To buy or not to buy, that is the question.  Should your institution invest its capital in off-campus locations, or does leasing make more sense?  For many hospitals this is a relatively new question, but the question is not unique to the healthcare industry.  It is a question encountered by many companies at various points in the evolution of their particular industry, and how it has been handled offers invaluable lessons for healthcare organizations.

All right, so it is not an uncommon question, but why look for lessons in the banking industry? While the products of the two industries are very different, their business models have many commonalities.  Though the banking industry has certainly been through its "ups and downs" its cycles are related to its core business, not its facilities.    Surprisingly, the evolution of the banking industry in the U.S. since the mid-twentieth century has many similarities to the evolution of the hospital industry starting in the 1990's.

Banking was originally a local business, both in ownership and customers.  The local nature of banking meant that most business was conducted from a centrally located bank building.  These imposing structures, with marble lobbies and massive vaults, were a staple of every American city.  It wasn't until after World War II and the growth of suburbs, that banks needed to follow their customers to locations less convenient to these central city offices.  Hence the rise of the bank branch system.  These satellite locations allowed the banks to reach more customers in a geographically wider area than had previously been possible.  The deposits and loans generated through the branch network, funneled back to the central office, allowing the headquarters to pursue larger and more sophisticated investments and activities.  Eventually, the most successful of these centrally located banks were able to break free of their geographic boundaries, challenging or absorbing smaller institutions in various sub-markets, and progressively spreading their reach to other cities, states, regions, and ultimately countries.  See the similarities with healthcare?

Most of us have first hand experience with bank branches.  In the sixties and seventies shopping centers and malls typically had free-standing bank branches located in their parking lots, most offering the convenience of drive-thru banking.  Usually about 5,000 to 7,000 square feet in size, these branches offered teller services, some relationship services, and access to the more sophisticated services located at the central bank office.  The development and spread of the ATM in the eighties and nineties, followed by the development of on-line banking at the turn of the century, lessened the need for large branch networks.  Many branches have given way to ATM's and, thanks to technological advances, those remaining are shrinking in size.  The average size of a free-standing branch today has dropped to between 2,800 and 3,500 square feet. 

So how did banks address the own versus lease dilemma?  In general, the preference was toward owning branches.  After all, institutions making mortgages possessed good knowledge of the local real estate market, and were usually eager to participate in any potential market upside.  Overtime, however, that commitment to ownership weakened. Some banks took advantage of favorable real estate markets by engaging in sale-leaseback transactions to investors.  Other institutions, damaged by the downturn of the real estate market in the early 1990's and again in the late 2000's, stopped viewing their branch networks as a potential source of investment returns, and separated facility decisions from investment portfolio decisions.  The consolidation in the banking industry over the past thirty years, coupled with the speed of technological advancements and changing delivery models, has put a premium on the flexibility best provided by a lease arrangement.

What are the take away lessons from this story for the healthcare industry, and hospitals in particular? 

1. Taking your services to your customers is a tried and true business model.
2. How much space you need to deliver those services will change due to technological advances.
3. How many locations are required to service your customers and the optimal sites for those locations will also change over time in response to population shifts and item 2 above.
4. Flexibility will be important in responding to items 1 through 3.
5. Real estate markets will not necessarily support a sale at the point in time your institution needs to recapture its capital from an investment in a satellite facility.
6. Leases offer more flexibility when needing to re-locate or downsize a facility.
7. When evaluating buy versus lease alternatives, differences in the cost of money should be considered in the context of these other risk factors.