Clean bill of health: How healthcare real estate is shaping up in 2013
Mar 28, 2013
The Affordable Care Act (ACA) — better known as Obamacare — is changing healthcare not only for insurers, providers, and patients, but for healthcare real estate as well. The ACA’s Medicare and Medicaid rules offer hospitals higher reimbursements than private physicians for patients covered under these plans, so hospitals are buying up diagnostic and imaging centers in order to take advantage of the higher reimbursement from Medicare and Medicaid patients.
But while the ACA is arguably the highest profile driver of change in healthcare real estate, there are several other forces at work that investors and developers — not to mention hospitals and providers — should keep an eye on. Two of the biggest are Stark Law and population and job growth. Let’s take a look at how they’re impacting healthcare real estate.
Stark Law
Stark Law continues to play an influential role in every healthcare real estate transaction nearly a quarter century after its passage, and the ACA adds a new twist: providers of services and suppliers must self-disclose potential or actual violations of Stark Law. For those who haven’t encountered Stark Law, it originally banned self-referrals for laboratory services working within Medicare, and was later expanded to prohibit healthcare providers from submitting Medicare and Medicaid claims for patients who were referred by doctors with whom providers have a financial relationship. It also applies to property leases between healthcare providers and referring offices. Under Stark Law, such leases must include a term of at least one year, “reasonable and necessary” space for legitimate business purposes, and rent consistent with fair market value, among other requirements.
The penalties for Stark Law noncompliance, especially when it comes to rents at fair market value, can be steep — some cases have ended in fines and penalties of more than $30 million. To avoid these steep fines, healthcare systems with a new or renewed lease from or to a referral source should do a market study to ensure compliance. This means issuing an appraisal report based on analysis of the market data and subject property data — gathering leases, rent rolls, floor plans, and site plans; inspecting the property; and monitoring the local market at the time of the lease. If healthcare systems are already defending against alleged Stark Law violations, retrospective fair market value reports can determine whether the lease in question was in compliance at the time of the transaction.
Stark Law compliance affects medical office as well as ground lease transactions.
Population and job growth
When the ACA was passed, some analysts speculated that a spike in development of new healthcare real estate would follow because increased coverage presumably meant an increase in patients, and the need for more or bigger facilities. Healthcare real estate is active in states and cities where jobs are available and the population is growing.
Areas with strong population and job growth are seeing healthcare centers develop new off-campus branches, such as free-standing emergency room facilities and cancer centers, to accommodate patients without requiring them to travel to the hospital. Off-campus facilities decrease construction costs and operating costs for the hospitals and can provide added convenience to patients.
In Texas, for example, the Dallas-Fort Worth region saw the largest numeric increase in population in the U.S., gaining nearly 132,000 new Texans between July 1, 2011 and July 1, 2012. In January, the region also had the third highest increase in nonfarm employment year over year. This growth has spurred the development of new stand-alone emergency facilities. Healthcare provider HCA has four emergency centers under construction or about to be under construction in the Dallas-Fort Worth area, and First Choice Emergency Room expects to build six to eight new sites in the region.
While the ACA is certainly having an impact on healthcare real estate, both Stark Law and job and population growth continue to drive the market. While Stark law incites necessary caution in signing new leases, a number of states with expanding populations and open jobs are seeing a number of new healthcare real estate developments.
Posted by: Jack Bass
