February 25, 2021
The coronavirus pandemic has changed the way we utilize American healthcare. Not only for providers and payors but also for consumers. As the fear of the pandemic ebbs with vaccine distribution we believe several factors will coalesce to accelerate the march from inpatient to ambulatory volumes. These create leverage for a smaller but purer acute environment, all forms of ambulatory expansion, and potentially negative headwinds for assisted living with a newly empowered older generation at home.
For a year that purported to have perfect clarity of vision, 2020 turned out to be anything but. As we turn a page both politically and philosophically, COVID-19 continues to significantly impact the U. S. healthcare industry and much uncertainty remains about vaccinations, bed capacity, and the future of investment strategies in the clinical environment. Yet, as with any crisis, opportunity does exist. Surely a key component of successful future investments in healthcare’s physical footprint will require a thorough recognition of which of COVID-19’s impacts are temporary, and which will be lasting trends in Acute, Ambulatory, and Senior Care settings.
Overview: Acute care volumes and revenue took a drubbing last year at the hand of COVID-19. By May 2020, the healthcare sector had lost 1.5 million jobs according to Health Affairs and was dealing with the dual threat of unexpected expenses for emergency planning and abrupt declines in revenue. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2.2 trillion economic stimulus bill signed into law on March 27, 2020, blunted much of the financial impact, -28% with aid vs -96% without according to Kaufman Hall. The damage, however, was still significant, especially for rural healthcare. Premier Academic Medical Centers, conversely, fared better than other healthcare portals but almost certainly saw declines in revenue in ‘health tourism’ from both international and domestic sources. Most prognosticators expect volumes to return, but not to pre-pandemic levels. According to TransUnion Healthcare, by mid-August 2020, in-patient volumes were still down 8% and Emergency Department visits more than 25% from the previous year. These financial impacts and job losses could linger. But there have been winners. Among them, hospital at home companies like Nashville-based Contessa and Boston-based Medically Home have been propelled by COVID related reimbursement flexibility and a general concern about being in the hospital according to Gist Healthcare. It remains to be seen if bed constraints or positive cost data continue the growth of this market entrant.
Prognosis: The shift away from the hospital as the epicenter of American healthcare is likely to continue and may accelerate. This is partly motivated by COVID-19 fears but also by the newly realized difficulties of visiting and navigating these complex campuses compared to the conveniences and safety of COVID-19 spawned telehealth. The reimbursement picture is also dynamic as there appears to be some level of bipartisan agreement to advance value-based payment systems and site-neutral cost schedules. This was born in the roots of the Affordable Care Act (ACA) of 2010, repackaged by the Trump administration, and will likely be continued by the Biden administration. In addition, new disruptive market entrants are more focused on disease management and specialty care than owning a footprint in this most expensive component of the care delivery continuum. Of course, the looming issue impacting the size of the hospital of the future is the thousands of patient days and procedures tied up in poorly managed chronic conditions. Given the complexity of both patient and provider commitment to impact improved management, the timing is difficult to predict. Overall, we expect hospital square footage to decrease and square feet/bed to increase in the 10-year window. Additionally, with low acuity square footage moving to ambulatory and home, and medically complex services consolidating it seems likely that $/SF will continue to accelerate.
Recommendation: As these forces coalesce it would be hard to overemphasize how important it is to invest cautiously in new acute care space. Significant healthcare investment has been driven by the aging population in America but the triggers to rising hospital volume are increasingly complex and not always tied to the aging demographic. Future strategy, therefore, should be built on a strong data supported foundation.
Overview: In the spring of 2020 the United States went from less than 1% virtual visits to 15% within a six-week period. Many patients were fearful of leaving their residence much less putting themselves in harm’s way by going to the doctor…with sick people. This caused a severe and immediate reduction in clinical visits, ambulatory surgery visits, and diagnostics. According to the Common Wealth Fund (from Phreesia/Harvard analytics), by late March 2020 in-person visits had declined by nearly 60%. This decline varied by region, and specialty, but suffice it to say it had a huge impact on clinical space usage and provided an unsettling pause to the work of healthcare facility planners. All rebounded quickly gaining back 20-30% by mid-May 2020 and returning to slightly above pre-pandemic levels by Labor Day. Telehealth levels have declined as in-person visits returned but most people believe they will settle out higher than their pre-COVID-19 levels. Relaxed regulation, reimbursement, and popularity of virtual care propelled new market entrants like Remedy and Village MD who already had virtual based clinical practices. As providers scrambled to put in place the technology to do telehealth at scale, they also looked for opportunities to use technology to boost customer confidence when they returned to the clinic. This included enhanced mobile communication that streamlined pre-visit and day of visit efficiency. By May 2020, many clinics had established ‘wait in your car, we’ll call you when your exam room is ready’ and other protocols. Additionally, as site-neutral payment legislation and pressure intensifies, ambulatory options are sure to benefit. The prominent question for many is how COVID-19 related telehealth experiments and experiences will serve to impact the long-range viability, demand, and lease rates for healthcare real estate space.
Prognosis: We do not believe that healthcare real estate will be negatively impacted by virtual care in the short or long term. Even if virtual visits were to stay at mid-summer 2020 levels, outpatient migration accelerated by site-neutral payments and other market forces should more than make up for any erosion. Outliers such as behavioral health which significantly benefited from virtual care could see further expansion. The remote work trend could have a larger, immediate impact on the medical office building (MOB) space as systems look to permanently relocate hospital ‘back of house’ functions to employees’ homes. As reported by Crain’s in October 2020, there is still a lot of money chasing healthcare real estate and although there was a bump in basis points in April/May 2020, healthcare REITs are maintaining rent collections in the high 90 percentiles which has propelled value and investment in this sector. Valuation should be on solid footing into the future, but we may see some ownership transition away from legacy providers as their balance sheets were dented. Having said that, we are not suggesting hospitals will move away from MOB expansion. Recruitment and specialty alignment are still critical to health system success and competitiveness. We also anticipate some evolution of design as providers look to streamline efficiency and enhance customer satisfaction. These may include pass through waiting areas and streamlined discharge as well as hybrid on-stage off-stage concepts.
Recommendation: Look for opportunities to continue to streamline design and operations as you invest in ambulatory footprints. Market location and provider partners will continue to be key and market gaps will emerge as virtual care and hospital at home options grow. Trends to watch: Although most expect legacy medical practices to return to low levels of telemedicine and virtual care (below 5%) keep an eye on the growing number of providers that already had a virtual care model and parlayed that into growth during the pandemic. Additionally, Teladoc Health’s merger with chronic disease manager Livongo (completed in late 2020) has significant ramifications on the $3 Trillion that was spent in the United States on chronic disease in 2019. These innovative market entrants could reshape how consumers view a ‘visit’ and fundamentally reshape the healthcare real estate landscape.
Summary: Senior Care may be the most complex of these three segments as we are dealing with larger issues than just the vulnerable population concerns of the pandemic. Enhanced care technology pioneered and expanded during the pandemic enhanced seniors’ ability to age in place. We’ll pick this up in our next edition.
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At Ankura, our team of healthcare professionals builds partnerships with clients to advise, manage, and execute strategic capital investments to effectively mitigate the risks inherent in the planning, design, construction, activation, and financing of capital projects. We have a long history of advising through all phases of complex projects to ensure clients deliver on their objectives to improve population health and the patient experience with the right care, the right place, the right time, and at the right cost.
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“Healthcare Real Estate Market Trends in the COVID Era: Sea Change or Transitory Ripple?” Ankura Consulting; 02/25/2021; Furgeson, Mark.