June 17, 2020
Gordon Soderlund is Executive Vice President of Strategic Relationships at Flagship Healthcare Properties, a full-service medical real estate firm headquartered in Charlotte. We caught up with him to discuss the dramatic growth of telemedicine and the state of the healthcare real estate in the face of the ongoing COVID-19 pandemic.
Q. Telemedicine has been making headlines since the COVID-19 pandemic began. CMS and insurers have raised their reimbursement rates and there is discussion about temporary regulations becoming permanent. What is the likely short- and long-term impact from telemedicine on medical real estate?
A. Telemedicine has grown dramatically in a very short time during the COVID-19 pandemic, and we believe it will remain relevant in the future because it successfully addresses lack of access, affordability and patient convenience. However, in order for it to achieve permanent relevance, it must overcome some challenges: parity with in-person reimbursement, stigma that it is a less effective intervention, patient privacy and access to technology, data security and the speed by which favorable regulatory policy is adopted.
Short term, telemedicine has saved a number of physician practices from financial ruin as their pre-COVID-19 patient volumes dropped by as much as 60% or more. One of our clients initially sought rent relief, but three weeks later withdrew their request as telemedicine revenues helped cover operating expenses. Hospital systems have seen their tele-visits explode from a few hundred per month to tens of thousands weekly.
Longer term, analysts and industry experts are confident telemedicine will not decrease overall medical office space demand, and we concur. In fact, it may have the opposite effect, serving as a complementary gateway to more in-person care. One of our clients is supplementing their urgent care centers with telemedicine capabilities, adding tele-visits when walk-in volumes fluctuate which maximizes the productivity of their staff. Another client believes telemedicine will render urgent care clinics obsolete, or at least diminish the need for “one on every corner.”
Q. Real estate is such a large asset on any healthcare provider’s balance sheet, and yet it seems the rapid changes in the healthcare industry require a hard look at their own portfolio. How should they critique their real estate holdings?
A. Generally, a hospital’s portfolio is split between core and non-core assets, depending on the hospital’s strategic view of its holdings. Where one hospital might classify an on-campus MOB as non-core, another might consider it a core asset – it is attached to the hospital, it houses significant revenue generating users or the hospital occupies significant space.
Health systems and large physician practices are executing aggregation strategies, consolidating healthcare providers to build economies of scale and create integrated delivery networks. However, mergers and acquisitions can create a dilemma with “inherited” real estate acquired in the transaction. Those facilities may conflict with operating strategies and they tie up precious capital.
Q. Healthcare providers of all types have encountered liquidity challenges as the pandemic has taken its toll on their patient revenues. How can real estate improve their cash positions?
A. As the healthcare industry evolves from a fee-for-service revenue model to one that emphasizes value-based care and the patient experience, hospitals are increasingly required to make investments in upgrades and improvements that contribute to the delivery of exceptional care, including new bed towers, state of the art ICUs, new medical equipment, medical records technology and physician practice acquisitions. The COVID-19 crisis, however, has taxed their liquidity in ways never contemplated.
Real estate is a sizable component of every hospital’s balance sheet, and yet its ownership, development, management, maintenance and leasing are not the hospital’s core business. Substantial capital and overhead are committed to the portfolio. When capital is plentiful, interest rates are low and patient volumes are steady, the risks of ownership seem limited. However, when an emergency arises, such as COVID-19, that threatens the longer-term viability of the hospital, cash is king.
Monetizing real estate has been a useful strategy for many years but employing it as a cash-raising strategy has been inconsistent. The borrowing environment for both for-profit and tax-exempt hospitals and healthcare systems has been very favorable. Debt capital has been plentiful and inexpensive. Though a hospital’s cost of capital is lower than a lease rate paid to a buyer, COVID-19 has revealed that maintaining a strong cash position is critical. Bond issuances are time-consuming and expensive. Unlocking precious capital in bricks and mortar can be an efficient and cost-effective way to raise cash.
For comments, questions or concerns, please contact David Cohen