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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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