Financial forces driving U.S. healthcare

The upending of many real estate fundamentals and shifting demographics throughout the United States during the COVID-19 pandemic pushed even more attention toward the growing healthcare real estate market. But valid questions are being asked about the short- and long-term outlooks on the industry as a possible recession looms, and the industry struggles with financial performance given significant increases in labor, supply chain, and capital expenditures.

Despite those concerns, investors and strategists in the U.S. are right to prioritize healthcare assets as industry shifts continue to push decentralized consumption of in-person medical services. In our last article, we explored the way American healthcare consumer experiences are changing. In a continuation of this series on these industry shifts, today we analyze the financial pressures driving changes by American healthcare providers.

The name of the game: costs

Downward pressure on reimbursement rates from commercial and government payers, buttressed by general consumer sentiment that healthcare is too expensive, may be the single strongest force in U.S. healthcare. Pressure from Medicare, Medicaid, and private insurers to lower the cost of healthcare has created what seems like a never-ending domino effect in the industry. Underwhelmed with cost management by traditional providers (primarily health systems), private payers like UnitedHealthcare, Aetna, and Cigna have aggressively built their own care delivery networks while simultaneously negotiating more and more risk-based agreements with traditional providers. These agreements incentivize traditional providers to better manage the overall spend on each of their patients, typically defined as the patients they see in their primary care settings. Health systems respond by:

• Growing their primary care networks in both scale and setting (traditional, urgent care, virtual) to capture as many patients as possible to both reduce the risk of an individual patient and provide negotiating leverage with payers; and
• Forming a variety of partnerships with independent specialty physician groups in their markets with financial incentives for lower-cost care.

This broad desire for lower-cost care and general acknowledgment from health systems that they must participate in the effort are major drivers of more patient interactions in non-hospital outpatient settings. Related efforts by payers to both reduce the list of procedures that can only be performed on inpatients and to push for site-neutral payments furthers the belief that non-hospital outpatient settings are likely to be the in-person setting for more and more care. Forecasts from healthcare intelligence firm Sg2 show a 16% increase in outpatient volumes and a 25% increase in ambulatory surgery volumes over the next decade.

Operating in the red

Starting with the enactment of the Affordable Care Act in 2010, healthcare operators had an excellent decade of financial performance as more and more Americans were added to commercial insurance and Medicaid plans. That changed with COVID-19, which kicked off a period of much more challenging financial performance.

Per Kaufman Hall’s Fall 2022 State of Hospital Finances, U.S. hospital operating margins were down 25% from 2019 to 2020, down 4% from 2019 to 2021, and down a whopping 102% from 2019 to the first six months of 2022.  Another important note is while 34% of U.S. hospitals had negative margins in 2019, about 53% are expected to have a negative margin in 2022. 

The investment market has been another source of disappointment, with nearly all large health systems that have released their financial results showing significant non-operating losses.  This combination of operational difficulty and non-operating losses has resulted in weakened cash reserves across nearly every health system.

The bottom line for real estate

These combined pressures of reimbursement rate stagnation and strong financial headwinds will require cost containment operating strategies, and it will further necessitate the need for highly targeted growth strategies to build revenue. These strategies must be underpinned by granular, predictive data about which locations, neighborhoods, and markets are most conducive for which service lines. Luckily, there are readily accessible tools that leverage demand and competition while simultaneously tracking and optimizing footprints for stronger and more transparent decision-making, like Avison Young’s AVANT suite, able to analyze your portfolio with powerful insights captured by experts.

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