Health care facilities can be stressful places for patients and visitors, with depressing waiting rooms, rows of uncomfortable seating, a blaring television. But designers of some medical spaces are remedying the situation.
A more holistic approach includes mood-elevating colors and artwork. Chairs are angled to look out the window. Screens offer calming nature scenes instead of newsfeeds. There’s softer overhead lighting and skylights. Sometimes, diffusers even waft a gentle breeze of lavender or citrus to mask the harsh scents of disinfectants and medicines.
Sheila Semrou, a Milwaukee-based design consultant who has worked on numerous health-care facilities, says she takes inspiration from local scenery and geography. Think big windows, natural light and a palette that reflects outside vistas.
“The results can be supportive spaces that nurture occupants and provide comfort,” she says.
New research is showing that a lot of clinical design norms are hard on patients, she says. Bright, polished floors can be slippery, and create glare. Bland color schemes aren’t so much soothing as uninspiring.
“Studies suggest that some of the best environments for health and healing incorporate a variety of hues, use both warm and cool tones, and vary color saturation,” Semrou says.
At the Diane L. Max Health Center in New York City, a project by Stephen Yablon Architecture, upbeat primary and neon colors were used on midcentury-style seating, facades and to define different areas of the building.
On the other hand, in the reception area of Memorial Sloan Kettering in West Harrison, New York, blonde terrazzo floors, rift white oak and chic, light blue chairs clad in walnut veneer create a serene space, designed by EwingCole.
In colder climes, a fireplace can add a welcoming feel at little cost, says Carolyn BaRoss, who leads a health-care interior design division at the New York firm Perkins and Will.
“A number of our projects in Canada and the northwestern U.S. have included fireplaces as part of the waiting areas and other lounges,” she says. “We try to specify ones that look the most realistic and surround them with interesting materials. We’ve used both electric and gas fireplaces. They provide a source of warmth, but are fitted with a protective enclosure for safety.”
BaRoss says an Orlando, Florida, project, Nemours Children’s Hospital, has a “hospital in a garden” theme, with nature elements, daylight and views woven into the design. There are small “picnic blanket” designs in the flooring pattern, and child-size play areas, as well as “ceiling elements like the large flower in the dining area.”
Treatment areas are also benefiting from this kind of patient-focused design. The Florida Hospital for Children in Orlando and the Women and Children’s Hospital in Adelaide, Australia, are among facilities offering the “Philips’ Ambient Experience” in MRI suites. Patients select a lighting color, as well as audiovisual projections like nature scenes, to help ease anxiety during the procedures.
At Mercy St. John’s Hospital in St. Louis, an enormous vibrant butterfly greets visitors in the lobby, while patient floors are decorated with laser-cut images of animals.
BaRoss says new LED technology allows for more dimmable, flattering lighting, which can also be used to help patients find their way in a new facility.
At the Colorado Center for Reproductive Medicine in New York City, designed by Perkins and Will, chairs face out onto the cityscape. Look out the window, and you’ll also see Robert Indiana’s large “Hope” sculpture on the street below.
“The waiting room is typically where a patient will spend the most time. With that in mind, we took care to design an environment that’s low-stress and soothing,” says Dr. Brian Levine, the practice’s director.
“We took advantage of the views by placing our waiting room in the brightest and most visually stimulating aspect of our floor plan. We chose light-colored wall coverings, flooring, and furniture to help reflect and carry the light throughout the room, so no patient would ever feel like they’re in a ‘dark corner,’” he says.
Melissa Thompson, a health-care industry strategist from Westport, Connecticut, developed breast cancer shortly after giving birth to her daughter in 2015, and began a long treatment journey. The experience got her thinking about how important physical environment was to her comfort and, she believes, even her recovery.
She didn’t stay long at the first hospital she went to: “It smelled bad — like an old cafeteria full of chemicals.”
But Greenwich Hospital in Connecticut and Memorial Sloan Kettering in New York City were a different story. Rooms were oases of natural woods and light. Both hospitals had lounge areas where patients could relax outside of their rooms in a warm, comfortable atmosphere.
“I was noticeably happier, and discharged sooner,” she says.
Source: The Frederick News-Post
Palm Beach Gardens Medical Center, or at least the real estate where the hospital operates, has a new owner.
Tenet Healthcare paid landlord HCP Inc. $43.4 million for the 282,000-square-foot facility on Burns Road, according to property records. HCP is a California-based real estate investment trust that specializes in medical facilities.
The companies also recorded a lease termination. Palm Beach Gardens Medical Center is in the midst of a $16 million renovation.
The Palm Beach County Property Appraiser records no previous sale price for the hospital, but HCP says in its latest annual report that it paid $24.9 million for the facility in 2011.
Dallas-based Tenet Healthcare operates 10 hospitals in Florida, and the 199-bed Palm Beach Gardens Medical Center was the only one it leased rather than owned, according to the company’s latest annual report.
Source: Palm Beach Post
Health care REITs face some challenges, which we expect to result in slower, albeit still positive, earnings growth in 2017. These challenges include slowing fundamentals for the senior housing sector and rising capital costs.
Over the past several years, health care REITs have expanded their senior housing portfolios substantially. Health care REITs are attracted by the sector’s focus on private pay sources of revenue and good demand from the growing population of seniors, which is living longer and wants residential care that offers assistance with daily activities and light medical needs. However, new supply of senior housing is rising and wage expense pressures are building in many U.S. markets. These trends are credit negative for health care REITs, and as a result, we expect more modest earnings growth for the REITs in 2017, particularly as many REITs have assumed more operating exposure via the use of taxable REIT subsidiaries. These subsidiaries allow the REITs to directly realize the properties’ net income after paying a third-party management fee. Health care REITs also invest via triple-net-lease structures, which limit the risk to the operators’ ability to keep making rent payments.
The operations of the taxable REIT subsidiaries have been a strong source of profit growth over the past few years for health care REITs. This profit growth has already begun to slow, however, and we expect it will continue to decelerate as more supply comes on line and as higher labor costs persist in 2017.
The extent of the downside for REITs will depend on the strength of their operating partners, as well as supply-demand characteristics within their sub-markets. For their triple-net-lease portfolios, tenant diversification and strong rent coverage ratios (1.2x or greater) are other key mitigating factors.
Another key challenge is the increasing cost of capital. Health care REITs rely on cost-effective access to debt and equity capital to finance acquisitions that drive their earnings growth. They also rely on external capital to refinance ongoing debt maturities, given their limited structural ability to retain cash flow. However, their debt costs are rising and their stock prices remain volatile owing to the prospect of rising interest rates, a situation that is resulting in compressed spreads earned on new investments and higher refinancing costs.
We expect rising capital costs to remain a credit challenge for health care REITs in 2017. The 10-year US Treasury yield rose to 2.48 percent as of Feb. 1, 2017, up from a low of 1.37 percent as of July 5, 2016. Moody’s Analytics expects the 10-year to rise to 2.9 percent by year-end 2017, and to 3.7 percent by year-end 2018.
Longer term, we expect health care REITs to reap some benefits from rising rates. Higher borrowing costs will affect all potential real estate buyers, both private and public, prompting asset prices to come down from the current, historically high levels. However, it will take time for prices to adjust to the changing rate environment, and we expect the earnings growth of health care REITs to slow accordingly this year. This modest growth outlook could present credit challenges if it were to incent REITs to use more leverage or riskier transaction structures to boost their profitability.
Real estate investment trust Duke Realty Corp (DRE.N) is exploring the sale of its medical office buildings that could be worth as much as $3 billion, as it seeks to focus on its warehouse portfolio, people familiar with the matter said.
The move represents the latest strategy shift for the Indianapolis-based company, two years after it decided to shed its suburban office properties to shield itself from volatility in the wider U.S. commercial real estate market.
Duke Realty is working with investment bank Morgan Stanley on the sale of its medical office portfolio, which has attracted the interest of healthcare-focused REITs, the sources said this week. The sale process is ongoing and there is no certainty it will result in a deal, the people added.
The sources asked not to be identified because the matter is confidential. Duke Realty and Morgan Stanley did not immediately respond to requests for comment.
Duke Realty shares jumped as much as 1.3 percent on the news to $26.03, giving the company a market capitalization of more than $9.3 billion.
Duke Realty owned a portfolio of 561 commercial properties in 21 major U.S. metropolitan areas encompassing 139.6 million net rentable square feet as of the end of December, according to its latest annual report. Out of those, 455 were bulk distribution industrial properties and 86 were medical office buildings.
The divestiture would leave Duke Realty’s portfolio comprised almost solely of industrial properties. These have been among the real estate sector’s strongest performers because of the advent of internet shopping, which has buoyed demand for warehouse space to store and process goods for shipment.
“The REIT’s well-located portfolio of industrial assets should continue to benefit from accelerating demand for high-quality logistics product and measured supply growth,” Moody’s Investors Service Inc analyst Alice Chung wrote in a note in November.
While Duke Realty’s medical office properties have proved resilient in economic downturns, their fortunes are tied to those of hospitals they share a campus with. Many hospitals are expected to take a hit if the Affordable Care Act is repealed, because fewer patients are expected to be covered by the alternative.
As well, the growth rate of rents in Duke’s medical office building portfolio has lagged that of its industrial properties. Real estate investors tend to reward REITs that focus on a single type of real estate, and buy or develop similar quality properties.
Last September, The Hospitals of Providence, a leading healthcare provider in El Paso, Texas, broke ground for a new medical campus on 10 acres in suburban Horizon City, 20 miles east of El Paso. There they will build a 40,000-sf “microhospital” to house an emergency department, a laboratory, imaging services, and 10 to 12 inpatient beds. The campus will also have 50,000 sf of office space for physicians and staff.
Microhospitals are acute care facilities that are smaller than the typical acute care hospital. They leave complex surgeries to the big guys, but are larger and provide more comprehensive services than the typical urgent care or outpatient center. They range in size from 10,000 sf to 60,000 sf.
Microhospitals offer the full services of a hospital emergency department and have labs that provide rapid clinical diagnostics and x-ray, CT, and ultrasound imaging. According to healthcare consultant Advisory Board, microhospitals can meet up to 90% of the healthcare needs of the communities they serve. And they never close.
Like urgi-centers and outpatient clinics, microhospitals generally treat patients with low-acuity medical problems. Unlike urgent care and outpatient facilities, they have inpatient beds (typically anywhere from eight to 15) and can support overnight observation of patients who require low-acuity hospital services.
The Horizon City microhospital, which will employ 75 clinical and nonclinical staff when it opens in September, will fill a gap in the availability of hospital-level services for Horizon City (2013 population: 18,997), whose area population has ballooned 180% over the past 16 years. “Initially, we had planned to go with a freestanding ED with imaging functions, but we took a step back and concluded that wouldn’t be enough,” says Sally Hurt-Deitch, Hospitals of Providence’s Market CEO. Hospitals of Providence has plans to open at least two more microhospital facilities.
Microhospitals are the latest twist in “population health,” as healthcare systems search for ways to bring quality care to demographic markets that can’t support full-size hospitals and offer such care closer to where people live and work.
“The days of us building 200,000-sf hospitals are over,” proclaims Isaac Palmer, CEO of Christus Health. Next fall, Christus will open the first microhospital in Louisiana, a 10,000-sf facility in Shreveport-Bossier with six short-stay inpatient beds. “It’s kind of a souped-up doctor’s office,” says Palmer. “We’re moving toward microhospitals to enhance our integrated delivery network,” says Laura Hennum, Chief Strategy Officer at Dignity Health. “It’s all about population health and one-stop shopping for consumers.”
At the close of 2016, there were at least 50 microhospitals operating in the U.S., according to Environments for Health (E4H) Architecture, which has designed a dozen of them. Micros are particularly popular in parts of the Midwest and certain western states, notably Arizona, Colorado, Nevada, and Texas. Most of the microhospitals in operation or under construction are located in states that don’t have certificate of need programs aimed at controlling overbuilding of healthcare facilities.
“This is a new concept,” says Chris DiGiusto, Corporate Vice President of Ambulatory Services with Franciscan Alliance, Indianapolis. The 14-hospital system will break ground on a 20,000-sf, $12 million microhospital with 12 emergency exam rooms and eight inpatient beds next month. “It’s like a tiny house: the essentials and nothing else,” he says.
DiGiusto admits that competition entered into Franciscan’s decision to plug a micro into the larger $50 million medical complex it’s building. St. Vincent Health, a 20-hospital system, has announced plans to build eight microhospitals in central Indiana, each with eight beds. DiGiusto says that St. Vincent’s first micro “will be right in Franciscan’s [patient] catchment area.”
CHEAPER AND QUICKER TO BUILD
Hospital admissions have declined in recent years, as patients have chosen to patronize clinics in pharmacies, urgent care centers, freestanding outpatient facilities, ambulatory procedure operations, and independent emergency care centers. Microhospitals have become service bridges between EDs and hospitals, especially in markets that lack convenient patient access to large hospitals.
“Some clients look at micros as an alternative to investing huge amounts of money in larger healthcare facilities,” says Catherine Corbin, Principal and Chicago Health Practice Leader for CannonDesign, which has prepared a tactical report on “Microhospitals: Inpatient Services with Outpatient Convenience.” Corbin says that health systems also see micros as a way of “planting their flag in new communities” and expanding their services outside of urban areas.
Microhospitals have been around for at least a decade, but they’re starting to proliferate. They’re cheaper to build than giant regional hospitals, averaging between $7 million and $35 million in construction costs, with much shorter build times—about 12 to 14 months, according to AEC industry sources.
They can also bill patients at the same rate as acute care hospitals. Their reimbursement from private insurers and Medicare and Medicaid is generally higher than for freestanding EDs or urgent care, outpatient, and freestanding surgical centers.
“For a freestanding ED to get maximum reimbursement, it either needs to be tethered to the mother ship or it has to build its own hospital,” says Rod Booze, AIA, ACHA, NCARB, Principal, E4H Architecture.
GOING OUTSIDE THE SYSTEM
So far, most microhospitals have been developed, constructed, and operated by third-party management companies through joint-venture agreements with health systems. They can be pretty secretive about their business models and facility designs.
Embree Asset Group, Georgetown, Texas—whose partners include Indiana’s St. Vincent Health and St. Luke’s Health System, based in Kansas City, Mo.—would not identify AEC firms it has worked with. Texas-based Adeptus Health, which reportedly operates a few micros, wasn’t available for comment.
The clear leader among microhospital management companies is Emerus Holdings, Woodlands, Texas, which was launched in 2006 by a group of emergency-care physicians. At the end of 2016 Emerus was operating 22 micros with more than 1,500 employees for various healthcare systems across the country. Emerus intends to triple its complement of facilities and systems partners and quadruple the number of states in which it operates by 2020.
Emerus’s prototype delivery model can be adapted to meet the needs of specific communities and patient demographic niches, says Dudley Carpenter, the company’s Senior Vice President of Real Estate.
Emerus prefers building from the ground up, typically on three acres; the company finds “little value” in retrofitting existing buildings, he says. The nurses’ stations have been designed to optimize sightlines and accessibility. CT and x-ray rooms emphasize patient comfort. Some of its micros have staffed surgical suites with anesthesia, post-operative care, and pain control capability.
“The bottom line comes from the square footage,” says Carpenter. “We are a hospital but it’s not a footprint with 100 or more beds. We bring that down to about 20,000 sf.” That also lessens the burden on local communities’ power and water resources, he notes.
The health systems with which Emerus partners are the “established brands” that confer legitimacy to the micros, says Carpenter. Sources at those systems respect Emerus’s track record. “Emerus is an organization that has executed microhospitals successfully,” says Hospitals of Providence’s Hurt-Deitch. “They fit our model.” She explains that micros can support the larger system without requiring the same manpower as a full-scale hospital. In some cases they can actually share staff and professionals with the acute care hospital.
Micros can also be more patient-friendly than other delivery formats. Dignity Health’s Hennum notes that the average admission-to-discharge time for all healthcare facilities in Nevada is 154 minutes; at Emerus-operated facilities, it’s less than half that: 74 minutes.
Franciscan is among the holdouts that have chosen to develop and operate microhospitals on their own. “We couldn’t get the math to work out right” by using a third-party management partner, says DiGiusto. “The margins were too thin.”
DiGiusto also wasn’t overly impressed with other micros he’s looked at. “They’re basically urgent cares open 24 hours a day with CT scanners. We didn’t think they’d meet our quality standards.”
MICROHOSPITAL OPPORTUNITIES OPENING UP FOR CONTRACTORS
Only a few AEC firms have engaged in microhospital projects. The Building Team on Franciscan’s complex, for example, includes Arc Design (architect and designer), KJWW (MEP), Crossroads Engineering (CE), Mader Design (landscape), and Tonn & Blank (GC).
Emerus has had a long-standing relationship with Houston-based architecture firm PhiloWilke Partnership. The first micro that PhiloWilke designed for Emerus was a retrofit and expansion of an 8,000-sf ED in a strip mall in Sugar Land, Texas. The facility had two inpatient rooms, eight exam rooms, a dietary department, and some imaging capability, all squeezed into 13,000 sf. That was a test run for Emerus’s first official microhospital, which opened in Tomball, Texas, in 2006.
After taking a timeout to refine its prototype and business model, Emerus built five micros in San Antonio in 2010, one of which was a converted 26,000-sf shoe store. Since then, PhiloWilke has developed several microhospital prototypes for Emerus, says Kevin TenBrook, AIA, LEED AP, a Partner at the design firm.
Emerus’s first-generation micros had a footprint of about 20,000 sf with a second floor (and sometimes a third) for office space. There was also a single-story model for tight plots. The second generation is three floors in a 13,000-sf footprint.
TenBrook says his firm’s microhospital designs for Emerus “have as much space for patients as full-size hospitals.” Over the years, PhiloWilke has been able to get construction costs down to 60% of the original prototype. It is now exploring what kind of micro could be built on a half acre.
PhiloWilke’s designs, says TenBrook, fall within the “spirit” of guidelines for hospitals put forth by the Facilities Guidelines Institute, the independent nonprofit that provides guidelines for the design of medical facilities. FGI does not have specific requirements for microhospitals and has yet to address differences between microhospitals and critical access hospitals, says FGI spokesperson Douglas Erickson.
While PhiloWilke has captured the lion’s share of Emerus’s design work, Emerus and its healthcare partners are drawing from a wide pool of contractors for microhospital construction. In Dallas, Baylor Health Care System favors Medco Construction. In San Antonio, Gilbane, Vaughn Construction, and F.A. Nunnelly have built or are building micros for other health systems. S.R. Construction and Martin Harris have been used in Las Vegas, Kiewit Building Group in Colorado, and Anderson Construction in Idaho.
ARE MICROS A SUSTAINABLE TREND, OR JUST ANOTHER FLASH IN THE PAN?
TenBrook is convinced that Emerus has created a viable product that “makes sense from an investment point of view.” He points to Baptist Emergency Hospital’s recently opened 38,500-sf micro at Zarzamora, in South San Antonio—once a “healthcare desert,” he claims—that has been handling twice the average patient load than was originally projected. (Depending on the market, microhospitals expect to see anywhere from 30 to 100 patients a day.)
Dignity Health plans to include medical office spaces and wellness centers in its micros and is considering leasing space for physical therapy and ambulatory surgery centers, says Hennum. Dignity will measure three variables—market demand, patient experience, and clinical outcomes—to determine whether its microhospitals are working, to decide if it will build more of them. Hennum says Dignity is looking into opening micros in California.
But healthcare construction trends come and go. It wasn’t too long ago that experts thought there were no limits to the growth of medical office buildings; in many markets, MOBs now seem passé, as patients choose other types of care facilities that fit their medical needs and tight wallets better.
Then there’s the cautionary tale of Adeptus Health, the nation’s largest ED operator, which lost $11.7 million in Q3/2016 and saw its stock price plummet by 88.4% from May 16 to $7.43 on December 22. Is Adeptus’s precipitous decline a signal that its business model, which relies heavily on non-hospital-affiliated emergency departments and on charging patients “facility fees” to cover its overhead, might not be sustainable?
(Emerus Senior Vice President Jason Jisovicz says his company has avoided Adeptus’s financial problems by using in-network services.)
There’s also no consensus about how quickly or broadly microhospitals might spread. Franciscan’s board has given DiGiusto approval to explore replicating the micro model at other Franciscan facilities: “We need to take some pressure off of our hospitals, which are regularly out of beds,” he says. But he doesn’t foresee micros having anywhere near the same growth trajectory of, say, urgent care centers. “You need special circumstances,” he says, especially regarding location: Micros only work in communities that don’t have ready access to a large acute care hospital.
CannonDesign’s Corbin says interest in microhospitals could last another five years, but she also expects states to tighten their reins on what kinds of healthcare facilities they allow. She says some investors already view the investment cycle of micros as being closer to medical office buildings (10–15 years) than full-size acute care hospitals (50 years).
PhiloWilke’s TenBrook says the only thing keeping microhospitals from becoming more mainstream is state regulations that are, in his view, “out of sync with the idea of a small hospital.” To meet one state’s code, he says, his firm had to produce a design template showing four janitors’ closets in every micro, when one or two would have been more than sufficient.
E4H’s Booze says the precariousness of the Affordable Care Act, which spurred healthcare growth over the past five years, makes predicting hazardous. He says one client in the Northeast that he would not name views microhospitals as “a growth instrument in a nongrowth market.”
Booze believes that as long as healthcare providers and private developers see micros as a real estate infill play, some day there could be up to 250 microhospitals dotting America’s countryside.
1. Repeal of the Affordable Care Act
On January 20, 2017, President Trump signed an executive order indicating “prompt repeal” of the Affordable Care Act (ACA) and instructed federal agencies to use “all authority and discretion available to them to waive, defer…or delay the implementation of any provision … that would impose a fiscal burden on any State or … individuals.” Republicans have made efforts to repeal the ACA since its enactment, but Congress has not yet acted in 2017 to make significant changes to the law. One may only speculate as to the extent to which the ACA will be unraveled and how it will be done. Republicans have circulated multiple plans to replace the law, and Republican leadership has indicated that a replacement plan should reverse the expansion of Medicaid, strengthen Medicare, and give taxpayers “more control and more choices” in selecting plans, while maintaining the ban on preexisting conditions. Rep. Tom Price, M.D. proposed a bill last year which would fully repeal the ACA and replace it with a plan which includes individual health pools, expanded HSAs and elimination of the healthcare exchange. This legislation passed in Congress under budget reconciliation rules but was vetoed by President Barack Obama.
There is a wide range of forecasted financial impact related to repeal of the ACA. The American Hospital Association (AHA) commissioned a report which estimates the impact on hospitals if the ACA is repealed, using the Price bill as a model. Should Congress pass legislation similar to this bill, the AHA report estimates that healthcare coverage would return to pre-ACA levels and further suggests that the result would be a rise in uncompensated care and a decline in revenue for hospitals, as the number of uninsured patients would increase. Furthermore, a report released by the Robert Wood Johnson Foundation (RWJ) estimates that if a reconciliation bill similar to Price’s was passed now, the result would be an increase in uninsured people by 29.8 million in 2019. The RWJ report suggests that even partial repeal of the ACA, which would eliminate the Medicaid expansion, the individual and employer mandates and the Marketplace tax credits, while maintaining the ACA’s insurance reforms including prohibition on pre-existing conditions exclusions “could lead to a fourfold increase in the amount of uncompensated care providers finance themselves compared to current levels.” Avalere Health has also released the results of its research on the effect of block grants and per capita caps which would decrease funding to states for Medicaid. Avalere projects that Medicaid spending would be lowered by $150 billion and per capita caps would lower spending by $110 billion. According to Avalere’s President, block grants and caps operate to shift power from the federal government to the states in determining covered services and program eligibility.
To date, the current climate of uncertainty does not appear to have significantly altered strategic planning on the part of health systems, as market participants indicate that real estate projects in planning phases continue to move forward. However, some caution within the industry is noted; for instance, Colliers International’s 2017 Healthcare Marketplace Report predicts delayed decision making as healthcare providers grapple with implementation of site-neutral payment legislation and with potential repeal of the ACA. The potential repeal of the ACA and the implementation of site-neutral legislation will significantly impact inpatient hospitals. Instead of expanding existing inpatient facilities, we predict that acute care providers will continue to look for off-campus opportunities within their community. In particular, we predict an increase in the construction of micro hospitals and other ambulatory facilities.
2. Value Based Reimbursement and Changes to Healthcare Delivery Setting
As noted above, significant uncertainty exists surrounding the potential repeal of the Affordable Care Act. However, healthcare industry consensus is that the trend to value based reimbursement will continue to accelerate, regardless of what reform ultimately looks like. HHS’ goal is to shift 50% of Medicare payments away from fee-for-service and to value-based payment models by 2018. This point was reiterated at the 2017 JP Morgan Healthcare Conference in January, where it was noted that the “focus on value – high quality affordable care and health for a population – has to continue.” Executive pay is increasingly linked to quality metrics, as outlined in a February 2017 feature in Modern Healthcare. The drive to value has influenced the ongoing convergence of payors and providers, as evidenced by UnitedHealth Group’s acquisition of Surgical Care Affiliates (SCA) for more than $2 billion, which will combine OptumCare and SCA to form a comprehensive ambulatory platform. Within the post-acute sector, programs such as the Quality Incentive Payment Program (QIPP) for nursing homes in Texas provide financial incentives for nursing facilities to improve quality.
Given the market forces in motion which are driving the push toward value based reimbursement, what are the implications for healthcare real estate? For starters, outpatient migration will continue, as outpatient settings are generally lower in cost and preferred by consumers. However, the January 2017 implementation of the site neutral payment legislation may cause health systems to modify their real estate strategy to ensure the financial viability of proposed projects that will be subject to decreased reimbursement. Nonetheless, incentives and patient preference will continue the multi-decade shift away from the acute care setting. As of 2014, the national average occupancy for hospitals was 61%, per MedPac. This was down from 64% in 2008 and from 77% in 1980. Large, older hospitals can be outdated or oversized, requiring innovative real estate strategies to determine how best to utilize these structures. An increasing number of hospitals are seeking to use unused floors or wings by leasing this space out to another provider for uses such as long-term acute-care, inpatient rehab, skilled nursing, hospice, or behavioral health. These arrangements can be complex, as many factors outside of a typical real estate lease must be taken into account. The challenges facing the acute care industry have also contributed to consolidation, as hospitals seek greater negotiating power, scalability, and improved access to technology. A 2013 academic study found that 60% of hospitals are now part of larger health systems.
3. Tax Exempt Hospitals Under Pressure
Nonprofit hospitals that have long relied on the benefits of tax-exempt status have begun to feel pressure from municipalities in recent years. Public pressure has prompted judicial and legislative scrutiny into the tax-exempt status of nonprofit hospitals across the country. In 2011, the well-known Provena case in Illinois sparked an intense debate as to the legitimacy of hospital-based property tax exemptions. Following the decision, stakeholders crafted legislation that was passed by the Illinois legislature in an attempt to clarify the scope of property tax exemptions for hospitals and health care providers. The legislative fix has also been challenged in recent years, which resulted in an Illinois appellate court declaring the statute unconstitutional. The Supreme Court of Illinois agreed to hear the dispute and a ruling is expected in 2017. In the meantime, property tax exemptions for hospitals and health care providers in Illinois are on hold and the debate continues. In New Jersey, AHS Hospital Corp., d/b/a Morristown Memorial Hospital, settled a property tax dispute with the Town of Morristown for $15.5 million. In the wake of the Morristown settlement, over 35 nonprofit hospitals have been sued by municipalities in New Jersey. The Morristown case disputed the nonprofit status of many nonprofit hospitals, arguing that their operational profile was more typical of the for-profit sector. Other municipalities in other states have begun scrutinizing nonprofit hospitals and health systems, compelling hospitals to defend their charitable nature in terms of dollars given away, rather than focusing on the scope of benefits given to the communities in which they serve.
In 2017, we believe that tax-exempt hospitals and health care providers will continue to face headwinds in terms of pursuing and preserving property tax exemptions. Tax exempt hospitals should be aware of these challenges and should be prepared to clearly demonstrate the benefits that they provide to the communities that they serve. Additionally, tax-exempt providers need to be vigilant in terms of complying with state law requirements and Internal Revenue Code and regulations including IRC Section 501(r) in order to maintain exemptions and demonstrate that they are providing a high level of charity care.
4. Capital Markets
In the last decade, healthcare real estate has become a more widely recognized asset class by both the domestic and international investment community. With this rise in potential buyers combined with reimbursement pressures on the operational side, many health systems and physician groups have elected to “monetize” their real estate assets. In 2016, the healthcare real estate industry’s largest single sale/leaseback occurred, when Catholic Health Initiatives sold 52 medical office buildings to Physicians Realty Trust (a Milwaukee-based REIT) for $724.9 million.
Though the Federal Reserve increased interest rates in December 2016 (and has indicated that three more rate hikes are likely to occur in 2017), investor optimism in the commercial real estate sector has not diminished, as cap rates and interest rates are only moderately correlated. However, health systems may be affected by increased borrowing costs and a rise in inflation. These factors create an incentive for healthcare providers to lock in occupancy costs, though the overall uncertainty around healthcare may create caution in the market in evaluating long term leases or acquisitions.
Within the healthcare real estate investment community, the consensus forecast is for a slight uptick in overall cap rates in 2017. Investors remain bullish overall, due to the fundamental demographic drivers which underlie the sector’s growth. Nonetheless, given the current state of the market, health systems evaluating a potential monetization may wish to accelerate their decision timetable.
5. New Rules Impact Leasing Arrangements
In recent years, several regulatory bodies have promulgated new rules that will impact how hospitals and healthcare providers own, operate and manage their real estate. In early 2016, the Financial Accounting Standards Board issued new lease accounting rules that will change how leases are treated for accounting purposes. Under current rules, leases for real estate assets are classified as operating leases or capital leases. Operating leases typically don’t impact the balance sheet of the lessee. On the other hand, capital leases are treated as debt on the balance sheet of the lessee. In years past, healthcare providers have been able to classify long-term leases for healthcare facilities as operating leases. Existing rules have allowed providers to monetize non-core assets like medical office buildings through sale-leaseback arrangements with little impact on their balance sheet. The new rules, which take effect in two to three years (depending on whether a provider is a public entity or private entity), are not as generous. Providers will be forced to classify real estate leases as either operating leases or financing leases. With the exception of short-term leases (term of 12 months or less), real estate leases will be treated as financing leases. This will have a significant effect on providers’ balance sheets going forward.
In late-2015, the Centers for Medicare & Medicaid Services (CMS) finalized a new exception to the Stark law for timeshare arrangements. Timeshare arrangements are often used by providers to attract physician specialists to underserved areas on a part-time basis. For example, a hospital may allow a cardiologist to use several furnished exam rooms in its medical office building for several days per month to see patients in the community. Under the existing rules, the hospital and physician are required to structure the arrangement as a lease with a term of one year, include a fixed schedule, and provide exclusive use of certain space and equipment. The new exception is designed to increase patient access to specialists in underserved areas by relaxing the requirements for part-time arrangements between providers. Under the new exception, providers are no longer required to structure the arrangement with a term of one year, include rigid occupancy schedules or provide for the exclusive use of space and equipment.
These new rules are already having an impact on how providers structure leasing arrangements. In light of the new accounting rules, providers have recognized that leasing arrangements will likely be classified as financing leases in years to come. As a result, providers looking to construct new facilities are carefully analyzing whether to own the facility or to engage a third-party developer to own the facility. Recent market trends suggest that an increasing number of providers are selecting the ownership model. Developers will continue to provide services to the healthcare industry, although an increasing number of developers are being engaged on a fee-for-service basis. Additionally, developers are offering alternative, creative solutions, such as credit-tenant leasing arrangements, whereby the healthcare provider will receive the benefits of ownership upon the expiration of the lease term. Finally, we believe that the new timeshare exception will cause providers to reconsider how timeshare arrangements are currently structured, which may result in an increase in the use of timeshare arrangements along with potential changes in facility design to more easily accommodate shared space and equipment.
. Continued Regulatory Scrutiny
Hospitals and healthcare providers continue to face government scrutiny on multiple fronts. In December, the Department of Justice issued a press release that summarized its annual collections from false claims act litigation. It indicates that that the federal government recovered $4.7 billion dollars in fiscal year 2016 from cases involving fraud against the government. Some of the largest recoveries involved claims against hospitals and healthcare providers ($360 million in collections), followed by cases against a lab services provider ($260 million), skilled nursing providers ($160 million) and a rehab provider ($125 million). According to the press release, $2.9 billion of the $4.7 billion collected were the result of claims filed by whistleblowers. In fact, the Department of Justice noted that approximately 13.5 new cases were filed every week by whistleblowers in fiscal year 2016.
Government investigations also made headlines within the healthcare real estate sector in 2016 due to the negative financial impact that it had on providers. Healthcare REITs like HCP and Sabra took steps to reduce their exposure to facilities operated by Genesis and facilities operated by HCR ManorCare, both of which suffered financially as a result of government investigations.
In addition to fraud and abuse investigations, providers are also facing significant regulatory scrutiny from the Office of Civil Rights (OCR) in terms of implementing and protecting health information. In 2016, the OCR collected over $23 million dollars from settlements, with numerous providers paying over $1 million to settle claims. Additionally, providers looking to merge or consolidate are also likely to face government scrutiny. Last year, we saw the Federal Trade Commission challenge a number of mergers. While the new Republican administration has vowed to cut regulations, healthcare providers are likely to continue to face significant regulatory oversight in 2017, regardless of what path healthcare reform ultimately takes. We believe that the regulatory scrutiny will impact providers and real estate investors alike. Providers will be forced to implement and maintain robust compliance programs in an attempt to avoid government investigations and whistleblower actions. The cost of implementing and maintaining these programs will influence the real estate strategies pursued by health systems, including the calculus of whether to lease or to own certain real estate assets. Real estate investors may pursue assets occupied by providers who serve a higher concentration of private pay patients due to a decreased perceived likelihood of their tenants facing government investigations or whistleblower actions.
Source: Beckers Hospital Review
Faith Development and FIP Realty Services, LLC recently celebrated the topping off of Aventura Medical Tower, a medical condominium designed by doctors for doctors.
More than 250 physicians, staff, community members, volunteers and elected officials including Enid Weisman, Mayor of the City of Aventura, helped commemorate the event, marking the symbolic completion of the structural phase of the project. Many doctors and other interested buyers were also present, a demonstration of the extreme interest in the development of medical condominiums on medical campuses.
Those in attendance added their signatures to the concrete pour bucket, which was hoisted atop the structure for the ceremonial final concrete pour.
Aventura’s first medical office and condo project, located In the heart of theAventura Hospital Medical Campus at 2801 NE 213th Street in Aventura, Florida, totals twelve floors comprised of 7 parking levels with 472 spaces and 5 floors of office suites housing approximately 105,000 square feet. The project also features just over 5,000 square feet of premium ground floor retail/clinical service space.
The tower is being marketed to doctors and other healthcare providers – tenants that can enjoy and take full advantage of the building’s amenities including:
- Private elevator for signature tenant
- Private outdoor patios for some 8th floor Doctor’s suites
- On site surgical center
- Collegial medical environment
- Tranquil outdoor waiting level
- Peaceful employee break location
- Energy efficient impact resistant glass
- ADA compliant
- Full service valet service
- State-of-the-art energy efficient building
- Parking provided in excess of local code requirements
- 7 levels of covered parking with reserved spaces
The tower broke ground in June 2016 and is expected to be completed in November 2017.
As is widely known, the growing cannabis industry remains subject to disparate state and federal legal limitations and, consequently, is an industry with many challenges to market entry and expansion. One challenge is the struggle to gain access to necessary resources, such as financing, to develop a cannabis company’s product and business model. Traditional industries and sources of financing remain unable or reluctant to deal with the emerging cannabis industry due to some real and perceived risks related to cannabis. One recent development in the market has been the introduction of a real estate solution to provide financing.
The first-ever cannabis REIT (real estate investment trust), Innovative Industrial Properties, Inc. (IIPR), went public on Dec. 1, 2016 and on Dec. 19, 2016 closed a sale-leaseback transaction with PharmaCann LLC, a fellow cannabis industry trailblazer that obtained the first of five licenses for cannabis production in New York. In the sale-leaseback deal, IIPR acquired PharmaCann’s 127,000-square-foot medical-use cannabis cultivation and processing facility in Montgomery, N.Y. for $30 million. The cash from the deal will allow PharmaCann to expand its operations, including recruiting new high-level personnel, and refine its products and dispensing practices, without needing to dip into its capital reserves or issue additional equity.
“Financing is challenging for marijuana companies and we had millions tied up in this building,” said Jeremy Unruh, PharmaCann’s general counsel and chief compliance officer, and “a leaseback transaction was one way to loosen up capital.”
Cannabis companies lack basic access to even the most traditional financing vehicles, as even the major credit card companies like MasterCard and Visa, as well as major banks, will not accept these companies as customers if they believe they are even remotely promoting the use of marijuana. One such example includes a marijuana research website that had its bank account closed by a major bank because it provided a link to a dispensary discount coupon.
IIPR maintains that its unique focus on buying industrial medical cannabis facilities from cannabis growers and sellers will provide an influx of capital to cannabis companies, and the REIT, in turn, will offer the cannabis companies leaseback deals so that the cannabis companies can continue operating. The REIT gains a reliable tenant generating rent revenues, as well as benefiting from increasing property values.
In November, when it was announced that IIPR would become the first such REIT to be listed on the New York Stock Exchange, much like other “firsts” in the cannabis industry, commentators worried that the NYSE could be breaking its requirement to not list companies that aren’t in compliance with the law. Despite both Nasdaq’s and the NYSE’s rigorous reviews of potential clients, the NYSE was persuaded to list IIPR, in part, it is believed, because the company’s executive chairman, Alan D. Gold, is a 30-year veteran of the real estate industry and co-founded two NYSE-listed REITs: BioMed Realty Trust and Alexandria Real Estate Equities.
IIPR’s listing represents a departure from the experience of other companies. In the past, we have seen other cannabis companies, such as the social media company MassRoots, being denied listing by Nasdaq due to concerns that Nasdaq could be accused of aiding and abetting criminal activity under federal law.
Unruh applauded IIPR’s listing, likening the achievement to other milestones, such as passing of the Rohrabacher-Farr Amendment, which barred the DOJ from spending federal funds to enforce the Controlled Substance Act against responsible medical cannabis licensees or the announced commitment of Scott’s Miracle Gro to the cannabis industry.
Unruh added, “IIPR’s publicly traded REIT will be the very first opportunity for institutional investors to comfortably generate exposure to an industry that currently lacks the sort of transparency that SEC oversight provides.”
The real estate sector is a prime example of the cannabis industry’s ability to enliven stagnant markets. For example, it has been reported that cannabis has dramatically boosted the warehouse business in Colorado, where marijuana is legal for both medical and recreational use. Following the November 2016 elections, 29 states and the District of Columbia have laws legalizing marijuana in some form. With more states legalizing medical use and even expanding the scope of legalization to recreational use, one can expect a greater need for available financing in this industry. The development of a market for REITs to acquire and leaseback real estate assets may provide a useful alternative to traditional finance options.
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