanted to stay in the business as did obviously the management folks.

Shawn Janus:  We bought back the management company and the development platform and then we raised capital through Prudential and formed a venture at the property level with Heitman for some of their funds. Yeah, so I was there really through the- and then we formed the second REIT, which was Health Care Lillibridge or a Lillibridge Health Care Real Estate Trust was the name of the second one. So I was there through the first two iterations and then actually got recruited away to join JLL right at the time or right before actually the Ventas transaction. So I was right there at the cusp of when that change occurred.

Andrew Dick: Okay, very interesting. So talk about that transition to JLL, big national firm. What were you doing for JLL?

Shawn Janus:  So JLL had made the … I’ve known that folks going back to those South Partner’s days, which is the predecessor entity to JLL. Jones Lang Wootton and they merged and they had several iterations, but I’d known the LaSalle partners guys having been in commercial real estate in Chicago for ages. Earl Webb, one of the gentlemen there actually is now, he ran capital markets in the Americas for JLL at the time. He is now the CEO of the Americas for Avison Young actually, no one leaves the industry we just move the pieces around a little bit, but I had known Earl for awhile.

Shawn Janus:  We got to talk, I think it was a barbecue if I’m not mistaken. And he had mentioned, they’re looking at, expanding their businesses and they either do it with bringing new products and services to existing clientele or they go into a new industry and they had focused on health care as a industry that which is becoming much more institutionalized, which they’d go- there was a lot of synergy to do that. Their research group internally had come up with some waive papers that made sense for that. So he would bounce things off me then with the, over the course of time in terms of how they should approach the business, what was driving the industry and they ended up getting that approved and to start a health care platform effectively.

Shawn Janus:  They actually hired a guy who came out of a different background. Initially, it didn’t work out and after a short period of time, Earl approached me and said, “Hey, would you be interested? You helped write this business plan if you will anyway,” so that’s when I joined JLL. So I really went there to basically put the entire strategy, the organization together and then to drive a growth platform for JLL across the service industry for health care real estate.

Andrew Dick: Okay. And after JLL you’ve also worked for some other prominent health care real estate firms, specific medical buildings, and then I think is it more recently Catus?

Shawn Janus:  Correct.

Andrew Dick: So talk a little bit about those opportunities and then we’ll jump into what’s going on here at Colliers.

Shawn Janus:  Yeah, so interesting. So my- Pacific Medical buildings, which is based out of San Diego, probably the preeminent health care real estate development company in California and the Western region of the country at that time and still today when we were at Lillibridge and going back, that’s my first interaction with them. One of the things that- I made the decision that we needed to rather than just grow organically on the development side of the business, we were doing, we did when I was there in excess of $1 billion of acquisition transactions through the course of several REITs. But the development side was growing rap- more and more rapidly as it went forward and so growing it organically, it was just tough to keep up with the demand in the industry. So we made the strategic decision to buy a developer, actually hired John Winer, another icon in the industry.

Shawn Janus:  John was with the NY at the time. One of the partners there, they identified, I think it was like 98 distinct entities, development entities across the country and either John, Todd or myself talked to every one of those. My first choice was to buy Pacific Medical buildings. We had approached them. They were maybe smart enough not to move forward with us at the time. We got to know those guys well. Entering the California is always, always tough. There’s a lot of different regulations there as well, but culturally, everything just fit with them. That didn’t work out. We ended up end of the day buying Mediplex Medical Building Corporation, MMBC out of Plano, Texas, outside of Dallas. But long story short, when I was with JLL, one of the things I saw an opportunity was to really bring some solutions into the ambulatory environment, which really was on the development side as well.

Shawn Janus:  So approached Mark Toothacre who is the, still the CEO out at Pacific Medical Buildings. We’ve known each other and stayed in touch all those years and just so happened, timing being everything. They were at a point where they were strategically looking at diversifying geographically and they were struggling with, well we don’t want to take on a bunch of overhead to start offices in other areas of the country. So ended up, we put together a venture of JLL and PMB whereby they had the expertise, the 40-year track record, the pretty pictures, the capital, all those things. JLL had an army of folks I had set up health care offices in most of the major and mid-major cities around the country. So JLL became the intake valve, if you will, from a business development perspective. And then also the execution arm.

Shawn Janus:  So we would get our service fees. We were a service organization, they would get more products, putting it to work and then building their portfolio. So we would do that, we would do the zoning and we would do the project management, we would do the leasing, so all those local type activities. Then they would bring the capital, the oversight and everything else. So that’s how I ended up getting involved with PMB and then eventually ended up joining PMB directly and effectively with the same function. So based in Chicago and was really taking their footprint, trying to expand it from the Rockies to East coast, if you will.

Andrew Dick: Very interesting. So your last stop was at Caddis. Tell us briefly about what you were doing there.

Shawn Janus:  Caddis, is very similar actually. I know Jud Jacobs, who is one of- the development partner at Caddis, he’s an old Trammell Crow guy. I actually worked at Trammell Crow in my commercial days and not that I knew Jud back then, but we’d known each other in the industry for quite some time. Similarly, they were actually looking to expand their platform geographically. They were growing in a much bigger way. They haven’t been around for 40 years. And so it’s a newer firm relative to the industry if you will, was an intriguing opportunity really to do the same thing.

Shawn Janus:  So effectively I was responsible for expanding their platform in the midwest in business development perspective and then for executive leadership for any and all projects in the midwest and that was- there are  acquisitions, there was development, they were involved in the senior housing arena through their hardest platform had not been as involved in the senior side of the business. But it was a great learning curve for me to actually bring that into my quiver in another area, if you will.

Andrew Dick: And how did the opportunity with Colliers present itself?

Shawn Janus:  Yeah, that’s interesting. So as we all do, as we get later in our career, obviously business development and relationships are always important. But particularly, once you’ve been in your career for quite some time. One of the things that I make a point of doing is reaching out to people in the industry and trying to stay in touch with them. A guy by the name of Ted McKenna in Chicago. I’d known Ted for, I don’t know how long, known Ted forever. So we would periodically try to get together just to catch up on what was going on. Just so happened we had arranged to have coffee up in the Northern suburbs of Chicago. We were sitting down and it just so happened that that week it was announced that Mary Beth Kuzmanovich, who was my predecessor here at Colliers, I’ve known Mary Beth for 12 years.

Shawn Janus:  Going back to when she was at Carolina’s Health Care that she had left the Colliers organization and had joined the Lillibridge organization in the small world category, which I’d get into that story. But anyway, we were just talking and catching up. I had mentioned an- what was going on with Mary Beth, and we were talking about the strikes they’ve made over the last four years. And then all of a sudden he stopped and looked at me and said, “Well I know you like your job and what you’re doing, but well you’d be perfect for this, any interest in potentially, thinking about joining the Colliers team?”

Shawn Janus:  So I said, “Well, love to hear more about it. It was right before BOMA. So he actually set up a meeting at BOMA with the internal executives who were running their search process. So that was in the April timeframe. And then over the course of, I guess I started there in September. So over the course of time I’ve got more and more intrigue in the opportunities and with Colliers it was about potential of the health care platform and really the value add that I could bring to the organization and made the decision to join the Colliers team.

Andrew Dick: And so what attracted you to the Colliers platform? When I think of Colliers, I think of an international brokers firm. They have a great health care group I’ve worked with personally over the years and always had good experiences. So what really drew you into the Colliers opportunity?

Shawn Janus:  A couple different things. One, obviously I had, I had built an organization very similar to JLL in terms of starting from scratch, if you will, and kind of building a health care capability. I mean they had some, even at JLL had some capabilities, but really moved that forward in a big way. That has always intrigued me. I really, I love real estate and enjoy the health care component of that. One of other things is I do enjoy the entrepreneurial nature of growing an organization. This was the, Colliers was a bit different in that Mary Beth had been here four plus years, so she had some had done some of the foundational elements in terms of putting their arms around the true health care platform. So those things really intrigued me. But I would tell you the thing that of put it over the top is just the culture of the organization.

Shawn Janus:  That’s very, very important to me has been since I mean going back to my soliloquy about choosing colleges and finding the right fit, if you will. So that’s always been important to me. So as I got to know the folks at the Colliers team across the country and their leadership, their vision, where they were going and just the comfort level in terms of how I could be a part of that team. So it was those things, it was the potential of the platform where they were and where we could take it, the entrepreneurial nature and just that culture.

Andrew Dick: So as the newly appointed national director, what are some of your goals and objectives?

Shawn Janus:  So it’s interesting. At Colliers, it’s set up a little bit differently than we had it at JLL. But, so my role is to really support, give vision, a strategy and drive the growth of the platform. Colliers is regionally based organization. So the health care folks in the organization are based through their regional presidents, if you will. So I look at my job and kind of, I put it in the four buckets, if you will. One of those, as we talked about, is always business development. Having been in the industry for 20 years specifically in health care, I’m talking about, have relationships across the country. So I can not only introduce Colliers into those relationships, ideally at least make those introductions, but can also be involved in pitches to help all those various teams as they try to win business.

Shawn Janus:  The second would be just in recruiting. I think that’s the second bucket. So helping the regions bring in the right type of individuals. Number one, help recruit them, understanding the nuances of the health care environment. They understand the Colliers platform obviously better than I do at this point in time, but identifying those types of candidates as having been in the industry for so long. The third would be just the tools that they use. So arming all those, all the brokers and the property managers and the consultants all across the country on the health care side, do they have the right tools? How can we organizationally support them to be successful, if you will. And then the last would be, and probably one of the most important is branding. In any organization obviously you need to be branded in terms of recognition and how you’re perceived in the industry.

Shawn Janus:  I would give kudos to Mary Beth Kuzmanovich because when I- I didn’t really know much about Colliers Heathcare in the business at a time I’d call it 15 years and I’d never really come across Colliers Health Care at any big way. But when they did make that decision to try to have a leader come forward with that Mary Beth’s leadership, she really did put them on the map a little bit and we began that entire process. But that’s a living, breathing organization- organism, if you will. So that whole branding concept would be my coming forth year.

Andrew Dick: So Shawn, when I think of working with a firm like Colliers, there’s often a couple of different service lines that I think about. There’s the brokerage, there’s the property management, sometimes there’s transaction management and then sometimes there’s investment sales. Are you going to be focusing on all of those within the health care platform or is there one that’s going to take priority over the other?

Shawn Janus:  So the easy answer to that Andrew, is actually we would focus on, we’ll focus on all of those and building all of those out. I think we- my vision is to be the best in classed health care, real estate service provider in the country. Obviously there’s great competition with some of the other larger firms we compete with every day. We’re friendly competitors with them, but I think we have the, the underpinnings and the foundation to be able to do that. Having said that, I mean Colliers is that entrepreneurial nature is, has been historically a broker led organization and much to your point. So I think we will first work through the brokerage side of the business on how can we better grow that piece of the business. But then also the other pieces you mentioned, the strategic consulting.

Shawn Janus:  I think that’s a big piece of what this industry needs and from a real estate perspective we can obviously bring that in a big way. You mentioned property management. I think project management is another area, project program management. So I think being able to bring that solution, like a lot of the big firms, you have the brokerage side of the house and you also have the corporate solutions side of the house. So also just marrying how those two work together. I’ve had experience with that. Obviously JLL had the same two type of platforms. So really looking to bring all those services to the industry.

Andrew Dick: So looking forward, where do you see the health care industry going? We hear a lot about the retailization of health care and the push for ambulatory care. I mean that’s been going on for years. But where do you think the industry is going?

Shawn Janus:  Yeah. I wish that crystal ball was clear. I would tell you. So essentially I always tell people that one of the things that’s intriguing about this industry is that it is constantly changing. And a big piece of that obviously is the fact that it’s so reliant on what the government is doing, through reimbursements, Medicare, Medicaid, all of those payees, if you will, into the health care system drive that. And that changes when we have elections and we’re obviously in that cycle right now. So irrespective of where you are on the political spectrum, it’s going to bring change at some point in time. And when you have that type of change, it creates challenges in the industry. But whenever you have challenges, there’s an opportunity to provide solutions. So I think that really allows an organization who can be nimble, who is strategic in their thinking, truly help their clients look at those things.

Shawn Janus:  You mentioned a couple of things and I think those are, those are probably first and foremost cost and convenience right now are probably two of the larger issues which have been driving health care decisions. The health care revenue model for hospitals and health systems has been under immense pressure. There’s been shifts in the payer mix as we talked about a little bit. Going from the private to the public. We’ve seen that, that affects reimbursements in a big way for hospitals. The case mix shift, that there’s a shift that’s going on there as well, which has implications.

Shawn Janus:  And then to your last point that you mentioned in terms of the convenience and the retailization, that shift of site of care, we’ve gone from this 20 years ago, this inpatient model to a much more diversified outpatient centric and ambulatory centers and whether that be larger MOBs, whether that be urgent care clinics, whether that be freestanding EDs, micro hospitals the buzz word in the industry, which should, depending on which states you’re in there’s quite a bit driving that as well. So, but I think those are two things that are really at this point in time right now we have the election coming up and then you have this issue relative to costs which everyone is dealing with and then the convenience factor which is really being driven by the consumer.

Andrew Dick: Shawn, in the past there was always the discussion about on-campus versus off campus medical office buildings. At one point investors really focused on the on campus assets. A couple of years ago there was a number of investors shifted their focus to looking at the off campus assets and then there’s always a discussion about cap rates spreads between on campus and off campus. What do you think- what’s your opinion, on campus, off campus assets? Where do you see investors going? Talk about some trends. I get that question all the time. I see a lot of activity on both fronts. I still see on campus buildings being constructed, we still are working on a lot of off-campus projects.

Shawn Janus:  Yeah, it’s, it’s interesting. So that … distinguishing between the on campus and the off campus has, as as you mentioned, has been, I would say a point of contention, but the differentiator if you will in terms of distinguishing how investors look at the market. When I first got into the business, it was as you said, just it was really wanted to be on campus. Then it was wanting it near campus and then that wasn’t quite off campus yet. But, it was across the street it would- but it was still around the major hospital. That has changed drastically. I don’t think the drivers of why investors are looking at that- not asset class, but that locational difference why they’re looking at that as a better investment opportunity is the fact that previously in the off campus location was the doc in the box.

Shawn Janus:  It had- it was a true medical office building, 40,000 square foot, two floors, 20,000 square foot floor plates and it really was the doctor’s office, if you will. We still refer to them as medical office building. It’s probably a misnomer. It’s just a general term that’s used now. They really are ambulatory care centers, so the driving factor for investors has been that higher and higher acuity delivery of care is now happening in those locations. It’s ambulatory surgery centers, it’s imaging centers. Now we’re moving into a whole wellness component which is, which is new to our industry, fairly new to our industry as well. So I think some of those factors are really what has driven investors to look at it and say, “What are we really underwriting?” Yeah, it’s real estate, but really underwriting the hospital, the provider, physician group, whatever it might be and what’s the driver for their business? It’s really the procedural side of things and where those occur in the fact that those higher acuities are now at a different location, it just made it easier for them to underwrite that.

Andrew Dick: Where do you see the most opportunities today in the health care real estate industry? I often get that question. I’m curious about, you’ve been in the business for many years. Where are the opportunities and I think you could say opportunities for Colliers or you could say opportunities for really anyone developing health care, real estate assets.

Shawn Janus:  It’s interesting, I answer that question similarly to the question when you asked why did I come to Colliers? The reason I did come here is because I do think there’s so many opportunities in the industry currently. And I think part of that is what I talked about. There’s so much change happening, it’s happening faster, just given technology and what’s going on in the industry and consumers are much more involved in their health care.

Shawn Janus:  So I think given all of that, hospitals and health systems and physician groups, through merger and acquisition activities, everything else that’s occurring, they become overwhelmed to some extent and pretty easily. And one of the things that I think the opportunity is, is to really bring them that trusted advisor. Some people think that’s an overused term, but I actually do believe that. I think if you can bring a specific expertise, again, we’re real estate experts in health care, but for us to be good at what we do, we will need to understand health care, what’s driving their industry, what’s keeping them up at night.

Shawn Janus:  And we always say that real estate will never be on the top issue for hospital or health system executives, but it never used to even be on the top 10 now what’s on the top 10 and it keeps going up and up and up into maybe number five on the list you make. It’ll probably never get higher than that. To use- just got to use an example because something else more relative to the health care. But I think the recognition of the importance of health care and how help app- excuse me, points of real estate and how real estate can from a tactical perspective, help them achieve what they’re trying to do from a mission critical and strategic perspective. So I think those opportunities to really have a seat at the table and really be that trusted advisor and offer that full breadth of services that they might need.

Andrew Dick: Shawn, during your tenure in the industry, what’s the biggest change that you’ve experienced working with health care providers?

Shawn Janus:  That’s a difficult question only because if so many things you could pick and choose from if I guess, just to pick one of those, and we talked about what happened, about elections and the affordable care act. I’m getting my tenure now, so that was a big transformational change in our industry. Even going back to the institutionalization of the class, when I first got into it, it really wasn’t an institutional asset class. It was the angel investors who would look at it and now it’s an accepted, their reach and their billions of dollars in REITs out there, et cetera. The shift to the ambulatory sector and what’s going on there. If I had to say one in that, most people wouldn’t think that would be the main one. But maybe it’s just because the recency of it is really this, this current shift in the delivery of care.

Shawn Janus:  And it’s driven by some of the other things. Obviously we just, that I just mentioned. But it’s really that shift to that ambulatory environment where you went from, as we were talking about early, this on-campus inpatient centric environment to really being responsive to consumers and delivering care in ambulatory settings. And that’s driven obviously in a couple of different ways. The fact, that technology, from the wearables to, how people … you go into your doctor’s office if you’re like me or anyone else. Now if you’re going in that you feel like you’re the expert, you’re- you’ve Googled stuff and you’re going to tell your doctor what you have and so the pressure on physicians and them is much greater as well.

Shawn Janus:  But I think all of those things have really driven the need to provide, not a different care, but a different sensitivity relative to the consumer. And what that is, so that whole ambulatory piece, irrespective if you had to affordable care act and some of these seismic shifts, but I think that is a systemic change to our business. They’ll foundationally be there. The affordable care act will it stay? Will it be repealed? Will it be tweaked? Those things are going to be changed, but I think this particular shift as it relates to controlling costs, convenience of care, that’s going to be a foundational elements it’s going to continue.

Andrew Dick: Shawn, you have a built a great reputation in the industry. There are a lot of young folks getting into the business, whether on the brokerage side, the development side. What advice would you have for someone who’s starting out in the health care real estate business?

Shawn Janus:  Well, I’ll tell you, it’s a great business to be in. Not to be repetitive, but it’s very dynamic. There is constant change in these challenges, creating opportunities. So if you’re someone who wants to provide real value to your clients, to your constituency, it’s a great place to not only learn but to make a career out of … health care is not going away. Whether it’s technology or big data or some of the other things that are now transforming our industry, there’s always going to be something that that creates those opportunities, if you will. The other thing I would tell young people though, and I go back to when I was talking about my recruiting efforts a little bit and then even how I got into into this crazy business is I think it’s really important to pursue your passion.

Shawn Janus:  So if you have a passion for something, I absolutely love real estate. When I got exposed to it and back in my Peat Marwick days and got thrown happenstance into real estate and I really had a love for real estate. The one thing I always thought was missing, and here I’m a south side blue collar Catholic boy growing up wanting to give something back and it always felt like there’s, it sounds trite. I realized that in terms of something else I could bring to the industry.

Shawn Janus:  Then when I had gotten a little bit more involved in health care and start thinking back to that first job when I had some health care experience as well, it was a way to say, “Hey, it’s not just bricks and mortar but we’re bringing a solution that helps people.” So for me that was the passion. It’s marrying the real estate side of things I love to do with the health care side, which more altruistically is in my background. So that’s just me personally. But I think importantly if you can have a passion and health care real estate is a great venue and a foundational place to build a career that can really make something.

Andrew Dick: Shawn, I’ve really enjoyed our conversation and getting to know you over the past few days. Where can our audience learn more about you and the Colliers Health Care platform?

Shawn Janus:  You can obviously go to our website, but I would encourage anyone who would like to learn more just to reach out to me directly, and I’m very approachable and my email is Shawn.Janus@Colliers.com.  Feel free to reach out to me with questions, thoughts, et cetera, and we’d be happy to respond to those.

Andrew Dick: Thanks again, Shawn. Thanks to our audience for listening to the podcast on your Apple or Android device. Please subscribe to the podcast and leave feedback for us. We also publish a newsletter called the Health Care Real Estate Advisor to be added to the list. Please email me at adick@hallrender.com.

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Understanding the Process & Issues in Real Estate Compliance Actions with Addison Bradford, Lauren Rodriguez and Justin Olson

Understanding the Process & Issues in Real Estate Compliance Actions:  A Conversation with Assistant US Attorney Justin Olson

Hall Render attorneys Addison Bradford and Lauren Rodriguez sit down with Justin Olson, an Assistant United States Attorney for the US Attorney’s Office for the Southern District of Indiana who serves as the office’s Civil Health Care Fraud Coordinator, about his experience litigating civil health care compliance actions arising out of or related to real estate arrangements, specifically leasing arrangements subject to the Stark Law and the Anti-Kickback Statute.

The conversation focuses on both the substance and the process for litigating these actions with particular emphasis on common real estate issues implicated in these actions and the relationship between DOJ, CMS and OIG in litigating these cases. The webinar is intended to give health care providers greater understanding of both Stark and Anti-Kickback and encourage them to consider these application of these statutes in their leasing arrangements.

Podcast Participants

Addison Bradford

Attorney with Hall Render.

Lauren Rodriguez

Attorney with Hall Render.

Justin Olson

Assistant United States Attorney for the US Attorney’s Office for the Southern District of Indiana who serves as the office’s Civil Health Care Fraud Coordinator.

Addison Bradford:  Hello and welcome to the Hall Render Real Estate Podcast. My name is Addison Bradford and I’m an attorney with Hall Render, which is the nation’s largest healthcare focus law firm in the country. You’re about to listen to a recent webinar that Hall Render conducted about Understanding the Process and Issues in Real Estate Compliance Actions. A conversation with assistant US Attorney Justin Olson. Who’s joined in the webinar with my colleague Lauren Rodriguez, who is an attorney at Hall Render as well within our litigation section. This podcast does not constitute legal advice for any of the parties but is intended to give parties it’s greater insight into real estate compliance issues from the DOJ perspective. If you have any questions about this webinar or this podcast, feel free to email me at abradfordd@hallrender.com.

If you’re interested in more materials, related to today’s topic, Hall Render puts out a real estate newsletter and has additional podcasts, which are available on iTunes. Thank you for listening and we hope you enjoy. Hello and welcome to this Hall Render webinar Understanding the Process and Issues and Real Estate Compliance Actions. A conversation with assistant US Attorney Justin Olson. I’m Addison Bradford with Hall Render and we are the nation’s largest healthcare-focused law firm in the country. Joining me today is my colleague Lauren Rodriguez, who will be my co-moderator for today’s discussion with Justin, who serves as his office’s Civil Health Care Fraud Coordinator.

Lauren Rodriguez:  The goal of today’s webinar is intended to give you a greater insight into the process by which health care compliance actions involving real estate issues are processed and litigated, as well as discuss some of the common issues that arise in these compliance actions.

Addison Bradford:  Also, if you’re interested in the content of today’s webinar, our webinar, Hall Render publishes a monthly newsletter and podcasts regarding health care real estate issues, which includes many compliance matters. Please feel free to email me directly after this webinar at aBradfordd@hallrender.com. If you would like to be added to that newsletter or like a link to that podcast, the podcast is also available on iTunes. Justin, thanks for joining us today.

Justin Olson:  Thanks for having me.

Lauren Rodriguez:  Alright, Justin, start off. Can you please tell us about your role as an AUSA specifically with regards to the health care issues?

Justin Olson:  Sure, I’m an Assistant US Attorney and in that position, I serve in the Civil Division. So first and foremost, I’m a litigator on behalf of the United States in the Southern District, Indiana. Our office has designated someone to handle or be the primary point of contact for health care fraud-related matters. And I fulfill that role. In that role. I work alongside our support staff. We have an amazing support staff at the US Attorney’s office we have a health care auditor and health care paralegal. Then obviously other AUSAs to assist as necessary. But maybe most importantly for purpose, this conversation I also work alongside and with the Criminal Health Care Fraud Coordinator, we have completely separate independent roles as a Civil AUSA, I cannot comment on any criminal matter nor do I have any discretion or say on the decisions that our offices makes on criminal matters, but we do like to work together and coordinate to the extent that is necessary.

 So health care fraud is a broad term, but practically speaking for office purposes, that is primarily enforcement of the Federal False Claims Act, which I’m sure most of you are familiar with. In that shell, deals with any claim presented to the government that was done with the not knowing that it was fraudulent. So we take that very seriously and False Claims Act cases can involve health care. They can involve other government programs, but to the extent that they involve federal dollars for health care programs, that’s what I like to work on.

Addison Bradford:  You mentioned that there are different people within your office, they’re handling civil claims and criminal claims. Are there offices around the country, similarly structured that way?

Justin Olson:  Yes, every office should have a Civil Health Care Fraud Coordinator and a Criminal Health Care Fraud Coordinator. Some of AUSAs were multiple hats, but that’s usually how the division of labor is set up. And I should have said this right when I started. All my comments today are made in my personal capacity and not as the Civil Health Care Fraud Coordinator. Nothing that I say should be binding or represent necessarily what the DOJ policy is, or what it’s going to do in a particular matter. So with that said, I can talk about my experience and my personal views. But just to… So we’re clear on that front.

Addison Bradford:  Absolutely. We appreciate your expertise and your knowledge of the process here. And we want to start with some questions about the process of beginning with kind of how something gets to you, tell us a little bit about the process by which a tip or complaint from CMS or OIG reaches your desk.

Justin Olson:  So if we get a complaint directly from HHS, it’s going to come to us usually through one of the special agents or case agents and that usually comes in the form of phone call, or could come in the form of an email, say, “Hey, we want to come to your office and we want to chat about something that we think you might be interested in.” They’ll then by that time, if it’s coming from them, they’ll have already done a preliminary investigation, but they want to get our input pretty early on because they want to know if what they have has legs to it. And if it makes sense to continue to invest government resources.

Addison Bradford:  Then what are the process? I mean, obviously, a lot of the actions you see are self-disclosures. How does a health system or hospital or other provider looking to self-disclose maybe a possible violation of Anti-kickback or Stark, how do they reach you?

Justin Olson:  Sure, self-disclosure can be to our office as you mentioned, it can also be directly to HHS to the extent that it comes to our office. The initial contact can be very informal. You can call me. You can call our civil chief, and you can just talk through the problem. At that point, we will say thank you and we will probably ask for a written disclosure of any self-report you’d like to make. But the initial point of contact can be as simple as an email or a phone call. That written self-disclosure is very important. You really want to make sure you’re thorough and exhaustive in what you put in that self-disclosure, anything that you think would be helpful, and we can talk about this more in this hour, but the point of self-disclosure is self-disclosure, and by self-disclosure, I mean full disclosure. So thoroughness is the point.

Addison Bradford:  And as Lauren mentioned at the outset of this webinar, we have a few questions to gauge in your feedback on some of the issues where we talking about. We have our first poll question that’s listed should appear on the right side of your screen, which asks about your understanding of self-disclose your actions. So, if you care for the… All the responses are anonymous and are viewable by… Even us here on the other side of the screen, but we just love to hear back from you and get your feedback on these issues throughout the webinar.

Lauren Rodriguez:  All right Justin. Moving on self-disclosures, so as a litigator with the Hall Render litigation practice group, we know that sometimes cases come through whistleblowers. Can you please describe the process for determining whether that case that’s brought by the whistleblower actually has some merit to it?

Justin Olson:  Yeah. So these whistleblower actions are what are also referred to as qui tam action, it’s probably the most common way that actions come across my desk. These actions are initiated by the whistleblower also called the Relator under the statute and this person will file a complaint under seal in federal court. And they will allege the content of the fraud, and how it violates the False Claims Act. They’ll also have to file or serve on us a disclosure statement, pretty much the same type of disclosure statement I referenced in the context of self-disclosure. And then they have to serve that our office in the US Attorney General, when that comes across our desk, first thing we want to do is schedule an interview with the whistleblower or with the Relator and just confirm that we fully understand what this person is disclosing and the nature of the allegations they’re making, and then also, essentially pick up where they left off to make a good faith, disclosure and False Claims Act complaint.

I have some idea of the nature of the fraud, and so we want to know what they know because once they file that self-disclosure and complaint, we instruct Relators to stop investigating, the case is now in the hands of the federal government. At that point, we will do our due diligence to try to confirm first, all the allegations in the complaint and in the self-disclosure statement, make sure that it’s accurate and what they’re reporting is true, and then we will continue the investigation. And the point of the investigation is just to satisfy all the elements of the False Claims Act violation.

Not only there has to be some kind of misrepresentation or material omission, there has to be an actual claim presented, and there have to be federal dollars that issue under a health care program and then there also has to be was probably often the most difficult prong to satisfy the center requirement. Getting at you have a Cheerio false statement. You have a claim. You have federal dollars an issue but if there’s no intent to defraud, then technically, it’s just a mistake. And it’s not fraud. And as I’m sure you know, as folks who are very well versed in the Federal Rules of Civil Procedure as real estate attorneys, you have to plead fraud with particularities under Rule of Civil Procedure nine and that’s hard to do. And you have to know the who, what, when, where why of the fraud and so that ends up being probably the area where our investigation is very helpful for Relators who hope to proceed to have the case fully litigated, but it also becomes often difficult to prove.

Lauren Rodriguez:  So you mentioned in the beginning that they fall under seal.

Justin Olson:  Yes.

Lauren Rodriguez:  So our audience is not just made up of attorneys. We have attorneys that are transactional attorneys. We also have people that work in the health systems. The goal of this is to explain a little bit in detail. I know as a litigator that sometimes the process is a little bit slower and uncomfortable with that. Some people aren’t. Can you describe or can you give us a typical length of time from when the case comes to you from a whistleblower until it’s unsealed?

Justin Olson:  Right. Sometimes they never get unsealed. Sometimes we investigate, and there’s nothing to the complaint, we declined to intervene. We do our best to inform the Relator of why we declined to intervene? And ideally, they would agree with us and voluntarily dismissed their complaint and the target of the complaint would never know that they were the subject of a qui tam lawsuit. Those can wrap up as soon as six months, if not a shorter amount of time. Some cases can go on for several years. I’m involved in some cases that have gone on… Are still unsealed and they’ve gone for 45 years. And that might sound odd. Our jurisdiction is pretty lenient on the time, the number of motions for extension of time that we file in some of these very complicated cases. Our jurisdictions are not as patient, other jurisdictions, the judges want to see these cases before more quickly.

So in our district in the Southern District of Indiana, to answer your question, six months to five years, we don’t want to go that long, but some of them are just extremely complicated and they just take a long time to really investigate. Our jurisdiction you got one shot after six months, maybe a year, they’re saying, “All right, I’m denying any motions for extension, we are on seal in this case, government if you don’t have your ducks in a row, too bad. Get your act together. These cases going forward.” So thankfully, our judges are… We have great judges in our district, but at the same time, there are benefits I can see for getting these cases moving along faster. Evidence never gets better, the staler it becomes. And so I can appreciate judges who want to see these cases move quickly.

Addison Bradford:  So one of the things we’ve noticed as we track Stark communicate back-related federal complaints action specifically those related to real estate. Sometimes we see or say frequent flyers, people who bring multiple whistleblower claims, whether they’d be successful or not. Do you guys keep track of frequent flyers? And does that impact your decision as to whether to bring a case?

Justin Olson:  Yes, the frequent flyers are known in our district. And as you said, we also compare notes with the Northern District of Indiana. Sometimes we’ll get Relators who filed cases in our district, and they’ve been rebuffed and file very similar cases in our district hoping to get another bite at the apple. At the same time, though, we take every case very seriously. And just because someone is a frequent flyer, and we know that they’re very interested in bringing these types of claims doesn’t mean that they don’t have something to say, and they don’t have concerns that they want to dress. So while it’s noted, and we appreciate that it does not affect at the end of the day our assessment of the merits of the case.

Lauren Rodriguez:  So when you first started out, you described the process of civil and criminal being separate where you work. So with the AKAs Anti-kickback statute, can you describe to us how these cases are distributed the timing around them? How do we know that it’s going to be a criminal matter? When do you execute that against?

Justin Olson:  Sure, there’s no understanding the line between civil and criminal… Again, I just want to say I’m never involved as a Civil AUSA and for experience is no Civil AUSA, there should be in our justice manual, prohibits it from making a determination on criminal. It depends on the evidence all at the end of the day.

Lauren Rodriguez:  Okay.

Justin Olson:  In a qui tam context, it comes to us as a civil matter. And as we depending on the extent of the investigation and what’s called forth we need to, for example, subpoena emails from the target or conducted depositions if in the course of those depositions, something extremely nefarious, that’s material to the fraud comes to light. And we have not just a matter, reckless disregard for the falsity of the claim, but there’s willful intentionality to the fraud, we would probably just make a referral to criminal and then they would take it from there. We wouldn’t tell them one way or another to treat it as criminal. They would make that determination on their own.

I’ll also say that sometimes it happens in reverse. Sometimes there’s a criminal investigation going on into an alleged fraud scheme. And I’m brought in just to observe, whether it’s a witness interview or strategic planning meeting among the case agents, and six months later, the criminal investigation wraps up, there’s nothing comes of it. But there’s been enough evidence collected that can be simply prosecuted. And so within comes in my desk and I would take over the investigation. As with any criminal case, there are certain things that civil can’t see, we’re not privy to any grand jury testimony or anything that’s been produced in response to a grand jury subpoena, we have to get a special order to see that. But we can share resources in that regard. So, bottom line, it’s the interplay between the two changes based on the nature of the evidence that comes in during the course of the investigation.

Lauren Rodriguez:  And you said that it comes to your desk, do you have a lot of autonomy to decide, “Oh, I believe that this is going to be a civil action that I want to pursue?” Or do you have to go up the ranks? How does that work?

Justin Olson:  I have to get sign off from the civil chief, for any case that I open, but there’s a lot of trust in our office, in particular, other offices, depending on how big they are, Southern District of New York or Eastern District of Pennsylvania, these very large offices, there’s a more formality to the decision to open a civil case or close a civil case. But at the end of the day, my supervisor trusts me and will often defer to the calls that I want to make.

Addison Bradford:  And we have our next poll question, which leads to our next topic. And something you indicated previously with regards to referrals from the civil side to the criminal side, what types of factors influence the decision to referral case to the Criminal Division? Is it based on intent? Or some of the factors that play into that?

Justin Olson:  Yeah, so just know that the question on the poll is, what are the factors for filing criminal charges? I can’t answer that question, but I can answer the referral question. For me, a referral to criminal involves two things, one patient harm is a big factor for criminal AUSA state. That’s a big factor that, the other factor is just kind of the high handedness of the violation the intentionality of the action. When something moves from a reckless disregard putting your head in the sand over to and clear intentionality, that might prompt me to ask for criminal to take a look.

Addison Bradford:  So let’s say that there is a, both the criminal and the civil side have decided that the allegations or the alleged violation of Anti-kickback are worth buying a lawsuit. How much coordination and what coordination is there between the entities in following an action or following actions? Excuse me.

Justin Olson:  Right. So to maybe change the question a little bit and just continue with the qui tam context. The qui tams are pretty much presumed to stay in the civil context. It’s fairly unusual for criminal to be involved in any qui tam investigation that goes before a decision for us to decline to intervene. In a case, that’s been referred to us by HHS directly, or that comes through another investigative agency, the coordination among criminal and civil in our office, I can only speak to our offices, the coordination is very robust. We will try to attend the same meetings to the extent that we’re talking to case agents, we’d like to talk to them together. Again, reaching our own lane, as criminal and civil AUSAs where we’re assessing it for different reasons and from different perspectives.

I have no ultimate say and what the criminal counterpart does, and they don’t ultimately determine what the civil does, but to the extent that we’re just not trying to duplicate efforts with regards to the information that we can legally share with one another, we don’t want to duplicate efforts. And we find that this not only benefits us, but it also makes the jobs of our case agents easier. They don’t have to explain things multiple times when they pitch a case to criminal but also to civil. And ultimately, at the end of the day, the public’s better serve, we’re more efficient. We were able to wrap up matters more quickly because we’re able to get to the heart of the matter at the same time.

  That said there are certain circumstances where civil will usually have to be put on hold, the case goes criminal, we essentially kind of hit the pause button, let them finish what they’re doing, once that wraps up and civil can jump back in or the opposite based on how the evidence comes in from the case agents and what they’ve seen criminal might say, “Hey, there’s nothing… I don’t see anything that’s worth criminals time here. So go forth and litigate Justin and if you get concerned about… If the facts change, and your investigation takes a different turn, come back and see me but they might check out.”

Lauren Rodriguez:  So civil actions, you’ll see a lot… I know when the DOJ posts things on our website through emails, I get alerts. There are multiple parties involved in these actions. And sometimes we have a party, one provider, or one entity providing a benefit to another entity. How do you determine, which entities are the ones that you go after? Sometimes it’s only one entity, sometimes it’s multiple.

Justin Olson:  Right.

Addison Bradford:  Yeah. And I’d like to just add on to that. And so where you have potentially like a real estate leasing arrangement where you have a physician and you have a hospital entity, however the decision made as to which party to file the civil action against.

Justin Olson:  Right. Well, when it comes time to file an action. Understand that our office to feel comfortable filing in good faith. There has to be an investigation, at least a couple of years in the making before we get to that filing decision.

Lauren Rodriguez:  And that includes the whistleblower or the other entities that come to you.

Justin Olson:  Exactly. Yeah, your self-disclosure, whistleblower, qui tam, or a referral directly from the agency. And by the time of filing the decision of what entities to name in the case caption when we filed a civil complaint really boils down to what’s the nature of the evidence that we have at the time.

Lauren Rodriguez:  Okay.

Justin Olson:  That’s different from who was investigating at the front end. At the front end, I think it’s safe to say every person who’s named on the lease, every person involved is going to be a subject of investigation. But as the case develops, as the evidence becomes clear, you’ll see certain entities likely drop out just because there’s not enough evidence to support a claim. There are not enough witnesses available that will be on call as the litigation develops to support the claim. And that will be a factor. The other factor is resources. The federal government cannot pursue every single possible claim. And as I’m sure some of your clients well know, DOJ declines to intervene in most qui tam cases. But that does not mean that most qui tam cases are frivolous or malicious.

The public is well served by helpful Relators who see a case to conclusion even without the direct assistance of the Department of Justice during the actual litigation. So it is a matter of priority, priority for the current Attorney General the priority for the US Attorney in our office and also the needs of the communities in which these cases are brought. So all those factors play a part in who is ultimately named in the case caption when it comes time to bring a lawsuit. And I would also say, most of our cases do settle before we have to file a complaint. And so naturally, if you already settled, you’re not going to be named of the complaint.

Addison Bradford:  Based on your experience with settlements. Is there many variations in settlements based on how the action started? So, our settlements typically from what you’ve seen lower when they arise at a self-disclosure, like if somebody self discloses in a… self-disclosure as a Stark, self-disclosure a Stark violation in a lease, is that typically the settlement amount lower than what you see if for instance, arises from either DOJ or a qui tam action?

Justin Olson:  It should be lower. And I’d refer our listeners to title four of our justice manual, which talks about the self-disclosure, framework and the cooperation credit that we give… Those guidelines are very clear about… The expectation is that they will be… The penalties and damages will be reduced. That said if there is truly… Even if there’s no fraud, even if they self-disclose, and there’s no fraud, but there was an actual mistake, claims were paid that shouldn’t have been paid, the disclosing party would be expected to repay what they shouldn’t have received. And if there is fraud and they self-disclose it.

It should be, and we would expect it to be less than double damages. Obviously, you can get up to triple damages for fraud under the False Claims Act. Many cases settle for… They can’t settled for triples, I’ve seen that they settled for doubles. But we would expect that a self-disclosure would result in settlement less than that.

Lauren Rodriguez:  So I kind of want to narrow the focus on real estate questions. How many Stark and AKAS cases you handle on a regular basis that deal with real estate?

Justin Olson:  Sure, I would say at our office at any given time, we have between, five to 10 cases, it can be less than that it can be more than that at any given time. We’re a medium-sized district. And there are ebbs and flows to it. But I think five to 10 is probably a good rough estimate.

Lauren Rodriguez:  And do you know how many are Stark only or how many you know that you had civil and criminal AKAS or is it just a mix at all times?

Justin Olson:  I think it’s a good mix. It’s really hard to put numbers on it. I don’t have a great sense of what criminals caseload is like right now. But on the civil side, I mean, most qui tams and referrals that come to us that are real estate related are probably going to involve both Stark and Anti-kickback just because when they first come to us, the facts are not as well developed. And so, the assumption is there’s probably going to be elements of both of those statutes that play here, and the picture becomes clear as the investigation continues.

Lauren Rodriguez:  And how many do you handle personally?

Justin Olson:  Personally…

Lauren Rodriguez:  Or do you work in teams? How does that work?

Justin Olson:  Yeah, we work in… I’ll be touching every healthcare case. That’s on a civil side in our office.

Lauren Rodriguez:  Okay.

Justin Olson:  But I may not be the lead. We’re a family-friendly office. So I’m expecting my third kid, so I will be on unbelief for a little bit for that and so someone else will momentarily step in, and we’ve had people… So I’ll be aware of at least every case, and my involvement will vary based on a variety of factors.

Addison Bradford:  Yeah, and these cases, specifically, real estate leases and other real estate arrangements. What are the most common issues you see in these from a compliance perspective?

Justin Olson:  So real estate cases, the most common issue will be fair market value. If you have a situation where someone is leasing property, and it involves health care entities, and there’s no lease in place or no agreement written down. That’s a pretty clear violation. I would hope that no entity would be so high handed in that. So there’s going to be some lease, there’s going to be some arrangement that on its face probably looks legitimate. And so the issue becomes, is that reflecting the ordinary course of business for entities that are engaged in these transactions? And so that ultimately comes down to the fair market value? And is there something baked into this transaction that’s being artificially affected based on the interest in referrals or trying to gain an advantage from a relationship that the federal statutes don’t allow?

Addison Bradford:  Yeah. So when you’re doing a fair market value analysis of a lease, what parts of a lease are you typically looking at? Obviously, the base grant would be one, but are you looking also for other factors in the lease?

Justin Olson:  Sure, I mean, we want to see that every part of the Safe Harbor is complied with. And so the terms of the lease become important. The use of the facility, if it’s a facility or premises. The use of the equipment if it’s equipment involved, there are specific factors that are very clearly spelled out in the Safe Harbor for space rental and a cooling rental. And so we want to see all parts of the lease that are going to impact those factors will be we looked at, I should say when we look at the fair market value we and that it will involve experts and so I’m not a valuation expert. I’m a litigator. So we do rely heavily on third-party experts when we conduct these analyses.

Addison Bradford:  Who typically do hire to do… I mean, are you looking at appraisal experts to perform these types of evaluations for leases?

Justin Olson:  Yeah, we want people that are well respected in the industry as with any expert, they have to stand up in court. They got to survive Adelbert challenge and so we want folks who were legit.

Lauren Rodriguez:  Alright, Justin, I love litigating, I think I was born to do. And you keep mentioning that you’re a litigator. So you also mentioned that these cases settle a lot. How many do you actually take to trial?

Justin Olson:  Not as many as I personally would like to take the trial.

Lauren Rodriguez:  Yes.

Justin Olson:  But I’m sure far too many than your clients that want to take the trial.

Lauren Rodriguez:  I agree.

Justin Olson:  A False Claims Act trial is very rare. You will read about every single one of them on law 360.

Lauren Rodriguez:  Right.

Justin Olson:  And everyone will be aware of them when they happen. I cannot recall the last time a Civil Health Care Fraud Trial happened in our district. So it’s very rare, but it does happen. It can happen.

Lauren Rodriguez:  And if they happen in the Northern District, can you do help out there, or do they not have been there either?

Justin Olson:  I really don’t know. I didn’t call Wayne [Nolte 00:32:53] who’s the AUSA counterpart in the Northern District to get that number.

Addison Bradford:  Are there any compliance actions, which you’re unwilling to settle? Let’s say you have a particularly egregious lease that, had two factors that you’re looking for and charges decisions with are charging stations for civil action versus patient with patient harm and the intentionality of the action?

Justin Olson:  Sure, there’s unwilling to settle… It just comes down to do we agree on the number and does the number reflect the egregiousness of the violation. And if our office and the other stakeholders involved in the federal government are not convinced that the number is what it should be, then that’s how a civil complaint gets filed. It’s if we can’t agree on the number. So basically, the complaint is unsealed. And we’ve intervened, it’s very safe assumption to say that we are unwilling to settle for the amount that was offered.

Lauren Rodriguez:  So you’ve been with the Office for how long?

Justin Olson:  I started pretty recently, earlier this year. So I am fairly new to this office. Yeah.

Lauren Rodriguez:  And before I see that we have some questions before we ask this question really quick. Can you describe the most notable case you’ve handled?

Justin Olson:  I cannot because-

Lauren Rodriguez:  Because you’re limited.

Justin Olson:  They’re still under seal.

Lauren Rodriguez:  Oh, okay. So any that you have handled that have been unsealed? Can you describe anything for us that you were just…

Justin Olson:  I don’t think we have any cases in our office that are unsealed.

Lauren Rodriguez:  Oh, wow.

Justin Olson:  Right now. I think that’s accurate. Like I said before this is ebbs and flows. I mean, it changes for a variety of reasons.

Lauren Rodriguez:  And they can say sealed from six months to five years.

Justin Olson:  Or they’ve settled Bob remain under seal and that sort of thing. I want to get away from this ‘five to six years.’ Don’t describe your seal. We don’t want cases to last that long.

Lauren Rodriguez:  No, I agree. I agree. It’s nice to hear. I know some of the listeners will probably feel a little bit better. I’m fine waiting. And most litigators are but non-litigators get a little antsy.

Justin Olson:  And I would think your clients, they should not know whether… If they know there’s an investigation, they should not know whether the investigation is a qui tam or a referral from our agency.

Lauren Rodriguez:  Okay.

Justin Olson:  If they know it’s a qui tam, it won’t be because we said anything.

Lauren Rodriguez:  Okay.

Justin Olson:  It’s under seal means it’s under seal and we can’t confirm or deny one way or another its existence, that’s what it means to be under seal. So, I understand that can be uncomfortable in the ambiguity of it all can be unsettling. But it is what it is.

Addison Bradford:  More I mentioned, we have a few questions and one of them deals with the timeliness of fair market valuation. So how much weight do you give the timeliness of an appraisal or broker opinion of value and establishing the fair market value of the proposed leasing arrangement?

Justin Olson:  Sure, well, I really can’t say for sure. It will depend on the terms of the lease. There are so many factors. Best advice, personally, I would give is just what would you do if this were not a health care… If this lease did not involve healthcare, did not involve anything related to doctors. What would you do under the normal business operations? That’s the language of the statute. And that’s the legal tests that we’re looking to deal with. And so, there are valuation experts who are much more qualified to understand what that statute means in the context of your particular practice, your particular region, and your particular lease.

Addison Bradford:  And so with appraisals in cases where there a hospital or a leasing arrangement that’s under investigation for possibly fair market value issues. If appraisal has been obtained, we will also obtained a third party expert to review that appraisal and what way do you give an appraisal that is received by a party under investigation?

Justin Olson:  In my experience, we always get a third party to weigh in. If it gets to the point where we are investigating the fair market value, we need that third party opinion. Now that said, you just be perfectly frank, we’re not assuming that every appraisal or assessment that the target has received before the investigation started is automatically a sham. Quite to the contrary, we assume that whatever due diligence they did before entering the lease is legitimate. But we want to know two things. How does that appraisal fit with our third-party opinion? And second, what were the facts and the assumptions that the target fed to their own appraiser or their own valuation expert? And I’ve seen cases where we have reason to suspect that the assumptions that the target fed to their own appraiser were false or misleading.

  And so in that situation, it’s not the initial appraiser’s fault that they may have come up with a figure that doesn’t match what our experts said it’s a function of them having the wrong information. So we want to look at both angles of it. What are the targets of the appraiser know? What were the assumptions they were operating under when they made their assessment? One, and then how does their conclusion assuming that they did get the right information fit with our independent expert?

Addison Bradford:  You mentioned doing due diligence. Assuming that it’s legitimate that the work that parties will do before signing the lease. Do you give more deference or more way or look at is more legitimate and appraisal versus a broker opinion a value? Or are you looking just for some type of support for the fair market value evaluation?

Justin Olson:  Yeah, I mean again these are complicated cases that do turn on the intent of the parties. And so again, back to industry standard, what would your clients do if this were in the normal course of business if they were trying to be above board? And that’s what we want to see as well. I don’t think it’s cookie cutter. We just want to see what did the target do to try to in good faith, assure that what they were doing was aboveboard and compliant with the law.

Lauren Rodriguez:  So we had another question in regards to HHS’s launching the regulatory spring to coordinated care. Do you think that the current Safe Harbors and exceptions under AKS and Stark are sufficient to allow for coordinated care models?

Justin Olson:  Sadly, I am not familiar with this initiative. So with that qualifier, I can’t fully answer the question, but I will say and this is purely my… Again, personal capacity. Stepping back looking at the health care industry from a 30,000-foot view, I think the assumption in this question that trying to do what is best for the patient can sometimes seem like it’s at odds with the spirit of the regulations, health care is extremely complicated in this country. We understand that. And we understand that often greater coordination, greater sharing of resources, is in some cases in the patient’s best interest, however, where there’s increased coordination, increased information sharing increased efficiencies, the solutions that your clients come up with, may not comply with the Safe Harbors.

So all that to say, I think, our office and I truly appreciate that the tension that arises at the end of the day, I think the purpose of the statutes is to do the best that Congress can in recognizing some low hanging fruit that by any standard is not going to harm patients, is not going to waste government resources. But as health care evolves, it can expose maybe some things that the regulation doesn’t take account of. And I think that’s probably the spirit behind the regulatory sprint that CMSs is engaged in. So that’s my attitude, I think, to that general landscape that you see, which I don’t think is exclusive to health care, I think any highly regulated industry is going to have the same types of tensions.

As the industry evolves and develops, presumably in an attempt to satisfy consumers and be for the good of the public. There’s always going to be tension with whether what’s best for the patient is really accounted for by the regulation. So that said, as an employee of a law enforcement agency, essentially, we have to go with what the statute says. And so I would think that CMS is aware of these things as well. And if you ever get them on one of these webinars, they can say more.

Lauren Rodriguez:  So in your time at the AUSA’s office, I’m sure you’ve dealt with some defendants, or potential defendants that you are like, “Oh my gosh, if you just would have done X, it would have been fine.” What is X? What do you suggest to providers, to physicians entities that would maybe save you some time, and them some time?

Justin Olson:  I would say listen to your general counsel.

Lauren Rodriguez:  Can you say that one more time?

Justin Olson:  Listen to your general counsel. That’s right. So I’m sure your clients can relate. You have a case where the business side of the brain, of the client so to speak has a great solution to increase revenue and increase patient demand and meet all sorts of good needs that make complete business sense. They say, “Oh, yeah, we got to get legal involved, hey Legal, what do you think?” And then Legal puts the kibosh on it all and then the CEO pilot forward. And then five years later, we’re deposing the CEO and saying, “Hey, you got this email from your general counsel, it said, we can’t do this? We got to change some things.” And you replied, “Who cares?” I would say that… You don’t want that. So, if there’s anything, I think most physician groups, hospitals, medical providers in Indiana are very sophisticated and very thoughtful. And I know the general counsel’s in those organizations want to do what’s right. And so that’s good for us. That’s good for our state. That’s good for Treasury, I hope that your clients just listen to their GCS and-

Lauren Rodriguez:  The attorneys.

Justin Olson:  Yeah.

Addison Bradford:  Well, Justin, we really appreciate you taking the time to talk to us today and sharing your insight on this issue. If there are any questions you have that weren’t addressed today, to our webinar participants, feel free to email me, Addison, at abradford@hallrender.com or Lauren at lrodriguez@hallrender.com. As mentioned earlier, we do have additional health care compliance resources related to real estate with our newsletter and podcasts, which would be happy to share. We thank you all for joining today and appreciate your time.

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Using Data Analytics for Site Selection with Bill Stinneford

Using Data Analytics for Site Selection with Bill Stinneford

An interview with Bill Stinneford from Buxton.  In this episode, Andrew Dick interviews Bill Stinneford, a Senior Vice President with Buxton. Buxton is a data analytics company based in Fort Worth, Texas.

Podcast Participants

Andrew Dick

Attorney with Hall Render.

Bill Stinneford

Senior Vice President with Buxton.

Andrew Dick:  Hello and welcome to the Healthcare Real Estate podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare-focused law firm in the country. Please remember the views expressed in this podcast are those of the participants only and do not constitute legal advice.

Today we’ll be talking about how hospitals and healthcare systems can use data analytics for site selection purposes. Buxton is a data company that helps a broad range of industry groups from retailers to healthcare providers make smart decisions when selecting the right location to do business. Today, we will be talking with Bill Stinneford, senior vice president with Buxton, about how healthcare providers can benefit from the use of customer data when developing an ambulatory network. Bill, thanks for joining me today.

Bill Stinneford: Thanks for having me.

Andrew Dick: Bill, before we talk about Buxton’s healthcare expertise, let’s talk about your background. You’re a Texas native with an interesting background in business and journalism. Tell us about your career experience before you joined Buxton.

Bill Stinneford: Yeah, well I studied business and English at college, and I got out of Texas A&M, and I was a financial analyst for a year, and I wasn’t really ready to grow up, and I’d always been a big sports fan and so I actually went back to graduate school to study journalism, and with the focus of really getting into sports, and ended up working with ESPN for about four years. So really, I got to be on the radio in Dallas Fort Worth and hosted pre- and post-game Mavericks shows. The Dallas Mavericks shows are still on the station, and were able to cover Super Bowls and spring training and training camps and just a fantastic education to study sports and study journalism, and did that for a long time. Hosted the afternoon show here in Dallas Fort Worth, and it was a blast, but you know, eventually, I didn’t want to … I guess I didn’t want to do that for the rest of my life, as fun as it was in the moment, and was ready to get back into quote-unquote “business.” So that led me to make a change.

Andrew Dick: So how did you make the transition from your broadcasting career to Buxton?

Bill Stinneford: Well, it was interesting. When I was going through graduate school, I was putting away through graduate school and so I had an internship at the ABC radio station here in town, and that internship was a great experience, but that was a free internship. I had to make a little money, obviously. Going to school, doing the free internship doing morning drives. So through friends, I had heard of this company called Buxton, which I didn’t know about at the time. I got an internship in the marketing department that paid me a little bit while I went to school, and I fell in love with this company. About that time that I was at ESPN, Moneyball had come out, by Michael Lewis and that became a sort of the rage and obviously they made a movie about it.

I remember reading that when it first came out, cover to cover, and I just loved that story. I think it’s important for data analytics today because I think that story gets bastardized at times about what it really was. I think sometimes people said, you know, that that was about the story about baseball and the Oakland As and being a very successful organization with one of the lowest payrolls in major league baseball, and doing it consistently over a long period of time. But with that story, what some people said was, “Oh, they just had a bunch of stats guys made decisions and you didn’t need scouts or baseball expertise.”

It was really, what the story was saying, was you do need expertise. You do need great scouts and gut, but you also need science and data as part of your decision-making process. When you can marry those two together, you can make much better decisions. Decisions that will produce the best return on investment for ballplayers. You’re investing millions of dollars into a ballplayer that you sign as a free agent or you draft, you want to go off more than just eyeballs.

So I loved that story, and in a way, that’s what Buxton was really doing for businesses, and what we do for businesses. It was really providing the science and the data to compliment the already strong decision-making processes of a company, to help them make better real estate decisions and better customer decisions. That always stuck with me, that fascinated me. That was fascinating to me while I was an intern for them, and then got into ESPN and did that, threw myself into that for four years. But again, I studied business in college and I was always wanting to kind of think about getting back into that world.

Buxton had always stayed in touch with me, and it came to the point in my career with broadcasting where you either need to kind of move markets, or really throw yourself into the next stage and I really didn’t want to move, and I didn’t want to do those types of things and I found a great home in Buxton. That was 14 years ago now, over 14 years ago. I have not looked back, and it’s been a tremendous professional decision, and to see how we’ve grown and advanced and helped companies with those investment decisions over time. So that’s kind of how I transitioned into Buxton.

Andrew Dick: So Bill, tell us a little bit about what you started off doing at Buxton and then what you’re doing today.

Bill Stinneford: Yeah, so I started out in our retail vertical, and Buxton is a consumer analytics company helping build predictive solutions that help people make great investment decisions, be there for new locations or relocations, market optimizations, targeted marketing, helping understand how their consumers behave beyond just demographics. So there’s a couple of different verticals that we have, but our historical vertical where we started was retail. So I started in our retail vertical in sort of a business development role, calling on majority retailers and restaurants throughout, when I first started, the southwestern portion of the United States, and helping in that. Quickly rose in our retail vertical, and then oversaw that and then also over the years took over our growing healthcare vertical and so now sort of oversee all client development, both making sure that our existing client relationships are strong and fruitful as well as helping coordinate our marketing message and our sales efforts to continue to bring new clients into Buxton.

Andrew Dick: That’s a great summary and Bill, how did Buxton get into the healthcare space? Because the audience listening to this podcast, they’re real estate investors, they’re hospital and healthcare executives looking to make smart decisions when they open up a new clinic location or a new hospital, and they’ll say, “Gosh, we’ve heard of Buxton, but primarily in the retail space.” But in reality, Buxton has done quite a bit of work in the healthcare space. Tell us about Buxton’s healthcare expertise and how Buxton moved from the retail vertical into the healthcare vertical.

Bill Stinneford: Yeah, so we still have a very strong retail vertical, but yeah. We’ve been around 25 years as a company, and we started in retail but yeah, over the years we’ve grown into a restaurant, we’ve grown into city government, private equity, and as you mentioned, healthcare. Basically, any type of business, if you have a customer or a patient or a consumer, and you want to find people that look just like that and grow your business with real estate or marketing or get more out of your existing investments, we can certainly help with that.

Our core verticals are those that I just mentioned but you know, we work with Marriott and we work with Fidelity Investments and insurance companies. So yeah, basically we can apply these types of approaches to all those different types of businesses, but specifically with healthcare, which is our fastest-growing vertical and pretty soon will end up being our largest overall vertical. It’s pretty close already. It is exciting to see, and it started probably 12, 13 years ago now. One of our retail clients actually sat on the board of Florida Hospital and they were looking to roll out their Centra Care line, their urgent care line. They were like, “Hey, this is kind of like retail, this type of healthcare business, and I think that you guys can help us with that.”

At the time, we said, “Well you know, we don’t know anything about healthcare, but we’ll try.” And it worked, and in fact, they’re still a client to this day. It’s been a really successful obviously rollout, Centra Care, over the years. They still use it for that. But we’ve branched into other different service lines for them and we realized, hey, there’s something here with where healthcare is going.

Then over the last sort of five, six years as there’s been a huge growth in ambulatory facilities or outpatient facilities, that’s really been the biggest boon to our healthcare business because the things that make an outpatient or an ambulatory location successful are somewhat different and in many cases very different than what makes an inpatient healthcare facility successful. In many cases, in an inpatient standpoint, it is still a bit of: if you build it, they will come. But in outpatient, there are so many choices and there’s so much competition that the difference between success or failure of an outpatient facility maybe a quarter of a mile apart from where you pick, right? So the things that make successful ambulatory location strategies work today are still a combination of some traditional healthcare metrics. You know, certain outpatient and inpatient utilization data, insurance data, competition provider data. Those types of things.

But just as much, if not more, it is an understanding of the consumer and not just based on demographics, but how they live their lives, how they spend their money, how they behave as consumers. Their attitudes toward different things, and also retail metrics. Things like co-tenancy or area draw, visibility. Sometimes people don’t realize that a lot of times your most successful marketing vehicle in a healthcare situation or a retail situation is your facility itself. You know? And how visible are you, and are you located near things that people are driving by all the time on their way to work, on their way home, when they run errands on the weekends. That impression frequency can build up and allow people to understand you’re there. Certainly for things like urgent care that’s vital, but what we’re seeing is even in things like orthopedics and sports medicine, things that were predominantly referral-based, while there’s still a huge component of that more and more you’re seeing healthcare companies go straight to the consumer to advertise their specialty services and location strategy is extremely important in that being successful.

That was just as much to do with understanding consumers and retail metrics as it does healthcare metrics, so when you can combine all those and bring them together, which we’ve done, because now we know a lot about healthcare, it allows our clients to have … or just companies in general that employ these strategies, to have a significant leg up on the ever-growing competition.

Andrew Dick: So Bill, if a healthcare provider came to you and said, “We’re thinking of rolling out an ambulatory care network or outpatient clinic network,” depending on what you call it, what could Buxton provide to that healthcare provider in terms of finding the right location? What type of metrics would you look at, what type of services would you offer?

Bill Stinneford: Yeah, well what we would do, I mean every case is a little bit different. We would want to build a customized solution for each one of those specific clients and what they’re trying to achieve, but you would build a forecasting solution, that is a combination of understanding the ideal patient/consumer profile for that particular service, and also the payer mix that you would like to optimize: is it all-payer, is it, commercial payer? You know, what are you trying to go achieve? Then what are the competitive variables? What are the positive correlating factors that need to be there? Then the traditional utilization data and provider data, and understand what makes successful locations successful and what makes ones that don’t succeed in an outpatient environment for that particular service unsuccessful? And build that solution that then allows the client to be able to forecast any intersection across their service areas or the whole country if they wanted, you know?

They can use the models to say: find me all the locations that will do greater than X in performance and will cannibalize my existing locations by more than a specific percentage that they set. So you help understand how many locations you can support in a market, where those locations should be optimally, how to evaluate your existing portfolio for that if you offer that service line. Which ones are not doing well but they’re underperforming their potential, which ones are not doing well but frankly they’re doing as well as they could be doing and they’re in the wrong spots, or that trade area has changed over time so they need to be consolidated or relocated and then they can use the solution to do that.

So those are a lot of the output that we provide, and we actually provide that into a very easy to use but powerful mapping and analytics platform that they can access on their phones or their tablets or their laptops, wherever they have an internet connection and visualize all the things that we’re talking about: where is their competition, where are their patients coming from, where are their potential patients coming from? Where are those recommended points? If there’s availability that pops up that you want to investigate, you can click a button and get a forecast on that potential site in about two minutes. Store files, run just regular utilization reports, insurance reports, demographic, behavioral reports. All those different types of things at their fingertips, but most imply from a real estate strategy standpoint, understand where their home runs will be and how to avoid expensiveness as well.

Andrew Dick: So Bill, we talked about a new outpatient clinical strategy. What about a health system that has an existing network that wants to analyze how that existing network is performing? Is that something that Buxton could help with?

Bill Stinneford: Yeah, you know, absolutely. I think one of the things that when you build those forecasting solutions and you’re studying their data, what makes them… For instance, you do this a lot with primary care, where they have many, many locations within a market if you’re a system. It’s identifying what’s the DNA of your best locations in suburban markets in your service areas? What are the things that are always present in those trade areas that are sort of present in the okay locations trade areas, that are hardly ever-present in the poor performing trade areas? You know, what are those factors?

Then that model that is built can again forecast future performance like we just talked about. But you can also take it and score the existing locations and compare actual performance to forecast performance. This becomes very valuable for our health system clients because it helps break down what I sort of like to call is the log jam of opinion that can develop.

So for instance, if leadership of the system comes in to evaluate the primary care facilities and their performance and they look at the low performing locations, the question that the CEO asks, she may say, “Why do we have these low performing locations?” Typically, what you’ll have is people pointing fingers at each other in the boardroom, you know? The people that picked the sites will blame the operators and the physicians within the site. The physicians and the operators of the site will blame whoever picked the site. Then eventually, everybody will get around to blaming marketing. They can all agree on that; it’s marketing’s fault.

But you know, in reality, sometimes is it the location that was a miss. Should have never been selected. Or, just as frequently, it was a great location for 20 years for primary care but that trade area has changed over time significantly and that’s not necessarily the most optimal spot for those services today. But the analytics, in an unbiased way, is informing to say, you know what? No matter what you do, no matter how many physicians you put in, no matter how often you change out the front office, no matter how much money you dump in from a marketing standpoint or a huge remodel, you’re wasting dollars. The analytics are showing that for that particular service line if you want it to produce at a certain level, the trade area potential is no longer there. So let’s use the models to understand how to best consolidate that site and where should that be transferred to, or, where should you best locate that site?

But that’s very different than another location that you may have that’s doing the same actual volume, which is below par, but when we look at that with the model the forecasts are saying it should be doing 40% better because this site looks like 10 other sites you have in these types of markets that they have the same type of potential patients in the same volumes, they have the same level of competition, the same area draw factors, the same utilization and insurance metrics. All these things are the same as all these other locations that all do 40% better but this one’s not: why?

Sometimes that can be that it does need to be remodeled or it needs to be moved just a little bit down the street to a more visible area because that piece of the street is no longer where people are drawn. Or it could be that you need to add physicians. A lot of times we see that. The wait times in those facilities end up being longer and it’s tougher to get an appointment because you don’t have the proper staff, or the front office isn’t … You know, the front office help is not as nice as they need to be. Or maybe we do need to do more marketing. But you know that that trade area should be performing better than it is.

That opens up a lot of possibilities because now what you’re doing is not only finding the best places to invest in new locations to the degree that you’re opening up locations for primary care or urgent care or specialty, but you’re also improving the performance of the existing portfolio of investments by knowing which ones to not invest in any more, and then which ones have potential and you should invest in. The overall return on investment on all of your real estate becomes that much better. There’s just a lot of waste in healthcare today because people are making decisions based on opinion, and people that make decisions based on data for the actual healthcare of their business, sometimes they’re not making the best decisions based on data for where they invest dollars.

Andrew Dick: That was a great summary, and it seems to me, Bill, that there are a lot of different companies that claim to offer site selection. A number of our healthcare clients get pitched all the time, but Buxton seems to have maybe the more comprehensive platform for this service. What do you think makes Buxton unique when compared to its competitors?

Bill Stinneford: Well you know, it’s interesting. I think we take a very different approach than the traditional players, I guess, in healthcare, with regard to these types of decisions. I think that that comes from our consumer analytics and retail site selection background. There’s a lot of good companies, but I think one of the things that I tend to see that people are still relying on or offering as a way to select sites is more macro-level traditional healthcare data. So certainly outpatient and inpatient utilization data, but at a county level or a city level. The output may say you have a need for three additional orthopedic surgeons within this market. Okay, great. Where? That’s a big county. That’s a big geography. Again, as we talked about in an outpatient environment, the difference between a successful location or an expensive miss might be only a half a mile down the road, one spot versus another.

So if you’re talking about macro level, county-level data that shows demand for a particular service, great. Where are you going to service that? Because especially as you have so much more competition, both system competition as well as, you know, private companies that are focusing on a specialty or two, many of them, backed by private equity that can choose where they operate, choose the type of payer, the type of patient that they want to go after. They’re employing a lot of these quote-unquote “consumer research strategies” and if you make it much more convenient, if somebody is in need of a service and you make it much more convenient, if your primary care doctor is telling you to go 40 minutes across town but there’s a specialist that you drive by all the time and you’re seeing their billboards and their advertisements on TV and those types of things, well, can I just check them out? And so it’s really important to understand where to be at an intersection level, at a micro-level.

That’s where we grew up and where we still excel today with retail and restaurant, and weaving in a lot of that traditional healthcare data and weaving in over a decade now of really strong ambulatory site selection healthcare experience with our consumer analytic experience and our retail experience really allows us to produce a unique solution that again can help our healthcare clients have a tool that the people that they’re competing against might not have to help them be successful in a very evolving healthcare environment.

Andrew Dick: Bill, let’s switch gears at this point and talk about ICSC or the International Council of Shopping Centers. They host an annual event called Recon. This year was significant from my perspective because there was quite a bit of effort and showcasing health and wellness programs and how retailers can collaborate with healthcare providers. Why do you think there was such a strong push this year to talk about health and wellness at ICSC Recon?

Bill Stinneford: Well, there’s a number of different reasons and I’ll try to knock out a few of them. I mean, first off, I was really excited that ICSC did that because it is such a strong push from a “retail center” standpoint, quote-unquote, obviously, it’s no secret that there are certain retail concepts that are struggling. Some are going out of business. There are vacancies in a lot of these centers. Now, I don’t think that retail is dying. I think that retail is evolving just like healthcare is evolving, but one of the things that you’ll see thriving right now are things like fitness facilities, gyms, restaurants. Things that are focused on a healthy type of environment. Urgent care, different healthcare specialties. So from an ICSC, an International Council of Shopping Centers perspective, to focus on a sector that can help fill vacancies and help create great foot traffic and those types of things, obviously that’s a no brainer.

But I also think you’re seeing the demand on that side, but I think also you’re seeing the demand on the healthcare and the health and wellness side of understanding that healthcare cannot exist in the old traditional way. That it has to be out in the neighborhoods, and it’s not just … You know this is something that we talk about all the time with our clients, with the health system. People need to think about their health system as a brand, and some people within those systems may be thinking about that as a brand, but not enough.

I think sometimes health systems think that people in the market, just regular Joe America, understand the difference between health system A and health system B in a market, but for the most part, they really don’t. So how do you distinguish your brand and how do you make people want to stay with you in sort of a cradle to grave relationship? Not just, “Hey, come to us. We’ll treat you when you’re sick.” But, “Come to us. We’ll keep you from getting sick. We’ll keep you healthy.” That’s really I think the future of healthcare and no amount of healthcare legislation or type of healthcare legislation is going to help us as a country if we don’t start getting healthier and start making better decisions.

Part of that is education. Part of that is taking that education and those types of offerings and types of ways to stay healthy, both with food and with education and with fitness, into the communities. Into neighborhoods. And that’s a retail strategy, right? So the things that will help people be successful in healthcare, offering these types of services, not just health and wellness but healthcare, you’re going to have to be out in the neighborhoods, and to do that you’re going to have to understand a real estate strategy beyond the old, if you build it, they will come.

In our presentations, we talk about how healthcare is evolving. Clearly there are regulatory hurdles and uncertainty with regard to healthcare regulation and certainly, Buxton can’t help with any of that. But the other things that are making healthcare evolve are the evolving consumer, and how people make decisions and choices about the healthcare services that they provide. Their smartphones and where they go and look at things as they go shopping for other things, you know? That you have an evolving consumer and the type of expectation that they have, but also you have, as we talked about earlier, an extremely competitive environment. Extremely competitive.

There is so much money being spent in healthcare, and any time you have that much money being spent and some of the traditional players by taking a traditional healthcare approach are investing those dollars inefficiently and leave themselves open to competitors, you’re going to have a bunch of people jump into that market. Any time there’s a bunch of money to be had and there’s a perceived inefficiency in the market, you’re going to have a lot of players jumping into that space and so you’ve got that. Private equity is in it in a huge way. You’ve got, obviously, you’re looking at the growth of CVS and Walgreens and Walmart and you know, just what is going on with all of that. You’ve got a lot of different players in the space and what are they doing? They’re understanding consumers. They’re understanding a retail strategy. They’re going into neighborhoods and being more convenient and more visible to provide these offerings.

If you’re sitting out there on the free land that the church gave you behind an industrial park that no one can see, you can’t see in from the highway and those types of things, you’re going to get slaughtered. So that’s part of why it’s important to not only have these conversations like you and I are having but why ICSC and retail are getting involved as well.

You know, sorry to keep blabbing here but the last piece on this is in our presentations we talk about Blockbuster. Blockbuster, I think there’s one Blockbuster still in business in Bend, Oregon. Right? But if you and I were having this conversation 13, 14 years ago and I told you Blockbuster would be completely out of business in 2019, you’d have told me I was crazy. But that happened. It wasn’t that Blockbuster didn’t have a lot of really smart people and did a lot of really smart things, but A, they didn’t pay enough attention, or enough people didn’t pay enough attention or pay enough respect to how the consumer was evolving and how they wanted to make choices, and they also didn’t pay attention or give enough respect to the new competitors in the market. “They can’t do what we do,” and that type of thing.

They’re completely out of business. That’s mind-blowing when you think about how big they were and how many smart people that they had, and they did a lot of things right. But it doesn’t take that many bad decisions, or that much not paying attention or giving enough respect to your competitors to let it bite you in the rear, so to speak.

So think about today. You’ve got CVS, right? What is CVS, there are 9000 CVS locations, most of them in the United States. There are 1100 plus MinuteClinic locations. They’re starting to offer other types of services. Obviously Aetna, with the affiliation there. You know, I mean there’s all kinds of innovation that can come from that, and they’re in every neighborhood in the United States. They can be the ones. They’re not there yet, but they could absolutely be the ones that have the ongoing conversation with the people in their trade areas and develop cradle to grave type relationships with those types of people across a variety of different healthcare services and wellness.

That is pretty interesting but should be pretty scary to a lot of traditional players in the space. But what is CVS but a retailer who understands consumers? All of these things are sort of blending together into this world, and so I was glad to see ICSC jump on that. So sorry if I’m talking too long about that, but that’s just near and dear to my heart and I’ve just seen that evolution over the last few years.

Andrew Dick: No, I appreciate the conversation, Bill, and in fact, the one reason I wanted you to talk about ICSC is that I know that Buxton has had a presence within the organization for some time, and that’s really where some of Buxton’s roots started, in the retail space. I also enjoyed our conversation offline about CVS and Walgreens and what those organizations are doing, because they have a powerful footprint. They have a network that’s hard to compete with, and I know they’ve partnered with some of the local healthcare providers to staff their clinics, but you’re right in that CVS and Walgreens are looking to expand healthcare operations and local healthcare providers should be watching what they’re doing, and be concerned in some cases because of the network that they have.

Bill Stinneford: Yeah, you know, and … Yeah, sorry, Andrew. I was just going to say real quick on that, but there are strategies to take if you are those systems to make sure that you don’t get swallowed up by that. You know, but it is taking a neighborhood by neighborhood approach and not a one size fits all approach to your marketing or to the services that you offer. It’s really catering your offerings in each of the neighborhoods that you serve to the population of that neighborhood and their needs and their desires and the services that they may need, and how to educate that population to have better outcomes over time, and think, you know, there’s no one size fits all approach to that.

The way that you achieve those localized, local store marketing if you will, neighborhood customization of your offerings, is to use data and analytics and understand people as consumers, not just demographics in those neighborhoods and understand their behaviors and their attitudes and how often do they exercise or not exercise, how are they eating, poorly or well? How are they aging? What are the different types of things? You could have two houses that demographically are the same, but how they live their lives, how active one is versus another, you know, one could be 65 and hikes three times a week and eats well and is always very active, and the other living right across the street that’s 65 that has the same net worth is a couch potato. You know, one guy needs an orthopedic surgeon, the other guy needs a cardiologist.

If I’m just looking at them demographically, I’m not going to be able to tell the difference, so implementing consumer-level data, understanding people’s attitudes and behaviors in combination with other things, can help people forecast what will be needed and how to change outcomes not on a market level basis, but on a location by location or a trade area by trade area basis. Not every CVS trade area is the same, but they’re using data and analytics to optimize their offerings and their messaging in those local communities to be as successful as possible, and that is possible for healthcare companies outside of those big guys, but you’ve got to implement some of the things we’ve been talking about today.

Andrew Dick: Great point, and I enjoyed that part of our discussion. Bill, switching gears, I know that Buxton recently developed a strategic relationship with CoStar, which is a huge player in the real estate space. What does that strategic relationship look like, and how will it benefit your clients?

Bill Stinneford: Yeah, we’re really excited about the relationship. It is a game-changer in real estate investment. For those that don’t know, CoStar is a very large data and research and analytics company in their own right, and publicly traded and they have amazing information on real estate. What’s available in the markets for sale, for lease, of what type of real estate, what are the asking rents, what’s the asks price for land, what are things being leased for around it, what’s the tenant mix, who are the tenants in particular facilities? It’s just, I’m not even doing it justice, the vast amounts of wonderful data market comps. The vast amount of data and research that goes into their offering. So for the first time, what we’re able to do is combine our two offerings in one platform for the benefit of our clients.

If you think about some of the things we talked about earlier, the output of a healthcare system comes to us and says, “Hey, we want to really grow primary care, urgent care, orthopedics and cardiology in an outpatient setting.” We would build those forecasting models based on combining their data with our data and methodologies and then forecast: here’s how many locations you’re going to have for each of those service lines in the market and here’s where they layout. The best analytical intersections for you. You now have that inventory of top potential locations that meet all the criteria that your successful locations already have for those services. Well now with CoStar, the one thing we weren’t able to provide was: okay, that’s great. These are the best analytical intersections for me. Is there anything available that meets my ideal location both in terms of size and quality but also economics.

Now, they can actually turn on the Buxton recommended potential traders. You can turn on then CoStar and say, “Okay. What’s available that meets my economic criteria, my size criteria, my use criteria, that fall within those recommended trade areas?” So actually see all of that in one platform, see who to contact there or who to put your people in contact with to get these very precious sites in the most ideal trade areas as quickly as possible without having to wait on brokers or other things that may take a while, or only see some of the sites that may be available. This gives you access to all of the sites with all of the information that you have to get to sites … Again, we’re talking about a very competitive market. To get to those sites in the best-recommended trade areas analytically faster than your competition, it is really a game-changer in our world.

Andrew Dick: So Bill, when we were talking offline it sounds like your clients could also use this, the CoStar feature as well, to the extent that they were looking at a leasing arrangement with a referral source and the Stark law or the anti-kickback law may apply. You could quickly pull comps from that area and make an educated decision based on what is fair market value in that area. Is that right?

Bill Stinneford: That’s exactly right. I mean, CoStar does a tremendous job pulling that data in every market across the United States at regular intervals so that it’s clearly available on the platform. So you have to utilize data to prove that you are asking fair market value for real estate. You can easily pull that report in a few seconds and so it’s just tremendously valuable, yes, for Stark law compliance and anti-kickback.

Andrew Dick: Right. Bill, as we wrap up, I want to ask you just a couple of questions. Over the next five years, how do you think the Buxton business model will change?

Bill Stinneford: It’s interesting. Over 25 years, our business model, what we do has not really changed, which is combining our clients’ data with our data and methodologies and technologies to produce answers, right? We love data. We’ll always love data. We spend millions of dollars a year on data to help answer a lot of these questions, but data in and of itself is worthless. There’s a lot of people that are data-rich and insight poor, to use the cliché. But what we really bring to the table and have always brought to the table is the ability to find the patterns in the chaos. To know what to do with all of that data combined, and experience to create answers. These are the things that you need to be successful and here are all the places that you do not that have it. Here are all the places that you are that don’t have it anymore. Right? Whatever that ends up being.

Now, where we’ve changed and evolved and grown is how our clients interact with those answers. So we talked about our technology platform that enables our clients to push buttons easily and get the answers that they need to make these decisions, so I think you’ll continue to see our technology evolve. You’re seeing all kinds of things with artificial intelligence and machine learning. Those are buzzwords out there, and we certainly implement those things into our solutions, but you always have to question with that, when you hear those sexy buzzwords, you still need a lot of sample set. A lot of data points, to be able to come up with valuable insights in that. But we’re experimenting with that. Data visualization, mobile data to be able to follow people’s traffic patterns and shopping behaviors. There are all kinds of interesting technologies and new data sources that we’ll continue to investigate and implement and develop ourselves to continue to make our answers better and the way in which our clients interact with them better.

But, you know, the fundamental question of what Buxton does, helping people understand who their consumers are and where’s everybody else that looks just like them that aren’t utilizing them right now, and where are the best places to invest their dollars for real estate, that’s always going to be who we are. In healthcare, that will only continue to grow. I think you’re continuing to see the advancement and the acceptance of these types of strategies and the need to understand people, patients as consumers. The need to think about things not purely as retail but more like retail than they have in the past. So I think you’ll continue to see us invest heavily in our healthcare vertical, in data technology and people to continue to produce the best solutions for our clients to help them navigate a very competitive and evolving time.

Andrew Dick: Great. Bill, where can our audience learn more about you and Buxton’s healthcare practice?

Bill Stinneford: Yeah, you know, the best place, we have a lot of great content, is to go to our website. That’s just buxtonco.com. You can contact me directly as well. It’s Bill Stinneford and my email is bstinneford@buxtonco.com. Or you go to our leadership page and you’ll see our leadership and our email addresses on the website as well, but there’s a healthcare section on there. Lots of great content and videos, and for people at any stage to learn more about the things that we’re talking about today and why they’re so important.

Andrew Dick: Bill, thanks for joining the podcast. I really enjoyed our discussion. Thanks to our audience for listening as well, on your Apple or Android device. Please subscribe to the podcast and leave feedback for us. If you have any ideas for future topics or guests, please reach out to me. My email address is adick@hallrender.com. We also publish a newsletter called the Healthcare Real Estate Advisor. To be added to the list, please reach out to me at the same email address. Thank you!

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Creating HealCo, A Technology Platform to Manage Medical Office Timesharing with Kirat Kharode

Creating HealCo, a Technology Platform to Manage Medical Office Timesharing with Kirat Kharode

An interview with Kirat Kharode that was recorded in Scottsdale, Arizona at the Health Care Real Estate Legal Summit sponsored by Hall Render. In this interview, Andrew Dick interviews Kirat Kharode, Founder and CEO of Healtor. Healtor is a technology platform that is designed to create a marketplace for health care providers to better utilize timeshare space and to manage timeshare arrangements in a compliant manner.

Podcast Participants

Andrew Dick

Attorney with Hall Render.

Kirat Kharode

Founder and CEO of Healtor.

Andrew Dick:  Hello and welcome to the Health Care Real Estate Advisor Podcast. I’m Andrew Dick. I’m an attorney with Hall Render, the largest healthcare focused law firm in the country. Today, we are broadcasting from the Health Care Real Estate Legal Summit in Scottsdale, Arizona. My guest today is Kirat Kharode, the founder and CEO of Healtor. We’re going to talk about his career and how he ended up founding a tech startup company. Kirat, Thanks for joining me.

Kirat Kharode:  Thanks so much for having me, Andrew.

Andrew Dick: Before we jump into your business, talk a little bit about your background. You have a unique story to tell, and tell us a little bit about.

Kirat Kharode: Sure. I started my career in hospital administration. I went to a grad school at Johns Hopkins School of Public Health. Started my career at the VA hospital in Pittsburgh. I had the opportunity to work with the transplant program there and separate the transplant program to be the first independent in-house liver and kidney transplant program based out of a VA hospital in the country, and that was my administrative residency. Kind of opened my eyes to compliance world regulatory issues and fostered my interest in going to law school.

Kirat Kharode: But coming out of grad school I didn’t really have a whole lot of funds, didn’t want to pay for law school. I was fortunate enough to find an opportunity where a health system, the University of Pennsylvania, paid for me to go to law school at night across town in Philadelphia while I was working at Penn.

Kirat Kharode: After that, I continued in hospital administration, did law school while I was working. Completed law school. Learned a lot about compliance. Regulatory health law was my particular focus, and it helped me understand a lot of the nuances as I was going through different business development and operations roles, to understand the complexities and also have intelligent conversations with the general counsel in the facility so that we could have some healthy discussions about what was appropriate and what wasn’t appropriate in the risk spectrum.

Kirat Kharode: I stayed in hospital administration for almost 20 years, working in all kinds of different organizations, both nonprofit, for profit publicly traded, for profit privately owned. It just opened me up to a gamut of sort of issues, both from a strategic perspective as well as an operation perspective that really kind of set the stage for the creation of Healtor.

Andrew Dick: You have this health care administration background. You have a law degree. At what point did you say, “Gosh, I want to start a technology company.” I mean, that’s a pretty big transition.

Kirat Kharode: Sure, sure. Well, you know, I think the theme throughout my career, regardless of the setting that I was in, was really focused on making convenient ambulatory care settings for patients. With the physician shortage that exists nationally, to me, it’s very important to foster that medical office ecosystem because I think the medical offices are really the unheralded hero to me in the whole health system. Everything that you do from the most complex of procedures to the very basic. The birth of a child doesn’t happen in a medical office, but certainly the first conversations do.

Kirat Kharode: The NRC actually just put out research that 80% of decisions that patients make are based on convenience of the provider location. To me, medical office locations was always extremely critical.

Kirat Kharode: As a hospital administrator, I feel today too, that there almost should be term limits on how long you stay in hospital administration before you’re forced to do something that really changes the world because, as an administrator you see all kinds of issues that you know that, hey, if somebody had a solution like this, this would solve a problem. I think that too often hospital executives stay in positions. They move from one facility to the other. They come up with these realizations, and it just kind of goes out the window.

Kirat Kharode: I really wanted to focus on this because I see it as an important issue, especially as we move to more of a value-based world. As more services are done outside of the hospital facility, I think it’s critical to have a technology where it makes it easier for doctors and hospitals to access and create timeshare spaces and places where patients want them to be.

Andrew Dick: Let’s stop there. Hospital administration, you find a pain point with how hospitals are managing, owning the real estate. When did the light bulb go on and you say, “Here’s a problem. I need to find a solution.” Talk a little bit about that. What was that moment like and talk about the pain point that you’re trying to solve for.

Kirat Kharode: Sure. To boil it down to just one or two might be a little difficult. I think there’s a whole … There’s a whole subset of problems that kind of compound the issue of medical office timesharing.

Kirat Kharode: First is just basically that right now, like 50 years ago, if a physician wanted to look for a medical office space in a new community, and they didn’t want to spend an inordinate amount for capital cost and leasing out the facility for 10 years, there’s really a few options that exist besides calling around to every building in town to try to find space.

Kirat Kharode: On the front end, there’s that problem that exists. On the back end is the bigger issue of whether hospitals are … When they enter arrangements with physicians if they remain compliant with stark and anti-kickback statutes.

Kirat Kharode: And both of those issues kind of came up in various points of my career a number of times as both we were trying to place physicians out into communities that we didn’t have a presence, hub and spoke type of strategy as well as issues where we have timeshares with physicians and we’re trying to manage it as best we can. But there’s just a whole host of compounding issues that take place and make it a little bit complicated to manage that process for both the administrators as well as the physicians, which leads to lapses in payments, and potentially down the road could lead to [inaudible 00:06:55].

Kirat Kharode: So, I can’t pinpoint a moment in time necessarily that I came to the realization. I think it was over the course of a few years that I realized that this was really something that needed to be addressed and was extremely important.

Andrew Dick: So, getting those specialist out in the community, trying to document those arrangements, trying to ensure that they’re fair market value, and you’re really focused on the timeshare space, is that correct?

Kirat Kharode: That’s correct. Yep.

Andrew Dick: And so, for our listeners, a timeshare space being a physician can go use some clinical space for a half a day, a day, a couple of days throughout the month, but there’s no longterm commitment. It’s just buying blocks of time. Is that what-

Kirat Kharode: That’s right. I mean if it’s a hospital leasing to the physician, there’s the commercial it has to be set in at dance in terms of the rate, and it has to be a year long in terms of the lease, depending on who the owners are and the relationships, those factors change a little bit have a different … They can lease it at different amounts of time than hospitals can when they have a referral arrangement with the physician.

Kirat Kharode: So, it’s certainly a very small amount of time, or it could be two, three days, but right now there’s no technology platform. If you wanted to buy a building, you could find that online. You could buy a medical office building. You could lease a 10,000 square foot space that’s completely shell and build it out yourself. You could find those opportunities. But if you wanted to look for a second generation space per se, one day a week or two days a week, that’s going to be really hard unless you’re picking up the phone and calling around at this point.

Andrew Dick: So, timeshare space is the area you’re working in, and you recognized really maybe two pain points. One is there’s not a way to connect landlord and tenant who wants to enter into these type of timeshare arrangements, at least not efficiently. And then there’s that compliance issue. Stark, kickback, if it’s two providers who want to enter into these arrangements. There’s often not a lot of money exchanging hands, but the risk is a quite great if they get it wrong.

Kirat Kharode: That’s correct.

Andrew Dick: Right? And you witnessed that as a hospital administrator, healthcare professional.

Kirat Kharode: That’s correct.

Andrew Dick: So, talk about Healtor and how does it solve for those problems?

Kirat Kharode: So, we essentially solve for six different issues, and those are pain points that we’ve learned through, not just my own experience, but countless conversations with hospital executives, medical office owners, physicians, and as we’ve developed the product, and we’re still very early stage, but as we’ve developed the product, we now have 70 customers around the country. We have three health systems in the pipeline as well for our compliance product. So, we’ve had the opportunity to talk with many executives, and I think it’s extremely important as we grow that we keep that alignment and discussions with the customer very close to what we’re trying to build.

Kirat Kharode: Those six pain points that we’ve encountered are a lack of accountability on who owns the timeshare. So, in a health system, there’s multiple different angles by which a timeshare becomes active. For example, business development may bring the doctor in. They court the doctor for a couple of years, then they hand off the arrangement to maybe a practice administrator who has a space that’s there for employee doctors. The actual leasing goes to the accounts receivable department and finance who’s tracking payments.

Kirat Kharode: There’s all these different hands kind of involved in that process, and when there’s a breakdown, there’s really few people that are accountable in terms of who’s actually responsible for that. So, that’s the first one.

Kirat Kharode: That triggers things like payment lapses, which is the second issue that we’ve heard quite a bit. So, physician either forgets to pay or now they’ve been there for a year, and Dr. Jones has decided that it’s time that he stopped paying because he’s doing a lot for the hospital, and as an administrator I’ve heard that quite a bit as well.

Kirat Kharode: The third is the lack of communication that exists between tenants and the physicians who are valuable parts of this ecosystem, and hospitals often look at medical offices as being an incubator to build a broader relationship with the doctor within the inpatient facility. And yet the lack of communication about the space issues that exist themselves, if something’s broken or not fixed, that could also ruin strategically the relationship with the doctor.

Kirat Kharode: The fourth one that we’ve heard quite a bit is a space creep. So, physician has space, and they decide they’re paying for two exam rooms. They decide that, yeah, take a third because nobody’s there. That’s obviously not okay either. We’ve also encountered a lot of organizational history gap that exists when there’s mergers and acquisitions and people who have an Excel spreadsheet somewhere are no longer a part of the organization, and now many hospitals are combining it to one and centralizing their real estate function and have no way to sort of track what’s going on in these new facilities that they’ve acquired.

Kirat Kharode: And then finally, it’s really the core issue of the front end piece, which is underutilized medical spaces not being optimized by the hospital. And often, employed medical groups that are affiliated with hospitals either through a captive PC or another arrangement often have specialists that they have out in the communities and they’re willing to take a loss on those employed specialists, but a big part of that overhead is where their offices are located. And when a physician is out during surgery or they’re rounding at the hospital, in days when those offices are not used, those lack of optimization creates overhead challenges for the medical group.

Andrew Dick: So, I’m hearing … You hit on a number of points that I’m very familiar with. One, the compliance issue but also the timeshare arrangements historically haven’t gotten the attention they deserve. The whole health system administrators will say, “Yeah, a couple of hundred dollars a month even if we don’t collect or we mess this up. It’s not a big deal.” When, in reality, is a very big deal.

Andrew Dick: And then, you’ve also talked about efficiency of timeshare spaces. So historically if a hospital has some timeshare space, you’re right, maybe they rent out a couple blocks of time throughout the month, and the rest it’s just sitting idle, right? Not generating any revenue, not helping further the health system’s mission, and that’s what you’re hitting on, right?

Kirat Kharode: Absolutely.

Andrew Dick: You’re hoping to make that space more efficient. And how do you do that?

Kirat Kharode: Right. So we have three basic products within our technology that we’re building right now. Healtor market is the front end piece of it and relates to onboarding. Healtor recon is our compliance engine. And the third piece is Healtor MD, and that’s more of our management function. Each of those plays a different role.

Kirat Kharode: The front end marketplace is like an Airbnb for medical offices if you will. And, as we’re building this … We’ve started … I wanted to point out we’ve started … As a non technology person, I’ve now surrounded myself with a lot of resources of really experienced technical people. But my goal from the beginning was really to be very basic and prove out the concept and really figure out our product market fit in terms of what we’re doing so that we’re not spending a whole lot of money and resources to build the technology that’s fancy and really doesn’t serve anybody’s purpose.

Kirat Kharode: So, what we’ve done is really create a basic front end splash website right now to prove out the concept around Healtor market. Right now we have 70 customers. We’ve already started generating revenue, which is really exciting. The Healtor … The recon piece of it, which is a compliance engine is where we’re working with health systems to figure out ways to take their best practices from across the country, and the health systems that we’re working with all have these pain points and so they’re really willing to work together in terms of building a product and improving our product from what I believe is the ideal to really what the customer believes is crucial in terms of making the compliance product effective.

Kirat Kharode: And the third piece of it, Healtor MD, is going to be further down in our technical development but really deals with how are we going to manage that space creep issue effectively and use technologies appropriately, whether it be machine learning, whether it be some sort of distributed ledger, a combination of those including IOT, things that we can use to basically take our technology and make it easier to manage the utilization of these spaces and do it in a compliant manner. So, those are the three basic areas that we’re, we’re working on.

Andrew Dick: So the marketplace idea is pretty interesting. So Airbnb gets a lot of attention, but this product will allow a physician, for example, to potentially find unused or available timeshare space. Is that the right way to look at it?

Kirat Kharode: Absolutely. So, available timeshare spaces and areas where they’re looking. We also give the control … I mean a lot of the control in that process is obviously with the physician that has a space, the landlord, so to speak. So, the physician landlord really has to make the decision about who they want to welcome into the space.

Kirat Kharode: And so, in these conversations that we’re having, and it depends on area. There’s some specialties that really aren’t welcome from a competitive perspective or from a perception perspective, and we honor those requests as we’re developing our protocol to make those arrangements.

Kirat Kharode: So, it’s not completely … It’s not exactly like Airbnb in that there are certain restrictions of who’s coming into the space that we allow, but we are creating that mechanisms to be able to bring physicians into communities and into spaces and blocks of times in these timesharing increments that they’re looking to come into.

Andrew Dick: What would that look like? You log … You get online, and you’d log into Healtor, and depending on what market you’re in, at some point, I know you’re company is relatively new, but as you grow out in certain areas around the country, someone could either list I guess or find available timeshare space. Is that right?

Kirat Kharode: Yeah. Ultimately that’s what’s going to happen. I suspect that this summer we’re going to be doing some private launches in particular regions of the country that we’ve already realized are pretty hot areas from the 70 customers that have signed up so far. And those are areas where we’re really going to fine tune the product itself and make sure that it’s delivering and the quality’s high before we kind of roll it out to five or six markets and so forth and so on.

Kirat Kharode: So, we’re really excited about some of the partnerships that we’re creating, some of the things that we’ll be announcing very soon about alignments we’ve made with really prominent members of the real estate community. Really a who’s who of BOMA [inaudible 00:18:25] if you will in terms of who’s helping us and is already on our board.

Kirat Kharode: And so we are envisioning a scenario where it’s an alignment both with brokers, with physician liaisons and hospital executives as well as the general marketing to the community of physicians at large that are looking for spaces and have spaces.

Andrew Dick: So let’s talk about the second component, the recon component, compliance. It’s a big deal in the timeshare world. What will the Healtor platform offer a healthcare provider in terms of compliance?

Kirat Kharode: Well, it’s really the management and the ability to account for, on a monthly basis, the transactions that are happening and any changes that might create a trigger. For example, if a physician stops paying in the middle of their lease, that sort of compliance alert and that chain of command at a very basic level will be a function that we’ll have a through the Healtor recon platform, but the compliance engine is being built to track those payments on a monthly basis.

Kirat Kharode: We’re also looking forward to building APIs with different data sources around the fair market value specifically so that if there are changes, so that these quote-unquote … Some of these in a discussion I was having the other day, there’s a physician who had a space, had a lease that was an evergreen for 20 year, and now they’re paying significantly and have for many years been paying significantly under fair market value. With Healtor recon that won’t be possible because we’d have caught that at the beginning. And I think that’s an important piece to highlight because in my experience and the experiences that I’ve heard from hospital executives, it’s one thing if you approach a physician who hasn’t paid a month in and say, “Hey doc, you’ve forgotten to pay. Something must’ve gone wrong with the setup.”

Kirat Kharode: It’s a very different conversation 18 months later when the person hasn’t been paid, and now they’ve incurred thousands of dollars in fees and penalties that they now owe the hospital, and they’ve also been bringing a ton of admissions, and they’re now the rock star of the hospital. And so, that immediate communication component is going to be a big part of recon as well.

Andrew Dick: Yeah. Because those noncompliant arrangements can really create tough conversations between providers and jeopardize those relationships.

Kirat Kharode: Right. And it’s also who … Going back to the point earlier about accountability. If there’s a clerk in finance who realizes that there’s been a non-payment, they might try to escalate it through the channels that they have, but they get buried with work. They’re trying to reach out to a business development person who, really what they’ve been spending two years trying to recruit those physicians. Do they really want to be shaking that person down now for a lack of payment along with kind of just the culture that often is created. As you pointed out earlier about, is $200 is really a big deal here and there? If you really think about the downstream revenue, which even though many hospitals don’t want to talk about really, that’s really what it’s all about is the downstream revenue that these physicians are bringing to the hospital, which is millions of dollars in some cases, and are they really going to irritate the physician about $200 here or there? It’s something that’s difficult to have when you don’t address it right away and proactively.

Andrew Dick: So, the way I envision this platform working almost like a … Not only do you have this Airbnb type component where you can shop for space or list space, you’ve got this compliance component that helps you manage the space. So, almost like a property management type platform. Is that a way to think about it?

Kirat Kharode: Yeah. In some ways it’s a bit of a property management platform, but really it addresses this particular pain point around timeshares and these arrangements that exist. So, we’re not trying to do everything to everyone. We’re really trying to address this … Property management, as you know Andrew, is such a wide span, a spectrum of things that get covered. And what we’re really trying to do is provide a specific value set around this pain point that everybody seems to have. And everybody seems to hate medical office timeshares, but the phrase that keeps coming up to me is necessary evil. Medical office timeshares are something that every hospital needs. Ever hospital wants to have, but it’s just a pain to manage. And that’s really the specific property management issue that we’re trying to tackle.

Andrew Dick: So, the third benefit, which sounds like will be developed maybe a little bit later on, this Healtor MD, that will help you manage the space. Give us a little bit more information about what that might do when you build that out.

Kirat Kharode: Yeah. I think that with Healtor MD, there certainly is going to be an integration beyond just the online technology but into more of a hardware integration. So for example, the monitoring of the spaces itself, and for the folks that really are … The health systems that really are on the Uber end of being compliant. these are the folks that we’re talking to about, what can we do about space to (a), from the get-go, create a 3D visual of the space, of what it looks like, what it looks like today, what’s in there, having a potentially [inaudible 00:23:54] some of the equipment that’s in there, looking at the activation and the doors as a key component of who’s entering the space, when they entered, how long they were there and tracking that utilization.

Kirat Kharode: And it also ultimately, if things go according to plan, will also be an automatic indicator that would prompt us to alert the medical office owner that they have under utilized space. If they have blocks and weeks and weeks ago by without a room or two rooms or a part of the space or all the space not being utilized on a particular day of the week. And so then it basically will fuel the Healtor market and get us more activity on that end too.

Kirat Kharode: So, Healtor MD is really going to be one of the things that we will build out over time once we really have the first two components built out. But I’m really excited about it. I think there’s a lot of the application that will come, and depending on the needs of our customers, we’ll adapt and we’ll speed up the development timeline to address those needs sooner rather than later if we have to.

Andrew Dick: Well this is fascinating. I think there is definitely a need for a product like this. Talk about you founded the company not so long ago have made quite a bit of progress in a short amount of time. Talk about that from the point when you founded the company. How long ago was that?

Kirat Kharode: Yeah, so we started the company in January of this year, so not too long ago. I’ve obviously been thinking about it a lot longer than that, but we became a C-Corp in January and started at that point, but since that time, we have, even though we’re a small team, a set of developers, there’s a few people that are helping me out. We have annual goals, and we have a quarterly goals that we track weekly in terms of the progress. And in the first six months, one of the things I really wanted to do is make relationships with the industry. There’s a lot of stuff, even having done this for almost 20 years, there’s a lot of things that I don’t know, and I’m learning things every day. And so really getting closer to the customers, whether they be the physicians, the hospital executives, the property management companies, the brokers, and really understanding what these pain points were from a macro perspective so that I’m that making assumptions about what the product should be or should ultimately look like.

Kirat Kharode:  And so, I’ve really been thrilled. I’ve met a ton of people. I’ve had hundreds of conversations about medical office timeshares. I joke around. I’m like the Bubba Gump shrimp guy for medical office timeshares because I’m always going around talking about medical office timeshares. But it’s really been fascinating, and everyone has a different perspective, and everyone … The common sentiment is that these are pain to deal with, but if we have a solution that comes in and can fix this, it’d be extremely valuable to a lot of people.

Kirat Kharode: And one of the very interesting things … I was so focused on the United States, and last week I was contacted by one person in Canada and one person from Australia. And so, as we are looking at our addressable market, it’s a lot larger than I initially expected this would be.

Kirat Kharode: So, I think there’s a lot of applications that we are probably not even thinking about when we look at the global market just yet. But we have to walk before we can run, and that’s exactly what we’re doing right now.

Kirat Kharode: So, the first six months have been really busy and active, and we value the key KPIs around revenue as being our North star in terms of how we’re developing the company and what metrics we’re looking at to grow. And so, we wanted to get to having revenue, ideally even before the technology was completely rolled out, which I’m thrilled that we’ve done. The traction from having customers join as quickly as they’ve been joining and the health system’s interests and just the tremendous amount of interest and activity as will be reflected in our announcement of our advisory board very soon, which really reflects a whole a spectrum of thought leaders in the healthcare real estate world.

Andrew Dick: So as we wrap up here, talk a little bit about your vision over the next five years and what does Healtor look like five years from now?

Kirat Kharode: Yeah, I think five years from now, five to seven years from now, there’s going to be … Ideally it’ll be …. In the medical office world, It’ll be a household name, if you will. Everyone will know that this is the gold standard to turn to as it relates to medical office marketplace and compliance.

Kirat Kharode: Marketplaces aren’t easy to develop. There’s just so many different factors in there, and there’s a lot of things that could trip up our success, but I think if we stay grounded and we really stay close to what the customers need and really keep fine tuning the product market fit, then I think that we’ll get to a place, in five years, where it’s very possible that we are, not only in medical office a household name for medical offices in the United States, but around the world.

Andrew Dick: How can our listeners find you and Healtor if they’re interested in the product?

Kirat Kharode: Sure. I think the easiest way is probably just email me. My email is Kirat, kirat@healtor.net. Please feel free to email me and share your thoughts, or any questions I can answer, I’m happy to do that.

Andrew Dick: And so if providers want to try the product out or be involved developing the product, they can just reach out to you.

Kirat Kharode: Absolutely, yep. Right now we have a very basic splash website right now where we’re lead-generating through a contact form, and I’m having discussions even through our chat rooms sometimes where I’ll take the helm and be answering chat questions from folks who interact through our website, and the questions range in spectrum from compliance issues to what they’re actually looking for in terms of space.

Kirat Kharode: And so, if they want to reach out to me they can certainly reach out through our website, healtor.net. We have a contact form on there. Again, it’s a very basic site, but it’s up and running, and my email would be the best way.

Andrew Dick: Terrific.

Andrew Dick: Kirat, thanks so much for being on the podcast. I want to thank our audience for listening as well. 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, Andrew Dick at adick@hallrender.com.

 

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Leveraging Opportunity Zones and Other Health Care Financing Tools with Jerimi Ullom and Joel Swider (Webinar)

Leveraging Opportunity Zones and Other Health Care Financing Tools with Jerimi Ullom and Joel Swider (Webinar)

Do you have a hospital development project that you would love to get done but just can’t seem to find the money? Wondering if your health system can benefit from the Opportunity Zones program? Join a health care finance attorney and a health care real estate attorney to hear about some unique and innovative ways to get your project funded.

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Podcast Participants

Joel Swider

Attorney with Hall Render

Jerimi Ullom

Attorney with Hall Render

Joel Swider: Welcome to the Health Care Real Estate Advisor Podcast. I’m Joel Swider, a healthcare real estate attorney with Hall Render, and for today’s episode we’re going to listen in on a webinar put on by my colleague Jerimi Ullom and I, which aired in September 2019, on Opportunity Zones and other healthcare financing tools.

Jerimi Ullom:   Thanks Joel, we want to first of all today thank the Indiana, Michigan and Ohio Hospital Associations for having us, and we look forward to talking with everyone.

Joel Swider:     So there’s been a lot of buzz about so-called qualified Opportunity Zones, but many of the hospitals that we work with haven’t focused a lot of attention on how they can benefit from this program, at least not to date. So in today’s webinar we’re going to answer at a high level three questions that frequently arise in the healthcare context when it comes to Opportunity Zones and the financing of hospital projects more generally.

Joel Swider:     First we’ll look at what are opportunities zones, how do they work, and how can a both for-profit and nonprofit providers benefit? Second I think we’re going to find that the Opportunity Zone program has a relatively narrow fact set where it can be best utilized as a financing tool. So we’re also going to look at what other tools and incentives are available to hospitals to fund new development projects and to drive complimentary development within their markets.

Joel Swider:     Finally, we’ll look at some concrete action items surrounding the next steps for hospitals who are looking at how to get their projects off the ground. Today’s session is designed as kind of a lunch and learn. We should go about 30 minutes, but feel free to type in any questions in the chat box or email us offline we’re happy to make ourselves available to answer any more in the leads questions that you may have.

Joel Swider:     So what are Opportunity Zones? Opportunity Zones were conceived by the Tax Cuts and Jobs Act of 2017 the TCJA. They were designed as a way to spur investment in distressed communities by providing tax incentives for taxpayers who invest capital gains in certain geographic regions. As authorized under the TCJA, state governors were the ones who originally designated these zones, over 8,700 of them and the IRS then later approved those. They’re in all 50 states, the District of Columbia as well as five US territories, and this slide shows just an overview of where the Opportunity Zones can be found.

Joel Swider:     At least this is a view of the continental US and there is an official government map, which we have a link to that on our website where you can zoom in, there’s third party maps as well. You can zoom in and find the area where your hospital or health system is located. And you can tell just from looking at this map at a high level that there are a lot of zones located in and around large cities, but they’re also in a lot of rural areas, especially if you look out West. So because it’s up to state governors to designate these zones, the state had some latitude as to where they’re located. So you might be interested to find whether you’re in one or near one.

Joel Swider:     So how do Opportunity Zones work? So I’m going to go through this slide and the next at kind of a high level, and I’ve used some numbers in here just as an example, the dates as well, just as an example, so that you can see how this might work in practice. But I’ll go through this just briefly so that you can see whether or not you have a situation that might actually fit into the Opportunity Zone program or not.

Joel Swider:     So to start with, you’ll have the sale of tangible property and a gain that’s been realized from that sale. So that’s work I’m calling that investment number one because that’s from some old investment. Now some hospitals buy and sell property more frequently than others. And we’ll get into how you might partner with a developer or other capital partner who might have more gains that they can deploy. So yeah, these dates here other than the timeframes are just for example purposes. But one date that’s important is within 180 days of the sale of that initial property, you must invest that gain into a qualified Opportunity Fund. So that could be all or a portion of that original gain. And I’m calling that investment number two.

Joel Swider:     So that’s a separate investment and you’ll see in a minute that it’s treated slightly differently. Within two and a half years of that initial investment, investment number two, the Opportunity Fund has to purchase Opportunity Zone property and that includes real estate businesses, business assets, etc. And they must improve it by at least the value of the purchase price. So this fund is essentially a vehicle, an investment vehicle, it could be a partnership, a multi-member LLC tax as a partnership or it could be a corporation. But importantly it has to invest at least 90% of its holdings in one or more Opportunity Zones.

Joel Swider:     So now we’ve got the gains from the sale of our initial property, invested it into the Opportunity Fund, we’ve put that money to work and then after five years in the fund, you will get a 10% increase in basis on the initial gain. So going back to that initial amount that you invested from the first gain, you will get a basis step up of 10% essentially that amount is the amount the taxable gain goes down by 10%. Then if you hold that investment for another two years, in year seven you will get an additional 5% increase in basis or another step up on that gain from the initial investment, investment number one.

Joel Swider:     Again, there’s no gain recognized either in year five or year seven, you’re still continuing to defer those gains. Then in 12.31.2026 that is a hard date. There is a mandatory deferred gain recognition on that original capital gain from investment number one. So that and so because of the timeframes here, I’ll mention, if you want to get the full 15% basis step up on that deferred gain, you need to really invest by 12.31.2019. Now you can still invest later and qualify for the 10% basis step up if you hold it for five years. But obviously you could no longer hold it for seven years because that 12.31.2026 drop dead date.

Joel Swider:     Then as to investment two, so going back to our Opportunity Zone investment, if you hold that investment for 10 years total, then any gain from that sale of a second investment is completely erased. You get a basis step up to fair market value. So as you’ll see, I think if you can fit into it, it’s a great program, and as I kind of talked about on the previous slides you can get temporary deferral of gains, you get a step up in basis as to those gains, and you can get a permanent exclusion on taxable gains on the second investment. So it can be a good program if you qualify.

Joel Swider:     Now what happens if you’re tax exempt, you say, “Look, I, don’t have any taxable gains. I am charitable, I’m nonprofit and tax exempt.” Well how can this work for you? And so I think there’s still are some ways that you could leverage the Opportunity Zone program, one of which is, especially for hospitals that are located in the Opportunity Zone or near the border. And there’s some specific rules that the IRS put out earlier this year with respect to those types of properties that span, that are partially in the zone, partially not, which we can again talk about kind of offline if you have questions about that.

Joel Swider:     But if you’re on or near the zone, you could partner with a capital or a development partner who is able to take advantage of the tax benefits and that could result in a lower cost of capital to you as a provider for the real estate or for other development projects.

Joel Swider:     Another way that we’ve seen this work is that hospitals can attract for-profit investors to improve social determinants of health in the community. So we’ve seen a lot of focus in recent years with our clients and other hospitals where they’re looking at non traditional healthcare investments it’s really within their charitable purpose, but what they’re doing is they’re investing in affordable housing, they’re putting grocery stores into sort of a food desert area, and they’re making nontraditional healthcare investments that really help improve the population health in the community as a whole. And by so doing achieve their mission. So this is another way, and we’ll get to an example of this in just a second of how you might partner with a for-profit to provide some of those services.

Joel Swider:     Another thing to think about when it comes to a tax exempt provider is that a rising tide floats all boats. So what kinds of investments could you make that are within your charitable purpose within that community where the longterm value might actually end up not as a direct result but indirectly helping others who would be willing to invest in that community. So for example, a hospital could pledge community improvements in order to attract for-profit investors to the community, thereby improving social determinants and population health more broadly.

Joel Swider:     So just we have three quick examples here kind of straightening what this can look like and I’ve got links to the … If you want to find out more about each of these, I’ve not used the provider’s names but you can look them up. There’s an academic medical center on the East Coast, which collaborated with a for-profit pharmacy operator to open a new pharmacy and wellness store near the hospital’s campus.

Joel Swider:     The store offers a variety of health services, daily living products and health food options, and it also provides a health clinic that’s staffed by nurse practitioners. So this is again in coordination with the hospital. And so this actually came out a couple of years before the Opportunity Zone program, but when we were looking at this we thought, wow, could we recreate this today and take advantage of the Opportunity Zone program? I think you certainly could.

Joel Swider:     And so for this example the for-profit pharmacy operator could defer, reduce their capital gains by investing in the zone and the academic medical center could attract additional capital and development partners, which they have that are able to utilize the program. So again, kind of a win-win for both parties.

Joel Swider:     Another example here, this is in the Midwest, a large nonprofit Midwest health system partnered with a community development financial institution to help mobilize loan and grant funding to revitalize under invested communities this was in greater [inaudible 00:11:53] area. The goals of that partnership included supporting and trusting social determinants of health, job training opportunities, employment skills, education and food security. And I’ve got a picture here of a grocery store that they have built in a food desert area.

Joel Swider:     The amount of this investment was about $45 million. And again here we see partnering with investors and asset managers that are looking who have capital gains exposure, they’re looking for social impact investment opportunities and both the investors in the health system can benefit in these types of arrangements.

Joel Swider:     So one other example that we’re aware of is a large healthcare organization with a national footprint it’s a nonprofit integrated health system, which created an investment fund that committed up to $200 million to target housing stability, homelessness, and other community needs. So they’re approaching it again from a little bit different angle with the goal of preventing displacement of homelessness or homelessness of low to middle income households in developing communities.

Joel Swider:     They’re also using it to promote access to supportive housing and helping to make homes more affordable, they’re looking at environmental impact as well. And the tax savings here again presents opportunities for those for-profit investors and it also improves the quality of housing and improves the overall population health in the community, which is important to the hospital.

Joel Swider:     So I guess as we’ve seen in this first portion of the presentation, there really can be substantial savings and investing in Opportunity Zones if you’re either a tax payer like a for-profit health system, but what about if you don’t have, you can’t partner, the timing is wrong, what other options exist out there particularly for nonprofit providers to take advantage of those, Jerimi?

Jerimi Ullom:   Sure. Thanks Joel. Appreciate it. Yeah, so beyond Opportunity Zones, I mean we’ve dealt for years with various economic development incentives and various models to get projects completed and get projects financed. So we thought it appropriate to maybe look at a few of those, this is not an exhaustive survey, but we’ll highlight a few things that we see in the marketplace, some of which had been around a long time and some of which are relatively new models.

Jerimi Ullom:   And the first thought is that there’s really been a change, I think in the last decade when folks think of healthcare as economic development, the conventional wisdom, and I think if you go back, you can find white papers and journal articles and the like was that healthcare development would simply follow population. And so unlike manufacturing or technology or these other industries, there really was no reason to incentivize healthcare development in a given community. The healthcare providers would simply follow behind the rooftops and want to locate near them.

Jerimi Ullom:   I think we’ve seen a change in that because what we’ve seen is that healthcare can be a catalyst to an entire community. It can almost function like an anchor tenant does for a retail area, if you will. Oftentimes healthcare providers are the first development in a new area. We’ve also seen an increase in kind of competition for healthcare facilities for decades and decades, if a new manufacturing plant was being built, you would have multiple states vying for it to come to their state. And healthcare was seen as not really in the same vein. We weren’t exactly competing Wisconsin versus Alabama to see where we build our new hospital.

Jerimi Ullom:   But at the micro level location is a bit fungible whether we are in suburb A or suburb B when they buddy each other can have a big impact on the project as a whole so we’ll look at that. And then obviously I think one thing that folks have always agreed on is that having quality providers in your community is important in attracting other economic development. Much like having quality education in a community. You want to make your city, your town a place where folks want to live.

Jerimi Ullom:   And before we leave this slide, I think one other objection that has been proffered throughout the years particularly with respect to nonprofit providers is well these guys don’t pay property tax. Why would we ever want to provide any incentives or whatnot to attract them to our community? Part of that came out of this notion that property taxes were generally the tool available to local governments to provide economic development incentives. And part of it came from this notion of viewing it, I think a little too narrowly, so we’ll get to that.

Jerimi Ullom:   But if we look first if we have a situation where maybe a healthcare development is really the catalyst in an area or an anchor tenant, if you will this slide, this is a live project, it’s under construction right now, but we’ve been through several variations of a very similar project. And in this instance what happened is the health system acquired roughly 70 acres, right? They were going to develop 10 or 12 of the acres represented by the blue circle, but they were going to put in the infrastructure and the utilities and the other things necessary for that entire area to develop. They wanted to play a role on the development of the full 70 acres. They wanted to control maybe how it was developed and what those ancillary uses were.

Jerimi Ullom:   So the healthcare system was kind of the initial catalyst, they were often responsible for putting in a lot of the infrastructure but that would lead to additional development. And what we’ve been able to successfully do in many of these instances is negotiate incentives with the local county, local city, whereby the TIF revenue, the tax increment revenue, which I’ll explain shortly generated by these future additional uses, would help offset those initial investments by the healthcare system.

Jerimi Ullom:   At a micro level location is fungible. This is a map I pulled up of the St. Louis, Missouri metropolitan area, not because we have a particular project here, but because I knew St. Louis is comprised of a gazillion municipalities. And if you look at this map, you see all of these small cities and towns that make up the metro area, if you’re a healthcare system looking to locate in a metropolitan area like this whether you locate in one hamlet or village or suburb or the other might not be that critical. We’ve had lots of projects where our clients have looked at multiple sites all within a very close proximity, but all potentially within a different jurisdiction, some might be in an unincorporated area of the county, others might be in the incorporated limits of the city or the next suburb or city over.

Jerimi Ullom:   So oftentimes without being overly harsh or playing hardball with all these communities, but you may well find a location or a community that is much more welcoming and willing to provide a lot more in the way of incentives because they want your project, they want it to be the catalyst in their community. Healthcare projects often come with a number of high wage jobs as states and communities around the country I think there’s a general shift from property tax reliance to income tax. I think that the location of the jobs rather than being on the tax rolls becomes much, much more important.

Joel Swider:     And Jerimi, before you go on, I think one thing I’d add there too, I think I mentioned with respect to Opportunity Zones that a lot of times a hospital is looking to expand its existing footprint, but especially if you’re going into new markets, like you said-

Jerimi Ullom:   sure.

Joel Swider:     It may not matter if it’s a couple blocks away from this side or the other and one may be in a zone one not.

Jerimi Ullom:   And we’ve had systems we’re going to build an orthopedic hospital, we’re going to build an ancillary center, or an ambulatory surgery center, and it needs to be on the Northwest side of the city, right? That could be in any one of two or three jurisdictions. So I mentioned TIF before, real briefly we’ll overview because this is one particularly around the Midwest that’s used very, very frequently. TIF stands for Tax Increment Financing, and it is as it sounds, a structure where we capture the incremental taxes generated by a development or a project and we can capture those funds and use them to help support that project or that development.

Jerimi Ullom:   Oftentimes the current property tax value is kind of locked in as the base assessed value and any amounts beyond that become increment. It’s a little easier to think about when you view it in graphically here, if we go from left to right along the time continuum and then from South to North is the appraised value. You can see when we create the TIF area, we set the baseline of property values. The taxes associated with that baseline continue to flow where they were flowing before to the schools, to the libraries, to the city, to the county, to all of the taxing districts.

Jerimi Ullom:   But the lighter blue triangle over time, that’s the tax increment, because what we’ve done at creation is we have built a new project, or we’ve attracted additional investment to the area that’s driven up the assessed value and therefore is generating more property taxes. That increment is captured and that increment can be used to finance or to pay for portions of the development in the first instance.

Jerimi Ullom:   So if we go back to couple slides that go to the map where the hospital is the anchor tenant that hospital is investing in the infrastructure in the area, but they intend to recoup that investment from future tax increment over time. So if they spend $5 million putting in roads and drainage and utilities, the arrangement with the town will provide that the future tax increment generated in the area will come back to the hospital as a way to recoup that investment.

Jerimi Ullom:   And then of course to the far right once that TIF area ends, determined by state law, but typically 20, 25 years in most states, then obviously all of that increased value is just in the general tax base. So the big win for the city is this is increment we wouldn’t otherwise have, so we’re not giving up any of our base and at some point in time we’re going to have the value of all of it after this TIF area has run its course.

Jerimi Ullom:   Again graphically kind of how it works in practice, you could see where the new development if you will in the graphic generates revenue that can be spent in the area. Most state laws restrict how that money can be spent, it has to be spent either in or connected to or in some states on projects that benefit the area, the city can’t simply capture TIF revenue and go off and do something wholly unrelated with it.

Jerimi Ullom:   This map just gives you a sense for how widespread the use of TIF financing and tax increment as an incentive is. If you look particularly we’ve got Indiana, Ohio, and Michigan associations on the line, and you guys are squarely in the upper echelon of TIF usage. We’re resident in Indianapolis I know there are literally thousands of TIF districts in the state of Indiana, and you can see kind of around the Midwest is a home to it. California, Texas also show up as being pretty significant users.

Jerimi Ullom:  And the overview here is that there’s been a shift over the last decade of healthcare from just something that follows population to really being an economic driver. And if you think about the modern healthcare campus, you can see that readily, all the ancillary for-profit development, all the hotels, longterm care, medical office buildings, et cetera, that are on the tax rolls that generate additional jobs that bring additional people to the area. That economic development story is usually a pretty easy one to put together.

Jerimi Ullom:  Two more thoughts here. Another phrase you might hear a lot about when you’re looking at projects and project finance and economic development is P3, public private partnerships. I say here, it could be P3, it could be four, five, six, seven. There’s no magic to P3. Okay? I hate to burst all the consultants bubble, but there’s no magic around this phrase.

Jerimi Ullom:  All a P3 project is, is multiple parties coming together to get something done. And typically those come from the public space in terms of government, you might have private for-profit, nonprofit, you might have all the above. And each of them often have different tools they can bring. They have different access to capital, you might have a city that owned some land that they want to contribute to a project. And so, a P3 project is really nothing more than bringing together a group and seeing what each of them can offer to the project, what risks they’re willing to take in the project to collaborate and get the thing done. I wish it were sexier than that, but that is really what we’re talking about in that arena.

Jerimi Ullom:  This is an example of one that we’ve worked on that is still in the planning stages. Lots of boxes, lots of lines. This project was out in the western United States, it involved a healthcare system. It involved a new nonprofit that was being created. It involved the local community college. It involved the local city. And it also involved a private developer, and then subsequently a private manager. And so all of them were coming together. The health system would brand the project, it would be built on its campus. The new nonprofit was going to serve as the owner of the project. They could finance that project with tax exempt debt. They would likely get a property tax exemption as a nonprofit owner. The private developer was obviously going to build it and then they were going to manage the property on an ongoing basis. The host city was going to use the project in part particularly for their first responders, their police and firefighters, and then the local community college, this was a wellness center, they wanted it to be available to their students.

Jerimi Ullom:  So we’re able to cobble together all of these parties in a P5, not a P3 project, to try to pull together a structure that worked and a credit that worked and an underlying cashflow that worked.

Joel Swider:    So Jerimi, when somebody talks about a P3 or P5, you’re saying that they could take really any number of forms in terms of-

Jerimi Ullom:  Yeah. And in fairness, the three refers to the three P words, not the number of parties. I just like to say that because oftentimes these projects involve many, many parties. If you think about them as multi ventures rather than joint ventures. My point is there’s nothing particularly sacred about P3, and I think people often hear that phrase and think there’s some magic to it and it’s really just about bringing the parties together and what can each add.

Jerimi Ullom:  Another model that we see gaining some traction is a nonprofit foundation, nonprofit real estate foundation models. Some of you may have seen this, may have heard about it recently. This is a model that’s been around for a while in higher education. We’ve seen it with student housing projects, with research facilities and the like, and we see that migrating to healthcare. We’re working on our first two projects with this model, both of them in the southern United States, and it’s really just an alternative to for-profit or developer or REIT ownership of a facility. So if you have facilities that maybe the health system doesn’t want to own, so they’re looking to maybe have a developer or a REIT or a for-profit entity own those projects and lease them back to the health system, this would be one potential alternative to that. You can almost view these entities as alternative landlords that are in the nonprofit space and maybe a little more aligned with the nonprofit mission of the healthcare providers.

Jerimi Ullom:  Very flexible, by and large willing to structure and finance and put the project together in any way the health system would like because of their nonprofit mission to try to serve the health system rather than a for-profit mission to try to enrich themselves. So this is one to keep an eye on. I’m sure we’ll be getting some more information out there. If you have interest in this model, my colleague Andrew Dick did a podcast with one of the players in this model recently and you can, I’m sure, find that by searching Hall Render Podcast, Hall Render Real Estate Podcast. And if all else fails, contact us and we’ll make sure you get it.

Jerimi Ullom:  And then, because I can’t resist boxes and lines, this was what one of those nonprofit real estate foundation deals look like. So, not simple, but can be a very, very good alternative to some of the for-profit players in the real estate development industry.

Jerimi Ullom:  And with that, Joel, we’ll see if we have any questions that have come in. I don’t believe we’ve seen any in the chat room, but if you have any beyond this, feel free to contact myself or Joel or really anyone at Hall Render.

Joel Swider:    Yeah. And special thanks again to the Indiana Hospital Association, Michigan Health and Hospital Association, and the Ohio Hospital Association for inviting us. And we hope to talk with you soon.

Joel Swider:    Remember that the views expressed on this podcast are those of the participants only and do not constitute legal advice.

 

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Challenges and Opportunities in Health System Property Management with Lorie Damon

Challenges and Opportunities in Health System Property Management with Lorie Damon

An interview with Lorie Damon that was recorded in Scottsdale, Arizona at the Health Care Real Estate Legal Summit sponsored by Hall Render. In this episode, Joel Swider interviews Lorie Damon, the Managing Director of Cushman & Wakefield’s Healthcare Advisory Practice. The Cushman & Wakefield Healthcare Advisory Practice provides healthcare organizations with strategic and transformational real estate services that directly affect positive business outcomes.

Podcast Participants

Joel Swider

Attorney with Hall Render

Lorie Damon

Managing Director, Cushman & Wakefield

Joel Swider: Hello and welcome to the Health Care Real Estate Advisor Podcast. I’m Joel Swider, an attorney with Hall Render, which is the largest healthcare-focused law firm in the country. Please remember that the views expressed in this podcast are those of the participants only and do not constitute legal advice. We’re in Scottsdale, Arizona today at Hall Render’s Health Care Real Estate Legal Summit, and I’m pleased to have with me Lorie Damon, the Managing Director of Cushman & Wakefield’s Healthcare Advisory Practice. We’re going to be talking today about trends in property management and some of the challenges and opportunities facing health providers in managing their real estate. Lorie, thanks for joining me.

Lorie Damon: Thank you. I’m pleased to be here.

Joel Swider: Lorie, before we dive into the property management, I wanted to get to know you a little bit and start with your background, who you are and how you came to be such an expert in the area of healthcare real estate services. You earned your bachelor’s degree from Hood College in English Literature, your PhD from Purdue, and you also taught a course at Harvard. How did you get into healthcare real estate?

Lorie Damon: Purely by accident. I am classically trained. I was trained to be an English professor, and I spent a number of years teaching. I ultimately decided that that was really not the career for me, and I came back to Washington D.C., which was my college home, and I found a job working in a trade association as the editor of their magazine. One of my colleagues there left shortly about a year after I had joined the firm, and she went to work at BOMA International, and a year later, she called me and said, “Hey, we have this job as our Director of Education.” “Would you be interested? You should interview.” We’re doing a lot of online learning, which I had done. I had piloted some online learning programs at Purdue, so I interviewed at BOMA, and I took the job, and I didn’t know a thing about real estate or healthcare real estate, except that I went to doctors in medical office buildings, but I had a really great … I had the best luck in that BOMA had a small Medical Office Buildings Conference that they asked me to be in charge of, and I am curious, so I had the good fortune of learning from some of the industry leaders by virtue of asking them to speak and contribute content to BOMA’s conference. I learned a lot from John Winer, who was then at Ernst & Young, and now is at Seavest, Todd Lillibridge was one of the first investors in medical office, and I used to talk with him every week to get a primmer on why somebody would buy a medical office, Gordon Soderlund, Danny Prosky, I mean, some of the luminaries in the industry and some of those who are really early, early to commit to this sector were, taught me the business. Then, out of that, in order to create our strategy for growing the conference, we really wanted to have the perspective of health systems, so I was always the person calling somebody and saying, “Oh, I’m sorry. I can’t pay you an honorarium, but would you be willing to come and speak at my conference?”, and so I really established good relationships and listened to those health systems and to real estate companies, trying to navigate their portfolios, right? I always say that one of the most important lessons that I learned is that the real estate industry wasn’t really built for healthcare, and has always, I think struggled in some ways to accommodate healthcare because healthcare doesn’t fit easily into some of our sort of standard boxes to classify their real estate or classify the occupants or classify the owners.

Joel Swider: That’s interesting to think of BOMA MOB Conference as a small conference, right? I mean, there’s what, thousands of people now, and you guys have really grown it?

Lorie Damon: There are 1,500 people there, but in my first BOMA Conference, there were about 100, and I was one of two women.

Joel Swider: Yeah, okay. Wow. Okay. Wow.

Lorie Damon: It was a great experience to watch that conference grow. Some of that was just the luck of market timing because the sector was starting to take off, and there was more interest in it, but I think it was also just very good fortune and having the right set of volunteers who were industry leaders and who were good at recognizing that the industry itself needed to come together and create a venue where we could talk about some of the more complicated matters of working in this sector, and where we could create a forum for health systems, and investor owners, and developers, and property management companies to sort of collaborate and establish a track record of best practices and common procedures, if you will. A lot of that was, really did not exist, and in its essence, that is the obligation of BOMA as the industry’s leading trade association, so it made sense. It gave us the perfect venue in which to do that. Then, one volunteer, we were so fortunate because one volunteer would recruit another. I can’t even tell you how many hours of time all of those folks that I mentioned not only spent teaching me, but just contributing to the industry so that we could have a body of knowledge about this particular sector.
Joel Swider: Sure. How long have you been with Cushman now?

Lorie Damon: I’m in my sixth year.

Joel Swider: Okay.

Lorie Damon: I will finish my sixth year in December.

Joel Swider: Okay. In my mind, I think about BOMA as, as you mentioned, it’s a trade association. You’re sharing best practices. For someone that wasn’t involved maybe on the operational side before you, before your role, and maybe I’m overgeneralizing, but how did you transition then from BOMA? You had a lot of knowledge and expertise to where you are now, where you’re really applying that for clients.

Lorie Damon: Yeah. I think one of the things that was very advantageous about my role at BOMA was that I really had a bird’s-eye view on the whole industry, right? I wasn’t in it. BOMA sits outside of it, but can see all of the things, all of the major real estate firms, regional firms, smaller firms. All of those folks are BOMA members, and there’s a cross-section of owners, and management companies, and brokerage houses who come together to comprise the membership at BOMA, and my job, I was just fortunate because my job was education and research, so I was at the crux of understanding, “What does the industry need, and then how should we teach them?” Well, in order to teach them, I had to learn it, and then I had to determine from all of the variety of sources of information about, well, for instance, “How do you create a compliant timeshare lease?” Well, it would be my job to distill seven different opinions into what looked like the most common set of practices, and then work with, in those days, I would call Bob Hicks and say, “Could you take a look at this, and make sure that we’re not communicating something that’s inappropriate or inaccurate?” All of that activity really helped me to understand how the industry worked, and like I said, how some of the methodologies for serving healthcare could be adapted to better suit the needs of that particular client base. Coming to Cushman, coming into the industry, I did have some reticence about that because I knew all of the firms, and I sort of knew, as they would say where all the bodies are buried, but I really felt like there was a great opportunity there too, to bring a body of knowledge that none of them would have by themselves to bear on a sector that was growing, and demanding, and evolving very quickly, and so I wanted to road test that theory.

Joel Swider: Sure. How has it gone?

Lorie Damon: Well, it’s been a great ride. Well, certainly, Cushman itself has undergone a number of changes. When I joined the firm, I joined one of the legacy firms, so we came together now as an entity. Cushman & Wakefield was a merger of Legacy Cushman & Wakefield, and then DTZ, and prior to that, Cassidy Turley, so we are about 10 times bigger than the company that I joined. We’re international now. We’re a publicly traded company, so we’ve seen a lot of changes on our side, but through the auspices of that, we now have an extraordinary array of services and capabilities that are really only possible with our size firm, and so that has been great because so much of that, as healthcare systems are looking at retail opportunities. I have colleagues who are retail experts. I can pick up the phone and call one of them. I have a colleague who’s an opportunity zone expert, and I can top that base of knowledge. I have a counterpart in London who we have some mutual investor clients. We also have a couple of health system operating clients in common, and so we can regularly compare notes across the pond and start to forge a truly global perspective on healthcare, which is exciting.

Joel Swider: Sounds like a powerful platform and a value add.

Lorie Damon: It is a powerful platform, for sure.

Joel Swider: Yeah. What are, I guess some of the benefits to people listening, benefits of outsourcing their property management through a platform like Cushman’s?

Lorie Damon: There are many benefits to outsourcing, but I always remind my teams and our clients that the best solution is the one that works best for you, and in health care, I just don’t believe that one size fits all. I think in any exercise where you’re looking for a partner, it’s really important to understand how you want, first of all, “What do you mean by property management? What needs to be managed? Let’s look at what those activities are. Which ones do you really want to do yourself for whatever reason?” You can do it better. You can do it more cost-effectively. For internal relationship purposes, you just need to retain that or to risk manage. You just need to retain it. “What do you want to do, and then what do you need a partner to do?”, and so I think one of the best arguments for working with an outsource service provider is that we house real estate expertise. We hire it, we train it, we groom it, we promote it. All we do is think about it, and we can invest in and deploy a variety of tools that might be prohibitively expensive, right? Lease administration is a very expensive technology, and we can work with a variety of platforms, so if that’s not a capability that you have, and you want it, and you can’t afford it, then that’s a good opportunity to look at having a service provider. If you don’t have a big enough facility management team to service a growing outpatient portfolio, if it’s just physically dispersed, and your FMs are based on your hospital campuses, it is not necessarily efficient to run those maintenance talks in a car from the campus out to a surgery center. In cases like that, I think it’s really important to be very transparent and collaborative upfront to understand, “What are the goals?” “What are we trying to accomplish, and then what are you able to accomplish? What do you want to accomplish yourself, and then what do you need help with?”, and then find, if we’re not the right partner, find a partner who’s equipped to address those needs and to do it in a manner that’s consistent with the health system’s philosophy for servicing its assets.

Joel Swider: What are some of the biggest challenges right now facing health systems in terms of managing their real estate? We’ll get to opportunities as well in a second, but what are some of those challenges?

Lorie Damon: Right. Well, I think one of the biggest challenges that I see and that I know a number of my panelists talked about today is just that their portfolios are growing, and they’re growing really rapidly, but their staffs are not necessarily keeping pace. The technologies that they use to manage those portfolios may not also be keeping pace, and so I think that’s really a challenge because in some cases, those portfolios have doubled or quadrupled in size, and it’s a lot. That can mean that you went from having 100 leases to 400 leases, and that’s difficult if you don’t have additional people to manage them. Healthcare leases get touched a lot, and so there’s sort of a constant administrative burden that comes with that growth. I think one of the other challenges in healthcare in general, but at this particular historical moment is just that there’s regulatory uncertainty and there’s also just an evolving set of regulations. I don’t mean just start getting a kickback, which has, in some ways, it feels like it’s always been with us, but I’m thinking about things like site-neutral payments, which dramatically impact how you pro forma a new site, and how you think about where to locate a new site. I think the push toward consumer-driven healthcare really changes the dynamics of site selection, and that’s a different set of skills and a different set of tools than what many health systems have historically used to figure out where they want their real estate. I think there’s just a lot of evolution in the sector now to adapt to a new regulatory environment and just a new consumer that requires a different set of real estate tools and skills than what we maybe had even 15 years ago when I started at BOMA and realized that that medical office was an asset class, and that people invested money in it.

Joel Swider: Yeah. What then are some of the opportunities on the flip side of that?

Lorie Damon: I think that some of the biggest opportunities are to really embrace the data. Embrace data is sort of my mantra. There’s a lot of data available that health systems have themselves about their patients and about future demand that doesn’t always make its way into real estate decision-making, but should and could create a much more foolproof strategy around where to put particular services or particular facilities. I think there’s also a lot of … We could all do a better job of managing the data around how our assets perform as assets, and really understanding the way any investor would want to know, right? “What are we generating and operating in common rent in this particular facility? How much of it is occupied and how much of it is vacant? Are there opportunities to lease out what we already have? Are we paying rent on vacant spaces?” I mean, really, really, really mining the data that’s available to us to create a much more optimal portfolio, I think is a great opportunity and can drive some pretty significant expense savings.

Joel Swider: Lorie, I want to switch gears a little bit. The Health Care Real Estate Legal Summit has just concluded, and you had a panel discussion on property management trends, and specifically for healthcare facilities. Could you give us maybe a little bit of a recap, or what did you view as kind of some of the nuggets of information that you kind of took away from that or that our listeners might take away from that?

Lorie Damon: Sure. I think one of the most important observations from our panel is just that there are no two systems operate that activity the same, so Nancy and Laura from Mercy Health, they manage all of their real estate internally with internal teams, including internal legal teams. Ashley, our other panelist from Atrium Health has a combination of internal teams, including an internal legal team and then external resources, including our property management partner and external counsel. I think that’s always good to know that there are just different models that evolve for that various needs. I think a couple of the other things that we heard is that there’s a real … Both of them echo that understanding control, having both control but flexibility and their portfolio, and structuring that into leases or purchase and sale agreements, or options for buybacks has become absolutely critical, and there are many reasons for that. First of all, there’s a lot of new owners, new investors who are seeking opportunities in this space, and there’s also just a lot of dynamism around what the health system might want to do and when they might want to do it, so one of their goals is to try and optimize that footprint and their control over it so that as their care delivery evolves, their portfolio can quickly adapt to those new changes. Then, of course, we close by talking a lot about retail strategies and how they’re approaching that. Mercy has a pretty significant urgent care strategy that they’ve launched in St. Louis. It’s very fast. In nine weeks, they can have them open and they have literally kind of [led 00:17:01] star city with options on every corner, which is great and very convenient for patients, but they’ve partnered to do that because they recognize that they didn’t have the internal expertise to execute as quickly as they needed to. I think we got a pretty good cross-section of some trends that other health systems everywhere else are grappling with.

Joel Swider: Yeah, and I guess that’s … Maybe I’ll close with that question. We heard from a couple of of well-respected health systems. I know you have the opportunity to work nationwide with a vast number of others. Is what we saw today representative or are there other trends or other approaches that you’ve seen that are kind of on the rise?

Lorie Damon: I think what we saw today is fairly representative. I think most health systems are really, are in some sort of growth mode, at least for their outpatient services. They are looking hard at taking care closer to the patients. I think that’s a fairly common refrain and a common strategy. What varies is the manner and form of that execution. On a lot of how you execute your outpatient strategy depends on who you are and where you are, and who your competition is. We’ve seen in some markets, urgent care is really popular sort of to the point of saturation, and other markets, we’re seeing experimentation with all new sorts of facilities like micro-hospitals, for instance are evolving, and we’re starting to see that. There are only 50 now. In two years, will there be 250? I don’t think we know. Freestanding EDs have come, and in some markets, they seem to be here to stay, and other markets, they seem to be really challenged. I think we’re definitely seeing an evolution of the types of outpatient facilities, and in the strategy for how you create an outpatient strategy to capture market share and to serve as a patient base. I think the other interesting evolution is this focus on the patient, and patient-centered care, and how that translates into the real estate footprint. I mean, Laura made a great point about how much effort Mercy is investing in creating branded facilities that look alike, so that the minute a patient steps into them, they know they’re in a Mercy facility. I definitely see that in all the markets that I visit. There is a much greater focus on making sure that hospitals have clear signage, that patients know where they’re receiving care and from whom.

Joel Swider: Well, Lorie Damon, thank you so much for being with us. It’s been a pleasure talking with you.

Lorie Damon: It’s a pleasure to be here. Thanks, Joel.

Joel Swider: Thanks. If you like what you heard on this podcast, please subscribe on iTunes, and if you’re interested in additional content from Hall Render, you can send me an email at jswider@hallrender.com subscribe to our monthly newsletter. Thanks again.

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