by Brianna Crandall — May 4, 2015—When the Affordable Care Act (ACA) was signed into law five years ago, it marked the beginning of a tumultuous new era for the healthcare industry, opines global commercial real estate services firm JLL (Jones Lang LaSalle). On the fifth anniversary of that historic event, JLL has identified five key risks healthcare organizations need to manage in the next two years — from increased financial risks/costs to consolidations to aging infrastructure.
“The Affordable Care Act was a defining moment for the U.S. healthcare industry, creating new challenges driven by demographics, technology and aging infrastructure,” said Peter Bulgarelli, executive managing director, JLL Healthcare Solutions. “Despite these challenges, healthcare organizations now have more opportunities than ever to increase efficiencies, drive savings and ultimately deliver world-renowned patient care. They can do this by implementing holistic, long-term real estate strategies aligned with their core missions.”
A new report by JLL outlines five significant ACA-related risks and opportunities affecting the healthcare industry and its real estate:
1. Increased financial risk— Healthcare providers are shouldering more financial risk, as pressures to increase care quality, reduce administrative and clinical costs, and maximize patient convenience become top priorities. The shift from a fee-for-service model to one that bases reimbursement on value is a key driver for these needs. Other contributing factors include the growing Medicare and Medicaid population, the expansion of high-deductible health insurance plans, and changes in admission patterns and volumes.
“Healthcare organizations can take a chapter from the retail industry’s book and reach consumers with the right facilities in the right locations to reduce their financial risk,” said Chad Pinnell, Managing Director, JLL Healthcare Solutions. “Consumers, patients and potential patients want choices, so healthcare organizations can thrive in this hyper-competitive landscape by reaching customers through less traditional entry points such as annual wellness visits, employer-sponsored wellness programs, smoking cessation programs and education opportunities.”
2. Return on assets has declined— Declining profitability and increasing resources allocated to property, plant and equipment have led to reduced return on assets (ROA). Many healthcare organizations are improving ROA by better utilizing their physical assets/real estate, including medical office buildings, through monetization and optimization.
Implementing this strategy can have a significant impact on the balance sheet, including capital raised, future capital avoidance for building maintenance, and outlays for tenant retention/recruitment in system-owned buildings. For example, a number of leading healthcare groups have monetized medical office buildings and other real estate recently, including Aurora Health Care, Novant Health, Carolinas HealthCare, Pinnacle Health System, Steward Healthcare, Scottsdale Health and Tenet Healthcare, among others.
3. Aging facilities, infrastructure and workforce— The healthcare FM workforce is inching closer to retirement, as the average age of a facilities manager is 49, six years above the U.S. general working population average. In addition to the workforce, healthcare facilities are also aging. According to Moody’s, the average age of a plant has steadily increased from 9.8 years in 2009 to 10.7 years in 2013. Healthcare systems that do not have capital to spend on this aging infrastructure can look to increase efficiency and lower operating costs through better operations/maintenance and energy management.
4. Consolidations and collaboration— Healthcare organizations are shifting alliances and embracing the concept of “co-opetition” to share resources. Providers are teaming with aligned industry partners to access buying clout, specialized expertise and services to enhance their mission. M&As are also on the rise: Modern Healthcare’s M&A Watch found that mergers and acquisitions were up 13.4 percent in the first three quarters of 2014 over the same period the previous year.
“The key for healthcare organizations is to partner with an organization that has developed ongoing, trusted relationships with preferred suppliers nationwide,” said Bulgarelli. “This allows newly merged healthcare organizations to streamline operations, integrate their supply chain more quickly, leverage their purchasing power and, ultimately, save money that can then be reinvested into patient care.”
5. Healthcare costs continue to rise— Numerous factors are continuing to push healthcare costs: greater utilization rates driven by the aging population, an increase in the insured population, aging infrastructure with associated maintenance and repair costs, ongoing upgrades of high-tech equipment and information technology (IT), and rising pharmaceutical drug costs.
“Now more than ever, we know that the Affordable Care Act is substantially different from any previous changes and challenges that the healthcare industry has ever seen. It requires significant organizational restructuring and efficiencies to ensure profitability while providing the very best patient care,” added Bulgarelli.
