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Paging private partners to build outpatient centers

With their profit margins increasingly thin, hospital executives turn to developers as they look to expand offerings

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Michael R. D’Agnes says a surgical center like the one he wants to bring to Raritan Bay Medical Center makes sense here, where there are few ‘specialty’ hospitals.
Michael R. D’Agnes says a surgical center like the one he wants to bring to Raritan Bay Medical Center makes sense here, where there are few ‘specialty’ hospitals. - (AARON HOUSTON)

No space, no capital, no problem — at least, that’s the thought behind a growing number of outpatient medical facilities being built through hospital-developer partnerships.

Michael Kotzen, executive vice president of population health management for Virtua Health, said the system was looking to invest in new technology, a new inpatient campus and outpatient wellness facilities in the early 2000s.

“We made a decision that we were going to invest our own dollars in inpatient facilities and technology, and that we were going to look for a third-party developer to develop our wellness and outpatient offering,” Kotzen said.

As of December 2012, Virtua’s three outpatient facilities are open. Kotzen said the system purchased the land, and leased it to Minneapolis-based Frauenshuh Healthcare Real Estate Solutions to build the facilities. Virtua is the main tenant in each facility, with fitness, wellness and outpatient care services run by the system.

Outside partners are useful for hospitals looking to build, as bottom lines are pinched by changing reimbursement models and patients who seek care outside hospital walls.

Keith Beneke, principal of Frauenshuh, said the company only works with health care facilities that either cannot or do not want to use their own capital.

“We don’t speculate, we don’t identify a marketplace and say ‘Hey, they need one there,’ ” Beneke said. “We’ve done over 70 projects, and it’s the same model we’ve used on all of them.”

Kotzen said Virtua’s outpatient facilities are mostly occupied, with physicians taking up offices in the space not being used by Virtua.

Seeing the work Virtua and Frauenshuh had done inspired Raritan Bay Medical Center to review its options for a developer-financed outpatient center.

President and CEO Michael R. D’Agnes said the two-hospital system consulted with some of the same experts Virtua had used, and eventually settled on Milwaukee-based Landmark Healthcare Facilities to build a new 100,000-square-foot outpatient surgical center on the system’s Old Bridge campus.

Shovels will hit the ground in April on the new facility, which will be connected via a skyway to the hospital.

Since there are few “specialty” hospitals in New Jersey, D’Agnes said it makes sense to turn the Old Bridge campus into more of a surgical center than a traditional community hospital. He said other states have specific surgical hospitals and orthopedic hospitals, but the trend hasn’t come to the Garden State in force.

D’Agnes said the plan is for Raritan Bay’s surgeons to move their offices to the new facility, as well as become partners in an outpatient surgical center based in the facility. He added surgeons spend most of their day driving between facilities, which could be eliminated by a more convenient space.

Raritan Bay also will move some imaging equipment to the facility and build out five operating rooms.

D’Agnes said fitting out the space for Raritan Bay’s use will cost around $12 million, which will be put together through a capital campaign and roughly $4 million in borrowing.

Kotzen said mixed ownership between hospitals and physicians means dealing with both big businesses and small business for the developer. He said a developer that has done health care work previously will be able to fit the needs better for both types of operators.

“Others could learn it,” Kotzen said, but the best results come from developers who have “done this time and time again.”

E-mail to: melindac@njbiz.com
On Twitter: @mcaliendo33

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