REITs and Healthcare Real Estate Acquisitions

Interesting news item regarding the acquisition of St. Vincent Medical Office Building in Cleveland by Grub & Ellis Healthcare REIT II. Their list of acquisitions is growing. I've also been looking at growth in a variety of other healthcare REITs including HCP. There certainly will be a growing need for physical space in which to render patient care and house staff. REITs have been buying a variety of properties including medical offices, professional buildings, hospitals, and large tertiary care facilities. I'm interested to see how these healthcare real estate deals will be impacted by changes in health economics and policy. My primary concern is the potential impact of lower reimbursements on healthcare entites who occupy these spaces, and whether occupany and lease rates will suffer as a result. These REITs likely have developed strategies to deal with these future uncertainty, but the spectre of change still looms.

Managing medical practice overhead expense

Shrinking reimbursements are a progressive reality of the healthcare practice environment. Under these conditions private practices need to make smart decisions about how to manage their overhead expenses. Reduced growth in income means that previously manageable expenses may envelop a larger percentage of potential earnings. In addition, normal business expenses are expected to rise naturally through inflation and other factors affecting price indexes. There a number of ways to reduce overhead expense but a few which come to mind are A) lease re-negotiation B) vendor contract re-negotiation and C) practice expense sharing arrangements or medical practice mergers.he

Many private practices lease the office spaces in which they are located. These leases may have been negotiated in more favorable economic environments. Reduced demand and lower occupancy has persuaded many landlords to be flexible to new and existing tenants. If possible, practice owners should approach their landlords for reductions or other concessions, even if their practices are faring well. The uncertainties of healthcare payor reimbursements going forward may make this a wise future option while still potentially available in today's environment.

Another step which practice owners may consider is the renegotiation of contracts with vendors and service providers. This can be helpful in reducing a wide range of practice expenses. The outsourced medical billing company may be one place to start, especially if their percentage fee of collections has not been adjusted to account for changing norms in the medical billing industry.

An additional option which may be helpful to some medical practices is entering into an arrangement with another medical practice. This can range from a basic cost sharing agreement between practices to a full-fledged business merger. The medical practice merger is a way to leverage economies of scale, negotiate more favorable payor contracts, gain unique competitive edge in a particular market, or extend reach into new markets. A less-binding alternative is cost sharing with another medical practice. This could be as simple as a single shared expense or common piece of equipment, or as involved as a full split of all practice expenses including staff and lease. Major factors to consider when entering into such arrangements are the financial health and staying power of the practices involved as well as the business strategy, trust level, and risk threshold of the respective practice owners. Naturally, a competent medical practice mergers and acquisitions team should be involved in such dealings.