Expanding into New Regions with Your Healthcare Business
Expanding a healthcare business in one’s usual area is always a great step forward for expanding the business’ footprint. However, an even greater accomplishment is expanding outside of the usual demographic area. Be it city to city, or state to state, expanding outside of a local area is a move that comes with its positives, negatives, and other areas to look out for like location and lease agreements.
Lisa D. Taylor, Partner, Inglesino, Webster, Wyciskala & Taylor, LLC says that in general there are several benefits of purchasing outside of region. One is certainly expansion with a second being, being able to take advantage of natural patterns of a business’ patients.
“For example, if you are in the North East region, there are a fair number of ‘snowbirds.’ Moving to the East Coast of Florida where your clients may go, is a good way to serve existing clients during times where you would otherwise not get their business because they are not there. Trying to capture business with your existing clients during times where you might not otherwise capture them is important,” Taylor says.
“Another thing is, is that by purchasing or expanding to another region, you may also capture patients who get referred to by family members of your current clientele. For example, someone may have a parent who doesn’t live in your location, they could refer their parent to you as a reputable source should your business move to particular regions.”
Although there are some definite positives to expanding outside of a region, Taylor warns that the first thing owners want to make sure of is that they don’t cannibalize their existing business.
“You want to be able to expand and actually capture business that you wouldn’t otherwise get or risk losing to another provider. You don’t want to just expand or buy a business and have the overhead without additional positive cash flow. A lot of this is based on geography; for example, there are many people in New Jersey who will go across the bridge to New York City. Let’s say you are a NY provider, and by expanding into NJ, you want to make sure that you have additional volume, and attract people who are not going to go over the bridge. You don’t want to have your infrastructure in NY, and your infrastructure in NJ, and all you have done is move your patients and doubled your cost of overhead,” Taylor says.
The second thing Taylor discusses is that owners have to be careful of differences in regulatory requirements. This is particularly critical because in healthcare, there are very different rules not only across state lines, but sometimes even in municipalities. One of the advantages of buying a healthcare business is getting new patients and having economies of scale. If the regulatory requirements are very different, owners may not have those economies of scale, or they may be unprepared to be able to provide services in that other jurisdiction.
“As an example, NJ and NY are corporate practice of medicine jurisdictions, Pennsylvania is not. If you come into NJ or NY you could run afoul into those rules. FL has very specific rules on non-health professionals owning and operating healthcare businesses, a lot of other states don’t. Certain states have rules that absolutely prohibit restrictive covenants. If you are used to using restrictive covenants and then expand into another state, you may find that your standard healthcare professional employment agreement needs to be modified because you can’t have a restrictive covenant. You have to be very careful about the regulatory requirements,” Taylor says.
Pick a Strategic Location
Taylor says that by expanding, it helps brand the organization over a wider geographic range. In terms of a strategic location, owners have really got to look at patterns of travel, live, work, and vacation patterns.
“An example of a strategic location would be if you are looking at a city center and you find that people come to a particular geographic area to work or go to a particular area for vacations. That is something that is going to be important and you can then take advantage of it,” she says.
William Williams, Director of Operations at 7 Day Clinic says he believes a key part of a successful location revolves around people being able to easily drive up and access a business; therefore, even when moving in a different region, selecting an ideal clinic location is still a big factor in a decision.
According to Williams, trying to understand one’s surrounding means they need to examine where their competitors are, how they are located and how their clinics are positioned.
Examining this matters for a variety of reasons depending on a client’s specific interests. Whether that is adding new facilities, relocating, understanding risk factors. Maybe there had recently been new clinics opening up nearby the potential site. Owners need to understand how they can anticipate any effects that competitors will have on the success of the business.
Williams stresses that understanding the statistics of a regions demographics and surrounding locations is important because the best locations are in the best proximity to where all of the traffic is generated in a region.
“Another example of a strategic location is to not only try to capture business for your patients who might not be there, but looking for something in an underserved area is also very important. Just because you build it, does not mean that they will come. You have really got to look at traffic patterns, travel patterns and whether people are likely to learn of the availability of services and use them,” Taylor says.
“Particularly in very congested areas, you have got to be careful because traveling 5 or 10 miles may be nothing in some areas, and in another area it might mean your location is an hour away and people are not going to go there because of the traffic.”
Carmin Grandinetti, Partner at Bingham Greenebaum Doll LLP, says that when moving regions or looking at a new location in general, an area that is often overlooked by prospective tenants when evaluating retail commercial leases for urgent care practices is the common area maintenance expense (CAM). Differences in how CAM is handled in an office lease could vary significantly from the way it is handled in strip malls or plazas.
“In any type of office lease setting, the CAM (which covers the taxes, the cost of maintaining the property, any cleaning costs, day-to-day maintenance costs, electricity, gas and utilities) is usually built into the initial rent rate,” Grandinetti says.
“Increases in CAM over the initial year are then billed to the tenants every year. Other landlords may keep it separate; they will charge the tenant an additional amount per square foot for the CAM, and the amount will likely increase over time.”
It’s also extremely important to understand how tenant improvement (TI) works. Sometimes, a retail space may be ready to house an urgent care practice from the start. Other times, space will need to be built out to accommodate the center.
There are often specific building requirements that owners have to comply with as a medical provider, instead of just a plain retail tenant. Prior to signing the lease, owners need to make sure that the building is zoned appropriately, and that they going to be able to obtain the permits needed to build out the space the way they want.
Taylor suggests that before a business owner invests, they want to make sure that they don’t have to relocate the business. Or, if they are buying the business but don’t necessarily like the location, they want to make sure that they can relocate the business.
“It is more than looking at if they have a lease, what the term of the lease is, whether it is renewable. You also want to look at exclusive and permitted uses. An exclusive use means that a tenant has the sole right to provide a service in a particular building. You do not want to acquire or open a radiology facility only to have another radiological facility open up across the hall. A permitted use is under the lease, you are allowed to use that location for a service. You may be buying a new business and the plan is to buy it because you are going to be expanding. Let’s say you are providing urgent care services and you decide that you want to expand to another area and you buy a physical therapy business. You figure you are going to be expanding your ambulatory care services there as well. You need to make sure that part of your strategic plan is to not only provide the services of the business that you have just acquired, but your existing business is allowed under the lease as well,” Taylor says.
If you would like to learn more about the concepts covered in this article, want to sell your business or discuss how Ambulatory Alliances, LLC might be able to help you out, contact Blayne Rush, (469)-385-7792, or Blayne@ambulatoryalliances.com.
If you have suggestions for future topics, email Blayne@ambulatoryalliances.com.