Note: This article was originally published by the Central Penn Business Journal. Click here to read the original version.
The Affordable Care Act, or Obamacare, represents the most significant overhaul of the U.S. health care system since the passage of Medicare and Medicaid in 1965.
While it’s easy to predict the industries where these waves of change will come crashing down the hardest, less obvious industries, like commercial real estate, have also felt the impact of these ripples — and there are more to come.
For real estate investors, the big question is what impact this regulatory overhaul of health care mandates, subsidies and insurance exchanges will ultimately have on the commercial market. The best clues can be found in the emerging trends taking place in local health care real estate across the region.
Simply put, there are two major trends we should be watching closely right now.
Noncore real estate, such as medical office buildings and outpatient facilities, have become a common asset that health care systems are monetizing first to help stay financially afloat. Selling off real estate and consolidating square footage is a necessary tool for health care systems right now. Here’s why.
1. Provide an infusion of capital for core investments. Selling off noncore real estate assets can provide health care systems with a quick and significant infusion of cash, allowing them to reinvest this capital back into essential items like construction, renovation and upgraded medical equipment.
2. Focus on strategic growth. Rather than holding on to an underperforming or noncore real estate asset, health care systems are selling them off and using this money to prioritize physician recruitment and retention, clinical expansion and growing their market share.
3. Strengthen balance sheet. The capital gained from monetization will improve liquidity — and a health system’s balance sheet as a result — allowing it to earn a better credit rating.
4. Reduce legal and regulatory exposure. More properties mean more opportunities for a costly violation. Health care systems benefit from reduced legal and regulatory exposure by monetizing their noncore real estate assets.
Mergers and Acquisitions
Some of Central Pennsylvania’s largest health care systems have engaged in discussions regarding merging or acquiring another facility. Specifically, four different mergers have already taken place or are currently in the works, each for unique reasons, but with the same goal in mind — to rein in costs and expand access.
1. PinnacleHealth (JC Blair Health System) and Penn State Hershey (St Joseph Regional Health Network). The most compelling reason for this merger is the projected economic savings. The recurring long-term savings is estimated to be at least $86 million annually through avoided capital and operating costs.
2. Holy Spirit and Geisinger (AtlantiCare Regional Medical Center and health care system, Shamokin Area Community Hospital, Bloomsburg Health System and Lewistown Hospital). In this “affiliation,” a small Catholic health system formally joins with a large, technologically-advanced system in an effort to continue to make health care accessible and affordable to the most people.
3. Lancaster General and University of Pennsylvania Health System. One of the largest benefits of this merger, aside from their entry into a new market, is the ability for patients to receive treatment at one facility and follow up at another. LG Health President and CEO Tom Beeman identified health care reform as the driving force behind this merger.
4. WellSpan (Good Samaritan, Ephrata Community Hospital and Philhaven).Wellspan/Good Samaritan is primarily focused on physical health while Philhaven specializes in behavioral conditions and mental health. Combined, these organizations will be better equipped to serve a broad range of patients at a fraction of the cost of trying to add these specialties independently.
The velocity at which the health care industry is changing cannot be overestimated. While we are already experiencing disruption and change resulting from health care reform, technology, big data, regulatory and other impactful forces in the health care industry, I believe it is simply too soon to accurately predict the full impact these changes will have on the commercial real estate industry.
Despite the many uncertainties surrounding the hot-button issue of health care reform, there is one certain conclusion I will draw. Health care systems are prepared (and have already begun) to proactively make changes to their real estate in an effort to stay afloat.
They will do whatever it takes, even if this means selling off large properties or merging with/acquiring another health care system. We should be prepared to continue to see health care systems tighten up and team up to make their services efficient and competitive.
While there are many more changes yet to come, ones that are sure to be both positive and negative, the real estate industry should remain ready to quickly react to the changing needs of health care systems during this time.