Commercial real estate decision makers in the healthcare space have been facing the bitter pill of uncertainty after this year’s repeal and replace efforts of the Affordable Care Act in Washington D.C.
Congress has tried, and failed, to repeal and replace the Affordable Care Act multiple times, the most recent bill being Graham-Cassidy. The most common theme among the bills involved a significant reduction in the amount of federally provided Medicaid dollars to states by switching to a block-grant system.
Under Graham-Cassidy, Arizona would have received $1.7 billion less in 2020 than it would have under the Affordable Care Act, according to the Arizona Legislature’s analysis estimates in September.
When the Affordable Care Act, or Obamacare as it’s often called, was initially passed and implemented, many Arizonans who previously did not have health insurance received access to care through insurance outside of emergency rooms for the first time in their lives.
Through the Medicaid expansion that was part of the Affordable Care Act, about 400,000 Arizonans were insured, according to the latest numbers from AHCCCS, Arizona’s Medicaid agency. An additional 140,000 Arizonans were able to receive their insurance through the exchanges too, according to the Centers for Medicare & Medicaid Services.
With this induced demand for healthcare services from the Affordable Care Act, Arizona hospitals began efforts to meet the demand by expanding through a variety of means, says Greg Vigdor, president and CEO of the Arizona Hospital and Healthcare Association.
Hospital systems became bigger, expanding vertically and horizontally, through urgent cares, doctor’s practices and more, Vigdor says. “And, of course, these hospitals and health systems had to find the space to do that,” he says. “And finding opportunities for space was a big part of that.”
This year’s failed attempts at healthcare reform have left many, who committed to plans that are based around the Affordable Care Act being the law of the land, wondering what’s next and how they should react.
Large hospitals and providers who may be in the midst of long-term plans that include large expansions of space can’t just steer the ship in a new direction, Vigdor explains. These providers are most likely proceeding with their plans, whatever the outcome might be, with some angst towards what might eventually happen, he says.
Meanwhile, others have nixed plans for new spaces.
“I can say this for a fact, across Arizona, that there’s been a certain chilling effect in terms of new projects,” Vigdor says. “A lot of our hospitals have shared to me they had some plans on the drawing board, and once the great uncertainty we’ve been living through the last nine months with Congress and the Administration, they’ve just said, ‘we’re not planning on doing anything until we have a better idea on what’s going to happen.’”
Will the building end?
All of this renewed debate around healthcare reform comes at an interesting time. The U.S. population is aging at a fast rate with more and more Baby Boomers reaching the age of 65 by the day.
And then, Arizona’s population has been quickly growing. Maricopa County, Arizona’s most populated county, was ranked as the fastest growing county in the country last year, according to the Census Bureau.
It doesn’t take an economist to know that all of this means more demand for healthcare services.
When the Affordable Care Act was passed and implemented, a lot of conversations about how healthcare providers will transition from “sickcare” to “wellcare,” among other noms de guerre, started.
Tucson-based construction firm Sundt saw this shift manifest after the ACA’s implementation in plans by health providers from massive campuses, that were needed for “sickcare,” to smaller clinics within neighborhoods, which were needed for “wellcare,” states Sundt Vice President Ryan Abbott.
There never really has been enough stability in the industry to help bring the community-based “wellcare” models to term, Abbott states. Providers think that after they make an investment to that model, they’ll fail to recover the costs due to politics, limited participation in the health exchanges, among other things, he adds.
“Until healthcare reform settles down, you’ll see systems waver between larger campus planning, with more sick care occurring through emergency services (costs recovered by paid for service procedures) on one end of the spectrum and regional clinics (outcome-based treatment) on the other (costs recovered by health insurance),” Abbott states.
The debates in Washington don’t seem to be negatively affecting demand for future healthcare projects, even with some groups putting plans on hold, as Vigdor mentioned. But it does seem to be having an effect on what kind of projects may be built in the future.
Banks don’t appear to be shy from lending to healthcare providers for expansion efforts either. Still, the potential loss of federal funding for local health providers is a concern for lenders like Alliance Bank of Arizona when considering a healthcare provider looking to grow its business, says Rob Gramhill, regional manager of the full-service bank.
But the bank takes an individual approach to each business’ needs for each industry, Gramhill says.
“A number of factors aside from government funding are considered when making the decision to provide financing for a healthcare company,” he explains.
Whatever the government does, Alliance Bank plans to continue to look into “smart” opportunities to provide financing for healthcare companies, Gramhill says.
This is true, even after President Donald Trump cut funding for Obamacare subsidies to insurers for low-income people, which could kill the insurance marketplaces, and the possibilities of wellcare coming into fruition anytime soon.
The spaces for care
Julie Johnson, principal at Avison Young, remembers the times before the ACA was passed when private practices were only signing leases on a year-to-year basis. The medical office broker for Avison Young recalls that the size for these spaces were much smaller. Investors didn’t see medical office buildings as a good source of cash flow either, due to the inconsistency of the year-to-year lease renewals.
But before and after the ACA was passed, hospital systems were buying up doctor’s practices, developing large projects and needing larger spaces as providers pursued assets that would enable them to deliver one-stop-shop services to their patients, Johnson says.
This type of shift of providers becoming larger through a variety of means, such as acquiring practices and mergers, was helped along by Obamacare, Vigdor says.
“But it was also an independent thing. It’s this thing that ‘bigger is better.’ That’s the beginning of the response due to the Affordable Care Act,” where hospitals were integrating services both horizontally and vertically, Vigdor says.
These larger entities helped along the overall market when it came to medical office buildings.
Now, the value of medical office buildings is practically at an all-time high from an investor’s standpoint, Johnson says.
“During the transition over the last six or eight years, hospitals, in addition to building and owning its own real estate, have been doing their own leases,” she adds. With these types of leases, risk to the property owners and investors are lowered due to the high credit rankings of these hospitals, Johnson explains.
Hospitals have these high credit rankings part in thanks to the added services under one roof, literally and figuratively, she adds.
With possible healthcare reform hanging in the air, Johnson says those who haven’t made leasing decisions might be waiting for calmer waters. But those who bought in the past few years are committed with long-term leases, typically about ten years.
And the investors? They rest easy in knowing that the higher cost of tenant improvement projects behind a new lease for a provider means the providers will be more committed to their spaces in the long-run, Johnson says.
They’re not as nervous about delaying plans for future purchases, or about their current assets at the end of the day. This is due to the corporate guarantees that are backing up the providers’ leases, Johnson says. Providers are much larger now, more so than ever, as a result from the many mergers and acquisitions that resulted in the large size of providers.
“Those guarantees [from providers] are definitely very important in today’s world, because the people investing in the owners or real estate, or the loan, or whoever, they know you need the financial strength to back up a large investment,” Johnson says. And investors are seeing this financial strength from both the high credit rankings of providers, and from expected future demand.
Johnson says the flipside, that more and more folks are becoming seniors, is helping medical office buildings be seen as a great investment.
“The amount of people who are continually turning 65, it’s just going to require more and more healthcare providers,” Johnson says.
Even with the uncertainty as to who’s going to pay for healthcare, there is one certainty: Everyone needs healthcare.
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