Medical office buildings aren’t immune from price pressures

The constant and significant focus on price containment under the ACA will put the spotlight on all real estate locations

I spent 46 hours in the hospital recently, getting a new right hip. It was time. It was not that I couldn’t limp about, playing golf and even hiking occasionally, but I simply could not sleep.

I come from a medical family. My father was an orthopedic surgeon. My mother was a nurse. My wife was a nurse, two of my sisters and two sisters-in-law were nurses. I remember hobbling into our kitchen back in 1968 or 69, having just inflicted a pretty deep puncture wound into my ankle, by having refused to put a sharp blade in my utility knife. I was greeted by my mother, sister and sister-in-law. They proceeded to enter into a debate as to the best method for treating this pulsing blood flow (compression and a butterfly bandage won out over a trip to the emergency room and a stitch or two).

I have had several day surgery procedures, including two hernia repairs over the past 35 years. The first hernia procedure in 1983 was over 40 stitches and 3-1/2 days in the hospital. The second was 3-1/2 hours in day surgery. So a hip replacement? How bad could that be?

I researched results and talked to lots of people over a two-year period (plenty of research!). I especially talked to recent patients. Most were satisfied, some ecstatically so. But to my surprise, many are pretty passive and accept the results. I talked to lots of nurses and many physical therapists who treat patients post-op. I especially talked with three friends who had had recent procedures, complained little and, in my opinion, made great strides. I narrowed the list of doctors, interviewed two, made my choice, researched hospital infection rates and selected the site. (Commercial real estate guys specialize in site selection!)

Cost-shifting

I went to all the pre-op meetings, classes, appointments, imaging, my GP – the whole nine yards.

While I was only in the hospital 46 hours, start to finish, I was able to observe the “mothership” in action. The current 26 hospitals in New Hampshire have a general model of collecting patients at primary care, passing them on to specialty groups (such as ortho), either “in network” or “out of network,” and ultimately to the hospital, where they can recoup sufficient revenues to cover the entire spectrum, compliance, insurance reimbursements and something called the Affordable Care Act (ACA).

I recently gave a brief presentation on the current and future values of medical office buildings (MOBs) to the New Hampshire chapter of the Appraisal Institute.

MOBs have been extremely popular investment properties, as they tend to be relatively new, have long-term leases because they are expensive to build and they have adequate credit – right? Well, it is the latter that needs to be discussed.

The ACA will shift costs, and some of them are huge. But how much of the U.S. GDP can we afford for health care? If 26 hospitals are too many for New Hampshire, then how many are enough? Six, 12, more?

The old adage is that a rising tide floats all boats. New Hampshire has had a rising tide for many decades. Recently, however, growth has slowed – maybe reversed. So even New Hampshire, the traditional gazelle of New England, will need to look hard at how many resources can be allocated to health care. Some of this is local, some is federally mandated. But to pay for the ACA, expansion of health insurance to millions of Americans, someone has to pay. Who and how much is yet to be determined.

One such revenue source would be a medical device tax. For my new hip, I was told if I were to have it done in 2014 I would have had to pay almost $1,400 (about 7½ percent of the list price of the device, not the negotiated price the insurance company got).

So the cost of medical services is one big issue, but access to your preferred providers is another. This is not policy from Washington or Concord, but the insurance companies themselves.

From a realistic perspective, the constant and significant focus on price containment will put the spotlight on all real estate locations. The churning and consolidation will put some stress on existing facilities. The norm that these medical buildings will continue to appreciate now has to be rethought mid- and long-term, if not short-term.

As the ACA unfolds, even with several scheduled delays, the real estate component of medical care will see more scrutiny. Stay tuned.

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). He can be reached at wbn@nortonnewengland.com.