Outlook for Investment in Healthcare Properties: Medical Office Buildings and Outpatient Facilities

October 28, 2011

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20 MILE RADIUS

55,000 EMPLOYEES

16.6 MM SQUARE FEET OF OWNED AND LEASED SPACE

PARTNERS HOSPITALS

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Key Trends Over the next 10 years, outpatient demand is expected to grow at a rate greater

than inpatient demand. Increasing outpatient demand has implications for design and location of new facilities –

continuing the trends of recent years Technology advances have allowed for more outpatient procedures – and will continue to do so Patient preference (convenience & access) Capacity constraints at in-town hospitals lead to attempts to decompress tight environments or

make them more efficient Decant less acute inpatient volume to free up beds at AMC’s for complex cases

77 million baby boomers eligible for Medicare over the next 20 years will force providers to look at alternatives to acute care, with an emphasis on ambulatory and urgent care

Pressure to reduce costs and improve quality of medical care In a competitive environment where consolidation is taking place With significant outside regulatory pressures, including healthcare reform In an industry with intensive use of energy (second only to foodservice industry) – need and desire

to reduce that consumption ALL OF WHICH SUGGESTS LOWER COST SETTINGS

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How Much Space Do We Actually Need?

Some are saying that the 32 million people who will be newly covered under healthcare reform will drive a need for 64 million SF of new space

Since universal coverage in Massachusetts in 2006, over 400,000 people have been covered with no obvious demand for additional space

Independent of the projected impact of healthcare reform, in recent years there’s been an accelerating migration of care to the community and to the home

Demand for space is likely to be constrained by the supply of health care providers

EMR and other changes in technology will likely dramatically change delivery of medical care

Growing focus on increased utilization of existing space (e.g., increase patients per SF) through process improvement and re-design to facilitate greater patient throughput may curb healthcare’s appetite for growth

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Approaches to Controlling Costs

Informal benchmarking survey of 12 other major health care systems conducted over past six months highlighted six real estate opportunities that are helping these systems reduce costs and increase efficiencies. Standardization - building and room templates, universal specifications, materials,

finishes and furnishings

Space Utilization - analysis and redesign of existing space for maximum efficiency and productivity, actually reducing demand for space

Construction Cost Control – clarifying project scope for tighter project estimating and controlling contingency

Investing in Maintenance - scheduled program of investment in deferred maintenance

Organizational Changes – centralizing or standardizing PM services

Strategic Real Estate Ownership

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Strategic Real Estate Ownership

Owning is almost always cheaper long term than leasing because of the more favorable cost of capital and real estate tax treatment available to some healthcare systems

A number of institutions actively land bank as a way to provide for future expansion space and to reduce or control long-term occupancy costs Some specifically took advantage of the most recent market downturn,

acquiring land inexpensively to have options on hand to support a future expansion or growth strategy

In some cases, the land or buildings acquired are strategic to current operations because of their adjacency

In other situations, sites were acquired for development of a separate campus, housing clinical, research or support services

Some institutions are reducing their leased space portfolios in favor of consolidation in owned buildings, anticipating the impending changes in lease accounting rules that reduce the advantages of leasing

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Conclusion

Uncertainty around impact of healthcare reform

Local market and health system configurations vary

widely

Cost reduction imperative while maintaining or improving

quality of medical care impacts space choices