Our healthcare system is awash in unprecedented change. While the various undercurrents are numerous, two specific concepts are dramatically impacting healthcare real estate decisions.
The Patient Protection and Affordable Care Act, “ObamaCare,” originated with the worthy intent of providing accessible care to all Americans (11.7 million additional insured in 2015). The chief unintended consequence is drastic and unencumbered consolidation — by all healthcare players.
The new terrain of reimbursement uncertainties, increased care mandates and administrative burdens forced healthcare providers to grow market share in the hopes of grabbing a seat at the ever-shrinking bargaining table. These market forces are illustrated by highly publicized hospital mergers — hospital mergers and acquisitions are up 24 percent from Q1 2015 vs. Q1 2014 — and multibillion-dollar health insurance alliances ($125B + in YTD M&A). True to its Lone Star heritage, Texas has championed the entrepreneurial spirit of its healthcare providers, but recent years have shown change on the horizon. Amidst the shifting dynamics, providers must focus on positioning their practices and real estate assets to greet the dawn of a new healthcare era.
Recent consolidation has turned back the clock to the 1990s, when HMO-style acquisitions were in full force. However, in our current ObamaCare environment, providers are considering employment opportunities or other alignment strategies for security and sustainability (increase in employed MDs went from 44 percent in 2012 to 53 percent in 2015). The evolution of electronic medical records allows compensation to track production (or outcomes) and leads the market to believe these current arrangements are more sustainable than previous acquisition models. Furthermore, today’s employers are no longer buying the practices’ real estate, and institutional money has long since declared its preference for Class A medical office buildings and ambulatory surgery centers, with aggressive cap rates at 6.5 percent for REIT-quality assets. Simply said, the road to physician alignment has never been clearer, but what about the real estate decisions?
Access and the importance of “retail rules” are the second critical consequence of ObamaCare. Urgent care centers, free-standing emergency rooms and retail providers, including CVS, Walgreens and Walmart, have sought to commoditize the role of healthcare providers. So, given the market strength of these corporate giants, how do local providers optimize the positioning of their healthcare practice?
It is paramount to rank a practice’s real estate decisions high on the treatment list and discuss with a specialist in healthcare real estate. The private capital market is seeking what it cannot find — yield. Proper planning can help providers maximize their real estate value when the timing is right, both personally and professionally. Furthermore, careful considering of patient demographics, weighing proximity to referral sources and identifying the competition is only the beginning of the conversation with your healthcare real estate expert. The real differentiating factor is the specialist’s data-driven knowledge of the local market and an understanding of healthcare real estate, allowing for the envisioned lease, acquisition or development to meet the current practices’ needs while maximizing the healthcare provider’s future value.
Jon Wiegand specializes in healthcare real estate and is a Member of Cushman & Wakefield’s national Healthcare Practice Group. Wiegand focuses on providing client-oriented advising services specific to healthcare real estate planning and transactional needs. Contact Wiegand at 210-585-4911, 210-241-2036 or firstname.lastname@example.org to schedule an appointment.