by Brianna Crandall — June 27, 2018 — As the health-care industry shifts toward value-based population health, mergers and acquisitions (M&A) continue to accelerate, creating mega-sized, nontraditional health systems. Meanwhile, the industry continues to grapple with regulatory uncertainty and increasing costs per patient. On the cusp of yet another major transformation, the health-care industry requires innovative approaches to real estate and facilities, says global real estate services and investment management firm JLL.
Whether providers’ real estate portfolios and facilities are well-positioned for this change remains a big question mark, according to JLL’s Healthcare Solutions division.
Richard Taylor, managing director of JLL Healthcare Solutions, stated:
Hospitals are sitting on an enormous amount of underutilized real estate following the intense M&A activity over the past several years, but most organizations still haven’t prioritized strategic real estate portfolio planning. In an environment of continued transformation and uncertainty, health-care organizations are leaving money on the table by not optimizing their facilities management and real estate portfolios. We expect more health-care organizations to tap experienced corporate real estate (CRE) facilities and consultancy partners to fill this strategic gap.
Five health-care trends to watch
Major trends are transforming how health-care organizations deliver — and are reimbursed for — patient care, driving new approaches to real estate and facilities. JLL has identified how hospitals and health systems can stay ahead of these five disruptors shaping the health-care industry:
1) Unprecedented M&A activity is creating mega health systems, cross-industry collaborations and new approaches to CRE. Hospital consolidation has steadily increased in recent years, and that trend continued in 2017. Many 2017 deals are set to close this year, pending federal and state regulatory review. These mergers, as well as never-before-seen cross-industry collaborations with pharmaceutical companies, faith-based organizations and nontraditional health-care players, will continue to impact the health-care industry this year. Further, many large health-care systems are creating their own insurance companies to combat the reduction of reimbursements from large insurance companies.
Consolidation is creating some of the largest systems in the country, along with new kinds of health-care organizations involving health-care providers, payers, retailers, pharmaceutical and device companies, and other players.
While 2017 may have been the year of hospital M&A, 2018 is likely to surpass last year’s deal volumes as hospitals and health systems prepare for value-based reimbursement and the convergence of health-care providers and retailers.
2) Traditional hospital networks may soon be obsolete, as the definition of a health system evolves. As health systems prepare for the future, payers, faith-based providers and academic institutions merge, while regional consolidation continues.
What does this mean for real estate? Expect fewer big hospitals, greater use of ambulatory surgery buildings, and more emergency clinics and micro-hospitals in local communities, says JLL. The concept is to engage the population before residents develop acute illnesses that require expensive treatment, and to manage their care through community facilities rather than a large, centralized facility. More diverse facilities also improve the patient experience and are healthy for the hospital balance sheet, so demand for remote-care locations is growing quickly. Outpatient centers often are less expensive to construct and operate than traditional hospitals.
As of year-end 2017, a full 70 percent of medical office building (MOB) construction projects were in off-campus locations, according to JLL’s 2018 Healthcare Real Estate Outlook. This is creating a new challenge for health-care systems that are used to running large campus-based facilities. Managing dispersed portfolios brings new challenges and increased pressures of building or buying real estate services.
3) Cost-per-patient continues to increase, and operating margins tighten. While specifics around the Affordable Care Act (ACA) may change, hospitals’ focus on value-based care will continue as pressure to reduce costs and improve outcomes remains a priority. Regardless of the debate over public policy, the transition to value-based care is already well underway.
Chris Wadley, senior vice president and Houston Healthcare and Life Science lead, JLL, predicted:
Pressure to reduce costs will continue to increase regardless of what happens with the ACA, and every opportunity to reduce fixed and operating costs should be considered. The acceleration of cost reduction is necessary as costs rise, margins fall, and uninsured populations increase, following the repeal of the individual mandate.
Projections for contracting operating cash
4) Predictable uncertainty surrounds the reimbursement model. Hospitals traded lower reimbursements for more stability and consistency made possible by insuring a larger portion of the population through the ACA. Now that the individual mandate has been repealed as a part of the Tax Cuts and Jobs Act, care providers will reabsorb financial risk, leaving considerable uncertainty.
Concurrently, while providing a high-quality patient care experience has always been a top ethical priority for hospitals and health systems, now that the Centers for Medicare and Medicaid Services is tying a larger portion of reimbursements to Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) scores, the patient experience will now be a financial priority, too.
Medicare spending is projected to outpace gross domestic product (GDP) despite lower growth in Medicare Spend Per Beneficiary (MSPB), according to the Medicare Payment Advisory Commission (Medpac) June 2017 Report to Congress. MSPB fell to an annual increase rate of 1 percent for the period 2010 to 2015, but projections for 2016-2025 show a higher annual growth rate of 4 percent. By 2030, 81 million beneficiaries will be in the Medicare program and overall Medicare spending will increase 6 to 7 percent each year — a higher projection than the GDP, which is projected to increase 4 percent annually.
5) Hospital-acquired infections remain a persistent problem. Although progress is being made to prevent health-care-associated infections (HAI), the US Centers for Disease Control and Prevention (CDC) estimates one in 25 hospital patients acquires at least one HAI.
The physical environment is fourth on the list of HAI causes, according to the CDC. While HAIs from treatment-related causes are actually decreasing, HAIs resulting from the environment of care may not be. Hospitals must consider how they can improve the design, maintenance and management of facilities — from ventilation systems to room décor — to reduce infection risks.
George Mills, director of Technical Operations, JLL Healthcare Solutions, pointed out:
Aging infrastructure and the buildings themselves are beginning to fail patients and cause compliance problems, as providers continue to hold an “it breaks, we fix it” mentality. At the same time, the aging workforce is resulting in a shortage of health-care facility management (FM) staff. FM partners and young, tech-savvy talent have an opportunity to bring new skillsets and fresh thinking into the industry during its journey to population health.
To learn more about JLL’s health-care services and receive exclusive insight from the firm’s experts, visit JLL Healthcare’s new Healthcare Real Estate Insights blog.