South Florida Hospital News
Friday December 6, 2019
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December 2011 - Volume 8 - Issue 6

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Health Care Reform Affects MOB Sales

Ninety percent of the doctors in the U.S. work in medical practices comprised of one to three doctors. These doctors own medical office buildings (MOB’s) totaling hundreds of millions of dollars. Health Care (HC) Reform has caused intense uncertainty among doctors today, which has led to lower MOB transaction volume. This is a timely misfortune for doctors that own MOB’s because fully rented medical buildings are trading at remarkably high values today relative to other commercial real estate sectors. MOB’s are deemed a safe haven in today’s stormy real estate market.
 
Government Health Care
President Lyndon Baines Johnson (LBJ) signed Medicare into law in 1965. The program was initially designed only to be minimally adequate. Numerous changes occurred every decade to allow more and more people access to free and subsidized health care. Today’s Medicare appears relatively generous as it now serves 41 million people and bears little resemblance to LBJ’s Medicare of 1966 when it served just 19 million people. This has forced us to make a change since we no longer have enough money to pay for the current system. But which Medicare do we now save?
 
Rising HC Costs
Similar to health care … the food, electronics and computer industries showed the same remarkable growth over the past forty years. But we witnessed the real cost of agricultural commodities, TV’s and computers fall over this time as HC costs rose with seemingly reckless abandon. The difference is “Supply & Demand” free market dynamics are missing from today’s health care system.
 
Good Old Days
There was a time in the 1960’s and early 1970’s when patients were responsible to pay their doctor in full for medical services. This former system accomplished two things that are lacking in today’s system:
1. It helped keep physician fees more competitive within the market by maintaining accountability between patient and HC provider.
2. It helped keep more reasonable health insurance rates since patients held their insurance companies more accountable since they had to chase the insurance companies for reimbursement.
 
Game Over
In the mid-1970’s, the insurance industry was able to convince doctors and hospitals to stop seeking full payment from their patients and instead collect only nominal co-pays or deductibles from their patients up front while seeking the majority of their fees from private insurance companies at a later date like Medicare operates. Can you imagine Home Depot suddenly agreeing to allow every customer to purchase their goods with only a small deposit and then having to collect the balances due 30 to 90 days later from an insurance company? In this one swift move, financial leverage over health care providers shifted from patients to the insurance industry. Patients readily embraced this change since they would only have to pay small co-pays or deductibles up front instead of being responsible for the whole bill. This is where the public unknowingly sold its soul to the insurance industry for smaller payments up front in exchange for run-away health care costs in the future. The present HC system guarantees escalating health care costs. We can’t turn things around without changing the system first.
 
Potential Outcome
Cuts to Medicare/Medicaid are anticipated. Doctors could face lower incomes. Some could stop seeing Medicare patients all together. Doctors who built or refinanced their MOB’s at the top of the market a few years ago are now saddled with high debt and may have a tough time. We could see practice bankruptcies in a few highly-leveraged cases. Concern is deep over doctors’ mandated lower income adjustments set for January 2012 unless they get rescinded once again. Some doctors will use MOB Sale/Leaseback transactions to pay off mortgages and replace with lower lease-back payments in an effort to lower overhead. Defaulting on a commercial lease is much less onerous than defaulting on a property mortgage so that should also lead to more MOB Sale/Leaseback transactions as a defensive strategy. If doctors have less future income to pay their rent or mortgage, their lower property payments will lead to lower MOB values. So we could see a softening of MOB values over time as MOB net incomes trend down. However, since demand for medical care is only going up due to demographics (i.e. baby boomer retirements), investor demand for MOB’s should remain strong leading to some cap rate compression. Doctors who stand to benefit most have low MOB property debt or have leases due to expire soon so they can renegotiate for lower rent or relocate to more affordable spaces. The insurance industry has helped bring the health care industry to its knees. The main mantra for the Health Care industry is now, “Reduce Overhead.” Early retirement by some senior physicians is likely.
 
Regardless of how Medicare and our tax rates may change, we need to find a way to let supply & demand work its’ natural magic to help keep future costs of HC services in check ... like it does for every other type of business in America.
 
 
 

Mark Alexander, Sperry Van Ness, can be reached at (239) 826-4174 or marka@svn.com.

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