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Healthcare REITs Hurt by Changing Government Reimbursements

by Jacob Heidkamp

Changes in government healthcare reimbursements may be beginning to have an impact on some large non-traded REITs.

Prior to the implementation of the Affordable Care Act (ACA) in 2010 healthcare reimbursement from the government through Medicaid and Medicare (administered via state programs) largely operated as a volume based fee-for-service model. With the passage of the ACA, reimbursement has begun shifting to capitated and value based approaches. Capitated models provide set compensation to healthcare providers for each enrolled patient for a designated period, regardless of whether that patient receives care. Value based approaches link compensation to patient outcomes, which may include reductions in readmittance rates for patients. Generally, these changes are reducing reimbursements for certain types of healthcare providers. 

As individual state programs implement reimbursement reforms along the major themes of capitation and value based approaches, it is likely that continued reductions in reimbursement growth rates will increase pressure on healthcare providers to improve efficiency in their business models. Continued reimbursement pressures formed a significant part of the foundation for Moody’s downgrade, from stable to negative, of the not-for-profit and public healthcare space’s outlook for 2018. These pressures invariably will challenge marginal healthcare providers and likely result in increased pressure on healthcare REITs as providers that are acutely reliant on government reimbursement, such as skilled nursing facilities and outpatient physician groups, may struggle to meet their obligations as tenants. 

Off-campus providers disadvantaged

One area of note that will affect healthcare REITs is change in reimbursement rates for off-campus hospital departments related to the Section 603 of the Bipartisan Budget Act of 2015. The crux of this legislative provision is to reduce reimbursement for services provided at off-campus departments of a hospital system. More information about this may be found here, here and here. The implementation of this reimbursement change began in January 2017, and will likely begin to flow into healthcare REIT performance over time. Nareit notes that on-campus medical office buildings will likely benefit from the rule, as reimbursements will be higher, compared to non-campus medical office buildings, for the same services provided. Nareit also reported that an executive at Healthcare Realty Trust (NYSE: HR) noted that some hospitals were reevaluating planned off-campus expansions in the wake of the reimbursement changes. 

Specific non-traded programs affected so far

The following non-traded healthcare REITs have noted portfolio performance issues in the past few quarters:

  • Recently, Carter Validus Mission Critical REIT, Inc. reported that three healthcare tenants had experienced hardships, which was a significant contributing factor in its recent NAV per share reduction. A Dallas area newspaper speculated that the bankruptcy of one of the tenants, the Walnut Hill Medical Center, may have resulted from changes in reimbursement models.
  • NorthStar Healthcare Income (NHI) reported in its third quarter 10-Q that certain debt investments (constituting 2.1% of the overall investment portfolio) had experienced breaches of debt covenants related to underlying tenant lease defaults. NHI did not directly attribute the covenant breaches to reimbursement changes; however, NHI noted that reimbursement challenges would be most acute in its skilled nursing facilities, which are reliant on government reimbursement as their primary source of revenues.  
  • In late February, Healthcare Trust, Inc. (HTI) announced a reduction in distributions to common stockholders from $1.45 per share, on an annualized basis, to $0.85 per share. The corresponding reduction in yield (based on a $25.00 purchase price) is from 5.8% to 3.4% (6.76% to 3.96% based on the most recent estimated NAV per share of $21.45 as of December 31, 2016). HTI cited increased difficulty in the healthcare space related to changes in reimbursement rates specifically related to skilled nursing facilities and senior housing properties as weighing on its performance.

Pain for publicly traded REITs, too

Concerns regarding reimbursement are not limited to the non-traded REIT space. Large, publicly traded healthcare REITs have also reported concerns regarding reimbursement rates:

  • Ventas, Inc., (NYSE: VTR, $17 billion market capitalization) noted in its 2017 annual report that the shift to value based and capitated reimbursement models would likely strain certain providers, including specialist physician groups and diagnostic services providers.
  • Welltower Inc. (NYSE: HCN $19 billion market capitalization) also reported in its 2017 annual report that new and modified reimbursement methodologies, specifically value based reimbursement models, may negatively impact healthcare property operations, specifically noting that outpatient hospital outpatient medical buildings would likely be adversely impacted.

We will continue to monitor these developments in our ongoing coverage of healthcare-related programs. 


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