John Smelter Smelter: “If they are taking away reimbursements, and hospitals can’t be reimbursed the same way off-campus, why would they continue building off-campus facilities at the same pace? I don’t think they will.”

SAN DIEGO—A change in legislation that is currently in effect has created giant cutbacks in reimbursements to health systems for medical services rendered off-campus, disrupting healthcare real estate, Marcus & Millichap’s John Smelter, IPA senior director, tells GlobeSt.com exclusively. The situation is in direct opposition to the trend of non-acute healthcare services moving off hospital campuses to better serve patients and be more cost efficient for health systems.

“There is change in legislation that is in effect right now that basically has taken away from hospitals the reimbursements that they get by going off-campus,” says Smelter. “So if they go out and build a medical office building off-campus and they have all of their outpatient services off-campus now—like their surgery centers and all of the things they can put in an off-campus, satellite, suburban community to capture more market share—they do not get reimbursed the same as if those services were being provided on-campus. There is a giant cutback; that is new legislation.”

Smelter adds that he thinks there will be a lot of hospitals putting the brakes on to see if the legislation will be changed. “If they are taking away reimbursements, and hospitals can’t be reimbursed the same way off-campus, why would they continue building off-campus facilities at the same pace? I don’t think they will.”

Smelter says that he thinks this legislation should not be in effect. “I’m hopeful there are a lot of lobbyists in Washington that will get it changed for the hospitals because there is a need to go in the direction of off campus. In order for hospital systems to capture more market share, they need to make care more consumer-centric and patient-centric, in the retail settings and in the settings next to the Walmarts, Starbucks, etc., where you can go out and get your healthcare services and not be inconvenienced by going to the mothership hospital that is way out of the way. When you are out doing your errands and shopping, you can also go see your doctor. Why should the hospitals be penalized for being off campus?”

We will see a cutback, Smelter believes, and in the interim, hospitals are likely going to be focusing on more M&A activity and where they need to create new hospital campuses and looking at those for the larger systems that need new hospitals. “They’re going to be focusing more energy on where are they building new hospitals rather than where are they are building off-campus medical-office buildings, where they can’t get the same reimbursements because it’s not on a hospital campus. I think it might be switched until this gets sorted out.”

Hospitals may also take a step back somewhat until this this reimbursement situation gets resolved, Smelter predicts, “and we hope that it will. Healthcare systems are looking at how they can save payers money, how they can lower cost with the insurance products that are being offered and create a lower cost model. We can do that by being in an outpatient setting. Even though the reimbursement structure has changed, I don’t think the movement to off-campus facilities will change. It might be stalled a little but surely it is the way of the future. How much impact this legislation will have is still to be determined, but it is surely unpopular. I hope that we see it go away because it does not make any sense.”

Stay tuned for a more in-depth feature story on on-campus healthcare real estate in the April issue of Real Estate Forum.

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