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