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Healthcare Reform Impacting Healthcare Real Estate

How Healthcare Reform Will Impact Healthcare Real Estate

How Healthcare Reform Will Impact Healthcare Real Estate

The Patient Protection and Affordable Care Act (ACA) which becomes fully effective in 2014 is the most ambitious undertaking in the American medical field since Medicare’s highly controversial passage in 1965.

The law, which expands healthcare coverage to as many as 52 million Americans who are currently uninsured, goes into effect at a time when the nation’s 68 million Baby Boomers – many of whom have pre-existing medical conditions – celebrate their 65th birthdays at the rate of one every eight seconds. And it’s these patients that the ACA addresses – those with four or more chronic conditions who are poised to account for 96 percent of healthcare costs going forward.

The impact of reform on healthcare real estate will be significant because there is a robust requirement for new mixed-use campuses and outpatient facilities where preventive care can be delivered to millions of newly insured Americans. Sg2, a Chicago firm that works with more than 1,000 hospitals and health systems, estimates that the use of outpatient services will grow by 21.6 percent between 2009 and 2019. In comparison, during that same time period, inpatient care will grow by just 1.7 percent.

As the Affordable Care Act Kicks In

Even if healthcare reform had not been passed, demographic trends were already supporting the outpatient sector, says Alan Pontius, managing director of the healthcare real estate group at Marcus & Millichap Real Estate Investment Services. According to Pontius, reform makes a good thing even better.

Although reform will definitely boost demand for space, investment principles for the healthcare sector are likely to remain unchanged. Supply is tagged to demand. “I don’t think spec development in medical office is the right thing to do,” Pontius said. “We’ve seen a lot of spec development fail in the past 24 months. And the impact of this healthcare reform isn’t going to show up overnight anyway.” There is still uncertainty over how healthcare reform will impact the overall economy, which drives demand for all types of outpatient facilities.

The Physician Shortage and Its Impact

Demand for space will be impacted by the supply of healthcare providers, according to Robert Bach, chief economist at Grubb & Ellis. “Do we have enough doctors, nurses and other professionals to accommodate the rising demand? Over time, we will see greater demand for healthcare facilities, but the rate of increase will be constrained by how quickly medical schools can ramp up the supply of healthcare professionals.”

Cecil B. Wilson, M.D., president of the American Medical Association (AMA), says that “This is not a surprise, of course, but I hope that the oft-repeated statistic will force our nation and our government to face the harsh reality of America’s current physician shortage, our growing underserved populations, and the dismal issue of access for those newly insured after 2014 under provisions of the Patient Protection and Affordable Care Act.” According to Wilson, the AMA anticipates that the nation will be short by at least 125,000 physicians by 2025. Complicating the situation is the fact that the Department of Health and Human Services estimates that as many as one-third of physicians practicing today will retire over the next 10 years.

How Much Outpatient Space Is Needed?

Jeffrey H. Cooper, an investment banker who specializes in healthcare facilities with Savills, believes the potential exists to develop as much as 60 million SF of new medical office buildings nationally over the next few years. Using the standard multiplier that calculates that each new outpatient requires 1.9 SF of medical office space, Cooper says that a low-ball figure of 30 million newly insured individuals will require the construction of approximately 57 million SF.

In Massachusetts from 2006 through 2009 — as a direct consequence of the introduction of the Commonwealth Care Health Insurance Program — an additional 1.8 million SF of medical office space was developed and absorbed, a 14 percent increase. CoStar reports that national medical office building space construction peaked at 19.5 million SF in the 4th quarter of 2006, and plummeted to 6.7 million in the 1st quarter of 2009. The Massachusetts numbers bucked the national trend and are a direct result of RomneyCare.

The Growth of Outpatient Care

Outpatient care – which accounts for 40 percent of a hospital’s total revenues – will surge as newly insured people seek healthcare services. Currently, the U.S. delivers 65 percent of healthcare services in outpatient facilities, a significant increase over the 43 percent reported in 1980.

A study by McKinsey & Company’s Global Institute found that outpatient spending is growing at a rate of 7.5 percent annually, adding $166 billion between 2003 and 2006. Outpatient spending is expected to total $163 billion in 2011 alone and is likely to grow by 30 percent over the next decade. With more than 600 million outpatient visits every year, inpatient admissions will continue to decline. As the number of annual outpatient visits increases dramatically, hospitals will shift their resources to more dynamic and integrated ways of delivering healthcare to their patients.

According to the McKinsey report, “In theory, this shift (to outpatient care) should help to save money, since fixed costs in outpatient settings tend to be lower than the cost of overnight hospital stays. In reality, however, the shift to outpatient care has added to – not taken away from – total system costs because of the higher utilization of outpatient care in the United States.”

Focus on Wellness

Healthcare villages – a campus-type environment that we’ve helped to pioneer, featuring primary-care, imaging, diagnostics, outpatient surgery and free-standing emergency departments– are becoming destinations of choice for people in the community. For practices looking to reduce their overhead and debt service, healthcare villages offer enormous growth opportunities. These include access to electronic health-record services, as well as service-line managers who help practices enhance growth of their revenue streams.

In my estimation, one of the most important components of the new paradigm will be wellness centers. Just five years ago, wellness was an emerging $200 billion a year industry; today, it totals $500 billion and is growing rapidly. These facilities usually include a state-of-the-art medically-based wellness center including clinical departments that promote health prevention, lifestyle modification, disease management programs and rehabilitation. Wellness centers typically house a fitness center with an indoor aquatics center; spa services; indoor walking track; group exercise rooms; cardio and strength-training equipment; and well-appointed men’s, women’s and family locker rooms.

The concept of integrating aligned services across the continuum is also creating new models for co-locating medical providers with R&D and even education. Take the Arizona Health & Technology Park, an alliance between The Alter Group and the Mesa Campus of A.T. Still University of Health Sciences, featuring a spectrum of complex facilities from a nationally recognized university to medical office buildings to a specialty hospital to biomedical research facilities. The East Valley park, situated in the state’s largest and fastest growing metro area, allows a new alignment of services that fosters the education of future healthcare providers, the expansion of chronic care, and new medical innovations with the presence major pharmaceutical and medical equipment companies.

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Alter Group's Arizona Health and Technology Park, AZRE Magazine May/June 2011

Mixed Use Medical Buildings in Arizona

Mixed Use Medical Buildings

Banner Health Systems’ 60-acre Gateway campus in Gilbert is buzzing with activity. The 120,000 SF MD Anderson Cancer Center is rising from the construction dust, a new mixed use medical office building was just completed, and an older office complex is being renovated and expanded.

The same healthcare giant just announced plans to build the Banner Health Center, housing doctors offices plus a variety of medical and lab services, on 11 acres in the Wells Retail Center in Maricopa.

And in one of the most unusual mixed use medical pairings, Arizona’s most prolific retail developer, Westcor (owned by Macerich), is teaming up with venerable healthcare provider John C. Lincoln to plot out 84 acres in northwest Phoenix for a community hospital/medical office/retail center/auto mall.

Healthcare-anchored, mixed use developments seem to be the current real estate trend. There are dozens around the state. Some are hospital centered, and others, such as the proposed Maricopa project and the 50-acre Arizona Health & Technology Park in Mesa, are designed to combine medically focused businesses and other community services.

The Mesa project’s plans include space for a dental clinic to serve the nearby Arizona School of Dentistry, other specialty outpatient service facilities, offices, and biotech research and development facilities.

Hamilton Espinosa, national healthcare specialist for DPR Construction, says clustering a variety of medical uses and complementary services is a national trend, not just a local one.

New hospitals are seldom designed as stand-alones. Campuses are master planned to grow as the surrounding community does, with room for expansion of inpatient beds, outpatient services and other ancillary services from specialized clinics to doctors’ offices to pharmacies and even restaurants and hotels.

It’s a natural progression, Espinosa says. Evolving medical technology has transformed many treatments that previously required a hospital stay into outpatient procedures. Add to the mix the need to rein in healthcare costs and — in Arizona, at least — a bounty of land.

Purchasing and master planning a big chunk of property, but building components as population and changing medical needs progress, makes sense in a cost-conscious and rapidly changing environment, Espinosa says.

He compares the mega-campus evolution to Arizona Department of Transportation (ADOT) planning of the state’s freeway needs.

“Healthcare providers have to be much more judicious in capital spending. There is more apprehension,” Espinosa says. “Like ADOT, they build what they can afford now and add later when they can afford it and as the census dictates (demand).”

Mixed-Use Medical,  AZRE Magazine May/June 2011

But far from being something new, master planning a campus that blends medical and other business services is old hat to Plaza Companies, says Sharon Harper, president of the Arizona-based real estate company.

Plaza pioneered the first mixed use, medically-anchored community in Peoria in 1982, Harper says. Plaza del Rio’s 185-acre campus was originally designed to meet all the needs of an active senior living complex and grew over time to also meet the needs of the thousands of employees who work in the ever-expanding community, Harper says.

It includes senior residences, skilled nursing facilities, dozens of doctors and dentists offices, several specialty hospitals, clinics and other outpatient medical centers, condos, apartments, shops, restaurants, schools, offices, science and research facilities. But there’s not a traditional inpatient hospital in the mix.

Next on the drawing board, according to Harper, are single-family homes.

Plaza del Rio is a hugely successful one-of-a-kind model of a medically-anchored, mixed use development, but Harper says big hospital-anchored campuses and small neighborhood-focused complexes are essential to the future of healthcare delivery.

Jason Meszaros, vice president for Irgens Healthcare Development Partners, which just completed Mercy Medical Commons, a medical office project adjacent to the Mercy Gilbert Medical Center campus, agrees that there is no one-size-fits-all solution. Arizona is relatively saturated with hospital beds, Meszaros says.

“The trend is we are done building hospitals for a while,” he adds.

The Desire For Mixed Use Medical Buildings

The focus for the foreseeable future will be filling out space on existing campuses with other services that make a hospital more competitive as a destination for patients, as well as for doctors and surgeons who want on-campus offices to cut daily commute times from inpatient to outpatient visits, he says.

“A hospital becomes an anchor for all types of real estate needs,” Meszaros says. “You most likely have hospitality needs, places for a family to stay. And you have lots of people who work there and in offices, and that drives retail. You need some place to eat lunch.”

But a bounty of available land on hospital campuses is only one motivation for mixing up healthcare real estate and other uses.

The changing needs and desires of aging baby boomers and new healthcare reform measures are also factors driving how and where medical services are provided now and into the future, says John Driscoll, president of Alter+Care, the healthcare division of the Alter Group. The company is developing the Arizona Health & Technology Park in Mesa.

“Boomers have been market changers over the years,” Driscoll says. “And the first boomers will be retiring this year.”

Lifestyle demands and the bubble of people moving to Medicare during the next two

Mixed-Use Medical,  AZRE Magazine May/June 2011

decades will require medical services that are more “competitive, attractive and affordable,” he says. And another 30 million insured people, many on Medicaid-like systems, means cost-effective real estate solutions will be key.

“There is no question in the future that healthcare providers will have to be more efficient,” Driscoll says.

Rather than a single model for healthcare real estate in the foreseeable future, there are several scenarios likely to emerge simultaneously based on a community’s needs and assets, he continues.

The giant, hospital-anchored campuses make sense for regional medical services, but the future focus will emphasize bringing healthcare closer and making it more convenient to those who use it on a regular basis.

Driscoll envisions smaller neighborhood-based destinations with a range of services such as medically-based fitness centers, post-surgery rehabilitation facilities, sports performance centers — “health villages with different kinds of services for people who are sick and to keep people well.”

“We’re seeing more co-mingling of medical and wellness services,” he says.

Future development also will be real estate-driven and may include adapting empty big boxes retailers to house medical services, he adds. Picture the shell of a former Borders Books or Ultimate Electronics housing a host of medical providers, such as acute care clinics, labs and medical imaging services.

Randy McGrane, managing director for Ensemble Real Estate, has already imagined that as the future of outpatient healthcare delivery. He adds that off-campus medical services are a bigger trend than the expansive hospital-centered developments.

The ratio of inpatient to outpatient medical services is about 60/40 now, McGrane says, but he predicts the numbers will reverse within 10 years.

Communities want medical services in their own neighborhoods, and retail centers are suffering from curtailed discretionary spending during the recession, he says. So, the empty retail anchor spaces are obvious and cost-effective solutions for both real estate segments.

In smaller neighborhood strip centers abandoned by a supermarket anchor, adding a clinic or urgent care facility could change the whole dynamic of the center. It could spawn new medical and/or retail services such as pharmacies or health-food shops, and the same type of services — dry cleaners, casual eateries and coffee shops, for example — that cluster around a supermarket to make a neighborhood commercial center a one-stop convenience for employees and customers, McGrane says.

And adding medical outpatient facilities to a big box-laden power center can re-energize flagging retail, bringing in new foot traffic and boosting business for all tenants, he says.

So who are the visionaries on top of the trends in changing healthcare delivery systems? Savvy industry giants already are planning multi-faceted networks that add satellite services in diverse locations, as well as boosting hospital campuses with a variety of services to remain competitive, according to the local industry experts.

The major players plotting out Arizona’s healthcare delivery systems of the future are the top hospital names, such as Scottsdale Healthcare, Banner Health, Catholic Healthcare West, John C. Lincoln and Abrazo Health Care, according to industry experts.

And the on-the-ball real estate developers, designers and construction companies have healthcare divisions in place ready to make it happen.

“There is growth in healthcare and in more sophisticated delivery of healthcare services,” Harper of Plaza Companies says. “It’s an exciting industry.

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AZRE Magazine May/June 2011