2023 Healthcare Outlook – Building to Thrive

The relationship between healthcare providers and patients has evolved over time based on healthcare options and trust. Patients placed even more weight on these factors during the pandemic. Anu Singh, Managing Director of Partnerships, M&A Practice Leader for Kaufman Hall, explains that patients are seeking alternatives to the high cost of legacy businesses, and are exploring new healthcare technology platforms:

“These industry pressures along with new entrants, disrupters, and a ‘black swan event’ like COVID-19, are transforming the way consumers and other stakeholders interact with healthcare providers and the affinity that underpins these relationships.”

Steve Newton, Executive Vice President and Chief Delivery System Operations Officer for Baylor Scott & White Health, illustrates how these industry changes impact healthcare real estate. He advocated for paying closer attention to how consumer demands are evolving:

“I would identify chiefly as a stimulus to our thinking right now is the emerging role of the consumer and, frankly, the disregard of brand loyalty. This is especially true of the generations that are entering the market where they have basically said, ‘If I don't get what I want, when I want it and how I want it in health care, I'm going to move on to where I can get what I want.’ We need to look at new strategies to respond to customers that are faster, better, more agile than some of those out-of-market, non-traditional competitors.”

The healthcare landscape continues to evolve, with new entrants and “non-traditional competitors” impacting the delivery of care. These new entrants include mega-cap technology organizations such as Amazon and Apple, along with long-standing players such as national insurers and pharmacy chains that are expanding outside their traditional offerings. They are responding to the consumer demand for convenience and lower costs. An example of this evolving consumer demand and the subsequent response is the pandemic-inspired shift to patients visiting urgent care centers, rather than booking appointments with primary care physicians.

Along with these new entrants, there are other competitor trends impacting the healthcare industry: Healthcare providers are continuing to consolidate into multi-state mega-systems, and the market is expanding for single-line specialty services catering to specific patient populations (e.g. women, cancer patients and geriatric populations). These specialty services are expanding at a significant rate due to how customized they are to these consumers’ unique needs. They deliver a consumer-focused level of care, where systems listen to and deliver on what the customer needs and wants. This concept is relatively new to the healthcare industry but is generating a positive response.

These competitive market forces are a significant challenge for developing a long-term real estate strategy. Newton provides solid advice for managing them:

“We see the importance of not only portfolio optimization but thinking about how we build projects that are more agile, more responsive, and frankly, more flexible, that can accommodate changing needs... What does it mean, for example, to design an input channel that is digital-enabled, hybrid-enabled, synchronous visit-enabled but also has a physical asset component? It is our conviction that focusing on the top of the funnel, mainly how folks get to us, is crucially important as we deliver on our mission to promote the well-being of individuals, families, and communities.”

The operational and financial story of healthcare in 2022 can be summed up in one word: labor. As Levy points out, “We are seeing a macro trend that is not necessarily about spaces but about labor and staff issues.” Singh adds, “Although Net Operating Revenues are up 15% for YTD 2022 vs. YTD 2019, total expenses are up 19% for the same time period, with the total labor expense component up 23%.” And as Levy reminds us, labor is characterized as a “sticky price,” meaning it will not decline in cost. Healthcare real estate, facility, and project management professionals have a talent management paradox: balancing the need to retain clinical talent while reducing payroll cost. Unfortunately, the administrative workforce, including facilities personnel, are often subject to the cost reduction efforts.

Leaders will need to face the challenge of going beyond “doing more with less” and instead identify innovative approaches that bring long-term, systemic solutions to address workforce reductions. One solution is the implementation of Smart FM solutions. In many cases, leveraging building technology such as occupancy sensors results in significant savings by improving space utilization, labor deployment and optimization of third-party services.

The more basic question for many healthcare real estate professionals is, “What to do with these underutilized buildings?” Waiting for a societal change causing colleagues to return to office is most likely not an effective strategy, especially since many buildings were significantly underutilized prior to the pandemic. Innovative solutions that address both clinical capacity issues and employee retention challenges could be successful. Possible solutions include converting office space into clinical space and providing employee amenities such as training facilities and daycare centers.

We start 2023 in a “moment of peak volatility,” as Levy calls it, with many real estate professionals “pencils down, not doing new deals.” This may be your healthcare organization’s current preferred approach, but adversity often motivates change. It’s time to focus on best positioning your organization for resilience against future challenges.

Be “wheels up” instead of “pencils down.” Launch new opportunities to drive improved clinical outcomes and innovation. Follow Steve Newton’s recommendation to advance with “speedy agility, adapting to the new normal, and with swift execution on those new and very ambitious goals.” This will enable healthcare real estate organizations to not only survive but thrive in 2023.