The involvement of REITs and sale-leasebacks in healthcare real estate has become a point of contention for many regulators, lawmakers and policymakers. But a consulting economist likely to write a study for industry representatives says the conclusions are incorrect and misinterpret the source of financial pressures in healthcare. In addition, Savills has previously stated that the healthcare industry may need to monetize its real estate investments for financial reasons.
Concerns about REITs and sale-leasebacks gained momentum due to a recent major event. Steward Health Care bankruptcy has rocked the healthcare industry. The largest private, for-profit healthcare system in the United States announced after filing for bankruptcy last month that it would sell all of its 31 hospitals at auction. Eight of those hospitals are in Massachusetts. The situation has prompted the state government to look for ways to prevent REITs from conducting future sale-leasebacks.
McKinney wrote that laws in Massachusetts, Connecticut, Rhode Island and Pennsylvania seeking to restrict REITs in the hospital industry were partly prompted by concerns about the “financial health of hospitals, particularly those in the social security system that serve low-income and rural communities.”
He argues that the financial difficulties are not due to participation in REITs and sale-leasebacks. Rather, the financing models are the result of other factors that cause economic problems.
The real problem, McKinney said, is low reimbursement of hospitals for their services, including low Medicare and Medicaid reimbursement rules. He said reimbursement rates and uninsured patients “lead to hospital closures.”
“Without significant philanthropic contributions, social security hospitals will be unable to cover their operating deficits, which will ultimately lead to bankruptcy,” McKinney wrote. “If we are to solve the financial problems facing hospitals in America’s cities and rural areas, government at all levels must pay hospitals a fair price for the services they provide to their patients.”
Savills said that Much of the healthcare industry may need to monetize their real estate investments. Health systems have sought to scale their operations through mergers and acquisitions. Without low-cost capital, continued M&A expansion is not possible because “many health systems have swollen to unsustainable levels of debt that are neither affordable nor conducive to short- and long-term business success,” as Savills put it.
As GlobeSt.com previously reported, health systems want to keep their core assets like hospitals. However, other properties could serve as sell-lease-back deals that could serve as a relatively safe way for health systems to generate cash.
Regardless of the industry, such a dilemma leads companies to look through their assets to determine how they can raise capital to continue their venture.
