Healthcare reform could have a major impact on the real estate needs of hospitals, even preventing new in-patient towers or major medical center expansions for several years, according to industry experts.

The next few years could bring a spike in medical office building construction in the suburbs as healthcare reform is expected to increase reimbursements for primary care services and those providers in turn move to accommodate the increased need, insiders say.

The new political focus on preventing patients from visiting emergency rooms or accessing the expanded care they often get at larger hospitals is creating abundant uncertainty in the medical community. Unless a project is already on the books, it is expected that anxiety will largely prevent new facility construction from going forward for at least the next few years.

Construction executives have seen an increase in Boston and across the nation in numbers of solicitations for design and construction of projects – they just aren’t for new hospitals or in-patient facilities, said Andrew Quirk, senior vice president in charge of Skanska’s national Healthcare Center of Excellence group in Nashville.

“There’s not a lot that I can point to,” for new hosiptal construction in Greater Boston in the next three years, said Denise Marien, senior vice president of strategic development for Walsh Bros. construction, which counts healthcare as about half its business. “There’s not a lot in the pipeline, and I think the individual project plans are being held until there’s a better understanding as to what’s going to happen to the hospitals and their business model.”

And while Walsh Bros. is building Partners Healthcare’s new Spaulding Rehabilitation Hospital in the Charlestown Navy Yard, that project had been planned for several years, Marien said. Instead, healthcare providers are focusing on creating primary care centers that offer family medicine, diagnostic services and health education.

“We have seen an uptick … but it’s not adding new hospitals or adding beds,” Quirk said. “There’s a definite shift toward outpatient … so hospitals are not looking to build patient towers, but are looking to get into the communities.”

The Bottom Line

‘Uncertainty’ is a popular word among many in the industry to describe the current healthcare environment. That uncertainty has infiltrated the real estate offices at many if not all major hospitals and healthcare institutions, leaving them unwilling to make aggressive strategic decisions, and instead focus on immediate investment return projects, like information technology upgrades and increasing energy efficiency.

And that is leaving decisions about new expansion or major renovations in the dark.

“As we know more and more about how new healthcare changes could impact the real estate needs of physicians and hospitals, how that impact will happen is still in the air,” said James Canfield, a principal with McCall & Almy who focuses on advising healthcare clients on real estate strategy. “I think it will tend to limit major new initiatives over the short-term. Healthcare changes will affect hospitals’ bottom lines, so you won’t see much construction activity [in the next one to three years].”

But healthcare reform is not the sole driver of a paradigm shift in the industry. Independent of the projected impacts of reform, many changes and trends in the healthcare market have had as much impact on real estate and facility decisions as anything else. The migration of care to the community and the home has been largely supported by new technology and accelerated the de-centralizing of hospital services, said Kathryn West, vice president of real estate and facilities for Partners Healthcare.

While she does not anticipate a glut of medical office buildings in the suburbs in the near future, she half-joked that if you ask 30 different people what the impacts of reform will be, you will get 30 different answers.

“We have not seen an enormous impact locally so far,” West told Banker & Tradesman. “A lot of this will be variable around the country,” especially in under-served areas where more people will have insurance and a greater need for more development of medical buildings will exist.

But locally, she said, “New things will have to be built, but the question is what are they and how many of them?”

A New Approach

With the anticipated shift toward primary care and facilities to support it, a move toward medical office buildings – where many primary care practices would be located – and increases in ambulatory care facilities are inevitable, said Timothy King, vice president and healthcare lead project manager for Jones Lang LaSalle. Medical office buildings cost decidedly less to build than hospitals and increase accessibility because they are built outside metropolitan areas in the suburbs and are more cost-efficient to operate, King said.

Going forward, hospital real estate managers will likely monetize assets they already own and will need to take on more joint venture and development partners if they want to build new facilities, he added. They will also start looking to their real estate portfolio to be a financial resource, which hospitals traditionally have not done, King said.

“Starting about three years ago, with the economy’s crash, hospitals really stopped constructing, the bond market disappeared and made it impossible to get money,” King offered. “Business for new hospital construction, including renovations and additions, is down about approximately 60 percent in the last three years,” compared to the previous 10 years.

“Reimbursements won’t be what they were,” King added. “There will be a market shakeout in the industry. New construction … may not happen, or it may happen in a different form. Maybe they can get money for two ambulatory/medical office buildings that once would have been a [patient] bed tower.”