ACA Ruling: A Healthcare Debacle—Or Opportunity

NEW YORK CITY—Wednesday marks the start of oral arguments in the closely watched King v. Burwell case before the US Supreme Court. At issue for 34 states that haven't established exchanges is whether Affordable Care Act tax credits can be utilized by individuals buying health insurance on federally established exchanges, versus state established exchanges. Should the court rule for the plaintiff, the decision could have far-reaching effects for healthcare institutions and their capital plans, Savills Studley's Jeffrey Cooper tells GlobeSt.com.

The cost factor would be “extraordinary,” says Cooper, New York City-based executive managing director with Savills Studley. Partly it's because while the ACA also promised hospitals more money in the form of larger numbers of insured patients, it also took away billions of dollars in payments through Medicare and Medicaid, as well as reducing the “market basket” adjustment under Medicare.

Over the first 10 years that the ACA is in effect, this would mean a total of $269 billion in lost reimbursements, says Cooper. With million of patients buying insurance on the exchanges, the impact of these lost reimbursements would be blunted, at least in theory.

For hospitals, then, the bottom line of a Court ruling for the plaintiff would be that “a lot of money they expected to get, they won't get,” Cooper says. “There will be a lot more uncompensated care and a lot less reimbursements going to hospitals. It's going to strangle both their operating and capital budgets.”

The real estate implications of a Court ruling striking down the federally-established exchanges would be wide-ranging. “Hospitals will either have to cut back on operations, cut back on capital plans or raise money in ways they haven't generally used before,” says Cooper. “That might mean monetization,” in the form of sale-leasebacks of their owned properties. It could theoretically put hospitals into the same direction that hotel companies went, “where the real business was in operations, not owning the real estate. It created a huge amount of monetization.”

That would lead to more deal flow in the form of investment sales. Further, for the healthcare systems, “it creates opportunities to create capital around the existing real estate.”

Conversely, however, Cooper says, “A lot of hospitals have capital plans to create outpatient facilities and ambulatory facilities. Some of these companies might have to scale back what they were planning. Or they might have to go to outside capital to finance it.”

That outside capital to finance development, generally speaking, won't take the form of bonds “since it's not on campus,” says Cooper. “It will have to be private, third-party capital, whether it's healthcare REITs, pension funds or private equity funds that invest in the space.”

A move toward third-party capital is likely to occur in the healthcare sector regardless of how the Court rules in King v. Burwell, Cooper says. For one thing, there's the longstanding “uncertainty” around how the ACA will or won't move forward, and Cooper says the King case is just one more factor in that uncertainty.

“It's going to force hospitals to not rely so heavily on their own revenues, or even their bond issues,” he says. That would be a positive for commercial real estate, since “most of the not-for-profit hospitals are investment-grade credit.”