• The Affordable Care Act (ACA) will add 30 million newly insured Americans to the healthcare system
• Driven in part by the ACA and new technology, healthcare delivery is moving away from acute care facilities and into decentralized, community-based centers.
• At the same time, hospitals are consolidating to achieve economies of scale.
• Healthcare property investors need to stay on top of trends to remain profitable.

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+ More on Health: Developers Incorporate Wellness Into Plans
As the Affordable Care Act is implemented, both the healthcare industry and the real estate owners and developers who provide space for the delivery of healthcare services remain uncertain about the future.

Some facts are known, stated panelists at the ULI Spring Meeting in San Diego. One is that the ACA will cover 30 million Americans who previously had no health insurance, allowing them to seek medical care in a variety of venues, rather than relying almost exclusively on emergency rooms.

In addition to the demand created by this newly insured cohort, the aging American population also will increase demand for medical services. Individuals over 65 not only visit doctors more frequently than younger people, but their frequency of visits has increased from 6.1 to 6.9 times per year since 1998, said Jonathan L. Winer of Seavest Healthcare Properties, based in White Plains, N.Y.

Despite efforts to reduce healthcare costs, healthcare spending is now about 17 percent of the American gross domestic product (GDP), heading for 20 percent, noted Michael D. Piette of KIRCO Health Partners, based in Troy, Mich. Spending on Social Security, Medicare, and Medicaid, less than five percent of the GDP in 1970, is projected to reach 25 percent by 2070. But this does not necessarily correlate to an explosion of demand for healthcare space, he cautioned.

Panelists agreed that healthcare delivery seems to be moving in two different directions: acute care is being consolidated into ever-larger hospitals that can share resources and achieve economies of scale, while outpatient care is being distributed throughout communities. With improved medical technologies, an increasing number of treatments, tests, and procedures can be conducted on an outpatient basis; as a result, the average hospital stay has decreased from 7.2 days in 1988 to 5.5 days now. And while the total number of hospital beds has decreased, the percentage of physicians employed by hospital groups has increased to 50 percent and is growing.

Although increasingly employed by hospitals, physicians and other practitioners are bringing medical care into a distributed network of satellite-type facilities scattered throughout communities, noted Eric W. Fischer of Trammell Crow Company. These include everything from medical office buildings to walk-in clinics located within retail stores such as CVS, Walgreens, or Wal-Mart. The next level, he said, is the “outpatient pavilion” where specialists and sub-specialists can share technology and resources. Finally, there is the acute care hospital.

“We are long-term owners of this type of real estate,” said Vincent Cozzi of Lillibridge Healthcare Services, Inc. a subsidiary of Chicago-based healthcare REIT Ventas, Inc. “The fundamentals of medical office buildings are strong, with almost no new net delivery of medical office space. The Affordable Care Act will increase the need for both services and space.”

In the past, Cozzi went on, medical office buildings (MOBs) were difficult to underwrite; now, however, as hospitals acquire physician practices, MOBs are perceived as safer investments, and cap rates are being compressed accordingly. Cap rates are now about 6.0 to 6.5 for core medical office space, he explained; however, as more developers seek profitable opportunities in this field, cap rates are likely to increase.

The ULI panelists acknowledged that the healthcare property arena is still wrought with risk. One risk is that a hospitals leasing MOB space for their outpatient physicians might not survive consolidation. Other risks include changing trends in healthcare delivery that are difficult to predict. Single-focus treatment centers, for example – such as heart centers and cancer hospitals – may become obsolete.

Healthcare provides realize the need to promote wellness instead of just treating diseases, especially since the ACA will slash reimbursements for re-admissions. However, they are taking a wide variety of approaches. Some hospitals are developing full-service onsite fitness centers with classes, nutrition counseling, and other wellness services, while Kaiser Permanente encourages patients to use gyms of their own choice. While the future of healthcare delivery is still unclear, one thing is certain: it will not be the same as yesteryear’s, or even the system we have today.