MNCAR Focus/Healthcare mergers anticipated to change landscape of Twin Cities healthcare...
Healthcare mergers anticipated to change landscape of Twin Cities healthcare real estate market
Twin Cities healthcare real estate experts believe the recent merger between HealthPartners and Park Nicollet Health Services–which makes it Minnesota’s second-largest hospital system behind Rochester-based Mayo Clinic--could be just the beginning of a series of mergers and alliances among systems as healthcare reform continues to reshape how healthcare is delivered.
Such mergers can help systems succeed in this new healthcare world as they increase their economies of scale and expand their geographic presence.
“We’re into 2014… and the Healthcare Reform Act is now taking place. The HealthPartners/Park Nicollet deal was the first of what many believe will be a number of mergers between systems,” says Steve Brown, executive director of Bloomington-based Cushman & Wakefield/ NorthMarq’s Healthcare Real Estate Advisory Group. “It’s really driven by efficiency and cost control.”
With the new provisions under the Affordable Care Act, hospitals and systems are facing changes in how they’re reimbursed, which is prompting mergers, consolidations and affiliations as they look to operate more efficiently and cost-effectively. As more mergers occur, it will impact the Twin Cities real estate market as systems seek to optimize and integrate real estate portfolios.
“A number of systems have been busy working on and implementing strategies designed to help position themselves for healthcare reform,” Brown says. “They don’t necessarily know yet how those facilities that they’ve put into place are going to effectively meet those needs, but they did that in anticipation of the changes that are coming.”
Mergers will mean that newly created organizations will want a well-positioned portfolio of properties. However, in some cases they could find themselves with a disjointed network of owned and leased buildings in close proximity to each other. This could result in the disposition of redundant and inefficient facilities. In other cases, there could be a need to develop facilities in new strategic markets. There are many unknowns and it takes times to put a transition plan into place.
The HealthPartners/Park Nicollet merger
Officials say the HealthPartners and Park Nicollet merger will help the new organization control costs while still providing patients with total-care options. The merger includes Regions Hospital in St. Paul and Methodist Hospital in St. Louis Park. HealthPartners brings 44 primary-care clinics, 18 urgent-care clinics and 20 dental clinics and Park Nicollet brings 26 clinics and several specialty clinics, including the Frauenshuh Cancer Center.
“Even with the Park Nicollet/HealthPartners situation, you haven’t seen a paradigm shift that they’re changing facilities,” Brown says. “There’s been a lot of discussion and I’m sure they’re trying to get their arms around what does the merged organization look like? The real estate is the ultimate end product down the road that will service the patients and there are still a lot of unknowns right now. I think that there will be an impact on the real estate; it could be where there’s overlap or duplicity that they combine into one facility. Or there could be a situation where they make some strategic decisions based upon how each organization’s current primary care and sub-specialty care locations are set up.”
If mergers result in duplication of facilities, it could mean repurposing buildings for other uses or selling them.
“On the chessboard, the HealthPartners/Park Nicollet merger made sense from the standpoint of the real estate pieces on the table as far as the geography and how space was distributed around the city,” Brown says. “But what comes from that going forward, I don’t think anybody really necessarily knows yet.”
What’s the next possible merger?
Ongoing discussions continue regarding Sanford Health, headquartered in Sioux Falls, S.D., and Fargo, N.D., entering the Twin Cities market although it recently backed out of negotiations with Fairview Health Services.
“Are they going to come in?” Brown asks. “If they come in, who are they going to come in with? They’re like the group lurking out in the shadows...”
Also, there has been continued discussion whether the Mayo Clinic will enter the metro market and how that scenario could play out. Now its entrance is coming to fruition as it was announced in early February that Mayo is teaming up with the Minnesota Timberwolves and Lynx on a "state-of-the-art" practice facility at Block E across from Target Center. The 20,000-square foot building will be called Mayo Clinic Square. In addition to the practice facility, the team is partnering with Mayo, which will operate a sports medicine clinic adjacent to the practice space. The teams and Mayo will occupy the complex’s third level, which was formerly a movie theater.
“I think the discussion amongst the leadership of the different healthcare systems has been how it looks today, it’s not going to look that way in the future,” Brown says. And how the real estate will be impacted depends on who the players are. “Some of it will be repositioning of space that’s in the hospitals and some of it will be repositioning or additions or subtractions to ambulatory spaces.”
Many larger systems are positioning themselves for healthcare reform by moving more services to outpatient ambulatory care facilities to bring healthcare closer to patients.
“There’s a lot of discussion about bed counts, what services are in the hospital, what services that historically have been in the hospital can we move out and put closer to the patient?” Brown says. “When people look at the inventory and as healthcare continues to change, the question is what are the right facilities needed to serve the population under this new reform? And that hasn’t been answered yet.”
Strategically located clinics are key
One thing for certain is the importance of bringing healthcare to patients with strategically located clinics. Jill Rasmussen, principal at the Davis Group in Minneapolis, says much of what’s happening is being driven by the Affordable Care Act, based on how systems and clinics will be reimbursed for services.
“You’re seeing a direct correlation of how systems and clinics are providing service—how they’re getting reviewed for patient care and patient satisfaction and quality of care --and how efficient and cost-effective they are,” she explains. “So a lot of clinics and systems are saying we need to locate close to our patients, so we need satellite primary-care clinics, specialty clinics, imaging—what we call hubs—with all these services.”
Medical site selection today is based on a retail-thinking methodology. “They’re looking to provide service that’s convenient for patients, who want to be able to go to Target and bring their kid to the pediatrician or go to their primary-care physician,” she says. “Systems are saying how can we expand and grow?”
Another trend is independent clinics are being acquired by bigger systems because it’s difficult for smaller clinics to stay competitive. “They have to figure out the electronic medical records and weed through the new administrative issues of the Affordable Care Act. It’s hard for them to survive,” Rasmussen says.
More groups are folding into the bigger systems so doctors can just go to work and be doctors versus worrying about how to be competitive and keep their practice alive, Rasmussen says, adding that this physician consolidation also impacts real estate.
Shedding older space
Many systems with older facilities are shedding them for modern facilities to better serve patients. The Davis Group developed a new building for Allina in Vadnais Heights; Allina partnered with the Urgency Room/Emergency Physicians Professional Association on the facility, which offers urgent care, primary care, imaging and specialty care. The facility is a hub to deliver services in a suburban marketplace. Allina vacated an older, outdated Aspen clinic.
The Davis Group is also building a facility for North Memorial Health Care in Minnetonka with a surgery center, imaging, primary care and specialty care.
“They’re getting out into the suburban marketplaces and may be positioning for acquisition by a larger group,” Rasmussen says. The new Minnetonka Medical Center will offer a “collaborative care” model with a convenient, one-stop resource for primary, specialty, emergency and diagnostic care.
Continuing merger activity
Rasmussen anticipates that the market will continue to see mergers by bigger groups, because they have more purchasing power and can work with insurance groups.
“Healthcare reform is definitely in place and moving forward,” she says. “When you look at value-based reimbursement, there are a lot of things systems and providers need to do. They need to provide systems of care. They need to consolidate. They’re going into retail facilities and creating full-service facilities with primary care, specialty care, urgent care and imaging and making it as absolutely convenient as possible.
“The trend is now we have to figure out how does real estate help support these new initiatives,” she adds. “We’ve done 10 projects in the last few years and lots of restructured leases and new leases. We’re also helping owners who are not benefitting from this. If their tenants are moving out of their buildings, what’s the strategy for re-lease up? Will it be medical or will it have to change over to something else?”