Disruptive Industry Trends Underscore Impact on Financial Performance

Healthcare Real Estate Insights, Part 4

Market Dynamics Cut a Broad Swath Across Providers’ Financial Performance, Scale, Capital Requirements, and Partnerships

Provider financial performance has surged to the forefront of importance in recent years as fee-for-service continues to evolve into value-based reimbursement, albeit faster in certain markets than others. Providers, faced with an increasingly competitive landscape, are laser-focused on the numbers, as they attempt to strengthen, or restructure, their balance sheets and profit margins, while not losing sight of their mission to maintain high-quality care for their patient populations.

As providers look at changing market dynamics — influenced by emerging technologies, consumer demand, and competition — any decision to replace or renovate aging or outdated facilities/infrastructure, or enter new markets through acquisition or consolidation, is being met with an eye toward proper scale, as well as scrutiny over required capital outlays and alternatives to traditional financing.

During 2018, we see:

  • Providers continuing to build scale through consolidation (i.e., over 3,200 hospitals nationwide are part of some health system).
  • Hospital/health system M&A activity continuing its pace as evidenced by 115 deals in 2017 as noted by Kaufman Hall.
  • More alignments and joint venture arrangements among not-for-profit hospitals, physicians, and non-acute healthcare providers in 2018. When executed properly, greater size and scale to reduce per-unit shared service costs, clinical and nonclinical efficiencies, and access to larger patient populations can pay off.
  • Capital allocation for outpatient/ambulatory investments growing to over 35 percent of total capital outlays.
  • The medical office building (MOB) market continuing to be strong, fueling investor demand
    • MOB vacancy rates under 10 percent.
    • Average cap rates 7.8 percent on new development; 6.6 percent on monetized (existing) assets.
  • Interest rates will continue to creep up, but not enough to discourage new ambulatory development.
  • The impact of price cuts and payment reform continuing to reduce margins while the future and timing of value-based contracting remains uncertain.
  • More partnerships evolving between communities, municipalities, private developers, managed care providers, and corporations as incentives become more aligned to reduce costs, improve quality of care, and focus on population health and wellness.
  • Nontraditional partnerships e.g., CVS and Aetna, JPMorgan Chase/Amazon/Berkshire Hathaway, will continue to disrupt.

For providers, continued revenue erosion, with rising operating expenses, reduces the margin of error for investments that do not produce ROI.

Fred Campobasso
Managing Director, Navigant Healthcare Real Estate Group

What Providers Need to do:

Have a question for Fred or Mike?

About the Experts

Back to top