Taking Stock of Medical Office Real Estate

Medical office real estate has emerged as a significant and robust subclass of office real estate. (The category can be very broad and include everything from a hospital facility to a chiropractic office.) There’s been exponential growth in this market segment in recent years, and current demographic trends indicate that the growth trend will continue for decades to come. An aging population, coupled with the mass retirement of the baby boomers, will presumably spur demand for medical services required by that
population. Simply put: demand for those services creates demand for the real estate that houses them. Hence the rise of medical office space. This apparent demand has also made medical office space a preferred product type for investment buyers who anticipate consistent and certain income in the foreseeable future.
However, within this generally positive outlook for medical office space, there are some tones of unpredictability.
First, there’s the ongoing possibility that the Affordable Care Act may be altered, or completely overhauled, or completely scrapped, which would cause some unpredictability in certain medical practices’ revenue model.
Additionally, we have been in, and likely will continue to be in, a massive shift toward consolidation of larger medical practices and organizations, along with their corresponding facilities. The small one- and two-physician practices that existed for many years are being displaced by large practices with multiple physicians. As a result, medical space that is geared towards smaller practices may see greatly diminished demand if it can’t adapt to facilities able to accommodate large occupants.
Another factor impacting medical space and its location is the patient’s preferences as to where they obtain their services. Generally, medical space is located in two geographic distinctions:
On-campus space — meaning on a hospital campus, where a patient may be traveling some distance from their home or workplace but is visiting their provider on a campus with other specialties and ancillary services present, both inpatient and outpatient.
Community setting — meaning a clinic or outpatient facility that’s located in a community-based setting, amongst rooftops, and geared to be convenient for the patient. Usually, these are a short distance from a patient’s home or workplace.
The consumer trends in recent years have demanded convenience, sometimes in the form of “convenient care” clinics located in the community retail setting. The future may require services to become even more convenient to the consumer. There’s some chatter in the industry of clinicians practicing inside of grocery stores and pharmacies such as Walgreens and CVS. Should the industry respond and accommodate that consumer preference, it could redirect demand from on-campus space and other large clinical facilities into community-based medicine that blurs the line between clinical and retail space.
On a local level, the medical industry, and the corresponding real estate that serves it, has thrived. Columbia now has several hospital campuses and significant specialty facilities that have made our community a regional draw for health care services. This is among the reasons that the recession didn’t hit Columbia with the same ferocity it hit other communities, and we recognize that to the point that “medical tourism” is now being focused on as an asset that we’ll attempt to nurture in the future. If we’re successful, our community will see robust economic growth as a result. And I believe that will translate to high occupancy rates at both on-campus and community-based clinics.
Source: CBT

Hedge Fund Led By ‘World’s Most Feared Investor’ Buys Stake In South Florida Medical Company

Elliott Management, a $34 billion hedge fund, has acquired a 7 percent stake in Mednax and intends to engage company leaders regarding “strategic options.”
In August, Bloomberg published an article called “Elliott Management head Paul Singer the ‘World’s Most Feared Investor.’” The article said Singer’s activist investor strategy led to the ousting of Arconic Inc.’s CEO and a battle with fellow billionaire Warren Buffett over the takeover of Oncor Electric. He was also in the headlines for battling Argentina’s government over its debt limits.
Now Singer has turned his attention to Sunrise-based Mednax (NYSE: MD), which owns medical practice groups across the country and several health care technology and billing firms.
On Nov. 16, New York-based Elliott Management and its affiliates disclosed that they obtained a 7 percent stake in Mednax worth about $84.9 million.

“The reporting persons believe that the securities of the issuer are undervalued and seek to engage in a constructive dialogue with the issuer’s management and board of directors regarding strategic options and operational opportunities to maximize shareholder value,” Elliott Management stated in the SEC filing. “The reporting persons believe that there is substantial upside from the issuer’s unaffected share price level of $43.37 per share, the closing price of the issuer’s shares on November 3, 2017, the last trading day prior to the reporting persons’ increased share accumulation.”

Upon disclosure of the news, Mednax shares jumped $6.11, or 13.9 percent, to $51.76 Thursday.
Mednax officials couldn’t immediately be reached for comment.
CFRA Research equity analyst Danny Yang kept a “hold” on Mednax shares and said a partial or full sale of the company appears possible and would be a positive for shareholders. However, Thursday’s gain in stock value was “purely speculative.”
Mednax is greatly impacted by the future of the Affordable Care Act, especially the Medicaid expansion that provides more coverage to the children’s health services offered at its pediatrics division.
Source: SFBJ

Reimbursement Changes, ACA And Disruptive Technology Redefining Healthcare Real Estate

Healthcare real estate has been changing and evolving according to payment reimbursement changes and increasing demand for medical office space due to growing patient populations since the passage of the Affordable Care Act and the entry of baby boomers to the Medicare population.
Cushman & Wakefield Senior Director in San Diego Travis Ives asked panelists at Bisnow’s San Diego Healthcare and Life Science Summit how increased demand for healthcare services and disruptive technology are impacting healthcare real estate. He said over the past six to eight years, the healthcare sector has enjoyed increasing absorption and declining vacancy.

“There’s more demand space, but type of space is the focus,” said Scott Mackey, a principal at local design and engineering firm Lionakis.

The ACA was intended to create value, so it allows patients to make informed decisions about where they want to receive care based on preferences like location, convenience, facility efficiency and timing, he said. So delivery of care became more patient-focused, with providers placing medical office buildings and clinics in neighborhoods close to the patients they serve.
Providers are motivated by cost containment, Mackey said. So when construction costs shot up, they began looking for ways to deliver care more cost-effectively. Providers began putting healthcare facilities in all types of spaces people frequent or congregate, beginning by backfilling retail space vacated by brick-and-mortar retailers as e-commerce gained market share and in grocery stores and big-box retail stores like Walmart.
Healthcare providers are beginning to take advantage of the drive to add outdoor spaces and other amenities in the workplace, according to Swinerton Project Executive Elizabeth Hawkins.

“Healthcare is sidling-up next to that,” she said, noting providers are adding on-site outpatient services as workplace amenities.

Mackey cited Scripps Health’s new clinic on Qualcomm’s office campus as an example, and said Hoag Health recently opened a clinic at a 24-Hour Fitness center, which also provides the flexibility to offer other programs like weight loss.
Mackey said in building out spaces, providers are looking for value and are moving to modular wall systems that provide the flexibility to change the use quickly and cost effectively. He said even complex uses like surgery centers and imaging facilities are moving in this direction and cited a mobile surgery suite created by Cedars Sinai for battlefield use. Mackey said this prototype could be adapted to civilian use and is the ultimate in flexibility, because it can easily be moved to different locations as needed.
Nationally there is a trend toward the merger of healthcare systems. Mackey said doctors once wanted to own their own buildings, but now work for health systems, which are buying out physician groups and other independent providers. As a result, big hospital systems own the majority of healthcare real estate and control delivery of care in their markets, which is impacting the build environment and providing them leverage for negotiating reimbursement deals with insurers.
Hawkins said San Diego is unique in that the huge life science/biotech sector is converging with hospital systems to create the biggest system of healthcare in the nation.

“The future is about tailoring care to a patient’s specific DNA makeup,” she said. “We’re in a better position to do that than any other place in the nation, because we have all the key pieces needed in San Diego.”

With value and volume the top priorities for providers, sustainability continues to be an important aspect of designing healthcare facilities, Hawkins said. She said it is commonplace and integral to the building process.
Mackey said inclusion of sustainable features comes down to cash flow — it has to make sense and provide a return.

“Utility bills at healthcare facilities are enormous, and anything you can to do lower costs is important,” he said.

This is why infrastructure in old buildings is being replaced with more efficient systems, he said, noting that as providers pursue ownership, they anticipate a 30-year horizon for new buildings, so LEED makes good sense.
Disruptive technology like Skype, which allows patients to have a video appointment with a doctor anytime via mobile devices, will eventually impact the medical office building footprint, Mackey said. Hawkins said providers are already pulling back on space commitments. But due to low MOB vacancy and changes in reimbursements by the Centers for Medicare and Medicaid Services, her company is still building ground-up MOBs and refurbishing or repositioning existing buildings in the community as MOBs.
She said legislation made reimbursement site-specific by requiring the CMS to reimburse providers based on type of license, with higher payments for services provided at hospital facilities. This legislation is driving hospital systems to expand MOBs on hospital campuses, rather than off-site, she said.
Disruptive technology, such as the Skype appointments, is making healthcare more accessible, consumer-friendly and cost-efficient, as well as improving price transparency. Hawkins said patients can take a picture of a rash, send it to a physician service via a mobile device and get a diagnosis for $9, or perform an EEG that would cost hundreds of dollars at a hospital inexpensively on an electronic tablet. She said technology will increasingly dictate where people get care and lower costs. Providers cannot ignore this trend and will shift to accommodate it, she said.
Transitioning to electronic medical records is also about adding value, but EMRs are not attaining their full potential for data generation, which could improve outcomes across populations, because paper copies are being scanned into the system rather than entered as data, Mackey said. He said EMR data could also provide greater price transparency and help providers determine where to locate facilities.
Mackey also noted rumors that Amazon may plan to enter the healthcare arena, partnering with patients to provide access to medical records and access to low-cost healthcare services. Amazon’s involvement could provide a big data resource for medical researchers with collection of medical records data, if patient privacy issues regulated by the Health Insurance Portability and Accountability Act can be resolved, he said.
Source: Bisnow

How Affordable Care Act And Millennials Are Changing Healthcare Real Estate

Healthcare commercial real-estate is a unique, subspecialized segment of the entire commercial real-estate industry. According to NAIOP Research Foundation, U.S. nonresidential construction spending in 2016 totaled $455.3 billion. Of this, approximately $41.4 billion (~9%) was spend on healthcare construction.
Strong demand from an aging population in setting of industry consolidation continues to propel the construction of large, consumer-friendly patient care facilities. Colliers International states that in 2016, over 22 million square feet of new healthcare commercial space was delivered, following 14.6 million square feet of deliveries in 2015. Despite a robust supply of new healthcare commercial office space, national vacancy rates, according to Colliers, continue to hit all time lows (7.4% at year-end 2016) with full service gross rents rising by almost 8%.
To better understand these trends, Clineeds, a free online platform designed to connect commercial brokers with healthcare professionals looking for office space, conducted a survey of its users consisting of healthcare professionals, hospital executives, and commercial brokers specializing in healthcare real estate. Over 79 commercial brokers along with 85 healthcare professionals/executives responded either partially or fully to the survey request and provided commentary on several questions.

“As a healthcare real estate tech platform, it’s important for us to understand the trends in the industry,” said Clineed co-founder Rishi Garg. “How are these trends impacting future decisions to construct, purchase or lease commercial office space?”

Here are the results, summarized below:
Retail clinics are on the rise. Cost-effective, convenient care provided at retail clinics has struck a chord with millennials. In an effort to capture this market, healthcare organizations have begun to partner and lease space within traditional retail outlets in lieu of purchasing offices. These leases, unlike traditional commercial leases, are faced with regulations regarding proper use, zoning, biohazard and medical waste. Also at play are issues regarding Starks Law and other anti-kickback regulations, often requiring the additional expertise of a healthcare lawyer.
Commercial office space close to hospitals retain value. Healthcare professionals continue to face declining reimbursement from insurers and government healthcare programs. This has indirectly impacted rent rates of commercial offices near hospitals.
To make up for lost income, physicians have substantially increased their productivity by adding new patients and extending office hours. Medical providers, especially surgeons, overwhelmingly stated they would prefer to rent an office near a hospital and not waste time commuting. As a result, commercial office space near hospitals continue to retain significant value. According to some brokers, in certain areas of New York City and San Francisco, rent may even exceed that of Class A commercial office space. For this reason, hospital executives continue to show a strong willingness to construct commercial space near their facilities with the added benefit of making making millions from services ordered by an affiliate physician. Large healthcare real estate investment trusts (REITs) have also shown a willingness to purchase large offices near medical campuses and hospitals given above market rent rates. Unfortunately, given the size of most transactions, small investors remain outmatched in this market.
Conversions costs remain significant barrier to supply. Transitioning a commercial real estate office to healthcare space are fraught with challenges. This has limited supply of these offices in certain markets. Aside from the myriad of regulations, the build out costs for many physician and dental offices remain significant. Owners and operators of large commercial buildings are hesitant to invest in such projects given the everchanging healthcare landscape.

What’s In Store For 2018?

Recently in an article titled The U.S. Medical Office Market Could Be Heading For A Bubble, David Park, senior SVP of Construction Novant Health, raises the concern of a potential bubble in healthcare commercial market due to a “population lull and changing technology.” Although most respondents failed to agree or disagree with that statement, a resounding concern exist about the impact changes to the ACA (Affordable Care Act) may have on yearly budgets. Short term, many hospital executives stated they may have to re-evaluate FY 2018-2019 capital expenditures, depending upon the costs of implementing new regulations and potentially lost revenue from changes to the ACA.
Although this may disrupt upcoming projects, long-term healthcare executives and commercial brokers continue to remain optimistic and bullish.

“Healthcare real estate is a unique subset of the commercial real estate market, influenced by factors beyond supply and demand. It’s essential that medical professionals partner with brokers knowledgeable in this field, and use specialized data to help them make smart leasing and construction decisions,” added Garg.

Source: cre.tech

Jackson Health System Facing ‘Most Challenging’ Year

Coming off a successful year that saw many advances, and with Carlos Migoya set to continue as president and CEO of Jackson Health System, officials of Miami’s Public Health Trust are cautiously optimistic about the future. The trust administers Jackson Health System, which includes Jackson Memorial Hospital and a network of clinics.

“Every year we come here and every year it has improved,” Joe Arriola, trust chairman, told Miami-Dade’s County Commission. “Jackson is better than it has ever been. There have been some exceptional changes, and we’re here with some incredible news: I am happy to say that Carlos Migoya has agreed to stay on for another two years.”

But “we are heading into rough times politically, and the squabbling is just going to get worse. To survive this, we need your help,” Mr. Arriola told commissioners.

“This has been one of the proudest chapters of my life,” Mr. Migoya said. “We have new facilities and are renovating patient care facilities across the system.”

The $175 million Christine Lynn Rehabilitation Center, set to open in 2019 or 2020, is the first project in which Jackson, the University of Miami and the Miami Project to Cure Paralysis have combined their resources in a single facility, he said.

“Research will be actively integrated into patient care, and it will be one of the most sought-after places in the country to recover from an injury,” Mr. Migoya said. “This positions Jackson and UM in a landmark treatment center.” Two old administration buildings will be torn down to accommodate the center, he added.

Jackson West, an inpatient hospital with outpatient and diagnostic clinics, is set to open in mid-2019, he said.

“This is in Doral, the fastest-growing area of the county, and we’ll be able to provide services to that population.” A separate walk-in care center will be six miles away, but also in Doral, he said.

Though he didn’t discuss the upcoming budget with commissioners, Mr. Migoya categorized it as break-even. The ever-rising cost of prescription drugs, salary costs to stay competitive, pressure from insurance companies to lower reimbursement rates, and the uncertainty of national health insurance are among the reasons, he said.

“I expect the coming year to be the most challenging since 2011,” Mr. Migoya said. “We’re getting ready to open new facilities, and doing it amidst storm clouds hanging over health care.

“We’re improving efficiencies and streamlining costs in non-clinical areas,” he said. “Labor and management are in partnership to identify ways to upgrade the patient experience.”

“What’s the plan” for survival? asked Commissioner Daniella Levine Cava. “The State Legislature came back with some dedicated funds, but not at the same level as before.”

“It depends on what the funding is,” Mr. Migoya said. “Every year for the past seven years, we’ve had cuts; last year it was $60 million.” Leaders in the Florida House of Representatives reduced the cut to $19 million.

“But the brand has changed,” he said. “Now, paying patients choose us, and we’re improving efficiencies to get patients home sooner, safely. The key to growth is to turn beds fast, and we want to do that so we can offer more access to everyone in the county.”

Assuming the US Senate passes a healthcare bill, “How much time will you need to know the economic hit?” asked Commissioner Sally Heyman.

“We could end up with some positives,” Mr. Migoya said. Florida turned down the expansion of Medicaid that was part of the Affordable Care Act. “The states that expanded Medicaid could take a worse hit. And some in government are looking for ways to help Florida.”

Source: Miami Today

Healthcare Real Estate: A Unique And Bullish Market

The future of healthcare real estate is bright with baby boomers aging, but industry leaders weighed in on what could change and why this segment is so unique from an operations standpoint.

“I’m easily bullish [on healthcare real estate]. 100%,” HCP Vice President of Leasing Tom Hulme said. “The market is smoking hot, and I’m absolutely bullish.” Hulme and other healthcare real estate leaders convened Monday at the 2017 BOMA International Conference & Expo to discuss the state of their sector and the unique nature of their arc of commercial real estate. LifePoint Health Senior Director of Real Estate Tammy Moore was equally bullish on the industry based on the sheer fact that there are so many baby boomers aging into the demographic likely in need of healthcare facilities. They were joined by Cambridge Holdings’ Ryan Doyle, who also was optimistic but cautioned ever-changing consumer demands could lead to a bearish climate.

Hospitals in tertiary markets have been closing in the years since the passing of the Affordable Care Act, but the panel was not ready to put the blame solely on the ACA. Hulme said his company did not see business impacted in the last seven to eight years from healthcare reform.

“I’ve read a report saying the United States is over-bedded, so you have to wonder if hospitals are closing because of that,” Moore said.

The panel also discussed the unique nature of healthcare real estate. Moderator and Healthcare Realty Trust Vice President Amy Byrd said medical office buildings have more specialized requirements and often have drastically more visitors than other commercial properties, leading owners or managers to approach operations and design in a different way — down to slight inclines in hallways and how that might affect a visitor.
While healthcare facilities might require more focus on detail, Byrd enjoys the challenges of this property type.

“I feel every day like I’ve contributed to someone’s well-being,” she said.

Source:  Bisnow

Key Trends Affecting Healthcare Real Estate In 2017

key trends affecting healthcare real estate in 2017

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

A Look Forward To Health Care In 2017: Top Five Trends

 medical staff

The new year is already underway and we expect both a new Republican-dominated Congress and President Donald Trump to bring ambitious policy changes to health care. With significant pent up energy among the Republicans and a limited 18-month window for legislation, lawmakers will be in an immediate all-out policy-making mode. This is particularly true for health care, which many in Congress consider a top issue on the docket. With an eagerness for change, health care is in flux, and difficult decisions will need to be made that will directly affect Americans both socially and economically. In this world, many are left wondering what to expect in 2017. Here are the top five health care trends to watch in the New Year.
ObamaCare, Interrupted
In all likelihood, legislation to repeal to the Affordable Care Act (ACA) will be sitting on Trump’s desk in short order. But a replacement plan will be missing and will require the balance of the year or later before it is complete.
Despite all the rhetoric around “repeal and replace,” the governing realities are much more complex. For one, Republicans have a lot of finer points to work out. Five lawmakers and two conservative think tanks have introduced different health care blueprints and Republicans will work to get at least a handful of Democrats to sign onto their proposal, meaning we’re in for a year of consensus building as essential questions are answered and final proposals are built.
For 2017, that may not be too much of an issue. Open enrollment closed on January 31 and those that have ACA coverage will keep it, but the clock is ticking. Insurers will need certainty around the law so they can design plans, set rates and premiums, and decide where they want to participate before some or all of the ACA exchanges phase out. If no replacement is forthcoming, the consequences could be significant, particularly for hospitals and health systems that must provide care regardless of insurance status, with reduced overall payments to offset the expense.
And the pressure is on for lawmakers, as well. Millions of people now depend on the ACA’s benefits — from those who have gained coverage through the marketplaces and Medicaid, to children that can stay on their parents’ plans until age 26, to those receiving no-cost preventive services. A total overhaul could mean taking those benefits away completely, or shifting people into the ranks of the underinsured.
Similar to an elaborate game of Jenga, our health system is made of interconnected pieces that if pulled at the wrong time or the wrong way, may result in the collapse of the entire structure. No question, change is needed. But we also can’t return to the days of millions of uninsured, coverage lock-outs due to pre-existing conditions, emergency rooms as the site of primary care, an unmanaged population that is invisible to the health care system, and ever-escalating costs.
In the end, 2017 will be the year that we move beyond some of the partisan stand offs that have tainted the ACA. One hallmark of these reforms will be moving away from the top-down federal mandate approach toward one that prioritizes customization and state-led innovations.
Health Care Hunger Games
Last year, I wrote about MACRAnomics, or organizational and financial changes to be unleashed with the new physician payment model. The question for 2017 is whether the Republicans will keep expanding current alternative payment models with some necessary improvements, build only on physician-led approaches, or turn the entire movement over to the private sector to figure out on its own.
Each choice has implications, some more advantageous than others. Letting the markets figure it out is in line with Republican ideology about getting government programs out of the way of private sector innovation and consumer choice. And it could be accomplished with Medicare Advantage (MA) plans — a favorite of Republicans because they provide private plans with fixed amount for care, allowing the plans themselves to push providers into alternative payment models (APMs) if that is effective at reducing costs and risk. But to date, such a push has been slow to materialize, with CMS finding that most MA providers remain in fee-for-service (FFS) and focus on cutting rates, not incenting the redesign of care. Moreover, even if MA plans embraced APMs, only about one-third of beneficiaries are covered in these plans, with even lower adoption in some states (2 percent in Wyoming). This means the status quo of FFS payment in Medicare for most providers, which keeps the system tied to volume-based payments that could lead to unsustainable cost growth and budget overruns.
The second option is to alter the current APM through rulemaking to favor physician-led approaches and physician-owned hospitals and outpatient clinics. These approaches could lead to greater employment and consolidation of physicians, as well as a temptation to avoid caring for the highest-risk populations. This in turn would lead to some patients delaying care or turning to emergency rooms for ambulatory treatments.
The last and most advantageous choice is to build on the APMs that are currently in place, with improvements to ensure they work to their full potential. Significant provider sector investments have already been made in these models, and any reversal of the current movement toward value-based care would cost the sector billions. Moreover, they are bearing the predicted fruit. Today, about 30 percent of all Medicare reimbursements are now flowing through an alternative payment model, and just in the Medicare Shared Savings Program, participants have generated $1.29 billion in savings since 2012, while improving quality in 84 percent of all quality indicators. Premier’s experience with our ACO collaborative has actually been even better, delivering three times the return as all the other ACOs in 2015.
Rather than throwing the baby out with the bathwater, I think Republicans will largely keep the current value-based care models in place today, while creating new options that give physicians greater choice. This is the only antidote to perpetual cuts to fee-for-service (which we can most definitely expect in any repeal and replace plan), as well as rising costs for medical devices and drugs. We will see substantive policy changes, such as added use of legal waivers, changes to the measures and benchmarks, fixes to the risk adjustment methodology, and potentially changes to the savings shared back with providers. But no matter how it’s organized, the writing is on the wall — we are long past the days of rewards based on consumption. In 2017, value becomes the new economy and measurement its currency.
50 Shades Of Health Care
While the ACA was predominantly a federal program pushed down to the states, the opposite dynamic is likely to be central to the Republican replacement plan, instead pushing greater control to the states to design their Medicaid programs as they deem fit. This will likely make Medicaid expansion more palatable to conservative Governors and legislatures that previously rejected it, as they will now be given the freedom to structure programs to include personal responsibility requirements such as employment, co-pays, or lifestyle changes. But, to gain the best results, providers need to find more efficient and innovative ways to care for Medicaid recipients. And to make the most of what is likely to be reduced federal financial support, states will need to explore delivery system reforms that improve the health of communities and control costs.
Tapping new advancements in data and enlisting health systems that share the same goal to align their performance to benefit all residents, more providers may push states to pursue Medicaid waivers, particularly those that test delivery system reform. These programs align well with the alternative payment models in MACRA, are budget neutral, and have been shown to align financial incentives with evidence-based best practices in population health management. Using these waivers, states are able to foster a locally driven move away from the fee-for-service mindset that focuses on treating the sick, to a system that emphasizes prevention and wellness — and saves a lot of money in the process.
Take Alabama, which last year won a waiver to provide care to 60 percent of the state’s Medicaid beneficiaries through regional care organizations (RCOs) that receive a set per member, per month fee for all care delivered. Similar to other payment programs, if quality is maintained and the care delivered costs less than what was allotted, the providers keep the remainder. If it costs more, the providers are at risk for the overage. Although Alabama is still working to set this program up, other states, such as Colorado, Maryland, and Washington, with similar experience with these types of waivers have reported strong health care cost and quality gains.
Still other states, such as Ohio and Arkansas, have applied for and won grants to test episode-based bundled payments for certain high-cost acute care episodes, with providers eligible to receiving bonus payments for cost savings if outcome goals are met.
In 2017, I expect many more of these innovative programs to produce results, and states that have been waiting to see the returns will follow with applications modeled on the most successful programs. I also expect that 2017 will be the year that providers increasingly leverage these programs through the creation of provider-sponsored Medicaid managed health plans that contract directly with the state, aligning the financial risk directly with performance across the continuum of care.
Year Of Living Competitively
With this election, many pharmaceutical companies may have thought they would get a reprieve on pricing, but escalating drug costs remains a huge issue on the table.
Drug price increases affect consumers in a number of ways, including insurance premium costs and higher co-pays for therapies. In fact, Blue Cross Blue Shield of Idaho recently increased costs for its plans by 49 percent, attributing 41 percent of the increase to escalating drug costs for beneficiaries. Similarly, in 2016, the top 10 Medicare Part D prescription drug plans increased their premiums by an average of 8 percent, with five of the plans raising premiums by double digits, the highest rate of increase in the program’s history.
Driving some of these price increases are anti-competitive economics. A recent Senate Special Committee on Aging Report found several market dynamics that contribute to the problem, including sole source drugs that allow for monopoly pricing power, small markets that do not provide enough competitive leverage, and closed distribution channels that prevent new competitors from accessing the drug for necessary generic or bioequivalence studies. We expect 2017 to be the year where Congress, the states, and the courts focus less on price controls and more on closing loopholes and market anomalies that have to date worked to prevent competitive forces from modulating prices.
At the regulatory level, we expect bipartisan support for new legislation that would require the Food and Drug Administration (FDA) to fast track new generic drug applications in cases where there are two or fewer manufacturers in the market, levying a decision within 150 days, as opposed to the four plus years it can take today. It’s also safe to assume we’ll see action on efforts to ease closed distribution regulations to allow generics competitors to gain appropriate access to samples that would enable testing of therapeutic equivalence.
In the courts, state, and federal attorneys will take up a myriad of anti-competitive dynamics that have been used for years to extend patents or prevent competition in the marketplace. Suits have already been filed to challenge the biosimilar 180-day waiting period, which today requires biosimilar competitors to notify the brand maker of their intent to market after they have FDA approval, as opposed to in tandem with their filing. This can delay market entry by six months or more. And we can expect more scrutiny of pay-for-delay deals where branded manufacturers reach agreements with generic companies to delay market entry for new products in exchange for cash or other payments of value.
Through The Looking Glass
Consumerism has been on the rise in health care for the better part of a decade, but it hasn’t truly materialized as many would have envisioned. Consumers today have more cost and quality information than ever before, but it can still be difficult to uncover meaningful differences between the various options. In other cases, the information is not personalized to them, providing information on total costs as opposed to their individual out-of-pocket expenses. Moreover, even in cases where consumers have a clear choice, they may not be able to act on it due to health plan or other restrictions.
But as we move into a post-ACA world, we can expect more consumers to become directly exposed to costs through health savings accounts (HSAs) and high-deductibles, meaning that they are going to seek care choices that provide the most value and convenience to them. The net is that providers need to start thinking more broadly in this new world — not just about how they deliver care, but about the total experience. Is the website easy to use and mobile friendly? Can patients book lower cost FaceTime appointments for non-emergency consults? Does the organization provide enough parking? Do patients understand costs up front, before receiving prescribed care? Can you describe your quality in terms that patients can really understand? Is the billing system easy to understand and straightforward?
On the policy front, that could involve some substantial changes, particularly at the state level, where new laws could be enacted to protect or empower consumers that are increasingly becoming the payers for health care services. Already, four states (California, Florida, Connecticut, and Utah) have passed legislation that would cap the amounts that can be collected from “surprise billing” or the practice of billing for out-of-network costs that the individual had no knowledge of receiving. Still more passed laws requiring disclosure of out-of-network costs and billing estimates. And five states (California, Florida, Maryland, Oregon, and New Jersey) have comprehensive sites that allow consumers to compare the prices and charges for common procedures. Going forward, it’s reasonable to assume that there will be greater transparency around cost, quality, and co-pay data to enable consumers to make more informed choices.
Not only is care going beyond the four walls of the provider organization, but so is the entire buying experience. For 2017, clinicians need to stop thinking exclusively about just performing better than their local competitors and start thinking about providing a customer experience that rivals the top consumer brands.
Without question, 2017 is going to be a year of change. But through it all, we must remember the larger purpose. Republican or Democrat, we’re all aligned behind designing a health care system that is coordinated, innovative, cost-effective, high-quality, available, and affordable for all Americans. If we keep the end goals in focus, this could be the year of tremendous promise and progress.


Source:  Health Affairs

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