Why Health Insurance Marketplaces Are Here to Stay

An investor paper by S&P Capital IQ, a division of McGraw Hill Financial, predicts that Standard & Poor’s 500 companies could shift 90 percent of their workforce from job-based health coverage to individual insurance sold on the nation’s marketplaces. If all U.S. companies with 50 or more employees followed, they could collectively save $3.25 trillion through 2025, according to report.

The S&P 500 is a stock market index of 500 large companies with common stock traded on the New York Stock Exchange or NASDAQ. It’s considered a leader of the larger U.S. economy. S&P 500 companies employ roughly 20 percent of the U.S. workforce for companies with more than 50 workers.

According to the report, the transition to marketplace coverage won’t take long. It is estimated that 30% of S&P 500 workers should shift coverage by 2017, 70% by 2019, and an estimated 90% of workers transferred by 2020.

These projections could change over time as the ACA is amended and modified, with implementation likely forwarded because of healthcare reform. “Whether the current version of the ACA remains intact or is amended,” the report said, “the burden of acquiring or providing health benefits is sure to shift more from the employer toward the individual or employee, with varying degrees of support from the government, as time passes.”

From a financial perspective, data and predictions within S&P Capital IQ’s model appear sound. Conceptually, a shift from employer-based healthcare where, on a global scale, costs far exceed results, to a platform that rewards competitiveness seems a recipe for sustainability and fiscal responsibility.

Healthcare: What Does Tomorrow Look Like?

Healthcare in the United States is currently undergoing the greatest paradigm shift in one-half century. Where is it going? How will it be delivered? What will the hospital look like?

1. Hospitals will be used for the highest level of acuity patients. Integrated care will be around the patient with an emphasis on prevention and wellness. Due to less invasive procedures and advancements in research, ultimately, a reduction of hospitalizations will occur. Systems will continue to push further into the suburbia with different models. Specialty areas of medicine will be available within a certain corridors; don’t expect redundancy though.

2. Size is strength. Systems will consolidate in which community hospitals may cease to exist and systems will be vertically integrated. As the differences between for profit and not-for-profit continue to shrink, they may partner or merge, and not-for-profits could lose their tax-exempt status.

3. An oft-used phrase in the healthcare real estate environment is the “patient-centered continuum of care”; this is the cornerstone between treating disease and illness and prevention and wellness. Medical homes and ACO’s are early responses and will jump-start this model.

4. Specialty areas will focus on those practices that have the greatest profitability. These include cancer, heart, orthopedic and neuroscience, and tied into needs of baby boomers.

keep calm5. IT is forcing change. Telemedicine, home monitoring systems, point of care testing, EMR, and data management will impact how infrastructure and physical space is designed. In turn, demand for off-campus land for medical use and small scale medical building components will continue to be impacted negatively.

6. Projects within hospitals will have to become more sophisticated and mission critical, thus, the re-purposing of existing facilities will occur. Under the reimbursement rules, patient satisfaction factors into reimbursement rates. We expect facility directors of older property to meet these challenges when new development is not cost effective or physically possible.

7. The industry now expects sustainable practices. LEED, for a short while, was seen as adding an unnecessary additional expense, but “green” and energy efficiency are now coveted for purposes of costs, community and care.

8. Demographics are of huge focus, both for expanding or maintaining qualified staff and for the diverse, aging patient population. 

9. As reform is instituted and buildings become a complex authority for the administration of care, medical real estate will develop into a vast submarket within its own parent, commercial real estate. Actively engaged, specialized contractors will compete to provide innovative, yet more cost effective solutions.

During our conference calls, it is apparent healthcare providers are instituting new policies that make them more competitive over the long run, rather than building the landmarks of the past. This is important as budget conscious US lawmakers and corporate heavies want to see their respective burdens lifted.

Health Providers: Create Wealth Through Real Estate

chainsReal estate is the number one long-term, wealth-building vehicle available to an established healthcare syndicate. Yet, more often than not, many organizations resort to paying into long-term variable rent models in new developments or improve existing buildings that offer small allowances for reconstruction.

As an example, one function of our comprehensive real estate service package includes that of development, in which we continue to field inquiries from well capitalized healthcare organizations that would rather turn over their keys to us and lease, than partner in the development of healthcare real estate. Yet, and as any lender will tell you, any associated risk in buying a medical building or performing a development is negated by the relative stability and/or strength of the organization. And in this environment, where capital is inexpensive and abundant, those organizations that utilize developers’ capital exclusively for building a medical project are simply not willing to accept the long term risk of their own business decisions. In other words, they should not be expanding. 

As real estate advisors to health professionals, we believe in a partnership-oriented approach to further strategic financial objectives through real estate holdings. And, indeed, your organization should view itself as a source for wealth creation outside of the traditional models of revenue production. In certain respects, this requires a paradigm shift in the way a healthcare organization views growth in revenue. It is clear that the majority of independent physicians just want to work, treat patients and arrive home at a decent hour. However, in a loose monetary economic environment, even these physicians are realizing the potential for inflation diluting their work earnings.

Over several years, we have heard a variety of misconceptions from medical professionals about why they do not participate in real estate ventures. Accordingly, let us help to disprove some of these arguments.

Real estate is too expensive. This has to be the largest misconception. As an example, how many times have you said, “If I bought that building or property 10 years ago, I would have 3X, 4X, 5X, 10X my original cash investment?” The truth is that money is relative and determining an entry in real estate usually occurs upon purchase or development a piece of property. Trust real estate counsel that can provide thorough comparable sales information, by area and product type. All information should be used to benchmark an investment when locating a property to develop or purchase.

Real estate requires too much money . After several years, one of our clients came back to us regarding his 15,000-square-foot medical office building that we assisted in site selection and development. Their total cash investment on this project was approximately $325,000, split evenly, and the remaining was financed through bank debt of $2 million + $75,000 interest for a total cost of $2.4 million, mi. After 5 1/2 years, the building appraised at $3.4 million and our client was able to refinance this building and receive triple their original investment.  And, to conclude, we are now responsible for the off-market disposition of the facility at a price that exceeds the refinanced amount with multiple bidders.

By no means, do organizations need excess capital to own real estate, especially within the medical arena. A good credit score, a successful care syndicate and a solid reputation in the community are the right ingredients for any institution to finance your investing activities in real estate.

Real estate is too risky. This may be more of a generational problem than anything and the risk averse tend not to be invested in real estate at all, rather recounting one person’s story.

For an example, if real estate is so risky, why are banks willing to give you 80 to 90 percent of a building’s value to buy or build your own medical office building or invest in healthcare real estate? Would they provide you with 80 percent of the value of a stock in the stock market? Likely not.

Banks inherently comprehend the value of real estate and are currently willing to lend to healthcare professionals. They know that as an industry care organizations work very hard to keep up with demand, rarely goes out of business and do not tend to transfer locations once established in a referral base and/or community.

Debt is too risky. There is good debt and there is bad debt. Good debt is used to accrue assets that generate income, appreciate in value and provide passive income. Bad debt is tied up in assets that do not generate income and depreciate in value over time.

Personal bad debt is another thing. It needs to be said that members of high stress, high reward work environments are notorious for spending their earned income on frivolous, short term items that depreciate upon purchase or soon thereafter. With inexpensive debt funding collateral (real estate), which will remain in place for decades, it is possible to create true wealth through real estate investment in a reasonable time period.

To conclude, contact MREA for all your healthcare real estate questions or concerns. Pair our knowledge of the real estate industry with your care organization’s spatial needs to start or further your personal wealth.

Locating Medical Real Estate: The Request for Proposal (RFP)

searchDuring an organization’s planning process, a consideration of how medical space should be acquired will be determined. Whether by lease or purchase, via development or existing retrofit, the option selected should be derived by the real estate’s ability to provide the desired utility at the lowest cost. The financing function will determine how to fund the space acquisition, whether through existing capital, mortgages, or operating lease.

For reasons of flexibility, timeliness, economies of scale, and availability of funds, leasing is a better decision. Otherwise, when cash flows dictate the opportunity to purchase an existing facility, a simple step should be undertaken to diligently search for the property that best fits the criteria.

For the purposes of targeting existing facilities to meet the specified criteria, reduce time, improve clarity, as well as  bargaining position, it is important to utilize a document that is called a Request For Proposal (RFP). This, as a precursor to the landlord’s formal proposal, and which will answer the following general questions:

  1. Who will occupy the space or property?
  2. What type of space or property is required, leased or owned?
  3. What growth space will be required, now or future?
  4. When is space requirement needed?
  5. How long will the current need for such space last?
  6. Where should the property be located?
  7. What are special requirements?

For examples of purchase RFPs, please contact us here. As for acquiring lease space, items to consider in a Lease or Sublease RFP commonly are:

  • Premises requirements (rentable or usable square feet)
  • Term of the lease
  • Commencement date
  • Rent abatement (Free or deferred rent)
  • Rental commencement date
  • Rental rate
  • Escalations or adjustments
  • Improvement allowance
  • Space planning and design services
  • Expansion option(s)
  • Renewal option(s)
  • Property management and tenants
  • Operating hours
  • ADA compliance and access
  • Extended or after hours HVAC
  • Telecommunications
  • Security
  • Parking (# per 1,000 square of rentable space)
  • Asbestos
  • Nondisturbance
  • Response to RFP due date
  • Exhibits (if applicable)

Are you seeking an example of our Medical Real Estate Request for Proposal (RFP)? Require real estate guidance for a purchase or lease of a medical building in Texas?

Contact: 

Robert S. "Bob" Lowery 
Managing Partner
MREA Medical Real Estate Advisors
1200 Smith Street, Suite 1600
Houston, TX 77002

713.701.7900
office@mreausa.com

Building a Medical Facility

Building a healthcare facility from scratch, similar to modeling a custom home, offers an opportunity to control the entire design to fit the particular needs of the medical provider. While the list of preparatory items is long and requires adequate time allotment and abundant resources to carry out, the opportunity, as part of a rebranding strategy is tremendous.

First, we suggest engaging a firm that is focused on relationships within the healthcare real estate sector. No, this does not entitle a medical professional to utilize a proprietary database to forge relationships independently for purposes of pitting one qualified real estate service provider against another. Rather, it allows for the opportunity to streamline the development process for the purposes of time expediency and future financial gain.

For small to mid-size healthcare providers that are initiating contact with real estate developers, it is vital to seek a real estate group that is knowledgeable in land management. Issues such as utility needs, zoning restrictions, detention requirements, along with developer demands and building or regulatory stipulations can quickly overwhelm these providers, especially if exhaustive planning was not prerequisite. Other items such as locale, comparable developments, leases or sales should be documented, and client, whether specialist group or primary care, should be made aware.

For most specialist physician groups, geographic awareness is an integral part of the entire value equation. The need to be within close proximity to a hospital or medical center is routinely the highest priority. Certain specialties will seek companionship with the hospital for benefits that are simply too costly for stand alone facilities that do not experience a high volume of patient care. Thus, seeking land or redevelopment opportunities that are well situated near hospital system is imperative.

As for primary care, locating within, or contiguous to, a hospital is not as important, especially if access is provided to hospitalists. Family practice organizations, which are now in highest demand by patients, specialists and large healthcare systems, are realigning themselves within medical centers for physician growth, referral and patient demand. This, especially as the financial incentives are too lucrative to ignore. To remain independent, some family practice physicians are seeking space in alternative uses such as retail centers or condominiums.

A unique development opportunity for healthcare providers is that of medical condominiums. This assemblage, or community, of buildings offers healthcare providers an opportunity to realize the equity and tax benefits of real estate ownership. The demand by physicians seeking such opportunities outweigh those pursuing traditional medical office space 2 to 1 these days; convenience taking precedence over compartment.

While this style gained favor in the medical community throughout the last decade, several medical providers have engaged our firm to assist in expansionary endeavors. As condos are built a certain size, the shape typically cannot be reconfigured. Also, condominiums are commonly built with unique features that are non standard. Any proforma sale analysis will have to include a longer sale schedule or reduction in price relative to added, exclusive amenities.

As specialized consultants that are unique to the commercial real estate industry, our assignment is to help chart the course for smooth sailing. We will assist healthcare providers through our unparalleled database of contacts and relationships. By streamlining the development process and assisting with routine financial and market surveys, we will minimize the risk of the provider while adding significant contributory support and value to the final product.

Lease Renewals for Medical Professionals

An important clause not to be overlooked within a lease contract is the renewal option. Renewal options pertain to the potential extension(s) of the lease upon the date of lease completion. Renewal options will contain language regarding lease rates going forward, concessions such as free rent and tenant improvement allowances and operating expenses. All of these terms are negotiable and will play an important role in the complete structure of a lease renewal. Renewal options are meant to provide flexibility for the tenant in the future. So, being aware of how to strike the right balance, within the lease as well as the renewal, will grant medical professionals the greatest flexibility and financial outcome for their real estate interests. 

One of the most common errors healthcare providers make is negotiating lease renewals without the help of a commercial real estate professional, specifically those who specialize in healthcare lease and renewal transactions. Most healthcare groups tend to be self-reliant and entertain lease interactions from within their office. The reasoning is fairly simple, which real estate investors are aware; the majority of medical providers will rely on referrals by way of other medical providers. So, if location (even space) can be identified by referral patterns, then the use of real estate counsel is unnecessary. Or, if location will remain the same, then negotiations of a renewal may be handled in-house.

But, rather, successful medical groups, large and small, understand that in order to achieve growth, they need leverage. Landlords, especially those that are in the real estate business, negotiate with professional guidance from real estate professionals. For healthcare providers, selecting their own representation, one that has performed the same real estate surgery with multiple instruments time and time over, to advocate their position will assist in influencing the outcome favorably. Furthermore, because landlords authorize a split of the commission between the landlord’s broker AND tenant/buyer broker, providers have the opportunity to receive representation from a healthcare real estate professional at no out-of-pocket cost.

MREA is a full service, healthcare real estate firm headquartered in Houston, TX. MREA provides commercial real estate services to healthcare providers and commercial real estate investors throughout the State of Texas.

3 Development Strategies for Healthcare Providers

Hospitals and physician groups are embracing third party ownership, management and development of real estate because it has the ability to preserve capital resources for acute care needs, eliminate the conflicts that arise in the landlord/tenant relationship and minimize the potential legal and regulatory challenges associated with leasing space to referring physicians.

Many partnership synergies and dispositions have been publicized through our organization’s newsletter, but a new trend is occurring in which small providers up to large systems are utilizing third parties to develop and own new medical real estate projects. This trend has the potential to have a significant impact on capital structure decisions for going forward.

The use of outside capital to fund non-core real estate assets has been used with improved adoption in corporate America to facilitate growth and expansion. Retailers such as Wal-Mart, CVS and Walgreens, which are becoming stronger competitors in providing healthcare, have all increased liquidity and implemented cost efficiencies using third party capital and development expertise to fund billions of real estate expansion over the last few decades.

As for the development of medical facilities, healthcare providers may choose a few approaches that have been highly successful.

One. Providers may select to develop a project internally using an owner’s representative in place of the traditional developer. The owner’s rep determines the size and scope of the project and works with architects, engineers and the general contractor to build the facility. The provider is responsible for procuring entitlements and utility easements and covering the costs for the site preparation process. In this scenario, third party consultants may be employed to assist with these individual processes. The hospital is also responsible for the leasing and management of the building, although it may appoint a property management firm.

Two. Another approach is through the use of a third party to develop the medical facility for a fee. The third party will receive a fee for its services. In this case, the provider is contracting the developer’s expertise, which commonly includes feasibility analysis, project guidelines, pre-leasing, management of the entitlement process, value engineering for the project, negotiating the contract with the general contractor, as well as project management.

Three. A third party developer and owner both develops and owns the building through its completion. The developer/owner performs all the same functions as the fee-based developer. The main difference is that the developer assumes all of the risks and benefits of the development process and the ownership. A fee-based developer may have an incentive to reel the project in at a contracted cost and within a specified timeframe. The developer-owner has the same incentive, but is likely to strategize on ways that will lower costs of the long-term ownership, because this will ultimately determine the owner’s total cash flow and return on investment. Furthermore, a developer-owner has an incentive to minimize the size of the building to assure high occupancy rates, which has the ability to create conflict with the providers longing for vacant space to accommodate future needs.

If you should have any questions or require a proposal for a medical development under one of these three proven commercial real estate development strategies, please contact MREA at 713.701.7900.