Number of outpatient facilities surges as industry values more convenient, affordable care
The number of outpatient centers increased 51% from 2005 to 2016, a trend that shows no sign of slowing.
The number of outpatient facilities jumped from 26,900 to 40,600 between 2005 and 2016, according to a new report from commercial real estate firm CBRE. Rents have followed. They reached a record high in the second quarter of this year, rising 1.4% year over year to $22.90 per square foot, driven by areas with low vacancy rates like Louisville, Ky., Seattle, Nashville, Manhattan and Indianapolis.
It mainly comes down to two things: making services more convenient and more affordable, said Christopher Bodnar, vice chairman of CBRE Healthcare Capital Markets.
"That strategy moves along the entire continuum of care for providers. It's front and center for their real estate strategy as well," Bodnar said, although there will always be demand for acute beds, he added. "We are seeing health systems look to decompress their main campus and look to move more services to an outpatient setting."
The report represents healthcare's transition from vast acute-care footprints to more convenient outpatient space. Some health systems have moved their clinics and ambulatory facilities off their main campus to make way for more beds and specialty care. But a significant number of providers have already pared down their acute operations to build outpatient networks closer to where people live and shop, responding to consumers who demand more accessible, affordable care as they shoulder more out-of-pocket costs.
Health systems are looking to keep pace with mergers like CVS Health and Aetna and Optum's continued push into the market, both of which draw patients away from the hospital into a retail setting. Many major health systems continue to watch their inpatient admissions dwindle and their outpatient visits grow.
Reimbursement pressure is also pushing providers to lower-cost settings that could offer higher margins, said Mark Lamp, executive managing director of healthcare at CBRE.
"Technology is also changing so fast that providers can bring care to the consumer quicker and in a different way," he said. "Providers recognize that they need to deliver care differently than they have in the past."
They need adaptable real estate that can evolve with technology, Lamp added.
Outpatient center employment has more than doubled since 2003. It grew 3.5% year over year in October 2018 compared with 2% annual growth in overall healthcare employment, CBRE's analysis of BLS data show. Ambulatory jobs are up 77% since 2000.
GoHealth Urgent Care will open its 116th location this week, growing from just five spaces in around four years. GoHealth and its affiliate Dignity Health just completed the acquisition of the six urgent-care centers operated by the Bay Area's Golden Gate Urgent Care.
"I've watched the growth and development of ancillary sites in healthcare for the last decade and a half," said Todd Latz, CEO of GoHealth. "The numbers we are seeing in terms of their proliferation represents a trend that is accelerating."
Partnering with a health system facilitates same-day referrals and cuts down on duplicative or misguided care as healthcare data are disseminated in real time, Latz said. More of these types of partnerships will continue, he said.
"Clinicians can get to the heart of the matter much more quickly because of the connectivity to a health system and the integrated approach to care," Latz said. "We are one piece of a much larger movement."
Consolidation, in many cases, has bolstered balance sheets. Combined institutions have deeper pockets to pull from and can invest in these types of partnerships and mergers and acquisitions that expand their ambulatory network.
Trailing 12-month medical office transaction volume decreased to just less than $12 billion in the second quarter but didn't stray far from the cyclical high of $14.2 billion, according to CBRE.
These deals are drawing interest from state pension funds and other institutional investors, Bodnar said. They are shying away from multifamily and retail investments that may have peaked, he said.
"Healthcare provides more of a runway to withstand a correction in the market," Bodnar said. "People will always need care."
Medical office vacancy rates have consistently been lower than the total office sector, according to CBRE data. Vacancy rates dipped from 11.1% in 2010 to 8.4% in the second quarter of 2018.
More medical office deals are being made in cities with high population growth, CBRE data show. Cities like Phoenix, Houston, Dallas/Fort Worth and Atlanta are among the top markets for total transactions completed over the past year. Houston, Minneapolis, St. Paul, Atlanta, Chicago, California's Inland Empire, Kansas City and Boston rank among the top markets for square footage under construction.
Big employers in these markets are looking to curb their coverage costs as they carve out narrow networks. These often incentivize employees to seek care in lower-cost settings outside of the hospital. Technology-enabled ambulatory space can facilitate collaboration among providers, a key to healthcare's new direction.
"Managing that population and planning for that growth has been top of mind for health systems in markets where there are huge increases in population," Lamp said.
Still, medical office construction levels have begun to trail off after increasing 60% from 2011 to 2017.
One thing that could further stall investment, at least on the health system side, is the proposal to level pay for outpatient services regardless of where they were delivered. The CMS issued a site-neutral payment proposal that would eliminate the rate discrepancy for hospital-owned outpatient departments and those owned by physicians. Higher reimbursement rates for hospital-owned facilities were initially intended to offset costs related to maintaining around-the-clock emergency services and specialized equipment, although new technology has somewhat leveled the playing field.
The current payment model has led to health systems building more outpatient facilities, said Paul Ginsburg, director of the USC-Brookings Schaeffer Initiative for Health Policy and the Leonard D. Schaeffer chair of health policy studies at the Brookings Institution.
"Under site-neutral payment, less of the new capacity would be health-system owned," he said.
Hospitals have begun to slow their development activity as they re-examine their operations and adapt their real estate strategies, real estate experts said.
But as they rethink their real estate strategy, health systems are forming more partnerships and joint ventures with real estate management firms to redeploy capital and hand off the maintenance and upkeep of their facilities to a professional.
"It allows them to free up capital, still have some equity and control of their real estate with a partner whose sole focus is to own and operate buildings in the most efficient manner," Bodnar said.
As providers snatch up more medical office space, it's important they pay close attention to rental rate commitments, he said. The right control provisions can prevent significant rent increases after a lease expires.
"This is a new environment of demand for these types of facilities," Bodnar said.
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