Y2K demand for large medical space is contagious.

As the 21st Century approaches, it is of paramount importance that we address the office space needs of the medical community in our city. For, inasmuch as the entire structure of the way doctors manage their business practice has changed, so too have their real estate requirements. In addition to the obvious issues doctors face regarding the insurance industry's creation of the Managed Health Care system, the new carrier reimbursement methods have put another burden on the doctors - the area of real estate.

Historically, the typical medical office space requirement seldom extended beyond 2,000 feet. However, this "typical" doctors practice no longer consists of two or three general practitioners. For, with the advent of Health Maintenance Organizations (HMOs), the physicians have found it necessary to operate as "groups" or "medical centers" consisting of 10 or more partnered doctors. Functioning this way reduces the operating costs and produces a more expanded potential for their referral base. However, while some of the centers focus on specific medical specialties such as orthopedic or-ophthalmology, there are many new groups opening which cater to a wider range of patient needs under umbrellas such as "women's clinics" or "family care centers," which can include every specialty from gynecology to psychology.

In addition to the formation of multiple partnered practices, another reason Managed Health Care has created the need for larger medical office space units is that the excessive delays in payment or reimbursement for claims is so rampant that physicians are increasingly finding it necessary to hire larger staffs strictly for the purpose of collecting payment of their fees from the insurance companies.

Since we are both insurance brokers and real estate brokers, we are in a unique position to view the synergy cause and effect surrounding both industries. The days of common indemnity plans, where the reimbursement was the customary 80 percent with seldom a question asked about the necessity or nature of the care given, are seldom sold anymore. Now, patients and doctors alike get caught in the red tape that is conveniently implemented in the claim payment systems of the carriers, who hold up reimbursement for a variety of "review process" reasons.

Dr. Susan M. Levine, a prominent Manhattan allergist and immunologist, said "We have had to purchase and install very expensive and elaborate computer hardware and software products in order to keep up with the unpaid insurance reimbursements. In addition, we have had to spend money, which we haven't received yet from the insurance companies, to hire and train staff to use the programs so that we can collect the fees due us."

While Managed Care invariably creates the need for larger medical space units attributed to the financial stresses the system places on our physicians, there is yet another growing medical business practice that has been introduced in New York State which affects the real estate community. However, this medical business system should be heralded as a medical break-through! It is the creation of ambulatory (outpatient) surgery centers. These centers enrich our lives by providing patients the opportunity to receive surgery in an environment that is not contiguous (read "contagious") with those patients being treated for sickness and disease. This is particularly important with respect to the recent publicity surrounding diseases which have become immune to antibiotics.

According to the Federated Ambulatory Surgery Association (FASA), "The infection rate among patients who receive surgery in ambulatory centers as opposed to hospitals that treat emergency and trauma cases is dramatically reduced." In addition, there is a psychological as well as physical benefit with the ratio of medial staff to patients being so much higher at outpatient surgical centers. Thus, patients receive more personalized attention, and the human element of the smaller environment is usually preferred to the colder, rushed atmosphere of large city hospitals. Add to these advantages the convenience of patients and physicians being able to plan their time knowing that their "scheduled surgery appointments" won't get delayed due to the unexpected arrival of an emergency case. Inasmuch as outpatient surgical centers are managed in a more efficient manner, they also save patients money by charging lower fees for the procedures, which lowers the co-pay amount.

Since Such a wide variety of specialists such as ophthalmologists, gastroenterologists and gynecologists frequently utilize the ambulatory centers, and because such a high volume of these procedures are done every year, the savings in time to doctors and money to patients and the insurance carriers could eventually translate into reduced overall costs for health-care.

Although ambulatory centers have been in existence in our country for over 29 years, New York State had a moratorium on the operation of the centers until 1997. Since the industry's market potential for the year 2002 is estimated at over $8.4 billion, with 80 percent of all surgical procedures being done as "outpatient," New York City needs to prepare to develop these centers in our communities by creating larger medical space for them. The typical square footage needed for ambulatory centers is about 12,000 square feet. However, given the trend of more and more hospitals to partner with outpatient ambulatory centers, there are often requirements of 25,000 to 50,000 square feet to fulfill the interest hospitals have in providing surgeons with on-site office space to make efficient use of the surgical facilities.

While the need for larger medical space is clearly evident, residential real estate owners are not rushing to fill the requirements within their buildings. The newer condominium buildings compete for sales by offering a variety of amenities - the most important one of which is on-site parking, a highly desirable feature. Therefore, high-ceilinged lower level space which could otherwise be leased to medical groups is used instead for parking garage space. In addition, rental building owners have been reaping the benefits of the deregulation ruling in the rent stabilization codes, as well as an exceptionally strong housing cycle (in fact, many rental units get leased site unseen.) Thus, landlords have no incentive to appoint space to medical use, which in some cases brings in lower rents than do apartments. (It doesn't take a brain surgeon to realize that when owners are given the choice to lease an apartment sight unseen, versus having to deal with a group of doctors who are notoriously slow at making busines s decisions, the residential property owner will choose the former.)

The commercial property owners have their reasons for not wanting to rent to doctors and medical facilities, as well. They too have been reaping the benefits of what has been a strong and steady office space cycle, with tenants competing for space at a frenetic pace. Compounding the problem, there is the perception that the image office tenants need to portray does not mix well with patients, which is perhaps a valid point. Does a corporate executive appreciate bringing an important client into a building that is trafficked with noisy children and (sometimes) bandaged or limping adults entering and leaving the building with them? Add to this the special water, electrical and medical waste requirement issues, and one can glean that the creation of more medical space is not in the foreseeable future, and won't be without the city becoming proactive.

Yet at the same time, creating larger and more modem medical spaces would prove beneficial, not only to the progression of care and convenience to patients and doctors, but also to the entire city. Job growth would accelerate as surgical centers, diagnostic centers and other such facilities open new placement opportunities in a growth industry other than media technology. Our office leasing brokerage business has closed many deals with tech companies, as referenced in a Real Estate Weekly article dated May 19, 1999 entitled "Real Estate Owners Filling Space With Young 'Chippies'", and we deeply appreciate that so many incentives have been designed to fill buildings with companies involved in the computer field. However, up to this point, no one has been considering the real estate needs of the medical and science community. An article entitled "Will the City Kill The High-Tech Goose?," which also appeared in Real Estate Weekly, reported on May 12, 1999 that the media industry "is pushing for legislation that would create three additional geographical incubation/accelerator zones" for newly formed and expanding media/tech companies.

Presently, there are already various programs in the city, such as Plug 'N Go and The Downtown Alliance Agency, which provide tax incentives and rent accommodations to tech/media tenants and the landlords who lease space to them. In the same Real Estate Weekly article of May 12, a New York City software industry association representative was quoted as saying "We want a line drawn around them (the high-tech media companies) and incentives and grants for new development and rehabbing, coupled with guarantees that the rents stay low." The association is also seeking property tax waivers, incentives to build, and incentives for wiring, the article stated.

One of the main premises the software association gives for why the city should provide such incentives to these companies is that "they tend to cluster geographically."

Since the medical community also tends to "cluster geographically," perhaps the city should start considering the needs of this industry's growth and expansion as well with incentives created to parallel those which the tech companies receive. The real estate community and the city should consider the benefits of giving "aid" to the doctors to enable them to "make our city better" by creating better and more efficient facilities in which to practice. Already, doctors don't earn the money they did previously, yet they are carrying the extra burden produced by the difficulty and bureaucracy Managed Health Care organizations cause by making it almost impossible for them to collect what little fees they do earn. Therefore, New York risks loosing some of its greatest assets, its physicians, because fewer will choose to enter a field with so many obstacles that take away from the real reason they began practicing in the first place, and that is to spend most of their time treating us!

Furthermore, building larger and more modem medical facilities would produce employment not only in the area of medicine, but also in construction, design, architecture, engineering, office administration and software, to name a few. This focus will be essential for the future!

Having modem medical facilities such as diagnostic labs and surgical centers in Manhattan is great for the economy, employment, and our health - both citywide and body-wise. In order to attain this, city officials should concentrate on making sure we sustain the existing - and also encourage the growth of - these precious service providers. Medical tenants need financial incentives to offset construction costs. Owners need financial incentives to convert buildings to medical use. Procedures must begin now to accomplish re-zoning to parallel the. newly re-zoned residential areas that are being built throughout the city - and the rezoning must take place in buildings with 10,000 to 50,000 square foot floorplates.

Will the city endeavor to meet these chalenges before the medical space shortage crisis meets New York?

                      Medical space needs by category
Gyne     10%
Ortho     9%
Plastic   8%
ENT       7%
General   7%
Pain      4%
Podiatry  4%
Urology   4%
Oral      2%
Neuro     0%
EYE      27%
GI       18%

Memo