Reform Update: Real estate investors seeing benefits of reform

While healthcare reform continues to cast uncertainty over much of the healthcare industry, savvy investors are finding medical office buildings a safe and solid bet as large health systems compete aggressively and more services move out of the hospital.

In the first half of 2013, Chicago-based real estate management firm Jones Lang LaSalle reports there have been 124 medical office building properties sold in deals totaling more than $1.83 billion. The average deal involves a 74,750-square-foot property selling for $14.8 million. More than a third of the deals are “multi-asset” portfolio sales, which are also driving the market.

Medical office building sales reached $5.94 billion in 2012, according to JLL. This far outpaced the previous totals of $2.79 billion, $3.45 billion and $1.62 billion for 2012, 2011 and 2010.

“These investors, while they would agree there's a lot of uncertainty, believe healthcare reform can and will be managed,” said Mindy Berman, JLL's healthcare capital markets group managing director.

Berman explained that the nation's aging population and a pent-up demand for new facilities are keeping the medical office building market active as reform makes efficiency and flexibility top priorities of healthcare organizations.

“Everything is moving out of the hospital,” Berman said. “It's just too expensive to operate in an inpatient environment.”

Buildings now make more efficient use of space by having just one reception area and one lab. Technology, through the use of online virtual visits or remote testing, is also reducing the number of face-to-face doctor-patient encounters.

“It's shrinking the square footage required to see patients,” Berman said.

Medical office buildings also serve strategic purposes, Berman said. She said systems use them to establish a “beachhead” in a community or prevent competitors from doing the same. The buildings also are used by health systems to introduce themselves to new communities with the hope that these introductions will lead to inpatient referrals.

While the medical office building market is strongest across the Sunbelt—from the Carolinas down to Florida and all the away across the county to Arizona—Berman said these buildings are smart investments in almost any region. “Investors are comfortable investing in smaller communities,” she said. She noted that in Texas, many of the new developments are joint ventures between health systems and doctors.

The CMS received a mixed reaction from physician advocacy groups to its proposed Medicare Physician Fee Schedule for 2014. While the physician groups cheered a proposal to have Medicare pay for care-coordination activities conducted outside of traditional face-to-face doctor-patient encounters, it criticized the agency for proposals that would reduce payments for services received in physician offices.

The groups noted that while progress has been made in Congress in finding a replacement to the sustainable growth-rate Medicare payment formula, an SGR-driven 24.4% pay cut scheduled to take effect Jan. 1, 2014, is still a concern.

“The current environment is forcing group practices to make operational changes that severely challenge their ability to provide quality care to Medicare beneficiaries,” Dr. Susan Turney, president and CEO of the MGMA-ACMPE said in an 18-page letter to CMS Administrator Marilyn Tavenner. “MGMA will continue to work with congressional leaders, urging them to permanently address the broken Medicare physician payment system and replace it with a more stable and predictable update mechanism that accounts for the actual cost of providing care to Medicare beneficiaries.”

Turney also noted her organization's opposition to the proposed policy, which resulted in reducing payment for 211 billing codes for services performed in a physician office to match the lower payments for the same services rendered in a hospital outpatient department or ambulatory surgery center. She urged the CMS “to use extreme caution” in adopting policies that “dramatically impact physician payment.”

Turney cited an AMA analysis of the proposal that reduced reimbursement would result in several instances where the new lower payments would not cover physician labor, supply and equipment expenses.

While Turney's letter also noted her support and appreciation for the CMS proposal to pay for more chronic-care coordination services starting in 2015, it said requirements for such payments would backfire. “Overall, while we support establishing Medicare payment for complex chronic care management, CMS' proposal is very onerous and, if finalized, would dramatically limit the ability of beneficiaries to receive these services,” Turney wrote.

Turney also urged Tavenner to immediately address the “burdensome” reporting requirements of the multiple federal quality-improvement programs. “Physicians should meet government quality reporting criteria by reporting through a single program—not four,” Turney wrote.

Turney's comments were echoed by the American Medical Association. In a 59-page letter to Tavenner (PDF), AMA Executive Vice President and CEO Dr. James Madara “implores” the CMS to rescind its proposal to cap physician office billings at the same level as payments in hospital outpatient settings or ASCs.

“We strongly dispute the fundamental premise behind this proposal, that higher payment rates for services in physicians' offices must be based upon inaccurate data,” Madara wrote. “This proposal's underlying premise is irreparably flawed.”

Madara applauded the proposal to pay for nonface-to-face complex chronic-care management services. But he criticized an idea floated by the CMS that a practice needs to get third-party certification as a patient-centered medical home in order to prove their ability to provide care coordination and management.

“We believe that any physician practice which meets the practice requirements should be able to qualify for payment of CCCM services, regardless of certification as a medical home,” Madara wrote. “We strongly disagree that employment of advanced practice nurses and/or physician assistants is an appropriate requirement for practices to bill these services.”

Dr. Glen Stream, board chairman of the American Academy of Family Physician, began his 21-page letter to Tavenner (PDF) by noting that a family doctor in solo practice could lose almost $90,000 if the 24.4% SGR pay cut went in effect.

The AAFP commended the CMS for proposing to pay for chronic-care management. But the group noted that the current coding system does not adequately value the evaluation and management services provided by family doctors and recommended that the CMS create dedicated codes for primary-care physicians.