ObamaCare Beneficiary: Medical Office Developers?
The Patient Protection and Affordable Care Act, a $940 billion overhaul of the nation’s health care system, also more familiarly known as ObamaCare promised to expand access to health insurance coverage to 32 million additional people. The controversial legislation has landed back center stage as President Trump and GOP leaders seek to repeal, replace or “restructure” the massive bill that has sparked a national conversation about how we lower the barrier to affordable healthcare. Undoubtedly, these newly insured patients are increasing demand for medical office space, and that has some property owners wondering how they may take advantage of the legislation.
Many hospitals are currently focused on expanding facilities to increase capacity and meet future demand. For example, Moses Cone Health System in Greensboro, NC is investing over $200 million in an expansion that will add 250,000 square feet to their existing 1 million square feet. Other health care providers, such as the Cleveland Clinic, are making more nominal investments as they focus strategically on expanding outpatient facilities. These investments provide lucrative contracts that help to support the nation’s construction industry and suppliers.
Developers that want to take advantage of this emerging trend should focus on building relationships with health care real estate brokers. Medical providers may engage these brokers to locate space in neighborhoods where uninsured people currently live, areas that will likely see increased demand as a result of ObamaCare. Most doctors are interested in owning their space, so developers may want to focus on constructing medical office condominiums.
Owners of medical office space that lease to providers should prepare themselves for the real costs of ObamaCare. For example, a 3.8% Medicare tax imposed on the investment income of upper-income tax payers – including rental income. In addition, landlords should be wary of other pending changes to the tax code, Trump has floated the idea of overhauling the complicated tax code with a more simple flat tax system. Typically many loopholes that benefit investors are closed in such proposals.
Not to mention, landlords need to screen tenants carefully, because some medical providers will suffer in this environment, due in part to changes in reimbursement levels. Several states continue to grapple with budget gaps. Fiscal struggles could grow if the federal government reverses course on funding the federal mandate to add 16 million people to the Medicaid system -or- Congress drops the individual mandate requiring all citizens to purchase health insurance or pay a fine. Other hidden costs to landlords may come from higher property taxes and new taxes or fees on services to cover the newly insured.
I expect that we will debate the winners and losers of ObamaCare for the next decade to come, but I think it is clear that our existing health care system will have enormous demand from the 32 million newly insured people. Our communities will need updated facilities and new medical office space to accommodate the growing number of patients that require quality health care.