How To Lease an Office Building

Micro-Hospitals are gaining popularity in leading healthcare markets around the world driven by the need to satisfy emerging needs, and deliver healthcare that is decentralized, accessible, convenient and affordable. In the USA there are dedicated corporations, some with over 30 facilities, focusing exclusively on the development and operation of micro-hospitals and integrating them with the wider health system.

They cover a market service gap between full scale hospitals that often offer more than what a community needs, often operating below optimal utilization, and between freestanding outpatient clinics and ambulatory centers. According to a survey by the American Hospital Association survey; 38% of all hospital emergency departments reported “overcapacity’ in their emergency departments, and this number reaches 50% in urban hospitals.

Seeking a competitive edge, health systems are building these facilities to extend their brand and target gaps in the market by bringing small, full-service hospitals out into the communities where their patients live. There’s also the business case: micro-hospitals are less complex, and they are cheaper and faster to build than a traditional hospital and in many cases more profitable.

There is no formal definition or regulatory classification for micro-hospitals. They are independently licensed inpatient facilities with acuity care comparable to a community hospital but at a fraction of the size, sometimes starting at 15,000 square feet and as few as 8-15 beds. They are small enough that three of them could be built side by side on a football field with enough room left to park a dozen ambulances.

1. They offer outpatient services, unlike rural critical access hospitals
2. They are not satellite hospitals, which can typically exceed 100,000 square feet.
3. They have inpatient beds, unlike ambulatory care centers or urgent care centers.
4. While most hospitals are designed to operate at around 80% occupancy, many don’t need as many beds as planned, often running at an occupancy in the mid-60%. This is because of several reasons, for one, many procedures can be done in an outpatient or day surgery setting, the average length of stay is dropping because of developments in technology, alternative models of home and community care and specialized rehabilitation and convalescence centers.

Micro-hospitals are especially useful in communities that have limited, or overcrowded options for acute and emergency care, offering faster discharge times, shorter length of stay and reduced wait times, and can operate as a one-stop shop with both primary and secondary care onsite. They help patients feel more taken care of and can help build the patient relationship with a hospital brand — which ultimately reduces leakage. Some benefits include:

• Improve access to primary and secondary care for patients
• Expand the reach of health systems and provide tertiary care referrals, sometimes acting as a feeder system for a larger health system that wants to attract patients to more profitable major medical centers. This is also known as hub and spoke model.
• Micro-hospitals also act as deterrent to protect certain catchment areas from possible future hospital competition.
• They reduce service and operating costs within health systems by providing more convenient care for lower acuity cases, freeing up resources at the larger more specialized facilities. They typically treat patients with acuity needs that are up to Level III trauma.

No two micro-hospitals are the same, their success depends on their highly customized service configuration that is based on a detailed market supply, demand, and location analysis. Many health systems are using them as an entry point into markets and locations where demand would not be able to support a full-sized hospital.

As a rule of thumb, a smaller sized micro-hospital should be located within 40km of a full-service hospital to ensure a seamless transfer for higher acuity cases and emergency transfers. For farther distances the size and service offerings in a micro-hospital are adapted to consumer needs and integrated within the health system. In some countries like the USA the focus is not on rural areas, but rather on affluent neighborhoods within a 30 minute drive radius of a parent hospital.

Depends on the strategy set up for the project. Some micro-hospitals may be designed as “community hospitals”. The goal is not to cater to all the needs of the community but rather be very specific and targeted to achieve the highest rates of utilization. General trends include serving cases not needing more than 48 hours of care, and core services may include primary care, chronic disease care such as diabetes, dietary services, women’s health, dental care, diagnostic imaging and laboratory, and low acuity general surgery. Patients are typically seen by a physician within 15 minutes of entering the door. Micro-hospitals may for example cater to a specific medical need, such as emergency and orthopedic services in areas with a younger demographic, or cardiovascular or dialysis services in communities with a larger aging population.

We tell our clients to identify existing market needs and opportunities and not worry too much about future potential. If future demand outpaces supply then another capital and operationally efficient facility could be developed. The key point is to identify opportunities where you can start small to avoid replication of fixed assets and understand what consumers seek most in terms of medical care.

Urban markets such as Dubai have full scale hospitals that generally meet the demands of the population, and there is a strong transport infrastructure that enables consumers to access a hospital within a 30-minute drive from almost every corner of the city. On the other hand, countries with large rural areas such as Saudi Arabia or Western Abu Dhabi could find that micro-hospitals offer a convenient and cost-effective way to provide public or private healthcare to regions and communities that have been underserved, they can be deployed as a part of a wider network within the health system to deliver healthcare and drive transfers and referrals to regional hospitals.

In a public health system, a micro-hospital would be highly supportive of population health goals by providing primary care, wellness programs, access to diagnostics, and patient education and awareness. They would serve as a key node in the healthcare network and provide much needed access to care to communities with populations of 40-60 thousand individuals.

They need to meet the same licensing requirements of a normal hospital, and are developed with a compact clinical and administrative framework that focuses directly on community needs. They can provide a kinder and more personalized level of care.

Micro-hospitals are designed functionally and operationally to deliver the right care at the right place, at the right price, and do not rely on an inbound referral model, unlike other hospitals.

In the USA, the model follows a retail focused approach that capitalizes on consumer convenience. A baseline facility would be 18,000 square feet with up to seven emergency bays, offices and administration would be on a second floor, operating rooms can be reduced to 500 square feet, and single bed patient rooms at 325 square feet, and many services are outsourced such as catering, and laundry.

There are several alternative financing solutions that can be used without increasing pressure on the financial resources of healthcare providers, these options increase a health systems access to capital, preserve available cash, and hedge long term risks without impacting operational control of the hospital.

Depending on the business environment and operational model, some alternative financing models include:

• Bank debt financing
• Private equity
• REIT capital
• Build-to-suit / leasebacks
• Joint ventures
• Public-Private Partnerships

There are not many micro-hospitals in the middle east, but looking at USA benchmarks the average 16,000 square foot hospital would cost around $10 million to build, have 24 FTE staff – of which six to eight are on duty at any time, and designed to see up to 100 patients a day. Fixed costs including payroll, insurance, utilities and administration would account for 70% of expenses, and earnings would be almost 25% EBITDA which is almost double the operating margin of many larger hospitals.

The most important factor is the proper research. Health systems and investors need to be intelligent about assessing the needs of the community and understand the demand and supply drivers that influence consumer decision. Additional research is needed to understand the regulatory and licensing constraints which in some cases specify rigid minimum bed numbers needed to obtain a hospital license.

It is important to choose the right strategic consultant who can conduct a detailed commercial, technical, financial, and regulatory assessment of the opportunity and identify the key inputs affecting the site, size, service composition, network integration, and financial viability of the micro-hospital, as well as support in putting together the right financial structure and resources to deliver the project.

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