Raritan Bay Medical Center in Old Bridge — Courtesy: NK Architects
By Ben P. Lee, AIA
Since the great recession of 2008, the health care sector has emerged as a reliable investment for real estate developers and the capital market.
The opportunities created by the health care market can be attributed to several major drivers:
The need to transform from tertiary services to ambulatory services
The transformation is necessary due to the influence of the Centers for Medicare & Medicaid Services (CMS) and health care insurance reimbursements. The response is to reduce costly length of stay, or LOS, for acute care patients and shift the delivery of care to less expensive ambulatory settings. For the real estate industry, this emphasis means an increase of outpatient services in medical office buildings for physician practices and specialty services, as well as the development of freestanding diagnostic and treatment services such as imaging centers and ambulatory surgery centers. Opportunities to address chronic health conditions through outpatient treatment also have grown, including dialysis centers, subacute care facilities and rehabilitation centers.
The strategy of increasing their encatchment area
Increased competition has driven health care organizations to move beyond their traditional boundaries to capture additional markets through the strategy of expanding geographically their physical presence into targeted surrounding communities. The strategy is to capture the primary care patients, thus increasing their population base. CMS is making changes to the reimbursement system based on performance of population health outcomes rather than by the volume hospital-based physician practices planted near the competitor’s hospital in an effort to increase one’s own market share.
Target unmet needs
There are many consolidation of hospitals in New Jersey. Some consolidations have created Accountable Care Organizations, or ACOs, to improve population health outcomes. In order to do so, the ACO needs to provide services for the full lifecycle of care. This requires the organization to address not only acute care and treatment, but manage all the physical and mental health needs throughout a person’s life. Therefore, many opportunities have been created for behavioral health, subacute care, long-term care and hospice care. Behavioral health has been neglected in our health care system over the years, so there are pent up needs for mental health treatment and new emerging needs for substance abuse facilities to address opioid addiction. This has led to the development of behavioral health hospitals being funded by private capital. NK Architects has recently designed such hospitals throughout the country in states including Kentucky, Ohio, Delaware and Texas.
The need for third-party financing
Over the years, health care systems have been looking to developers and private equity sources to help accomplish their goals for capital improvements and offset their debt service. It began with medical office buildings for physician practices and has extended into specialty care practices. Currently there are many national developers that venture into clinical service management and construction of specialty facilities including dialysis centers, endoscopy centers, subacute and rehabilitation centers. We now see it extending into imaging and treatment services that require large front-end equipment costs, such as MRI, linear accelerator and proton therapy. We see this trend continuing for high-cost equipment manufacturers and the well-capitalized developer that has the ability to finance, design-build, manage and operate such facilities.
Finally, the overarching goal for our country is to control our GDP spending in health care to reduce our labor overhead costs in order for us to compete in the world market. At the present time, the United States outspends all the world’s developed countries in health care. This has not resulted in the improvement of population health; we have the worst population health outcomes. Currently there are several managed care organizations that are streamlining their performance and cost models. Recently there was an announcement from Amazon, Berkshire Hathaway and JP Morgan Chase that they are entering the market and have the ability to reduce costs to thousands of employees. There are still many opportunities for emerging health care solutions by major players, and all these trends point to positive growth in health care sector for the real estate industry.
Ben Lee is the 2017 New Jersey chapter president of the American Institute of Architects and has more than 35 years of experience in the field of architecture. The managing principal and chief financial officer at NK Architects, Ben’s specialized experience includes health care, behavioral health and senior care. He is a board-certified health care architect by the American College of Healthcare Architects. He is a registered architect in 25 states and Washington, D.C. He also has a master’s in management and has prior experience including planning and development for real estate development companies.
AIA is the professional organization that helps architects serve the public’s needs and builds awareness of the role of architects and architecture in American society. AIA New Jersey has 2,000 members in six local sections and has served as the voice of the architecture profession in the Garden State since 1900.