The Medical Office Sector Continues To Hold Steady

/in , , /by

The medical office sector couldn’t be in better shape despite fears of the impact from telemedicine and given the demand for health care, the industry should be robust over the next 12 months, according to analysts.

A segment known for its stability and resistance to recessions set record highs for asking rents in 2021 as vacancies decreased–a trend expected through the next year and beyond. Development of new medical office buildings continues after a slowdown at the start of the COVID-19 pandemic, and for quality properties on the market, investors are gobbling them up quicker than ever. That’s coming off record highs in sales volume and pricing in 2021.

None of that demand is a surprise given an aging population along with migrations and relocations that have picked up since the start of the pandemic in 2020.

Maddie Holmes, a New York-based senior research health care analyst for JLL, said medical office absorption hit a record in 2021 at 18.5 million sq. ft. on a trailing fourth-quarter basis–nearly two times the typical rate going back to 2019 and previous years. That demand continues to be strong in 2022 despite telemedicine becoming a bigger part of the health care landscape.

“Health care is a contact sport in that you have to see your physician,” said Bryan Lewitt, a managing director for healthcare in JLL’s Southern California office. “Telemedicine and Facetime and other avenues of technology aren’t enough because they’re not diagnostic. When the hospitals closed because of COVID, most people delayed their health care visits, procedures. That has created a huge demand for these next two years.”

Travis Ives, an executive director with Cushman & Wakefield who heads its U.S. Healthcare capital markets team, said telehealth has even helped the medical office segment because it connects patients with physicians.

“That makes it more likely that a serious problem will be diagnosed and require treatment,” Ives said. “That treatment is going to occur in a medical office building rather than in an emergency situation like in a hospital. There’s just so much health care that can’t be delivered over the phone. It’s become another component to the delivery care continuum, but not something that’s going to replace medical offices.”

The State Of Medical Office Occupancies

During the pandemic when there was a slowdown in construction starts, coupled with those high rates of absorption, occupancy for medical offices moved from 91.3 percent during the first quarter of 2020 to 91.7 percent at the start of the first quarter of 2022, Holmes said.

Shawn Janus, national director of Healthcare Services for Colliers, reported five of the 10 leading U.S. markets started 2022 with vacancy rates lower than the national average of 8.3. percent. Boston had the lowest vacancy rate at 6.3 percent, followed by New York, 6.8 percent. Miami, Philadelphia, and Chicago were below the national average while Los Angeles was just above it. On the other side, Dallas and Houston had the highest vacancy rates among leading markets at 10.9 percent and 12.5 percent, respectively. Atlanta and Washington, D.C. exceeded 9 percent, Janus said.

“I think you’re seeing vacancy in older medical buildings that are now picking up office tenants, while class-A and class-B (medical offices) have lower vacancy. And if they are strictly medical they do much better,” said Susan Wilson, a healthcare real estate advisor for Lee & Associates and vice president of Lee Healthcare.

Medical office rents historically grow at a steady rate of 2 percent to 3 percent year–over-year, but that pattern is being challenged by current conditions.

“There’s very little supply coming online, and we have already fallen below 10 percent vacancy, which is not a healthy market for tenants,” Lewitt said. “The landlords are going to have a lot of leverage, plus you have increased construction costs that will make it difficult for providers to relocate. I suspect that rents are going to continue to go up because 80 percent of tenants renew their lease in health care. It’s a very sticky business.”

During the BOMA International’s Medical Office Buildings + Healthcare Real Estate Conference held in May in Nashville, Ives said this was the first time that every meeting they took with medical office building owners focused on rental growth.

“They are starting to push their annual escalations and wondering how far they can push their rents,” Ives said. “Most of them have portfolios that are getting up to 90 percent to 95 percent occupied and are starting to think ‘we may as well be asking for it at this point.’ I think rent growth will run hot here for a little bit. As long as vacancy remains tight and inflation is relatively high, I think you will see rent growth running higher than it has historically. Where it used to be the norm to ask for 2.5 percent to 3 percent annual increases on a new lease, in a lot of markets now it’s 3.5 percent to 4 percent-plus. That might not be a big deal in other products but for medical offices those are big escalations.”

Janus said there’s a lot of discussion with tenants about sharing inflation risks since a 2 percent increase doesn’t compensate owners costs with inflation currently running at 8 percent.

“I have heard 4 percent fixed-rate increases, which I have never seen in 20-plus years in this space,” Janus said. “There has been talk about going to CPI and doing it in a risk-sharing manner.”

While leases of 10 to 15 years give owners a security of income, they are looking at shorter term leases so they can bring it back up to the market given the volatility and inflation, Janus said.

“Providers are asking if we want shorter-term leases because inflation is high right now and when it comes back down, do we want to be caught in a 10-year lease that continues to escalate,” Janus said. “And if we can reset, the market may come back down.”

With this environment, Janus said some tenants are looking at whether they should now own their buildings rather than lease them.

There are limits, however, to how much medical office rents can grow, according to Chris Jacobson, a healthcare real estate advisor for Lee & Associates and vice president of Lee Healthcare.

“It’s never going to go through the roof,” Jacobson said. “They can only afford what they can afford with reimbursement from insurance. They can only see so many patients and do so many procedures a day. It’s not like they can sell more coffee.”

Lee Asher, who leads the Healthcare & Life Sciences Capital Markets at CBRE, cited how rental rates are trending up because of rising construction costs and increased tenant improvements. Rental rates across the country have been in the low $20s on a triple net basis while new construction is in the low $30s on a triple net basis, he said.

“If you’re an existing tenant that used to be in the low $20s and your alternative is to relocate to a new building that’s going to be $30, you’re going to think hard about staying,” Asher said. “The landlords recognize that and are able to push rates at their buildings to mid-$20s on a triple-net basis.”

For those who want to relocate, a tenant improvement package to upgrade and do a full build-out for new space is about $100 a sq. ft. and $150 if it’s specialized, Asher said. The tenants can stay where they’re at, and the landlord will increase rents and give $10 a sq. ft. in tenant improvements for paint, carpet and millwork.

“If you’re an existing owner, you’re probably at 85 percent to 90 percent retention,” Asher said. “The question is if you have a vacancy in your building, how do you fill it if no one is moving. What we are seeing is there’s still a lot of consolidation and expansion among physician groups. The No. 1 reason I hear from our leasing folks as to why someone would relocate is they’ve grown out of their space and the building can’t accommodate them. It creates a vacancy in the building, but there are other tenants expanding as well that can backfill that space.”

Entering 2022, average net asking rents for medical office space increased by 1.7 percent over 2021 to $22.61 per sq. ft., which is a new high, Janus said. Rent growth in 2021 was strongest in Los Angeles at 3 percent, followed by Chicago and New York with 2.2 percent.

Los Angeles has the highest average net asking rents at $35.13 per sq. ft. Boston and New York were the next highest at $26.70 per sq. ft. and $26.11 per sq. ft., respectively. Rents in the remaining markets range from $20 to $25 per sq. ft., Janus said.

The Medical Office Investment Sales Climate

The medical office sector is building off a record year in 2021 for sales that resulted in $15.4 billion in transaction volume, according to Todd Perman, vice chairman of global healthcare services for Newmark. Perman said he doesn’t expect hospitals to use general offices as much going forward when employees can work from home.. That was a 23 percent increase over 2020 and 142 percent increase over 10 years. The price at $358 per sq. ft. reached its highest value in 20 years. Cap rates have compressed to the lowest average in more than 20 years at 5.9 percent. Private equity, strong medical office occupiers, and shifting demographics contributed to the banner year, Perman said. Because of recession resiliency, new domestic and foreign investors are seeking out acquisitions, he added.

“In recessionary periods, there’s always been a flight to quality and health care is one of those areas people fly to,” Perman said. “They flock to invest in health care when other areas like retail and other sectors are not performing as well, and there’s more risk in those sectors. We have seen through the pandemic that we have new investors in this space and billions of dollars invested on top of what was already here because of that flight to quality.”

Private equity interests led the way accounting for 63 percent of sales volume, according to Revista. PE investors also made up 75 percent of the sellers.

“There is a lot more money going after buildings than there are buildings for sale,” Wilson said. “If an investor wants to sell the building, it will probably never make the market if it’s fully leased. If it’s 100 percent medical and good credit tenants, it will be gone in a week.”

Janus said pricing was highest in the West and Northeast at $515 and $420 per sq. ft. The Southwest was third at $361 per sq. ft. The Midwest has the lowest average pricing of the six U.S. regions at $280 per sq. ft., he said. There have been sub-4 percent cap rates for prime medical office buildings, he said.

Jacobson said he recently saw a 2.7 cap rate in California.

Analysts said they don’t think the new cap-rate lows can sustain themselves but flatten out. There’s no shortage of capital, and there’s a lot of competition for assets and thus a positive outlook for medical office demand.

Lewitt added, however, that given inflation at 8 percent and rising interest rates, there’s some pause at the moment among investors to figure out the returns.

 

Source: Wealth Management

U.S. Demographic Trends Strongly Favor Medical Office Real Estate

/in , , /by

The dislocation caused by COVID impacted all areas of life and transformed work and leisure for tens of millions of Americans.

The health crisis also prompted an unprecedented population shift over the past two years, which along with an accommodative Federal Reserve, stimulus payments, and a buoyant stock market contributed to a dramatic rise of residential real estate prices in the United States.

The availability of remote work, a tight labor market which shifted power to employees to demand more flexible work arrangements, escape from strict pandemic-related public health measures, a general interest of people to move to a warmer climate, more tax-friendly locations, with better job and salary prospects, a buoyant stock market that lifted household wealth and, of course, rising home prices, and a frantic search for a shrinking inventory of affordable homes all contributed to an unprecedented population shift over the past couple of years.

These trends also favor another area of real estate favored by sophisticated individual investors and institutions, healthcare real estate.

“Before the pandemic, the healthcare sector was characterized by long-term leases, stable occupancy, consistent income streams and quality tenants with stable, long-term leases and high credit ratings,” says Martin Freeman, OrbVest CEO, “as the pandemic recedes we see even more reason for long-term optimism for individuals and institutional investors considering opportunities in this sector.”

OrbVest is a global real estate company investing in income-producing medical commercial real estate in the United States, and is one of a growing number of companies looking to capitalize on the growth and potential of US healthcare real estate.

What Are The Trends?

The National Association of Realtors recently highlighted metropolitan areas in the Sunbelt and Mountain states that saw the highest yearly price gains: Punta Gorda, Fla. (28.7%); Ocala, Fla. (28.2%); Austin-Round Rock, Texas (25.8%); Phoenix-Mesa-Scottsdale, Ariz. (25.7%); Sherman-Denison, Texas (25.1%); Tucson, Ariz. (24.9%); Las Vegas-Henderson-Paradise, Nev. (24.7%); Ogden-Clearfield, Utah (24.7%); Salt Lake City, Utah (24.4%); and Boise City-Nampa, Idaho (24.3%).

Chicago, Milwaukee, New York City, and San Francisco all saw a population decline during the pandemic because of fewer jobs and unfavorable demographic trends.  In 2021, New York, California, and Illinois each lost over 100,000 people to outmigration.

According to Redfin, a record 32% of users nationwide were looking to move to a different metro area during the first quarter of 2022.

The 2021 U.S. Moving Migration Patterns Report from North American Moving Services also showed that Illinois, New York, California, New Jersey, and Michigan were the top five states for outbound moves, while Idaho, Arizona, South Carolina, Tennessee, North Carolina, Florida, Texas, and Utah were the top states for inbound moves.

Redfin noted the top 10 places where Americans are considering moving include: Miami; Phoenix, Las Vegas; Sacramento; Tampa; Dallas; Cape Coral, Fla.; North Port, Fla.; San Antonio; Atlanta.

The Marcus & Millichap multifamily market forecast primarily reflects these statistics and trends. The company specifically cited that the Sunbelt and Mountain regions should thrive. Even before the pandemic, the Sunbelt saw significant in-migration, household formation, and employment growth. During the pandemic, this region saw fewer job losses, mainly due to public policy regarding restrictions. The Mountain region is also seeing momentum thanks to rapidly growing populations, a strong quality of life, and affordable living costs.

Let’s take a deeper look at what could be driving these migration trends.

COVID-19

A Pew Research Center study conducted in June 2020 found that over a quarter (28%) cited COVID-19 as a significant driver for why they moved. Many people relocated due to fear of catching the virus while others moved to escape restrictions.

A worldwide pandemic would not have necessarily been a migration driver pre-2020. However, the pandemic indeed exposed a divide between how to handle the pandemic. Blue states such as California, New York, and Illinois had some of the harshest coronavirus restrictions. Michigan also saw significant out-migration due to the collapse of the auto industry and COVID-related public policy. Red states, on the other hand, such as Texas and Florida, kept their conditions largely open. This undoubtedly led to a short-term migration driver for people seeking to earn a living and escape restrictions.

Take New York City, for example.  In March 2020, there was a 256% increase in people moving out of the city compared to the same month in 2019. Between March and August 2020, 246,000 people filed a change of address request- an almost 100% increase compared to the same period in 2019.

Remote Work And Learning

Somewhat related to COVID and its shutdown restrictions, the rise of remote work and learning has been another driver for migration. Many students could also be taking advantage of online learning to save money on housing and living expenses.

Climate

The 2020 U.S. Moving Migration Patterns Report noted that the Northwest and Midwest were the regions in the U.S. experiencing the most outbound migrations. Harsh winters are certainly a contributing factor. Meanwhile, the same report cited climate and open space availability as reasons for southern states experiencing great inbound migrations.

According to Moving.com, the weather is the number one reason people move to Florida, for example. Despite hot and humid summers, the state has about 200 sunshine-filled days a year and seasons that tend to be mostly mild and warm. Average winter temperatures also appear to range between the 60s and 70s.

Not every state can boast the same climate that Florida has. However, other places in the Sunbelt and South have mild temperatures of their own that might be contributing to the amount of inbound migration.

Job Growth/Availability

In the Pew Research survey we previously mentioned, a total of 18% gave financial reasons, including job loss, as their motivation to relocate. This driver is also correlated with COVID-19 and policy restrictions. While states hit hardest by restrictions and job losses saw the most out-migration, those who stayed relatively open and kept their job market afloat saw the most in-migration.

Multiple sources and indications show that the Sunbelt, the South, and the Mountain regions are the best locations for job opportunities and job growth.

According to U.S. News, the Top 5 states for job growth are as follows: That’s 2 Sunbelt states, 2 Mountain states, and 1 Southern state.

Other data corroborates this too. According to the Seidman Institute, Idaho was the ONLY state in the U.S. to experience year-over-year job growth for total nonfarm payrolls in January 2021 and is leading year-to-date too.

4 of the Top 5 states leading in job growth based on a 12-month moving average are also all Mountain states: Idaho, Utah, Arkansas, Montana, and South Dakota.

This interactive map from the WorldPopulationReview depicting “Job Growth by State 2021” seems to expand on this data. Notice which regions of the country are lighter shaded (less job growth) and which areas are darker shaded (more job growth).

Income Tax/Affordability

“An income tax increase in a state may cause individuals to out-migrate over time,” says the Cato Institute.

Because of the economic hardships that many Americans have faced, the correlation between state income tax rates, affordability, and migration is not coincidental.

3 of the Top 8 states for in-migration- Florida, Tennessee, and Texas- do not collect state income tax. Meanwhile, other top states for in-migration, Arizona, North Carolina, and South Carolina, have a minimal state income tax.

While growing Mountain States, such as Idaho, do have state-income tax, Mountain States are generally more affordable and have a slower life pace. Compare that to states such as California, New Jersey, and New York. All three of those states are in the Top 5 for most out-migration, and unsurprisingly, their state income tax rates are 13.3%, 10.75%, and 8.82%, respectively.

Impact On The Healthcare Industry

The Sunbelt, South, and Mountain regions have experienced the most in-migration. It is not a coincidence that these regions are also seeing the highest volume of medical office sales.

Medical office sales volume totaled $19.6 billion in 2021 a 40.1% increase from 2020, a significant increase from prior years’ sales ranges of $13 to $14 billion.

The five states with the most MOB square footage under construction are California, Florida, and Texas, New York and Ohio.  The same five states also top the list of hospital construction activity.

Houston, Texas is the leading metro market for construction, and other Sun Belt areas like Orlando, Miami, and Atlanta are all in the top 10.

There is a direct correlation between healthcare real estate, demographics, and migration. Sunbelt states have seen investor interest in medical office buildings due to pleasant year-round climates attracting aging boomers and young families seeking to enjoy better weather and a more active lifestyle.

You have to consider the cost of living and the cost of healthcare as well. For the younger population, it is much more affordable to raise a family in the Sunbelt and the South compared to New York City and San Francisco, especially when you consider the cost of healthcare.

For our aging population, consider the essential needs for affordable and convenient healthcare as the 80+ demographic is growing quickly, and outspending every other age on healthcare combined.

The 65-and-older population has increased from 12.8 percent of the population to 16.1 percent. By 2030, it may comprise more than 1/5 of the U.S. population. This has a direct and critical impact on healthcare. According to data from the 2010 Census, more than two-thirds of people in this age group (66.5 percent) see the doctor three or more times a year, up from less than half of those aged 46-64 (44.2 percent).

For one example of how demographics provide a tail wind for  segmented and specialized healthcare facilities, look to South Florida, home to the highest concentration of seniors in the country, with more than 3.3 million Floridians aged 65 and older, and 1 in 20 now 80 years old or older.

Migration and Demographics Fueling Medical Office Building Boom

We are witnessing a boom in the medical office building (MOB) real estate market.  MedCraft Investment Partners announced the launch of a $500 million joint venture for medical office acquisitions, and, Kayne Anderson Real Estate is getting ready to close a $2.5 billion fund of which approximately half will be allocated to medical offices.

In 2021, 280,000 square feet of medical office space was absorbed – a 77% increase from 2020, according to JLL.  medical office vacancy down two basis points to 5.8%, the lowest levels since 2006 and medical office rents rose 5.5% in 2021, according to JLL.

Average net asking rents for MOB space increased by 1.7% in 2021 to $22.61 per square foot — setting a new high for the sector, according to Colliers.

Companies with a track record for success like OrbVest, are able to navigate this competitive marketplace and are attracting a great deal of interest from individual and business investors around the world seeking dollar dividends and an inflation-resistant asset in times of volatility.

“We are mindful of the increasingly competitive market for prime assets and are constantly re-assessing and adjusting OrbVest’s business model to match evolving market conditions,” says Freeman. “We are fortunate that OrbVest is able to leverage the relationships it has built up with brokers and providers of these assets so we can continue to secure almost 75% of our deals off-market, providing a sustainable pipeline to meet investor expectations.”

Key Takeaways

For healthcare real estate, demographic shifts and population migration trends go hand in hand with location and its correlation to healthcare real estate trends.

America is rapidly changing and graying.  Our population is not only aging but also taking into account quality of lifestyle more than ever before.  Young families want a more affordable, lower-stress and higher-quality lifestyle. Seniors want to enjoy a better climate with affordable and convenient healthcare integrating with their lifestyles. These migration trends preceded the pandemic, but the pandemic accelerated these trends.

If you’re considering investing in healthcare real estate, consider how demographic changes, migration, and how people’s location preferences directly correlate with healthcare properties.

Suppose you can look into crystal ball not 5 years into the future but 10+. In that case, you can unlock a historically strong investment opportunity in medical office buildings and healthcare real estate.

“We believe that healthcare-related commercial real estate in the U.S. should continue its growth as an ageing population and technological progress drives increasing demand for these specialized buildings. We are very excited to be executing successfully in this rapidly growing space,” says Freeman.

 

Source: Global Banking & Finance Review

Hospitals Buying Real Estate, Revamping Clinical Space For Innovation Hubs

/in , , , /by

In February, Pittsburgh-based Allegheny Health Network held a ribbon-cutting in Bellevue, Pennsylvania, to unveil a home for one of its newest ventures—AlphaLab Health, which the system hopes will spur innovation and improvements to community health.

The 10,000-square-foot innovation hub, a partnership with Pittsburgh-based startup incubator Innovation Works, is housed in a former hospital owned by AHN. It will serve as the home base for startups participating in AlphaLab Health, AHN’s healthcare and life sciences startup accelerator launched in fall 2020.

“It’s a demonstration of what you can do to repurpose these assets that are aged but have great bones,” said Dr. Jeff Cohen, AHN’s chief physician executive for community health and innovation.

The space gives AlphaLab Health startups access to wet and dry labs to develop products, as well as office space and areas to collaborate and meet with other startups. The startups also receive early-stage funding and opportunities to connect with clinicians and test products at AHN.

The project has involved more than two years and $5 million, including renovations and investments in startups and programing—of which AHN and its parent Highmark Health contributed $2 million.

“Accelerators and other innovation centers became more popular during the COVID-19 pandemic,” said Pam Arlotto, president and CEO of healthcare consultancy Maestro Strategies.

While hospitals have been setting up innovation programs for years, the efforts took on a new focus as the healthcare industry eyed consumerism and pushed to create new care models that engage patients at home and outside of the hospital. They’re expensive projects, usually involving investments in real estate and hiring staff to run the programs.

“Hospitals starting innovation centers have done everything from revamping old clinical or administrative space to building new facilities to house innovation programs,” said Rob Lowe, CEO of Wellspring, a software company that sells products for innovation and research and development programs. “It depends what type of work the hospital needs to do or the form of the incubator itself. Some hospitals create accelerators to identify startups worth partnering with or venture capital arms that invest. Some, like AHN’s, are partially funded through local government as part of economic development efforts. Almost in all cases of these hospitals that we work with around the U.S., we see dedicated space.”

A Hospital Makeover

The vision for AlphaLab Health started in 2019. Cohen, then president of the system’s Allegheny General Hospital, wanted to embark on a community health project. He requested that the health system let him start an accelerator at a nearby facility that Allegheny General was responsible for—a 240,000-square-foot facility about 6 miles away in Bellevue, which closed its inpatient units and emergency department in 2010.

The hospital, formerly AGH Suburban, had transitioned into a nursing facility, but that closed in 2019. AHN continues to operate an urgent care center and outpatient clinics at the facility. It required significant renovations to become AlphaLab Health.

The facility’s intensive-care units were transformed into lab space, patient rooms turned into office space, and waiting rooms became conference space. Startups aren’t charged rent while participating in the accelerator but can choose to continue to rent office space from AlphaLab Health after the six-month program comes to an end.

Cohen is curious whether this model, should it prove successful, could be used in other regions. He said many hospital closures have left vacant facilities in poor areas. In rural areas alone, more than 181 hospitals have closed nationwide since 2005, according to the North Carolina Rural Health Research Program.

But initiatives like AlphaLab Health could help turn around that blight by creating jobs in underserved areas, lifting community health and improving medical care with new innovations. Jobs could serve to decrease the cost of care, since research has suggested employment is a social determinant of health.

To renovate the former hospital, AlphaLab Health raised funds from government, philanthropy and AHN’s parent company Highmark Health. The funding included a grant from the Pennsylvania Department of Community and Economic Development, which will reimburse $500,000 in construction costs from its Redevelopment Assistance Capital Program. More than 181 hospitalshave closed since 2005 in rural areas alone, according to the North Carolina Rural Health Research Program.

Each startup also receives up to $100,000 in funding—half of which is provided by AHN, and the other half from Innovation Works. AlphaLab Health retains 2% equity. AlphaLab Health accepted its first class of seven startups in 2020, six startups in 2021 and received more than 100 applicants each year.

AlphaLab Health is tracking a few metrics to gauge success, including follow-on funding that startups receive after the accelerator. Already, five of the first 13 startups have raised an estimated $10 million in additional funding, Cohen said. Six companies have started tests of their products and five have hired at least one new local full-time employee.

“We’ve been very early, but so far we’re very pleased with the direction of where this is going,” Cohen said.

Spinning Off Innovation

Milwaukee-based Froedtert and the Medical College of Wisconsin launched Inception Health, a program that develops innovations and evaluates digital tools in the market, seven years ago. It’s a separate company owned by Froedtert and MCW, housed in a 10,000-square-foot office space in the health system’s North Hills Health Center.

“The office was previously used for outpatient ambulatory services but was revamped to be a classic innovation space,” said Cathy Jacobson, Froedtert’s president and CEO. “The team needed dedicated meeting areas, since it’s often bringing in external partners and vendors. It couldn’t just be a conference room buried within a hospital. Inception Health was set up as a limited-liability corporation owned and funded by Froedtert so that innovative ideas wouldn’t have to compete for resources with the traditional health system.”

Inception Health’s projects must align with challenges and goals outlined in Froedtert’s strategic plan, such as patient access, consumer experience and population health. The company’s board is made up of C-suite executives from Froedtert and chaired by Jacobson. Inception Health’s annual budget has increased over the years, from roughly $2.5 million in 2015 to $10 million.

“The board evaluates return on investment across the portfolio rather than for individual projects, according to Jacobson. “That factors in care quality and consumer access improvements. We want the ability to experiment and fail.”

Inception Health doesn’t sell services to other health systems. It does have one hospital that pays to be a partner, which means it’s able to deploy tools that Inception Health has developed and assessed. Inception Health is working to onboard another hospital partner.

“Froedtert is still fine-tuning how to design innovations with full-scale deployment in mind, beyond the initial pilot or experiment,” Jacobson said.

While Inception Health’s charter is to develop innovations, it doesn’t implement them. That’s handled by Froedtert’s operations team. Once an innovation is developed, Froedtert’s team will work with Inception Health to pilot the new product or process at the health system. But Jacobson said leadership has realized they need to build up that implementation capacity and dedicate more staff to scaling an innovation across the health system after a successful pilot, similar to how IT workers home in on EHR work during a go-live or upgrade.

“You always staff an EHR implementation,” Jacobson said. “We weren’t doing it with the same rigor with Inception.”

Creating a business plan with next steps for after product development and piloting technology is critical for a successful innovation center, said Ash Shehata, national sector leader for healthcare and life sciences at consulting firm KPMG. That could include how to scale it across the health system for an internal return on investment, as well as considering whether to commercialize the intellectual property and sell to peers.

“Without that business plan, it’s easy to get stuck in a prototype phase,” Jacobson said.

A Pandemic Shift

Cedars-Sinai in Los Angeles has run a startup accelerator since 2016 to connect with early-stage companies.

“The Cedars-Sinai Accelerator provides an entry point for the health system’s work with startups,” said Jim Laur, vice president of technology transfer and business affairs at the system.

It’s a three-month program in which startups work with hospital staffers who have identified problems to develop possible pilots. Cedars-Sinai has hosted seven accelerator cohorts with about eight to 10 startups in each.

“Usually, each class has at least two or three startups that end up launching a pilot and subsequently providing services to the health system,” Laur said.

The accelerator is hosted in the Cedars-Sinai Innovation Space, a two-story, 10,000-square-foot building across the street from Cedars-Sinai Medical Center. Being across the street was important for the accelerator, making it easy for startup founders to walk to the hospital to talk with staff and see workflows in action.

“We thought it would be good to have a space that’s on its own for a specific purpose … while still being just across the street,”  Laur said. “People can still connect really easily.”

It’s a repurposed building that was originally a retail space, which meant Cedars-Sinai had to do some minimal renovations, like taking out the store counters and putting in conference rooms.

“The goal for the Cedars-Sinai Accelerator is to bring solutions to clinicians and business leaders at the hospital,” Laur said. “It’s not expected to drive a financial return for the health system.”

Laur’s team has found ways to measure the accelerator’s performance and whether it’s succeeding in identifying high-impact startups. The team tracks the number of employees that a startup has before and after the program, to see whether the company has grown. They also track funding the company raises after the program.

Cedars-Sinai took a break from using the innovation space during the COVID-19 pandemic, when the accelerator shifted to a virtual model. During that time, the building was used to create supplies like hand sanitizer and face shields during shortages.

Moving forward, the accelerator plans to take some lessons from the pandemic. Leaders are looking to maintain a virtual option for startups that may not be able to relocate, only bringing them to Los Angeles for a portion of the program focused on things that are hard to replicate remotely, like walking through the hospital floors. It will continue to offer educational sessions virtually, which leaders hope will create opportunities for entrepreneurs with families or other responsibilities that make it challenging to move for three months.

“We’re able to now accommodate a broader range of individual circumstances,” Laur said. “It’s really been an exciting refresh for the program.”

The pandemic’s push toward more remote and hybrid work could lead to more innovation centers, KPMG’s Shehata suggested. As organizations downsize office space where back-office employees used to work, that space will need a new purpose.

“Health systems need to reconsider what they want to do with it,” Laur said. “They could offload it to reap the savings or transform it into something new.”

Building From The Ground Up

Peoria, Illinois-based OSF HealthCare has operated a 168,000-square-foot innovation center, dubbed the Jump Trading Simulation and Education Center, since 2013.

“It was new construction,” said Dr. John Vozenilek, vice president and chief medical officer for innovation and digital health at OSF HealthCare.

Jump Simulation, which cost an estimated $55 million to build, is attached to the system’s St. Francis Medical Center in Peoria The building was funded through a $25 million donation from trading firm Jump Trading, as well as private donors and OSF HealthCare. It’s a partnership with the University of Illinois College of Medicine at Peoria.

The building’s first two floors comprise simulation spaces, including an operating theater, inpatient and outpatient settings, and a home environment with an ambulance used for medical training, The floors above are innovation spaces, where teams of engineers and clinicians design and build solutions—and then test them in the simulation spaces below. The innovation spaces house seven labs focused on research and development for topics like children’s healthcare, data science and informatics, and advanced imaging and modeling, among others.

OSF HealthCare’s Jump Simulation innovation hub houses a simulated operating theater and inpatient and outpatient settings for medical training.

The labs often work with external partners who have expertise in their given focus area, as well as professors and students from nearby universities.

“The labs almost serve as a beacon, letting outside experts know that this is an area OSF HealthCare is investing in and is interested in expanding,” according to Vozenilek. “That’s really accelerated our whole process. For the model to be successful, the work in the lab can’t just stay there. It has to be translated back into hospital operations or patient care,’OSF leadership monitors the labs’ progress based on whether they’re producing new ideas and the extent to which those ideas are getting disseminated into the hospital and throughout the industry.”

“The vision behind Jump Simulation is to improve outcomes and cut costs through innovative training, as well as finding better ways to perform clinical care,” said Dr. Lisa Barker, chief medical director at the Jump Simulation center. “To demonstrate the value of Jump Simulation’s work to health system leadership, the team often measures ROI based on cost avoidance. That includes figuring out how programs at the center contribute to reductions in medical errors and complications or creating efficiencies when onboarding new medical professionals. Not only do we have a qualitative impact, but we can have a tangible benefit as well.”

 

Source: Modern Healthcare