Review Articles: Healthcare Real Estate: Excess Capacity and Growing Costs

Article excerpt

Abstract

An apparent paradox is the coexistence of excess demand by patients for medical services and excess supply by hospital and nursing home providers. The vacancy rate of licensed hospital and nursing home beds has been rising even as the total number of beds and hospitals has been declining as rates are regulated. This paper examines alternative explanations for this paradox. One explanation is that since providers receive similar rates from public and private insurers and other third-party payers regardless of quality, the healthcare sector effectively operates as a price-regulated industry. There is an incentive to carry excess capacity. A second is that the separation of capital and operating budgets leads to added construction even if unnecessary or redundant. A third explanation is that excess capacity is a convenience with an option value that allows patients and providers to have staff and hospital beds available at any time and location.

This paper examines real estate as it applies to the delivery of medical services. The focus is on the provider or supply side of medical care services. Medical services can be delivered from a variety of locations and facilities. These range from a hospital to seniors housing to at-home care. Which location and facility is least costly and most efficient for treatment delivery depends on the disease, provider, and treatment protocol.

A supply-side approach contrasts with the existing literature that focuses primarily on the demand side of medical services with emphasis on patient access and treatment costs. The demand-side research has extensive analysis on rationing by price regulation and treatment length-of-stay limits. The managers and determiners of demand are doctors and insurers. Doctors establish whether a patient requires a stay in a healthcare real estate facility such as a hospital or nursing home, or can be treated as an outpatient or sent home. Insurers control how long a stay in a hospital is required, conditional on the diagnosis. Sometimes insurers can propose alternative procedures.

Excess demand, as in any real estate market, should lead to price rationing. Instead, the healthcare real estate sector has a positive and rising vacancy rate of hospital and nursing home beds. The vacancy rate, or proportion of unoccupied licensed hospital beds, has been rising. This rise has occurred even as the total number of beds and hospitals has been declining. In 1975, the United States had nearly 1.5 million licensed hospital beds. By 2002, the bed count had declined to less than one million. Onethird of capacity was eliminated in a generation. Even with the smaller bed count, on an average night, more than one-third of hospital beds are empty. This proportion is remarkably similar to the vacancy rate at hotels. A similar excess capacity exists for nursing homes. Vacancy rates indicate rising real estate excess capacity even as the healthcare system imposes price and quantity regulations normally associated with excess demand.

In the hospital sector, this paradox exists even as the incentive to generate revenue and profit has increased. More than 85% of hospital beds in the U.S. are owned by entities outside of federal, state, and local governments. Federal hospitals as opposed to community, all-comer institutions, maintain an exclusive clientele as those for the Veterans Administration, mental institutions, and in prisons. State and local hospitals have been declining in number, and lessening their mission to treat the very poor, which leaves for-profit and traditional non-profit community hospitals. The latter are largely managed by for-profit management companies on a model well-established in other real estate markets, such as for office, industrial, apartments, and hotel.

Public policy requires open access of emergency rooms to all-comers regardless of ability to pay. Unlike other real estate facilities, hospital admission is controlled not by users but by intermediaries including public and private insurers. …