Guest Column: Healthcare Reform and Real Estate

The Patient Protection and Affordable Care Act, 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.

The impact 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.

Even if healthcare reform had not been passed, demographic trends were already supporting the outpatient sector, according to 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.

Demand for space will be impacted by the supply of healthcare providers, according to Robert Bach, chief economist at Grubb & Ellis Co. “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.”

The American Medical Association anticipates that the nation will be short by at least 125,000 physicians by 2025. Dr. Cecil Wilson, its president, 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.” 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.

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

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 square feet of medical office space was developed and absorbed, a 14 percent increase. CoStar Group Inc. reported that construction of medical office building space on a national basis peaked at 19.5 million square feet in the fourth quarter of 2006 and plummeted to 6.7 million square feet in the first 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 currently accounts for 40 percent of a hospital’s total revenues, will surge as newly insured people seek healthcare services. Currently, the United States delivers 65 percent of healthcare services in outpatient facilities, a significant increase over the 43 percent reported in 1980.
A study by McKinsey & Co.’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 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.”

The mission of healthcare facility development firms in coming years will be to build primary-care, imaging, diagnostics, outpatient surgery and free-standing emergency departments so preventive medicine can be delivered in positive, convenient, patient-centered environments.

Additionally, there will be a strong focus on wellness centers. Just five years ago, wellness was an emerging $200 billion-a-year industry; today, it totals $500 billion and is growing rapidly.

Healthcare villages–which typically are associated with a local hospital and feature a wellness center–are becoming destinations of choice for people in the community. For practices striving 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.

These facilities usually also include a state-of-the-art, medically based wellness center, including clinical departments that promote preventive care, lifestyle modification, disease management programs and rehabilitation. Wellness centers typically house a fitness center with an indoor aquatics center; spa services; an indoor walking track; group exercise rooms; cardio and strength-training equipment; and well-appointed men’s, women’s and family locker rooms.

Donna Jarmusz is a senior vice president for Alter+Care, an integrated, comprehensive consulting services company that plans, develops, finances, markets and manages healthcare real estate assets. Alter+Care is the healthcare services affiliate of The Alter Group. For more information, visit www.altercare.net or call 800-637-4842.