TAHFM Interlink “Continuing” Changes in an Era of Healthcare Reform and Oil Industry

Concerns…. April 1, 2015

Memorial Hermann Overview

• Greatest market share in Houston area market

• Largest provider of uncompensated care and

community service

• 4,350 beds

• Only Air Ambulance Service in Houston – Life

Flight

• Only Burn Center in Houston

• Only Hemophilia Center in Houston

• Only non-county based Level One Trauma

Center

• 25,000 employees

• Three National Quality Awards Winner – Only

System in Texas

• 215 retail locations vs 2008

• $6 billion in physical medical facilities ($2B in

progress)

• $1 billion in medical office buildings

• $2.3 billion current capital program

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Houston - Forbes #1 America’s Fastest Growing Cities

• “When oil prices are low, Houston’s economy grows. When oil prices are high, Houston’s economy booms”

• MSA: Houston-Sugar Land-Baytown, TX • 2014 Population growth rate: 1.81% • 2015 (Projected) pop. growth rate: 1.74% • 2014 Gross metro product growth rate: 3.52% • Job growth rate: 4.5% • Unemployment: 4.8% • Median pay: $71,900 • 2014 Population: 6. 4M • 2019 Population: 7.0M (est.)

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4

Health System

Integration

15 Top Health Systems; Top

5 Large Health Systems

(2012 & 2013)

National Quality Forum

National Quality

Healthcare Award (2009)

TIRR Memorial Hermann -

- No. 3 in rehabilitation

hospitals

2011 Texas Healthcare

Foundation Quality

Improvement Awards

(9 Memorial Hermann

Campuses)

Healthcare’s “100

Most Wired” 8th

consecutive year

America’s 50

Best Hospitals

(2010-2014)

Texas Hospital

Association

Bill Aston Quality Award

(2011)

America‘s #1 Quality

Hospital for Overall Care

(2011 & 2012)

John M. Eisenberg

National Patient Safety &

Quality Award (2012)

Recent Accolades

2014 Houston

Business Journal

(HBJ) No. 3 Best

Places to Work

The Joint

Commission

Top Performer

(2012), Heart

Attack, Heart

Failure,

Pneumonia,

Surgical Care

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High Reliability Organization

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Awareness

43%

40%

13%

28% 31%

8%

58%

6%

15%

26%

80%

69%

20%

60%

100%

2012 2013 2014

0%

Memorial Hermann Methodist St. Luke's MD Anderson Don't Know/No Others

* 2013 & 2014 data reflects phone and online survey 7

Q: When you think of hospital systems in the area, which one comes to

mind first?

Preference

60%

45%

12%15% 9%

2.0%

13% 15% 17%

36% 38%

3.0% 11% 8%

1.0%

22% 20%

40%

80%

100%

2012 2013 2014

0%

Memorial Hermann Methodist St. Luke's MD Anderson Don't Know/No Others

* 2013 & 2014 data reflects phone and online survey 8

Q: Which hospital system would you prefer to use if you or someone in

your household needed medical care?

Balance ……Or Close Enough….Be Reasonable

REMEMBER:

HEALTH CARE SYSTEMS HAVE CASH, CREDIT,

FINANCING, EXPERTISE ≠ DESIRE TO BE REAL ESTATE

DEVELOPERS/OWNERS…..

Balance Sheet

MOBs Retail CCCs

Many MHHS

Worthy Projects

(Critical Timing/Need) (Real Estate Projects Needed x Many Clinical Projects)

Developer Funding/Benefit (Profit)

Hospitals

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To Own…..Or Not To Own….That, Is the Question….

• Balance sheet impact

– Days cash on hand

– Debt capacity

– Wall Street Financial Ratios

– Spectacular patient care programs that should be funded

• Funding sources – In order of preference

– Cash flow

– Debt – tax exempt vs. taxable

– Partners (a lengthy discussion)

– Developer owners (for-profit projects)

• Asset Types

– Hospital – Tax exempt financing available vs. MHHS/Northeast Hospital

– MOBs – Taxable – Not strategic/core assets (lengthy discussion on MOB

asset management philosophies)

– Retail locations (CCC example of pure retail)

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Convenient Care Centers

• The tale of a Convenient Care Center (CCC) project funding

discussion

– What is a CCC?

– Owned by Memorial Hermann?

– Developed and leased by MHHS and then monetized?

– RFP for developer – turn-key lease?

– Who owns the key piece of land? Expansion opportunities?

– Developer covenants vs. leasing?

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The healthcare industry along with

its associated medical real estate

and facilities management industry

is changing and your organization

needs to continuously be educated,

informed and active to add value

and be successful in the future.

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Facility Services Overview

Facility Services Departments

• Architecture and Construction

• Capital Planning & Asset Management

• Clinical Engineering

• Biomedical Engineering

• Electronic Engineering

• Imaging Support Services

• Environmental Services

• Laundry Services (MH & TMC Laundries)

• Medical Equipment Investment Council

• Medical Plaza Leasing and Property Management

• Physician Medical Plaza Joint Venture Operations

• Sterile Processing

• System Engineering

• System Parking

• System Security

• Food Service

• Materials Management and Supply Chain SIGNIFICANT DIVERSITY OF RESPONSIBILITIES

Every department is becoming more efficient and effective

through standardization and centralization.

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Bundling Facility Services

Facility Services Philosophy

(Personal Philosophy)

• Design

• Construct

• Occupy/Lease

• Maintain

• Supply

• All one team – All one vision

• Single Point of Responsibility

• New entities into this bundled services model

• Standardization…..current initiative…..

• Henry Ford quote…….. 14

Recent Events

• Exchange sign-up still very low

• State of the Union/Rebuttal – January 2015 (no mention)

• Future government shutdowns for Texas and Medicaid?

• Healthcare reform delay – January 1, 2016

• Employers shedding healthcare coverage = savings to them

• Benefit plans dropping healthcare coverage or large

deductibles added

• Actual cost of new healthcare coverage vs. value

• Employer fines

• Individual fines

• Lacking: “Sign up” of the “young and healthy” – (SS Program

Example) 15 15

Community Charity Care

• MHHS budgeting $800 million in

uncompensated care!

• Not sustainable! (Fair)

• Who will support our community?

• MHHS investing $2.3 billion in our

community with new projects

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Capital Construction Strategies

• Reduce the initial capital construction and ongoing

operational cost of medical facilities and real estate

without impacting the quality of care (use of

different types of construction)

• Developing new medical real estate (non-hospital)

strategies (own vs. master lease vs. JV)

• Declining reimbursements continue

• Changing physician-hospital-payer relationships -

MHHS now offers a payor and MD employment is

increasing

• Be alert for future healthcare consolidations…… 17 17

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Healthcare Reform Impact (MHHS)

1. Continued, significant reimbursement declines per procedure • MHHS is at capacity at almost every campus

• Medicare/Medicaid payment reductions – hospitals and physicians negatively impacted

• Disproportionate Share Hospital (DSH) reductions

• Increase in volume of Medicaid patients

• Increase in volume of Medicare patients - 10K per day – celebrate 65! – Next 22 years!

• Rise in uninsured patients due to corporate cost considerations and deletion of private medical

insurance as a benefit – Wall Street will encourage transition

• Employer/employee options example – provide/pay fines

• New elections changes profile

2. Houston & Texas economy still envy of most cities!

3. Oil and jobs!

4. Shifts focus from solely growth of patient volumes to wellness, efficiency

& quality to be successful with new payer government programs • Accountable Care Organizations (ACO’s)

• Low cost provider

• High Quality patient safety and satisfaction

• Guaranteed costs = at risk provider coverage

5. Scarcity of capital for all healthcare providers and impact on

development

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What Does All of This Mean to a Medical Tenant/Developer/Manager?

• Continued consolidation

• No one’s future is totally clear…..patient, physician,

hospital, real estate industry, etc. Be cautious……

• Effective forecasting distance is probably less than 12-

18 months

• Physician reluctance to invest in new medical real estate

ventures

• Physician reluctance to execute long-term leases

• Physician reluctance to align with organizations due to

the unknown….or relief…..

• Frustration over compensation/reimbursements

• Increased downward pressure on operating expenses

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Management Models/ Cultural Change

• Outsourcing Experience

• Environmental Services

• Food and Nutrition Services

• Clinical Engineering

• Laundry

• Property Management & Leasing

Centralizing

• Security

• Supply Chain Management

• Clinical Engineering

• Sterile Processing (New 2014)

• Medical Equipment Investment Council (New 2014)

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Facility Services

Facility Services Strategy and Philosophy

• All Facility Services Departments have input on capital

projects and we enforce “Best Practices” – previously local

campuses dominant

• One Team + One Vision + One Point of Accountability =

Success/Efficiency (Better be Correct!)

• SLOW AND DIFFICULT TRANSITION FROM FULL

CAMPUS AUTONOMY TO CENTRALIZED

CORPORATE DIRECTION

• Hotel example

• Top executive support

• Performance “usually” = acceptance

• Aggregate spending

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MHHS Reorganization

• Discussion:

• Purpose

• Succession Planning

• Standardization

• Service Lines

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75 vs 50 vs 25 Year Facilities

• Recent focus on “First cost capital”

• Less expenditures on architectural interiors

• No longer building 50-year or 75-year facilities

• Focus on energy efficiency – not “green” if costs

more $$$

• Make it a rectangle

• “Every Team Starts Fresh”……Unfortunately – limit!

• Depreciation impact to financials

• Competitive pricing model impact

• Joint ventures - OPM – leasing of assets – Ex:

Convenient Care Centers

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Further Areas for Exploration

• Medical Real Estate and Facilities Managers must

understand the industry and have experienced

personnel!

• Implementation of Environmentally Friendly programs

Waste stream

Utilities

LEED Certifications

Energy Star Ratings

Recycling

Reprocessed supplies

• Cost neutral mandate for all “green” programs!

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Memorial Hermann Pearland CCC/Hospital

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MOB 2

Site Plan

Katy Hospital – Site Plan

New MOB 2

New Tower

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Sugar Land Hospital Expansion Rendering

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Digital Scan Conducted by Contractor for Site Logistics Planning

Life Flight to Continue Operations During All Construction

Texas Medical Center Campus MFP – Site Logistics

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Parking Infrastructure Building (PIB)

HPI (Existing)

HPII

MH-TMC Master Facility Plan Partial Robertson Demo

Phase I of PIB -

Generator Building

Demo line

Note: All structures in Red

will be demolished

Bridge from G4

Dock

Central

Plant

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Robertson

Pavilion

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MHHS TMC Campus Master Plan Preliminary Rendering – Park View

North Campus Elevation

MHHS TMC Campus Master Plan Preliminary Rendering – Park View

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North Campus Elevation - Night

Memorial Hermann Cypress Hospital

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Preliminary Rendering

View From Highway 290

Hospital MOB 1

CCC

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MH Convenient Care Center South Katy – Architectural Night Rendering

MHHS Medical Office Building Development (Six MOBs)

• Memorial Hermann engaged Powers Brown Architects to design a new proto-typical

medical office building for Memorial Hermann, utilizing tilt-wall construction vs.

traditional pre-cast construction. Several months were devoted to designing a

rectangular, energy-efficient and efficiently designed floor plan, that could easily be

replicated at multiple sites, saving significant design fees and schedule time. This new

tilt-wall design is less expensive, delivers occupancy more quickly, keeps physician

lease rates affordable, and still provides a high-quality, long-term asset

• Design is complete for TWH – MOB 4, Katy Hospital MOB 2, Sugar Land Hospital MOB

2, Pearland Hospital MOB 2, NE MOB 2 and Cypress MOB 1

TWH – MOB 4

(On Hold)

SLH – MOB 2

PLH – MOB 2

NEH MOB 2 KH – MOB 2

Standardization…It Pays….. 34

Questions

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