November 26, 2019
Jon Carlson

Key Health Care Trends That Will Impact Health Care Real Estate Decisions

Introduction

On the consumer side, health care costs represent almost 18% of GNP in the U.S. which is far higher than other industrialized nations around the world. The reasons are legion but will not be the focus of this article. To add insult to injury, overall health care outcomes in the U.S. are trending in the wrong direction in comparison to the rest of the world or, at best, just staying somewhat even.  With regard to the providers of care, there has been a steady reduction in provider reimbursement levels both from Medicare and commercial payors because of concerns about perverse financial incentives inherent in a fee-for-service system and significant unnecessary and inappropriate increases in the utilization of health care services and facilities (such as ERs) in general. This has made it difficult for many health care institutions and physicians to generate reasonable financial margins. Thus, both the consumers and providers of health care have a significant stake in determining strategies for doing more with less while still delivering positive health care outcomes. 

Health care economics are very complex, and it is not the intent of this article to delve into that topic, nor to discuss the causes and potential solutions to these issues. But the fact of the matter is that these trends are unsustainable.  Rising health care costs translate into higher expenses to the consumer not only for health care, but for most other goods and services. This is because pricing for the latter inevitably factors in the element of health care costs incurred by businesses on behalf of their employees.  As an industry, health care has not historically been as consumer-centric as other industries.  However, because of the out of control cost issue, this is starting to change. 

The real focus of this article is to address how these trends may be affecting health care real estate decisions on the part of major health care providers as well as private investors.  

Health Care Delivery

Unlike the majority of its national counterparts—is. England, Canada, Germany, Sweden, etc., the U.S. Health Care system is not based on the assumption that health care is a right.  Indeed, there are the haves and the have nots with close to 30 million Americans under the age of 65 still lacking health insurance despite the passage of the Patient Protection and Affordable Care Act of 2010 (ACA). This number could grow even more over the next couple of years in part due to Congress recently repealing the individual mandate under the ACA which required that most Americans have some form of health insurance or pay a penalty. The system, therefore, tends to ration care depending upon one’s ability to pay. This is not to say that there is not a significant amount of charity care underwritten by most providers, which is the case, but the fact of the matter is that there is a limit to how much “free care” is available. Most health care providers, whether operating as a profit or not-for-profit business entity, must still achieve a positive bottom line in order to survive.  

Over the past 40 years, the U.S. health care delivery system has been characterized by complexity—i.e. it is pluralistic in nature, fragmented, and fee-for-service driven.  A wide variety of providers and insurance companies cover the market but are not structured in a way to incent price competition and efficiency. There is no universal medical record maintained on each individual accessing the system in order to avoid duplication and potential safety risks.  U. S. medical technology is one of the most sophisticated in the world but has put upward pressure on health care spending. This all is starting to change, however, because of the aforementioned cost crisis. 

Since the passage of the 1973 HMO Act and, as previously mentioned, the Patient Protection and Affordable Care Act of 2010, new measures have been introduced into the system to address its inherent weakness with a focus on improving quality while reducing cost.  We have seen the rise in fully integrated health care systems—- defined as a consolidated collection of health care providers and facilities which are financially and organizationally linked and which cover the entire continuum of care. The growth of these organizations has, by and large, resulted in a reduction of the number of independently owned and operated hospitals in the U. S. as most networks were formed through a variety of mergers and acquisitions. Some of these mega networks even deploy their own managed health care plan and employ physicians, thus resulting in a totally vertically integrated service arrangement.  As a result, they have a lot of clout in the financial and health insurance markets.  With regard to real estate, most networks employ a team of real estate professionals to oversee real estate strategy.

Because of the economic pinch which health care concerns are experiencing, and the fact that real estate accounts for 8 – 12% of hospital costs, the delivery of health care in the U.S. has been undergoing a metamorphosis characterized, in part, by the following:

  • Growth in outpatient services including urgent care as a more appropriate option for some ER visits
  • Increased mergers and consolidations amongst providers resulting in strategically and financially integrated health care systems which allow for economies of scale and greater bargaining power with insurance companies
  • Since 2010, the overall number of uninsured members of the population has decreased dramatically
  • Aging of the population triggering a greater need for health care services and resulting in job growth in the health care industry
  • Downsizing facility requirements
  • Fee for service reimbursement by Medicare, Medicaid and commercial insurance companies moving towards value-based payment models where there is an element of risk sharing as well as financial incentives for using outpatient facilities as opposed to an in- hospital setting
  • Increase in the use of technology such as digital health, virtual health, telehealth, wearable monitoring, fitness devices, robotics and artificial intelligence
  • Higher use of retail locations for the delivery of services
  • Increased use of physician extenders such as nurse practitioners and physician assistants
  • Taking health care services closer geographically to the patient population 
  • Increased use of electronic medical records
  • More emphasis on team approaches to care with a focus on holistic care and wellness
  • Patients becoming more engaged, demanding and influential in their health care decision making
  • Consumer demand for lower cost, convenient services and price transparency
  • Increased concern about cybersecurity
  • Entry of non-traditional companies into the health care market that offer low-cost clinics
  • More health insurance coverage available for lower cost options like retail clinics and telemedicine

Impact on Real Estate Strategy

The aforementioned trends have and will continue to directly impact and shape the health care real estate landscape of the future.  Some of these impacts have included and will likely include:

  • Hospitals and health care networks monetizing real estate assets in order to meet other capital needs 
  • The establishment of one-stop shop, off campus “micro hospitals” and outpatient/ambulatory care facilities which handle more than the traditional medical office building (MOB) of the past. Examples are medical offices that also house ambulatory surgery, diagnostic lab, x-ray and urgent care service capacity—literally hospitals without beds
  • The growth of free-standing emergency rooms, mobile clinics, medical kiosks, urgent care and ambulatory care surgery centers and retail clinics
  • Re-purposing non-medical real estate for medical use or changing the zoning of a parcel to allow for medical use
  • Reducing the size of the typical medical office suite by growing the floor plate to accommodate shared space amongst practices (e.g. waiting and reception areas, break rooms, multi-purpose exam rooms and space for support staff), elimination of file rooms, higher ceilings, fewer walls, more space flexibility through modular design, less redundancy of functional space, etc.
  • Increasing the width of elevators, corridors and entryways to better accommodate those with disabilities
  • Development of MOBs that are greener, cyber-friendly, more convenient and aesthetically more appealing than the traditional MOB
  • Assuring higher parking ratios
  • An increase in the demand for assisted and independent senior living centers
  • The need for more knowledgeable and experienced property managers to handle a much wider variety and more sophisticated set of service tenants 
  • The spawning of telemedicine firms which deploy convenient facilities for linking patients up with their physicians for virtual office visits.

Conclusion

Given the trends in the growth of service demand and convenient off-hospital campus locations, and the need to rethink the design of the traditional MOB, there is much to be optimistic about relative to the future growth of the health care real estate industry.  Some health care analysts believe this will be the case regardless of the continuation or repeal of the ACA. Investment transactions for MOB space alone within the top 50 metros from 3Q18 to 2Q19 have totaled about $7.14B according to REVISTA in its October 2019 edition of “The MOB Scene”, and this trend is expected by industry experts to continue or, worst case, remain steady.  However, given the digital revolution, the re-purposing of existing facilities as opposed to the development of new, and uncertainties with regard to the health care reimbursement landscape and, of course, the ever changing regulatory environment, the health care real estate industry will continue to experience countervailing forces that will need to be carefully monitored and strategically and creatively addressed in order to maintain its growth and stability. 

Jon H. Carlson, BA, MS, RPT | Property Manager | Lincoln Harris CSG

Sources:

REVISTA, MOB Scene, October 2019 edition

George Mills, “3 Trends Disrupting Healthcare Facilities and Real Estate”, Jones, Lang LaSalle, Inc. 9/13/19 website BLOG, Retrieved from:  https://www.us.jll.com/en/views/three-trends-disrupting-healthcare-facilities-and-real-estate

Steve Burrill, Vice Chairman, Deloitte LLP, “Five Trends that Could Impact Health Care in 2019”, Deloitte Insights, 12/12/2018, Retrieved from:  https://deloitte.wsj.com/riskandcompliance/2019/01/09/five-trends-that-could-impact-health-care-in-2019/

Kelly M. Bondy, Victor, H. McConnell and Andrew Dick, “6 Key Trends Affecting Healthcare Real Estate in 2018”, VMG Health Insights , 2/14/2018, Retrieved from:  https://www.beckershospitalreview.com/hospital-transactions-and-valuation/6-key-trends-affecting-healthcare-real-estate-in-2018.html

Tula Voutieros and Sean McDonnell, “Evolution of Health Care and Its Impact on the Real Estate Landscape in the United States”, Avison Young Topical Report, June 2018, Retrieved from: https://www.hammesco.com/files/In%20the%20News/aytopicalreport-evolutionofhealthcare-impactonrealestate-june2018final%20(2).pdf

Alex Kacik, “Health Systems Overlook Potential of Real Estate Assets”, Modern Healthcare, 4/3/2018, Retrieved from:  https://www.modernhealthcare.com/article/20180403/NEWS/180409978/health-systems-overlook-potential-of-real-estate-assets

Jared Stark and John Marshall, “Healthcare Facility Trends, Emerging Models of Care Explored at Conference”, MCD  Newsletter, 2/2/2017, Retrieved from: https://mcdmag.com/2017/02/duke-realtys-marshall-stark-discuss-healthcare-real-estate-trends-at-realshare/#.XbMob5UUrMM

Patricia Wassik and Deborah Carlson, “Medical Office Trends, Hospital Affiliation is a Strong Indicator of MOB Asset Value”, CIRE Magazine, 9/13/19, Retrieved from: https://www.ccim.com/cire-magazine/articles/204377/2012/07/medical-office-trends/?gmSsoPc=1

Peter Bulgarelli, “Plotting a Real Estate Strategy for the Future of Healthcare”, Becker’s Hospital Review, 8/29/17, Retrieved from:  https://www.beckershospitalreview.com/healthcare-information-technology/plotting-a-real-estate-strategy-for-the-future-of-healthcare.html

Seeking Alpha.com, “The Evolving Landscape of Healthcare Real Estate”, 4/9/2019, Retrieved from:  https://seekingalpha.com/article/4253484-evolving-landscape-healthcare-real-estate

Mary Diduch, “What’s the Outlook for Medical Office Buildings?” National Real Estate Investor, 6/27/2018, Retrieved from: https://www.nreionline.com/medical-office/what-s-outlook-medical-office-buildings

Jeff Lagasse, “Technology poised to Alter the Healthcare Real Estate Picture, Report Says”, Healthcare Finance, 7/2/2018, Retrieved from: https://www.healthcarefinancenews.com/news/technology-poised-alter-healthcare-real-estate-picture-report-says

Dan Mangan, “Number of Americans Without Health Insurance Jumped by More than 3 Million Under Trump”, CNBC Health and Science Article, 1/16/18, Retrieved from: https://www.cnbc.com/2018/01/16/americans-without-health-insurance-up-more-than-3-million-under-trump.html

Center for Disease Control and Prevention/National Center for Health Statistics, Source: Health Insurance Coverage: Early Release of Estimates From the National Health Interview Survey, 2018, tables I, II pdf icon[PDF – 648 KB],Retrieved from:  https://www.cdc.gov/nchs/fastats/health-insurance.htm