6 Key Trends Affecting Healthcare Real Estate in 2018

Published by: Becker’s Hospital Review

Written by Victor H. McConnell, VMG Health, Kelly M. Bondy, Hall Render and Andrew Dick, Hall Render

1. The Tax Cuts and Jobs Act

Since the election of Donald Trump as President, Republicans on Capitol Hill have made attempts to repeal the Affordable Care Act (“ACA”) throughout 2017. A comprehensive repeal was not achieved, but certain legislative changes in the last year have chipped away at the ACA. Those legislative changes will have an impact on hospitals and health systems. Most notably, the Tax Cuts and Jobs Act (“TCJA”), which was signed into law on December 22, 2017, will significantly affect the healthcare sector.

Beginning in 2019, the TCJA will effectively repeal the “individual mandate” set forth in the ACA by reducing the penalty tax to $0. Without the individual mandate, the Congressional Budget Office (“CBO”) and the Joint Committee on Taxation (“JCT”) expect premiums for policies purchased in the marketplace to rise, with fewer people obtaining health insurance. The CBO and JCT estimate that with the repeal of the individual mandate, approximately 43 million people under the age of 65 will be uninsured by 2026. That is a significant increase over its previous estimate of 28 million uninsured under the ACA prior to the passage of the TCJA. This larger uninsured population may result in an increase in the use of financial assistance programs and a rise in uncompensated care costs for many non-profit hospitals and health systems.

Additionally, the TCJA has changed certain aspects of tax-exempt financing. While the TCJA did not repeal tax-exempt financing for private activity bonds, it does prohibit new advance refunding bonds. This removal of advance refunding opportunities may affect certain non-profit healthcare organizations by removing the ability to save money for other cash flow needs. Further, Standard & Poor’s Outlook for 2018 suggests that other provisions of the TCJA, such as the reduction of the corporate tax rate, may reduce demand for tax-exempt paper and could mean an increase in interest rates for tax-exempt healthcare bonds, thus reducing banks’ interest in doing direct placement or direct purchase bonds. Moody’s 2018 Healthcare Outlook suggests that tax reform may increase the cost of capital for hospitals and healthcare providers, creating greater merger and acquisition activity, especially for smaller hospitals who cannot afford higher interest rate costs in the taxable market. More broadly, the TCJA is expected to have a significant effect across all real estate sectors, with changes to include new rules for pass-through income and asset depreciation.

Overall, the continued uncertainty surrounding the ACA will make planning and strategizing difficult for hospitals and health systems. This uncertainty is compounded by the effect that the TCJA will have on the healthcare market, especially in the non-profit sector, including an increase in the cost of tax-exempt financing and a rise in uninsured patients. These changes may result in more pressure on operating margins for non-profit systems, especially as healthcare policy continues to move towards value-based reimbursement and outpatient migration. Commercial real estate owners and investors will likely benefit from the tax savings generated by the TCJA, with the change in tax treatment of capital expenditures and new deductions for owners of pass-through entities, which may result in increased investment in real estate assets and development.

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