The Leaflet Article
Forecast: Healthcare Should Partner With Retail
To stay relevant, a healthcare system in transition must forge partnerships, and the retail services industry is a good place to start.
A healthcare presence in a retail setting will be an essential strategy in meeting expectations inherent in a restructured health system where success is measured by keeping patients healthy rather than maximizing billable units of service.
At a glance:
Healthcare system is moving to a population-health-based model.
A new healthcare economy is emerging, and with it, demand for outpatient services is expanding.
Part of the formula for staying relevant is engaging patients and delivering care in settings familiar to them. This suggests healthcare service will engage patients in retail settings.
Healthcare services will be offered in non-traditional venues, as healthcare increasingly will share more in common with the retail industry in terms of providing a customer experience.
Partnering with retail has a myriad of benefits in brand recognition, brand distribution, cost savings etc. for healthcare providers.
Healthcare operators can benefit retail operators with long term leasing, foot traffic, outfitting of space, stability as anchor tenants and more.
There are a number of models of healthcare/retail integration.
HEALTHCARE IS CHANGING
Healthcare delivery is undergoing a profound transformation. Methods of delivering care and how consumers pay for it are changing. These changes are redefining what it will take to remain a successful and relevant provider.
Under the new rules of competition, growth remains important; but has a different motivation. In the past growth meant bulking up and leveraging market dominance. Success was measured by rising market share, exerting pricing leverage, solidifying referrals, and increasing utilization. Today growth means being better by demonstrating a cost, quality, and service advantage relative to the competition. The new success formula means embracing a population health management view of care delivery, assuming risk for covered lives, competing on outcomes, minimizing cost, and offering convenience and expanded access. Part of the formula for remaining relevant in the new healthcare economy is to engage patients and deliver care in community settings and locales that are familiar and encourage contact and use.
Traditionally healthcare has been offered in purpose-built and readily identifiable healthcare facilities; the hospital, clinic, medical office building and typically as a standalone facility. Over time the design of interior healthcare space has been influenced by trends in hospitality, commercial, “mixed-use” developments and specifically retail. Delivering healthcare within an outpatient environment aided by technology supports safe, high quality, and cost effective care, and will continue. The hospital admission rate per 1,000 population has declined and is now steady at 116 admissions per 1,000 population based on American Hospital Association data. According to the Henry Kaiser Foundation, outpatient visit utilization has risen from 1,817 visits per 1,000 population in 1999 to 2,106 in 2011; an increase of 16%. Growth in outpatient services is predicted to continue and expand a further 20% by 2019. Not surprisingly outpatient services now reflect a larger portion of a healthcare organization’s total revenue increasing from approximately 22% in 1991 to 40% in 2011. Additionally, 20% of current Medicare admissions are ambulatory sensitive; meaning that these admissions can be effectively managed without an inpatient stay. Healthcare reform will accelerate this growth as the transition from paying for volume to paying for value becomes the new template.
The proliferation of outpatient services has given rise to the emerging service delivery philosophy of “care anywhere” which extends to providing home-based care and remote, on-demand monitoring. While the “care anywhere” model meshes with our society’s expectations for real time everything, the business model is still a work in progress. Regardless, it will have a significant effect. We believe that over the next few years healthcare service delivery will need to become more diffuse and available in non-traditional venues. As healthcare becomes demystified to consumers, its costs and outcomes transparent and available, and consumers take on more financial responsibility for the healthcare purchase, the healthcare industry will share more in common with the retail industry and follow many of its trends.
Several other factors should make consideration of a retail healthcare strategy part of your overall marketing plan.
- A population-health-based delivery model will result in more continuum-based patient care requiring more points of connection with the provider, both virtual and face-to-face.
- Healthcare transition to a risk model of care delivery whereby the organization will be responsible for the health outcomes for a defined population
- Continued pressure to reduce the cost of care
- Availability of actionable cost and quality information to the healthcare consumer, think Castlight, Pokitdoc, and Health Grades
- Consumer-driven health with the desire for the same degree of access and convenience experienced in the retail market
- Empowered patients participating in defining a personalized care plan
- Growing expectations that care delivery be accessible and convenient
AFFECTING LIFESTYLE CHOICES
With over 80% of deaths attributable to modifiable behaviors (smoking, obesity, physical inactivity, alcohol use, high LDL levels, poor diet choices) a strategy that reaches, engages, and equips patients to make wise lifestyle choices is well suited to deployment at the retail level of patient interaction.
A viable strategy for healthcare providers is to provide services in a retail setting either independently or in partnership with an established retailer that operates in the consumer healthcare product sector. There are several rationales for this approach:
- A retail presence will be an essential strategy in meeting expectations inherent in a restructured health system where success is measured by keeping patients healthy rather than maximizing billable units of service. This is facilitated by meeting patients where they live and shop to foster patient engagement and identify and treat issues at their earliest emergence.
- Cost. Leasing space in a mixed use retail venue may be less expensive than developing similar stand-alone single purpose space. Affordable and longer term leases are available as owners recognize the collateral retail traffic that can occur when a major ambulatory care provider leases space at a mall or lifestyle center. Utilizing space within a healthcare consumer product provider’s facility (Walgreens, Walmart, and CVS) can also be a cost effective means of establishing a retail presence.
- Brand Recognition. Service alignment with a national healthcare consumer products company can elevate and spread your brand throughout your defined service area. Non-traditional providers of direct patient care have an opportunity to offer a product extension that includes primary and chronic care services. Until they are viewed by the market as a legitimate provider of these services, co-branding their direct patient care services with established local and regional healthcare providers will accrue benefits to both organizations.
- Brand Distribution. Forming a service delivery relationship with a healthcare consumer product operator has the potential for a rapid diffusion of your brand at a fraction of the cost of establishing an independent market presence. This approach may limit the scale and scope of services due to square footage limitations at the partner’s facilities; however it may also present additional opportunity to test market services or offer services that would not be economically viable with independent development.
In short, sophisticated retailers bring a number of valuable attributes to the deal for the health care provider including branding opportunities, amenities to keep patients and visitors on the property, and design standards that are consistent with the retail and health care providers’ brand image. The health care provider can stabilize the property with a long term lease commitment.
Recently McKinsey & Company reported on the trends impacting the retail industry and the steps retailers must take to succeed in the next decade. Historically, retail and healthcare have changed at glacial rates, but business as usual is no longer a recipe for sustainable success in either industry. Several trends identified by McKinsey support a closer connection between the retail and healthcare providers in marketing and selling their products.
- Baby boomers will drive expansion in both segments. Baby boomers disproportionally spend their disposable income on services and experiences instead of off-the -shelf products.
- Healthcare’s refocused emphasis on the customer experience can bring a missing element into the appropriate retailer’s customer retention strategy.
- Social networks and user reviews compete for attention with company-directed marketing. The average consumer peer recommendation carries ten times more weight in the purchase decision than do salespeople. This finding has been supported in healthcare research as well in the selection of a personal physician.
- Dividing lines between retail formats and sectors are breaking down in efforts to capture the important consumer shopping trip. For example, fresh food is no longer the domain of supermarkets but is also found in warehouse clubs, convenience stores, pharmacies, and dollar stores. Almost all retailers are investing in multichannel capabilities to expand revenue and profit as in-store purchases decline due to online sales and competition.
- Retailers are establishing third-party marketplaces. As an example, Best Buy is using its in store space to partner with Samsung in more than 1,000 Samsung Experience Shops; a store within a store. Similar to what is occurring in healthcare, McKinsey notes that consumers will no longer shop at a retailer just because it “happens to be where a product is distributed.” Rather they will search out retailers that provide value as shopping becomes more experiential. These changes open the door to exploring promising and exciting new relationships between both industries undergoing structural change.
OUTPATIENT SERVICE MODELS
Outpatient service models are undergoing change that can foster the integration of healthcare in a retail setting. As healthcare organizations deliberately scale up to effectively operate under a population management model, outpatient facilities are getting larger and offering more amenities. The new facility model ranges from 80,000 to 120,000 square feet; rather than previous 25,000 to 50,000 square foot model. Operators are looking for a convenient and accessible address in a Class A or B building setting that will attract more patients to support this model’s scale and added scope of services.
Healthcare operators can provide owners of retail venues with long term leases, substantial foot traffic, high-end fit out of space, and ability to provide stability as an anchor tenant. In return, healthcare operators will seek street level or first floor access, visible signage, adequate and proximate parking, stable and responsive property management, and the ability to limit direct competition at the venue. Retail property owners who have typically shied away from healthcare tenants assuming that the presence of noticeably sick individuals sends the wrong message, may be reluctant to enter into a long term lease agreement, or prefer to have the health care tenant occupy more interior and less curb side visible space. These biases are likely to dissipate as commercial property owners become more familiar with the value healthcare tenants bring to the property.
AN EXAMPLE OF HEALTHCARE-RETAIL INTEGRATION
An example of a successful and large scale healthcare-retail integration project is Vanderbilt Health at 100 Oaks in Nashville, TN. Having outgrown the available space at its main campus for the expansion and growth of its ambulatory services, Vanderbilt Health sought a property that would be accessible and convenient to its patient population. Eschewing development of new standalone space Vanderbilt Health saw an opportunity in the city’s first enclosed shopping mall. The mall had seen better days and the great recession of 2008 was about to add to its woes. Vanderbilt was prepared to infuse the property with over 1,000 employees and 2,000 patients per day. Seeing the long term market value of a mixed healthcare and retail concept Vanderbilt Health entered into a twelve year lease with the mall’s owners. The current owners of the 880,000 square foot mall were delighted to accommodate Vanderbilt’s requirements for property upgrades, including façade improvements, interior renovation, ingress/egress changes to improve traffic flow, prime space within the mall, and parking access for patients near all five mall entrances. Vanderbilt leased nearly half the available space and established its first satellite outpatient location there to house 20 medical clinics including a number of its back office functions. The commitment helped revitalize the mall, which was now able to attract new national brand retail tenants, and contributed to a rebirth of the surrounding neighborhood.
The model we’ve discussed so far has healthcare integrating with retail. However other models exist in which the health care partner is the lead in attracting retail to a healthcare setting creating a mixed use development. For an urban, safety net, health care hospital the established healthcare services become the central point in improving the neighborhood on multiple levels including education, housing, social, food, fitness, retail, faith, and community based healthcare services. Leading a coordinated effort to bring the spectrum of services enjoyed by better off communities to an underserved market the health care provider can attract multiple related organizations to the project and create economies of scale where individual, separate, and uncoordinated initiatives may otherwise fail. Demonstrating a commitment to community development can interest both public and private entity participation in the mixed use project since the successful outcome has societal benefits that exceed an exclusive focus on the pro forma. Financial success or the potential for it must be clear as often times the disposable income in underserved neighborhoods may be insufficient to support the retail investment.
A robust example of this model is the health care and research led effort by Johns Hopkins University and Hospital to renew an 88-acre area in East Baltimore known as “Middle East”. In conjunction with East Baltimore Development, Inc. (EBDI) a 501 [c]  organization established by community, government, institutional and philanthropic partners to “revitalize, re-energize and rebuild” the East Baltimore neighborhood and to protect and advocate for the resident’s interests during the urban renewal process. In addition to Johns Hopkins EBDI is supported by public and private partners, including the U.S. Government, the State of Maryland, the City of Baltimore, and the Annie E. Casey Foundation. The Middle East neighborhood was a tough place to live. The community was shattered by a series of catastrophic events over several decades: the loss of manufacturing jobs and tax base, the devastating riots of 1967-1968, white flight, loss of middle class African-American families, and the spread of drugs, crime, and gang activity resulting in a vicious cycle of disinvestment and decline. Absorbing the lessons of failed national attempts at urban renewal the East Baltimore Revitalization Initiative was created. The plan, first announced by then-Mayor Martin O’Malley in early 2001, envisioned a project costing more than $1 billion to acquire and demolish hundreds of homes in the Middle East neighborhood, relocate several hundred households, and create a renewed 88-acre community featuring research facilities for life sciences and biotechnology, retail development, and housing. Today the development known as Eager Park is thriving. Johns Hopkins has invested in a science and technology park in the neighborhood drawing on its own research initiatives as well as making space available for commercial bioscience firms anchoring the neighborhood. Employees are encouraged to live where they work with rental and purchase properties available to suit a range of incomes. A new middle school has opened developed as a university-community collaboration. A six acre park features three themed areas, one of which is dedicated to promoting wellness. Retailers such as Walgreens are investing in the neighborhood and a 150-room hotel will open in the near future bringing jobs for local residents.
HEALTH CARE VILLAGES
The health care village, another model for healthcare and retail integration, is typically found in new suburban and exurban areas where healthcare and retail investment has been marginal. This model generally follows planned residential development that occurs at the edge of the transition zone from rural to suburban. The healthcare village is anchored by a hospital built on a large parcel sufficient to accommodate further campus investment in a planned, mixed use healthcare-retail development. One example is Metro Health Village located in Wyoming, Michigan near Grand Rapids. The 170-acre health care village is the first suburban hospital in the region and includes an entire community of support services, retail, restaurants, with Metro Health Hospital as its focal point. The village environment coordinates nature, convenience and calm with zoned transitions designed to provide a distinct look and feel. The core of the campus is medically-oriented comprised of the 200-bed hospital, medical office buildings, cancer treatment center, medical retail, laboratory, adult day care center, YMCA, and weight management center. Out lots to date contain more traditional commercial vendors such as restaurants, Starbucks, Hyatt Place, IIT Technical Institute, a grocery store, bank, real estate broker, Sprint, and Great Clips. The concept in this suburban setting is to create a town center where one did not previously exist with an ideal mix of healthcare and retail infrastructure to make the development a destination and generate sufficient traffic to support each occupant’s investment in the site.
In each of these models, format drives development. Each positions health care organizations for a transition from encounter-based to a continuum-of-care-based healthcare delivery.
These models are achievable, but complex, requiring a partnership between a multidisciplinary team consisting of the healthcare provider and its real estate team, developer/retailer, and real estate consultant. A good partnership is one with mutually beneficial terms.
We’ve outlined the ways in which sophisticated retailers can benefit the healthcare provider, but there are some issues to keep in mind when entering the retail space for the provider accustomed to medical office and commercial project development. In the retail environment be prepared for:
- A longer project schedule to allow rezoning to work its way through village approvals
- Much lower tenant improvement allowances
- Building infrastructure with minimal HVAC and electrical capacity; including no back-up generators for services or equipment. Therefore allocate more funding for utility upgrades.
- Retail developers that want to utilize their own design team; which isn’t in the best interest of the healthcare provider.
- Work letters that vary from good to poor depending on the sophistication of the retail developer. This is where a poorly negotiated work letter can be to the detriment of the tenant.
In working with retailers the partnerships with commercial and not-for-profit entities can be strengthened and goals met more promptly if the retail partner has an understanding of the role of healthcare in a retail setting as part of a deliberate population health management strategy that includes reducing the cost of healthcare for the business community’s employers and employees.
The sea change in incentives that underpins health care reform provides continued momentum to the shift to outpatient based care and redefinition of where that care is delivered. Just as the idea of mixing retail and entertainment was a revolutionary idea when the Mall of America opened in 1992, combining healthcare and retail has the same additive potential for enhancing traffic and sales for both market segments. Twenty years ago the motivations for connecting with patients with accessible and convenient care in their community was not about population health or the synergistic qualities between retail and healthcare. It was about being a good neighbor and attracting employees and physicians.
Today it’s about:
- Providing the most cost effective care coupled with the best outcome in the most appropriate geographic setting for patients with chronic disease
- Securing patients to the organization for life
- Creating the funding necessary to offer healthcare services across the organization’s strategically identified continuum of care
- Developing aligned partnerships among the broadly defined community of health care providers and facilitators for your organization’s service population
As outpatient care expands it will be offered in a variety of retail settings. Healthcare will increasingly be seen by the commercial real estate industry as a welcome asset to a portfolio of tenants for all of the reasons outlined in this article. In light of sweeping changes to healthcare delivery and payment for individuals, healthcare organizations should seek out commercial development and real estate projects which enable the reformed healthcare delivery system to operate efficiently and effectively. An alliance between healthcare and retail should be seen as a logical phase in forging a better connection between patient and healthcare provider. Success in achieving the accretive benefits of linking healthcare with retail will require a group effort from healthcare, real estate, and commercial property professionals. All need to share a vision of how healthcare integrated with retail can create a valued consumer experience.