Tag: Healthcare Real Estate

Medical Fitness Trends

At MedFit Partners, our assessment of market conditions affecting medical fitness centers contains both challenging news and exciting opportunities for 2014.

1. Hospital-financed projects continue an anemic growth trend. During the last 10 years, health care has been undergoing a transformation at all levels. Priorities have shifted from local to regional perspectives as providers have merged to create larger, more efficient systems. In 2009, there were 52 hospital mergers, 72 in 2010, 90 in 2011 and 105 in 2012. The goal is market share with the correct cost mix of physicians and vendors providing outpatient services. In most markets, medical real estate development becomes too expensive and competitive with other medical users to support the returns from a medical fitness center. Without a pressing mandate, it will be difficult to gain hospital executives’ attention.
2. The word wellness is everywhere, especially in major urban markets. There is an amazing range of retail options in fitness, personal services, dining, grocery and information under the wellness umbrella. New entries arrive daily providing a variety of choices and price points for the knowledgeable consumer. Messaging, multi-channel marketing, outrageous customer service and outcome reporting are especially critical today in creating demand and differentiation for the medical fitness product.
3. Collaborations and networks are critical for improving community health. The 2008 and 2013 reports from the Robert Woods Johnson Foundation, Commission to Build a Healthier America, speak to the importance of making healthcare more responsively linked into the development context of our communities. To me, this means more public and private collaborations as well as integrated fitness networks with all types of providers. Just as there are “food deserts” there are “medical fitness deserts” that need our services to improve community health. Our goal should be to substantially increase the national fitness membership demand above the 20 percent participation rate.
4. Prevention and fitness under Accountable Care Organizations (ACOs) may provide opportunities for medical fitness centers. Obamacare supports the creation of larger networks of insurers, hospitals, physicians and providers under ACOs. A limited number of trials are underway, providing medical coverage to a large group of lives paid under a bundled provider payment model. If the goal is to reduce the demand for medical services by managing chronic issues, what is a reasonable amount that could be allocated to prevention and fitness services provided by a vendor? If the average per capita medical cost in the United States is $8,601, what portion should cover wellness activities to reduce this number? This critical question needs to be answered by medical fitness center member research.
5. Orthopedic specialists and their ancillaries will continue to be major champions of medical fitness, but in smaller, more integrated settings. Driven by demographics, more active lifestyles and obesity, the demand for orthopedic services will continue at high levels, providing pre- and post- treatment opportunities. Medical fitness providers should be able to take on the role of outpatient therapy, extending patient care well beyond the typical reimbursement period.
6. Technology and its application to chronic-condition management for all age groups is a critical necessity for all fitness providers. Currently, one out of four adults has multiple chronic conditions—a focus of high-risk management strategies by ACOs. To control medical usage patterns, chronic patients will need to become more physically active under uniform, condition-based exercise guidelines applied through a software solution. Fitness providers will need to have certified personnel capable of translating and applying this technology to the specifics of the consumer and the ACO.
7. Weak economy continues to negatively impact sales and retention. The fitness industry is definitely feeling the impact of the weak economy—14 percent of adults out of work, weak consumer discretionary spending and static real estate prices. Simultaneously, there has been a dramatic increase in the supply of health clubs at all price levels. In some markets, fitness clubs are as prevalent as coffee shops. The result: consumers have a range of choices, and they are willing to try other fitness providers that have excellent staff, programming and clean facilities.

Unlock the Value of Your Medical Fitness Center

With hospitals increasingly focused on core businesses, there is a growing trend to sell and lease back a variety of non-core real estate, including medical office buildings, surgery centers and senior housing. Which raises the question, should your hospital capitalize on the real estate value of your medical fitness center? If it is an underperforming asset, the organization may consider selling it and developing a strategy to achieve the financial results required for future disposition.

During the last two decades, more than 700 community hospitals in the United States have developed medically integrated fitness centers or wellness centers. These hospitals have invested more than $3 billion in real estate. While many centers have produced sizeable long-term economic benefits, most have drained financial resources. Often rationalized as a community asset or a marketing channel for the hospital, many of these retail service businesses simply have lost their energy and failed to produce long-term economic benefits.

Within the last 15 years, the healthcare real estate market has exploded. Both public and private real estate investment trusts (REITs) as well as private investors have acquired all types of healthcare real estate, including such special-purpose facilities as free-standing emergency rooms. The movement away from the fortress mentality of owning everything has been steady as executives have sought to capture values in these locked-up assets.

To benefit from this trend, owners must significantly improve financial performance to achieve a net operating income comparable with other medical real estate holdings. For medical fitness centers, we project an outside investor will value a facility at a 9 to 10 percent market capitalization rate of net operating income. This rate is greater than the target for a medical office building (7 to 8 percent) due to the special-purpose nature of the medical fitness center facility. Depending on your organization’s credit, both targets may be reduced under a sale/leaseback transaction.

If your center is not earning at least an 8 to 10 percent return on total project costs, it will take strategic planning, execution and communication as well as time to significantly improve financial performance. To achieve the positive consecutive returns that will allow an outside investor to value a potential acquisition can easily take at least three years.

For those organizations with viable medical fitness centers interested in capitalizing on their real estate values, the timing couldn’t be better. With real estate capital inflows at record levels and portfolios shifting to proven income-producing acquisitions, investors are becoming more interested in medical fitness centers. As with other real estate transactions, proper due diligence documentation and esthetic property improvements should be completed prior to solicitation.

As management consultants, MedFit Partners brings the focus to achieve financial results: we adhere to proven procedures and training programs to improve and empower staff performance, and we plan and execute strategic initiatives through powerful communications. MedFit Partners helps you find the answers needed to achieve your goals. We offer property evaluation services as well as placement of your transaction.